1

CORPORATION LAW DEFINITION AND ATTRIBUTES

 Corporation is one of the types of  4 attributes of a corporation

business organizations. It is also the
most important in economic 1. Artificial being
2. Created by operation of law
development.
3. Right of succession
4. Powers, attributes and properties
INTRODUCTION
expressly authorized by law or incident
 Sole proprietorship to its existence.

- One man form of business entity,  Doctrine of limited capacity

personally answers all liabilities, but
enjoys all the profits with the
exclusion of others
- Limited shareholders responsibility
- Paid subscription in full, you are no
longer liable
 Partnership
- Based on mutual trust and confidence
 Joint venture
- one time grouping of persons whether
they be natural or juridical
- does not entail continuity because
after the undertaking is completed it is
already the end
- particular partnership and joint
venture would be similar, but there is
already a decision of the Supreme
Court declaring them as different
- when they do not register, it does not
exist
- Foreign corporations enters into an
agreement with a domestic
corporation, it must be registered.
Generally they do not need to be
registered.
 Corporations
- They may enter into joint venture, but
generally they cannot enter into a
partnership, but there are exceptions
allowed by the SEC: the 3 exceptions
must go hand in hand
1. The articles of incorporation
expressly authorized the
corporation to enter into contracts
of partnership;
2. The agreement or articles of
partnership must provide that all
the partners will manage the
partnership; and
3. The articles of partnership must
stipulate that all the partners are
and shall be jointly and severally
liable for all obligations of the
partnership.
- Only such powers as are expressly
granted to it by law and by its articles
of incorporation including others
which are incidental to such conferred
powers, those reasonably necessary to
accomplish its purpose and those
which may be incidental to its
existence
- Can do things as the law asks or
allows it to do
- If it does anything beyond, it shall be
considered as ULTRA VIRES
 General rule: Moral damages cannot
be granted to corporations
 Exception: Filipinas Broadcasting
Network Inc. vs. Ago Med
- In cases of slander, libel and other
forms of defamation (should not
qualify because the code does not
qualify whether natural or juridical)
Art. 2219 of the civil code:
Art. 2219. Moral damages may
be recovered in the following and
analogous cases:
(1) A criminal offense resulting in
physical injuries;
(2) Quasi-delicts causing physical
injuries;
(3) Seduction, abduction, rape, or
other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or
arrest;
(6) Illegal search;
(7) Libel, slander or any other form of
defamation;
(8) Malicious prosecution;

(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in
Articles 21, 26, 27, 28, 29, 30, 32, 34,
and 35.
The parents of the female seduced,
abducted, raped, or abused, referred to
in No. 3 of this article, may also
recover moral damages.
The spouse, descendants, ascendants,
and brothers and sisters may bring the
action mentioned in No. 9 of this
article, in the order named.
 Advantages (SEE LADIA BOOK)
- No. 2 may also be a disadvantage
- No. 5 may also be a disadvantage
 A corporation is a person, therefore
protected by the due process clause
and equal protection clause of the
Constitution
CLASSIFICATION OF CORPORATIONS
 Section 3 Stock and non-stock
- Importance of knowing, determining
what provisions of the code or the law
may be applicable
Section 3. Classes of
corporations. - Corporations formed or
organized under this Code may be
stock or non-stock corporations.
Corporations which have capital stock
divided into shares and are authorized
to distribute to the holders of such
shares dividends or allotments of the
surplus profits on the basis of the
shares held are stock corporations. All
other corporations are non-stock
corporations. (3a)
 Non-stock- title 10
 Stock- section 51
 Stockholders must generally cast their
votes in the meeting; section 4
governed primarily by the law creating
them
Section 4. Corporations created
by special laws or charters. -
Corporations created by special laws
or charters shall be governed primarily
by the provisions of the special law or
charter creating them or applicable to
them, supplemented by the provisions
of this Code, insofar as they are
applicable. (n)
2
 Section 3
- The two requisites must always concur
1. That they have a capital stock divided
into shares; and,
2. That they are authorized to distribute
dividends or allotments as surplus
profits to its stockholders on the basis
of the shares held by each of them.
 Section 4
- Created by a special law, they have
their own character
- They are not immune from suit unless
provided by the law of their creation
- Primarily governed by the law creating
them
- Their subsidiaries are entirely different
or independent from that of the other
 Close corporation
- There is no exemption it is absolute
 Public corporation
- Political or governmental purposes
- Those formed or organized for the
government or a portion of the State or
any of its political subdivision and
which have for their purpose the
general good and welfare
 Private Corporation
- Immediate benefit, aim or advantage of
private individuals
- Those formed for some private
purpose, benefit, aim or end
- Distinction: public for governmental
purpose
 Corporation Sole
- Exemption to the rule because it is
composed only of one person
- An incorporator may also be a juridical
person
 Close corporation
- There is exclusivity of shares of stock
- Section 96-105
- Restrictions to transfer shares
- Only those indicated can own shares
- Article must provide that there will be
no public offering
 Open corporation
- openly admit investors
- example: stock exchange

 Domestic/ Foreign
 Test
- Incorporation test
- If incorporated under the laws of the
Philippines it is a domestic corporation
ME Gray vs. CA
- Parent or Holding/ subsidiaries and
affiliates
- Affiliates- no majority vote
SMC 12%
HERSHEY CBPl
CBP
12%
12%
Affiliate is subject to common control by the
12 % owners
 De jure
- cannot be attached by the state even
in a quo warranto proceeding
 De facto
- exists by virtue of colorable
compliance
- Attached directly only by the state in a
quo warranto proceeding
 Corporation by estoppel
-So defectively formed, but still
considered corporation, but only in
relation to those who cannot deny
their existence section 20 and 21
FORMATION AND ORGANIZATION
 3 stages
1. Creation
2. Re-organization or quasi-
reorganization
3. Dissolution/winding-up
 Purpose clause
- Defining the scope of authority of the
corporate enterprise pr undertaking.
Both confirmed and limited
 4 limitations of purpose clause
1. Lawful
2. Specific or stated concisely
3. More than one, the primary and
secondary must be specified
4. Lawfully combined
- Provision that states, cannot be issued
less than par, exception is treasury
shares because it can be issued less
than par
 A corporation commences only upon
issuance of the certificate, prior
thereto it has no being and cannot
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transact business. Promoters cannot
act for a projected corporation
 Metro Manila- paid up capital
requirement is 10 M
 Non- stock- mere mention of the
operating capital
 Mention the authorized capital
 Restrictions
- Mandatory in close
- Not mandatory in ordinary
 Non-stock
- If value is not more than 100,000
 A corporation cannot use any other
name unless it has been amended
 Section 19
- If confusingly similar it will not be
allowed to be registered
- Verification slip from the records
officer
Section 19. Commencement of
corporate existence. - A private
corporation formed or organized under
this Code commences to have
corporate existence and juridical
personality and is deemed
incorporated from the date the
Securities and Exchange Commission
issues a certificate of incorporation
under its official seal; and thereupon
the incorporators,
stockholders/members and their
successors shall constitute a body
politic and corporate under the name
stated in the articles of incorporation
for the period of time mentioned
therein, unless said period is extended
or the corporation is sooner dissolved
in accordance with law. (n)
- Words corporation or inc. either in full
or abbreviated form must be included
Section 18. Corporate name. -
No corporate name may be allowed by
the Securities and Exchange
Commission if the proposed name is
identical or deceptively or confusingly
similar to that of any existing
corporation or to any other name
already protected by law or is patently
deceptive, confusing or contrary to
existing laws. When a change in the
corporate name is approved, the
Commission shall issue an amended

certificate of incorporation under the
amended name. (n)
 Doctrine of secondary meaning
- A word or phrase originally incapable
of exclusive appropriation [usually
generic] with reference to an article in
the market, because of geographically
or otherwise descriptive, might
nevertheless have been used so long
and so exclusively by one producer
with reference to his article that, in
that trade and to that branch of the
purchasing public, the word or phrase
has become to mean that the article
was his product.
 Section 18
- Lyceum of the Philippines case, the
additional geographical name does not
make it confusingly similar
- actual confusion is not necessary-
Philips case “it is enough that there is
probable confusion”
 2 requisites must be proven
- that the complainant corporation
acquired a prior right over the use of
such corporate name
- identical, deceptively or confusingly,
patently deceptive
 principal office
- statement of principal office is required
- city and municipality not only province
must be specified
- principal office NOT operations office
- necessary because it will establish the
residence of corporations
- venue of actions for or against the
corporations
- venue of meetings
- section 51 meetings may only be
within the boundaries of the city where
the principal office
- non-stock may be held anywhere in
the Philippines, if provided in its by-
laws
- where summons may be served
- registration of chattel mortgage must
be registered in the register of deeds
where the principal office is located
Clavecilla Radio System vs. Antillon
- action not upon a written contract
- city where the defendant resides
 term of existence
4
- corporate term required
- determining what point in time the
juridical personality will cease to exist
- enter into contract only when it has
juridical personality
- once it ceases to exist, it no longer has
personality
- exist for another 3 years only for
purposes of liquidation
- Dissolution- it is automatic
 When should extension be made?
- General rule: Not earlier than 5 years
- Exception: unless there are justifiable
reasons
 May it be extended after expiration?
- Alhambra cigar vs. SEC once it ceases
to exist it has no vested politic, exist
only for a period of 3 years only for
liquidation and for that purpose only
 Article 5 How many incorporators
should there be?
- 5-15
 May a corporation be an incorporator?
- General rule: only natural persons
- Exception: cooperatives and
corporation primarily organized to hold
equities in rural banks
 How about minors?
- NO, because they must be of legal age
 May a corporation organized by
incorporators consisting solely of
foreigners
- Yes, there is no nationality
requirement only residence, as long as
majority are residents of the Phil
 Define incorporators <sec.5>
- Those person mentioned in the articles
as originally forming the corporation
and who are signatories of the articles
of incorporation.
- Must be signatories to be
incorporators
Section 5. Corporators and
incorporators, stockholders and
members. - Corporators are those who
compose a corporation, whether as
stockholders or as members.
Incorporators are those stockholders
or members mentioned in the articles

of incorporation as originally forming
and composing the corporation and
who are signatories thereof.
Corporators in a stock
corporation are called stockholders or
shareholders. Corporators in a non-
stock corporation are called members.
(4a)
 Define corporators <sec.5>
- All persons who compose the
corporation at any given time and need
not be among those who execute the
articles of incorporation at the start of
its formation and organization.
- Originally or subsequently
- Section 5 provides:
Corporators in a stock
corporation are called stockholders or
shareholders. Corporators in a non-
stock corporation are called members.
(4a)
 May a corporation be a corporator?
- YES. There is nothing to prevent a
corporation from being a stockholder
 Incorporator must subscribe to 1 be issued for a consideration less than
share
 There are those that are exclusively
reserved to Filipinos
 An incorporator maybe a corporator as
long as he is a stockholder
 section 6
Section 6. Classification of
shares. - The shares of stock of stock
corporations may be divided into
classes or series of shares, or both,
any of which classes or series of
shares may have such rights,
privileges or restrictions as may be
stated in the articles of incorporation:
Provided, That no share may be
deprived of voting rights except those
classified and issued as "preferred" or
"redeemable" shares, unless otherwise
provided in this Code: Provided,
further, That there shall always be a
class or series of shares which have
complete voting rights. Any or all of
the shares or series of shares may
have a par value or have no par value
as may be provided for in the articles
of incorporation: Provided, however,
That banks, trust companies,
insurance companies, public utilities,
and building and loan associations
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shall not be permitted to issue no-par
value shares of stock.
Preferred shares of stock issued
by any corporation may be given
preference in the distribution of the
assets of the corporation in case of
liquidation and in the distribution of
dividends, or such other preferences
as may be stated in the articles of
incorporation which are not violative of
the provisions of this Code: Provided,
That preferred shares of stock may be
issued only with a stated par value.
The board of directors, where
authorized in the articles of
incorporation, may fix the terms and
conditions of preferred shares of stock
or any series thereof: Provided, That
such terms and conditions shall be
effective upon the filing of a certificate
thereof with the Securities and
Exchange Commission.
Shares of capital stock issued
without par value shall be deemed
fully paid and non-assessable and the
holder of such shares shall not be
liable to the corporation or to its
creditors in respect thereto: Provided;
That shares without par value may not
the value of five (P5.00) pesos per
share: Provided, further, That the
entire consideration received by the
corporation for its no-par value shares
shall be treated as capital and shall
not be available for distribution as
dividends.
A corporation may,
furthermore, classify its shares for the
purpose of insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in
the articles of incorporation and stated
in the certificate of stock, each share
shall be equal in all respects to every
other share.
Where the articles of
incorporation provide for non-voting
shares in the cases allowed by this
Code, the holders of such shares shall
nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of by-
laws;
3. Sale, lease, exchange, mortgage,
pledge or other disposition of all or

substantially all of the corporate
property;
4. Incurring, creating or increasing
bonded indebtedness;
5. Increase or decrease of capital
stock;
6. Merger or consolidation of the
corporation with another corporation
or other corporations;
7. Investment of corporate funds in
another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the
immediately preceding paragraph, the
vote necessary to approve a particular
corporate act as provided in this Code
shall be deemed to refer only to stocks
with voting rights. (5a)
 How many directors should there be?
- General rule: Not less than 5 not more
than 15
- Exceptions:
1. Educational corporations registered as
non stock corporation whose number
of trustees, though not less than five
and not more than [15] should be
divisible by five [5], meaning they must
have either five, ten, or fifteen trustees
and no other;
2. In close corporations where all the
stockholders are considered as
members of the board of directors
thereby effectively allowing twenty
members in the board.
3. The by-laws of a corporation may
provide for additional qualifications
and disqualifications of its members of
the board of directors or trustees.
However it may not do away with the
minimum disqualifications lay down
by the Code.
 Qualifications of the governing board
- Requires mere residency <sec. 23>
Section 23. The board of
directors or trustees. - Unless otherwise
provided in this Code, the corporate
powers of all corporations formed
under this Code shall be exercised, all
business conducted and all property of
such corporations controlled and held
by the board of directors or trustees to
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be elected from among the holders of
stocks, or where there is no stock,
from among the members of the
corporation, who shall hold office for
one (1) year until their successors are
elected and qualified. (28a)
Every director must own at
least one (1) share of the capital stock
of the corporation of which he is a
director, which share shall stand in
his name on the books of the
corporation. Any director who ceases
to be the owner of at least one (1)
share of the capital stock of the
corporation of which he is a director
shall thereby cease to be a director.
Trustees of non-stock corporations
must be members thereof. A majority
of the directors or trustees of all
corporations organized under this
Code must be residents of the
Philippines.
 May a domestic corporation have a
governing board consisting solely of
foreigners?
- YES, section 23 majority of them must
be residents of the Philippines, no
nationality requirement
 Anti-dummy act <sec.2-A>
- If the business undertaking or activity
is only partially nationalized, aliens
can be elected as such directors,
[unless the law provides otherwise] but
their number shall only be in
proportion to their equity or
participation in the capital stock of the
corporation.
 Disqualifications <sec.27>
- The disqualifications provided for is
absolute and may not be done away
with. Corporate by-laws may, however,
provide for additional qualifications
and disqualifications.
Section 27. Disqualification of
directors, trustees or officers. - No
person convicted by final judgment of
an offense punishable by
imprisonment for a period exceeding
six (6) years, or a violation of this Code
committed within five (5) years prior to
the date of his election or
appointment, shall qualify as a
director, trustee or officer of any
corporation. (n)
 7

 Section 27 and 23 minimum outstanding capital stock at a regular

disqualifications and qualifications or special stockholders' meeting. In no
case shall the total yearly
Lee vs. CA compensation of directors, as such
directors, exceed ten (10%) percent of
- By laws may provide for additional the net income before income tax of
the corporation during the preceding
 Gov’t vs. El hogar Filipino, Gokongwei year. (n)
vs. SMC
 Minimum for a domestic corporation?
Capital structure
- In no case shall the paid- up capital be
Foundation- minimum paid-up capital 3M less than 5k

Authorized capital 1 M No. of  Is there a minimum authorized capital

shares 1M shares par value imposed by the code?
1.00
- If there is minimum paid-up logically
Amount of shares subscribed there should also be a minimum
capital =5000
50 K A
 Minimum paid-up capital for a
50 K B
financing company metro manila 10 M
C 250K if located in MM

D  Shares of stock

E  Purpose of classification

PAID UP =62,500 - To specify and define the rights and

Corporation cannot exceed more than 1 M it
is the maximum amount it cannot issue more
unless amended
Maximum shares it can issue is 1M shares
unless amended
 How much shares should
subscribed?
- Must be at least 25% of the authorized
capital stock
 Paid- up must be at least 25%-
minimum
 Section 30
- Total subscription compliance with
minimum 25% total
- Any combination would comply with
the minimum required by section 30
Section 30. Compensation of
directors. - In the absence of any
provision in the by-laws fixing their
compensation, the directors shall not
receive any compensation, as such
directors, except for reasonable per
diems: Provided, however, That any
such compensation other than per
diems may be granted to directors by
the vote of the stockholders
representing at least a majority of the
privileges of the stockholders;
- For regulation and control of the
issuance of sale of corporate securities
for the protection of purchasers and
stockholders.
- As a management control device.
be
- To comply with statutory requirements
particularly those which provide for
certain limitations on foreign
ownership and shares like overseas
employment agencies requiring to own
at least 75% of the shares of stock
thereof.
- To better insure return on investment
which can be affected through the
issuance of redeemable shares or
preferred shares, i.e., granting the
holders thereof, preference as to
dividends and/or distribution of assets
in case of liquidation; and,
- For flexibility in price, particularly, no
par shares may be issued or sold from
time to time at different price
depending on the net worth of the
company since they do not purport to
represent an actual of fixed value.
 Section 6

- Each shall be equal in all respects to
every other share
 Preferred shares
- Specific preference
- Dividends or during liquidation
 No par
- Can sell it with the network of the
corporation
 Distinction between the subscribed
and outstanding stocks?
- Section 137
Section 137. Outstanding
capital stock defined. - The term
"outstanding capital stock", as used in
this Code, means the total shares of
stock issued under binding
subscription agreements to
subscribers or stockholders, whether
or not fully or partially paid, except
treasury shares. (n)
- Voting and dividend rights, it refers to
the outstanding capital stocks
- Only outstanding stocks are allowed to
vote and receive dividends
- Actually the same
 Treasury shares
- are also subscribed shares
- while they remain in the treasury, no
voting and dividend rights
- may be reissued by the corporation
- once reissued they become
outstanding stocks again
 common shares
- carry the right to vote
 preferred shares
- grants the holder preference
- preference as to dividends
- preference as to distribution of the
remaining assets upon dissolution or
- both
- YOU MUST STATE THE PREFERENCE
BECAUSE IF NOT THEY ARE
PRESUMED TO BE EQUAL
- It may include such other preferences
not inconsistent with the Code. This is
so because Section 6 of the said law
allows a stock corporation to issue
preferred shares subject only to the
limitations imposed therein which are:
8
a. They can be issued only with sated par
value; and,
b. The preferences must be stated in the
articles of incorporation and in the
certificate of stock, otherwise, each
share shall be, in all respect, equal to
every other share.
 Participating
- Must be stated because the
presumption is that it is participating
 Cumulative
- Irrespective of whether or not they
where earned
 Preferred
- May be denied
- Unless denied they are still entitled
 What if hindi i-declare kahit na may
dividends rights for the previous
years? May they be denied dividend
rights because they are non holders of
non-cumulative? NOTE: YOU CANNOT
COMPEL THE CORPORATION TO
DECLARE DIVIDENDS UNLESS IT
EXCEEDS 100 % PAID UP CAPITAL
SEC. 43
Section 43. Power to declare
dividends. - The board of directors of a
stock corporation may declare
dividends out of the unrestricted
retained earnings which shall be
payable in cash, in property, or in
stock to all stockholders on the basis
of outstanding stock held by them:
Provided, That any cash dividends due
on delinquent stock shall first be
applied to the unpaid balance on the
subscription plus costs and expenses,
while stock dividends shall be withheld
from the delinquent stockholder until
his unpaid subscription is fully paid:
Provided, further, That no stock
dividend shall be issued without the
approval of stockholders representing
not less than two-thirds (2/3) of the
outstanding capital stock at a regular
or special meeting duly called for the
purpose. (16a)
Stock corporations are
prohibited from retaining surplus
profits in excess of one hundred
(100%) percent of their paid-in capital
stock, except: (1) when justified by
definite corporate expansion projects
or programs approved by the board of
directors; or (2) when the corporation
is prohibited under any loan

agreement with any financial
institution or creditor, whether local or
foreign, from declaring dividends
without its/his consent, and such
consent has not yet been secured; or
(3) when it can be clearly shown that
such retention is necessary under
special circumstances obtaining in the
corporation, such as when there is
need for special reserve for probable
contingencies. (n)
- It depends because there are three
types of non-cumulative preferred
shares
- Discretionary dividend type
- Mandatory if earned
- Earned cumulative or dividend credit
type
 Compare cumulative share from non-
cumulative, earned cumulative or
dividend credit type
- Cumulative share –whether or not
earned
- Non-cumulative earned cumulative or
dividend credit type- only if earned
 Par
- stated par value; shall not be issued
less than par
 No par
- without stated par value
- once fully paid no longer liable
 Corporations cannot use its capitals in
declaring dividends; not all can issue
no par value section 6
 Voting
- entitled to vote at any motion brought
up in writing
 Non-voting
- not entitled to vote
 What types of shares may be denied of
the right to vote?
- Preferred and redeemable shares
 Is it correct to state that common
shares can never be denied the right to
vote?
- Only preferred and redeemable shares
are denied unless provided in this code
9
- PWEDENG MA-DENY YUNG COMMON
SHARES, KASI YUNG FOUNDER’S
SHARES MERON SILANG EXCLUSIVE
RIGHTS NA SILA LANG ANG MERON,
SO PWEDE SILANG BUMOTO WITH
REGARDS TO SOMETHING NA HINDI
NA SAKOP NG COMMON SHARE
RIGHTS
- Example: founders shares- may be
given certain rights and privileges
- Even common shares may be denied
the right to vote of founders’ shares
issued <sec.7>
Section 7. Founders' shares. -
Founders' shares classified as such in
the articles of incorporation may be
given certain rights and privileges not
enjoyed by the owners of other stocks,
provided that where the exclusive right
to vote and be voted for in the election
of directors is granted, it must be for a
limited period not to exceed five (5)
years subject to the approval of the
Securities and Exchange Commission.
The five-year period shall commence
from the date of the aforesaid approval
by the Securities and Exchange
Commission. (n)
 Do you include non-voting shares in
passing a valid corporate act?
- Even non-voting shares are entitled to
vote under section 6
 Redeemable shares
- Discretionary/optional
- Obligatory or mandatory
 Generally a corporation can reacquire
its own shares if it has unrestricted
retained earnings
 Exception: redeemable shares may be
reacquired irrespective of retained
earnings
 Treasury shares
- They are treasury while in the treasury
account of the corporation
 May they be reissued by the
corporation?
- YES
 If they are reissued will they be denied
the right to vote?
 10

- Once reissued they shall become  When the law speaks of outstanding
outstanding stocks again and rights it does not include treasury
purchasers shall be entitled to all the shares
rights and privileges as the other
holders have  Treasury shares may be reissued

 Section 57 treasury shares have no - They are actually assets of the

voting and dividend rights. Why not? corporation

- Once re-issued they become

Section 57. Voting right for
treasury shares. - Treasury shares
shall have no voting right as long as
such shares remain in the Treasury.
(n)
- Answer: commissioner vs. manning
page 62 first par.
“Although authorities may differ
on the exact legal and accounting
status of so-called treasury shares,
they are more or less in agreement
that treasury shares are stocks issued
and fully paid for and reacquired by
the corporation either by purchase,
donation, forfeiture or other means.
Treasury shares are therefore issued
shares but being in the treasury they
do not have the status of outstanding
shares. Consequently, although a
treasury share, not having been retired
by the corporation re-acquiring it, may
be re-issued or sold again, such
shares, as long as it is held by the
corporation as a treasury share,
participates neither in dividends,
because dividends cannot be declared
by the corporation to itself, nor in
meetings of the corporation as voting
stock, for otherwise equal distribution
of voting powers among stockholders
will be effectively lost and the directors
will be able to perpetrate their control
of the corporation, though it still
represents a paid for interest in the
property of the corporation. The
foregoing essential features of a
treasury stocks are lacking in the
questioned shares.
In this case, and under the
terms of the trust agreement, the
shares of stock of Reese
participated in dividends which the
trustee received and the said shares
were voted upon by the trustee in all
corporation meetings. They were not,
therefore, treasury shares.”
outstanding stocks again
- The corporation may cancel them; in
effect there will be a reduction in the
outstanding capital stocks
- The code does not require ordinary
corporations to provide for restrictions,
but it does not likewise prohibit
restrictions
- Example: right of first refusal
- The restriction must be contained in
the articles of incorporation
- If provided in by-laws but not in the
articles of incorporation then it will not
be binding
- Restrictions and preferences are
mandatorily required in close
corporations
- If it does not provide restrictions it is
not a close corporation
- Specified persons- close corporations
- If not one of those specified you are
not included because there is
exclusivity in close corporations
- Should also be in the by-laws not only
in the articles of incorporation
 No transfer clause
 Execution clause
 Acknowledgment
 Treasurer affidavit part of the articles
of incorporation
 Section 23-27 minimum qualifications,
but there may be additional
 Grounds for disapproval
- Only substantial and not strict is
required

 May the SEC refuse or reject
registration?
- <Section 17>
Section 17. Grounds when
articles of incorporation or amendment
may be rejected or disapproved. - The
Securities and Exchange Commission
may reject the articles of incorporation
or disapprove any amendment thereto
if the same is not in compliance with
the requirements of this Code:
Provided, That the Commission shall
give the incorporators a reasonable
time within which to correct or modify
the objectionable portions of the
articles or amendment. The following
are grounds for such rejection or
disapproval:
1. That the articles of incorporation or
any amendment thereto is not
substantially in accordance with the
form prescribed herein;
2. That the purpose or purposes of the
corporation are patently
unconstitutional, illegal, immoral, or
contrary to government rules and
regulations;
3. That the Treasurer's Affidavit
concerning the amount of capital stock
subscribed and/or paid is false;
4. That the percentage of ownership of
the capital stock to be owned by
citizens of the Philippines has not been
complied with as required by existing
laws or the Constitution.
No articles of incorporation or
amendment to articles of incorporation
of banks, banking and quasi-banking
institutions, building and loan
associations, trust companies and
other financial intermediaries,
insurance companies, public utilities,
educational institutions, and other
corporations governed by special laws
shall be accepted or approved by the
Commission unless accompanied by a
favorable recommendation of the
appropriate government agency to the
effect that such articles or amendment
is in accordance with law. (n)
- But the grounds in section 17 are not
exclusive
 When will the corporation commence
to exist?
- Section 19
11
Section 19. Commencement of
corporate existence. - A private
corporation formed or organized under
this Code commences to have
corporate existence and juridical
personality and is deemed
incorporated from the date the
Securities and Exchange Commission
issues a certificate of incorporation
under its official seal; and thereupon
the incorporators,
stockholders/members and their
successors shall constitute a body
politic and corporate under the name
stated in the articles of incorporation
for the period of time mentioned
therein, unless said period is extended
or the corporation is sooner dissolved
in accordance with law. (n)
 A corporation de jure can come into
existence only upon the issuance of
the certificate of registration by the
SEC? TRUE OR FALSE?
- TRUE
- EXCEPTION: CORPORATION SOLE
<sec. 112>
Section 112. Submission of the
articles of incorporation. - The articles
of incorporation must be verified,
before filing, by affidavit or affirmation
of the chief archbishop, bishop, priest,
minister, rabbi or presiding elder, as
the case may be, and accompanied by
a copy of the commission, certificate of
election or letter of appointment of
such chief archbishop, bishop, priest,
minister, rabbi or presiding elder, duly
certified to be correct by any notary
public.
From and after the filing with
the Securities and Exchange
Commission of the said articles of
incorporation, verified by affidavit or
affirmation, and accompanied by the
documents mentioned in the preceding
paragraph, such chief archbishop,
bishop, priest, minister, rabbi or
presiding elder shall become a
corporation sole and all temporalities,
estate and properties of the religious
denomination, sect or church
theretofore administered or managed
by him as such chief archbishop,
bishop, priest, minister, rabbi or
presiding elder shall be held in trust
by him as a corporation sole, for the
use, purpose, behalf and sole benefit of
his religious denomination, sect or
church, including hospitals, schools,
colleges, orphan asylums, parsonages
and cemeteries thereof. (n)

- CORPORATION SOLE- upon filing of
the verified articles of incorporation,
once filed it is vested with a judicial
capacity
 General rule section 19
- Vested with judicial capacity upon
issuance of the certificate by the SEC
o However it is not accurate
according to atty. Ladia
because there are those that
can issue for example
cooperatives- BUREAU OF
COOPERATIVES which
register, home insurance
guaranty corporation- HOME
OWNERS
Cagayan Fishing vs. Sandika
- Corporations are created by law
- Commence to exist upon issuance by
the CONCERNED government
corporation or agency
- Prior there to it has no being
- The transfer of the property was not
valid, it likewise did not have the right
to transfer
 De jure
- Strict or substantial compliance
 De facto
- 4 requisites must go hand in hand
take out anyone of them there can be
no de facto corporation
1. There is a valid statute under which
the corporation could have been
created as a de jure corporation.
2. An attempt, in good faith, to form a
corporation according to the
requirements of law, which goes far
enough to amount to a “colorable
compliance” with the law;
3. A user of corporate powers, the
transaction of business in some way
as if it were a corporation; and,
4. Good faith in claiming to be and doing
business as a corporation.
12
 Are the rights and obligations between
officers and directors of a de jure and
de facto the same?
- YES. Governed by the same law, rules
and regulations
 Only important in determining, is for
the purpose of applying the rules with
regards to the direct and collateral
attack
 The existence of a de jure cannot be
questioned even by the State, either
directly or indirectly
 Existence of a de facto can be
questioned only by the State directly in
a quo warranto proceeding only
Municipality of Malabang vs. Benito
- What is the missing link so as to
consider it a de facto? A law, because
the executive order is unconditional
- An unconditional act affords no rights,
creates no office
- Legal contemplation it was never
passed at all
- It can therefore be questioned by any
person
 If the certificate of registration has not
been issued, may a corporation de
facto exist?
- NO!
- Number 4 requirement, good faith in
claiming to be and doing business as a
corporation
Hall vs. Piccio
- Missing link is good faith
- The certificate was not yet issued by
the SEC, the members knew and
therefore they were not acting in good
faith, therefore anybody can question
its existence
 Corporation by estoppel
- So defectively formed so that they are
not to be considered a de jure or de
facto

- General partners- liable even beyond
his promise even his personal
properties are prone to attachment
Lozano vs. Delos Santos
- Founded on principle of equity
- Exercise corporate powers
- Enters with business with 3rd parties
- When there is no 3rd persons involved
and the problem arises between there
members, therefore they themselves
know that there is no corporation by
estoppel
Albert vs. University
- 1965 case, no section 21 yet
- Applied where the rules governing
agency
- A person purporting in behalf of a non
existing corporation
- Section 21, you arrive at the same
decision
Chiang Kai Siek vs. CA
- SC based its decision from the
provision of the education act
- It cannot immune itself by virtue of its
non compliance with the law
 Assuming there was no law?
- YES, it may still be sued as a school
for the past 32 years the school
represented itself as possessed of
juridical personality
 General rule: a 3rd party transacting
with a non existent corporation shall
be estopped to deny
Asia banking vs. standard products
- General rule: absence of fraud a
person who has dealt with a non
incorporated corporation shall be
stopped to deny from actions in which
it had benefited
- Exemptions: when there is fraud the
general rule shall not apply
Salvatierra vs. Garlitos
13
- As a general rule a person who has
contracted it a corporation lacking
personality
- Doctrine is not applicable where fraud
takes part in the transaction
 Another exemption
International express travel and tours
vs. CA
- No fraud in this case
- How come Kahn was made liable?
- Doctrine of incorporation
- Applies only if that person is trying to
escape from a contract where he is
benefited
- In this case petitioner is not trying to
escape liability, but rather the one
claiming from the contract
 Would this apply to foreign
corporation?
- YES, it may apply
- Georg Grotjahn vs. Isnami
 A foreign corporation cannot gain
access to our courts unless they attain
a license to engage in business in the
Philippines but applying corporation
by estoppels, the court allowed
 Municipality of Malabang case
- No law, hence may be questioned by
any person
- An unconstitutional act is not a law, t
confers no rights, it imposes no duties,
it affords no protections, it crates o
office, it is in legal contemplation, as
inoperative as though it had never
been passes
 Hall vs. Piccio
- No good faith
 Corporation by estoppel
- Admission, conduct or agreement
- Will not apply among members
themselves there must be a 3rd party
- Cannot escape when benefited

- General rule: you deal with
corporation, as to estop it
- Exceptions: 1. fraudulently
misrepresents the third person may
file an action directly to those
members, 2. 3rd party will not be
estopped if he is not trying to escape
liability
 2 possible remedies
- Chiang kai siek case
- Albert case
 What would be the effect if the
corporation failed to commence
transaction?
- Automatic
 Operated but becomes subsequently
inoperative for 5 years only a ground
for suspension, proper notice and
hearing
 Commencement
- Example realty company
CORPORATE CHARTER AND
AMENDMENTS
 What do you understand by the word
charter? Is it the same as articles of
incorporation?
- Corporate charter is broader
 Franchise
- Primary power granted by the state to
be and act as a corporation
- Secondary franchise is the right or
privilege that the corporation may
exercise
 You cannot issue investment contracts
without a secondary franchise,
kailangan primary muna hindi pwede
mauna secondary kasi sa section 19 it
does not exist until issued with a
certificate of registration or
incorporation
 Corporate entity
- Corporation exist separately and
independently from the stockholders
14
a - Stockholders cannot bring an action,
to bring back the properties of a
corporation
- Corporation has no interest in the
individual properties of its members
Sulo ng Bayan vs. Araneta
- Corporation cannot bring an action for
the recovery of the properties of its
members
Caram vs. CA
- Stockholders cannot be held liable for
the legitimate obligations of the
corporation, they exist separately and
independently from one another
Cruz vs. Dalisay
- Final judgment against a corporation
cannot be enforced against
stockholders
Rustan Pulp vs. CA
- Corporation exist separately and
independently
ITS - Corporation are juridical entities, they
exist only in legal contemplation, can
act only through its authorized
representatives
Soriano vs. CA
- They are not personally liable
- They where signed for and in behalf of
the corporation
Palay inc. vs. Clave
- Liabilities incurred by the corporation
cannot be enforced against
stockholders, etc., even if
stockholders, etc. happens to own a
substantial interest in the corporation,
mere ownership does not disregard the
corporate entity theory
 Corporate entity for legal or legitimate
purposes only
 Two or more corporations, one of them
will be treated as a mere alter-ego
 You cannot pierce the veil of corporate
fiction when there are no facts
attendant in the case
 Corporate Entity Theory

- The corporation is possessed with a
personality separate and distinct from
the individual stockholders or
members and is not affected by the
personal rights, obligations or
transactions of the latter
 Instrumentality rule
- Where one corporation is so organized
and controlled and its affairs are
conducted so that it is, in fact, a mere
instrumentality or adjunct of the
other, the fiction of the corporate
entity of the “instrumentality” may be
disregarded
- Courts are concerned with reality and
not form
- Mere ownership of all or substantially
all of the shares of stock of a
corporation is not, in itself, insufficient
ground for disregarding the separate
corporate personality. And for the
separate personality of the corporation
to be disregarded, the wrong doing
must be clearly and convincingly
established
- Fraud must be proven by clear and
convincingly evidence amounting to
more than preponderance. It cannot be
justified by speculation and can never
be presumed. And only if it sought to
hold the stockholders liable directly for
corporate debt
Palacio vs. Fely
- Piercing the veil of corporate fiction
- Fely trans and the other corporation is
one and the same
Marvel bldg. vs. David
- There must be facts before the court
will be justified in piercing the veil of
corporate fiction
- Corporation was a mere extension of
the personality of the person
Yutivo and sons vs. Court of Tax
Appeals
- What where the facts or circumstances
arrived by the court here?
15
- Subscribed capital where all advanced
by Yutivo, the board where the same
as Yutivo
Commissioner of Internal Revenue vs.
Norton and Harrison
- Court applied the general rule
- Mere substantial ownership does
not mean that it has a same
corporate entity
La Campana Coffee Factory, Inc. vs.
KKM
- Two corporations managed by the
same family, workers were made
interchangeably
Emilio Cano vs. CIR
- Sued in there official capacity
- Reverse of Soriano vs. CA (signed in
their official capacity)
Tesco vs. WCC
- The two corporations where located in
the same office
Claparols vs. CIR
- Same as NAFLU and A.C. Ransom
Concept builders vs. NLRC
- Instrumentality rule. What is the
instrumentality rule? “where one
corporation is so organized and
controlled and its affairs are conducted
so that it is, in fact, a mere
instrumentality or adjunct of the
other, the fiction of the corporate
entity of the “instrumentality” may be
disregarded.”
- Has no separate mind of its own. What
is the degree of control?
1. Control, not mere majority or complete
stock control, but complete
domination, not only of finances but of
policy and business practice in respect
to the transaction attacked so that the
corporate entity as to this transaction
had at the time no separate mind, will
or existence of its own.
2. Such control must have been used by
the defendant to commit fraud or
wrong, to perpetuate the violation of a
 16

statutory or other positive legal duty or
dishonest and unjust act in
contravention of plaintiff’s legal rights;
and,
3. The aforesaid control and breach of
duty must proximately cause the
injury or unjust loss complained of.
- The absence of one of the elements
prevents “piercing the corporate veil.”
In applying the “instrumentality” or
“alter ego” doctrine, the courts are
concerned with reality and not form,
with how the corporation operated and
the individual defendant’s relationship
to that operation.
 There must facts and circumstances
before warrant piercing the veil of
corporate fiction
- As to not deprive the holders of their
successional rights
- Mere ownership of all or substantially
all is not a justification of piercing the
veil of corporate fiction
 Fraud must be proven by clear and
convincing evidence cannot presume
or speculate, there must be facts and
circumstances
 Fraud must be clear and convincing
evidence more than preponderance
Remo Jr. vs. IAC
- The resolution was not entered to
defraud anyone
Del Rosario vs. National Labor
Commission

 The control necessary does not mean - The wrongdoing must be clearly
stock ownership established

MCConnel vs. CA - There must be facts to support

- were located in the same floor - Payment of claims cannot thus be

presumed
- “while the mere ownership of all or
nearly all of the capital stock of a Indophil Textile Mill vs. CALICA
corporation does not necessary mean
that it is a mere business conduit of - How do you distinguish this ruling to
the stockholder, that conclusion is La Campana, having the same issues:
amply justified where it is shown, as in
the case before us, that the operations - La campana, one payroll, employees
of the corporation were so merged with were made interchangeable. Acrylic
the stockholders as to be practically had its own standards
indistinguishable from them. To hold
PNB vs. Ritratto Group
the latter liable for the corporation’s
obligations is not to ignore the - Control test
corporation’s separate entity, but
merely to apple the established - Not mere majority but rather complete
principle that such entity cannot be
- Twin ace was only a subsequent
invoked or used for purposes that
interested party
could not have been intended by the
law that created that separate - Assets and machineries
personality.”
 Amendment of the articles of
Tan boon bee vs. Jarencio incorporation
- Why would a drug company need a - Express power granted to a
printing machine corporation
- The property must be in pursuance of  Section 16
a company business
- Appraisal right
Cease vs. CA
- Section 81 to object on certain acts
- Alter-ego or the extension of the and transactions
person of forest ware does the court
pierced the veil of corporate fiction
 17

Section 81. Instances of 3 & 4= objected

appraisal right. - Any stockholder of a
corporation shall have the right to
dissent and demand payment of the
fair value of his shares in the following
instances:
1. In case any amendment to the
articles of incorporation has the effect
of changing or restricting the rights of
any stockholder or class of shares, or
of authorizing preferences in any
respect superior to those of
outstanding shares of any class, or of
extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange,
transfer, mortgage, pledge or other
disposition of all or substantially all of
the corporate property and assets as
provided in the Code; and
3. In case of merger or consolidation.
(n)
- Right granted only in specified
instances
Are non-voting shares included in amending
the articles of incorporation
1 100/s
XYZ-----ABC
2 100/s
To
10 100/s
=1M/S what
would be the 2/3?
Section 6 last paragraph
Voting shares are excluded except the
foregoing instances
1 1
2 2
3 3
4 4
5 5
6 6
1 & 2=absent
1&2=absent but gave their written
assent
3&4=objected
5 & 6= approved the amendment
5&6=approved
Would there be a valid amendment
 Special amendments 37 & 38
shortening that would result to
dissolution require prior approval by
the SEC
Section 37. Power to extend or
shorten corporate term. - A private
corporation may extend or shorten its
term as stated in the articles of
incorporation when approved by a
majority vote of the board of directors
or trustees and ratified at a meeting by
the stockholders representing at least
two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds
(2/3) of the members in case of non-
stock corporations. Written notice of
the proposed action and of the time
and place of the meeting shall be
addressed to each stockholder or
member at his place of residence as
shown on the books of the corporation
and deposited to the addressee in the
post office with postage prepaid, or
served personally: Provided, That in
case of extension of corporate term,
any dissenting stockholder may
exercise his appraisal right under the
conditions provided in this code. (n)
Section 38. Power to increase
or decrease capital stock; incur, create
or increase bonded indebtedness. - No
corporation shall increase or decrease
its capital stock or incur, create or
increase any bonded indebtedness
unless approved by a majority vote of
the board of directors and, at a
stockholder's meeting duly called for
the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor
the increase or diminution of the
capital stock, or the incurring, creating
or increasing of any bonded
indebtedness. Written notice of the
proposed increase or diminution of the
capital stock or of the incurring,
creating, or increasing of any bonded
indebtedness and of the time and
place of the stockholder's meeting at
which the proposed increase or
diminution of the capital stock or the
incurring or increasing of any bonded
indebtedness is to be considered, must
be addressed to each stockholder at
his place of residence as shown on the
books of the corporation and deposited

to the addressee in the post office with
postage prepaid, or served personally.
A certificate in duplicate must
be signed by a majority of the directors
of the corporation and countersigned
by the chairman and the secretary of
the stockholders' meeting, setting
forth:
(1) That the requirements of this
section have been complied with;
(2) The amount of the increase or
diminution of the capital stock;
(3) If an increase of the capital stock,
the amount of capital stock or number
of shares of no-par stock thereof
actually subscribed, the names,
nationalities and residences of the
persons subscribing, the amount of
capital stock or number of no-par
stock subscribed by each, and the
amount paid by each on his
subscription in cash or property, or
the amount of capital stock or number
of shares of no-par stock allotted to
each stock-holder if such increase is
for the purpose of making effective
stock dividend therefor authorized;
(4) Any bonded indebtedness to be
incurred, created or increased;
(5) The actual indebtedness of the
corporation on the day of the meeting;
(6) The amount of stock represented at
the meeting; and
(7) The vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness.
Any increase or decrease in the
capital stock or the incurring, creating
or increasing of any bonded
indebtedness shall require prior
approval of the Securities and
Exchange Commission.
One of the duplicate certificates
shall be kept on file in the office of the
corporation and the other shall be filed
with the Securities and Exchange
Commission and attached to the
original articles of incorporation. From
and after approval by the Securities
and Exchange Commission and the
issuance by the Commission of its
certificate of filing, the capital stock
shall stand increased or decreased and
the incurring, creating or increasing of
any bonded indebtedness authorized,
18
as the certificate of filing may declare:
Provided, That the Securities and
Exchange Commission shall not accept
for filing any certificate of increase of
capital stock unless accompanied by
the sworn statement of the treasurer of
the corporation lawfully holding office
at the time of the filing of the
certificate, showing that at least
twenty-five (25%) percent of such
increased capital stock has been
subscribed and that at least twenty-
five (25%) percent of the amount
subscribed has been paid either in
actual cash to the corporation or that
there has been transferred to the
corporation property the valuation of
which is equal to twenty-five (25%)
percent of the subscription: Provided,
further, That no decrease of the capital
stock shall be approved by the
Commission if its effect shall prejudice
the rights of corporate creditors.
Non-stock corporations may
incur or create bonded indebtedness,
or increase the same, with the
approval by a majority vote of the
board of trustees and of at least two-
thirds (2/3) of the members in a
meeting duly called for the purpose.
Bonds issued by a corporation
shall be registered with the Securities
and Exchange Commission, which
shall have the authority to determine
the sufficiency of the terms thereof.
(17a)
 The vote must be cast at the meeting
called for that purpose
 Written assent would not suffice
 When do amendments become valid
and effective?
- Only upon the approval of the SEC
TRUE OR FALSE?
- FALSE because it can be valid upon
the date of filing if not acted upon
within 6 months without fault
attributable to the corporation
 Why is it retroactive?
 What provision may be amended,
altered or repealed
 Can you change name, address for
example she married or changed
address?
- NO. you cannot change that

 Fait accompli, are beyond the powers
or authority of the corporation to
change, alter or modify. These would
include the following:
- Names of the incorporators and
- The incorporating directors or
trustees,
- The name of the treasurer originally or
first elected by the subscribers or
members to act as such until his
successor has been duly elected and
qualified,
- The number of shares and amount
originally subscribed and paid out of
the original authorized capital stock of
the corporation,
- The date and place of execution of the
articles of incorporation,
- The signatories and acknowledgment
thereof.
- All other provisions or matters stated
or contained in the articles are subject
to amendment.
 Founder’s or signatories hindi pwede
palitan
 Names, nationalities- you cannot
 Capital- right granted by law to all
corporation
 Paid up capital- NO
 Restriction and transfer of shares in
ordinary stock corporations
- You can, but close corporation cannot
- Section 96, otherwise it will not be a
close corporation
Section 96. Definition and
applicability of Title. - A close
corporation, within the meaning of this
Code, is one whose articles of
incorporation provide that: (1) All the
corporation's issued stock of all
classes, exclusive of treasury shares,
shall be held of record by not more
than a specified number of persons,
not exceeding twenty (20); (2) all the
issued stock of all classes shall be
subject to one or more specified
restrictions on transfer permitted by
this Title; and (3) The corporation shall
not list in any stock exchange or make
19
any public offering of any of its stock
of any class. Notwithstanding the
foregoing, a corporation shall not be
deemed a close corporation when at
least two-thirds (2/3) of its voting
stock or voting rights is owned or
controlled by another corporation
which is not a close corporation within
the meaning of this Code.
Any corporation may be
incorporated as a close corporation,
except mining or oil companies, stock
exchanges, banks, insurance
companies, public utilities,
educational institutions and
corporations declared to be vested with
public interest in accordance with the
provisions of this Code.
The provisions of this Title shall
primarily govern close corporations:
Provided, That the provisions of other
Titles of this Code shall apply
suppletorily except insofar as this Title
otherwise provides.
 Transfer clause, executor clause,
acknowledgment, treasury affidavit-NO
Philippine First Insurance case
- Mere change in the name of a
corporation or by merely complying
with the law is general amendment
- It does not change its personality. It is
the same person in a different name.
the charter is the same
 Amendment of a corporate term
- Extending the same can never be
made 7 years prior? TRUE or FALSE
- FALSE. It can be if there are
justifiable reasons for earlier extension
as may be determined by the SEC
 Can you extend the corporate term if it
has already expired?
- Once the term expires without an
amendment having happen it ceases to
exist as a body politic. It is dissolved
automatically on the day it expires.
 Alhambra cigar and PNB case
 Instances when the SEC allowed
extension whose term has already
expired
- All of them involved are institutions of
learning, it was the case in order to

avoid confusion that would arise later
on.
BOARD OF DIRECTORS/TRUSTEES
 Section 23
Section 23. The board of
directors or trustees. - Unless otherwise
provided in this Code, the corporate
powers of all corporations formed
under this Code shall be exercised, all
business conducted and all property of
such corporations controlled and held
by the board of directors or trustees to
be elected from among the holders of
stocks, or where there is no stock,
from among the members of the
corporation, who shall hold office for
one (1) year until their successors are
elected and qualified. (28a)
Every director must own at
least one (1) share of the capital stock
of the corporation of which he is a
director, which share shall stand in
his name on the books of the
corporation. Any director who ceases
to be the owner of at least one (1)
share of the capital stock of the
corporation of which he is a director
shall thereby cease to be a director.
Trustees of non-stock corporations
must be members thereof. A majority
of the directors or trustees of all
corporations organized under this
Code must be residents of the
Philippines.
- Controlled by the board of directors
- Authority are however restricted to the
day to day
- Stockholders may have all the profit
but will turn over the management to
the governing board
- But unless the law provides the power
may be delegated
 General rule
- Corporations must sit and act as a
body
- Will be bound by corporate officers if
they acted within the 5 classification
page 150
Ramirez vs. Orientalist co.
- What was the position of Fernandez in
this case? TREASURER
20
- Why did the court rule that actions of
Fernandez bound the corporation
when he is not even a board of
director?
“if a man is found acting for a
corporation with the external indicia of
authority, any person not having
notice of want of authority, may
usually rely upon those appearances;
and if it be found that the directors
had permitted the agent to exercise
that authority and thereby held him
out as a person competent to bind the
corporation, or had acquiesced in a
contract and retained the benefit
supposed to have been conferred by it,
the corporation will be bound,
notwithstanding the actual authority
may never have been granted.”
- Contracts must be made by the
director and not the stockholders
- Actions of the stockholders in such
matters is only advisory and not in any
way binding in the corporation
Barreto vs. La previsora Filipina
- Everything emanates from the board of
directors
- Stockholders action is merely advisory
except their approval or vote is
necessary to prove a valid corporate
act
 Qualifications:
- No citizenship requirement, at least
majority must be residents
- Can have a governing board consisting
solely of foreigners
- But we have to take into consideration
partly nationalized industries and
other laws which prohibits or limits
foreign ownership
- Anti-dummy act
- Utilization development of natural
resources 60% must be owned by
Filipino citizens, therefore they only
own 40%---10 members they can only
have 4 seats, but not entirely correct
because the law may provide
otherwise; educational institutions
restricted to Filipinos, but there are
 21

exceptions when created by religious  May this term exceed one year?
and charitable institutions.
- Yes, they may serve in a hold over
- By-laws may provide additional capacity until their successors have
qualifications and disqualifications been duly elected and qualified

- To qualify as a director he must own at Detective and protective bureau vs.

least 1 share Cloribel

 Should the stockholder be the - In the by-laws, managing director

equitable or beneficial owner in order must be elected from among
to qualify as a director? themselves

- NO, it is not necessary, as long as you - Must be duly elected and qualified
are listed in the books as owner of one
share How are the directors elected?

Lee vs. CA 1-100T/S

- As long as you are listed in the books 2-100T/S

as owner of one share
3-100T/S
- Under the old law he must be the to 10=1M/S
beneficial owner and legal owner
thereof but in the new law it is not  Do you include the vote of 1 & 2 to
required as long as it stands in his have a quorum to have a valid
name he is qualifies meeting?

1 A-100t/S B (own in the trust of X) is B - NO, quorum requirements is 401,000

qualified to be a director?
Quorum requirement is 501k
2
Holders of non-voting shares are only entitled
3-10 to vote in last par. Of section 6

2– transferring there voting rights in favor of 1-200k

VT
2-200k
Other rights will accrue in favor of them, but
not the voting rights 3-200k

voting rights must be recorder in the books of 4-100k

the corporation that it is transferred
5-100k
PNB-IFL- wholly owned subsidiary of PNB
6-100k
PNB will assign to PNB-IFL nominal shares
7-50k
and PNB-IFL now will be able to be
nominated 8-40k

 Gen. Rule: 9-5k

- Term of one year who will serve as 10-5k

such until there successors are elected
and qualified =1MS

 Exception: 1&2 is absent, 3&4 ayaw tumakbo and hindi

nagvote 6-10, tumakbo and ninominate nila
- Non-stock corporation can serve for a yung sarili nila and cast all their shares on
term of 3 years themselves

- Educational non-stock- term of the  Who wins? Or who gets elected?

governing board can be 5 years

- No vote requirement, the one who gets
the most number of votes gets elected,
section24.
 What is cumulative voting?
- Process of multiplying the number of
shares to the number of director to be
elected
- Matter of right granted to stockholders
in a stock corporation
1 to 5 has 200k/s and members of the same
family- majority 800k they have 4M votes
they are guaranteed 4 seats
6 to 10 are not related- 1 seat 1M votes
 Cumulative to allow the minority to
have a rightful representation in the
board
 Is it allowed in a non-stock
corporation?
- Not generally available
- Section 89 unless the articles or by-
laws allow cumulative voting
Section 89. Right to vote. - The
right of the members of any class or
classes to vote may be limited,
broadened or denied to the extent
specified in the articles of
incorporation or the by-laws. Unless so
limited, broadened or denied, each
member, regardless of class, shall be
entitled to one vote.
Unless otherwise provided in
the articles of incorporation or the by-
laws, a member may vote by proxy in
accordance with the provisions of this
Code. (n)
Voting by mail or other similar
means by members of non-stock
corporations may be authorized by the
by-laws of non-stock corporations with
the approval of, and under such
conditions which may be prescribed
by, the Securities and Exchange
Commission.
 Other corporate officers other than the
governing board section 25
Section 25. Corporate officers,
quorum. - Immediately after their
election, the directors of a corporation
must formally organize by the election
22
of a president, who shall be a director,
a treasurer who may or may not be a
director, a secretary who shall be a
resident and citizen of the Philippines,
and such other officers as may be
provided for in the by-laws. Any two (2)
or more positions may be held
concurrently by the same person,
except that no one shall act as
president and secretary or as president
and treasurer at the same time.
The directors or trustees and
officers to be elected shall perform the
duties enjoined on them by law and
the by-laws of the corporation. Unless
the articles of incorporation or the by-
laws provide for a greater majority, a
majority of the number of directors or
trustees as fixed in the articles of
incorporation shall constitute a
quorum for the transaction of
corporate business, and every decision
of at least a majority of the directors or
trustees present at a meeting at which
there is a quorum shall be valid as a
corporate act, except for the election of
officers which shall require the vote of
a majority of all the members of the
board.
Directors or trustees cannot
attend or vote by proxy at board
meetings. (33a)
 Is the president required to be a
stockholder. YES
 The chairman may be another person
 The president may also be another
person
 Prohibited is president to be secretary
or treasurer at the same time
 Board of director must sit and act as a
body to arrive at a corporate act
 What would constitute a quorum if 5
then 3 must be present
 May the vote of 2 members past a 5
man governing board pass a valid
corporate act?
- YES. Voting requirement is majority of
directors present at which there where
a quorum
1 1 and 2 present=valid
voting requirement
2 1 and 2 voted yes
3 3 voted no

4 -
5 in the corporate account
 Is it absolute?
- NO, except in the election because it
requires the majority of all the
members of the board
- If by-laws or articles provide a higher
voting requirement
 Artificial beings must act through its
members and act as a body to have a
valid corporate act
 Exception:
- Delegation
- Expressly conferred
- Where the officer or agent is clothed
with actual or apparent authority
- Otherwise it will not bind the
corporation
 Yao ka sin trading case “already asked
in the bar”
- Only bind the corporation to the extent
of authority confined to him or virtue
of customs, usage and policy
- Must pass first the controller and
counsel
 What if the notice requirement is not
complied with?
Lopez realty vs. Fotencha
- Notice requirement must be complied
with hence it should have been with
force and effect, but according to the
SC, it may be ratified expressly if there
is a subsequent meeting called for that
purpose
- Impliedly through acts
- Asuncion was aware of the
corporations obligation
- There was implied ratification or she
was estopped
Pua casim vs. Neumark and Co.
- Considered 3 circumstanced
23
Check which was the proceed of the
loan which was endorsed and deposit
- Neumark as president and also
stockholder
Yu chuck vs. Kong Li Po
- General manager usually has the
power to hire but the SC said the
contract must be reasonable
- The contract here is so onerous that it
would throw the corporation into
insolvency
Francisco vs. GSIS
- GSIS cannot evade the binding effect
of the telegram
- Only 15 months later that the
corporation said there was a mistake
- The silence coupled with the
unconditional acceptance of the other
subsequent remittances is binding to
the corporation
Board of liquidators vs. Kalaw
“Settled jurisprudence has it
that where similar acts have been
approved by the directors as a matter
of general practice, custom and policy,
the general manager may bind the
company without formal authorization
of the board of directors. In varying
language, existence of such authority
is established, by proof of the course of
business, the usages and practices of
the company and by the knowledge
which the board of directors has, or
must be presumed to have, of acts and
doings of its subordinates in and
about the affairs of the corporation. So
also, “xx authority to act for and bind
a corporation may be presumed from
acts of recognition in other instances
where the power was in fact exercised.”
“xx Thus, when, in the usual course of
business of a corporation, an officer
has been allowed in his official
capacity to manage its affairs, his
authority to represent the corporation
may be implied from the manner in
which he has been permitted by the
directors to manage its business.”

In the case at bar, the practice
of the corporation has been to allow its
general manager to negotiate and
execute contracts in its copra trading
activities for and in NACOCO’s behalf
without prior board approval. If the by-
laws were to be literally followed, the
board should give its stamp of prior
approval on all corporate contracts.
But that Board itself, by its acts and
through acquiescence, practically laid
aside the by-law requirement of prior
approval.
- Kalaw signed alone and said contracts
were submitted to the board of
directors after its consummation and
not before
Buenaseda vs. Bowen
- Express ratification is made through a
formal board action
- Implied ratification is through: silence
or acquiescence, acceptance benefits
and lastly recognition or adoption
 An unauthorized act may nevertheless
be binding either by express or implied
by estoppels
 By virtue of silence the board had
impliedly accepted the act
 By recognition or adoption
 By virtue of payment of obligations
arising therefore- Lopez realty
 May directors or trustees be
disqualified to act as such?
- YES, crime, etc. disqualifications in
book
- Possess or dispossess any of the
qualifications or disqualifications ,
cease to hold at least one share
 May directors be ousted from office?
- At least 2/3 of members representing
outstanding capital stock. Again notice
requirement must be complied with
1-200 1-5 same
family
2-200
3-200
24
4-100
5-100 electing
6-100 6 to 10 not
related
7-50
8-40
9-5
10-5
outstanding director
 Meetings called by the president or the
secretary ordered by the president
 It depends if the removal is without
cause they cannot do so because
removal without cause shall not
deprive the minority stockholders or
members of the right of representative
 If with cause they can even if it will
prejudice the rights of the minority,
provided of course additional
requirements by-laws and articles of
incorporation
 Who will fill up the vacancy created
due to the ouster of a member of the
board of directors <section 29>
Section 29. Vacancies in the
office of director or trustee. - Any
vacancy occurring in the board of
directors or trustees other than by
removal by the stockholders or
members or by expiration of term, may
be filled by the vote of at least a
majority of the remaining directors or
trustees, if still constituting a quorum;
otherwise, said vacancies must be
filled by the stockholders in a regular
or special meeting called for that
purpose. A director or trustee so
elected to fill a vacancy shall be elected
only or the unexpired term of his
predecessor in office.
Any directorship or trusteeship
to be filled by reason of an increase in
the number of directors or trustees
shall be filled only by an election at a
regular or at a special meeting of
stockholders or members duly called
for the purpose, or in the same
meeting authorizing the increase of
directors or trustees if so stated in the
notice of the meeting. (n)
 Other than by removal or expiration of
term they do not have the power

 When will the vacancies be filled up?
 Is notice required, to fill up vacancies
due to removal?
 What if the vacancy is due to an
increase, can it be filled up in the
same meeting where in the number is
increased?
 Election due to removal-in the same
meeting notice is not required
 Election due to increase in number- it
must be so stated in the meeting
 Section 30
Section 30. Compensation of
directors. - In the absence of any
provision in the by-laws fixing their
compensation, the directors shall not
receive any compensation, as such
directors, except for reasonable per
diems: Provided, however, That any
such compensation other than per
diems may be granted to directors by
the vote of the stockholders
representing at least a majority of the
outstanding capital stock at a regular
or special stockholders' meeting. In no
case shall the total yearly
compensation of directors, as such
directors, exceed ten (10%) percent of
the net income before income tax of
the corporation during the preceding
year. (n)
- Generally not entitled to receive
compensation because they render it
gratuitously
- Unless the by-laws allows
- Stockholders may also grant pursuant
to a majority vote
- Must not exceed net income of 10% tax
of the preceding year
- Acting in special capacity
- In, sum directors may receive
compensation when
1. there is a provision in the by-laws to
that effect
2. When the stockholders, by a majority
vote of the outstanding capital stock
grant the same; and,
3. If the director renders extra-ordinary
or unsual service
25
Central cooperative exchange vs. Tibe
- By-laws may allow, stockholders may
also allow such
 What do you understand by the phrase
“as such directors”
Western institute vs. Salas
- Compensation was granted without
by-laws authority
- Prohibition is not a sweeping rule
- Members of the board may receive
when they receive in a special capacity
- Mere act of the board will suffice
 Is the 10% ceiling applicable to other
officers?
- NO. the phrase “as such director” was
used twice <Section 30>
- The SC ruled that the 10% ceiling will
not likewise apply if they acted in a
capacity other than “as such directors”
Government vs. El Hogar
- Judicial intervention is not proper
- The appropriates remedy is to those
who can make or unmake the by-laws
 Liability of corporate officers
- Obligations incurred by those acting
for and in behalf of the corporations
are not there’s BUT there are
exceptions even if they are acting for
and in behalf of the corporation
Tramat vs. CA
- General rule was applied in the case
- Ong acted as officers and acted within
the scope of his authority
- Court laid down 4 instances when
even if acting within the scope of his
authority he is held solidarily liable
1. He assents (a) to a patently unlawful
act of the corporation, or (b) for bad
faith, or gross negligence in directing
its affairs, or (c) for conflict of interest,
resulting in damages to the
corporation, its stockholders or other
persons;

2. He consents to the issuance of watered
stocks or who, having knowledge
thereof, does not forthwith file with the
corporate secretary his written
objection thereto;
3. He agrees to hold himself personally
and solidarily liable with the
corporation;
4. He is made, by a specific provision of
law, to personally answer for his
corporate action.
- Watered stocks- issued, fully paid up
when in fact they have not been fully
paid or promised as such
Llamado vs. CA
- The corporate entity theory cannot be
used as a defense to escape liability in
violation of B.P. 22
- Where the check is drawn by a
corporation the persons who signed
the check shall be liable.
Uichico vs. NLRC
- Labor case corporate directors and
officers are solidarily liable with the
corporation for the termination of
employment of corporate employee
done with malice and bad faith
 3 fold duty of directors
- obedient
- diligent
- loyal
 Business judgment rule
- Questions of policy and management
are left solely to the honest decision of
the board of directors and the courts
are without authority to substitute its
judgment as against the former. The
directors are the business managers of
the corporation and as long as they act
in good faith, its actuations are not
subject to judicial review. Montelibano
vs. Bacolod Murcia Milling
- questions of policy and management
are left solely to the board of directors
- BOD, business manager of the
corporation and as long as they act in
26
good faith, its actuations are not
subject to judicial review
- They are not insurer of the property of
the company, they were guarantors
that the enterprise undertaken by the
corporation shall be successful
Montelibano vs. Bacolod Murcia
Milling Co.
- Directors are not liable due to
imprudence or honest error of
judgment
- Duty of loyalty of corporate directors
- 31,32,33,34
- 31,32,33- specific instances when
corporate officers may violate loyalty
- 32,33 self-dealing and interlocking
director
 Corporate opportunity doctrine
- It places a director of a corporation in
the position of a fiduciary and
prohibits him form seizing a business
opportunity and/or developing it at the
expense and with the facilities of the
corporation. He cannot appropriate to
himself a business opportunity which
in fairness should belong to the
corporation.
 Last paragraph of section 31 and the
provision of section 34 make reference
to recovery of “forbidden profits”
 Distinction between section 31 and 34
relative to the ratification by the
stockholders
- The second paragraph of section 31
which makes a director liable to
account for profits if he attempts to
acquire or acquires any interest
adverse to the corporation in respect to
any matter reposed in him in
confidence as to which equity imposes
a disability upon him to deal in his
own behalf is not subject to ratification
by the stockholders. Whereas, in
section 34 if a director acquires for
himself a business opportunity which
should belong to the corporation, he is
bound to account for such profits
unless his act is ratified by the
stockholders owning ore representing

at least 2/3 of the outstanding capital
stock.
- If reposed in him in confidence, not
subject to ratification
- If the acquisition is merely that of a
business opportunity which has not
been reposed in him in confidence, the
same may be subject to ratification by
the stockholders.
Director x co.
A-REALTY
B trustee in the board meeting in which
C Z owns property and is
going abroad never to
Return, he wants to sell
for 25M the fair market
value is 30M
D
E reasonable under the circumstances;
E goes to Z and offers to pay the property for
26 M and later he sells it for 30M making 4M
profit, one of the stockholders learned and
complains that he should submit the profits.
E said that he will move for ratification of his
actuation. Can it be ratified?
- It can be ratified he merely acquired a
business owning to the corporation
- It would be different if it was entrusted
in his confidence
Another scenario:
Had A not attended the meeting he would
not have known of the sale it is then a matter
reposed in him in confidence
 A corporation cannot reaquire its
share if it has no restricted unretained
earnings
Strong vs. Rapide
- What duty did he violate?
- He violated his duty of loyalty
- The law would be impotent if the sale
were not invalidated
 Self-dealing director and interlocking
director
 What is a self-dealing director?
27
- Director of a corporation dealing or
transacting business with his
corporation
 Are the contracts and dealing of a
self0dealing director valid?
 General rule: voidable
 May the contracts of a self-dealing
director be valid per se.
- YES. If all the 4 conditions are present
they will be valid per se
1. That the presence of such director or
the contract was approved was not
necessary to constitute a quorum for
such meeting;
2. That the vote of such director or
trustee was not necessary for the
approval of the contract;
3. That the contract is fair and
and
4. That in case of an officer, the contract
has been previously authorized by the
board of directors.
 When do they become voidable?
- When any of the two requisites are
absent it is voidable, but subject to
ratification by 2/3 of the outstanding
capital stock or 2/3 of the member
 Requisites for ratification (subject to
ratification by the stockholders holding
or representing at least 2/3 of the
outstanding capital stock or 2/3 of the
members.)
- it must be at a meeting called for the
purpose
- full disclosure of the adverse interest
of the director concerned must be
made
- the contract is fair and reasonable
under the circumstances
 Problem if self-dealing director
involved owns all or substantially all of
the shares of stock of the corporation
thereby making it easily possible to
have the contract ratified

- last sentence of section 32 should be
made to apply by determining the
reasonableness and fairness of the
contract
Section 32. Dealings
directors, trustees or officers with the
corporation. - A contract of the
corporation with one or more of its
directors or trustees or officers is
voidable, at the option of such
corporation, unless all the following
conditions are present:
1. That the presence of such director
or trustee in the board meeting in
which the contract was approved was
not necessary to constitute a quorum
for such meeting;
2. That the vote of such director or
trustee was not necessary for the
approval of the contract;
3. That the contract is fair and
reasonable under the circumstances;
and
4. That in case of an officer, the
contract has been previously
authorized by the board of directors.
Where any of the first two
conditions set forth in the preceding
paragraph is absent, in the case of a
contract with a director or trustee,
such contract may be ratified by the
vote of the stockholders representing
at least two-thirds (2/3) of the
outstanding capital stock or of at least
two-thirds (2/3) of the members in a
meeting called for the purpose:
Provided, That full disclosure of the
adverse interest of the directors or
trustees involved is made at such
meeting: Provided, however, That the
contract is fair and reasonable under
the circumstances. (n)
Prime white cement vs. IAC
- a director of a corporation owes a
position in trust
- in case of conflict between himself and
that of the corporation, he cannot
sacrifice the interest of the corporation
to his own advantage
- as a director he should have acted in a
manner as not to unduly prejudice the
corporation
- he cannot be allowed to enrich himself
28
 May corporate directors purchase the
corporate property?
Mead vs. Mccullogh
- interlocking director- a director of one
of
corporation who deals and transacts
business with another corporation who
is himself a director
A- director of X company also a director
of Y corporation
B-
C-
D-
E-
 Both companies enter into a contract
and A sits, is the contract valid?
- Yes on the ground of fraud or if it is
unfair
- May be subject to the provision of
section 32
- Section 32 contract may become
voidable, hence it may also be ratified
X Co.
Y Co.
A owe 20%
A owe 20%
Is it generally valid or voidable? VALID
25%
25% VALID
15%
25% VOIDABLE SUBJECT TO section
32
More than 20 substantial
 BOD mismanages corporate officers.
Who may file a suit?
- General rule: BOD which can institute
a case because it has all the powers.
To allow stockholders to file would
violate the doctrine of corporate entity
and may result to multiplicity of suits
- Stockholders cannot therefore
generally file a case EXCEPT of course
in a DERIVATIVE SUIT
 Derivative suit

- An action based on injury to the
corporation-to enforce a corporate
right- wherein the corporation itself is
joined as a necessary party, and
recovery is in favor of and for the
corporation.
- Remedy granted by law
stockholders to institute a case to
remedy a wrong done directly to the
corporation and indirectly to the
stockholders, if the board refuses to do
so. Otherwise if not they would be left
without any recourse
 Available suits
 individual or personal
- Wrong done against his person as a
stockholder
 Class suit
- Filed by a stockholder
representation of other stockholders
- A wrong or redress done, a derivative
suit in nature
 Intra-corporate remedies
- Demand to the BOD to institute such
action
- Negated by the BOD
- The one who instituted must be a
stockholder at the date when the act
was done, must have been a
stockholder by that time
 Demand will not be required if the
majority of the BOD are the one’s
guilty of the wrong charged
 The corporation must be made a party
in the case whatever side will not
matter because under Philippine law
misjoinder is not a ground for
dismissal
 Non-joinder is a ground for dismissal
 Any benefit should inure to
corporation
 Stockholder bringing the action is
entitled to reimbursement such as
attorney’s fee ONLY IF the case is
SUCCESSFUL to avoid harassment
suit to their management
29
Pascual vs. Orozco
- By virtue of the fact that he is a
stockholder, may maintain a derivative
suit
- Depend on how, when and what
to reason
- Seeking for the years 1898 all the way
1907
- Only became a stockholder in 1903
- He can sue only in 1903 forward
because he must be a stockholder
- The right of action is personal in
nature. He became a stockholder only
in 1902
 Derivative suit
- By a stockholder to address a wrong
done against the corporation and the
in
stockholder indirectly
- Essential requisite must have been a
stockholder from the time the act
complained of took place
- Cannot institute an action from the
years he was still not a stockholder
Everett vs. Asia Banking
- Stockholders cannot ordinarily
commence suit in equity and such is
in the hands of its BOD however there
are exceptions when the BOD will not
sue since they are themselves
principals to the fraud.
Republic vs. Cuaderno
- The facts constitute sufficient cause of
action
- It is not the corporate interest to shield
one from criminal prosecution which is
personal interest
- Perez is not suing in his behalf, but in
behalf of the corporation
the
Western institute vs. Salas
- Assuming it was filed in the proper
forum would there argument that it is
a derivative suit prosper? NO. it is
people of the Philippines vs. individual
director, it must be stated in the
complaint that it is being instituted as

a derivative suit and for and in behalf
of the corporation
- Granting arguendo, that this is a
derivative suit, the same is still
outrightly dismissible for having been
wrongfully filed in the regular court
devoid of any jurisdiction to entertain
the complaint. The case should have
been filed with the SEC which
exercises original and exclusive
jurisdiction over derivative suits, they
being intra-corporate disputes, per
Section 5 (b) of P.D. 902-A
San Miguel vs. Khan
- Was a demand made? NO
- It is not necessary because he objected
in the board meeting, but still it was
adopted therefore it was useless
Chase vs. Buencamino
- Argument that he should be in
estoppels since he filed in the U.S.
- Assuming the case prospered in the
U.S. would not estoppels apply as
against him? NO for estoppels to step
in it must be a case by the corporation
Reyes vs. tan
- Corporate director are guilty of breach
of trust
- A stockholder may institute an action
to remedy a wrong done
- Fraud in the conduct of corporate
affairs
Gamboa vs. Victoriano
- Is derivative suit appropriate in this
case
- They are not vindicatory damage done
to the corporation, but rather they
where vindicating damage against him
- Violation of their rights as individuals,
hence derivative suit is not the remedy
Evangelista vs. Santos
- Derivative suit is not proper
- Claim is not for the benefit of the
corporation, but rather his individual
benefit
30
 From the cases above cited, these are
the requirements and the procedures
that must be followed in order that a
derivative suit may prosper
1. That the party bringing the suit should
be a stockholder as of the time the act
or transaction complained of took
place, or whose shares have evolved
upon him since by operation of law.
This rule, however, does not apply if
such act or transaction continues and
is injurious to the stockholder or affect
him specifically in some other way.
The number of his hares is immaterial
since he is not suing in his own behalf
or for the protection or vindication of
his own right, or the redress of a
wrong done against him, individually,
but in behalf and for the benefit of the
corporation.
2. He has tried to exhaust intra-corporate
remedies, he has made a demand on
the board of directors for the
appropriate relief but the latter had
failed or refused to heed his plea.
Demand, however, is not required if
the company is under the complete
control of the directors who are the
very ones to be sued (or where it
becomes obvious that a demand upon
them would have been futile and
useless) since the law does not require
a litigant to perform useless acts;
3. The stockholder bringing the suit must
allege in his complaint that he is suing
on a derivative cause of action on
behalf of the corporation and all other
stockholders similarly situated,
otherwise, the case is dismissible. This
is because the cause of action actually
devolves on the corporation and not to
a particular stockholder.
4. The corporation should be made a
party, either as party-plaintiff or
defendant, in order to make the court’s
judgment binding upon it, and thus,
bar future litigation of the same
issues. On what side the corporation
appears loses importance when it is
considered that it lay within the power
of the court to direct the making of
amendment of the pleading, by adding
or dropping parties, as may be
required in the interest of justice.

Misjoinder of parties is not a ground to
dismiss action; and,
5. Any benefit or damages recovered shall
pertain to the corporation. This is so
because in all instances, derivative
suit is instituted for and in behalf of
the corporation and not for the
protection or vindication of a right or
rights of a particular stockholder,
otherwise, the aggrieved stockholder
should institute, instead, an individual
or personal suit to vindicate his
personal or individual right. Or, for
that matter, representative or class
suit for all other stockholders whose
rights are similarly situated, injured or
violated, personally or individually.
 Executive committee
- Not allowed under the OLD law
 How may executive committee created
and constituted?
- Section 35
Section 35. Executive
committee. - The by-laws of a
corporation may create an executive
committee, composed of not less than
three members of the board, to be
appointed by the board. Said
committee may act, by majority vote of
all its members, on such specific
matters within the competence of the
board, as may be delegated to it in the
by-laws or on a majority vote of the
board, except with respect to: (1)
approval of any action for which
shareholders' approval is also
required; (2) the filing of vacancies in
the board; (3) the amendment or repeal
of by-laws or the adoption of new by-
laws; (4) the amendment or repeal of
any resolution of the board which by
its express terms is not so amendable
or repealable; and (5) a distribution of
cash dividends to the shareholders.
- Said committee may act and bind the
corporation by the majority vote of all
its members except with respect to
those matters provided for in sec. 35
these are:
1. Approval of any action for which
shareholders’ approval is also required
2. The filing of vacancies in the board;
3. Amendment or repeal of by-laws or the
adoption of new by-laws;
31
4. Amendment or repeal of any resolution
of the board which by its express
terms is not so amenable or
repealable; and,
5. Distribution of cash dividends to the
shareholders.
 May the board alone create an
executive committee without any
authority provided for the by-laws?
- NO board of directors must sit and act
as a body to have a valid transaction
 May a non-member of the board of
directors be a member of the executive
committee?
- NO, all of them must be members of
the board of directors
- BOD cannot act by proxy it would be
abdication of powers
 Purpose clauses necessary because it
confers and also limits the actual
authority of the corporation
CORPORATE POWERS AND AUTHORITY
 Corporate authority may be classified
into three classes namely:
1. Those expressly granted or authorized
by law inclusive of the corporate
charter or articles of incorporation;
2. Those impliedly granted as are
essential or reasonably necessary to
the carrying out of the express powers;
3. Those that are incidental to its
existence.
 Section 36 to 45- POWER GRANTED
BY LAW
Section 36. Corporate powers and
capacity. - Every corporation incorporated
under this Code has the power and capacity:
1. To sue and be sued in its corporate
name;
2. Of succession by its corporate name
for the period of time stated in the
articles of incorporation and the
certificate of incorporation;
3. To adopt and use a corporate seal;

4. To amend its articles of
incorporation in accordance with the
provisions of this Code;
5. To adopt by-laws, not contrary to
law, morals, or public policy, and to
amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to
issue or sell stocks to subscribers and
to sell stocks to subscribers and to sell
treasury stocks in accordance with the
provisions of this Code; and to admit
members to the corporation if it be a
non-stock corporation;
7. To purchase, receive, take or grant,
hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such
real and personal property, including
securities and bonds of other
corporations, as the transaction of the
lawful business of the corporation may
reasonably and necessarily require,
subject to the limitations prescribed by
law and the Constitution;
8. To enter into merger or
consolidation with other corporations
as provided in this Code;
9. To make reasonable donations,
including those for the public welfare
or for hospital, charitable, cultural,
scientific, civic, or similar purposes:
Provided, That no corporation,
domestic or foreign, shall give
donations in aid of any political party
or candidate or for purposes of
partisan political activity;
10. To establish pension, retirement,
and other plans for the benefit of its
directors, trustees, officers and
employees; and
11. To exercise such other powers as
may be essential or necessary to carry
out its purpose or purposes as stated
in the articles of incorporation. (13a)
Section 37. Power to extend or shorten
corporate term. - A private corporation may
extend or shorten its term as stated in the
articles of incorporation when approved by a
majority vote of the board of directors or
trustees and ratified at a meeting by the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at
least two-thirds (2/3) of the members in case
of non-stock corporations. Written notice of
the proposed action and of the time and place
of the meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
32
corporation and deposited to the addressee in
the post office with postage prepaid, or served
personally: Provided, That in case of
extension of corporate term, any dissenting
stockholder may exercise his appraisal right
under the conditions provided in this code. (n)
Section 38. Power to increase or
decrease capital stock; incur, create or
increase bonded indebtedness. - No
corporation shall increase or decrease its
capital stock or incur, create or increase any
bonded indebtedness unless approved by a
majority vote of the board of directors and, at
a stockholder's meeting duly called for the
purpose, two-thirds (2/3) of the outstanding
capital stock shall favor the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness. Written notice of the
proposed increase or diminution of the capital
stock or of the incurring, creating, or
increasing of any bonded indebtedness and of
the time and place of the stockholder's
meeting at which the proposed increase or
diminution of the capital stock or the
incurring or increasing of any bonded
indebtedness is to be considered, must be
addressed to each stockholder at his place of
residence as shown on the books of the
corporation and deposited to the addressee in
the post office with postage prepaid, or served
personally.
A certificate in duplicate must be signed by a
majority of the directors of the corporation
and countersigned by the chairman and the
secretary of the stockholders' meeting, setting
forth:
(1) That the requirements of this
section have been complied with;
(2) The amount of the increase or
diminution of the capital stock;
(3) If an increase of the capital stock,
the amount of capital stock or number
of shares of no-par stock thereof
actually subscribed, the names,
nationalities and residences of the
persons subscribing, the amount of
capital stock or number of no-par
stock subscribed by each, and the
amount paid by each on his
subscription in cash or property, or
the amount of capital stock or number
of shares of no-par stock allotted to
each stock-holder if such increase is
for the purpose of making effective
stock dividend therefor authorized;
(4) Any bonded indebtedness to be
incurred, created or increased;

(5) The actual indebtedness of the
corporation on the day of the meeting;
(6) The amount of stock represented at
the meeting; and
(7) The vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness.
Any increase or decrease in the capital stock
or the incurring, creating or increasing of any
bonded indebtedness shall require prior
approval of the Securities and Exchange
Commission.
One of the duplicate certificates shall be kept
on file in the office of the corporation and the
other shall be filed with the Securities and
Exchange Commission and attached to the
original articles of incorporation. From and
after approval by the Securities and Exchange
Commission and the issuance by the
Commission of its certificate of filing, the
capital stock shall stand increased or
decreased and the incurring, creating or
increasing of any bonded indebtedness
authorized, as the certificate of filing may
declare: Provided, That the Securities and
Exchange Commission shall not accept for
filing any certificate of increase of capital
stock unless accompanied by the sworn
statement of the treasurer of the corporation
lawfully holding office at the time of the filing
of the certificate, showing that at least
twenty-five (25%) percent of such increased
capital stock has been subscribed and that at
least twenty-five (25%) percent of the amount
subscribed has been paid either in actual
cash to the corporation or that there has been
transferred to the corporation property the
valuation of which is equal to twenty-five
(25%) percent of the subscription: Provided,
further, That no decrease of the capital stock
shall be approved by the Commission if its
effect shall prejudice the rights of corporate
creditors.
Non-stock corporations may incur or create
bonded indebtedness, or increase the same,
with the approval by a majority vote of the
board of trustees and of at least two-thirds
(2/3) of the members in a meeting duly called
for the purpose.
Bonds issued by a corporation shall be
registered with the Securities and Exchange
Commission, which shall have the authority
to determine the sufficiency of the terms
thereof. (17a)
Section 39. Power to deny pre-emptive
right. - All stockholders of a stock corporation
shall enjoy pre-emptive right to subscribe to
all issues or disposition of shares of any
33
class, in proportion to their respective
shareholdings, unless such right is denied by
the articles of incorporation or an amendment
thereto: Provided, That such pre-emptive right
shall not extend to shares to be issued in
compliance with laws requiring stock
offerings or minimum stock ownership by the
public; or to shares to be issued in good faith
with the approval of the stockholders
representing two-thirds (2/3) of the
outstanding capital stock, in exchange for
property needed for corporate purposes or in
payment of a previously contracted debt.
Section 40. Sale or other disposition of
assets. - Subject to the provisions of existing
laws on illegal combinations and monopolies,
a corporation may, by a majority vote of its
board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its
property and assets, including its goodwill,
upon such terms and conditions and for such
consideration, which may be money, stocks,
bonds or other instruments for the payment
of money or other property or consideration,
as its board of directors or trustees may deem
expedient, when authorized by the vote of the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or in
case of non-stock corporation, by the vote of
at least to two-thirds (2/3) of the members, in
a stockholder's or member's meeting duly
called for the purpose. Written notice of the
proposed action and of the time and place of
the meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee in
the post office with postage prepaid, or served
personally: Provided, That any dissenting
stockholder may exercise his appraisal right
under the conditions provided in this Code.
A sale or other disposition shall be deemed to
cover substantially all the corporate property
and assets if thereby the corporation would
be rendered incapable of continuing the
business or accomplishing the purpose for
which it was incorporated.
After such authorization or approval by the
stockholders or members, the board of
directors or trustees may, nevertheless, in its
discretion, abandon such sale, lease,
exchange, mortgage, pledge or other
disposition of property and assets, subject to
the rights of third parties under any contract
relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict
the power of any corporation, without the
authorization by the stockholders or
members, to sell, lease, exchange, mortgage,
pledge or otherwise dispose of any of its
property and assets if the same is necessary

in the usual and regular course of business of
said corporation or if the proceeds of the sale
or other disposition of such property and
assets be appropriated for the conduct of its
remaining business.
In non-stock corporations where there are no
members with voting rights, the vote of at
least a majority of the trustees in office will be
sufficient authorization for the corporation to
enter into any transaction authorized by this
section.
Section 41. Power to acquire own
shares. - A stock corporation shall have the
power to purchase or acquire its own shares
for a legitimate corporate purpose or
purposes, including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the shares to be
purchased or acquired:
1. To eliminate fractional shares arising out of
stock dividends;
2. To collect or compromise an indebtedness
to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said
sale; and
3. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Code. (a)
Section 42. Power to invest corporate
funds in another corporation or business or for
any other purpose. - Subject to the provisions
of this Code, a private corporation may invest
its funds in any other corporation or business
or for any purpose other than the primary
purpose for which it was organized when
approved by a majority of the board of
directors or trustees and ratified by the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by
at least two thirds (2/3) of the members in
the case of non-stock corporations, at a
stockholder's or member's meeting duly called
for the purpose. Written notice of the
proposed investment and the time and place
of the meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee in
the post office with postage prepaid, or served
personally: Provided, That any dissenting
stockholder shall have appraisal right as
provided in this Code: Provided, however,
That where the investment by the corporation
is reasonably necessary to accomplish its
primary purpose as stated in the articles of
incorporation, the approval of the
stockholders or members shall not be
necessary. (17 1/2a)
34
Section 43. Power to declare
dividends. - The board of directors of a stock
corporation may declare dividends out of the
unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all
stockholders on the basis of outstanding
stock held by them: Provided, That any cash
dividends due on delinquent stock shall first
be applied to the unpaid balance on the
subscription plus costs and expenses, while
stock dividends shall be withheld from the
delinquent stockholder until his unpaid
subscription is fully paid: Provided, further,
That no stock dividend shall be issued
without the approval of stockholders
representing not less than two-thirds (2/3) of
the outstanding capital stock at a regular or
special meeting duly called for the purpose.
(16a)
Stock corporations are prohibited from
retaining surplus profits in excess of one
hundred (100%) percent of their paid-in
capital stock, except: (1) when justified by
definite corporate expansion projects or
programs approved by the board of directors;
or (2) when the corporation is prohibited
under any loan agreement with any financial
institution or creditor, whether local or
foreign, from declaring dividends without
its/his consent, and such consent has not yet
been secured; or (3) when it can be clearly
shown that such retention is necessary under
special circumstances obtaining in the
corporation, such as when there is need for
special reserve for probable contingencies. (n)
Section 44. Power to enter into
management contract. - No corporation shall
conclude a management contract with
another corporation unless such contract
shall have been approved by the board of
directors and by stockholders owning at least
the majority of the outstanding capital stock,
or by at least a majority of the members in
the case of a non-stock corporation, of both
the managing and the managed corporation,
at a meeting duly called for the purpose:
Provided, That (1) where a stockholder or
stockholders representing the same interest
of both the managing and the managed
corporations own or control more than one-
third (1/3) of the total outstanding capital
stock entitled to vote of the managing
corporation; or (2) where a majority of the
members of the board of directors of the
managing corporation also constitute a
majority of the members of the board of
directors of the managed corporation, then
the management contract must be approved
by the stockholders of the managed
corporation owning at least two-thirds (2/3)
of the total outstanding capital stock entitled
to vote, or by at least two-thirds (2/3) of the
members in the case of a non-stock
corporation. No management contract shall
 35

be entered into for a period longer than five - should be served to those named in
years for any one term. the statute

The provisions of the next preceding - secretary of a dep’t are not those
paragraph shall apply to any contract included in the statute
whereby a corporation undertakes to manage
or operate all or substantially all of the E.B. Villarosa vs. Benito
business of another corporation, whether
such contracts are called service contracts, - decision En Banc repeals all other
operating agreements or otherwise: Provided, pronouncement
however, That such service contracts or
operating agreements which relate to the - section 13 Rule 14 was repealed
exploration, development, exploitation or
utilization of natural resources may be - the old rules was ambiguous and
entered into for such periods as may be
broad and at all time illogical
provided by the pertinent laws or regulations.
(n)  the particular revision under Section
11 of Rule 14 was explained by retired
Section 45. Ultra vires acts of
Supreme Court Justice Florenz
corporations. - No corporation under this
Code shall possess or exercise any corporate Regalado, thus:
powers except those conferred by this Code or
by its articles of incorporation and except “xxx the then section 13 of this
such as are necessary or incidental to the Rule allowed service upon a
exercise of the powers so conferred. (n) defendant corporation to “be
made on the president,
Section 36 manager, secretary, cashier,
agent or any of its directors.”
 Where should the corporation be
The aforesaid terms were
sued?
obviously ambiguous and
- principal office is important because it susceptible of broad and
establishes the residence of the sometimes illogical
corporation and determining service of interpretations, especially the
summons, venue of action word “agent” of the corporation.
The Filoil case, involving the
- it can be sued in the city or litigation lawyer of the
municipality where its principal office corporation who precisely
is found appeared to challenge the
validity of service of summons
 Principal office is also important for but whose very appearance for
venue of meetings that purpose was seized upon
to validate the defective service,
 Non-stock corporation may provide in
is an illustration of the need for
its by-laws that the venue of meeting
this revised section with limited
be anywhere in the Philippines
scope and specific terminology.
 Upon whom service of summons be Thus the absurd result in the
made? Filoil case necessitated the
amendment permitting service
- Section 11. Service upon domestic only on the in-house counsel of
private juridical entity- when the the corporation who is in effect
defendant is a corporation, an employee of the corporation,
partnership or association organized as distinguished from an
under the laws of the Philippines with independent practitioner.”
a juridical personality, service may be
made upon the president, managing o notes: additional knowledge
partner, general manager, corporate
- special appearance enter for that
secretary, treasurer, or in house
particular appearance you are not the
counsel.
counsel in the case
Delta motor vs. Mangosing
- would apply only if it does not involve
- strict compliance is necessary an intra-corporate controversy

(controversy between and among the
stockholders)
- upon any of the statutory officers or
officers fixed in the by-laws any
secretary, any of the directors; any
managers in the by-laws
 Seal
- merely ministerial or permissive
 Power to amend
- section 16
- special 37,38,120
 Power to adopt by-laws
- section 46-48
 Power to issue or sell stocks and to
admit members
- stock of stockholders and provision
governing non-stock
 Power to acquire or alienate real or
personal property
- is there any limitation? YES
- Two specific limitation
1. Section 36, as lawful transactions of
business of the corporation may
reasonably and necessarily require
2. Constitution and law
Luneta vs. A.D. Santos
- Importance of the purpose clause
- Cannot have the power to acquire
- Cannot engage in land transportation
- Doctrine of limited capacity
Gov’t vs. El Hogar
- As the lawful transaction of its
business may reasonably represent
Director of Lands vs. CA
- Exception to the rule in
constitution
- Alienable public land
- Converts the property to a private land
automatically once converted it can
now be registered
36
 Power to make donation
- Limitation section 36 par.9
- These are circumstances, however,
under which a donation by a
corporation may be to its benefit as a
means of increasing its business or
promoting patronage. Thus, paragraph
9 of section 36 expressly authorizes a
corporation to make donations. The
only limitations imposed are the
following:
1. The donation must be “reasonable”;
2. It must be for public welfare, or for
hospital, charitable, scientific, cultural
or similar purpose; and,
3. It shall not be in aid of political party
or candidate, or for purposes of
partisan political activity.
 Power to establish pension
- Include any act to promote and
improve the convenience, welfare and
benefit of the employees or offices
Republic vs. Acoje
- While as a rule an ultra-vires act is
one committed outside the object for
which a corporation is created as
defined by law, there are however
certain corporate acts that may be
performed outside of the scope of the
powers expressly conferred if they are
necessary to promote the interest or
welfare of the corporation. Thus, it has
been held that “although not expressly
authorized to do so a corporation may
become a surety where the particular
transaction is reasonably necessary or
proper to the conduct of its business,”
and here it is undisputed that the
establishment local post office is a
reasonable and proper adjunct to the
conduct of the business of appellant
company. Indeed, such post office is a
vital improvement in the living
condition of its employees and
laborers who came to settle in its
the mining camp which is far removed
from the postal facilities or means of
communication accorded to people
living in a city or municipality.

 Power to exercise such other powers
essential or necessary to carry out its
purpose (implied power)
1. Acts in the usual course of business;
2. Acts to protect debts owing to the
corporation;
3. Embarking in a different business;
4. Acts in part or wholly to protect or aid
employees; and,
5. Acts to increase business
Teresa Electric and Power Co. vs.
P.S.C.
- Examined the articles of incorporation
to arrive at its decision
National Power vs. Vera
- For purpose of prohibiting the
NAPOCOR
- The court must decide whether or not
a logical and necessary relation exists
between the act questioned and the
corporate purpose expressed in the
NPC charter
 Importance of PLACE of registration
- Residence
- Venue
- Place of meetings
- Place or registration of chattel
mortgage
 Power to extend its terms
- Once its term expires, already
dissolved automatically, thus can no
longer ask for extension
- After dissolution, it has 3 years to
windup
 What are the modes of increasing
capital stock?
1. Increasing the par value of the existing
number of shares without increasing
the number of shares;
2. Increasing the number of existing
shares without increasing the par
value thereof; and,
37
3. Increasing the number of existing
shares and at the same time
increasing the par value of the shares.
 Why a corporation increases it capital
stock?
- Generate funds, business expansion,
or payment of liabilities, purposes of
acquiring other business. (example: to
buy cars for the officers, purpose of
acquiring other business, expansion,
other valid reasons)
 How do you decrease capital stock and
why a corporation decreases?
- Reduce or wipeout existing deficit
where no creditors would thereby be
effected
- When capital is more than necessary
to procreate the business or reduction
of capital surplus
- To write down the value of its fixed
assets to reflect those present and
actual
o NOTE: any increase or decrease of
capital stock requires approval of
government agency like SEC it can
never take place unless SEC approves
the same
 Relevance of decrease of capital?
1. To reduce or wipe out existing deficit
where no creditors would thereby be
affected;
2. When the capital is more than what is
necessary to procreate the business or
reduction of capital surplus; or,
3. To write down the value of its fixed
assets to reflect there present actual
value in case where there is a decline
in the value of the fixed assets of the
corporation.
- Examples: Php 10M capital for grocery
business, mayor didn’t want to issue
license/permit because mayor has 3
other grocery stores, only allowed sari-
sari store permit, reduce capital for
sari-sari so that the money will not
sleep in bank
- Example: car rental agencies-Php 10M
capital for 20 taxi’s, after some time
each taxi is only 250K, nagmura ang

taxi, to reduce capital is to show
actual assets
 Limitation imposed by law
- Decrease shall not in any way affect
the rights of the creditors
 Philippine Trust Company vs. Rivera
- Without the appraisal of SEC, a
decrease in capital stocks has no effect
 TRUST FUND DOCTRINE:
- Subscription to capital stock of a
corporation constitute a fund to which
the creditors have a right to look upon
for satisfaction of their claims and that
the assignee in insolvency can
maintain an action upon any unpaid
stock subscription in order to realize
assets for the payment of its debts.
Madrigal vs. Zamora
- Decrease in capital has a subterfuge to
evade payment
- Thus not valid and effective
- Must not prejudice creditors which
includes the employees
 Bond
- Commonly understood as an
obligation of a state, its subdivision or
a private corporation, represented by a
certificate or an instrument for the
principal and by detachable coupons
for the payment of interests. In its
simplest term, it is one where an
obligor obliges himself to pay a certain
sum of money to another at a day
named.
- There are different kinds of bond but
before they may be issued or floated by
the corporation, the same must be
registered and approved by the SEC
subject to the rules and regulations
that may be adopted by that agency.
The procedure and requirements set
forth in section 38 is the same as in
increasing or decreasing the capital
stock except that the certificate does
not have to state the matters required
in sub-section 2 & 3 thereof.
 Pre-emptive rights
38
- A right granted by law to all existing
stockholders of a stock corporation to
subscribe to all issues or disposition of
shares of any class, in proportion to
their respective stockholdings, subject
only to the limitations imposed under
section 39 of the Code.
- Internationally granted
 Pre-emptive rights, why it is granted?
- In order that the existing stockholders
may maintain their proportionate right
as not to dilute their right
 Power to deny pre-emptive rights
Section 39. Power to deny pre-
emptive right. - All stockholders of a
stock corporation shall enjoy pre-
emptive right to subscribe to all issues
or disposition of shares of any class, in
proportion to their respective
shareholdings, unless such right is
denied by the articles of incorporation
or an amendment thereto: Provided,
That such pre-emptive right shall not
extend to shares to be issued in
compliance with laws requiring stock
offerings or minimum stock ownership
by the public; or to shares to be issued
in good faith with the approval of the
stockholders representing two-thirds
(2/3) of the outstanding capital stock,
in exchange for property needed for
corporate purposes or in payment of a
previously contracted debt.
 May it be denied? How?
- Yes, if provided by articles of
incorporation or by an amendment
- However, pre-emptive rights is
unavailable to shares in trading in
stock exchange otherwise stockholders
must waive first their right before they
may sell such.
 Exceptions
1. When the shares to be issued is in
compliance with laws requiring
stock offerings or minimum stock
ownership by the public
2. Shares to be issued in good faith
with the approval of the
stockholders representing 2/3 of
the outstanding capital stock either
a. In exchange for property needed
for corporate purpose or,

b. In payment of a previously
contracted debt
- The exceptions, however will not apply
to stockholders of a close corporation
by virtue of a subsequent and specific
provision of the Code which provides
that the “pre-emptive right of a
stockholder in a close corporation
shall extend to all stock to be issued,
including reissuance of treasury
shares, whether for money, property or
personal services or in payment of a
corporate debt, unless the articles of
incorporation provide otherwise, if not
entirely absolute, in that it extends to
all issuance and disposition of shares
- Such right of pre-emption may be lost
by waiver of the stockholder, expressly
or impliedly by his inability or failure
to exercise it after having been notified
of the proposed issuance or disposition
of shares
 When is it unavailable?
- In shares traded openly in stock
exchange/market
 Is it applicable to close corporations?
- See section 96, close corporations
must provide it first on its articles of
incorporation, that its articles does not
really deny such pre-emptive rights.
 Section 102, will not apply to close
corporations
 The right of pre-emptive rights is
absolute in close corporations
“All issues or depositing shares of any class”
form part of ACS
 Certain instances when a stockholder
may nevertheless be unable to exercise
this right:
- Issued for public ownership
- Issued in good faith, with approval of
2/3 of outstanding capital stock either
a) in exchange for property needed or
b) for payment of a previously
contracted debt
 Pre- emptive rights of stockholders in
ordinary stock corporations may be
denied
39
- if the shares are to be issued in
compliance with laws requiring stock
offering or minimum stock ownership
by the pubic
- In exchange for property needed for
corporate purposes
- In payment of previously contracted
debts
 This rule, however, does not apply in a
close corporation as the pre-emptive
rights of the stockholders thereof is
broadened to include all issues
without exceptions unless, of course,
denied or limited by the articles of
incorporations. Section 102 provides:
Section 102. Pre-emptive right
in close corporations. - The pre-emptive
right of stockholders in close
corporations shall extend to all stock
to be issued, including reissuance of
treasury shares, whether for money,
property or personal services, or in
payment of corporate debts, unless the
articles of incorporation provide
otherwise.
 Denial will not apply to a close
corporation, ABSOLUTE
- section 96
 May a stock holder in a close
corporation insist in the exercise of his
pre-emptive rights?
- Yes, section 102
 What type or shares are covered by
pre-emptive rights?
 Does it include those originally
unsubscribed?
- NO. Benito vs. SEC
 Will the stockholders be able to
exercise their pre-emptive right with
respect to the old unissued shares?
- Pre-emptive rights is applicable only to
new issued shares and not to the old
unissued shares because it is
presumed that the original subscribers
is deemed to have taken his shares
knowing that they form a definite
proportionate part of the whole
number of authorized shares
 40

- When the shares, left unsubscribed - YES, it’s an internationally recognized

are re-offered, he cannot therefore
claim. DILUTION OF INTEREST
 Will the acquiring purchaser be liable
for debts of the former corporation?
- Generally no, corporate entity theory
because there may be instances when
purchasing corporation may be held
liable
 May a corporation acquire its own
shares?
right because it includes “all issues
and disposition of shares of any class”
and all kinds of shares new or old
- If the remaining unsubscribed shares
are issued, it’s an issuance of any
class
 May a corporation sell/dispose all or
substantially all of its corporate assets
and liabilities?
- YES

- Yes - 1) RESOLUTION 2) AUTHORIZATION

3) RATIFICATION 4) PRIOR WRITTEN
 Is there any restriction provided for by NOTICE 5) SALE SUBJECT TO
law in reacquiring its own shares? PROVISIONS OF EXITING LAWS 6)
DISSENTING STOCKHOLDERS HAVE
- Yes, it must have been unrestricted
THE RIGHT TO EXERCISE THEIR
retained earnings appearing in the
APPRAISAL RIGHT
books of corporation
 If a corporation sells substantially all
 A corporation can never acquire its
of it assets and properties, will the
own shares if it has no unrestricted
buyer assume liability?
retained earnings
- NO, EXCEPT
- False, exception close corporation and
redeemable shares 1) Express or implied agreement to the
purchase
EXAMPLE:
2) Where the transaction amounts to
ACS 2M
consolidation or merger of the
SUBSCRIBED 1M corporations

PAID UP 1M 3) When purchasing corporation is

merely a continuation of the selling
1 100K corporation

2 100K 4) Where the transaction is entered into

fraudulently in order to escape liability
TO
for such debt
10 100K
 Legitimate purpose: for a corporation
 If 1-5 became 200K each, may 6-10 to reacquire its own shares
demand the exercise their pre-emptive
- Limitation: it must have
right?
surplus/unrestricted retained
- YES earnings

 May 1-5 subscribe to the - Exception: may redeem irrespective of

unsubscribed capital stock to the unrestricted retained earnings
exclusion of 6-10?
1) Exercise of stockholders’ right to
- If a corporation makes 2M unrestricted compel “close corporation” to purchase
retained earnings, it is the shares and his shares
not the number of persons that
2) Where corporation has sufficient
matters
assets in its books to cover its debts
 May 6-10 complain for a dilution of and liabilities exclusive of capital stock
their interest?
ACS 1M

SUBSRIBED 1M
PAID-UP 1M
ASSETS 500K
1M PROFITS
- 500K LIABILITIES
____________________
500K RESERVES IN A the option to exercise his appraisal
CLOSE CORPORATION IT CAN USE THIS TO
REACQUIRE ISSUED STOCKS
X – REALTY CORPORATION
 THE ONLY
PROPERTY OF
THE
CORPORATION
 BOARD OF
DIRECTORS
DECIDED TO
SELL IT
Will it need the approval of the stockholders?
- NO, if the same is necessary in the
usual and regular course of business
of said corporation or if the proceeds of
the sale or other disposition of such
property and assets be appropriated
for the conduct of its remaining
business
 If X is a manufacturing company, then
it can sell its only property upon
approval of the stockholders because it
will render itself capable of continuing
its business, BUT if the proceeds will
be used to purchase a better one for
the continuance of its business, then it
does not need the approval of the
stockholders
 Conditions for the valid exercise of this
power are the following
1. Resolution by the majority vote of the
board of directors/trustees
2. Authorization from the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of the
members;
3. The ratification of the stockholders or
members must be made at a meeting
duly called for that purpose
41
4. Prior written notice of the proposed
action and of the time and place of
meeting must be made addressed to all
stockholders of record, either by mail
or personal service;
5. The sale of the assets shall be subject
to the provisions of existing laws on
illegal combinations and monopolies
6. Any dissenting stockholder shall have
right
IDP vs. CA
- Consent of the members was not
secured
Edward Nell Co. vs. Pacific Farms
- Generally where one corporation sells
or otherwise transfers all of its assets
to another corporation, the latter is not
liable for the debts and liabilities of the
transferor, except:
1. Where the purchaser expressly or
impliedly agrees to assume such
debts;
2. Where the transaction amounts to
a consolidation or merger of the
corporations;
3. Where the purchasing corporation
is merely a continuation of the
selling corporation;
4. Where the transaction is entered
into fraudulently in order to escape
liability for such debts.
 Power to acquire own shares
Section 41. Power to acquire
own shares. - A stock corporation shall
have the power to purchase or acquire
its own shares for a legitimate
corporate purpose or purposes,
including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the
shares to be purchased or acquired:
1. To eliminate fractional shares
arising out of stock dividends;
2. To collect or compromise an
indebtedness to the corporation,
arising out of unpaid subscription, in a
delinquency sale, and to purchase

delinquent shares sold during said
sale; and
3. To pay dissenting or withdrawing
stockholders entitled to payment for
their shares under the provisions of
this Code. (a)
 The corporation must at all times have
“unrestricted retained earnings” to
exercise this corporate power
Steinberg vs. Velasco
- For as long as there are debts and
liabilities, a corporation may not
reacquire its shares (subject to
exceptions)
- Creditors of a corporation have the
right to assume that so long as there
are outstanding debts and liabilities,
the board of directors will not use the
assets of the corporation to purchase
its own stock, and that it will not
declare dividends to stockholders
when the corporation is insolvent.
 Power to invest funds <sec.42>
Section 42. Power to invest
corporate funds in another corporation
or business or for any other purpose. -
Subject to the provisions of this Code,
a private corporation may invest its
funds in any other corporation or
business or for any purpose other than
the primary purpose for which it was
organized when approved by a majority
of the board of directors or trustees
and ratified by the stockholders
representing at least two-thirds (2/3)
of the outstanding capital stock, or by
at least two thirds (2/3) of the
members in the case of non-stock
corporations, at a stockholder's or
member's meeting duly called for the
purpose. Written notice of the
proposed investment and the time and
place of the meeting shall be
addressed to each stockholder or
member at his place of residence as
shown on the books of the corporation
and deposited to the addressee in the
post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder shall have
appraisal right as provided in this
Code: Provided, however, That where
the investment by the corporation is
reasonably necessary to accomplish its
primary purpose as stated in the
articles of incorporation, the approval
of the stockholders or members shall
not be necessary. (17 1/2a)
42
- For any other purpose other than the
primary purpose, stockholder’s
consent or approval is necessary
- Thus, if it’s for the secondary purpose,
it is necessary
- If it’s in connection with the primary
purpose, only board resolution is
necessary
 Requirements and steps to be followed
for a valid investment of corporate
funds are:
1. Resolution by the majority of the board
of directors or trustees;
2. Ratification by the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of the
members in case of non-stock
corporations;
3. The ratification must be made at a
meeting duly called for that purpose;
4. Prior written notice of the proposed
investment and the time and place of
the meeting shall be made, addressed
to each stockholder or member by mail
or by personal service, and;
5. Any dissenting stockholder shall have
the option to exercise his appraisal
right
Dela rama vs. Ma-ao Sugar
- There is a substantial and not remote
connection between the sugar bags
and the sugar manufacture, thus
stockholder’s approval is not necessary
for validity
- A private corporation, in order to
accomplish its purpose as stated in its
articles of incorporation, and imposed
by the Corporation Law, has the power
to acquire, hold, mortgage, pledge, or
dispose of shares bonds, securities
and other evidences of indebtedness of
any domestic or foreign corporation.
Such an act, if done in pursuance of
the corporate purpose, does not need
the approval of the stockholders; but
when the purchase of shares of
another corporation is done solely for
investment and not to accomplish the
purpose of its incorporation, the vote
of approval of the stockholders is
necessary.

Gokongwei vs. SEC
- Investments made by SMC is
necessarily connected with its primary
purpose and this was ratified in a
meeting
- Submission of previous action is a
sound corporate practice
 Redeemable shares
 Closed corporation (see section 105)
- For any reason, compel the value of
shares “withdrawal shares” provided
corporation has sufficient funds to
cover its debts and liabilities
Section 105. Withdrawal of
stockholder or dissolution of
corporation. - In addition and without
prejudice to other rights and remedies
available to a stockholder under this
Title, any stockholder of a close
corporation may, for any reason,
compel the said corporation to
purchase his shares at their fair value,
which shall not be less than their par
or issued value, when the corporation
has sufficient assets in its books to
cover its debts and liabilities exclusive
of capital stock: Provided, That any
stockholder of a close corporation may,
by written petition to the Securities
and Exchange Commission, compel
the dissolution of such corporation
whenever any of acts of the directors,
officers or those in control of the
corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly
prejudicial to the corporation or any
stockholder, or whenever corporate
assets are being misapplied or wasted.
 If shares are reacquired, what
happens?
- It becomes treasury shares
 Stockholder’s consent/ approval is not
necessary and mere board action is
sufficient if in accordance with primary
purpose
 The logical relation of act done and
primary purpose of corporation and
between the board of directors to
undertake submission of acts is a
sound corporate practice
 Dividends
43
Section 43. Power to declare
dividends. - The board of directors of a
stock corporation may declare
dividends out of the unrestricted
retained earnings which shall be
payable in cash, in property, or in
stock to all stockholders on the basis
of outstanding stock held by them:
Provided, That any cash dividends due
on delinquent stock shall first be
applied to the unpaid balance on the
subscription plus costs and expenses,
while stock dividends shall be withheld
from the delinquent stockholder until
his unpaid subscription is fully paid:
Provided, further, That no stock
dividend shall be issued without the
approval of stockholders representing
not less than two-thirds (2/3) of the
outstanding capital stock at a regular
or special meeting duly called for the
purpose. (16a)
Stock corporations are
prohibited from retaining surplus
profits in excess of one hundred
(100%) percent of their paid-in capital
stock, except: (1) when justified by
definite corporate expansion projects
or programs approved by the board of
directors; or (2) when the corporation
is prohibited under any loan
agreement with any financial
institution or creditor, whether local or
foreign, from declaring dividends
without its/his consent, and such
consent has not yet been secured; or
(3) when it can be clearly shown that
such retention is necessary under
special circumstances obtaining in the
corporation, such as when there is
need for special reserve for probable
contingencies. (n)
 What are dividends?
- Corporate profits set aside, declared
and ordered by the Board of Directors
to be paid to the stockholders.
 What are property dividends?
- Those paid in property surplus
 Like tables and chairs? Can tables and
chairs make surplus profits?
- No, they do not make surplus, bonds,
etc.
 Where should dividends come from?
- Stock dividends are declared as stocks
coming from corporation
 44

 Who declares dividends to be  Revocation

declared? Do stockholders have any
say? - No revocation of dividend may be has
unless it has not been officially
- Board of Directors, if stock approval of communicated to the stockholders or
2/3 outstanding capital stock is in the form of stock dividends which
is revocable at any time prior to
ACS-1M SUB-1M P.U.-1M distribution.
1M-U.R.E. (surplus profits of the
corporation)  Stock dividends- no reduction, you
capitalize your restricted retained
1-100k earnings, what is issued is a piece of
paper. The restricted earnings remain
2-100k
in the corporation
To
 Cash and property- reduces corporate
10-100k assets

1M  Stock dividends increase corporate

assets? No, it will only have the effect
 Board decides to declare 1M, how of increasing the subscribed and paid-
much will each receive? May the board up capital of the corporation
declare stock dividend
 Will there be a corresponding increase
- NO. that would be over issuance of in their proportionate interest?
shares, violation of securities
regulation code - REMAINS THE SAME

- It must have a free portion - Exception: when stock dividends will

result in a fractional share
- The corporation may increase its
capital ACS-2M 1-100K 200 (10%)
*VOTING AND DIVIDEND RIGHTS
 Z co. 1M to X Co. is 2/3 of Xco. STILL THE SAME
Stockholders reacquired?
SUB-1M TO
- No, because in property 2/3 is not 10%
required
PU-1M 10-100K
 What is the effect of declaration of
dividends with regards to the assets of ACS 2M
a company?
SUB 1M
- As compared to stock dividends, the
PU 1M
declaration of cash or property
dividends have the effect of reducing 1M RE
corporate assets to the extent of
dividends declared. 1 100K

- Neither would stock dividends increase 2 100K

the proportionate interest of the
TO
stockholders of the corporation
although it will have the effect of 10 100K
increasing the subscribed and paid-up
capital of the corporation. It gives the 1M
stockholders nothing in the way of
distribution of assets but merely  May they be compelled?
divides his existing shares into smaller
- NO. You cannot declare if it does not
units.
come from unrestricted retained
 Earnings belong to the corporation earnings.
until declared or given
 45

1. 1M-U.R.E. (is it true there is no way to ACS 2M 1M U.R.E.

compel?)
SUB 1M JULY 24 DECLARATION
2. 2M-U.R.E. JULY 31

 May they be compelled to declare PU 1M

dividends
1 100K 100T JULY 26-
- Mandatory if earned, the board may be Y(NEW ONE WAS DECLARED TO
compelled to declare dividends Y) JULY 30- 100K

- if exceeds 100% of the paid-up capital 2

the boards may be compelled
TO TO HAVE THE
ACS 2M 1M U.R.E. TRANSFER RECORDED

SUB 1M 10 100K

PU 800K 1M

1-100K 50K PU  Insofar as 1 and Y who has a better

2-100K 50K
TO
10-100K
1M
 Will 1 and 2 receive full amount of
dividends?
- YES. They are entitled however if they
are declared delinquent, the amount
due them shall first be applied to his
delinquency plus expenses.
 Delinquency occurs, you are called to
pay, but you failed to pay. In case of
stock dividend, the delinquent stock
holder will not be entitled thereto until
he has paid his subscription in full.
 Are non-stockholders entitled
receive dividends?
- No, tock dividends are civil fruits of the
original investment, and to the owners
of the shares belong the civil fruits.
 How did the court decide dividends in
the case of Neilsen
- Stock dividends cannot be issued to a
person who is not a stockholder in
payment of services rendered.
- Whether cash, property or stock, only
stockholders may receive dividends.
Dividends are fruits of investments.
They come from the U.R.E. or surplus
profits of the corporation.
right? Already declared, but not yet
paid?
- Right to receive vest upon declaration.
Who ever owns at the time of
declaration owns the dividends
- Unless there is a stipulation to the
contrary
 TRUST FUND DOCTRINE
- The power to declare it if paid-up
capital is not maintained or is
impaired
- Trust fund must be kept intact for the
protection of creditors who have the
right to rely on such subscription and
the paid-up capital for the satisfaction
of their claims
 Cannot accumulate surplus
to
unreasonably
 Basis is the paid-up capital
 Entitled to dividends
 Irrespective of whether the
subscription is full
 Illegally declared
- Declare dividend with the belief that it
formed part of the U.R.E., but yun
pala sa capital
 Directors are not liable, unless sec31
acted in bad faith or gross negligence
in the conduct of corporate affairs

 Directors even if acting in behalf of the
corporation, may still be held solidarily
liable
 Power to enter into management
contract
- New provision
Section 44. Power to enter into
management contract. - No corporation
shall conclude a management contract
with another corporation unless such
contract shall have been approved by
the board of directors and by
stockholders owning at least the
majority of the outstanding capital
stock, or by at least a majority of the
members in the case of a non-stock
corporation, of both the managing and
the managed corporation, at a meeting
duly called for the purpose: Provided,
That (1) where a stockholder or
stockholders representing the same
interest of both the managing and the
managed corporations own or control
more than one-third (1/3) of the total
outstanding capital stock entitled to
vote of the managing corporation; or
(2) where a majority of the members of
the board of directors of the managing
corporation also constitute a majority
of the members of the board of
directors of the managed corporation,
then the management contract must
be approved by the stockholders of the
managed corporation owning at least
two-thirds (2/3) of the total
outstanding capital stock entitled to
vote, or by at least two-thirds (2/3) of
the members in the case of a non-
stock corporation. No management
contract shall be entered into for a
period longer than five years for any
one term.
The provisions of the next
preceding paragraph shall apply to any
contract whereby a corporation
undertakes to manage or operate all or
substantially all of the business of
another corporation, whether such
contracts are called service contracts,
operating agreements or otherwise:
Provided, however, That such service
contracts or operating agreements
which relate to the exploration,
development, exploitation or utilization
of natural resources may be entered
into for such periods as may be
provided by the pertinent laws or
regulations. (n)
 The requirement for a valid
management contract are as follows:
46
1. Resolution of the board of directors
2. Approval by the stockholders holding
or representing a majority of the
outstanding capital stock or majority
of the members in case of non-stock
corporation of both the managing and
the managed corporation
3. The approval of the stockholders or
members must be made at the meeting
called for that purpose
4. The contract shall not be for a period
longer than 5 years for any one term,
except those which relate to
exploration, development or utilization
of natural resources which may be
entered into for such periods as may
be provided by pertinent laws and
regulations
 Every corporate act emanates from the
BOARD
 Is the voting requirements of a
majority stockholder ABSOLUTE?
- Not only a majority but 2/3 of the
outstanding capital stock or 2/3 of the
members in a non-stock corporation
would be required for the approval of a
management contract in the following
instances:
1. Where the stockholders representing
the same interest of both the
managing and managed corporation
own or control more than 1/3 of the
total outstanding capital stock of the
managing corporation; and
2. Where a majority of the members of
the board of directors of the managing
corporation also constitute a majority
of the directors of the managed
corporation
3. Where the contract would constitute
the management or operation of all or
substantially all of the business of
another corporation, whether such
contracts are called service contracts.
If it will not constitute the
management of all or substantially all
of the business of another corporation
the first paragraph of section 44 will
apply and not that of the second, that
is, only the vote of the stockholders
holding or representing at least a
majority of the outstanding capital
stock or majority of the members in

the case of non-stock corporation will
be required.
 How long?
- Not longer than 5 years for any one
term
- Exception: exploration, development or
utilization of natural resources
 What is an ultra-vires act or contract?
- Doctrine of limited capacity.
Corporation can do such acts and
things as it is allowed to do
- Acts beyond it will be ultra vires,
allowing a collateral attack
- If not illegal per se merely voidable.
Can be ratified expressly or impliedly
or even stopped as equitable grounds
- Ultra-vires acts which are not illegal
per se may become binding and
enforceable either by satisfaction,
estoppels or equitable grounds
 Consequences of ultra-vires acts?
1. On the corporation itself
- The proper forum, in accordance with
the provisions of PD 902-A, as
amended and R.A. No. 8799 may
suspend or revoke, after proper notice
and hearing, the franchise or
certificate of registration of the
corporation for serious
misrepresentation as to what the
corporation can do or is doing to the
great damage or prejudice of the
general public
2. On the rights of the stockholders
- A stockholder may bring either an
individual or derivative suit to enjoin a
threatened ultra-vires act or contract.
If the act or contract has already been
performed, a derivative suit for
damages against the directors may be
filed, but their liability will depend on
whether they acted in good faith and
with reasonable diligence in entering
into the contract.
3. On the immediate parties
- The courts have not agreed as to the
legal effect of a corporate contract
outside of its authorized business but
47
Ballatine gives the following summary
of the doctrines evolved:
a. If the contract is fully executed on
both sides, the contract is effective
and the courts will no interfere to
deprive either party of what has
been acquired under it
b. If the contract is executory on both
sides, as a rule, neither party can
maintain an action for its non-
performance
c. Where the contract is executor on
one side only, and has been fully
performed on the other, the courts
differ as to whether an action will
lie on the contract against the
party who has received benefits of
performance under it. Majority of
the courts, however, hold that the
party who has received benefits
from the performance is estopped
to set up that the contract is ultra-
vires to defeat an action on the
contract. This is more in
conformity with the doctrine that
no person shall be allowed to
enrich himself at the expense of
another
Privano vs. Dela Rama
- Court looked into the purpose clause
- The purpose clause empowers and
limits
- Articles likewise provide that it may
deal with any of its money
- “deal” broad enough to cover the
donation it is not then ultra-vires
- Not illegal per se hence (law of agency)
excess powers are subject to
ratification
- Ratified by passing the resolution in
question
Carlos vs. Mindoro sugar Co.
- PTC- trust company as such, it also
has implied powers as to make them
more attractable
- Not ultra-vires in pursuance of its
legitimate business
Japanese war notes vs. SEC

- Non-stock corporations cannot make
profits and distribute profits to its
shareholders
- Ultra-vires because Japanese war
notes is a non-stock corporation
Crisologo-Jose vs. CA (ALWAYS
ASKED BY DEAN SUNDIANG)
- The negotiable instruments law which
holds an accommodation party liable
on the instrument to a holder for
value, although such holder at the
time of taking the instrument knew
him to be only an accommodation
party, does not include nor apply to
corporations which are
accommodation parties. This is
because the issue or indorsement of
negotiable paper by a corporation
without consideration and for the
accommodation of another is ultra-
vires
- Corporate officers may guarantee or
endorse an accommodation only if
specifically authorized
Section 36 paragraph 11
Section 10
Section 14 and 15
 Corporate powers depend on the
agreement of the stockholders rather
than any director
- It may sell and it may guarantee,
contract not necessarily illegal, it will
in the absence of proof to the contrary
presumed within its power.
Corporations are presumed to contract
with in its powers- CARLOS CASE
- Purpose clause may be stretched to
cover PLDT internet. It may be within
its business.
- May it sell computers? NO! other line
of business. Its trading!
BY-LAWS
 By-Laws
- Rule adopted by the corporation for its
internal governance
 Is the adoption of by-laws mandatory?
48
 When should the by-laws be adopted
or filed? Can it not be adopted earlier?
- After incorporation- within 1 month
(emanates from the BOARD)
- Prior-more convenient (signed by the
incorporators)
 Who will sign the adoption clause?
- Majority of the stockholders or
members attested to by the corporate
secretary
 What happens if the corporation fails
to adopt the by-laws from the tie
provided by the law? Would there be
an automatic revocation or
suspension?
- Proper notice and hearing, must first
be complied with
Loyola grand villas vs. CA
- Not the SEC, but the HIGC
- Must – not always imperative
- Filing of by-laws mandatory
- Empowered by SEC
- Merely a ground, there must be proper
notice and hearing
- Not affect the status of the corporation
as a juridical person
- Subject the corporation to a fine, as
may be issued by the SEC
 When do by-laws become effective?
- Until and unless the SEC gives it
stamped of approval
- Suspension of any government agency.
The permission must first be secured-
section 46
 Elements of a valid by-law
1. It must not be contrary to law, public
policy or morals;
2. It must not be inconsistent with the
articles of incorporation;
3. It must be general and uniform in its
effect or applicable to all alike or those
similarly situated;

4. It must not impair obligations and
contracts or vested rights; and’
5. It must be reasonable.
- Must not be inconsistent with existing
laws. Not be inconsistent with articles
of incorporation
 By-laws
- None filing would not affect the status
of the corporation, Loyola grand villas
case
- The word “must” is not always
imperative
- Stockholders are conlusively presumed
to know the provisions of the by-laws
 How about 3rd persons?
- NO. unless there is actual knowledge
of the same they are not presumed to
know of the provisions of the by-laws
Fleischer vs. Botika Nolasco
- Shares of stock are personal properties
- Shares of stock may transfer to whom
ever he wishes
- The by-laws is contrary to law
 Articles of incorporation
- May provide reasonable restriction
- By-laws merely internal laws
- Articles is the contract between and
among the parties and corporation
Gov’t vs. El Hogar
- Did the court categorically ruled here
that the provision in the 5th cause of
action is valid?
- Rules governing equity, considering
the fact that there was always lack of
quorum
- Section 29 BOD if still constituting a
quorum may fill up a vacancy other
than by removal, etc.
Gokongwei vs. SEC
- Section 48 allows a corporation to
amend it by-laws
49
- Section 47 of the code, the by-laws
may provide for the qualification and
disqualification
- It cannot be said Gokongwei has a
vested rights
- Prevent directors from taking
advantage of position to promote his
individual interest to the damage of
others
- The validity or reasonableness of a by-
laws is a question of law
- Subject to the limitations that
reasonableness of a by-law is a mere
matter of judgment
- Rule of the majority and not the
tyranny of the minority
 May the by-laws be amended altered
or appealed?
- YES. HOW? Two modes
1. By a majority vote of the directors or
trustees and the majority vote of the
outstanding capital stock or members
in a non-stock corporation, at a
regular or special meeting called for
that purpose;
2. By the board of directors alone when
delegated by 2/3 of the outstanding
capital stock or 2/3 of the members in
a non-stock corporation.
- This delegated power, however, is
considered revoked whenever a
majority of the outstanding capital
stock or members shall so vote at a
regular or special meeting.
 If it is to be amended what is the
proceeding?
- Section 48 2nd paragraph provides:
Section 48. Amendments to by-
laws. - The board of directors or
trustees, by a majority vote thereof,
and the owners of at least a majority of
the outstanding capital stock, or at
least a majority of the members of a
non-stock corporation, at a regular or
special meeting duly called for the
purpose, may amend or repeal any by-
laws or adopt new by-laws. The owners
of two-thirds (2/3) of the outstanding
capital stock or two-thirds (2/3) of the
members in a non-stock corporation

may delegate to the board of directors
or trustees the power to amend or
repeal any by-laws or adopt new by-
laws: Provided, That any power
delegated to the board of directors or
trustees to amend or repeal any by-
laws or adopt new by-laws shall be
considered as revoked whenever
stockholders owning or representing a
majority of the outstanding capital
stock or a majority of the members in
non-stock corporations, shall so vote
at a regular or special meeting.
Whenever any amendment or
new by-laws are adopted, such
amendment or new by-laws shall be
attached to the original by-laws in the
office of the corporation, and a copy
thereof, duly certified under oath by
the corporate secretary and a majority
of the directors or trustees, shall be
filed with the Securities and Exchange
Commission the same to be attached
to the original articles of incorporation
and original by-laws.
The amended or new by-laws
shall only be effective upon the
issuance by the Securities and
Exchange Commission of a statement have been prepared
certification that the same are not
inconsistent with this Code. (22a and
23a)
Baretto vs. La Previsora
- Any corporate act emanates from the
board
- Directors themselves cannot amend
the by-laws if they were not granted
the same
 Section 48
 The power granted is not subject to
revocation T or F?
- FALSE
 If the by-laws are amended when will
they become valid?
- Upon issuance of the SEC that they
are not inconsistent
 What if the SEC failed to act within 10
months without fault attributable to
the corporation?
 T or F any amendment of the by-laws
will never become valid until it gives its
stamp of approval even after 1 year
50
- TRUE. Articles of incorporation and
by-laws are different
MEETINGS
 Meetings
- Meetings of stockholders 1.
Date fixed in the by-laws or by-law
- Meetings of director or trustees
 Meetings are regular and special
 Meetings of stockholders
 What is regular and what is special?
 When are regular meetings of the
stockholders held?
- Fixed date provided by the by-laws
 What if there is no date?
- April
 Why april?
- Point in time the audited financial
 What if in the date specified in the by-
laws or by the law itself the meeting
was not convened, for instance lack of
quorum or force majeure?
- It may be postponed on a reasonable
date
 Notice requirement?
- Regular- 2 weeks prior notice
- Special- 1 week
 May the notice requirement be
lessened?
- By-laws may provide a longer or a
shorter duration
 What if the notice requirement is not
complied with?
 What happened to any act passed in a
meeting when notice requirement was
not required with?
- Voidable, subject to ratification
Board of directors vs. Tan
- Notice requirement is the by-laws is a
mandatory requirement

- Improperly served, any action will be
invalidated at the objection of any
stockholder or member
 Must be held in the proper place
 Where should it be held?
- Apparent from the foregoing provision
is that meetings of stockholders must,
at all times, be held in the city or
municipality where the principal office
of the corporation is located and, as
far as practicable, in the principal
office of the corporation.
 May the by-laws of a corporation
provide that meetings be held
anywhere in the Philippines?
- While there is no provision authorizing
a stock corporation to hold
stockholders’ meetings outside of the
City of Municipality where the
principal office is located, the law
allows a non-stock corporation to
provide in its by-laws any place of
members’ meeting provided that
proper notice is sent to all members
indicating the date, time and place of
the meeting which shall be within the
Philippines.
 T or F the by-laws of a stock
corporation may validly provide that
meetings shall be held anywhere in the
Philippines?
- FALSE. Non-stock corporations lang
pwede provided nakalagay sa by-laws
and provided proper notice is given
 Corporation can do only such things
as the law allows it to do, DOCTRINE
OF LIMITED CAPACITY
 San Miguel office located in Ortigas
Center. May stockholders meeting be
held in PICC center?
- YES. Metro Manila, one single city
 Must be called by the proper party
 Who calls?
- President until and unless there is a
provision , secretary on order of the
president
 What if there is nobody who can call?
51
- The petitioner, stockholder may
petition the court
 What if there is a person who can call,
but he fails or neglects to call the
meeting? May a stockholder petition to
authorize a meeting?
- Ponce case only applies when there is
NO person authorized to call the
meeting. If there is a person, but
neglects his duty. Ponce will not apply.
 Writ of injunction may never be issued
ex parte
 Is there any exception?
- Section 28 only instance
Section 28. Removal of
directors or trustees. - Any director or
trustee of a corporation may be
removed from office by a vote of the
stockholders holding or representing
at least two-thirds (2/3) of the
outstanding capital stock, or if the
corporation be a non-stock
corporation, by a vote of at least two-
thirds (2/3) of the members entitled to
vote: Provided, That such removal
shall take place either at a regular
meeting of the corporation or at a
special meeting called for the purpose,
and in either case, after previous
notice to stockholders or members of
the corporation of the intention to
propose such removal at the meeting.
A special meeting of the stockholders
or members of a corporation for the
purpose of removal of directors or
trustees, or any of them, must be
called by the secretary on order of the
president or on the written demand of
the stockholders representing or
holding at least a majority of the
outstanding capital stock, or, if it be a
non-stock corporation, on the written
demand of a majority of the members
entitled to vote. Should the secretary
fail or refuse to call the special meeting
upon such demand or fail or refuse to
give the notice, or if there is no
secretary, the call for the meeting may
be addressed directly to the
stockholders or members by any
stockholder or member of the
corporation signing the demand.
Notice of the time and place of such
meeting, as well as of the intention to
propose such removal, must be given
by publication or by written notice
prescribed in this Code. Removal may
be with or without cause: Provided,
That removal without cause may not
be used to deprive minority

stockholders or members of the right
of representation to which they may be
entitled under Section 24 of this Code.
(n)
 Cases of removal or ouster of a director
 Mandamus would be appropriate
remedy if there is a person authorized
but refuses
 Quorum and voting requirement
- Majority stockholders or members
constitute a quorum
 Is the presence of the majority owners
of the outstanding capital stock
ABSOLUTE to have a quorum?
- NO. when the code requires a higher
quorum it must also be equivalent to
the vote required
 Do you include non-voting shares in
arriving at the voting requirement to
have a valid corporate act?
- It depends.
- Section 6 last par. If it falls within the
penultimate par. Of section 6
 Five requisites of a valid meeting
1. It must be held on the date fixed in the
by-laws or in accordance with law
2. Prior notice must be given
3. It must be held at he proper place
4. It must be called by the proper party
5. Quorum and voting requirements
must be met
 Date not complied with, notice, place,
not complied with and the person who
called not authorized, what happens to
any resolution called?
- Section 51, any meeting shall be valid
provided all the stockholders are
present or duly represented and
provided it is within the power of the
corporation. 3RD paragraph of 324
- If the voting requirement is met, any
resolution passed in the meeting, even
if improperly held or called will be
valid if all the stockholders or
members are present or duly
represented thereat. The last
52
paragraph of section 51 is clear on the
matter when it provides:
“all proceedings had and any
business transacted at any
meeting of the stockholders or
members, if within the powers
or authority of the corporation,
shall be valid even if the
meeting be improperly held or
called, provided all the
stockholders or members of the
corporation are present or duly
represented at the meeting.”
 Directors/trustees meeting
 Regular (monthly) and special
(anytime)
 May that be restricted (within or
outside the Phil)
- YES. unless the by-laws provide
otherwise.
 Is there any notice requirement?
- YES. 1 day unless otherwise provided
by the by-laws
 What happens if notice is not complied
with?
- If the notice requirement is not
complied with the meeting is illegal
and will not bind the corporation
except when subsequently ratified or
in the case of a close corporation
where the act of any one director may
bind the corporation even without a
meeting under the special provision of
Section 101 of the Code.
 Can notice be waived? <sec.53>
Section 53. Regular and
special meetings of directors or
trustees. - Regular meetings of the
board of directors or trustees of every
corporation shall be held monthly,
unless the by-laws provide otherwise.
Special meetings of the board of
directors or trustees may be held at
any time upon the call of the president
or as provided in the by-laws.
Meetings of directors or
trustees of corporations may be held
anywhere in or outside of the
Philippines, unless the by-laws provide
otherwise. Notice of regular or special

meetings stating the date, time and
place of the meeting must be sent to
every director or trustee at least one
(1) day prior to the scheduled meeting,
unless otherwise provided by the by-
laws. A director or trustee may waive
this requirement, either expressly or
impliedly. (n)
- YES. Expressly and impliedly
- SEC ruling
A special meeting is valid
without notice where the
directors are all present or
where they consent to the
meeting. Presence at the
meeting waives the want of
notice. Moreover, it has been
ruled that the meeting of the
directors without a formal call
first being had, and notice
thereof given to the members,
did not operate to invalidate it
or to render the proceedings
which were taken at it void, for
every member of the board were
present, and their joint action
had completely bound the
corporation as if the meeting
has been called with due
formality, and everyone of the
directors had received proper
notice.
 What is the quorum and voting
requirement in the directors meeting?
- Majority of the members of the board
of directors (entire membership)
 Vote required to pass a valid corporate
act?
- Majority of those present at which
there is a quorum (3 present, vote of 2
sufficient)
- Exception, majority of all the members
of the board in case of election of
corporate officers, unless the articles
provide for a greater quorum or voting
requirement
 Should the director or trustees be
physically present?
- General rule, must sit and act as a
body to have a valid corporate act
53
 Five man member board, a meeting
was called today, should the physical
presence or warm bodies requires to
constitute a quorum?
- NO. it is not required. Teleconference
or video conference is allowed, E-
commerce law
 Membership subject to laws
 Stockholder not yet
 May director vote by proxy?
- NO
 If A is a director and a meeting is
called for the purpose of electing a new
set of BOD can A vote by proxy?
- YES. Because it is a stockholders
meeting
 If directors meeting, cannot vote by
proxy
 Stockholder’s right to vote
- Inherent in stock ownership
- However this right is not always
inherent, because it may be denied:
1. Redeemable and preferred shares,
however if founders shares are
issued others may be denied the
right to vote.
2. May be denied by the articles of
incorporation or contracts
- When not denied they may do so in
person or by proxy
 May the right to vote by proxy be
denied?
 May the articles of incorporation deny?
 May the by-laws validly provide that
proxy voting is not allowed?
- NO
 Only non-stock may be denied proxy
voting (may be broaden, limited or
denied)
 Proxy voting is a matter of right
granted by law
 Requirements of a valid proxy?
- Section 58

Section 58. Proxies. - reservation to the owners or persons
Stockholders and members may vote
in person or by proxy in all meetings of
stockholders or members. Proxies shall
in writing, signed by the stockholder or
member and filed before the scheduled
meeting with the corporate secretary.
Unless otherwise provided in the
proxy, it shall be valid only for the
meeting for which it is intended. No
proxy shall be valid and effective for a
period longer than five (5) years at any
one time. (n)
 How long may a proxy exist?
- Maximum of 5 years
- Valid for the meeting in which it is
intended
 Is proxy revocable?
- Generally revocable, unless coupled
with interest
 Revocation
- A proxy, like agency in general is
revocable unless coupled with an
interest and revocation need not be
made by formal notice in writing.
Revocation may be expressed to the
proxy holder, to the election
committee, by a subsequent proxy to
another or by sale of the shares. Thus
it may be revoke orally by conduct
such that appearing and asserting the
right to vote at a meeting by the
registered owner of the shares revokes
a proxy previously given.
 Must be submitted to a validation
committee
 By-laws of non-stock corporations may
deny proxy voting
 What is voting trust agreement?
- One created by an agreement between
a group of stockholders of a
corporation and a trustee, or a group
of identical agreements between
individual stockholders and a common
trustee, whereby it is provided that for
a term o years or for a period
contingent upon a certain event, or
until the agreement is terminated,
control over the stock owned by such
stockholders, shall be lodged in the
trustee, either with or without
54
designated by them the power to direct
how such control shall be issued.
- It is a devise of binding stockholders to
vote as a unit and thus assuring a
desirable stability and continuity in
management in situations where it is
needed.
 What is the effect of a voting trust
agreement relative to the rights?
- Lee vs. CA must pass these criteria
1. That the voting rights of the stock are
separated from the other attributes of
ownership;
2. That the voting rights granted are
intended to be irrevocable for a definite
period of time; and,
3. That the principal purpose of the grant
of voting rights is to acquire voting
control of the corporation.
 During the duration of the trust they
are irrevocable unless there is a
violation either by fraud
 Requisites
- Section 59
Section 59. Voting trusts. - One
or more stockholders of a stock
corporation may create a voting trust
for the purpose of conferring upon a
trustee or trustees the right to vote
and other rights pertaining to the
shares for a period not exceeding five
(5) years at any time: Provided, That in
the case of a voting trust specifically
required as a condition in a loan
agreement, said voting trust may be
for a period exceeding five (5) years but
shall automatically expire upon full
payment of the loan. A voting trust
agreement must be in writing and
notarized, and shall specify the terms
and conditions thereof. A certified copy
of such agreement shall be filed with
the corporation and with the Securities
and Exchange Commission; otherwise,
said agreement is ineffective and
unenforceable. The certificate or
certificates of stock covered by the
voting trust agreement shall be
cancelled and new ones shall be issued
in the name of the trustee or trustees
stating that they are issued pursuant
to said agreement. In the books of the
corporation, it shall be noted that the
transfer in the name of the trustee or

trustees is made pursuant to said
voting trust agreement.
The trustee or trustees shall
execute and deliver to the transferors
voting trust certificates, which shall be
transferable in the same manner and
with the same effect as certificates of
stock.
The voting trust agreement filed
with the corporation shall be subject
to examination by any stockholder of
the corporation in the same manner as
any other corporate book or record:
Provided, That both the transferor and
the trustee or trustees may exercise
the right of inspection of all corporate
books and records in accordance with
the provisions of this Code.
Any other stockholder may
transfer his shares to the same trustee
or trustees upon the terms and
conditions stated in the voting trust
agreement, and thereupon shall be
bound by all the provisions of said
agreement.
No voting trust agreement shall
be entered into for the purpose of
circumventing the law against
monopolies and illegal combinations in
restraint of trade or used for purposes
of fraud.
Unless expressly renewed, all
rights granted in a voting trust
agreement shall automatically expire
at the end of the agreed period, and
the voting trust certificates as well as
the certificates of stock in the name of
the trustee or trustees shall thereby be
deemed cancelled and new certificates
of stock shall be reissued in the name
of the transferors.
The voting trustee or trustees
may vote by proxy unless the
agreement provides otherwise. (36a)
 Does it need to be notarized?
- Yes, otherwise it is ineffective and
unenforceable
 Only legal ownership is transferred
 Being still the beneficial owner they
may transfer these rights
 Is the right granted to a voting trust
agreement absolute? (to inspect)
- NO.
55
- The voting trust agreement filed with
the corporation shall be subject to
examination by any stockholder of the
corporation in the same manner as
any other corporate book or record.
Provided, that both the transfer and
the trustee or trustees may exercise
the right of inspection of all corporate
books and records in accordance with
the provisions of this Code.
 Legal title is transferred to the voting
trustee
 May the voting trustee vote by proxy?
- Yes, legal owner may vote by proxy
 May the proxy holder vote by proxy?
- NO, (AGENT) an agent can have no
other agent unless specifically allowed
by the principal
 Stockholder executing as a proxy, is he
qualified to be voted as a director?
 Why is he qualified to act as a director
if the stockholder executes as a
director?
- The beneficial owner of the shares in a
voting trust is disqualified to be a
director in a voting trust whereas in a
proxy, the owner of the shares may be
elected as such since legal title thereof
remains with him
- YES he remains to be the owner
 Is the stockholder executing in a
voting trust agreement, is he qualified
to act as a director?
- NO. ceases to be stockholder of record,
no longer the legal owner of shares
 May the corporation enforce the voting
trust agreements executed by its
stockholders?
- NO. NIDC vs. AQUINO
- Not a privy to the contract
- Rights liabilities of a stockholder are
there in their individual capacity-
corporate entity theory
 Voting trust agreements
- Normally executed in favor of banking
and financial institutions

- So that they can vote a certain set of
directors
- They will be more secured
 Voting pull agreement
- Enters into an agreement
- Pull all their shares to cast one vote
- Covered by rules governing contracts
- By pulling their votes they can decline
the resolution passed by the board
 END OF MIDTERMS
STOCKS AND STOCKHOLDERS
 3 modes
1. By a contract of subscription with the
corporation;
2. By purchase of treasury shares from
the corporation; and,
3. By purchase or acquisition of shares
from existing stockholders.
 Section 60 subscription
- Any contract
- Whether existing or still to be formed
Section 60. Subscription contract. -
Any contract for the acquisition of
unissued stock in an existing corporation
or a corporation still to be formed shall be
deemed a subscription within the meaning
of this Title, notwithstanding the fact that
the parties refer to it as a purchase or
some other contract. (n)
 Under the old law the 4th mode is
PURCHASE
 Purchase
- Reciprocal in nature
- Purchaser can neither require the
issuance
Xco. Inc.
P
Authorized capital 1M
56
500 SUBSCRIBED
500 UNISSUED STOCKS (AS LONG AS
GALING DITO)
Z wants to acquire 100K
Entered in June 50% shall be down payment
remainder December 08
o he will not be considered a stockholder
unless he has paid in full
August 08 property is ravaged by fire all are
turned into shares
 Is Z liable to pay the balance of his
acquisitions?
- YES, no matter how the party refer to
it, it is considered subscription
- Once you subscribe, you become a
stockholder which is entitled to all the
liabilities of a stockholder
Z- subscribed to 100T/S of XCo.
Amount he paid 50k
Z did not pay on the date called and was
declared a delinquent share
 Corporation paid 100T/S therefore the
corporation reacquired the shares
again, what are they called?
- Treasury shares
Y- 80T/S DECEMBER 08
40 % (AUGUST) WAS DESTROYED BY FIRE,
IS HE STILL LIABLE TO PAY THE UNPAID
PORTION?
 IT WAS AGREED THAT IT WAS A
PURCHASE AND WILL BE A
STOCKHOLDER ONLY IF PAID IN
FULL IS HE LIABLE?
- NO, because that was a purchase
- First example galing sa unissued stock
- 2nd example galling sa treasury shares
hindi sa unissued share
 NO such thing as purchase of
unissued stocks
 A subscription contract can be
conditional provided there is nothing
in the charter or statute prohibiting it
and not against public order, law, etc.

 Must it be in writing?
- NO, it may be oral
 5M should it be in writing to be valid
and binding as a subscription?
- NO, statutes of frauds only applies to
SALES
Trillana vs. Quezon College
- Counter proposal, therefore there was
a need for an acceptance
- Facultative because it is in his own
free will, it is void
 What may be used as a consideration
and how much should be the
consideration?
- Section 62 provides:
Section 62. Consideration for
stocks. - Stocks shall not be issued for
a consideration less than the par or
issued price thereof. Consideration for
the issuance of stock may be any or a
combination of any two or more of the
following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible,
actually received by the corporation
and necessary or convenient for its use
and lawful purposes at a fair valuation
equal to the par or issued value of the
stock issued;
3. Labor performed for or services
actually rendered to the corporation;
4. Previously incurred indebtedness of
the corporation;
5. Amounts transferred from
unrestricted retained earnings to
stated capital; and
6. Outstanding shares exchanged for
stocks in the event of reclassification
or conversion.
Where the consideration is
other than actual cash, or consists of
intangible property such as patents of
copyrights, the valuation thereof shall
initially be determined by the
incorporators or the board of directors,
subject to approval by the Securities
and Exchange Commission.
57
Shares of stock shall not be
issued in exchange for promissory
notes or future service.
The same considerations
provided for in this section, insofar as
they may be applicable, may be used
for the issuance of bonds by the
corporation.
The issued price of no-par value
shares may be fixed in the articles of
incorporation or by the board of
directors pursuant to authority
conferred upon it by the articles of
incorporation or the by-laws, or in the
absence thereof, by the stockholders
representing at least a majority of the
outstanding capital stock at a meeting
duly called for the purpose. (5 and 16)
 “Amounts transferred from
unrestricted retained earnings to
stated capital” what does it mean?
- Stock dividends will in effect capitalize
the unrestricted retained earnings
 After 5 years the founders shares may
be converted into common shares or
other kinds of shares
 May shares of stocks be issued
without consideration? Why?
- NO, two reasons by the SC,
discriminatory against other
stockholders and second unlawful, it
prejudices the right of the creditors
“Trust Fund Doctrine”
 If issued without a consideration
- Section 65, they will be considered as
watered stocks
Section 65. Liability of
directors for watered stocks. - Any
director or officer of a corporation
consenting to the issuance of stocks
for a consideration less than its par or
issued value or for a consideration in
any form other than cash, valued in
excess of its fair value, or who, having
knowledge thereof, does not forthwith
express his objection in writing and file
the same with the corporate secretary,
shall be solidarily, liable with the
stockholder concerned to the
corporation and its creditors for the
difference between the fair value
received at the time of issuance of the
stock and the par or issued value of
the same. (n)

- Subscribers may be compelled to pay
the value
 Issuance of a certificate of stock is
another thing
 What are the requisites for the
issuance of a valid certificate of stock?
1. It must be signed by the president or
vice-president and countersigned by
the secretary or assistant secretary;
2. It must be sealed with the corporate
seal; and the entire value thereof
(together with interest or expenses, if
any) should have been paid.
While it appears, that a subscriber to
shares of stock cannot be entitled to
the issuance of a certificate of stock
until the full amount of
subscription together with interest and
expenses (in case of delinquent shares)
if any is due, has been paid, a
subscriber to shares of stock, even if
not yet fully paid, is entitled to exercise
all the rights of a stockholder and the
corresponding liability that attach
thereunder. Thus, the Code provides:
Section 72. Rights of unpaid
shares. - Holders of subscribed shares
not fully paid which are not delinquent
shall have all the rights of a
stockholder. (n)
 Is the issuance of a certificate of stock
necessary to consider the subscriber a
stockholder?
- NO, shall be considered a stockholder
even without a certificate of stock
 Instances when he may not be able to
exercise his rights as such stockholder
- Declared delinquent
- When he exercises his appraisal right
 Are certificate of stocks transferrable?
- YES
 Are certificate of stocks considered
negotiable?
- Quasi-negotiable
 Why are they considered quasi-
negotiable when it may be transferred
through endorsement and delivery?
58
100t/s 001 10/s
Abc co.
B stole and forged the signature
C is purchaser in good faith and for value will
C acquire title
Endorsement from
When issued by owner
Endorsed by owner- strict compliance
his
ANSWER: a certificate of stock is not regarded
as negotiable in the same sense that a bill or
note is negotiable, even if it is endorsed in
blank. Thus, while it may be transferred by
endorsement coupled with delivery thereof,
and therefore merely quasi-negotiable, it is
nonetheless non-negotiable in that the
transferees takes it without prejudice to all
the rights and defenses which the true and
lawful owner may have except in so far as the
principles governing estoppels may apply.
He acquired it by virtue of a forged
instrument; no matter how innocent the
purchaser is because it is subject to all the
rights and defenses
 What if A endorsed it?
- He is estopped, unless there are other
available defenses
 Transfer is required to be recorded in
the books of the corporation, however
even if not recorded, it will be valid
between the parties. Non-registration
will not however, affect the validity
thereof at least in so far as the
contracting parties are concerned.
Section 63. Certificate of stock
and transfer of shares. - The capital
stock of stock corporations shall be
divided into shares for which
certificates signed by the president or
vice president, countersigned by the
secretary or assistant secretary, and
sealed with the seal of the corporation
shall be issued in accordance with the
by-laws. Shares of stock so issued are

personal property and may be
transferred by delivery of the certificate
or certificates indorsed by the owner or
his attorney-in-fact or other person
legally authorized to make the
transfer. No transfer, however, shall be
valid, except as between the parties,
until the transfer is recorded in the
books of the corporation showing the
names of the parties to the
transaction, the date of the transfer,
the number of the certificate or
certificates and the number of shares
transferred.
No shares of stock against
which the corporation holds any
unpaid claim shall be transferable in
the books of the corporation. (35)
 “Until registration is accomplished, the
transfer, though valid between the
parties, cannot be effective as against
the corporation. Thus the, unrecorded
transfer cannot enjoy the status of a
stockholder; he cannot vote nor be
voted for, and he will not be entitled to
dividends. The corporation will be
protected when it pays dividend to the
registered owner despite a previous
transfer of which it had no knowledge.
The purpose of registration therefore is
twofold: to enable the transferee to
exercise all the rights of a stockholder
and to inform the corporation of any
change in shares ownership so that it
can ascertain the persons entitled to
the rights and subject to the liabilities
of a stockholder.”
Thus, it was also ruled by the
High Court in Nautica Canning
Corp. vs. Yumul that “A transfer
of shares not recorded in the
stock and transfer book of the
corporation is non-existent in
so far as the corporation is
concerned.” This is so because
“the corporation looks only
through its books for the
purpose of determining who its
stockholders are.”
 Registration is necessary for the
following:
1. To enable the corporation to know who
its stockholders are;
2. To enable the transferee to exercise his
rights a s stockholders;
59
3. To afford the corporation an
opportunity to object or refuse
registration of the transfer in case
allowed by law;
4. To avoid fictitious and fraudulent
transfers; and,
5. To protect creditors who have the right
to look upon stockholders, in case of
no-payment or watered shares, for the
satisfaction of their claims.
 Duty of the secretary is ministerial,
hence mandamus will lie if the
secretary refuses to record the
transfer, but he cannot be compelled
when the transferee’s title to the said
shares has no prima facie validity or
uncertain
 Transfer- absolute and unconditional
transfer to warrant registration in the
books of the corporation in order to
bind the latter and other third
persons.
 Other restrictions on the right to
transfer shares would include:
1. It is not valid, except as between the
parties, until recorded in the books of
the corporation;
2. Shares of stock against which the
corporation holds any unpaid claim
shall not be transferable in the books
of the corporation; unpaid claims, refer
to claims arising from unpaid
subscription and not to any
indebtedness which a stockholder may
owe the corporation such as monthly
dues;
3. Restrictions required to be indicated in
the articles of incorporation, by-laws
and stock certificates of a close
corporation;
4. Restrictions imposed by special law,
such as the Public Service Act
requiring the approval of the
government agency concerned if it will
vest unto the transferee 40% of the
capital of the public service company;
5. Sale to aliens in violation of maximum
ownership of shares under the
Nationalization Laws;
6. Those covered by reasonable
agreement of the parties.

Monserat vs. Ceron
- Does it include mortgage?
- NO, it is not an absolute transfer
- Will not affect the transfer through
mortgage
- Absolute and unconditional transfer
- Only the transfer or absolute
conveyance of the ownership of the
title to a share need be entered and
noted upon the books of the
corporation in order that such transfer
may be valid, therefore, inasmuch as a
chattel mortgage of the aforesaid title
is not a complete and absolute
alienation of the dominion and
ownership thereof, its entry and
notation upon the books of the
corporation is not necessary requisite
to its validity
 Chua guan vs. Magsasaka
- Was the mortgage valid and effective
as against subsequent third parties
- Register of deeds where the
corporation resides and if different in
the register of deeds of owner’s
domicile
 Unson vs. Dinamito
- All transferred not register will not
have a valid force and effect
 Right to transfer may be regulated
 May not be unreasonably restricted
 Violation of nationalization law-
Central Bank
Lambert vs. Fox
- Valid , may be reasonably regulated,
restricted by agreement of parties
- Reasonable agreement by the parties
- Reasonable as to length of time
Padgett vs. Babcock
- Any attempt to restrain transfer
- SC, in the absence of a valid lien upon
its shares
- Valid restrictions shares are applicable
60
- Any restriction on a stockholder’s right
to dispose of his shares must be
construed strictly; and any attempt to
restrain a transfer of shares is
regarded as being in restraint of trade,
in the absence of a valid lien upon its
shares, and except to the extent that
valid restrictive regulations and
agreements exist and are applicable.
Subject only to such restrictions, a
stockholder cannot be controlled in or
restrained from exercising his right to
transfer by the corporation or its
officers or by other stockholders, even
though the sale is to a competitor of
the company, or to an insolvent
person, or even though a controlling
interest is sold to one purchaser.
 Certificate of stocks are transferrable
- By endorsement and delivery of the
stock certificate to the transferee
 In order to be valid, must be registered
in the books. If not, will only be
binding among parties
 How may shares of stock be
transferred?
- Endorsement of stock certificate by
owner or attorney-in-fact with delivery
Embassy farms vs. CA
- Must be endorsed by owner or
attorney-in-fact coupled with delivery
- Endorsed not delivered
- Proper mode and manner must be
complied with
Razon vs. IAC
- Delivered not endorsed
- Reverse of Embassy Farms
- Endorsement alone is not sufficient
nor delivery without endorsement is
not allowed
- Endorsement plus delivery is
mandatory
 Is there any other mode of transferring
stock?
- Notarized deed
- Deed of assignment

Rural bank of Salinas vs. CA
- If denied or refused without good
cause, mandamus will lie
Tay vs. CA
- Mandamus may issue if petition has a
clear legal right
- Never issued in doubtful cases
- Petitioner failed to establish a clear
legal right and alleged ownership is
without merit
- Did not acquire ownership by virtue of
the contract of pledge
- In a contract of pledge there must be
foreclosure
- In the case there was no attempt to
foreclose
- Petitioner must have a prima facie
right
Nava vs. Peers Marketing
- A stock subscription is a subsisting
liability from the time the subscription
is made
- The subscriber is as much bound to
pay his subscription as he would be to
pay any other debt
- No stock certificate was issued.
Without stock certificate, which is the
evidence of ownership of corporate
stock, the assignment of corporate
shares is effective only between the
parties to the transaction
 Exception to the general rule
Rural Bank of Lipa vs. CA
- By notarized deed
- Certificate of stocks already issued
must be coupled with delivery,
exception (TAN vs. SEC)
 Stock certificate has already been
issued it must be coupled with the
delivery
 After certificate of stock is issued, may
it be effectively transferred even
without endorsement or delivery of the
stock certificate?
61
- Person sought to be a stockholder is
an officer and has custody
 Endorsement and delivery is not
necessary (TAN vs. SEC)
Tan vs. SEC (FULL KNOWLEDGE, HE
IS ESTOPPED)
- Persons sought to be stockholder is
officer and has custody of the book
(estopped)
 General Rule for valid transfer
- Certificate of stock must be endorsed
by owner or attorney-in-fact coupled
with delivery
 Exceptions
- Section 63 uses the word “may”
- Showing that there may be other
modes of transferring shares
 Is there a time frame or fixed period as
when transfer can be made?
- NO, (WON vs. WACK WACK)
Won vs. Wack Wack
- Valid between contracting parties even
if not recorded in corporation books
- Right accrues only if refused
- Statute of limitations does not apply in
registration of shares of stock
- Must determined from the time of
refusal
 Why are they non-negotiable when
they may be transferred?
- Transferees pays it without prejudice
to all the rights and defenses as the
true and lawful owner may have under
the law except insofar as such rights
and defenses are subject to the
limitations imposed by the principles
governing estoppels
De los Santos vs. Republic
- Why is he, not considered as the
owner of shares? When it has been
said that when endorsed by the owner
it is considered as strict certificate?
Because certificate of stocks are non-
negotiable

- Although a stock-certificate is
sometimes regarded as quasi-
negotiable, in the sense that it may be
transferred by endorsement, coupled
with delivery, it is well settled that the
instrument is non-negotiable, because
the holder thereof takes it without
prejudice to such rights or defenses as
the registered owner or creditor may
have under the law, except insofar as
such rights or defenses are subject to
the limitations imposes by the
principles governing estoppels.
 Unauthorized issuance of stock
certificates
100/s 100
XYZCo
100 pesos per share
Stolen by B and forged the signature of A
B sells to C will C acquire title? NO
ENDORSEMENT FORM
 C armed with the endorsement form
certificate, sold to D (innocent
purchaser for value), will D acquire
title?
- NO, subject to such rights and defenses
as the true and lawful owner may have
 What if C now goes to the corporation
and presents the form?
- Then the corporation shall cancel the
old certificate and issues a new one,
now in the name of C, now registered
in the name of C, will C acquire title?
 A found out what happened and goes
to the corporation who has a better
title C or A?
- A, A cannot be deprived of his right by
virtue of an unauthorized transfer
 Corporation can compel C to deliver
the new stock certificate because he
made a representation that the
certificate where good.
62
 Armed with the new certificate issued
to C, C delivers to D a purchaser in
good faith and for value will D acquire
title?
- D will acquire title took the shares not
by virtue of a forged or unauthorized
transfer, but on the reliance that the
stock certificate is valid and owned by
C
 Stock certificate now in possession of
D. A knew of what happened and went
to the corporation and complains. Who
will have a better title?
- the corporation may be compelled to
recognize both, A as stockholder (non-
negotiable) D, reliance that the stock
certificate is valid and existing and
owned by C
 Forged transfers
- If the corporation should issue a new
certificate in pursuance of a forged
transfer, the corporation incurs no
liability to the person in whose favor it
is issued and it may demand its return
for cancellation. The corporation in
such case has been guilty of no
misrepresentation. On the other hand,
it is the duty of the purchaser to
determine that the indorsement of the
owner is genuine. However, if the new
certificate issued to the purchaser
comes into the hands of a bona fide
purchaser for value, the corporation
will be stopped from denying validity
thereof, since by issuing such new
certificate it represents that the person
named therein is a stockholder of the
corporation. The corporation is thus
forced to recognize both the original
certificate and new certificate-the
original, because the true owner could
not be deprived of his title by a forged
transfer, and the new, because of its
representation that the person named
therein is the owner of shares in the
corporation. But if the recognition of
both stockholders would result in an
over issue of shares, then only the
original and true owner can be
recognized as a stockholder. The bona
fide purchaser of the new certificate
will however have a right of damages
against the corporation. The
corporation, in turn, would have a
right of action against the person who

made false representations and in
whose favor it issued a new certificate.
The true owner of the shares which
were wrongfully transferred would of
course have a right to compel the
corporation to issue him a certificate
in lieu of the original one which was
wrongfully cancelled.
 Authorized capital stock 1M shares
 All are subscribed who will the
corporation recognize as rightful owner
A or D? if both will be recognized there
will be over issuance
- only A citing citizens national bank vs.
state (but if recognition of both
stockholders would result in an over
issue of shares, then only the original
and true owner can be recognized as a
stockholder)
- by virtue of the doctrine of non-
negotiability of certificate of stocks
 The true and lawful owner will never
be deprived of his rights
 What happens to D?
- D will have a cause of action against the
corporation for the value of his
acquisition cost inclusive of damages,
attorney’s fees and cost of suit
 D sues the corporation for the value of
his acquisition cost, inclusive of
damages, attorney’s fees and cost of
suit. What may the corporation do?
- NO defense, no valid defense, because it
was represented to other parties that
the certificate of stocks is valid,
subsisting, etc.
 2nd situation, what cause of action may
the corporation have? Remedy?
- Third party complaint against C, but
what if he is a purchaser for value? 4th
party claim against B
 When may certificate of stocks be
issued?
- Section 64 provides:
Section 64. Issuance of stock
certificates. - No certificate of stock
shall be issued to a subscriber until
the full amount of his subscription
together with interest and expenses (in
63
case of delinquent shares), if any is
due, has been paid. (37)
 A certificate of stock cannot be issued
unless he fully paid the amount
subscribed
 Subscription to the capital stocks of
the corporation are indivisible
 Clear mandate of section 148 of the
code is that the ruling of the court in
Baltazar vs. Lingayen Gulf, no longer
holds true
Section 148. Applicability to
existing corporations. - All corporations
lawfully existing and doing business in
the Philippines on the date of the
effectivity of this Code and heretofore
authorized, licensed or registered by
the Securities and Exchange
Commission, shall be deemed to have
been authorized, licensed or registered
under the provisions of this Code,
subject to the terms and conditions of
its license, and shall be governed by
the provisions hereof: Provided, That if
any such corporation is affected by the
new requirements of this Code, said
corporation shall, unless otherwise
herein provided, be given a period of
not more than two (2) years from the
effectivity of this Code within which to
comply with the same. (n)
 Subscription to shares of stocks are
indivisible
 Also apparent is that once a
subscriber has paid his subscription
in full, he becomes entitled to be
issued a stock certificate and in the
event that the corporation refuses to
do so, the stockholder my institute a
case for mandamus with damages.
Thus, it has been said that the duty of
the corporate officers to issue stock
certificates to those entitled thereto is
a ministerial duty enforceable by
mandamus.
Fua Cun vs. Summers and China
Banking Corp.
- The court erred in holding the plaintiff
as the owner of 250 shares of stock;
“the plaintiff’s rights consist in equity
in 500 shares and upon payment of
the unpaid portion of the subscription
price he becomes entitled to the
issuance of certificate for said 500
shares in his favor.”
- No certificate of stock until the full
amount has been paid.
 Watered stock

- One which is issued by the corporation
as fully paid-up shares, when in fact
the whole amount of the value thereof
has not been paid.
- Basis is par value and not the fair
market value
 Section 62 states that stocks shall not
be issued for a consideration less than
par or issued price thereof, while
section 13 states that in no case shall
be paid-up capital be less than five
thousand [P5000] pesos.
 If issued below par, issued value
considered as water
 How may watered stocks be issued?
1. For a monetary consideration less
than its par or issued value;
2. For a consideration in property,
tangible or intangible, valued in excess
of its fair market value;
3. Gratuitously or under an agreement
that nothing shall be paid at all; or
4. In the guise of stock dividends when
there are no surplus profits of the
corporation.
 Why is stock watering illegal?
1. The corporation is deprived of its
capital thereby hurting its business
prospects, financial capability and
responsibility;
2. Stockholders who paid their
subscriptions in full, or promised to
pay the same, are injured and
prejudiced by the reduction of their
proportionate interest in the
corporation; and,
3. Present and future creditors are
deprived of the corporate assets for the
protection of their interest.
- Corporation is prejudiced
- Stockholders, dilution of interest
- Creditors are prejudiced, virtue of right
to look upon corporations properties
for the satisfaction of their claims
 What is the effect of issuance of
watered stocks
1. As to the corporation - when a
corporation is guilty of ultra-vires or
illegal acts which constitute an injury
to or fraud upon the public, or which
will tend to injure or defraud the
public, the State may institute a quo-
warranto proceeding to forfeit its
charter for the misuse or abuse of its
franchise.
2. As between the corporation and the
subscriber- The subscription is void.
Such being the case, the subscriber is
liable to pay the full par or issued
value thereof, to render it valid and
effective.
64
3. As to the consenting stockholders -
They are stopped from raising any
objection thereto;
4. As to dissenting stockholders - In view
of the dilution of their proportionate
interest in the corporation, they may
compel the payment of the “water” in
the stock solidarily against the
responsible and consenting directors
and officers inclusive of the holder of
the watered stocks;
5. As to creditors - They may enforce
payment of the difference in the price,
or the water in the stock, solidarily
against the responsible
directors/officers and the stockholders
concerned; and’
6. As against transferees of the watered
stock – His right is the same as that of
his transferor. If, however, a certificate
of stock has been issued and duly
indorsed to a bona fide purchaser,
without knowledge, actual or
constructive, the latter cannot be held
liable, at least as against the
corporation, since he took the shares
on reliance of the misrepresentation
made by the corporation that the stock
certificate is valid and subsisting. This
is because a corporation is prohibited
from issuing certificates of stock until
the full value of the subscriptions have
been paid and could not, therefore,
deny the validity of the stock certificate
it issued as against a purchaser in
good faith. Thus, Ballentine states that
whether there is any liability on the
part of the transferee of watered stock
is made to depend upon whether he
acquired the same without notice,
either as purchaser or donee. If he had
knowledge thereof, he is subject to the
same liability as his transferor.
 What is the nature of the liability of
the corporate directors consenting to
the issuance of watered stocks and the
extent of their liabilities?
- Solidarily liable with the holder of the
watered stocks to the extent of the
water from said shares of stocks
 Will all the directors be liable? What if
you objected will you also be liable?
- If you do not issue a written objection,
you are still liable
- Even passive directors may be liable
- Those having knowledge thereof, but
did not interpose their objection shall
be liable
- Section 65 provides:

Section 65. Liability of
directors for watered stocks. - Any
director or officer of a corporation
consenting to the issuance of stocks
for a consideration less than its par or
issued value or for a consideration in
any form other than cash, valued in
excess of its fair value, or who, having
knowledge thereof, does not forthwith
express his objection in writing and file
the same with the corporate secretary,
shall be solidarily, liable with the
stockholder concerned to the
corporation and its creditors for the
difference between the fair value
received at the time of issuance of the
stock and the par or issued value of
the same. (n)
 ACS-100M 100M/S PAR
VALUE-1.00
SUBSCRIBED-50M FAIR
MARKET VALUE-12.00/S
UNSUBSCRIBED-50M
A
B
C
D
E
There is a denial of pre-emptive rights and
directors A,B,C,D,E decided to issue the
remaining 50M and subscribed for 10M
each at 2 per share.
 Is there stock watering if the fair
market value is 12.00?
- No stock watering
- The basis is the par value
- The shares where in fact paid more
than the par value indicated in the
articles of incorporation
3 days later they sold their 10M share for
P11.00 each, therefore making a profit.
 Can you question there actuations?
What would be the cause of action?
- It may be questioned.
- Duty of loyalty or fiduciary duty as
such directors
- They cannot advance their own
motives to the damage prejudice of the
corporation which they represents and
stockholders as a whole instead of it
being sold outside
- 500M would have gone to the coffers of
the corporation, 500M should be there
for the protection of creditors
- They are placed in a fiduciary
relationship
- Sila lang ba ang kikita, pano naman
yung corporation, opportunity na yun
para kumita
65
 When are unpaid subscriptions due
and payable?
- Section 67. Payment of balance of
subscription. - Subject to the
provisions of the contract of
subscription, the board of directors of
any stock corporation may at any time
declare due and payable to the
corporation unpaid subscriptions to
the capital stock and may collect the
same or such percentage thereof, in
either case with accrued interest, if
any, as it may deem necessary.
Payment of any unpaid subscription or
any percentage thereof, together with
the interest accrued, if any, shall be
made on the date specified in the
contract of subscription or on the date
stated in the call made by the board.
Failure to pay on such date shall
render the entire balance due and
payable and shall make the
stockholder liable for interest at the
legal rate on such balance, unless a
different rate of interest is provided in
the by-laws, computed from such date
until full payment. If within thirty (30)
days from the said date no payment is
made, all stocks covered by said
subscription shall thereupon become
delinquent and shall be subject to sale
as hereinafter provided, unless the
board of directors orders otherwise.
(38)
 Remedies of the corporation to enforce
payment of unpaid subscription
1. By board action in accordance with the
procedure laid down in sections 67 to
69 of the code
2. By a collection case in court as
provided for in section 70
 Are subscribers of shares of stocks not
fully paid, liable to pay interest?
- General rule is they are not liable to
pay interest because the code says
unless requires in the by-laws
- Aside from the mandate of the law that
subscribers to shares of stock must
pay the full value of their subscription,
they may likewise be required to pay
interest on all unpaid subscriptions if
so imposed in the contract or in the
corporate by-laws at such rate as may
be indicated thereat or the legal rate if
not so fixed. Unless so required or
provided, however, subscribers to
shares of stock, not fully paid, are not

liable to pay interest on their unpaid
subscriptions. The code thus provides:
Section 66. Interest on unpaid
subscriptions. - Subscribers for stock
shall pay to the corporation interest on
all unpaid subscriptions from the date
of subscription, if so required by, and
at the rate of interest fixed in the by-
laws. If no rate of interest is fixed in
the by-laws, such rate shall be deemed
to be the legal rate. (37)
 Until a call is made, they are not due
and payable, but still subject to the
provisions of the contracts
 Procedures in case of sale of
delinquent stocks
- Section 68. Delinquency sale. - The
board of directors may, by resolution,
order the sale of delinquent stock and
shall specifically state the amount due
on each subscription plus all accrued
interest, and the date, time and place
of the sale which shall not be less than
thirty (30) days nor more than sixty
(60) days from the date the stocks
become delinquent.
Notice of said sale, with a copy
of the resolution, shall be sent to every
delinquent stockholder either
personally or by registered mail. The
same shall furthermore be published
once a week for two (2) consecutive
weeks in a newspaper of general
circulation in the province or city
where the principal office of the
corporation is located.
Unless the delinquent
stockholder pays to the corporation,
on or before the date specified for the
sale of the delinquent stock, the
balance due on his subscription, plus
accrued interest, costs of
advertisement and expenses of sale, or
unless the board of directors otherwise
orders, said delinquent stock shall be
sold at public auction to such bidder
who shall offer to pay the full amount
of the balance on the subscription
together with accrued interest, costs of
advertisement and expenses of sale,
for the smallest number of shares or
fraction of a share. The stock so
purchased shall be transferred to such
purchaser in the books of the
corporation and a certificate for such
stock shall be issued in his favor. The
remaining shares, if any, shall be
credited in favor of the delinquent
stockholder who shall likewise be
entitled to the issuance of a certificate
of stock covering such shares.
66
Should there be no bidder at
the public auction who offers to pay
the full amount of the balance on the
subscription together with accrued
interest, costs of advertisement and
expenses of sale, for the smallest
number of shares or fraction of a
share, the corporation may, subject to
the provisions of this Code, bid for the
same, and the total amount due shall
be credited as paid in full in the books
of the corporation. Title to all the
shares of stock covered by the
subscription shall be vested in the
corporation as treasury shares and
may be disposed of by said corporation
in accordance with the provisions of
this Code. (39a-46a)
 Who is the winning bidder in a
delinquency sale?
- Bidder who shall “offer to pay the full
amount of the balance on the
subscription together with accrued
interest, cost of advertisement and
expenses of sale, for the smallest
number of shares or fraction of a
share.”
X Co. has 1M authorized capital stock
500 thousand is already subscribed
A subscribed to 100 thousand shares,
50 thousand is already paid leaving 50
thousand unpaid
The corporation is at a loss of 250
thousand, the board decides to make a
call for the payment of the unpaid
subscriptions, however A could not
paid, hence declared delinquent and
decides to sell his share at a public
auction
55 thousand is to be paid, remaining
balance plus cost and expenses
BIDDERS:
X-55K FOR 99,900 shares
Y-55K FOR 99,500 shares
Z-55K FOR 99,000 shares (winning
bidder)
 Assume there is no bidder, may the
corporation bid?
- NO. It cannot bid because the law
says, subject to the provisions of this
CODE. Section 68 and 41 should be
reconciled. Section 68 states that:
 67

Should there be no bidder at the date of the sale at the legal rate;
the public auction who offers to pay and,
the full amount of the balance on the
subscription together with accrued 2. The action shall be commenced by the
interest, costs of advertisement and filing of a complaint within six months
expenses of sale, for the smallest from the date of the sale.
number of shares or fraction of a
share, the corporation may, subject to - The reason for such is the stability of
the provisions of this Code, bid for transactions of the shares of stock
the same, and the total amount due
shall be credited as paid in full in the
 Suppose in the example, since there
books of the corporation. Title to all
are no unrestricted retained earnings,
the shares of stock covered by the
hence the corporation cannot bid, is
subscription shall be vested in the
the corporation left without any
corporation as treasury shares and
recourse?
may be disposed of by said corporation
in accordance with the provisions of
this Code. (39a-46a) - Section 70. Court action to recover
unpaid subscription. - Nothing in this
Code shall prevent the corporation
from collecting by action in a court of
proper jurisdiction the amount due on
- There was no unrestricted retained any unpaid subscription, with accrued
earnings in the example given interest, costs and expenses. (49a)
therefore the corporation cannot bid ,
section 41, it states that:
Velasco vs. Poizat
Section 41. Power to acquire
- The subscriber is as much bound to
own shares. - A stock corporation shall
pay the amount of the share
have the power to purchase or acquire
subscribed by him as he would be to
its own shares for a legitimate
pay any other debt, and the right of
corporate purpose or purposes,
the company to demand payment is no
including but not limited to the
less incontestable.
following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the - Two available remedies: the first and
shares to be purchased or acquired: most special remedy given by the
statute consist in permitting the
corporation to put up the unpaid stock
1. To eliminate fractional shares
and dispose of it for the account of the
arising out of stock dividends;
delinquent subscriber. The other
remedy is by action in court.
2. To collect or compromise an
indebtedness to the corporation,
De Silva vs. Aboitiz and Co.
arising out of unpaid subscription, in a
delinquency sale, and to purchase
delinquent shares sold during said - Discretionary on the part of the board
sale; and of directors to do whatever is provided
in the said article relative to the
application of the part of the 70
3. To pay dissenting or withdrawing
percent of the profit distributable in
stockholders entitled to payment for
equal parts on the payment of the
their shares under the provisions of
shares subscribed to and fully paid
this Code. (a)
Lingayen Gulf vs. Baltazar
 What if the shares of A were sold
without compliance of the
requirements? May A question the - Exception: pursuant to a bona fide
sale? compromise or to set off a debt due
from the corporation, a release
supported by consideration, will be
- The law prescribes two conditions
effectual as against dissenting
before an action to recover delinquent
stockholders and subsequent and
stocks irregularly sold may be allowed.
existing creditors. A release which
These are:
might originally have been held invalid
may be sustained after a considerable
1. The party seeking to maintain such lapse of time
action first pays or tenders to the party
holding the stock the sum for which
Apocada vs. NLRC
the same was sold, with interest from

- Set-off is without any legal basis
- It was premature
- Unpaid subscriptions will become due
and payable only upon certain
instance
- Call or if there is a stipulation in
contract
- If no call and no stipulation in contract
then it will not be demandable or
payable at all
Lumanlan vs. Cura
- Trust Fund Doctrine- subscription to
the capital of a corporation constitute
a fund to which the creditors have a
right to look for satisfaction of their
claims and that the assignee in
insolvency can maintain an action
upon any unpaid stock subscription in
order to realize assets for the payment
of its debts.
PNB vs. Bitulak
- Where it not for the promise, the
defendants would have not subscribed
- Trust Fund Doctrine, it is established
doctrine that subscriptions to the
capital of a corporation constitute a
fund to which creditors have a right to
look for satisfaction of their claims and
that the assignee in insolvency can
maintain an action upon any unpaid
stock subscription in order to realize
assets for the payment of its debts.
- A corporation has no power to release
an original subscriber to its capital
stock from the obligation of paying for
his shares, without a valuable
consideration for such release; and as
against creditors a reduction of the
capital stock can take place only in the
manner and under the conditions
prescribed by the statute or the
charter or the articles of incorporation.
Edward Keller and Co. vs. COB
- May the stockholder be held liable for
the debts of the corporation? YES. To
the extent of their unpaid subscription
- As to the liability of the stockholders,
it is settled that a stockholder is
personally liable for the financial
obligations of a corporation to the
extent of his unpaid subscriptions
68
 Is there a prescriptive period wherein a
demand for unpaid subscription
should be made?
- NO. Garcia vs. Suarez case
Garcia vs. Suarez
- Never became due and payable until
there is a call made
- Prescription will not run until and
unless there is demand
- Prescription should be determined
from the time demand has been made
and not from the time of subscription
 If declared delinquent, what would be
the effect as to the owner of said
shares?
- Section 71. Effect of delinquency. - No
delinquent stock shall be voted for or
be entitled to vote or to representation
at any stockholder's meeting, nor shall
the holder thereof be entitled to any of
the rights of a stockholder except the
right to dividends in accordance with
the provisions of this Code, until and
unless he pays the amount due on his
subscription with accrued interest,
and the costs and expenses of
advertisement, if any. (50a)
- However if the shares are not
delinquent, subscribers to the capital
of a corporation, though not fully paid,
are entitled to all the rights of a
stockholder, according to section 72
Section 72. Rights of unpaid
shares. - Holders of subscribed shares
not fully paid which are not delinquent
shall have all the rights of a
stockholder. (n)
 May the rules governing delinquency
sale apply to a non-stock corporation?
Are there unpaid shares in a non-stock
corporation?
- Rules governing stock corporations,
when applicable, also applies to a non-
stock corporation
- There are delinquent shareholders also
in a non-stock corporation. Example is
membership dues
 A corporation paid 50% of subscription
and was later on declared delinquent
when he could not pay upon call; A is
also a director of the corporation. Will
A, upon declaration of delinquency ,

still be able to exercise his right as a
director?
- Yes, he loses all his right as a
stockholder except his right to receive
dividends
- He remains to be a director, only
qualification to be a director is he
must own at least 1 share and since it
still stands in his name pending the
sale, he remains to be and act as a
director
- Even if there is sale, he may still be
director because the winning bidder
may not bid or pay for all the shares or
there might be remaining shares,
which would be credited in favor of the
delinquent stockholder
- Section 43 provides:
Section 43. Power to declare
dividends. - The board of directors of a
stock corporation may declare
dividends out of the unrestricted
retained earnings which shall be
payable in cash, in property, or in
stock to all stockholders on the basis
of outstanding stock held by them:
Provided, That any cash dividends due
on delinquent stock shall first be
applied to the unpaid balance on the
subscription plus costs and expenses,
while stock dividends shall be withheld
from the delinquent stockholder until
his unpaid subscription is fully paid:
Provided, further, That no stock
dividend shall be issued without the
approval of stockholders representing
not less than two-thirds (2/3) of the
outstanding capital stock at a regular
or special meeting duly called for the
purpose. (16a)
Stock corporations are
prohibited from retaining surplus
profits in excess of one hundred
(100%) percent of their paid-in capital
stock, except: (1) when justified by
definite corporate expansion projects
or programs approved by the board of
directors; or (2) when the corporation
is prohibited under any loan
agreement with any financial
institution or creditor, whether local or
foreign, from declaring dividends
without its/his consent, and such
consent has not yet been secured; or
(3) when it can be clearly shown that
such retention is necessary under
special circumstances obtaining in the
corporation, such as when there is
need for special reserve for probable
contingencies. (n)
69
 When a certificate of stock is loss or
destroyed, what must be done by the
owner thereof?
- Section 73. Lost or destroyed
certificates. - The following procedure
shall be followed for the issuance by a
corporation of new certificates of stock
in lieu of those which have been lost,
stolen or destroyed:
1. The registered owner of a
certificate of stock in a corporation or
his legal representative shall file with
the corporation an affidavit in
triplicate setting forth, if possible, the
circumstances as to how the certificate
was lost, stolen or destroyed, the
number of shares represented by such
certificate, the serial number of the
certificate and the name of the
corporation which issued the same. He
shall also submit such other
information and evidence which he
may deem necessary;
2. After verifying the affidavit
and other information and evidence
with the books of the corporation, said
corporation shall publish a notice in a
newspaper of general circulation
published in the place where the
corporation has its principal office,
once a week for three (3) consecutive
weeks at the expense of the registered
owner of the certificate of stock which
has been lost, stolen or destroyed. The
notice shall state the name of said
corporation, the name of the registered
owner and the serial number of said
certificate, and the number of shares
represented by such certificate, and
that after the expiration of one (1) year
from the date of the last publication, if
no contest has been presented to said
corporation regarding said certificate
of stock, the right to make such
contest shall be barred and said
corporation shall cancel in its books
the certificate of stock which has been
lost, stolen or destroyed and issue in
lieu thereof new certificate of stock,
unless the registered owner files a
bond or other security in lieu thereof
as may be required, effective for a
period of one (1) year, for such amount
and in such form and with such
sureties as may be satisfactory to the
board of directors, in which case a new
certificate may be issued even before
the expiration of the one (1) year
period provided herein: Provided, That
if a contest has been presented to said
corporation or if an action is pending
in court regarding the ownership of
said certificate of stock which has been
lost, stolen or destroyed, the issuance

of the new certificate of stock in lieu
thereof shall be suspended until the
final decision by the court regarding
the ownership of said certificate of
stock which has been lost, stolen or
destroyed.
Except in case of fraud, bad
faith, or negligence on the part of the
corporation and its officers, no action
may be brought against any
corporation which shall have issued
certificate of stock in lieu of those lost,
stolen or destroyed pursuant to the
procedure above-described. (R.A. 201a)
- The rationale of the above-quoted law
is to avoid duplication of certificates of
stock and the avoidance of fictitious
and fraudulent transfers.
 When will the replacement certificate
be issued?
- The code provides that:
after the expiration of one (1)
year from the date of the last
publication, if no contest has been
presented to said corporation
regarding said certificate of stock, the
right to make such contest shall be
barred and said corporation shall
cancel in its books the certificate of
stock which has been lost, stolen or
destroyed and issue in lieu thereof new
certificate of stock,
 Could it be issued earlier than 1 year?
- Yes it can be, the code states that:
unless the registered owner files
a bond or other security in lieu thereof
as may be required, effective for a
period of one (1) year, for such amount
and in such form and with such
sureties as may be satisfactory to the
board of directors, in which case a
new certificate may be issued even
before the expiration of the one (1)
year period provided herein:
Provided, That if a contest has been
presented to said corporation or if an
action is pending in court regarding
the ownership of said certificate of
stock which has been lost, stolen or
destroyed, the issuance of the new
certificate of stock in lieu thereof shall
be suspended until the final decision
by the court regarding the ownership
of said certificate of stock which has
been lost, stolen or destroyed.
 May corporate officers be held liable
for the unauthorized issuance?
70
- YES, the code provides that:
Except in case of fraud, bad
faith, or negligence on the part of the
corporation and its officers, no action
may be brought against any
corporation which shall have issued
certificate of stock in lieu of those lost,
stolen or destroyed pursuant to the
procedure above-described. (R.A. 201a)
 Assuming the last paragraph is not
there; would it be not the same, that
they should be held liable due to
fraud, bad faith or negligence?
- YES. Section 31 provides that:
Section 31. Liability of
directors, trustees or officers. -
Directors or trustees who willfully and
knowingly vote for or assent to
patently unlawful acts of the
corporation or who are guilty of gross
negligence or bad faith in directing the
affairs of the corporation or acquire
any personal or pecuniary interest in
conflict with their duty as such
directors or trustees shall be liable
jointly and severally for all damages
resulting there from suffered by the
corporation, its stockholders or
members and other persons.
When a director, trustee or
officer attempts to acquire or acquires,
in violation of his duty, any interest
adverse to the corporation in respect of
any matter which has been reposed in
him in confidence, as to which equity
imposes a disability upon him to deal
in his own behalf, he shall be liable as
a trustee for the corporation and must
account for the profits which otherwise
would have accrued to the corporation.
(n)
 Certificate of stock was lost, the owner
transfers his shares by way of a
notarized deed will it be valid?
- He cannot do so, if a certificate of
stock is issued by a corporation, a
mere notarized deed will not suffice
- Deed of assignment was not sufficient
since there was no endorsement (Rural
Bank of Lipa vs. CA)
 Rights and liabilities of stockholders
- RIGHTS
1. Participation in the management of the
corporate affairs by exercising their
 71

right to vote and be voted upon either event of a deadlock as allowed under
personally or by proxy as provided for section 104; and,
under sections 50 and 58 of the code;
16. Also in the case of a close corporation,
2. To enter into a voting trust agreement to withdraw therefrom, for my reason,
subject to the procedure, requirements and compel the corporation to
and limitations imposed under section purchase his shares as provided for
50; under section 105.

3. To receive dividends and to compel

their declaration if warranted under
section 43;

4. To transfer shares of stock subject

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

5. To be issued a certificate of stock for

fully paid-up shares in accordance
with 64;

6. To exercise pre-emptive rights as

provided for in section 39;

7. To exercise their appraisal right in

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

8. To institute and file a derivative suit;

9. To recover shares of stock unlawfully

sold for delinquency as may be allowed
under section 69;

10. To inspect the books of the corporation

subject only to the limitations imposed
by section 73;

11. To be furnished by the most recent

financial statement of the corporation
as by section 75;

12. To be issued a new stock certificate in

lieu of the lost or destroyed one
subject to the procedure laid down in
section 73;

13. To have the corporation dissolved

under section 118 to 121, and section
105 in a close corporation;

14. To participate in the distribution of the

assets of the corporation upon
dissolution under section 122;

15. In the case of a close corporation, to

petition the SEC to arbitrate in the

- LIABILITIES
1. To pay to the corporation the balance
of his unpaid subscriptions subject to
the provision of section 67 to 70;
2. To pay interest on his unpaid
subscription if required by the by-laws
or by the contract of subscription in
accordance with section 66;
3. To answer to the creditors for the
unpaid portion of his subscription
under the TRUST FUND DOCTRINE;
4. To answer the “water” in his stocks as
provided for in section 65;
5. To be liable, as general partners, for all
debts, liabilities and damages of a
determinable corporation as
envisioned under section 21
(corporation by estoppel); and,
6. To be personally liable for torts, in the
event that a stockholder in a close
corporation actively participates in the
management of the corporate affairs.
CORPORATE BOOKS AND RECORDS
 What are these books and records that
are required to be kept?
- Section 74. Books to be kept; stock
transfer agent. - Every corporation
shall keep and carefully preserve at
its principal office a record of all
business transactions and minutes
of all meetings of stockholders or
members, or of the board of
directors or trustees, in which shall
be set forth in detail the time and
place of holding the meeting, how
authorized, the notice given,
whether the meeting was regular or
special, if special its object, those
present and absent, and every act
done or ordered done at the
meeting. Upon the demand of any
director, trustee, stockholder or
member, the time when any
director, trustee, stockholder or
member entered or left the meeting
must be noted in the minutes; and
on a similar demand, the yeas and
nays must be taken on any motion
or proposition, and a record thereof
carefully made. The protest of any
director, trustee, stockholder or
member on any action or proposed
action must be recorded in full on
his demand.
The records of all business
transactions of the corporation and the
72
minutes of any meetings shall be open
to inspection by any director, trustee,
stockholder or member of the
corporation at reasonable hours on
business days and he may demand, in
writing, for a copy of excerpts from
said records or minutes, at his
expense.
Any officer or agent of the
corporation who shall refuse to allow
any director, trustees, stockholder or
member of the corporation to examine
and copy excerpts from its records or
minutes, in accordance with the
provisions of this Code, shall be liable
to such director, trustee, stockholder
or member for damages, and in
addition, shall be guilty of an offense
which shall be punishable under
Section 144 of this Code: Provided,
That if such refusal is made pursuant
to a resolution or order of the board of
directors or trustees, the liability
under this section for such action
shall be imposed upon the directors or
trustees who voted for such refusal:
and Provided, further, That it shall be
a defense to any action under this
section that the person demanding to
examine and copy excerpts from the
corporation's records and minutes has
improperly used any information
secured through any prior examination
of the records or minutes of such
corporation or of any other
corporation, or was not acting in good
faith or for a legitimate purpose in
making his demand.
Stock corporations must also
keep a book to be known as the "stock
and transfer book", in which must be
kept a record of all stocks in the
names of the stockholders
alphabetically arranged; the
installments paid and unpaid on all
stock for which subscription has been
made, and the date of payment of any
installment; a statement of every
alienation, sale or transfer of stock
made, the date thereof, and by and to
whom made; and such other entries as
the by-laws may prescribe. The stock
and transfer book shall be kept in the
principal office of the corporation or in
the office of its stock transfer agent
and shall be open for inspection by
any director or stockholder of the
corporation at reasonable hours on
business days.
No stock transfer agent or one
engaged principally in the business of
registering transfers of stocks in behalf
of a stock corporation shall be allowed
to operate in the Philippines unless he

secures a license from the Securities
and Exchange Commission and pays a
fee as may be fixed by the
Commission, which shall be renewable
annually: Provided, That a stock
corporation is not precluded from
performing or making transfer of its
own stocks, in which case all the rules
and regulations imposed on stock
transfer agents, except the payment of
a license fee herein provided, shall be
applicable. (51a and 32a; P.B. No.
268.)
 To summarize:
1. Records of all business transactions
which include, among others, journals,
ledger, contracts, vouchers and
receipts, financial statements and
other books of accounts, income tax
returns, and voting trust agreements
which must be kept and carefully
preserved at its principal office;
2. Minutes of all meetings of stockholders
or members and of the directors or
trustees setting forth in detail the date,
time, and place of meeting, how
authorized, the notice given whether
the same be regular or special, and if
special, the purpose thereof shall be
specified, those present and absent,
and every act done or ordered done
there at which ,must likewise be kept
at the principal office of the
corporation; and,
3. Stock and transfer book showing the
names of the stockholders, the amount
paid or unpaid on all stocks for which
subscription has been made, a
statement of every alienation, sale or
transfer of stock made, if any the date
thereof, and by whom and to whom
made which must also be kept at the
principal office of the corporation or in
the office of its stock transfer agent.
These corporate books and records,
inclusive of all business transactions
and minutes of meetings, are subject
to inspection by any of the directors,
trustees, stockholders or members of
the corporation at reasonable hours on
business days and a copy of excerpts
of said records may be demanded. In
fact, in so far as financial statement is
concerned, the Code clearly provides:
Section 75. Right to financial
statements. - Within ten (10) days from
receipt of a written request of any
stockholder or member, the
corporation shall furnish to him its
most recent financial statement, which
73
shall include a balance sheet as of the
end of the last taxable year and a
profit or loss statement for said taxable
year, showing in reasonable detail its
assets and liabilities and the result of
its operations.
At the regular meeting of stockholders
or members, the board of directors or
trustees shall present to such
stockholders or members a financial
report of the operations of the
corporation for the preceding year,
which shall include financial
statements, duly signed and certified
by an independent certified public
accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00,
the financial statements may be
certified under oath by the treasurer or
any responsible officer of the
corporation. (n)
 May books and records be examined?
Who may examine? Can they copy
them? In whose expense?
- Yes, according to the code:
“The records of all business
transactions of the corporation and
the minutes of any meetings shall
be open to inspection by any
director, trustee, stockholder or
member of the corporation at
reasonable hours on business days
and he may demand, in writing, for
a copy of excerpts from said records
or minutes, at his expense. “
 Is there any defense available that
could be raised? By the corporate
officers to justify the refusal?
- Yes, the code provides that:
“and Provided, further, That it
shall be a defense to any action under
this section that the person
demanding to examine and copy
excerpts from the corporation's
records and minutes has improperly
used any information secured
through any prior examination of
the records or minutes of such
corporation or of any other
corporation, or was not acting in
good faith or for a legitimate
purpose in making his demand.”
 What is the stock and transfer? Where
should stock and transfer be kept?
Can it be kept elsewhere?

“Stock corporations must also
keep a book to be known as the "stock
and transfer book", in which must be
kept a record of all stocks in the
names of the stockholders
alphabetically arranged; the
installments paid and unpaid on all
stock for which subscription has
been made, and the date of payment
of any installment; a statement of
every alienation, sale or transfer of
stock made, the date thereof, and
by and to whom made; and such
other entries as the by-laws may
prescribe. The stock and transfer book
shall be kept in the principal office
of the corporation or in the office of
its stock transfer agent and shall be
open for inspection by any director or
stockholder of the corporation at
reasonable hours on business days. “
 Stock and transfer agent
- Records every movement
- Person who monitors movement by the
minutes or by the hours
- Non-stock corporation- stock and
transfer books
- Club share- membership
 Are stockholders entitled to financial
statements?
- Yes, they are entitled to a copy, the
code provides that:
Section 75. Right to financial
statements. - Within ten (10) days from
receipt of a written request of any
stockholder or member, the
corporation shall furnish to him its
most recent financial statement, which
shall include a balance sheet as of the
end of the last taxable year and a
profit or loss statement for said taxable
year, showing in reasonable detail its
assets and liabilities and the result of
its operations.
At the regular meeting of
stockholders or members, the board of
directors or trustees shall present to
such stockholders or members a
financial report of the operations of the
corporation for the preceding year,
which shall include financial
statements, duly signed and certified
by an independent certified public
accountant.
However, if the paid-up capital
of the corporation is less than
74
P50,000.00, the financial statements
may be certified under oath by the
treasurer or any responsible officer of
the corporation. (n)
- Audited financial statement filed in the
SEC, 120 days from the end of the
final year, or must be filed on or before
April of each year
- Must be stamp received by the BIR
 Those in the stock exchange
- Disclosure of any matter that have to
do with increasing and decreasing
- If not “kulong” violation of securities
and regulation act
 Why is this right of inspection granted
to a stockholder?
- The basis of the right of the
stockholder to inspect the books and
records of the corporation for a proper
purpose is to protect his interest as a
stockholder. Thus, it has been said
that:
“The right of the shareholders
to ascertain how the affairs of
his company are being
conducted by its directors and
officers is founded by his
beneficial interest through
ownership of shares and the
necessity of self-protection.
Managers of some corporations
deliberately keep the
shareholders in ignorance or
under misapprehension as to
the true condition of its affairs.
Business prudence demands
that the investor keep a
watchful eye on the
management and the condition
of the business. Those in
charge of the company may be
guilty of gross incompetence or
dishonesty for years and escape
liability if the shareholders
cannot inspect the records and
obtain information.”
 Is there any distinction of the right of
inspection of a stockholder and that of
a director?
- Yes, as compared to a stockholder or
member, the right of a director or
trustee to inspect and examine
corporate books and records is
considered absolute and unqualified
and without regard to motive. This is
because a director supervises, directs
and manages corporate business and

it is necessary that he be equipped
with all the information and data with
regard to the affairs of the company in
order that he may manage and direct
its operations intelligently and
according to his best judgment in the
interest of all the stockholders he
represents. Thus, while stockholders
and members are entitled to inspect
and examine the books and records as
provided in sections 74 and 75 they
may not gain access to highly sensitive
and confidential information. In the
case of directors. “it is not denied” that
they have such access. This would
include, among others,
a. Marketing strategies and pricing
structure;
b. Budget for expansion and
diversification;
c. Research and development;
d. Sources of funding, availability of
personnel, proposals of mergers or
tie-ups with other firms
 May this right be exercised, other than
by the stockholders themselves?
- Yes, while the right is founded on
stock ownership thus personal in
nature it may be made by the
stockholder’s agent or representative
since it may be unavailing in many
instances
 What if the right of the stockholder to
inspect is denied? What is his remedy?
1. Mandamus
2. Damages either against the
corporation or responsible officer who
refused the inspection
3. Criminal complaint for violation of his
right to inspect and copy excerpts of
all business transactions and minutes
of meeting. Section 74 provides that
Any officer or agent of the corporation
who shall refuse to allow any director,
trustees, stockholder or member of the
corporation to examine and copy
excerpts from its records or minutes,
in accordance with the provisions of
this Code, shall be liable to such
director, trustee, stockholder or
member for damages, and in addition,
shall be guilty of an offense which
shall be punishable under Section 144
of this Code. The latter provision
imposes a penalty of a fine of not less
than P1,000 but not more than
75
P10,000 or an imprisonment for not
less than 30 days but not more than 5
years, or both, at the discretion of the
court. If the refusal is pursuant to a
resolution or order of the board, the
liability shall be imposed upon the
directors or trustees who voted for
such refusal.
 Defense of the responsible corporate
officer
1. That the person demanding has
improperly used any information
secured through any prior examination
of the records or minutes of such
corporation or of any other
corporation;
2. That he was not acting in good faith or
for a legitimate purpose in making his
demand;
3. The right is limited or restricted by
special law or the law of it creation.
W.G. Philpotts vs. Philippine
Manufacturing Co.
- The right of inspection given to a
stockholder can be exercised either by
himself or by any proper
representative or attorney-in-fact, and
either with or without the attendance
of the stockholder
- The right may be regarded as personal,
in the sense that only a stockholder
may enjoy it; but the inspection and
examination may be made by another.
Otherwise it would be unavailing in
many instances.
o Note: Usually hires an auditor or
accountant to safeguard his
interest
Pardo vs. Hercules Lumber Co.
- The law is clear, it may be exercised
during reasonable hours on any
business days, the by-laws cannot
deny this right all together
- The general right given by the statute
may not be lawfully abridged to the
extent attempted in this resolution. It
may be admitted that the officials in
charge of a corporation may deny
inspection when sought at unusual
hours or under other improper
conditions; but neither the executive
officers nor the board of directors have
the power to deprive a stockholder of
the right altogether.

- The corporation, or its responsible
directors and officers cannot unduly
restrict this right of inspection and
may not arbitrarily set a few days of
the year within which the stockholder
may make the inspection.
- A by-law unduly restricting the right of
inspection is undoubtedly invalid
Vegaruth vs. Isabela Sugar Co.
- Directors of a corporation have the
unqualified right to inspect the books
and records of the corporation at all
reasonable hours.
- We do not conceive, however, that a
director or stockholder has any
absolute right to secure certified copies
of the minutes of the corporation until
these minutes have been written up
and approved by the directors.
 May a stockholder of a holding
company inspect the books and
records of a subsidiary?
- It depends
- The right of the stockholders to
examine corporate books extends to
wholly-owned subsidiary which is
completely under the control and
management of the parent company
where he is such a stockholder. But if
the two entities (subsidiary and
parent) are legally being operated as
separate and distinct entities, there is
no such right of inspection on the part
of the stockholder of the parent
company.
AYALA- HOLDING COMPANY/PARENT
COMPANY
SUBSIDIARIES: BPI/GLOBE/AYALA
LAND (not wholly-owned subsidiary)
o HOLD ATLEAST 50 +1 shares in
order to be a PARENT COMPANY
 A, is a stockholder of Ayala, does he
have a right to inspect the records of
its subsidiaries?
- If wholly owned pwede, but its
subsidiaries are not wholly owned
kaya hindi pwede
Gokongwei vs. SEC
- San Miguel corporation owns all of the
shares of stock of San Miguel
International
76
- It is wholly-owned
- It would be in accord with equity, good
faith and fair dealing to construe the
statutory right of petitioner as
stockholder to inspect the books and
records of such wholly-owned
subsidiary which are in respondent
corporation’s possession and control
 If being operated as separate and
distinct corporations, there is no such
right
 Telecommunications- special
franchise, it is a legislative grant
Gonzales vs. PNB
- Provisions of the old law was
unqualified, when it granted
stockholders the right to inspect
- However, whole seemingly enlarging
the right of inspection, the new code
has prescribed limitations to the same.
It is now expressly required as a
condition for such examination that
the one requesting it must not have
been guilty of using improperly any
information secured through a prior
examination and that the person
asking for such examination must be
acting in good faith and for a
legitimate purpose in making his
demand
- Admittedly, he sought to be a
stockholder in order to pry into
transactions entered into by the
respondent bank even before he
became a stockholder. His obvious
purpose was to arm himself with
materials he can use against the
respondent bank for acts done by the
latter when the petitioner was a total
stranger to the same.
- Bank was created by a special law, it
has its own charter and primarily
governed by the law creating them
- The bank is only subject to the
inspection of the Central Bank and
any information pertaining to the bank
is confidential and shall not be
revealed to any person other than the
President of the Philippines, the
Secretary of Finance and the Board of
Directors, nor shall any information
relative to the funds in its custody, its
current accounts or deposits belonging
to private individuals, corporations or
other entities except by order of a
Court of Competent Jurisdiction,
hence inspection sought to by the

petitioner is violative of the provisions
of its charter and is even subject to
penal sanctions
 Assuming you are a stockholder of
PNB, and then it was privatized, may
you already have the right to inspect?
- No, unless its charter has been altered
or repealed it is still subject to the
same law
 3 stages in the life of a corporation
- Formation or birth
- We now discuss the union of the
corporation
- The last would be its death or
dissolution
MERGER AND CONSOLIDATION
 Merger and consolidation
- In corporate parlance it is called spin-
off
- Almost a year ago San Miguel
separated its brewery business
- San Miguel Corporation is now a full
time holding company; it can later on
absorb the company
- Corporations are granted by the code
to merge or consolidate
- most common type of corporate
recognition
- not the same in every case
- but most common in the weal financial
or insolvent condition, aim is to bring
it back to its financial capability
- also a method of recapitalization
o purchase and sale of corporate
assets is another form of corporate
reorganization
 How do you value the assets of the
merging corporation, do you consider
goodwill?
 First secure favorably recommendation
of government agency
- Section 79. Effectivity of
merger or consolidation. - The articles
of merger or of consolidation, signed
77
and certified as herein above required,
shall be submitted to the Securities
and Exchange Commission in
quadruplicate for its approval:
Provided, That in the case of merger
or consolidation of banks or banking
institutions, building and loan
associations, trust companies,
insurance companies, public
utilities, educational institutions
and other special corporations
governed by special laws, the
favorable recommendation of the
appropriate government agency
shall first be obtained. If the
Commission is satisfied that the
merger or consolidation of the
corporations concerned is not
inconsistent with the provisions of this
Code and existing laws, it shall issue a
certificate of merger or of
consolidation, at which time the
merger or consolidation shall be
effective.
If, upon investigation, the
Securities and Exchange Commission
has reason to believe that the
proposed merger or consolidation is
contrary to or inconsistent with the
provisions of this Code or existing
laws, it shall set a hearing to give the
corporations concerned the
opportunity to be heard. Written notice
of the date, time and place of hearing
shall be given to each constituent
corporation at least two (2) weeks
before said hearing. The Commission
shall thereafter proceed as provided in
this Code. (n)
 Merger
- A union effected by absorbing one or
more existing corporations by another
which survives and continues the
combined business
- It is the uniting of two or more
corporations by the transfer of
property to one of them which
continue in existence, the other or the
others being dissolved and merged
therein.
A B
A transfers all assets, properties,
rights, obligations, liabilities to B
B issues shares of stocks in exchange
of the transfer
A is then dissolved and B SURVIVES

o Parties to a merger are called
constituent corporation
 Consolidation
- The uniting or amalgamation of two or
more existing corporations to form a
new corporation
- In merger there is a surviving
corporation, the others are dissolved,
while in consolidation, all constituent
are dissolved and a new one organized
A B
C
 Like all other corporate acts, it
emanates from the board
1. The board of directors or trustees of
each constituent corporations shall
approve a plan of merger or
consolidation setting forth the matters
required in section 76;
2. Approval of the plan by the
stockholders representing 2/3 of
the outstanding capital stock or 2/3
of the member in non-stock
corporations of each of such
corporations at separate corporate
meetings called for the purpose;
3. Prior notice of such meeting, with a
copy or summary of the plan of
merger or consolidation shall be
given to all stockholders or members
at least two (2) weeks prior to the
scheduled meeting, either personally
or registered mail stating the purpose
thereof;
4. Execution of the articles of merger or
consolidation by each constituent
corporations to be signed by the
president or vice-president and
certified by the corporate secretary
or assistant secretary setting forth
the matters required in section 78;
5. Submission of the articles of merger
or consolidation in quadruplicate to
the SEC subject to the requirement of
section 79 that if it involve
corporations under the direct
supervision of any other government
agency or governed by special laws the
favorable recommendation of the
government agency concerned shall
first be secured and;
78
6. Issuance of the certificate of merger
or consolidation by the SEC at which
time the merger or consolidation shall
be effective. If the plan, however, is
believed to be contrary to law, the SEC
shall set a hearing to give the
corporations concerned an opportunity
to be heard upon proper notice and
thereafter, the Commission shall
proceed as provided in the Code.
 Although merger and consolidation is
an express power granted to
corporation, it is subject to limitations,
as maybe proscribed by law
 What would be the effect of merger or
consolidation? <sec. 80>
1. There will only be a single corporation.
In case of merger, the surviving
corporation or the consolidated
corporation in case of consolidation;
2. The termination of the corporate
existence of the constituent
corporations, except that of the
surviving corporation or the
consolidated corporation;
3. The surviving corporation or the
consolidated corporation will possess
all the rights, privileges, immunities
and powers and shall be subject to all
the duties and liabilities of a
corporation organized under the Code;
4. The surviving or consolidated
corporation shall possess all the
rights, privileges, immunities and
franchises of the constituent
corporations, and all property and all
receivables due, including
subscriptions to shares and other
choses in action, and every other
interest of, or belonging to or due to
the constituent corporations shall be
deemed transferred to and vested in
such surviving or consolidated
corporation without further act and
deed; and,
5. The rights of creditors or any lien on
the property of the constituent
corporations shall not be impaired by
the merger or consolidation.
 Is there a liquidation process in case of
merger or consolidation?
- None, there is nothing to distribute
Associated Bank vs. CA
- By virtue of a specific provision in the
merger agreement

- Although the subject promissory note
names CBTC as the payee, the
reference to CBTC in the note shall be
construed, under the very provision of
the merger agreement, as a reference
to petitioner bank, “as if such
reference (was a) direct reference to the
latter for all intents and purposes
- Section 80 par. 4 states:
The surviving or the
consolidated corporation shall
thereupon and thereafter possess all
the rights, privileges, immunities and
franchises of each of the constituent
corporations; and all property, real or
personal, and all receivables due on
whatever account, including
subscriptions to shares and other
choses in action, and all and every
other interest of, or belonging to, or
due to each constituent corporation,
shall be deemed transferred to and
vested in such surviving or
consolidated corporation without
further act or deed; and
- Without further acts, meaning it is
automatic
 When do merger and consolidation
become effective? What if the SEC fails
to act on it without fault attributable
to the corporation involved?
- It will never become valid until and
unless the SEC gives its stamp of
approval
- It will be up to the constituent
corporation to follow it up
- It will never take effect until the SEC
gives its approval and issues the
articles of merger
o Granted 3 years to wing up unless
there is a trustee to wing up its
affairs
 Could there be liquidators and winding
up with respect to the corporation in
consolidation and merger?
- No, there is none
- No assets properties or rights to
collect, they are transferred
- No debts and liabilities to pay because
they become the liabilities of the
surviving corporations
79
- No properties transferred because they
will be the properties of the surviving
corporations
o Hardest part is the financial act,
regarding how many shares would
be issued, probability of collection
and the like
o In merger and consolidation, there
is due diligence and an economist
is usually hired
APPRAISAL RIGHT
 Define appraisal
- Right to withdraw from the corporation
and demand payment of the fair value
of his shares after dissenting from
certain corporate acts involving
fundamental changes in corporate
structure <sec. 81>
 What property? When may this right
be exercises?
- Section 81 provides:
Section 81. Instances of
appraisal right. - Any stockholder of a
corporation shall have the right to
dissent and demand payment of the
fair value of his shares in the following
instances:
1. In case any amendment to the
articles of incorporation has the effect
of changing or restricting the rights of
any stockholder or class of shares, or
of authorizing preferences in any
respect superior to those of
outstanding shares of any class, or of
extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange,
transfer, mortgage, pledge or other
disposition of all or substantially all of
the corporate property and assets as
provided in the Code; and
3. In case of merger or consolidation.
(n)
 May it be exercised by a stockholder
who dissents to the act of a business
other than a primary purpose?
X Co. inc
Principal office is in Quezon city, it
was changed to Paranaque

A objects and makes a written
demand. May he exercise his right of
appraisal?
- It is not available in all amendments of
the corporation
- It must be changing or restricting the
rights of any stockholder
 What if the principal office is changed
from QC to TAWI-TAWI, will it change
or affect the rights of A?
- To some it may change or restrict the
rights to others it may not
 How is the right exercised?
- According to section 82 of the code:
Section 82. How right is
exercised. - The appraisal right may be
exercised by any stockholder who shall
have voted against the proposed
corporate action, by making a written
demand on the corporation within
thirty (30) days after the date on which
the vote was taken for payment of the
fair value of his shares: Provided, That
failure to make the demand within
such period shall be deemed a waiver
of the appraisal right. If the proposed
corporate action is implemented or
affected, the corporation shall pay to
such stockholder, upon surrender of
the certificate or certificates of stock
representing his shares, the fair value
thereof as of the day prior to the date
on which the vote was taken,
excluding any appreciation or
depreciation in anticipation of such
corporate action.
If within a period of sixty (60)
days from the date the corporate
action was approved by the
stockholders, the withdrawing
stockholder and the corporation
cannot agree on the fair value of the
shares, it shall be determined and
appraised by three (3) disinterested
persons, one of whom shall be named
by the stockholder, another by the
corporation, and the third by the two
thus chosen. The findings of the
majority of the appraisers shall be
final, and their award shall be paid by
the corporation within thirty (30) days
after such award is made: Provided,
That no payment shall be made to any
dissenting stockholder unless the
corporation has unrestricted retained
earnings in its books to cover such
payment: and Provided, further, That
upon payment by the corporation of
the agreed or awarded price, the
80
stockholder shall forthwith transfer his
shares to the corporation. (n)
X Co.
Principal Office- QC, it was changed to
Manila
A objects and makes a written demand
for payment of fair value of shares.
Can he make a demand of payment of
shares?
 True or False, no stockholder in a
stock corporation can ever demand if
the principal office is amended,
changing it from QC to Manila
- False, a stockholder in a close
corporation may for any reason compel
the close corporation that he be paid
the fair value of his shares
Can he exercise his appraisal rights in
the first place? He hasn’t even paid his
subscription in full.
 May a stockholder who hasn’t paid his
subscription in full exercise his
appraisal rights?
- Yes, he can exercise his appraisal
rights, by reconciling the provisions of
section 72, section 82 and section 86
Section 72. Rights of unpaid
shares. - Holders of subscribed shares
not fully paid which are not delinquent
shall have all the rights of a
stockholder. (n)
Section 82. How right is
exercised. - The appraisal right may be
exercised by any stockholder who shall
have voted against the proposed
corporate action, by making a written
demand on the corporation within
thirty (30) days after the date on which
the vote was taken for payment of the
fair value of his shares: Provided, That
failure to make the demand within
such period shall be deemed a waiver
of the appraisal right. If the proposed
corporate action is implemented or
affected, the corporation shall pay to
such stockholder, upon surrender of
the certificate or certificates of
stock representing his shares, the
fair value thereof as of the day prior to
the date on which the vote was taken,
excluding any appreciation or
depreciation in anticipation of such
corporate action.
If within a period of sixty (60)
days from the date the corporate

action was approved by the
stockholders, the withdrawing
stockholder and the corporation
cannot agree on the fair value of the
shares, it shall be determined and
appraised by three (3) disinterested
persons, one of whom shall be named
by the stockholder, another by the
corporation, and the third by the two
thus chosen. The findings of the
majority of the appraisers shall be
final, and their award shall be paid by
the corporation within thirty (30) days
after such award is made: Provided,
That no payment shall be made to any
dissenting stockholder unless the
corporation has unrestricted retained
earnings in its books to cover such
payment: and Provided, further, That
upon payment by the corporation of
the agreed or awarded price, the
stockholder shall forthwith transfer his
shares to the corporation. (n)
Section 86. Notation on
certificates; rights of transferee. -
Within ten (10) days after demanding
payment for his shares, a dissenting
stockholder shall submit the
certificates of stock representing his
shares to the corporation for notation
thereon that such shares are
dissenting shares. His failure to do so
shall, at the option of the
corporation, terminate his rights
under this Title. If shares represented
by the certificates bearing such
notation are transferred, and the
certificates consequently cancelled, the
rights of the transferor as a dissenting
stockholder under this Title shall
cease and the transferee shall have all
the rights of a regular stockholder; and
all dividend distributions which would
have accrued on such shares shall be
paid to the transferee. (n)
- Notation is not mandatory, it is even
discretionary because the code
provides “at the option of the
corporation” because it never issued
one for that matter since the
subscriptions are not yet fully paid
 May the corporation be compelled to
pay the interest of A
300 T, 150T, 150T and 0 unrestricted
retained earnings
 No stockholder may be able to compel
the corporation to pay the value of his
shares if the corporation has no
unrestricted retained earnings
81
- False, a stockholder of a close
corporation may for any reason,
provided only that the corporation has
sufficient assets to cover its debts and
liabilities
o General rule: there should be
unrestricted retained earnings
o Exception: section 105 “close
corporation”
 The procedure and requirements for
the valid exercise of this rights are:
1. The stockholder must have voted
against the proposed corporate action
in any of the instances allowed by law
for the exercise of the right of
appraisal;
2. The written demand for payment must
be made by the dissenting stockholder
within thirty (30) days after the date
on which the vote was taken thereon.
Failure to make the demand within the
said period shall be deemed a waiver
on the part of the stockholder
concerned to exercise his appraisal
right;
3. Surrender of the certificate of stock by
the dissenting stockholder for notation
in the corporate books and the
payment by the corporation of the fair
market value of the said shares as of
the day prior to the date on which the
vote was taken. If the stockholder and
the corporation cannot agree on the
fair market value thereof, the same
shall be determined in accordance
with the provision of paragraph 2 of
section 82;
4. The fair value of the shares of the
dissenting stockholder must be paid
by the corporation only if it has
“unrestricted retained earnings” in its
books to cover such payment. If the
corporation has no unrestricted
retained earnings, the dissenting
stockholder may not, therefore, be able
to effectively exercise his appraisal
rights;
5. Upon payment of the shares by the
corporation, the dissenting stockholder
shall transfer his shares to the
corporation.
 What would be the effect if the
stockholder exercises his appraisal
rights? What happens to his voting
and dividend rights if he exercises his
appraisal rights?

- It will be suspended, with a limitation
of 30 days, as provided for by section
83 of the code:
Section 83. Effect of demand
and termination of right. - From the
time of demand for payment of the fair
value of a stockholder's shares until
either the abandonment of the
corporate action involved or the
purchase of the said shares by the
corporation, all rights accruing to
such shares, including voting and
dividend rights, shall be suspended
in accordance with the provisions of
this Code, except the right of such
stockholder to receive payment of
the fair value thereof: Provided,
That if the dissenting stockholder is
not paid the value of his shares
within 30 days after the award, his
voting and dividend rights shall
immediately be restored. (n)
 How do you compare the rights of a
stockholder, declared delinquent
compared to a dissenting stockholder
exercising his appraisal rights
 What if a stockholder exercising his
appraisal rights is also a director, will
he also lose his rights as a
stockholder?
- The shares remain to stand in his
name until he is paid, unless there is a
stipulation in the by-laws
 When may the right to be paid the
value of his shares cease? Can he
withdraw his right of appraisal?
- Yes, he may withdraw, but there must
be consent by the corporation as
provided for by section 83 of the code:
Section 84. When right to
payment ceases. - No demand for
payment under this Title may be
withdrawn unless the corporation
consents thereto. If, however, such
demand for payment is withdrawn
with the consent of the corporation, or
if the proposed corporate action is
abandoned or rescinded by the
corporation or disapproved by the
Securities and Exchange Commission
where such approval is necessary, or if
the Securities and Exchange
Commission determines that such
stockholder is not entitled to the
appraisal right, then the right of said
stockholder to be paid the fair value of
his shares shall cease, his status as a
stockholder shall thereupon be
restored, and all dividend distributions
82
which would have accrued on his
shares shall be paid to him. (n)
 Instances when the right of a
dissenting stockholder to be paid the
fair value of his shares ceases.
1. When he withdraws his demand for
payment and the corporation consents
thereto;
2. When the proposed action is
abandoned or rescinded by the
corporation;
3. When the proposed action is
disapproved by the SEC where such
approval is necessary;
4. When the SEC determines that he is
not entitled to exercise his appraisal
right;
5. When he fails to submit the stock
certificate within ten (10) days from
demand to the corporation for notation
that such shares are dissenting
shares; and,
6. If the shares are transferred and the
certificate subsequently cancelled.
 Who bears the cost of appraisal?
- It depends
- The corporation bears the cost if
a. The price offered by the corporation
is lower than the fair value of the
shares of the dissenting
stockholder as determined by the
appraisers;
b. Where an action is filed by the
dissenting stockholder to recover
such fair value and the refusal of
the stockholder to receive payment
is found by the court to be
justified.
- Dissenting stockholder will be liable
for the cost and expenses of appraisal
when
a. When the price offered by the
corporation is approximately the
same as the fair value ascertained
by the appraisers;
b. Where the action filed by the
dissenting stockholder and his
refusal to accept payment is found
by the court to be unjustified.

 The dissenting stockholder may also
sell, transfer or assign his shares
Section 86. Notation on
certificates; rights of transferee. -
Within ten (10) days after demanding
payment for his shares, a dissenting
stockholder shall submit the
certificates of stock representing his
shares to the corporation for notation
thereon that such shares are
dissenting shares. His failure to do so
shall, at the option of the corporation,
terminate his rights under this Title. If
shares represented by the
certificates bearing such notation
are transferred, and the certificates
consequently cancelled, the rights
of the transferor as a dissenting
stockholder under this Title shall
cease and the transferee shall have
all the rights of a regular
stockholder; and all dividend
distributions which would have
accrued on such shares shall be paid
to the transferee. (n)
NON-STOCK CORPORATIONS
 What is a non-stock corporation?
- A non-stock corporation is one where
no part of its income is distributable
as dividends to its members, trustees,
or officers, subject to the provisions of
this code on dissolution
 What provision of the code will govern
non-stock corporations? Would the
provision governing stock corporations
also apply to non-stock corporations?
- Yes, 2nd par. Of section 87 provides:
The provisions governing stock
corporation, when pertinent, shall be
applicable to non-stock corporations,
except as may be covered by specific
provisions of this Title. (n)
 How is the right to vote exercised in a
non-stock corporation compared to a
stock corporation
 May a member in a non-stock
corporation vote cumulatively?
- General rule is NO
 May it be granted or allowed by the by-
laws?
- Yes
 May the right to cumulative voting be
denied in a stock corporation?
83
- No, Doctrine of Limited Capacity
 May members in a non-stock
corporation vote by proxy?
- Yes, section 89 provides that:
“Unless otherwise provided in
the articles of incorporation or the by-
laws, a member may vote by proxy in
accordance with the provisions of this
Code. (n) “
 May the right to vote by proxy be
validly denied in a stock corporation?
- No, it is a matter of right in a stock
corporation
 May member of a non-stock
corporation cast their vote by text?
- Yes, subject to the approval and terms
and conditions of the SEC <sec. 89>
“Voting by mail or other similar
means by members of non-stock
corporations may be authorized by the
by-laws of non-stock corporations with
the approval of, and under such
conditions which may be prescribed
by, the Securities and Exchange
Commission. “
 How about in stock?
- Voting by mail or other similar means
may also be authorized and allowed by
the by-laws of non-stock corporations.
Generally, in stock corporations, the
vote must be cast at a duly constituted
meeting. The only exception, in case of
the latter, is in the matter of general
amendment of the articles of
incorporation where the written assent
of the stockholder may be sufficient.
 How is the governing board constituted
in a non-stock corporation? How many
members?
- It may exceed 15 in a non-stock
corporation unless the AOI or by-laws
provide otherwise, as provided for by
section 92 of the code:
Section 92. Election and term
of trustees. - Unless otherwise provided
in the articles of incorporation or the
by-laws, the board of trustees of non-
stock corporations, which may be
more than fifteen (15) in number as
may be fixed in their articles of
incorporation or by-laws, shall, as
soon as organized, so classify

themselves that the term of office of
one-third (1/3) of their number shall
expire every year; and subsequent
elections of trustees comprising one-
third (1/3) of the board of trustees
shall be held annually and trustees so
elected shall have a term of three (3)
years. Trustees thereafter elected to fill
vacancies occurring before the
expiration of a particular term shall
hold office only for the unexpired
period.
No person shall be elected as
trustee unless he is a member of the
corporation.
Unless otherwise provided in
the articles of incorporation or the by-
laws, officers of a non-stock
corporation may be directly elected by
the members. (n)
 Qualifications?
1. He is a member of the association;
2. Majority thereof must be residents of
the Philippines; and,
3. Other qualifications as may be
provided for in the by-laws.
 Governing board in a non-stock
- Board of Trustees, however section
138 provides that:
Section 138. Designation of
governing boards. - The provisions of
specific provisions of this Code to the
contrary notwithstanding, non-stock
or special corporations may,
through their articles of
incorporation or their by-laws,
designate their governing boards by
any name other than as board of
trustees. (n)
 Disqualifications
- Section 27 also applies to a non-stock
corporation, same holds true to the
manner of removal <sec. 29 ad 30>
Section 27. Disqualification of
directors, trustees or officers. - No
person convicted by final judgment of
an offense punishable by
imprisonment for a period exceeding
six (6) years, or a violation of this Code
committed within five (5) years prior to
the date of his election or
appointment, shall qualify as a
84
director, trustee or officer of any
corporation. (n)
Section 29. Vacancies in the
office of director or trustee. - Any
vacancy occurring in the board of
directors or trustees other than by
removal by the stockholders or
members or by expiration of term, may
be filled by the vote of at least a
majority of the remaining directors or
trustees, if still constituting a quorum;
otherwise, said vacancies must be
filled by the stockholders in a regular
or special meeting called for that
purpose. A director or trustee so
elected to fill a vacancy shall be elected
only or the unexpired term of his
predecessor in office.
Any directorship or trusteeship
to be filled by reason of an increase in
the number of directors or trustees
shall be filled only by an election at a
regular or at a special meeting of
stockholders or members duly called
for the purpose, or in the same
meeting authorizing the increase of
directors or trustees if so stated in the
notice of the meeting. (n)
Section 30. Compensation of
directors. - In the absence of any
provision in the by-laws fixing their
compensation, the directors shall not
receive any compensation, as such
directors, except for reasonable per
diems: Provided, however, That any
such compensation other than per
diems may be granted to directors by
the vote of the stockholders
representing at least a majority of the
outstanding capital stock at a regular
or special stockholders' meeting. In no
case shall the total yearly
compensation of directors, as such
directors, exceed ten (10%) percent of
the net income before income tax of
the corporation during the preceding
year. (n)
 Who elects the other officers?
- Directly by the general members
unless the by-laws or articles provide
otherwise. <sec.92>
“Unless otherwise provided in
the articles of incorporation or the by-
laws, officers of a non-stock
corporation may be directly elected by
the members. (n) “
 In stock corporations who elect
officers?

- Directors
 The provision that stock corporations
cannot validly provide that members
cannot be voted by stockholders is
only a general rule because there is an
exception section 97 of the code states
that:
The articles of incorporation
of a close corporation may provide
that the business of the corporation
shall be managed by the
stockholders of the corporation
rather than by a board of directors.
So long as this provision continues in
effect:
1. No meeting of stockholders need be
called to elect directors;
2. Unless the context clearly requires
otherwise, the stockholders of the
corporation shall be deemed to be
directors for the purpose of applying
the provisions of this Code; and
3. The stockholders of the corporation
shall be subject to all liabilities of
directors.
The articles of incorporation
may likewise provide that all officers
or employees or that specified
officers or employees shall be elected
or appointed by the stockholders,
instead of by the board of directors.
 Nature of membership is non-
transferrable and personal in nature
unless the articles of incorporation or
by-laws provide otherwise
Section 90. Non-transferability
of membership. - Membership in a
non-stock corporation and all rights
arising there from are personal and
non-transferable, unless the articles of
incorporation or the by-laws otherwise
provide. (n)
 How is a membership requirement in a
non-stock corporation
A holds a membership certificate
B goes to the corporation and compels
the corporation to record the transfer
in his name
- Membership in non-stock corporations
may be acquired by complying with the
provisions of its rules prescribed in the
by-laws. This is in consonance with
the express power granted by law
85
under section 36, paragraph 6 of the
code, authorizing them to admit
members thereof and that authority
carries with it the power to prescribe
rules on membership. It has thus been
stated that in the absence of charter or
statutory restrictions, non-stock
corporations may determine who shall
be admitted to membership and how
they shall be admitted.
Section 36. Corporate powers
and capacity. - Every corporation
incorporated under this Code has the
power and capacity:
6. In case of stock corporations, to
issue or sell stocks to subscribers and
to sell stocks to subscribers and to sell
treasury stocks in accordance with the
provisions of this Code; and to admit
members to the corporation if it be a
non-stock corporation;
- They can provide the manner in which
to admit depending on their own rules
 The power or authority to terminate
members in non-stock corporations is
said to be inherent but strict
compliance with the manner and
procedure laid down in the by-laws
must be observed, otherwise it may
render the expulsion ineffective and
invalid.
Section 91. Termination of
membership. - Membership shall be
terminated in the manner and for the
causes provided in the articles of
incorporation or the by-laws.
Termination of membership shall have
the effect of extinguishing all rights of
a member in the corporation or in its
property, unless otherwise provided in
the articles of incorporation or the by-
laws. (n)
 Power is inherent and may be
exercised in certain situations:
1. When an offense is committed
which, although it has no
immediate relation to a member’s
duty as such, it is so infamous as
to render him unfit for society of
honest men, which is indictable at
common law;
2. When the offense is a violation of
his duty as member of the
corporation; and,
3. When the offense is of a mixed
nature, being both against his duty
 86

as a member of the corporation, d. There is lack of jurisdiction on the

and also indictable at common law.
If the conduct of the member comes
within any of this cases, it is a ground
for valid expulsion although it may not
be expressly made so by the by-laws
Chinese YMCA vs. Ching
- Right of the corporation to choose who
the members are, cannot be inquired
or intervened by the court
- The appealed decision thus
contravened the establish principle
that the courts cannot strip a member
of a non-stock corporation of his
membership therein without cause.
part of the tribunal conducting the
proceedings, where the
organization exceeds its powers, or
where the proceedings are
otherwise illegal
 Corporations, stock and non-stock,
may be dissolved in accordance and
pursuant to the provisions of Sections
118 to 121 of the Corporation Code
and the pertinent provisions of P.D.
902-A, as amended. If such be the
case, the assets of the corporation are
to be distributed in accordance with
law and established jurisprudence.
 If a non-stock corporation is dissolved
how will its properties be distributed?

Lions Club International vs. CA Section 94. Rules of

distribution. - In case dissolution of
a non-stock corporation in
- Courts will not generally interfere on
accordance with the provisions of
matters involving the internal affairs of
this Code, its assets shall be
an unincorporated association such as
applied and distributed as follows:
election contest unless the acts
complained of are arbitrary,
oppressive, fraudulent, violative of civil 1. All liabilities and obligations of
rights and the like the corporation shall be paid,
satisfied and discharged, or
adequate provision shall be made
- General rule is that the courts will not
therefore;
interfere with the internal affairs of an
unincorporated association so as to
settle disputes between the members, 2. Assets held by the corporation
or questions of policy, discipline, or upon a condition requiring return,
internal government, so long as the transfer or conveyance, and which
government of the society is fairly and condition occurs by reason of the
honestly administered in conformity dissolution, shall be returned,
with its by-laws and the law of the transferred or conveyed in
land, and no property or civil rights accordance with such
are involved. requirements;

3. Assets received and held by the

- Exceptions are the following:
corporation subject to limitations
permitting their use only for
a. Where law and justice so require, charitable, religious, benevolent,
and the proceedings of the educational or similar purposes,
association are subject to judicial but not held upon a condition
review where there is fraud, requiring return, transfer or
oppression, or bad faith, or where conveyance by reason of the
the action complained of is dissolution, shall be transferred or
capricious, arbitrary, or unjustly conveyed to one or more
discriminatory corporations, societies or
organizations engaged in activities
b. To grant relief in case property or in the Philippines substantially
civil rights are invaded, although it similar to those of the dissolving
has also been held that the corporation according to a plan of
involvement of property rights does distribution adopted pursuant to
not necessarily authorize judicial this Chapter;
intervention, in the absence of
arbitrariness, fraud or collusion. 4. Assets other than those
mentioned in the preceding
c. Are violative of the laws of the paragraphs, if any, shall be
society, or the law of the land, as distributed in accordance with the
by depriving the person of due provisions of the articles of
process of law incorporation or the by-laws, to the

extent that the articles of
incorporation or the by-laws,
determine the distributive rights of
members, or any class or classes of
members, or provide for
distribution; and
CLOSE CORPORATIONS
5. In any other case, assets may be
distributed to such persons,
societies, organizations or
corporations, whether or not
organized for profit, as may be
specified in a plan of distribution
adopted pursuant to this Chapter.
(n)
 Non-stock corporations with 4Billion
funds, may it be distributed for and
among its members?
- Section 94 number 3 provides:
3. Assets received and held by
the corporation subject to limitations
permitting their use only for
charitable, religious, benevolent,
educational or similar purposes, but
not held upon a condition requiring
return, transfer or conveyance by
reason of the dissolution, shall be
transferred or conveyed to one or more
corporations, societies or organizations
engaged in activities in the Philippines
substantially similar to those of the
dissolving corporation according to a
plan of distribution adopted pursuant
to this Chapter;
- If there is no distributive agreement
then they may do so through a plan of
distribution under section 95
Section 95. Plan of distribution
of assets. - A plan providing for the
distribution of assets, not inconsistent
with the provisions of this Title, may
be adopted by a non-stock corporation
in the process of dissolution in the
following manner:
The board of trustees shall, by
majority vote, adopt a resolution
recommending a plan of distribution
and directing the submission thereof
to a vote at a regular or special
meeting of members having voting
rights. Written notice setting forth the
proposed plan of distribution or a
summary thereof and the date, time
and place of such meeting shall be
given to each member entitled to vote,
within the time and in the manner
provided in this Code for the giving of
notice of meetings to members. Such
plan of distribution shall be adopted
upon approval of at least two-thirds
87
(2/3) of the members having voting
rights present or represented by proxy
at such meeting. (n)
 Section 96. Definition and
applicability of Title. - A close
corporation, within the meaning of this
Code, is one whose articles of
incorporation provide that: (1) All the
corporation's issued stock of all
classes, exclusive of treasury shares,
shall be held of record by not more
than a specified number of persons,
not exceeding twenty (20); (2) all the
issued stock of all classes shall be
subject to one or more specified
restrictions on transfer permitted
by this Title; and (3) The
corporation shall not list in any
stock exchange or make any public
offering of any of its stock of any
class. Notwithstanding the foregoing, a
corporation shall not be deemed a
close corporation when at least two-
thirds (2/3) of its voting stock or voting
rights is owned or controlled by
another corporation which is not a
close corporation within the meaning
of this Code.
- Between and among themselves, they
feel and act alike
- Not more than 20 stockholders
- Specified persons, if you are not
specified, you cannot be a stockholder
- All the issued stocks of all classes is
subject to restrictions
- Shall not be listed in the stock
exchange not publicly offered
- 3 qualifying conditions must be
contained in the articles of
incorporation, to be considered as a
close corporation, if not, it will not be
considered as such and will be
governed by the general provisions of
the code
- Even if 100 % is owned by one person
it will not be considered a close
corporation without the 3 qualifying
provisions
- Identity of stockholders, specified
persons

- Active management either as directors
or partners in management
- Combination of the corporation and
partnership type of business
 May any type of corporation, be
organized as such close corporation?
- No, the 3 qualifying conditions must
be present
 What if 2/3 of the outstanding capital
stock is owned by another corporation
which is also a close corporation, will
it be a close corporation?
- No, it will only be a closed corporation
if 2/3 of the voting stocks of a close
corporation is also owned by a close
corporation. It must be “voting” stocks
- Even if another corporation owns or
controls 2/3 of the voting stocks of a
close corporation, the latter may still
be considered as such close
corporation if the corporation owning
or controlling the shares is also a close
corporation.
“Notwithstanding the foregoing,
a corporation shall not be deemed a
close corporation when at least two-
thirds (2/3) of its voting stock or voting
rights is owned or controlled by
another corporation which is not a
close corporation within the meaning
of this Code.”
 What kind of corporations cannot be a
close corporation?
1. Mining or oil companies,
2. Stock exchange
3. Banks and insurance companies,
4. Public utilities
5. Educational institutions
6. Corporations vested with public
interest
 Classification of directors
- Ordinary stock- no such right
- Close corporation-yes there is such a
right
 Section 97 is a permissive provision
88
Section 97. Articles of
incorporation. - The articles of
incorporation of a close corporation
may provide:
1. For a classification of shares or
rights and the qualifications for
owning or holding the same and
restrictions on their transfers as may
be stated therein, subject to the
provisions of the following section;
2. For a classification of directors into
one or more classes, each of whom
may be voted for and elected solely by
a particular class of stock; and
3. For a greater quorum or voting
requirements in meetings of
stockholders or directors than those
provided in this Code.
 After classification what then?
- After classification, qualification and
then restriction as provided for under
the 3 qualifying conditions in section
96
 Cumulative voting is restricted in
close corporations if will be elected
solely by a particular class
 In a close corporation, the articles of
incorporation may provide for a greater
quorum and voting requirement in
meetings of both stockholders or
directors to increase the veto power of
minority stockholders, unlike in a
stock corporation wherein only
directors meetings may provide for
greater quorum requirement and in
stockholders meeting which may not
be altered or increased, as provide for
in section 25, following the doctrine of
limited capacity
 The articles of a close corporation may
likewise provide that the business of
the corporation shall be managed by
the stockholders rather than by the
board of directors. However the same
must contain the continuing
provisions required in paragraph 2 of
section 97, that is:
1. No meeting of stockholders need be
called to elect directors;
2. Unless the context clearly requires
otherwise, the stockholders of the
corporation shall be deemed to be
directors; and;

3. The stockholders of the corporation
shall be subject to all liabilities of
directors.
 Liability of stockholders acting as
directors in a close corporation are
more extensive since they are
personally liable for corporate torts
unless the corporation has obtained a
reasonable adequate liability
insurance, unlike a ordinary stock
corporation, wherein directors thereof
are only liable for corporate torts only
if they have been negligent or acted
fraudulently in the performance of
their functions.
 Restrictions
- In ordinary stock corporations, the
restrictions must appear in the articles
of incorporation as well as the
certificate of stocks
- In a close corporation, the restrictions
must appear in the articles of
incorporation, the by-laws and the
certificate of stocks. Otherwise, the
same shall not be binding on any
purchaser thereof in good faith
 What if the stockholders do not want
to exercise their right or option to
purchase may it be sold to any
person?
- Yes, any third person, section 98
provides:
Section 98. Validity of
restrictions on transfer of shares. -
Restrictions on the right to transfer
shares must appear in the articles of
incorporation and in the by-laws as
well as in the certificate of stock;
otherwise, the same shall not be
binding on any purchaser thereof in
good faith. Said restrictions shall not
be more onerous than granting the
existing stockholders or the
corporation the option to purchase the
shares of the transferring stockholder
with such reasonable terms,
conditions or period stated therein. If
upon the expiration of said period,
the existing stockholders or the
corporation fails to exercise the
option to purchase, the transferring
stockholder may sell his shares to
any third person.
o ordinary stock corporations are
liable only if acted in Bad faith,
fraud or negligence in
performance of duty
89
 What if there are already 20
stockholders and they want to add 2
more, may it compel?
- In ordinary stock corporations, they
may compel by mandamus
- In close corporations, may not be
compelled to admit because it
breaches the qualifying conditions
 Since they cannot be compelled, may
they admit?
- Yes, provided all the stockholders
consented or instead of consenting
they decide to amend their articles of
incorporation
- Will have to amend the articles of
incorporation to accommodate other
purchasers of share
- Will cease to be a close corporation if it
amends and becomes in excess of 20
o Unless all the stockholders
consent they “may”
 What if the other stockholders object
to register? What will be the remedy of
the transferee?
- His remedy is rescission. The effect of
rescission is mutual restitution
 How about the stockholder, what is his
recourse?
- He may compel the close corporation
to purchase his shares at their fair
value for any reason, provided the
corporation has sufficient assets in its
books to cover the debts and liabilities
exclusive of capital
- In a close corporation, there is a
withdrawing stockholder, unlike in an
ordinary stockholder where there is
none, they may only do so in the
exercise of appraisal rights
Section 105. Withdrawal of
stockholder or dissolution of
corporation. - In addition and without
prejudice to other rights and remedies
available to a stockholder under this
Title, any stockholder of a close
corporation may, for any reason,
compel the said corporation to
purchase his shares at their fair
value, which shall not be less than
their par or issued value, when the
corporation has sufficient assets in
its books to cover its debts and

liabilities exclusive of capital stock:
Provided, That any stockholder of a
close corporation may, by written
petition to the Securities and
Exchange Commission, compel the
dissolution of such corporation
whenever any of acts of the directors,
officers or those in control of the
corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly
prejudicial to the corporation or any
stockholder, or whenever corporate
assets are being misapplied or wasted.
 Agreements may also be entered in a
close corporation <sec.100>
- They can even agree to be partners in
management
- Pre-incorporation
- Manner in which the business of the
corporation shall be managed
 Board resolution
- Ordinary stock corporations- sit and
act as a body at a duly constituted
meeting, they may do so by virtue of
the E-Commerce Act through
teleconference or video conference
 Exception to the rule: other officers
may be directly appointed and hired by
the stockholders
 Close corporations may validly act
even without a meeting provided the
conditions are obtained
Section 101. When board
meeting is unnecessary or improperly
held. - Unless the by-laws provide
otherwise, any action by the directors
of a close corporation without a
meeting shall nevertheless be deemed
valid if:
1. Before or after such action is taken,
written consent thereto is signed by all
the directors; or
2. All the stockholders have actual or
implied knowledge of the action and
make no prompt objection thereto in
writing; or
3. The directors are accustomed to
take informal action with the express
or implied acquiescence of all the
stockholders; or
4. All the directors have express or
implied knowledge of the action in
90
question and none of them makes
prompt objection thereto in writing.
 Pre-emptive rights in a close
corporation is absolute
Section 102. Pre-emptive right
in close corporations. - The pre-emptive
right of stockholders in close
corporations shall extend to all stock
to be issued, including reissuance of
treasury shares, whether for money,
property or personal services, or in
payment of corporate debts, unless the
articles of incorporation provide
otherwise.
 Why is it said to be absolute?
- Because there is no public offering in a
close corporation, otherwise it will not
be considered as close
 In a close corporation the pre-emptive
rights is broadened to include all
issues without exception unless denied
or limited by the articles of
incorporation
 Section 39 is the governing provision
concerning rights of the stockholder in
an ordinary stock corporation and it
may be denied. If it is not denied a
stockholder can exercise his pre-
emptive rights for all issues of shares
whether money, property or previously
incurred indebtedness.
Section 39. Power to deny pre-
emptive right. - All stockholders of a
stock corporation shall enjoy pre-
emptive right to subscribe to all issues
or disposition of shares of any class, in
proportion to their respective
shareholdings, unless such right is
denied by the articles of incorporation
or an amendment thereto: Provided,
That such pre-emptive right shall not
extend to shares to be issued in
compliance with laws requiring stock
offerings or minimum stock ownership
by the public; or to shares to be issued
in good faith with the approval of the
stockholders representing two-thirds
(2/3) of the outstanding capital stock,
in exchange for property needed for
corporate purposes or in payment of a
previously contracted debt.
 Are treasury shares covered in the
exercise of pre-emptive rights in
ordinary stock corporations?
 As regards amendments
Section 103. Amendment of
articles of incorporation. - Any

amendment to the articles of
incorporation which seeks to delete or
remove any provision required by this
Title to be contained in the articles of
incorporation or to reduce a quorum or
voting requirement stated in said
articles of incorporation shall not be
valid or effective unless approved by
the affirmative vote of at least two-
thirds (2/3) of the outstanding capital
stock, whether with or without voting
rights, or of such greater proportion of
shares as may be specifically provided
in the articles of incorporation for
amending, deleting or removing any of
the aforesaid provisions, at a meeting
duly called for the purpose.
 What happens if there is a deadlock?
- Section 104 provides for a remedy
Section 104. Deadlocks. -
Notwithstanding any contrary
provision in the articles
incorporation or by-laws or agreement
of stockholders of a close corporation,
if the directors or stockholders are so
divided respecting the management of
the corporation's business and affairs
that the votes required for any
corporate action cannot be obtained,
with the consequence that the
business and affairs of the corporation
can no longer be conducted to the
advantage of the stockholders
generally, the Securities and Exchange
Commission, upon written petition by
any stockholder, shall have the power
to arbitrate the dispute. In the exercise
of such power, the Commission shall
have authority to make such order as
it deems appropriate, including an
order: (1) cancelling or altering any
provision contained in the articles of
incorporation, by-laws, or any
stockholder's agreement; (2)
cancelling, altering or enjoining any
resolution or act of the corporation or
its board of directors, stockholders, or
officers; (3) directing or prohibiting any
act of the corporation or its board of
directors, stockholders, officers, or
other persons party to the action; (4)
requiring the purchase at their fair
value of shares of any stockholder,
either by the corporation regardless of
the availability of unrestricted retained
earnings in its books, or by the other
stockholders; (5) appointing
provisional director; (6) dissolving the
corporation; or (7) granting such other
relief as the circumstances may
warrant.
A provisional director shall be
an impartial person who is neither a
91
stockholder nor a creditor of the
corporation or of any subsidiary or
affiliate of the corporation, and whose
further qualifications, if any, may be
determined by the Commission. A
provisional director is not a receiver of
the corporation and does not have the
title and powers of a custodian or
receiver. A provisional director shall
have all the rights and powers of a
duly elected director of the
corporation, including the right to
notice of and to vote at meetings of
directors, until such time as he shall
be removed by order of the
Commission or by all the stockholders.
His compensation shall be determined
by agreement between him and the
corporation subject to approval of the
Commission, which may fix his
compensation in the absence of
agreement or in the event of
disagreement between the provisional
director and the corporation.
of
- Powers of the SEC in intra-corporate
concerns has been transferred to the
proper commercial courts
- Prohibit, even if acting in good faith
- Provisional director appointed by the
court
- Requiring the purchase, irrespective of
unrestricted retained earnings
- The provision of the law above-quoted
gives the SEC a very wide discretion in
respect to management of a close
corporation in the event of a deadlock.
It may:
1. Cancel or alter any provision in the
articles of incorporation, by-laws or
any stockholders agreement
2. Cancel, alter or enjoin any
resolution or other act of the
corporation or its board of
directors, stockholders or officers
3. Prohibit any act of the corporation
or its board of directors,
stockholders or officers or other
persons party to the action;
4. Requiring the purchase of the par
value of the shares of any
a stockholders, either by the
corporation regardless of
availability of unrestricted
earnings, or by the other
shareholders,
5. Appointment of a provisional
director
 92

6. Dissolving the corporation; or

adequate liability
7. Other relief as the circumstances insurance
may warrant.
7. Directors can Directors must, as a
 Section 105 validly act even rule, act as a body at
without a meeting a duly constituted
- Dishonesty is a ground for dissolution meeting
of a close corporation
8. Agreements Not valid and
- Even one stockholder may petition for between binding since
dissolution stockholders stockholders’
regarding the agreement cannot
o when there is a relief available, operations of the limit the discretion of
dissolution would not be business can the Board to manage
available in an ordinary validly be made corporate affairs
corporation
9. To the extent Ordinarily, no such
that directors may classification and no
CLOSE ORDINARY STOCK be classified into restrictions on
CORPORATION CORPORATION one or more cumulative voting
classes and to be
voted solely by a
1. The number No limitation as to particular class of
of stockholders number of stock, cumulative
cannot exceed 20 shareholder voting may, in
effect, be restricted
2. To the extent Maximum number of
that all directors is 15 10. The articles of Officers are elected
stockholders can incorporation may by the Board of
be deemed provide that all Directors
directors, the officers shall be
number of elected or
directors can appointed by the
effectively be more stockholders
than 15
11. It may provide Although the articles
3. Shares of Generally no for greater quorum of incorporation or
stock are subject to restriction on and voting by-laws may provide
specified transfer of shares requirements in for greater quorum
restrictions meetings of and voting
stockholders and requirements in
4. Shares of No prohibition directors directors’ meeting
stock are under section 25,
prohibited from those for
being listed in the stockholders’
stock exchange or meeting cannot
offered for sale to generally be altered
the public
12. Restriction on Valid and binding if
5. Stockholders Management is transfer of shares indicated in the
may take an active lodged in the Board should be articles of
part in corporate of Directors indicated in the incorporation and
management by articles of stock certificates
vesting incorporation, by-
management to laws and stock
them rather than a certificates
Board of Director
13. Pre-emptive Pre-emptive rights
6. Those active Directors are liable rights of may be denied as
in management are for torts only if they stockholders is provided for in
personally liable have acted broader as it section 39
for corporate torts negligently or include all issues
unless the fraudulently without exception
corporation has
obtained an 14. A stockholder Unless he sells his
 93

- Virgilio Dulay is a signatory witness,

may withdraw and shares, a stockholder he knows very well about the deed of
compel the cannot get back his absolute sale, he is estopped
corporation to investment nor
purchase his compel the Naguiat vs. NLRC
shares for any corporation to buy
reason with the his shares except in - Section 100 par. 5. To the extent that
limitation only that the exercise of his the stockholders are actively engaged
the corporation has appraisal right in the management or operation of the
sufficient assets to business and affairs of a close
cover its liabilities corporation, the stockholders shall be
exclusive of capital held to strict fiduciary duties to each
stock other and among themselves. Said
stockholders shall be personally liable
15. The proper Courts cannot for corporate torts unless the
forum may interfere I the corporation has obtained reasonably
interfere in the business judgment of adequate liability insurance.
management of a the
close corporation directors/stockholde  Family corporations is not
in case of rs “BUSINESS automatically a close corporation the 3
deadlocks under JUDGMENT RULE” qualifying conditions must be present.
Section 104, even
of the SPECIAL CORPORATIONS
directors/stockhol
ders are acting in  2 types of special corporations
good faith
1. Educational corporations
16. Any Dissolution may be
stockholder may had only on the
2. Religious corporations
petition the SEC grounds provided by
for corporate the provisions of the
dissolution on Code on dissolution 2.1 Corporation Sole
grounds among and P.D. 902-A, as
others, provides for amended 2.2 Religious Societies
in section 105
Manuel Dulay Enterprises vs. CA  What provision governs educational
corporations?
- What was the position of Manuel
Dulay here? President, General Section 106. Incorporation. -
Manager and Treasurer Educational corporations shall be
governed by special laws and by the
- Cannot act both as president and general provisions of this Code. (n)
treasurer at the same time
- Special laws like they Education Act of
- Since it is a close corporation owned the Philippines
by the family of Manuel Dulay, save - These institutions of learning, once
and except the secretary, it should be recognized by the government as such
governed by Title XII are mandated by law to be
incorporated within ninety (90) days
under the provisions of the
- Petitioner is classified as a close
Corporation Code and must, perforce,
corporation and consequently a board
comply with the requirements and
resolution authorizing the sale or
procedure laid down there under.
mortgage of the subject property is not
Their failure to so will not immune the
necessary to bind the corporation for
educational institution from suit as a
the action of its president. At any rate,
corporation. (Chiang Kai Siek Case)
a corporate action taken at a board
meeting without proper call or notice
in a close corporation is deemed - Favorable recommendation of
ratified by the absent director unless government agency involved
the latter promptly files his written
objection with the secretary of the  Two types of educational corporations
corporation after having knowledge of
the meeting which, in this case, - Certificate of completion in the
petitioner Virgilio Dulay failed to do. academic field

- Vocational and technical one’s


o Recommendation of DECS if
certificate of completion in the
academic field
 How is the governing board of an
educational institution instituted?
- Non-stock- multiples of 5 only
(example: 5,10,15)
- Stock- can be anywhere between 5 to
15
 Can they consist of 7 or 9 members?
- Yes, if stock
 Can they be incorporated also as non-
stock?
- Yes
- B.P. 232 allows the organization of an
educational institution that is stock
corporation, only if they do not issue a
certificate of completion in the
academic field
 Qualifications and disqualifications of
the membership in the board of an
educational corporation
- Educational corporations are governed
by special laws and general provisions,
hence if there is no provision in the
special law, you go back to section 25
and 27 of the general provisions
- Stock- must be a stockholder
- Non-stock- must be a member
- By-laws may provide for additional
qualifications and disqualifications
Section 25. Corporate officers,
quorum. - Immediately after their
election, the directors of a corporation
must formally organize by the election
of a president, who shall be a director,
a treasurer who may or may not be a
director, a secretary who shall be a
resident and citizen of the Philippines,
and such other officers as may be
provided for in the by-laws. Any two (2)
or more positions may be held
concurrently by the same person,
except that no one shall act as
president and secretary or as president
and treasurer at the same time.
The directors or trustees and
officers to be elected shall perform the
duties enjoined on them by law and
the by-laws of the corporation. Unless
94
the articles of incorporation or the by-
laws provide for a greater majority, a
majority of the number of directors or
trustees as fixed in the articles of
incorporation shall constitute a
quorum for the transaction of
corporate business, and every decision
of at least a majority of the directors or
trustees present at a meeting at which
there is a quorum shall be valid as a
corporate act, except for the election of
officers which shall require the vote of
a majority of all the members of the
board.
Directors or trustees cannot attend or
vote by proxy at board meetings. (33a)
Section 27. Disqualification of
directors, trustees or officers. - No person
convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to
the date of his election or appointment, shall
qualify as a director, trustee or officer of any
corporation. (n)
 Article 14 section 4 par. 2 of the
Constitutions
Educational institutions, other
than those established by religious
groups and mission boards, shall be
owned solely by citizens of the
Philippines or corporations or
associations at least sixty per centum
of the capital of which is owned by
such citizens. The Congress may,
however, require increased Filipino
equity participation in all educational
institutions. The control and
administration of educational
institutions shall be vested in citizens
of the Philippines.
No educational institution shall be
established exclusively for aliens and
no group of aliens shall comprise more
than one-third of the enrollment in
any school. The provisions of this sub
section shall not apply to schools
established for foreign diplomatic
personnel and their dependents and,
unless otherwise provided by law, for
other foreign temporary residents.
- Management is left solely to citizens of
the Philippines
- Board of Directors manages the
corporate affairs, foreigners cannot
therefore be elected in the board
- Exceptions are, mission boards and
religious orders, which may have a
governing board consisting of
foreigners

 Term of office of governing board in an
educational institutions
- Can serve a term of 5 years. If that be
the case, 1/5 of their number shall
expire every year
 Non-stock or stock, can they serve for
a 1 year term only?
- Yes, the articles of incorporation may
provide that it be 1 year only
 What are these religious corporations
spoken off?
- Corporation sole and religious societies
 What is a corporation sole?
- Consists of one person only and his
successor in some particular station,
who are incorporated by law in order
to give them some legal capacities and
advantages, particularly that of
perpetuity, which in their natural
persons they could not have had
 May a corporation be organized by less
than 5 natural persons?
- General rule, 5 to 15 natural
persons(except cooperatives and
corporations primarily organized to
hold equities in rural banks and may
rightfully become incorporators
thereof)
- Exception, corporation sole, consist of
only one person
 May any person form or organize a
corporation sole?
- No, not any person can form a
corporation sole, section 110 provides:
Section 110. Corporation sole. -
For the purpose of administering and
managing, as trustee, the affairs,
property and temporalities of any
religious denomination, sect or
church, a corporation sole may be
formed by the chief archbishop,
bishop, priest, minister, rabbi or other
presiding elder of such religious
denomination, sect or church. (154a)
 Is it required to file the articles of
incorporation in the SEC?
- Yes
 What should be contained in the
articles of incorporation?
95
- Section 111 and section 112 provides
for the contents and procedures
Section 111. Articles of
incorporation. - In order to become a
corporation sole, the chief archbishop,
bishop, priest, minister, rabbi or
presiding elder of any religious
denomination, sect or church must file
with the Securities and Exchange
Commission articles of incorporation
setting forth the following:
1. That he is the chief archbishop,
bishop, priest, minister, rabbi or
presiding elder of his religious
denomination, sect or church and that
he desires to become a corporation
sole;
2. That the rules, regulations and
discipline of his religious
denomination, sect or church are not
inconsistent with his becoming a
corporation sole and do not forbid it;
3. That as such chief archbishop,
bishop, priest, minister, rabbi or
presiding elder, he is charged with the
administration of the temporalities and
the management of the affairs, estate
and properties of his religious
denomination, sect or church within
his territorial jurisdiction, describing
such territorial jurisdiction;
4. The manner in which any vacancy
occurring in the office of chief
archbishop, bishop, priest, minister,
rabbi of presiding elder is required to
be filled, according to the rules,
regulations or discipline of the
religious denomination, sect or church
to which he belongs; and
5. The place where the principal office
of the corporation sole is to be
established and located, which place
must be within the Philippines.
The articles of incorporation
may include any other provision not
contrary to law for the regulation of
the affairs of the corporation. (n)
Section 112. Submission of the
articles of incorporation. - The articles
of incorporation must be verified,
before filing, by affidavit or affirmation
of the chief archbishop, bishop, priest,
minister, rabbi or presiding elder, as
the case may be, and accompanied by
a copy of the commission, certificate of
election or letter of appointment of
such chief archbishop, bishop, priest,
minister, rabbi or presiding elder, duly

certified to be correct by any notary
public.
From and after the filing with
the Securities and Exchange
Commission of the said articles of
incorporation, verified by affidavit or
affirmation, and accompanied by the
documents mentioned in the preceding
paragraph, such chief archbishop,
bishop, priest, minister, rabbi or
presiding elder shall become a
corporation sole and all temporalities,
estate and properties of the religious
denomination, sect or church
theretofore administered or managed
by him as such chief archbishop,
bishop, priest, minister, rabbi or
presiding elder shall be held in trust
by him as a corporation sole, for the
use, purpose, behalf and sole benefit of
his religious denomination, sect or
church, including hospitals, schools,
colleges, orphan asylums, parsonages
and cemeteries thereof. (n)
 Is it required to indicate its terms of
execution? Why not?
- Not required because they are
supposed to exist in perpetuity
- However, it does not mean that it shall
continue to exist forever, it merely
means that it has the capacity of
continuous existence during a
particular period until dissolved in
accordance with law
 When will it acquire judicial
personality? How do you compare this
to other types of corporation?
- After the filing the verified articles of
incorporation along with the
documents required in Section 112
with the SEC, immediately becomes
endowed with corporate personality,
this serves as an exception to the rule
that a corporation acquires juridical
personality only upon the issuance of
a certificate of incorporation by the
said government agency.
- Upon filing of verified articles of
incorporation with the SEC, will not
require the approval of SEC
 A corporation sole is possessed with
the same power, rights and privileges,
to own, acquire and hold or convey
properties like any other corporation?
True or False
- False, they have the same power rights
and privileges, but when it comes to
96
alienation and acquisition, it must
possess a court order, however when
there is a regulated method, a court
order may be dispensed with <sec.
113>
Section 113. Acquisition and
alienation of property. - Any
corporation sole may purchase and
hold real estate and personal property
for its church, charitable, benevolent
or educational purposes, and may
receive bequests or gifts for such
purposes. Such corporation may sell
or mortgage real property held by it by
obtaining an order for that purpose
from the Court of First Instance of the
province where the property is situated
upon proof made to the satisfaction of
the court that notice of the application
for leave to sell or mortgage has been
given by publication or otherwise in
such manner and for such time as
said court may have directed, and that
it is to the interest of the corporation
that leave to sell or mortgage should
be granted. The application for leave to
sell or mortgage must be made by
petition, duly verified, by the chief
archbishop, bishop, priest, minister,
rabbi or presiding elder acting as
corporation sole, and may be opposed
by any member of the religious
denomination, sect or church
represented by the corporation sole:
Provided, That in cases where the
rules, regulations and discipline of the
religious denomination, sect or
church, religious society or order
concerned represented by such
corporation sole regulate the method of
acquiring, holding, selling and
mortgaging real estate and personal
property, such rules, regulations and
discipline shall control, and the
intervention of the courts shall not be
necessary. (159a)
 Since a corporation sole is consists
only of one person, will the registration
of the property in the name of the
corporation sole vest unto the head
thereof the ownership of the property?
- No, it will not vest unto the head, the
head is acting merely as a guardian
Roman Catholic Apostolic Adm. Of
Davao, inc. vs. Land Reg. Comm, et al.
- Act only as a guardian
- Ownership devolves upon the
congregation or religious denomination

- A corporation consists of one person
only and his successors (who will
always be one at a time, in some
particular station), who are
incorporated by law in order to give
them some legal capacities and
advantages, particularly that of
perpetuity, which in their natural
persons they could not have had
- Roman Catholic Church has no
nationality and that the framers of the
Constitution, as will be hereunder
explained, did not have in mind the
religious corporations sole when they
provided that 60 percent of the capital
thereof be owned by Filipino citizens.
Director of Lands vs. CA
- Alienable public land is converted into
private land when the same has been
openly, continuously and exclusively
in possession of the property as
concept of an owner for 30 years,
automatically that is
Republic of the Philippines vs. IAC
- Determination of the character of the
land should be in mind
- If they still form part of public domain
they cannot be owned, but if they are
converted into private land, the
constitutional prohibition will not
apply
 If there is vacancy who will fill up the
same? What if there is none, what
must the successor do?
- According to section 114:
Section 114. Filling of
vacancies. - The successors in office of
any chief archbishop, bishop, priest,
minister, rabbi or presiding elder in a
corporation sole shall become the
corporation sole on their accession to
office and shall be permitted to
transact business as such on the filing
with the Securities and Exchange
Commission of a copy of their
commission, certificate of election, or
letters of appointment, duly certified
by any notary public.
During any vacancy in the
office of chief archbishop, bishop,
priest, minister, rabbi or presiding
elder of any religious denomination,
sect or church incorporated as a
corporation sole, the person or persons
authorized and empowered by the
rules, regulations or discipline of the
97
religious denomination, sect or church
represented by the corporation sole to
administer the temporalities and
manage the affairs, estate and
properties of the corporation sole
during the vacancy shall exercise all
the powers and authority of the
corporation sole during such vacancy.
(158a)
 If a corporation exists in equity may it
not be dissolved?
Section 115. Dissolution. - A
corporation sole may be dissolved and
its affairs settled voluntarily by
submitting to the Securities and
Exchange Commission a verified
declaration of dissolution.
The declaration of dissolution shall set
forth:
1. The name of the corporation;
2. The reason for dissolution and
winding up;
3. The authorization for the dissolution
of the corporation by the particular
religious denomination, sect or
church;
4. The names and addresses of the
persons who are to supervise the
winding up of the affairs of the
corporation.
Upon approval of such
declaration of dissolution by the
Securities and Exchange Commission,
the corporation shall cease to carry on
its operations except for the purpose of
winding up its affairs. (n)
- While section 115 of the code provides
for the process and procedure for the
dissolution of a corporate sole, there is
nothing in the law itself which would
prohibit it from amending its articles of
incorporation
- It is believed that authorization for the
dissolution by the particular religious
denomination, sect or church, as
required in sub-paragraph 3 of section
115 would still be necessary in the
case of amending the articles of
incorporation to affect dissolution.
o Expiration of a corporate term
will not apply to a religious
corporation
 May a corporation sole be dissolved by
judicial decree?
 98

- General rule: No, because a 3. That the incorporation of the

corporation sole, is by its very nature
ecclesiastical and religious (doctrine of
separation of church and state)
- Exception: police power of the state, if
its purpose is being carried out and is
instead being used for illegal purpose,
it may be so dissolved
religious society or religious order, or
diocese, synod, or district organization
desiring to incorporate is not forbidden
by competent authority or by the
constitution, rules, regulations or
discipline of the religious
denomination, sect, or church of
which it forms a part;

 What are religious societies? 4. That the religious society or

religious order, or diocese, synod, or
- Under common law, a religious society district organization desires to
is a body of persons associated incorporate for the administration of
together for the purpose of its affairs, properties and estate;
maintaining religious worship.
5. The place where the principal office
 Is it also required to file its articles of of the corporation is to be established
incorporation to the SEC? and located, which place must be
within the Philippines; and
- No <sec. 116> “may”
6. The names, nationalities, and
residences of the trustees elected by
 What should be contained in the
the religious society or religious order,
articles of incorporation?
or the diocese, synod, or district
organization to serve for the first year
- Section 116 provides: or such other period as may be
prescribed by the laws of the religious
Section 116. Religious society or religious order, or of the
societies. - Any religious society or diocese, synod, or district organization,
religious order, or any diocese, synod, the board of trustees to be not less
or district organization of any religious than five (5) nor more than fifteen (15).
denomination, sect or church, unless (160a)
forbidden by the constitution, rules,
regulations, or discipline of the  Is it required to indicate its term of
religious denomination, sect or church existence?
of which it is a part, or by competent
authority, may, upon written consent
- Likewise to exist in perpetuity, the law
and/or by an affirmative vote at a
does not require to indicate its term of
meeting called for the purpose of at
existence
least two-thirds (2/3) of its
membership, incorporate for the
administration of its temporalities or  When will it acquire juridical
for the management of its affairs, personality?
properties and estate by filing with the - Only a corporation sole may come into
Securities and Exchange Commission,
articles of incorporation verified by the existence without SEC approval,
affidavit of the presiding elder, section 19 will thus govern, Vested
secretary, or clerk or other member of with judicial capacity upon issuance of
such religious society or religious the certificate by the SEC
order, or diocese, synod, or district
organization of the religious o However it is not accurate
denomination, sect or church, setting according to atty. Ladia
forth the following: because there are those that
can issue for example
1. That the religious society or
cooperatives- BUREAU OF
religious order, or diocese, synod, or
district organization is a religious COOPERATIVES which
organization of a religious register, home insurance
denomination, sect or church; guaranty corporation- HOME
OWNERS
2. That at least two-thirds (2/3) of its
membership have given their written  How may religious societies be
consent or have voted to incorporate, dissolved?
at a duly convened meeting of the
body; - Go to the general rules governing
dissolution, because the rules under

special corporations do not provide for
such rule
DISSOLUTION
 What is dissolution?
- Extinguishment of the corporate
franchise and the termination of
corporate existence
 3 modes of dissolution
1. By expiration of its term;
2. By voluntary surrender of its primary
franchise (voluntary dissolution);
3. By revocation of its corporate franchise
(involuntary dissolution)
Philippine National Bank vs. CFI
- When the period of corporate life
expires, the corporation ceases to be a
body corporate for purposes of
continuing the business for which it is
organized. But it shall nevertheless be
continued as a body corporate for
three years after the time when it
would have be dissolved, for the
purpose of prosecuting and defending
suits by or against it and for enabling
it gradually to settle and close its
affairs to dispose of and convey its
property and to divide its assets. There
is no need for the institution of a
proceeding for quo warranto to
determine the time and date of the
dissolution of a corporation because
the period of corporate existence is
provided in the articles of
incorporation. When such period
expires and without any extension
having been made pursuant to law, the
corporation is dissolved automatically
insofar as the continuation of its
business is concerned.
- The rights of the lessor and the lessee
over the improvements which the latter
constructed on the leased premises are
governed by Article 1678 of the Civil
Code. The provision gives the lessee
the right to remove the improvements
if the lessor chooses not to pay one
half of the value thereof. However, in
the case at bar the law will not apply
because the parties herein have
stipulated in the contract their own
terms and conditions concerning the
improvements before the termination
of the lease. Petitioner PNB as assignee
of PBM succeeded to the obligation of
the latter under the contract of lease.
It could not possess rights more than
what PBM had as lessee under the
99
contract. Hence, petitioner was duly
bound to remove the improvements
before the expiration of the period of
lease. Its failure to do so when the
lease was terminated was tantamount
to a waiver of its rights and interest
over the improvements on the leased
premise.
o 3 modes of dissolution, 3
modes of voluntary dissolution
and 3 modes of liquidation and
winding up- FREQUENTLY
ASKED IN THE FINALS
 What are the 3 modes of voluntary
dissolution?
1. Voluntary dissolution where no
creditors are affected; <sec.118>
2. Voluntary dissolution where creditors
are affected; <sec. 119>
3. Shortening of corporate term. <sec.
120>
 Voluntary dissolution where no
creditors are affected <sec.118>
- The formal and procedural
requirements necessary are the
following:
1. Majority vote of the board of directors
or trustees;
2. Sending of notice of each stockholders
or member either by registered mail or
personal delivery at least thirty (30)
days prior to the meeting (scheduled
by the board for the purpose of
submitting the board action to dissolve
the corporation for approval of the
stockholder or members.);
3. Publication of the notice of time, place
and subject of the meeting for three (3)
consecutive weeks in a newspaper
published in the place where the
principal office of said corporation is
located or in a newspaper of general
circulation in the Philippines;
4. Resolution adopted by the affirmative
vote of the stockholders owning at
least 2/3 of the outstanding capital
stock or 2/3 of the members at the
meeting duly called for the purpose;
5. A copy of the resolution authorizing
the dissolution must be certified by a
majority of the board of directors or
trustees and countersigned by the
corporate secretary;
6. Issuance of a certificate of dissolution
by the SEC.

 Should this be strictly complied with?
- Yes, compliance with the requirements
and formalities prescribed above is
mandatory such that failure to comply
therewith will have no effect on the
legal existence of the corporation.
 Will dissolution be effective and valid
by a mere resolution of the BOD and
stockholders?
- No, a mere resolution by the
stockholders or the BOD of a
corporation to dissolve the same does
not affect the dissolution but that
some other steps, administrative or
judicial is necessary. (Daguhoy
Enterprises vs. Ponce)
- Since it is the State which grants its
right to exist, it is only through the
State which can allow the termination
of its existence; without consent of the
State, it will not be dissolved.
 Voluntary dissolution where creditors
are affected <sec.119>
- By virtue of a petition, when there are
creditors affected
- The following formalities would thus be
required:
1. Affirmative vote of the stockholders
representing at least 2/3 of the
outstanding capital stock or at least
2/3 of the members at a meeting duly
called for that purpose;
2. Petition for dissolution shall be filed
with the SEC signed by a majority of
its board of directors or trustees or
other officers having the management
of its affairs, verified by the president
or secretary or one of its directors or
trustees, setting forth all claims and
demands against it.
3. Issuance of an order by the SEC
reciting the purpose of the petition and
fixing the date on or before which
objections thereto may be filed by any
person, which date shall not be less
than thirty days nor more than sixty
days after entry of the order.
4. Before such date, a copy of the order
must be published once a week for
three (3) consecutive weeks in a
newspaper of general circulation
published in the city or municipality
where the principal office is situated or
in a newspaper of general circulation
in the Philippines.
100
5. Posting of the same order for three (3)
consecutive weeks in three (3) public
places in such city or municipality.
6. Upon five (5) days’ notice, given after
the date on which the right to file
objections has expired, the SEC shall
hear the petition and try any issue
made by the objections filed.
7. Judgment dissolving the corporation
and directing of its assets as justice
requires and the appointment of a
receiver (if necessary in its discretion)
to collect such assets and pay the
debts of the corporation.
o The foregoing are also
mandatory requirements
 Is the appointment of a receiver
mandatory?
- No, it is merely permissive or
discretionary on the part of the court.
The code uses the word “may”; the law
intended to let the shareholders have
the control of the assets of the
corporation upon dissolution and
winding up.
- The directors may also undertake
liquidation and winding up of its
corporate affairs, and sound business
judgment, on how they will wind up
 Dissolution by shortening of corporate
term <sec.120>
- Will be valid upon approval of the SEC,
unlike general amendments, which will
be deemed approved if not acted upon
by the SEC within 6 months from the
date of filing for a cause not
attributable to the corporation.
- Shortening of the corporate term
partakes the nature of an amendment
of the articles of incorporation. Section
16 under general amendments allows
“written assent” section 37 mandates
that the vote must be cast at a duly
constituted meeting.
Section 120. Dissolution by
shortening corporate term. - A
voluntary dissolution may be effected
by amending the articles of
incorporation to shorten the corporate
term pursuant to the provisions of this
Code. A copy of the amended articles
of incorporation shall be submitted to
the Securities and Exchange
Commission in accordance with this
Code. Upon approval of the amended
articles of incorporation of the
expiration of the shortened term, as

the case may be, the corporation shall
be deemed dissolved without any
further proceedings, subject to the
provisions of this Code on liquidation.
(n)
o Intra-corporate- special
commercial courts
 Another way of dissolving a
corporation is through involuntary
dissolution
Section 121. Involuntary
dissolution. - A corporation may be
dissolved by the Securities and
Exchange Commission upon filing of a
verified complaint and after proper
notice and hearing on the grounds
provided by existing laws, rules and
regulations. (n)
- Dissolution is tantamount to the
imposition of death penalty
- Instead of dissolving the corporation,
courts normally enjoin the further
commission of the questioned act
- The relief of dissolution will be
awarded only where no other remedy
is available and it will not be allowed
where the rights of the stockholders
can be, or are, protected in some other
way (Republic vs. Bisaya Land Trans.
Co. Inc.)
 What are the grounds for involuntary
dissolution?
- It is commenced through a verified
complaint or motu proprio by the
proper courts
- Section 6 of PD 902-A provides for the
grounds for involuntary dissolution as
follows:
1. Fraud in procuring its certificate of
registration;
2. Serious misrepresentation as to what
the corporation can do or is doing to
the great prejudice of or damage to the
general public;
3. Refusal to comply or defiance of any
lawful order of the Commission
restraining commission of acts which
would amount to a grave violation of
its franchise;
4. Continuous inoperation for a period of
at least five (5) years;
5. Failure to file by-laws within the
required period;
101
6. Failure to file required reports in
appropriate forms as determined by
the Commission within the prescribed
period.
- Other grounds are provided for in the
corporation code itself: among them
are:
1. Violation of any provision of the Code
under section 144;
2. In case of deadlock in a close
corporation as provided for in section
105;
3. In a close corporation, any acts of
directors, officers or those in control of
the corporation which is illegal or
fraudulent or dishonest or oppressive
or unfairly prejudicial to the
corporation or any stockholder or
whenever corporate assets are being
misapplied or wasted under section
105.
- Mere dishonesty is also a ground in a
close corporation
- Other grounds can be found in other
special laws like the Securities
Regulation Code and the General
Banking Act as well as the Insurance
Code.
Government vs. Philippine Sugar
Estate
- It is necessary in order to secure
judicial foreclosure of respondent’s
charter to show a mis-user of its
franchise justifying such a forfeiture
- Object is to protect the public, and not
to redress private grievances, the mis-
user must be such as to work or
threaten a substantial injury to the
public, or such as to amount to a
violation of the fundamental condition
of the contract by which the franchise
was granted and thus defeat the
purpose of the grant
- Courts proceed with extreme caution
which has for their object the forfeiture
of corporate franchise, and forfeiture
will not be allowed, except under
express limitation, or for plain abuse
of power by which the corporation fails
to fulfill the design and purpose of its
organization. But when the abuse or
violation constitutes or threatens a
substantial injury to the public or
such as to amount to a violation of the
fundamental conditions of its charter,
or its conduct is characterized by

obduracy or pertinacity in contempt of
law, dissolution will be granted
- Did the court dissolve the corporation?
No, it did not, it granted the
corporation 6 months to cease and
desist the performance of the
questioned act otherwise it will be
dissolved
Government vs. El Hogar
- 3 causes of action, the first is that the
corporation violated the law by holding
on the property beyond that provide
for by law, the second is that the
corporation undertook the
management f petitioners belonging to
delinquent shareholders of the
association, and lastly that the by-law
provision, which empowers the BD to
cancel shares and to return to the
owners thereof the balance returning
from the liquidation
 Compare to Philippine Sugar Estate,
wherein the court ruled conditional
dissolution. Why decree conditional
dissolution in one and not in the other
case?
- Because in El Hogar the government
was at fault, the government wasn’t
able to issue the certificate of title on
time
- When the case was instituted, El
Hogar was already able to dispose the
properties in question, in Philippine
Sugar Estate it was still the holding
the properties in order to enrich itself
at the expense of the taxpayers
Republic vs. Security Credit and
Acceptance Corp. et al.
- The corporation here is a lending
institution and not a banking
institution
- Defendant corporation violated the law
because before a corporation may
engage into a banking activity it must
first obtain a secondary franchise from
the Central Bank
- Defendant corporation threatens
substantial injury to the general
public, dissolution is warrant
- If there is a bank run kawawa naman
yung depositors
Republic vs. Bisaya Land
Transportation Co. Inc
102
- The relief of dissolution will be
awarded only where no other remedy
is available and it will not be allowed
where the rights of the stockholders
can be, or are, protected in some other
way
- Misuse and misapplication of the
funds and assets of the respondent
were committed particularly by the
corporate officers, where they can
instead be held personally liable
- Since there is another remedy
available dissolution is not warranted
 Assuming the above stated corporation
is a close corporation, would the court
decree otherwise?
- Yes, because in a close corporation,
mere dishonesty is a ground for the
dissolution
- Can even be dissolved by petition of
only one stockholder on the grounds
stated in the code < sec. 105>
Financing Corporation of the
Philippines vs. Teodoro
- Minority stockholders may not ask for
the dissolution of a corporation in
private suits and that such actions
should be brought by the Government
through its legal officers, except in
cases where the intervention of the
State, for one reason or another,
cannot be obtained, as when the
State is not interested because the
complaint is strictly a matter
between the stockholders and does
not involve, in the opinion of the
legal officer of the Government, any
of the acts or omissions warranting
quo warranto proceeding , in which
minority stockholders are entitled
to have such dissolution. It should
be exercised if necessary in order not
to entirely ignore and disregard the
rights of said minority stockholders,
especially when said minority
stockholders are unable to obtain
redress and protection of their rights
within the corporation itself.
Stockholders should not be left
without recourse
 Present set up
- Any stockholder or member of a
corporation can institute a dissolution
proceeding against his own
corporation before the proper forum
- Special Commercial Courts, shall hear
and decide intra-corporate disputes
 103

 May a corporation ask for dissolution business for which it was organized. It
of the corporation when there is no cannot apply for a new certificate or a
prejudice to the general public? secondary franchise for it is incapable
of receiving a grant.
- Yes, in a close corporation, a petition
for the dissolution of the corporation - Awarding it to Camarines Sur is
may be instituted by any one tantamount to a medal for its illegal
individual shareholder on the ground, acts
even by mere dishonesty
- It cannot apply for a new certificate or
 Effects of dissolution a secondary franchise for it is
incapable of receiving a grant. It was
- The dissolution of a corporation not not even a corporation de facto. And
only terminates its primary franchise then, there is no application
to be a corporation, but generally subscribed by the new corporation
prevents it from further exercising
other or secondary franchises which - And yet as stated, the new corporation
have been conferred to its. It has not filed any application for
terminates its power to enter into certificate of public convenience in
contracts or t o continue the business Sabang, and has not published such
as a going concern. application.

- Based on this general rule, the Cebu Port Labor Union vs. State
Supreme Court held that a Marine Co
corporation, whose corporate life
expired, cannot lawfully pursue the
- Even a cursory reading of the provision
business for which it was organized. It
would convey the idea clearly
cannot apply for a new certificate or a
manifested in the limitation “but not
secondary franchise for it is incapable
for the purpose of continuing the
of receiving a grant. Neither can it
business for which it was established,”
enforce a contract executed prior its
that the 3-year period allowed by the
dissolution for the purpose of
law is only for the purpose of winding
continuing the business of its
up its affairs.
organization.

- In general the rights and liabilities of Gonzales vs. Sugar Regulatory

the corporation are not extinguished
by its dissolution.
Section 145. Amendment or
repeal. - No right or remedy in favor of
or against any corporation, its
stockholders, members, directors,
trustees, or officers, nor any liability
incurred by any such corporation,
stockholders, members, directors,
trustees, or officers, shall be removed
or impaired either by the subsequent
dissolution of said corporation or by
any subsequent amendment or repeal
of this Code or of any part thereof. (n)
Buenaflor vs. Camarines Sur Industry
Corp.
- From that time on Camarines Sur was
plying in an activity that was illegal
- A corporation where the corporate life
has expired it cannot lawfully pursue
the business for which it was
organized.
- the Supreme Court held that a
corporation, whose corporate life
expired, cannot lawfully pursue the
Administration
- Instead of applying the corporation
code, the court applied the
constitutional provision
- Cannot be read as permitting to
destroy the substantive rights
- Such would collide with the non-
impairment of contracts clause of the
constitution
- Complainants will have the right to
follow the assets of the corporation in
the hands of SRA or any other agency
for that matter
 After dissolution what next?
- Liquidation and winding up should
follow
 What is the definition of liquidation
and winding up?
- Collection of all corporate assets, the
payments of all its debts and
settlement of its obligations and the
ultimate distribution of the corporate

assets, if any of it remains, to all
stockholders in accordance with their
proportionate stockholdings in the
corporation or in accordance with their
respective contracts of subscription.
 Preference upon liquidation
- If there are preferred shares, the
preference granted to such should be
complied with
- Preferred shares may give the holder
thereof, preference only in the
dividends but also in the distribution
of corporate assets upon liquidation or
termination of the corporate existence.
If such is the intent, the contract of
subscription must so indicate lest they
are placed on equal footing with
common shareholders
- Preference may be participating or
non-participating
 Dissolved corporations are granted a
period of 3 years to liquidate
Section 122. Corporate
liquidation. - Every corporation whose
charter expires by its own limitation or
is annulled by forfeiture or otherwise,
or whose corporate existence for other
purposes is terminated in any other
manner, shall nevertheless be
continued as a body corporate for
three (3) years after the time when it
would have been so dissolved, for the
purpose of prosecuting and defending
suits by or against it and enabling it to
settle and close its affairs, to dispose of
and convey its property and to
distribute its assets, but not for the
purpose of continuing the business for
which it was established.
At any time during said three
(3) years, the corporation is authorized
and empowered to convey all of its
property to trustees for the benefit of
stockholders, members, creditors, and
other persons in interest. From and
after any such conveyance by the
corporation of its property in trust for
the benefit of its stockholders,
members, creditors and others in
interest, all interest which the
corporation had in the property
terminates, the legal interest vests in
the trustees, and the beneficial
interest in the stockholders, members,
creditors or other persons in interest.
Upon the winding up of the
corporate affairs, any asset
distributable to any creditor or
stockholder or member who is
104
unknown or cannot be found shall be
escheated to the city or municipality
where such assets are located.
Except by decrease of capital
stock and as otherwise allowed by this
Code, no corporation shall distribute
any of its assets or property except
upon lawful dissolution and after
payment of all its debts and liabilities.
(77a, 89a, 16a)
 However the 3 year period is not
absolute
 Liquidation may be undertaken in
either of the 3 ways
1. By the corporation itself through the
BOD
- Usual method or procedure of
liquidating a corporation and although
there is no law authorizing it, neither
is there anything that prohibits the
BOD from undertaking the same
- If this method is resorted to, the board
will only have a period of 3 years to
finish its task of liquidation
- Claims for or against the corporate
entity not filed within the period will
become unenforceable as there exist
no corporate entity against which they
can be enforced
- Actions pending for or against the
corporation when the 3 year period
expires, are abated since after the
period, the corporation ceases for all
intents and purposes and is no longer
capable of suing or being sued
2. By a trustee appointed by the
corporation
- The corporation may opt to convey all
corporate assets to a trustees who will
take charge of liquidation
- If this method is used, the three year
period limitation imposed by section
122 will not apply provided the
designation of the trustee is made
within that period
3. By appointment of a receiver
- A receiver may be appointed by the
proper forum on petition or motu
proprio upon the dissolution of the
corporation
- The appointment of a receiver is,
however, permissive rather than

mandatory and the law tends to
recognize that in cases of voluntary
dissolution there is no occasion for the
appointment of a receiver except under
special circumstances and upon
proper showing
- If a receiver is appointed, the 3 year
period fixed by law within which to
complete the task of liquidation will
not likewise apply because the
dissolved corporation is substituted by
the receiver who may sue or be sued
even after that period
o Mere appointment of a receiver
without anything more does
imply in the dissolution of a
corporation
National Abaca other Fibers Co. vs.
Pore
- Actions pending for or against the
corporation when the 3 year period
expires, are abated since after that
period, the corporation ceases for all
intents and purposes and is no longer
capable of suing or being sued
- May be continued by the trustee
provided done within the 3 year period
- Should the corporation, therefore,
finds it difficult to finish its
liquidation, it may, at any time during
the three year period, convey all its
assets and receivables to a trustee to
prosecute and defend suits by or
against the corporation begun before
the expiration of said period
- The effect of the conveyance is to make
the trustees the legal owners of the
property conveyed, subject to the
beneficial interest therein of creditors
and stockholders
Sumera vs. Valencia
- Thus it was held that when a
corporation is dissolved and the
liquidation of the assets is placed in
the hands of receiver or assignee, the
period of 3 years prescribed by law is
not applicable and the assignee may
institute all actions leading to the
liquidation of the corporation even
after the expiration of 3 years.
- If the corporation carries out the
liquidation of its assets through its
own officers and continues and
defends the actions brought by or
against it, its existence shall terminate
105
at the end of three years from the time
of dissolution; but if a receiver or
assignee is appointed, with or without
a transfer of its properties within 3
years, the legal interest passes to the
assignee, the beneficial interest
remaining in the members,
stockholders, creditors and other
interested persons and said assignee
may bring an action, prosecute that
which has already been commenced
for the benefit of the corporation, or
defend the latter against any other
action already instituted or which may
be instituted even outside of the period
of three years fixed for the offices of
the corporation.
Board of Liquidators vs. Kalaw
- If there is a trustee, assignee or
liquidator, it can continue prosecuting
suit even beyond the 3 year period
fixed by law because he becomes the
legal owner of the rights, assets and
properties conveyed to him
Gelano vs. CA
- “Trustee” as used in the corporation
statute must be understood in its
general concept which could include
the counsel to whom was entrusted in
the instant case, the prosecution of the
suit filed by the corporation. The
purpose in the transfer of the assets of
the corporation to a trustee upon its
dissolution is more for the protection
of its creditors and stockholders.
Debtors like the petitioners herein may
not take advantage of the failure of the
corporation to transfer its assets to a
trustee, assuming it has any to
transfer which petitioner has failed to
show, in the first place. To sustain
petitioners’ contention would be to
allow them to enrich themselves at the
expense of another, which all
enlightened legal systems condemn.
- The counsel who prosecuted and
defended the interest of the
corporation may be considered as a
“trustee” at least with respect to the
matter in litigation only
 May a corporation that is already
dissolved, transfer and assign its
assets and properties to a new
corporation which will continue the
business of the dissolved one?
- Yes, provided all the stockholders gave
their consent (Chung Ka Bio vs. IAC)

Republic vs. Marsman Development
Company & Chung Ka Bio vs. IAC
- During the three year period granted
to a corporation to liquidate or wind
up its affairs, the BOD is not normally
permitted to undertake any activity
outside the usual liquidation of the
corporation. There is, however, nothing
to prevent the stockholders from
conveying their respective
shareholdings toward the creation of a
new corporation to continue the
business of the old. This is because
winding up is the sole activity of the
dissolved corporation that does not
intend to incorporate a new. If it does,
however, it is not unlawful for the old
board of directors to negotiate and
transfer the assets of the dissolved
corporation to the new corporation
intended to be created as long as the
stockholders have given their consent
(Republic vs. Marsman Development
Company)
- Winding up is the sole activity of a
dissolved corporation that does not
intend to incorporate anew. If it does,
however, it is not unlawful for the old
board of directors to negotiate and
transfer the assets of the dissolved
corporation to the new corporation
intended to be created as long as the
stockholders have given their consent
(Chung Ka Bio vs. IAC)
 What happens to the remaining assets
and properties of the dissolved
corporation if liquidation and winding
up as provided in section 122 is not
complied with, as a result of which the
3 year period has elapsed
- If the three year extended life has
expired without a trustee or receiver
having been expressly designated by
the corporation within that period, the
board of directors o trustees itself,
following the rationale of the Supreme
Court’s decision in Gelano vs. CA may
be permitted to do so continue as”
trustees” by legal implication to
complete the liquidation. Still in the
absence of a BOD or BOT, those
having any pecuniary interest in the
assets, including not only the
shareholders but likewise the creditors
of the corporation, acting for and in its
behalf, might make proper
representations with the SEC, which
has primary and sufficiently broad
jurisdiction in matters of this nature,
for working out a final settlement of
the corporate concerns (Clemente vs.
CA)
106
o According to atty. Ladia the
ruling of the Supreme Court in
the case of Clemente vs. CA is
wrong, opinion is further
discussed after the Clemente
Case
Clemente vs. CA
- Who owns the properties? SOCIEDAD
ANONIMA
- The termination of the life of a juridical
entity does not by itself cause the
extinction or diminution of the rights
and liabilities of such entity or those of
its owners and creditors. If the three
year extended life has expired without
a trustee or receiver having been
expressly designated by the
corporation within that period, the
board of directors o trustees itself,
following the rationale of the Supreme
Court’s decision in Gelano vs. CA may
be permitted to do so continue as”
trustees” by legal implication to
complete the liquidation. Still in the
absence of a BOD or BOT, those
having any pecuniary interest in the
assets, including not only the
shareholders but likewise the creditors
of the corporation, acting for and in its
behalf, might make proper
representations with the SEC, which
has primary and sufficiently broad
jurisdiction in matters of this nature,
for working out a final settlement of
the corporate concerns
o the ruling is wrong according
to atty. Ladia
 According to atty Ladia: What happens
to a corporation that is already
dissolved, that has not been able to
appoint a trustee with in the 3 year
period?
- a corporation dissolved which failed to
exercise its rights granted in section
122 after the 3 year period has
elapsed, ceases to exist for all intents
and purposes, it can no longer sue or
be sued
- according to 122 of the code, the
property should be escheated,
accordingly:
Section 122. Corporate
liquidation. - Every corporation whose
charter expires by its own limitation or
is annulled by forfeiture or otherwise,
or whose corporate existence for other
purposes is terminated in any other
manner, shall nevertheless be

continued as a body corporate for
three (3) years after the time when it
would have been so dissolved, for the
purpose of prosecuting and defending
suits by or against it and enabling it to
settle and close its affairs, to dispose of
and convey its property and to
distribute its assets, but not for the
purpose of continuing the business for
which it was established.
At any time during said three
(3) years, the corporation is authorized
and empowered to convey all of its
property to trustees for the benefit of
stockholders, members, creditors, and
other persons in interest. From and
after any such conveyance by the
corporation of its property in trust for
the benefit of its stockholders,
members, creditors and others in
interest, all interest which the
corporation had in the property
terminates, the legal interest vests in
the trustees, and the beneficial
interest in the stockholders, members,
creditors or other persons in interest.
Upon the winding up of the
corporate affairs, any asset
distributable to any creditor or
stockholder or member who is
unknown or cannot be found shall
be escheated to the city or
municipality where such assets are
located.
Except by decrease of capital
stock and as otherwise allowed by this
Code, no corporation shall distribute
any of its assets or property except
upon lawful dissolution and after
payment of all its debts and liabilities.
(77a, 89a, 16a)
FOREIGN CORPORATIONS
 Definition
- Section 123. Definition and rights of
foreign corporations. - For the purposes
of this Code, a foreign corporation is
one formed, organized or existing
under any laws other than those of the
Philippines and whose laws allow
Filipino citizens and corporations to do
business in its own country or state. It
shall have the right to transact
business in the Philippines after it
shall have obtained a license to
transact business in this country in
accordance with this Code and a
certificate of authority from the
appropriate government agency. (n)
107
 What if the law of the state of the
foreign corporation does not allow
Filipino citizens to do business in their
country?
- The phrase “and whose laws allow
Filipino citizens and corporations to do
business in its own country or state” is
not, however, an accurate inclusion in
the definition as ay corporation
registered or organized under the laws
of another state is necessarily a foreign
corporation whether or not the state of
its incorporation allow Filipino citizens
or corporations to do business in that
forum.
- The said phrase was inserted by the
framers of the law only as a condition
precedent to the grant of a license of a
foreign corporation to do business in
the Philippines.
 Composed of 100% Americans;
organized under the laws other than
the Philippines
- The test is the “incorporation test”
- General rule: the place of its
incorporation irrespective of the
nationality
- Exception: control test would apply in
determining the corporate nationality,
i.e., the citizenship of the controlling
stockholders determines the
nationality of the corporation
 If a foreign corporation wants to
transact business in the Philippines,
what must it do?
- Obtain a license
 How may it do so?
- According to sec. 125:
Section 125. Application for a
license. - A foreign corporation
applying for a license to transact
business in the Philippines shall
submit to the Securities and Exchange
Commission a copy of its articles of
incorporation and by-laws, certified in
accordance with law, and their
translation to an official language of
the Philippines, if necessary. The
application shall be under oath and,
unless already stated in its articles of
incorporation, shall specifically set
forth the following:
1. The date and term of incorporation;

2. The address, including the street
number, of the principal office of the
corporation in the country or state of
incorporation;
3. The name and address of its
resident agent authorized to accept
summons and process in all legal
proceedings and, pending the
establishment of a local office, all
notices affecting the corporation;
4. The place in the Philippines where
the corporation intends to operate;
5. The specific purpose or purposes
which the corporation intends to
pursue in the transaction of its
business in the Philippines: Provided,
That said purpose or purposes are
those specifically stated in the
certificate of authority issued by the
appropriate government agency;
6. The names and addresses of the
present directors and officers of the
corporation;
7. A statement of its authorized capital
stock and the aggregate number of
shares which the corporation has
authority to issue, itemized by classes,
par value of shares, shares without
par value, and series, if any;
8. A statement of its outstanding
capital stock and the aggregate
number of shares which the
corporation has issued, itemized by
classes, par value of shares, shares
without par value, and series, if any;
9. A statement of the amount actually
paid in; and
10. Such additional information as
may be necessary or appropriate in
order to enable the Securities and
Exchange Commission to determine
whether such corporation is entitled to
a license to transact business in the
Philippines, and to determine and
assess the fees payable.
Attached to the application for
license shall be a duly executed
certificate under oath by the
authorized official or officials of the
jurisdiction of its incorporation,
attesting to the fact that the laws of
the country or state of the applicant
allow Filipino citizens and corporations
to do business therein, and that the
applicant is an existing corporation in
good standing. If such certificate is in
a foreign language, a translation
108
thereof in English under oath of the
translator shall be attached thereto.
The application for a license to
transact business in the Philippines
shall likewise be accompanied by a
statement under oath of the president
or any other person authorized by the
corporation, showing to the
satisfaction of the Securities and
Exchange Commission and other
governmental agency in the proper
cases that the applicant is solvent and
in sound financial condition, and
setting forth the assets and liabilities
of the corporation as of the date not
exceeding one (1) year immediately
prior to the filing of the application.
Foreign banking, financial and
insurance corporations shall, in
addition to the above requirements,
comply with the provisions of existing
laws applicable to them. In the case of
all other foreign corporations, no
application for license to transact
business in the Philippines shall be
accepted by the Securities and
Exchange Commission without
previous authority from the
appropriate government agency,
whenever required by law. (68a)
 Is there any deposit or security
requirement?
- Yes, within 60 days after the issuance
of the license, a foreign corporation,
except those engaged in foreign
banking or insurance, shall deposit
with the SEC, for the benefit of
creditors, securities consisting of
bonds or other evidence of
indebtedness of the Philippine
government or its political subdivision,
or of government owned or controlled
corporation, shares of stock in
“registered enterprises” as this term is
defined in R.A. 5186, shares of stock
in domestic insurance companies and
banks or any combination thereof with
an actual market value of 100,000
- Additional securities may be required
by the SEC if the actual market value
of the securities on deposit has
decreased by at least 10%. Section 126
of the code provides:
Section 126. Issuance of a
license. - If the Securities and
Exchange Commission is satisfied that
the applicant has complied with all the
requirements of this Code and other
special laws, rules and regulations, the
Commission shall issue a license to

the applicant to transact business in
the Philippines for the purpose or
purposes specified in such license.
Upon issuance of the license, such
foreign corporation may commence to
transact business in the Philippines
and continue to do so for as long as it
retains its authority to act as a
corporation under the laws of the
country or state of its incorporation,
unless such license is sooner
surrendered, revoked, suspended or
annulled in accordance with this Code
or other special laws.
Within sixty (60) days after the
issuance of the license to transact
business in the Philippines, the
license, except foreign banking or
insurance corporation, shall deposit
with the Securities and Exchange
Commission for the benefit of present
and future creditors of the licensee in
the Philippines, securities satisfactory
to the Securities and Exchange
Commission, consisting of bonds or
other evidence of indebtedness of the
Government of the Philippines, its
political subdivisions and
instrumentalities, or of government-
owned or controlled corporations and
entities, shares of stock in "registered
enterprises" as this term is defined in
Republic Act No. 5186, shares of stock
in domestic corporations registered in
the stock exchange, or shares of stock
in domestic insurance companies and
banks, or any combination of these
kinds of securities, with an actual
market value of at least one hundred
thousand (P100,000.) pesos; Provided,
however, That within six (6) months
after each fiscal year of the licensee,
the Securities and Exchange
Commission shall require the licensee
to deposit additional securities
equivalent in actual market value to
two (2%) percent of the amount by
which the licensee's gross income for
that fiscal year exceeds five million
(P5,000,000.00) pesos. The Securities
and Exchange Commission shall also
require deposit of additional securities
if the actual market value of the
securities on deposit has decreased by
at least ten (10%) percent of their
actual market value at the time they
were deposited. The Securities and
Exchange Commission may at its
discretion release part of the additional
securities deposited with it if the gross
income of the licensee has decreased,
or if the actual market value of the
total securities on deposit has
increased, by more than ten (10%)
percent of the actual market value of
the securities at the time they were
109
deposited. The Securities and
Exchange Commission may, from time
to time, allow the licensee to substitute
other securities for those already on
deposit as long as the licensee is
solvent. Such licensee shall be entitled
to collect the interest or dividends on
the securities deposited. In the event
the licensee ceases to do business in
the Philippines, the securities
deposited as aforesaid shall be
returned, upon the licensee's
application therefor and upon proof to
the satisfaction of the Securities and
Exchange Commission that the
licensee has no liability to Philippine
residents, including the Government of
the Republic of the Philippines. (n)
 Other than section 125 and 126. What
other requirements are set under
Philippine Law before a foreign
corporation may transact business in
the Philippines
- Yes. A Resident agent is required. As a
condition precedent to the grant of a
license to do or transact business in
the Philippines, the foreign corporation
is required to designate its resident
agent on whom summons and other
legal processes may be served in all
actions or legal proceedings against
such corporation
- Section 128 provides:
Section 128. Resident agent;
service of process. - The Securities and
Exchange Commission shall require as
a condition precedent to the issuance
of the license to transact business in
the Philippines by any foreign
corporation that such corporation file
with the Securities and Exchange
Commission a written power of
attorney designating some person who
must be a resident of the Philippines,
on whom any summons and other
legal processes may be served in all
actions or other legal proceedings
against such corporation, and
consenting that service upon such
resident agent shall be admitted and
held as valid as if served upon the duly
authorized officers of the foreign
corporation at its home office. Any
such foreign corporation shall likewise
execute and file with the Securities
and Exchange Commission an
agreement or stipulation, executed by
the proper authorities of said
corporation, in form and substance as
follows:

"The (name of foreign
corporation) does hereby stipulate and
agree, in consideration of its being
granted by the Securities and
Exchange Commission a license to
transact business in the Philippines,
that if at any time said corporation
shall cease to transact business in the
Philippines, or shall be without any
resident agent in the Philippines on
whom any summons or other legal
processes may be served, then in any
action or proceeding arising out of any
business or transaction which
occurred in the Philippines, service of
any summons or other legal process
may be made upon the Securities and
Exchange Commission and that such
service shall have the same force and
effect as if made upon the duly-
authorized officers of the corporation
at its home office."
Whenever such service of
summons or other process shall be
made upon the Securities and
Exchange Commission, the
Commission shall, within ten (10) days
thereafter, transmit by mail a copy of
such summons or other legal process
to the corporation at its home or
principal office. The sending of such
copy by the Commission shall be
necessary part of and shall complete
such service. All expenses incurred by
the Commission for such service shall
be paid in advance by the party at
whose instance the service is made.
In case of a change of address
of the resident agent, it shall be his or
its duty to immediately notify in
writing the Securities and Exchange
Commission of the new address. (72a;
and n)
- The necessity of the appointment of a
resident agent is only for the purpose
of receiving summons and other legal
processes in any legal action or
proceeding against the foreign
corporation
 Who may be appointed as a resident
agent?
- Section 127 provides that:
Section 127. Who may be a
resident agent. - A resident agent may
be either an individual residing in the
Philippines or a domestic corporation
lawfully transacting business in the
Philippines: Provided, That in the case
of an individual, he must be of good
110
moral character and of sound financial
standing. (n)
 May a partnership be appointed as a
resident agent?
- Yes, domestic corporation taken in its
general sense not legal sense
 If there is a resident agent appointed.
May summons be served to any
officers of the corporation?
- No, if there is a resident agent, the
designation is exclusive and service
must be made only to the resident
agent or else the service is without
force and effect unless made to him
- Thus, while the law allows service
upon the SEC or any of its officers or
agents within the Philippines
- The two modes may become effective
only if the foreign corporation failed or
neglected to designate such a person
or an agent
- Summons must be made only to
resident agent except when there is no
resident agent appointed
- Where such foreign corporation
actually doing business here has not
applied for a license to do and has not
designated an agent to receive
summons, then service of summons
on it will be made pursuant to the
provisions of the rules of court. If such
foreign corporation has a license to do
business, then summons to it will be
served on the agent designated by it
for the purpose, or otherwise in
accordance with the Corporation Law
(General Corporation of the Philippines
vs. Union Insurance Soc. Of Canton
Ltd.)
 If the foreign corporation conducts
business in the Philippines without the
license requirement. What is the
effect?
- Section 133 provides:
Section 133. Doing business
without a license. - No foreign
corporation transacting business in
the Philippines without a license, or its
successors or assigns, shall be
permitted to maintain or intervene in
any action, suit or proceeding in any
court or administrative agency of the
Philippines; but such corporation may
be sued or proceeded against before
 111

Philippine courts or administrative

tribunals on any valid cause of action the Philippines Philippines with
recognized under Philippine laws. (69a) with a license can the requisite
sue before license can be sued
- if they do so, the responsible officers Philippine Courts in the Philippine
may be subjected to the penal Courts
sanctions provided for in section 144
of the code, which may either be fine Subject to certain A foreign
or imprisonment exceptions, a corporation
foreign corporation transacting
 What if it is not doing business doing business in business in the
without a license? the country Philippines without
without a license a license can be
- If it is not transacting business in the cannot sue in sued in Philippine
Philippines, even without a license, it Philippine Courts Courts
can sue before the Philippine Courts
If it is not if it is not doing
 The general rule is that “it is not the transacting business in the
lack of required license but doing business in the Philippines, it
business without a license which bars Philippines, even cannot be sued in
a foreign corporation form access to without a license, Philippine Courts
our courts.” it can sue before for lack of
the Philippine jurisdiction
 Exception: Courts
 A foreign corporation not doing
1. Foreign corporations can sue business in the Philippines, may it be
before the Philippine Courts if the sued?
act or transaction involved is an
“isolated transaction” or the - If it is not transacting business in the
corporation is not seeking to country it cannot be sued for lack of
enforce any legal or contractual jurisdiction
rights arising from, or growing out
of, any business which it has  Is there any sanction that can be
transacted in the Philippines enforced to foreign corporations which
are doing business without the
2. Neither is a license required before required license?
a foreign corporation may sue
before the forum if the purpose of - Penal sanctions under section 144
the suit is to protect its trademark,
trade name, corporate name, - Any violation of the code is subject to
reputation or goodwill; such penal sanctions

3. Or where it is based on a violation  What would constitute doing

of the Revised Penal Code; business?

4. Or merely defending a suit filed - The true test, however, seems to be

against it whether the foreign corporation is
continuing the body or substance of
5. Or where a party is stopped to the business or enterprise for which it
challenge the personality of the was organized or whether it has
corporation by entering into a substantially retired from it and
contract with it. turned it over to another. The term
implies a continuity of commercial
 Rules laid down by the SC dealings and arrangements, and
contemplates, to that extent, the
performance of acts or works or the
A. As to B. As to exercise of some of the functions
whether or whether or normally incident to, and in
not it can not it can be progressive prosecution of, the
sue sued purpose and object of its organization
(Mentholatum Co. Inc. vs. Mangaliman)
A foreign A foreign
corporation corporation Mentholatum vs. Mangaliman
transacting or transacting
doing business in business in the

- The true test, however, seems to be
whether the foreign corporation is
continuing the body or substance of
the business or enterprise for which it
was organized or whether it has
substantially retired from it and
turned it over to another. The term
implies a continuity of commercial
dealings and arrangements, and
contemplates, to that extent, the
performance of acts or works or the
exercise of some of the functions
normally incident to, and in
progressive prosecution of, the
purpose and object of its organization
- Whatever transaction the Philippine-
American Drug Co. had executed in
view of the law, the Mentholatum Co.
did it itself. And the Mentholatum Co.
being a foreign corporation doing
business in the Philippines without the
license required by section 68 of the
Corporation Law, it may not prosecute
this action for violation of trade mark
and unfair competition
 Why is foreign corporations barred
access from our courts if they do
business without a license?
- Marshall-Wells Co. vs. Henry W. Elser
and Co.
Marshall-Wells Co. vs. Henry W. Elser
and Co.
- The object of the statute was to subject
the foreign corporation doing business
in the Philippines to the jurisdiction of
its courts. The object of the statute
was not to prevent the foreign
corporation from performing single
acts, but to prevent it from acquiring a
domicile for the purpose of business
without taking the steps necessary to
render it amenable to suit in local
courts.
Bulakhidas vs. Navarro
- It is settled that if a foreign corporation
is not engaged in business in the
Philippines, it may not be denied the
right to file an action in Philippine
courts for isolated transactions
- The object of section 68 and 69 of the
Corporation law was not to prevent the
foreign corporation from performing
single acts, but to prevent it from
acquiring a domicile for the purpose of
business without taking the steps
necessary to render it amenable to suit
in the local courts. It was never the
purpose of the Legislature to exclude a
112
foreign corporation which happens to
obtain an isolated order for business
from the Philippines, from securing
redress in the Philippine courts
The Swedish East Asia Co., Ltd. Vs.
Manila Port Service
- It must stated that the section is not
applicable to a foreign corporation
performing single acts or “isolated
transactions.” There is nothing to
show that the petitioner has been in
the Philippines engaged in continuing
business or enterprise for which it was
organized, when the sixteen bundles
were erroneously discharged in
manila, for it to be considered as
transacting business in the
Philippines. The fact is that the
bundles, the value of which is sought
to be recovered, were landed not as a
result of a business transaction,
isolated or otherwise, but due to a
mistaken belief that they were part of
the shipment of forty similar bundles
consigned to persons or entities in the
Philippines, there is no justification
therefore, for invoking the section
 There were 3 contracts entered into,
how come they were still not
considered as doing business? (Antam
Consolidted, Inc. vs. CA)
- Every case shall be judged in the light
of its peculiar circumstances, where a
single act or transaction however, is
not merely incidental or casual but
indicates the foreign corporation’s
intention to do other business in the
Philippines, said single act or
transaction constitutes “doing” or
“engaging in” or “transacting” business
in the Philippines
- In the case at bar, the transaction
entered into by the respondent with
the petitioners are not a series of
commercial dealings which signify an
intent on the part of the respondent to
do business in the Philippines but
constitute an isolated one which does
not fall under the category of “doing
business.”
- The records show that the only reason
why the respondent entered into the
second and third transactions with the
petitioner was because it wanted to
recover the loss it sustained from the
failure of the petitioners to deliver the
crude coconut oil under the first
transaction and in order to give the
latter a chance to make good on their
obligation. From these facts alone, it

can be deducted that in reality there
was only one agreement between the
petitioners and the respondent.
- The three seemingly different
transactions were entered into by the
parties only in an effort to fulfill the
basic agreement and in no way
indicate an intent on the part of the
respondent to engage in a continuity of
transactions with petitioners which
will categorize it as a foreign
corporation doing business in the
Philippines
- 3 contracts, but according to the court
was not doing business in the
Philippines
Far East Int’l import vs. Nankai Kogyo
Co. Ltd.
- Only one contract , but according to
the Supreme Court was doing
business in the Philippines
- Every case shall be judged in the light
of its peculiar circumstances, where a
single act or transaction however, is
not merely incidental or casual but
indicates the foreign corporation’s
intention to do other business in the
Philippines, said single act or
transaction constitutes “doing” or
“engaging in” or “transacting” business
in the Philippines
- In the instant case, the testimony of
Atty. Pablo Ocampo, that appellant
was doing business in the Philippines
corroborated by no less than Nabuo
Toshida, one of appellant’s officers,
that he was sent to the Philippines to
look into the operation of mines,
thereby revealing the defendant’s
desire to continue engaging in
business here, after receiving the
shipment of the scrap iron under
consideration, making the Philippines
a base thereof.
- In such a case, the single act of
transaction is not merely incidental or
casual, but is of such character as
distinctly to indicate a purpose on the
part of the operations for the conduct
of a part of corporation’s ordinary
business
 If a corporation appoints a distributor
or a representative, will it necessarily
imply doing business in the country?
- If the foreign corporation maintained
an independent status during the
existence of the disputed contract.
113
- Appointment of a distributor or
representative in the Philippines,
unless it has an independent status
(transacts and does business in its
own name and for its account and not
of the foreign corporation)
- if that be the case the mere
appointment of a distributor will not
constitute doing business
 How do you know if it has an
independent status?
- Communications Materials and Design
vs. CA
Communications Materials and Design
vs. CA
- A perusal of the agreements between
petitioner ASPAC and the respondents
show that there are provisions which
are highly restrictive in nature, such
as to reduce petitioner ASPAC to a
mere extension or instrument of the
private respondents
- ITEC was doing business without a
license, however ASPAC is estopped
- by entering into the Representative
Agreement” with ITEC, petitioner is
charge with knowledge that ITEC was
not licensed to engage in business
activities in the country, and is thus
stopped from raising in defense such
incapacity of ITEC, having chosen to
ignore or even presumptively take
advantage of the same
- In top-weld we ruled that a foreign
corporation may be exempted from the
license requirements in order to
institute an action in our courts if its
representative in the country
maintained an independent status
during the existence of the disputed
contract. Petitioner is deemed to have
acceded to such independent
character when it entered into the
Representative Agreement with ITEC
Western Equipment and Supply Co.
vs. Reyes
- The company is not here seeking to
enforce any legal or contract rights
arising from, or growing out of any
business which it has transacted in
the Philippine Islands. The sole
purpose of the action is to protect its
reputation, its corporate name, its
goodwill, whenever that reputation,
corporate name or goodwill have
through the natural development of its
trade, established themselves

- And it contends that its rights to the
use of its corporate and trade name, is
a property right, a right in rem, which
may assert and protect against all the
world, in any of the courts of the world
even in jurisdictions where it does not
transact business just the same as it
may protect its tangible property, real
or personal, against trespass, or
conversion
- Since it is the trade and not the mark
that is to be protected a trademark
acknowledges no territorial boundaries
or municipalities or states or nations,
but extends to every market where the
trader’s goods have become known
and identified by the use of the mark
General Garments Corporation vs.
Director of Patents
- A foreign corporation which has never
done business in the Philippine
Islands and which is unlicensed and
unregistered to do business here, but
is widely and favorably known in the
Islands through the use therein of its
products bearing its corporate and
trade name has a legal right to
maintain an action in the Islands
- Mentholatum case was subsequently
derogated when Congress, purposely
to “counteract the effects” of said case,
enacted R.A. 638, inserting Section 21-
A in the Trademark Law, which allows
a foreign corporation or juristic person
to bring an action in Philippine Courts
for infringement of a mark or trade-
name, for unfair competition, or false
designation of origin and false
description, “whether or not it has
been licensed to do business in the
Philippines under Act Numbered
Fourteen hundred and fifty-nine, as
amended, otherwise known as
Corporation Law, at the time it brings
complaint.
Puma Sporschufabriken Rudolf
Dassler, K.G. vs. IAC and MIL-ORO
MFG. Corp.
- Treaties for part of the law of the land
- Quoting the Paris Convention and the
case of Vanity Fair Mills Inc. vs. T.
Eaton Co. this court further said:
“By the same token, the
petitioner should be given the
same treatment in the
Philippines as we make
available to our own citizens.
We are obliged to assure to
nationals of countries of the
114
Union an effective protection
against unfair competition on
the same way that they are
obligated to similarly protect
Filipino Citizen and firms
- The ruling in the aforecited case is in
consonance with the Convention of the
Union of Paris for the protection of
Industrial Property to which the
Philippines became a party. Article 8
thereof provides that a trade name
shall be protected in all the countries
of the Union without the obligation of
filing or registration, whether or not it
forms part of the trademark
Le Chemiste Lacoste vs. Fernandez
- The French company may gain access
to our courts, in the first place it was
not doing business in the Philippines
- The marketing of its products in the
Philippines is done through an
exclusive distributor, Rustan
Commercial Corporation. The latter is
an independent entity which buys and
then markets not only products of the
petitioner but also many other
products bearing equally well-known
and established trademarks and trade-
names
 Assuming Rustans had no
independent status would the SC
grant Lacoste access to our courts?
- Even if Lacoste did business in the
Philippines it can bring action because
the case involves a violation of our
penal code
- Such was a violation of article 189 of
the RPC, if prosecution follows after
the completion of the preliminary
investigation being conducted by the
Special Prosecutor the information
shall be in the name of the People of
the Philippines and no longer the
petitioner which is only an aggrieved
party since a criminal offense is
essentially an act against the State. It
is the latter which is principally the
injured party although there is a
private right violated
- The records show that the goodwill
and reputation of the petitioner’s
products bearing the trademark
Lacoste date back even before 1964
when Lacoste clothing apparels were
forst marketed in the Philippines. To
allow Hemandas to continue using the
trademark Lacoste for the simple
reason that he was the first registrant
in the Supplemental Register of a

trademark used in international
commerce and not belonging to him is
to render nugatory the very essence of
the law on trademarks and trade
names
Atlantic Mutual Insurance Co. vs.
Cebu Stevedoring Co.
- The law denies to a foreign corporation
the right to maintain suit unless it has
previously complied with a certain
requirement, then such compliance, or
the fact that the suing corporation is
exempt there from, becomes a
necessary averment in the complaint
- These are matters peculiarly within the
knowledge of appellants alone, and it
would be unfair to impose upon
appellee the burden of asserting and
proving the contrary. It is enough that
foreign corporations are allowed by law
to seek redress in our courts under
certain conditions: the interpretation
of the law should not go so far as to
include, in effect, an inference than
those conditions have been met from
the mere fact that the party suing is a
foreign corporation
Olympia Business Machines Co. vs. E.
Razon
- How do you distinguish this case with
Atlantic?
- In Atlantic it dismissed the case, while
in Olympia it did not
Time Inc. vs. Reyes
- We fail to see how these doctrines can
be a propos in the case at bar, since
the petitioner is not “maintaining any
suit” but is merely defending one
against itself; it did not file any
complaint but only a corollary
defensive petition to prohibit the lower
court from further proceeding with a
suit that it had no jurisdiction to
entertain
 What law govern foreign corporation
doing and transacting business in the
Philippines with a license
- Laws of the Republic of the Philippines
save and except that would normally
be those matters which concern its
formation, organization or dissolution,
or those fixing the relationship,
liabilities, responsibilities, or duties of
the stockholders, members or officers
of the foreign corporation or their
relations to each other.
115
- In effect, intra-corporate or internal
matters not affecting creditors or the
public in general are governed not by
Philippine laws but the law under
which the foreign corporation was
formed or organized
Section 129. Law applicable. -
Any foreign corporation lawfully doing
business in the Philippines shall be
bound by all laws, rules and
regulations applicable to domestic
corporations of the same class, except
such only as provide for the creation,
formation, organization or dissolution
of corporations or those which fix the
relations, liabilities, responsibilities, or
duties of stockholders, members, or
officers of corporations to each other
or to the corporation. (73a)
 Will the pre-emptive rights of a foreign
corporation be governed by the same
section of the code? Is the pre-emptive
rights of a stockholder in a domestic
corporation same as the pre-emptive of
a stockholder of a foreign corporation.
- No
M.E. Grey vs. Insular Lumber
Company
- PNB vs. Gonzales, will this apply to a
foreign corporation? How do you
distinguish this case from a Philippine
law?
- Since it concerns the rights of
stockholders it is the law of New York
that should govern
 Is the license to do business of a
foreign corporation subject to
suspension or revocation? What are
the grounds?
- Section 134 provides:
Section 134. Revocation of
license. - Without prejudice to other
grounds provided by special laws, the
license of a foreign corporation to
transact business in the Philippines
may be revoked or suspended by the
Securities and Exchange Commission
upon any of the following grounds:
1. Failure to file its annual report or
pay any fees as required by this Code;
2. Failure to appoint and maintain a
resident agent in the Philippines as
required by this Title;

3. Failure, after change of its resident
agent or of his address, to submit to
the Securities and Exchange
Commission a statement of such
change as required by this Title;
4. Failure to submit to the Securities
and Exchange Commission an
authenticated copy of any amendment
to its articles of incorporation or by-
laws or of any articles of merger or
consolidation within the time
prescribed by this Title;
5. A misrepresentation of any material
matter in any application, report,
affidavit or other document submitted
by such corporation pursuant to this
Title;
6. Failure to pay any and all taxes,
imposts, assessments or penalties, if
any, lawfully due to the Philippine
Government or any of its agencies or
political subdivisions;
7. Transacting business in the
Philippines outside of the purpose or
purposes for which such corporation is
authorized under its license;
8. Transacting business in the
Philippines as agent of or acting for
and in behalf of any foreign
corporation or entity not duly licensed
to do business in the Philippines; or
9. Any other ground as would render it
unfit to transact business in the
Philippines. (n)
 SEC does not have the sole authority
to suspend or revoke the license of a
foreign corporation doing business in
the Philippines, other government
agencies like the Central Bank , the
Insurance Commission may also do so
within their respective dominion,
despite the provision of section 134
 If the SEC believes that revocation is
warranted, section 135 provides that:
Section 135. Issuance of
certificate of revocation. - Upon the
revocation of any such license to
transact business in the Philippines,
the Securities and Exchange
Commission shall issue a  Jurisdiction of special commercial
corresponding certificate of revocation,
furnishing a copy thereof to the
appropriate government agency in the
proper cases.
The Securities and Exchange
Commission shall also mail to the
corporation at its registered office in
116
the Philippines a notice of such
revocation accompanied by a copy of
the certificate of revocation. (n)
 Voluntary withdrawal of license
- All 3 conditions must be complied with
Section 136. Withdrawal of
foreign corporations. - Subject to
existing laws and regulations, a foreign
corporation licensed to transact
business in the Philippines may be
allowed to withdraw from the
Philippines by filing a petition for
withdrawal of license. No certificate of
withdrawal shall be issued by the
Securities and Exchange Commission
unless all the following requirements
are met;
1. All claims which have accrued in
the Philippines have been paid,
compromised or settled;
2. All taxes, imposts, assessments,
and penalties, if any, lawfully due to
the Philippine Government or any of
its agencies or political subdivisions
have been paid; and
3. The petition for withdrawal of
license has been published once a
week for three (3) consecutive weeks in
a newspaper of general circulation in
the Philippines.
P.D. 902-A
 P.D. 902-A was amended by R.A. 8799
or the SECURITIES REGULATION
CODE in the year 2000
 The jurisdiction of SEC for cases
falling under section 5 thereof was
transferred to the courts of general
jurisdiction designated by the SC, they
were called special commercial courts,
the only exceptions were revocation of
corporate franchise and calling of
elections
 However the SEC retained receivership
or suspension payments within June
20,2000
courts are exclusive and original,
jurisdiction is conferred by law; 1
Special Commercial Court per region
except MAKATI and QUEZON CITY
which has two
 Devices or Schemes

- Pyramid scheme (misrepresentation)-
Special Commercial Courts
- Syndicated estafa- not bailable
 Alleje case
- Falls squarely under sec. 5 (a) Special
Commercial Courts
- Allegation corporate officers employing
schemes in diverting
- Not only detrimental to corporation,
but general membership
- Fraud must be stated with
particularity
Abad vs. CFI of Pangasinan
- Fraud must be stated with
particularity otherwise it may be filed
to any court
 Intra-corporate
- Exclusive and original jurisdiction of
special commercial courts
- Sole criteria is there must be an intra-
corporate relationship
- Pertaining to a controversy (speaks
also of intra-partnership controversy,
that partnership must be registered
with the SEC)
 Rule now
1. Necessarily be an intra-corporate
relationship; and,
2. The controversy must arise out of said
relationship
 Intra-corporate relationship alone will
not suffice to put it in the ambit of
special commercial courts and courts
of general jurisdiction may take
cognizance
 Case of a transferee of shares of stock
to compel the corporation to recognize
him as a stockholder
 How can it be intra-corporate when he
is not yet fully paid
- When the transferee has done all he
can be required to do to render the
transfer effectual and the corporation
refuses to register the transfer, the
requirement of the registration is
waived and the transferee is
considered technically a stockholder
who may sue to enforce the right to
have the transfer registered
 Florendo vs. rivera, Embassy Farms
- The transferor withheld the delivery,
they are not yet prima facie; it will not
be considered intra-corporate
 Controversies in the appointment
(asked in the bar)
- Cases involving election, appointment
and removal
 In Andaya the court said that a
corporate officer elected or appointed
by the BOD is always a corporate act
117
- The fact that petitioner sought
payment of his back wages, other
benefits as well as moral and
exemplary damages and attorney’s fees
in his complaint will not operate to
prevent the SEC from exercising its
jurisdiction under P.D. 902-A. The
jurisdiction will not wrest on the NLRC
just because of that
Tabang vs. NLRC
- Jurisdiction lies originally and
exclusively to special commercial
courts and not in the NLRC
- SEC has jurisdiction over cases of
removal from employment of corporate
officers
- The relationship of a person to a
corporation, whether as officer or as
agent or employee or not determined
by the nature of the servides
performed, but by the incidents of the
relationship on they actually exist
- Corporate officers dismissal is always
a corporate act or intra-corporate
controversy
Midland construction vs. Movilla
- NLRC will be possessed of jurisdiction
exception will not apply to mere
recovery
 Main consideration
- Asserts his right to the office or
questions the propriety or validity of
his ouster or removal, it will be the
special commercial courts and not the
NLRC
 Securities Regulation Code
- Transferred jurisdiction of the SEC to
Special Commercial Courts
- Suspension of payment, appointment
of management receivership
 What is the reason for suspension of
all claims?
- The reason for suspending actions for
claims against the corporation is not
really to enable the management
committee or the rehabilitation
receiver to substitute the defendant in
any pending action against it before
any court, tribunal or body. The real
justification is to enable the
management committee or
rehabilitation receiver to effectively
exercise his powers free from any
Judicial or extra-judicial interference
that might unduly hinder or prevent
the “rescue” of the debtor company. To
allow such other actions to continue
would only add to the burden of the
management committee pr
rehabilitation receiver, whose time,
 118

effort and resources would be wasted  Effect of suspension- you cannot

in defending claims against the foreclose
corporation instead of being directed  What are claims?
towards restructuring and - Debts or demands of pecuniary
rehabilitation.(PAL vs. Spouses Sadic nature. Assertion of a right to have
and Kurangking) money paid
- To enable the receiver to effectively - Claims against the corporation shall
exercise his or her power free form any be suspended, assertion of a right to
judicial or extra-judicial that may have money paid; it must present a
disturb monetary claim, liquidated or
 3 types of suspension of payments unliquidated
1. Simple suspension of payments  Nullification of corporations does not
- where deferment of payment of claims present a monetary claim of pecuniary
against a distress company; ask the nature
court to be given time to the payment Union vs. CA
of liability by postponing the payment - It does not allow a mere individual to
- When it has sufficient assets and file the petition which is limited to
liabilities but forces the impossibility corporations partnership or
of meeting them when they associations.
respectively fall due - Where no authority is granted to hear
2. Suspension of receiver with a petitions of individuals for suspension
management committee with a of payments, such petition are beyond
rehabilitation play or suspension of the competence of the SEC
payments accompanied by a proposal  What happens if there is a suspension
for rehabilitation (with or without order?
rehabilitation)  Explain the key phrase “quality is
- corporation has sufficient assets to equity”
- All creditors stand on equal footing,
cover its liabilities, but sees the
possibility; is or without rehabilitation secure or unsecure, holding or lien or
plans; normally would attach the without a lien, no creditor may enforce
rehabilitation plan his lien while rehabilitation is going
- For purpose of economic development (Alemar case)
3. Suspension of payments when the - No preference shall be given
corporation has no sufficient assets to RCBC vs. IAC
- Decided on motion for reconsideration
its liabilities
- It court 7 years to decide
 May it still be revived?
- Yes, it may still be revived authentication
 How can a corporation with more  Rule of the thumb
- Automatic suspension even if not
liabilities than assets continue its
decreed in the decision itself
operations profitably?
- Once lifted the preferred creditors will
- Even if the distressed company has no
regain their preference
sufficient assets and liabilities it can
 Appointment of a management
go for suspension
committee
- It asked for a management committee
- Take over the management committee
without a receiver plan (Victorius
of the distressed corporation
Milling case) - Extraordinary and drastic remedy
 Convert their claims into equity - Without any remedy
- Their liability was almost wiped out  What is an intra-corporate
they became stockholders instead of controversy?
creditors - Section 5(B)
- After 5 years those who converted sold - Sole criteria is whether there exists an
it back to the corporation, thereby intra-corporate dispute is that if there
making profits is an intra-corporate relationship
 Amendment is for the economic  Why is there suspension of all actions
development of the country against claims when a receiver is
 What if walang amendment, e mas
appointed?
maraming liabilities kesa assets - To enable the management committee
 Suspension order- all actions for
to exercise its powers
claims against the corporation are
accordingly suspended at whatever
stage the proceedings maybe
 119

Sy Chim vs. Sy Siy Ho (before a - Special commercial courts where

management committee may be opt by principal office is located/established
a court) (section 5 rule 1)
- 2 requisites for a valid appointment of - Matters of payment/suspension must
management committee be filed in the city/ municipality where
1. Imminent danger of dissipation, loss, corporation is located
wastage or destruction of assets or  Under old rule, creditors have no right
other corporate properties to institute an action for receivership;
2. Paralysis of business operations, the now creditors, if they sold 20% they
mere apprehension of future can institute an action for receivership
misconduct based upon prior  Section 5
management - Service of summons may be made by
- Save and except in the case of a close fax/e-mail
corporation in case of deadlock E.B. Villarosa vs. Benito
management committee is allowed to - Will apply only if it is not an intra-
take over right away corporate controversy
Jacinto case  If the controversy arose out of an
- 2nd par of page 676 intra-corporate dispute rules on
- 2 requisites where present interim rules of procedure of intra-
- Wala ng mapautang, there was a corporate controversies shall govern
paralyzation  Rule 4 section 17- immunity from suit
Sy Chim  Rehabilitation receiver shall not
- Did not appoint a management subject to any action, claim or demand
committee in connection with any act done
- In the absence of a strong showing of omitted by him in good faith in the
an imminent danger of dissipation, exercise of his functions and powers
loss wastage or destruction of assets herein conferred
or other properties of a corporation  Claim
and paralysis of its business - Right to payment, whether or not it is
operations, the mere apprehension of reduced to judgment, liquidated or
future misconduct based upon prior unliquidated, fixed or contingent,
mismanagement will not authorize the matured or unmatured, disputed or
appointment of a management undisputed, legal or equitable and
committee secured or unsecured
 Section 5 and 6(D) governed by  Investment contracts
separate rules; interim rules and intra- - A contract, transaction or scheme
corporate controversy whereby a person invests his money in
 Venue of actions a common enterprise and is led to
- Rules of court- where the parties are expect profits primarily from the
residing effects of others
- Intra-corporate- no matter where the  The management committee and
parties are residing it will be in the city rehabilitation receiver are empowered
or municipality where the principal to:
office is located 1. Take custody and control of all assets
 Rehabilitation proceedings venue of the corporation
- In rem 2. Evaluate assets and liabilities,
- Acquired upon publication without earnings operations of the corporation
furnishing the creditors a copy of the 3. Determine the best way to protect the
petition and attachments thereof investors and creditors
- A creditor may now file the suspension 4. Study, review evaluate the feasibility of
proceedings; provides that creditors continuing operation and structures
owns at least 25% 5. Submit recommendations to the RTC
 Intra-corporate- rule 1 section 6 regarding rehabilitation plan
 Service of summons- rule 2 section 5 6. Rehabilitate the corporation if
- Summons may be made to anyone determined to be feasible by the RTC
 In case of intra-corporate dispute, 7. Report to the RTC until the
elections, fraud, etc; if they are corporation is dissolved
governed by interim rules of procedure
on intra-corporate controversies THE SECURITIES REGULATION CODE
 Venue (RA8799)

- Also known as the Blue Sky Law since it
was enacted to protect the public from
unscrupulous promoters who stake business
which have no basis and sell shares and
interest therein to investors, who are then left
holding certificates representing nothing more
than a claim to a square of the blue sky.
-SEC. 2. Declaration of State Policy. – The
State shall establish a socially conscious, free
market that regulates itself, encourage the
widest participation of ownership in
enterprises, enhance the democratization of
wealth, promote the development of the
capital market, protect investors, ensure full
and fair disclosure about securities, minimize
if not totally eliminate insider trading and
other fraudulent or manipulative devices and
practices which create distortions in the free
market.
BROKER - person who buys and sells
securities for the account of others.
DEALER - person who buys and sells
securities for his/her own account in the
ordinary course of business.
NOTE: No person shall engage
in the business of buying or selling
securities in the Philippines as a
broker or dealer, or act as a
salesman, or an associated person
of any broker or dealer unless
registered as such with the
Commission. (Sec 28)
SECURITES - shares, participation or
interests in a corporation or in a commercial
enterprise or profit-making venture and
evidenced by a certificate, contract,
instrument, whether written or electronic in
character. It includes:
CODE: COFDIPS
a) Certificates of assignments, certificates
of participation, trust certificates,
voting trust certificates or similar
instruments;
b) Other instruments as may in the
future be determined by the
Commission;
c) Fractional undivided interests in oil,
gas or other mineral rights;
d) Derivatives like option and warrants;
e) Investment contracts, certificates of
interest or participation in a profit
sharing agreement, certificates of
deposit for a future subscription;
f) Proprietary or non proprietary
membership certificates
incorporations; and
g) Shares of stock, bonds, debentures,
notes, evidences of indebtedness,
asset-backed securities;
GR: Securities shall not be sold or offered for
sale or distribution within the PH, without a
120
registration statement filed with and approved
by SEC. Prior to such sale, information on the
securities, in such form and with such
substance as the Commission may prescribe,
shall be made available to each prospective
purchaser. (Sec 8)
EXCEPT: Exempt Securities under Sec 9
a) Any security issued or guaranteed by
the Government of the PH, or by any
political subdivision or agency thereof,
or by any person controlled or
supervised by, and acting as an
instrumentality of said Government.
b) Any security issued or guaranteed by
the government of any country with
diplomatic relations with the PH, or by
any state, province or political
subdivision thereof on the basis of
reciprocity: Provided, that the SEC
may require compliance with the form
and content of disclosures the
Commission may prescribe.
c) Certificates issued by a receiver or by a
trustee in bankruptcy duly approved
by the proper adjudicatory body.
d) Any security or its derivatives the sale
or transfer of which, by law, is under
the supervision and regulation of the
Office of the Insurance Commission,
Housing and Land Use Regulatory
Board, or the Bureau of Internal
Revenue.
e) Any security issued by a bank except
its own shares of stock.
AND Exempt Transactions under Sec 10
a) A judicial sale, or sale by an executor,
administrator, guardian or receiver or
trustee in insolvency or bankruptcy.
b) By or for the account of a pledge
holder, or mortgagee or any other
similar lien holder selling or offering
for sale or delivery in the ordinary
course of business and not for the
purpose of avoiding the provisions of
this Code, to liquidate a bona fide debt,
a security pledged in good faith as
security for such debt.
c) An isolated transaction in which any
security is sold, offered for sale,
subscription or delivery by the owner
thereof, or by his representative for the
owner’s account, such sale or offer for
sale, subscription or delivery not being
made in the course of repeated and
successive transactions of a like
character by such owner, or on his
account by such representative and
such owner or representative not being
the underwriter of such security.
d) Distribution by a corporation, actively
engaged in the business authorized by
its AOI, of securities to its stockholders
or other security holders as a stock
dividend or other distribution out of
surplus.

e) Sale of capital stock of a corporation to
its own stockholders exclusively, where
no commission or other remuneration
is paid or given directly or indirectly in
connection with the sale of such
capital stock.
f) Issuance of bonds or notes secured by
mortgage upon real estate or tangible
personal property, where the entire
mortgage together with all the bonds or
notes secured thereby are sold to a
single purchaser at a single sale.
g) Issue and delivery of any security in
exchange for any other security of the
same issuer pursuant to a right of
conversion entitling the holder of the
security surrendered in exchange to
make such conversion: Provided, That
the security so surrendered has been
registered under this Code or was,
when sold, exempt from the provisions
of this Code, and that the security
issued and delivered in exchange, if
sold at the conversion price, would at
the time of such conversion fall within
the class of securities entitled to
registration under this Code. Upon
such conversion the par value of the
security surrendered in such exchange
shall be deemed the price at which the
securities issued and delivered in such
exchange are sold.
h) Broker’s transactions, executed upon
customer’s orders, on any registered
Exchange or other trading market.
i) Subscriptions for shares of the capital
stock of a corporation prior to the
incorporation thereof or in pursuance
of an increase in its authorized capital
stock under the Corporation Code,
when no expense is incurred, or no
commission, compensation or
remuneration is paid or given in
connection with the sale or disposition
of such securities, and only when the
purpose for soliciting, giving or taking
of such subscriptions is to comply with
the requirements of such law as to the
percentage of the capital stock of a
corporation which should be
subscribed before it can be registered
and duly incorporated, or its
authorized capital increased.
j) The exchange of securities by the
issuer with its existing security holders
exclusively, where no commission or
other remuneration is paid or given
directly or indirectly for soliciting such
exchange.
k) The sale of securities by an issuer to
fewer than twenty (20) persons in the
Philippines during any twelve-month
period.
l) The sale of securities to any number of
the following qualified buyers: (i) Bank;
(ii) Registered investment house;
(iii)insurance company; (iv) Pension
121
fund or retirement plan maintained by
the Government of the Philippines or
any political subdivision thereof or
managed by a bank or other persons
authorized by the Bangko Sentral to
engage in trust functions; (v)
investment company or; (vi) Such other
person as the Commission may by rule
determine as qualified buyers, on the
basis of such factors as financial
sophistication, net worth, knowledge,
and experience in financial and
business matters, or amount of assets
under management.
PROTECTION OF SHAREHOLDERS
INTEREST
1. Tender Offers (Sec 19)
2. Proxy solicitation (Sec 20)
3. Internal record keeping and
accounting (Sec 22)
TENDER OFFER – A publicly announced
intention acting alone or in concert with
others to acquire equity securities of a
company. (2002 Bar Exams)
Instances when Tender Offer is Required
1. When the person intends to acquire
15% or more of the equity share of a
public company pursuant to an
agreement made between or among the
person and one or more sellers;
2. When the person intends to acquire
30% or more of the equity share of a
public company within a period of 12
months;
3. When the person intends to acquire
shares that would result in an
ownership of more than 50% of the
equity shares of a public company.
PROXY SOLICITATION
NOTE: A broker or dealer who holds or
acquires the proxy for at least ten per centum
(10%) or such percentage as the Commission
may prescribe of the outstanding share of the
issuer, shall submit a report identifying the
beneficial owner within ten (10) days after
such acquisition, for its own account or
customer, to the issuer of the security, to the
Exchange where the security is traded and to
the Commission. (Sec 20.5)
FRAUDULENT TRANSACTIONS AND OTHER
MARKET MANIPULATIONS
1. Wash Sale (Sec 24.1(a)(i)) – any
transaction in a security which
involves no change in the beneficial
ownership thereof.
2. Matched Order (Sec 24.1(a)(ii)) – order
or orders for the purchase or sale of
security with the knowledge that a
simultaneous order or orders of

substantially the same size, time and
price for the sale or purchase of such
security has, or will be entered by or
for the same or different parties.
Note: Wash sale and matched orders
become illegal when they are used as a
means to create false appearance of
active trading in the security concerned.
3. Marking the close – placing the
purchase order, at or near the close of
the trading period. The price that was
closed will then be the price that will
be posted on the following trading day.
4. Painting the tape – involves a series
of transactions that are reported
publicly to give the impression of an
activity in a security.
5. Squeezing the float – the part of an
outstanding security intentionally held
by dealers or other persons with a view
of reselling them later for profit.
6. Hype and dump – Act employed by a
person or group of persons of
purchasing the outstanding capital
stock of a dormant public shell
company for a nominal amount and
merge it with their privately held
company. They would then gain
control of the majority stocks of the
merged entity. Stock certificates are
often re-issued in the name of the
merged entity to relatives and
associates who act as nominees of the
person or persons employing the
device. They would then look for a
broker-dealer who would be willing to
make a “hype” of the securities. The
broker-dealer then generates volume
and advance bid price. When the
market reaches a high price, they
would “dump” their shareholdings and
bail out.
7. Boiler Room Operations – involves an
intensive selling campaign through
numerous salesmen by telephone or
through direct mail offerings for
securities of either a certain type or
from a specific issuer. Investors are
induced to purchase through hard-sell
based on unfounded predictions and
mailing of misleading market letters.
Note: Marking the close, Painting the
tape, Squeezing the float, Hype and
dump, Boiler Room Operations become
unlawful if it is effected to either raise
the price or induce the purchase of a
security or of a controlling, controlled, or
commonly controlled company by
others or to depress the price to induce
the sale of a security, whether of the
same or of a different class, of the same
issuer or of a controlling, controlled
company or common controlled
company by others or to create active
122
trading to induce the purchase through
said devices or schemes.
8. Circulating or Disseminating
Information – circulating an
information that any of the security
listed in the exchange will or is likely
to rise or fall because of manipulative
market operations of any one or more
persons conducted for the purpose of
raising or depressing the price of the
security and thus inducing the
purchase of such security.
9. Making False or Misleading
Statements with respect to any
material fact which he knew or had
reasonable ground to believe was so
false or misleading for the purpose of
inducing the purchase or sale of such
security.
10. Pegging or Fixing Or Stabilizing the
price of security effected either alone or
with others through any series of
transactions for the purchase or sale
thereof, if done for such purpose.
11. Short sale – selling of security which
the vendor does not own unless done
in accordance with the rules and
regulations of the SEC.
12. Insider Trading – the act of an insider
to buy or sell security of the issuer
while in possession of material
information with respect to such
security that is not generally made
known to the public unless (a) The
insider proves that the information was
not gained from such relationship; or
(b) If the other party selling to or
buying from the insider (or his agent)
is identified, the insider proves: (i) that
he disclosed the information to the
other party, or (ii) that he had reason
to believe that the other party
otherwise is also in possession of the
information.
Note: When is information
“material non-public”? - if: (a) It has
not been generally disclosed to the
public and would likely affect the
market price of the security after being
disseminated to the public and the
lapse of a reasonable time for the
market to absorb the information; or (b)
would be considered by a reasonable
person important under the
circumstances in determining his course
of action whether to buy, sell or hold a
security.
Note: Who is an “insider”? - “Insider”
means: (a) the issuer; (b) a director or
officer (or person performing similar
functions) of, or a person controlling the
issuer; (c) a person whose relationship
or former relationship to the issuer
gives or gave him access to material
 123

information about the issuer or the
security that is not generally available
to the public; (d) a government
employee, or director, or officer of an
exchange, clearing agency and/or self-
regulatory organization who has access
to material information about an issuer
or a security that is not generally
available to the public; or (e) a person
who learns such information by a
communication from any of the
foregoing insiders.
INDEPENDENT DIRECTOR
Person other than an officer or
employee of the corporation, its parent or
subsidiaries, or any other individual having a
relationship with the corporation, which
would interfere with the exercise of
independent judgment in carrying out the
responsibilities of a director.
All suits to recover damages shall be
brought before the Regional Trial Court,
which shall have exclusive jurisdiction to hear
and decide such suits. The Court is
authorized to award damages in an amount
not exceeding triple the amount of the
transaction plus actual damages.
NOTES
 If there are goods involved in the
multimarket, it is beyond the
jurisdiction of SEC (Ex First Quadrant)
 Criminal charge for violation of SRC is
a specialized dispute, hence it must be
first referred with SEC (Baviera vs.
Paglinawan G.R. No. 168380
Feb 8, 2007)
 T3 Rule in trading of Securities –
Trading day + 3 more days you must
comply with your obligations.

Corporations which require an

Independent Director
1. An exchange; or
2. Any corporation with a class of equity
securities listed for trading on an
Exchange or with assets in excess of
P50M and having 200 or more holders,
at least 200 of which are holding at
least 100 shares of a class of its equity
securities or which has sold a class of
equity securities to the public
pursuant to an effective registration
statement shall have at least two (2)
independent directors or such
independent directors shall constitute
at least 20% of the members of such
board, whichever is the lesser.

OPTION TRADING
 Put – a transferrable option or offer to
deliver a given number of shares of
stock at a stated price on any given
time during the stated period.
 Call – a transferrable option to buy a
specified number of share at a stated
price
 Straddle – a combination of put and
call.

SETTLEMENT OFFERS
At any time, during an investigation or
proceeding under this Code, parties being
investigated and/or charged may propose in
writing an offer of settlement with the
Commission. The Commission may only
agree to a settlement offer based on its
findings that such settlement is in the public
interest. Any agreement to settle shall have no
legal effect until publicly disclosed. Such
decision may be made without a
determination of guilt on the part of the
person making the offer.

DAMAGES