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CORPORATION LAW – ATTY. MARIANNE JOANNE K.

CO-PUA Lectures 2018 DY’NOTES

Stakeholder vs. Shareholders/Stockholders XPN: Civil liability - When one binds himself
personally liable such as being a surety or
STAKEHOLDERS – could act in any capacity; could be a guarantor.
stockholder/shareholder, director, trustee, officer,
employee, or public in general.  Liability to third person-creditors. The Board of
 Those who has interest insofar as the corporation Directs (BoD) can collect from the stockholders
is concerned; those unpaid subscription for payment of credits
 Those who stand to benefit or prejudice in any of the corporation owed to third persons.
action of the corporation.
TRUST FUND DOCTRINE
Example: Employees are affected in case of merger or
consolidation. Example: Capital stock structure:
 Authorized Capital Stock (ACS) – 400M
STOCKHOLDERS/SHAREHOLDERS – from the words  Outstanding Capital Stock (OCS) also called as
“shares of stock”. Subscribed Capital Stock (SCS)– 100M
 Paid-in Capital (PIC) – 25M
 Shareholders are the owners.
OCS – is the committed money of the stockholders (SHs).
CORPORATION vs. PARTNERSHIP
A creditor may ask for a copy of the articles of
Q: What would encourage persons to enter into incorporation (AoI) to see when the balance of the SCS
partnership? or OCS is payable. If there is no deadline for payment of
the OCS, then the creditor may impose upon a condition
A: In a corporation, it has to have at least 5 incorporators. to the loan, that there should be a specific date on when
It is more tedious to have a corporation. the balance of the subscription would be called. The BoD
can compel the SHs to pay the full subscription.
Q: What will encourage persons to enter into a
corporation? If there is no specific date on when the balance of the
subscription will be paid, it is presumed that it is payable
A: It will shield one person to have a personal liability. In upon being called or upon the discretion of the directors
a partnership, if the partnership as a separate juridical on when the balance is needed. It is one of the powers of
entity, cannot pay with its assets, it extends to the BoD, i.e., to call upon the payment of the subscription. If
personal or own properties of the partners. In a it is not paid upon being called, then it will become a
corporation, extent of liability depends on the subscription delinquent stock. Hence there will be restrictions on what
because it is the extent of one’s commitment. the SH can and cannot do such as:

“By operation of law”  SH may be restricted to participate


 Dividends might be put on hold.
When we have the Corporation Code (CC), when its
provisions are applied, a corporation can be formed, But as long as stocks are not yet delinquent because it is
which has a separate entity. not yet due, SH may still have all the rights of a SH, as
expressly provided for by law.
Liabilities, responsibilities, all lie with the
corporation; Distinguish kinds of liability BALANCE SHEET vs. INCOME STATEMENT

 Liabilities insofar as finances are concerned, one Balance sheet is on the asset.
limits its exposure to whatever he subscribes. Income statement shows the following:
But this is not absolute because of criminal  Deductions:
liability which is imposed upon the person who  How much is the revenue
caused the offense or crime to happen. It is  Gross receipts: Cost of goods and services
devolved upon such person because the  Operating expenses (not related to the goods
corporation, as an artificial being, acts through but is necessary for the manufacture of the
such person; it acts through a natural person. It is goods)
in accord with criminal law principle that a juridical  Tax = 30%
entity cannot be imprisoned.  Net profit after tax

(Ex: Trust Receipt Law, BP22 – whoever signs is RETAINED EARNINGS


the one responsible.)
CORPORATION LAW – ATTY. MARIANNE JOANNE K. CO-PUA Lectures 2018 DY’NOTES

- Come from the operation of income statement. It Q: Can a SH question the BoDs in restricting retained
is the cumulated earnings every year. If it earnings?
cumulates there having an excess, a corporation
may have UNRESTRICTED RETAINED A: No. BoDs are the one restricting because they are the
EARNINGS (URE), which follows that dividends ones who determine the needs of the corporation.
may now be distributed. As long as there is still However, SHs can dictate indirectly by appoint BoDs to
no URE, there can be no distribution of dividends represent them who can work for their benefit. They
yet. Otherwise, if there is no URE yet, it is in effect cannot do it directly because it is within the prerogative of
a distribution of dividends from the paid-in capital, the BoDs. How to declare it, whether cash or property or
which are held in trust for the creditors, and not to stock, it depends on the directors.
the stockholders.
EFFECT OF STOCKHOLDINGS
UNRESTRICTED RETAINED EARNINGS
SHs’ approval is being secured because it might amount
When a corporation earns, and it has URE, then it would to lower percentage. There is no such threat in stock
have options: dividends because it is always proportionate (e.g., If one
1. Earmark a potion to expand the business; definite is a 5% holder now, he will receive 5% of the dividends;
expansion plans resulting or the stake in the corporation is the same). If
one is formerly a 20% holder and the base is not higher,
If the URE is appropriated, it become RRE, for it cannot he will still get 20% of the dividends. Hence, there is no
be declared as divides because it is already earmarked dilution.
for a specific purpose.
In other circumstances like increase of capital, consent of
If the URE is not allocated for dividends or expansion, if it the SHs is being secured because of possible dilution.
accumulates, it is subject to IAET of 10%.
AMENDMENTS IN THE AOI; APPROVAL
Solution: Increase the SCS or OCS so that if there are
already excess in PIC, it can still be retained by the Approval of the SHs is needed because it changes the
corporation without having it declared as dividends or very nature of the company to which a SH invested, even
without it having allocated for specific purpose. those who have shares whose voting rights are restricted,
can vote. (AASIIMID)
If the URE is distributed as CASH DIVIDENDS, it can be
declared by BoD approval only because it can just a “ONCE AN INCORPORATOR, ALWAYS AN
return of capital. It is only up to BoD level because it is INCORPORATOR”
only to determine whether there is a retained earnings or
unrestricted earnings.
Meaning: Everything can be amended in the AOI
If it would be as STOCK DIVIDENDS or PROPERTY except the portion where the incorporation is stated
DIVIDENDS, as may be decided by the BoD it has to have because it is the history of the company. Original
the SHs approval. It may only touch upon retained SHs in the corporation cannot be changed.
earnings particularly URE. If it is in stock dividends, it - ACS may be increased.
cannot be converted into cash but it will only become an
additional investment. It requires approval of the SHs INCORPORATORS:
because had it been in cash, then the unpaid subscription 1. Natural person
could be paid until the commitment is fully satisfied 2. Filipino citizen (depends on the Negative List)
whereas if it is in property or stock, the unpaid 3. Resident
subscription remains a commitment. In stock, it means 4. At least 5 incorporators
that on top of the subsisting, stock dividends will be added
thereto. Directors have to be SHs to meet the requirements in
incorporation for the meantime.
3 LAYERS OF MANAGEMENT
SHs can be more than the directors.
1. SHs – electing the BoDs because SHs want to be
represented on the Board level who can work for At the time of incorporation, for example…
their benefit;
2. BoDs – appointing the officers because they want GENERAL INFORMATION SHEET (GIS)
have people on the ground to manage the - The document one can rely on to know who the
corporation. present directors.
3. Officers - Submitted under oath by the corporate secretary.
CORPORATION LAW – ATTY. MARIANNE JOANNE K. CO-PUA Lectures 2018 DY’NOTES

- Contains the business address; (principal place 1. DILIGENCE


of business is contained in the AoI) 2. OBEDIENCE
- It is mandated to be updated annually. 3. LOYALTY

Effect of not updating: Incorporators who are no longer If one loses in the voting, his objections must be recorded
connected may still be held liable. Diligence requires that in the minutes which can be seen by the public or
the incorporator makes sure that once he is no longer stockholders. Hence, one must be diligent in objecting
connected, his name no longer appears to in the GIS, or because this could be a defense in case of liability.
in case of a SH, when he has already divested his
interests. CORPORATION BY ESTOPPEL
Examples of additional requirements for incorporation: It can only be invoked by the person who relied to the
representation in good faith to be true and as to what is
 In Competition Law, any application for merger represented. It cannot be invoked by the one who
with the SEC, it cannot be processed without misrepresented because he is the one who caused the
endorsement from the Philippine Competition confusion in the first place.
Commission so that they would know if it is within
their jurisdiction. FOUNDERS SHARE

 If one is incorporating a bank, he cannot process REDEEMABLE SHARES – exception to the general
it to SEC without the BSP’s endorsement. nature of shares. It may be allowed by the corporation but
it must be expressly provided for in the by-laws and in the
 In one is incorporating a hospital, he cannot AoI. (Why? Trust Fund Doctrine)
process it to SEC without the DOH’s
endorsement. GR: once a person has invested, it is his commitment and
it remains as his commitment to fully pay it. He cannot
 In insurance company, endorsement of the simply surrender his shares.
Insurance Commission is required.
XPN: One can simply surrender his shares if it is
Under CC, there is no requirement for the minimum expressly provided for in the by-laws or when it is sold to
capitalization. But under special laws, there are stated the public in a secondary sale and chances are, it should
minimum capitalization. In corporation, there is no be sold in a lower price so it would be enticing to another
minimum capitalization except for paid-in capital which person to come in.
requires at least P5, 000.
PREFERRED SHARES – usually redeemable because of
VALUES the guaranty of return.
 This cannot be demanded unless there is
1. Par Value – stated value of the shares upon available URE.
issuance. For a stock corporation, (except  Usually non-voting shares;
specific companies such as insurance companies  Has nothing to do with day-to-day operations
which are not entitled to have an unissued value)  Passive income of corporations
this is the value stated in the AoI.
MEMORIZE PREFERENCE OF SHARES
2. Book Value – (in relation to Balance Sheet and
Income Statement); that which dictates market KINDS OF PREFERRED SHARES
value. 1) Preferred Shares as to assets
2) Preferred Shares as to dividends
3. Market Value – the amount which the willing
seller is willing to sell, and the willing buyer, a) CUMULATIVE PREFERRED SHARE
willing to give. b) NON-CUMULATIVE PREFERRED SHARE
c) PARTICIPATING PREFERRED SHARE
VOTINGS d) NON-PARTICIPATING PREFERRED SHARE
e) CUMULATIVE-PARTICIPATING
1. Straight PREFERRED SHARE
2. Cumulative
3. NOTE: First in dividends, first in assets!

OBLIGATIONS OF A DIRECTOR
CORPORATION LAW – ATTY. MARIANNE JOANNE K. CO-PUA Lectures 2018 DY’NOTES

“Properties, Attributes, and Properties” SECTION 2

1. “Expressly attributed by law” (demanded by the


nature of existence) – implied powers, reasonably “Right of Succession”
necessary to carry out what it is expressly
conferred by law (either by CC or by special law) Corporation remains the same even the stockholders will
or to carry out the purpose for which the change. It is one of the advantages of having a
corporation is formed. corporation. A stockholder may also transfers his shares
to another person and it does not affect the corporation. It
Example: Corporate funds can be used as an investment will still be the same corporation as it is known even it
to another corporation as a passive investment. It can be would have different stockholders, different directors or
invested in a preferred share so that one could have a officers. It may still survive.
guaranteed rate; or with a company with a very good
retained earnings; or in redeemable shares which could “Properties, Attributes, and Properties”; 2 Types
be either at the option of the corporation or of the investing
shareholder. 1. “Expressly attributed by law”
2. “Incident to its existence”
NOTE: Do not invest in a corporation where the
redeemable shares is at the option of the corporation DOCTRINE OF PIERCING THE VEIL OF
issuing it because it would discretionary on the part of the CORPORATE FICTION
latter on when the former can redeem it. It should be at
the option of the stockholder. “A corporation’s separate and distinct legal personality
may be disregarded and the veil of corporate fiction
2. “Incident to its existence” – those which are pierced when the notion of legal entity is used to:
necessary to corporate existence. Example: to 1. defeat public convenience;
have name; to have stockholders, etc. 2. justify wrong;
3. protect fraud; or
- Implied is conferred from something that is existing 4. defend crime.” (Siain Enterprise vs. Cupertino;
basically from express authority of the law. G.R. No. 170782, June 22, 2009)
- Incident, is when the very nature of its existence, it
demands or requires those powers. It is elementary that a corporation has a personality,
separate and distinct from its officers, directors, or
Ownership in the shares is not ownership in the assets. It persons composing it.
cannot pertain into any asset of the corporation. He may
own the stocks that run the corporation, but he cannot “While a share of stock represents a proportionate or
claim to own the properties and assets of the same. aliquot interest in the property of the corporation, it does
not vest the owner thereof with any legal right or title to
CORPORATE OFFICERS any of the property, his interest in the corporate property
being equitable or beneficial in nature. Shareholders are
1. President – must be a stockholder; no director who in no legal sense the owners of corporate property, which
is not a stockholder at the same time; cannot be is owned by the corporation as a distinct legal person.”
CorSec and Treasurer. (G.R. No. 90580; April 8, 1991)

2. Treasurer – need not be a citizen and a stockholder NOTE: What would vest ownership would be the
but must be a resident. dissolution and liquidation of the assets and properties of
the corporation. If the properties were sold prior to
3. Corporate Secretary – must be a Filipino citizen but dissolution, then aliquot interest or inchoate right ceases.
does not need to be a stockholder.
“It is basic that a corporation is invested by law with a
NOTE: Officers not mentioned in the by-laws, they are not personality separate and distinct from those of the
corporate officers. The significance is that, if an officer is persons composing it as well as from that of any other
in the by-laws, and was removed, it is intra-corporate. If legal entity to which it may be related. Mere ownership
he filed a case, it is a civil case before regular courts. If an by a single stockholder or by another corporation of
officer is not in the by-laws, and was removed, it is not a all or nearly all of the capital stock of a corporation is
termination of employment. If he will file a case, it should not of itself sufficient ground for disregarding the
be filed before the NLRC. separate corporate personality.” (Alberto S. Sunio vs.
NLRC; G.R. No. L-57767; January 31, 1984)
CORPORATION LAW – ATTY. MARIANNE JOANNE K. CO-PUA Lectures 2018 DY’NOTES

Exceptions are strictly construed; elements must be subject to, or distinguished one corporation from a
present. seemingly separate one, were it not for the existing
corporate fiction. But to do this, the court must be sure
that the corporate fiction was misused, to such an extent
“The attempt to make the two factories appear as two that injustice, fraud, or crime was committed upon
separate businesses, when in reality they are but one, is another, disregarding, thus, his, her, or its rights. It is the
but a devise to defeat the ends of the law and should not protection of the interests of innocent third persons
be permitted to prevail. Although the coffee factory is a dealing with the corporate entity which the law aims to
corporation and, by legal fiction, an entity existing protect by this doctrine.” General rule must be upheld.
separate and apart from persons composing it, T and his (Traders Royal Bank vs. CA; G.R. No. 93397; March 3,
family, it is settled that this fiction of law, which had been 1997)
introduced as a matter of convenience and to subserve
the ends of justice cannot be invoked to further an end The rule is that “when the veil of corporate fiction is made
subversive of that purpose. (13 Am. Jur. 160-162; Anno. as a shield to perpetuate fraud and/or confuse legitimate
1 A.L.R. 612, s. 34 A.L.R. 599.)” issues, the same should be pierced.” (Jacinto vs. CA; GR.
No. 80043; June 6, 1991)
(20:00)
The theory of corporate entity, in the first place, was not
“Under the doctrine of piercing the veil of corporate entity, meant to promote unfair objectives or otherwise, to shield
when valid grounds therefore exist, the legal fiction that a them. (Villanueva vs. Adre; G.R. No. 80863; April 27,
corporation is an entity with a juridical personality 1989)
separate and distinct from its members or stockholders
may be disregarded. In such cases, the corporation will Likewise, where it appears that two business enterprises
be considered as a mere association of persons. The are owned, conducted and controlled by the same parties,
members or stockholders of the corporation will be both law and equity will, when necessary to protect the
considered as the corporation, that is liability will attach rights of third persons, disregard the legal fiction that two
directly to the officers and stockholders. The doctrine corporations are distinct entities, and treat them as
applies when the corporate fiction is used to defeat public identical. (Philippine Veterans Investment Development
convenience, justify wrong, protect fraud, or defend crime, Corporation vs. CA; G.R. No. 85266; January 30, 1990)
or when it is made as a shield to confuse the legitimate
issues, or where a corporation is the mere alter ego or WHEN NOT APPLICABLE
business conduit of a person, or where the corporation is
so organized and controlled and its affairs are so It is apparent, therefore, that the doctrine has no
conducted as to make it merely an instrumentality, application to this case where the purpose is not to hold
agency, conduit or adjunct of another corporation.” the individual stockholders liable for the obligations of the
(INDOPHIL TEXTILE MILL WORKERS UNION-PTGWO corporation but, on the contrary, to hold the corporation
vs. VOLUNTARY ARBITRATOR TEODORICO P. liable for the obligations of a stockholder or stockholders.
CALICA and INDOPHIL TEXTILE MILLS, INC.; G.R. No. Piercing the veil of corporate entity means looking through
96490 February 3, 1992) the corporate form to the individual stockholders
composing it. (Robledo vs. NLRC; G.R. No. 110358;
“But for the separate juridical personality of a corporation November 9, 1994)
to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.” (Del RIGHTS AND LIABILITIES OF A CORPORATION
Rosario vs. NLRC; G.R. No. 85416; July 24, 1990)
A corporation is liable, therefore, whenever a tortious act
“So, when the notion of separate juridical personality is is committed by an officer or agent under express
used to defeat public convenience, justify wrong, protect direction or authority from the stockholders or members
fraud or defend crime, or is used as a device to defeat the acting as a body, or, generally, from the directors as the
labor laws, this separate personality of the corporation governing body. (PNB vs. CA; G.R. No. L-27155; May 18,
may be disregarded or the veil of corporate fiction pierced. 1978)
This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another The test in determining the applicability of the
corporation.” (Concept Builders vs. NLRC; G.R. No. doctrine of piercing the veil of corporate fiction is as
108734; May 29, 1996) follows:

NATURE OF DOCTRINE 1. Control, not mere majority or complete stock control,


but complete domination, not only of finances but of policy
“Piercing the veil of corporate entity requires the court to and business practice in respect to the transaction
see through the protective shroud which exempts its attacked so that the corporate entity as to this transaction
stockholders from liabilities that ordinarily, they could be
CORPORATION LAW – ATTY. MARIANNE JOANNE K. CO-PUA Lectures 2018 DY’NOTES

had at the time no separate mind, will or existence of its actions. All things considered, conversion to preferred
own; shares would best serve the interests and rights of the
government or the eventual owner of the CIIF SMC
2. Such control must have been used by the defendant to shares.” (Philippine Coconut Producers Federation, Inc.
commit fraud or wrong, to perpetuate the violation of a (COCOFED); G.R. Nos. 177857-58)
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal rights; and “A preferred share of stock, on one hand, is one which
entitles the holder thereof to certain preferences over the
3. The aforesaid control and breach of duty must holders of common stock. The preferences are designed
proximately cause the injury or unjust loss complained of. to induce persons to subscribe for shares of a
corporation.9 Preferred shares take a multiplicity of forms.
The absence of any one of these elements prevents The most common forms may be classified into two:
piercing the corporate veil in applying the instrumentality
or alter ego doctrine, the courts are concerned with reality (1) preferred shares as to assets; and
and not form, with how the corporation operated and the (2) preferred shares as to dividends.
individual defendants relationship to that operation.
(Concept Builders vs. NLRC; G.R. No. 108734; May 29, “The former is a share which gives the holder thereof
1996) preference in the distribution of the assets of the
corporation in case of liquidation; the latter is a share the
Section 4 of the Corporation Code renders the provisions holder of which is entitled to receive dividends on said
of that Code applicable in a supplementary manner to all share to the extent agreed upon before any dividends at
corporations, including those with special or individual all are paid to the holders of common stock. There is no
charters so long as those provisions are not inconsistent guaranty, however, that the share will receive any
with such charters. We find no provision in P.D. No. 269, dividends.” (Republic Planters Bank vs. Agana, Sr; G.R.
as amended, that would exclude expressly or by No. 51765; March 3, 1997)
necessary implication the applicability of Section 31 of the
Corporation Code in respect of members of the boards of “Redeemable shares, on the other hand, are shares
directors of electric cooperatives. (Benguet Electric usually preferred, which by their terms are redeemable at
Cooperative, Inc. vs. NLRC; G.R. No. 89070; May 18, a fixed date, or at the option of either issuing corporation,
1992) or the stockholder, or both at a certain redemption price.
A redemption by the corporation of its stock is, in a sense,
CLASSIFICATION OF SHARES a repurchase of it for cancellation. The present Code
1. Voting Shares allows redemption of shares even if there are no
2. Non-voting Shares unrestricted retained earnings on the books of the
corporation. This is a new provision which in effect
KINDS OF MEETINGS qualifies the general rule that the corporation cannot
1. Regular purchase its own shares except out of current retained
2. Special earnings. However, while redeemable shares may be
redeemed regardless of the existence of unrestricted
“Shares of stock in corporations may be divided into retained earnings, this is subject to the condition that the
voting shares and non-voting shares, which are generally corporation has, after such redemption, assets in its
issued as preferred or redeemable shares. books to cover debts and liabilities inclusive of capital
stock. Redemption, therefore, may not be made where
Voting rights are exercised during regular or special the corporation is insolvent or if such redemption will
meetings of stockholders; regular meetings to be held cause insolvency or inability of the corporation to meet its
annually on a fixed date, while special meetings may be debts as they mature.” (Republic Planters Bank vs.
held at any time necessary or as provided in the by-laws, Agana, Sr; G.R. No. 51765; March 3, 1997) – (Note:
upon due notice. (GSIS vs. CA; Gr. No. 183905 & SEC Relate to Trust Fund Doctrine)
vs. Rosete, GR. No. 184275)
“A treasury share or stock, which may be common or
MEMORIZE SEC. 6 preferred, may be used for a variety of corporate
purposes, such as for a stock bonus plan for management
ADVANTAGES ACCORDED TO PREFERRED and employees or for acquiring another company. It may
SHARES UPON CONVERSION be held indefinitely, resold or retired. While held in the
companys treasury, the stock earns no dividends and has
“The advantages accorded to the preferred shares are no vote in company affairs. Thus, the CIIF common
undeniable, namely: the significant premium in the price shares that would become treasury shares are not entitled
being offered; the preference enjoyed in the dividends as to voting rights.” (Philippine Coconut Producers
well as in the liquidation of assets; and the voting rights Federation, Inc. (COCOFED); G.R. Nos. 177857-58) –
still retained by preferred shares in major corporate (Note: Example: Stock Bous)
CORPORATION LAW – ATTY. MARIANNE JOANNE K. CO-PUA Lectures 2018 DY’NOTES

The right to the exclusive use of a corporate name with


“The charter of a corporation is a contract between three freedom from infringement by similarity is determined by
parties: (a) it is a contract between the state and the priority of adoption.
corporation to which the charter is granted; (b) it is a
contact between the stockholders and the state and (c) it As early as Western Equipment and Supply Co. v. Reyes,
is also a contract between the corporation and its 51 Phil. 115 (1927), the Court declared that a
stockholders.” (The Governtment of the Philippines corporation's right to use its corporate and trade name is
Islands vs. The Manila Railroad Company & Paez; GR. a property right, a right in rem, which it may assert and
No. L-30646; January 30, 1929) protect against the world in the same manner as it may
protect its tangible property, real or personal, against
“SEC. 17, CC; The amendment of the articles of trespass or conversion. It is regarded, to a certain extent,
incorporation requires merely that: as a property right and one which cannot be impaired or
a) the amendment is not contrary to any provision or defeated by subsequent appropriation by another
requirement under the Corporation Code, and corporation in the same field.” (PHILIPS EXPORT B.V.,
that vs. CA; GR. No. 96161; February 21, 1992)
b) it is for a legitimate purpose.”
(Iglesia Evangelica Metodista En Las Islas Filipinas “The name of a corporation is therefore essential to its
(IEMELIF) (Corporation Sole), INC. vs. Bishop Nathanael existence. It cannot change its name except in the
Lazaro; G.R. No: 184088; July 6, 2010) manner provided by the statute. By that name alone is it
authorized to transact business. The law gives a
CORPORATE NAME corporation no express or implied authority to assume
another name that is unappropriated: still less that of
“Parties organizing a corporation must choose a name at another corporation, which is expressly set apart for it and
their peril; and the use of a name similar to one adopted protected by the law. If any corporation could assume at
by another corporation, whether a business or a nonprofit pleasure as an unregistered trade name the name of
organization, if misleading or likely to injure in the exercise another corporation, this practice would result in
of its corporate functions, regardless of intent, may be confusion and open the door to frauds and evasions and
prevented by the corporation having a prior right, by a suit difficulties of administration and supervision.” (RED LINE
for injunction against the new corporation to prevent the TRANSPORTATION CO. vs. RURAL TRANSIT CO.,
use of the name.” (Ang Mga Kaanib Sa Iglesia Ng Dios LTD.; G.R. No. 41570; September 6, 1934)\
Kay Kristo Hesus, H.S.K. Sa Bansang Pilipinas, Inc. Vs.
Iglesia Ng Dios Kay Cristo Jesus, Haligi At Suhay Ng IMPORTANCE OF CORPORATE NAME
Katotohanan; G.R. No. 137592. December 12, 2001)
A name is peculiarly important as necessary to the very
“A change in the corporate name does not make a new existence of a corporation. Its name is one of its attributes,
corporation, and whether effected by special act or under an element of its existence, and essential to its identity.
a general law, has no effect on the identity of the The general rule as to corporations is that each
corporation, or on its property, rights, or liabilities. corporation must have a name by which it is to sue and
be sued and do all legal acts. The name of a corporation
The corporation continues, as before, responsible in its in this respect designates the corporation in the same
new name for all debts or other liabilities which it had manner as the name of an individual designates the
previously contracted or incurred.” (Republic Planters person; and the right to use its corporate name is as much
Bank vs. CA; G.R. No. 93073; December 21, 1992) a part of the corporate franchise as any other privilege
granted.
“SEC. 18, CC; The statutory prohibition cannot be any A corporation has an exclusive right to the use of its name,
clearer. To come within its scope, two requisites must be which may be protected by injunction upon a principle
proven, namely: similar to that upon which persons are protected in the
use of trademarks and tradenames. Such principle
(1) that the complainant corporation acquired a prior right proceeds upon the theory that it is a fraud on the
over the use of such corporate name; and corporation which has acquired a right to that name and
(2) the proposed name is either:
perhaps carried on its business thereunder, that another
should attempt to use the same name, or the same name
(a) identical; or
(b) deceptively or confusingly similar to that of any with a slight variation in such a way as to induce persons
existing corporation or to any other name already to deal with it in the belief that they are dealing with the
protected by law; or corporation which has given a reputation to the name.”
(c) patently deceptive, confusing or contrary to (PHILIPS EXPORT B.V., vs. CA; GR. No. 96161;
existing law. February 21, 1992)
CORPORATION LAW – ATTY. MARIANNE JOANNE K. CO-PUA Lectures 2018 DY’NOTES

CORPORATE NAME vs. TRADE NAME office may have become vacant, nor because the
incumbent holds over in office beyond the end of the term
CORPORATE NAME due to the fact that a successor has not been elected and
TRADE NAME has failed to qualify.

COMMENCEMENT OF CORPORATE EXISTENCE Term is distinguished from tenure in that an officers


tenure represents the term during which the incumbent
“Substantial compliance with conditions subsequent will actually holds office. The tenure may be shorter (or, in
suffice to perfect corporate personality. case of holdover, longer) than the term for reasons within
or beyond the power of the incumbent.
Organization and commencement of transaction of
corporate business are but conditions subsequent and not The holdover period that time from the lapse of one year
prerequisites for acquisition of corporate personality. The from a members election to the Board and until his
adoption and filing of by-laws is also a condition successors election and qualification is not part of the
subsequent. Under Section 19 of the Corporation Code, directors original term of office, nor is it a new term; the
a corporation commences its corporate existence and holdover period, however, constitutes part of his tenure.
juridical personality and is deemed incorporated from the
date the Securities and Exchange Commission issues Corollary, when an incumbent member of the board of
certificate of incorporation under its official seal. This may directors continues to serve in a holdover capacity, it
be done even before the filing of the by-laws, which under implies that the office has a fixed term, which has
Section 46 of the Corporation Code, must be adopted expired, and the incumbent is holding the succeeding
"within one month after receipt of official notice of the term.” (Valle Verde Country Club, Inc., vs. Africa; G.R. No.
issuance of its certificate of incorporation." (CHUNG KA 151969; September 4, 2009)
BIO vs. IAC; G.R. No. L- 71837; July 26, 1988) (Note: 30
days from receipt of Certificate of Incorporation from SEC, “As a general rule, officers and directors of a corporation
must file by-laws.) hold over after the expiration of their terms until such time
as their successors are elected or appointed.
CORPORATION BY ESTOPPEL
The holdover doctrine has, to be sure, a purpose which is
When a third person has entered into a contract with an at once legal as it is practical. It accords validity to what
association which represented itself to be a corporation, would otherwise be deemed as dubious corporate acts
the association will be estopped from denying its and gives continuity to a corporate enterprise in its
corporate capacity in a suit against it by such third person. relation to outsiders.” (Seeres vs. COMELEC; G.R. No.
It cannot allege lack of capacity to be sued to evade 178678; April 16, 2009)
responsibility on a contract it had entered into and by
virtue of which it received advantages and benefits. THE BOARD OF DIRECTORS MAY VALIDLY
(Christian Child’s Fund vs. NLRC; G.R. No. L-84502; DELEGATE SOME OF ITS FUNCTIONS AND POWERS
June 30, 1989) TO OFFICERS COMMITTEE OR AGENTS

“Corporation by estoppel doctrine is founded on principles Under Section 23, the power and the responsibility to
of equity and is designed to prevent injustice and decide whether the corporation should enter into a
unfairness. It applies when persons assume to form a contract that will bind the corporation are lodged in the
corporation and exercise corporate functions and enter board of directors, subject to the articles of incorporation,
into business relations with third persons. Where there is by-laws, or relevant provisions of law. However, just as a
no third person involved and the conflict arises only natural person may authorize another to do certain
among those assuming the form of a corporation, who acts for and on his behalf, the board of directors may
therefore know that it has not been registered, there is no validly delegate some of its functions and powers to
corporation by estoppel.” (Lozano v. De Los Santos, 274 officers, committees or agents. The authority of such
SCRA 452 (1997) individuals to bind the corporation is generally derived
from law, corporate by-laws or authorization from the
“TERM” OF OFFICE, defined; Distinguished from board, either expressly or impliedly by habit, custom or
tenure acquiescence in the general course of business. (CEBU
MACTAN MEMBERS CENTER, INC. vs. MASAHIRO
The word term has acquired a definite meaning in TSUKAHARA; G.R. No. 159624; July 17, 2009) (NOTE:
jurisprudence. In several cases, we have defined term as “authorize another to do certain acts for and on his behalf”
the time during which the officer may claim to hold the – ATTORNEY-IN-FACT; “authorization from the board” –
office as of right, and fixes the interval after which the BOARD RESOLUTION)
several incumbents shall succeed one another. The term
of office is not affected by the holdover. The term is fixed
by statute and it does not change simply because the
CORPORATION LAW – ATTY. MARIANNE JOANNE K. CO-PUA Lectures 2018 DY’NOTES

CORPORATION MAY DELEGATE POWERS AND


FUNCTIONS TO OFFICERS, COMMITTEES OR
AGENTS

“A corporation, like a natural person who may authorize


another to do certain acts for and in his behalf, through its
board of directors, may legally delegate some of its
functions and powers to its officers, committees or agents
appointed by it. In the absence of an authority from the
board of directors, no person, not even the officers of the
corporation, can validly bind the corporation.”
(Luzviminda Visayan vs. NLRC; G.R. No. 69999; April 30,
1991)

TAKE NOTE ON HOW EXECUTIVE COMMITTEE IS


CONSTITUTED!!!

LIMITATATIONS:
The things that they cannot do are:
1. those which are reserved for action of the BoD; If they
come across things they cannot do because it is only
within the power of the BoD, they are only
RECOMMENDARY. They will discuss and when they
present it to the BoD, there would already be a clear
recommendation, but they cannot approve the action.
They will present it to the BoD, and the Board will be the
one to officially approve it.

SELF-ASSESSMENT EXAM DAY!!!


CORPORATION LAW – ATTY. MARIANNE JOANNE K. CO-PUA Lectures 2018 DY’NOTES

CORPORATE POWERS Commissioner of Internal Revenue; G.R. No. 151413;


February 13, 2008)
The corporate powers of a corporation, including the
power to sue and be sued in its corporate name, are “Indubitably, a corporation may act only through its board
exercised by the board of directors. The physical acts of of directors, or, when authorized either by its bylaws or by
the corporation, like the signing of documents such as its board resolution, through its officers or agents in the
verification and certification of non-forum shopping, can normal course of business. The general principles of
only be performed by natural persons duly authorized for agency govern the relation between the corporation and
the purpose by corporate by-laws or by a specific act of its officers or agents, subject to the articles of
the board of directors. (G.R. No. 179652) incorporation, bylaws, or relevant provisions of law. Thus,
this Court has held that a corporate officer or agent may
NOTE: represent and bind the corporation in transactions with
If a counsel is representing a corporation, there should third persons to the extent that the authority to do so has
always be a Board Resolution appointing the former as been conferred upon him, and this includes:
counsel. If the name of the counsel is not indicated in the  powers which have been intentionally conferred,
Board Resolution, it is still acceptable provided the and also such powers as, in the usual course of
president or other officer was empowered to hire counsel, the particular business, are incidental to, or may
which is the alternative. The authority of the counsel be implied from,
would be derived from the authority given to the  the powers intentionally conferred,
authorized President or other officer. It cannot be simply  powers added by custom and usage, as usually
be argued that just because the power to sue is expressly pertaining to the particular officer or agent, and
provided in the CC, then it would no longer require any  such apparent powers as the corporation has
authority from the Board, and can just sue for and in caused persons dealing with the officer or agent
behalf of the corporation. It is not part of the function of to believe that it has conferred.” (San Juan
the president or other officers. If the act is not in the by- Structural and Steel Fabricators, Inc. vs. CA; G.R.
laws, then a Board Resolution regarding such act is No. 129459. September 29, 1998)
required. o Estoppel is possible the effect of an act
of an officer which was not authorized.
Physical acts of the corporation such as signing of a
document or verification of a non-forum shopping, can “Since a corporation, such as the private respondent, can
only be performed by natural persons duly authorized for act only through its officers and agents, all acts within the
the purpose by the corporate by-laws, or a specific act of powers of said corporation may be performed by agents
the Board of Directs. of its selection; and, except so far as limitations or
restrictions may be imposed by special charter, by-law, or
Corporate authority is necessary, either the by-laws would statutory provisions, the same general principles of law
specifically provide for example that the Vice-President which govern the relation of agency for a natural
for legal affairs shall take charge to pursue an action for person govern the officer or agent of a corporation,
and in behalf of the corporation. Otherwise, there should of whatever status or rank, in respect to his power to
be a resolution specifically pointing in that representative. act for the corporation; and agents when once
appointed, or members acting in their stead, are
subject to the same rules, liabilities, and incapacities
EXERCISE OF CORPORATE POWERS as are agents of individuals and private persons.” (AF
REALTY & DEVELOPMENT, INC. vs. DIESELMAN
Corporate powers exercised through board of FREIGHT SERVICES, CO.; G.R. No. 111448. January
directors. It must be borne in mind that Sec. 23, in 16, 2002)
relation to Sec. 25 of the Corporation Code, clearly
enunciates that: NOTE:
1. All corporate powers are exercised, -Legal capacity
2. All business conducted, and
3. All properties controlled by the board of directors. -When you authorize someone as your attorney-in-fact,
you also impliedly confer with him to act all other things.
A corporation has a separate and distinct personality from This is when you authorize someone with SPA, by
its directors and officers and can only exercise its enumerating powers including those which are necessary
corporate powers through the board of directors. Thus, it and incidental for him to discharge those functions. It is
is clear that an individual corporate officer cannot solely the same as in this case but those which are not expressly
exercise any corporate power pertaining to the conferred are considered as beyond the scope of the
corporation without authority from the board of directors. agency. It must be strictly construed. If it is not in the
This has been our constant holding in cases instituted by resolution, then the third party can say that the agent has
a corporation. (Cagayan Valley Drug Corporation vs. no authority.
CORPORATION LAW – ATTY. MARIANNE JOANNE K. CO-PUA Lectures 2018 DY’NOTES

-President can be given power to engage counsel but the "apparent authority", with special reference to banks, was
counsel was not yet named. So the Board Resolution laid out in Prudential Bank vs. Court of Appeals31 , where
would specifically state that parameters under which the it was held that:
President may appoint counsel.
Conformably, we have declared in countless
“Moreover, " . . . a corporate officer or agent may decisions that the principal is liable for obligations
represent and bind the corporation in transactions with contracted by the agent. The agent's apparent
third persons to the extent that authority to do so has been representation yields to the principal's true
conferred upon him, and this includes powers which have representation and the contract is considered as
been intentionally conferred, and also such powers as, in entered into between the principal and the third
the usual course of the particular business, are: person (citing National Food Authority vs.
1. incidental to the powers intentionally conferred; Intermediate Appellate Court, 184 SCRA 166).
2. implied from the powers intentionally conferred;
3. powers added by custom and usage, as usually A bank is liable for wrongful acts of its officers done
pertaining to the particular officer or agent, and in the interests of the bank or in the course of
such apparent powers as the corporation has dealings of the officers in their representative
caused persons dealing with the officer or agent capacity but not for acts outside the scope of their
to believe that it has conferred.” (Yao Ka Sin authority (9 C.J.S., p. 417). A bank holding out its
Trading vs. CA; G.R. No. L-53820; June 15, officers and agents as worthy of confidence will not
1992) be permitted to profit by the frauds they may thus
be enabled to perpetrate in the apparent scope of
NOTE: Customarily, a corporate secretary is in charged their employment; nor will it be permitted to shirk its
with the records. There is already customary that he also responsibility for such frauds even though no
certifies the records because he is the custodian. He need benefit may accrue to the bank therefrom. (10 Am
not be authorized by the Board to certify records. It may Jur 2d, p. 114).
also be incidental to his power as a corporate secretary.
Accordingly, a banking corporation is liable to
Powers to be exercised need not all be enumerated as innocent third persons where the representation is
long as the 3 parameters above are observed. made in the course of its business by an agent
acting within the general scope of his authority even
BUSINESS JUDGMENT RULE though, in the particular case, the agent is secretly
abusing his authority and attempting to perpetrate
“This is in accord with the business judgment rule a fraud upon his principal or some other person, for
whereby the SEC and the courts are barred from his own ultimate benefit (McIntosh v. Dakota Trust
intruding into business judgments of corporations, Co., 52 ND 752, 204 NW 818, 40 ALR 1021).
when the same are made in good faith. The said rule
precludes the reversal of the decision of the PSE to deny NOTES: Even if the agent has acted beyond the scope of
PALIs listing application, absent a showing a bad faith on his authority, the corporation cannot deny such authority
the part of the PSE.” (Philippine Stock Exchange, Inc. vs. if has made the third person believe that such agent has
CA; G.R. No. 125469, October 27, 1997) an authority.

NOTES: As long as the business judgment is not one of Example: A corporation has given the broker a contact
those excepted such as bad faith and fraud, then the SEC which provides 2 months deposit, 2 months advance, and
and he courts cannot encroach upon the business 10 postdated checks. The broker delivered it to the lessee
judgment of a corporation. but he delivered different contract, which provides 12
months advance payment and 2 months deposit. What
Example: When one of the departments in a corporation the lessee delivered then, are postdated checks of his
was closed, it would have an effect of retrenchment or friend who is unknown. Hence, it was complied insofar as
redundancy. Even if the business is not losing, as long as the corporation is concerned.
it is made in good faith, the SEC and the courts cannot
encroach upon the business judgment. But if the corporation has only told the client that the
broker will only show the unity and that he must come to
DOCTRINE OF APPARENT AUTHORITY the office of the corporation if he is willing to transact, then
there would be no apparent authority given to the broker
FIRST PHILIPPINE INTERNATIONAL BANK vs. CA; because the latter was never authorized in the first place
G.R. No. 115849; January 24, 1996 to deliver documents or get document in behalf of the
corporation. What he is authorized is just to show the unit.
The authority of a corporate officer in dealing with third
persons may be actual or apparent. The doctrine of If within the scope and it was abused by the agent to
something related to that, the representations and
CORPORATION LAW – ATTY. MARIANNE JOANNE K. CO-PUA Lectures 2018 DY’NOTES

actuations or acquiescence of the corporation would give of doing business.” (Vicente vs. Geraldez; G.R. No. L-
apparent authority to the agent to act in its behalf. 32473. July 31, 1973)

DOCTRINE OF APPARENT AUTHORITY, NOT “The power and the responsibility to decide whether the
APPLICABLE corporation should enter into a contract that will bind the
corporation are lodged in the board, subject to the articles
“Contracts entered into by a corporate president without of incorporation, bylaws, or relevant provisions of law. In
express prior board approval bind the corporation, when the absence of authority from the board of directors, no
such officers apparent authority is established and when person, not even its officers, can validly bind a
these contracts are ratified by the corporation. corporation.

Apparent authority is derived not merely from practice. Its However, just as a natural person may authorize
existence may be ascertained through: another to do certain acts for and on his behalf, the
board of directors may validly delegate some of its
(1) the general manner in which the corporation functions and powers to its officers, committees or agents.
holds out an officer or agent as having the power The authority of these individuals to bind the corporation
to act or, in other words, the apparent authority to is generally derived from law, corporate bylaws or
act in general, with which it clothes him; or authorization from the board, either expressly or impliedly
(2) the acquiescence in his acts of a particular by habit, custom or acquiescence in the general course of
nature, with actual or constructive knowledge business.”
thereof, whether within or beyond the scope of his
ordinary powers. The existence of apparent authority may be ascertained
through:
It requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other parties. It 1) the general manner in which the corporation holds
is not the quantity of similar acts which establishes out an officer or agent as having the power to act, or in
apparent authority, but the vesting of a corporate other words, the apparent authority to act in general,
officer with the power to bind the corporation.” with which it clothes him; or
(PEOPLES AIRCARGO AND WAREHOUSING CO.
INC., vs. CA; G.R. No. 117847. October 7, 1998) 2) the acquiescence in his acts of a particular nature,
with actual or constructive knowledge thereof, within or
A CORPORATION CAN ACT ONLY THROUGH ITS beyond the scope of his ordinary powers.
BOARD OF DIRECTORS
Accordingly, the authority to act for and to bind a
"The law is settled that contracts between a corporation corporation may be presumed from acts of recognition in
and third persons must be made by or under the authority other instances when the power was exercised without
of its board of directors and not by its stockholders. any objection from its board or shareholders.” (Banate vs.
Hence, the action of the stockholders in such matters is Philippine Countryside Rural Bank; G.R. No. 163825; July
only advisory and not in any wise binding on the 13, 2010) (NOTE: If no intention of giving apparent
corporation." (Luzviminda Visayan vs. NLRC; G.R. No. authority, do not keep quiet if you have actual/constructive
69999; April 30, 1991) knowledge.)

“A corporation is bound by the act of an officer or agent “The board of directors of a corporation is a creation of the
only to the extent that the power to do the act has been stockholders and controls and directs the affairs of the
conferred upon him expressly by the charter, by-laws or corporation by allegation of the stockholders. But the
action of the stockholders or directors, or can be implied board of directors, or the majority thereof, in drawing to
from powers expressly conferred, or which are incidental themselves the power of the corporation, occupies a
thereto, or where the act is within the apparent powers position of trusteeship in relation to the minority of the
which the corporation has caused third persons to believe stock in the sense that the board should exercise good
it has conferred upon the officer or agent. faith, care and diligence in the administration of the affairs
of the corporation and should protect not only the interest
Whatever authority the officers or agents of a corporation of the majority but also those of the minority of the stock.
may have is derived from the board of directors, or other Where a majority of the board of directors wastes or
governing body, unless conferred by the charter of the dissipates the funds of the corporation or fraudulently
corporation. A corporate officer’s power as an agent of the disposes of its properties, or performs ultra vires acts, the
corporation must therefore be sought from the statute, court, in the exercise of its equity jurisdiction, and upon
the charter, the by-laws, or in a delegation of authority showing that intracorporate remedy is unavailing, will
to such officer, from the acts of the board of directors, entertain a suit filed by the minority members of the board
formally expressed or implied from a habit or custom of directors, for and in behalf of the corporation, to prevent
waste and dissipation and the commission of illegal acts
CORPORATION LAW – ATTY. MARIANNE JOANNE K. CO-PUA Lectures 2018 DY’NOTES

and otherwise redress the injuries of the minority corporation, each stockholder is necessarily affected
stockholders against the wrongdoing of the majority. The because the value of his interest therein would be
action in such a case is said to be brought derivatively in impaired, this fact of itself is not sufficient to give him an
behalf of the corporation to protect the rights of the individual cause of action since the corporation is a
minority stockholders thereof.” (Angeles vs. Santos; G.R. person distinct and separate from him, and can and
No. L-43413; August 31, 1937) should itself sue the wrongdoer. Otherwise, not only
would the theory of separate entity be violated, but there
“Where the majority of the board of directors wastes or would be multiplicity of suits as well as a violation of the
dissipates the funds of the corporation or fraudulently priority rights of creditors. Furthermore, there is the
disposes of its properties, or performs ultra vires acts, the difficulty of determining the amount of damages that
court, in the exercise of its equity jurisdiction, and upon should be paid to each individual stockholder.
showing that intracorporate remedy is unavailing, will
entertain a suit filed by the minority members of the board However, in cases of mismanagement where the wrongful
of directors, for and in behalf of the corporation, to prevent acts are committed by the directors or trustees
waste and dissipation and the commission of illegal acts themselves, a stockholder or member may find that he
and otherwise redress the injuries of the minority has no redress because the former are vested by law with
stockholders against the wrongdoing of the majority. The the right to decide whether or not the corporation should
action in such a case is said to be brought derivatively in sue, and they will never be willing to sue themselves. The
behalf of the corporation to protect the rights of the corporation would thus be helpless to seek remedy.
minority stockholders thereof.” (Cua, Jr. vs. Tan; G.R. No. Because of the frequent occurrence of such a situation,
181455-56; December 4, 2009) the common law gradually recognized the right of a
stockholder to sue on behalf of a corporation in what
DERIVATIVE SUIT eventually became known as a derivative suit. It has been
proven to be an effective remedy of the minority against
It is well settled in this jurisdiction that where corporate the abuses of management.
directors are guilty of a breach of trust not of mere
error of judgment or abuse of discretion and Thus, an individual stockholder is permitted to institute a
intracorporate remedy is futile or useless, a derivative suit on behalf of the corporation wherein he
stockholder may institute a suit in behalf of himself and holds stock in order to protect or vindicate corporate
other stockholders and for the benefit of the corporation, rights, whenever officials of the corporation refuse to sue
to bring about a redress of the wrong inflicted directly or are the ones to be sued or hold the control of the
upon the corporation and indirectly upon the stockholders. corporation. In such actions, the suing stockholder is
regarded as the nominal party, with the corporation as the
NOTE: Best Judgment Rule may justify why they sell party in interest.” (Cua, Jr. vs. Tan; G.R. No. 181455-56;
properties or assets at a loss. December 4, 2009)

A DERIVATIVE SUIT MUST BE DIFFERENTIATED (57:41)


FROM INDIVIDUAL AND REPRESENTATIVE OR
CLASS SUIT, thus, ELECTION OF DIRECTORS OR TRUSTEES

“Suits by stockholders or members of a corporation based “…the distinction between proxy solicitation and proxy
on wrongful or fraudulent acts of directors or other validation cannot be dismissed offhand. The right of a
persons may be classified into: stockholder to vote by proxy is generally established by
1. individual suits the Corporation Code, but it is the SRC which specifically
2. class suits, and regulates the form and use of proxies, more particularly
3. derivative suits. the procedure of proxy solicitation, primarily through
Section 20.
Where a stockholder or member is denied the right of
inspection, his suit would be individual because the wrong It is plain that proxy solicitation is a procedure that
is done to him personally and not to the other antecedes proxy validation. The former involves the
stockholders or the corporation. Where the wrong is done securing and submission of proxies, while the latter
to a group of stockholders, as where preferred concerns the validation of such secured and submitted
stockholders rights are violated, a class or representative proxies (proxy forms).
suit will be proper for the protection of all stockholders
belonging to the same group. NOTE: Proxy Solicitation – cannot be done without
approval by SEC; it would in effect tarnish the right of the
But where the acts complained of constitute a wrong to SHs.
the corporation itself, the cause of action belongs to the
corporation and not to the individual stockholder or Under Section 5(c) of Presidential Decree No. 902-A, in
member. Although in most every case of wrong to the relation to the SRC, the jurisdiction of the regular trial
CORPORATION LAW – ATTY. MARIANNE JOANNE K. CO-PUA Lectures 2018 DY’NOTES

courts with respect to election-related controversies is “To be eligible as a director, what is material is the legal
specifically confined to controversies in the election or title to, not beneficial ownership of, the stock as appearing
appointment of directors, trustees, officers or managers on the books of the corporation.” (Lee vs. CA; G.R. No.
of corporations, partnerships, or associations. Evidently, 93695; February 4, 1992)
the jurisdiction of the regular courts over so-called
election contests or controversies under Section 5(c) Under Section 25 of the Corporation Code of the
does not extend to every potential subject that may be Philippines, the articles of incorporation or by-laws of the
voted on by shareholders, but only to the election of corporation may fix a greater number than the majority of
directors or trustees, in which stockholders are authorized the number of board members to constitute the quorum
to participate under Section 24 of the Corporation necessary for the valid transaction of business. Any
Code.[49] number less than the number provided in the articles or
by-laws therein cannot constitute a quorum and any act
This qualification allows for a useful distinction that gives therein would not bind the corporation; all that the
due effect to the statutory right of the SEC to regulate attending directors could do is to adjourn. (Pena vs. CA;
proxy solicitation, and the statutory jurisdiction of regular G.R. No. 91478; February 7, 1991)
courts over election contests or controversies. The power
of the SEC to investigate violations of its rules on proxy
solicitation is unquestioned when proxies are obtained to
vote on matters unrelated to the cases enumerated under
Section 5 of Presidential Decree No. 902-A. However,
when proxies are solicited in relation to the election of
corporate directors, the resulting controversy, even if it
ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election
controversy within the original and exclusive jurisdiction
of the trial courts by virtue of Section 5.2 of the SRC in
relation to Section 5(c) of Presidential Decree No. 902-A.

The conferment of original and exclusive jurisdiction on


the regular courts over such controversies in the election
of corporate directors must be seen as intended to confine
to one body the adjudication of all related claims and
controversy arising from the election of such directors. For
that reason, the aforequoted Section 2, Rule 6 of the
Interim Rules broadly defines the term election contest as
encompassing all plausible incidents arising from the
election of corporate directors, including:
(1) any controversy or dispute involving title or claim
to any elective office in a stock or nonstock
corporation,
(2) the validation of proxies,
(3) the manner and validity of elections and
(4) the qualifications of candidates, including the
proclamation of winners.
If all matters anteceding the holding of such election
which affect its manner and conduct, such as the proxy
solicitation process, are deemed within the original and
exclusive jurisdiction of the SEC, then the prospect of
overlapping and competing jurisdictions between that
body and the regular courts becomes frighteningly real.
From the language of Section 5(c) of Presidential Decree
No. 902-A, it is indubitable that controversies as to the
qualification of voting shares, or the validity of votes cast
in favor of a candidate for election to the board of directors
are properly cognizable and adjudicable by the regular
courts exercising original and exclusive jurisdiction over
election cases.” (GSIS vs. CA; G.R. No. 183905; April 16,
2009)