Corporation Law Ladia Transcripts Finals PDF

1 CORPORATION LAW
Meetings  If there is a person who authorize to call the

meeting but neglects or fails to call one, the court
2 types of meetings: is not authorized to grant the SH may not be
1. Stockholders granted to call one, the proper remedy is
2. Directors mandamus
 Whenever, for any cause, there is no person
2 kinds: authorized to call a meeting, the SEC, upon
1. Regular petition of a SH/Members, and showing good
2. Special cause thereof, may issue an order to the
petitioning SH/members directing him to call a
5 essential requisites for a valid SH’s meeting: meeting of a corporation by giving proper notice
1. It must be held on the date fixed by the by-laws or in required in the by-laws.
accordance with law (if there is no date fixed, it may be  The petitioning SH/members shall preside until at
held on any date on April as may be fixed by the BOD) least a majority of the SH/members present have
chosen one of their number as presiding officer.
2. Prior notices must be given (posted or sent at least 2
weeks prior to the meeting [regular/annual]; and 1 5. The quorum and voting requirements must be met.
week [special]); unless the by-laws requires a different  Majority of the SH/members owning or
period. The by-laws may extend or shorten the sending representing at least a majority of the outstanding
out of notices. capital stock is the requisite quorum, unless the
law requires a higher voting percentage)
 Directors vs. Tan – the by-laws provided for a 5 day  For instance in the voting for amendment of AOI,
notice rule which upheld its validity, nonetheless, it the vote requires 2/3 of the outstanding capital
posted 2 days prior to the meeting, thus the court held stock, but only majority of SH representing OCS,
that the meeting and resolution passed was not valid there is a quorum if there is a majority SH but
for want of notice. cannot amend the AOI because the vote required
 Failure to give notice in accordance therwith would is 2/3 as provided by the law.
render the resolution made thereunder voidable at the  Amendment of the by-laws – majority
option of the SH/members who was not notified.  Amendment of the AOI – 2/3
 A SH/member who is present and participated without
objection in a meeting cannot complaint of failure to  Non-voting shares are not including in determining the
give notice or defects in the notice. (waives the defect) voting requirement, unless they are nonetheless
 The notice of meeting must state the agenda or entitled to vote in the penultimate paragraph of Sec. 6.
business matter that may be taken up before the (in amendments of AOI, can vote;
meeting otherwise it may become voidable  If 1M ACS, 20% NVS, 800k VS, election of directors
(quorum requirement is 400k), amendments of AOI
3. Must be held at the proper place/venue. include NVS because they are entitled to vote. 2/3 will
 As far as practicable, in the province or be based on 1M shares.
municipality where the principal office is located  The effect of a SH’s meeting improperly held or called,
[stock]; meetings may held anywhere in the the resolutions passed will not be necessarily be
Philippines provided that proper notices shall be without force and effect. It shall nonetheless be valid if
posted/sent [non-stock] all of the SHs/members are present or duly
 Metro Manila is considered as one municipality represented (proxy).
 During annual meetings of the SH, the audited financial
4. It must be called by the proper person or officer. statement is presented to SH for their perusal. That’s
 By the president or the secretary on orders of the why the law choose the date of April (if no provision in
president, unless the by-laws provide for a the by-law) because it is the time when the financial
different person statement is audited (filing of the Income Tax).
This is a modified transcript of Atty. Ladia’s Audio Lecture in Corporation Law covering only the finals part.
Transcribed and modified by Duke Sucgang. For educational purposes only.
2 CORPORATION LAW
they may be ratified, express or implied or by way

GR: The SH/members have no power to act as or for the of estoppel.
corporation  Lopez realty vs Fontecha – Dir’s meeting was
EXCEPTION: at a corporate meeting called and conducted called granting employees incentive benefits.
according to law if there is a need to protect the SH by providing One of them was abroad and not notified but
them, with notice of meeting and giving opportunity to attend evidence presented that she knew of the
the meeting, discuss the issue and vote. resolution taken by the board in the meeting
EXCEPTION TO THE EXCEPTION: in case of ordinary amendment improperly held and she did not interpose any
of AOI where the vote/written assent of SH/members objections and signed the two vouchers and
representing 2/3 OCS could pass a valid amendment resolutions. The Court held that that director
is in estoppel.
Directors/Trustees meetings (S53 and S54)  Express if it is in a subsequent formal meeting
 Regular or Special of the same board. Implied from the acts of
 Regular – held monthly or provided for in the by-laws the responsible corporate officers.
 Special – called at any time upon call of the president
or provided in the by-laws  The president shall preside at all meetings of the
directors/trustees meeting as well as of the SH/members
 Venue is anywhere within or outside the unless the by-laws otherwise provides.
Philippines, unless provided in the by-laws. For
purposes of convenience. SH/members’ right to vote and manner of voting – it is
 SMC acquired brewery in HK, SMBHI they inherent and incidental to the ownership of corporate stock
went to see the facility in HK before they and such it is a property right.
acquired the property. They held a meeting Exceptions:
and decided to purchase the property in HK. 1. Non-voting shares are not entitled to vote except provided
The court ruled that they can hold their in the penultimate paragraph of section 6 (only preferred
meetings anywhere for their convenience and redeemable shares may be deprived of the right to
 The quorum requirement is fixed. Majority of the vote)
number is fixed in the AOI is the quorum 2. Treasury shares
requirement. 3. Delinquent shares
 If 9, the quorum is 5. If 2 died, the quorum 4. Unregistered transferees of shares of stock
requirement is still 5. Exception to the exception: may vote through
 The vote of the majority of those present at which proxy/VTA/executor/administrator/receiver or other
there is a quorum will pass a valid corporate act. representatives
Except in the case of election in the other
corporate officers the vote requires of the entire  In case of pledged/mortgaged shares, the
membership of the board; or unless the AOI or By- pledgor/mortgagor/administrator is entitled to attend
laws provided greater requirement. and vote at SH’s meeting unless the pledgee/mortgagee
 9 members, 5 present – there is a quorum. Of is expressly given by the pledgor/mortgagor such right in
the 5, 3 voted of a particular corporate act is writing which is recorded on the appropriate books .
still valid, 3 of 9 – quorum  If shares are owned jointly, the consent of all co-owners
 SH meetings, proxy is matter of right; in members are necessary unless there is a written proxy signed by all
(s25)
and directors meetings , proxy may be denied. co-owners. When shares are owned in an “and/or”
If they vote by proxy, they have abdicated the capacity of the holders thereof, any of the joint owners
powers granted to them. can vote said shares or appoint a proxy.
 But if a director but it is a SH’s meeting, may send
a proxy but if director’s meeting, no. PROXY AND OTHER REPRESENTATIVE VOTING
 A director’s meeting improperly held/call,  The authority given by the SH/m to another to vote for
generally, it would be without force and effect. But him at a SH’s/m’s meeting
3 CORPORATION LAW
 Should be in writing, signed by the SH and filed before 4. It shall be noted in the books of the corporation that
the scheduled meeting with the corporate secretary the transfer in the name of trustee is made in
 Shall be valid only for the meeting which it is intended pursuance to said VTA
unless otherwise provided in the proxy
 No proxy shall be valid and effective for a period longer  Please know the difference of Voting trust vs. Proxy (it
than 5 years at any one time is asked in the recitation and exam)
2 TYPES OF PROXY
1. General – gives a general discretionary power-of- Chapter 10: Stocks and Stockholders
attorney to vote for directors and all ordinary matters
3 ways in which a person may become a stockholder:
that may properly come before the meeti ng
1. By a contract of subscription with the corporation;
2. Limited – restricts the authority to vote on specified
2. By the purchase of treasury shares from the corporation; and
matters only and may direct the manner in which the 3. By purchase or acquisition of shares from existing
vote will be cast stockholders (includes purchase from the stock exchange).
 Revocable unless coupled with an interest and
revocation need not be made by formal notice in writing. Subscription Contract
May be express to the proxy holder by subsequent proxy
Subscription – the mutual agreement of the subscribers to take
to another or by sale of the shares.
and pay for the stocks of a corporation.
 Need not be notarized
 If executed by the corporation, it shall be in the form of a Subscription contract – any contract for the acquisition of
board reso duly certified by the corpo sec or in a proxy unissued stock in an existing corporation or a corporation still to
form executed by a duly authorized corpo officer be formed, not withstanding the fact that the parties refer to it
accompanied by a corpo sec’s certificate quoting the as a purchase or some other contract.
 A subscription contract is not required to be written; an
board reso authorizing the proxy.
oral contract for subscription is valid and enforceable. The
statutes of fraud do not apply to a subscription contract
VOTING TRUST because such subscription does not fall under the statutory
 one created by an agreement between a group of SH and a definition of a sale.
trustee whereby it is provided that for a term of years, or
period contingent upon certain event or until agreement is Conditional subscription – one made upon a condition
precedent, does not make the subscriber a stockholder, or
terminated, control over the stock owned by such SH, shall
render him to pay the amount of his subscription, until the
be lodged in the trustee, either with or without reservation
performance or fulfillment of the condition.
to the owners or persons designated by them the power to
direct how such control shall be iss ued. Subscription upon special terms – an absolute subscription,
 VTA results in the separation of the VR of a SH from his making the subscriber a stockholder, and rendering hi m liable as
other rights such as right to receive dividend, inspect the such, as soon as the subscription is accepted, the special term
books, sell certain interests and other rights to which a SH being an independent stipulation.
may be entitled until the liquidation of the corporation.
 In case of doubt, a subscription shall be considered one
upon special terms in order to protect the creditors and
REQUISITES: other subscribers.
1. Must be in writing, notarized and specify the terms and
conditions thereof General rule: Conditional subscriptions are valid.
2. Certified copy must be filed with SEC and corporation Exceptions:
otherwise such agreement is ineffective and 1. The charter or enabling act prohibits the same; or
2. The conditions are such as to render their performance
unenforceable
beyond the powers of the corporation or in violation of law
3. The certificate of stocks covered by VTA shall be or contrary to public policy.
cancelled and new ones shall be issued in the name of
the trustee  An application for subscription which is at variance with the
terms evidenced in a general form of subscription must be
4 CORPORATION LAW
accepted by the corporation to create a binding contract.  A condition facultative as to the debtor renders the whole
(Trillana vs. Quezon College, Inc.) obligation void. (Trillana vs. Quezon College, Inc.)
 Stocks shall not be issued in exchange of

PRE-INCORPORATION SUBSCRIPTIONS promissory notes or future services. Their
2 types of subscription as to time of execution: realization is uncertain
1. Pre-incorporation subscriptions – subscriptions
for shares of stock of a corporation still to be Issue – the making of a share contract or contract of
formed; and subscription; transaction by which a person becomes the
2. Post-incorporation – those made or executed owner of shares and by which new share contracts are
after the formation or organization of the created.
corporation
 The issuance of shares is not dependent on the
delivery of a certificate of stock.
 GR: a subscription for shares of stock of a
corporation still to be formed is irrevocable Par or issue price – indicates the amount which the
EXCEPTIONS: Lapse of a period of 6 months from original subscribers are supposed to contribute to the
the date of subscription; all subcribers consent to corporate capital as the basis of the privilege of profit
the revocation; or the incorporation of said sharing with limited liability.
corporation fails to materialize within 6 months
Two theories in the valuation of property or services:
or within a longer period as may be stipulated in
1. True value rule – the motives or intent of those
the contract of subscription. making the valuation are disregarded and the sole
EXCEPTION TO THE EXCEPTION: No pre- and decisive factor or question is whether or not the
incorporation subscription may be revoked after property or services are in fact worth the value placed
the submission of the AOI to the SEC on them.
2. Good faith rule – the value of the property or services
is a matter about whi ch there can be an honest
 Pre-incorporation subscriptions are mandatory
difference of opinion. Therefore, if the parties have
which mandates that a corporation may be acted in good faith without fraud or intentional over -
registered as such only if at least 25% of its ACS valuation, the transaction cannot be overturned even
has been subscribed and that at least 25% of the if the later becomes evident that the property or
total subscription has been paid. services were in fact worth much less than the value
 Stocks shall not be issued for a consideration less fixed on them initially.
than the par or issued price thereof.
 i.e. Founder’s shares because it may be granted
S62 CONSIDERATION FOR STOCKS: rights and privileges not accorded to other SH.
1. Actual cash paid Such as Exclusive right to vote or be voted upon
2. Property, tangible or intangible, actually received from the period of 5 years with approval of the
by the corporation SEC and after the 5 yr period the holders thereof
3. Labor/services actually rendered to the shall surrender the founder’s shares and be
corporation converted to common stock. The amount paid
4. Previously incurred indebtedness will be the same consideration of the common
5. Amounts transferred from URE to stated capital shares by virtue of reclassification
(Stock Dividends)  The consideration for the issuance of s tocks of a
The corporation makes profits and instead corporation may consist of any of the six forms
distributing cash to SH, it will issue SD. The indicated in S62 or combination of two or more
consideration will be the URE of the corporation of them.
6. Outstanding stocks exchange for stocks in the
event for reclassification  A corporation is allowed to issue its stocks, in
exchange of properties tangible or intangible,
which must be: 1. Actually received by the
5 CORPORATION LAW
corporation; 2. Necessary and convenient for its  Transferability of shares of stock in the
use and lawful purposes; 3. The value of the corporate form of business. The CS may be
property should be at least equal to the par or transferred by the delivery of the stock
issued value of the stocks. certificates endorsed by the owner/atty-in-
fact.
Valuation of properties given as a consideration for  No transfer shall be valid except as between
issuance of stock:
the parties, until the transfer is recorded in
1. Tangible properties (particularly real properties):
the books of the corporation. If not
a. Appraisal report of an independent appraiser;
b. Zonal valuation as certified by the BIR; or recorded, insofar as the parties are
c. Market value indicated in the Real Estate Tax concerned, the transfer shall be valid
Declaration.  For a valid transfer of shares of stocks may
2. Intangible properties (such as patents or copyrights): transferred when endorsed and delivery of the
a. Initial determination by the incorporators or the certificate of stocks.
board of directors subject to the approval of the
 Endorsement without delivery is not a valid
SEC; or
b. Appraisal report of an independent appraiser. and effective mode of the transfer of stocks
(embassy farms vs ca)
Labor performed or services actually rendered to the  Delivery alone without endorsement is also
corporation must be capable of valuation and in fact fairly ineffective mode of transferring shares.
valued. (Razon vs IAC)
S64- Issuance of Certificate of Stocks

 Other modes of transferring shares of
stocks:
Certificate of stock – the piece of paper or document
1. Duly notarized deed (Rural Bank of Salinas vs
which evidences the ownership of shares and a
convenient instrument for the transfer of the title. CA)
 A transfer set in a notarized deed is
Requisites for the issuance of a certificate of stock: equivalent to the delivery of the thing
1. It must be signed by the president or vice-president itself. (Upiaco case)
and countersigned by the secretary or assistant  When the corporation has not yet issued
secretary; certificates of stocks
2. It must be sealed with the corporate seal; and
3. The full amount of subscription together with interest
and expenses (in case of deli nquent shares) if any is 2. But when a certificate of stock has already
due, has been paid. been issued to the owner thereof, a mere
notarized deed may not be sufficient for a
Transfer – refers to absolute and unconditional valid transferred share of stocks . It must be
conveyance of the title and ownership of a share of stock coupled with delivery avoid fraudulent or
to warrant registration in the books of the corporation in fictitious transfers of shares. (Rural Bank vs.
order to bind the latter and other third persons.
CA)
(Monserrat vs. Ceron)
3. Exception to the exception: Even without a
delivery/endorsement of Stock Cert which
 CS cannot be issued unless it is fully paid
have already been issued, transfer is valid if
 CS cannot be issued for the corresponding
the transferor is in estoppel
number of shares which the subscribers may
 Tan vs SEC- the transferee is the brother
have already been paid for
of the transferor, the transferee already
 subscribed 1M shares, 500k paid, the
exercised his right as a director and was
corporation cannot issue CS unles s fully
elected as such during the time the
paid
transferor was the president of the
 Stock subscriptions are indivisible.
corporation. The court ruled that
6 CORPORATION LAW
endorsement/delivery is not essential  (Rural bank of Salinas vs. CA) the right of
where the person sought to be the assignee/transferee to have the
considered as a SH is an officer of the stocks transferred in his name in the
corporation and has the custody of the books of the corporation is his inherit
stock and transfer book. He is right flowing from his ownership of
considered as an estoppel. shares of stock. The court ruled that
when a corpo refuses the transfer,
 Are certificates of stocks negotiable instruments? mandamus will issue to compel the
NO. they are merely quasi -negotiable but non- officer to transfer the said stocks in the
negotiable. The transferee takes it without books of the corporation. The duty of
prejudice to all the rights and defenses which the the corporation to record the transfer of
true and lawful owner may have and obtaining in shares of stock in the stock and transfer
a particular set of circumstances subject to the book is ministerial. If refused without
rules governing estoppel. (delos santos vs good cause, may be compelled to do so
mcgruise) by mandamus.
 No matter how innocent the purchaser  Exception: in order that mandamus may
may be, if there is no endorsement and issue, the alleged transferee must have a
delivery, no valid and effective transfer, clear and legal right to the thing
because it is subject to all defenses and demanded. It is the imperative duty of
rights in which the true owner may the Corporation to perform the act
have. required. It neither confers nor imposes
duties and never issued in doubtful
General rule: A certificate of stock is not a negotiable cases.
instrument. A bona-fide purchaser of a certificate of stock  TAY vs CA – creditor sought to compel
will acquire no better title to the shares than his the corporation to record the transfer,
transferor had and will be subject to all rights, remedies
the debtor SH pledged his share to the
and defenses which the true and lawful owner may have.
creditor certain amount of money. SH
Exception: When the general principles of estoppel apply. failed to pay, the creditor sought the
Thus, if the legal owner thereof, by his act or negligence, is recording of the shares of stocks in his
estopped from claiming ownership, (as when he clothes name in the books by failure of the SH to
another with apparent title or authority to dispose of the pay pursuant to contract of pledged.
same) a purchaser in good faith and without notice will Corporation refused. The Court denied
acquire a better title as against the owner so estopped.
the mandamus because the owner of
 Shares of stock are personal properties and the the thing pledged remains to be the
owners thereof have the unbridled right to owner thereof until a sale of public
transfer the same to anyone they please subject auction has made under the Civil Code.
only to reasonable charter provisions. The creditor never failed to do so, thus
he has no clear and legal right. The
 Registration of the transfer in the stock and pledgor remains the owner of the thing
transfer book must be had in order to be valid unless sold in public auction
and binding to third parties even to corporation
and even subsequent creditors. Reasons for the necessity of the registration of transfers
 No transfer shall be valid, except as between of stock:
the parties, until the transfer is recorded in 1. To enable the corporation to know who its
the books of the corporation. stockholders are;
 Failure or refusal to record such transfer, 2. To enable the transferee to exercise his rights as a
the remedy is mandamus. stockholder;
7 CORPORATION LAW
3. To afford the corporation an opportunity to object or provisions, all of which

refuse registration of the transfer in cases allowed by shares of stocks of any
law (as when it has unpaid claims on the shares class shall be subjected to
transferred);
one or more specified
4. To avoid fictitious and fraudulent transfers; and
5. To protect creditors who have the right to look upon restrictions allowed by the
stockholders, in case of non-payment or watered code. All close to provide
shares, for the satisfaction of their claims. restrictions in the transfers
of shares.
The duty of the corporate secretary to record a valid  All shares of stocks,
transfer of shares of stock is ministerial. Thus, he may be exclusive of treasury
compelled by mandamus.
shares, shall be held of
record by not more than 20
 The duty of the corporate secretary to register a
specified persons
valid transfer of shares is ministerial. Therefore,
 If the transferee is not one
mandamus will lie to compel registration in case
of those specified person,
the corporation or the corporate secretary
cannot transfer or have the
refuses registration. (Rural Bank of Salinas vs. CA)
transfer recorded in the
However, the transferee has no such right when
books of the corporation.)
his title to said shares has no prima facie validity
of is uncertain.
 Unpaid subscription or any percentage thereof,
together with interest if required by the by-laws
 The right to transfer shares of stock may not be
unreasonably restricted or prohibited. Every or contract of subscription, shall be paid either:
owner of corporate shares has the same 1. On the date or dates fixed in the contract of
uncontrollable right to alienate them and is subscription
under no obligation from selling them at his 2. On the date or dates that may be specified
sacrifice and for the welfare and benefit of the by the BOD pursuant to a call declaring any
corporation and other stockholders. (Padgett vs.
or all unpaid portion thereof to be so
Bobcock & Templeton; Fleischer vs. Botica
payable.
Nolasco)
 However, the right Transfer shares of stock may “Trust Fund Doctrine” – subscriptions to the capital of a
be restricted or regulated by law or agreement of corporation constitute a fund to which creditors have the
the parties. right to look up to for the satisfaction of their claims.
 Restrictions:
1. The corporation cannot be  The minimum requirement of capital structure is
compelled to record transfers of at least 25 % of the ACS must be subscribed and
shares if it has unpaid claims over 25% of the subscription must be paid.
the shares sought to be transferred  (remedies to enforce payment):
in the books. (S63) a. By way of a delinquency sale (S67-
 Unpaid Claim is the unpaid 68)
portion of the subscriptions b. Direct action in court (S70)
(CBC case)
2. May be imposed by Special Laws  (S67-70) The unpaid portion of the subscription
(Nationalization laws) may be payable or demandable upon call made
3. Imposed by the Corporation Code, by the board of directors for the payment of the
63, 96 (close corporation) unpaid portions thereof fixing the date when
 Close corporation, it must they are to pay the same, failure to do so, the
contain all the three shares will become delinquent and would subject
8 CORPORATION LAW
the shares to a delinquency sale. The shares will  If the corporation has losses, it has no
be subjected to an auction sale not earlier 30 URE, thus corporation cannot bid its own
days and not later than 60 days. shares
 It will be sold to the bidder who tenders  But the corporation may still file a
to pay the full amount of the balance of collection case to recover payment from
the subscription + cost and expenses the unpaid portions of the SH because
FOR THE LEAST NUMBER OF SHARES. the unpaid portions is considered debt
 X subscribed 1M shares, 500k of the SH.
paid out of subscriptions, the
corpo incurs loses and needs  Redeemable shares, in case of close corporation.
money, in order to raise money,  If the auction sale was irregularly held, the
it calls to the unpaid portions of validity of the sale may be questioned by the SH
the subscribers and specified subject to the provision of S69.
the date when they are due. X  If SH tenders payment of the acquisition
did not pay on the date cost to the winning bidder, and he must
specified on the call. The institute the complaint within 6 months
corporation may now proceed from the date of the sale. Failure to do
to sell the same at a so, SH cannot validly question the sale.
delinquency sale (30-60 days) (was inserted for the purpose of the
 The winning bidder shall be the stability of shares)
one who pays all balance of the
subscription plus cost and  If the shares are declared delinquent/due and
expenses, if any, for the least demandable, and corporation made a call, it will
number of shares. (3 bidders, A- be the bound duty of the subscriber to pay when
505k for 990k shares; B-505k they became due and demandable as provided in
for 980k shares; C-505k for the contract, failure to do so may still be subject
970k shares. The winning to delinquency sale.
bidder will be C because he  Effect of delinquent SH. The delinquent
tendered the full amount of the SH loses his right to vote and be voted
unpaid subscription + cost and upon and will not be entitled to any
expenses for the least number rights of a SH except the right to receive
of shares) (970k shares will be dividend. (S71)
listed under the name of C in  Delinquent SH may still be entitled
the books of the Corporation. X to cash dividends. But must be first
will still be a SH to the extent of be applied to his delinquency + cost
the difference between the bid and expenses due him
of C and 1M subscription of X,  If it is by way of stock dividend, it
30k shares left in his name. the shall be withheld from him
effect, X paid 505k for only 30k
shares, and C paid 505k for  If the SH is also a director, who is
970k shares) delinquent, he will likewise loses his
right to vote and be voted upon and
 If no bidders, the corporation may also bid shall not be entitled to any of the rights
subject to the provisions of the code. Through of the SH except the ri ghts to receive
the power of the corporation to reacquire shares dividends. But he shall not be
and it should have URE in order that i t may disqualified to be a director as long as he
reacquire its shares. owns at least one share of the stock.
9 CORPORATION LAW
Even if he is delinquent, he is still  W. Philpotts case, inspection may be

qualified to act as a director(Bar) until all done with the SH’s representatives
his share is sold in public auction.  Non-Stockholders, or assuming even the
 If he predeceases to be a SH, he is also heirs of the deceased stockholder
automatically disqualifies to act as a cannot inspect the books and records of
Director. the corporation of the SH.
 Puno vs Puno Ent. (599S685)
Lost or destroyed Stocks Certificates the SH’s right to inspection of
 The SH must execute an affidavit stating: the corporate books and
1. The manner and conditions on how it was records is based upon his
lost/destroyed ownership of shares and the
2. Number of shares represented by such necessity of self-protection. A
certificate SH has the right to be
3. Serial number of the certificate and intelligently informed about the
4. Name of the corporation which issued the corporate affairs and such right
same rest upon the underlying
ownership of the corporate
 The replacement will be issued after 1 assets and properties. Only the
year from the date of the last SH of record are entitled to
publication. But may be issued earlier receive dividends from the
than 1 year if the owner files a bond corporation as an inherit right.
satisfactory to the owners.  In this case, the SH died, the
 Purpose is to avoid duplication of heirs wanted to exercise the
certificates of stock and the avoidance ownership over the shares left
of fictitious and fraudulent transfers. by their deceased father. Upon
 The BOD has the authority to decide the the death of SH, the heirs do
amount and the kind of surety bond. not automatically become SH of
the corporation and acquire the
rights and privileges of the
Corporate Books and Records (S74, S75) deceased SH. The stocks must
 The following shall be kept and maintained by the first be distributed to the heirs
corporation: upon estate proceedings and
1. Every corporation registered under this the transfer of the stocks
provisions to keep a record of all business should be recorded in the
transactions (S74) books as required under S63.
2. Minutes of meetings of both the SH and Directors During the interim period, the
3. The Stock and Transfer Book or Membership heirs stand as the equitable
Book if non-stock owners of the stocks. The
4. Financial statements (S75) executor/administrator duly
appointed by the court being
 All this books and records shall be vested with the legal title of the
subject to inspection by members and stocks until the settlement and
SH during reasonable hours on any division of the estate are
business day and either personally or effected, the estate of the
through his authorize representative, decedent are held by the
with or without the presence of the executor/administrator who
particular SH concerned.
10 CORPORATION LAW
are entitled to exercise the improper use of

rights of the deceased SH. information secured
 An estate proceeding must first through previous
be effected before the heirs can examination and not acting
exercise ownership over the in good faith.
shares  PNB was created by special
law and primarily governed
 A SH of a holding/parent company cannot inspect by law creating them and
the books and records of the subsidiary if he is supplemented only by
not a SH of the subsidiary. The holding company Corporation Code
must own wholly all the shares of the stocks of whenever applicable. A SH
the subsidiary before a SH of the holding/parent of PNB cannot examine the
company may inspect the books and records of financial records of the
the subsidiary. bank. The charter of the
 Case of Gokongwei vs. SEC bank only allows the
 If wholly owned, even if not a SH of the monetary board of the
subsidiary, the SH of the parent may Central Bank itself and the
inspect the books of the subsidiary. result can be divulged to
 If the two entities, parent and the President of the
subsidiary, are legally being operated as Philippines, Secretary of
separated and distinct copy, no right of Finance and the board
inspection on the part of the parent to themselves.
inspect the books of the subsidiary. c. The right is limited or restricted by
(rogers vs. Sherman oil) special law or the law of its creation
 If a SH/member is refused the right of inspection, S76-80 Mergers and Consolidations

the remedy is mandamus with claim for damages  78 and 79 are procedures of mergers and
and/or attorney’s fees; or criminal complaint for consolidations
the violation of his right under Sec. 144 of The requirements and procedure necessary to accomplish
Corporation Code where a fine of 1k-10k or a merger or consolidation are as follows:
imprisonment of 30 days – 5 years (it is the penal 1. The BOD/Trustees of each constituent
provision of the Corporation Code) corporation shall approve a plan of merger or
 (S74(2))The defenses of the consolidation setting forth the matters required
officers/directors may advance to avoid in Section 76;
liability are: 2. Approval of the plan by the SH representing 2/3
a. Improper use of information of the OCS or 2/3 of the member in Non-Stock of
secured through previous each of such corporations at separate corporate
examination meetings called for that purpose
b. Not acting in good faith or for a 3. Prior notice of such meeting, with copy or
legitimate purpose summary of the plan of merger or consolidation
 PNB vs. Gonzales, Gonzales shall be given to all SH or members at least 2
acquired 1 share of stock of weeks prior to the scheduled meeting
PNB in order to pry into the 4. Execution of articles of merger or consolidation
activities of the bank even by each constituent corporations to be signed by
before he was a SH. The the president or VP and certified by the
bank officers refused. The corporate secretary or asst. secretary setting
court ruled that there was forth the matters required in Sec. 78
11 CORPORATION LAW
5. Submission of articles of merger or consolidation and obligations of the constituent in the same
in quadruplicate to the SEC subject to the manner as if the surviving/consolidated
requirement of Sec. 79 that if it involve corporation have itself incurred such liabilities
corporations under the direct supervision of any and obligations; and any pending claim brought
other gov’t agency or governed by special laws, by or against any of the constituent corporation
the favourable recommendation of the said gov’t may be prosecuted against the
agency shall be first be secured; and surviving/consolidated corporation.
6. Issuance of the certificate of merger or
consolidation by the SEC at which it shall be  Merger – union effected by absorbing one or more
effective. If the plan is contrary to law, the SEC existing corporations by another which survives and
shall set a hearing to give the corporations an continues the combined business.
opportunity to be heard upon proper notice and  Consolidation – the uniting or amalgamation of two
the SEC shall proceed as provided. or more existing corporations to form a new
corporation.
S80: Effects of Mergers
1. The constituent corporation or the parties to the Associated Bank vs CA
mergers and consolidation shall become a single F: Associated Bank Corporation and Citizens Bank and
corporation, in the case of merger would be the Trust Company merged to form just one banking
surviving or absorbing corporation; in corporation by virtue of the Amended AOI. The defendant
consolidation, the consolidated corporation. Lorenzo Sarmiento executed in favor of AB a promissory
2. The separate existence of the corporation shall note undertaking to pay the latter P2.5M on or before
cease except that of the surviving or March 6, 1978. However, due to failure of Sarmiento to
consolidated. pay, AB filed this complaint. The defendant denied all the
3. The surviving or consolidated corporation shall allegations and alleged as affirmative and special defenses
possess all the rights, immunities and powers and that the complaint states no valid cause of action and AB
shall be subjected to all the duties and liabilities is not the proper party in interest because the prom note
of the corporation organized under the code. was executed in favor of CBTC.
4. The surviving or consolidated shall thereupon
and thereafter possess all the rights, privileges, The court ruled in favor of AB and ordered Sarmiento to
immunities and franchises of each of the pay AB his remaining balance + interest and atty’s fees.
constituent corporations and any and all CA set aside the decision of the tc and dismissed the
properties and all receivables due and whatever complaint. Hence, this appeal.
account including subscriptions to shares and
other choses in action and all and any other I: W/N the AB may enforce the prom note made by
interest of, or belonging to or due to each of the provate respondent in favor of CBTC, the absorbed
constituent corporations shall be transferred to company after merger?
surviving or consolidated corporation without
any further act or deed. R: Yes. In the merger of two or more existing corporations,
 No need to indicate in the contract to one of the combining corporations survives and continues
the effect that all rights, properties, or the combined business, while the rest are dissolved and all
remedies shall be vested to the their rights, properties and liabilities are acquired by the
surviving/consolidated corporation. The surviving corporation. Although there is a dissolution of
law provides for its effect and it is the absorbed corporations, there is no winding up of their
automatic. affairs or liquidation of their assets because the surviving
corporation automatically acquires all their rights,
5. The surviving and the consolidated corporations privileges and powers, as well as their liabilities.
shall be responsible and liable to all the liabilities
12 CORPORATION LAW
The merger, however, does not become effective upon decisions and demand the payment of the fair
the mere agreement of the constituent corporati ons. value of his share.
There should be approval by the SEC of the articles of  Not available in any or all instances
merger which, in turn, must have been duly approved by a when a SH objects on a particular
majority of the respective SH of the constituent corporate act or transactions. Only
corporations. available as provided for the corporation
code.
In this case, an agreement of merger with AB and CBTC
was entered on September 16, 1975 and provided that its  Instances of appraisal right – any SH of a
effectivity shall be the date when the necessary papers to corporation shall have the right to dissent and
carry out this merger shall have been approved by the demand payment of the fair value of his shares in
SEC. the agreement likewise provided for the transfer of the following instances:
the properties, rights, privileges, powers, franchi ses, 1. In case of any amendment of AOI that has
assets, including goodwill and tradename, and all debts the effect of changing or restricting the
due to CBTC and all other actions belonging to CBTC shall rights of any SH; or class of shares or
be vested in AB as the surviving bank without need of authorizing preferences in any respect
further act or deed. superior to those outstanding shares of any
class; or shortening or extending the
The records do not show when the SEC approved the corporate term or existence
merger, however, assuming that the effectivity date of the  It is not available in all
merger was the date of execution, the Court cannot agree instances where there
that petitioner no longer has any interest in the is an amendment of
promissory note. The fact that the promissory note was AOI under S16 subject
executed after the effectivity date of merger does not to the appraisal right
militate against petitioner. The agreement itself clearly or provisions
provides that all contracts irrespective of the date of governing general
execution entered in the name of CBTC shall be amendment. Unless
understood as pertaining to the surviving bank AB. such appraisal right is
Although the promissory note names CBTC as the payee, subject to the
the reference to CBTC in the note shall be construed as a preceding paragraph.
reference to petitioner bank. The Court holds that 2. In case of the sale, lease, transfer, mortgage,
petitioner has a valid cause of action against Sarmiento. exchange, pledge or other disposition of the
corporate assets
- Consolidated/surviving corporation will not 3. In cases of mergers and consolidation
absorb the employees of constituent corporation 4. May be exercised by dissenting SH in cases
absent specific provision in the merger falling under S42
agreement because the employees are not 5. However, a SH in closed corporation may for
considered “assets” nor “liabilities” of the any reason under S105 compel the
corporation. Management of the corporation to purchase his share at the fair
surviving/consolidated corporation has the value effectively granting the SH absolute
discretion to deny or absorb the employees, right of appraisal, if not denied by AOI and
while the employees may likewise refuse to be provided only that the corporation has
absorbed otherwise there will be forced labor. sufficient assets to cover debts and liabilities
exclusive of capital. This rule does not apply
S81 APPRAISAL RIGHT vs Pre-emptive right in ordinary corporation.
 Appraisal – right granted to dissenting or  The effect of appraisal right from the time the
objecting SH uncertain corporate or business demand of payment until the abandonment of
13 CORPORATION LAW
corporate action, all rights accruing to such  Membership acquired in a non-stock

shares including voting and dividend right shall be corporation
suspended provided the SH is not paid the value  Pursuant to the powers to issue stocks
of the shares within 30 days from the date of the and admit under S36(6), A non-stock
award, his voting and dividend right shall be corporation can provide manner of
restored admission of its members.
 The delinquent SH is entitled to receive  Cebu Country Club vs. Elizagake – can
dividends, but a SH exercising his appraisal right set criteria and standards to admit their
is not entitled to any of it. However, both of them member. The transferee of a
have no voting rights. membership certificate does not have
 A SH exercising his appraisal right who is also a the same right or privilege to compel the
director does not lose his right as a director corporation to transfer in his name to
unless his shares are fully paid for by the become a member of the non-stock.
corporation. The shares will still stand and remain However, in this case, it effectively
in his name in the books of the corporation. upholds the non-profit, non-stock
 A SH who does not paid his subscription in full corporation to determine who its
may exercise his appraisal right under S72. members shall be. It has the right to
Subscribers to shares of stocks not fully paid shall approve or disapprove an application for
have all the rights of a SH. The annotation of the propriety membership. As long as the
Stocks Certificate under S86 in order that right should not be exercised arbitrarily.
appraisal right may be exercised is not (In this case, Elizagake is a transferee of
mandatory; it is in the option of the corporation. Cebu Country Club. He filed an
application and used the application
Title 11 – Non-stock Corporation form of the club, however, it appears
 Sec. 3 with 87, one where no part of its income is that that form does not impose or
distributable as dividends, members, trustees or require a unanimous vote of the
officers. The provisions governing stock members to admit a member. He did not
corporation when pertinent except may be know that there was already an
covered by specific provisions of title 11. amendment of that provision in the
application form which was amended
S89 VOTING RIGHTS more than 19 years ago. He only
 Each member is entitled to one vote, thus presumed that the requirement for the
cumulative is not generally allowed in NS. vote is only the majority. But he was
(Whereas cumulative voting is a matter of right denied membership because one of the
granted to SH in a Stock Corporation) members objected. One of the defenses
 Except where the AOI or by-laws of non- was that the amendment was not
stock may broaden, limit or deny voting printed due to economic reason. The
rights of the members. i.e voting rights Court ruled that the said excuse was
by proxy, honorary members, inactive or flimsy and unconvincing. The Court
active members, etc. cannot fathom why such a prestigious
 Doctrine of limited capacity in the country club whose members are all
corporate form of business affluent did not have enough money to
cause the printing of an updated
 Membership in a non-stock is personal in nature application form. The court though
and non-transferable unless the by-laws provide admitted that a non-stock have the right
otherwise. to set standards and criterias, it should
14 CORPORATION LAW
not be, however, be arbitrary as

provided under Art. 19 of the Civil Code.)  There is exclusivity of stocks ownership in a close
corporation. The three qualifying conditions must be
(S93) Place of Meetings indicated in the AOI so that it may be considered
 In non-stock corporation, anywhere within the legally and technically a close corporation.
Philippines, otherwise provided in for the by-  The mere fact the H & W owns 99% of a Shares of
laws. Stocks in a corporation will not make it a close
corporation. All of the qualifying conditions required
Board of Directors in Section 96 must be present. (San Juan Structural
 GR: in a Stock corporation, BOD is composed of a Steel vs CA)
5-15 members except in close corporations, or  In cases of deadlock in a close corporation, what
banks is the appropriate remedy available? SEC 104
 EXCEPTION in non-stock, BOD can be more than  There are corporation or business activities in
15 members which a close corporation may not be organized.
(second paragraph of Sec. 96) i.e mining, oil
Term of Office companies, stock exchanges, banks, insurance
 In Stock, not more than 1 year; In Non-stock it companies, public utilities, education institutions
can be 3 years and corporations declared to be vested with
 Term of office is fixed by law public interest.
Tenure of Office Close Corporation vs Ordinary Stock Corporation:

 May be shorter or be longer; Close Corporation Ordinary Stock
Corporation
 In non-stock, the other corporate officers, i.e Number of SH are There are no specified
president, secretary or treasurer, may be directly specified persons and SH and no limit as to its
cannot exceed 20 number
elected by the members unless provided for in
Management may be Management shall be
the AOI vested with the SH vested with the SH not
 In Stock, the officers are voted by the BOD themselves rather by the BOD
 DIFFERENT TYPES OF CORPORATIONS ARE the BOD (97)
GOVERNED BY THE DIFFERENT PROVISIONS OF All of its shares of There are no
THE CODE stocks of any class are restrictions in the
subject to one or more transfer of shares
specified restrictions
TITLE 12 – CLOSE CORPORATION
and transfers of shares
Shares of stocks No prohibition; can be
Close Corporation cannot be listed in the listed in the stock
Sec. 96 – a close corporation is one whose AOI provides stock exchange or exchange
for 3 specific provisions: offered for sale in
1. All of the corporations issued stocks, exclusive of general public
treasury shares, shall be held of record by not SH can take an active management is lodged
participation in the with BOD
more than a specified number of persons not
management affairs
exceeding 20; by vesting
2. All of the issued stocks of all classes shall be management unto
subjected to one or more specified restrictions on them
transfers permitted by this title; SH who takes active SH is only liable if they
3. The corporation shall not issue or list in any stock the management acted in bad faith,
exchange or make any public offering of any of its corporate affairs in a fraudulently or gross
close corporation is negligence
stocks of any class
personally liable for
15 CORPORATION LAW
corporate torts unless A SH can withdraw NO WITHDRAWING SH.

the corporation has and compel the Can only exercise to
taken adequate corporation to pay the withdraw his shares
liability insurance value of his shares for through appraisal rights
(100[5]) any reason with the AND MAY DONE ONLY
The directors, if any, Directors must act as a limitation only that IN SPECIFIED
can validly act even body at a duly the corporation has INSTANCES or unless
without a meeting constituted meeting sufficient assets to they sell their shares for
(100) cover its liabilities a consideration to
Agreements between The SH agreement exclusive of capital another person
SH regarding the cannot limit the stock
operations and affairs discretion the BOD the The proper forum can Courts cannot interfere
of the corporation can management of the interfere in the in the business
validly be made corporate affairs management of a judgment of the
The AOI may provide The BOD are the ones close corporation in BOD/SH
that all officers and who are to elect the cases of deadlocks
even employees shall other officers of the even if the BOD/SH
be elected or corporation are acting in good
appointed by the SH faith (104); it may
(97) even appoint a
The AOI may provide AOI and by-laws can provisional director
for a greater quorum provide for a greater who may cast the
and voting quorum and voting deciding vote. The
requirements in requirement in business judgment
meetings of both SH director’s meeting, but rule will not apply to a
and directors (97[3]) cannot provide for a close in cases of
greater quorum and deadlocks. It may also
voting requirement in order the dissolution;
SH’s meeting, otherwise can even compel any
provided by law SH to pay the
Restriction on transfer Restrictions on corporation
of shares should be transfers of shares are irrespective of the
indicated in the AOI, valid and binding if URE.
by-laws and stock indicated in the AOI and Any SH may petition Dissolution may be had
certificate stock certificates the SEC for corporate only on the grounds
(102) if pre-emptive (39) Pre-emptive rights dissolution on the provided by the
right is not denied, the of SH may be denied. grounds among other provisions of the Code
right of SH to exercise Even if it is not denied, provided for in Sec. on dissolution and PD
his right to pre- A SH cannot exercise his 105 and includes 902-A, as amended
emption is absolute. pre-emptive right if his dishonesty
(Without exception) shares is to be issued in A transferee cannot A transferee can
extend to all stock to compliance with the compel the compel the corporation
be issued including requirements of the law corporation to register to register in its book
reissuance of treasury regarding minimum in its books such such transfer by way of
shares, whether for stock ownership of the transfer if it breaches writ of mandamus
money, property, public or shares to be the provisions of the
personal services or issued in good faith AOI (99)
previously incurred with the consent and
indebtedness, a SH approval of the SH SAMPLE QUESTIONS:
can exercise this right. either in exchange of  The corporation issues shares of stocks for
property needed by the the purpose of payment of its debts and
corporation or payment
liabilities, may a SH exercise his pre-emptive
previously incurred
indebtedness. right? [NO. SEC. 39] Will your answer be the
16 CORPORATION LAW
same if it is a close corporation? [NO. SEC.

102]  SEC’s discretion in respect to management of a close
 The AOI of ordinary is amended changing the corporation in the event of a deadlock. It may:
principal office from QC to Manila, a SH 1. Cancel or alter any provision in the AOI, by-laws
objects and compels the corporation that he or any SH’s agreement
be paid the value of shares, is the objection 2. Cancel, alter or enjoin any resolution or other act
valid? [NO. cannot exercise right of of the corporation or its board of directors,
appraisal]; Will your answer be the same if it stockholders or officers
is a close corporation? [NO can withdraw and 3. Prohibit any act of the corporation or its BOD, SH
compel to pay the value of his shares for any or officers or other persons party to the action
reason] 4. Requiring the purchase of the par value of the
 shares of any SH, either by the corporation
regardless of availability of unrestricted earnings
- A close corporation may partake the nature of a or by the other SH;
partnership in that the SH take an active role in 5. Appointment of a provisional director
the management of the corporate affairs either 6. Dissolving the corporation; or
as directors, officers or even partners in 7. Other relief as the circumstances may warrant.
management which is akin to the partnership
form of business.
- A corporation is not considered as a close
corporation when at least 2/3 of its voting stocks Manuel R. Dulay Enterprises vs. Court of Appeals
is owned or controlled by another corporation [GR 91889, 27 August 1993]
which is not a close corporation. Even if another Second Division, Nocon (J): 3 concur, 1 took no part
corporation owns or controls 2/3 of the voting
F: Manuel R.Dulay Enterprises, Inc., a domestic, owned a
stocks of a close corporation, the latter may still
property covered by TCT 17880 4 and known as Dulay
be considered as such close corporation if the Apartment consisting of 16 apartment units on a 689
corporation owning or controlling the shares is square meter lot, more or less, located at Seventh Street
also a close corporation. (now Buendia Extension) and F.B. Harrison Street, Pasay
- When the proposed business is affected with City. The corporation through its president, Manuel Dulay,
public interest, the formation of a close obtained various loans for the construction of its hotel
corporation may not be possible and the project, Dulay Continental Hotel (now Frederick Hotel). It
even had to borrow money from Virgilio Dulay to be able
determination of whether or not it should be
to continue the hotel project. As a result of said loan,
vested with public interest within its domain. Virgilio Dulay occupied one of the unit apartments of the
- A selling SH may not be able to transfer his shares subject property since 1973 while at the same time
if to do so would violate the qualifying conditions managing the Dulay Apartment as his shareholdings in the
indicated in the AOI unless number 5 Sec. 99 is corporation was subsequently increased by his father. On
made to apply. 23 December 1976, Manuel Dulay by virtue of Board
Resolution, of the corporation sold the subject property to
- The SH concerned is not, however, left without
spouses Maria Theresa and Castrense Veloso in the
any recourse as he may compel the close
amount of P300,000.00 as evidenced by the Deed of
corporation to purchase his shares at their fair Absolute Sale. Thereafter, TCT 17880 was cancelled and
value for any reason subject only to the condition TCT 23225 was issued to Maria Theresa Veloso.
laid down in Sec. 105 of the code. Subsequently, Manuel Dulay and the spouses Veloso
- The transferee, on the other hand, may rescind executed a Memorandum to the Deed of Absolute Sale of
the transaction or to recover from the transferor 23 December 1976 dated 9 December 1977 giving Manuel
Dulay within 2 years or until 9 December 1979 to
under any applicable warranty, express, or
repurchase the subject property for P200,000.00 which
implied. was, however, not annotated either in TCT 17880 or TCT
23225. On 24 December 1976, Maria Veloso, without the
17 CORPORATION LAW
knowledge of Manuel Dulay, mortgaged the subject Pasay in Civil Case 2880-P. Thereafter, the 3 cases were
property to Manuel A. Torres for a loan of P250,000.00 jointly tried and the trial court rendered a decision in favor
which was duly annotated as Entry 68139 in TCT 23225. of Pabalan and Torres. Not satisfied with said decision, the
Upon the failure of Maria Veloso to pay Torres, the corporation, et al. appealed to the Court of Appeals which
subject property was sold on 5 April 1978 to Torres as the rendered a decision on 23 October 1989, affirming the
highest bidder in an extrajudicial foreclosure sale as trial court decision. On 8 November 1989, the corporation,
evidenced by the Certificate of Sheriff's Sale issued on 20 et al. filed a Motion for Reconsideration which was denied
April 1978. On 20 July 1978, Maria Veloso executed a on 26 January 1990. The corporation, et al. filed the
Deed of Absolute Assignment of the Right to Redeem in petition for review on certiorari. During the pendency of
favor of Manuel Dulay assigning her right to repurchase the petition, Torres died on 3 April 1991 as shown in his
the subject property from Torres as a result of the death certificate and named Torres-Pabalan Realty &
extrajudicial sale. As neither Maria Veloso nor her Development Corporation as his heir in his holographic
assignee Manuel Dulay was able to redeem the subject will dated 31 October 1986.
property within the one year statutory period for
redemption, Torres filed an Affidavit of Consolidation of I: Whether the sale of the subject property between
Ownership 13 with the Registry of Deeds of Pasay City and spouses Veloso and Manuel Dulay has no binding effect on
TCT 24799 was subsequently issued to Torres on 23 April the corporation as Board Resolution 18 which authorized
1979. On 1 October 1979, Torres filed a petition for the the sale of the subject property was resolved without the
issuance of a writ of possession against spouses Veloso approval of all the members of the board of directors and
and Manuel Dulay in LRC Case 1742-P. However, when said Board Resolution was prepared by a person not
Virgilio Dulay appeared in court to intervene in said case designated by the corporation to be its secretary.
alleging that Manuel Dulay was never authorized by the
corporation to sell or mortgage the subject property, the R: Section 101 of the Corporation Code of the Philippines
trial court ordered Torres to implead the corporation as an provides that "When board meeting is unnecessary or
indispensable party but the latter moved for the dismissal improperly held. Unless the by-laws provide otherwise,
of his petition which was granted in an Order dated 8 April any action by the directors of a close corporation without
1980. On 20 June 1980, Torres and Edgardo Pabalan, real a meeting shall nevertheless be deemed valid i f: (1) Before
estate administrator of Torres, filed an action a gainst the or after such action is taken, written consent thereto is
corporation, Virgilio Dulay and Nepomuceno Redovan, a signed by all the directors; or (2) All the stockholders have
tenant of Dulay Apartment Unit No. 8-A for the recovery actual or implied knowledge of the action and make no
of possession, sum of money and damages with prompt objection thereto in writing; or (3) The directors
preliminary injunction in Civil Case 8198-P with the then are accustomed to take informal action with the express
Court of First Instance of Rizal . On 21 July 1980, the or implied acquiesce of all the stockholders; or (4) All the
corporation filed an action against spouses Veloso and directors have express or implied knowledge of the action
Torres for the cancellation of the Certificate of Sheriff's in question and none of them makes prompt objection
Sale and TCT 24799 in Civil Case 8278-P with the then thereto in writing. If a directors' meeting is held without
Court of First Instance of Rizal. On 29 January 1981, proper call or notice, an action taken therein within the
Pabalan and Torres filed an action against spouses corporate powers is deemed ratified by a director who
Florentino and Elvira Manalastas, a tenant of Dulay failed to attend, unless he promptly files his written
Apartment Unit No. 7-B, with the corporation as objection with the secretary of the corporation after
intervenor for ejectment in Civil Case 38-81 with the having knowledge thereof." Herein, the corporation is
Metropolitan Trial Court of Pasay City which rendered a classified as a close corporation and consequently a board
decision on 25 April 1985, in favor of Pabalan, et al., resolution authorizing the sale or mortgage of the subject
ordering the spouses Manalastas and all persons claiming property is not necessary to bind the corporation for the
possession under them to vacate the premises; and to pay action of its president. At any rate, a corporate action
the rents in the sum of P500.00 a month from May 1979 taken at a board meeting without proper call or notice in a
until they shall have vacated the premises with interest at close corporation is deemed ratified by the absent
the legal rate; and to pay attorney's fees in the sum of director unless the latter promptly files his written
P2,000.00 and P1,000.00 as other expenses of litigation objection with the secretary of the corporation after
and for them to pay the costs of the suit. Thereafter or on having knowledge of the meeting which, in this case,
17 May 1985, the corporation and Virgilio Dulay filed an Virgilio Dulay failed to do. The corporation's claim that the
action against the presiding judge of the Metropolitan sale of the subject property by its president, Manuel
Trial Court of Pasay City, Pabalan and Torres for the Dulay, to spouses Veloso is null and void as the alleged
annulment of said decision with the Regional Trial Court of Board Resolution 18 was passed without the knowledge
18 CORPORATION LAW
and consent of the other members of the board of that the drivers are entitled to $120.00 per every year of
directors cannot be sustained. Virgilio E. Dulay's service subject to exchange rates prevailing that time.
protestations of complete innocence to the effect that he
never participated nor was even aware of any meeting or The NLRC likewise ruled that SFNEI as well as CFTI’s
resolution authorizing the mortgage or sale of the subject president and vice president Sergio Naguiat and Antolin
premises is difficult to believe. On the contrary, he is very Naguiat should be held jointly and severally liable to pay
much privy to the transactions involved. To begin with, he the drivers. The NLRC ruled that SFNEI actively managed
is an incorporator and one of the board of directors CFTI and its business affairs hence it acted as the
designated at the time of the organization of Manuel R. employer of the drivers.
Dulay Enterprises, Inc. In ordinary parlance, the said entity
is loosely referred to as a "family corporation." The ISSUE: Whether or not the ruling of the NLRC is correct.
nomenclature, if imprecise, however, fairly reflects the
cohesiveness of a group and the parochial instincts of the
HELD: It is only partially correct.
individual members of such an aggrupation of which
Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of
1. It is correct when it ruled that the Sergio Naguiat
its incorporators being close relatives namely, 3 children
and their father whose name identifies their corporation. is jointly and severally liable to pay the drivers
the award of separation pay in the amount so
Besides, the fact that Virgilio Dulay on 24 June 1975
determined. As president of CFTI, Sergio Naguiat
executed an affidavit that he was a signatory witness to
the execution of the post-dated Deed of Absolute Sale of is considered an “employer” of the dismiss ed
employees who is therefore liable for the
the subject property in favor of Torres indicates that he
obligations of the corporation to its dismissed
was aware of the transaction executed between his father
employees. Moreover, CFTI, being a close family
and Torres and had, therefore, adequate knowledge about
the sale of the subject property to Torres. Consequently, corporation, is liable for corporate torts and
stockholders thereof shall be personally liable for
the corporation is liable for the act of Manuel Dulay and
corporate torts unless the corporation has
the sale of the subject property to Torres by Manuel Dulay
is valid and binding. obtained reasonably adequate liability insurance
(par. 5, Section 100, “Close Corporations”,
Corporation Code). Antolin Naguiat is absolved
NAGUIAT vs. NLRC
because there was insufficient evidence as
against him.
F: Sergio Naguiat was the president of Clark Field Taxi, Inc. 2. SFNEI is not liable jointly or s everally with CFTI.
(CFTI) which supplied taxi services to Clark Air Base. At the SFNEI has nothing to do with CFTI. There is no
same time, Naguiat was a director of the Sergio F. Naguiat sufficient evidence to prove that it actively
Enterprises, Inc. (SFNEI), their family owned corporation managed CFTI especially so when even the
along with CFTI. drivers testified that their employer is CFTI and
that their payroll comes from CFTI. Further, SFNEI
In 1991, CFTI had to close due to “great financial losses was into trading business while CFTI was into taxi
and lost business opportunity” resulting from the phase- services.
out of Clark Air Base brought about by the Mt. Pinatubo
eruption and the expiration of the RP-US military bases
agreement. SPECIAL CORPORATIONS
2 types:
CFTI then came up with an agreement with the drivers
1. Education corporations – governed by
that the latter be entitled to a separation pay in the
amount of P500.00 per every year of service. Most of the special law (education act) and general
drivers accepted this but some drivers did not. The drivers provisions of the corporation code.
who refused to accept the separation pay offered by CFTI 2. Religious corporations
instead sued the latter before the labor arbiter.
 Education corporations – governed by special law
The labor arbiter ruled in favor of the taxi drivers. The (education act) and general provisions of the
National Labor Relations Commission affirmed the labor corporation code. These institutions of learning, once
arbiter. It was established that when CFTI closed, it was in
recognized by the government as such are mandated
profitable standing and was not incurri ng losses. It ruled
by law to be incorporated within 90 days under the
19 CORPORATION LAW
provisions of the corporation code, and must, comply or own properties but no powers to dispose
with the requirements and procedure laid down or alienate its real properties. Unless it
thereunder. Their failure to do so will not immune the obtains an order by application for leave
education institution from suit as a corporation. The from RTC where the property is located for
SEC, however, shall not act on the incorporation of purposes of disposition and encumberance.
any educational corporation unless the provisions of  If there is rules to dispose or alienate in the
S107 is complied with. rules of discipline provides for manner in
 The governing board shall not be less that 5 but not how it may dispose or alienated, no need for
more than 15; in case of a non-stock educational court intervention.
institution, the governing board must be divisible by 5 2. Religious society – organized by not less than 5
only. (5, 10, or 15 only) and not more than 15.
 Term of office can be 5 years unless otherwise
provided in the AOI. They shall classify themselves - The AOI of a corporation sole must be verified
that at least 1/5 of their membership shall expire setting forth the following:
every year. 1. The he is the chief archbishop, bishop, priest,
 (Art. 14, sec. 4 of the Constitution) educational minister, rabbi or presiding elder of his
institutions other than those established by religious religious denomination, sec or church and
order, etc. shall be owned solely by Filipino citizens or that he desires to become a corporation
60% owned. The control or administration shall be sole;
vested in Filipino citizen. A foreign cannot qualify and 2. That the rules, regulations and discipline of
act as a governing board in educational institution. his religious denomination, sect or church
Except: educational institutions established by are not inconsistent with his becoming a
religious order, mission board or charitable corporation sole and do not forbid it
institutions or those that are created for the 3. That as such chief archbishop, bishop, etc., is
dependence of other countries, i.e international charged with the administration of the
school, brent school, etc. temporalities and the management of the
 Does this mean that an educational affairs, estate and properties of his religious
institution may be formed as stock or NS denomination, sect or church within his
educational corporation? No. they can only territorial jurisdiction, describing such
be organized under bp 232 as non-stock territorial jurisdiction
corporations and those organized as stock 4. The manner in which any vacancy occurring
corporations are being urged to convert itself in the office of the chief archbishop, bishop,
as NS corporation. etc., is required to be filled, according to the
rules, regulations or discipline of the
RELIGIOUS INSTITUTION religious denomination, sect or church to
1. Corporation sole (110) those formed or organized which he belongs; and
by one single individual. But should be organized 5. The place where the principal office of the
by bishop, rabbi, priest or residing elder or head corporation sole is to be established and
of any religious denomination, sect or church. located, which place must be within the
 Compare to corporation sole under Sec. 19. Philippines
Exception is the corporation sole of religious
institution - Upon filing the verified AOI along with the
 Under 112, it commences to exist and vested documents required in Sec. 112 wi th the SEC
with juridical personality upon the filing of immediately becomes endowed with corporate
the verified AOI with SEC. personality. This is an exception to the rule that a
 The corporation sole has the same powers, corporation acquires juridical personality only
rights power and authority to acquire, hold
20 CORPORATION LAW
upon the issuance of a certificate of

incorporation by the said government agency. Issue: Whether or not the LRC may be compelled to
- The registration of real property in the name of a register the land in RCAD’s name
corporation sole will not vest unto the head
thereof ownership of the property which would Ruling: YES. Lands held in trust for specific purposes may
devolve upon the church or congregation be subject of registration, and the capacity of a
acquiring it. corporation sole, like RCAD, to register lands belonging to
it is acknowledged, and title thereto may be issued in its
name. The bishops or archbishops, as the case may be, as
Roman Catholic Apostolic Adm. Of Davao, Inc. v. Land corporation's sole are merely administrators of the church
Registration Commission properties that come to their possession, and which they
Facts: On October 4, 1954, Mateo L. Rodis, a Filipino hold in trust for the church. Through this legal fiction,
citizen and resident of the City of Davao, executed a deed church properties acquired by the incumbent of a
of sale of a parcel of land located in the same city in favor corporation sole pass, by operation of law, upon his death
of the Roman Catholic Administrator of Davao, Inc., not to his personal heirs but to his successor in
(RCAD) a corporation sole organized and existing in office.Although a branch of the Universal Roman Catholic
accordance with Philippine laws, with Msgr. Clovis Apostolic Church, every Roman Catholic Church in
Thibault, a Canadian citizen, as actual incumbent. different countries, if it exercises its mission and is lawfully
incorporated in accordance with the laws of the country
The Commissioner of the LRC denied RCADs request to where it is located, is considered an entity or person with
register the parcel of land in its name, holding that in view all the rights and privileges granted to such artificial being
of the provisions of Sections 1 and 5 of Article XIII of the under the laws of that country, separate and distinct from
Philippine Constitution, RCAD was not qualified to acquire the personality of the Roman Pontiff or the Holy See,
private lands in the Philippines in the absence of proof without prejudice to its religious relations with the latter
that at least 60 per centum of the capital, property, or which are governed by the Canon Law or their rules and
assets of the Roman Catholic Adminis trator of Davao, Inc., regulations.
was actually owned or controlled by Filipino citizens, there
being no question that the present incumbent of the When the specific provision of the Constitution invoked by
corporation sole was a Canadian citizen. respondent Commissioner (section 1, Art. XIII), was under
consideration, the framers of the same did not have in
The RCAD argued that a corporation sole, irrespective of mind corporations sole (prohibition limited to foreign
the citizenship of i ts incumbent, is not prohibited or corporation). The corporation sole by reason of their
disqualified to acquire and hold real properties. The peculiar constitution and form of operation have no
Corporation Law and the Canon Law are explicit in their designed owner of its temporalities, although by the
provisions that a corporation sole or "ordinary" is not the terms of the law it can be safely implied that they
owner of the properties that he may acquire but merely ordinarily hold them in trust for the benefit of the Roman
the administrator thereof. Catholic faithful of their respective locality or diocese.
They can not be considered as aliens because they have
The Canon Law also specified that church temporalities no nationality at all. In determining, therefore, whether
are owned by the Catholic Church as a "moral person" or the constitutional provision requiring 60 per centum
by the dioceses as minor "moral persons" with the Filipino capital is applicable to corporations sole, the
ordinary or bishop as administrator. And elaborating on nationality of the constituents of the diocese, and not the
the composition of the Catholic Church in the Philippines, nationality of the actual incumbent of the parish, must be
RCAD explained that as a religious society or organization, taken into consideration. In the present case, even if the
it is made up of 2 elements or divisions — the clergy or question of nationality be considered, the aforesaid
religious members and the faithful or lay members. constitutional requirement is fully met and satisfied,
considering that the corporation sole in question is
The 1948 figures of the Bureau of Census and Statistics composed of an overwhelming majority of Filipinos.
showed that there were 277,551 Catholics in Davao and
aliens residing therein numbered 3,465. Even granting - A corporation sole consists of one person only, and his
that all these foreigners are Catholics, RCAD contends successors (who will always be one at a time), in some
particular station, who are incorporated by law in order
that Filipino citizens form more than 80 per cent of the
to give them some legal capacities and advantages,
entire Catholics population of that area.
21 CORPORATION LAW
particularly that of perpetuity, which in their natural

persons they could not have had. In this sense, the king R: In Manila Electric Comp. vs. Castro-Bartolome, a juridical person,
is a sole corporation; so is a bishop, or deans, distinct private reposndent in particular, is disqualified under the 1973
from their several chapters Constitution from applying registration in its name alienable public land,
- Characteristics of corporation sole: as such land ceases to be public land “only upon the issuance of title to
(1) the corporation sole, unlike the ordinary any Filipino citizen.” However, the Meralco vase is no longer deemed to
corporations which are formed by no less than 5 be binding and that the correct rule is that alienable public land held by
incorporators, is composed of only one person, usually a possessor, personally or through its predecessors-in-interest, OCENO
for 30 years is converted to private property by mere lapse or
the head or bishop of the diocese, a unit which is not
completion of said period, ipso jure.
subject to expansion for the purpose of determining
any percentage whatsoever; In this case, the land in question was acquired by INC from Aquelina
dela Cruz in 1947, who, in turn acquired by same by purchase from
(2) the corporation sole is only the administrator and Ramoses. The completion by private respondents of this statutory 30-
not the owner of the temporalities loca ted in the year period that the land in question ceased by operation of law to be
territory comprised by said corporation sole; part of the public domain and private respondent could have its title
(3) such temporalities are administered for and on confirmed through appropriate proceedings as under the Constitution.
behalf of the faithful residing in the diocese or territory If in 1966, the land in question was converted ipso jure into private land,
of the corporation sole; and it remained so in 1974 when the registration proceedings were
commenced. The prohibition under the 1973 Constitution would have
(4) the latter, as such, has no nationality and the no application.
citizenship of the incumbent Ordinary has nothing to
do with the operation, management or administration Republic of the Philippines vs. IAC and Roman Catholic Bishop of
Lucena
of the corporation sole, nor affects the citizenship of
the faithful connected with their respective diocese or
FACTS: Roman Catholic Bishop of Lucena, represented by Msgr. Jose
corporation sole. Sanchez, filed an application of confirmation of title to 4 parcels of land.
3 of said parcels, denominated as Lots 1, 2, and 3 are situated in Barrio
Masin, Municipality of Candelaria, Quezon Province and
DIRECTOR OF LANDS vs. CA and INC th
the 4 parcel located in Barrio Bucal (Taguan), same
municipality and province. The court ordered the
F: Private respondent INC filed an application with CFI For registration of registration of the four parcels with the improvements
a parcel of land in Cavite. It was alleged that it was the owner in fee thereon in the name of the RCB of Lucena, a religious
simple of the land having acquired title thereto by in its favor and that corporation sole duly registered and existing under the
applicant and its predecessors-in-interest had been in actual, laws of the RP. The SOLGEN filed a MR claiming that the
continuous, public, peaceful and adverse possession and occupation of applicant claimed title to the various properties through
said land for more than 30 years. Private respondents prayed that either purchase or donation dating as far back as 1928 and
should the Land Registration Act be not applicable, the provisions of the that the applicant did not have an imperfect title or title in
Comm. Act No. 141 as amended by RA 6236 be applied as applicant fee simple to the parcel of land being applied for. The
and its predecessors-in-interest had been in possession of the land for issue raised in this case involves the question of whether
more than 30 years and had introduced improvements thereon. the Roman Catholic Bishop of Lucena, as a corporation
sole is qualified to apply for confirmation of its titleto the
The Dir. Of Lands opposed the application stating that the applicant and four (4) parcels of land subject of this case, that the
its predecessors-in-interest did not possess sufficient title to acquire Roman Catholic Church, as acorporation, is disqualified
ownership in fee simpleof the parcel of land applied for; neither the from owning properties from the public domain based on
applicant nor its predecessors-in-interest have been in OCENO of the Art. XIV,Sec. 11 of the 1973 Constitution and that the
land in question and the subject parcel is a portion of the public registration was applied after the effectivity of the1973
domain. constitution.
The TC rendered judgement granting private respondent’s application ISSUE:

for registration of title. Whether or not a corporation sole should be treated as an
ordinary private corporation, forpurpose of the
I: WON the registration of the land in question in favor of the INC application of Art. XIV, Sec. 11 of the 1973 Constitution
should be upheld
22 CORPORATION LAW
W/N the lots are part of the public domain.  PNB vs CFI – when the period of the
corporate life expires, the corporation ceases
RULING: The parties do not dispute that since the to be a body politic for the purpose of
acquisition of the four lots by the applicant, it has been in
continuing the business for which it was
continuous possession and enjoyment thereof, and such
possession, together with its predecessors -in-interest, organized. There is no need for the
covering a period of more than 52 years with respect to institution of a quo warranto proceeding to
lots 1 and 2 and about 62 years with respect to lot 3 and determine the time and date of the
more than 39 years with lot 4. dissolution of the corporation because the
period is provided in the AOI. When such
In 1980, which developed, affirmed and reaffirmed the period expires without any extension
doctrine that open, exclusive and undisputed possession
provided in the law, the corporation is
of alienable public land for the period prescribed by law
creates the legal fiction whereby the land, upon dissolved automatically insofar as the
completion of the requisite period ipso jure and without the continuation of its business is concerned.
need of judicial or other sanction, ceases to be public land
and becomes' private property. (DIRECTOR OF LANDS vs.  Voluntary Dissolution; 3 modes:
IAC, supra, p.518).No proof being admissable to overcome 1. Voluntary Dissolution where no creditors are
a conclusive presumption, confirmation proceedings
affected (S118)
would, intruth be little more than a formality, at the most
2. VD where creditors would be affected (S119)
limited to ascertaining whether the possession claimedis
of the required character and length of time, and 3. Shortening of corporate term [which would
registration thereunder would not confer title, butsimply partake an amendment of the corporation]
recognize a title already vested.We can say the following: (S120 in relation to S27)
A corporation sole is a special form of corporation usually  In S120, shortening corporate term which
associated with theclergy.A corporation sole consists of results to the dissolution of the corporation
one person only, and his successors (who will always be
requires approval of the SEC.
one at atime), Pertinent to this case is the provision of
 The vote or the written assent of the SH or
Sec. 113 Batas Pambansa Blg. 68 which reads as
follows:Sec. 113. representing at least 2/3 of the OCS or 2/3 of
Acquisition and alienation of property the voting members will be required. But not
. sufficient in cases of special amendment (as
— provided in S37), must be cast for the
Any corporation sole may purchase and hold real estate meeting duly called for that purpose either
and personal property for its church, charitable,
by the SH themselves or duly representative
benevolent or educational purposes, and may receive
bequests or gifts for such purposes or proxy.
…
 Involuntary Dissolution – by way of verified
DISSOLUTION, LIQUIDATION AND WINDING UP petition either by complaint or motu proprio
upon the grounds provided for by the law. Such
DISSOLUTION – extinguishment of corporation franchise as:
and termination of its corporate existence. a. Non-user of corporate franchise
b. Continuous inoperation for at least 5 years
 3 modes c. Failure to file by-laws
1. Expiration of corporate term d. Fraud in procuring representation under PD 902-
2. Voluntary surrender of corporate franchise A
3. Involuntary dissolution e. Serious misrepresentation
f. Refusal to comply with the lawful orders of the
 In expiration of corporate term, there is SEC
automatic dissolution of the corporation. g. Violation of the provision of Corporation Code
23 CORPORATION LAW
h. Under certain circumstances in cases of gross remaining assets, if any after payment of debts
mismanagement or fraudulent conduct of its and liabilities, to the SH in proportion to their
affairs; or respective stock holdings.
i. Any other ground that may be provided for by  The dissolved corporation is granted 3 years and
other laws or special laws. still vested with body politic for another 3 years
as a corporate body but only for the purpose of
 Involuntary dissolution should be by a liquidation and winding up of all corporate
judicial decree and it is an extreme remedy affairs; or for the purpose of prosecuting or
so that the court may proceed with extreme defending suit for or against it and enabling it to
caution for forfeiture of corporate franchise settle and close its affairs to dispose of or convey
and forfeiture will not be allowed except for its properties to the SH in proportion to their
express limitation or abuse of corporate stock holding
power.  Upon the expiration of 3 year period, the juridical
 The relief of dissolution will be awarded only personality of the dissolved corporation ceases to
where the SH are not protected in some exist for all intent and purpose and cannot sue or
other way. be sued. No more valid existence.
 Once dissolved, the dissolved corporation, not
only terminates its primary franchise to be and 3 modes:
act as corporation, but also prevents it from 1. By the BOD themselves;
exercising other or secondary franchises which 2. By appointment of assignee/trustee
was conferred to it. It terminates to enter into 3. By appointment of receiver/liquidating trustee
contracts or continue its business as a going
concern.  If the liquidation through BOD, it will only have a
 A corporation whose corporate life expires, period for 3 years. Claims not filed within 3 years,
cannot purse its business in which it was become unenforceable as it has no more
organized and cannot apply a certificate for corporate entity existing against which they can
secondary franchise for it is not capable of be enforce. Actions pending for or against the
receiving any grant for the purpose of continuing corporation when the 3 years expires are abated.
its business  If the liquidation is through trustee, assignee,
 Buenaflor vs. CAMSUR INDUSTRY – it is no longer receiver, or liquidator, the 3 year period imposed
possessed with a juridical personality to continue by law will not apply. If they are appointed, the
its business and neither can enforce a contracts assets, properties or rights of the dissolved
executed prior of its dissolution for the purpose corporation will be conveyed to them, and as
of continuing its business organization. Debts due effect, the said appointed person wil l be the legal
to or by the corporation is not extinguished from owner of the assets, properties or rights
its dissolution as provided in Sec. 145 of the code. conveyed to it subject to the beneficial interest of
No rights or remedy in favor of or against any the SH and creditors alike. Thus, he can continue
corporation, SH, members, BOD, trustees or suing or prosecuting any case even beyond the 3
officers nor any liability incurred from them shall year period for the benefit of the SH and
be removed or impaired either by dissolution of creditors alike. The appointed person has now
the said corporation or subsequent amendment the legal personality for the dissolved
or repeal of the AOI or by-laws. corporation.
 Liquidation and winding up – refer to the act of Question:

the dissolved corporation to collect all its assets,  May a dissolved corporation, transfer all its
properties and or its rights. Payment of all its assets and properties to a new corporation for
liabilities and ultimate distribution of its the purpose of reincorporating the new and the
24 CORPORATION LAW
business of the dissolved one? Yes. Chiongavio vs. created or over its creation and cannot do
IAC, the BOD is not normally permitted to business in any other state or forum
undertake activity outside the normal business of  Exception: By virtue of state comity, a foreign
the dissolved corporation but nothing will corporation may be able to transact business in
prevent the SH from conveying the stock holdings another forum subject to the law, rules and
toward the creation of a new corporation to regulations of the foreign state.
continue the business of the old one. The SC  Under S123, no corporation transacting business
ruled that winding up is the sole activity of the in the Philippines without a license shall be
dissolved corporation. It does not intend to permitted to maintain or intervene in any action,
incorporate a new. However, if it does, it is not suit or proceeding in any court or administrative
unlawful for the old BOD to negotiate or transfer agency in the Philippines.
the assets to the new corporation intended to be  GR: (Universal Shipping vs IAC) it is not the lack of
created as long as the SH gave their consent. the required license but doing business without
the license which bars the foreign corporation
 (S122[3]) Upon winding up of the corporate from access of our courts.
affairs, any assets distributable to the creditors,  What constitutes doing or transacting business as
SH or member who are unknown or cannot be to bar a foreign corporation from access to our
found are to be escheated to the courts if it does so without the requisite license?
city/municipality where the assets are located. (Agilant Tech vs. Integrated Silicone) the term
“doing or transacting” business implies a
 FOREIGN CORPORATION (S123) – one that is continuity of commercial dealings and
formed/organized or existing under any laws arrangements contemplates the performance of
other than those of the Philippines and whose acts or works incident and/or to the progressive
laws allows Filipinos or Philippine Corporation to prosecution of the purpose and objects of its
do business in its own country or state of organization. A foreign corporation can sue or
corporation. gain access to Philippine courts if it is not doing
 GR: Test: INCORPORATION TEST is applied in business in the Philippines. i.e isolated
determining whether a corporation is domestic transaction or one single act does not constitute
or foreign. If it is incorporated under the laws continuing commercial dealing or transaction; or
other than the Philippines, thus it is a foreign corporation does not enforce any legal or
corporation. If incorporated under the Philippine contractual rights arising from or growing out any
laws, it is Domestic Corporation. business transaction which has transacted in the
 EXCEPTION: CONTROLLING TEST IN CASES OF Philippines; or the purpose of the suit is to
WAR: in times of war or purpose of national protect corporate name, trademark or goodwill.
security, the citizenship of the controlling SH will (Paris Convention); or based on the violation of
determine the nationality of the corporation. A RPC (Lacoste vs. Fernandez); or if it is not
corporation former organized under the maintaining a suit but rather defending a case
Philippine laws (Trade Liberization of the filed against it; or if the party is estopped to
Philippines) composed of the foreign SH is challenge the personality by merely entering into
considered a domestic corporation because it a transaction or contract
was created under TLP in relation to the
Corporation Code. Requisites for a foreign corporation to transact business
in the Philippines:
 General Rule: The existence of the Corporation
1. A license or permit to do so; and
remains within the territorial boundaries of the 2. A certificate of authority from the appropriate
state creating it and may have no existence government agency.
beyond the boundaries of the State in which it is
Procedure for application of a license:
25 CORPORATION LAW
1. Submission to the SEC of its articles of incorporation

and by-laws, certified in accordance with law, and  Foreign corporations already issued a license to
their translation to an official language of the transact business in the Philippines prior to the
Philippines, if necessary. effectivity of the Code continue to have such
2. The application shall be under oath and, unless authority under the terms and conditions of its
already stated in its articles of incorporation, shall license, subject to the provisions of the Code and
specifically set forth the following: other special laws.
a. The date and term of incorporation;  Upon compliance with the provisions of Sec. 125,
b. The principal offi ce of the corporation in the other special laws and the rules and regulations
country or state of incorporation; implementing them, the SEC shall thereafter iss ue the
c. The resident agent; license.
d. The place in the Philippines where the  Upon issuance of the license, such foreign corporation
corporation intends to operate; may commence to transact business in the Philippines
e. The purpose or purposes of the corporation; and continue to do so for as long as it retains its
f. The directors and officers of the corporation; authority to act as a corporation under the laws of the
g. Its authorized capital stock; country or state of i ts incorporation, unless such
h. Its outstanding capital stock; license is sooner surrendered, revoked, suspended or
i. The amount actually paid in; and annulled in accordance with this Code or other special
j. Such additional information as may be necessary laws.
or appropriate in order to enable the SEC to  Within 60 days after the issuance of the license, a
determine whether such corporation is entitled foreign corporation, except those engaged in foreign
to a license to transact business in the banking or insurance, shall deposit with the SEC, for
Philippines, and to determine and assess the fees the benefit of creditors, securities consisting of bonds
payable. or other evidence of indebtedness of the Philippine
3. Attached to the application for license shall be a duly government or its political subdivisions or
executed certificate under oath by the authorized instrumentalities, or of government owned or
official or officials of the jurisdiction of its controlled corporations and entities, shares of stock
incorporation, attesting to the fact that the laws of in “registered enterprises,” shares of stock in
the country or state of the applicant allow Filipino domestic insurance companies and banks, or any
citizens and corporations to do business therein, and combination thereof, with an actual market value of
that the applicant is an existing corporation in good P100,000.00. Additional securities may be required by
standing. If such certificate is in a foreign language, a the SEC if the actual market value of the securities on
translation thereof in English under oath of the deposit has decreased by at leas t 10%.
translator shall be attached thereto.  The objective of the law requiring the license is not to
4. The application for a license to transact business in prevent the foreign corporation from performing
the Philippines shall likewise be accompanied by a isolated or single acts, but to prevent it from
statement under oath of the president or any other acquiring a domicile for the purpose of pursuing its
person authorized by the corporation, showing to the business without taking steps to render it amendable
satisfaction of the Securities and Exchange to suit in the local courts. (Marshall -Wells Co. vs. H.
Commission and other governmental agency in the W. Elser & Co.)
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  If a foreign corporation appoints a distributor or
exceeding one (1) year immediately prior to the filing representative in the Philippines, it is considered
of the application.
as not doing business in the Philippines because
5. Foreign banking, financial and insurance corporations
shall, in addition to the above requirements, comply the distributor or representative has an
with the provisions of existing laws applicable to independent status and transacts business in its
them. In the case of all other foreign corporations, no own name and own account and not under the
application for license to transact business in the name of the foreign corporation.
Philippines shall be accepted by the Securities and
Exchange Commission without previous authority
from the appropriate government agency, whenever Modes Of Entry Of Foreign Corporations
required by law.
26 CORPORATION LAW
Modes of entry of foreign corporations: Philippines or has no resident agent in the Philippines;
1. Branch office; - one which carries out the business or
activities of the foreign corporation itself and derives 3. Service upon any of its officers or agents within the
income from the Philippines. Philippines.
2. Representative or liaison office – one which deals
directly with the clients of the parent company but
does not derive income from the host country and is  S129 Any foreign corporation lawfully doing
fully subsidized by its head office. business in the Philippines shall be bound by all
3. Local subsidiary – a foreign corporation may form or
laws, rules and regulations applicable to a
organize a separate corporation under the Foreign
domestic corporation to the same class except
Investment Act by making at least a majority of the
investments therein. The local subsidiary of the only if it may provide for the creation, formation,
investing foreign corporation becomes a legally organization or dissolution of the corporation or
independent unit governed by the laws of the those which involves intra-corporate relationship
Philippines which is subject to the law in which they are
4. Regional or area headquarters – an office whose incorporated
purpose is to act as an administrative branch of a
multinational company engaged in international trade
which principally serves as a supervision,  S136 Foreign corporation may withdraw its
communications and coordinating center for its license to do business in the Philippines subject
subsidiaries, branches or affiliates in the Asia -Pacific to the 3 requirement imposed: (must go hand in
Region and other foreign markets and which does not hand before SEC allows withdrawal of license)
earn or derive income in the Philippines 1. All claims which have been accrued in the
5. Regional operating headquarters – it is a foreign
Philippines have been paid, compromised or
business entity which is allowed to derive income in
settled
the Philippines by performing qualifying
6. Regional warehouse; or 2. All taxes, impost, assessment, and penalties
7. Joint venture. lawfully due to the government have been
settled and paid
Resident Agent 3. The petition for withdrawal of license have been
published once a week for 3 consecutive week of
The appointment of a resident agent is a condition
newspaper of general circulation
precedent to the issuance of a license to transact business
in the Philippines by a foreign corporation.
Doing Business Without A License
The following may be appointed as a resident agent:

General rule: No foreign corporation transacting business
1. An individual residing in the Philippines, of good
in the Philippines without a license, or its successors or
moral character and of sound financial standing; or
assigns, shall be permitted to maintain or intervene in any
2. A domestic corporation lawfully transacting business action, suit or proceeding in any court or administrative
in the Philippines (includes partnerships such as law
agency of the Philippines
firms and accounting firms).
Exception: Such corporation may be sued or proceeded
against before Philippine courts or administrative
The necessity of the appointment of a resident agent is
tribunals on any valid cause of action recognized under
only for the purpose of receiving summons and other legal
Philippine laws.
processes in any l egal action or proceeding against the
foreign corporation. A foreign corporation cannot transact business in the
Philippines without the requisite license. If it does so, the
Modes of service of summons upon a foreign
responsible officers may be subjected to the pena l
corporation:
provisions of Sec. 144.
1. Service upon the resident agent – service upon the
resident agent is mandatory if the foreign corporation
General rules regarding whether or not a foreign
is license to do business in the Philippines;
corporation may sue or be sued in the Philippines:
2. Service upon the SEC – if the licensed foreign 1. As to whether or not it can sue.
corporation has ceased to transact business in the
27 CORPORATION LAW
a. A foreign corporation transacting or doing implies a continuity of commercial dealings and

business in the Philippines with a license can sue arrangements, and contemplates, to that extent,
before Philippine Courts. the performance of acts or works or the exercise
b. Subject to certain exceptions, a foreign of some of the functions normally incident to,
corporation doing business in the country and in progressive prosecution of, the purpose
without a license can not sue in Philippine Courts. and object of its organization. (Mentholatum Co.,
c. If it is not transacting business in the Philippines, Inc. vs. Mangaliman)
even without a license, it can sue before the  The object of the statute was to subject the
Philippine Courts. foreign corporation doing business in the
2. As to whether it can be sued or not. Philippines to the juris diction of its courts. The
a. A foreign corporation transacting business in the object of the statute was not to prevent the
Philippines with the requisite license can be sued foreign corporation from performing single acts,
in the Philippines. but to prevent is from acquiring domicile for the
b. A foreign corporation transacting business in the purpose of business without taking the steps
Philippines without a license can be sued in necessary to render it amenable to suit in the
Philippine courts. local courts. The law simply means that no
c. If it is doing business in the Philippines, it cannot foreign corporation shall be permitted “to
be sued in Philippine courts for lack of transact business in the Philippine Islands” unless
jurisdiction. it shall have the license required by law, and until
it complies with the law, shall not be permitted
It is not the lack of required license but doing business to maintain any suit in the local courts. (Marshall-
without a license which bars a foreign corporation from Wells Co. vs. Henry W. Elser & Co.)
access to our courts. (Universal Shipping vs. IAC)  A foreign corporation not engaged in business in
the Philippines may not be denied the right to file
General rule: A foreign corporation must have the an action in Philippine courts for isolated
requisite license to sue before the Philippine courts. transactions. (Bulakhidas vs. Navarro)
Exceptions:  If A foreign corporation not engaged in business
1. The act or transaction involved is an “isolated in the Philippines has the right to sue on an
transaction;” isolated transaction, more so may it sue based on
2. The foreign corporation is not seeking to enforce any a mistake. (Swedish East Asia Co., Ltd. vs. Manila
legal or contractual rights arising from, or growing Port Service)
out of any business which it has transacted in the  There was only one agreement between
Philippines; petitioners and the respondent. The three
3. The purpose of the suit is to protect its trademark, seemingly different transactions were entered
tradename, corporate name, reputation or goodwill; into by the parties only in an effort to fulfill the
4. The suit is based on a violation of the Revised Penal basic agreement and in no way indicate an intent
Code; on the part of the respondent to engage in a
5. The foreign corporation is merely defending a suit continuity of transactions with petitioners which
filed against it; will categorize it as a foreign corporation doing
6. The party is estopped to challenge the personality of business in the Philippines. The respondent,
the corporation by entering into a contract with it. being a foreign corporation not doing business in
Exception to an exception: Where a single act or the Philippines, does not need to obtain a license
transaction however, is not merely incidental or casual but to do business in order to have the capacity to
indicates the foreign corporation’s intention to do other sue. (Atnam Consolidated, Inc. vs. CA)
business in the Philippines, said single act or transaction
constitutes “doing” or “engaging in” or “transacting” Under the rules of the BOI, the phrase „doing business‟
business in the Philippines. has been exemplified with illustrations, among them
being as follows:
 The true test regarding “doing” or “engaging in” 1. Soliciting orders, purchase (sales) or service contracts.
or “transacting” business is whether the foreign Concrete and specific solicitations by a foreign firm,
corporation is continuing the body or substance not acting independently of the foreign firm
of the business or enterprise for which it was amounting to negotiation or fixing of the terms and
organized or whether it has substantially retired conditions of sales or service contract, regardless of
from it and turned it over to another. The term whether the contracts are actually reduced to writing,
28 CORPORATION LAW
shall constitute doing business even in the enterprise noncompliance with the statutes chiefly in cases
has no office or fixed place of business in the where such person has received the benefits of the
Philippines. contract. (Communication Materials and Design, Inc.
2. Appointing a representative or distributor who is vs. CA)
domiciled in the Philippines unless said representative  The right of a corporation to use its corporate and
or distributor has an independent status, i.e., it trade name is a property right, a right in rem, which it
transacts business in its name and for its own may assert and protect against all the world, in any of
account, and not in the name or for the account of the courts of the world – even in jurisdictions where it
the pricipal. does not transact business – just the same as it may
3. Opening offices, whether called „liaison‟ offices, protect its tangible property, real or personal, against
agencies or branches, unless provided otherwise. trespass, or conversion. Since it is the trade and not
4. Any other act or acts that imply a continuity of the make that is to be protected, a trademark
commercial dealings or arrangements, and acknowledges no territorial boundaries or
contemplate to that extent the performance of acts municipalities or states or nations, but extends to
or works, or the exercise of some of the functions every market where the trader‟s goods have become
normally incident to, or in the progressive known and identified by the use of the mark.
prosecution of, commercial gain or of the purpose (Western Equipment and Supply Co. vs. Reyes)
and objective of the business organization. (Facilities  A foreign corporation which has never done business
Management Corp. vs. De La Rosa) in the Philippine Islands and which is unlicensed and
unregistered to do business here, but is widely and
 A single act may bring the corporation within the favorably known in the Islands through the use
purview of the statute where it is an act of the therein of its products bearing its corporate and trade
ordinary business of the corpora tion. In such a case, name has a legal right to maintain an action in the
the single act of transaction is not merely incidental Islands. Parenthetically the Trademark Law allows a
or casual, but is of such character as distinctly to foreign corporation or juristic person to bring an
indicate a purpose on the part of the operations for action in Philippine courts for infringement of a mark
the conduct of a part of the corporation‟s ordinary or trade-name, for unfair competition, or false
business. (Far East Int‟l Import vs. Nankai) designation of origin and false description, whether or
 ITEC’s arrangement with its various business contacts not it has been licensed to do business in the
in the country indicate its purpose to bring about the Philippines. (General Garments Corporation vs.
situation among its customers and the general public Director of Patents)
that they are dealing directly with ITEC and that ITEC  Article 8 of the Paris Convention to which the
is actively engage in business in the country. I n Philippines became a party provides that a trade
determining whether a corporation does business in name shall be protected in all the countries of the
the Philippines or not, aside from their activities Union without the obligation of filing or registration,
within the forum, reference may be made to the whether or not it forms part of the trademark. (Puma
contractual agreements entered into by it with other vs. IAC)
entities in the country. (Communication Materials and  A foreign corporation not doing business not doing
Design, Inc. vs. CA) business in the Philippines needs no license to sue
 A foreign corporation doing business in the before Philippine courts for infringement of
Philippines may sue in Philippine courts although no trademark and unfair competition. (Le Chemise
authorized to do business here against a Philippine Lacoste vs. Fernandez)
citizen or entity who had contracted with and  In a suit involving the violation of the Revised Penal
benefited by said corporation. To put it another way, Code the complainant foreign corporation‟s capacity
a party is estopped to challenge the personality of a to sue is not significant. (Le Chemise Lacoste vs.
corporation after having acknowledged the same by Fernandez)
entering into a contract with it. An the doctrine of
estoppel to deny corporate existence applies to a Capacity To Sue
foreign as well as to domestic corporations. One who
has dealt with a corporation of foreign origin as a General rule: A foreign corporation must affirmatively
corporate entity is estopped to deny its corporate plead its capacity to sue in order that it may proceed and
existence and capacity. The principle will be applied effectively institute a case in Philippine courts.
to prevent a person contracting with a foreign Exceptions:
corporation from later taking advantage of its
29 CORPORATION LAW
1. The action involves a complaint for violation of the  A foreign corporation authorized to transact business
Revised Penal Code. in the Philippines which amends its articles of
2. The foreign corporation is not suing or maintaining a incorporation or by-laws must file a copy of such
suit but is merely defending itself from one filed amended articles of incorporation or by-laws with the
against it. SEC or the appropriate government agency within 60
days from the effectivity of such amendment.
 The qualifying circumstance of whether or not a
foreign corporation has engaged in business in the Instances when a foreign corporation authorized to
Philippines is an essential part of the element of a transact business in the Philippines must obtain an
foreign corporation‟s capacity to sue and must be amended license:
affirmatively pleaded. (Atlantic Mutual Insurance Co. 1. The foreign corporation changes its corporate name;
vs. Cebu Stevedoring Co., Inc.) or
 If the dismissal of the case, based on failure of the 2. The foreign corporation desires to pursue other or
foreign corporation to aver its capacity to sue, would additional purposes in the Philippines.
not, however, bar the institution of the same action,
dismissal should not be allowed, especially so if it Requirements in a merger or consolidation of a foreign
would be an idle, circuitous ceremony considering the corporation licensed in the Philippines:
absence of any meritorious substantial defense of the
defense of the defendant. Technical rules should not With a domestic corporation:
be accorded undue importance to frustrate and 1. Such must be permitted under Philippines laws and
defeat a plainly valid claim. (Olympia Business by the law of its incorporation; and
Machines Co. vs. Razon, Inc.) 2. The requirements on merger or consolidation
 Since petitioner is not maintaini ng any suit but is provided by the Code must be followed.
merely defending one against itself (it did not file any
complaint but only a corollary defensive petition to With a foreign corporation:
prohibit the lower court from further proceeding with 1. Such must be permitted by the law of its
a suit that it had no jurisdiction to entertain), its incorporation;
failure to aver its legal capacity to institute the 2. A duly authenticated articles of merger or
present petition is not fatal. (Time, Inc. vs. Reyes) consolidation must be filed with the SEC or the
appropriate government agency within 60 days from
Laws Governing Foreign Corporations the effectivity of the merger or consolidation; and
3. If the absorbed corporation is the foreign corporation
General rule: Any foreign corporation lawfully doing doing business in the Philippines, a petition for
business in the Philippines shall be bound by all laws, rules withdrawal of its license must also be filed.
and regulations applicable to domestic corporations of the
same class. Requirements and procedure for the withdrawal of
Exceptions: foreign corporations:
1. Laws which provide for the creation, formati on, 1. Filing of a petition for withdrawal of license;
organization or dissolution of corporations; or 2. All claims which have accrued in the Philippines have
2. Laws which fix the relations, liabilities, been paid, compromised or settled;
responsibilities, or duties of stockholders, members 3. All taxes, imposts, assessments and penalties, if any,
or officers of a corporation to each other or to the lawfully due to the Philippine Government or any of
corporation. its agencies or political subdivisions have been paid;
4. Publication of the petition for withdrawal once a
 Intra-corporate or internal matters not affecting week for 3 consecutive weeks in a newspaper of
creditors or the public in general are governed not by general circulation in the Philippines; and
Philippine laws but the law under which the foreign 5. Issuance of the certificate of withdrawal by the SEC.
corporation was formed or organized.
 Special laws may provide or grant certain restrictions, Grounds for the revocation or suspension of license:
limitations, privileges or incentives to a foreign 1. Failure to file its annual report or pay any fees as
corporation not otherwise applicable or granted to required by the Code;
domestic corporations (e.g. import duties and tax 2. Failure to appoint and maintain a resident agent in
incentives under the Omnibus Investments Code). the Philippines;
30 CORPORATION LAW
3. Failure, after change of its resident agent or of his  Non-stock or special corporati ons may, through their
address, to submit to the SEC a statement of such articles of incorporation or their by-laws, designate
change; their governing boards by any name other than as
4. Failure to submit to the SEC an authenticated copy of board of trustees.
any amendment to its articles of incorporation or by-  The NEDA shall, from time to time, make a
laws or of any articles of merger or consolidation determination of whether the corporate vehicle has
within the time prescribed by the Code; been used by any corporation or by business or
5. Misrepresentation of any material matter in any industry to frustrate the provisions thereof or of
application, report, affidavit or other document applicable laws, and shall submit to Congress,
submitted; whenever deemed necessary, a report of its findings,
6. Failure to pay any and all taxes, imposts, assessments including recommendations for their prevention or
or penalties, if any, lawfully due to the Philippine correction.
Government or any of its agencies or political  Maximum limits may be set by Congress for
subdivisions; stockholdings in corporations declared by it to be
7. Transacting business in the Philippines outside of the vested with a public interest pursuant to the
purpose or purposes for which such corporation is provisions of this section, belonging to individuals or
authorized under its license; groups of individuals related to each other by
8. Transacting business in the Philippines as agent of or consanguinity or affinity or by close business
acting for and in behalf of any foreign corporation or interests, or whenever it is necessary to achieve
entity not duly licensed to do business in the national objectives, prevent illegal monopolies or
Philippines; or combinations in restraint or trade, or to implement
9. Any other ground as would render it unfit to transact national economic policies declared in laws, rules and
business in the Philippines. regulations designed to promote the general welfare
and foster economic development.
Other grounds for revocation of license under special  In recommending to Congress corporations, business
laws: or industries to be declared vested with a public
1. General Banking Act – imminent danger of insolvency; interest and in formulating proposals for limitations
2. Insurance Code – unsound condition, failure to on stock ownership, the NEDA shall consider the type
comply with the provisions of law or regulation and nature of the industry, the size of the enterprise,
obligatory upon it, a condition or method of business the economies of scale, the geographic location, the
hazardous to the public or its policy holders, extent of Filipino ownership, the labor intensity of the
impairment of its security deposit, or deficiency i n the activity, the export potential, as well as other factors
margin of solvency. which are germane to the realization and promotion
3. Omnibus Investments Code – willful violation of the of business and industry.
provisions of existing laws and implementing  Every corporation, domestic or foreign, lawfully doing
guidelines or violation of the terms and conditions of business in the Philippines shall submit to the SEC an
its license. annual report of its operations, together with a
financial statement of its assets and liabilities,
In case the revocation is warranted the SEC shall: certified by any independent certified public
1. Issue a certificate of revocation; accountant in appropriate cases, covering the
2. Furnish a copy thereof to the appropriate government preceding fiscal year and such other requirements as
agency; and the SEC may require. Such report shall be submitted
3. Mail a notice of such revocation accompanied by a within such period as may be prescribed by the SEC.
copy of the certificate of revocation to the  All interrogatories propounded by the SEC and the
corporation at its registered office in the Philippines. answers thereto, as well as the results of any
examination made by the Commission or by any other
Chapter 19: Miscellaneous Provisions official authorized by law to make an examination of
the operations, books and records of any corporation,
Outstanding capital stock – the total shares of stock shall be kept strictly confidential, except insofar as
issued under binding subscription agreements to the law may require the same to be made public or
subscribers or stockholders, whether or not fully or where such interrogatories, answers or results are
partially paid, except treasury shares. necessary to be presented as evidence before any
court.
31 CORPORATION LAW
 The SEC shall have the power and authority to

implement the provisions of this Code, and to General rule: The Special Commercial Courts shall have
promulgate rules and regulations reasonably exclusively and originally jurisdiction over cases falling
necessary to enable it to perform its duties under Sec. 5 of PD 902-A.
hereunder, particularly in the prevention of fraud and Exception: The SEC shall retain jurisdi ction over cases
abuses on the part of the controlling stockholders, involving suspension of payments and corporate
members, directors, trustees or officers. rehabilitation filed on or before June 30, 2000.
 Violations of any of the provisions of this Code or its
amendments not otherwise specifically penalized Distribution of Special Commercial Courts:
therein shall be punished by a fine of not less than 1. Two in Makati City;
one thousand (P1,000.00) pesos but not more than 2. Two in Quezon City;
ten thousand (P10,000.00) pesos or by imprisonment 3. One in each in other cities in Metro Manila; and
for not less than thirty (30) days but not more than 4. One per region.
five (5) years, or both, in the discretion of the court. If
the violation is committed by a corporation, the same Devices Or Schemes Amounting To Fraud And
may, after notice and hearing, be dissolved in Misrepresentation (Sec. 5 [A])
appropriate proceedings before the Securities and
Exchange Commission: Provided, That such General rule: The Special Commercial Courts shall have
dissolution shall not preclude the institution of original and exclusive jurisdiction to hear and decide cases
appropriate action against the director, trustee or involving devices or schemes empl oyed by or any acts of
officer of the corporation responsible for said the board of directors, business associates, its officers or
violation: Provided, further, That nothing in this partners, amounting to fraud and misrepresentation
section shall be construed to repeal the other causes which may be detrimental to the interest of the public
for dissolution of a corporation provided in this Code. and/or of the stockholder, partners, members of
 No right or remedy in favor of or against any associations or organizations registered with the SEC.
corporation, its stockholders, members, directors, Exception: The complaint is based on the violation of the
trustees, or officers, nor any liability incurred by any Revised Penal Code (Ex. Syndicated Estafa)
such corporation, stockholders, members, directors, Even if the action is for recovery of sums of money paid or
trustees, or officers, shall be removed or impaired given to the corporation through devices and schemes
either by the subsequent dissolution of said amounting to fraud or misrepresentation detrimental to
corporation or by any subsequent amendment or the investing public, the same must be filed, heard and
repeal of this Code or of any part thereof. tried by the Special Commercial Courts.
 All corporations lawfully existing and doing business
in the Philippines on the date of the effectivity of this Examples of acts amount to fraud or misrepresentation
Code and heretofore authorized, licensed or within the original and exclusive jurisdiction of the
registered by the Securities and Exchange Special Commercial Courts:
Commission, shall be deemed to have been 1. Fraud committed by a corporation in failing to pay
authorized, licensed or registered under the individual money market placements. (Orosa, Jr. vs.
provisions of this Code, subject to the terms and CA)
conditions of its license, and shall be governed by the 2. Corporations act of duping persons into investing
provisions hereof: Provided, That if any such money when such corporations authority to issue
corporation is affected by the new requirements of commercial papers has already expired. (Mangalad vs.
this Code, said corporation shall, unless otherwise Premier Corporation)
herein provided, be given a period of not more than 3. Corporate officer‟s act of diverting corporate funds
two (2) years from the effectivity of this Code within and assets for his personal use. (Alleje vs. CA)
which to comply with the same. 4. Pyramiding schemes.
The allegation of fraud must be stated with particularity to

place the case with the jurisdiction of the Special
Commercial Courts.
PD 902-A, AS AMENDED
The SEC’s quasi-judicial functions under Sec. 5 of PD 902- Intra-Corporate Controversies (Sec. 5 [B])
A, as amended were transferred to the Special Intra-corporate controversies include those of
Commercial Courts by RA 8799. corporations, partnerships and associations.
32 CORPORATION LAW
 The filing of the civil/intra-corporate case before the

Elements of intra-corporate controversies: SEC does not preclude the simultaneous and
1. An intra-corporate relationship: concomitant filing of a criminal action before the
a. Between and among the stockholders, members, regular courts; such that, a fraudulent act may give
associates of a corporation, partnership or rise to liability for violation of the rules and
association; regulations of the SEC cognizable by the SEC itself, as
b. Between them and the corporation, partnership well as criminal liability for violation of the Revised
or association; or Penal Code cognizable by the regular courts, both
c. Between the corporation, partnership or charges to be filed and proceeded independently, and
association and the State. may be simultaneously, with the other. (Fabia vs. CA)
2. The controversy must arise out of said relationship.
Controversies In The Appointment, Election And Removal
 The dispute among the parties must be intrinsically Of Directors And Officers (Sec. 5 [C])
connected with the regulation of the corporation. If The Special Commercial Courts have original and exclusive
the nature of the controversy involves matters that jurisdiction to hear and decide cases involving
are purely civil in character necessarily the cas e does controversies in the election or appointment of directors,
not involve an intra-corporate controversy. (Speed trustees, officers or managers of corporations,
Distributing Corp. vs. CA) partnerships or associations.
 The fact that shares of stock were issued to be used
as part payment for lease rentals does not convert it General rule: A corporate officer‟s election, appointment
into a intra-corporate controversy. (DMRC Enterprises or termination by the board of directors is always a
vs. Este del Sol Mountain Reserve, Inc.) corporate act, and the fact that the officer asks for
 Recovery of the control and management of a backwages does not alter the picture. The original and
corporation in the guise of a complaint for rescission exclusive jurisdiction rests with the Special Commercial
of a memorandum of agreement which vested such Courts.
control and management is an intra -corporate Exception: The main cause of action is for the recovery of
controversy. (DPB vs. Ilustre, Jr.) unpaid wages and separation pay. (Midland Construction
 If all of the requirements for a valid transfer have Co., Inc. vs. Movilla)
been complied the dispute is intra-corporate and is
within the jurisdiction of the Special Commercial The main aspect to be considered is whether the
Court. (Abejo vs. de la Cruz; Rural Bank of Salinas, Inc. corporate officer asserts his rights as such officer or
vs. CA) questions his removal or ouster. If so, the case would fall
 If the petitioner does not have a “prima facie” title to within the ambit of the jurisdiction of the Special
the share sought to be recorded in his name the Commercial Courts and not the NLRC.
dispute is not intra-corporate and the ordinary or
regular court can assume jurisdiction over the case. Receivership And Suspension (Sec. 5 [D] AND 6[C, D])
(Rivera vs. Florendo; Tay vs. CA) Petitions for suspension of payments of corporations,
 A dispute regarding the automatic rescission clause of partnerships or associations, and appointment of
a Memorandum of Agreement regarding the sale of receivership, management committee, board or body are
shares of a group of stockholders to another group of lodged within the jurisdiction of the Special Commercial
stockholders is intra-corporate. (Saavedra vs. SEC) Courts.
 Where the conflict involves the enforcement of rights
and obligations under the Corporation Code or the A corporation, partnership or association, whether or not
inter and intra-corporate affairs of the corporation, insolvent, can file a petition for suspension of payments
jurisdiction would fall with the Special Commercial provided it is placed under a rehabilitation receiver or
Courts. But if it requires a mere determination of the management committee or rehabilitation receiver.
contractual rights of the parties under an ordinary
agreement, the ordinary/regular courts can acquire Three types of suspension of payments:
jurisdiction thereto. 1. Simple suspension of payments – mere deferment of
 The factor which decides whether the action is within payment of debts and it refers to a petiti on which is
the jurisdiction of the Special Commercial Courts is filed by a corporation which possesses sufficient
that the controversy arose out of an intra -corporate assets to cover its liabilities but foresees the
relation between and among the parties. (SEC vs. CA) possibility of meeting them when they respectively
fall due owing to temporary liquidity problems.
33 CORPORATION LAW
2. Suspension of payments with the appointment of a but pending execution, the execution of the decision
receiver with or without a rehabilitation plan. The is likewise suspended. (Filinvest vs. Ejercito)
rehabilitation plan is a plan under which the  Note the words “against the corporation.”
corporation will reschedule the payment of its debts  If a corporation secures a loan, and one of its key
and liabilities. Either the petitioner corporation will officers uses his private properties to guarantee the
propose the plan or ask for the appointment of a loan, corporation files for suspension, the bank want
receiver who will study and make the plan. to foreclose on the prop, may the bank foreclose?
3. Suspension of payments where the corporation has Yes. It is not an action for ac claim against the
no sufficient assets to cover its debts and liabilities corporation. Union bank case.
with or without the appointment of a management  Properties of an individual stockholder, director or
committee with or without a rehabilitation plan. officer, as surety of corporate liabilities, are not, and
will not be covered by the suspension of payments
Effects Of Suspension Of Payments order issued by the court pursuant to PD 902-A.
 The proper court may issue an order suspending  Same with regard to criminal proceedings, personal to
payments of claims due from a distress corporation. corporate officer concerned.
 Upon the appointment of a management committee,  Despite the appointment of a receiver for a
rehabilitation receiver, board or body all actions for corporation under PD 902-A, an action against a
claims against the corporation, partnership or corporation seeking the nullification of corporate
association under management or receivership documents cannot be suspended by reason thereof,
pending before any court, tribunal, board or body since the civil action does not present a monetary
shall be suspended accordingly. claim against the corporation. (Finasia Investment and
 The reason for suspension of payments for claims Finance Corporation vs. CA)
against a distressed corporation is to enable the  The SEC does not have jurisdiction to entertain
management committee to effectively exercis e its petitions for suspension of payments filed by parties
powers free from judicial or extrajudicial interference other than corporations, partnerships or associations.
that might unduly hinder or prevent the „rescue‟ of (Union Bank vs. CA)
the debtor company. (PAL vs. Sps. Sadic and  Equality is Equity – during suspension the assets are
Kurangking) held in trust for the equal benefit of all creditors to
 The suspension of all actions for claims against a preclude one from obtaining an advantage or
corporation embraces all phases of the suit, be it preference over another by the expediency of an
before the trial court or any tribunal or before this attachment, execution or otherwise. The creditors
Court. No other action may be taken, i ncluding the should stand on equal footing. Not anyone of them
rendition of judgment during the state of suspension. should be given any preference by paying one of
It must be stressed that what are automatically them ahead of the others. (Alemars Sibal and Son, Inc.
stayed or suspended are the proceedings of a suit and vs. Elibenas)
not just the payment of claims during the execution  The issue of whether or not preferred creditors of
stage after the case had become final and executory. distressed corporations stand on equal footing with
Once the process of rehabilitation, however, is all other creditors gains relevance and materiality
completed, this Court will proceed to complete the only upon the appointment of a management
proceedings on the suspended actions. Furthermore, committee, rehabilitation receiver, board or body.
the actions that are suspended cover all claims Suspension of claims against the corporation under
against the corporation whether for dama ges rehabilitation is counted or figured up only upon the
founded on a breach of contract of carriage, labor appointment of a management committee or a
cases, collection suits or any other claims of a rehabilitation receiver. (RCBC vs. IAC)
pecuniary nature. No exception in favor of labor
claims is mentioned in the law. (PAL vs. Zamora)
 Claims – refers to debts or demands of pecuniary
nature; the assertion of right to have money paid. VERY IMPORTANT!!!
 Suspended proceedings include extra judicial 1. All claims against corporations, partnerships or
foreclosures. You cannot even consolidate. All associations that are pending before any court,
proceedings at whatever stage are suspended. tribunal or board, without distinction as to whether or
 Even if the suspension order is issued after a not a creditor is secured or unsecured, shall be
creditor‟s action in court has already become final suspended effective upon the appointment of a
management committee, rehabilitation receiver,
34 CORPORATION LAW
board or body in accordance with the provisions of PD  In the absence of a strong showing of an imminent
902-A. danger of dissipation, loss, wastage or destruction of
2. Secured creditors retain their preference over assets or other properties of a corporation and
unsecured creditors, but enforcement of such paralysis of its business operations, the mere
preferences is equally suspended upon the apprehension of future misconduct based upon prior
appointment of a management committee, mismanagement will not authorize the appointment
rehabilitation receiver, board or body. In the event of a management committee/receiver. (Sy Chim vs. Sy
that the assets of the corporation, partnership or Siy Ho & Sons, Inc.)
association are finally liquidated, however, secured or  Mere disagreement among stockholder as to the
preferred credits under the applicable provisions of fairness of the corporation would not in itself suffice
the Civil Code will definitely have preference over as a ground for the appointment of a management
unsecured ones. committee. However, where the dissention among
the stockholders is such that the corporation cannot
If the rehabilitation of the corporation is not feasible, the successfully carry on its corpora te functions, the
court muto propio or the management committee may appointment of a management committee becomes
petition the lifting and the preferences will be there again. imperative. (Jacinto vs. First Women‟s Credit
Corporation)
Appointment Of Management Committee, Board Or  A management committee shall have the power to
Body (Sec. 6 [D]) take custody of and control all assets and properties
Special Commercial Courts may create or appoint a owned and possessed by the enti ty under
management committee, board or body upon petition or management. It shall take the place of the
muto propio to undertake the management of management and board of directors of the entity
corporations, partnerships or association not supervised under management, assume their rights and
or regulated by other government agencies in appropriate responsibilities, and preserve the entity‟s assets and
cases where there is imminent danger of dissipation, loss properties in its possession.
or wastage or destruction of assets or other properties or  The rehabilitation receiver shall not take over the
paralyzation of business operations of such corporation or management and control of the debtor but shall
entities which may be prejudicial to the interest of closely oversee and monitor the operations of the
minority stockholders, parties -litigant or the general debtor during the pendency of the proceedings. He
public. shall be primarily tasked to study the best way to
rehabilitate the debtor and to ens ure that the value
It may also create or appoint a management committee, of the debtor‟s property is reasonably maintained
board or body to undertake the management of pending the determination of whether or not the
corporations, partnerships or other associations debtor should be rehabilitated, as well as implement
supervised or regulated by other government agencies the rehabilitation plan after its approval.
such as banks and insurance companies, upon the request  Venue of actions in intra-corporate controversies –
of the government agency concerned. Special Commercial Court which has jurisdiction over
the principal office of the corporation, partners hip or
Requisites before a management committee, board or association.
body may be appointed or created:  Nature of proceedings is in rem. Jurisdiction acquired
1. Dissipation, loss, wastage or destruction of assets or upon publication of the proceeding.
other properties; and  Creditors have the personality (at least 25% of the
2. Paralyzation of its business operations which may be total outstanding liablitities) may file, ex. Bayantel.
prejudicial to the interest of the minority  Their compensation is subject to agreement of the
stockholders, parties-litigants or the general public. parties.
(Sy Chim vs. Sy Siy Ho & Sons, Inc.)
Actuations of the board, body, committee subject to:
 Danger – a general term, including peril, jeopardy, 1. Service of pleadings . Sec. 6 rule 1. may be by fax or
hazard and risk; refers to exposure or liability to email. When authorized by the court.
injury. 2. Service of summons. Sec. 5 rule 2. made upon any of
 Imminent – something which is threatening to the statutory or corporate officers or their respective
happen at once, something close at hand, something secretaries. vs. Eb Villarosa case. (Rule of Court)
to happen upon the instant, close although not yet
happening, and on the verge of happening.
35 CORPORATION LAW
RA 8799 – SECURITIES REGULATION CODE  Question: (tender offer rules/independent director

 Took effect August 2000 rule) (Sec. 38) [was inserted to protect the interest of
 Transferred the jurisdiction of SEC over the cases general public in corporations that are publicly listed
falling under Secs 5 and 6 of PD 902 whose shares are being traded openly in general
 Diversion of merit regulation (full disclosure rule) public] when is an independent director required to
wherein the corporation makes a full and complete be elected by the corporation? Any corporation with a
disclosure of the securities in question to the public, it class of equity
will be up to the investing public whether he will risk  Q: who is qualified to be an independent director?
his money to that purpose (Sec. 3) A: is a person other than an officer or
employee of the corporation, its parents or
 Sec. 3 – securities defined subsidiaries, or any other individual having a
 Sec. 3 (g)(other instrument as may in the future as relationship with the corporation which would
may be determined by SEC) is all encompassing and interfere in the exercise of independent judgment in
grants the SEC the right to determine WON a carrying out his responsibilities as a director. Apart
particular instrument may be considered as a security from his fees and stockholdings, which should not be
 Enumerates and defines securities more than 2% of the outstanding stocks, is
 Pre-need plans – contracts which provides for the independent of management and free from any
performance of future services or payment of future business or other relationship with the corporation
monetary consideration at the time of actual need for which could or could reasonably be perceived to
which the plan holders pay either in cash or materially interfere with the exercise of his
instalment at a stated prices, with or without interest independent judgment in carrying out his
or insurance coverage and includes life, pension, responsibilities as a director of the corporation(sec.
education, interment and other plans which the SEC 38)
may from time to time.
 Securities defined in Sec. 3 cannot be sold, offered or  General Rule: Insider trading (S27) it is unlawful for
sale to the public; or di stributed or issued to the an insider to buy and sell the security of the issuer
general public without a registration statement (corporation whose shares are being
having been filed or approved by SEC. (more than 19 traded/transacted) while in possession of material
person is considered public offering subject to the information with respect thereto which is not
exemptions allowed by SEC) generally available to the public,
 (Sec. 9 and 10) enumerate exempt
transactions/securities which are not required to be Exception: the insider proves the information was not
registered before sold to other person. gained from such relationship or other parties selling
 Even they are duly registered pursuant to the to or buying from i nsider is identified, and the insider
registration filed and approved by SEC, no proves that he disclose the information to the other
person can engage in the business of party or has reason to believe that the other party is
buying/selling securities either as broker, also in possession of the information.
dealer, salesman or an associated person,  If the insider has possession of material non-
unless duly registered and accredited as such public information that may have the effect of
by SEC under Sec. 28. increasing/decreasing the value of the shares, he
 Broker – a person engaged in the business of cannot trade in that particular security. If he
buying and selling securities for the account does, the penal sanctions of Sec. 73 shall be
of others applied.
 Dealer/salesman – many person who buys
and sells securi ties thereof who, directly  Q: What is material non-public information so as to
exercises control of supervisory a bar an insider from trading in a particular security if
he is in possession of that material non-public
36 CORPORATION LAW
information? – if it has not been generally disclosed

to the public and would affect the market price of the  Section 73. Penalties. – Any person who violates any
security after being disseminated to the general of the provisions of this Code, or the rules and
public and the lapse of the reasonable time for the regulations promulgated by the Commission under
market to absorbed the information; or considered by authority thereof, or any person who, in a registration
a reasonable person important under the statement filed under this Code, makes any untrue
circumstance in determining his course of action statement of a material fact or omits to state any
whether to buy or sell or hold on to the security or material fact required to be stated therein or
shares. It will have the effect of increasing/decreasing necessary to make the statements therein not
the value of the security traded misleading, shall, upon conviction, suffer a fine of not
 Q: Who may be considered as insiders? (S3.8) – (a) less than Fifty thousand pesos (P50,000.00) nor more
the issuer; (b) a director or officer (or any person than Five million pesos (P5,000,000.00) or
performing similar functions) of, or a person imprisonment of not less than seven (7) years nor
controlling the issuer; gives or gave him access to more than twenty-one (21) years, or both in the
material information about the issuer or the security discretion of the court. If the offender is a
that is not generally available to the public; (d) A corporation, partnership or association or other
government employee, director, or officer of an juridical entity, the penalty may in the discretion of
exchange, clearing agency and/or self-regulatory the court be imposed upon such juridical entity and
organization who has access to material information upon the officer or officers of the corporation,
about an issuer or a security that is not generally partnership, association or entity responsible for the
available to the public; or (e) a person who learns violation, and if such officer is an alien, he shall in
such information by a communication from any addition to the penalties pres cribed, be deported
forgoing insiders. without further proceedings after service of sentence.
 Q: Manila gases engaged in the exploration of natural  Other forms of fraudulent and market manipulation:
gas, it was able to drill natural gas of commercial 1. Insider trading
quantity and did not disclose the matter to the 2. Wash sales –Any transaction in such security
general public, and corporate directors and officers which involves no change in the beneficial
bought the shares, and went to the printing house of ownership thereof; a series of buy and sell
their choice to have it printed to the effect that it has transaction may be placed by one and the same
drilled the said gas of commercial quantity, the beneficial owner in the Exchange which would
printing house, likewise, bought shares of stock which not affect any change of ownership of the shares
have not yet been disclosed to the public. What is transacted.
violated under Securities laws? A: Insider trading. The 3. Match order – An order or orders for the
directors and printer are liable for insider trading. purchase or sale of such security with the
knowledge that a simultaneous order or orders of
 Investment contract (S3) – contract transaction or substantially the same size, time and price, for
scheme whereby a person invests his money to a the sale or purchase of any such security, has or
common enterprise and led to expect profits solely to will be entered by or for the same or different
the efforts of the promoter or third party. parties
 The touchstone is the presence of an investment 4. Marking the clause – placing of purchase or sale
in a common venture premised on a reasonable order, at or near the close of the trading period.
expectation of profits to be derived from the The person making the order would thus post a
managerial or entrepreneurial skills/efforts of higher or lower price for the security just barely
others. before the close of the market thereby increasing
 Generally cannot engage in investment contract, or lowering the closing price.
unless such activity was filed with the SEC and 5. Painting the tape – akin to marking the close but
approved by it. the activity is made during normal trading hours .
37 CORPORATION LAW
Intentionally increasing or decreasing the value of investigated and/or charged may propose in writing
the shares or causing fictitious reports to appear an offer of settlement with the Commission. Upon
on the ticker tape. receipt of such offer of settlement, the Commission
6. Short sale – the selling of security which the may consider the offer based on timing, the nature of
vendor does not own, possess or hold. It is illegal the investigation or proceeding, and the public
unless in accordance with the rules prescribed by interest. The Commission may only agree to a
the SEC. settlement offer based on its findings that such
 T3/T4 rule: Trading day + 3 – if you entered settlement is in the public interest. Any agreement to
into a contract/transaction, either for sale or settle shall have no legal effect until publicly
purchase of security, 3 days therefrom, you disclosed. Such decision may be made without a
have to comply with your part or obligation. determination of guilt on the part of the person
7. Boiler room operations – involves an intensive making the offer.
selling campaign through numerous salesmen by 
telephone or through direct mail offerings for
securities of either a certain type of from a
specific issuer. Securities Regulation Code (SRC)
8. Squeezing the float – the part or portion of the
issue/security which is outstanding but  Full disclosure rule – as long as there is full and
intentionally held by dealers or other persons complete disclosure relative to the issue of securities
with a view of reselling them later for profit. the investing public should determine for themselves
9. Hype and dump – the act employed by a person whether or not to invest.
or group of persons of purchasing the  Doctrine of primary jurisdiction – courts will not
outstanding capital stock of a dormant public determine a controversy involving a question within
shell company for a nominal amount and merge the jurisdiction of the administrative tribunal, where
it with their privately held company. They would the question demands the exercise of sound
then gain control of the majority of the stocks of administrative discretion requiring the specialized
the merged entity. The shares of the Shell knowledge and expertise of said administrative
Company are often reverse-split four to one or tribunal to determine technical and intricate matters
more to reduce the number of shares. Stock of fact.
certificates are often re-issued in the name of the  A criminal charge for violation of the SRC is a
merged entity to relatives and associates who act specialized dispute. Hence, it must first be referred to
as nominees of the person or group of persons an administrative agency of special competence, i.e.,
employing the device. They would then look for a the SEC… The SRC is a special law. Its enforcement is
broker-dealer who would be willing to make a particularly vested in the SEC. Hence, all complaints
market relative to the stocks of the newly for any violation of the Code and its implementing
merged company; then hire a promoter who rules and regulations should be filed with the SEC.
would “hype” the virtues of the company, its Where the complaint is criminal in nature, the SEC
products and stocks. The broker-dealer then shall indorse the complaint to the DOJ for preliminary
generates volume and advance bid price. When investigation and prosecution as provi ded in Section
the market reaches a high price, they would 53.1. (Baviera vs. Paglinawan)
“dump” their shareholdings and bail out.
10. Securities
 Any violation of the provision of the code would Securities – are shares, participation or interests in a
subject the offender with penal sanction under S73 or corporation or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract,
even under RPC or special penal laws.
instrument, whether written or electronic in character. It
includes:
 Settlement offers in any violations of the SEC Code 1. Shares of stock, bonds, debentures, notes, evidences
under S25. (s55.3) At any time, during an investigation of indebtedness, asset-backed securities;
or proceeding under this Code, parties being
38 CORPORATION LAW
2. Investment contracts, certificates of interest or

participation in a profit sharing agreement, Exempt Securities
certificates of deposit for a future subscription;
3. Fractional undivided interests in oil, gas or other Exempt Securities (Sec. 9):
mineral rights; 1. Any security issued or guaranteed by the Government
4. Derivatives like option and warrants; of the Philippines, or by any political subdivision or
5. Certificates of assignments, certificates of agency thereof, or by any person controlled or
participation, trust certificates, voting trust supervised by, and acting as an instrumentality of said
certificates or similar instruments; Government.
6. Proprietary or non proprietary membership 2. Any security issued or guaranteed by the government
certificates incorporations; and of any country with which the Philippines maintains
7. Other instruments as may in the future be diplomatic relations, or by any state, province or
determined by the Commission. political subdivision thereof on the basis of
reciprocity: Provided, That the Commission may
The definition of securities is extra-ordinarily broad. It is a require compliance with the form and content of
catch all phrase meant to include all novel devices which disclosures the Commission may prescribe.
are of the same nature. Investment contracts and golf club 3. Certificates issued by a receiver or by a trustee in
shares are included in the definition of securities. bankruptcy duly approved by the proper adjudicatory
body.
General rule: Securities cannot be sold or offered for sale 4. Any security or its derivatives the sale or transfer of
or distribution to more than 19 persons without a which, by law, is under the supervision and regulation
Registration Statement duly filed and approved by the of the Office of the Insurance Commission, HLURB, or
SEC. Once the securities are sold or offered to more than BIR.
19 persons, it becomes a public offering requiring prior 5. Any security issued by a bank except its own shares of
registration with the SEC. Violation thereof renders the stock.
person administratively, civilly and criminally liable.
Exception: The securities involved are covered by Sec. 9 Exempt Transactions
(exempt securities) and Sec. 10 (exempt transactions).
Exempt Transactions (Sec. 10):
 Persons engaging in the business of buying or selling 1. Any judicial sale, or sale by an executor,
securities in the Philippines as a broker or dealer, or administrator, guardian or receiver or trustee in
acting as a salesman for such entities must be insolvency or bankruptcy.
registered and authorized as such by the SEC. 2. By or for the account of a pledge holder, or
 Investment contract – a contract or scheme whereby mortgagee or any other similar lien holder selling or
a person invests his money in a common venture offering for sale or delivery in the ordinary course of
premised on a reasonable expectation of profits to be business and not for the purpose of avoiding the
derived from the entrepreneurial or managerial provisions the SRC, to liquidate a bona fide debt, a
efforts of others. security pledged in good faith as security for such
 Issuance of certificates of participation in a multi -level debt.
marketing scheme, solely on the management of 3. An isolated transaction in which any security is sold,
others without goods or services is an investment offered for sale, subscription or delivery by the owner
contract and thus a security. (Justee vs. SEC) thereof, or by his representative for the owner’s
 Pyramiding schemes partakes of a nature of an account, such sale or offer for sale, subscription or
investing contract which cannot be sold to more than delivery not being made i n the course of repeated
19 persons without prior approval of the SEC. and successive transactions of a like character by such
 When an investor is relatively uninformed and turns owner, or on his account by such representative and
over his money to others, essentially depending upon such owner or representative not being the
their representations and their honesty and skill in underwriter of such security.
managing it, the transaction generally is considered as 4. The distribution by a corporation, actively engaged in
an investment contract. The touchstone is the the business authorized by its articles of
presence of an investment in a common venture incorporation, of securities to its stockholders or
premised on a reasonable expectation of profits to be other security holders as a stock dividend or other
derived from the entrepreneurial or managerial distribution out of surplus.
efforts of others. (People vs. Petralba)
39 CORPORATION LAW
5. The sale of capital stock of a corporation to its own d. Pension fund or retirement plan maintained by
stockholders exclusively, where no commission or the Government of the Philippines or any political
other remuneration is paid or given directly or subdivision thereof or managed by a bank or
indirectly in connection with the sale of such capital other persons authorized by the Bangko Sentral
stock. to engage in trust functions;
6. The issuance of bonds or notes secured by mortgage e. Investment company; or
upon real estate or tangible personal property, where f. Such other person as the Commission may by
the entire mortgage together with all the bonds or rule determine as qualified buyers, on the basis
notes secured thereby are sold to a single purchaser of such factors as financial sophistication, net
at a single sale. worth, knowledge, and experience in financial
7. The issue and delivery of any security in exchange for and business matters, or amount of assets under
any other security of the same issuer pursuant to a management.
right of conversion entitling the holder of the security
surrendered in exchange to make such conversion: Tender Offer
Provided, That the security so surrendered has been
registered under the SRC or was, when sold, exempt Tender Offers – a publicly announced intention by the
from the provisions of the SRC, and that the security purchaser to acquire a certain block of equities of a
issued and delivered in exchange, if sold at the company through open market purchases or private
conversion price, would at the time of such negotiations.
conversion fall within the class of securities entitled
to registration under the SRC. Upon such conversion A tender offer is required of any person or group of
the par value of the security surrendered in such persons acting in concert who intend to acquire:
exchange shall be deemed the price at which the 1. At least 15% of any class of any equity security of a
securities issued and delivered in such exchange are listed corporation or of any class of any equity
sold. security of a corporation with assets of at least P50M
8. Broker‟s transactions, executed upon customer‟s and having 200 or more stockholders with at least 100
orders, on any registered Exchange or other trading shares each; or
market. 2. At least 30% of such equity over a period of 12
9. Subscriptions for shares of the capital stock of a months.
corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital Proxies
stock under the Corporation Code, when no expense Proxies must be issued and proxy solicitation must be
is incurred, or no commission, compensation or made in accordance with rules and regulations to be
remuneration is paid or given in connection with the issued by the Commission.
sale or disposition of such securities, and only when
the purpose for soliciting, giving or taking of such Requisites for proxies:
subscriptions is to comply with the requirements of 1. In writing;
such law as to the percentage of the capital stock of a 2. Signed by the stockholder or his duly authorized
corporation which should be subscribed before it can representative; and
be registered and duly incorporated, or its authorized 3. Filed before the scheduled meeting with the
capital increased. corporate secretary.
10. The exchange of securities by the issuer with its
existing security holders exclusively, where no General rule: A proxy shall be valid only for the meeting
commission or other remuneration is paid or given for which it is intended.
directly or indirectly for soliciting such exchange. Exception: It is otherwise provided in the proxy.
11. The sale of securities by an issuer to fewer than 20
persons in the Philippines during any twelve-month  No proxy shall be valid and effective for a period
period. longer than 5 years at one time.
12. The sale of securities to any number of the following  No broker or dealer shall give any proxy, consent or
qualified buyers: authorization, in respect of any security carried for
a. Bank; the account of a customer, to a person other than the
b. Registered investment house; customer, without the express written authorization
c. Insurance company; of such customer.
40 CORPORATION LAW
 A broker or dealer who holds or acquires the proxy respect to the issuer or the security that is not generally
for at least 10% or such percentage as the available to the public.
Commission may prescribe of the outstanding share Exceptions:
of the issuer, shall submit a report identifying the 1. The insider proves that the information was not
beneficial owner within 10 days after such acquisition, gained from such relationship; or
for its own account or customer, to the issuer of the 2. The insider disclosed the information to a party
security, to the Exchange where the security is traded reasonably believed by the insider to possess the
and to the Commission. information.
Independent Director Material non-public information – has not been generally

disclosed to the public and:
Independent director – a person other than an officer or 1. would likely affect the market price of the security
employee of the corporation, its parent or subsidiaries, or after being disseminated to the public and the lapse
any other individual having a relationship with the of a reasonable time for the market to absorb the
corporation, which would interfere with the exercise of information; or
independent judgment in carrying out the responsibilities 2. would be considered by a reasonable person
of a director. important under the circumstances in determining his
course of action whether to buy, sell or hold a
 Any corporation with a class of equity securities listed security.
for trading on an Exchange or with assets in excess of
P50M and having 200 or more holders, at least of 200  An insider may not communicate material non-public
of which are holding at least 100 shares of a class of information to any person who will likely buy or sell a
its equity securities or which has sold a class of equity security of the issuer while in possession of such
securities to the public pursuant to an effective information.
registration statement shall have at least 2  Trading by persons who have material non-public
independent directors or such independent directors information about a tender offer is prohibited.
shall constitute at least 20% of the members of such
board, whichever is the lesser. Registration of Brokers, Dealers, Salesmen and
 The SEC may exempt corporations from the required Associated Persons
independent directors as i t did in the rehabilitation of Persons engaging in the business of buying or selling
Victorias Milling Co. Inc. securities in the Philippines as a broker or dealer, or acting
as a salesman for such entities must be registered and
authorized as such by the SEC.
Insider Trading
Broker – a person engaged in the business of buying and
Insider: selling securities for the account of others.
1. The issuer; Dealer – any person who buys and sells securities for
2. A director or officer (or person performing similar his/her own account in the ordinary course of business.
functions) of, or a person controlling the issuer; Salesman - a natural person, employed as such or as an
3. A person whose relationship or former relationship to agent, by a dealer, issuer or broker to buy and sell
the issuer gives or gave him access to material securities.
information about the issuer or the security that is
not generally available to the public;  A stockbrokerage firm can have no other business
4. A government employee, or director, or officer of an than that.
exchange, clearing agency and/or self-regulatory  Purchase of shares should be coursed through a
organization who has access to material information broker. However a private transaction can be made.
about an issuer or a security that is not generally
available to the public; or Fraudulent Transactions and Other Market
5. A person who learns such information by a Manipulations
communication from any of the foregoing insiders.
1. Circulating or dissemination information that the
General rule: An insider may not sell or buy a security of price of any security listed in the Exchange will or is
the issuer while in possession of material information with like to rise or fall (illegal)
41 CORPORATION LAW
2. Making false or misleading statements with respect to propose in writing an offer of settlement with the
any material fact, which he knew or had reasonable Commission.
ground to believe was so false or misleading for the
purpose of inducing the purchase or sale of any  Upon receipt of such offer of settlement, the
security (illegal). Commission may consider the offer based on timing,
3. Pegging or fixing or stabilizing the price of security the nature of the investigation or proceeding, and the
effected either alone or with others through any public interest.
series of transactions for the purchase or sale thereof  The Commission may only agree to a settlement offer
(illegal) based on its findings that such settlement is in the
4. Short sale – sale of securities which the vendor does public interest. Any agreement to settle shall have no
not own (illegal unless done in accordance with the legal effect until publicly disclosed. Such decision may
rules and regulations of the SEC) (T3 rule). be made without a determination of guilt on the part
5. Insider trading – the act of an insider of buying or of the person making the offer.
selling securities of the issuer while in possession of
material information with respect thereto that is not Limitation of Actions
generally available to the public (illegal unless
exempted). 62.1. No action shall be maintained to enforce any liability
created under Section 56 or 57 of this Code unless
Wash sale and matched order is il legal when used as a brought within two (2) years after the discovery of the
means to create a false or misleading appearance of active untrue statement or the omission, or, if the action is to
trading in the security concerned. enforce a liability created under Subsection 57.1(a), unless
brought within two (2) years after the violation upon
Marking the close, painting the tape, squeezing the float, which it is based. In no event shall any such action be
hype and dump, and boiler room operations are illegal brought to enforce a liability created under Section 56 or
when they are effected to: Subsection 57.1 (a) more than five (5) yea rs after the
1. Raise the price or induce the purchase of a security or security was bona fide offered to the public, or under
of a controlling, controlled or commonly controlled Subsection 57.1 (b) more than five (5) years after the sale.
company by others; 62.2. No action shall be maintained to enforce any liability
2. Depress their price to induce the sale of a security, created under any other provision of this Code unless
whether of the same or of a different class, of the brought within two (2) years after the discovery of the
same issuer or of a controlling, controlled company, facts constituting the cause of action and within five (5)
or common controlled company of others; and years after such cause of action accrued.
3. Creates active trading to induce such purchase or sale
through said devices or schemes. False registration statement - liable civily - sec. 56
Ceiling as to amount of damages - triple of the amount
Other fraudulent transactions: involved
1. Employing any device, scheme, or artifice to defraud; Limitation of actions - not later than 5 years after the
2. Obtaining money or property by means of any untrue cause of action accrues
statement of a material fact of any omission to state a
material fact necessary in order to make the
statements made, in the light of the circumstances
under which they were made, not misleading; or
3. Engaging in any act, transaction, practice or course of
business which operates or would operate as a fraud
or deceit upon any person.
Fraud – akin to bad faith which implies a conscious and

intentional design to do a wrongful act for a dishonest
purpose or moral obliquity.
Settlement Offer
At any time, during an investigation or proceeding under
this Code, parties being investigated and/or charged may

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1 CORPORATION LAW

Meetings  If there is a person who authorize to call the

they may be ratified, express or implied or by way

 Stocks shall not be issued in exchange of

S64- Issuance of Certificate of Stocks

3. To afford the corporation an opportunity to object or provisions, all of which

Even if he is delinquent, he is still  W. Philpotts case, inspection may be

are entitled to exercise the improper use of

 If a SH/member is refused the right of inspection, S76-80 Mergers and Consolidations

corporate action, all rights accruing to such  Membership acquired in a non-stock

not be, however, be arbitrary as

Tenure of Office Close Corporation vs Ordinary Stock Corporation:

corporate torts unless A SH can withdraw NO WITHDRAWING SH.

same if it is a close corporation? [NO. SEC.

upon the issuance of a certificate of

particularly that of perpetuity, which in their natural

The TC rendered judgement granting private respondent’s application ISSUE:

 Liquidation and winding up – refer to the act of Question:

1. Submission to the SEC of its articles of incorporation

The following may be appointed as a resident agent:

a. A foreign corporation transacting or doing implies a continuity of commercial dealings and

 The SEC shall have the power and authority to

The allegation of fraud must be stated with particularity to

 The filing of the civil/intra-corporate case before the

RA 8799 – SECURITIES REGULATION CODE  Question: (tender offer rules/independent director

information? – if it has not been generally disclosed

2. Investment contracts, certificates of interest or

Independent Director Material non-public information – has not been generally

Fraud – akin to bad faith which implies a conscious and

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