1
CORPORATION LAW
 Corporation is one of the types of business
organizations. It is also the most important in economic
development.
INTRODUCTION
 Sole proprietorship
- One man form of business entity, personally answers all
liabilities, but enjoys all the profits with the exclusion of
others
- Limited shareholders responsibility
- Paid subscription in full, you are no longer liable
 Partnership
- Based on mutual trust and confidence
 Joint venture
- one time grouping of persons whether they be natural or
juridical
- does not entail continuity because after the undertaking
is completed it is already the end
- particular partnership and joint venture would be
similar, but there is already a decision of the Supreme
Court declaring them as different
- when they do not register, it does not exist
- Foreign corporations enters into an agreement with a
domestic corporation, it must be registered. Generally
they do not need to be registered.
 Corporations
- They may enter into joint venture, but generally they
cannot enter into a partnership, but there are
exceptions allowed by the SEC: the 3 exceptions must
go hand in hand
1. The articles of incorporation expressly authorized
the corporation to enter into contracts of
partnership;
2. The agreement or articles of partnership must
provide that all the partners will manage the
partnership; and
3. The articles of partnership must stipulate that all
the partners are and shall be jointly and severally
liable for all obligations of the partnership.
DEFINITION AND ATTRIBUTES
 4 attributes of a corporation
1. Artificial being
2. Created by operation of law
3. Right of succession
4. Powers, attributes and properties expressly authorized
by law or incident to its existence.
 Doctrine of limited capacity
- Only such powers as are expressly granted to it by law
and by its articles of incorporation including others
which are incidental to such conferred powers, those
reasonably necessary to accomplish its purpose and
those which may be incidental to its existence
- Can do things as the law asks or allows it to do
- If it does anything beyond, it shall be considered as
ULTRA VIRES
 General rule: Moral damages cannot be granted to
corporations
 Exception: Filipinas Broadcasting Network Inc. vs. Ago
Med
- In cases of slander, libel and other forms of defamation
(should not qualify because the code does not qualify
whether natural or juridical) Art. 2219 of the civil code:
Art. 2219. Moral damages may be recovered
in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
Notes on Corporation Law
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(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27,
28, 29, 30, 32, 34, and 35.
The parents of the female seduced, abducted, raped, or
abused, referred to in No. 3 of this article, may also
recover moral damages.
The spouse, descendants, ascendants, and brothers and
sisters may bring the action mentioned in No. 9 of this
article, in the order named.
 Advantages (SEE LADIA BOOK)
- No. 2 may also be a disadvantage
- No. 5 may also be a disadvantage
 A corporation is a person, therefore protected by the due
process clause and equal protection clause of the
Constitution
CLASSIFICATION OF CORPORATIONS
 Section 3 Stock and non-stock
- Importance of knowing, determining what provisions of
the code or the law may be applicable
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)
 Non-stock- title 10
 Stock- section 51
 Stockholders must generally cast their votes in the
meeting; section 4 governed primarily by the law
creating them
Section 4. Corporations created by special
laws or charters. - Corporations created by special laws
or charters shall be governed primarily by the provisions
of the special law or charter creating them or applicable
to them, supplemented by the provisions of this Code,
insofar as they are applicable. (n)
 Section 3
- The two requisites must always concur
1. That they have a capital stock divided into shares; and,
2. That they are authorized to distribute dividends or
allotments as surplus profits to its stockholders on the
basis of the shares held by each of them.
 Section 4
- Created by a special law, they have their own character
- They are not immune from suit unless provided by the
law of their creation
- Primarily governed by the law creating them
- Their subsidiaries are entirely different or independent
from that of the other
 2

 Close corporation - Provision that states, cannot be issued less than par,
exception is treasury shares because it can be issued
- There is no exemption it is absolute less than par

 Public corporation  A corporation commences only upon issuance of the

- Political or governmental purposes
- Those formed or organized for the government or a
portion of the State or any of its political subdivision
and which have for their purpose the general good and
welfare
 Private Corporation
- Immediate benefit, aim or advantage of private
individuals
- Those formed for some private purpose, benefit, aim or
end
- Distinction: public for governmental purpose
certificate, prior thereto it has no being and cannot
transact business. Promoters cannot act for a projected
corporation
 Metro Manila- paid up capital requirement is 10 M
 Non- stock- mere mention of the operating capital
 Mention the authorized capital
 Restrictions
- Mandatory in close
- Not mandatory in ordinary

 Corporation Sole  Non-stock

- Exemption to the rule because it is composed only of - If value is not more than 100,000
one person
- An incorporator may also be a juridical person  A corporation cannot use any other name unless it has
been amended
 Close corporation
 Section 19
- There is exclusivity of shares of stock
- Section 96-105
- If confusingly similar it will not be allowed to be
- Restrictions to transfer shares
- Only those indicated can own shares registered
- Verification slip from the records officer
- Article must provide that there will be no public offering

 Open corporation Section 19. Commencement of corporate

existence. - A private corporation formed or organized
- openly admit investors under this Code commences to have corporate existence
- example: stock exchange and juridical personality and is deemed incorporated
from the date the Securities and Exchange Commission
issues a certificate of incorporation under its official
 Domestic/ Foreign seal; and thereupon the incorporators,
stockholders/members and their successors shall
 Test constitute a body politic and corporate under the name
stated in the articles of incorporation for the period of
time mentioned therein, unless said period is extended
- Incorporation test
or the corporation is sooner dissolved in accordance
- If incorporated under the laws of the Philippines it is a
with law. (n)
domestic corporation

- Words corporation or inc. either in full or abbreviated

ME Gray vs. CA
form must be included

- Parent or Holding/ subsidiaries and affiliates

- Affiliates- no majority vote Section 18. Corporate name. - No corporate
SMC 12% name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing
HERSHEY CBPl 12% corporation or to any other name already protected by
law or is patently deceptive, confusing or contrary to
12% CBP existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended
Affiliate is subject to common control by the 12 % owners certificate of incorporation under the amended name. (n)
 De jure

 Doctrine of secondary meaning

- cannot be attached by the state even in a quo warranto
proceeding - A word or phrase originally incapable of exclusive
appropriation [usually generic] with reference to an
 De facto article in the market, because of geographically or
otherwise descriptive, might nevertheless have been
- exists by virtue of colorable compliance used so long and so exclusively by one producer with
- Attached directly only by the state in a quo warranto reference to his article that, in that trade and to that
proceeding branch of the purchasing public, the word or phrase has
become to mean that the article was his product.
 Corporation by estoppel
 Section 18
-So defectively formed, but still considered corporation,
but only in relation to those who cannot deny their - Lyceum of the Philippines case, the additional
existence section 20 and 21 geographical name does not make it confusingly similar
FORMATION AND ORGANIZATION - actual confusion is not necessary- Philips case “it is
 3 stages
enough that there is probable confusion”
1. Creation
2. Re-organization or quasi-reorganization
3. Dissolution/winding-up  2 requisites must be proven
 Purpose clause
- Defining the scope of authority of the corporate - that the complainant corporation acquired a prior right
enterprise pr undertaking. Both confirmed and limited over the use of such corporate name
 4 limitations of purpose clause - identical, deceptively or confusingly, patently deceptive
1. Lawful
2. Specific or stated concisely
 principal office
3. More than one, the primary and secondary must
be specified
4. Lawfully combined - statement of principal office is required

Notes on Corporation Law

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- city and municipality not only province must be
specified
- principal office NOT operations office
- necessary because it will establish the residence of
corporations
- venue of actions for or against the corporations
- venue of meetings
- section 51 meetings may only be within the boundaries
of the city where the principal office
- non-stock may be held anywhere in the Philippines, if
provided in its by-laws
- where summons may be served
- registration of chattel mortgage must be registered in
the register of deeds where the principal office is located
Clavecilla Radio System vs. Antillon
- action not upon a written contract
- city where the defendant resides
 term of existence
- corporate term required
- determining what point in time the juridical personality
will cease to exist
- enter into contract only when it has juridical personality
- once it ceases to exist, it no longer has personality
- exist for another 3 years only for purposes of liquidation
- Dissolution- it is automatic
 When should extension be made?
- General rule: Not earlier than 5 years
- Exception: unless there are justifiable reasons
 May it be extended after expiration?
- Alhambra cigar vs. SEC once it ceases to exist it has no
vested politic, exist only for a period of 3 years only for
liquidation and for that purpose only
 Article 5 How many incorporators should there be?
- 5-15
 May a corporation be an incorporator?
- General rule: only natural persons
- Exception: cooperatives and corporation primarily
organized to hold equities in rural banks
 How about minors?
- NO, because they must be of legal age
 May a corporation organized by incorporators consisting
solely of foreigners
- Yes, there is no nationality requirement only residence,
as long as majority are residents of the Phil
 Define incorporators <sec.5>
- Those person mentioned in the articles as originally
forming the corporation and who are signatories of the
articles of incorporation.
- Must be signatories to be incorporators
Section 5. Corporators and incorporators,
stockholders and members. - Corporators are those who
compose a corporation, whether as stockholders or as
members. Incorporators are those stockholders or
members mentioned in the articles of incorporation as
originally forming and composing the corporation and
who are signatories thereof.
Corporators in a stock corporation are called
stockholders or shareholders. Corporators in a non-
stock corporation are called members. (4a)
 Define corporators <sec.5>
- All persons who compose the corporation at any given
time and need not be among those who execute the
articles of incorporation at the start of its formation and
organization.
Notes on Corporation Law
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3
- Originally or subsequently
- Section 5 provides:
Corporators in a stock corporation are called
stockholders or shareholders. Corporators in a non-
stock corporation are called members. (4a)
 May a corporation be a corporator?
- YES. There is nothing to prevent a corporation from
being a stockholder
 Incorporator must subscribe to 1 share
 There are those that are exclusively reserved to Filipinos
 An incorporator maybe a corporator as long as he is a
stockholder
 section 6
Section 6. Classification of shares. - The
shares of stock of stock corporations may be divided
into classes or series of shares, or both, any of which
classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles
of incorporation: Provided, That no share may be
deprived of voting rights except those classified and
issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided, further, That
there shall always be a class or series of shares which
have complete voting rights. Any or all of the shares or
series of shares may have a par value or have no par
value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and
building and loan associations shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by any
corporation may be given preference in the distribution
of the assets of the corporation in case of liquidation
and in the distribution of dividends, or such other
preferences as may be stated in the articles of
incorporation which are not violative of the provisions of
this Code: Provided, That preferred shares of stock may
be issued only with a stated par value. The board of
directors, where authorized in the articles of
incorporation, may fix the terms and conditions of
preferred shares of stock or any series thereof: Provided,
That such terms and conditions shall be effective upon
the filing of a certificate thereof with the Securities and
Exchange Commission.
Shares of capital stock issued without par
value shall be deemed fully paid and non-assessable
and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be
issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the
entire consideration received by the corporation for its
no-par value shares shall be treated as capital and shall
not be available for distribution as dividends.
A corporation may, furthermore, classify its
shares for the purpose of insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in the articles of
incorporation and stated in the certificate of stock, each
share shall be equal in all respects to every other share.
Where the articles of incorporation provide for
non-voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to
vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another corporation
or business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately
preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall
be deemed to refer only to stocks with voting rights. (5a)
 How many directors should there be?
- General rule: Not less than 5 not more than 15
- Exceptions:
1. Educational corporations registered as non stock
corporation whose number of trustees, though not less
than five and not more than [15] should be divisible by
five [5], meaning they must have either five, ten, or
fifteen trustees and no other;
2. In close corporations where all the stockholders are
considered as members of the board of directors thereby
effectively allowing twenty members in the board.
3. The by-laws of a corporation may provide for additional
qualifications and disqualifications of its members of the
board of directors or trustees. However it may not do
away with the minimum disqualifications lay down by
the Code.
 Qualifications of the governing board
- Requires mere residency <sec. 23>
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.
 May a domestic corporation have a governing board
consisting solely of foreigners?
- YES, section 23 majority of them must be residents of
the Philippines, no nationality requirement
 Anti-dummy act <sec.2-A>
- If the business undertaking or activity is only partially
nationalized, aliens can be elected as such directors,
[unless the law provides otherwise] but their number
shall only be in proportion to their equity or
participation in the capital stock of the corporation.
 Disqualifications <sec.27>
- The disqualifications provided for is absolute and may
not be done away with. Corporate by-laws may,
however, provide for additional qualifications and
disqualifications.
Section 27. Disqualification of directors,
trustees or officers. - No person convicted by final
judgment of an offense punishable by imprisonment for
a period exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to the date of
his election or appointment, shall qualify as a director,
trustee or officer of any corporation. (n)
Notes on Corporation Law
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4
 Section 27 and 23 minimum disqualifications and
qualifications
Lee vs. CA
- By laws may provide for additional
 Gov’t vs. El hogar Filipino, Gokongwei vs. SMC
Capital structure
Foundation- minimum paid-up capital 3M
Authorized capital 1 M No. of shares 1M shares
par value 1.00
Amount of shares subscribed
50 K A
50 K B
C 250K
D
E
PAID UP =62,500
Corporation cannot exceed more than 1 M it is the maximum
amount it cannot issue more unless amended
Maximum shares it can issue is 1M shares unless amended
 How much shares should be subscribed?
- Must be at least 25% of the authorized capital stock
 Paid- up must be at least 25%-minimum
 Section 30
- Total subscription compliance with minimum 25% total
- Any combination would comply with the minimum
required by section 30
Section 30. Compensation of directors. - In
the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any
compensation, as such directors, except for reasonable
per diems: Provided, however, That any such
compensation other than per diems may be granted to
directors by the vote of the stockholders representing at
least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall
the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the
preceding year. (n)
 Minimum for a domestic corporation?
- In no case shall the paid- up capital be less than 5k
 Is there a minimum authorized capital imposed by the
code?
- If there is minimum paid-up logically there should also
be a minimum capital =5000
 Minimum paid-up capital for a financing company
metro manila 10 M if located in MM
 Shares of stock
 Purpose of classification
- To specify and define the rights and privileges of the
stockholders;
- For regulation and control of the issuance of sale of
corporate securities for the protection of purchasers and
stockholders.

- As a management control device.
- To comply with statutory requirements particularly
those which provide for certain limitations on foreign
ownership and shares like overseas employment
agencies requiring to own at least 75% of the shares of
stock thereof.
- To better insure return on investment which can be
affected through the issuance of redeemable shares or
preferred shares, i.e., granting the holders thereof,
preference as to dividends and/or distribution of assets
in case of liquidation; and,
- For flexibility in price, particularly, no par shares may
be issued or sold from time to time at different price
depending on the net worth of the company since they
do not purport to represent an actual of fixed value.
 Section 6
- Each shall be equal in all respects to every other share
 Preferred shares
- Specific preference
- Dividends or during liquidation
 No par
- Can sell it with the network of the corporation
 Distinction between the subscribed and outstanding
stocks?
- Section 137
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)
- Voting and dividend rights, it refers to the outstanding
capital stocks
- Only outstanding stocks are allowed to vote and receive
dividends
- Actually the same
 Treasury shares
- are also subscribed shares
- while they remain in the treasury, no voting and
dividend rights
- may be reissued by the corporation
- once reissued they become outstanding stocks again
 common shares
- carry the right to vote
 preferred shares
- grants the holder preference
- preference as to dividends
- preference as to distribution of the remaining assets
upon dissolution or
- both
- YOU MUST STATE THE PREFERENCE BECAUSE IF
NOT THEY ARE PRESUMED TO BE EQUAL
- It may include such other preferences not inconsistent
with the Code. This is so because Section 6 of the said
law allows a stock corporation to issue preferred shares
subject only to the limitations imposed therein which
are:
a. They can be issued only with sated par value; and,
b. The preferences must be stated in the articles of
incorporation and in the certificate of stock, otherwise,
each share shall be, in all respect, equal to every other
share.
 Participating
- Must be stated because the presumption is that it is
participating
Notes on Corporation Law
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5
 Cumulative
- Irrespective of whether or not they where earned
 Preferred
- May be denied
- Unless denied they are still entitled
 What if hindi i-declare kahit na may dividends rights for
the previous years? May they be denied dividend rights
because they are non holders of non-cumulative? NOTE:
YOU CANNOT COMPEL THE CORPORATION TO
DECLARE DIVIDENDS UNLESS IT EXCEEDS 100 %
PAID UP CAPITAL SEC. 43
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)
- It depends because there are three types of non-
cumulative preferred shares
- Discretionary dividend type
- Mandatory if earned
- Earned cumulative or dividend credit type
 Compare cumulative share from non-cumulative, earned
cumulative or dividend credit type
- Cumulative share –whether or not earned
- Non-cumulative earned cumulative or dividend credit
type- only if earned
 Par
- stated par value; shall not be issued less than par
 No par
- without stated par value
- once fully paid no longer liable
 Corporations cannot use its capitals in declaring
dividends; not all can issue no par value section 6
 Voting
- entitled to vote at any motion brought up in writing
 Non-voting
- not entitled to vote
 What types of shares may be denied of the right to vote?
- Preferred and redeemable shares
 Is it correct to state that common shares can never be
denied the right to vote?

- Only preferred and redeemable shares are denied unless
provided in this code
- PWEDENG MA-DENY YUNG COMMON SHARES, KASI
YUNG FOUNDER’S SHARES MERON SILANG
EXCLUSIVE RIGHTS NA SILA LANG ANG MERON, SO
PWEDE SILANG BUMOTO WITH REGARDS TO
SOMETHING NA HINDI NA SAKOP NG COMMON
SHARE RIGHTS
- Example: founders shares- may be given certain rights
and privileges
- Even common shares may be denied the right to vote of
founders’ shares issued <sec.7>
Section 7. Founders' shares. - Founders'
shares classified as such in the articles of incorporation
may be given certain rights and privileges not enjoyed
by the owners of other stocks, provided that where the
exclusive right to vote and be voted for in the election of
directors is granted, it must be for a limited period not
to exceed five (5) years subject to the approval of the
Securities and Exchange Commission. The five-year
period shall commence from the date of the aforesaid
approval by the Securities and Exchange Commission.
(n)
 Do you include non-voting shares in passing a valid
corporate act?
- Even non-voting shares are entitled to vote under
section 6
 Redeemable shares
- Discretionary/optional
- Obligatory or mandatory
 Generally a corporation can reacquire its own shares if
it has unrestricted retained earnings
 Exception: redeemable shares may be reacquired
irrespective of retained earnings
 Treasury shares
- They are treasury while in the treasury account of the
corporation
 May they be reissued by the corporation?
- YES
 If they are reissued will they be denied the right to vote?
- Once reissued they shall become outstanding stocks
again and purchasers shall be entitled to all the rights
and privileges as the other holders have
 Section 57 treasury shares have no voting and dividend
rights. Why not?
Section 57. Voting right for treasury shares. -
Treasury shares shall have no voting right as long as
such shares remain in the Treasury. (n)
- Answer: commissioner vs. manning page 62 first par.
“Although authorities may differ on the exact
legal and accounting status of so-called treasury shares,
they are more or less in agreement that treasury shares
are stocks issued and fully paid for and reacquired by
the corporation either by purchase, donation, forfeiture
or other means. Treasury shares are therefore issued
shares but being in the treasury they do not have the
status of outstanding shares. Consequently, although a
treasury share, not having been retired by the
corporation re-acquiring it, may be re-issued or sold
again, such shares, as long as it is held by the
corporation as a treasury share, participates neither in
dividends, because dividends cannot be declared by the
corporation to itself, nor in meetings of the corporation
as voting stock, for otherwise equal distribution of
Notes on Corporation Law
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6
voting powers among stockholders will be effectively lost
and the directors will be able to perpetrate their control
of the corporation, though it still represents a paid for
interest in the property of the corporation. The foregoing
essential features of a treasury stocks are lacking in the
questioned shares.
In this case, and under the terms of the trust
agreement, the shares of stock of Reese participated
in dividends which the trustee received and the said
shares were voted upon by the trustee in all corporation
meetings. They were not, therefore, treasury shares.”
 When the law speaks of outstanding rights it does not
include treasury shares
 Treasury shares may be reissued
- They are actually assets of the corporation
- Once re-issued they become outstanding stocks again
- The corporation may cancel them; in effect there will be
a reduction in the outstanding capital stocks
- The code does not require ordinary corporations to
provide for restrictions, but it does not likewise prohibit
restrictions
- Example: right of first refusal
- The restriction must be contained in the articles of
incorporation
- If provided in by-laws but not in the articles of
incorporation then it will not be binding
- Restrictions and preferences are mandatorily required in
close corporations
- If it does not provide restrictions it is not a close
corporation
- Specified persons- close corporations
- If not one of those specified you are not included
because there is exclusivity in close corporations
- Should also be in the by-laws not only in the articles of
incorporation
 No transfer clause
 Execution clause
 Acknowledgment
 Treasurer affidavit part of the articles of incorporation
 Section 23-27 minimum qualifications, but there may
be additional
 Grounds for disapproval
- Only substantial and not strict is required
 May the SEC refuse or reject registration?
- <Section 17>
Section 17. Grounds when articles of
incorporation or amendment may be rejected or
disapproved. - The Securities and Exchange
Commission may reject the articles of incorporation or
disapprove any amendment thereto if the same is not in
compliance with the requirements of this Code:
Provided, That the Commission shall give the
incorporators a reasonable time within which to correct
or modify the objectionable portions of the articles or
amendment. The following are grounds for such
rejection or disapproval:
1. That the articles of incorporation or any amendment
thereto is not substantially in accordance with the form
prescribed herein;
 7

2. That the purpose or purposes of the corporation are for example cooperatives- BUREAU OF
patently unconstitutional, illegal, immoral, or contrary COOPERATIVES which register, home
to government rules and regulations; insurance guaranty corporation- HOME
OWNERS
3. That the Treasurer's Affidavit concerning the amount
of capital stock subscribed and/or paid is false; Cagayan Fishing vs. Sandika

4. That the percentage of ownership of the capital stock - Corporations are created by law
to be owned by citizens of the Philippines has not been
complied with as required by existing laws or the
- Commence to exist upon issuance by the CONCERNED
Constitution.
government corporation or agency

No articles of incorporation or amendment to - Prior there to it has no being

articles of incorporation of banks, banking and quasi-
banking institutions, building and loan associations,
trust companies and other financial intermediaries, - The transfer of the property was not valid, it likewise did
insurance companies, public utilities, educational not have the right to transfer
institutions, and other corporations governed by special
laws shall be accepted or approved by the Commission  De jure
unless accompanied by a favorable recommendation of
the appropriate government agency to the effect that
such articles or amendment is in accordance with law. - Strict or substantial compliance
(n)
 De facto
- But the grounds in section 17 are not exclusive
- 4 requisites must go hand in hand take out anyone of
them there can be no de facto corporation
 When will the corporation commence to exist?

1. There is a valid statute under which the corporation

- Section 19
could have been created as a de jure corporation.

Section 19. Commencement of corporate 2. An attempt, in good faith, to form a corporation

existence. - A private corporation formed or organized according to the requirements of law, which goes far
under this Code commences to have corporate existence enough to amount to a “colorable compliance” with the
and juridical personality and is deemed incorporated
law;
from the date the Securities and Exchange Commission
issues a certificate of incorporation under its official
seal; and thereupon the incorporators, 3. A user of corporate powers, the transaction of business
stockholders/members and their successors shall in some way as if it were a corporation; and,
constitute a body politic and corporate under the name
stated in the articles of incorporation for the period of 4. Good faith in claiming to be and doing business as a
time mentioned therein, unless said period is extended
corporation.
or the corporation is sooner dissolved in accordance
with law. (n)
 Are the rights and obligations between officers and
directors of a de jure and de facto the same?
 A corporation de jure can come into existence only upon
the issuance of the certificate of registration by the
- YES. Governed by the same law, rules and regulations
SEC? TRUE OR FALSE?

 Only important in determining, is for the purpose of

- TRUE
applying the rules with regards to the direct and
collateral attack
- EXCEPTION: CORPORATION SOLE <sec. 112>

 The existence of a de jure cannot be questioned even by

Section 112. Submission of the articles of the State, either directly or indirectly
incorporation. - The articles of incorporation must be
verified, before filing, by affidavit or affirmation of the  Existence of a de facto can be questioned only by the
chief archbishop, bishop, priest, minister, rabbi or
State directly in a quo warranto proceeding only
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, Municipality of Malabang vs. Benito
priest, minister, rabbi or presiding elder, duly certified
to be correct by any notary public.
- What is the missing link so as to consider it a de facto?
A law, because the executive order is unconditional
From and after the filing with the Securities
and Exchange Commission of the said articles of - An unconditional act affords no rights, creates no office
incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the
preceding paragraph, such chief archbishop, bishop, - Legal contemplation it was never passed at all
priest, minister, rabbi or presiding elder shall become a
corporation sole and all temporalities, estate and - It can therefore be questioned by any person
properties of the religious denomination, sect or church
theretofore administered or managed by him as such
chief archbishop, bishop, priest, minister, rabbi or  If the certificate of registration has not been issued, may
presiding elder shall be held in trust by him as a a corporation de facto exist?
corporation sole, for the use, purpose, behalf and sole
benefit of his religious denomination, sect or church, - NO!
including hospitals, schools, colleges, orphan asylums,
parsonages and cemeteries thereof. (n)
- Number 4 requirement, good faith in claiming to be and
doing business as a corporation
- CORPORATION SOLE- upon filing of the verified articles
of incorporation, once filed it is vested with a judicial
Hall vs. Piccio
capacity
- Missing link is good faith
 General rule section 19

- The certificate was not yet issued by the SEC, the

- Vested with judicial capacity upon issuance of the
members knew and therefore they were not acting in
certificate by the SEC
good faith, therefore anybody can question its existence

o However it is not accurate according to atty.

 Corporation by estoppel
Ladia because there are those that can issue

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- So defectively formed so that they are not to be
considered a de jure or de facto
- General partners- liable even beyond his promise even
his personal properties are prone to attachment
Lozano vs. Delos Santos
- Founded on principle of equity
- Exercise corporate powers
- rd
Enters with business with 3 parties
- When there is no 3rd persons involved and the problem
arises between there members, therefore they
themselves know that there is no corporation by
estoppel
Albert vs. University
- 1965 case, no section 21 yet
- Applied where the rules governing agency
- A person purporting in behalf of a non existing
corporation
- Section 21, you arrive at the same decision
Chiang Kai Siek vs. CA
- SC based its decision from the provision of the
education act
- It cannot immune itself by virtue of its non compliance
with the law
 Assuming there was no law?
- YES, it may still be sued as a school for the past 32
years the school represented itself as possessed of
juridical personality
 General rule: a 3rd party transacting with a non existent
corporation shall be estopped to deny
Asia banking vs. standard products
- General rule: absence of fraud a person who has dealt
with a non incorporated corporation shall be stopped to
deny from actions in which it had benefited
- Exemptions: when there is fraud the general rule shall
not apply
Salvatierra vs. Garlitos
- As a general rule a person who has contracted it a
corporation lacking personality
- Doctrine is not applicable where fraud takes part in the
transaction
 Another exemption
International express travel and tours vs. CA
- No fraud in this case
- How come Kahn was made liable?
- Doctrine of incorporation
- Applies only if that person is trying to escape from a
contract where he is benefited
- In this case petitioner is not trying to escape liability,
but rather the one claiming from the contract
 Would this apply to foreign corporation?
- YES, it may apply
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8
- Georg Grotjahn vs. Isnami
 A foreign corporation cannot gain access to our courts
unless they attain a license to engage in business in the
Philippines but applying corporation by estoppels, the
court allowed
 Municipality of Malabang case
- No law, hence may be questioned by any person
- An unconstitutional act is not a law, t confers no rights,
it imposes no duties, it affords no protections, it crates o
office, it is in legal contemplation, as inoperative as
though it had never been passes
 Hall vs. Piccio
- No good faith
 Corporation by estoppel
- Admission, conduct or agreement
- Will not apply among members themselves there must
be a 3rd party
- Cannot escape when benefited
- General rule: you deal with a corporation, as to estop it
- Exceptions: 1. fraudulently misrepresents the third
person may file an action directly to those members, 2.
3rd party will not be estopped if he is not trying to escape
liability
 2 possible remedies
- Chiang kai siek case
- Albert case
 What would be the effect if the corporation failed to
commence transaction?
- Automatic
 Operated but becomes subsequently inoperative for 5
years only a ground for suspension, proper notice and
hearing
 Commencement
- Example realty company
CORPORATE CHARTER AND ITS AMENDMENTS
 What do you understand by the word charter? Is it the
same as articles of incorporation?
- Corporate charter is broader
 Franchise
- Primary power granted by the state to be and act as a
corporation
- Secondary franchise is the right or privilege that the
corporation may exercise
 You cannot issue investment contracts without a
secondary franchise, kailangan primary muna hindi
pwede mauna secondary kasi sa section 19 it does not
exist until issued with a certificate of registration or
incorporation
 Corporate entity
- Corporation exist separately and independently from the
stockholders
- Stockholders cannot bring an action, to bring back the
properties of a corporation

- Corporation has no interest in the individual properties
of its members
Sulo ng Bayan vs. Araneta
- Corporation cannot bring an action for the recovery of
the properties of its members
Caram vs. CA
- Stockholders cannot be held liable for the legitimate
obligations of the corporation, they exist separately and
independently from one another
Cruz vs. Dalisay
- Final judgment against a corporation cannot be
enforced against stockholders
Rustan Pulp vs. CA
- Corporation exist separately and independently
- Corporation are juridical entities, they exist only in legal
contemplation, can act only through its authorized
representatives
Soriano vs. CA
- They are not personally liable
- They where signed for and in behalf of the corporation
Palay inc. vs. Clave
- Liabilities incurred by the corporation cannot be
enforced against stockholders, etc., even if stockholders,
etc. happens to own a substantial interest in the
corporation, mere ownership does not disregard the
corporate entity theory
 Corporate entity for legal or legitimate purposes only
 Two or more corporations, one of them will be treated as
a mere alter-ego
 You cannot pierce the veil of corporate fiction when
there are no facts attendant in the case
 Corporate Entity Theory
- The corporation is possessed with a personality separate
and distinct from the individual stockholders or
members and is not affected by the personal rights,
obligations or transactions of the latter
 Instrumentality rule
- Where one corporation is so organized and controlled
and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the
corporate entity of the “instrumentality” may be
disregarded
- Courts are concerned with reality and not form
- Mere ownership of all or substantially all of the shares
of stock of a corporation is not, in itself, insufficient
ground for disregarding the separate corporate
personality. And for the separate personality of the
corporation to be disregarded, the wrong doing must be
clearly and convincingly established
- Fraud must be proven by clear and convincingly
evidence amounting to more than preponderance. It
cannot be justified by speculation and can never be
presumed. And only if it sought to hold the stockholders
liable directly for corporate debt
Palacio vs. Fely
- Piercing the veil of corporate fiction
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- Fely trans and the other corporation is one and the
same
Marvel bldg. vs. David
- There must be facts before the court will be justified in
piercing the veil of corporate fiction
- Corporation was a mere extension of the personality of
the person
Yutivo and sons vs. Court of Tax Appeals
- What where the facts or circumstances arrived by the
court here?
- Subscribed capital where all advanced by Yutivo, the
board where the same as Yutivo
Commissioner of Internal Revenue vs. Norton and
Harrison
- Court applied the general rule
- Mere substantial ownership does not mean that it
has a same corporate entity
La Campana Coffee Factory, Inc. vs. KKM
- Two corporations managed by the same family, workers
were made interchangeably
Emilio Cano vs. CIR
- Sued in there official capacity
- Reverse of Soriano vs. CA (signed in their official
capacity)
Tesco vs. WCC
- The two corporations where located in the same office
Claparols vs. CIR
- Same as NAFLU and A.C. Ransom
Concept builders vs. NLRC
- Instrumentality rule. What is the instrumentality rule?
“where one corporation is so organized and controlled
and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the
corporate entity of the “instrumentality” may be
disregarded.”
- Has no separate mind of its own. What is the degree of
control?
1. Control, not mere majority or complete stock control,
but complete domination, not only of finances but of
policy and business practice in respect to the
transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will
or existence of its own.
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty or dishonest and
unjust act in contravention of plaintiff’s legal rights;
and,
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained
of.
- The absence of one of the elements prevents “piercing
the corporate veil.” In applying the “instrumentality” or
“alter ego” doctrine, the courts are concerned with
reality and not form, with how the corporation operated
and the individual defendant’s relationship to that
operation.

 There must facts and circumstances before warrant
piercing the veil of corporate fiction
 The control necessary does not mean stock ownership
MCConnel vs. CA
- were located in the same floor
- “while the mere ownership of all or nearly all of the
capital stock of a corporation does not necessary mean
that it is a mere business conduit of the stockholder,
that conclusion is amply justified where it is shown, as
in the case before us, that the operations of the
corporation were so merged with the stockholders as to
be practically indistinguishable from them. To hold the
latter liable for the corporation’s obligations is not to
ignore the corporation’s separate entity, but merely to
apple the established principle that such entity cannot
be invoked or used for purposes that could not have
been intended by the law that created that separate
personality.”
Tan boon bee vs. Jarencio
- Why would a drug company need a printing machine
- The property must be in pursuance of a company
business
Cease vs. CA
- Alter-ego or the extension of the person of forest ware
does the court pierced the veil of corporate fiction
- As to not deprive the holders of their successional rights
- Mere ownership of all or substantially all is not a
justification of piercing the veil of corporate fiction
 Fraud must be proven by clear and convincing evidence
cannot presume or speculate, there must be facts and
circumstances
 Fraud must be clear and convincing evidence more than
preponderance
Remo Jr. vs. IAC
- The resolution was not entered to defraud anyone
Del Rosario vs. National Labor Commission
- The wrongdoing must be clearly established
- There must be facts to support
- Payment of claims cannot thus be presumed
Indophil Textile Mill vs. CALICA
- How do you distinguish this ruling to La Campana,
having the same issues:
- La campana, one payroll, employees were made
interchangeable. Acrylic had its own standards
PNB vs. Ritratto Group
- Control test
- Not mere majority but rather complete
- Twin ace was only a subsequent interested party
- Assets and machineries
 Amendment of the articles of incorporation
- Express power granted to a corporation
 Section 16
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- Appraisal right
- Section 81 to object on certain acts and transactions
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)
- Right granted only in specified instances
Are non-voting shares included in amending the articles of
incorporation
1 100/s
XYZ-----ABC
2 100/s
To
10 100/s
=1M/S what would be
the 2/3?
Section 6 last paragraph
Voting shares are excluded except the foregoing instances
1 1
2 2
3 3
4 4
5 5
6 6
1 & 2=absent
1&2=absent but gave their written assent
3 & 4= objected
3&4=objected
5 & 6= approved the amendment 5&6=approved
Would there be a valid amendment
 Special amendments 37 & 38 shortening that would
result to dissolution require prior approval by the SEC
Section 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)
 11

Section 38. Power to increase or decrease Bonds issued by a corporation shall be

capital stock; incur, create or increase bonded registered with the Securities and Exchange
indebtedness. - No corporation shall increase or Commission, which shall have the authority to
decrease its capital stock or incur, create or increase determine the sufficiency of the terms thereof. (17a)
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 vote must be cast at the meeting called for that
the outstanding capital stock shall favor the increase or purpose
diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness.  Written assent would not suffice
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  When do amendments become valid and effective?
and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or - Only upon the approval of the SEC TRUE OR FALSE?
the incurring or increasing of any bonded indebtedness
is to be considered, must be addressed to each - FALSE because it can be valid upon the date of filing if
stockholder at his place of residence as shown on the
not acted upon within 6 months without fault
books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served attributable to the corporation
personally.
 Why is it retroactive?
A certificate in duplicate must be signed by a
majority of the directors of the corporation and  What provision may be amended, altered or repealed
countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:  Can you change name, address for example she married
or changed address?
(1) That the requirements of this section have been
complied with; - NO. you cannot change that

(2) The amount of the increase or diminution of the  Fait accompli, are beyond the powers or authority of the
capital stock; corporation to change, alter or modify. These would
include the following:

(3) If an increase of the capital stock, the amount of

capital stock or number of shares of no-par stock - Names of the incorporators and
thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount - The incorporating directors or trustees,
of capital stock or number of no-par stock subscribed by
each, and the amount paid by each on his subscription - The name of the treasurer originally or first elected by
in cash or property, or the amount of capital stock or
the subscribers or members to act as such until his
number of shares of no-par stock allotted to each stock-
holder if such increase is for the purpose of making successor has been duly elected and qualified,
effective stock dividend therefor authorized;
- The number of shares and amount originally subscribed
and paid out of the original authorized capital stock of
(4) Any bonded indebtedness to be incurred, created or
increased; the corporation,

- The date and place of execution of the articles of

(5) The actual indebtedness of the corporation on the
incorporation,
day of the meeting;

- The signatories and acknowledgment thereof.

(6) The amount of stock represented at the meeting; and
- All other provisions or matters stated or contained in
(7) The vote authorizing the increase or diminution of the articles are subject to amendment.
the capital stock, or the incurring, creating or increasing
of any bonded indebtedness.
 Founder’s or signatories hindi pwede palitan

Any increase or decrease in the capital stock  Names, nationalities- you cannot
or the incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the
 Capital- right granted by law to all corporation
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.
 Paid up capital- NO
 Restriction and transfer of shares in ordinary stock
corporations
- You can, but close corporation cannot
- Section 96, otherwise it will not be a close corporation
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

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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.
 Transfer clause, executor clause, acknowledgment,
treasury affidavit-NO
Philippine First Insurance case
- Mere change in the name of a corporation or by merely
complying with the law is general amendment
- It does not change its personality. It is the same person
in a different name. the charter is the same
 Amendment of a corporate term
- Extending the same can never be made 7 years prior?
TRUE or FALSE
- FALSE. It can be if there are justifiable reasons for
earlier extension as may be determined by the SEC
 Can you extend the corporate term if it has already
expired?
- Once the term expires without an amendment having
happen it ceases to exist as a body politic. It is dissolved
automatically on the day it expires.
 Alhambra cigar and PNB case
 Instances when the SEC allowed extension whose term
has already expired
- All of them involved are institutions of learning, it was
the case in order to avoid confusion that would arise
later on.
BOARD OF DIRECTORS/TRUSTEES
 Section 23
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.
- Controlled by the board of directors
- Authority are however restricted to the day to day
- Stockholders may have all the profit but will turn over
the management to the governing board
- But unless the law provides the power may be delegated
 General rule
- Corporations must sit and act as a body
- Will be bound by corporate officers if they acted within
the 5 classification page 150
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12
Ramirez vs. Orientalist co.
- What was the position of Fernandez in this case?
TREASURER
- Why did the court rule that actions of Fernandez bound
the corporation when he is not even a board of director?
“if a man is found acting for a corporation
with the external indicia of authority, any person not
having notice of want of authority, may usually rely
upon those appearances; and if it be found that the
directors had permitted the agent to exercise that
authority and thereby held him out as a person
competent to bind the corporation, or had acquiesced in
a contract and retained the benefit supposed to have
been conferred by it, the corporation will be bound,
notwithstanding the actual authority may never have
been granted.”
- Contracts must be made by the director and not the
stockholders
- Actions of the stockholders in such matters is only
advisory and not in any way binding in the corporation
Barreto vs. La previsora Filipina
- Everything emanates from the board of directors
- Stockholders action is merely advisory except their
approval or vote is necessary to prove a valid corporate
act
 Qualifications:
- No citizenship requirement, at least majority must be
residents
- Can have a governing board consisting solely of
foreigners
- But we have to take into consideration partly
nationalized industries and other laws which prohibits
or limits foreign ownership
- Anti-dummy act
- Utilization development of natural resources 60% must
be owned by Filipino citizens, therefore they only own
40%---10 members they can only have 4 seats, but not
entirely correct because the law may provide otherwise;
educational institutions restricted to Filipinos, but there
are exceptions when created by religious and charitable
institutions.
- By-laws may provide additional qualifications and
disqualifications
- To qualify as a director he must own at least 1 share
 Should the stockholder be the equitable or beneficial
owner in order to qualify as a director?
- NO, it is not necessary, as long as you are listed in the
books as owner of one share
Lee vs. CA
- As long as you are listed in the books as owner of one
share
- Under the old law he must be the beneficial owner and
legal owner thereof but in the new law it is not required
as long as it stands in his name he is qualifies
1 A-100t/S B (own in the trust of X) is B qualified to be a
director?
2
3-10
2– transferring there voting rights in favor of VT
 13

Other rights will accrue in favor of them, but not the voting rights  What is cumulative voting?

voting rights must be recorder in the books of the corporation that - Process of multiplying the number of shares to the
it is transferred number of director to be elected

PNB-IFL- wholly owned subsidiary of PNB
PNB will assign to PNB-IFL nominal shares and PNB-IFL now will
be able to be nominated
 Gen. Rule:
- Term of one year who will serve as such until there
successors are elected and qualified
 Exception:
- Non-stock corporation can serve for a term of 3 years
- Educational non-stock- term of the governing board can
be 5 years
 May this term exceed one year?
- Yes, they may serve in a hold over capacity until their
successors have been duly elected and qualified
Detective and protective bureau vs. Cloribel
- Matter of right granted to stockholders in a stock
corporation
1 to 5 has 200k/s and members of the same family- majority 800k
they have 4M votes they are guaranteed 4 seats
6 to 10 are not related- 1 seat 1M votes
 Cumulative to allow the minority to have a rightful
representation in the board
 Is it allowed in a non-stock corporation?
- Not generally available
- Section 89 unless the articles or by-laws allow
cumulative voting
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.

- In the by-laws, managing director must be elected from

among themselves 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)
- Must be duly elected and qualified

Voting by mail or other similar means by

How are the directors elected?
members of non-stock corporations may be authorized
by the by-laws of non-stock corporations with the
1-100T/S approval of, and under such conditions which may be
prescribed by, the Securities and Exchange
2-100T/S Commission.

3-100T/S

to 10=1M/S  Other corporate officers other than the governing board

section 25
 Do you include the vote of 1 & 2 to have a quorum to
have a valid meeting?
Section 25. Corporate officers, quorum. -
Immediately after their election, the directors of a
- NO, quorum requirements is 401,000 corporation must formally organize by the election of a
president, who shall be a director, a treasurer who may
Quorum requirement is 501k or may not be a director, a secretary who shall be a
resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two
Holders of non-voting shares are only entitled to vote in last par.
(2) or more positions may be held concurrently by the
Of section 6 same person, except that no one shall act as president
and secretary or as president and treasurer at the same
1-200k time.

2-200k The directors or trustees and officers to be

elected shall perform the duties enjoined on them by law
3-200k and the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater
4-100k majority, a majority of the number of directors or
trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate
5-100k business, and every decision of at least a majority of the
directors or trustees present at a meeting at which there
6-100k is a quorum shall be valid as a corporate act, except for
the election of officers which shall require the vote of a
majority of all the members of the board.
7-50k

8-40k Directors or trustees cannot attend or vote by

proxy at board meetings. (33a)
9-5k
 Is the president required to be a stockholder. YES
10-5k
 The chairman may be another person
=1MS
 The president may also be another person
1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10,
tumakbo and ninominate nila yung sarili nila and cast all their  Prohibited is president to be secretary or treasurer at
shares on themselves the same time

 Who wins? Or who gets elected?  Board of director must sit and act as a body to arrive at
a corporate act
- No vote requirement, the one who gets the most number
of votes gets elected, section24.

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 What would constitute a quorum if 5 then 3 must be
present
 May the vote of 2 members past a 5 man governing
board pass a valid corporate act?
- YES. Voting requirement is majority of directors present
at which there where a quorum
1 1 and 2 present=valid
requirement
2 1 and 2 voted yes
3 3 voted no
4 practices of the company and by the knowledge which
5 have, of acts and doings of its subordinates in and
 Is it absolute?
- NO, except in the election because it requires the
majority of all the members of the board
- If by-laws or articles provide a higher voting requirement
 Artificial beings must act through its members and act
as a body to have a valid corporate act
 Exception:
- Delegation
- Expressly conferred
- Where the officer or agent is clothed with actual or
apparent authority
- Otherwise it will not bind the corporation
 Yao ka sin trading case “already asked in the bar”
- Only bind the corporation to the extent of authority
confined to him or virtue of customs, usage and policy
- Must pass first the controller and counsel
 What if the notice requirement is not complied with?
Lopez realty vs. Fotencha
- Notice requirement must be complied with hence it
should have been with force and effect, but according to
the SC, it may be ratified expressly if there is a
subsequent meeting called for that purpose
- Impliedly through acts
- Asuncion was aware of the corporations obligation
- There was implied ratification or she was estopped
Pua casim vs. Neumark and Co.
- Considered 3 circumstanced
- Check which was the proceed of the loan which was
endorsed and deposit in the corporate account
- Neumark as president and also stockholder
Yu chuck vs. Kong Li Po
- General manager usually has the power to hire but the
SC said the contract must be reasonable
- The contract here is so onerous that it would throw the
corporation into insolvency
Francisco vs. GSIS
- GSIS cannot evade the binding effect of the telegram
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- Only 15 months later that the corporation said there
was a mistake
- The silence coupled with the unconditional acceptance
of the other subsequent remittances is binding to the
corporation
Board of liquidators vs. Kalaw
voting “Settled jurisprudence has it that where
similar acts have been approved by the directors as a
matter of general practice, custom and policy, the
general manager may bind the company without formal
authorization of the board of directors. In varying
language, existence of such authority is established, by
proof of the course of business, the usages and
the board of directors has, or must be presumed to
about the affairs of the corporation. So also, “xx
authority to act for and bind a corporation may be
presumed from acts of recognition in other instances
where the power was in fact exercised.” “xx Thus, when,
in the usual course of business of a corporation, an
officer has been allowed in his official capacity to
manage its affairs, his authority to represent the
corporation may be implied from the manner in which
he has been permitted by the directors to manage its
business.”
In the case at bar, the practice of the
corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading
activities for and in NACOCO’s behalf without prior
board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior
approval on all corporate contracts. But that Board
itself, by its acts and through acquiescence, practically
laid aside the by-law requirement of prior approval.
- Kalaw signed alone and said contracts were submitted
to the board of directors after its consummation and not
before
Buenaseda vs. Bowen
- Express ratification is made through a formal board
action
- Implied ratification is through: silence or acquiescence,
acceptance benefits and lastly recognition or adoption
 An unauthorized act may nevertheless be binding either
by express or implied by estoppels
 By virtue of silence the board had impliedly accepted the
act
 By recognition or adoption
 By virtue of payment of obligations arising therefore-
Lopez realty
 May directors or trustees be disqualified to act as such?
- YES, crime, etc. disqualifications in book
- Possess or dispossess any of the qualifications or
disqualifications , cease to hold at least one share
 May directors be ousted from office?
- At least 2/3 of members representing outstanding
capital stock. Again notice requirement must be
complied with
1-200 1-5 same
family
2-200
3-200
4-100

5-100 electing
6-100 6 to 10 not
related
7-50
8-40
9-5
10-5 outstanding
director
 Meetings called by the president or the secretary
ordered by the president
 It depends if the removal is without cause they cannot
do so because removal without cause shall not deprive
the minority stockholders or members of the right of
representative
 If with cause they can even if it will prejudice the rights
of the minority, provided of course additional
requirements by-laws and articles of incorporation
 Who will fill up the vacancy created due to the ouster of
a member of the board of directors <section 29>
Section 29. Vacancies in the office of director
or trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by the
stockholders or members or by expiration of term, may
be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called for
that purpose. A director or trustee so elected to fill a
vacancy shall be elected only or the unexpired term of
his predecessor in office.
Any directorship or trusteeship to be filled by
reason of an increase in the number of directors or
trustees shall be filled only by an election at a regular or
at a special meeting of stockholders or members duly
called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so
stated in the notice of the meeting. (n)
 Other than by removal or expiration of term they do not
have the power
 When will the vacancies be filled up?
 Is notice required, to fill up vacancies due to removal?
 What if the vacancy is due to an increase, can it be filled
up in the same meeting where in the number is
increased?
 Election due to removal-in the same meeting notice is
not required
 Election due to increase in number- it must be so stated
in the meeting
 Section 30
Section 30. Compensation of directors. - In
the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any
compensation, as such directors, except for reasonable
per diems: Provided, however, That any such
compensation other than per diems may be granted to
directors by the vote of the stockholders representing at
least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall
the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the
preceding year. (n)
- Generally not entitled to receive compensation because
they render it gratuitously
- Unless the by-laws allows
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- Stockholders may also grant pursuant to a majority vote
- Must not exceed net income of 10% tax of the preceding
year
- Acting in special capacity
- In, sum directors may receive compensation when
1. there is a provision in the by-laws to that effect
2. When the stockholders, by a majority vote of the
outstanding capital stock grant the same; and,
3. If the director renders extra-ordinary or unsual service
Central cooperative exchange vs. Tibe
- By-laws may allow, stockholders may also allow such
 What do you understand by the phrase “as such
directors”
Western institute vs. Salas
- Compensation was granted without by-laws authority
- Prohibition is not a sweeping rule
- Members of the board may receive when they receive in
a special capacity
- Mere act of the board will suffice
 Is the 10% ceiling applicable to other officers?
- NO. the phrase “as such director” was used twice
<Section 30>
- The SC ruled that the 10% ceiling will not likewise apply
if they acted in a capacity other than “as such directors”
Government vs. El Hogar
- Judicial intervention is not proper
- The appropriates remedy is to those who can make or
unmake the by-laws
 Liability of corporate officers
- Obligations incurred by those acting for and in behalf of
the corporations are not there’s BUT there are
exceptions even if they are acting for and in behalf of the
corporation
Tramat vs. CA
- General rule was applied in the case
- Ong acted as officers and acted within the scope of his
authority
- Court laid down 4 instances when even if acting within
the scope of his authority he is held solidarily liable
1. He assents (a) to a patently unlawful act of the
corporation, or (b) for bad faith, or gross negligence in
directing its affairs, or (c) for conflict of interest,
resulting in damages to the corporation, its stockholders
or other persons;
2. He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with
the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable
with the corporation;
4. He is made, by a specific provision of law, to personally
answer for his corporate action.

- Watered stocks- issued, fully paid up when in fact they
have not been fully paid or promised as such
Llamado vs. CA
- The corporate entity theory cannot be used as a defense
to escape liability in violation of B.P. 22
- Where the check is drawn by a corporation the persons
who signed the check shall be liable.
Uichico vs. NLRC
- Labor case corporate directors and officers are solidarily
liable with the corporation for the termination of
employment of corporate employee done with malice and
bad faith
 3 fold duty of directors
- obedient
- diligent
- loyal
 Business judgment rule
- Questions of policy and management are left solely to
the honest decision of the board of directors and the
courts are without authority to substitute its judgment
as against the former. The directors are the business
managers of the corporation and as long as they act in
good faith, its actuations are not subject to judicial
review. Montelibano vs. Bacolod Murcia Milling
- questions of policy and management are left solely to
the board of directors
- BOD, business manager of the corporation and as long
as they act in good faith, its actuations are not subject
to judicial review
- They are not insurer of the property of the company,
they were guarantors that the enterprise undertaken by
the corporation shall be successful
Montelibano vs. Bacolod Murcia Milling Co.
- Directors are not liable due to imprudence or honest
error of judgment
- Duty of loyalty of corporate directors
- 31,32,33,34
- 31,32,33- specific instances when corporate officers may
violate loyalty
- 32,33 self-dealing and interlocking director
 Corporate opportunity doctrine
- It places a director of a corporation in the position of a
fiduciary and prohibits him form seizing a business
opportunity and/or developing it at the expense and
with the facilities of the corporation. He cannot
appropriate to himself a business opportunity which in
fairness should belong to the corporation.
 Last paragraph of section 31 and the provision of
section 34 make reference to recovery of “forbidden
profits”
 Distinction between section 31 and 34 relative to the
ratification by the stockholders
- The second paragraph of section 31 which makes a
director liable to account for profits if he attempts to
acquire or acquires any interest adverse to the
corporation in respect to any matter reposed in him in
confidence as to which equity imposes a disability upon
him to deal in his own behalf is not subject to
ratification by the stockholders. Whereas, in section 34
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16
if a director acquires for himself a business opportunity
which should belong to the corporation, he is bound to
account for such profits unless his act is ratified by the
stockholders owning ore representing at least 2/3 of the
outstanding capital stock.
- If reposed in him in confidence, not subject to
ratification
- If the acquisition is merely that of a business
opportunity which has not been reposed in him in
confidence, the same may be subject to ratification by
the stockholders.
Director x co.
A-REALTY
B
C Z owns property and is going
abroad never to Return, he wants
to sell for 25M the fair market
value is 30M
D
E
E goes to Z and offers to pay the property for 26 M and later he
sells it for 30M making 4M profit, one of the stockholders learned
and complains that he should submit the profits. E said that he
will move for ratification of his actuation. Can it be ratified?
- It can be ratified he merely acquired a business owning
to the corporation
- It would be different if it was entrusted in his confidence
Another scenario:
Had A not attended the meeting he would not have known of the
sale it is then a matter reposed in him in confidence
 A corporation cannot reaquire its share if it has no
restricted unretained earnings
Strong vs. Rapide
- What duty did he violate?
- He violated his duty of loyalty
- The law would be impotent if the sale were not
invalidated
 Self-dealing director and interlocking director
 What is a self-dealing director?
- Director of a corporation dealing or transacting business
with his corporation
 Are the contracts and dealing of a self0dealing director
valid?
 General rule: voidable
 May the contracts of a self-dealing director be valid per
se.
- YES. If all the 4 conditions are present they will be valid
per se
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
 17

4. That in case of an officer, the contract has been B-

previously authorized by the board of directors.
C-
 When do they become voidable?
D-
- When any of the two requisites are absent it is voidable,
but subject to ratification by 2/3 of the outstanding E-
capital stock or 2/3 of the member
 Both companies enter into a contract and A sits, is the
 Requisites for ratification (subject to ratification by the contract valid?
stockholders holding or representing at least 2/3 of the
outstanding capital stock or 2/3 of the members.) - Yes on the ground of fraud or if it is unfair

- it must be at a meeting called for the purpose - May be subject to the provision of section 32

- full disclosure of the adverse interest of the director - Section 32 contract may become voidable, hence it may
concerned must be made also be ratified

- the contract is fair and reasonable under the X Co.

circumstances Y Co.

 Problem if self-dealing director involved owns all or A owe 20%

substantially all of the shares of stock of the corporation A owe 20%
thereby making it easily possible to have the contract
ratified Is it generally valid or voidable? VALID

- last sentence of section 32 should be made to apply by 25%

determining the reasonableness and fairness of the
contract
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 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)
25% VALID
15%
25% VOIDABLE SUBJECT TO section 32
More than 20 substantial
 BOD mismanages corporate officers. Who may file a
suit?
- General rule: BOD which can institute a case because it
has all the powers. To allow stockholders to file would
violate the doctrine of corporate entity and may result to
multiplicity of suits
- Stockholders cannot therefore generally file a case
EXCEPT of course in a DERIVATIVE SUIT
 Derivative suit
- An action based on injury to the corporation-to enforce
a corporate right- wherein the corporation itself is joined
as a necessary party, and recovery is in favor of and for
the corporation.
- Remedy granted by law to stockholders to institute a
case to remedy a wrong done directly to the corporation
and indirectly to the stockholders, if the board refuses
to do so. Otherwise if not they would be left without any
recourse
 Available suits

 individual or personal
Prime white cement vs. IAC

- Wrong done against his person as a stockholder

- a director of a corporation owes a position in trust

 Class suit
- in case of conflict between himself and that of the
corporation, he cannot sacrifice the interest of the
- Filed by a stockholder in representation of other
corporation to his own advantage
stockholders

- as a director he should have acted in a manner as not to

- A wrong or redress done, a derivative suit in nature
unduly prejudice the corporation

 Intra-corporate remedies
- he cannot be allowed to enrich himself

- Demand to the BOD to institute such action

 May corporate directors purchase the corporate
property?
- Negated by the BOD

Mead vs. Mccullogh

- The one who instituted must be a stockholder at the
date when the act was done, must have been a
- interlocking director- a director of one corporation who
stockholder by that time
deals and transacts business with another corporation
who is himself a director
 Demand will not be required if the majority of the BOD
are the one’s guilty of the wrong charged
A- director of X company also a director of Y corporation

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 The corporation must be made a party in the case
whatever side will not matter because under Philippine
law misjoinder is not a ground for dismissal
 Non-joinder is a ground for dismissal
 Any benefit should inure to the corporation
 Stockholder bringing the action is entitled to
reimbursement such as attorney’s fee ONLY IF the case
is SUCCESSFUL to avoid harassment suit to their
management
Pascual vs. Orozco
- By virtue of the fact that he is a stockholder, may
maintain a derivative suit
- Depend on how, when and what reason
- Seeking for the years 1898 all the way 1907
- Only became a stockholder in 1903
- He can sue only in 1903 forward because he must be a
stockholder
- The right of action is personal in nature. He became a
stockholder only in 1902
 Derivative suit
- By a stockholder to address a wrong done against the
corporation and the stockholder indirectly
- Essential requisite must have been a stockholder from
the time the act complained of took place
- Cannot institute an action from the years he was still
not a stockholder
Everett vs. Asia Banking
- Stockholders cannot ordinarily commence suit in equity
and such is in the hands of its BOD however there are
exceptions when the BOD will not sue since they are
themselves principals to the fraud.
Republic vs. Cuaderno
- The facts constitute sufficient cause of action
- It is not the corporate interest to shield one from
criminal prosecution which is personal interest
- Perez is not suing in his behalf, but in behalf of the
corporation
Western institute vs. Salas
- Assuming it was filed in the proper forum would there
argument that it is a derivative suit prosper? NO. it is
people of the Philippines vs. individual director, it must
be stated in the complaint that it is being instituted as a
derivative suit and for and in behalf of the corporation
- Granting arguendo, that this is a derivative suit, the
same is still outrightly dismissible for having been
wrongfully filed in the regular court devoid of any
jurisdiction to entertain the complaint. The case should
have been filed with the SEC which exercises original
and exclusive jurisdiction over derivative suits, they
being intra-corporate disputes, per Section 5 (b) of P.D.
902-A
San Miguel vs. Khan
- Was a demand made? NO
- It is not necessary because he objected in the board
meeting, but still it was adopted therefore it was useless
Chase vs. Buencamino
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- Argument that he should be in estoppels since he filed
in the U.S.
- Assuming the case prospered in the U.S. would not
estoppels apply as against him? NO for estoppels to step
in it must be a case by the corporation
Reyes vs. tan
- Corporate director are guilty of breach of trust
- A stockholder may institute an action to remedy a wrong
done
- Fraud in the conduct of corporate affairs
Gamboa vs. Victoriano
- Is derivative suit appropriate in this case
- They are not vindicatory damage done to the
corporation, but rather they where vindicating damage
against him
- Violation of their rights as individuals, hence derivative
suit is not the remedy
Evangelista vs. Santos
- Derivative suit is not proper
- Claim is not for the benefit of the corporation, but rather
his individual benefit
 From the cases above cited, these are the requirements
and the procedures that must be followed in order that
a derivative suit may prosper
1. That the party bringing the suit should be a stockholder
as of the time the act or transaction complained of took
place, or whose shares have evolved upon him since by
operation of law. This rule, however, does not apply if
such act or transaction continues and is injurious to the
stockholder or affect him specifically in some other way.
The number of his hares is immaterial since he is not
suing in his own behalf or for the protection or
vindication of his own right, or the redress of a wrong
done against him, individually, but in behalf and for the
benefit of the corporation.
2. He has tried to exhaust intra-corporate remedies, he has
made a demand on the board of directors for the
appropriate relief but the latter had failed or refused to
heed his plea. Demand, however, is not required if the
company is under the complete control of the directors
who are the very ones to be sued (or where it becomes
obvious that a demand upon them would have been
futile and useless) since the law does not require a
litigant to perform useless acts;
3. The stockholder bringing the suit must allege in his
complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other
stockholders similarly situated, otherwise, the case is
dismissible. This is because the cause of action actually
devolves on the corporation and not to a particular
stockholder.
4. The corporation should be made a party, either as
party-plaintiff or defendant, in order to make the court’s
judgment binding upon it, and thus, bar future
litigation of the same issues. On what side the
corporation appears loses importance when it is
considered that it lay within the power of the court to
direct the making of amendment of the pleading, by
adding or dropping parties, as may be required in the
interest of justice. Misjoinder of parties is not a ground
to dismiss action; and,
5. Any benefit or damages recovered shall pertain to the
corporation. This is so because in all instances,
derivative suit is instituted for and in behalf of the
corporation and not for the protection or vindication of a
right or rights of a particular stockholder, otherwise, the

aggrieved stockholder should institute, instead, an
individual or personal suit to vindicate his personal or
individual right. Or, for that matter, representative or
class suit for all other stockholders whose rights are
similarly situated, injured or violated, personally or
individually.
 Executive committee
- Not allowed under the OLD law
 How may executive committee created and constituted?
- Section 35
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 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.
- Said committee may act and bind the corporation by the
majority vote of all its members except with respect to
those matters provided for in sec. 35 these are:
1. Approval of any action for which shareholders’ approval
is also required
2. The filing of vacancies in the board;
3. Amendment or repeal of by-laws or the adoption of new
by-laws;
4. Amendment or repeal of any resolution of the board
which by its express terms is not so amenable or
repealable; and,
5. Distribution of cash dividends to the shareholders.
 May the board alone create an executive committee
without any authority provided for the by-laws?
- NO board of directors must sit and act as a body to have
a valid transaction
 May a non-member of the board of directors be a
member of the executive committee?
- NO, all of them must be members of the board of
directors
- BOD cannot act by proxy it would be abdication of
powers
 Purpose clauses necessary because it confers and also
limits the actual authority of the corporation
CORPORATE POWERS AND AUTHORITY
 Corporate authority may be classified into three classes
namely:
1. Those expressly granted or authorized by law inclusive
of the corporate charter or articles of incorporation;
2. Those impliedly granted as are essential or reasonably
necessary to the carrying out of the express powers;
3. Those that are incidental to its existence.
 Section 36 to 45- POWER GRANTED BY LAW
Section 36. Corporate powers and capacity. - Every
corporation incorporated under this Code has the power and
capacity:
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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. (13a)
Section 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)
Section 38. Power to increase or decrease capital stock;
incur, create or increase bonded indebtedness. - No corporation
shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority
vote of the board of directors and, at a stockholder's meeting duly
called for the purpose, two-thirds (2/3) of the outstanding capital
stock shall favor the increase or diminution of the capital stock, or
the incurring, creating or increasing of any bonded indebtedness.
Written notice of the proposed increase or diminution of the capital
stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholder's
meeting at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to each
stockholder at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with
postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the
directors of the corporation and countersigned by the chairman
and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been
complied with;
(2) The amount of the increase or diminution of the
capital stock;

(3) If an increase of the capital stock, the amount of
capital stock or number of shares of no-par stock
thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount
of capital stock or number of no-par stock subscribed by
each, and the amount paid by each on his subscription
in cash or property, or the amount of capital stock or
number of shares of no-par stock allotted to each stock-
holder if such increase is for the purpose of making
effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or
increased;
(5) The actual indebtedness of the corporation on the
day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of
the capital stock, or the incurring, creating or increasing
of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring,
creating or increasing of any bonded indebtedness shall require
prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of
the corporation and the other shall be filed with the Securities and
Exchange Commission and attached to the original articles of
incorporation. From and 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 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.
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.
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A sale or other disposition shall be deemed to cover substantially
all the corporate property and assets if thereby the corporation
would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or
members, the board of directors or trustees may, nevertheless, in
its discretion, abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets, subject to the
rights of third parties under any contract relating thereto, without
further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or otherwise
dispose of any of its property and assets if the same is necessary
in the usual and regular course of business of said corporation or
if the proceeds of the sale or other disposition of such property and
assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting
rights, the vote of at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter into any
transaction authorized by this section.
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)
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)
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)
Section 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
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least the majority of the outstanding capital stock, or by at least a
majority of the members in the case of a non-stock corporation, of
both the managing and the managed corporation, at a meeting
duly called for the purpose: Provided, That (1) where a stockholder
or stockholders representing the same interest of both the
managing and the managed corporations own or control more than
one-third (1/3) of the total outstanding capital stock entitled to
vote of the managing corporation; or (2) where a majority of the
members of the board of directors of the managing corporation
also constitute a majority of the members of the board of directors
of the managed corporation, then the management contract must
be approved by the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total outstanding capital
stock entitled to vote, or by at least two-thirds (2/3) of the
members in the case of a non-stock corporation. No management
contract shall be entered into for a period longer than five years for
any one term.
The provisions of the next preceding paragraph shall apply to any
contract whereby a corporation undertakes to manage or operate
all or substantially all of the business of another corporation,
whether such contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such service
contracts or operating agreements which relate to the exploration,
development, exploitation or utilization of natural resources may
be entered into for such periods as may be provided by the
pertinent laws or regulations. (n)
Section 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)
Section 36
 Where should the corporation be sued?
- principal office is important because it establishes the
residence of the corporation and determining service of
summons, venue of action
- it can be sued in the city or municipality where its
principal office is found
“agent” of the corporation. The Filoil case,
involving the litigation lawyer of the
corporation who precisely appeared to
challenge the validity of service of summons
but whose very appearance for that purpose
was seized upon to validate the defective
service, is an illustration of the need for this
revised section with limited scope and specific
terminology. Thus the absurd result in the
Filoil case necessitated the amendment
permitting service only on the in-house
counsel of the corporation who is in effect an
employee of the corporation, as distinguished
from an independent practitioner.”
o notes: additional knowledge
- special appearance enter for that particular appearance
you are not the counsel in the case
- would apply only if it does not involve an intra-
corporate controversy (controversy between and among
the stockholders)
- upon any of the statutory officers or officers fixed in the
by-laws any secretary, any of the directors; any
managers in the by-laws
 Seal
- merely ministerial or permissive
 Power to amend
- section 16
- special 37,38,120
 Power to adopt by-laws
- section 46-48

 Principal office is also important for venue of meetings  Power to issue or sell stocks and to admit members

 Non-stock corporation may provide in its by-laws that - stock of stockholders and provision governing non-
the venue of meeting be anywhere in the Philippines stock

 Upon whom service of summons be made?  Power to acquire or alienate real or personal property

- Section 11. Service upon domestic private juridical - is there any limitation? YES
entity- when the defendant is a corporation, partnership
or association organized under the laws of the
- Two specific limitation
Philippines with a juridical personality, service may be
made upon the president, managing partner, general
1. Section 36, as lawful transactions of business of the
manager, corporate secretary, treasurer, or in house
corporation may reasonably and necessarily require
counsel.

2. Constitution and law

Delta motor vs. Mangosing

Luneta vs. A.D. Santos

- strict compliance is necessary

- Importance of the purpose clause

- should be served to those named in the statute

- Cannot have the power to acquire

- secretary of a dep’t are not those included in the statute

- Cannot engage in land transportation

E.B. Villarosa vs. Benito
- Doctrine of limited capacity
- decision En Banc repeals all other pronouncement

Gov’t vs. El Hogar

- section 13 Rule 14 was repealed

- As the lawful transaction of its business may

- the old rules was ambiguous and broad and at all time
reasonably represent
illogical

 the particular revision under Section 11 of Rule 14 was Director of Lands vs. CA
explained by retired Supreme Court Justice Florenz
Regalado, thus: - Exception to the rule in the constitution

“xxx the then section 13 of this Rule allowed - Alienable public land
service upon a defendant corporation to “be
made on the president, manager, secretary, - Converts the property to a private land automatically
cashier, agent or any of its directors.” The once converted it can now be registered
aforesaid terms were obviously ambiguous
and susceptible of broad and sometimes  Power to make donation
illogical interpretations, especially the word
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- Limitation section 36 par.9
- These are circumstances, however, under which a
donation by a corporation may be to its benefit as a
means of increasing its business or promoting
patronage. Thus, paragraph 9 of section 36 expressly
authorizes a corporation to make donations. The only
limitations imposed are the following:
1. The donation must be “reasonable”;
2. It must be for public welfare, or for hospital, charitable,
scientific, cultural or similar purpose; and,
3. It shall not be in aid of political party or candidate, or
for purposes of partisan political activity.
 Power to establish pension
- Include any act to promote and improve the
convenience, welfare and benefit of the employees or
offices
Republic vs. Acoje
- While as a rule an ultra-vires act is one committed
outside the object for which a corporation is created as
defined by law, there are however certain corporate acts
that may be performed outside of the scope of the
powers expressly conferred if they are necessary to
promote the interest or welfare of the corporation. Thus,
it has been held that “although not expressly authorized
to do so a corporation may become a surety where the
particular transaction is reasonably necessary or proper
to the conduct of its business,” and here it is
undisputed that the establishment local post office is a
reasonable and proper adjunct to the conduct of the
business of appellant company. Indeed, such post office
is a vital improvement in the living condition of its
employees and laborers who came to settle in its mining
camp which is far removed from the postal facilities or
means of communication accorded to people living in a
city or municipality.
 Power to exercise such other powers essential or
necessary to carry out its purpose (implied power)
1. Acts in the usual course of business;
2. Acts to protect debts owing to the corporation;
3. Embarking in a different business;
4. Acts in part or wholly to protect or aid employees; and,
5. Acts to increase business
Teresa Electric and Power Co. vs. P.S.C.
- Examined the articles of incorporation to arrive at its
decision
National Power vs. Vera
- For purpose of prohibiting the NAPOCOR
- The court must decide whether or not a logical and
necessary relation exists between the act questioned
and the corporate purpose expressed in the NPC
charter
 Importance of PLACE of registration
- Residence
- Venue
- Place of meetings
- Place or registration of chattel mortgage
 Power to extend its terms
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22
- Once its term expires, already dissolved automatically,
thus can no longer ask for extension
- After dissolution, it has 3 years to windup
 What are the modes of increasing capital stock?
1. Increasing the par value of the existing number of
shares without increasing the number of shares;
2. Increasing the number of existing shares without
increasing the par value thereof; and,
3. Increasing the number of existing shares and at the
same time increasing the par value of the shares.
 Why a corporation increases it capital stock?
- Generate funds, business expansion, or payment of
liabilities, purposes of acquiring other business.
(example: to buy cars for the officers, purpose of
acquiring other business, expansion, other valid
reasons)
 How do you decrease capital stock and why a
corporation decreases?
- Reduce or wipeout existing deficit where no creditors
would thereby be effected
- When capital is more than necessary to procreate the
business or reduction of capital surplus
- To write down the value of its fixed assets to reflect
those present and actual
o NOTE: any increase or decrease of capital stock requires
approval of government agency like SEC it can never
take place unless SEC approves the same
 Relevance of decrease of capital?
1. To reduce or wipe out existing deficit where no creditors
would thereby be affected;
2. When the capital is more than what is necessary to
procreate the business or reduction of capital surplus;
or,
3. To write down the value of its fixed assets to reflect
there present actual value in case where there is a
decline in the value of the fixed assets of the
corporation.
- Examples: Php 10M capital for grocery business, mayor
didn’t want to issue license/permit because mayor has
3 other grocery stores, only allowed sari-sari store
permit, reduce capital for sari-sari so that the money
will not sleep in bank
- Example: car rental agencies-Php 10M capital for 20
taxi’s, after some time each taxi is only 250K, nagmura
ang taxi, to reduce capital is to show actual assets
 Limitation imposed by law
- Decrease shall not in any way affect the rights of the
creditors
 Philippine Trust Company vs. Rivera
- Without the appraisal of SEC, a decrease in capital
stocks has no effect
 TRUST FUND DOCTRINE:
- Subscription to capital stock of a corporation constitute
a fund to which the creditors have a right to look upon
for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the
payment of its debts.
Madrigal vs. Zamora

- Decrease in capital has a subterfuge to evade payment
- Thus not valid and effective
- Must not prejudice creditors which includes
employees
 Bond
- Commonly understood as an obligation of a state, its
subdivision or a private corporation, represented by a
certificate or an instrument for the principal and by
detachable coupons for the payment of interests. In its
simplest term, it is one where an obligor obliges himself
to pay a certain sum of money to another at a day
named.
- There are different kinds of bond but before they may be
issued or floated by the corporation, the same must be
registered and approved by the SEC subject to the rules
and regulations that may be adopted by that agency.
The procedure and requirements set forth in section 38
is the same as in increasing or decreasing the capital
stock except that the certificate does not have to state
the matters required in sub-section 2 & 3 thereof.
 Pre-emptive rights
- A right granted by law to all existing stockholders of a
stock corporation to subscribe to all issues or
disposition of shares of any class, in proportion to their
respective stockholdings, subject only to the limitations
imposed under section 39 of the Code.
- Internationally granted
 Pre-emptive rights, why it is granted?
- In order that the existing stockholders may maintain
their proportionate right as not to dilute their right
 Power to deny pre-emptive rights
Section 39. Power to deny pre-emptive right. -
All stockholders of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or disposition of
shares of any class, in 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.
 May it be denied? How?
- Yes, if provided by articles of incorporation or by an
amendment
- However, pre-emptive rights is unavailable to shares in
trading in stock exchange otherwise stockholders must
waive first their right before they may sell such.
 Exceptions
1. When the shares to be issued is in compliance with
laws requiring stock offerings or minimum stock
ownership by the public
2. Shares to be issued in good faith with the approval
of the stockholders representing 2/3 of the
outstanding capital stock either
a. In exchange for property needed for corporate
purpose or,
b. In payment of a previously contracted debt
- The exceptions, however will not apply to stockholders
of a close corporation by virtue of a subsequent and
specific provision of the Code which provides that the
“pre-emptive right of a stockholder in a close
Notes on Corporation Law
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23
corporation shall extend to all stock to be issued,
including reissuance of treasury shares, whether for
money, property or personal services or in payment of a
corporate debt, unless the articles of incorporation
the provide otherwise, if not entirely absolute, in that it
extends to all issuance and disposition of shares
- Such right of pre-emption may be lost by waiver of the
stockholder, expressly or impliedly by his inability or
failure to exercise it after having been notified of the
proposed issuance or disposition of shares
 When is it unavailable?
- In shares traded openly in stock exchange/market
 Is it applicable to close corporations?
- See section 96, close corporations must provide it first
on its articles of incorporation, that its articles does not
really deny such pre-emptive rights.
 Section 102, will not apply to close corporations
 The right of pre-emptive rights is absolute in close
corporations
“All issues or depositing shares of any class” form part of ACS
 Certain instances when a stockholder may nevertheless
be unable to exercise this right:
- Issued for public ownership
- Issued in good faith, with approval of 2/3 of outstanding
capital stock either a) in exchange for property needed
or b) for payment of a previously contracted debt
 Pre- emptive rights of stockholders in ordinary stock
corporations may be denied
- if the shares are to be issued in compliance with laws
requiring stock offering or minimum stock ownership by
the pubic
- In exchange for property needed for corporate purposes
- In payment of previously contracted debts
 This rule, however, does not apply in a close corporation
as the pre-emptive rights of the stockholders thereof is
broadened to include all issues without exceptions
unless, of course, denied or limited by the articles of
incorporations. Section 102 provides:
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.
 Denial will not apply to a close corporation, ABSOLUTE
- section 96
 May a stock holder in a close corporation insist in the
exercise of his pre-emptive rights?
- Yes, section 102
 What type or shares are covered by pre-emptive rights?
 Does it include those originally unsubscribed?
- NO. Benito vs. SEC
 Will the stockholders be able to exercise their pre-
emptive right with respect to the old unissued shares?
- Pre-emptive rights is applicable only to new issued
shares and not to the old unissued shares because it is
presumed that the original subscribers is deemed to
have taken his shares knowing that they form a definite
 24

proportionate part of the whole number of authorized 2) Where the transaction amounts to consolidation or
shares merger of the corporations

- When the shares, left unsubscribed are re-offered, he 3) When purchasing corporation is merely a continuation
cannot therefore claim. DILUTION OF INTEREST of the selling corporation

 Will the acquiring purchaser be liable for debts of the 4) Where the transaction is entered into fraudulently in
former corporation? order to escape liability for such debt

- Generally no, corporate entity theory because there may  Legitimate purpose: for a corporation to reacquire its
be instances when purchasing corporation may be held own shares
liable
- Limitation: it must have surplus/unrestricted retained
 May a corporation acquire its own shares? earnings

- Yes - Exception: may redeem irrespective of unrestricted

retained earnings
 Is there any restriction provided for by law in
reacquiring its own shares? 1) Exercise of stockholders’ right to compel “close
corporation” to purchase his shares
- Yes, it must have been unrestricted retained earnings
appearing in the books of corporation 2) Where corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital stock
 A corporation can never acquire its own shares if it has
no unrestricted retained earnings ACS 1M

- False, exception close corporation and redeemable SUBSRIBED 1M

shares
PAID-UP 1M
EXAMPLE:
ASSETS 500K
ACS 2M
1M PROFITS
SUBSCRIBED 1M
- 500K LIABILITIES
PAID UP 1M
____________________
1 100K
500K RESERVES IN A CLOSE
2 100K CORPORATION IT CAN USE THIS TO REACQUIRE ISSUED
STOCKS
TO
X – REALTY CORPORATION
10 100K
 THE ONLY PROPERTY
 If 1-5 became 200K each, may 6-10 demand the OF THE CORPORATION
exercise their pre-emptive right?
 BOARD OF DIRECTORS
- YES DECIDED TO SELL IT

 May 1-5 subscribe to the unsubscribed capital stock to
the exclusion of 6-10?
- If a corporation makes 2M unrestricted retained
earnings, it is the shares and not the number of persons
that matters
 May 6-10 complain for a dilution of their interest?
- YES, it’s an internationally recognized right because it
includes “all issues and disposition of shares of any
class” and all kinds of shares new or old
- If the remaining unsubscribed shares are issued, it’s an
issuance of any class
 May a corporation sell/dispose all or substantially all of
its corporate assets and liabilities?
- YES
Will it need the approval of the stockholders?
- NO, if the same is necessary in the usual and regular
course of business of said corporation or if the proceeds
of the sale or other disposition of such property and
assets be appropriated for the conduct of its remaining
business
 If X is a manufacturing company, then it can sell its
only property upon approval of the stockholders
because it will render itself capable of continuing its
business, BUT if the proceeds will be used to purchase a
better one for the continuance of its business, then it
does not need the approval of the stockholders
 Conditions for the valid exercise of this power are the
following
1. Resolution by the majority vote of the board of
directors/trustees

- 1) RESOLUTION 2) AUTHORIZATION 3) RATIFICATION 2. Authorization from the stockholders representing at

4) PRIOR WRITTEN NOTICE 5) SALE SUBJECT TO
PROVISIONS OF EXITING LAWS 6) DISSENTING
STOCKHOLDERS HAVE THE RIGHT TO EXERCISE
THEIR APPRAISAL RIGHT
 If a corporation sells substantially all of it assets and
properties, will the buyer assume liability?
- NO, EXCEPT
1) Express or implied agreement to the purchase
least 2/3 of the outstanding capital stock or 2/3 of the
members;
3. The ratification of the stockholders or members must be
made at a meeting duly called for that purpose
4. Prior written notice of the proposed action and of the
time and place of meeting must be made addressed to
all stockholders of record, either by mail or personal
service;
5. The sale of the assets shall be subject to the provisions
of existing laws on illegal combinations and monopolies

Notes on Corporation Law

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 25

6. Any dissenting stockholder shall have the option to articles of incorporation, the approval of the
exercise his appraisal right stockholders or members shall not be necessary. (17
1/2a)

IDP vs. CA
- For any other purpose other than the primary purpose,
- Consent of the members was not secured stockholder’s consent or approval is necessary

- Thus, if it’s for the secondary purpose, it is necessary

Edward Nell Co. vs. Pacific Farms

- If it’s in connection with the primary purpose, only

- Generally where one corporation sells or otherwise
board resolution is necessary
transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the
 Requirements and steps to be followed for a valid
transferor, except:
investment of corporate funds are:
1. Where the purchaser expressly or impliedly agrees
1. Resolution by the majority of the board of directors or
to assume such debts;
trustees;
2. Where the transaction amounts to a consolidation
2. Ratification by the stockholders representing at least
or merger of the corporations;
2/3 of the outstanding capital stock or 2/3 of the
members in case of non-stock corporations;
3. Where the purchasing corporation is merely a
continuation of the selling corporation;
3. The ratification must be made at a meeting duly called
for that purpose;
4. Where the transaction is entered into fraudulently
in order to escape liability for such debts.
4. Prior written notice of the proposed investment and the
time and place of the meeting shall be made, addressed
 Power to acquire own shares
to each stockholder or member by mail or by personal
service, and;
Section 41. Power to acquire own shares. - A
stock corporation shall have the power to purchase or 5. Any dissenting stockholder shall have the option to
acquire its own shares for a legitimate corporate exercise his appraisal right
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 Dela rama vs. Ma-ao Sugar
shares to be purchased or acquired:
- There is a substantial and not remote connection
1. To eliminate fractional shares arising out of stock between the sugar bags and the sugar manufacture,
dividends; thus stockholder’s approval is not necessary for validity

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)
 The corporation must at all times have “unrestricted
retained earnings” to exercise this corporate power
Steinberg vs. Velasco
- For as long as there are debts and liabilities, a
corporation may not reacquire its shares (subject to
exceptions)
- A private corporation, in order to accomplish its purpose
as stated in its articles of incorporation, and imposed by
the Corporation Law, has the power to acquire, hold,
mortgage, pledge, or dispose of shares bonds, securities
and other evidences of indebtedness of any domestic or
foreign corporation. Such an act, if done in pursuance of
the corporate purpose, does not need the approval of the
stockholders; but when the purchase of shares of
another corporation is done solely for investment and
not to accomplish the purpose of its incorporation, the
vote of approval of the stockholders is necessary.
Gokongwei vs. SEC
- Investments made by SMC is necessarily connected with
its primary purpose and this was ratified in a meeting

- Creditors of a corporation have the right to assume that
so long as there are outstanding debts and liabilities,
the board of directors will not use the assets of the
corporation to purchase its own stock, and that it will
not declare dividends to stockholders when the
corporation is insolvent.
- Submission of previous action is a sound corporate
practice
 Redeemable shares
 Closed corporation (see section 105)

 Power to invest funds <sec.42> - For any reason, compel the value of shares “withdrawal
shares” provided corporation has sufficient funds to
Section 42. Power to invest corporate funds cover its debts and liabilities
in another corporation or business or for any other
purpose. - Subject to the provisions of this Code, a
Section 105. Withdrawal of stockholder or
private corporation may invest its funds in any other
dissolution of corporation. - In addition and without
corporation or business or for any purpose other than
prejudice to other rights and remedies available to a
the primary purpose for which it was organized when
stockholder under this Title, any stockholder of a close
approved by a majority of the board of directors or
corporation may, for any reason, compel the said
trustees and ratified by the stockholders representing at
corporation to purchase his shares at their fair value,
least two-thirds (2/3) of the outstanding capital stock,
which shall not be less than their par or issued value,
or by at least two thirds (2/3) of the members in the
when the corporation has sufficient assets in its books
case of non-stock corporations, at a stockholder's or
to cover its debts and liabilities exclusive of capital
member's meeting duly called for the purpose. Written
stock: Provided, That any stockholder of a close
notice of the proposed investment and the time and
corporation may, by written petition to the Securities
place of the meeting shall be addressed to each
and Exchange Commission, compel the dissolution of
stockholder or member at his place of residence as
such corporation whenever any of acts of the directors,
shown on the books of the corporation and deposited to
officers or those in control of the corporation is illegal, or
the addressee in the post office with postage prepaid, or
fraudulent, or dishonest, or oppressive or unfairly
served personally: Provided, That any dissenting
prejudicial to the corporation or any stockholder, or
stockholder shall have appraisal right as provided in
whenever corporate assets are being misapplied or
this Code: Provided, however, That where the
wasted.
investment by the corporation is reasonably necessary
to accomplish its primary purpose as stated in the

Notes on Corporation Law

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 26

 If shares are reacquired, what happens?
- It becomes treasury shares
 Stockholder’s consent/ approval is not necessary and
mere board action is sufficient if in accordance with
primary purpose
 The logical relation of act done and primary purpose of
corporation and between the board of directors to
undertake submission of acts is a sound corporate
practice
 Dividends
- NO. that would be over issuance of shares, violation of
securities regulation code
- It must have a free portion
- The corporation may increase its capital
 Z co. 1M to X Co. is 2/3 of Xco. Stockholders
reacquired?
- No, because in property 2/3 is not required
 What is the effect of declaration of dividends with
regards to the assets of a company?

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)
- As compared to stock dividends, the declaration of cash
or property dividends have the effect of reducing
corporate assets to the extent of dividends declared.
- Neither would stock dividends increase the
proportionate interest of the stockholders of the
corporation although it will have the effect of increasing
the subscribed and paid-up capital of the corporation. It
gives the stockholders nothing in the way of distribution
of assets but merely divides his existing shares into
smaller units.
 Earnings belong to the corporation until declared or
given

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)
 What are dividends?
- Corporate profits set aside, declared and ordered by the
Board of Directors to be paid to the stockholders.
 Revocation
- No revocation of dividend may be has unless it has not
been officially communicated to the stockholders or is in
the form of stock dividends which is revocable at any
time prior to distribution.
 Stock dividends- no reduction, you capitalize your
restricted retained earnings, what is issued is a piece of
paper. The restricted earnings remain in the corporation
 Cash and property- reduces corporate assets
 Stock dividends increase corporate assets? No, it will
only have the effect of increasing the subscribed and
paid-up capital of the corporation

 What are property dividends?  Will there be a corresponding increase in their

proportionate interest?
- Those paid in property surplus
- REMAINS THE SAME
 Like tables and chairs? Can tables and chairs make
surplus profits? - Exception: when stock dividends will result in a
fractional share
- No, they do not make surplus, bonds, etc.
ACS-2M 1-100K 200 (10%) *VOTING AND
 Where should dividends come from? DIVIDEND RIGHTS STILL THE SAME

- Stock dividends are declared as stocks coming from SUB-1M TO

corporation 10%

 Who declares dividends to be declared? Do stockholders PU-1M 10-100K

have any say?
ACS 2M
- Board of Directors, if stock approval of 2/3 outstanding
capital stock SUB 1M

ACS-1M SUB-1M P.U.-1M 1M-U.R.E. (surplus PU 1M

profits of the corporation)
1M RE
1-100k
1 100K
2-100k
2 100K
To
TO
10-100k
10 100K
1M
1M
 Board decides to declare 1M, how much will each
receive? May the board declare stock dividend  May they be compelled?

- NO. You cannot declare if it does not come from

unrestricted retained earnings.
Notes on Corporation Law
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 27

1. 1M-U.R.E. (is it true there is no way to compel?) - The power to declare it if paid-up capital is not
maintained or is impaired
2. 2M-U.R.E.
- Trust fund must be kept intact for the protection of
 May they be compelled to declare dividends creditors who have the right to rely on such
subscription and the paid-up capital for the satisfaction
- Mandatory if earned, the board may be compelled to of their claims
declare dividends
 Cannot accumulate surplus unreasonably
- if exceeds 100% of the paid-up capital the boards may
be compelled  Basis is the paid-up capital

ACS 2M 1M U.R.E.  Entitled to dividends

SUB 1M  Irrespective of whether the subscription is full

PU 800K  Illegally declared

1-100K 50K PU - Declare dividend with the belief that it formed part of
the U.R.E., but yun pala sa capital
2-100K 50K
 Directors are not liable, unless sec31 acted in bad faith
TO or gross negligence in the conduct of corporate affairs

10-100K  Directors even if acting in behalf of the corporation, may

still be held solidarily liable
1M
 Power to enter into management contract
 Will 1 and 2 receive full amount of dividends?
- New provision
- YES. They are entitled however if they are declared
delinquent, the amount due them shall first be applied Section 44. Power to enter into management
to his delinquency plus expenses. contract. - No corporation shall conclude a management
contract with another corporation unless such contract
 Delinquency occurs, you are called to pay, but you shall have been approved by the board of directors and
failed to pay. In case of stock dividend, the delinquent by stockholders owning at least the majority of the
stock holder will not be entitled thereto until he has outstanding capital stock, or by at least a majority of the
members in the case of a non-stock corporation, of both
paid his subscription in full.
the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That (1)
 Are non-stockholders entitled to receive dividends? where a stockholder or stockholders representing the
same interest of both the managing and the managed
- No, tock dividends are civil fruits of the original corporations own or control more than one-third (1/3) of
the total outstanding capital stock entitled to vote of the
investment, and to the owners of the shares belong the
managing corporation; or (2) where a majority of the
civil fruits. members of the board of directors of the managing
corporation also constitute a majority of the members of
 How did the court decide dividends in the case of the board of directors of the managed corporation, then
Neilsen 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
- Stock dividends cannot be issued to a person who is not
entitled to vote, or by at least two-thirds (2/3) of the
a stockholder in payment of services rendered. members in the case of a non-stock corporation. No
management contract shall be entered into for a period
- Whether cash, property or stock, only stockholders may longer than five years for any one term.
receive dividends. Dividends are fruits of investments.
They come from the U.R.E. or surplus profits of the The provisions of the next preceding
corporation. paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or
ACS 2M 1M U.R.E. substantially all of the business of another corporation,
whether such contracts are called service contracts,
operating agreements or otherwise: Provided, however,
SUB 1M JULY 24 DECLARATION
That such service contracts or operating agreements
JULY 31 which relate to the exploration, development,
exploitation or utilization of natural resources may be
PU 1M entered into for such periods as may be provided by the
pertinent laws or regulations. (n)
1 100K 100T JULY 26-Y(NEW
ONE WAS DECLARED TO Y) JULY 30- 100K  The requirement for a valid management contract are as
follows:
2
1. Resolution of the board of directors
TO TO HAVE THE TRANSFER
RECORDED
2. Approval by the stockholders holding or representing a
majority of the outstanding capital stock or majority of
10 100K the members in case of non-stock corporation of both
the managing and the managed corporation
1M
3. The approval of the stockholders or members must be
 Insofar as 1 and Y who has a better right? Already made at the meeting called for that purpose
declared, but not yet paid?

4. The contract shall not be for a period longer than 5

- Right to receive vest upon declaration. Who ever owns at
the time of declaration owns the dividends
- Unless there is a stipulation to the contrary
years for any one term, except those which relate to
exploration, development or utilization of natural
resources which may be entered into for such periods as
may be provided by pertinent laws and regulations

 TRUST FUND DOCTRINE  Every corporate act emanates from the BOARD

Notes on Corporation Law

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 Is the voting requirements of a majority stockholder
ABSOLUTE?
- Not only a majority but 2/3 of the outstanding capital
stock or 2/3 of the members in a non-stock corporation
would be required for the approval of a management
contract in the following instances:
1. Where the stockholders representing the same interest
of both the managing and managed corporation own or
control more than 1/3 of the total outstanding capital
stock of the managing corporation; and
2. Where a majority of the members of the board of
directors of the managing corporation also constitute a
majority of the directors of the managed corporation
3. Where the contract would constitute the management or
operation of all or substantially all of the business of
another corporation, whether such contracts are called
service contracts. If it will not constitute the
management of all or substantially all of the business of
another corporation the first paragraph of section 44
will apply and not that of the second, that is, only the
vote of the stockholders holding or representing at least
a majority of the outstanding capital stock or majority of
the members in the case of non-stock corporation will
be required.
 How long?
- Not longer than 5 years for any one term
- Exception: exploration, development or utilization of
natural resources
 What is an ultra-vires act or contract?
- Doctrine of limited capacity. Corporation can do such
acts and things as it is allowed to do
- Acts beyond it will be ultra vires, allowing a collateral
attack
- If not illegal per se merely voidable. Can be ratified
expressly or impliedly or even stopped as equitable
grounds
- Ultra-vires acts which are not illegal per se may become
binding and enforceable either by satisfaction, estoppels
or equitable grounds
 Consequences of ultra-vires acts?
1. On the corporation itself
- The proper forum, in accordance with the provisions of
PD 902-A, as amended and R.A. No. 8799 may suspend
or revoke, after proper notice and hearing, the franchise
or certificate of registration of the corporation for serious
misrepresentation as to what the corporation can do or
is doing to the great damage or prejudice of the general
public
2. On the rights of the stockholders
- A stockholder may bring either an individual or
derivative suit to enjoin a threatened ultra-vires act or
contract. If the act or contract has already been
performed, a derivative suit for damages against the
directors may be filed, but their liability will depend on
whether they acted in good faith and with reasonable
diligence in entering into the contract.
3. On the immediate parties
- The courts have not agreed as to the legal effect of a
corporate contract outside of its authorized business
but Ballatine gives the following summary of the
doctrines evolved:
a. If the contract is fully executed on both sides, the
contract is effective and the courts will no interfere
to deprive either party of what has been acquired
under it
Notes on Corporation Law
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28
b. If the contract is executory on both sides, as a rule,
neither party can maintain an action for its non-
performance
c. Where the contract is executor on one side only,
and has been fully performed on the other, the
courts differ as to whether an action will lie on the
contract against the party who has received
benefits of performance under it. Majority of the
courts, however, hold that the party who has
received benefits from the performance is estopped
to set up that the contract is ultra-vires to defeat
an action on the contract. This is more in
conformity with the doctrine that no person shall
be allowed to enrich himself at the expense of
another
Privano vs. Dela Rama
- Court looked into the purpose clause
- The purpose clause empowers and limits
- Articles likewise provide that it may deal with any of its
money
- “deal” broad enough to cover the donation it is not then
ultra-vires
- Not illegal per se hence (law of agency) excess powers
are subject to ratification
- Ratified by passing the resolution in question
Carlos vs. Mindoro sugar Co.
- PTC- trust company as such, it also has implied powers
as to make them more attractable
- Not ultra-vires in pursuance of its legitimate business
Japanese war notes vs. SEC
- Non-stock corporations cannot make profits and
distribute profits to its shareholders
- Ultra-vires because Japanese war notes is a non-stock
corporation
Crisologo-Jose vs. CA (ALWAYS ASKED BY DEAN
SUNDIANG)
- The negotiable instruments law which holds an
accommodation party liable on the instrument to a
holder for value, although such holder at the time of
taking the instrument knew him to be only an
accommodation party, does not include nor apply to
corporations which are accommodation parties. This is
because the issue or indorsement of negotiable paper by
a corporation without consideration and for the
accommodation of another is ultra-vires
- Corporate officers may guarantee or endorse an
accommodation only if specifically authorized
Section 36 paragraph 11
Section 10
Section 14 and 15
 Corporate powers depend on the agreement of the
stockholders rather than any director
- It may sell and it may guarantee, contract not
necessarily illegal, it will in the absence of proof to the
contrary presumed within its power. Corporations are
presumed to contract with in its powers- CARLOS CASE
- Purpose clause may be stretched to cover PLDT internet.
It may be within its business.
- May it sell computers? NO! other line of business. Its
trading!
 29

BY-LAWS - NO. unless there is actual knowledge of the same they

are not presumed to know of the provisions of the by-
 By-Laws laws

- Rule adopted by the corporation for its internal Fleischer vs. Botika Nolasco
governance
- Shares of stock are personal properties
 Is the adoption of by-laws mandatory?
- Shares of stock may transfer to whom ever he wishes
 When should the by-laws be adopted or filed? Can it not
be adopted earlier? - The by-laws is contrary to law

- After incorporation- within 1 month (emanates from the  Articles of incorporation

BOARD)
- May provide reasonable restriction
- Prior-more convenient (signed by the incorporators)
- By-laws merely internal laws
 Who will sign the adoption clause?
- Articles is the contract between and among the parties
- Majority of the stockholders or members attested to by
and corporation
the corporate secretary

Gov’t vs. El Hogar

 What happens if the corporation fails to adopt the by-
laws from the tie provided by the law? Would there be
an automatic revocation or suspension? - Did the court categorically ruled here that the provision
in the 5th cause of action is valid?
- Proper notice and hearing, must first be complied with
- Rules governing equity, considering the fact that there
was always lack of quorum
Loyola grand villas vs. CA

- Section 29 BOD if still constituting a quorum may fill up

- Not the SEC, but the HIGC
a vacancy other than by removal, etc.

- Must – not always imperative

Gokongwei vs. SEC
- Filing of by-laws mandatory
- Section 48 allows a corporation to amend it by-laws

- Empowered by SEC
- Section 47 of the code, the by-laws may provide for the
qualification and disqualification
- Merely a ground, there must be proper notice and
hearing
- It cannot be said Gokongwei has a vested rights

- Not affect the status of the corporation as a juridical

- Prevent directors from taking advantage of position to
person
promote his individual interest to the damage of others
- Subject the corporation to a fine, as may be issued by
- The validity or reasonableness of a by-laws is a question
the SEC
of law
 When do by-laws become effective?
- Subject to the limitations that reasonableness of a by-
law is a mere matter of judgment
- Until and unless the SEC gives it stamped of approval

- Rule of the majority and not the tyranny of the minority

- Suspension of any government agency. The permission
must first be secured- section 46
 May the by-laws be amended altered or appealed?
 Elements of a valid by-law
- YES. HOW? Two modes
1. It must not be contrary to law, public policy or morals;
1. By a majority vote of the directors or trustees and the
majority vote of the outstanding capital stock or
2. It must not be inconsistent with the articles of
members in a non-stock corporation, at a regular or
incorporation;
special meeting called for that purpose;
3. It must be general and uniform in its effect or applicable
2. By the board of directors alone when delegated by 2/3 of
to all alike or those similarly situated;
the outstanding capital stock or 2/3 of the members in
a non-stock corporation.
4. It must not impair obligations and contracts or vested
rights; and’
- This delegated power, however, is considered revoked
whenever a majority of the outstanding capital stock or
5. It must be reasonable.
members shall so vote at a regular or special meeting.

- Must not be inconsistent with existing laws. Not be

 If it is to be amended what is the proceeding?
inconsistent with articles of incorporation

- Section 48 2nd paragraph provides:

 By-laws

- None filing would not affect the status
corporation, Loyola grand villas case
- The word “must” is not always imperative
- Stockholders are conlusively presumed to know the
provisions of the by-laws
 How about 3rd persons?
Notes on Corporation Law
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of the 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)
Baretto vs. La Previsora
- Any corporate act emanates from the board
- Directors themselves cannot amend the by-laws if they
were not granted the same
 Section 48
 The power granted is not subject to revocation T or F?
- FALSE
 If the by-laws are amended when will they become
valid?
- Upon issuance of the SEC that they are not inconsistent
 What if the SEC failed to act within 10 months without
fault attributable to the corporation?
 T or F any amendment of the by-laws will never become
valid until it gives its stamp of approval even after 1 year
- TRUE. Articles of incorporation and by-laws are different
MEETINGS
 Meetings
- Meetings of stockholders 1. Date fixed
in the by-laws or by-law
- Meetings of director or trustees
 Meetings are regular and special
 Meetings of stockholders
 What is regular and what is special?
 When are regular meetings of the stockholders held?
- Fixed date provided by the by-laws
 What if there is no date?
- April
 Why april?
- Point in time the audited financial statement have been
prepared
 What if in the date specified in the by-laws or by the law
itself the meeting was not convened, for instance lack of
quorum or force majeure?
- It may be postponed on a reasonable date
 Notice requirement?
- Regular- 2 weeks prior notice
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- Special- 1 week
 May the notice requirement be lessened?
- By-laws may provide a longer or a shorter duration
 What if the notice requirement is not complied with?
 What happened to any act passed in a meeting when
notice requirement was not required with?
- Voidable, subject to ratification
Board of directors vs. Tan
- Notice requirement is the by-laws is a mandatory
requirement
- Improperly served, any action will be invalidated at the
objection of any stockholder or member
 Must be held in the proper place
 Where should it be held?
- Apparent from the foregoing provision is that meetings
of stockholders must, at all times, be held in the city or
municipality where the principal office of the
corporation is located and, as far as practicable, in the
principal office of the corporation.
 May the by-laws of a corporation provide that meetings
be held anywhere in the Philippines?
- While there is no provision authorizing a stock
corporation to hold stockholders’ meetings outside of
the City of Municipality where the principal office is
located, the law allows a non-stock corporation to
provide in its by-laws any place of members’ meeting
provided that proper notice is sent to all members
indicating the date, time and place of the meeting which
shall be within the Philippines.
 T or F the by-laws of a stock corporation may validly
provide that meetings shall be held anywhere in the
Philippines?
- FALSE. Non-stock corporations lang pwede provided
nakalagay sa by-laws and provided proper notice is
given
 Corporation can do only such things as the law allows it
to do, DOCTRINE OF LIMITED CAPACITY
 San Miguel office located in Ortigas Center. May
stockholders meeting be held in PICC center?
- YES. Metro Manila, one single city
 Must be called by the proper party
 Who calls?
- President until and unless there is a provision ,
secretary on order of the president
 What if there is nobody who can call?
- The petitioner, stockholder may petition the court
 What if there is a person who can call, but he fails or
neglects to call the meeting? May a stockholder petition
to authorize a meeting?
- Ponce case only applies when there is NO person
authorized to call the meeting. If there is a person, but
neglects his duty. Ponce will not apply.
 Writ of injunction may never be issued ex parte
 Is there any exception?
- Section 28 only instance

Section 28. Removal of directors or trustees. -
Any director or trustee of a corporation may be removed
from office by a vote of the stockholders holding or
representing at least two-thirds (2/3) of the outstanding
capital stock, or if the corporation be a non-stock
corporation, by a vote of at least two-thirds (2/3) of the
members entitled to vote: Provided, That such removal
shall take place either at a regular meeting of the
corporation or at a special meeting called for the
purpose, and in either case, after previous notice to
stockholders or members of the corporation of the
intention to propose such removal at the meeting. A
special meeting of the stockholders or members of a
corporation for the purpose of removal of directors or
trustees, or any of them, must be called by the secretary
on order of the president or on the written demand of
the stockholders representing or holding at least a
majority of the outstanding capital stock, or, if it be a
non-stock corporation, on the written demand of a
majority of the members entitled to vote. Should the
secretary fail or refuse to call the special meeting upon
such demand or fail or refuse to give the notice, or if
there is no secretary, the call for the meeting may be
addressed directly to the stockholders or members by
any stockholder or member of the corporation signing
the demand. Notice of the time and place of such
meeting, as well as of the intention to propose such
removal, must be given by publication or by written
notice prescribed in this Code. Removal may be with or
without cause: Provided, That removal without cause
may not be used to deprive minority stockholders or
members of the right of representation to which they
may be entitled under Section 24 of this Code. (n)
 Cases of removal or ouster of a director
 Mandamus would be appropriate remedy if there is a
person authorized but refuses
 Quorum and voting requirement
- Majority stockholders or members constitute a quorum
 Is the presence of the majority owners of the
outstanding capital stock ABSOLUTE to have a
quorum?
- NO. when the code requires a higher quorum it must
also be equivalent to the vote required
 Do you include non-voting shares in arriving at the
voting requirement to have a valid corporate act?
- It depends.
- Section 6 last par. If it falls within the penultimate par.
Of section 6
 Five requisites of a valid meeting
1. It must be held on the date fixed in the by-laws or in
accordance with law
2. Prior notice must be given
3. It must be held at he proper place
4. It must be called by the proper party
5. Quorum and voting requirements must be met
 Date not complied with, notice, place, not complied with
and the person who called not authorized, what
happens to any resolution called?
- Section 51, any meeting shall be valid provided all the
stockholders are present or duly represented and
provided it is within the power of the corporation. 3 RD
paragraph of 324
- If the voting requirement is met, any resolution passed
in the meeting, even if improperly held or called will be
valid if all the stockholders or members are present or
duly represented thereat. The last paragraph of section
51 is clear on the matter when it provides:
“all proceedings had and any business
transacted at any meeting of the stockholders
or members, if within the powers or authority
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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.”
 Directors/trustees meeting
 Regular (monthly) and special (anytime)
 May that be restricted (within or outside the Phil)
- YES. unless the by-laws provide otherwise.
 Is there any notice requirement?
- YES. 1 day unless otherwise provided by the by-laws
 What happens if notice is not complied with?
- If the notice requirement is not complied with the
meeting is illegal and will not bind the corporation
except when subsequently ratified or in the case of a
close corporation where the act of any one director may
bind the corporation even without a meeting under the
special provision of Section 101 of the Code.
 Can notice be waived? <sec.53>
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
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)
- YES. Expressly and impliedly
- SEC ruling
A special meeting is valid without notice
where the directors are all present or where
they consent to the meeting. Presence at the
meeting waives the want of notice. Moreover,
it has been ruled that the meeting of the
directors without a formal call first being had,
and notice thereof given to the members, did
not operate to invalidate it or to render the
proceedings which were taken at it void, for
every member of the board were present, and
their joint action had completely bound the
corporation as if the meeting has been called
with due formality, and everyone of the
directors had received proper notice.
 What is the quorum and voting requirement in the
directors meeting?
- Majority of the members of the board of directors (entire
membership)
 Vote required to pass a valid corporate act?
- Majority of those present at which there is a quorum (3
present, vote of 2 sufficient)
- Exception, majority of all the members of the board in
case of election of corporate officers, unless the articles
provide for a greater quorum or voting requirement
 Should the director or trustees be physically present?
- General rule, must sit and act as a body to have a valid
corporate act

 Five man member board, a meeting was called today,
should the physical presence or warm bodies requires to
constitute a quorum?
- NO. it is not required. Teleconference or video
conference is allowed, E- commerce law
 Membership subject to laws
 Stockholder not yet
 May director vote by proxy?
- NO
 If A is a director and a meeting is called for the purpose
of electing a new set of BOD can A vote by proxy?
- YES. Because it is a stockholders meeting
 If directors meeting, cannot vote by proxy
 Stockholder’s right to vote
- Inherent in stock ownership
- However this right is not always inherent, because it
may be denied:
1. Redeemable and preferred shares, however if
founders shares are issued others may be denied
the right to vote.
2. May be denied by the articles of incorporation or
contracts
- When not denied they may do so in person or by proxy
 May the right to vote by proxy be denied?
 May the articles of incorporation deny?
 May the by-laws validly provide that proxy voting is not
allowed?
- NO
 Only non-stock may be denied proxy voting (may be
broaden, limited or denied)
 Proxy voting is a matter of right granted by law
 Requirements of a valid proxy?
- Section 58
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)
 How long may a proxy exist?
- Maximum of 5 years
- Valid for the meeting in which it is intended
 Is proxy revocable?
- Generally revocable, unless coupled with interest
 Revocation
- A proxy, like agency in general is revocable unless
coupled with an interest and revocation need not be
made by formal notice in writing. Revocation may be
expressed to the proxy holder, to the election committee,
by a subsequent proxy to another or by sale of the
shares. Thus it may be revoke orally by conduct such
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that appearing and asserting the right to vote at a
meeting by the registered owner of the shares revokes a
proxy previously given.
 Must be submitted to a validation committee
 By-laws of non-stock corporations may deny proxy
voting
 What is voting trust agreement?
- One created by an agreement between a group of
stockholders of a corporation and a trustee, or a group
of identical agreements between individual stockholders
and a common trustee, whereby it is provided that for a
term o years or for a period contingent upon a certain
event, or until the agreement is terminated, control over
the stock owned by such stockholders, shall be lodged
in the trustee, either with or without reservation to the
owners or persons designated by them the power to
direct how such control shall be issued.
- It is a devise of binding stockholders to vote as a unit
and thus assuring a desirable stability and continuity in
management in situations where it is needed.
 What is the effect of a voting trust agreement relative to
the rights?
- Lee vs. CA must pass these criteria
1. That the voting rights of the stock are separated from
the other attributes of ownership;
2. That the voting rights granted are intended to be
irrevocable for a definite period of time; and,
3. That the principal purpose of the grant of voting rights
is to acquire voting control of the corporation.
 During the duration of the trust they are irrevocable
unless there is a violation either by fraud
 Requisites
- Section 59
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. 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.
The trustee or trustees shall execute and
deliver to the transferors voting trust certificates, which
shall be transferable in the same manner and with the
same effect as certificates of stock.
The voting trust agreement filed with the
corporation shall be subject to examination by any
stockholder of the corporation in the same manner as
any other corporate book or record: Provided, That both
the transferor and the trustee or trustees may exercise
the right of inspection of all corporate books and records
in accordance with the provisions of this Code.
Any other stockholder may transfer his
shares to the same trustee or trustees upon the terms
and conditions stated in the voting trust agreement, and
thereupon shall be bound by all the provisions of said
agreement.
 33

No voting trust agreement shall be entered - They will be more secured

into for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade  Voting pull agreement
or used for purposes of fraud.

- Enters into an agreement

Unless expressly renewed, all rights granted
in a voting trust agreement shall automatically expire at
- Pull all their shares to cast one vote
the end of the agreed period, and the voting trust
certificates as well as the certificates of stock in the
name of the trustee or trustees shall thereby be deemed - Covered by rules governing contracts
cancelled and new certificates of stock shall be reissued
in the name of the transferors. - By pulling their votes they can decline the resolution
passed by the board
The voting trustee or trustees may vote by
proxy unless the agreement provides otherwise. (36a)
 END OF MIDTERMS
 Does it need to be notarized?

- Yes, otherwise it is ineffective and unenforceable STOCKS AND STOCKHOLDERS

 Only legal ownership is transferred  3 modes

 Being still the beneficial owner they may transfer these 1. By a contract of subscription with the corporation;
rights
2. By purchase of treasury shares from the corporation;
 Is the right granted to a voting trust agreement and,
absolute? (to inspect)
3. By purchase or acquisition of shares from existing
- NO. stockholders.

- The voting trust agreement filed with the corporation
shall be subject to examination by any stockholder of
the corporation in the same manner as any other
corporate book or record. Provided, that both the
transfer and the trustee or trustees may exercise the
right of inspection of all corporate books and records in
accordance with the provisions of this Code.
 Legal title is transferred to the voting trustee
 May the voting trustee vote by proxy?
- Yes, legal owner may vote by proxy
 May the proxy holder vote by proxy?
- NO, (AGENT) an agent can have no other agent unless
specifically allowed by the principal
 Section 60 subscription
- Any contract
- Whether existing or still to be formed
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.
(n)
 Under the old law the 4th mode is PURCHASE
 Purchase
- Reciprocal in nature

 Stockholder executing as a proxy, is he qualified to be

- Purchaser can neither require the issuance
voted as a director?
Xco. Inc.
 Why is he qualified to act as a director if the stockholder
executes as a director?

- The beneficial owner of the shares in a voting trust is

P
disqualified to be a director in a voting trust whereas in
a proxy, the owner of the shares may be elected as such
Authorized capital 1M
since legal title thereof remains with him

500 SUBSCRIBED
- YES he remains to be the owner

500 UNISSUED STOCKS (AS LONG AS GALING DITO)

 Is the stockholder executing in a voting trust agreement,
is he qualified to act as a director?
Z wants to acquire 100K

- NO. ceases to be stockholder of record, no longer the

Entered in June 50% shall be down payment remainder December
legal owner of shares
08

 May the corporation enforce the voting trust agreements

o he will not be considered a stockholder unless he has
executed by its stockholders?
paid in full

- NO. NIDC vs. AQUINO

August 08 property is ravaged by fire all are turned into shares

- Not a privy to the contract

 Is Z liable to pay the balance of his acquisitions?

- Rights liabilities of a stockholder are there in their

- YES, no matter how the party refer to it, it is considered
individual capacity- corporate entity theory
subscription

 Voting trust agreements

- Once you subscribe, you become a stockholder which is
entitled to all the liabilities of a stockholder
- Normally executed in favor of banking and financial
institutions
Z- subscribed to 100T/S of XCo.

- So that they can vote a certain set of directors

Amount he paid 50k

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Z did not pay on the date called and was declared a delinquent
share
 Corporation paid 100T/S therefore the corporation
reacquired the shares again, what are they called?
- Treasury shares
Y- 80T/S DECEMBER 08
40 % (AUGUST) WAS DESTROYED BY FIRE, IS HE STILL LIABLE
TO PAY THE UNPAID PORTION?
 IT WAS AGREED THAT IT WAS A PURCHASE AND WILL
BE A STOCKHOLDER ONLY IF PAID IN FULL IS HE
LIABLE?
- NO, because that was a purchase
- First example galing sa unissued stock
- 2nd example galling sa treasury shares hindi
unissued share
 NO such thing as purchase of unissued stocks
 A subscription contract can be conditional provided
there is nothing in the charter or statute prohibiting it
and not against public order, law, etc.
 Must it be in writing?
- NO, it may be oral
 5M should it be in writing to be valid and binding as a
subscription?
- NO, statutes of frauds only applies to SALES
Trillana vs. Quezon College
- Counter proposal, therefore there was a need for an
acceptance
- Facultative because it is in his own free will, it is void
 What may be used as a consideration and how much
should be the consideration?
- Section 62 provides:
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;
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.
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The same considerations provided for in this
section, insofar as they may be applicable, may be used
for the issuance of bonds by the corporation.
The issued price of no-par value shares may
be fixed in the articles of incorporation or by the board
of directors pursuant to authority conferred upon it by
the articles of incorporation or the by-laws, or in the
absence thereof, by the stockholders representing at
least a majority of the outstanding capital stock at a
meeting duly called for the purpose. (5 and 16)
 “Amounts transferred from unrestricted retained
earnings to stated capital” what does it mean?
- Stock dividends will in effect capitalize the unrestricted
retained earnings
 After 5 years the founders shares may be converted into
common shares or other kinds of shares
 May shares of stocks be issued without consideration?
sa Why?
- NO, two reasons by the SC, discriminatory against other
stockholders and second unlawful, it prejudices the
right of the creditors “Trust Fund Doctrine”
 If issued without a consideration
- Section 65, they will be considered as watered stocks
Section 65. Liability of directors for watered
stocks. - Any director or officer of a corporation
consenting to the issuance of stocks for a consideration
less than its par or issued value or for a consideration in
any form other than cash, valued in excess of its fair
value, or who, having knowledge thereof, does not
forthwith express his objection in writing and file the
same with the corporate secretary, shall be solidarily,
liable with the stockholder concerned to the corporation
and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par
or issued value of the same. (n)
- Subscribers may be compelled to pay the value
 Issuance of a certificate of stock is another thing
 What are the requisites for the issuance of a valid
certificate of stock?
1. It must be signed by the president or vice-president and
countersigned by the secretary or assistant secretary;
2. It must be sealed with the corporate seal; and the entire
value thereof (together with interest or expenses, if any)
should have been paid.
While it appears, that a subscriber to shares of stock
cannot be entitled to the issuance of a certificate of
stock until the full amount of his subscription together
with interest and expenses (in case of delinquent shares)
if any is due, has been paid, a subscriber to shares of
stock, even if not yet fully paid, is entitled to exercise all
the rights of a stockholder and the corresponding
liability that attach thereunder. Thus, the Code
provides:
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)
 Is the issuance of a certificate of stock necessary to
consider the subscriber a stockholder?
- NO, shall be considered a stockholder even without a
certificate of stock
 Instances when he may not be able to exercise his rights
as such stockholder
- Declared delinquent
- When he exercises his appraisal right

 Are certificate of stocks transferrable?
- YES
 Are certificate of stocks considered negotiable?
- Quasi-negotiable
 Why are they considered quasi-negotiable when it may
be transferred through endorsement and delivery?
100t/s 001 10/s
Abc co.
B stole and forged the signature
C is purchaser in good faith and for value will C acquire title
Endorsement from
When issued by owner
Endorsed by owner- strict compliance
ANSWER: a certificate of stock is not regarded as negotiable in the
same sense that a bill or note is negotiable, even if it is endorsed in
blank. Thus, while it may be transferred by endorsement coupled
with delivery thereof, and therefore merely quasi-negotiable, it is
nonetheless non-negotiable in that the transferees takes it without
prejudice to all the rights and defenses which the true and lawful
owner may have except in so far as the principles governing
estoppels may apply.
He acquired it by virtue of a forged instrument; no matter how
innocent the purchaser is because it is subject to all the rights and
defenses
 What if A endorsed it?
- He is estopped, unless there are other available defenses
 Transfer is required to be recorded in the books of the
corporation, however even if not recorded, it will be valid
between the parties. Non-registration will not however,
affect the validity thereof at least in so far as the
contracting parties are concerned.
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 his attorney-in-fact
or other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books of
the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares
transferred.
No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation. (35)
 “Until registration is accomplished, the transfer, though
valid between the parties, cannot be effective as against
the corporation. Thus the, unrecorded transfer cannot
enjoy the status of a stockholder; he cannot vote nor be
voted for, and he will not be entitled to dividends. The
corporation will be protected when it pays dividend to
the registered owner despite a previous transfer of which
it had no knowledge. The purpose of registration
therefore is twofold: to enable the transferee to exercise
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all the rights of a stockholder and to inform the
corporation of any change in shares ownership so that it
can ascertain the persons entitled to the rights and
subject to the liabilities of a stockholder.”
Thus, it was also ruled by the High Court in
Nautica Canning Corp. vs. Yumul that “A
transfer of shares not recorded in the stock
and transfer book of the corporation is non-
existent in so far as the corporation is
concerned.” This is so because “the
corporation looks only through its books for
the purpose of determining who its
stockholders are.”
 Registration is necessary for the following:
1. To enable the corporation to know who its stockholders
are;
2. To enable the transferee to exercise his rights a s
stockholders;
3. To afford the corporation an opportunity to object or
refuse registration of the transfer in case allowed by law;
4. To avoid fictitious and fraudulent transfers; and,
5. To protect creditors who have the right to look upon
stockholders, in case of no-payment or watered shares,
for the satisfaction of their claims.
 Duty of the secretary is ministerial, hence mandamus
will lie if the secretary refuses to record the transfer, but
he cannot be compelled when the transferee’s title to the
said shares has no prima facie validity or uncertain
 Transfer- absolute and unconditional transfer to
warrant registration in the books of the corporation in
order to bind the latter and other third persons.
 Other restrictions on the right to transfer shares would
include:
1. It is not valid, except as between the parties, until
recorded in the books of the corporation;
2. Shares of stock against which the corporation holds any
unpaid claim shall not be transferable in the books of
the corporation; unpaid claims, refer to claims arising
from unpaid subscription and not to any indebtedness
which a stockholder may owe the corporation such as
monthly dues;
3. Restrictions required to be indicated in the articles of
incorporation, by-laws and stock certificates of a close
corporation;
4. Restrictions imposed by special law, such as the Public
Service Act requiring the approval of the government
agency concerned if it will vest unto the transferee 40%
of the capital of the public service company;
5. Sale to aliens in violation of maximum ownership of
shares under the Nationalization Laws;
6. Those covered by reasonable agreement of the parties.
Monserat vs. Ceron
- Does it include mortgage?
- NO, it is not an absolute transfer
- Will not affect the transfer through mortgage
- Absolute and unconditional transfer
- Only the transfer or absolute conveyance of the
ownership of the title to a share need be entered and
noted upon the books of the corporation in order that
such transfer may be valid, therefore, inasmuch as a
chattel mortgage of the aforesaid title is not a complete
and absolute alienation of the dominion and ownership
 36

thereof, its entry and notation upon the books of the - Endorsement plus delivery is mandatory
corporation is not necessary requisite to its validity
 Is there any other mode of transferring stock?
 Chua guan vs. Magsasaka
- Notarized deed
- Was the mortgage valid and effective as against
subsequent third parties - Deed of assignment

- Register of deeds where the corporation resides and if Rural bank of Salinas vs. CA
different in the register of deeds of owner’s domicile
- If denied or refused without good cause, mandamus will
 Unson vs. Dinamito
lie

- All transferred not register will not have a valid force

Tay vs. CA
and effect

- Mandamus may issue if petition has a clear legal right

 Right to transfer may be regulated

 May not be unreasonably restricted - Never issued in doubtful cases

 Violation of nationalization law- Central Bank - Petitioner failed to establish a clear legal right and
alleged ownership is without merit

Lambert vs. Fox

- Did not acquire ownership by virtue of the contract of
pledge
- Valid , may be reasonably regulated, restricted by
agreement of parties
- In a contract of pledge there must be foreclosure

- Reasonable agreement by the parties

- In the case there was no attempt to foreclose

- Reasonable as to length of time

- Petitioner must have a prima facie right

Padgett vs. Babcock

Nava vs. Peers Marketing

- Any attempt to restrain transfer

- A stock subscription is a subsisting liability from the
time the subscription is made
- SC, in the absence of a valid lien upon its shares

- The subscriber is as much bound to pay his

- Valid restrictions shares are applicable
subscription as he would be to pay any other debt

- Any restriction on a stockholder’s right to dispose of his

- No stock certificate was issued. Without stock
shares must be construed strictly; and any attempt to
certificate, which is the evidence of ownership of
restrain a transfer of shares is regarded as being in
corporate stock, the assignment of corporate shares is
restraint of trade, in the absence of a valid lien upon its
effective only between the parties to the transaction
shares, and except to the extent that valid restrictive
regulations and agreements exist and are applicable.
 Exception to the general rule
Subject only to such restrictions, a stockholder cannot
be controlled in or restrained from exercising his right to
transfer by the corporation or its officers or by other Rural Bank of Lipa vs. CA
stockholders, even though the sale is to a competitor of
the company, or to an insolvent person, or even though - By notarized deed
a controlling interest is sold to one purchaser.
- Certificate of stocks already issued must be coupled
 Certificate of stocks are transferrable with delivery, exception (TAN vs. SEC)

- By endorsement and delivery of the stock certificate to  Stock certificate has already been issued it must be
the transferee coupled with the delivery

 In order to be valid, must be registered in the books. If
not, will only be binding among parties
 How may shares of stock be transferred?
- Endorsement of stock certificate by owner or attorney-
in-fact with delivery
Embassy farms vs. CA
 After certificate of stock is issued, may it be effectively
transferred even without endorsement or delivery of the
stock certificate?
- Person sought to be a stockholder is an officer and has
custody
 Endorsement and delivery is not necessary (TAN vs.
SEC)

- Must be endorsed by owner or attorney-in-fact coupled Tan vs. SEC (FULL KNOWLEDGE, HE IS ESTOPPED)
with delivery
- Persons sought to be stockholder is officer and has
- Endorsed not delivered custody of the book (estopped)

- Proper mode and manner must be complied with  General Rule for valid transfer

- Certificate of stock must be endorsed by owner or

Razon vs. IAC
attorney-in-fact coupled with delivery

- Delivered not endorsed

 Exceptions

- Reverse of Embassy Farms

- Section 63 uses the word “may”

- Endorsement alone is not sufficient nor delivery without

- Showing that there may be other modes of transferring
endorsement is not allowed
shares

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 Is there a time frame or fixed period as when transfer
can be made?
- NO, (WON vs. WACK WACK)
Won vs. Wack Wack
- Valid between contracting parties even if not recorded in
corporation books
- Right accrues only if refused
- Statute of limitations does not apply in registration of
shares of stock
- Must determined from the time of refusal
 Why are they non-negotiable when they may be
transferred?
- Transferees pays it without prejudice to all the rights
and defenses as the true and lawful owner may have
under the law except insofar as such rights and
defenses are subject to the limitations imposed by the
principles governing estoppels
De los Santos vs. Republic
- Why is he, not considered as the owner of shares? When
it has been said that when endorsed by the owner it is
considered as strict certificate? Because certificate of
stocks are non-negotiable
- Although a stock-certificate is sometimes regarded as
quasi-negotiable, in the sense that it may be transferred
by endorsement, coupled with delivery, it is well settled
that the instrument is non-negotiable, because the
holder thereof takes it without prejudice to such rights
or defenses as the registered owner or creditor may have
under the law, except insofar as such rights or defenses
are subject to the limitations imposes by the principles
governing estoppels.
 Unauthorized issuance of stock certificates
100/s 100
XYZCo
100 pesos per share
Stolen by B and forged the signature of A
B sells to C will C acquire title? NO
ENDORSEMENT FORM
 C armed with the endorsement form certificate, sold to D
(innocent purchaser for value), will D acquire title?
- NO, subject to such rights and defenses as the true and
lawful owner may have
 What if C now goes to the corporation and presents the
form?
- Then the corporation shall cancel the old certificate and
issues a new one, now in the name of C, now registered
in the name of C, will C acquire title?
 A found out what happened and goes to the corporation
who has a better title C or A?
- A, A cannot be deprived of his right by virtue of an
unauthorized transfer
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 Corporation can compel C to deliver the new stock
certificate because he made a representation that the
certificate where good.
 Armed with the new certificate issued to C, C delivers to
D a purchaser in good faith and for value will D acquire
title?
- D will acquire title took the shares not by virtue of a forged
or unauthorized transfer, but on the reliance that the
stock certificate is valid and owned by C
 Stock certificate now in possession of D. A knew of what
happened and went to the corporation and complains.
Who will have a better title?
- the corporation may be compelled to recognize both, A as
stockholder (non-negotiable) D, reliance that the stock
certificate is valid and existing and owned by C
 Forged transfers
- If the corporation should issue a new certificate in
pursuance of a forged transfer, the corporation incurs
no liability to the person in whose favor it is issued and
it may demand its return for cancellation. The
corporation in such case has been guilty of no
misrepresentation. On the other hand, it is the duty of
the purchaser to determine that the indorsement of the
owner is genuine. However, if the new certificate issued
to the purchaser comes into the hands of a bona fide
purchaser for value, the corporation will be stopped
from denying validity thereof, since by issuing such new
certificate it represents that the person named therein is
a stockholder of the corporation. The corporation is thus
forced to recognize both the original certificate and new
certificate-the original, because the true owner could not
be deprived of his title by a forged transfer, and the new,
because of its representation that the person named
therein is the owner of shares in the corporation. But if
the recognition of both stockholders would result in an
over issue of shares, then only the original and true
owner can be recognized as a stockholder. The bona fide
purchaser of the new certificate will however have a
right of damages against the corporation. The
corporation, in turn, would have a right of action
against the person who made false representations and
in whose favor it issued a new certificate. The true
owner of the shares which were wrongfully transferred
would of course have a right to compel the corporation
to issue him a certificate in lieu of the original one
which was wrongfully cancelled.
 Authorized capital stock 1M shares
 All are subscribed who will the corporation recognize as
rightful owner A or D? if both will be recognized there
will be over issuance
- only A citing citizens national bank vs. state (but if
recognition of both stockholders would result in an over
issue of shares, then only the original and true owner
can be recognized as a stockholder)
- by virtue of the doctrine of non-negotiability of certificate
of stocks
 The true and lawful owner will never be deprived of his
rights
 What happens to D?
- D will have a cause of action against the corporation for
the value of his acquisition cost inclusive of damages,
attorney’s fees and cost of suit
 D sues the corporation for the value of his acquisition
cost, inclusive of damages, attorney’s fees and cost of
suit. What may the corporation do?
- NO defense, no valid defense, because it was represented
to other parties that the certificate of stocks is valid,
subsisting, etc.
 2nd situation, what cause of action may the corporation
have? Remedy?

- Third party complaint against C, but what if he is a
purchaser for value? 4th party claim against B
 When may certificate of stocks be issued?
- Section 64 provides:
Section 64. Issuance of stock certificates. -
No certificate of stock shall be issued to a subscriber
until the full amount of his subscription together with
interest and expenses (in case of delinquent shares), if
any is due, has been paid. (37)
 A certificate of stock cannot be issued unless he fully
paid the amount subscribed
 Subscription to the capital stocks of the corporation are
indivisible
 Clear mandate of section 148 of the code is that the
ruling of the court in Baltazar vs. Lingayen Gulf, no
longer holds true
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)
 Subscription to shares of stocks are indivisible
 Also apparent is that once a subscriber has paid his
subscription in full, he becomes entitled to be issued a
stock certificate and in the event that the corporation
refuses to do so, the stockholder my institute a case for
mandamus with damages. Thus, it has been said that
the duty of the corporate officers to issue stock
certificates to those entitled thereto is a ministerial duty
enforceable by mandamus.
Fua Cun vs. Summers and China Banking Corp.
- The court erred in holding the plaintiff as the owner of
250 shares of stock; “the plaintiff’s rights consist in
equity in 500 shares and upon payment of the unpaid
portion of the subscription price he becomes entitled to
the issuance of certificate for said 500 shares in his
favor.”
- No certificate of stock until the full amount has been
paid.
 Watered stock
- One which is issued by the corporation as fully paid-up
shares, when in fact the whole amount of the value
thereof has not been paid.
- Basis is par value and not the fair market value
 Section 62 states that stocks shall not be issued for a
consideration less than par or issued price thereof,
while section 13 states that in no case shall be paid-up
capital be less than five thousand [P5000] pesos.
 If issued below par, issued value considered as water
 How may watered stocks be issued?
1. For a monetary consideration less than its par or issued
value;
2. For a consideration in property, tangible or intangible,
valued in excess of its fair market value;
3. Gratuitously or under an agreement that nothing shall
be paid at all; or
4. In the guise of stock dividends when there are no
surplus profits of the corporation.
 Why is stock watering illegal?
1. The corporation is deprived of its capital thereby hurting
its business prospects, financial capability and
responsibility;
2. Stockholders who paid their subscriptions in full, or
promised to pay the same, are injured and prejudiced by
the reduction of their proportionate interest in the
corporation; and,
3. Present and future creditors are deprived of the
corporate assets for the protection of their interest.
- Corporation is prejudiced
- Stockholders, dilution of interest
- Creditors are prejudiced, virtue of right to look upon
corporations properties for the satisfaction of their
claims
 What is the effect of issuance of watered stocks
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1. As to the corporation - when a corporation is guilty of
ultra-vires or illegal acts which constitute an injury to or
fraud upon the public, or which will tend to injure or
defraud the public, the State may institute a quo-
warranto proceeding to forfeit its charter for the misuse
or abuse of its franchise.
2. As between the corporation and the subscriber- The
subscription is void. Such being the case, the subscriber
is liable to pay the full par or issued value thereof, to
render it valid and effective.
3. As to the consenting stockholders - They are stopped
from raising any objection thereto;
4. As to dissenting stockholders - In view of the dilution of
their proportionate interest in the corporation, they may
compel the payment of the “water” in the stock solidarily
against the responsible and consenting directors and
officers inclusive of the holder of the watered stocks;
5. As to creditors - They may enforce payment of the
difference in the price, or the water in the stock,
solidarily against the responsible directors/officers and
the stockholders concerned; and’
6. As against transferees of the watered stock – His right is
the same as that of his transferor. If, however, a
certificate of stock has been issued and duly indorsed to
a bona fide purchaser, without knowledge, actual or
constructive, the latter cannot be held liable, at least as
against the corporation, since he took the shares on
reliance of the misrepresentation made by the
corporation that the stock certificate is valid and
subsisting. This is because a corporation is prohibited
from issuing certificates of stock until the full value of
the subscriptions have been paid and could not,
therefore, deny the validity of the stock certificate it
issued as against a purchaser in good faith. Thus,
Ballentine states that whether there is any liability on
the part of the transferee of watered stock is made to
depend upon whether he acquired the same without
notice, either as purchaser or donee. If he had
knowledge thereof, he is subject to the same liability as
his transferor.
 What is the nature of the liability of the corporate
directors consenting to the issuance of watered stocks
and the extent of their liabilities?
- Solidarily liable with the holder of the watered stocks to
the extent of the water from said shares of stocks
 Will all the directors be liable? What if you objected will
you also be liable?
- If you do not issue a written objection, you are still
liable
- Even passive directors may be liable
- Those having knowledge thereof, but did not interpose
their objection shall be liable
- Section 65 provides:
Section 65. Liability of directors for watered
stocks. - Any director or officer of a corporation
consenting to the issuance of stocks for a consideration
less than its par or issued value or for a consideration in
any form other than cash, valued in excess of its fair
value, or who, having knowledge thereof, does not
forthwith express his objection in writing and file the
same with the corporate secretary, shall be solidarily,
liable with the stockholder concerned to the corporation
and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par
or issued value of the same. (n)
 ACS-100M 100M/S PAR VALUE-
1.00
SUBSCRIBED-50M FAIR MARKET VALUE-
12.00/S
UNSUBSCRIBED-50M
A
B
C
D
E
There is a denial of pre-emptive rights and directors
A,B,C,D,E decided to issue the remaining 50M and
subscribed for 10M each at 2 per share.
 Is there stock watering if the fair market value is 12.00?
- No stock watering
- The basis is the par value
- The shares where in fact paid more than the par value
indicated in the articles of incorporation

3 days later they sold their 10M share for P11.00 each,
therefore making a profit.
 Can you question there actuations? What would be the
cause of action?
- It may be questioned.
- Duty of loyalty or fiduciary duty as such directors
- They cannot advance their own motives to the damage
prejudice of the corporation which they represents and
stockholders as a whole instead of it being sold outside
- 500M would have gone to the coffers of the corporation,
500M should be there for the protection of creditors
- They are placed in a fiduciary relationship
- Sila lang ba ang kikita, pano naman yung corporation,
opportunity na yun para kumita
 When are unpaid subscriptions due and payable?
- Section 67. Payment of balance of subscription. -
Subject to the provisions of the contract of subscription,
the board of directors of any stock corporation may at
any time declare due and payable to the corporation
unpaid subscriptions to the capital stock and may
collect the same or such percentage thereof, in either
case with accrued interest, if any, as it may deem
necessary.
Payment of any unpaid subscription or any percentage
thereof, together with the interest accrued, if any, shall
be made on the date specified in the contract of
subscription or on the date stated in the call made by
the board. Failure to pay on such date shall render the
entire balance due and payable and shall make the
stockholder liable for interest at the legal rate on such
balance, unless a different rate of interest is provided in
the by-laws, computed from such date until full
payment. If within thirty (30) days from the said date no
payment is made, all stocks covered by said
subscription shall thereupon become delinquent and
shall be subject to sale as hereinafter provided, unless
the board of directors orders otherwise. (38)
 Remedies of the corporation to enforce payment of
unpaid subscription
1. By board action in accordance with the procedure laid
down in sections 67 to 69 of the code
2. By a collection case in court as provided for in section
70
 Are subscribers of shares of stocks not fully paid, liable
to pay interest?
- General rule is they are not liable to pay interest
because the code says unless requires in the by-laws
- Aside from the mandate of the law that subscribers to
shares of stock must pay the full value of their
subscription, they may likewise be required to pay
interest on all unpaid subscriptions if so imposed in the
contract or in the corporate by-laws at such rate as may
be indicated thereat or the legal rate if not so fixed.
Unless so required or provided, however, subscribers to
shares of stock, not fully paid, are not liable to pay
interest on their unpaid subscriptions. The code thus
provides:
Section 66. Interest on unpaid subscriptions.
- Subscribers for stock shall pay to the corporation
interest on all unpaid subscriptions from the date of
subscription, if so required by, and at the rate of
interest fixed in the by-laws. If no rate of interest is fixed
in the by-laws, such rate shall be deemed to be the legal
rate. (37)
 Until a call is made, they are not due and payable, but
still subject to the provisions of the contracts
 Procedures in case of sale of delinquent stocks
- Section 68. Delinquency sale. - The board of directors
may, by resolution, order the sale of delinquent stock
and shall specifically state the amount due on each
subscription plus all accrued interest, and the date,
time and place of the sale which shall not be less than
thirty (30) days nor more than sixty (60) days from the
date the stocks become delinquent.
Notice of said sale, with a copy of the
resolution, shall be sent to every delinquent stockholder
either personally or by registered mail. The same shall
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39
furthermore be published once a week for two (2)
consecutive weeks in a newspaper of general circulation
in the province or city where the principal office of the
corporation is located.
Unless the delinquent stockholder pays to the
corporation, on or before the date specified for the sale
of the delinquent stock, the balance due on his
subscription, plus accrued interest, costs of
advertisement and expenses of sale, or unless the board
of directors otherwise orders, said delinquent stock shall
be sold at public auction to such bidder who shall offer
to pay the full amount of the balance on the
subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest
number of shares or fraction of a share. The stock so
purchased shall be transferred to such purchaser in the
books of the corporation and a certificate for such stock
shall be issued in his favor. The remaining shares, if
any, shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to the
issuance of a certificate of stock covering such shares.
Should there be no bidder at the public
auction who offers to pay the full amount of the balance
on the subscription together with accrued interest, costs
of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share, the corporation
may, subject to the provisions of this Code, bid for the
same, and the total amount due shall be credited as
paid in full in the books of the corporation. Title to all
the shares of stock covered by the subscription shall be
vested in the corporation as treasury shares and may be
disposed of by said corporation in accordance with the
provisions of this Code. (39a-46a)
 Who is the winning bidder in a delinquency sale?
- Bidder who shall “offer to pay the full amount of the
balance on the subscription together with accrued
interest, cost of advertisement and expenses of sale, for
the smallest number of shares or fraction of a share.”
X Co. has 1M authorized capital stock
500 thousand is already subscribed
A subscribed to 100 thousand shares, 50 thousand is
already paid leaving 50 thousand unpaid
The corporation is at a loss of 250 thousand, the board
decides to make a call for the payment of the unpaid
subscriptions, however A could not paid, hence declared
delinquent and decides to sell his share at a public
auction
55 thousand is to be paid, remaining balance plus cost
and expenses
BIDDERS:
X-55K FOR 99,900 shares
Y-55K FOR 99,500 shares
Z-55K FOR 99,000 shares (winning bidder)
 Assume there is no bidder, may the corporation bid?
- NO. It cannot bid because the law says, subject to the
provisions of this CODE. Section 68 and 41 should be
reconciled. Section 68 states that:
Should there be no bidder at the public
auction who offers to pay the full amount of the balance
on the subscription together with accrued interest, costs
of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share, the corporation
may, subject to the provisions of this Code, bid for
the same, and the total amount due shall be credited as
paid in full in the books of the corporation. Title to all
the shares of stock covered by the subscription shall be
vested in the corporation as treasury shares and may be
disposed of by said corporation in accordance with the
provisions of this Code. (39a-46a)

- There was no unrestricted retained earnings in the
example given therefore the corporation cannot bid ,
section 41, it states that:
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)
 What if the shares of A were sold without compliance of
the requirements? May A question the sale?
- The law prescribes two conditions before an action to
recover delinquent stocks irregularly sold may be
allowed. These are:
1. The party seeking to maintain such action first pays or
tenders to the party holding the stock the sum for which
the same was sold, with interest from the date of the
sale at the legal rate; and,
2. The action shall be commenced by the filing of a
complaint within six months from the date of the sale.
- The reason for such is the stability of transactions of the
shares of stock
 Suppose in the example, since there are no unrestricted
retained earnings, hence the corporation cannot bid, is
the corporation left without any recourse?
- Section 70. Court action to recover unpaid subscription.
- Nothing in this Code shall prevent the corporation
from collecting by action in a court of proper jurisdiction
the amount due on any unpaid subscription, with
accrued interest, costs and expenses. (49a)
Velasco vs. Poizat
- The subscriber is as much bound to pay the amount of
the share subscribed by him as he would be to pay any
other debt, and the right of the company to demand
payment is no less incontestable.
- Two available remedies: the first and most special
remedy given by the statute consist in permitting the
corporation to put up the unpaid stock and dispose of it
for the account of the delinquent subscriber. The other
remedy is by action in court.
De Silva vs. Aboitiz and Co.
- Discretionary on the part of the board of directors to do
whatever is provided in the said article relative to the
application of the part of the 70 percent of the profit
distributable in equal parts on the payment of the
shares subscribed to and fully paid
Lingayen Gulf vs. Baltazar
- Exception: pursuant to a bona fide compromise or to set
off a debt due from the corporation, a release supported
by consideration, will be effectual as against dissenting
stockholders and subsequent and existing creditors. A
release which might originally have been held invalid
may be sustained after a considerable lapse of time
Apocada vs. NLRC
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- Set-off is without any legal basis
- It was premature
- Unpaid subscriptions will become due and payable only
upon certain instance
- Call or if there is a stipulation in contract
- If no call and no stipulation in contract then it will not
be demandable or payable at all
Lumanlan vs. Cura
- Trust Fund Doctrine- subscription to the capital of a
corporation constitute a fund to which the creditors
have a right to look for satisfaction of their claims and
that the assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to realize
assets for the payment of its debts.
PNB vs. Bitulak
- Where it not for the promise, the defendants would have
not subscribed
- Trust Fund Doctrine, it is established doctrine that
subscriptions to the capital of a corporation constitute a
fund to which creditors have a right to look for
satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the
payment of its debts.
- A corporation has no power to release an original
subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration
for such release; and as against creditors a reduction of
the capital stock can take place only in the manner and
under the conditions prescribed by the statute or the
charter or the articles of incorporation.
Edward Keller and Co. vs. COB
- May the stockholder be held liable for the debts of the
corporation? YES. To the extent of their unpaid
subscription
- As to the liability of the stockholders, it is settled that a
stockholder is personally liable for the financial
obligations of a corporation to the extent of his unpaid
subscriptions
 Is there a prescriptive period wherein a demand for
unpaid subscription should be made?
- NO. Garcia vs. Suarez case
Garcia vs. Suarez
- Never became due and payable until there is a call made
- Prescription will not run until and unless there is
demand
- Prescription should be determined from the time
demand has been made and not from the time of
subscription
 If declared delinquent, what would be the effect as to the
owner of said shares?
- 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)

- However if the shares are not delinquent, subscribers to
the capital of a corporation, though not fully paid, are
entitled to all the rights of a stockholder, according to
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)
 May the rules governing delinquency sale apply to a
non-stock corporation? Are there unpaid shares in a
non-stock corporation?
- Rules governing stock corporations, when applicable,
also applies to a non-stock corporation
- There are delinquent shareholders also in a non-stock
corporation. Example is membership dues
 A corporation paid 50% of subscription and was later on
declared delinquent when he could not pay upon call; A
is also a director of the corporation. Will A, upon
declaration of delinquency , still be able to exercise his
right as a director?
- Yes, he loses all his right as a stockholder except his
right to receive dividends
- He remains to be a director, only qualification to be a
director is he must own at least 1 share and since it still
stands in his name pending the sale, he remains to be
and act as a director
- Even if there is sale, he may still be director because the
winning bidder may not bid or pay for all the shares or
there might be remaining shares, which would be
credited in favor of the delinquent stockholder
- Section 43 provides:
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)
 When a certificate of stock is loss or destroyed, what
must be done by the owner thereof?
- 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;
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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 have issued certificate of stock in lieu of those lost,
stolen or destroyed pursuant to the procedure above-
described. (R.A. 201a)
- The rationale of the above-quoted law is to avoid
duplication of certificates of stock and the avoidance of
fictitious and fraudulent transfers.
 When will the replacement certificate be issued?
- The code provides 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,
 Could it be issued earlier than 1 year?
- Yes it can be, the code states that:
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.
 May corporate officers be held liable for the
unauthorized issuance?
- YES, the code provides that:
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 have issued certificate of stock in lieu of those lost,
stolen or destroyed pursuant to the procedure above-
described. (R.A. 201a)
 42

 Assuming the last paragraph is not there; would it be 14. To participate in the distribution of the assets of the
not the same, that they should be held liable due to corporation upon dissolution under section 122;
fraud, bad faith or negligence?

15. In the case of a close corporation, to petition the SEC to

- YES. Section 31 provides that: arbitrate in the event of a deadlock as allowed under
section 104; and,

Section 31. Liability of directors, trustees or

officers. - Directors or trustees who willfully and 16. Also in the case of a close corporation, to withdraw
knowingly vote for or assent to patently unlawful acts of therefrom, for my reason, and compel the corporation to
the corporation or who are guilty of gross negligence or purchase his shares as provided for under section 105.
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
there from suffered by the corporation, its stockholders
or members and other persons.

When a director, trustee or officer attempts to

acquire or acquires, in violation of his duty, any interest
adverse to the corporation in respect of any matter
which has been reposed in him in confidence, as to
which equity imposes a disability upon him to deal in
his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which
otherwise would have accrued to the corporation. (n)

 Certificate of stock was lost, the owner transfers his

shares by way of a notarized deed will it be valid?

- He cannot do so, if a certificate of stock is issued by a

corporation, a mere notarized deed will not suffice

- Deed of assignment was not sufficient since there was

no endorsement (Rural Bank of Lipa vs. CA)

 Rights and liabilities of stockholders

- RIGHTS

1. Participation in the management of the corporate affairs

by exercising their right to vote and be voted upon either
personally or by proxy as provided for under sections 50
and 58 of the code;

2. To enter into a voting trust agreement subject to the

procedure, requirements and limitations imposed under
section 50;

3. To receive dividends and to compel their declaration if

warranted under section 43;

4. To transfer shares of stock subject only to reasonable

restrictions such as options and preferences as may be
allowed by law inclusive of the right of the transferee to
compel the registration of the transfer in the books of
the corporation as provided for in section 63;

5. To be issued a certificate of stock for fully paid-up

shares in accordance with 64;

6. To exercise pre-emptive rights as provided for in section

39;

7. To exercise their appraisal right in accordance with the

provision of section 81 and in those instance allowed by
law such as section 42 and 105;

8. To institute and file a derivative suit;

9. To recover shares of stock unlawfully sold for

delinquency as may be allowed under section 69;

10. To inspect the books of the corporation subject only to

the limitations imposed by section 73;

11. To be furnished by the most recent financial statement

of the corporation as by section 75;

12. To be issued a new stock certificate in lieu of the lost or

destroyed one subject to the procedure laid down in
section 73;

13. To have the corporation dissolved under section 118 to

121, and section 105 in a close corporation;

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- LIABILITIES
1. To pay to the corporation the balance of his unpaid
subscriptions subject to the provision of section 67 to
70;
2. To pay interest on his unpaid subscription if required by
the by-laws or by the contract of subscription in
accordance with section 66;
3. To answer to the creditors for the unpaid portion of his
subscription under the TRUST FUND DOCTRINE;
4. To answer the “water” in his stocks as provided for in
section 65;
5. To be liable, as general partners, for all debts, liabilities
and damages of a determinable corporation as
envisioned under section 21 (corporation by estoppel);
and,
6. To be personally liable for torts, in the event that a
stockholder in a close corporation actively participates
in the management of the corporate affairs.
CORPORATE BOOKS AND RECORDS
 What are these books and records that are required to
be kept?
- 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 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
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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.)
 To summarize:
1. Records of all business transactions which include,
among others, journals, ledger, contracts, vouchers and
receipts, financial statements and other books of
accounts, income tax returns, and voting trust
agreements which must be kept and carefully preserved
at its principal office;
2. Minutes of all meetings of stockholders or members and
of the directors or trustees setting forth in detail the
date, time, and place of meeting, how authorized, the
notice given whether the same be regular or special, and
if special, the purpose thereof shall be specified, those
present and absent, and every act done or ordered done
there at which ,must likewise be kept at the principal
office of the corporation; and,
3. Stock and transfer book showing the names of the
stockholders, the amount paid or unpaid on all stocks
for which subscription has been made, a statement of
every alienation, sale or transfer of stock made, if any
the date thereof, and by whom and to whom made
which must also be kept at the principal office of the
corporation or in the office of its stock transfer agent.
These corporate books and records, inclusive of all
business transactions and minutes of meetings, are
subject to inspection by any of the directors, trustees,
stockholders or members of the corporation at
reasonable hours on business days and a copy of
excerpts of said records may be demanded. In fact, in so
far as financial statement is concerned, the Code clearly
provides:
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)
 May books and records be examined? Who may
examine? Can they copy them? In whose expense?
- Yes, according to the code:
“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. “
 Is there any defense available that could be raised? By
the corporate officers to justify the refusal?

- Yes, the code provides that:
“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.”
 What is the stock and transfer? Where should stock and
transfer be kept? Can it be kept elsewhere?
“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. “
 Stock and transfer agent
- Records every movement
- Person who monitors movement by the minutes or by
the hours
- Non-stock corporation- stock and transfer books
- Club share- membership
 Are stockholders entitled to financial statements?
- Yes, they are entitled to a copy, the code provides that:
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)
- Audited financial statement filed in the SEC, 120 days
from the end of the final year, or must be filed on or
before April of each year
- Must be stamp received by the BIR
 Those in the stock exchange
- Disclosure of any matter that have to do with increasing
and decreasing
- If not “kulong” violation of securities and regulation act
 Why is this right of inspection granted to a stockholder?
- The basis of the right of the stockholder to inspect the
books and records of the corporation for a proper
purpose is to protect his interest as a stockholder. Thus,
it has been said that:
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“The right of the shareholders to ascertain
how the affairs of his company are being
conducted by its directors and officers is
founded by his beneficial interest through
ownership of shares and the necessity of self-
protection. Managers of some corporations
deliberately keep the shareholders in
ignorance or under misapprehension as to
the true condition of its affairs. Business
prudence demands that the investor keep a
watchful eye on the management and the
condition of the business. Those in charge of
the company may be guilty of gross
incompetence or dishonesty for years and
escape liability if the shareholders cannot
inspect the records and obtain information.”
 Is there any distinction of the right of inspection of a
stockholder and that of a director?
- Yes, as compared to a stockholder or member, the right
of a director or trustee to inspect and examine corporate
books and records is considered absolute and
unqualified and without regard to motive. This is
because a director supervises, directs and manages
corporate business and it is necessary that he be
equipped with all the information and data with regard
to the affairs of the company in order that he may
manage and direct its operations intelligently and
according to his best judgment in the interest of all the
stockholders he represents. Thus, while stockholders
and members are entitled to inspect and examine the
books and records as provided in sections 74 and 75
they may not gain access to highly sensitive and
confidential information. In the case of directors. “it is
not denied” that they have such access. This would
include, among others,
a. Marketing strategies and pricing structure;
b. Budget for expansion and diversification;
c. Research and development;
d. Sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms
 May this right be exercised, other than by the
stockholders themselves?
- Yes, while the right is founded on stock ownership thus
personal in nature it may be made by the stockholder’s
agent or representative since it may be unavailing in
many instances
 What if the right of the stockholder to inspect is denied?
What is his remedy?
1. Mandamus
2. Damages either against the corporation or responsible
officer who refused the inspection
3. Criminal complaint for violation of his right to inspect
and copy excerpts of all business transactions and
minutes of meeting. Section 74 provides that 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. The latter provision
imposes a penalty of a fine of not less than P1,000 but
not more than P10,000 or an imprisonment for not less
than 30 days but not more than 5 years, or both, at the
discretion of the court. If the refusal is pursuant to a
resolution or order of the board, the liability shall be
imposed upon the directors or trustees who voted for
such refusal.
 Defense of the responsible corporate officer
1. That the person demanding has improperly used any
information secured through any prior examination of
the records or minutes of such corporation or of any
other corporation;

2. That he was not acting in good faith or for a legitimate
purpose in making his demand;
3. The right is limited or restricted by special law or the
law of it creation.
W.G. Philpotts vs. Philippine Manufacturing Co.
- The right of inspection given to a stockholder can be
exercised either by himself or by any proper
representative or attorney-in-fact, and either with or
without the attendance of the stockholder
- The right may be regarded as personal, in the sense that
only a stockholder may enjoy it; but the inspection and
examination may be made by another. Otherwise it
would be unavailing in many instances.
o Note: Usually hires an auditor or accountant to
safeguard his interest
Pardo vs. Hercules Lumber Co.
- The law is clear, it may be exercised during reasonable
hours on any business days, the by-laws cannot deny
this right all together
- The general right given by the statute may not be
lawfully abridged to the extent attempted in this
resolution. It may be admitted that the officials in
charge of a corporation may deny inspection when
sought at unusual hours or under other improper
conditions; but neither the executive officers nor the
board of directors have the power to deprive a
stockholder of the right altogether.
- The corporation, or its responsible directors and officers
cannot unduly restrict this right of inspection and may
not arbitrarily set a few days of the year within which
the stockholder may make the inspection.
- A by-law unduly restricting the right of inspection is
undoubtedly invalid
Vegaruth vs. Isabela Sugar Co.
- Directors of a corporation have the unqualified right to
inspect the books and records of the corporation at all
reasonable hours.
- We do not conceive, however, that a director or
stockholder has any absolute right to secure certified
copies of the minutes of the corporation until these
minutes have been written up and approved by the
directors.
 May a stockholder of a holding company inspect the
books and records of a subsidiary?
- It depends
- The right of the stockholders to examine corporate
books extends to wholly-owned subsidiary which is
completely under the control and management of the
parent company where he is such a stockholder. But if
the two entities (subsidiary and parent) are legally being
operated as separate and distinct entities, there is no
such right of inspection on the part of the stockholder of
the parent company.
AYALA- HOLDING COMPANY/PARENT COMPANY
MERGER AND CONSOLIDATION
SUBSIDIARIES: BPI/GLOBE/AYALA LAND (not wholly-
owned subsidiary)
o HOLD ATLEAST 50 +1 shares in order to be a
PARENT COMPANY
 A, is a stockholder of Ayala, does he have a right to
inspect the records of its subsidiaries?
- If wholly owned pwede, but its subsidiaries are not
wholly owned kaya hindi pwede
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Gokongwei vs. SEC
- San Miguel corporation owns all of the shares of stock of
San Miguel International
- It is wholly-owned
- It would be in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of such
wholly-owned subsidiary which are in respondent
corporation’s possession and control
 If being operated as separate and distinct corporations,
there is no such right
 Telecommunications- special franchise, it is a legislative
grant
Gonzales vs. PNB
- Provisions of the old law was unqualified, when it
granted stockholders the right to inspect
- However, whole seemingly enlarging the right of
inspection, the new code has prescribed limitations to
the same. It is now expressly required as a condition for
such examination that the one requesting it must not
have been guilty of using improperly any information
secured through a prior examination and that the
person asking for such examination must be acting in
good faith and for a legitimate purpose in making his
demand
- Admittedly, he sought to be a stockholder in order to pry
into transactions entered into by the respondent bank
even before he became a stockholder. His obvious
purpose was to arm himself with materials he can use
against the respondent bank for acts done by the latter
when the petitioner was a total stranger to the same.
- Bank was created by a special law, it has its own
charter and primarily governed by the law creating them
- The bank is only subject to the inspection of the Central
Bank and any information pertaining to the bank is
confidential and shall not be revealed to any person
other than the President of the Philippines, the
Secretary of Finance and the Board of Directors, nor
shall any information relative to the funds in its
custody, its current accounts or deposits belonging to
private individuals, corporations or other entities except
by order of a Court of Competent Jurisdiction, hence
inspection sought to by the petitioner is violative of the
provisions of its charter and is even subject to penal
sanctions
 Assuming you are a stockholder of PNB, and then it was
privatized, may you already have the right to inspect?
- No, unless its charter has been altered or repealed it is
still subject to the same law
 3 stages in the life of a corporation
- Formation or birth
- We now discuss the union of the corporation
- The last would be its death or dissolution
 Merger and consolidation
- In corporate parlance it is called spin-off
- Almost a year ago San Miguel separated its brewery
business
- San Miguel Corporation is now a full time holding
company; it can later on absorb the company

- Corporations are granted by the code to merge or
consolidate
- most common type of corporate recognition
- not the same in every case
- but most common in the weal financial or insolvent
condition, aim is to bring it back to its financial
capability
- also a method of recapitalization
o purchase and sale of corporate assets is another
form of corporate reorganization
 How do you value the assets of the merging corporation,
do you consider goodwill?
 First secure favorably recommendation of government
agency
- Section 79. Effectivity of merger or
consolidation. - The articles of merger or of
consolidation, signed and certified as herein above
required, shall be submitted to the Securities and
Exchange Commission in quadruplicate for its approval:
Provided, That in the case of merger or
consolidation of banks or banking institutions,
building and loan associations, trust companies,
insurance companies, public utilities, educational
institutions and other special corporations governed
by special laws, the favorable recommendation of
the appropriate government agency shall first be
obtained. If the Commission is satisfied that the merger
or consolidation of the corporations concerned is not
inconsistent with the provisions of this Code and
existing laws, it shall issue a certificate of merger or of
consolidation, at which time the merger or consolidation
shall be effective.
If, upon investigation, the Securities and
Exchange Commission has reason to believe that the
proposed merger or consolidation is contrary to or
inconsistent with the provisions of this Code or existing
laws, it shall set a hearing to give the corporations
concerned the opportunity to be heard. Written notice of
the date, time and place of hearing shall be given to
each constituent corporation at least two (2) weeks
before said hearing. The Commission shall thereafter
proceed as provided in this Code. (n)
 Merger
- A union effected by absorbing one or more existing
corporations by another which survives and continues
the combined business
- It is the uniting of two or more corporations by the
transfer of property to one of them which continue in
existence, the other or the others being dissolved and
merged therein.
A B
A transfers all assets, properties, rights, obligations,
liabilities to B
B issues shares of stocks in exchange of the transfer
A is then dissolved and B SURVIVES
o Parties to a merger are called constituent
corporation
 Consolidation
- The uniting or amalgamation of two or more existing
corporations to form a new corporation
- In merger there is a surviving corporation, the others
are dissolved, while in consolidation, all constituent are
dissolved and a new one organized
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A B
C
 Like all other corporate acts, it emanates from the board
1. The board of directors or trustees of each constituent
corporations shall approve a plan of merger or
consolidation setting forth the matters required in
section 76;
2. Approval of the plan by the stockholders representing
2/3 of the outstanding capital stock or 2/3 of the
member in non-stock corporations of each of such
corporations at separate corporate meetings called for
the purpose;
3. Prior notice of such meeting, with a copy or summary
of the plan of merger or consolidation shall be given
to all stockholders or members at least two (2) weeks
prior to the scheduled meeting, either personally or
registered mail stating the purpose thereof;
4. Execution of the articles of merger or consolidation by
each constituent corporations to be signed by the
president or vice-president and certified by the
corporate secretary or assistant secretary setting
forth the matters required in section 78;
5. Submission of the articles of merger or consolidation
in quadruplicate to the SEC subject to the
requirement of section 79 that if it involve corporations
under the direct supervision of any other government
agency or governed by special laws the favorable
recommendation of the government agency concerned
shall first be secured and;
6. Issuance of the certificate of merger or
consolidation by the SEC at which time the merger or
consolidation shall be effective. If the plan, however, is
believed to be contrary to law, the SEC shall set a
hearing to give the corporations concerned an
opportunity to be heard upon proper notice and
thereafter, the Commission shall proceed as provided in
the Code.
 Although merger and consolidation is an express power
granted to corporation, it is subject to limitations, as
maybe proscribed by law
 What would be the effect of merger or consolidation?
<sec. 80>
1. There will only be a single corporation. In case of
merger, the surviving corporation or the consolidated
corporation in case of consolidation;
2. The termination of the corporate existence of the
constituent corporations, except that of the surviving
corporation or the consolidated corporation;
3. The surviving corporation or the consolidated
corporation will possess all the rights, privileges,
immunities and powers and shall be subject to all the
duties and liabilities of a corporation organized under
the Code;
4. The surviving or consolidated corporation shall possess
all the rights, privileges, immunities and franchises of
the constituent corporations, and all property and all
receivables due, including subscriptions to shares and
other choses in action, and every other interest of, or
belonging to or due to the constituent corporations shall
be deemed transferred to and vested in such surviving
or consolidated corporation without further act and
deed; and,
5. The rights of creditors or any lien on the property of the
constituent corporations shall not be impaired by the
merger or consolidation.
 Is there a liquidation process in case of merger or
consolidation?
- None, there is nothing to distribute

Associated Bank vs. CA
- By virtue of a specific provision in the merger agreement
- Although the subject promissory note names CBTC as
the payee, the reference to CBTC in the note shall be
construed, under the very provision of the merger
agreement, as a reference to petitioner bank, “as if such
reference (was a) direct reference to the latter for all
intents and purposes
- Section 80 par. 4 states:
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
- Without further acts, meaning it is automatic
 When do merger and consolidation become effective?
What if the SEC fails to act on it without fault
attributable to the corporation involved?
- It will never become valid until and unless the SEC gives
its stamp of approval
- It will be up to the constituent corporation to follow it
up
- It will never take effect until the SEC gives its approval
and issues the articles of merger
o Granted 3 years to wing up unless there is a
trustee to wing up its affairs
 Could there be liquidators and winding up with respect
to the corporation in consolidation and merger?
- No, there is none
- No assets properties or rights to collect, they are
transferred
- No debts and liabilities to pay because they become the
liabilities of the surviving corporations
- No properties transferred because they will be the
properties of the surviving corporations
o Hardest part is the financial act, regarding how
many shares would be issued, probability of
collection and the like
o In merger and consolidation, there is due diligence
and an economist is usually hired
APPRAISAL RIGHT
 Define appraisal
- Right to withdraw from the corporation and demand
payment of the fair value of his shares after dissenting
from certain corporate acts involving fundamental
changes in corporate structure <sec. 81>
 What property? When may this right be exercises?
- Section 81 provides:
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:
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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)
 May it be exercised by a stockholder who dissents to the
act of a business other than a primary purpose?
X Co. inc
Principal office is in Quezon city, it was changed to
Paranaque
A objects and makes a written demand. May he exercise
his right of appraisal?
- It is not available in all amendments of the corporation
- It must be changing or restricting the rights of any
stockholder
 What if the principal office is changed from QC to TAWI-
TAWI, will it change or affect the rights of A?
- To some it may change or restrict the rights to others it
may not
 How is the right exercised?
- According to section 82 of the code:
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.
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)
X Co.
Principal Office- QC, it was changed to Manila
A objects and makes a written demand for payment of
fair value of shares. Can he make a demand of payment
of shares?
 True or False, no stockholder in a stock corporation can
ever demand if the principal office is amended, changing
it from QC to Manila

- False, a stockholder in a close corporation may for any
reason compel the close corporation that he be paid the
fair value of his shares
Can he exercise his appraisal rights in the first place?
He hasn’t even paid his subscription in full.
 May a stockholder who hasn’t paid his subscription in
full exercise his appraisal rights?
- Yes, he can exercise his appraisal rights, by reconciling
the provisions of section 72, section 82 and section 86
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)
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.
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)
Section 86. Notation on certificates; rights of
transferee. - Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall
submit the certificates of stock representing his shares
to the corporation for notation thereon that such shares
are dissenting shares. His failure to do so shall, at the
option of the corporation, terminate his rights under
this Title. If shares represented by the certificates
bearing such notation are transferred, and the
certificates consequently cancelled, the rights of the
transferor as a dissenting stockholder under this Title
shall cease and the transferee shall have all the rights of
a regular stockholder; and all dividend distributions
which would have accrued on such shares shall be paid
to the transferee. (n)
- Notation is not mandatory, it is even discretionary
because the code provides “at the option of the
corporation” because it never issued one for that matter
since the subscriptions are not yet fully paid
 May the corporation be compelled to pay the interest of
A -
300 T, 150T, 150T and 0 unrestricted retained earnings
 No stockholder may be able to compel the corporation to
pay the value of his shares if the corporation has no
unrestricted retained earnings
- False, a stockholder of a close corporation may for any
reason, provided only that the corporation has sufficient
assets to cover its debts and liabilities
o General rule: there should be unrestricted retained
earnings
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o Exception: section 105 “close corporation”
 The procedure and requirements for the valid exercise of
this rights are:
1. The stockholder must have voted against the proposed
corporate action in any of the instances allowed by law
for the exercise of the right of appraisal;
2. The written demand for payment must be made by the
dissenting stockholder within thirty (30) days after the
date on which the vote was taken thereon. Failure to
make the demand within the said period shall be
deemed a waiver on the part of the stockholder
concerned to exercise his appraisal right;
3. Surrender of the certificate of stock by the dissenting
stockholder for notation in the corporate books and the
payment by the corporation of the fair market value of
the said shares as of the day prior to the date on which
the vote was taken. If the stockholder and the
corporation cannot agree on the fair market value
thereof, the same shall be determined in accordance
with the provision of paragraph 2 of section 82;
4. The fair value of the shares of the dissenting stockholder
must be paid by the corporation only if it has
“unrestricted retained earnings” in its books to cover
such payment. If the corporation has no unrestricted
retained earnings, the dissenting stockholder may not,
therefore, be able to effectively exercise his appraisal
rights;
5. Upon payment of the shares by the corporation, the
dissenting stockholder shall transfer his shares to the
corporation.
 What would be the effect if the stockholder exercises his
appraisal rights? What happens to his voting and
dividend rights if he exercises his appraisal rights?
- It will be suspended, with a limitation of 30 days, as
provided for by section 83 of the code:
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)
 How do you compare the rights of a stockholder,
declared delinquent compared to a dissenting
stockholder exercising his appraisal rights
 What if a stockholder exercising his appraisal rights is
also a director, will he also lose his rights as a
stockholder?
- The shares remain to stand in his name until he is paid,
unless there is a stipulation in the by-laws
 When may the right to be paid the value of his shares
cease? Can he withdraw his right of appraisal?
Yes, he may withdraw, but there must be consent by the
corporation as provided for by section 83 of the code:
Section 84. When right to payment ceases. -
No demand for payment under this Title may be
withdrawn unless the corporation consents thereto. If,
however, such demand for payment is withdrawn with
the consent of the corporation, or if the proposed
corporate action is abandoned or rescinded by the
corporation or disapproved by the Securities and
Exchange Commission where such approval is
necessary, or if the Securities and Exchange
Commission determines that such stockholder is not
entitled to the appraisal right, then the right of said
stockholder to be paid the fair value of his shares shall
cease, his 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)

 Instances when the right of a dissenting stockholder to
be paid the fair value of his shares ceases.
1. When he withdraws his demand for payment and the
corporation consents thereto;
2. When the proposed action is abandoned or rescinded by
the corporation;
3. When the proposed action is disapproved by the SEC
where such approval is necessary;
4. When the SEC determines that he is not entitled to
exercise his appraisal right;
5. When he fails to submit the stock certificate within ten
(10) days from demand to the corporation for notation
that such shares are dissenting shares; and,
6. If the shares are transferred and the certificate
subsequently cancelled.
 Who bears the cost of appraisal?
- It depends
- The corporation bears the cost if
a. The price offered by the corporation is lower than
the fair value of the shares of the dissenting
stockholder as determined by the appraisers;
b. Where an action is filed by the dissenting
stockholder to recover such fair value and the
refusal of the stockholder to receive payment is
found by the court to be justified.
- Dissenting stockholder will be liable for the cost and
expenses of appraisal when
a. When the price offered by the corporation is
approximately the same as the fair value
ascertained by the appraisers;
b. Where the action filed by the dissenting
stockholder and his refusal to accept payment is
found by the court to be unjustified.
 The dissenting stockholder may also sell, transfer or
assign his shares
Section 86. Notation on certificates; rights of
transferee. - Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall
submit the certificates of stock representing his shares
to the corporation for notation thereon that such shares
are dissenting shares. His failure to do so shall, at the
option of the corporation, terminate his rights under
this Title. If shares represented by the certificates
bearing such notation are transferred, and the
certificates consequently cancelled, the rights of the
transferor as a dissenting stockholder under this
Title shall cease and the transferee shall have all the
rights of a regular stockholder; and all dividend
distributions which would have accrued on such
shares shall be paid to the transferee. (n)
NON-STOCK CORPORATIONS
 What is a non-stock corporation?
- 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
 What provision of the code will govern non-stock
corporations? Would the provision governing stock
corporations also apply to non-stock corporations?
- Yes, 2nd par. Of section 87 provides:
The provisions governing stock corporation,
when pertinent, shall be applicable to non-stock
Notes on Corporation Law
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corporations, except as may be covered by specific
provisions of this Title. (n)
 How is the right to vote exercised in a non-stock
corporation compared to a stock corporation
 May a member in a non-stock corporation vote
cumulatively?
- General rule is NO
 May it be granted or allowed by the by-laws?
- Yes
 May the right to cumulative voting be denied in a stock
corporation?
- No, Doctrine of Limited Capacity
 May members in a non-stock corporation vote by proxy?
- Yes, section 89 provides that:
“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)
“
 May the right to vote by proxy be validly denied in a
stock corporation?
- No, it is a matter of right in a stock corporation
 May member of a non-stock corporation cast their vote
by text?
- Yes, subject to the approval and terms and conditions of
the SEC <sec. 89>
“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. “
 How about in stock?
- Voting by mail or other similar means may also be
authorized and allowed by the by-laws of non-stock
corporations. Generally, in stock corporations, the vote
must be cast at a duly constituted meeting. The only
exception, in case of the latter, is in the matter of
general amendment of the articles of incorporation
where the written assent of the stockholder may be
sufficient.
 How is the governing board constituted in a non-stock
corporation? How many members?
- It may exceed 15 in a non-stock corporation unless the
AOI or by-laws provide otherwise, as provided for by
section 92 of the code:
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)
 Qualifications?
1. He is a member of the association;
2. Majority thereof must be residents of the Philippines;
and,
3. Other qualifications as may be provided for in the by-
laws.
 Governing board in a non-stock
- Board of Trustees, however section 138 provides that:
Section 138. Designation of governing
boards. - The provisions of specific provisions of this
Code to the contrary notwithstanding, non-stock or
special corporations may, through their articles of
incorporation or their by-laws, designate their
governing boards by any name other than as board of
trustees. (n)
 Disqualifications
- Section 27 also applies to a non-stock corporation, same
holds true to the manner of removal <sec. 29 ad 30>
Section 27. Disqualification of directors,
trustees or officers. - No person convicted by final
judgment of an offense punishable by imprisonment for
a period exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to the date of
his election or appointment, shall qualify as a director,
trustee or officer of any corporation. (n)
Section 29. Vacancies in the office of director
or trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by the
stockholders or members or by expiration of term, may
be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called for
that purpose. A director or trustee so elected to fill a
vacancy shall be elected only or the unexpired term of
his predecessor in office.
Any directorship or trusteeship to be filled by
reason of an increase in the number of directors or
trustees shall be filled only by an election at a regular or
at a special meeting of stockholders or members duly
called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so
stated in the notice of the meeting. (n)
Section 30. Compensation of directors. - In
the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any
compensation, as such directors, except for reasonable
per diems: Provided, however, That any such
compensation other than per diems may be granted to
directors by the vote of the stockholders representing at
least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall
the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the
preceding year. (n)
 Who elects the other officers?
- Directly by the general members unless the by-laws or
articles provide otherwise. <sec.92>
“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)
“ effect of extinguishing all rights of a member in the
 In stock corporations who elect officers?
- Directors
Notes on Corporation Law
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 The provision that stock corporations cannot validly
provide that members cannot be voted by stockholders
is only a general rule because there is an exception
section 97 of the code states that:
The articles of incorporation of a close
corporation may provide that the business of the
corporation shall be managed by the stockholders of
the corporation rather than by a board of directors.
So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect
directors;
2. Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed to be
directors for the purpose of applying the provisions of
this Code; and
3. The stockholders of the corporation shall be subject
to all liabilities of directors.
The articles of incorporation may likewise
provide that all officers or employees or that specified
officers or employees shall be elected or appointed by
the stockholders, instead of by the board of
directors.
 Nature of membership is non-transferrable and personal
in nature unless the articles of incorporation or by-laws
provide otherwise
Section 90. Non-transferability of
membership. - Membership in a non-stock corporation
and all rights arising there from are personal and non-
transferable, unless the articles of incorporation or the
by-laws otherwise provide. (n)
 How is a membership requirement in a non-stock
corporation
A holds a membership certificate
B goes to the corporation and compels the corporation
to record the transfer in his name
- Membership in non-stock corporations may be acquired
by complying with the provisions of its rules prescribed
in the by-laws. This is in consonance with the express
power granted by law under section 36, paragraph 6 of
the code, authorizing them to admit members thereof
and that authority carries with it the power to prescribe
rules on membership. It has thus been stated that in
the absence of charter or statutory restrictions, non-
stock corporations may determine who shall be
admitted to membership and how they shall be
admitted.
Section 36. Corporate powers and capacity. -
Every corporation incorporated under this Code has the
power and capacity:
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;
- They can provide the manner in which to admit
depending on their own rules
 The power or authority to terminate members in non-
stock corporations is said to be inherent but strict
compliance with the manner and procedure laid down in
the by-laws must be observed, otherwise it may render
the expulsion ineffective and invalid.
Section 91. Termination of membership. -
Membership shall be terminated in the manner and for
the causes provided in the articles of incorporation or
the by-laws. Termination of membership shall have the
corporation or in its property, unless otherwise provided
in the articles of incorporation or the by-laws. (n)
 Power is inherent and may be exercised in certain
situations:

1. When an offense is committed which, although it
has no immediate relation to a member’s duty as
such, it is so infamous as to render him unfit for
society of honest men, which is indictable at
common law;
2. When the offense is a violation of his duty as
member of the corporation; and,
3. When the offense is of a mixed nature, being both
against his duty as a member of the corporation,
and also indictable at common law.
If the conduct of the member comes within any of this
cases, it is a ground for valid expulsion although it may
not be expressly made so by the by-laws
Chinese YMCA vs. Ching
- Right of the corporation to choose who the members are,
cannot be inquired or intervened by the court
- The appealed decision thus contravened the establish
principle that the courts cannot strip a member of a
non-stock corporation of his membership therein
without cause.
Lions Club International vs. CA
- Courts will not generally interfere on matters involving
the internal affairs of an unincorporated association
such as election contest unless the acts complained of
are arbitrary, oppressive, fraudulent, violative of civil
rights and the like
- General rule is that the courts will not interfere with the
internal affairs of an unincorporated association so as to
settle disputes between the members, or questions of
policy, discipline, or internal government, so long as the
government of the society is fairly and honestly
administered in conformity with its by-laws and the law
of the land, and no property or civil rights are involved.
- Exceptions are the following:
a. Where law and justice so require, and the
proceedings of the association are subject to
judicial review where there is fraud, oppression, or
bad faith, or where the action complained of is
capricious, arbitrary, or unjustly discriminatory
b. To grant relief in case property or civil rights are
invaded, although it has also been held that the
involvement of property rights does not necessarily
authorize judicial intervention, in the absence of
arbitrariness, fraud or collusion.
c. Are violative of the laws of the society, or the law of
the land, as by depriving the person of due process
of law
d. There is lack of jurisdiction on the part of the
tribunal conducting the proceedings, where the
organization exceeds its powers, or where the
proceedings are otherwise illegal
 Corporations, stock and non-stock, may be dissolved in
accordance and pursuant to the provisions of Sections
118 to 121 of the Corporation Code and the pertinent
provisions of P.D. 902-A, as amended. If such be the
case, the assets of the corporation are to be distributed
CLOSE CORPORATIONS
in accordance with law and established jurisprudence.
 If a non-stock corporation is dissolved how will its
properties be distributed?
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;
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2. Assets held by the corporation upon a condition
requiring return, transfer or conveyance, and
which condition occurs by reason of the
dissolution, shall be returned, transferred or
conveyed in accordance with such requirements;
3. Assets received and held by the corporation
subject to limitations permitting their use only for
charitable, religious, benevolent, educational or
similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason
of the dissolution, shall be transferred or conveyed
to one or more corporations, societies or
organizations engaged in activities in the
Philippines substantially similar to those of the
dissolving corporation according to a plan of
distribution adopted pursuant to this Chapter;
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)
 Non-stock corporations with 4Billion funds, may it be
distributed for and among its members?
- Section 94 number 3 provides:
3. Assets received and held by the corporation
subject to limitations permitting their use only for
charitable, religious, benevolent, educational or similar
purposes, but not held upon a condition requiring
return, transfer or conveyance by reason of the
dissolution, shall be transferred or conveyed to one or
more corporations, societies or organizations engaged in
activities in the Philippines substantially similar to
those of the dissolving corporation according to a plan of
distribution adopted pursuant to this Chapter;
- If there is no distributive agreement then they may do so
through a plan of distribution under section 95
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)
 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.
- Between and among themselves, they feel and act alike
- Not more than 20 stockholders
- Specified persons, if you are not specified, you cannot
be a stockholder
- All the issued stocks of all classes is subject to
restrictions
- Shall not be listed in the stock exchange not publicly
offered
- 3 qualifying conditions must be contained in the articles
of incorporation, to be considered as a close corporation,
if not, it will not be considered as such and will be
governed by the general provisions of the code
- Even if 100 % is owned by one person it will not be
considered a close corporation without the 3 qualifying
provisions
- Identity of stockholders, specified persons
- Active management either as directors or partners in
management
- Combination of the corporation and partnership type of
business
 May any type of corporation, be organized as such close
corporation?
- No, the 3 qualifying conditions must be present
 What if 2/3 of the outstanding capital stock is owned by
another corporation which is also a close corporation,
will it be a close corporation?
- No, it will only be a closed corporation if 2/3 of the
voting stocks of a close corporation is also owned by a
close corporation. It must be “voting” stocks
- Even if another corporation owns or controls 2/3 of the
voting stocks of a close corporation, the latter may still
be considered as such close corporation if the
corporation owning or controlling the shares is also a
close corporation.
“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.”
 What kind of corporations cannot be a close
corporation?
1. Mining or oil companies,
2. Stock exchange
3. Banks and insurance companies,
4. Public utilities
5. Educational institutions
6. Corporations vested with public interest
 Classification of directors
- Ordinary stock- no such right
- Close corporation-yes there is such a right
 Section 97 is a permissive provision
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Section 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.
 After classification what then?
- After classification, qualification and then restriction as
provided for under the 3 qualifying conditions in section
96
 Cumulative voting is restricted in close corporations if
will be elected solely by a particular class
 In a close corporation, the articles of incorporation may
provide for a greater quorum and voting requirement in
meetings of both stockholders or directors to increase
the veto power of minority stockholders, unlike in a
stock corporation wherein only directors meetings may
provide for greater quorum requirement and in
stockholders meeting which may not be altered or
increased, as provide for in section 25, following the
doctrine of limited capacity
 The articles of a close corporation may likewise provide
that the business of the corporation shall be managed
by the stockholders rather than by the board of
directors. However the same must contain the
continuing provisions required in paragraph 2 of section
97, that is:
1. No meeting of stockholders need be called to elect
directors;
2. Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed to
be directors; and;
3. The stockholders of the corporation shall be
subject to all liabilities of directors.
 Liability of stockholders acting as directors in a close
corporation are more extensive since they are
personally liable for corporate torts unless the
corporation has obtained a reasonable adequate liability
insurance, unlike a ordinary stock corporation, wherein
directors thereof are only liable for corporate torts only if
they have been negligent or acted fraudulently in the
performance of their functions.
 Restrictions
- In ordinary stock corporations, the restrictions must
appear in the articles of incorporation as well as the
certificate of stocks
- In a close corporation, the restrictions must appear in
the articles of incorporation, the by-laws and the
certificate of stocks. Otherwise, the same shall not be
binding on any purchaser thereof in good faith
 What if the stockholders do not want to exercise their
right or option to purchase may it be sold to any
person?
- Yes, any third person, section 98 provides:
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.
o ordinary stock corporations are liable only if
acted in Bad faith, fraud or negligence in
performance of duty
 What if there are already 20 stockholders and they want
to add 2 more, may it compel?
- In ordinary stock corporations, they may compel by
mandamus
- In close corporations, may not be compelled to admit
because it breaches the qualifying conditions
 Since they cannot be compelled, may they admit?
- Yes, provided all the stockholders consented or instead
of consenting they decide to amend their articles of
incorporation
- Will have to amend the articles of incorporation to
accommodate other purchasers of share
- Will cease to be a close corporation if it amends and
becomes in excess of 20
o Unless all the stockholders consent they
“may”
 What if the other stockholders object to register? What
will be the remedy of the transferee?
- His remedy is rescission. The effect of rescission is
mutual restitution
 How about the stockholder, what is his recourse?
- He may compel the close corporation to purchase his
shares at their fair value for any reason, provided the
corporation has sufficient assets in its books to cover
the debts and liabilities exclusive of capital
- In a close corporation, there is a withdrawing
stockholder, unlike in an ordinary stockholder where
there is none, they may only do so in the exercise of
appraisal rights
Section 105. Withdrawal of stockholder or
dissolution of corporation. - In addition and without
prejudice to other rights and remedies available to a
stockholder under this Title, any stockholder of a
close corporation may, for any reason, compel the
said corporation to purchase his shares at their fair
value, which shall not be less than their par or
issued value, when the corporation has sufficient
assets in its books to cover its debts and liabilities
exclusive of capital stock: Provided, That any
stockholder of a close corporation may, by written
petition to the Securities and Exchange Commission,
compel the dissolution of such corporation whenever
any of acts of the directors, officers or those in control of
the corporation is illegal, or fraudulent, or dishonest, or
oppressive or unfairly prejudicial to the corporation or
any stockholder, or whenever corporate assets are being
misapplied or wasted.
 Agreements may also be entered in a close corporation
<sec.100>
- They can even agree to be partners in management
- Pre-incorporation
- Manner in which the business of the corporation shall
be managed
 Board resolution
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53
- Ordinary stock corporations- sit and act as a body at a
duly constituted meeting, they may do so by virtue of
the E-Commerce Act through teleconference or video
conference
 Exception to the rule: other officers may be directly
appointed and hired by the stockholders
 Close corporations may validly act even without a
meeting provided the conditions are obtained
Section 101. When board meeting is
unnecessary or improperly held. - Unless the by-laws
provide otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be
deemed valid if:
1. Before or after such action is taken, written consent
thereto is signed by all the directors; or
2. All the stockholders have actual or implied knowledge
of the action and make no prompt objection thereto in
writing; or
3. The directors are accustomed to take informal action
with the express or implied acquiescence of all the
stockholders; or
4. All the directors have express or implied knowledge of
the action in question and none of them makes prompt
objection thereto in writing.
 Pre-emptive rights in a close corporation is absolute
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.
 Why is it said to be absolute?
- Because there is no public offering in a close
corporation, otherwise it will not be considered as close
 In a close corporation the pre-emptive rights is
broadened to include all issues without exception unless
denied or limited by the articles of incorporation
 Section 39 is the governing provision concerning rights
of the stockholder in an ordinary stock corporation and
it may be denied. If it is not denied a stockholder can
exercise his pre-emptive rights for all issues of shares
whether money, property or previously incurred
indebtedness.
Section 39. Power to deny pre-emptive right. -
All stockholders of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or disposition of
shares of any class, in 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.
 Are treasury shares covered in the exercise of pre-
emptive rights in ordinary stock corporations?
 As regards amendments
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 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
 54

incorporation for amending, deleting or removing any of 6. Dissolving the corporation; or

the aforesaid provisions, at a meeting duly called for the
purpose.
7. Other relief as the circumstances may warrant.

 What happens if there is a deadlock?

 Section 105

- Section 104 provides for a remedy

- Dishonesty is a ground for dissolution of a close
corporation
Section 104. Deadlocks. - Notwithstanding
any contrary provision in the articles of incorporation or
by-laws or agreement of stockholders of a close - Even one stockholder may petition for dissolution
corporation, if the directors or stockholders are so
divided respecting the management of the corporation's
o when there is a relief available, dissolution
business and affairs that the votes required for any
would not be available in an ordinary
corporate action cannot be obtained, with the
corporation
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 CLOSE CORPORATION ORDINARY STOCK
dispute. In the exercise of such power, the Commission CORPORATION
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 1. The number of stockholders No limitation as to number of
incorporation, by-laws, or any stockholder's agreement; cannot exceed 20 shareholder
(2) cancelling, altering or enjoining any resolution or act
of the corporation or its board of directors, stockholders,
2. To the extent that all Maximum number of directors
or officers; (3) directing or prohibiting any act of the
stockholders can be deemed is 15
corporation or its board of directors, stockholders,
directors, the number of
officers, or other persons party to the action; (4)
directors can effectively be
requiring the purchase at their fair value of shares of
more than 15
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 3. Shares of stock are subject Generally no restriction on
provisional director; (6) dissolving the corporation; or (7) to specified restrictions transfer of shares
granting such other relief as the circumstances may
warrant.
4. Shares of stock are No prohibition
prohibited from being listed
A provisional director shall be an impartial in the stock exchange or
person who is neither a stockholder nor a creditor of the offered for sale to the public
corporation or of any subsidiary or affiliate of the
corporation, and whose further qualifications, if any,
may be determined by the Commission. A provisional 5. Stockholders may take an Management is lodged in the
director is not a receiver of the corporation and does not active part in corporate Board of Directors
have the title and powers of a custodian or receiver. A management by vesting
provisional director shall have all the rights and powers management to them rather
of a duly elected director of the corporation, including than a Board of Director
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 6. Those active in management Directors are liable for torts
compensation shall be determined by agreement are personally liable for only if they have acted
between him and the corporation subject to approval of corporate torts unless the negligently or fraudulently
the Commission, which may fix his compensation in the corporation has obtained an
absence of agreement or in the event of disagreement adequate liability insurance
between the provisional director and the corporation.
7. Directors can validly act even Directors must, as a rule, act
- Powers of the SEC in intra-corporate concerns has been without a meeting as a body at a duly constituted
transferred to the proper commercial courts meeting
- Prohibit, even if acting in good faith
8. Agreements between Not valid and binding since
- Provisional director appointed by the court stockholders regarding the stockholders’ agreement cannot
operations of the business limit the discretion of the Board
can validly be made to manage corporate affairs
- Requiring the purchase, irrespective of unrestricted
retained earnings
9. To the extent that directors Ordinarily, no such
may be classified into one or classification and no
- The provision of the law above-quoted gives the SEC a more classes and to be voted restrictions on cumulative
very wide discretion in respect to management of a close solely by a particular class of voting
corporation in the event of a deadlock. It may: stock, cumulative voting
may, in effect, be restricted
1. Cancel or alter any provision in the articles of
incorporation, by-laws or any stockholders 10. The articles of Officers are elected by the
agreement incorporation may provide Board of Directors
that all officers shall be
elected or appointed by the
2. Cancel, alter or enjoin any resolution or other act
stockholders
of the corporation or its board of directors,
stockholders or officers
11. It may provide for greater Although the articles of
quorum and voting incorporation or by-laws may
3. Prohibit any act of the corporation or its board of
requirements in meetings of provide for greater quorum and
directors, stockholders or officers or other persons
stockholders and directors voting requirements in
party to the action;
directors’ meeting under section
25, those for stockholders’
4. Requiring the purchase of the par value of the meeting cannot generally be
shares of any stockholders, either by the altered
corporation regardless of availability of
unrestricted earnings, or by the other
shareholders, 12. Restriction on transfer of Valid and binding if indicated in
shares should be indicated the articles of incorporation and
in the articles of stock certificates
5. Appointment of a provisional director incorporation, by-laws and
stock certificates

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 55

Section 106. Incorporation. - Educational

corporations shall be governed by special laws and by
13. Pre-emptive rights of Pre-emptive rights may be the general provisions of this Code. (n)
stockholders is broader as it denied as provided for in
include all issues without section 39
exception - Special laws like they Education Act of the Philippines
- These institutions of learning, once recognized by the
government as such are mandated by law to be
14. A stockholder may Unless he sells his shares, a incorporated within ninety (90) days under the
withdraw and compel the stockholder cannot get back his provisions of the Corporation Code and must, perforce,
corporation to purchase his investment nor compel the comply with the requirements and procedure laid down
shares for any reason with corporation to buy his shares there under. Their failure to so will not immune the
the limitation only that the except in the exercise of his educational institution from suit as a corporation.
corporation has sufficient appraisal right (Chiang Kai Siek Case)
assets to cover its liabilities
exclusive of capital stock
- Favorable recommendation of government agency
involved
15. The proper forum may Courts cannot interfere I the
interfere in the management business judgment of the
of a close corporation in case directors/stockholders  Two types of educational corporations
of deadlocks under Section “BUSINESS JUDGMENT RULE”
104, even of the
directors/stockholders are - Certificate of completion in the academic field
acting in good faith
- Vocational and technical one’s
16. Any stockholder may Dissolution may be had only on
petition the SEC for the grounds provided by the o Recommendation of DECS if certificate of
corporate dissolution on provisions of the Code on
completion in the academic field
grounds among others, dissolution and P.D. 902-A, as
provides for in section 105 amended
Manuel Dulay Enterprises vs. CA  How is the governing board of an educational institution
instituted?

- What was the position of Manuel Dulay here? President,

General Manager and Treasurer - Non-stock- multiples of 5 only (example: 5,10,15)

- Cannot act both as president and treasurer at the same - Stock- can be anywhere between 5 to 15
time
 Can they consist of 7 or 9 members?
- Since it is a close corporation owned by the family of
Manuel Dulay, save and except the secretary, it should
- Yes, if stock
be governed by Title XII

 Can they be incorporated also as non-stock?

- Petitioner is classified as a close corporation and
consequently a board resolution authorizing the sale or
mortgage of the subject property is not necessary to - Yes
bind the corporation for the action of its president. At
any rate, a corporate action taken at a board meeting
without proper call or notice in a close corporation is - B.P. 232 allows the organization of an educational
deemed ratified by the absent director unless the latter institution that is stock corporation, only if they do not
promptly files his written objection with the secretary of issue a certificate of completion in the academic field
the corporation after having knowledge of the meeting
which, in this case, petitioner Virgilio Dulay failed to do.
 Qualifications and disqualifications of the membership
in the board of an educational corporation
- Virgilio Dulay is a signatory witness, he knows very well
about the deed of absolute sale, he is estopped
- Educational corporations are governed by special laws
and general provisions, hence if there is no provision in
Naguiat vs. NLRC the special law, you go back to section 25 and 27 of the
general provisions

- Section 100 par. 5. To the extent that the stockholders

are actively engaged in the management or operation of - Stock- must be a stockholder
the business and affairs of a close corporation, the
stockholders shall be held to strict fiduciary duties to - Non-stock- must be a member
each other and among themselves. Said stockholders
shall be personally liable for corporate torts unless the
corporation has obtained reasonably adequate liability - By-laws may provide for additional qualifications and
insurance. disqualifications

 Family corporations is not automatically a close Section 25. Corporate officers, quorum. -
corporation the 3 qualifying conditions must be present. Immediately after their election, the directors of a
corporation must formally organize by the election of a
president, who shall be a director, a treasurer who may
SPECIAL CORPORATIONS
or may not be a director, a secretary who shall be a
resident and citizen of the Philippines, and such other
 2 types of special corporations officers as may be provided for in the by-laws. Any two
(2) or more positions may be held concurrently by the
same person, except that no one shall act as president
1. Educational corporations and secretary or as president and treasurer at the same
time.
2. Religious corporations
The directors or trustees and officers to be
elected shall perform the duties enjoined on them by law
2.1 Corporation Sole and the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater
2.2 Religious Societies majority, a majority of the number of directors or
trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate
 What provision governs educational corporations? business, and every decision of at least a majority of the
directors or trustees present at a meeting at which there
is a quorum shall be valid as a corporate act, except for
the election of officers which shall require the vote of a
majority of all the members of the board.

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Directors or trustees cannot attend or vote by proxy at
board meetings. (33a)
Section 27. Disqualification of directors, trustees or
officers. - No person convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six (6) years, or
a violation of this Code committed within five (5) years prior to the
date of his election or appointment, shall qualify as a director,
trustee or officer of any corporation. (n)
 Article 14 section 4 par. 2 of the Constitutions
Educational institutions, other than those
established by religious groups and mission boards,
shall be owned solely by citizens of the Philippines or
corporations or associations at least sixty per centum of
the capital of which is owned by such citizens. The
Congress may, however, require increased Filipino
equity participation in all educational institutions. The
control and administration of educational institutions
shall be vested in citizens of the Philippines.
No educational institution shall be established
exclusively for aliens and no group of aliens shall
comprise more than one-third of the enrollment in any
school. The provisions of this sub section shall not apply
to schools established for foreign diplomatic personnel
and their dependents and, unless otherwise provided by
law, for other foreign temporary residents.
- Management is left solely to citizens of the Philippines
- Board of Directors manages the corporate affairs,
foreigners cannot therefore be elected in the board
- Exceptions are, mission boards and religious orders,
which may have a governing board consisting of
foreigners
 Term of office of governing board in an educational
institutions
- Can serve a term of 5 years. If that be the case, 1/5 of
their number shall expire every year
 Non-stock or stock, can they serve for a 1 year term
only?
- Yes, the articles of incorporation may provide that it be
1 year only
 What are these religious corporations spoken off?
- Corporation sole and religious societies
 What is a corporation sole?
- Consists of one person only and his successor in some
particular station, who are incorporated by law in order
to give them some legal capacities and advantages,
particularly that of perpetuity, which in their natural
persons they could not have had
 May a corporation be organized by less than 5 natural
persons?
- General rule, 5 to 15 natural persons(except
cooperatives and corporations primarily organized to
hold equities in rural banks and may rightfully become
incorporators thereof)
- Exception, corporation sole, consist of only one person
 May any person form or organize a corporation sole?
- No, not any person can form a corporation sole, section
110 provides:
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)
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56
 Is it required to file the articles of incorporation in the
SEC?
- Yes
 What should be contained in the articles of
incorporation?
- Section 111 and section 112 provides for the contents
and procedures
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 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)
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
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)
 Is it required to indicate its terms of execution? Why
not?
- Not required because they are supposed to exist in
perpetuity
- However, it does not mean that it shall continue to exist
forever, it merely means that it has the capacity of
continuous existence during a particular period until
dissolved in accordance with law
 When will it acquire judicial personality? How do you
compare this to other types of corporation?

- After the filing the verified articles of incorporation along
with the documents required in Section 112 with the
SEC, immediately becomes endowed with corporate
personality, this serves as an exception to the rule that
a corporation acquires juridical personality only upon
the issuance of a certificate of incorporation by the said
government agency.
- Upon filing of verified articles of incorporation with the
SEC, will not require the approval of SEC
 A corporation sole is possessed with the same power,
rights and privileges, to own, acquire and hold or convey
properties like any other corporation? True or False
- False, they have the same power rights and privileges,
but when it comes to alienation and acquisition, it must
possess a court order, however when there is a
regulated method, a court order may be dispensed with
<sec. 113>
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
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)
 Since a corporation sole is consists only of one person,
will the registration of the property in the name of the
corporation sole vest unto the head thereof the
ownership of the property?
- No, it will not vest unto the head, the head is acting
merely as a guardian
Roman Catholic Apostolic Adm. Of Davao, inc. vs. Land
Reg. Comm, et al.
- Act only as a guardian
- Ownership devolves upon the congregation or religious
denomination
- A corporation consists of one person only and his
successors (who will always be one at a time, in some
particular station), who are incorporated by law in order
to give them some legal capacities and advantages,
particularly that of perpetuity, which in their natural
persons they could not have had
- Roman Catholic Church has no nationality and that the
framers of the Constitution, as will be hereunder
explained, did not have in mind the religious
corporations sole when they provided that 60 percent of
the capital thereof be owned by Filipino citizens.
Director of Lands vs. CA
- Alienable public land is converted into private land
when the same has been openly, continuously and
exclusively in possession of the property as concept of
an owner for 30 years, automatically that is
Republic of the Philippines vs. IAC
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- Determination of the character of the land should be in
mind
- If they still form part of public domain they cannot be
owned, but if they are converted into private land, the
constitutional prohibition will not apply
 If there is vacancy who will fill up the same? What if
there is none, what must the successor do?
- According to section 114:
Section 114. Filling of vacancies. - The
successors in office of any chief archbishop, bishop,
priest, minister, rabbi or presiding elder in a corporation
sole shall become the corporation sole on their
accession to office and shall be permitted to transact
business as such on the filing with the Securities and
Exchange Commission of a copy of their commission,
certificate of election, or letters of appointment, duly
certified by any notary public.
During any vacancy in the office of chief
archbishop, bishop, priest, minister, rabbi or presiding
elder of any religious denomination, sect or church
incorporated as a corporation sole, the person or
persons authorized and empowered by the rules,
regulations or discipline of the religious denomination,
sect or church represented by the corporation sole to
administer the temporalities and manage the affairs,
estate and properties of the corporation sole during the
vacancy shall exercise all the powers and authority of
the corporation sole during such vacancy. (158a)
 If a corporation exists in equity may it not be dissolved?
Section 115. Dissolution. - A corporation sole
may be dissolved and its affairs settled voluntarily by
submitting to the Securities and Exchange Commission
a verified declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the
corporation by the particular religious denomination,
sect or church;
4. The names and addresses of the persons who are to
supervise the winding up of the affairs of the
corporation.
Upon approval of such declaration of
dissolution by the Securities and Exchange
Commission, the corporation shall cease to carry on its
operations except for the purpose of winding up its
affairs. (n)
- While section 115 of the code provides for the process
and procedure for the dissolution of a corporate sole,
there is nothing in the law itself which would prohibit it
from amending its articles of incorporation
- It is believed that authorization for the dissolution by
the particular religious denomination, sect or church, as
required in sub-paragraph 3 of section 115 would still
be necessary in the case of amending the articles of
incorporation to affect dissolution.
o Expiration of a corporate term will not apply
to a religious corporation
 May a corporation sole be dissolved by judicial decree?
- General rule: No, because a corporation sole, is by its
very nature ecclesiastical and religious (doctrine of
separation of church and state)
- Exception: police power of the state, if its purpose is
being carried out and is instead being used for illegal
purpose, it may be so dissolved
 What are religious societies?

- Under common law, a religious society is a body of
persons associated together for the purpose of
maintaining religious worship.
 Is it also required to file its articles of incorporation to
the SEC?
- No <sec. 116> “may”
 What should be contained in the articles
incorporation?
- Section 116 provides:
Section 116. Religious societies. - Any
religious society or religious order, or any diocese,
synod, or district organization of any religious
denomination, sect or church, unless forbidden by the
constitution, rules, regulations, or discipline of the
religious denomination, sect or church of which it is a
part, or by competent authority, may, upon written
consent and/or by an affirmative vote at a meeting
called for the purpose of at least two-thirds (2/3) of its
membership, incorporate for the administration of its
temporalities or for the management of its affairs,
properties and estate by filing with the Securities and
Exchange Commission, articles of incorporation verified
by the affidavit of the presiding elder, secretary, or clerk
or other member of such religious society or religious
order, or diocese, synod, or district organization of the
religious denomination, sect or church, setting forth the
following:
1. That the religious society or religious order, or
diocese, synod, or district organization is a religious
organization of a religious denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have
given their written consent or have voted to incorporate,
at a duly convened meeting of the body;
3. That the incorporation of the religious society or
religious order, or diocese, synod, or district
organization desiring to incorporate is not forbidden by
competent authority or by the constitution, rules,
regulations or discipline of the religious denomination,
sect, or church of which it forms a part;
4. That the religious society or religious order, or
diocese, synod, or district organization desires to
incorporate for the administration of its affairs,
properties and estate;
5. The place where the principal office of the corporation
is to be established and located, which place must be
within the Philippines; and
6. The names, nationalities, and residences of the
trustees elected by the religious society or religious
order, or the diocese, synod, or district organization to
serve for the first year or such other period as may be
prescribed by the laws of the religious society or
religious order, or of the diocese, synod, or district
organization, the board of trustees to be not less than
five (5) nor more than fifteen (15). (160a)
 Is it required to indicate its term of existence?
- Likewise to exist in perpetuity, the law does not require
to indicate its term of existence
 When will it acquire juridical personality?
- Only a corporation sole may come into existence without
SEC approval, section 19 will thus govern, Vested with
judicial capacity upon issuance of the certificate by the
SEC
o However it is not accurate according to atty.
Ladia because there are those that can issue
for example cooperatives- BUREAU OF
COOPERATIVES which register, home
insurance guaranty corporation- HOME
OWNERS
 How may religious societies be dissolved?
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- Go to the general rules governing dissolution, because
the rules under special corporations do not provide for
such rule
DISSOLUTION
 What is dissolution?
- Extinguishment of the corporate franchise and the
of termination of corporate existence
 3 modes of dissolution
1. By expiration of its term;
2. By voluntary surrender of its primary franchise
(voluntary dissolution);
3. By revocation of its corporate franchise (involuntary
dissolution)
Philippine National Bank vs. CFI
- When the period of corporate life expires, the
corporation ceases to be a body corporate for purposes
of continuing the business for which it is organized. But
it shall nevertheless be continued as a body corporate
for three years after the time when it would have be
dissolved, for the purpose of prosecuting and defending
suits by or against it and for enabling it gradually to
settle and close its affairs to dispose of and convey its
property and to divide its assets. There is no need for
the institution of a proceeding for quo warranto to
determine the time and date of the dissolution of a
corporation because the period of corporate existence is
provided in the articles of incorporation. When such
period expires and without any extension having been
made pursuant to law, the corporation is dissolved
automatically insofar as the continuation of its business
is concerned.
- The rights of the lessor and the lessee over the
improvements which the latter constructed on the
leased premises are governed by Article 1678 of the Civil
Code. The provision gives the lessee the right to remove
the improvements if the lessor chooses not to pay one
half of the value thereof. However, in the case at bar the
law will not apply because the parties herein have
stipulated in the contract their own terms and
conditions concerning the improvements before the
termination of the lease. Petitioner PNB as assignee of
PBM succeeded to the obligation of the latter under the
contract of lease. It could not possess rights more than
what PBM had as lessee under the contract. Hence,
petitioner was duly bound to remove the improvements
before the expiration of the period of lease. Its failure to
do so when the lease was terminated was tantamount to
a waiver of its rights and interest over the improvements
on the leased premise.
o 3 modes of dissolution, 3 modes of voluntary
dissolution and 3 modes of liquidation and
winding up- FREQUENTLY ASKED IN THE
FINALS
 What are the 3 modes of voluntary dissolution?
1. Voluntary dissolution where no creditors are affected;
<sec.118>
2. Voluntary dissolution where creditors are affected; <sec.
119>
3. Shortening of corporate term. <sec. 120>
 Voluntary dissolution where no creditors are affected
<sec.118>
- The formal and procedural requirements necessary are
the following:
1. Majority vote of the board of directors or trustees;
2. Sending of notice of each stockholders or member either
by registered mail or personal delivery at least thirty (30)
days prior to the meeting (scheduled by the board for
the purpose of submitting the board action to dissolve
the corporation for approval of the stockholder or
members.);

3. Publication of the notice of time, place and subject of
the meeting for three (3) consecutive weeks in a
newspaper published in the place where the principal
office of said corporation is located or in a newspaper of
general circulation in the Philippines;
4. Resolution adopted by the affirmative vote of the
stockholders owning at least 2/3 of the outstanding
capital stock or 2/3 of the members at the meeting duly
called for the purpose;
5. A copy of the resolution authorizing the dissolution
must be certified by a majority of the board of directors
or trustees and countersigned by the corporate
secretary;
6. Issuance of a certificate of dissolution by the SEC.
 Should this be strictly complied with?
- Yes, compliance with the requirements and formalities
prescribed above is mandatory such that failure to
comply therewith will have no effect on the legal
existence of the corporation.
 Will dissolution be effective and valid by a mere
resolution of the BOD and stockholders?
- No, a mere resolution by the stockholders or the BOD of
a corporation to dissolve the same does not affect the
dissolution but that some other steps, administrative or
judicial is necessary. (Daguhoy Enterprises vs. Ponce)
- Since it is the State which grants its right to exist, it is
only through the State which can allow the termination
of its existence; without consent of the State, it will not
be dissolved.
 Voluntary dissolution where creditors are affected
<sec.119>
- By virtue of a petition, when there are creditors affected
- The following formalities would thus be required:
1. Affirmative vote of the stockholders representing at least
2/3 of the outstanding capital stock or at least 2/3 of
the members at a meeting duly called for that purpose;
2. Petition for dissolution shall be filed with the SEC
signed by a majority of its board of directors or trustees
or other officers having the management of its affairs,
verified by the president or secretary or one of its
directors or trustees, setting forth all claims and
demands against it.
3. Issuance of an order by the SEC reciting the purpose of
the petition and fixing the date on or before which
objections thereto may be filed by any person, which
date shall not be less than thirty days nor more than
sixty days after entry of the order.
4. Before such date, a copy of the order must be published
once a week for three (3) consecutive weeks in a
newspaper of general circulation published in the city or
municipality where the principal office is situated or in a
newspaper of general circulation in the Philippines.
5. Posting of the same order for three (3) consecutive weeks
in three (3) public places in such city or municipality.
6. Upon five (5) days’ notice, given after the date on which
the right to file objections has expired, the SEC shall
hear the petition and try any issue made by the
objections filed.
7. Judgment dissolving the corporation and directing of its
assets as justice requires and the appointment of a
receiver (if necessary in its discretion) to collect such
assets and pay the debts of the corporation.
o The foregoing are also mandatory
requirements
 Is the appointment of a receiver mandatory?
- No, it is merely permissive or discretionary on the part
of the court. The code uses the word “may”; the law
intended to let the shareholders have the control of the
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assets of the corporation upon dissolution and winding
up.
- The directors may also undertake liquidation and
winding up of its corporate affairs, and sound business
judgment, on how they will wind up
 Dissolution by shortening of corporate term <sec.120>
- Will be valid upon approval of the SEC, unlike general
amendments, which will be deemed approved if not
acted upon by the SEC within 6 months from the date of
filing for a cause not attributable to the corporation.
- Shortening of the corporate term partakes the nature of
an amendment of the articles of incorporation. Section
16 under general amendments allows “written assent”
section 37 mandates that the vote must be cast at a
duly constituted meeting.
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)
o Intra-corporate- special commercial courts
 Another way of dissolving a corporation is through
involuntary dissolution
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)
- Dissolution is tantamount to the imposition of death
penalty
- Instead of dissolving the corporation, courts normally
enjoin the further commission of the questioned act
- The relief of dissolution will be awarded only where no
other remedy is available and it will not be allowed
where the rights of the stockholders can be, or are,
protected in some other way (Republic vs. Bisaya Land
Trans. Co. Inc.)
 What are the grounds for involuntary dissolution?
- It is commenced through a verified complaint or motu
proprio by the proper courts
- Section 6 of PD 902-A provides for the grounds for
involuntary dissolution as follows:
1. Fraud in procuring its certificate of registration;
2. Serious misrepresentation as to what the corporation
can do or is doing to the great prejudice of or damage to
the general public;
3. Refusal to comply or defiance of any lawful order of the
Commission restraining commission of acts which
would amount to a grave violation of its franchise;
4. Continuous inoperation for a period of at least five (5)
years;
5. Failure to file by-laws within the required period;
6. Failure to file required reports in appropriate forms as
determined by the Commission within the prescribed
period.
- Other grounds are provided for in the corporation code
itself: among them are:
1. Violation of any provision of the Code under section
144;

2. In case of deadlock in a close corporation as provided for
in section 105;
3. In a close corporation, any acts of directors, officers or
those in control of the corporation which 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 under section 105.
- Mere dishonesty is also a ground in a close corporation
- Other grounds can be found in other special laws like
the Securities Regulation Code and the General Banking
Act as well as the Insurance Code.
Government vs. Philippine Sugar Estate
- It is necessary in order to secure judicial foreclosure of
respondent’s charter to show a mis-user of its franchise
justifying such a forfeiture
- Object is to protect the public, and not to redress
private grievances, the mis-user must be such as to
work or threaten a substantial injury to the public, or
such as to amount to a violation of the fundamental
condition of the contract by which the franchise was
granted and thus defeat the purpose of the grant
- Courts proceed with extreme caution which has for their
object the forfeiture of corporate franchise, and
forfeiture will not be allowed, except under express
limitation, or for plain abuse of power by which the
corporation fails to fulfill the design and purpose of its
organization. But when the abuse or violation
constitutes or threatens a substantial injury to the
public or such as to amount to a violation of the
fundamental conditions of its charter, or its conduct is
characterized by obduracy or pertinacity in contempt of
law, dissolution will be granted
- Did the court dissolve the corporation? No, it did not, it
granted the corporation 6 months to cease and desist
the performance of the questioned act otherwise it will
be dissolved
Government vs. El Hogar
- 3 causes of action, the first is that the corporation
violated the law by holding on the property beyond that
provide for by law, the second is that the corporation
undertook the management f petitioners belonging to
delinquent shareholders of the association, and lastly
that the by-law provision, which empowers the BD to
cancel shares and to return to the owners thereof the
balance returning from the liquidation
 Compare to Philippine Sugar Estate, wherein the court
ruled conditional dissolution. Why decree conditional
dissolution in one and not in the other case?
- Because in El Hogar the government was at fault, the
government wasn’t able to issue the certificate of title on
time
- When the case was instituted, El Hogar was already able
to dispose the properties in question, in Philippine
Sugar Estate it was still the holding the properties in
order to enrich itself at the expense of the taxpayers
Republic vs. Security Credit and Acceptance Corp. et al.
- The corporation here is a lending institution and not a
banking institution
- Defendant corporation violated the law because before a
corporation may engage into a banking activity it must
first obtain a secondary franchise from the Central Bank
- Defendant corporation threatens substantial injury to
the general public, dissolution is warrant
- If there is a bank run kawawa naman yung depositors
Republic vs. Bisaya Land Transportation Co. Inc
- The relief of dissolution will be awarded only where no
other remedy is available and it will not be allowed
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where the rights of the stockholders can be, or are,
protected in some other way
- Misuse and misapplication of the funds and assets of
the respondent were committed particularly by the
corporate officers, where they can instead be held
personally liable
- Since there is another remedy available dissolution is
not warranted
 Assuming the above stated corporation is a close
corporation, would the court decree otherwise?
- Yes, because in a close corporation, mere dishonesty is
a ground for the dissolution
- Can even be dissolved by petition of only one
stockholder on the grounds stated in the code < sec.
105>
Financing Corporation of the Philippines vs. Teodoro
- Minority stockholders may not ask for the dissolution of
a corporation in private suits and that such actions
should be brought by the Government through its legal
officers, except in cases where the intervention of
the State, for one reason or another, cannot be
obtained, as when the State is not interested
because the complaint is strictly a matter between
the stockholders and does not involve, in the
opinion of the legal officer of the Government, any
of the acts or omissions warranting quo warranto
proceeding , in which minority stockholders are
entitled to have such dissolution. It should be
exercised if necessary in order not to entirely ignore and
disregard the rights of said minority stockholders,
especially when said minority stockholders are unable
to obtain redress and protection of their rights within
the corporation itself. Stockholders should not be left
without recourse
 Present set up
- Any stockholder or member of a corporation can
institute a dissolution proceeding against his own
corporation before the proper forum
- Special Commercial Courts, shall hear and decide intra-
corporate disputes
 May a corporation ask for dissolution of the corporation
when there is no prejudice to the general public?
- Yes, in a close corporation, a petition for the dissolution
of the corporation may be instituted by any one
individual shareholder on the ground, even by mere
dishonesty
 Effects of dissolution
- The dissolution of a corporation not only terminates its
primary franchise to be a corporation, but generally
prevents it from further exercising other or secondary
franchises which have been conferred to its. It
terminates its power to enter into contracts or t o
continue the business as a going concern.
- Based on this general rule, the Supreme Court held that
a corporation, whose corporate life expired, cannot
lawfully pursue the business for which it was organized.
It cannot apply for a new certificate or a secondary
franchise for it is incapable of receiving a grant. Neither
can it enforce a contract executed prior its dissolution
for the purpose of continuing the business of its
organization.
- In general the rights and liabilities of the corporation are
not extinguished by its dissolution.
Section 145. Amendment or repeal. - No right
or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers,
nor any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers,
shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part thereof.
(n)

Buenaflor vs. Camarines Sur Industry Corp.
- From that time on Camarines Sur was plying in an
activity that was illegal
- A corporation where the corporate life has expired it
cannot lawfully pursue the business for which it was
organized.
- the Supreme Court held that a corporation, whose
corporate life expired, cannot lawfully pursue the
business for which it was organized. It cannot apply for
a new certificate or a secondary franchise for it is
incapable of receiving a grant.
- Awarding it to Camarines Sur is tantamount to a medal
for its illegal acts
- It cannot apply for a new certificate or a secondary
franchise for it is incapable of receiving a grant. It was
not even a corporation de facto. And then, there is no
application subscribed by the new corporation
- And yet as stated, the new corporation has not filed any
application for certificate of public convenience in
Sabang, and has not published such application.
Cebu Port Labor Union vs. State Marine Co
- Even a cursory reading of the provision would convey
the idea clearly manifested in the limitation “but not for
the purpose of continuing the business for which it was
established,” that the 3-year period allowed by the law is
only for the purpose of winding up its affairs.
Gonzales vs. Sugar Regulatory Administration
- Instead of applying the corporation code, the court
applied the constitutional provision
- Cannot be read as permitting to destroy the substantive
rights
- Such would collide with the non-impairment of
contracts clause of the constitution
- Complainants will have the right to follow the assets of
the corporation in the hands of SRA or any other agency
for that matter
 After dissolution what next?
- Liquidation and winding up should follow
 What is the definition of liquidation and winding up?
- Collection of all corporate assets, the payments of all its
debts and settlement of its obligations and the ultimate
distribution of the corporate assets, if any of it remains,
to all stockholders in accordance with their
proportionate stockholdings in the corporation or in
accordance with their respective contracts of
subscription.
 Preference upon liquidation
- If there are preferred shares, the preference granted to
such should be complied with
- Preferred shares may give the holder thereof, preference
only in the dividends but also in the distribution of
corporate assets upon liquidation or termination of the
corporate existence. If such is the intent, the contract of
subscription must so indicate lest they are placed on
equal footing with common shareholders
- Preference may be participating or non-participating
 Dissolved corporations are granted a period of 3 years to
liquidate
Section 122. Corporate liquidation. - Every
corporation whose charter expires by its own limitation
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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. 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)
 However the 3 year period is not absolute
 Liquidation may be undertaken in either of the 3 ways
1. By the corporation itself through the BOD
- Usual method or procedure of liquidating a corporation
and although there is no law authorizing it, neither is
there anything that prohibits the BOD from undertaking
the same
- If this method is resorted to, the board will only have a
period of 3 years to finish its task of liquidation
- Claims for or against the corporate entity not filed
within the period will become unenforceable as there
exist no corporate entity against which they can be
enforced
- Actions pending for or against the corporation when the
3 year period expires, are abated since after the period,
the corporation ceases for all intents and purposes and
is no longer capable of suing or being sued
2. By a trustee appointed by the corporation
- The corporation may opt to convey all corporate assets
to a trustees who will take charge of liquidation
- If this method is used, the three year period limitation
imposed by section 122 will not apply provided the
designation of the trustee is made within that period
3. By appointment of a receiver
- A receiver may be appointed by the proper forum on
petition or motu proprio upon the dissolution of the
corporation
- The appointment of a receiver is, however, permissive
rather than mandatory and the law tends to recognize
that in cases of voluntary dissolution there is no
occasion for the appointment of a receiver except under
special circumstances and upon proper showing
- If a receiver is appointed, the 3 year period fixed by law
within which to complete the task of liquidation will not
likewise apply because the dissolved corporation is
substituted by the receiver who may sue or be sued
even after that period

o Mere appointment of a receiver without
anything more does imply in the dissolution
of a corporation
National Abaca other Fibers Co. vs. Pore
- Actions pending for or against the corporation when the
3 year period expires, are abated since after that period,
the corporation ceases for all intents and purposes and
is no longer capable of suing or being sued
- May be continued by the trustee provided done within
the 3 year period
- Should the corporation, therefore, finds it difficult to
finish its liquidation, it may, at any time during the
three year period, convey all its assets and receivables to
a trustee to prosecute and defend suits by or against the
corporation begun before the expiration of said period
- The effect of the conveyance is to make the trustees the
legal owners of the property conveyed, subject to the
beneficial interest therein of creditors and stockholders
Sumera vs. Valencia
- Thus it was held that when a corporation is dissolved
and the liquidation of the assets is placed in the hands
of receiver or assignee, the period of 3 years prescribed
by law is not applicable and the assignee may institute
all actions leading to the liquidation of the corporation
even after the expiration of 3 years.
- If the corporation carries out the liquidation of its assets
through its own officers and continues and defends the
actions brought by or against it, its existence shall
terminate at the end of three years from the time of
dissolution; but if a receiver or assignee is appointed,
with or without a transfer of its properties within 3
years, the legal interest passes to the assignee, the
beneficial interest remaining in the members,
stockholders, creditors and other interested persons and
said assignee may bring an action, prosecute that which
has already been commenced for the benefit of the
corporation, or defend the latter against any other
action already instituted or which may be instituted
even outside of the period of three years fixed for the
offices of the corporation.
Board of Liquidators vs. Kalaw
- If there is a trustee, assignee or liquidator, it can
continue prosecuting suit even beyond the 3 year period
fixed by law because he becomes the legal owner of the
rights, assets and properties conveyed to him
Gelano vs. CA
- “Trustee” as used in the corporation statute must be
understood in its general concept which could include
the counsel to whom was entrusted in the instant case,
the prosecution of the suit filed by the corporation. The
purpose in the transfer of the assets of the corporation
to a trustee upon its dissolution is more for the
protection of its creditors and stockholders. Debtors like
the petitioners herein may not take advantage of the
failure of the corporation to transfer its assets to a
trustee, assuming it has any to transfer which petitioner
has failed to show, in the first place. To sustain
petitioners’ contention would be to allow them to enrich
themselves at the expense of another, which all
enlightened legal systems condemn.
- The counsel who prosecuted and defended the interest
of the corporation may be considered as a “trustee” at
least with respect to the matter in litigation only
 May a corporation that is already dissolved, transfer and
assign its assets and properties to a new corporation
which will continue the business of the dissolved one?
- Yes, provided all the stockholders gave their consent
(Chung Ka Bio vs. IAC)
Republic vs. Marsman Development Company & Chung
Ka Bio vs. IAC
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- During the three year period granted to a corporation to
liquidate or wind up its affairs, the BOD is not normally
permitted to undertake any activity outside the usual
liquidation of the corporation. There is, however,
nothing to prevent the stockholders from conveying their
respective shareholdings toward the creation of a new
corporation to continue the business of the old. This is
because winding up is the sole activity of the dissolved
corporation that does not intend to incorporate a new. If
it does, however, it is not unlawful for the old board of
directors to negotiate and transfer the assets of the
dissolved corporation to the new corporation intended to
be created as long as the stockholders have given their
consent (Republic vs. Marsman Development Company)
- Winding up is the sole activity of a dissolved corporation
that does not intend to incorporate anew. If it does,
however, it is not unlawful for the old board of directors
to negotiate and transfer the assets of the dissolved
corporation to the new corporation intended to be
created as long as the stockholders have given their
consent (Chung Ka Bio vs. IAC)
 What happens to the remaining assets and properties of
the dissolved corporation if liquidation and winding up
as provided in section 122 is not complied with, as a
result of which the 3 year period has elapsed
- If the three year extended life has expired without a
trustee or receiver having been expressly designated by
the corporation within that period, the board of directors
o trustees itself, following the rationale of the Supreme
Court’s decision in Gelano vs. CA may be permitted to
do so continue as” trustees” by legal implication to
complete the liquidation. Still in the absence of a BOD
or BOT, those having any pecuniary interest in the
assets, including not only the shareholders but likewise
the creditors of the corporation, acting for and in its
behalf, might make proper representations with the
SEC, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a
final settlement of the corporate concerns (Clemente vs.
CA)
o According to atty. Ladia the ruling of the
Supreme Court in the case of Clemente vs.
CA is wrong, opinion is further discussed
after the Clemente Case
Clemente vs. CA
- Who owns the properties? SOCIEDAD ANONIMA
- The termination of the life of a juridical entity does not
by itself cause the extinction or diminution of the rights
and liabilities of such entity or those of its owners and
creditors. If the three year extended life has expired
without a trustee or receiver having been expressly
designated by the corporation within that period, the
board of directors o trustees itself, following the
rationale of the Supreme Court’s decision in Gelano vs.
CA may be permitted to do so continue as” trustees” by
legal implication to complete the liquidation. Still in the
absence of a BOD or BOT, those having any pecuniary
interest in the assets, including not only the
shareholders but likewise the creditors of the
corporation, acting for and in its behalf, might make
proper representations with the SEC, which has primary
and sufficiently broad jurisdiction in matters of this
nature, for working out a final settlement of the
corporate concerns
o the ruling is wrong according to atty. Ladia
 According to atty Ladia: What happens to a corporation
that is already dissolved, that has not been able to
appoint a trustee with in the 3 year period?
- a corporation dissolved which failed to exercise its rights
granted in section 122 after the 3 year period has
elapsed, ceases to exist for all intents and purposes, it
can no longer sue or be sued
- according to 122 of the code, the property should be
escheated, accordingly:
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. 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)
FOREIGN CORPORATIONS
 Definition
- 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 with this Code and a certificate of
authority from the appropriate government agency. (n)
 What if the law of the state of the foreign corporation
does not allow Filipino citizens to do business in their
country?
- The phrase “and whose laws allow Filipino citizens and
corporations to do business in its own country or state”
is not, however, an accurate inclusion in the definition
as ay corporation registered or organized under the laws
of another state is necessarily a foreign corporation
whether or not the state of its incorporation allow
Filipino citizens or corporations to do business in that
forum.
- The said phrase was inserted by the framers of the law
only as a condition precedent to the grant of a license of
a foreign corporation to do business in the Philippines.
 Composed of 100% Americans; organized under the
laws other than the Philippines
- The test is the “incorporation test”
- General rule: the place of its incorporation irrespective
of the nationality
- Exception: control test would apply in determining the
corporate nationality, i.e., the citizenship of the
controlling stockholders determines the nationality of
the corporation
 If a foreign corporation wants to transact business in
the Philippines, what must it do?
- Obtain a license
 How may it do so?
 Is there any deposit or security requirement?
- According to sec. 125:
- Yes, within 60 days after the issuance of the license, a
Section 125. Application for a license. - A
foreign corporation applying for a license to transact
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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 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)
foreign corporation, except those engaged in foreign

banking or insurance, shall deposit with the SEC, for
the benefit of creditors, securities consisting of bonds or
other evidence of indebtedness of the Philippine
government or its political subdivision, or of government
owned or controlled corporation, shares of stock in
“registered enterprises” as this term is defined in R.A.
5186, shares of stock in domestic insurance companies
and banks or any combination thereof with an actual
market value of 100,000
- Additional securities may be required by the SEC if the
actual market value of the securities on deposit has
decreased by at least 10%. Section 126 of the code
provides:
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 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
Philippines. (n)
 Other than section 125 and 126. What other
requirements are set under Philippine Law before a
foreign corporation may transact business in the
Philippines
- Yes. A Resident agent is required. As a condition
precedent to the grant of a license to do or transact
business in the Philippines, the foreign corporation is
required to designate its resident agent on whom
summons and other legal processes may be served in all
actions or legal proceedings against such corporation
- Section 128 provides:
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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
writing the Securities and Exchange Commission of the
new address. (72a; and n)
- The necessity of the appointment of a resident agent is
only for the purpose of receiving summons and other
legal processes in any legal action or proceeding against
the foreign corporation
 Who may be appointed as a resident agent?
- Section 127 provides that:
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)
 May a partnership be appointed as a resident agent?
- Yes, domestic corporation taken in its general sense not
legal sense
 If there is a resident agent appointed. May summons be
served to any officers of the corporation?
- No, if there is a resident agent, the designation is
exclusive and service must be made only to the resident
agent or else the service is without force and effect
unless made to him
- Thus, while the law allows service upon the SEC or any
of its officers or agents within the Philippines
- The two modes may become effective only if the foreign
corporation failed or neglected to designate such a
person or an agent
- Summons must be made only to resident agent except
when there is no resident agent appointed
 65

- Where such foreign corporation actually doing business

here has not applied for a license to do and has not
designated an agent to receive summons, then service of
summons on it will be made pursuant to the provisions
of the rules of court. If such foreign corporation has a
license to do business, then summons to it will be
served on the agent designated by it for the purpose, or
otherwise in accordance with the Corporation Law
(General Corporation of the Philippines vs. Union
Insurance Soc. Of Canton Ltd.)
 If the foreign corporation conducts business in the
Philippines without the license requirement. What is the
effect?
- Section 133 provides:
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)
- if they do so, the responsible officers may be subjected
to the penal sanctions provided for in section 144 of the
code, which may either be fine or imprisonment
 What if it is not doing business without a license?
- If it is not transacting business in the Philippines, even
without a license, it can sue before the Philippine
Courts
business in the Philippines, the Philippines, it cannot be
even without a license, it can sued in Philippine Courts for
sue before the Philippine lack of jurisdiction
Courts
 A foreign corporation not doing business in the
Philippines, may it be sued?
- If it is not transacting business in the country it cannot
be sued for lack of jurisdiction
 Is there any sanction that can be enforced to foreign
corporations which are doing business without the
required license?
- Penal sanctions under section 144
- Any violation of the code is subject to such penal
sanctions
 What would constitute doing business?
- The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the
business or enterprise for which it was organized or
whether it has substantially retired from it and turned it
over to another. The term implies a continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the
purpose and object of its organization (Mentholatum Co.
Inc. vs. Mangaliman)
Mentholatum vs. Mangaliman

 The general rule is that “it is not the lack of required
license but doing business without a license which bars
a foreign corporation form access to our courts.”
 Exception:
1. Foreign corporations can sue before the Philippine
Courts if the act or transaction involved is an
“isolated transaction” or the corporation is not
seeking to enforce any legal or contractual rights
arising from, or growing out of, any business which
it has transacted in the Philippines
2. Neither is a license required before a foreign
corporation may sue before the forum if the
purpose of the suit is to protect its trademark,
trade name, corporate name, reputation or
goodwill;
3. Or where it is based on a violation of the Revised
Penal Code;
4. Or merely defending a suit filed against it
5. Or where a party is stopped to challenge the
personality of the corporation by entering into a
contract with it.
 Rules laid down by the SC
A. As to whether or B. As to whether or
not it can sue not it can be sued
- The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the
business or enterprise for which it was organized or
whether it has substantially retired from it and turned it
over to another. The term implies a continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally
incident to, and in progressive prosecution of, the
purpose and object of its organization
- Whatever transaction the Philippine-American Drug Co.
had executed in view of the law, the Mentholatum Co.
did it itself. And the Mentholatum Co. being a foreign
corporation doing business in the Philippines without
the license required by section 68 of the Corporation
Law, it may not prosecute this action for violation of
trade mark and unfair competition
 Why is foreign corporations barred access from our
courts if they do business without a license?
- Marshall-Wells Co. vs. Henry W. Elser and Co.
Marshall-Wells Co. vs. Henry W. Elser and Co.
- The object of the statute was to subject the foreign
corporation doing business in the Philippines to the
jurisdiction of its courts. The object of the statute was
not to prevent the foreign corporation from performing
single acts, but to prevent it from acquiring a domicile
for the purpose of business without taking the steps
necessary to render it amenable to suit in local courts.
Bulakhidas vs. Navarro

A foreign corporation A foreign corporation - It is settled that if a foreign corporation is not engaged
transacting or doing transacting business in the in business in the Philippines, it may not be denied the
business in the Philippines Philippines with the requisite right to file an action in Philippine courts for isolated
with a license can sue before license can be sued in the transactions
Philippine Courts Philippine Courts

- The object of section 68 and 69 of the Corporation law

Subject to certain A foreign corporation was not to prevent the foreign corporation from
exceptions, a foreign transacting business in the performing single acts, but to prevent it from acquiring
corporation doing business Philippines without a license a domicile for the purpose of business without taking
in the country without a can be sued in Philippine the steps necessary to render it amenable to suit in the
license cannot sue in Courts local courts. It was never the purpose of the Legislature
Philippine Courts to exclude a foreign corporation which happens to
obtain an isolated order for business from the
If it is not transacting if it is not doing business in

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Philippines, from securing redress in the Philippine
courts
The Swedish East Asia Co., Ltd. Vs. Manila Port Service
- It must stated that the section is not applicable to a
foreign corporation performing single acts or “isolated
transactions.” There is nothing to show that the
petitioner has been in the Philippines engaged in
continuing business or enterprise for which it was
organized, when the sixteen bundles were erroneously
discharged in manila, for it to be considered as
transacting business in the Philippines. The fact is that
the bundles, the value of which is sought to be
recovered, were landed not as a result of a business
transaction, isolated or otherwise, but due to a
mistaken belief that they were part of the shipment of
forty similar bundles consigned to persons or entities in
the Philippines, there is no justification therefore, for
invoking the section
 There were 3 contracts entered into, how come they
were still not considered as doing business? (Antam
Consolidted, Inc. vs. CA)
- Every case shall be judged in the light of its peculiar
circumstances, where a single act or transaction
however, is not merely incidental or casual but indicates
the foreign corporation’s intention to do other business
in the Philippines, said single act or transaction
constitutes “doing” or “engaging in” or “transacting”
business in the Philippines
- In the case at bar, the transaction entered into by the
respondent with the petitioners are not a series of
commercial dealings which signify an intent on the part
of the respondent to do business in the Philippines but
constitute an isolated one which does not fall under the
category of “doing business.”
- The records show that the only reason why the
respondent entered into the second and third
transactions with the petitioner was because it wanted
to recover the loss it sustained from the failure of the
petitioners to deliver the crude coconut oil under the
first transaction and in order to give the latter a chance
to make good on their obligation. From these facts
alone, it can be deducted that in reality there was only
one agreement between the petitioners and the
respondent.
- The three seemingly different transactions were entered
into by the parties only in an effort to fulfill the basic
agreement and in no way indicate an intent on the part
of the respondent to engage in a continuity of
transactions with petitioners which will categorize it as
a foreign corporation doing business in the Philippines
- 3 contracts, but according to the court was not doing
business in the Philippines
Far East Int’l import vs. Nankai Kogyo Co. Ltd.
- Only one contract , but according to the Supreme Court
was doing business in the Philippines
- Every case shall be judged in the light of its peculiar
circumstances, where a single act or transaction
however, is not merely incidental or casual but indicates
the foreign corporation’s intention to do other business
in the Philippines, said single act or transaction
constitutes “doing” or “engaging in” or “transacting”
business in the Philippines
- In the instant case, the testimony of Atty. Pablo
Ocampo, that appellant was doing business in the
Philippines corroborated by no less than Nabuo
Toshida, one of appellant’s officers, that he was sent to
the Philippines to look into the operation of mines,
thereby revealing the defendant’s desire to continue
engaging in business here, after receiving the shipment
of the scrap iron under consideration, making the
Philippines a base thereof.
- In such a case, the single act of transaction is not
merely incidental or casual, but is of such character as
distinctly to indicate a purpose on the part of the
operations for the conduct of a part of corporation’s
ordinary business
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 If a corporation appoints a distributor or a
representative, will it necessarily imply doing business
in the country?
- If the foreign corporation maintained an independent
status during the existence of the disputed contract.
- Appointment of a distributor or representative in the
Philippines, unless it has an independent status
(transacts and does business in its own name and for its
account and not of the foreign corporation)
- if that be the case the mere appointment of a distributor
will not constitute doing business
 How do you know if it has an independent status?
- Communications Materials and Design vs. CA
Communications Materials and Design vs. CA
- A perusal of the agreements between petitioner ASPAC
and the respondents show that there are provisions
which are highly restrictive in nature, such as to reduce
petitioner ASPAC to a mere extension or instrument of
the private respondents
- ITEC was doing business without a license, however
ASPAC is estopped
- by entering into the Representative Agreement” with
ITEC, petitioner is charge with knowledge that ITEC
was not licensed to engage in business activities in the
country, and is thus stopped from raising in defense
such incapacity of ITEC, having chosen to ignore or even
presumptively take advantage of the same
- In top-weld we ruled that a foreign corporation may be
exempted from the license requirements in order to
institute an action in our courts if its representative in
the country maintained an independent status during
the existence of the disputed contract. Petitioner is
deemed to have acceded to such independent character
when it entered into the Representative Agreement with
ITEC
Western Equipment and Supply Co. vs. Reyes
- The company is not here seeking to enforce any legal or
contract rights arising from, or growing out of any
business which it has transacted in the Philippine
Islands. The sole purpose of the action is to protect its
reputation, its corporate name, its goodwill, whenever
that reputation, corporate name or goodwill have
through the natural development of its trade,
established themselves
- And it contends that its rights to the use of its corporate
and trade name, is a property right, a right in rem,
which may assert and protect against all the world, in
any of the courts of the world even in jurisdictions
where it does not transact business just the same as it
may protect its tangible property, real or personal,
against trespass, or conversion
- Since it is the trade and not the mark that is to be
protected a trademark acknowledges no territorial
boundaries or municipalities or states or nations, but
extends to every market where the trader’s goods have
become known and identified by the use of the mark
General Garments Corporation vs. Director of Patents
- A foreign corporation which has never done business in
the Philippine Islands and which is unlicensed and
unregistered to do business here, but is widely and
favorably known in the Islands through the use therein
of its products bearing its corporate and trade name has
a legal right to maintain an action in the Islands
- Mentholatum case was subsequently derogated when
Congress, purposely to “counteract the effects” of said
case, enacted R.A. 638, inserting Section 21-A in the
Trademark Law, which allows a foreign corporation or
juristic person to bring an action in Philippine Courts
for infringement of a mark or trade-name, for unfair
competition, or false designation of origin and false
description, “whether or not it has been licensed to do
business in the Philippines under Act Numbered
Fourteen hundred and fifty-nine, as amended, otherwise

known as Corporation Law, at the time it brings
complaint.
Puma Sporschufabriken Rudolf Dassler, K.G. vs. IAC
and MIL-ORO MFG. Corp.
- Treaties for part of the law of the land
- Quoting the Paris Convention and the case of Vanity
Fair Mills Inc. vs. T. Eaton Co. this court further said:
“By the same token, the petitioner should be
given the same treatment in the Philippines
as we make available to our own citizens. We
are obliged to assure to nationals of countries
of the Union an effective protection against
unfair competition on the same way that they
are obligated to similarly protect Filipino
Citizen and firms
- The ruling in the aforecited case is in consonance with
the Convention of the Union of Paris for the protection of
Industrial Property to which the Philippines became a
party. Article 8 thereof provides that a trade name shall
be protected in all the countries of the Union without
the obligation of filing or registration, whether or not it
forms part of the trademark
Le Chemiste Lacoste vs. Fernandez
- The French company may gain access to our courts, in
the first place it was not doing business in the
Philippines
- The marketing of its products in the Philippines is done
through an exclusive distributor, Rustan Commercial
Corporation. The latter is an independent entity which
buys and then markets not only products of the
petitioner but also many other products bearing equally
well-known and established trademarks and trade-
names
 Assuming Rustans had no independent status would
the SC grant Lacoste access to our courts?
- Even if Lacoste did business in the Philippines it can
bring action because the case involves a violation of our
penal code
- Such was a violation of article 189 of the RPC, if
prosecution follows after the completion of the
preliminary investigation being conducted by the Special
Prosecutor the information shall be in the name of the
People of the Philippines and no longer the petitioner
which is only an aggrieved party since a criminal offense
is essentially an act against the State. It is the latter
which is principally the injured party although there is a
private right violated
- The records show that the goodwill and reputation of the
petitioner’s products bearing the trademark Lacoste
date back even before 1964 when Lacoste clothing
apparels were forst marketed in the Philippines. To
allow Hemandas to continue using the trademark
Lacoste for the simple reason that he was the first
registrant in the Supplemental Register of a trademark
used in international commerce and not belonging to
him is to render nugatory the very essence of the law on
trademarks and trade names
Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co.
- The law denies to a foreign corporation the right to
maintain suit unless it has previously complied with a
certain requirement, then such compliance, or the fact
that the suing corporation is exempt there from,
becomes a necessary averment in the complaint
- These are matters peculiarly within the knowledge of
appellants alone, and it would be unfair to impose upon
appellee the burden of asserting and proving the
contrary. It is enough that foreign corporations are
allowed by law to seek redress in our courts under
certain conditions: the interpretation of the law should
not go so far as to include, in effect, an inference than
those conditions have been met from the mere fact that
the party suing is a foreign corporation
Olympia Business Machines Co. vs. E. Razon
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- How do you distinguish this case with Atlantic?
- In Atlantic it dismissed the case, while in Olympia it did
not
Time Inc. vs. Reyes
- We fail to see how these doctrines can be a propos in the
case at bar, since the petitioner is not “maintaining any
suit” but is merely defending one against itself; it did
not file any complaint but only a corollary defensive
petition to prohibit the lower court from further
proceeding with a suit that it had no jurisdiction to
entertain
 What law govern foreign corporation doing and
transacting business in the Philippines with a license
- Laws of the Republic of the Philippines save and except
that would normally be those matters which concern its
formation, organization or dissolution, or those fixing
the relationship, liabilities, responsibilities, or duties of
the stockholders, members or officers of the foreign
corporation or their relations to each other.
- In effect, intra-corporate or internal matters not
affecting creditors or the public in general are governed
not by Philippine laws but the law under which the
foreign corporation was formed or organized
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)
 Will the pre-emptive rights of a foreign corporation be
governed by the same section of the code? Is the pre-
emptive rights of a stockholder in a domestic
corporation same as the pre-emptive of a stockholder of
a foreign corporation.
- No
M.E. Grey vs. Insular Lumber Company
- PNB vs. Gonzales, will this apply to a foreign
corporation? How do you distinguish this case from a
Philippine law?
- Since it concerns the rights of stockholders it is the law
of New York that should govern
 Is the license to do business of a foreign corporation
subject to suspension or revocation? What are the
grounds?
- Section 134 provides:
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 outside of the
purpose or purposes for which such corporation is
authorized under its license;
8. Transacting business in the Philippines as agent of or
acting for and in behalf of any foreign corporation or
entity not duly licensed to do business in the
Philippines; or
9. Any other ground as would render it unfit to transact
business in the Philippines. (n)
 SEC does not have the sole authority to suspend or
revoke the license of a foreign corporation doing
business in the Philippines, other government agencies
like the Central Bank , the Insurance Commission may
also do so within their respective dominion, despite the
provision of section 134
 If the SEC believes that revocation is warranted, section
135 provides that:
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)
 Voluntary withdrawal of license
- All 3 conditions must be complied with
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.
P.D. 902-A
 P.D. 902-A was amended by R.A. 8799 or the
SECURITIES REGULATION CODE in the year 2000
 The jurisdiction of SEC for cases falling under section 5
thereof was transferred to the courts of general
jurisdiction designated by the SC, they were called
special commercial courts, the only exceptions were
revocation of corporate franchise and calling of elections
 However the SEC retained receivership or suspension
payments within June 20,2000
 Jurisdiction of special commercial courts are exclusive
and original, jurisdiction is conferred by law; 1 Special
Commercial Court per region except MAKATI and
QUEZON CITY which has two
 Devices or Schemes
- Pyramid scheme (misrepresentation)-Special
Commercial Courts
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- Syndicated estafa- not bailable
 Alleje case
- Falls squarely under sec. 5 (a) Special Commercial
Courts
- Allegation corporate officers employing schemes in
diverting
- Not only detrimental to corporation, but general
membership
- Fraud must be stated with particularity
Abad vs. CFI of Pangasinan
- Fraud must be stated with particularity otherwise it
may be filed to any court
 Intra-corporate
- Exclusive and original jurisdiction of special commercial
courts
- Sole criteria is there must be an intra-corporate
relationship
- Pertaining to a controversy (speaks also of intra-
partnership controversy, that partnership must be
registered with the SEC)
 Rule now
1. Necessarily be an intra-corporate relationship; and,
2. The controversy must arise out of said relationship
 Intra-corporate relationship alone will not suffice to put
it in the ambit of special commercial courts and courts
of general jurisdiction may take cognizance
 Case of a transferee of shares of stock to compel the
corporation to recognize him as a stockholder
 How can it be intra-corporate when he is not yet fully
paid
- When the transferee has done all he can be required to
do to render the transfer effectual and the corporation
refuses to register the transfer, the requirement of the
registration is waived and the transferee is considered
technically a stockholder who may sue to enforce the
right to have the transfer registered
 Florendo vs. rivera, Embassy Farms
- The transferor withheld the delivery, they are not yet
prima facie; it will not be considered intra-corporate
 Controversies in the appointment (asked in the bar)
- Cases involving election, appointment and removal
 In Andaya the court said that a corporate officer elected
or appointed by the BOD is always a corporate act
- The fact that petitioner sought payment of his back
wages, other benefits as well as moral and exemplary
damages and attorney’s fees in his complaint will not
operate to prevent the SEC from exercising its
jurisdiction under P.D. 902-A. The jurisdiction will not
wrest on the NLRC just because of that
Tabang vs. NLRC
- Jurisdiction lies originally and exclusively to special
commercial courts and not in the NLRC
- SEC has jurisdiction over cases of removal from
employment of corporate officers
- The relationship of a person to a corporation, whether
as officer or as agent or employee or not determined by
the nature of the servides performed, but by the
incidents of the relationship on they actually exist
- Corporate officers dismissal is always a corporate act or
intra-corporate controversy
Midland construction vs. Movilla
- NLRC will be possessed of jurisdiction exception will not
apply to mere recovery
 Main consideration
- Asserts his right to the office or questions the propriety
or validity of his ouster or removal, it will be the special
commercial courts and not the NLRC
 Securities Regulation Code
- Transferred jurisdiction of the SEC to Special
Commercial Courts
- Suspension of payment, appointment of management
receivership
 What is the reason for suspension of all claims?
- The reason for suspending actions for claims against the
corporation is not really to enable the management
committee or the rehabilitation receiver to substitute the
defendant in any pending action against it before any
court, tribunal or body. The real justification is to
enable the management committee or rehabilitation
receiver to effectively exercise his powers free from any
Judicial or extra-judicial interference that might unduly
hinder or prevent the “rescue” of the debtor company.
To allow such other actions to continue would only add
to the burden of the management committee pr
rehabilitation receiver, whose time, effort and resources
would be wasted in defending claims against the
corporation instead of being directed towards
restructuring and rehabilitation.(PAL vs. Spouses Sadic
and Kurangking)

- To enable the receiver to effectively exercise his or her
power free form any judicial or extra-judicial that may
disturb
 3 types of suspension of payments
1. Simple suspension of payments
- where deferment of payment of claims against a
distress company; ask the court to be given time to the
payment of liability by postponing the payment
- When it has sufficient assets and liabilities but forces
the impossibility of meeting them when they respectively
fall due
2. Suspension of receiver with a management committee
with a rehabilitation play or suspension of payments
accompanied by a proposal for rehabilitation (with or
without rehabilitation)
- corporation has sufficient assets to cover its liabilities,
but sees the possibility; is or without rehabilitation
plans; normally would attach the rehabilitation plan
- For purpose of economic development
3. Suspension of payments when the corporation has no
sufficient assets to its liabilities
 May it still be revived?
- Yes, it may still be revived
 How can a corporation with more liabilities than assets
continue its operations profitably?
- Even if the distressed company has no sufficient assets
and liabilities it can go for suspension
- It asked for a management committee without a receiver
plan (Victorius Milling case)
 Convert their claims into equity
- Their liability was almost wiped out they became
stockholders instead of creditors
- After 5 years those who converted sold it back to the
corporation, thereby making profits
 Amendment is for the economic development of the
country
 What if walang amendment, e mas maraming liabilities
kesa assets
 Suspension order- all actions for claims against the
corporation are accordingly suspended at whatever
stage the proceedings maybe
 Effect of suspension- you cannot foreclose
 What are claims?
- Debts or demands of pecuniary nature. Assertion of a
right to have money paid
- Claims against the corporation shall be suspended,
assertion of a right to have money paid; it must present
a monetary claim, liquidated or unliquidated
 Nullification of corporations does not present a
monetary claim of pecuniary nature
Union vs. CA
- It does not allow a mere individual to file the petition
which is limited to corporations partnership or
associations.
- Where no authority is granted to hear petitions of
individuals for suspension of payments, such petition
are beyond the competence of the SEC
 What happens if there is a suspension order?
 Explain the key phrase “quality is equity”
- All creditors stand on equal footing, secure or unsecure,
holding or lien or without a lien, no creditor may enforce
his lien while rehabilitation is going (Alemar case)
- No preference shall be given
RCBC vs. IAC
- Decided on motion for reconsideration
- It court 7 years to decide authentication
 Rule of the thumb
- Automatic suspension even if not decreed in the
decision itself
- Once lifted the preferred creditors will regain their
preference
 Appointment of a management committee
- Take over the management committee of the distressed
corporation
- Extraordinary and drastic remedy
- Without any remedy
 What is an intra-corporate controversy?
- Section 5(B)
- Sole criteria is whether there exists an intra-corporate
dispute is that if there is an intra-corporate relationship
 Why is there suspension of all actions against claims
when a receiver is appointed?
- To enable the management committee to exercise its
powers
Sy Chim vs. Sy Siy Ho (before a management committee
may be opt by a court)
- 2 requisites for a valid appointment of management
committee
1. Imminent danger of dissipation, loss, wastage or
destruction of assets or other corporate properties
2. Paralysis of business operations, the mere apprehension
of future misconduct based upon prior management
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- Save and except in the case of a close corporation in
case of deadlock management committee is allowed to
take over right away
Jacinto case
- 2nd par of page 676
- 2 requisites where present
- Wala ng mapautang, there was a paralyzation
Sy Chim
- Did not appoint a management committee
- In the absence of a strong showing of an imminent
danger of dissipation, loss wastage or destruction of
assets or other properties of a corporation and paralysis
of its business operations, the mere apprehension of
future misconduct based upon prior mismanagement
will not authorize the appointment of a management
committee
 Section 5 and 6(D) governed by separate rules; interim
rules and intra-corporate controversy
 Venue of actions
- Rules of court- where the parties are residing
- Intra-corporate- no matter where the parties are
residing it will be in the city or municipality where the
principal office is located
 Rehabilitation proceedings venue
- In rem
- Acquired upon publication without furnishing the
creditors a copy of the petition and attachments thereof
- A creditor may now file the suspension proceedings;
provides that creditors owns at least 25%
 Intra-corporate- rule 1 section 6
 Service of summons- rule 2 section 5
- Summons may be made to anyone
 In case of intra-corporate dispute, elections, fraud, etc;
if they are governed by interim rules of procedure on
intra-corporate controversies
 Venue
- Special commercial courts where principal office is
located/established (section 5 rule 1)
- Matters of payment/suspension must be filed in the
city/ municipality where corporation is located
 Under old rule, creditors have no right to institute an
action for receivership; now creditors, if they sold 20%
they can institute an action for receivership
 Section 5
- Service of summons may be made by fax/e-mail
E.B. Villarosa vs. Benito
- Will apply only if it is not an intra-corporate controversy
 If the controversy arose out of an intra-corporate
dispute rules on interim rules of procedure of intra-
corporate controversies shall govern
 Rule 4 section 17- immunity from suit
 Rehabilitation receiver shall not subject to any action,
claim or demand in connection with any act done
omitted by him in good faith in the exercise of his
functions and powers herein conferred
 Claim
- Right to payment, whether or not it is reduced to
judgment, liquidated or unliquidated, fixed or
contingent, matured or unmatured, disputed or
undisputed, legal or equitable and secured or unsecured
 Investment contracts
- A contract, transaction or scheme whereby a person
invests his money in a common enterprise and is led to
expect profits primarily from the effects of others
 The management committee and rehabilitation receiver
are empowered to:
1. Take custody and control of all assets of the corporation
2. Evaluate assets and liabilities, earnings operations of
the corporation
3. Determine the best way to protect the investors and
creditors
4. Study, review evaluate the feasibility of continuing
operation and structures
5. Submit recommendations to the RTC regarding
rehabilitation plan
6. Rehabilitate the corporation if determined to be feasible
by the RTC
7. Report to the RTC until the corporation is dissolved
THE SECURITIES REGULATION CODE (RA8799)
- Also known as the Blue Sky Law since it was enacted to protect
the public from unscrupulous promoters who stake business
which have no basis and sell shares and interest therein to
investors, who are then left holding certificates representing
nothing more than a claim to a square of the blue sky.
-SEC. 2. Declaration of State Policy. – The State shall establish a
socially conscious, free market that regulates itself, encourage the
widest participation of ownership in enterprises, enhance the
democratization of wealth, promote the development of the capital
market, protect investors, ensure full and fair disclosure about
securities, minimize if not totally eliminate insider trading and

other fraudulent or manipulative devices and practices which
create distortions in the free market.
BROKER - person who buys and sells securities for the account of
others.
DEALER - person who buys and sells securities for his/her own
account in the ordinary course of business.
NOTE: No person shall engage in the business
of buying or selling securities in the Philippines as a
broker or dealer, or act as a salesman, or an
associated person of any broker or dealer unless
registered as such with the Commission. (Sec 28)
SECURITES - shares, participation or interests in a corporation or
in a commercial enterprise or profit-making venture and evidenced
by a certificate, contract, instrument, whether written or electronic
in character. It includes:
CODE: COFDIPS
a) Certificates of assignments, certificates of participation,
trust certificates, voting trust certificates or similar
instruments;
b) Other instruments as may in the future be determined
by the Commission;
c) Fractional undivided interests in oil, gas or other
mineral rights;
d) Derivatives like option and warrants;
e) Investment contracts, certificates of interest or
participation in a profit sharing agreement, certificates
of deposit for a future subscription;
f) Proprietary or non proprietary membership certificates
incorporations; and
g) Shares of stock, bonds, debentures, notes, evidences of
indebtedness, asset-backed securities;
GR: Securities shall not be sold or offered for sale or distribution
within the PH, without a registration statement filed with and
approved by SEC. Prior to such sale, information on the securities,
in such form and with such substance as the Commission may
prescribe, shall be made available to each prospective purchaser.
(Sec 8)
EXCEPT: Exempt Securities under Sec 9
a) Any security issued or guaranteed by the Government of
the PH, or by any political subdivision or agency thereof,
or by any person controlled or supervised by, and acting
as an instrumentality of said Government.
b) Any security issued or guaranteed by the government of
any country with diplomatic relations with the PH, or by
any state, province or political subdivision thereof on the
basis of reciprocity: Provided, that the SEC may require
compliance with the form and content of disclosures the
Commission may prescribe.
c) Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory
body.
d) Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and regulation
of the Office of the Insurance Commission, Housing and
Land Use Regulatory Board, or the Bureau of Internal
Revenue.
e) Any security issued by a bank except its own shares of
stock.
AND Exempt Transactions under Sec 10
a) A judicial sale, or sale by an executor, administrator,
guardian or receiver or trustee in insolvency or
bankruptcy.
b) By or for the account of a pledge holder, or mortgagee or
any other similar lien holder selling or offering for sale or
delivery in the ordinary course of business and not for
the purpose of avoiding the provisions of this Code, to
liquidate a bona fide debt, a security pledged in good
faith as security for such debt.
c) An isolated transaction in which any security is sold,
offered for sale, subscription or delivery by the owner
thereof, or by his representative for the owner’s account,
such sale or offer for sale, subscription or delivery not
being made in the course of repeated and successive
transactions of a like character by such owner, or on his
account by such representative and such owner or
representative not being the underwriter of such
security.
d) Distribution by a corporation, actively engaged in the
business authorized by its AOI, of securities to its
stockholders or other security holders as a stock
dividend or other distribution out of surplus.
e) Sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.
f) Issuance of bonds or notes secured by mortgage upon
real estate or tangible personal property, where the
entire mortgage together with all the bonds or notes
secured thereby are sold to a single purchaser at a
single sale.
g) Issue and delivery of any security in exchange for any
other security of the same issuer pursuant to a right of
conversion entitling the holder of the security
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surrendered in exchange to make such conversion:
Provided, That the security so surrendered has been
registered under this Code or was, when sold, exempt
from the provisions of this Code, and that the security
issued and delivered in exchange, if sold at the
conversion price, would at the time of such conversion
fall within the class of securities entitled to registration
under this Code. Upon such conversion the par value of
the security surrendered in such exchange shall be
deemed the price at which the securities issued and
delivered in such exchange are sold.
h) Broker’s transactions, executed upon customer’s orders,
on any registered Exchange or other trading market.
i) Subscriptions for shares of the capital stock of a
corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital stock
under the Corporation Code, when no expense is
incurred, or no commission, compensation or
remuneration is paid or given in connection with the
sale or disposition of such securities, and only when the
purpose for soliciting, giving or taking of such
subscriptions is to comply with the requirements of such
law as to the percentage of the capital stock of a
corporation which should be subscribed before it can be
registered and duly incorporated, or its authorized
capital increased.
j) The exchange of securities by the issuer with its existing
security holders exclusively, where no commission or
other remuneration is paid or given directly or indirectly
for soliciting such exchange.
k) The sale of securities by an issuer to fewer than twenty
(20) persons in the Philippines during any twelve-month
period.
l) The sale of securities to any number of the following
qualified buyers: (i) Bank; (ii) Registered investment
house; (iii)insurance company; (iv) Pension fund or
retirement plan maintained by the Government of the
Philippines or any political subdivision thereof or
managed by a bank or other persons authorized by the
Bangko Sentral to engage in trust functions; (v)
investment company or; (vi) Such other person as the
Commission may by rule determine as qualified buyers,
on the basis of such factors as financial sophistication,
net worth, knowledge, and experience in financial and
business matters, or amount of assets under
management.
PROTECTION OF SHAREHOLDERS INTEREST
1. Tender Offers (Sec 19)
2. Proxy solicitation (Sec 20)
3. Internal record keeping and accounting (Sec 22)
TENDER OFFER – A publicly announced intention acting alone or
in concert with others to acquire equity securities of a company.
(2002 Bar Exams)
Instances when Tender Offer is Required
1. When the person intends to acquire 15% or more of the
equity share of a public company pursuant to an
agreement made between or among the person and one
or more sellers;
2. When the person intends to acquire 30% or more of the
equity share of a public company within a period of 12
months;
3. When the person intends to acquire shares that would
result in an ownership of more than 50% of the equity
shares of a public company.
PROXY SOLICITATION
NOTE: A broker or dealer who holds or acquires the proxy for at
least ten per centum (10%) or such percentage as the Commission
may prescribe of the outstanding share of the issuer, shall submit a
report identifying the beneficial owner within ten (10) days after
such acquisition, for its own account or customer, to the issuer of the
security, to the Exchange where the security is traded and to the
Commission. (Sec 20.5)
FRAUDULENT TRANSACTIONS AND OTHER MARKET
MANIPULATIONS
1. Wash Sale (Sec 24.1(a)(i)) – any transaction in a
security which involves no change in the beneficial
ownership thereof.
2. Matched Order (Sec 24.1(a)(ii)) – order or orders for the
purchase or sale of security with the knowledge that a
simultaneous order or orders of substantially the same
size, time and price for the sale or purchase of such
security has, or will be entered by or for the same or
different parties.
Note: Wash sale and matched orders become illegal
when they are used as a means to create false
appearance of active trading in the security concerned.
3. Marking the close – placing the purchase order, at or
near the close of the trading period. The price that was
closed will then be the price that will be posted on the
following trading day.
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4. Painting the tape – involves a series of transactions 1. An exchange; or

that are reported publicly to give the impression of an
activity in a security.
5. Squeezing the float – the part of an outstanding
security intentionally held by dealers or other persons
with a view of reselling them later for profit.
6. Hype and dump – Act employed by a person or group of
persons of purchasing the outstanding capital stock of a
dormant public shell company for a nominal amount
and merge it with their privately held company. They
would then gain control of the majority stocks of the
merged entity. Stock certificates are often re-issued in
the name of the merged entity to relatives and associates
who act as nominees of the person or persons employing
the device. They would then look for a broker-dealer
who would be willing to make a “hype” of the securities.
The broker-dealer then generates volume and advance
bid price. When the market reaches a high price, they
would “dump” their shareholdings and bail out.
7. Boiler Room Operations – involves an intensive selling
campaign through numerous salesmen by telephone or
through direct mail offerings for securities of either a
certain type or from a specific issuer. Investors are
induced to purchase through hard-sell based on
unfounded predictions and mailing of misleading market
letters.
Note: Marking the close, Painting the tape, Squeezing the
float, Hype and dump, Boiler Room Operations become
unlawful if it is effected to either raise the price or induce
the purchase of a security or of a controlling, controlled, or
commonly controlled company by others or to depress the
price to induce the sale of a security, whether of the same
or of a different class, of the same issuer or of a
controlling, controlled company or common controlled
company by others or to create active trading to induce
the purchase through said devices or schemes.
2. Any corporation with a class of equity securities listed
for trading on an Exchange or with assets in excess of
P50M and having 200 or more holders, at least 200 of
which are holding at least 100 shares of a class of its
equity securities or which has sold a class of equity
securities to the public pursuant to an effective
registration statement shall have at least two (2)
independent directors or such independent directors
shall constitute at least 20% of the members of such
board, whichever is the lesser.
OPTION TRADING
 Put – a transferrable option or offer to deliver a given
number of shares of stock at a stated price on any given
time during the stated period.
 Call – a transferrable option to buy a specified number
of share at a stated price
 Straddle – a combination of put and call.
SETTLEMENT OFFERS
At any time, during an investigation or proceeding under
this Code, parties being investigated and/or charged may propose
in writing an offer of settlement with the Commission. The
Commission may only agree to a settlement offer based on its
findings that such settlement is in the public interest. Any
agreement to settle shall have no legal effect until publicly
disclosed. Such decision may be made without a determination of
guilt on the part of the person making the offer.
DAMAGES
All suits to recover damages shall be brought before the
Regional Trial Court, which shall have exclusive jurisdiction to
hear and decide such suits. The Court is authorized to award
damages in an amount not exceeding triple the amount of the
transaction plus actual damages.

8. Circulating or Disseminating Information – NOTES

circulating an information that any of the security listed  If there are goods involved in the multimarket, it is
in the exchange will or is likely to rise or fall because of beyond the jurisdiction of SEC (Ex First Quadrant)
manipulative market operations of any one or more  Criminal charge for violation of SRC is a specialized
persons conducted for the purpose of raising or dispute, hence it must be first referred with SEC
depressing the price of the security and thus inducing (Baviera vs. Paglinawan G.R. No. 168380 Feb 8,
the purchase of such security. 2007)
9. Making False or Misleading Statements with respect  T3 Rule in trading of Securities – Trading day + 3
to any material fact which he knew or had reasonable more days you must comply with your obligations.
ground to believe was so false or misleading for the
purpose of inducing the purchase or sale of such
security.
10. Pegging or Fixing Or Stabilizing the price of security
effected either alone or with others through any series of
transactions for the purchase or sale thereof, if done for
such purpose.
11. Short sale – selling of security which the vendor does
not own unless done in accordance with the rules and
regulations of the SEC.
12. Insider Trading – the act of an insider to buy or sell
security of the issuer while in possession of material
information with respect to such security that is not
generally made known to the public unless (a) The
insider proves that the information was not gained from
such relationship; or (b) If the other party selling to or
buying from the insider (or his agent) is identified, the
insider proves: (i) that he disclosed the information to
the other party, or (ii) that he had reason to believe that
the other party otherwise is also in possession of the
information.

Note: When is information “material non-public”? -

if: (a) It has not been generally disclosed to the public and
would likely affect the market price of the security after
being disseminated to the public and the lapse of a
reasonable time for the market to absorb the information;
or (b) would be considered by a reasonable person
important under the circumstances in determining his
course of action whether to buy, sell or hold a security.

Note: Who is an “insider”? - “Insider” means: (a) the

issuer; (b) a director or officer (or person performing
similar functions) of, or a person controlling the issuer; (c)
a person whose relationship or former relationship to the
issuer gives or gave him access to material information
about the issuer or the security that is not generally
available to the public; (d) a government employee, or
director, or officer of an exchange, clearing agency and/or
self-regulatory organization who has access to material
information about an issuer or a security that is not
generally available to the public; or (e) a person who
learns such information by a communication from any of
the foregoing insiders.

INDEPENDENT DIRECTOR
Person other than an officer or employee of the
corporation, its parent or subsidiaries, or any other individual
having a relationship with the corporation, which would interfere
with the exercise of independent judgment in carrying out the
responsibilities of a director.

Corporations which require an Independent Director

Notes on Corporation Law
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