CORPORATE LAW: Midterms Reviewer

CHAPTER 8 - CORPORATE POWERS AND AUTHORITY

Powers of Corporation:
1. Express – those expressly authorized by the Corporation Code and other laws, and its
Articles of Incorporation or Charter.
2. Implied Powers (necessary) – those that can be inferred from or necessary for the exercise
of the express powers.
3. Incidental Powers – those that are incidental to the existence of the corporation
 There are express powers that are incidental powers like the power to acquire
properties.

Express Powers under the Corporation Code

a) General Powers (Sec 36, CCP)
1) Sue and be sued in its corporate name – GR: power vested to BOD; XPN: when the
circumstances allow the filing by a realtor-stockholder of a derivative suit in behalf
of the corporation without prior approval of the BOD.
2) Succession
3) Adopt and use a corporate seal
4) Amend articles of incorporation
5) Adopt, amend or repeal by-laws
6) For stock corporation- issue stocks to subscribers and to sell treasury stocks;
For non-stock corporations – admit members
7) Purchase, receive, take, or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with real and personal property pursuant to its lawful business
8) Enter into merger or consolidation
9) To make reasonable donations for public welfare, hospital, charitable, cultural,
scientific, civil or similar purposes. Prohibited: for partisan political activity
10) to establish pension, retirement and other plans for the benefit of directors,
trustees, officers and employees; and
11) other powers essential or necessary to carry out its purposes.

 Gokongwei, Jr. vs SEC: It is recognized by an authorities that every corporation has the
inherent power to adopt by-laws for its internal government, and to regulate the conduct
and prescribe the rights and duties of its members towards itself and among themselves in
reference to the management of its affairs. At common law, the rule was "that the power to
make and adopt by-laws was inherent in every corporation as one of its necessary and
inseparable legal incidents.”

Who may exercise the powers of the corporation? The Board of Directors
When are the powers not exercised by the Board?
 The powers are not exercised by the board directly if:
i. there is a management contract; and
ii. the powers of the board are delegated by majority vote of the board to an executive
committee

b) Specific Powers (Sec. 37-44, CCP) - (approval of the majority of the board and concurrence
of the stockholders representing 2/3 of the outstanding capital or 2/3 of the members is
necessary in the exercise of the following powers, except #6)
 1) Power to extend or shorten corporate term
- Power to extend life is not an inherent power because the State is presumed to have
granted it only for the period of time provided in the corporation’s charter.
- Power to shorten corporate life (although cover an amendment of the AOI) is an
inherent right since the decision to shorten the business life of a business endeavour
should really be addressed to the business decision of the co-ventures.
- It is only in the case of extension of the corporate term that a dissenting stockholder
may exercise his appraisal right to have his shares bought back at fair value by the
corporation.
2) Increase/decrease corporate stock
- Shall require approval by the SEC; not an inherent power
3) Incur or create bonded indebtedness
- Falls within the business judgment power of the BOD under the doctrine of
centralized management
- Sec. 36: express power to borrow money; no need for stockholders concurrence
- “bonded indebtedness” indebtedness of the corp. which are secured by mortgaged
on real or personal property
4) To deny pre-emptive right
5) Sell, dispose, lease, encumber all or substantially all of corporate assets
6) Purchase or acquire owns shares
7) To invest in another corporation, business other than the primary purpose
8) To declare stock dividends
9) To enter into management contract
10) Amend the Articles of Incorporation

Who may declare dividends?

1. Board of Directors alone – cash, property dividends
2. BOD with the approval of stockholders representing not less than 2/3 of Outstanding capital
– stock dividends

What are the conditions that must be present to declare dividends?

1. Unrestricted retained earnings
2. Resolution of the board or if stock dividends, the board with the concurrence of 2/3 of
outstanding capital

Can the Board be compelled to declare dividends every year? – NO. Declaration of dividends is
discretionary upon the Board. GR: Dividends are payable only when there are profits earned by the
corporation. XPN: stock corporations are prohibited from retaining surplus profits in excess of 100%
of their paid-in capital. XPN to the XPN: 1) definite corporate expansion projects/programs
approved by the board; 2) prohibited under any loan agreement with any financial
institution/creditor; 3) retention is necessary under special circumstances.

CHAPTER 9 - BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

Sources of Power of the Board:
1. Theory of Original Power – comes directly from the law; BOD is vested with the legal title to
the properties and business enterprise of the corporation.
2. Theory of delegated power – the authority exercised by the Board is viewed as derived or
delegated authority, delegated to them by stockholders or members of the corp. Promotes
 the notion of “agency” where the real sources of power are the stockholders or members,
and the representatives thereof would be the Board.

Qualifications of Directors:
1. Stock corporation- must own at least 1 share capital stock of the corp. in his own name;
Non-stock corp. – must be member. Must be a stockholder in his own right. It must be legal
title not beneficial title. Ex. Stockholder-trustor in a voting trust agreement cannot be a
director because he only has beneficial title; the trustee can be elected as director because
he has a legal title.
2. Majority of the directors/trustees must be residents of the Philippines
3. Must not have been convicted by final judgment of an offense punishable by imprisonment
for a period exceeding 6 years or a violation of the Corporation Code, committed within 5
years before the date of his election
4. Must be of legal age
5. Must possess other qualifications as may be prescribed in the By-Laws of the corporation.
Ex.: percentage equity participation of foreigners with respect to nationalized activities or he
must not be a director in a competing corporation.

BUSINESS JUDGMENT RULE – states that questions of policy or management are left solely to the
honest decision of officers and directors of a corporation and the courts are without authority to
substitute their judgment for the judgment of the BOD; the board is the business manager of the
corp. and so long as it acts in good faith, its orders are not reviewable by the courts or the SEC.

Branches of the Business Judgment Rule:

1. Resolutions approved, contracts and transactions entered into, by the BOD within the
powers of the corp. cannot be reversed by the courts, not even on the behest of the
stockholders of the corp.; and
2. Directors and officers acting within such business judgment cannot be held personally liable
for the consequence of such acts.

3-Fold Duties of Directors

1. Duty of Obedience
 To direct the affairs of the corporations only in accordance with the purposes for
which it was organized.
 Sec. 25: the directors or trustees and officers to be elected shall perform the duties
enjoined on them by the law and the By-Laws.
2. Duty of Diligence
 Sec. 31: Directors or trustees who wilfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of negligence or bad faith
in directing the affairs of the corp. shall be liable jointly and severally for all damages
resulting therefrom suffered by the corp., its stockholders or members and other
persons.
3. Duty of Loyalty
 Sec. 31: Directors or trustees who acquire any pecuniary or personal interest in
conflict with their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom.
 Sec. 34: where a director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corp., thereby obtaining profits which
should belong to the corp, he must account to the latter for all such profits by
refunding the same.
METHODS OF VOTING: Election of Directors (sec. 24)
1. Straight voting – every stockholders “may vote such number of shares for as many persons
as there are directors” to be elected.
2. Cumulative voting for one candidate – a stockholder is allowed to concentrate his votes and
“give one candidate as many votes as the number of directors to be elected multiplied by
the number of his shares shall equal”.
3. Cumulative voting by distribution - a stockholder may cumulate his shares by multiplying also
the number of his shares by the number of directors to be elected and distribute the same
among as many candidates as he shall see fit.

 Cumulative voting is not available in non-stock corporations unless provided for in

the By-Laws
 By cumulative voting, minority shall be given a seat
 No limit as to the term for BOD/BOT to be re-elected

Election of Directors/Trustees
 Stock corp - election of directors should be by the stockholders constituting a quorum; all
shareholders holding voting shares have the right to vote.
 Non-stock corp – straight voting only; members are entitled only to 1 vote.

Obligations of BOD/T after election:

1. Make a report to the SEC within 30days (mandatory and jurisdictional)
2. Shall serve only for one (1) year

Removal and Vacancies in the Board – requisites:

1. Must take place either at a regular or special meeting of the stockholders or members called
for the purpose
2. There must be previous notice to the stockholders or members of the intention to remove
3. The removal must be by a vote of the stockholders representing 2/3 of Outstanding Capital
or 2/3 members and
4. The director may be removed with or without cause unless he was elected by the minority,
in which case, it is required that there is cause for removal (violation of 3 duties- obedience,
diligence and loyalty)

 The call of the meeting must be made by the corp. secretary upon the order if the President
of stockholders representing majority of the members, otherwise the meeting is void.
 If there is no secretary, or the latter refuses, the notice may be signed by a stockholder or
member making the demand.
 Board has no power to discipline or remove any of its own members – it is vested with the
stockholders

The power to remove directors is vested with the stockholders

Filing of vacancies in the Board

1. By stockholders or members – if vacancy results because of 1) removal; 2) expiration of
terms; 3)other than removal or expiration of term (i.e death, resignation, abandonment)
where the remaining directors do not constitute a quorum; 4) increase in the number of
directors
2. By Board if remaining directors constitute a quorum – cases not reserved to stockholders or
members, i.e. other than removal or expiration of term
 a) Majority of the Board, not the majority number of board present

HOLD-OVER – if there is no succession that takes place, BOD/T shall hold the position.

Replacement of Hold-Over Directors

 Directors must be replaced by the stockholder or members in an election when their term of
office expires.
 The loss of rights of the directors is automatic upon the expiration of their term.
 If election is not held, the directors whose term expired can continue to function in a hold-
over capacity.
 If one of the hold-over directors resigns, the remaining hold-over directors cannot replace
him even if they constitute a quorum

DOCTRINE OF CORPORATE OPPORTUNITY

 If there is presented to a corporate director a business opportunity which:
1) corporation is financially able to undertake
2) from its nature, is in line with corporations business and is of practical advantage to it; &
3) one in which the corp has an interest or a reasonable expectancy.
 By embracing the opportunity, the self-interest of the director will be brought into conflict
with that of his corporation; hence, the law does not permit him to seize the opportunity
even if he will use his own funds in the venture
 GR: if a director seizes the opportunity thereby obtaining profits to the expense of the corp,
he must account all the profits by refunding the same to the corp.; XPN: the contract or act
may be ratified by a vote of the stockholders owning or representing at least 2/3 of the
outstanding capital stock.

INTERLOCKING DIRECTOR – when one or some or all of the directors in one corp is/are a director in
another corporation.
1. If the interest of the interlocking director in the corporations are both substantial
(stockholdings exceed 20% of Outstanding Capital Stock)
GR: a contract between two or more corporations having interlocking directors shall NOT be
invalidated on that ground alone
XPN: If the contract is fraudulent or not fair and reasonable

2. GR: If the interest of the interlocking director in one of the corporations is nominal while
substantial in the other, the contract shall be Voidable.
XPN: It will only be valid if the following conditions are present
b) The presence of such director/trustee in the board meeting in which the contract
was approved was NOT necessary to constitute a quorum for such meeting
c) That the vote of such BOD/T was not necessary for the approval of the contract
d) That the contract is fair and reasonable under the circumstances

3. Absence of a) and b), the contract can be ratified by the vote of stockholders representing
2/3 of the OTS or 2/3 of the members
 Full disclosure of the adverse interest of the BOD/T involved is made on such
meeting
 The contract is fair and reasonable under the circumtances

Compensation of Directors or Trustees

 General Rule: They shall be entitled to reasonable per diems only

  Exception:
a. when their compensation is fixed in the by-laws
b. when granted by the vote of stockholders representing at least a majority of the outstanding
capital stock at a regular or special meeting
c. when they are also officers of the corporation

SELF DEALING DIRECTORS/TRUSTEES/OFFICERS

 Are those who personally contract with the corporation in which they are directors
 It is discouraged because the D/T/O have fiduciary relationship with the corporation and
there can be no real bargaining where the same is acting on both sides of the trade
 The contract between the corp. and the self-dealing D/T/O is voidable unless:
a. Presence of D/T/O in the meeting approving the contract is not necessary to constitute a
quorum
b. Vote of D/T/O is not necessary for the approval of the contract
c. Contract is fair and reasonable
d. There was previous authorization by the BOD/T

EXECUTIVE COMMITTEE
 A body created by the by-laws and composed of some members of the board which, subject
to the statutory limitations, has all the authority of the board to the extent provided in the
board resolution or by-laws.
 Must be provided for in the by-laws and composed of not less than 3 members of the board
appointed by the board.
 May act by a majority vote of all of its members.

Limitations on the Powers of the Executive Committee - It cannot act on the following:
1. Matters needing stockholder approval;
2. Filling up of board vacancies;
3. Amendment, repeal or adoption of by-laws;
4. Amendment or repeal of any resolution of the Board which by its express terms is not amendable
or repealable; and
5. Cash dividend declaration.

MEETINGS OF DIRECTORS OR TRUSTEES

Kinds:
1. Annual meeting – the date is specified in the By-Laws
2. Regular meeting – held by the Board monthly, unless the By-Laws provide otherwise
3. Special meeting – held by the Board at any time upon the call of the President

 The President shall preside at all meetings of the Board

 The quorum in the meeting of the Board shall be the presence of a majority of the number
of directors as fixed in the articles of incorporation
 The required vote to pass a resolution shall be a majority vote of the directors present at
such meeting where quorum is achieved
 In the election of officers, the vote of the majority of all the members of the Board is
necessary
 BOD/T special meetings may be held anywhere in and outside of the Philippines.

Requisites for a Valid Board Meeting:

a) Meeting of the directors or trustees duly assembled as Board, at the place, time and manner
provided in the by-laws
 b) Presence of the required quorum
c) Decision of the majority of the quorum, or in other cases, majority of the entire board

Mode of attendance of Board Meetings

a) Attendance by proxy not allowed – because BOD has been elected by the stockholders
or members on the basis of his personal qualification and capabilities that he would
discharge his duties and functions personally
b) Tele-conferencing allowed for Board meeting - - there must be proper recording and the
safekeeping of the electronic recording

 Stockholders do not have any right to attend board meetings. The allowance of stockholders
to attend board meeting is upon the Board’s discretion.
 Stockholders cannot interfere with the management of the corporation
 Minutes of the Board Meetings must be signed by the Corporate Secretary to give probative
value and credibility

CORPORATE OFFICERS: appointed by the BOD; positions expressly mentioned in the By-Laws
1. President – who shall be a director
2. Treasurer – who may or may not be a director
3. Secretary – who shall be a resident and citizen of the Philippines
 Two or more position 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 to
prevent an abuse of power and discretion and to provide a system of check and balance
between such sensitive positions.

 Term of office are co-terminous with the BOD

TRUST FUND DOCTRINE

 By the trust fund doctrine subscriptions to the capital stock of a corporation constitute a
fund to which the creditors have the right to look for satisfaction of their claims. The scope
of the doctrine encompasses not only the capital stock but also other property and assets
generally regarded in equity as a trust fund for the payment of corporate debts.

 Cases where the Trust Fund Doctrine was violated:

a) When the corporation releases or condones payment of the unpaid subscription
b) When there is payment of dividends without unrestricted retained earnings
c) When properties are transferred in fraud of creditors
d) When properties are disposed or undue preference is given to some creditors even if the
corporation is insolvent.

DOCTRINE OF APPARENT AUTHORITY

 By the doctrine of apparent authority, the corporation will be estopped from denying the
agent’s authority if it knowingly permits one of its officers or any other agent to act within
the scope of an apparent authority and it holds him out to the public as possessing the
power to do those acts.
CHAPTER 10 - STOCKHOLDERS AND MEMBERS
Nature of the Rights of Stockholders
a) All stockholders have equal rights – each share shall be equal in all respects to every other
share
b) Preferences or restrictions applied to a class of shareholders shall exists and be valid only
when expressly “provided in the articles of incorporation and stated in the certificate of
stock”.

Rights of Stockholders:
1. Direct or indirect participation in management
2. Voting rights
3. Right to remove directors
4. Proprietary rights:
i. Right to dividends
ii. Appraisal right
iii. Right to issuance of stock certificate for fully paid shares
iv. Proportionate participation in the distribution of assets in liquidation
v. Right to transfer of stocks in corporate books
vi. Pre-emptive right
5. Right to inspect books and records
6. Right to be furnished with the most recent financial statement/financial report
7. Right to recover stocks unlawfully sold for delinquent payment of subscription; and
8. Right to file individual suit, representative suit and derivative suit

VOTING RIGHTS
 Inherent and incidental to ownership of stock in the crop.
 Attendance to meetings after due notice
 Quorum – stockholders representing a majority of the outstanding capital stock or majority
of the members
 Excluded from computation of quorum – delinquent shares or members; non-voting shares
or members
 Special stockholders meeting shall be called by Officer designated in the AOI, if none, by the
BOD/T or SEC, if there is no person authorized or the person authorized refuses to call a
meeting. XPN: In removal of directors, the corporate secretary makes the call upon order of
the President or majority of the OCS
 Place of meeting – principal office or principal place of business
 May vote in person or by proxy – proxy must be in writing filed with the corporate secretary
before the scheduled meeting ; no proxy shall be valid and effective for a longer period than
5 years at any one time
 Voting trust – for a period not exceeding 5 years; if the voting trust is a requirement for a
loan agreement, period may exceed 5 years but shall automatically expire upon full payment
of the loan
 Declared delinquent stockholders by the BOD for unpaid subscription are not entitled to
be to vote, to be voted for or to a representation at any stockholder’s meeting; shall not
be entitled to any of the rights but he shall still be entitled to receive dividends. If the
delinquent stockholder is a director, he shall continue to be a director but he cannot run
for re-election.
 Stockholder is still entitled to vote even if the shares are mortgaged or pledged unless he
authorizes the creditor in writing to vote.
 Executors/administrators have the right to vote
  Non stock members does not extend to their heirs the right to vote because it is personal,
unless provided in the AOI
 Pledgor or mortgagor have the right to attend and vote, unless expressly given in writing by
the pledger/mortgagee
 Sequestered shares – GR: right to vote retains to the stockholder; XPN: the government is
able to comply with either “public character” or two-tiered tests” = prima evidence show
that the shares are indeed ill-gotten and there is demonstrated imminent danger of
dissipation of the assets.

APPRAISAL RIGHT
 is the statutory right of a corporation’s minority shareholders to have a judicial proceeding
or independent valuator to determine a fair stock price and oblige the acquiring corp. to
repurchase shares at that price.
 shareholder’s 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. It may be exercised in the following instances:
a) Extension or reduction of corporate term
b) Change in the rights of stockholders, authorize preferences superior to those stockholders,
or restrict the right of any stockholder
c) Corporation authorized the board to invest corporate funds in another business or purpose
d) Corporation decides to sell or dispose of all or substantially all assets of corporation
e) Merger or consolidation

Rules for exercise of appraisal right:

1. The stockholder must be a dissenting stockholder- he voted against the proposed action
2. The stockholder must make a written demand on the corp within 30 days after the vote
3. The proposed action is any one of the instances where the appraisal right be exercised
4. The price to be paid is the fair value of the shares on the date before the vote was taken
5. The fair value shall be agreed upon but in case there is no agreement within 60 days from
the vote was taken, the fair value shall be determined by a majority of the 3 disinterested
persons one of whom shall be named by the stockholder, another by the corporation and
the third by the two (2) who were chosen. Decision is final; award shall be made within
30days (provided there is the presence of unrestricted retain earnings and with due
consideration of the Doctrine of Trust Fund)

PRE-EMPTIVE RIGHT
 right to purchase additional shares in the corporation prior to shares being made available
or purchase by the general public.
 is the shareholders’ right to subscribe to all issues or disposition of shares of any class in
proportion to their respective shareholdings. Purpose: to enable the shareholder to retain
his equity in the surplus.

RIGHT OF FIRST REFUSAL – provide that a stockholder who may wish to sell or assign his shares must
first offer the shares to the corporation or to the other existing stockholders of the corporation.

PRE-EMPTIVE RIGHT RIGHT OF FIRST REFUSAL

Is a common law right and may be exercised by
stockholders even when there is no provision
granted in the law; does not require any
statutory enabling provision
Pertains to that portion of the authorized capital
Arises only by virtue of contractual stipulations;
if not provided for by law or by the AOI, does not
exist at all; essentially creatures of Contract Law
Pertains to shares already issued
stock that has not been subscribed, i.e., unissued
shares that are offered for subscription
Claimed against the corporation on unissued Exercisable against another stockholder of the
shares of its capital stock and on treasury shares corporation on his shares of stock.

RIGHT TO INSPECT BOOK

 Must be exercised at reasonable hours on business days
 SH has not improperly used any information he secured through any previous examination
 Demand is made in good faith or for a legitimate purpose
 Mandamus is a proper remedy if the stockholder is being improperly deprived of his right to
inspect.
a) Book of minutes of stockholders meetings
b) Book of minutes of board meetings
c) Record or book of all business transactions; and
d) Stock and transfer book which contains the:
 All stocks in the name of the stockholders which are alphabetically arranged
 Amount paid and unpaid on all stocks and the date of payment of any instalment
 Alienation, sale or transfer of stocks; and
 Other entries as the by-laws may prescribe
 Corporate secretary is the officer duly authorized to make entries on the STB; Stock Transfer
agent is also authorized but is required to get license from the SEC

RIGHT TO INDIVIDUAL SUIT, REPRESENTATIVE SUIT OR DERIVATIVE SUIT

DERIVATIVE SUIT
 is one in which is instituted by a shareholder or a member of a corporation, for and in behalf
of the corporation for its protection from acts committed by directors, trustees, corporate
officers, and even third persons.
 It is an exception to the general rule that the corporation’s power to sue is exercised only by
the BOD/T
 The real party in interest is the corporation and the suing stockholder is a mere nominal
party
 Requisites:
1) He was stockholder or member at the time the acts or transactions subject of the
action occurred and at the time the action was filed and remains as such during the
pendency of the action;
2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the AOI, By-laws, laws or rules
governing the corporation to obtain the relief he desires;
 Exhaustion would be futile or useless because the Board itself would not
bring the suit for the reason that they are also guilty of part of the fraud
committed against the corporation
3) The reliefs sought pertain to the corporation;
4) No appraisal rights are available for the act or acts complained of;
5) The suit is not nuisance or harassment suit

 Legaspi Towers 300, Inc vs Muer: held that “since it is the corporation that is the real party-
in-interest in a derivative suit, then the reliefs prayed for must be for the benefit or interest
of the corporation. When the relied prayed for do not pertain to the corporation, then it is
an improper derivative suit”.
  Derivative suit may be instituted on Appeal – a suit that is not originally a derivative suit at
the onset, may on appeal, when it is shown that the cause of action accrues to the
corporation, and that the corporation is impleaded as a party thereto, may ripen into a
derivative suit.
 Chua vs CA: held that although the corporation was not a complainant in the criminal action,
the subject of the falsification was the corporation’s project and the falsified document were
corporate documents. Therefore, the corporation is a proper party in the petition for
certiorari because the proceedings in the criminal case directly and adversely affected the
corporation.

 Corporation’s retained counsel cannot defend the Board in a Derivative Suit

 Hornilla vs Salunat: held that a lawyer officially retained or engaged by a corporation cannot
defend members of the BOD in a derivative suit filed by a minority stockholder. It gives rise
to conflict of interest.

 Appointment of Receiver pending derivative suit

 Chase vs CFI Manila: held that in addition to the right to file a derivative suit, a shareholder,
in order to ensure that during the pendency of the derivative suit, the corporation is ran
properly, he can also ask the appointment of a receiver to take management away from the
board and instead place it in the hands of a receiver.

 The availability of appraisal right for the act or acts complained of is an important factor in
intra-corporate suits for the courts to determine whether the suit is a nuisance suit or one
brought for harassment.

 Yu vs Yukayguan:
- held that the failure to allege explicitly or otherwise, the fact that there were no
appraisal rights available for the acts complained of, was fatal to the merit of the
filing of the derivative suit.
- held that the failure to allege categorically that the suit was not a nuisance or a
harassment suit was fatal to the merit of the filing of the derivative suit.

INDIVIDUAL SUIT – those brought by the shareholder in his own name against the corporation when
a wrong is directly inflicted against him.

REPRESENTATIVE/CLASS SUIT – those brought by the stockholder in behalf of himself and all other
stockholders similarly situated when a wrong is committed against a group of stockholders.

CHAPTER 11 – SHARES OF STOCK

SHARES OF STOCK
- interest or right which an owner has in the management of the corporation, and its surplus
profits, and, on dissolution, in all assets remaining after the payment of its debts.
- The stockholder may own the share even if he is not holding a certificate of stock
- Constitute intangible personal property of the stockholders, which they can transact with as
in any other form of property, like assignment by way of disposition or pledge by way of
encumbrance
Common Shares – the most common type of shares which enjoy no preference.
Preferred Shares – par value shares which enjoy preference as to dividends or assets upon
dissolution as stated in the AOI.

Treasury Shares – shares which have been earlier issued as fully paid and have thereafter been
acquired by the corporation by purchase, donation, redemption or through some lawful
means.

Redeemable Shares – those which permit the issuing corporation to redeem or purchase its own
shares.

Escrow shares – shares subjected to an agreement by virtue of which the shares are deposited by
the grantor or his agent with a third person to be held by the latter until the performance of
a certain condition.

Modes of Dealings with shares of stock

1. Level 1 (original dealings) – the initial issuance of shares of stock from the Authorized Capital
Stock of the corp constitutes a commercial transaction between the issuing corp and he
subscribing stockholder = Subscription Agreement
2. Level 2 (subsequently issued) – contracts of disposition involve essentially a contract of sale
over the shares disposed of, and such a contract is between the original stockholder as the
seller, and the substitute stockholder, as buyer of the shares.

Modes of Tradition applicable to shares of stock

- Not capable of actual or physical delivery
- Can only be effective trough CONSTRUCTIVE DELIVERY by:
a) Execution of a public document – usually denominated as a “deed of sale of shares of stock”
or more properly “deed of assignment of shares of stock”
b) The transfer or negotiation of the titles, certificates or other evidence of the incorporeal
right – the endorsement and delivery of the stock certificates
c) The use and enjoyment by the buyer of the rights and privileges pertaining to the
incorporeal right, with the knowledge and consent of the selling stockholder

Rights of Corporation with respect to shares of stock

a) To call for the payment of unpaid subscription, together with interest accrued, if any
b) To impose interest on the unpaid subscription
c) To refuse to issue to the subscriber the certificates of stock covering shares where the
subscription has not been fully paid
d) To refuse to recognize and register the sale or assignment of any share where the
subscription has not been fully paid
e) To refuse to recognize a sale or assignment of shares which have not been duly registered in
the stock and transfer book.

How does one become a shareholder in a corporation?

- when he enters into a subscription agreement or contract with the corporation
- when one buys a share of stock from existing stockholder
- when one enters into a document of deed of assignment or transfer
- when one enters into a Voting Trust Agreement because the original cert in the name of the
trustor shall be cancelled for the duration of the agreement
- when one acquire share by operation of law like succession
SUBSCRIPTION AGREEMENT/CONTRACT - any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed

Pre-incorporation subscription - entered into before the incorporation and irrevocable for a period
of 6 months from the date of subscription unless all other subscribers consent or if the corporation
failed to materialize. It cannot also be revoked after filing the AOI with the SEC

Post-incorporation subscription – entered into after incorporation.

Nature of Subscription agreement: perfected upon the meeting of the minds of the corp and the
subscriber as to the number and subscription value of the shares

Valid considerations for subscription agreements:

1) cash
2) property – actually received by the corp; necessary or convenient for the corp’s use and
lawful purpose; and at a fair valuation equal to the par value of the stock issued to be
approved by the SEC
3) labor or services actually rendered to the corporation
4) prior corporate obligations
5) amounts transferred from unrestricted retained earnings to stated capital (in case of
declaration of stock dividends)
6) outstanding shares in exchange for stocks in the event of reclassification or conversion

DOCTRINE OF INDIVIDUALITY AND INDIVISIBILITY OF SUBSCRIPTION

 a subscription is one, entire and indivisible whole contract even if two or more shares are
covered. The subscriber is not entitled to the certificate for part or all of certificates covered
until full payment of the subscription price.

WATERED STOCK - are those issued not in exchange for its equivalent either in cash, property,
share, stock dividends, or services; thus, the issuance of such stocks are prohibited. These include
stocks:
1) issued without consideration (bonus share)
2) issued as fully paid when the corp has received a lesser sum of money than its issued value
(discounted share)
3) issued for consideration other than actual cash (i.e., property or services), the fair valuation
of which is less than its par or issued value or
4) issued as stock dividend when there are no sufficient retained earnings or surplus to justify it

 Directors or officers who consented to its issuance is solidarily liable to the corporation for
the difference in value.
 Those who have knowledge thereof must express his objection in writing and file the same
with the corporate secretary

When subscription become due and demandable:

 Section 67. Subject to the provisions of the contract of subscription agreement, the BOD may
at any time declare due and payable the unpaid subscriptions to the capital stock and may
collect the same or such percentage thereof, with accrued interest, if any
 When there is a call made by the BOD – CALL is a declaration by the BOD that the unpaid
subscriptions are due and payable to the corporation
 When the corporation becomes insolvent
When shareholders become delinquent
 SH failed to pay unpaid subscription including interest within 30 days from demand

Effects of Delinquency
 All rights are suspended, except the right to receive dividends

Remedies available to corporation – Absolute discretion of the BOD

1) Delinquent stock shall be sold at public auction
2) Delinquency Sale - BOD sell the unpaid stocks
3) By action in court – court shall depend on the amount due

Procedure in Delinquency Sale

1) Notice of Sale shall be sent to every delinquent stockholder
2) Publication shall be published once a week for 2 consecutive weeks in a newspaper of
general circulation in the province or city where the principal office is located
3) Order of the sale of delinquent stock 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
30 days, nor more than 60 days from the date the stocks become delinquent.

Who is the highest bidder? – such bidder who shall offer to pay the full amount of the balance on
the subscription together with accrued interest, costs amount of the balance on the subscription
together with accrued interest, costs of advertisement and expenses of sale, for the smallest
numbers of shares or fraction of a share.

Can the Delinquency Sale be questioned

 May be questioned upon the ground of irregularity or defect in the notice of sale or in the
sale itself
 When the person with legal interest pays or tenders to the party holding the stock the sum
for which the same was sold, with interest from the date of sale at the legal rate
 Action shall commence by the filing of a complaint within 6 months from the date of sale m

Prescriptive period to enforce subscription agreement

 Ten (10) years from the due date of subscription in writing
 For oral contract – six (6) years from the time of demand (art. 1145 CC)

CERTIFICATE OF STOCK
 An instrument issued formally by the corporation with intention that the same constitute
the best evidence of the issuance of shares of stock that are fully paid and no longer
assessable.
 is merely a prima facie evidence of ownership and evidence can be presented to determine
the real owner of the shares
 delivery is essential for its issuance

Probative value of a Certificate of Stock – covers fully paid shares

When certificate of stock may be issued? – only until the full amount of his subscription together
with interest and expenses (in case of delinquent shares) is due has been paid.

Formality/When certificate of stock deemed issued

 must be signed by the President or Vice-President
 countersigned by the corporate secretary of the assistant secretary
  sealed with the seal of the corporation
 if not properly issued – void; not binding on the corporation

How are shares of stocks transferred?

a) If represented by a certificate:
1) Endorsement by the owner or his agent
2) Delivery of the certificate
- SC ruled that delivery means delivery to the assignee/transferee and not
delivery to the corporation
3) To be valid to third parties, the transfer must be recorded in the books of the
corporation

b) If NOT represented by the certificate (certificate has not yet been issued or for some reason
is not in the possession of the stockholder
1) By means of deed of assignment, and
2) Such is duly recorded in the books of the corporation
- Registration in the stock and transfer book is not necessary if the conveyance is
by way of chattel mortgage. However, there must be due registration with the
Register of Deeds.
- Registration is necessary is the heirs acquire the shares of a deceased
shareholder.

Section 64: is the statutory basis to support the proposition that when a corporation issues a
certificate of stock, it certifies to the world that the shares described and covered therein are fully
paid.

Inherent right of a stockholder to be issued the certificate of stock for his fully paid subscription:
- Because of a subscription agreement it has entered into with the corporation
- His shareholdings are duly covered by the AOI
- He has been registered as such in the stock and transfer book

 No inherent right to be Issued Certificate to one who merely bought shares from a
registered stockholder

Negotiation of Certificates of stock

- Are quasi-negotiable in nature
- Normal mode of dealing with COS is by the process of endorsement and delivery for any of
the 3 purposes:
1) For sale or assignment of the shares
2) Pursuant to a trust nominee arrangement, or
3) By way of pledge or encumbrance of the shares

Forged and Illegal transfers of COS

 Because COS is only a quasi-negotiable, they do not afford the same protection to a holder
in good faith and for value who receives them in the course of their being negotiated.
 Transferee under a forged assignment acquires no title which can be asserted against the
true owner, unless the latter’s own negligence has been such as to create an estoppel
against him.
When a COS is endorsed in Blank by the owner:

 Santamaria vs HSBC: held that when a COS is endorsed in blank by the owner thereof, it
constitute as a “street certificate”, so that upon its face, the holder is entitled to demand its
transfer into his name from the issuing corporation. Such certificate is deemed quasi-
negotiable, and as such the transferee thereof is justified in believing that it belongs to the
holder and transferor.

 Neugene Marketing vs CA: where the stock certificates endorsed in blank were stolen from
the possession of the beneficial owners, the Court declare the transfer void for lack of
delivery and want of value

 Guy vs Guy: With Gilbert’s failure to allege specific acts of fraud in his complaint and his
failure to rebut the NBI report, this Court pronounces, as a consequence thereof, that the
signatures appearing on the stock certificates, including his blank endorsement thereon
were authentic. With the stock certificates having been endorsed in blank by Gilbert, which
he himself delivered to his parents, the same can be cancelled and transferred in the names
of herein petitioners. Indeed, even if Gilbert s parents were not the beneficial owners, an
endorsement in blank of the stock certificates coupled with its delivery, entitles the holder
thereof to demand the transfer of said stock certificates in his name from the issuing
corporation.

Lost or Destroyed Certificates – procedure in the issuance of new certificate:

1) Registered owner of COS shall file with the corp. an affidavit in triplicate (circumstances,
number of shares, serial number of the certs and name of the corp. which issued the same)

2) Submit such other information and evidence which he may deem necessary

3) After verification of the affidavit, said corp shall publish a notice in newspaper of general
circulation once a week for 3 consecutive weeks at the expense of the registered owner

4) After expiration of 1 year from the publication and no contest has been presented, the corp.
shall cancel the COS which have been lost and issue a new one. New COS may be issued
even before the 1 year required period if the owner files a bond or other security

5) If contest has been presented or if an action is pending in court, issuance of new certificate
shall be suspended until the final decision by the court.
Period within which to enforce registration rights
 Considering that the law does not prescribe a period within which the registration of
purchase of shares in the stock and transfer book should be effected, the action to enforce
the right does not accrue until there has been a demand and a refusal concerning the
transfer.
CASES:

Voting Trust Agreement

 Lee vs CA: Considering that the voting trust agreement between ALFA and the DBP
transferred legal ownership of the stock covered by the agreement to the DBP as trustee,
the latter became the stockholder of record with respect to the said shares of stocks. In the
absence of a showing that the DBP had caused to be transferred in their names one share of
stock for the purpose of qualifying as directors of ALFA, the petitioners can no longer be
deemed to have retained their status as officers of ALFA which was the case before the
execution of the subject voting trust agreement. There appears to be no dispute from the
records that DBP has taken over full control and management of the firm.

Qualifications of BOD
 Gokongwei, Jr. vs CA: under section 21 of the Corporation Law, a corporation may prescribe
in its by-laws "the qualifications, duties and compensation of directors, officers and
employees ... " This must necessarily refer to a qualification in addition to that specified by
section 30 of the Corporation Law, which provides that "every director must own in his right
at least one share of the capital stock of the stock corporation of which he is a director.
Sound principles of public policy and management, therefore, support the view that a by-law
which disqualifies a competition from election to the Board of Directors of another
corporation is valid and reasonable.

Examination of Corporate Books

 Gokongwei, Jr. vs CA: considering that the foreign subsidiary is wholly owned by respondent
San Miguel Corporation and, therefore, under its control, it would be more 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 the corporation as extending to books and records of
such wholly subsidiary which are in respondent corporation's possession and control.

Vacancy in the BOD

 Valle Verde Country Club vs Africa: It also bears noting that the vacancy referred to in
Section 29 contemplates a vacancy occurring within the director’s term of office. When a
vacancy is created by the expiration of a term, logically, there is no more unexpired term to
speak of. Hence, Section 29 declares that it shall be the corporation’s stockholders who shall
possess the authority to fill in a vacancy caused by the expiration of a member’s term.

Removal of BOD
 Raniel vs Jochico: A corporation exercises its powers through its board of directors and/or
its duly authorized officers and agents, except in instances where the Corporation Code
requires stockholders’ approval for certain specific acts. Based on its articles of
incorporation, Nephro has five directors – two of the positions were occupied by
complainants and the remaining three are held by respondents. This being the case, the
presence of all three respondents in the Special Meeting of the Board on February 2, 1998
established a quorum for the conduct of business. The unanimous resolutions carried by the
Board during such meeting are therefore valid and binding against complainants.

Record of Meetings
 Expert Travel & Tours, Inc. vs CA: Even assuming that there was such a teleconference, it
would be against the provisions of the Corporation Code not to have any record thereof.

Liability of Directors for Corporate Debts

  Carag vs NLRC: The rule is that a director is not personally liable for the debts of the
corporation, which has a separate legal personality of its own. Section 31 makes a director
personally liable for corporate debts if he wilfully and knowingly votes for or assents to
patently unlawful acts of the corporation. To hold a director personally liable for debts of the
corporation, and thus pierce the veil of corporate fiction, the bad faith or wrongdoing of the
director must be established clearly and convincingly. Bad faith is never presumed. Bad faith
does not connote bad judgment or negligence. Bad faith imports a dishonest purpose. Bad
faith means breach of a known duty through some ill motive or interest. Bad faith partakes
of the nature of fraud.

Derivative Suit
 Filipinas Port Services vs Go: the injury complained of primarily pertains to the corporation
so that the suit for relief should be by the corporation. However, since the ones to be sued
are the directors/officers of the corporation itself, a stockholder, like petitioner Cruz, may
validly institute a "derivative suit" to vindicate the alleged corporate injury, in which case
Cruz is only a nominal party while Filport is the real party-in-interest. A demand upon the
board to institute an action and prosecute the same effectively would have been useless and
an exercise in futility.

Validity of By-Laws provision

 Grace Christian High School vs CA: Since the provision in question is contrary to law, the fact
that for fifteen years it has not been questioned or challenged but, on the contrary, appears
to have been implemented by the members of the association cannot forestall a later
challenge to its validity. Neither can it attain validity through acquiescence because, if it is
contrary to law, it is beyond the power of the members of the association to waive its
invalidity. For that matter the members of the association may have formally adopted the
provision in question, but their action would be of no avail because no provision of the by-
laws can be adopted if it is contrary to law.

Apparent Authority
 Peoples Air Cargo vs CA: Contracts entered into by a corporate president without express
prior board approval bind the corporation, when such officer's apparent authority is
established and when these contracts are ratified by the corporation. A corporation, by
accepting benefits of a transaction entered into without authority, has ratified the
agreement and is, therefore, bound by it.

Quorum in BOD/T Meeting

 Tan vs Sycip: For stock corporations, the "quorum" referred to in Section 52 of the
Corporation Code is based on the number of outstanding voting stocks. For nonstock
corporations, only those who are actual, living members with voting rights shall be counted
in determining the existence of a quorum during members’ meetings. Dead members shall
not be counted.

Unrestricted Retained Earnings

 Turner vs Lorenzo Shipping: no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earnings in its books to cover the payment. In case
the corporation has no available unrestricted retained earnings in its books, Section 83 of
the Corporation Code provides 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.
Derivative Suit
 Legaspi Towers 300, Inc vs Muer: held that “since it is the corporation that is the real party-
in-interest in a derivative suit, then the reliefs prayed for must be for the benefit or interest
of the corporation. When the relied prayed for do not pertain to the corporation, then it is
an improper derivative suit”.

Stock Certificate
 Guy vs Calo, Guy: With the stock certificates having been endorsed in blank by Gilbert, which
he himself delivered to his parents, the same can be cancelled and transferred in the names
of herein petitioners. Indeed, even if Gilbert s parents were not the beneficial owners, an
endorsement in blank of the stock certificates coupled with its delivery, entitles the holder
thereof to demand the transfer of said stock certificates in his name from the issuing
corporation.

Merger
 Mindanao Savings vs Willkom: The issuance of the certificate of merger is crucial because
not only does it bear out SEC’s approval but it also marks the moment when the
consequences of a merger take place. By operation of law, upon the effectivity of the
merger, the absorbed corporation ceases to exist but its rights and properties, as well as
liabilities, shall be taken and deemed transferred to and vested in the surviving corporation.

Merger
 Bank of Commerce vs RPN: that no merger took place between Bancommerce and TRB as
the requirements and procedures for a merger were absent. A merger does not become
effective upon the mere agreement of the constituent corporations. All the requirements
specified in the law must be complied with in order for merger to take effect. Section 79 of
the Corporation Code further provides that the merger shall be effective only upon the
issuance by the Securities and Exchange Commission (SEC) of a certificate of merger.

 Agdao vs Maramion: Being the corporation's agents and therefore, entrusted with the
management of its affairs, the directors or trustees and other officers of a corporation
occupy a fiduciary relation towards it, and cannot be allowed to contract with the
corporation, directly or indirectly, or to sell property to it, or purchase property from it,
where they act both for the corporation and for themselves.[