Soriano Corpo

THE CORPORATION CODE OF THE PHILIPPINES
CHAPTER 1: INTRODUCTION law is necessary for its creation such that the mere agreement of the
persons composing it or intending to organize it does not warrant the
KINDS OF BUSINESS ORGANIZATION grant of its independent existence as a juridical entity;
1. SOLE PROPRIETORSHIP – one conducted for profit by a lone or 2. ARTIFICIAL BEING – it has a juridical personality, separate and
single individual who owns all assets, personally owes and answers all distinct from the persons composing it.
the liabilities or suffers all the losses and enjoys all the profits to the
exclusion of others. 3. RIGHT OF SUCCESSION – unlike in a partnership, the death,
incapacity or civil interdiction of one or more of its stockholder does not
ADVANTAGES DISADVANTAGES result in its dissolution;
Eliminates the bureaucratic process Unlimited personal liability of the
common in corporations where the proprietor 4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY
board of directors must sit as a AUTDHORIZED BY LAW – it can exercise only such powers and can
body to have a valid transaction. hold only such properties as are granted to it by the enabling statutes
The proprietor makes his own unlike natural persons who can do anything as they please.
decisions and can act without delay.
Proprietor owns all the profits Capital is limited by the proprietor’s LBC EXPRESS, INC. VS. COURT OF APPEALS (236 SCRA 602 [Sept. 21,
without having to share the same personal resources 1994]) – Private respondent Carloto, incumbent President-Manager of private
respondent Rural Bank of Labason, alleged that he was instructerd to go to
2. PARTNERSHIP – a contract where two or more persons bind Manila to follow up on the Bank’s plan of payment of rediscounting
themselves to contribute money, property or industry to a common fund obligations with Central Bank’s main office, where he purchased a round trip
with the intention of dividing the profits among themselves (Art. 1767, ticket and phone his sister to send him P1,000 for his pocket money which
Civil Code) LBC failed to deliver and eventually Carloto was not able to submit the
rediscounting documents and the Bank was made to pay the Central Bank
3. JOINT VENTURE – a one-time grouping of two or more persons, P32,000 s penalty interest and alleged that he suffered embarrassment and
natural or juridical, in a specified undertaking. humiliation. Respondent Rural Bank was later on joined as one of the plaintiff
and prayed for the reimbursement of P32,000. Carloto and the Bank was
PARTNERSHIP JOINT VENTURE awarded moral and exemplary damages of P10,000 and P5,000, respectively.
Has a personality separate and Does not acquire a separate and
distinct from the partners distinct personality from the ISSUE: WON Rural Bank of Labason, Inc. being an artificial person should be
venturers awarded moral damages?
Has for its object a general business Object is an undertaking of a
of particular kind, although there particular or single transaction HELD: No. Moral damages are granted in recompense for physical suffering,
may be partnership for a single mental anguish, fright, serious anxiety, besmirched reputation, wounded
transaction feelings, oral shock, social humiliation and social injury. A corporation, being
an artificial person and having existence only in legal contemplation, has no
Corporations, generally are not Corporations may enter joint
allowed to enter into partnerships* ventures feelings, no emotions, no senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering can be experienced only by
one having a nervous system and it flows from real ills, sorrows and grieves
*A corporation is generally not allowed to enter into partnerships because (1)
of life – all of which cannot be suffered by respondent bank as an artificial
the identity of the corporation is lost or merged with that of another; and (2)
person.
the discretion of the officials is placed in other hands other than those
permitted by the law in its creation.
BEDROCK RULE: Under Article 2219 of the Civil Code, for cases of libel,
slander and other forms of defamation, a corporation is entitled to moral
EXCEPTION to the rule is when the following conditions are met:
damages.
a. The articles of incorporation expressly authorized the corporation to enter
into contracts of partnership;
C. ADVANTAGES OF THE CORPORATE FORM OF BUSINESS
b. The agreement or articles of partnership must provide that all the partners
will manage the partnership; and
1. CAPACITY TO ACT AS A SINGLE UNIT – any number of persons
c. The articles of partnership must stipulate that all the partners are and shall
may unite in a single enterprise without using their names, without
be jointly and severally liable for all obligations of the partnership
difficulty or inconvenience, and with the valuable right to contract, to
sue and be sued, and to hold or convey property, in the corporate
4. CORPORATION – an artificial being created by operation of law,
name;
having the right of succession and the powers, attributes and properties
2. LIMITED SHAREHOLDER‘S LIABILITY – the limit of his liability since
expressly authorized by law or incident to its existence (Sec. 1,
stockholders are not personally liable for the debts of the corporation;
Corporation Code [CC])
3. CONTINUITY OF EXISTENCE – rights and obligations of a
corporation are not affected by the death, incapacity or replacement of
the individual members;
CHAPTER 2: DEFINITION AND ATTRIBUTES
4. FEASIBILITY OF GREATER UNDERTAKING – it enables the
individuals to cooperate in order to furnish the large amounts of capital
A. DEFINITION
necessary to finance large scale enterprises;
5. TRANSFERABILITY OF SHARES – unless reasonably restricted,
Sec. 2. Corporation Defined – A corporation is an artificial being created
shares of stocks, being personal properties, can be transferred by the
by operation of law, having the right of succession and the powers, attributes
owner without the consent of the other stockholders;
and properties expressly authorized by law or incident to its existence.
6. CENTRALIZED MANAGEMENT – the vesting of powers of
management and appointing officers and agents in board of directors
B. ATTRIBUTES (CARP)
gives to a corporation the benefit of a centralized administration which
is a practical business necessity in any large organization; and
1. CREATED BY OPERATION OF LAW – the formal requirement of the
7. STANDARDIZED METHOD OF ORGANIZATION, MANAGEMENT
State’s consent through compliance with the requirements imposed by
AND FINANCE – which are provided under a well-drawn general
Cesar Nickolai F. Soriano Jr.

1 Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia
corporation law. The corporation statutes enter into the charter contract F. GOVERNMENT POWERS IN RELATION TO CORPORATIONS
and these are constantly being interpreted by courts. An established
system of management and protection of shareholders and creditors’ The Corporation Code places all corporations registered under its provision to
rights has thus been and are being evolved. be under the control and supervision of the Securities and Exchange
Commission (Sec. 19 and 144). Its powers and functions are clearly spelled
D. DISADVANTAGES out in PD 902-A, as amended by RA No. 8799, otherwise known as the
1. To have a valid and binding corporate act, formal proceedings, such as Securities Regulation Code.
board meetings are required;
2. The business transactions of a corporation is limited to the State of its
incorporation and may not act as such corporation in other jurisdiction CHAPTER 3: CLASSIFICATION OF CORPORATION
unless it has obtained a license or authority from the foreign state;
3. The shareholders’ limited liability tends to limit the credit available to the A. CLASSES OF CORPORATIONS UNDER THE CORPORATION CODE
corporation as a separate legal entity;
4. Transferability of shares may result to uniting incompatible and Sec. 3. Classes of corporations. - Corporations formed or organized under
conflicting interests; this Code may be stock or non-stock corporations. Corporations which have
5. The minority shareholders have practically no say in the conduct of capital stock divided into shares and are authorized to distribute to the
corporate affairs; holders of such shares dividends or allotments of the surplus profits on the
6. In large scale enterprises, stockholders’ voting rights may become basis of the shares held are stock corporations. All other corporations are
merely fictitious and theoretical because of disinterest in management, non-stock corporations.
wide-scale ownership and inaccessible place of meeting;
7. ―Doubt taxation‖ may be imposed on corporate income; and REQUISITES TO BE CLASSIFIED STOCK CORPORATIONS:
8. Corporations are subject to governmental regulations, supervision and 1. They have a capital stock dividend into shares; and
control including submission of reportorial requirements not otherwise 2. That they are authorized to distribute dividends or allotments as surplus
imposed in other business form. profits to its stockholders on the basis of the shares held by each of
them.
E. CORPORATION VS. PARTNERSHIP
SIGNIFICANT DISTINCTION: Although a non-stock corporation exists for
CORPORATION PARTNERSHIP purposes other than for profit, it does not follow that they cannot make
Created by operation of law (Sec. Created by mere agreement of the profits as an incident to their operations. But a significant distinction is that
2&4, Corp Code) parties (Art. 1767, Civil Code) profits obtained by a non-stock corporation cannot be distributed as
There must be at least 5 Maybe formed by two or more dividends but are used merely for the furtherance of their purpose or
incorporations (Sec. 10), except natural persons (Art. 1767) purposes.
corporation sole which is
incorporated by one single individual COLLECTOR OF INTERNAL REVENUE VS. CLUB FILIPINO, INC. DE
(Sec. 110) CEBU (5 SCRA 312; May 31, 1968) – Herein respondent Club operates a
Can exercise only such powers and Can do anything by agreement of clubhouse, a bowling alley, a golf course and a bar restaurant where it sells
functions expressly granted to it by the parties provided only that it is wines, liquors, soft-drinks, meals and short orders to its members and their
law and those that are necessary or not contrary to law, morals, good guests. The bar and restaurant was a necessary incident to the operation of
incidental to its existence (Sec. 2, customs or public order. (Art. 1306) the Club and its golf course is operated mainly with funds derived from
45) membership fees and dues. Whatever profits it had were used to defray its
Unless validly delegated expressly or In the absence of an agreement to overhead expenses and to improve its golf course. In 1951, as a result of
impliedly, a corporation must the contrary, any one of the parties capital surplus arising from the revaluation of its real properties, the Club
transact its business through the in the partnership form of business declared stock dividends. In 1952, the BIR assessed percentage taxes on the
board of directors (Sec. 23) may validly bind the partnership (Art. gross receipt of the Club’s bar and restaurant pursuant to Sec. 182 of the Tax
1308, par. 1) Code: ―unless otherwise provided, every person engaging in a business on
Right of succession, it continues to Based on mutual rust and the death, which the percentage tax is imposed shall pay in full a fixed annual tax of
exist despite the death, withdrawal, incapacity, insolvency, civil P10 for each calendar year or a fraction thereof‖ and under Sec. 191:
incapacity or civil interdiction of the interdiction or mere withdrawal of ―keepers of restaurant, refreshment parlors and other eating places shall pay
stockholders or members. (Sec. 3) one of the parties would result in its a tax of 3% of their gross receipts‖
dissolution (Art. 1830, par. 6 & 7)
Transferability of shares – without A partner cannot transfer his rights ISSUE: WON the Club is liable for the assessment?
the consent of the other or interests in the partnership so as
stockholders. (Sec. 63) to make the transferee a partner HELD: No. It has been held that the liability for fixed and percentage taxes
without the consent of the other does not ipso facto attach by mere reason of the operation of a bar and
partners (Art. 1830, par. 6 & 7) restaurant. For the liability to attach, the operator thereof must be engaged
Limited liability – only to the extent All partners, including industrial ones in the business as a bar keeper and restauranteur. Business, in the ordinary
of their subscription or their (except a limited partner) are liable sense, is restricted to activities or affairs where profit is the purpose or
promised contribution. pro rata with all their property and livelihood is the motive, and the term business when used without
after all the partnership property has qualification, should be construed in its plain and ordinary meaning;
been exhausted, for all partnership restricted to activities for profit or livelihood.
liability (Art. 1813)
The term of corporate existence is May exist for an indefinite period The fact that the Club derived profits from the operation of its bar and
limited only to fifty years and unless subject only to the causes of restaurant does not necessarily convert it into a profit making enterprise. The
extended by amendment, it shall be dissolution provided for by the law of bar and restaurant are necessary adjunct of the Club to foster its purpose
considered non-existent except for its creation (Art. 1824) and the profits derived therefrom are necessarily incidental to the primary
the purpose of liquidation. object of developing and cultivating sports for the healthful recreation and
entertainment of the stockholders and members. That a club makes profit
Cannot be dissolved by mere Partners may dissolve their
agreement of the stockholders. The partnership at will or at any time does not make it a profit-making club.
consent of the State is necessary for they deem it fit (Art. 1830, par. 1(b)
it to cease as a body corporate. and par. 2) ISSUE2: Is the Club a stock corporation?
HELD: No. The fact that the capital of the Club is divided into shares does
not detract from the finding of the trial court that it is not engaged in the
business of operator of bar and restaurant. What is determinative of whether PUBLIC CORPORATION: those formed or organized for the government of
or not the Club is engaged in such business is its object or purpose as stated a portion of the State or any of its political subdivisions and which have for
in its articles and by-laws. their purpose the general good and welfare.
Moreover, for a stock corporation to exists, two requisites must be It is to be observed, however, that the mere fact that the undertaking in
complied with: (1) a capital stock divided into shares; and (2) an which a corporation is engaged in is one which the State itself might enter
authority to distribute to the holders of such shares, dividends or into as part of its public work does not make it a public one. Nor is the fact
allotments of surplus profits on the basis of the shares held. In the that the State has granted property or special privileges to a corporation
case at bar, nowhere it its AOI or by-laws could be found an authority for the render it public. Likewise, the fact that some or all of the stocks in the
distribution of its dividends or surplus profits. Strictly speaking, it cannot corporation are held by the government does not make it a public
therefore, be considered as stock corporation, within the contemplation of corporation.
the Corporation Code.
The TRUE TEST to determine the nature of a corporation is found in the
B. CORPORATIONS CREATED BY SPECIAL LAW OR CHARTER relation of the body to the State. Strictly speaking, a public corporation is
one that is created, formed or organized for political or governmental
Sec. 4. Corporations created by special laws or charters. - purposes with political powers to be exercised for purposes connected with
Corporations created by special laws or charters shall be governed primarily the public good in the administration of the civil government.
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 The GOCCs are regarded as private corporations despite common
applicable. misconceptions.
NATIONAL COAL COMPANY VS. COLLECTOR OF INTERNAL REVENUE

Among these corporations created by special law are the Philippine National (146 Phil. 583) – Herein plaintiff brought an action for the purpose of
Oil Company, the National Development Company, the Philippine Export and recovering a sum of money allegedly paid by it under protest to the herein
Foreign Loan Guarantee Corporation and the GSIS. All these are government defendant, a specific tax on some tons of coal. It claimed exemption from
owned or controlled, operating under a special law or charter such that taxes under Sec. 1469 of the Administrative Code which provides that ―on all
registration with the SEC is not required for them to acquire legal and coal and coke shall be collected per metric ton, fifty centavos‖. Of the 30,000
juridical personality. They owe their own existence as such not by virtue of shares issued by the corporation, the Philippine government is the owner of
their compliance with the requirements of registration under the Corporation 29,809 or substantially all of the shares of the company.
Code but by virtue of the law specially creating them.
ISSUE: WON the plaintiff corporation is a public corporation?
They are primarily governed by the special creating them. But unless
otherwise provided by such law, they are not immune from suits, it is thus HELD: No. The plaintiff is a private corporation. The mere fact that the
settled that when the government engages in a particular business through government happens to be a majority stockholder does not make it
the instrumentality of a corporation, it divests itself pro hoc vice of its a public corporation. As a private corporation, it has no greater rights,
sovereign character so as to subject itself to the rules government private powers and privileges than any other corporation which might be organized
corporations (PNB vs. Pabolar 82 SCRA 595) for the same purpose under the Corporation Law, and certainly, it was not
the intention of the Legislature to give it a preference or right or privilege
Officers and employees of GOCCs created by special laws are governed by over other legitimate private corporation in the mining of coal.
the law of their creation, usually the Civil Service Law. Their subsidiaries,
organized under the provisions of the Corporation Code are governed by the PRIVATE CORPORATIONS: those formed for some private purpose,
LAbor Code. The test in determining whether they are governed by the Civil benefit, aim or end. They are created for the immediate benefit and
Service Law is the manner of their creation. advantage of the individuals or members composing it and their franchise
may be considered as privileges conferred by the State to be exercised and
PNOC-EDC VS. NLRC (201 SCRA 487; Sept. 11, 1991) – Danilo Mercado, enjoyed by them in the form of the corporation.
an employee of herein petitioner was dismissed on the ground of dishonesty
and violation of company rules and regulations. He filed an illegal dismissal 2. ECCLESIASTICAL AND LAY CORPORATIONS
complaint before herein respondent NLRC who ruled on his favour, despite
the motion to dismiss of petitioner that the Civil Service Commission has ECCLESIASTICAL OR RELIGIOUS CORPORATIONS: are composed
jurisdiction over the case. exclusively of ecclesiastics organized for spiritual purposes or for
administering properties held for religious ones. They are organized to secure
ISSUE: WON NLRC has jurisdiction over the case? public worship or perpetuating the right of a particular religion.
HELD: Yes. Employees of GOCCs, whether created by special law or formed LAY CORPORATIONS: are those organized for purposes other than
as subsidiaries under the Corporation Law are governed by the Civil Service religion. They may further be classified as:
Law and not the Labor Code, under the 1973 Constitution has been a. ELEEMOSYNARY: created for charitable and benevolent purposes such
supplanted by the present Constitution. as those organized for the purpose of maintaining hospitals and houses for
the sick, aged or poor.
Thus, under the present state of the law, the test in determining b. CIVIL: organized not for the purpose of public charity but for the benefit,
whether a GOCC is subject to the Civil Service Law is the manner of pecuniary or otherwise, of its members.
its creation, such that government corporations created by special
charter are subject to its provisions while those incorporated under 3. AGGREGATE AND SOLE CORPORATIONS
the General Corporaiton Law are not within its coverage.
AGGREGATE CORPORATIONS: are those composed of a number of
PNOC has its special charter, but its subsidiary, PNOC-EDC, having been individuals vested with corporate powers.
incorporated under the General Corporation Law was held to be a GOCC
whose employees are subject to the provisions of the Labor Code. CORPORATION SOLE: those consist of one person or individual only and
who are made as bodies corporate and politic in order to give them some
C. OTHER CLASSES OF CORPORATIONS legal capacity and advantage which, as natural persons, they cannot have.
Under the Code, a corporation sole may be formed by the chief archbishop,
1. PUBLIC AND PRIVATE CORPORATIONS bishop, priest, minister, rabbi, or other presiding elder or religious

denominations, sects or churches. the State in a quo warranto proceeding. They are, in effect, incorporated by
strict adherence to the provisions of the law of their creation.
4. CLOSE AND OPEN CORPORATION
DE FACTO CORPORATIONS: are those which exist by the virtue of an
CLOSE CORPORATIONS: are those whose shares of stock are held by a irregularity or defect in the organization or constitution or from some
limited number of persons like the family or other closely-knit group. There omission to comply with the conditions precedent by which corporations de
are no public investors and the shareholders are active in the conduct of the jure are created, but there was colorabe compliance with the requirements of
corporate affairs. Recognized under Sec. 96 of the Corporation Code. the law under which they might be lawfully incorporated for the purpoes and
powers assumed, and user of the rights claimed to be conferred by law. Its
OPEN CORPORATIONS: are those formed to openly accept outsiders as existence can only be attacked by a direct action of quo warranto
stockholders or investors. They are authorized and empowered to list in the proceedings.
stock exchange and to offer their shares to the public such that stock
ownership can widely be dispersed. Sec. 20. De facto corporations. - The due incorporation of any
corporation claiming in good faith to be a corporation under this Code, and its
5. DOMESTIC AND FOREIGN CORPORATIONS right to exercise corporate powers, shall not be inquired into collaterally in
any private suit to which such corporation may be a party. Such inquiry may
DOMESTIC CORPORATIONS: are those organized or created under or by be made by the Solicitor General in a quo warranto proceeding.
virtue of the Philippine laws, either by legislative act or under the provisions
of the General Corporation Law.
CORPORATION BY ESTOPPEL: those which are so defectively formed as
not to be either de jure or de facto corporations but which are considered as
FOREIGN CORPORATIONS: are those formed, organized or existing under
corporations in relation only to those who cannot deny their corporate
any laws other than those of the Philippines and whose laws allow Filipino existence due to their agreement, admission or conduct.
citizens and corporations to do business in its own country or state (Sec. 123,
Corporation Code).
Sec. 21. Corporation by estoppel. - All persons who assume to act as a
The second part of the definition is, however, somehow misplaced since any corporation knowing it to be without authority to do so shall be liable as
corporation for that matter, which is not registered under Philippine laws is a general partners for all debts, liabilities and damages incurred or arising as a
foreign corporation. Such second part was inserted only for the purpose of result thereof: Provided, however, That when any such ostensible corporation
qualifying a foreign corporation to secure a license and to do business in the is sued on any transaction entered by it as a corporation or on any tort
Philippines. committed by it as such, it shall not be allowed to use as a defense its lack of
corporate personality.
6. PARENT OR HOLDING COMPANIES AND SUBSIDIARIES AND
AFFILIATES On who assumes an obligation to an ostensible corporation as such, cannot
resist performance thereof on the ground that there was in fact no
PARENT OR HOLDING COMPANY: a corporation who controls another corporation.
corporation, or several other corporations known as its subsidiaries. Holding
companies have been defined as corporations that confine their activities to
owning stock in, and supervising management of other companies. A holding CHAPTER 4: FORMATION AND ORGANIZATIONS OF CORPORATIONS
company usually owns a controlling interest (more than 50% of the voting
stock) in the companies whose stocks it holds. As may be differentiated from 1. PROMOTIONAL STAGE
investment companies which are active in the sale or purchase of shares of
stock or securities, parent or holding companies have a passive portfolio and This is undertaken by the organizers or promoters who bring together
hold the securities merely for purposes of control and management. persons interested in the business venture. They enter into contract either in
their own names or in the name of the proposed corporation.
SUBSIDIARY CORPORATIONS: those which another corporation owns at
least a majority of the shares, and thus have control. LIABILITY OF PROMOTERS:
GENERAL RULE: a promoter, although he may assume to act for and on
A subsidiary has an independent and separate juridical personality, distinct behalf of a projected corporation and not for himself, will be held personally
from that of its parent company, hence any claim or suit against the latter liable on contracts made by him for the benefit of a corporation he intends to
does not bind the former or vice versa. organize. The personal liability continues even after the formation of the
corporation unless there is novation or other agreement to release him from
AFFILIATES: are those corporations which are subject to common control liability. As such, the promoter may do either of the following options:
and operated as part of a system. They are sometimes called ―sister
companies‖ since the stockholdings of a corporation is not substantial enough a. He may make a continuing offer on behalf of the corporation, which, if
to control the former. Example: 15% of ABCD Company is held by A Corp, accepted after incorporation, will become a contract. In this case, the
18% by B Corp, and another 15% by C Corp. – A, B and C are affiliates. promoter does not assume any personal liability, whether or not the
corporation will accept the offer;
7. QUASI-PUBLIC CORPORATIONS b. He may make a contract at the time binding himself, with the
understanding that if the corporation, once formed, accepts or adopts the
These are private corporations which have accepted from the state the grant contract, he will be relieved of responsibility; or
of a franchise or contract involving the performance of public duties. The c. He may bind himself personally and assume responsibility of looking to the
term is sometimes applied to corporations which are not strictly public in the proposed corporation, when formed, for reimbursement.
sense of being organized for governmental purposes, but whose operations
contribute to the convenience or welfare of the general public, such as 2. PROCESS OF INCORPORATION
telegraph and telephone companies, water and electric companies. More
appropriately, they are known as public service corporations. Includes the drafting of the Articles of Incorporation, preparation and
submission of additional and supporting documents, filing with the SEC, and
8. DE JURE, DE FACTO AND CORPORATION BY ESTOPPEL the subsequent issuance of the Certificate of Incorporation.
DE JURE CORPORATIONS: are juridical entities created or organized in CONTENTS OF THE ARTICLES OF INCORPORATION
strict or substantial compliance with statutory requirements of incorporation
and whose rights to exist as such cannot be successfully attacked even by Contents of the articles of incorporation. - All corporations organized
under this code shall file with the Securities and Exchange Commission that it can act and perform all legal acts. Each corporation should therefore,
articles of incorporation in any of the official languages duly signed and have a name by which it is to sue and be sued and do all legal acts.
acknowledged by all of the incorporators, containing substantially the
following matters, except as otherwise prescribed by this Code or by special A corporation, once formed, cannot use any other name, unless it has been
law: amended in accordance with law as this would result in confusion and may
open the door to fraud and evasion as well as difficulties of administration
1. The name of the corporation; and supervision.
2. The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purpose, the Thus, the organizers must make sure that the name they intend to use as a
articles of incorporation shall state which is the primary purpose and which corporate name is not similar or confusingly similar to any other name
is/are he secondary purpose or purposes: Provided, That a non-stock already registered and protected by law since the SEC would refuse
corporation may not include a purpose which would change or contradict its registration if such be the case.
nature as such;
3. The place where the principal office of the corporation is to be located, Sec. 18. Corporate name. - No corporate name may be allowed by the
which must be within the Philippines; Securities and Exchange Commission if the proposed name is identical or
4. The term for which the corporation is to exist; deceptively or confusingly similar to that of any existing corporation or to any
5. The names, nationalities and residences of the incorporators; other name already protected by law or is patently deceptive, confusing or
6. The number of directors or trustees, which shall not be less than five (5) contrary to existing laws. When a change in the corporate name is approved,
nor more than fifteen (15); the Commission shall issue an amended certificate of incorporation under the
7. The names, nationalities and residences of persons who shall act as amended name.
directors or trustees until the first regular directors or trustees are duly
elected and qualified in accordance with this Code; The SEC, in implementing the above provision on corporate name, thus
8. If it be a stock corporation, the amount of its authorized capital stock in requires that a ―Verification Slip‖ from the Records Division of the
lawful money of the Philippines, the number of shares into which it is divided, Commission be submitted showing that the proposed name is legally
and in case the share are par value shares, the par value of each, the names, permissible. If the corporate name is available for use, the SEC will allow the
nationalities and residences of the original subscribers, and the amount incorporators to ―reserve‖ it for a nominal fee for a specific period until the
subscribed and paid by each on his subscription, and if some or all of the AOI is filed with the SEC.
shares are without par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names, SEC Memorandum Circular No. 14-2000 dated October 24, 2000, provides:
nationalities and residences of the contributors and the amount contributed
by each; and In implementing Section 18 of the Corporation Code of the Philippines (BP
10. Such other matters as are not inconsistent with law and which the 68), the following revised guidelines in the approval of corporate and
incorporators may deem necessary and convenient. partnership names are hereby adopted for the information and guidelines of
all concerned:
The Securities and Exchange Commission shall not accept the articles of
incorporation of any stock corporation unless accompanied by a sworn 1. The corporation name shall contain the word "Corporation" or
statement of the Treasurer elected by the subscribers showing that at least its abbreviation "Corp." or "Incorporated", or "Inc.".
twenty-five (25%) percent of the authorized capital stock of the corporation
has been subscribed, and at least twenty-five (25%) of the total subscription The partnership name shall contain the word "Company" or "Co.". For
has been fully paid to him in actual cash and/or in property the fair valuation limited partnership, the word "Limited" or "Ltd." shall be included. In
of which is equal to at least twenty-five (25%) percent of the said case of professional partnership, the word "Company" need not be used.
subscription, such paid-up capital being not less than five thousand 2. Terms descriptive of a business in the name shall be indicative of the
(P5,000.00) pesos. primary purpose. If there are two (2) descriptive terms, the first shall
refer to the primary purpose and the second shall refer to one of the
FORMS OF ARTICLES OF INCORPORATION (Sec. 15) secondary purposes.
3. The name shall not be identical, misleading or confusingly
similar to one already registered by another corporation or
a. PREFATORY PARAGRAPH partnership with the Commission or a sole proprietorship registered with
the Department of Trade and Industry.
xxx
―KNOW ALL MEN BY THESE PRESENTS: If the proposed name is similar to the name of a registered
The undersigned incorporators, all of legal age and a majority of firm, the proposed name must contain at least one distinctive
whom are residents of the Philippines, have this day voluntarily word different from the name of the company already
agreed to form a (stock) (non-stock) corporation under the laws of registered. (The Book of Sir Ladia, 2007 Edition, provides that there
the Republic of the Philippines‖ must be two other words different and distinct from the name of the
xxx company already registered or protected by law).
4. Business or tradename of any firm which is different from its corporate
It must specify the nature of the corporation being organized in order to or partnership name shall be indicated in the articles of incorporation or
prevent difficulties of administration and supervision. Thus, the corporation partnership of said firm.
should indicate whether it is a stock or a non-stock corporation, a close 5. Tradename or trademark duly registered with the Intellectual Property
corporation, corporation sole or a religious corporation. Office cannot be used as part of a corporate or partnership name
without the consent of the owner of such tradename of trademark.
6. If the name or surname of a person is used as part of a
b. CORPORATE NAME corporate or partnership name, the consent of said person or
his heirs must be submitted except of that person is a
xxx stockholder, member, partner of a declared national hero. If
AND WE HEREBY CERTIFY: such person cannot be identified or non-existent, an
FIRST: That the name of said corporation shall be explanation for the use of such name shall be required.
".............................................., INC. or CORPORATION"; 7. The meaning of initials in the name shall be disclosed in writing
xxx by the registrant.
The name of the corporation is essential to its existence since it is through it

8. Name containing a term descriptive of a business different from the therefore essential to its existence. It cannot change its name except in the
business of a registered company whose name also bears similar manner provided by law. By that name alone it is authorized to transact
term(s) used by the former may be allowed. business.
9. The name should not be patently deceptive, confusing or
contrary to existing laws. The law gives a corporation on express or implied authority to assume
10. The name which contains a word identical to a word in a another name that is unappropriated; still less that of another corporation,
registered name shall not be allowed if such word is coined or which is expressly set apart from it and protected by law. If any corporation
already appropriated by a registered firm, regardless of the should assume at pleasure as a unregistered trade name, the name of
number of the different words in the proposed name, unless another corporation, this practice would result in confusion of administration
there is consent from the registered firm of this firm is one of and supervision. The policy of the law as expressed in our corporation statute
the stockholders of partners of the entity to be registered. and the Code of Commerce is clearly against such a practice.
11. The name of an internationally known foreign corporation or
one similar to it may not be used by a domestic corporation UNIVERSAL MILLS CORP. VS. UNIVERSAL TEXTILE MILLS INC. (78
without the consent of the former. SCRA 62; July 28, 1977) – In 1953, Universal Textile Mills, Inc. (UTMI) was
12. The term "Philippines" when used as part of the name of a organized. In 1954, Universal Hosiery Mills Corporation (UHMC) was also
subsidiary corporation of a foreign corporation shall be in organized. Both are actually distinct corporations but they engage in the
parenthesis: i.e. "(Philippines)" or "(Phil.)". same business (fabrics). In 1963, UHMC petitioned to change its name to
13. The following words shall not be used as part of a corporate or Universal Mills Corporation (UMC). The Securities and Exchange Commission
partnership names: (SEC) granted the petition.
a. As provided by special laws:
1. "Finance", "Financing" or "Finance and Investment" by Subsequently, a warehouse owned by UMC was gutted by fire. News about
corporations or partnerships not engaged in the financing the fire spread and investors of UTMI thought that it was UTMI’s warehouse
business (R.A. 5980, as amended) that was destroyed. UTMI had to make clarifications that it was UMC’s
2. "Engineer", "Engineering" or "Architects" as part of the warehouse that got burned. Eventually, UTMI petitioned that UMC should be
corporate name (R. A. 546 and R.A. 1582) enjoined from using its name because of the confusion it brought. The SEC
3. "Bank", "Banking", "Banker", Building and Loan Association", granted UTMI’s petition. UMC however assailed the order of the SEC as it
Trust Corporation", "Trust Company" or words of similar averred that their tradename is not deceptive; that UTMI’s tradename is
import by corporations or associations not engaged in banking qualified by the word ―Textile‖, hence, there can be no confusion,
business. (R.A. 337, as amended)
4. "United Nations" in full or abbreviated form can not be part of ISSUE: WON the SEC is correct?
a corporate or partnership name (R.A. 226)
5. "Bonded" for corporations or partnerships with unlicensed HELD: Yes. There is definitely confusion as it was evident from the facts
warehouse (R.A. 245) where the investors of UTMI mistakenly believed that it was UTMI’s
b. As a matter of policy: warehouse that was destroyed. Although the corporate names are not really
1. "Investment(s)" by corporations or partnership not organized identical, they are indisputably so similar that it can cause, as it already did,
as investment house company or holding company. confusion. The SEC did not act in abuse of its discretion when it order UMC to
2. "National" by all stock corporations and partnership. drop its name because there was a factual evidence presented as to the
3. "Asean", "Calabarzon" and "Philippines 2000". confusion. Further, when UMC filed its petition for change of corporate name,
14. The name of a dissolved firm shall not be allowed to be used by other it made an undertaking that it shall change its name in the event that there is
firms within three (3) years after the approval of the dissolution of the another person, firm or entity who has obtained a prior right to the use of
corporation by the Commission, unless allowed by the last stockholders such name or one similar to it. That promise is still binding upon the
representing at least majority of the outstanding capital stock of the corporation and its responsible officers
dissolved firm.
15. Registrant corporations or partnership shall submit a letter undertaking
to change their corporate or partnership name in case another person or LYCEUM OF THE PHILIPPINES VS. COURT OF APPEALS (219 SCRA
firm has acquired a prior right to the use of the said firm name or the 610; March 5, 1993) - Lyceum of the Philippines Inc. previously obtained
same is deceptively or confusingly similar to one already registered from the SEC a favourable decision on the exclusive use of ―Lyceum‖ against
unless this undertaking is already included as one of the provisions of Lyceum of Baguio, Inc.. such decision assailed by the latter before the SC
the articles of incorporation or partnership of the registrant. which was denied for lack of merit.
(http://www.disini.ph/res_sec__mc142000.html) Armed with the Resolution of the Supreme Court, the Lyceum of the
Philippines then wrote all the educational institutions it could find using the
RED LINE TRANSPORTATION CO. VS. RURAL TRANSIT CO. (60 Phil. word "Lyceum" as part of their corporate name, and advised them to
549; Sept. 6, 1934) – A certificate of public convenience was issued in the discontinue such use of "Lyceum." Unheaded, Lyceum of the Philippines
name of Rural Transit Co. by the Public Service Commission despite instituted before the SEC an action to enforce what Lyceum of the Philippines
opposition of herein petitioner-appellant Red Line Transportation Co.. It claims as its proprietary right to the word "Lyceum." The SEC rendered a
appears that ―Red Line Transit Co.‖ is being used as a trade name of Bahrach decision sustaining petitioner's claim to an exclusive right to use the word
Motors Co. "Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of
Baguio, Inc. case.
ISSUE: Who is the real party in interest, Rural Transit Co. which appears in
the face of the application? Or Bahrach Motors, Inc. using the name of the On appeal, however, by Lyceum Of Aparri, Lyceum Of Cabagan, Lyceum Of
former as a trade name? Camalaniugan, Inc., Lyceum Of Lallo, Inc., Lyceum Of Tuao, Inc., Buhi
Lyceum, Central Lyceum Of Catanduanes, Lyceum Of Southern Philippines,
HELD: Bahrach Motors, Inc.. There is no law that empowers PSC or any Lyceum Of Eastern Mindanao, Inc. and Western Pangasinan Lyceum, Inc.,,
court in this jurisdiction to authorize one corporation to assume the name of which are also educational institutions, to the SEC En Banc, the decision of
another corporation as a trade name. Both Rural Transit and Bahrach are the hearing officer was reversed and set aside. The SEC En Banc did not
Philippine corporations and the very law of their creation and continued consider the word "Lyceum" to have become so identified with Lyceum of the
existence requires each to adopt and certify a distinctive name. Philippines as to render use thereof by other institutions as productive of
confusion about the identity of the schools concerned in the mind of the
The incorporators constitute a body politic and corporate under the name general public. Unlike its hearing officer, the SEC En Banc held that the
state in the certificate (Sec. 11, Act. No. 1459). A corporation has the power attaching of geographical names to the word "Lyceum" served sufficiently to
of succession in its corporate name (Sec. 13). The name of a corporation is distinguish the schools from one another, especially in view of the fact that

the campuses of Lyceum of the Philippines and those of the other Lyceums that if any institution had acquired an exclusive right to the word "Lyceum,"
were physically quite remote from each other. that institution would have been the Western Pangasinan Lyceum, Inc. rather
than Lyceum of the Philippines. Hence, Lyceum of the Philippines is not
On appeal, the CA affirmed the deicison of the CA en banc, and denied entitled to a legally enforceable exclusive right to use the word "Lyceum" in
reconsideration. its corporate name and that other institutions may use "Lyceum" as part of
their corporate names.
ISSUE: WON private respondents can be directed to delete the word
―lyceum‖ from their corporate names? PHILIPS EXPORT B.V. et. al. VS. COURT OF APPEALS (206 SCRA 457;
Feb. 21, 1992) – Petitioner is the registered owner of the trademark PHILIPS
HELD: No. The policy underlying the prohibition in Section 18 against and PHILIPS SHIELD EMBLEM issued by the Philippine Patent Office. Philips
the registration of a corporate name which is "identical or deceptively or Electric Lamp Inc. and Philips Industrial Development Inc., also petitioners,
confusingly similar" to that of any existing corporation or which is "patently are the authorized users of such trademark.
deceptive" or "patently confusing" or "contrary to existing laws," is the
avoidance of fraud upon the public which would have occasion to Petitioner filed a case with SEC praying for a writ of injunction to prohibit
deal with the entity concerned, the evasion of legal obligations and herein respondent Standard Philips Corporation from using the word
duties, and the reduction of difficulties of administration and ―PHILIPS‖ in its corporate name, which was denied. On appeal, the CA
supervision over corporations. affirmed the SEC.
Herein, the Court does not consider that the corporate names of the ISSUE: WON Standard Philips should be directed to delete the word PHILIPS
academic institutions are "identical with, or deceptively or confusingly similar" from its corporate name?
to that of Lyceum of the Philippines Inc.. True enough, the corporate names
of the other schools (defendant institutions) entities all carry the word HELD: Yes. As early as Western Equipment and Supply Co. v. Reyes , 51 Phil.
"Lyceum" but confusion and deception are effectively precluded by the 115 (1927), the Court declared that a corporation's right to use its
appending of geographic names to the word "Lyceum." Thus, the "Lyceum of corporate and trade name is a property right, a right in rem, which
Aparri" cannot be mistaken by the general public for the Lyceum of the it may assert and protect against the world in the same manner as it
Philippines, or that the "Lyceum of Camalaniugan" would be confused with may protect its tangible property, real or personal, against trespass
the Lyceum of the Philippines. Further, etymologically, the word "Lyceum" is or conversion. It is regarded, to a certain extent, as a property right
the Latin word for the Greek lykeion which in turn referred to a locality on the and one which cannot be impaired or defeated by subsequent
river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo appropriation by another corporation in the same field (Red Line
and adorned with fountains and buildings erected by Pisistratus, Pericles and Transportation Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549).
Lycurgus frequented by the youth for exercise and by the philosopher
Aristotle and his followers for teaching." A name is peculiarly important as necessary to the very existence of
a corporation (American Steel Foundries vs. Robertson, 269 US 372, 70 L
In time, the word "Lyceum" became associated with schools and other ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First
institutions providing public lectures and concerts and public discussions. National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its
Thus today, the word "Lyceum" generally refers to a school or an institution name is one of its attributes, an element of its existence, and essential to its
of learning. Since "Lyceum" or "Liceo" denotes a school or institution of identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations
learning, it is not unnatural to use this word to designate an entity which is is that each corporation must have a name by which it is to sue and
organized and operating as an educational institution. To determine whether be sued and do all legal acts. The name of a corporation in this
a given corporate name is "identical" or "confusingly or deceptively similar" respect designates the corporation in the same manner as the name
with another entity's corporate name, it is not enough to ascertain the of an individual designates the person (Cincinnati Cooperage Co. vs.
presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate Bate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg. Co. vs. Starbird. 10 NH
names in their entirety and when the name of Lyceum of the Philippines is 123); and the right to use its corporate name is as much a part of the
juxtaposed with the names of private respondents, they are not reasonably corporate franchise as any other privilege granted (Federal Secur. Co.
regarded as "identical" or "confusingly or deceptively similar" with each other. vs. Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs.
Portuguese Beneficial Association, 18 RI 165, 26 A 36).
ISSUE2: WON the word ―Lyceum‖ has acquired a secondary meaning
although originally generic? A corporation acquires its name by choice and need not select a name
identical with or similar to one already appropriated by a senior corporation
HELD: No. The Court of Appeals recognized this issue and answered it in the while an individual's name is thrust upon him (See Standard Oil Co. of New
negative: "Under the doctrine of secondary meaning, a word or phrase Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A
originally incapable of exclusive appropriation with reference to an article in corporation can no more use a corporate name in violation of the
the market, because geographical or otherwise descriptive might rights of others than an individual can use his name legally acquired
nevertheless have been used so long and so exclusively by one producer with so as to mislead the public and injure another (Armington vs. Palmer,
reference to this article that, in that trade and to that group of the 21 RI 109. 42 A 308).
purchasing public, the word or phrase has come to mean that the article was
his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance The statutory prohibition (under Sec. 18 of the Corporation Code) cannot be
has been referred to as the distinctiveness into which the name or any clearer. To come within its scope, two requisites must be proven,
phrase has evolved through the substantial and exclusive use of the namely:
same for a considerable period of time. . . . No evidence was ever
presented in the hearing before the Commission which sufficiently proved (1) that the complainant corporation acquired a prior right over the use of
that the word 'Lyceum' has indeed acquired secondary meaning in favor of such corporate name; and
the appellant. If there was any of this kind, the same tend to prove only that (2) the proposed name is either:
the appellant had been using the disputed word for a long period of time. (a) identical; or
(b) deceptively or confusingly similar to that of any existing corporation
The number alone of the private respondents in the present case suggests or to any other name already protected by law; or
strongly that the Lyceum of the Philippines' use of the word "Lyceum" has (c) patently deceptive, confusing or contrary to existing law.
not been attended with the exclusivity essential for applicability of the
doctrine of secondary meaning. It may be noted also that at least one of the The right to the exclusive use of a corporate name with freedom
private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the from infringement by similarity is determined by priority of
term "Lyceum" 17 years before Lyceum of the Philippines registered its own adoption (1 Thompson, p. 80 citing Munn v. Americana Co., 82 N. Eq. 63,
corporate name with the SEC and began using the word "Lyceum." It follows 88 Atl. 30; San Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac.

921). In this regard, there is no doubt with respect to Petitioners' prior single word, that is, "STANDARD", different from that of Petitioners inasmuch
adoption of' the name ''PHILIPS" as part of its corporate name. Petitioners as the inclusion of the term "Corporation" or "Corp." merely serves the
Philips Electrical and Philips Industrial were incorporated on 29 August 1956 Purpose of distinguishing the corporation from partnerships and other
and 25 May 1956, respectively, while Respondent Standard Philips was issued business organizations.
a Certificate of Registration on 12 April 1982, twenty-six (26) years later.
Petitioner PEBV has also used the trademark "PHILIPS" on electrical lamps of The fact that there are other companies engaged in other lines of business
all types and their accessories since 30 September 1922. using the word "PHILIPS" as part of their corporate names is no defense and
does not warrant the use by Private Respondent of such word which
The second requisite no less exists in this case. In determining the constitutes an essential feature of Petitioners' corporate name previously
existence of confusing similarity in corporate names, the test is adopted and registered and-having acquired the status of a well-known mark
whether the similarity is such as to mislead a person, using ordinary in the Philippines and internationally as well (Bureau of Patents Decision No.
care and discrimination. In so doing, the Court must look to the record as 88-35 [TM], June 17, 1988, SEC Records).
well as the names themselves (Ohio Nat. Life Ins. Co. v. Ohio Life Ins. Co.,
210 NE 2d 298). While the corporate names of Petitioners and Private c. PURPOSE CLAUSE
Respondent are not identical, a reading of Petitioner's corporate names, to
wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS xxx
INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude that SECOND: That the purpose or purposes for which such corporation
"PHILIPS" is, indeed, the dominant word in that all the companies affiliated or is incorporated are: (If there is more than one purpose, indicate
associated with the principal corporation, PEBV, are known in the Philippines primary and secondary purposes);
and abroad as the PHILIPS Group of Companies. xxx
Respondent’s argue that there were no evidence presented that there was The statement of the objects or purpose or powers in the charter results
actual confusion. It is settled, however, that proof of actual confusion practically in defining the scope of authority of the corporate enterprise or
need not be shown. It suffices that confusion is probably or likely to undertaking. This statement both congers and also limits the actual authority
occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases). of the corporate representatives.
Moreover, Given Private Respondent's underlined primary purpose in its AOI, The reasons for requiring a statement of the purposes or objects:
nothing could prevent it from dealing in the same line of business of electrical 1. In order that the stockholder who contemplates on an investment in a
devices, products or supplies which fall under its primary purposes. Besides, business enterprise shall know within what lines of business his money is to
there is showing that Private Respondent not only manufactured and sold be put at risks;
ballasts for fluorescent lamps with their corporate name printed thereon but 2. So that the board of directors and management my now within what
also advertised the same as, among others, Standard Philips (TSN, before the lines of business they are authorized to act; and
SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As 3. So that anyone who deals with the company may ascertain whether a
aptly pointed out by Petitioners, [p]rivate respondent's choice of "PHILIPS" as contract or transaction into which he contemplates entering is one within the
part of its corporate name [STANDARD PHILIPS CORPORATION] . . . tends to general authority of the management.
show said respondent's intention to ride on the popularity and established
goodwill of said petitioner's business throughout the world" ( Rollo, p. 137). SECONDARY PURPOSE: Although the Corporation Code does not restrict
The subsequent appropriator of the name or one confusingly similar thereto nor limit the number of purpose or purposes which a corporation may have,
usually seeks an unfair advantage, a free ride of another's goodwill (American Sec. 14 thereof, requires that if it has more than one purpose, the primary
Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC purpose as well as the secondary ones must be indicated therein.
269, 191 F 2d 488).
PROHIBITION: The following are prohibited by special laws for having any
In allowing Private Respondent the continued use of its corporate name, the other purpose not peculiar to them:
SEC maintains that the corporate names of Petitioners PHILIPS ELECTRICAL 1. Educational, religious, and other non-stock corporations cannot include any
LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least other purpose which would change or contradict its nature or to engage in
two words different from that of the corporate name of respondent any enterprise to make profits for is members;
STANDARD PHILIPS CORPORATION, which words will readily identify Private 2. Insurance companies cannot engage in commercial banking at the same
Respondent from Petitioners and vice-versa. time, and vice-versa; and
3. Stock brokers can have no other line of business not peculiar to them.
True, under the Guidelines in the Approval of Corporate and Partnership
Names formulated by the SEC, the proposed name "should not be similar to RESTRICTIONS AND/OR ADDITIONAL REQUIREMENTS:
one already used by another corporation or partnership. If the proposed 1. As a general rule, the purpose or purposes must be lawful. Hence, the SEC
name contains a word already used as part of the firm name or style of a is duty bound to determine the legality of the corporate purpose/s before it
registered company; the proposed name must contain two other issues the certificate of registration;
words different from the company already registered" (Emphasis 2. A corporation may not be formed for the purpose of practicing a profession
ours). It is then pointed out that Petitioners Philips Electrical and Philips like law, medicine or accountancy, either directly or indirectly. These are
Industrial have two words different from that of Private Respondent's name. reserved exclusively for professional partnerships;
3. The retail trade, where the corporate capital is less than $2.5M, or its peso
What is lost sight of, however, is that PHILIPS is a trademark or trade name equivalent are reserved exclusively for Filipinos, or for corporations or
which was registered as far back as 1922. Petitioners, therefore, have the partnerships wholly owned by such citizen.
exclusive right to its use which must be free from any infringement by 4. As a general rule, corporations with foreign equity are not allowed to
similarity. A corporation has an exclusive right to the use of its name, engage in restaurant business but corporations with such foreign equity can
which may be protected by injunction upon a principle similar to purse such undertaking if it is incidental or in connection with hotel or inn-
that upon which persons are protected in the use of trademarks and keeping business.
tradenames (18 C.J.S. 574). Such principle proceeds upon the theory that it 5. Management consultants, advisers and/or specialists, must submit the
is a fraud on the corporation which has acquired a right to that name and personal information sheet of the incorporators and directors in order that
perhaps carried on its business thereunder, that another should attempt to the SEC may be able to find out or determine whether or not the applicant
use the same name, or the same name with a slight variation in such a way corporation is qualified to act as such.
as to induce persons to deal with it in the belief that they are dealing with the 6. As a matter of policy, financing companies are required by the SEC to
corporation which has given a reputation to the name (6 Fletcher [Perm Ed], submit certain additional documents together with their applications for
pp. 39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210 registration to verify compliance with RA 8556.
F 510). Notably, too, Private Respondent's name actually contains only a 7. For bonded warehousing companies, an undertaking to comply with the
General Bonded Warehousing Act must be submitted along with the AOI. xxx
8. In case the applicant proposes to engage in the business of hospital
and/or clinic, the purpose clause must contain the following proviso: Sec. 11. Corporate term. - A corporation shall exist for a period not
―Provided that purely medical or surgical services in connection therewith exceeding fifty (50) years from the date of incorporation unless sooner
shall be performed by duly qualified physician and surgeon who may or may dissolved or unless said period is extended. The corporate term as originally
not be freely and individually contracted by the parties.‖ stated in the articles of incorporation may be extended for periods not
9. In the case of Customs Brokerage business, the applicant must submit the exceeding fifty (50) years in any single instance by an amendment of the
license of at least two customs broker connected with the applicant articles of incorporation, in accordance with this Code; Provided, That no
corporation; extension can be made earlier than five (5) years prior to the original or
10. Transfer Agents, Broker and Clearing Houses must submit the certificate subsequent expiry date(s) unless there are justifiable reasons for an earlier
of admission to the profession of the CPA of any officer of the corporation; extension as may be determined by the Securities and Exchange Commission
11. Carriage of mails cannot be a purpose of a corporation unless a special
franchise has been granted to it. The corporate term is necessary in determining at what point in time the
12. If the corporate purpose or objective includes any purpose under the corporation will cease to exist or have lost its juridical personality. Once it
supervision of another government agency, prior clearance and/or ceases to exist, its legal personality also expires and could not thereafter, act
approval of the concerned government agencies or instrumentalities in its own name for the purpose of prosecuting it business.
will be required pursuant to the last paragraph of Sec. 17 of the Code.
EXTENSION: can be made not earlier than 5 years prior to the expiry date
GENERAL LIMITATIONS: unless there are justifiable reasons.
1. The purpose or purposes must be lawful;
2. The purpose must be specific or stated concisely although in broad or
general terms; f. INCORPORATORS
3. If there is more than one purpose, the primary as well as the secondary xxx
ones must be specified; and FIFTH: That the names, nationalities and residences of the
4. The purposes must be capable of being lawfully combined. incorporators of the corporation are as follows:
d. PRINCIPAL OFFICE NAME NATIONALITY RESIDENCE

xxx ..................... ............................. ............................
THIRD: That the principal office of the corporation is located in the ..................... ............................. ............................
City/Municipality of............................................, Province ..................... ............................. ............................
of................................................., Philippines ..................... ............................. ............................
xxx ..................... ............................. ............................
xxx
It must be located within the Philippines. The AOI must not only specify the
province, but also the City or Municipality where it is located. In this regard, it
is to be observed that the principal office may be in one place but the Sec. 5. Corporators and incorporators, stockholders and members. -
business operations are actually conducted in other areas. The law does not, Corporators are those who compose a corporation, whether as stockholders
of course, require a statement of the place of corporate operations and, or as members. Incorporators are those stockholders or members mentioned
therefore, may be dispensed with. in the articles of incorporation as originally forming and composing the
corporation and who are signatories thereof.
The principal office serves as the residence of the corporation, and is thus
important in: (1) venue of actions; (2) registration of chattel mortgage of Corporators in a stock corporation are called stockholders or shareholders.
shares; (3) validity of meetings of stockholders or members in so far as Corporators in a non-stock corporation are called members.
venue thereof is concerned.
CLAVECILLA RADIO SYSTEM VS. ANTILLON (19 SCRA 379; Feb. 18, CORPORATORS apply to all who compose the corporation at any given time
1967) – The New Cagayan Grocery filed a complaint against CRS for some and need not be among those who executed the AOI at the start of its
irregularities in the transmission of a message which changed the context formation or organization.
and purport causing damages. The complaint was filed in the City Court of
Cagayan de Oro. INCORPORATORS are those mentioned in the AOI as originally forming
the corporation and who are signatories in the AOI.
ISSUE: WON the action will prosper?
An incorporator may be considered as a corporator as long as he continues to
HELD: No. The action was based on tort and not upon a written contract and be a stockholder or a member, but not all corporators are incorporators.
as such, under the Rules of Court, it should be filed in the municipality where
the defendant or any of the defendants resides or may be served with
Sec. 10. Number and qualifications of incorporators. - Any number of
summons.
natural persons not less than five (5) but not more than fifteen (15), all of
legal age and a majority of whom are residents of the Philippines, may form
Settled is the principle in corporation law that the residence of a
a private corporation for any lawful purpose or purposes. Each of the
corporation is the place where the principal office is established.
incorporators of a stock corporation must own or be a subscriber to at least
Since it is not disputed that CRS has its principal office in Manila, it follows
one (1) share of the capital stock of the corporation.
that the suit against it may properly be filed in the City of Manila.
QUALIFICATIONS OF INCORPORATORS:
The fact that CRS maintains branch office in some parts of the country does
1. Must be natural persons. It implies that a corporation or a partnership
not mean that it can be sued in any of these places. To allow such would
cannot become incorporators. EXCEPTION: (1) cooperatives; (2)
create confusion and work untold inconveniences to the corporation.
corporations primarily organized to hold equities in rural banks and may
rightfully become incorporators thereof. It must be noted likewise that the
e. TERM OF EXISTENCE
law does not preclude firms and other entities from becoming stockholders or
xxx
subscribers to the shares of a stock corporation. Thus, while they cannot
FOURTH: That the term for which said corporation is to exist
qualify as incorporators, they can become corporators or stockholders.
is............... years from and after the date of issuance of the
2. Of Legal Age. Minors cannot be incorporators. They may, however,
certificate of incorporation;

become stockholders provided they are legally represented by parents, election or appointment;
guardians or administrators. 3. Such other disqualifications that may be provided in the by-laws.
3. Must own at least 1 share.
4. Majority must be residents of the Philippines. The law does not provide for JOHN GOKONGWEI, JR., Petitioner,
citizenship requirements. EXCEPT: in certain areas of activity or industry vs.
wherein ownership of shares of stock are reserved wholly or partially to SECURITIES AND EXCHANGE COMMISSION, SAN MIGUEL
Filipino citizens. Hence, all incorporators may be foreigners provided majority CORPORATION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL,
of them are residents. Note that the requirement is residence and not ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
citizenship. ORTIGAS, EMIGDIO TANJUATCO and EDUARDO VISAYA, Respondents
(GR No. L-52129; April 21, 1980)
g. DIRECTORS/TRUSTEES
xxx FACTS: Petitioner, stockholder of San Miguel Corp. filed a petition with the
SIXTH: That the number of directors or trustees of the corporation SEC for the declaration of nullity of the by-laws etc. against the majority
shall be............; and the names, nationalities and residences of the members of the BOD and San Miguel. The amended by-laws provided for the
first directors or trustees of the corporation are as follows: disqualification of competitors from nomination and election in the Board of
irectors of SMC. This was denied by the SEC.
NAME NATIONALITY RESIDENCE
..................... ............................. ............................ ISSUE: Is the disqualification valid?
..................... ............................. ............................
..................... ............................. ............................ HELD: Yes. The Court held that a corporation has authority prescribed, by
..................... ............................. ............................ law, the qualifications of directors. It has the inherent power to adopt by-
..................... ............................. ............................ laws for its internal government, and to regulate the conduct and prescribe
xxx the rights and duties of its members towards itself and among themselves in
reference to the management of its affairs. A corporation, under the
DIRECTORS is the governing board in stock corporations. TRUSTEES refer Corporation law, may prescribe in its by-laws the qualifications,
to non-stock corporations. duties and compensation of directors, officers, and employees. Any
person who buys stock in a corporation does so with the knowledge that its
There must be at least 5 but not more than 15 directors in a private affairs are dominated by a majority of the stockholders and he impliedly
corporation. EXCEPTIONS: contracts that the will of the majority shall govern in all matters within the
1. Educational corporations registered as non-stock corporations whose limits of the acts of incorporation and lawfully enacted by-laws and not
number of trustees, though not less than 5 and not more than 15 should be forbidden by law. Any corporation may amend its by-laws by the owners of
divisible by 5. the majority of the subscribed stock. It cannot thus be said that petitioners
2. In close corporations where all stockholders are considered as members of has the vested right, as a stock holder, to be elected director, in the face of
the board of directors (Sec. 97) thereby effectively allowing 20 members in the fact that the law at the time such stockholder's right was acquired
the board. contained the prescription that the corporate charter and the by-laws shall be
subject to amendment, alteration and modification. A Director stands in a
The by-laws of a corporation may provide for additional qualifications and fiduciary relation to the corporation and its shareholders, which is
disqualifications of its members of the board of directors or trustees. characterized as a trust relationship. An amendment to the
However, it may not do away with the minimum disqualifications laid down corporate by-laws which renders a stockholder ineligible to be
by the Code. The minimum qualifications of directors and trustees in a director, if he be also director in a corporation whose business is in
domestic corporation are provided under the 2nd par. Of Sec. 23: competition with that of the other corporation, has been sustained
as valid. This is based upon the principle that where the director is
employed in the service of a rival company, he cannot serve both, but must
Sec. 23. The board of directors or trustees betray one or the other. The amendment in this case serves to advance the
xxx benefit of the corporation and is good. Corporate officers are also not
Every director must own at least one (1) share of the capital stock of the permitted to use their position of trust and confidence to further their private
corporation of which he is a director, which share shall stand in his name on needs, and the act done in furtherance of private needs is deemed to be for
the books of the corporation. Any director who ceases to be the owner of at the benefit of the corporation. This is called the doctrine of corporate
least one (1) share of the capital stock of the corporation of which he is a opportunity.
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 h. CAPITALIZATION
Philippines. xxx
SEVENTH: That the authorized capital stock of the corporation
QUALIFICATIONS OF DIRECTORS/TRUSTEES: is................................................ (P......................) PESOS in lawful
money of the Philippines, divided into.............. shares with the par
1. Must own at least 1 share in their own names or a member (in the case of
trustees); value of.................................. (P.......................) Pesos per share.
(In case all the share are without par value):
2. Majority must be resident of the Philippines. Even aliens may be elected as
directors, provided that the majority of such directors are residents of the
That the capital stock of the corporation is.......................... shares
Philippines. EXCEPT: in activities exclusively reserved to Filipino citizens like
the management of educational institutions and those governed by the Retail without par value. (In case some shares have par value and some
Trade Law. are without par value): That the capital stock of said corporation
consists of....................... shares of which...................... shares are of
the par value of............................. (P.....................) PESOS each, and
Sec. 27. Disqualification of directors, trustees or officers. - No person of which............................... shares are without par value.
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 EIGHTH: That at least twenty five (25%) per cent of the authorized
five (5) years prior to the date of his election or appointment, shall qualify as capital stock above stated has been subscribed as follows:
a director, trustee or officer of any corporation.
Name of Subscriber Nationality No of Shares Amount
DISQUALIFICATIONS: Subscribed
1. Imprisonment for a period exceeding 6 years; ........................ .............. ................ ...........................
2. Violation of the Corporation Code within 5 years prior to the date of ........................ .............. ................ ...........................
........................ .............. ................ ...........................
........................ .............. ................ ........................... 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
NINTH: That the above-named subscribers have paid at least thereof, by the stockholders representing at least a majority of the
twenty-five (25%) percent of the total subscription as follows: outstanding capital stock at a meeting duly called for the purpose.
Name of Subscriber Amount Subscribed Total Paid-Up SHARES OF STOCKS AND THEIR CLASSIFICATIONS
.............................. .............................. ....................
.............................. .............................. .................... SHARES OF STOCK designate the units into which the proprietary interest
.............................. .............................. .................... in a corporation is divided. They represent the proportionate integers or
.............................. .............................. .................... units, the sum of which constitutes the capital stock of the corporation. It is
.............................. .............................. .................... likewise the interest or right which the owner, called the stockholders or
shareholder, has in the management of the corporation, and in the surplus
(Modify Nos. 8 and 9 if shares are with no par value. In case the profits and in case of distribution, in all of its assets remaining after the
corporation is non-stock, Nos. 7, 8 and 9 of the above articles may payment of its debts.
be modified accordingly, and it is sufficient if the articles state the
amount of capital or money contributed or donated by specified CERTIFICATE OF STOCK is a document or instrument evidencing the
persons, stating the names, nationalities and residences of the interest of a stockholder in the corporation.
contributors or donors and the respective amount given by each.)
xxx
Sec. 6. Classification of shares. - The shares of stock of stock
corporations may be divided into classes or series of shares, or both, any of
The Corporation Code requires the AOI to state the authorized capital stock,
which classes or series of shares may have such rights, privileges or
the number of shares and/or kind of shares into which the authorized capital
restrictions as may be stated in the articles of incorporation: Provided, That
is divided, the par value of each share, if there by any, the names,
no share may be deprived of voting rights except those classified and issued
nationalities and residences of the original subscribers, and the amount
as "preferred" or "redeemable" shares, unless otherwise provided in this
subscribed and paid by each. At least 25% of the subscribed capital must be
Code: Provided, further, That there shall always be a class or series of shares
paid and in no case may the paid-up capital be less than P5,000.
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
AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articles
articles of incorporation: Provided, however, That banks, trust companies,
to be subscribed and paid-in or secured to be paid by the subscribers. It may
insurance companies, public utilities, and building and loan associations shall
also refer to the maximum number of shares that a corporation can issue.
not be permitted to issue no-par value shares of stock.
SUBSCRIBED CAPITAL STOCK is the total number of shares and its total
Preferred shares of stock issued by any corporation may be given preference
value for which there are contracts for their acquisition or subscription. It is
in the distribution of the assets of the corporation in case of liquidation and in
in effect, the stockholder’s equity account showing that part of the authorized
the distribution of dividends, or such other preferences as may be stated in
capital stock which has been paid or promised to be paid, or that portion of
the articles of incorporation which are not violative of the provisions of this
the authorized capital stock which has been subscribed by the subscribers or
Code: Provided, That preferred shares of stock may be issued only with a
stockholders.
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
PAID UP CAPITAL STOCK or paid-in capital is the actual amount or value
or any series thereof: Provided, That such terms and conditions shall be
which has been actually contributed or paid to the corporation in
effective upon the filing of a certificate thereof with the Securities and
consideration of the subscriptions made thereon. It may be in the form of
Exchange Commission.
cash, property or in the form of services actually rendered to the corporation
as provided under Sec. 62 of the Corporation Code:
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
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a corporation or to its creditors in respect thereto: Provided; That shares
consideration less than the par or issued price thereof. Consideration for the without par value may not be issued for a consideration less than the value
issuance of stock may be any or a combination of any two or more of the of five (P5.00) pesos per share: Provided, further, That the entire
following: 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.
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and A corporation may, furthermore, classify its shares for the purpose of insuring
necessary or convenient for its use and lawful purposes at a fair valuation compliance with constitutional or legal requirements.
equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation; Except as otherwise provided in the articles of incorporation and stated in the
4. Previously incurred indebtedness of the corporation; certificate of stock, each share shall be equal in all respects to every other
5. Amounts transferred from unrestricted retained earnings to stated capital; share.
and
6. Outstanding shares exchanged for stocks in the event of reclassification or Where the articles of incorporation provide for non-voting shares in the cases
conversion. allowed by this Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:
Where the consideration is other than actual cash, or consists of intangible
property such as patents of copyrights, the valuation thereof shall initially be 1. Amendment of the articles of incorporation;
determined by the incorporators or the board of directors, subject to approval 2. Adoption and amendment of by-laws;
by the Securities and Exchange Commission. 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
Shares of stock shall not be issued in exchange for promissory notes or 4. Incurring, creating or increasing bonded indebtedness;
future service. 5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or
The same considerations provided for in this section, insofar as they may be other corporations;
applicable, may be used for the issuance of bonds by the corporation. 7. Investment of corporate funds in another corporation or business in
accordance with this Code; and dividends every year when profits are earned. In effect, directors cannot
8. Dissolution of the corporation. withhold dividends if there are profits.
3. Earned cumulative or dividend credit type – gives the holder the right to
Except as provided in the immediately preceding paragraph, the vote arrears in dividends if there were profits earned during the previous years. In
necessary to approve a particular corporate act as provided in this Code shall effect, their right to receive dividends is merely postponed on a later date.
be deemed to refer only to stocks with voting rights. The moment dividends are declared, back dividends earned in previous years
but not declared as such must first be paid to this type of preferred
PURPOSE OF CLASSIFICATION: shareholders before the common shareholders receive theirs.
1. To specify and define the rights and privileges of the stockholders;
2. For regulation and control of the issuance of sale of corporate securities DIFFERENCE WITH CUMULATIVE PREFERRED: Cumulative preferred are
for the protection of purchasers and stockholders. entitled to dividends whether or not there are profits. Earned cumulative or
3. As a management control device. dividend credit type is entitled only to arrears if there are profits in those
4. To comply with statutory requirements particularly those which provide for years.
certain limitations on foreign ownership.
5. To better insure return on investment which can be affected through the
issuance of redeemable shares or preferred shares, i.e., granting the holders b. Voting Right of Preferred Shares
thereof, preference as to dividends and/or distribution of assets in case of Preferred shares, along with redeemable shares, are usually denied voting
liquidation; and rights as they are allowed to be denied of such as provided in Sec. 6, but this
6. For flexibility in price, particularly, no par shares may be issued or sold right must clearly be withheld. However, even if deprived, preferred
from time to time at different prices depending on the net worth of the shareholders have the right to vote in matters enumerated in the penultimate
company since they do not purport to represent an actual or fixed value. paragraph of Sec. 6.
COMMON STOCKS are the most commonly issued shares of stock of a c. Preference Upon Liquidation
corporation. Although no clear cut definition can be found, it has been Such preference must also be stated in the contract, accordingly giving tem
described as one which entitles it owner to an equal or pro-rata division of the preference to the distribution of corporate assets upon liquidation or
profits, if there are any, but without any preference or advantage in that termination of corporate existence. If the preferred shares are cumulative,
respect over any other stockholder or class of stockholders. they have the right to any arrears in arrears in priority to any distribution of
assets to the common stockholders.
A common share usually carries with it the right to vote, and frequently, the
exclusively right to do so. However, where the AOI is silent, all issued and PAR AND NON-PAR VALUE SHARES
outstanding shares shall be considered to have the right to vote and be voted
for. Par Value Shares are those whose values are fixed in the AOI. Its par value is
the minimum subscription or original issue price of the shares and indicates
PREFERRED STOCKS is a stock that gives the holder preference over the the amount which the original subscribers are supposed to contribute to the
holder of common stocks with respect to the payment of dividends and/or capital, which, however, may not reflect the true value of the shares because
with respect to distribution of capital upon liquidation. LIMITATIONS imposed the same may fluctuate depending on the liability and networth of the
by the Code in the issuance of preferred stocks: (1) They can be issued only enterprise.
with a stated par value; and (2) The preference must be stated in the AOI
and in the certificate of stock otherwise each share shall be, in all respect, Watered Stocks are those issued at less than par value where the
equal to every other share. stockholders will remain liable for the difference between what he paid and
the actual par value thereof (Sec. 65).
a. PREFERENCE AS TO DIVIDENDS
They have the privilege of being paid dividends first before any other No Par Value Shares are those whose issued price are not stated in the
stockholders are paid theirs. The guaranty is not absolute so as to create a certificate of stock but may be fixed in the AOI, or by the BOD when so
relation of debtor and creditor between the corporation and the holders of authorized the articles or the by-laws, or in the absence thereof, the
such stock. The amount of preference is stated in the contract of subscription stockholders themselves. They do not purport to represent ay stated
and is usually a fixed percentage or by specified amount indicated therein. proportionate interest in the capital measured by value, but only an aliquot
part of the whole number of shares of the corporation issuing it.
Participating and Non-Participating Preferred Shares
If the preferred shares is participating, they are entitled to participate in The Code allows the issuance of no par value shares, subject to the following
dividends with the common shareholders beyond their stated preference. limitations provided in Sec. 6:
Non-participating preferred shares on the other hand are entitled to its fixed 1. Such shares once issued, are deemed fully paid and thus, non-assessable;
priority or preference only. 2. The consideration for its issuance should not be less than P5;
3. The entire consideration constitutes capital, hence, not available for
Cumulative and Non-cumulative Preference Shares dividend declaration;
Cumulative preferred shares are those that entitle the owner thereof to 4. They cannot be issued as preferred stock; and
payment not only of current dividends but also back dividends not previously 5. They cannot be issued by banks, trust companies, insurance companies,
paid whether or not, during the pas years, dividends were declared or paid. public utilities and building and loans associations.
In light of the provision of the Code stating that all shares are equal in all
respects unless otherwise stated in the AOI, a preferred share to be Advantages of no-par value shares:
considered cumulative, the same must be provided for and specified in the 1. Flexibility in price – no par shares may be issued from time to time at
certificate. different prices with the exception only that it shall not be issued at less than
P5;
Non-cumulative preferred shares are those which grant the holders of such 2. The issuance thereof practically results to the evasion of the danger of
shares only to the payment of current dividends but not back dividends, liability upon watered stock in case of overvaluation of the consideration paid
when and if dividends are paid, to the extent agreed upon before any other for it;
stockholders are paid the same. This type may be divided into three groups: 3. There is a disappearance of personal liability on the part of the holder for
1. Discretionary dividend type – depends on the judgment or discretion of the unpaid subscription since they are already deemed fully paid and non-
board of directors. Unless there is grave abuse of discretion as to result in assessable.
oppression, fraud or unfair discrimination, the dividend right of stockholders
of a particular year cannot be made up in subsequent years; VOTING AND NON-VOTING SHARES
2. Mandatory if earned – impose a positive duty on directors to declare Voting shares as the name suggests, gives the holder thereof the right to
vote and participate in the management of the corporation, through the liable to the creditors of the corporation for the difference of the purchase
election of the BOD, or in any matter requiring stockholders’ approval. price and its par value. They may also be declared as dividends since they
are properties of the corporation.
However, voting shares may practically be denied the right to vote where
there exist founders’ shares. Such shares do not have the right to share in dividends nor the right to vote.
Non-voting shares do not grant the holder thereof, a voice in the election of COMMISSIONER OF INTERNAL REVENUE VS. MANNING (66 SCRA 14;
directors and some other matter requiring stockholders’ vote. Aug. 6, 1975) – Julius Reese owned 24,700 of the 25,000 authorized capital
stock of Manta Trading and Supply Co., the rest are owned by herein
Only preferred and redeemable shares may be denied the right to vote. But, respondents. Upon Reese’ death, his shares was held in trust by the law firm
even if denied such right, they may still vote on the following matters: Ross, Carrascoso and Janda for the private respondent, who were to continue
management of the corporation. These shares considered by the respondents
1. Amendment of the articles of incorporation; as treasury shares, prior to full payment, were declared as stock dividends.
2. Adoption and amendment of by-laws; Such declaration was assessed by the BIR as distribution of assets subject to
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or income tax.
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness; ISSUE: WON the subject shares are treasury shares?
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or HELD: No. Treasury shares are stocks issued and fully paid for and
other corporations; reacquired by the corporation either by purchase, donation, forfeiture or
7. Investment of corporate funds in another corporation or business in other means and do not have the status of outstanding shares. They may be
accordance with this Code; and re-issued or sold again and while held by the company participates neither in
8. Dissolution of the corporation dividends, because dividends cannot be declared by the corporation to itself,
nor in meeting of the corporation as voting stock for otherwise equal
distribution of voting powers among stockholders will be effectively lost and
FOUNDERS‘ SHARES are shares issued to the founders of the corporation the directors wil be able to perpetuate their control of the corporation,
which are granted certain right and privileges such as the exclusive right to though it still represent a paid for interest in the property of the corporation.
vote and be voted for in the election of directors. These features of a treasury stock are lacking in the questioned shares.
Sec. 7. Founders' shares. - Founders' shares classified as such in the In this case, and under the terms of the trust agreement, the shares of stock
articles of incorporation may be given certain rights and privileges not of Reese participated in dividends which the trustee received and the said
enjoyed by the owners of other stocks, provided that where the exclusive shares were voted upon by the trustee in all corporate meetings. They were
right to vote and be voted for in the election of directors is granted, it must not, therefore, treasury shares. The 24,700 shares were outstanding shares
be for a limited period not to exceed five (5) years subject to the approval of of Reese’s estate until they were fully paid. Such being the case, their
the Securities and Exchange Commission. The five-year period shall declaration as treasury stock dividend was a complete nullity.
commence from the date of the aforesaid approval by the Securities and
Exchange Commission. CAPITAL REQUIREMENTS
The period of 5 years is non-extendable because it may result in the almost Sec. 12. Minimum capital stock required of stock corporations. -
perpetual disqualification of other stockholders to elect or be elected as Stock corporations incorporated under this Code shall not be required to have
members of the BOD resulting to the lack of proper representation thereat. any minimum authorized capital stock except as otherwise specifically
provided for by special law, and subject to the provisions of the following
REDEEMABLE SHARES are those subject to redemption as may be section
provided in the subscription contract, which are usually attached to preferred
shares and other debt securities like bonds.
Sec. 13. Amount of capital stock to be subscribed and paid for the
purposes of incorporation. - At least twenty-five percent (25%) of the
Sec. 8. Redeemable shares. - Redeemable shares may be issued by the authorized capital stock as stated in the articles of incorporation must be
corporation when expressly so provided in the articles of incorporation. They subscribed at the time of incorporation, and at least twenty-five (25%) per
may be purchased or taken up by the corporation upon the expiration of a cent of the total subscription must be paid upon subscription, the balance to
fixed period, regardless of the existence of unrestricted retained earnings in be payable on a date or dates fixed in the contract of subscription without
the books of the corporation, and upon such other terms and conditions as need of call, or in the absence of a fixed date or dates, upon call for payment
may be stated in the articles of incorporation, which terms and conditions by the board of directors: Provided, however, That in no case shall the paid-
must also be stated in the certificate of stock representing said shares up capital be less than five Thousand (P5,000.00) pesos
These types of shares grants the corporation the right to repurchase the From the above provisions, it can be said that there is no minimum capital
shares at its option or at the option of the holder based on the face or issued requirement in order that a corporation may be duly incorporated except in
value plus specified premium, such redemption may be optional or special cases and provided that at least P5,000 should be paid-in, which
mandatory at a fixed or future date. effectively would make the P5,000 the minimum capital requirement.
Such repurchase may also be made regardless if there are unrestricted The 25% minimum paid-in capital can be paid by any shareholder, meaning
retained earnings. (see Power to Acquire Own Shares) that it is not particularly required that each subscriber pay 25% of their
subscription.
TREASURY SHARES
There are instances were the SEC, by virtue of an existing law, rules and
Sec. 9. Treasury shares. - Treasury shares are shares of stock which have regulations or policies, requires the payment of more than the amount
been issued and fully paid for, but subsequently reacquired by the issuing provided in the Code, such as Financing Companies where he required
corporation by purchase, redemption, donation or through some other lawful minimum paid-up capital be P10,000,000 (within Metro Manila), P5,000,000
means. Such shares may again be disposed of for a reasonable price fixed by (other cities), and P2,000,000 (municipalities).
the board of directors.
i. RESTRICTIONS AND PREFERENCES
Treasury shares, as provided in Sec. 9, are reacquired but not retired. They
may be issued for a price, even less than par, and the purchaser will not be Corporations are not required to provide for certain restrictions and
preferences regarding the transfer, sale or assignment of shares in the AOI corporation, and that as such Treasurer, I hereby certify under oath
except in close corporations which would subject their shares to specific that at least 25% of the authorized capital stock of the corporation
restrictions as required in Sec. 96 of the Code. They are not, however, has been subscribed and at least 25% of the total subscription has
restrained or prohibited from doing so been paid, and received by me, in cash or property, in the amount of
not less than P5,000.00, in accordance with the Corporation Code.
If the corporation desires to grant such options, restrictions and/or .......................................
preferences, the same must be indicated in the AOI AND in all of the stock
certificates. Failure to provide the same in the AOI would not bind the (Signature of Treasurer)
purchasers in good faith despite the fact that the said restriction and/or xxx
preference is indicated in the by-laws of the corporation.
n. NOTARIAL ACKNOWLEDGMENT
In a close corporation, however, such restrictions and preferences must not xxx
only appear in the articles of incorporation and in the stock certificates BUT SUBSCRIBED AND SWORN to before me, a Notary Public, for and in
ALSO be embodied in the by-laws of that close corporation otherwise it may the City/Municipality of................................. Province
not bind purchasers in good faith. of........................................., this............ day of........................,
19.......; by........................................... with Res. Cert.
j. THE TREASURER No..................... issued at................ on....................., 19.........
xxx
TENTH: That...................................... has been elected by the NOTARY PUBLIC
subscribers as Treasurer of the Corporation to act as such until his
successor is duly elected and qualified in accordance with the by- My commission expires on.........................., 19.......
laws, and that as such Treasurer, he has been authorized to receive
for and in the name and for the benefit of the corporation, all
subscription (or fees) or contributions or donations paid or given by Doc. No...............;
the subscribers or members. Page No...............;
xxx Book No..............;
Series of 19.....
k. NO TRANSFER CLAUSE xxx
xxx
ELEVENTH: (Corporations which will engage in any business or GROUNDS FOR DISAPPROVAL
activity reserved for Filipino citizens shall provide the following):
Sec. 17. Grounds when articles of incorporation or amendment may
"No transfer of stock or interest which shall reduce the ownership be rejected or disapproved. - The Securities and Exchange Commission
of Filipino citizens to less than the required percentage of the may reject the articles of incorporation or disapprove any amendment thereto
capital stock as provided by existing laws shall be allowed or if the same is not in compliance with the requirements of this Code: Provided,
permitted to recorded in the proper books of the corporation and That the Commission shall give the incorporators a reasonable time within
this restriction shall be indicated in all stock certificates issued by which to correct or modify the objectionable portions of the articles or
the corporation." amendment. The following are grounds for such rejection or disapproval:
xxx
1. That the articles of incorporation or any amendment thereto is not
This indicates the treasurer who has been elected as such until his successor substantially in accordance with the form prescribed herein;
has been elected and qualified and who is authorized to receive for and in 2. That the purpose or purposes of the corporation are patently
the name of the corporation all subscriptions, contributions or donations paid unconstitutional, illegal, immoral, or contrary to government rules and
or given by the subscribers or members. regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock
l. THE EXECUTION CLAUSE subscribed and/or paid if false;
xxx 4. That the percentage of ownership of the capital stock to be owned by
IN WITNESS WHEREOF, we have hereunto signed these Articles of citizens of the Philippines has not been complied with as required by existing
Incorporation, this..............day of....................., 19.......... in the laws or the Constitution.
City/Municipality of......................................., Province
of................................................, Republic of the Philippines. No articles of incorporation or amendment to articles of incorporation of
banks, banking and quasi-banking institutions, building and loan associations,
(Names and signatures of the incorporators) trust companies and other financial intermediaries, insurance companies,
xxx 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
The signatures are important as the AOI serves as a contract between the agency to the effect that such articles or amendment is in accordance with
signatories thereof, by and among themselves, with the corporation, and the law.
latter with the State.
After filing of the AOI, the SEC will examine and process them to determine
m. TREASURER‘S AFFIDAVIT compliance with the requirements enumerated in Sec. 14 and if the form
xxx prescribed under Sec. 15 is complied with. Only substantial and not strict
TREASURER'S AFFIDAVIT compliance is required.
REPUBLIC OF THE PHILIPPINES ) The above grounds are not exclusive. There may be other reasons for
CITY/MUNICIPALITY OF ) S.S. rejection or disapproval such as the corporate name is not legally permissible
PROVINCE OF ) or that the minimum capital requirement is not sufficient.
I,..................................., being duly sworn, depose and say: 3. COMMENCEMENT OF CORPORATE EXISTENCE
That I have been elected by the subscribers of the corporation as
Treasurer thereof, to act as such until my successor has been duly Corporate existence is reckoned from the time of the issuance of its
elected and qualified in accordance with the by-laws of the CERTIFICATE OF INCORPORATION or registration. It is only from this
time that it acquires juridical personality and legal existence, EXCEPT: created as a de jure corporation (or according to some, an apparently
a. Corporations by Estoppel; valid statute);
b. Those created by special laws; b. An attempt, in good faith, to form a corporation according to the
c. Those organized as Cooperatives covered by Bureau of Cooperatives and requirements of law which goes far enough to amount to a ―colourable
Home Owners’ Associations covered by Home Insurance Guaranty compliance‖ with the law;
Corporation. c. A user of corporate powers, the transaction of business in some way as
d. Corporation Sole – which is reckoned from the filing of verified articles. if it were a corporation;
(Sec. 112) d. Good faith in claiming to be and doing business as a corporation.
Sec. 19. Commencement of corporate existence. - A private Sec. 20. De facto corporations. - The due incorporation of any
corporation formed or organized under this Code commences to have corporation claiming in good faith to be a corporation under this Code, and its
corporate existence and juridical personality and is deemed incorporated from right to exercise corporate powers, shall not be inquired into collaterally in
the date the Securities and Exchange Commission issues a certificate of any private suit to which such corporation may be a party. Such inquiry may
incorporation under its official seal; and thereupon the incorporators, be made by the Solicitor General in a quo warranto proceeding
stockholders/members and their successors shall constitute a body politic and
corporate under the name stated in the articles of incorporation for the ATTACK: From the above provision, the only purpose of determining
period of time mentioned therein, unless said period is extended or the whether it is a de facto or de jure corporation is the applicability of the rules
corporation is sooner dissolved in accordance with law. on collateral and direct attack. Such that a de jure is impregnable to either,
while a de facto corporation’s existence can only be questioned in a direct
CAGAYAN FISHING DEVELOPMENT CO. VS. SANDIKO (65 Phil. 233; proceeding by the State through a quo warranto. A de facto corporation’s
Dec. 23, 1937) – On May 31, 1930, Manuel Tabora executed a Deed of Sale corporate existence however cannot be attacked collaterally.
where he sold four parcels of land in favor of herein petitioner Cagayan
Fishing Development Co., said to be under the process of incorporation. THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER
Plaintiff company filed its AOI with the Bureau of Commerce and Industry on MACAORAO BALINDONG, petitioners,
Oct. 22, 1930. A year later, before the issuance of the certificate of vs.
incorporation, the BD of the company adopted a resolution to sell the four PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN
parcels of land to Teodoro Sandiko for P42,000. MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG
ANDOY, MACALABA INDAR LAO. Respondents
ISSUE: WON the subsequent sale to Sandiko is valid? GR No. L-28113; March 28, 1969)
HELD: No. A duly organized corporation has the power to purchase and hold FACTS: The Municipality of Balabagan was created from the barrios and
real property as the purpose for which such corporation was formed may sitios of the Municipality of Malabang by virtue of EO No 386 issued by
permit and for this purpose may enter into such contract as may be President Garcia by virtue of Sec. 68 of the Revised Administrative Code.
necessary. But before a corporation may be said to be lawfully organized Following the decision of the Court in Pelaez vs. Auditor General, which
many thing have to be done. Among which, the law requires the filing of the declared Sec. 68 unconstitutional and that the President had no power to
AOI. create a municipality, herein petitioners sought to nullify EO 386 and to
restrain the respondents, who are officers of Balabagan, to vacate said their
It cannot be denied that the plaintiff was not incorporated when it entered office and desist from performing their functions.
into the contract of sale. It was not even a de facto corporation at that time.
Not being in legal existence then, it did not possess juridical personality to Respondents argue that it is at least a de facto corporation and the ruling in
enter into the contract. Pelaez is not applicable to it, having been organized under color of a statute
before it was declared unconstitutional, its officers having been either elected
Corporations are creatures of the law, and can only come into existence in or appointed, and the municipality itself having discharged corporate
the manner prescribed by the law. That a corporation should have a full and functions for the past five years. That as a de facto corporation, its existence
complete organization and existence as an entity before it can enter into a cannot be collaterally attacked.
contract or transact any business, would seem to be self-evident. A
corporation, until organized, has no being, franchises or faculties. Nor do ISSUE: WON the Municipality of Balabagan is a de facto corporation?
those engaged in bringing it into being have any power to bind it by contract,
unless so authorized by the charter, there is no corporation, nr does it HELD: No. In cases where a de facto municipal corporation was recognized
possess franchise or faculties for it to exercise, until it acquires complete as such despite the fact that the statute creating it was later invalidated, the
existence. decision could be fairly made to rest on the consideration that there was
some other valid law giving validity to the organization. Hence, in the
If the company could not and did not acquire the four parcels of and here case at bar, the mere fact that Balabagan was organized at the time when
involved, it follows that it did not have the resultant right to dispose the same the statute had not been invalidated cannot conceivably make it a de facto
to the defendant. corporation, as independently of the Administrative Code provision in
question, there is no other valid statute to give color of authority for its
D. DEFECTIVELY FORMED CORPORATIONS creation.
A corporation de jure is one created in strict or substantial compliance to the An unconstitutional act is not a law; it confers no rights; it imposes no duties;
governing corporation statutes and whose right to exist and act as such could it affords no protection; it creates no office; it is, in legal contemplation, as
not be attacked in a either collaterally or through a direct proceeding for that inoperative as though it had never been passed.
purpose even by the State.
HALL VS. PICCIO (86 Phil 603 June 29, 1950) – Petitioner, together with
1. DE FACTO CORPORATIONS private respondents signed and acknowledged the AOI of Far East Lumber
and Commercial Co., Inc., after the execution of which the corporation
A de facto corporation is one that is so defectively created as not to be a de proceeded to do business by adopting its by-laws and election of its officers.
jure corporation but nevertheless exists, for all practical purposes, as a Subsequently, pending action on the AOI, the respondents filed with the CFI
corporate body, by virtue of its bona fide attempt to incorporate under alleging the corporation to be an unregistered partnership and praying for its
existing statutory authority, coupled with the exercise of corporate powers. dissolution, which was granted.
REQUISITES: Herein petitioner claims that the corporation is a de facto corporation, that its
a. There is a valid statute under which the corporation could have been dissolution may be ordered only in a quo warranto proceedings instituted by
the State. AOI. Their respective associations are distinct and separate entities,
petitioner and private respondent does not have an intra-corporate relation
ISSUE: WON it is a de facto corporation? much less do they have an intra-corporate dispute. The SEC has no
jurisdiction over the complaint.
HELD: No. First, not having obtained a certificate of incorporation, the
company, even its stockholders, may not probably claim ―in good faith‖ to be The doctrine of corporation by estoppel advance by privte respondent cannot
a corporation. override jurisdictional requirements. Jurisdiction is fixed by law and is not
subject to the agreement of the parties.
Such claim is compatible with the existence of errors and irregularities, but
not with a total or substantial disregard of the law. UNnless there has been Corporation by estoppel is founded on principle of equity and is designated to
an evident attempt to comply with the law the claim to be a corporation prevent injustice and unfairness. It applies when persons assume to form a
―under this Act‖ (Sec. 19) could not be made in good faith. corporation and exercise corporate functions and enter into business relations
with third persons. Where there is no third person involved and the
Second, this is not a suit where the corporation is a party. This is a litigation conflict arises only among those assuming to form a corporation,
between a stockholder of the alleged corporation, for the purpose of who therefore know that it has not been registered, there is no
obtaining its dissolution. Even the existence of a de jure corporation may be corporation by estoppel.
terminated in a private suit for its dissolution between stockholders, without
the intervention of the State. ALBERT VS. UNIVERSITY PUBLISHING CO., INC. (13 SCRA 84; Jan. 30,
1965) – Jose Aruego, president of defendant University Publishing Co, Inc.
2. CORPORATION BY ESTOPPEL entered into a contract with plaintiff for the publishing of the latter’s revised
commentaries on the Revised Penal Code, which the defendant failed to pay
A corporation may exist on the ground of estoppel by virtue of the the second instalment due. The CFI of Manila rendered judgment in favor of
agreement, admission or conduct of the parties such that they will not be plaintiff, such judgment reduced by the Supreme Court to P15,000.
permitted to deny the fact of the existence of the corporation. It is neither a
de jure nor de facto because of serious defects in its incorporation or The CFI issued a writ of execution against Aruego, as the real defendant,
organization, unlike the de facto doctrine, it does not involve a theory that stating the discovery that there is no such entity as University Publishing Co.,
the irregular corporation has acquired a corporate status generally. It applies Inc.
to the consequences of some particular transactions or acts done in the
corporate name by associates assuming to be a corporation. ISSUE: WON the writ of execution may be effected upon Aruego?
Sec. 21. Corporation by estoppel. - All persons who assume to act as a HELD: Yes. On account of non-registration, University cannot be considered
corporation knowing it to be without authority to do so shall be liable as a corporation, not even a corporation de facto. It has therefore, no
general partners for all debts, liabilities and damages incurred or arising as a personality separate from Aruego it cannot be sued independently.
result thereof: Provided, however, That when any such ostensible corporation
is sued on any transaction entered by it as a corporation or on any tort The doctrine of corporation by estoppel is inapplicable. Aruego represented a
committed by it as such, it shall not be allowed to use as a defense its lack of non-existent entity and induced not only the plaintiff but even the court of
corporate personality. belief of such representation. He signed the contract as ―President‖ of
University and obviously misled plaintiff in to believing that University is a
On who assumes an obligation to an ostensible corporation as such, cannot ―corporation duly organized and existing under the laws of the Philippines‖.
resist performance thereof on the ground that there was in fact no One who has induced another to act upon his wilful
corporation. misrepresentation that a corporation was duly organized and
existing under the law, cannot, thereafter, set up against his victim
From the above provision, it is clear that the doctrine of estoppel may apply the principle of corporation by estoppel.
to the alleged corporation or to a third party transacting with the former.
SALVATIERRA VS. GARLITOS, ET AL. (103 Phil. 757; May 23, 1958) –
As to the Corporation – the members who purported to be a corporate body Petitioner Manuel T. Vda de Salvatierra, owner of a parcel of land, entered
cannot deny their purported existence as a corporation in an action against into a contract of lease with Philippine Fibers Processing Co., Inc., allegedly a
them on the contract, where the third persons were induced to deal with the corporation. For failure to comply with the obligations under the lease,
supposed corporation. They cannot avoid liability on the ground of lack of petitioner filed a complaint in the CFI where the company was declared in
personality to be sued. default and decision was rendered in favor of petitioner. Defendant Refuerzo
filed a motion claiming that he should not be made personally liable in the
As to third persons – they are estopped from denying the existence of the decision which was granted by the Court. Hence, this petition.
alleged corporation in a suit to enforce a contract. However, the association
of persons must have purported or acted, and were treated by the third ISSUE: WON Refuerzon can be made personally liable?
persons, as corporations. The doctrine also applies when the third person
tries to escape liability on a contract from which he has benefited on the HELD: Yes. While as a general rule, a person who has contracted or dealt
irrelevant ground of defective incorporation. with an association in such a way as to recognize its existence as a corporate
body is estopped from denying the same in an action arising out of such
LOZANO VS. DE LOS SANTOS (274 SCRA 452; June 19, 1977) – Petitioner transaction or dealing, yet this doctrine may not be held applicable
Reynaldo Lozano and respondent Antontio Anda agreed to consolidate their where fraud takes part in the said transaction. In the instant case, on
respective Jeepney Associations, to which they are presidents. They plaintiff’s charge that she was unaware of the fact that the company had no
conducted an election for one set of officers of the consolidated association, juridical personality, defendant Refuerzo gave no confirmation or denial and
where petitioner was the winner. Respondent, however, refused to abide by the circumstances surrounding the execution of the contract led to the
the agreement which prompted petitioner to institute an action for damages inescapable conclusion that plaintiff Salvatierra was really made to believe
in the trial court which was denied for being intra-corporate, and was held to that such corporation was duly organized in accordance with law.
be within the jurisdiction of the SEC.
The rule on the separate personality of a corporation is understood to refer
ISSUE: WON there is corporation by estoppel placing the case within SEC merely to registered corporations and cannot be made applicable to the
jurisdiction? liability of members of an unincorporated association. The reason behind this
doctrine is obvious – since an organization which before the law is
HELD: None. The unified association was still a proposal and had not been non-existent has no personality and would be incompetent to act on
approved by the SEC, neither had its officers and members submitted their its behalf; thus, those who act or purport to act as its

representatives or agent do so without authority and at their own INTERNATIONAL EXPRESS TRAVEL & TOURS SERVICES, INC. VS. CA
risk. And, as is it elementary principle of law that a person who acts as an (343 SCRA 674; Oct. 19, 2000) – Petitioner International Express Travel &
agent without authority or without principal is himself regarded as Tours Services, Inc. entered into an agreement with the Philippine Football
the principal, a person acting or purporting to act on behalf of a Federation through its president Henry Kahn, herein private respondent,
corporation which has no valid existence assumes such privileges where the former supplied tickets for the trips of the athletes to the
and obligations and becomes personally liable for contracts entered Southeast Asian Games and other various trips. The Federation failed to pay
into or for other acts performed as such agents. a balance of P265,894.33 which led petitioner to file a civil case in the RTC of
Manila which decided in its favor and holding Henry Kahn personally liable.
In acting on behalf of a corporation which he knew to be unregistered, the On appeal, the CA reversed the decision of the RTC absolving Kahn from
president of the unregistered corporation Refuerzo, assumed the risk of personal liability holding that the Federation had a separate and distinct
reaping the con the consequential damages of resultant right, if any, arising personality.
out of such transaction.
ISSUE: WON Henry Kahn can be made personally liable?
CHANG KAI SHEK SCHOOL VS. CA (172 SCRA 389; April 18, 1989) –
Private respondent Faustina Oh has been teaching in the herein petitioner HELD: Yes. While we agree with the appellate court that associations may be
School since 1932 for a continuous period of 33 years until that day that she accorded corporate status, such does not automatically take place by the
was told that she had no assignment for the next semester. She filed a suit mere passage of RA 3135 otherwise known as the Revised Charter of the
before the CFI against the school and later on amended her complaint to Philippine Amateur Athletic Federation and PD 604. It is a basic postulate that
include certain officials. The CFI of Sorsogon dismissed the complaint. On before a corporation may acquire juridical personality, the State must give its
appeal, the CA reversed the decision and held herein petitioner school liable consent either in the form of a special law or a general enabling act.
but absolved the other defendants. Nowhere can it be found in RA 3135 and PD 604 any provision creating the
Philippine Football Federation. These laws merely recognized the existence of
ISSUE: WON the School can be held liable? national sports associations and provided for the manner by which these
entities may acquire juridical personality.
HELD: Yes. Even though the school failed to incorporate as mandated by
law, it cannot now invoke such non-compliance with the law to immunize it The recognition of Philippine Amateur Athletic Federation required under RA
from the private respondent’s complaint. There should also be no question 3135 and the Department of Youth and Sports Development under 604,
that having contracted with the private respondent every year for 32 years extended to the PFF was not substantiated by Kahn. Accordingly, the PFF is
and thus represented itself possessed of juridical personality to defeat her not a national sports association within the purview of the aforementioned
claim against it. According to Art. 1431 of the Civil Code: ―through estoppel laws and does not have corporate existence of its own.
an admission or representation is rendered conclusive upon the person
making it and it cannot be denied as against the person relying on it‖. This being said, it follows that private respondent Kahn should be held liable
for the unpaid obligations of the unincorporated PFF. It is a settled principle
As the school itself may be sued in its own name, there is no need to apply in corporation law that any person acting or purporting to act on behalf of a
Rule 3, Sec. 15 ,under which the persons joined in an association without any corporation which has no valid existence assumes such privileges and
juridical personality may be sued with such an association. Besides, it has obligations and becomes personally liable for contracts entered into or for
been shown that the individual members of the board of trustees are not other acts performed as such agents.
liable, having been appointed only after the private respondent’s dismissal.
We cannot subscribe to the position taken by the appellate court that even
ASIA BANKING CORP., plaintiff-appelle VS. STANDARD PRODUCTS assuming that the PFF was defectively incorporated, the petitioner cannot
CO., INC., defendant-appellant (46 Phil. 144; Sept. 11, 1924) – This action deny the corporate existence of the PFF because it had contracted and dealt
was brought to recover the balance due of a promissory note executed by with the PFF in such a manner as to recognize and in effect admits its
herein appellant. The court rendered judgment in favor of the plaintiff. existence. The doctrine of corporation by estoppel is mistakenly applied by
the respondent court to the petitioner. The application of the doctrine
At the trial of the case the plaintiff failed to prove affirmatively the corporate applies to a third party only when he tries to escape liability on a
existence of the parties and the appellant insists that under these contract from which he has benefited on the irrelevant ground of
circumstances the court erred in finding that the parties were corporations defective incorporation. In the case at bar, the petitioner is not trying to
with juridical personality and assigns same as reversible error. escape liability from the contract but rather is the one claiming from the
contract.
ISSUE: WON parties herein are corporations with juridical personality?
GEORG GROTJAHN GMBH & CO. VS. ISNANI (235 SCRA 216; Aug. 10,
HELD: Yes. There is no merit whatever in the appellant's contention. The 1994) – Petitioner is a German company who was granted a license to
general rule is that in the absence of fraud a person who has establish a regional or area headquarters in the Philippines. Private
contracted or otherwise dealt with an association in such a way as respondent Romana Lanchinebre was a sales representative of petitioner who
to recognize and in effect admit its legal existence as a corporate made advances totalling P35,000 which were left unpaid. Petitioner filed a
body is thereby estopped to deny its corporate existence in any complaint for the collection of a sum of money which was dismissed by the
action leading out of or involving such contract or dealing, unless its judge holding, among others, that the license of petitioner does not include
existence is attacked for cause which have arisen since making the the license to do business in the Philippines.
contract or other dealing relied on as an estoppel and this applies to
foreign as well as to domestic corporations. (14 C. J., 227; Chinese ISSUE: WON petitioner has capacity to sue?
Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.)
HELD: Yes. Private respondent is estopped from assailing the personality of
The defendant having recognized the corporate existence of the plaintiff by petitioner. ―The rule is that the party is estopped to challenge the personality
making a promissory note in its favor and making partial payments on the of a corporation after having acknowledged the same by entering into a
same is therefore estopped to deny said plaintiff's corporate existence. It is, contract with it. And the doctrine of estoppel to deny corporate existence
of course, also estopped from denying its own corporate existence. Under applies to foreign as well as domestic corporation; one who has dealt with a
these circumstances it was unnecessary for the plaintiff to present other corporation of foreign origin as a corporate entity is estopped to deny its
evidence of the corporate existence of either of the parties. It may be noted corporate existence and capacity. The principle will be applied to prevent a
that there is no evidence showing circumstances taking the case out of the person contracting with a foreign corporation from later taking advantage f
rules stated. its non-compliance with the statutes chiefly in case where such person has
received the benefits of the contract‖ (Merill Lynch Futures, Inc. vs. CA).

In the case of Merill Lynch Futures, the SC held that a foreign corporation Strict compliance is not required. Substantial compliance therewith is
doing business in the Philippines may sue in Philippine courts although not sufficient. Thus, it has been held in the case of Perez vs. Balmaceda that a
authorized to do business here against the Philippine citizen who had corporation is deemed to have formally organized if it had a governing board
contracted with and been benefited by said corporation. Citing and applying which direct its affairs, as well as a treasurer and a clerk, and that through
the doctrine laid down in Asia Banking Corp. vs. Standard Prodcuts Co., Inc. these instrumentalities, it actually functioned and engaged in the business for
which it was organized. It cannot be held to have forfeited its charter simply
IN SUMMARY: it appears that if a corporation by estoppel exist and enters because it has not been shown that is also had a president and a secretary.
into a contract and transact business with a third party, tha latter has three
possible remedies: b. COMMENCEMENT OF BUSINESS/TRANSACTION
1. He may file a suit against the ostensible corporation to recover from the
corporate properties; This means that the corporation has actually functioned and engaged in
2. He may file the case directly against the associates personally liable who business for which it was organized which must be done within two years
held out the association as a corporation; and from the issuance of the certificate of incorporation lest it is
3. Against both the ostensible corporation and persons forming it, jointly deemed dissolved. This may take the form of entering into contracts which
and severally. The last two remedies may not, however, be availed of if tend to pursue its business undertaking or other acts related thereto.
the third party by his conduct is estopped from denying the existence of
the association as a corporation and as such, recovery should be limited If a corporation has commenced its business but subsequently becomes
only against the corporate assets. inoperative continuously for a period of at least 5 years, the same
shall be merely a ground for suspension or revocation of its
INDIVIDUAL LIABILITY of associates should not be overlooked. If the corporate franchise or certificate of registration.
doctrine of corporation by estoppel cannot be applied in their favor because
the third party dealing with it has not, in any manner, deemed to have
chosen to deal with it as a corporation or in short not, estopped to deny CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS
corporate existence, the associates can be held liable either as partners or
principals. A. CORPORATE CHARTER
WHO SHOULD BEAR THE LOSS: The better view is that those who actively CORPORATE CHARTER signifies an instrument or authority from the
participated in holding out the association as a corporation should be held sovereign power, bestowing rights or power, and is often used convertibly
personally liable by virtue of the express provision of Sec. 21 which provides with the term ―act of incorporation‖, where the corporation was formed under
that ―all persons who assume to act as a corporation knowing it to be a special act of the legislature, and with the ―articles of incorporation‖, when
without authority to do so shall be liable as general partners for all debts, the corporation was formed under a general law.
liabilities and damages incurred or arising‖ therefrom.
THREE-FOLD CONTRACT:
4. ORGANIZATION AND COMMENCEMENT OF BUSINESS 1. Between the corporation and the state insofar as it concerns its primary
franchise to be and act as a corporation’
a. CORPORATE ORGANIZATION 2. Between the corporation and the stockholders or members insofar as it
governs their respective rights and obligations;
Sec. 22. Effects on non-use of corporate charter and continuous 3. Between and among the stockholders or members themselves as far as
inoperation of a corporation.- If a corporation does not formally organize their relationship with one another is concerned.
and commence the transaction of its business or the construction of its works
within two (2) years from the date of its incorporation, its corporate powers FRANCHISE: appropriately applies to the right or privilege itself to be and
cease and the corporation shall be deemed dissolved. However, if a act as a corporation or to do a certain act while charter applies to the
corporation has commenced the transaction of its business but subsequently instrument by which the state vests such right or privilege. Franchise may
becomes continuously inoperative for a period of at least five (5) years, the either be: (1) Primary – nothing more than the right or privilege of being a
same shall be a ground for the suspension or revocation of its corporate corporation; or (2) Secondary – the powers and privileges vested in, and to
franchise or certificate of incorporation. be exercised by the corporate body as such. Example: Employment Agencies,
primary franchise is the certificate of incorporation from the SEC, the
This provision shall not apply if the failure to organize, commence the secondary franchise is the license issued by the POEA.
transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the corporation B. CORPORATE ENTITY THEORY
as may be determined by the Securities and Exchange Commission.
As a legal entity, the corporation is possessed with a juridical personality
Once the certificate of incorporation has been issued, the corporation MUST separate and distinct from the individual stockholders or members and is not
formally organize and commence its business. affected by the personal rights, obligations or transactions of the latter. The
properties it possesses belongs to it exclusively as a separate juridical entity
NON-USE OF CORPORATE CHARTER: Apparent from the above provision such that the personal creditors of its stockholders or members cannot attach
is that the failure of the corporation to organize within 2 years would corporate properties to satisfy their claims.
result in it automatic dissolution, unless, of course, its failure to do so is
due to causes beyond its control. On the other hand, the corporation is not likewise liable for the debts,
obligations or liabilities of its stockholders. Neither may it properties be made
FORMAL ORGANIZATION: refers to the process of structuring the answerable to satisfy the claim of creditors against its stockholders or
corporation to enable it to effectively pursue the purpose for which it was member even if the stockholder concerned is its president.
organized. It includes:
a. Organizational meeting of the stockholders to elect the BOD; SULO NG BAYAN, INC., plaintiff-appellant VS. GREGORIO ARANETA,
b. Adoption of by-laws, if not simultaneously filed with the AOI, and its INC. ET AL., defendant-appelle (72 SCRA 347; Aug. 17, 1976) – Plaintiff-
subsequent filing with the SEC which must be within 1 month from the appellant Sulo ng Bayan, Inc. instituted a reinvindicatory action for the
issuance of the certificate of incorporation; recovery of 28,000 square meters of land for and in behalf of it members,
c. Organizational meeting of the BOD to elect the corporate officers, who were themselves and their predecessors-in-interest pioneered in the
adoption of corporate seal, accepting pre-incorporation subscriptions, clearing of the land and cultivated the same since the Spanish Regime and
establishing the principal office and such other steps necessary to have been in continuous possession of the same. The action was dismissed
transact the legitimate business for which the corporation was formed. on the ground that there is no cause of action. On appeal, the CA certified
the case to the SC for the legal issues involved.

HELD: No. The president and manager of a corporation, who entered
ISSUED: WON Sulo ng Bayan, Inc. may institute the action for recovery of into and signed a contract in his official capacity, cannot be made
property of it individual members? liable thereunder in his individual capacity in the absence of
stipulation to that effect due to the personality of a corporation
HELD: No. It is a doctrine well-established and obtains both at law and in being separate and distinct from the person composing it. And
equity that a corporation is a distinct legal entity to be considered as separate because of this precept, Vergara’s supposed non-participation in the contract
and apart from the individual stockholders or members who compose it, and of sale although he signed the letter terminating it is completely immaterial.
is not affected by the personal rights, obligations and transactions of its
stockholders or members. The property of a corporation is its property and CRUZ VS. DALISAY (152 SCRA 482; July 31, 1987) – Adelio Cruz charged
not that of the stockholders, as owners, although they have equities in it. Quiterio Dalisay, Senior Deputy Sheriff of Manila, with malfeasance in office,
Properties registered in the name of the corporation are owned by it as an corrupt practices and serious irregularities when the respondent sheriff
entity separate and distinct from its members. Conversely, a corporation attached and/or levied the money belonging to complainant Cruz when he
ordinarily has no interest in the individual property of it stockholders unless was not himself the judgment debtor in the final judgment of NLRC sought to
transferred to the corporation, ―even in the case of a one-man corporation‖. be enforced but rather the company known as Qualitrans Limousine Service,
Inc., a duly registered corporation.
Absent any showing of interest, therefore, a corporation, like plaintiff-
appellant herein, has no personality to bring an action for and in behalf of its ISSUE: WON the charge against the respondent should be upheld for
stockholders or members for the purpose of recovering property which attaching personal property of the corporate president?
belongs to said stockholders or members in their personal capacities.
HELD: Yes. The respondent’s action in enforcing judgment against complaint
It is fundamental that there cannot be a cause of action without an who is not the judgment debtor in the case calls for disciplinary action.
antecedent primary legal right conferred by law upon a person. Evidently, Considering the ministerial duty in enforcing writs of execution, what is
there can be no wrong without a corresponding right, and no breach of duty incumbent upon him is to ensure that only that portion of a decision ordered
by one person without a corresponding right belonging to some other person. or decreed in the dispositive part should be the subject of execution. No
more, no less. That the title of the case specifically names complaint as one
FERMIN CARAM, JR. AND ROSA DE CARAM VS. CA AND ALBERTO V. of the respondent is of no moment as execution must conform to that
ARELLANO (151 SCRA 372; June 30, 1987) – Herein petitioners were directed in the dispositive portion and not in the title of the case. The tenor
ordered jointly and severally to pay the plaintiff P50,000 for the preparation of the NLRC judgment and the implementing writ are clear enough. It
of the project study and his technical services that led to the organization of directed Qualitrans to reinstate the discharged employee and pay the full
the defendant corporation. The petitioners questioned the order stating that backwages. Respondent, however, chose to ―pierce the veil of corporate
they are mere subsequent investors in the corporation that was later created, entity‖ usurping a power belonging to the court and assumed improvidently
that they should not be held solidarily liable with the Filipinas Orient Airways, that since the complainant is the owner/president, they are one and the
a separate juridical entity, and with co-defendants who were the ones who same. It is well-settled doctrine, both in law and in equity that as a legal
requested the said services from the private respondent. entity, a corporation has a personality distinct and separate from its
individual stockholders or members. The mere fact that one is
ISSUE: WON petitioners can be held personally liable for such expenses? president of a corporation does not render the property he owns or
possesses the property of the corporation, since the president, as
HELD: No. Petitioners were not involved in the initial stages of the individual, and the corporation are separate entities.
organization of the airline, which were being directed by Baretto, respondent,
as the main promoter. It was he who was putting all the pieces together, so PALAY INC. VS. CLAVE (124 SCRA 638; Sept. 21, 1983) – Petitioner Palay,
to speak. The petitioners were merely among the financiers whose interest Inc. through its president Albert Onstott, executed in favor of respondent
was to be invited and who were in fact persuaded, on the strength of the Naario Dumpit a Contract to Sell a parcel of land which provided for
project study, to invest in the proposed airline. automatic rescission upon default in payment of any monthly amortization
without need of notice and forfeiture of all instalments paid. Respondent
Significantly, there was no showing that the Filipinas Orient Airways was a failed to pay some instalments and later offered to update all his overdue
fictitious corporation and did not have a separate juridical personality, to account but was informed that the contract has already been rescinded.
justify making the petitioner, as principal stockholder thereof, responsible for
its obligations. As a bona fide corporation, the Filipinas Orient Airways should Respondent filed with the NHA a complaint questioning the validity of the
alone be liable for its corporate acts as duly authorized by its directors and rescission which decided in its favor holding Palay, Inc. and Alberto Onstott,
officers. in his capacity as president, jointly and severally liable.
The most that can be said is that they benefited from the services, but that ISSUE: WON the corporate president is liable to refund the amount state in
surely is no justification t hold them personally liable therefor. Otherwise, all the NHA ruling?
other stockholders of the corporation, including those who came in later, and
regardless of the amount of their stockholdings would be equally and HELD: No. As a general rule, a corporation may not be made to answer for
personally liable also with the petitioners for the claims of the private acts or liabilities of its stockholders or those of the legal entities to which it
respondents. may be connected and vice versa. However, the veil of corporate fiction may
be pierced when it is used as a shield to further an end subversive of justice;
Petitioners are not liable under the challenged decision. or for purposes that could not have been intended by the law that created it;
or to defeat public convenience, justify wrong, protect fraud, or defend
RUSTAN PULP AND PAPER MILLS, INC. VS. IAC (214 SCRA 665; Oct. crime; or to perpetuate fraud or confuse legitimate issues; or to circumvent
19, 1992) – Petitioner Rustan entered into a conract of sale with respondent the law or perpetuate deception; or as an alter ego, adjunct or business
Lluch which was later on stopped by Rustan through a letter. Lluch sent a conduit for the sole benefit of the stockholders.
letter to clarify whether the letter sent by Rustan was for the stoppage of
delivery or termination of the contract of sale. Unanswered, respondent Lluch We find no badges of fraud on petitioners’ part. They had literally relied,
resumed devliveries and later on filed a complaint for contractual breach albeit mistakenly, on its contract with private respondent when it rescinded
which was dimissed. On appeal, the CA modified the decision of the trial the contract to sell extrajudicially and had sold it to another person.
court directing petitioner including Tantoco, president and general manager,
and Vergara, resident manager, to pay private respondents. No sufficient proof exists on record that said petitioner used the corporation
to defraud private respondent. He cannot, therefore, be made personally
ISSUE: WON individual petitioners may be held liable? liable just because he ―appears to be the controlling stockholder‖. Mere
ownership by a single stockholder or by another corporation of all

or nearly all of the capital stock of a corporation is not, of itself, stead.
sufficient ground for disregarding the separate corporate
personality. In light of the foregoing, it is clear that the liability of the petitioners under
the document subject of the instant case is not personal but corporate, and
PAULINO SORIANO, NENITA C. ESPERANZA and JANDRO G. therefore attached to the Bacarra (I.N.) Facoma, Inc. which being a
MACADANGDANG, petitioners, corporation, has a personality distinct and separate from that of the
vs. petitioners who are only its officers. It is the general rule that the
HON. COURT OF APPEALS (Former Sixth Division) and GERVACIO CU, protective mantle of a corporation‘s separate and distinct
respondents personality could only be pierced and liability attached directly to its
(GR No. L-49834; June 22, 1989) officers and/or member-stockholders, when the same is used for
fraudulent, unfair or illegal purpose.
FACTS: Petitioners were held solidarily liable by the appellate court in their
personally capacity to the private respondent for non-payment of tobacco C. PIERCING THE VEIL OF CORPORATE FICTION
under an agreement between them embodied in a receipt which states as
follows: The notion of corporate legal entity is not, at all ties respected. This is
because the applicability of the corporate entity theory is confined to
GREETINGS: legitimate transactions and is subject to equitable limitations to prevent its
WE, the President, Manager, Treasurer and Director Representative of being used as a cloak or cover for fraud or illegality, or to work injustice.
Bacarra (I.N.) Facoma, Inc., do hereby execute this document:
While no hard and fast rule exists as to when the corporate fiction may
That we received from Mr. Gervacio Cu, a truck load of Virginia tobacco pierced or disregarded, it is a fundamental principle in Corporation law that a
consisting of ONE HUNDRED SIXTY (160) bales of fifty (50) kilos each bale corporation is an entity separate and distinct from its stockholders or member
(sic) the said Virginia tobacco consists of different grades or class from E and from other corporations to which it may be connected. But when the
to A (sic) the said tobaccos are to be shipped to the redrying plants notion of legal entity is used to defeat public convenience, Justify wrong,
through the Bacarra Facoma under Guia number 236. Protect fraud, Defend crime, the law will regard the corporation as a mere
association of persons, or in the case of two corporations, merge them into
Conditions of the deal between Mr. Cu and the Association. Upon payment one, the one being merely regarded as part or instrumentality of the other.
of the said tobacco by the Philippine Virginia Tobacco Administration then The same is true where a corporation is a mere dummy and serves no
Mr. Cu, will collect the corresponding payments as graded by the redrying business purpose and is intended only as a blind, or an alter-ego or business
plant as further stipulated that the check representing the payment shall conduit for the sole benefit of the stockholders.
only be cashed in the presence of Mr. Cu, or his authorized representative.
(Sic) In cases where the doctrine of piercing the veil of corporate fiction, liability
This instrument is executed for the protection, guidance and information of will attach directly to the officers and stockholders, at least, in so far as that
the parties concerned. particular act is concerned.
Done this 10th day of August 1964 at Bacarra, Ilocos Norte. PALACIO VS. FELY TRANSPORTATION COMPANY (5 SCRA 1011; Aug.
31, 1962) – Alfredo Carillo, a driver of herein respondent corporation, ran
(Sgd.) Paulino Soriano over the child of herein petitioner Mario Palacio, and was found guilty of the
PAULINO SORIANO criminal case filed against him. Isabelo Calingasan, the employer, was held
President subsidiarily liable and not the defendant corporation. Plaintiffs now contend
that the defendant corporation should be made subsidiarily liable for
(Sgd.) Nenita C. Esperanza damages in the criminal case because the sale to it of the jeep in question,
NENITA C. ESPERANZA after the conviction of Carillo was merely an attempt on the part of
Sec. Treasurer Calingasan, its president and general manager, to evade his subsidiary civil
liability.
by:
(Sgd.) Erlinda V. Acosta BIENVENIDO ISSUE: WON the corporation can be held liable for the subsidiary civil
E. ACOSTA Director, Official liability of Isabelo Calingasan?
Representative
HELD: Yes. It is evident that Calingasan’s main purpose in forming the
(Sgd.) A. Macadangdang corporation was to evade his subsidiary civil liability resulting from the
A.G. MACADANGDANG conviction of his driver. This conclusion is borned out by the fact that the
Manager incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his
son, Dr. Calingasan, and his two daughters. We believe that this one case
ISSUE: WON petitioners are liable? where the defendant corporation should not be heard to say that it
has a personality separate and distinct from its members when to
HELD: No. We cannot accept the conclusion that the official designations of allow it to do so would be to sanction the use of the fiction of
petitioners were written on the document merely as meaningless and hollow corporate entity as a shield to further an end of subversive of
decorations or as mere descripto personae without any relevance to the justice. Furthermore, the failure of the defendant corporation to prove that
liability of the corporation these officers obviously represented. Indeed, it has other property other than the jeep strengthens the conviction that its
taking in conjunction with the other obtaining circumstances, the receipt formation was for the purpose above indicated.
discloses the capacity by which the petitioners entered into the ―deal‖ with
private respondent. MARVEL BUILDING CORPORATION, et al. VS. DAVID (94 Phil. 376;
Feb. 24, 1954) – Plaintiffs, as stockholders of Marvel Building Corporation
The subject receipt itself states tht the conditions contained therein were sought to enjoin the defendant Collector of Internal Revenue from selling at a
between the private respondent and the ―Association‖. The lower court held public auction properties which were said to be registered in the name of said
that the ―Association‖ referred only to the signatories. We disagree. It is quite corporation. Said properties were seized and distrained by defendant to
plain and we are convinced that the ―Association is none other than the collect war profits taxes against Maria Castro who the former claims to be the
Bacarra (I.N.) Facoma, Inc. which is a farmer’s cooperative marketing sole owner of the said corporation. Maria Castro owns P250,000 of the
association. Not only that , we cannot find any cogent reason why the P1,025,000 capital of the corporation, of the rest of the incorporators were
petitioners used the word ―Association‖ when they could have more easily her half-brothers, half-sister and a brother-in-law.
and conveniently placed ―the undersigned‖ or words to the same effect in its

ISSUE: WON Maria Castro is the sole owner of the Corporation? majority of the BOD of Yutivo is also the controlling majority of the Board of
SM. At the same time, the principal officers of both corporations are identical.
HELD: Yes. Circumstantial pieces of evidence presented were: (1) In addition, both corporations have a common comptroller. There is therefore
Endorsement in blank of the certificates of stock issued in the name of the no doubt that by virtue of such control, the business, financial and
incorporators and the possession thereof by Maria Castro; (2) The other management policies of both corporations would be directed towards
incorporators did not have incomes in such amount, during the time of the common ends. Likewise, cash or funds of SM, including those of its branches
organization of the corporation or immediately thereto, as to enable them to which are directly remitted to Yutivo, and subject to withdrawal only by
pay in full their supposed subscriptions; and (3) It should have been the Yutivo, SM’s being under Yutivo’s control, the former’s operations and
supposed subscribers who should have come to court to assert that they existence became dependent upon the latter.
actually paid for their subscriptions and are not mere dummies.
SM, being but a mere instrumentality or adjunct of Yutivo, the CTA correctly
The circumstantial evidence is not only convincing, it is conclusive. In disregarded the technical defense of separate corporate entity to arrive at the
addition to the above, the fact that the stockholders or directors never true tax liability of Yutivo.
appeared to hae ever met to discuss the business of the corporation and the
fact that Maria Castro advanced big sums of money to the corporation COMMISSIONER OF INTERNAL REVENUE, petitioner,
without any previous arrangements or account, and the fact that the books of vs.
accounts were kept as if they belonged to Maria Castro alone – these facts NORTON and HARRISON COMPANY, respondent.
are of patent and potent significance. (GR No. L-17618; 11 SCRA 714; Aug 31, 1964)
In our opinion, the facts and circumstances duly set forth, all of which have FACTS: Herein respondent entered into an agreement with Jackbilt where
been proved to our satisfaction, prove conclusively and beyond reasonable the former was made the sole and exclusive distributor of concrete blocks
doubt that Maria Castro is the sole and exclusive owner of all the shares of manufactured by Jackbilt and accordingly every order of a customer of
stock of the corporation and that the other partners are her dummies. Norton was transmitted to Jackbilt which delivered the merchandise directly
to the customer. Payment of the goods, however, is made to Norton, which
YUTIVO & SONS CO. VS. CTA (1 SCRA 160; Jan. 28, 1961) – Herein in turn pays Jackbilt the amount charged the customer less a certain amount,
petitioner Yutivo purchased its cars and trucks from General Motors Overseas as its compensation or profit.
Corporation (GM), the latter paying the sales tax once on original sales,
Yutivo no longer paid sales tax on its sales to the public. Later no, GM During the existence of the agreement, Norton acquired by purchase all the
withdrew from the Philippines and appointed Yutivo as importer. Yutivo in outstanding stocks of Jackbilt. Due to this, the Commissioner of Internal
turn exclusively sold to Southern Motors, Inc. (SM), a corporation where the Revenue, assess respondent Norton for deficiency taxes making the basis of
incorporators are sons fo the founders of Yutivo. Under this arrangement, sales tax the sales of Norton to the public, which is the higher price compare
Yutivo paid the sales tax on original sale, while SM did not subject to sales to the sale of Jackbilt to Norton. The CTA decided in favor of Norton.
tax its sales to the public.
ISSE: WON the two corporations may be merged into a single corporation?
The Collector of Internal Revenue assessed Yutivo for deficiency sales taxes
which the CTA affirmed. HELD: Yes. It has been settled that the ownership of all the stocks of a
corporation by another corporation does not necessarily breed an
ISSUE: WON Yutivo is liable for the deficiency taxes? identity of corporate interest between the two companies and be
considered as a sufficient ground for disregarding distinct
HELD: No. It is elementary rule and fundamental principle of corporation law personalities. However, in the case at bar, we find sufficient grounds to
that a corporation is an entity separate and distinct from its stockholders and support the theory that the separate identities of the two companies should
from other corporations to which it may be connected. However, when the be disregarded.
notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud or defend crime, the law will regard the corporation as an (a) Norton owned all the outstanding stocks of Jackbilt;
association of persons, or in case of two corporations merge them into one. (b) Norton constituted Jackbilt’s directors;
Another rule is that, when the corporation is a mere alter-ego or business (c) Norton financed the operations of Jackbilt;
conduit of a person, it may disregarded. (d) Norton treats Jackbilt’s employees as its own;
(e) Compensation given to board members of Jackbilt indicate that Jackbilt is
The sales tax liability of Yutivo did not arise until it became the importer and merely a department of Norton;
simply continued its practice of selling to SM. The decision, therefore, of the (f) The offices of Norton and Jackbilt are located in the same compound;
Tax Court that SM was organized purposely as a tax evasion device runs (g) Payments were effected by Norton of accounts for Jackbilt and vice versa;
counter to the fact that there was no tax to evade. (h) Payments were also made to Norton of accounts due or payable to
Jackbilt and vice versa.
We are, however, inclined to agree with the court below that SM was actually
owned and controlled by petitioner as to make it a mere subsidiary or branch The circumstances presented by the facts of the case, yields to the
of the latter created for the purpose of selling the vehicles at retail and conclusion that Jackbiltis merely an adjunct, business conduit or alter-ego of
maintaining stores for spare parts as well as service repair shops. It is not Norton and that the fiction of corporate entities, separate and distinct from
disputed that the petitioner, which is engaged principally in hardware each other should be disregarded.
supplies and equipment, is completely controlled by the Yutivo, Young and Yu
family. The founders of the corporation are closely related to each other LA CAMPANA COFFEE FACTORY, INC. VS. KAISAHAN NG MGA
either by blood or affinity and most of its stockholders are members of the Yu MANGGAGAWA SA LA CAMPANA (KKM) (93 Phil. 160; May 25, 1953) –
(Yutivo or Young) family. Tan Tong, one of herein petitioners, is engaged in the buying and selling of
guagua under the trade name La Campana Guagua Packing. Later on, Tong
According to the AOI, the amount of P62,500 was actually advanced by and his family organized a family corporation known as La Campana Coffee
Yutivo. The additional subscriptions to SM were paid by Yutivo. The Factory Co, Inc. with its principal office located at the same place as that of
shareholders in SM are mere nominal stockholders holding the share for and La Campana Guagua Packing.
in behalf of Yutivo, so even conceding that the original subscribers were bona
fide stockholders, Yutivo was at all tie in control of the stock of SM and that Tan Tong’s employees later on formed a union (herein respondent) through
the latter was a mere subsidiary of the former. which they demanded (from both companies) higher salaries and more
privileges. As the demand was not granted and an attempt at a settlement
SM is under the management control of Yutivo by virtue of the management through mediation had given no result, the Department of Labor certified the
contract entered into between the two parties. In fact, the controlling dispute to the Court of Industrial Relations (CIR). Petitioners filled a motion

to dismiss which was denied. Hence, this present petition for certiorari. The sheriff levied on and attached the property of TESCO and scheduled the
sale of the same at public auction. Thus, the present petition for certiorari
ISSUE: WON the corporate entity of La Campana Coffee Factory, Inc. may with preliminary injunction.
be disregarded?
ISSUE: WON the award may be rendered against TESCO?
HELD: Yes. La Campana Guagua Packing and La Campana Coffee Factory,
Inc. are operating under on single management, that is, as one business HELD: Yes. We note that it is only in this Petition that petitioner denied, for
though with two trade names. True, the coffee factory is a corporation and, the first time, the employer-employee relationship. In fact, in the letters it
by legal fiction, an entity existing separate and apart from the person submitted to the Acting Referee and to the Commission, petitioner
composing it, that Tan Tong and his family. But it is settled that this fiction represented and defended itself as the employer of the deceased. Petitioner
of law, which has been introduced as a matter of convenience and even admitted that TESCO and UMACOR are sister companies operating
to subserve the ends of justice cannot be invoked as to further and under one single management and housed in the same building. Although
end subversive of that purpose. respect for the corporate personality as such, is the general rule,
there are exceptions. In appropriate cases, the veil of corporate
In the present case, Tan Tong appears to be the owner of the guagua fiction may be pierced as when the same is made as a shield to
factory. And the factory, though an incorporated business, is in reality owned confuse the legitimate issues.
exclusively by Tan Tong and his family. As found by the CIR, one payroll,
except after July 17, the day the case was certified to the CIR, when the While indeed, jurisdiction cannot be conferred by acts or omission of the
person who was discharging the office of cashier for both branches of the parties. TESCO’s denial at this stage that it is the employer of the deceased is
business began preparing separate payrolls for the two. And above all, it obviously an afterthought, a devise to defeat the law and evade its
should not be overlooked that, as also found by the industrial court, the obligations. This denial also constitutes a change of theory on appeal which is
laborers of the guagua factory and the coffee factory were interchangeable. not allowed in this jurisdiction.
In view of all these, the attempt to make the two factories appear as two
separate businesses, when in reality they are but one, is but a device to CLARAPOLS VS. COMMISSIONER OF INTERNAL REVENUE (July 31,
defeat the ends of the law and should not be permitted to prevail. 1975; 65 SCRA 613) – A decision rendered against herein petitioner was
rendered on a complaint filed by herein private respondents Allied Workers’
EMILIO CANO ENTERPRISES, INC. VS. COURT OF INDUSTRIAL Association, Demetrio Garlitos and 10 respondent workers who petitioner
RELATIONS (CIR) (13 SCRA 290; Feb. 26, 1965) – In a complaint for dismissed from Clarapols Steel and Nail Plant.
unfair labor practice, the Court of Industrial Relations rendered a decision in
favor of Honorata Cruz, ordering Emilio and Rodolfo Cano, officials of herein ISSUE: WON the veil of corporate fiction should be pierced?
petitioner corporation, to reinstate Cruz. An order of execution was issued
directed against the properties of herein petitioner. Hence, this petition. HELD: Yes. It very clear that the latter corporation was a continuation and
successor of the first entity, and its emergence was skilfully timed to avoid
ISSUE: WON execution may be had on the properties of the corporation? financial liability that already attached to its predecessor, Clarapols Steel and
Nail Plant. (1) Both predecessor and successor were owned and controlled by
HELD: Yes. We should not lose sight of the fact that Emilio Cano Enterprises, the petitioner Eduardo Clarapols; and (2) there was no break in the
Inc. is a closed family corporation where the incorporators and directors succession and continuity in the same business. This avoiding-the-liability
belong to one single family. Here is an instance where the corporation and its scheme is very patent, considering that (3) 90% of the subscribed shares of
members are considered as one. And to hold such entity liable for the stock of the second corporation was owned by Clarapols himself, and (4) all
acts of its members is not to ignore the legal fiction but merely to assets of the dissolved Clarapols Steel and Nail Plant were turned over to the
give meaning to the principle that such fiction cannot be invoked if emerging Clarapols Steel Corporation.
its purpose is to use it as a shield to further an end subversive of
justice. And so it has been held that while a corporation is a legal It is very obvious that the second corporation seeks the protective shield of a
entity existing separate and apart from the person composing it, corporate fiction whose veil in the present case could, and should be pierced
that concept cannot be extended to a point beyond it reason and as it was deliberately and maliciously designed to evade its financial
policy, and when invoked in support of an end subversive of this obligations to its employees.
policy it should be disregarded by the courts.
NATIONAL FEDERATION OF LABOR UNION (NAFLU) VS. OPLE (143
Emilio and Rodlfo Cano were indicted in the case, not in their personal SCRA 124; July 22, 1986) – NAFLU requested for conciliation before the
capacity, but as president and manager of the corporation. Having been sued Bureau of Labor Relations for certain money claims and refusal of the
officialy, their connection with the case must be deemed to be impressed company to conclude collective agreement and run-away shop undertaken by
with the representation of the corporation. In fact, the court’s order is for management. In the course of the negotiation, management unilaterally
them to reinstate Honorata Cruz to her former position in the corporation and declared a temporary shutdown. But it was discovered that the actual partial
incidentally pay her the wages she had been deprived of during her shutdown begun a month before and that the machines of Lawman were
separation. Verily, the order against them is in effect against the corporation. transferred to a different location and the name of the company was changed
No benefit can be attained if this case were to be remanded to the court a to Libra Garments, upon discovery of this, the name was further changed to
quo merely in response to a technical substitution of parties. DOLPHIN garments. For failure of the company to resume operations in
January 1983 (as promised) a complaint for unfair labor practice was filed.
TELEPHONE ENGINEERING SERVICE CO. VS. WCC (104 SCRA 354; May
13, 1981) – The late Pacifico Gatus was an employee of Utilities Management ISSUE: WON the corporate fiction of LIBRA (now DOLPHIN) garments
Corporation (UMACOR), a sister company of herein Petitioner TESCO. He was should be pierced?
later on detailed with Petitioner Company and returned back to UMACOR. But
he contracted illness and later on died of ―liver cirrhosis with malignant HELD: Yes. It is very obvious from the above findings that the second
degeneration‖. corporation seeks the protective shield of a corporate fiction to achieve illegal
purpose. As enunciated in Clarapols vs. CIR, its view in the present case
His wife, respondent Leonila Gatus filed a Notice and Claim for Compensation should, therefore be pierced as it was deliberately and maliciously designed
with the Workmen’s Compensation Commission (WCC) alleging Pacifico to be to evade its financial obligations to it employees. It is an established principle
an employee of TESCO. An employer’s report was submitted to WCC where that when the veil of corporate fictions is made as a shield to perpetrate a
UMACOR was indicated as the employer of the deceased and stated that it fraud or to confuse legitimate issues (here, the relation of employer-
would not contravert the claim and admitted that Pacifico contracted illness employee), the same should be pierced.
―in regular occupation‖.
After finding that Lawman Industrial Corporation had transferred business

operations to Libra Garments, which later changed to Dolphin Garments, the the doctrine of piercing the veil of corporate veil, to wit:
public respondent cannot deny reinstatement to the petitioners simply 1. Stock ownership by one or common ownership of both corporations;
because Lawman has ceased its operation. 2. Identity of directors and officers;
3. The manner of keeping corporate books and records;
As Libra Garments is but an alter-ego of the old employer, Lawman 4. Methods of conducting the business.
Industrial, the former must bear the consequences of the latter’s unfair act
by reinstating petitioners to their former positions without loss of seniority The SEC en banc explained the ―instrumentality rule‖ which the courts have
rights. applied in disregarding separate juridical personality of corporations as
follows:
AC RANSOM LABOR UNION-CCLU VS. NLRC (150 SCRA 498 May 29,
1987) – A decision was rendered by the CIR and affirmed by this Court ―Where on corporation is so organized and controlled and its affairs are
against AC Ransom for unfair labor practice. Writ of execution were issued conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
successively against Ransom to no avail. The Union filed an ex-parte motion the fiction of the corporate entity of the ―instrumentality‖ may be
for a Writ of Execution and Garnishment against the officers/agents of AC disregarded. The control necessary to invoke the rule is not majority or even
Ransom personally and on their estates, as the case may be, which the Labor complete stock control but such domination of finances, policies, and
Arbiter granted. On appeal, the NLRC reversed the Labor Arbiter relieving the practices that the controlled corporation has, so to speak, no separate mind,
officers of personal liability. will or existence of its own and is a business conduit of its principal. It must
be kept in mind that the control must be shown to have been exercised at
ISSUE: WON the officers may be liable? the time the acts complained of took place. Moreover, the control and breach
of duty must proximately cause the injury or unjust loss for which the
HELD: Yes. The NLRC, on appeal, could not have modified the CIR decision complaint is made‖
as affirmed by this Court, by relieving AC Ransom’s officers and agent of
liability which were held to be jointly and severally liable to the 22 employees The test in determining the applicability of piercing the veil of
for unfair labor practice. corporate fictions is as follows:
1. Control, not mere majority or complete stock control, but complete
This finding does not ignore the legal fiction that a corporation has a domination, not only in finances but of policy and business practice in
personality separate and distinct from its stockholders and members for, as respect to the transaction attacked so that the corporate entity as to this
this Court had held ―where the incorporators belong to a single family, the transaction had at the time no separate mind, will or existence of its
corporation and its members can be considered as one in order to avoid it own;
being used as an instrument to commit injustice,‖ or to further an end 2. Such control must have been used by the defendant to commit fraud or
subversive of justice. In the case of Clarapols vs. CIR involving almost similar wrong, to perpetuate the violation of a statutory or other positive legal
facts as in this case, it was also held that the shield of corporate fiction duty or dishonest and unjust act in contravention of plaintiff’s legal
should be pierced when it is deliberately and maliciously designed to evade rights; and
financial obligations to employees. 3. The aforesaid control and breach of duty must proximately cause the
injury or unjust los complained of.
Aggravating AC Ransom’s clear evasion of pyment of it financial obligations is
the organization of a ―run-away‖ corporation, ROSARIO Industrial The absence of one of the elements prevents piercing the corporate veil. In
Corpoartion, in 1969 at the time the unfair labor practice case was applying the ―instrumentality‖ or ―alter-ego‖ doctrine, the courts are
proceeding before the CIR by the same person who were the officers and concerned with reality and not form, with how the corporation operated and
stockholders of AC Ransom, engaged in the same line of business, producing the individual defendant’s relationship to that operation. Thus, the question
the same line of product, occupying the same compound, using the same of whether a corporation is mere alter-ego, a mere sheet of paper
machineries, buildings, factories, bodega and sales and accounts corporation, a sham or a subterfuge is purely one of fact.
departments used by AC Ransom, and which is still in existence. Both
corporations were closed corporations owned and managed by members of In this case, while petitioner claimed that it ceased on operations on April 29,
the same family. Its organization proved to be a convenient instrument to 1986, it filed an information sheet with the SEC on May 15, 1987 stating that
avoid payment of backwages and the reinstatement of 22 workers. This is its office address is at 355 Maysan Road, Valenzuela Metro Manila. On the
another instance where the fiction of separate and distinct corporate entities other hand, third-party claimant Hydro, on the same day, filed an information
should be disregarded. sheet with the same address, both information sheets filed by the same
Virgilio O. Casino. Both companies have the same president, the same BOD,
CONCEPT BUILDERS, INC. VS. NLRC (257 SCRA 149; May 29, 1996) – the same corporate officers and substantially the same subscribers.
Private respondents were employees of petitioner Concept Builders, Inc, who
were served termination letters stating that the project for which they were Clearly, petitioner ceased its business operations in order to evade the
hired was already completed and that their contracts have already expired. payment to private respondents of back wages and to bar their reinstatement
Finding that the project was not actually completed yet, and that petitioner to their former position. Hydro is obviously a business conduit of petitioner
employed a subcontractor whose employees performed the duties of private corporation and its emergence was skilfully orchestrated to avoid the financial
respondents, the latter filed a complaint for illegal dismissal with the Labor liability attached to petitioner orporaiton.
Arbiter who held that the dismissal was illegal.
MC CONNEL VS. CA (1 SCRA 722; March 1, 1961) – Petitioners, original
A writ of execution was issued but was partially satisfied only. The sheriff incorporators of Park Rite Co., Inc. was ordered to pay the unsatisfied
sought levy upon the properties in the head office of Concept Builders, inc. balance of a judgment rendered in favor of lot owners whose property they
but was not allowed to do so on the ground that it was occupied by Hydro used in the operations of their parking business without the owners’ consent.
Pipes Philippines, Inc. and not concept builders. Unable to remove the
personal properties he found thereat, the Sheriff asked for a ―break-open‖ ISSUE: WON the incorporators may be held liable for obligations of the
order which was denied by the Labor Arbiter after a third party claim was corporation?
filed by Hydro, which was reversed by the NLRC on appeal.
HELD: Yes. The Court has already answered the question in the affirmative
ISSUE: WON the break-open order should be issued? wherever the circumstances have shown that the corporate entity is being
used as an alter-ego or business conduit for the sole benefit of the
HELD: Yes. The conditions under which the juridical entity may be stockholders, or else to defeat public convenience, justify wrong, protect
disregarded vary according to the particular facts and circumstances of each fraud, or defend crime.
case. No hard and fast rule can be accurately laid down, but certainly there
are some probative factors of identity that will justify the application of The evidence shows that Cirilio Paredes and Ursula Tolentino (present

stockholders) and M. McConnel, WP Cochrane and Ricardo Rodriguez course of its corporate existence all other incorporators were bought out by
(previous stockholders) completely dominated and controlled the corporation Cease and his children. The corporation’s charter expired but there were no
and that the functions of the corporation were solely for their benefit, as records as to its liquidation. Upon Cease’s death, Ernesto, Teresita, Cecilia (3
shown that the other shareholders were merely qualifying shares. This is of the 5 children) and Bonifacia Terante re-incorporated under FL Cease
strengthened by the fact that the office of Cirilio Paredes and that of Park Plantation Company, to the objection of Benjamin and Florence who wanted
Rite Co., Inc. were located in the same building, in the same floor, and in the actual division of Forrest Cease’s shares. The latter two filed a civil case
same room. This is further shown by the fact that the funds of the asking to declare the corporation identical to FL Cease and that its properties
corporation were kept by Cirilio Paredes in his own name. The corporation be divided among Fl Cease’s children as his intestate heirs which was granted
itself had no visible assets, as correctly found by the trial court, except by the trial court.
perhaps the toll house, the wire fence around the lot and the signs thereon It
was for this reason that the judgment against it could not be fully satisfied. ISSUE: WON the assets of the corporation are also the properties of Forrest
L. Cease?
While the mere ownership of all or nearly all of the capital stock of a
corporation does not necessarily mean that it is a mere business HELD: Yes. In sustaining respondent’s theory of ―merger of Forrest Cease
conduit of the stockholder, that conclusion is amply unjustified and the Tiaong Milling as one personality‖, or that ―the company is only the
where it is shown, as in this case before us, that the operations of business conduit and alter-ego of the deceased FL Cease and the registered
the corporation were so merged with the stockholders as to be properties of Tiaong Milling are actually properties of FL Cease and sould be
practically indistinguishable from them. To hold the latter liable for the divided equally among his children‖, the trial court did aptly apply the familiar
corporation’s obligations is not to ignore the corporation’s separate entity, but exception to the general rule by disregarding the legal fiction of distinct and
merely to apply the established principle that such entity cannot be invoked separate corporate personality and regarding the corporation and the
or used for purposes that could not have been intended by the law that individual members one and the same. In shredding the fictitious corporate
created the separate personality. veil, the trial judge narrated the undisputed factual premise:
TAN BOON BEE & CO., INC., petitioner, ―While the records show that originally, the incorporators were aliens, friends
vs. or third-parties in relation of one to another, in the course of its existence, it
THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE OF developed into a close family corporation. The BOD and stockholders belong
BRANCH XVIII of the Court of First Instance of Manila, GRAPHIC to one family the head of which FL Cease always retained the majority and
PUBLISHING, INC., and PHILIPPINE AMERICAN CAN DRUG COMPANY, hence, the control and management of its affairs. In fact, during the
respondents reconstruction of its records before the SEC, only 9 nominal shares out of 300
(GR No. L-41337; 163 SCRA 205; June 30, 1988) appear in the name of his 3 eldest children then and another person close to
them (Ternate). It is likewise noteworthy to observe that as his children
FACTS: For failure of private respondent Graphic Publishing Inc. to pay increase or perhaps become of age, he continued distributing his shares
paper products purchased from petitioner (doing business under the name among them adding Florence, Teresa and Marion until at the time of his
and style Anchor Supply, Inc.), petitioner filed a complaint in the CFI of death, only 190 were left to his name. Definitely, only the members of his
Manila. A writ of Execution was issued levying a printing machine which family benefited from the corporation.
private respondent Philippine American Drug Company claimed as its own.
PADCO filed a third party claim and asked the court to nullify the auction sale The accounts of the corporation and therefore its operation, as well as that of
already conducted, which herein respondent judge granted. the family appears to be indistinguishable and apparently joined together. As
admitted by the defendants, the corporation ―never‖ had any account with
ISSUE: WON the respondent judge should be upheld? any banking institution or if any account was carried in a bank on its behalf, it
was in the name of FL Cease. In brief, the operation of the Corporation is
HELD: No. It is true that a corporation, upon coming into being, is invested merged with those of the majority stockholders, the latter using the former
by law with a personality separate and distinct from that of the persons as his instrumentality and for the exclusive benefit of all his family. From the
composing it as well as from any other legal entity to which it may be foregoing indication, therefore, there is truth in plaintiffs’ allegation that the
related. As a matter of fact, the doctrine that a corporation is a legal entity corporation is only a business conduit of his father and an extension of his
distinct and separate from the members and stockholders who compose it is personality, they are once and the same thing. Thus, the assets of the
recognized and respected in all cases which are within reason and the law. corporation are also the estate of FL Cease, the father of the parties herein
However, this separate and distinct personality is merely a fiction who are al legitimate children of full blood‖
created by law for convenience and to promote justice. Accordingly,
this separate personality of the corporation may be disregarded, or Were we to sustain petitioners, the legal fiction of separate corporate
the veil of corporate fiction pierced, in cases where it is used as a personality shall have been used to delay and ultimately deprive and defraud
cloak or cover for fraud or illegality, or to work an injustice, or the respondents of their successional right to the estate of their deceased
where necessary to achieve equity or when necessary for the father.
protection of creditors. Corporations are composed of natural
persons and the legal fiction of a separate corporate personality is D. WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
not a shield for the commission of injustice and inequity. Likewise,
this is true when the corporation is merely an adjunct, business WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
conduit or alter-ego of another corporation. In such case, the fiction
of separate and distinct corporate entities should be disregarded. 1. Absent any of the following circumstances, the courts will not be
justified in disregarding the corporate entity;
In the instant case, petitioner’s evidence established that PADCO never a. The corporation is used or being used to defeat public
engaged in the printing business; that the BOD and the officers of PADCO convenience;
and Graphic are the same; and that PADCO holds 50% share of stock of b. Justify wrong;
Graphic. The printing machine in question was in the premises of Graphic, c. Protect fraud;
long before PADCO even acquired its alleged title from Capitol Publishing. d. Defend crime;
e. Confuse legitimate issues;
Considering the above, respondent judge should have pierced PADCO’s veil of f. Circumvent the law;
corporate identity. g. Perpetuate deception; or
h. An alter-ego, adjunct or business conduit for the sole benefit of a
CEASE VS. CA (93 SCRA 483; Oct. 18, 1979) – Forrest L. Cease is the stockholder or a group of stockholders or another corporation.
common predecessor-in-interest of the parties. He and other American 2. The wrong doing must be clearly and convincingly established. It
citizens organized the Tiaong Milling and Plantation Company and in the cannot be justified by speculation and can never be presumed.

3. The petitioner must seek to impose a claim against the stockholders or and its successor-in-interest shall be considered as one and the liability of the
officers directly liable, otherwise piercing the veil of corporate fiction former shall attach to the latter.
would not be available nor justified.
But for the separate juridical personality of a corporation to be disregarded,
CRUZ VS. DALISAY (supra) – It is well-settled doctrine, both in law and in the wrongdoing must be clearly and convincingly established. It cannot be
equity that as a legal entity, a corporation has a personality distinct presumed. In this regard, we find the NLRC decision wanting.
and separate from its individual stockholders or members. The mere
fact that one is president of a corporation does not render the 1. PHILSA allowed its license to expire so as to evade payment of private
property he owns or possesses the property of the corporation, respondent’s claim – not supported by facts. The license expired in 1985,
since the president, as individual, and the corporation are separate it was delisted in 1986, there was no judgment yet in favour of PR. An
entities intent to evade payment of his claims cannot therefore be implied
from the expiration of PHILSA‘s license and its delisting.
REMO, JR. VS. INTERMEDIATE APPELLATE COURT (175 SCRA 405;
April 18, 1989) – Petitioner Feliciano Coprada, as president of Akron, 2. Organization of PHILSA International Placemen and Services Corp. and its
purchased 13 trucks from private respondent (EB Marcha Transport Co., Inc.) registration with POEA implies fraud – it was organized and registered in
for and in consideration of P525,000 as evidenced by a deed of absolute sale. 1981, several years before private respondent filed his complaint with the
In a side agreement, the parties agreed on a down payment of P50,000 and POEA in 1985. The creation of the second corporation could not
the balance to be paid within 60 days. They further agreed that until the therefore have been in anticipation of PR‘s money claims and the
balance is paid, the down payment shall accrue as rentals for the 13 trucks; consequent adverse judgment against PHILSA.
and in case of failure to pay the balance shall constitute a chattel mortgage
lien; and the parties may allow 30 day extension; and private respondent 3. Substantial identity of the incorporators of the two corporations – does not
may ask for the revocation of the contract and re-conveyance of the said necessarily imply fraud.
trucks. The obligation is further secured by a promissory note executed by
Coprada, where it is stated that the balance shall be paid from the proceeds *Distinguished from other cases*
of a loan from DBP which was never applied for. A complaint was later on LA CAMPANA – the two companies were substantially owned by the same
filed by private respondent for the recovery of the P525, 000 or the return of person. They had one office, one management, and a single payroll for both
the 13 trucks against Akron and its officers and directors including herein businesses. The laborers were also interchangeable.
petitioner which was granted by the CFI of Rizal. Petitioner denied any
participation the transaction and alleging that Akron has distinct corporate CLARAPOLS – Both corporations were substantially owned and controlled by
personality. He was, however, declared in default for failure to attend pre- the same person and there was no break or cessation in operations.
trial. Moreover, all the assets of the old was transferred to the new corporation.
ISSUE: WON Petitioner Remo, Jr. is jointly and severally liable? AC RANSOM – The distinguishing mark of fraud were clearly apparent in AC
Ransom, when such corporation ceased operation after the decision of the
HELD: No. The facts of the case show that there is no cogent basis to pierce CIR and new one replacing it which was owned by the same family, engaging
the corporate veil of Akron and hold petitioner personally liable for its in the same business and operating in the same compound. In the present
obligation to private respondent. While it is true that he is a member of the case, not only has there been failure to establish fraud, but it has
board at the time the resolution to purchase the trucks were adopted, it does also not been shown that petitioner is the corporation officer
not appear that said resolution was intended to defraud anyone. It was responsible for PR‘s predicament. It must be emphasized that the claims
Coprada who negotiated with respondent and the one who signed the were actually directed against the employer, PHILSA became liable only
promissory note. The word ―We‖ in the said promissory note must refer to because of its undertaking to be jointly and severally bound with the foreign
the corporation and COprada and not of its stockholders and directors. employer, as required by POEA rules.
Petitioner did not sign such note so he cannot be personally bound thereby.
Thus, if there was any fraud or misrepresentation that was foisted on private INDOPHIL TEXTILE MILL WORKERS UNION VS. CALICA (205 SCRA
respondent in that there was forthcoming loan from the DBP when in fact 697; Feb. 3, 1992) - On April 1987, petitioner and Indophil Textile Mills, Inc.
there as none, it is Coprada who should account for the same and not the executed a CBA effective from April 1, 1987 to March 31, 1990. On
petitioner. November 3, 1987, Indophil ACRYLIC MANUFACTURING CORP was formed
and registered with the SEC and in 1988 became operation and hired workers
according to its own criteria and standards.
DEL ROSARIO VS. NLRC (182 SCRA 777; July 24, 1990) - Pursuant to a
complaint for money claims which was ultimately decided by the NLRC In 1989, the workers of ACRYLIC unionized and a CBA was executed. In
against PHILSA Construction and Trading Co. (recruiter) and Arieb 1990, petitioner union claimed that the plant facilities build and set up by
Enterprises (employer), a writ of execution was issed by the POEA which was ACRYLIC should be considered an extension or expansion of the facilities of
returned unsatisfied as PHILSA was no longer operating and was financially TEXTILE MILLS, to make ACRYLIC part of the TEXTILE MILLS bargaining unit.
incapable of satisfying the judgment. Public respondent voluntary arbitrator Calica declared that the CBA of
petitioner DOES NOT extend to employees of ACRYLIC.
At the motion of private respondent, an alias writ was issued against the
properties of Mr. Francisco del Rosario and if insufficient, against the cash ISSUE: WON the veil of corporate entity should be pierced?
and/or surety bond of the Bonding Company concerned.
HELD: No. Under the doctrine of piercing the veil of corporate entity, when
Petitioner appealed to the NLRC which was denied together with his MR. valid grounds therefore exist, the legal fiction that a corporation is an entity
with a juridical personality separate and distinct from its members or
ISSUE: WON the writ of execution must be upheld? stockholders may be disregarded. In such cases, the corporation will be
considered as a mere association of persons. The members or
HELD: No. Under the law, a corporation is bestowed juridical personality, stockholders of a corporation will be considered as the corporation,
separate and distinct from its stockholders. But when the juridical personality that is, liability will attach directly to the officers and stockholders.
of the corporation is used to defeat public convenience, Justify wrong,
protect fraud or defend crime, the corporation shall be considered as a In the case at bar, petitioner alleges that the creation of the ACRYLIC is a
mere association of persons, and its responsible officers and/or devise to evade the application of the CBA between petitioner and TEXTILE
stockholders shall be held individually liable. For the same reasons, a MILL. While we do not discount the possibility of the similarities of the
corporation shall be liable for he obligation of a stockholder or a corporation businesses of the two corporations, neither are we inclined to apply the
doctrine invoked by petitioner.

1. The fact that the business of Indophil Textile Mills and Indphil Acrylic controlled and its affairs are so conducted as to make it merely an
Manufacturing are related; instrumentality, agency, conduit or adjunct of another corporation;
2. That some of the employees of PR are the same persons manning and
providing for auxilliary services to the units of ACRILYC, and that; 3. The test in determining the doctrine of piercing the veil of corporation
3. The physical plants, offices and facilities are situated in the same fiction:
compound. a. Control, not mere majority of complete control, but complete
domination, not only of finances, but of policy and business
It is our considered opinion that these facts are not sufficient to practices in respect to the transaction attacked so that the corporate
justify piercing the corporate veil of ACRILYC. entity as to this transaction had at the time no separate mind, will
or existence of its own;
UMALI VS. CA – ―the legal corporate entity is disregarded only if its sought
to hold the officers and stockholders directly liable for a corporate debt or b. Such control must have been used by the defendant to commit
obligation‖. In the instant case, petitioner does not seek to impose a fraud, or wrong to perpetuate the violation of a statutory or other
claim against the members of ACRILYC. positive legal duty, or dishonest and unjust act in contravention
to plaintiff‘s legal rights; and
PNB VS. RITRATTO GROUP, INC. ET. AL. (362 SCRA 216; July 31, 2001) c. The aforesaid control and breach of duty must proximately cause
- PNB International Finance Ltd. (IFL), a wholly-owned subsidiary of PNB, the injury or unjust loss complained of.
organized and doing business in HK, extended a letter of credit in favor of
respondent RITRATTO in the amount of US$300K , later increased to 1.14M, The absence of any one of these elements prevents ―piercing the
to 1.29M, to 1.425M and decreased to 1,421,316.18, secured by a real corporate veil‖. In applying the ―instrumentality‖ or ―alter-ego‖ doctrine,
estate mortgage constituted in 4 parcels of land in Makati City. the courts are concerned with reality and not form, with how the
corporation operated and the individual defendant‘s relationship
As of April 1998, the outstanding obligation of respondents stood at to the operation. (Concept Builders, Inc vs. NLRC)
US$1,497,274.70. Pursuant to the terms of the mortgages, IFL, through its
attorney-in-fact PNB, notified respondents of the foreclosure of all the real Aside from the fact that IFL is a wholly owned subsidiary, there is no showing
estate mortgages and that the properties would be sold at a public auction. of the indicative factors that the it is a mere instrumentality of PNB. Neither is
there a demonstration that any of the evils sought to be prevented by
Respondents filed a complaint for injunction for which a TRO was issued and the doctrine of piercing the corporate veil based on the alter-ego or
later on a writ of preliminary injunction, which petitioner assailed with the CA instrumentality doctrine finds application in the case at bar.
through petition for certiorari.
The injunction suit was directed against PNB, as agent of IFL and not as
The CA dismissed the petition. parent. A suit against an agent, cannot, without compelling reasons be
considered a suit against the principal, for he is not the real party in interest
ISSUE: WON the corporate entity of IFL may be disregarded? provided under the Rules of Court.
HELD: No. Respondents, therefore do not have any cause of action against
it. The trial court erred in disregarding the corporate entity by saying that IFL YU VS. NLRC, FERNANDO DURAN, EDUARDO PALIWAN, ROQUE
is a wholly owned subsidiary of PNB and that it is a mere alter-ego or ESTOCE AND RODRIGO SANTOS (245 SCRA 134) - Private respondents
business conduit of the latter. were employees of Tanduay Distillery, Inc. (TDI). On March 29, 1988, 22
employees of TDI, including PRs, received a memorandum from TDI,
The mere fact that a corporation owns all of the stocks of another terminating their services for reasons of retrenchment, because First Pacific
corporation, taken alone is not sufficient to justify their being Metro Corporation is buying TDI’s assets, which purchase did not push
treated as one entity. If used to perform legitimate functions, a through.
subsidiary‘s separate existence may be respected, and the liability
of the parent corporation as well as the subsidiary will be confined On June 1, 1988, after employees had ceased as such, Twin Ace Holdings,
to those arising in their respective businesses. Inc. took over the business and assumed the name Tanduay Distillers
(Tanduay).
KOPPEL PHIL VS. YATCO – this Court disregarded the separate existence
of the parent and subsidiary on the ground that the latter was formed Labor Arbiter, on a case originally filed in April 26, decided in favor of PRs
merely for the purpose of evading the payment of higher taxes. In the case holding the retrenchment illegal, which was affirmed by the NLRC. Petitioners
at bar, respondents failed to show any cogent reason why the filed an opposition against the motion for execution (which was directed
separate entities of PNB and IFL should be disregarded. towards them and TDI) contending that Tanduay is a separate entity distinct
from TDI, and respondents James Yu and Wilson Young, which was
While there exists no definite test of general application in determining when dismissed by the NLRC.
a subsidiary may be treated as a mere instrumentality of the parent
corporation some factors have been identified that will justify the application ISSUE1: WON the order of execution is void?
of the treatment of the doctrine of piercing the corporate veil:
HELD: Yes. The decision dated May 24, 1989, was already final and
1. As a general rule, the stock ownership alone by one corporation ofhte executory and cannot be amended or corrected except for clerical errors or
stock of anoher does not thereby render the dominant corporation liable for mistakes. An examination of the said decision does not in any manner
the torts of the subsidiary unless the separate corporate existence of obligate Tanduay or even petitioners Yu and Young to reinstate PRs. Only
the subsidiary is a mere sham, or unless the control of the TDI was held liable upto the time of change of ownership. The order of
subsidiary is such that it is by an instrumentality or adjunct of the execution in effect amended the decision. It is beyond the power and
dominant corporation (Garrett vs. Southern Railway Co.; Tennessee SC); competence of Labor Arbiter Cueto to amend a final decision. The writ of
execution must not go beyond the scope of judgment.
2. The doctrine of piercing the corporate veil is an equitable doctrine
developed to address situations where the separate corporate personality of ISSUE2: WON NLRC committed grave abuse of discretion in holding
a corporation is abused or used for wrongful purpose. The doctrine applies petitioner Yu and Young liable?
when the corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime, or when it is used as a shield to
confuse legitimate issues or where the corporation is so organized and

HELD: It cannot be said that TDI and Tanduay are one and the same, as Exchange Commission or from the date of filing with the said Commission if
seems to be the impression of respondents when they impleaded petitioners not acted upon within six (6) months from the date of filing for a cause not
as party-respondents in their complaint. attributable to the corporation
Such a stance is not supported by the facts. The name of the company The steps to be followed for an effective amendment of the articles of
for whom the petitioners are working is Twin Ace Holdings incorporation would thus be:
Corporation. As stated by the SolGen, Twin Ace is part of the Allied Banking 1. Resolution by at least a majority of the board of directors or trustees;
Group although it conducts the rum business under the name of Tanduay 2. Vote OR WRITTEN ASSENT of the stockholders representing at least
Distillers. The use of a similar sounding or almost identical name is an 2/3 of the outstanding capital stocks or members in case of a non-stock
obvious device to capitalize on the goodwill which Tanduay Rhum has built corporation. (Note: non-voting shares are considered in determining the
over the years. Twin Ace or Tanduay Distillers and TDI are distinct voting and quorum requirement in case of amendments of the articles of
and separate corporations. There is nothing to suggest that the incorporation as provided in Sec. 6);
owners of TDI, have any common relationship as to identify it with 3. Submission and filing of the amendments with the SEC as follows:
Allied Banking Group which runs Tanduay Distillery. a. The original and amended articles together shall contain all the
provision required by law to be set out in the articles of
The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin incorporation. Such articles, as amended, shall be indicated by
Ace was only a subsequent interested buyer. PRs have not presented any underscoring the change or changes made;
proof as to communality of ownership and management to support b. A copy thereof, duly certified under oath by the corporate secretary
their contention that the two companies are one firm or closely and a majority of the directors or trustees stating the fact that such
related. amendments have been approved by the required vote of the
stockholders or members;
The complaint was filed against TDI. Only later when the manufacture c. Favorable recommendation of the appropriate government agency
and sale of Tanduay products was taken over by Twin Ace or concerned in the case where the corporation is under its
Tanduay Distillers were James Yu and Wilson Young impleaded. The supervision such as banking and insurance companies, etc.
corporation itself was never made a party to the case.
When to take effect? (1) Upon approval by the SEC; or (2) From the date of
The buyer (Twin Ace) did not buy TDI as a corporation, only most of its filing if not acted upon within 6 months for a cause not attributed to the
assets, equiment and machinery. Thus, Tanduay Distillers or Twin-Ace corporation (does not apply to increasing or decreasing the capital stock or
did not take over the corporate personality of TDI although they shortening the corporate term, which shall require the approval of the SEC
manufacture the same product at the same plant with the same [Sec. 38 and 120])
equipment and machinery. Obviously, the trade name ―Tanduay‖ went
with the sale because the new firm does business as Tanduay Distillers and SPECIAL AMENDMENTS
its main product of rum is sold as Tanduay Rum. There is no showing,
however, that TDI itself was absorbed by Twin Ace or that it ceased Sec. 37.Power to extend or shorten corporate term. - A private
to exist as a separate corporation. In point of fact, TDI is now herein a corporation may extend or shorten its term as stated in the articles of
party respondent represented by its own counsel. 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
The fiction of separate and distinct corporate entites cannot, in the instant two-thirds (2/3) of the outstanding capital stock or by at least two-thirds
case, be disregarded and brushed aside, there being not the lease (2/3) of the members in case of non-stock corporations. Written notice of the
indication that the second corporation was a dummy or servces as a proposed action and of the time and place of the meeting shall be addressed
client of the first corporate entity. 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
AMENDMENT OF THE CORPORATE CHARTER extension of corporate term, any dissenting stockholder may exercise his
appraisal right under the conditions provided in this code.
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity: Sec. 38. Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness. - No corporation shall increase or
xxx decrease its capital stock or incur, create or increase any bonded
4. To amend its articles of incorporation in accordance with the provisions of indebtedness unless approved by a majority vote of the board of directors
this Code; 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
Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise capital stock, or the incurring, creating or increasing of any bonded
prescribed by this Code or by special law, and for legitimate purposes, any indebtedness. Written notice of the proposed increase or diminution of the
provision or matter stated in the articles of incorporation may be amended by capital stock or of the incurring, creating, or increasing of any bonded
a majority vote of the board of directors or trustees and the vote or written indebtedness and of the time and place of the stockholder's meeting at which
assent of the stockholders representing at least two-thirds (2/3) of the the proposed increase or diminution of the capital stock or the incurring or
outstanding capital stock, without prejudice to the appraisal right of increasing of any bonded indebtedness is to be considered, must be
dissenting stockholders in accordance with the provisions of this Code, or the addressed to each stockholder at his place of residence as shown on the
vote or written assent of at least two-thirds (2/3) of the members if it be a books of the corporation and deposited to the addressee in the post office
non-stock corporation. with postage prepaid, or served personally.
The original and amended articles together shall contain all provisions A certificate in duplicate must be signed by a majority of the directors of the
required by law to be set out in the articles of incorporation. Such articles, as corporation and countersigned by the chairman and the secretary of the
amended shall be indicated by underscoring the change or changes made, stockholders' meeting, setting forth:
and a copy thereof duly certified under oath by the corporate secretary and a
majority of the directors or trustees stating the fact that said amendment or (1) That the requirements of this section have been complied with;
amendments have been duly approved by the required vote of the (2) The amount of the increase or diminution of the capital stock;
stockholders or members, shall be submitted to the Securities and Exchange (3) If an increase of the capital stock, the amount of capital stock or number
Commission. of shares of no-par stock thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount of capital stock or
The amendments shall take effect upon their approval by the Securities and 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 laws or the Constitution.
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; No articles of incorporation or amendment to articles of incorporation of
(4) Any bonded indebtedness to be incurred, created or increased; banks, banking and quasi-banking institutions, building and loan associations,
(5) The actual indebtedness of the corporation on the day of the meeting; trust companies and other financial intermediaries, insurance companies,
(6) The amount of stock represented at the meeting; and public utilities, educational institutions, and other corporations governed by
(7) The vote authorizing the increase or diminution of the capital stock, or special laws shall be accepted or approved by the Commission unless
the incurring, creating or increasing of any bonded indebtedness. accompanied by a favorable recommendation of the appropriate government
agency to the effect that such articles or amendment is in accordance with
Any increase or decrease in the capital stock or the incurring, creating or law.
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission. PROVISIONS NOT SUBJECT TO AMENDMENT (fait accompli):
1. Names of the incorporations and the incorporating directors or trustees;
One of the duplicate certificates shall be kept on file in the office of the 2. Name of the treasurer originally or first elected by the subscribers or
corporation and the other shall be filed with the Securities and Exchange members to act as such;
Commission and attached to the original articles of incorporation. From and 3. Number of shares and the amount originally subscribed and paid out of
after approval by the Securities and Exchange Commission and the issuance the original authorized capital stock of the corporation; and
by the Commission of its certificate of filing, the capital stock shall stand 4. Date and place of execution of the articles of incorporation and the
increased or decreased and the incurring, creating or increasing of any signatories and acknowledgment thereof.
bonded indebtedness authorized, as the certificate of filing may declare: CHANGE IN CORPORATE NAME
Provided, That the Securities and Exchange Commission shall not accept for
filing any certificate of increase of capital stock unless accompanied by the Change in corporate name is included in the general power to amend and
sworn statement of the treasurer of the corporation lawfully holding office at maybe effected with compliance to Sec. 16.
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 Any change in the corporate identity or name does not affect the rights and
at least twenty-five (25%) percent of the amount subscribed has been paid obligations of the corporation. A mere change in the name of the
either in actual cash to the corporation or that there has been transferred to corporation does not affect the identity of a corporation nor in any
the corporation property the valuation of which is equal to twenty-five (25%) manner affect the rights, privileges and obligations previously
percent of the subscription: Provided, further, That no decrease of the capital acquired or incurred by it.
stock shall be approved by the Commission if its effect shall prejudice the
rights of corporate creditors. PHILIPPINE FIRST INSURANCE CO., plaintiff-appellant
vs.
Non-stock corporations may incur or create bonded indebtedness, or increase MARIA CARMEN HARTIGAN, CGH and O. ENGKEE, defendants-
the same, with the approval by a majority vote of the board of trustees and appellees (GR No. L-26370; 74 SCRA 252; July 31, 1970)
of at least two-thirds (2/3) of the members in a meeting duly called for the
purpose. FACTS: Plaintiff changed its name from ―The Yek Tong Lin Fire and Marine
Insurance Co., Ltd‖ (Yek Tong).
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the The complaint alleges that under its old name, PFIC signed as co-maker
sufficiency of the terms thereof. together with Hartigan, a promissory note for P5,000 in favor of China
Banking Corporation (Chinabank). Plaintiff agreed to act as such upon
SEC. 37&38 vs. SEC. 16: application of the defendant, who together with Antonio Chua and Chang Ka
1. In the former a meeting of the stockholders would be REQUIRED, unlike in Fu, signed an indemnity agreement in favor of the plaintiff.
Sec. 16, where the ―written assent‖ would suffice.
2. Former requires the approval of the SEC. Defendants admitted the execution of the indemnity agreement but argued
that it was made in favor of Yek Tong and not PFIC. They claim that there
NOTE: When the amendment of the corporate charter involves shortening was no privity of contract between plaintiff and defendants and consequently,
the life of the corporation with the effect of dissolution, Sec. 120 would the plaintiff has no cause of action against them considering that the plaintiff
apply, requiring approval by the SEC. does not allege that PFIC and Yek Tong are one and the same or that the
plaintiff has acquired the rights of the latter.
GROUNDS FOR DISAPPROVAL OF AMENDMENT
CFI of Manila dismissed the complaint.
Sec. 17. Grounds when articles of incorporation or amendment may
be rejected or disapproved.- The Securities and Exchange Commission ISSUE: WON the trial court correctly dismissed the case?
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, HELD: No. Sec. 18 (Now Sec. 16) of the Corporation Law (Act No. 1459)
That the Commission shall give the incorporators a reasonable time within explicitly permits the articles of incorporation to be amended. The law does
which to correct or modify the objectionable portions of the articles or not only authorize corporations to amend their charter; it also lays down the
amendment. The following are grounds for such rejection or disapproval: procedure for such amendment; and, what is more relevant to the present
discussion, it contains provisos restricting the power to amend when it comes
1. That the articles of incorporation or any amendment thereto is not to the term of their existence and the increase or decrease of the capital
substantially in accordance with the form prescribed herein; stock. There is no prohibition therein against the change of name. The
inference is clear that such a change is allowed, for if the legislature had
2. That the purpose or purposes of the corporation are patently intended to enjoin corporations from changing names, it would have
unconstitutional, illegal, immoral, or contrary to government rules and expressly stated so in this section or in any other provision of the law.
regulations;
No doubt, the name of the corporation is peculiarly important as
3. That the Treasurer's Affidavit concerning the amount of capital stock necessary to the very existence of a corporation. The general rule as
subscribed and/or paid if false; to corporation is that each corporation shall have a name by which
it is to sue and be sued and do all legal acts. The name of the
4. That the percentage of ownership of the capital stock to be owned by corporation in this respect designates the corporation in the same manner as
citizens of the Philippines has not been complied with as required by existing the name of an individual designates the person. Since an individual has
the right to change his name under certain conditions, there is no FACTS: ACCMC was incorporated on Jan. 15, 1912 for a period of 50 years
compelling reason why a corporation may not enjoy the same right. which expired on Jan. 15, 1962.
The sentimental considerations which individuals attach to their names are
not present in corporations and partnerships. Of course, as in the case of an On July 15, 1963, during the period within which it is to liquidate, the board
individual, such change may not be made exclusively by the of directors resolved to amend its articles of incorporation extending its
corporation‘s own act. It has to follow the procedure prescribed by corporate life for another 50 years which was approved by the stockholders
law for the purpose, and this is what is important and indispensably but denied by the SEC.
prescribed – strict adherence to such procedure.
ISSUE: WON the extension of corporate term should be allowed?
RED LINE TRANSPORT VS. RURAL TRANSIT CO. – what was held as
contrary to public policy is the USE by one corporation of the name of HELD: No. The privilege of extension is purely statutory. All the statutory
another corporation as its trade name. We are certain no one will disagree conditions precedent must be complied with in order that the
that such an act can only result in confusion and open the door to frauds and extension may be effectuated. And, generally, these conditions must be
evasions and difficulties of administration and supervision. Surely, the Red complied with, and the steps necessary to effectuate an extension must be
Line case was not one of change of name. taken, during the life of the corporation, and before the expiration of
the term of existence as originally fixed by its charter or the general law,
The change of name of a corporation DOES NOT result in its dissolution. since, as a rule, the corporation is ipso facto dissolved as soon as the
There is unanimity in authorities: ―An authorized change in the name of a time expires. So where the extension is by amendment of the articles of
corporation has no more effect upon its identity as a corporation than incorporation, the amendment must be adopted before that time.
change of name of natural person has upon his identity. It does not
affect the rights of the corporation or lessen or add to its The logic of this position is well-expressed in a four square case decided by
obligations. After a corporation has effected a change in its name it the CA of Kentucky:
should sue and be sued in its new name‖ (13 Am. Jur. 276-277)
―But section 561 (section 2147) provides that, when any corporation
A mere change in the name of a corporation, either by the legislature or by expires by the terms of its articles of incorporation, it may be thereafter
the corporators or stockholders under legislative authority, does not, continued to act for the purpose of closing up its business, but for no other
generally speaking, affect the identity of the corporation, nor in any purpose. The corporate life of the Home Building Association expired on
way affect the rights, privileges, or obligations previously acquired May 3, 1905. After that date, by the mandate of the statute, it could
or incurred by it. Indeed, it has been said that a change of name by a continue to act for the purpose of closing up its business, but for no other
corporation has no more effect upon the identity of the corporation than a purpose. The proposed amendment was not made until January 16, 1908,
change of name by a natural person has upon the identity of such person. or nearly three years after the corporation expired by the terms of the
The corporation, upon such change in its name, is in no sense a new articles of incorporation. When the corporate life of the corporation was
corporation, nor the successor of the original one, but remains and ended, there was nothing to extend. Here it was proposed nearly three
continues to be the original corporation. It is the same corporation years after the corporate life of the association had expired to revivify the
with a different name, and its character is in no respect changed. ... dead body, and to make that relate back some two years and eight
(6 Fletcher, Cyclopedia of the Law of Private Corporations, 224-225, citing months. In other words, the association for two years and eight months
cases). had only existed for the purpose of winding up its business, and, after this
length of time, it was proposed to revivify it and make it a live corporation
for the two years and eight months daring which it had not been such.
REPUBLIC PLANTERS BANK VS. CA (216 SCRA 738; Dec. 31, 1992) – A
change in the corporate name does not make a new corporation, and The law gives a certain length of time for the filing of records in this court,
whether effected by special act or under a general law, has no effect on the and provides that the time may be extended by the court, but under this
identity of the corporation, or on its property rights or liabilities. The provision it has uniformly been held that when the time was expired, there
corporation continues, as before, responsible in its new name for all debts or is nothing to extend, and that the appeal must be dismissed... So, when
other liabilities which it had previously contracted or incurred. the articles of a corporation have expired, it is too late to adopt an
amendment extending the life of a corporation; for, the corporation having
expired, this is in effect to create a new corporation ..."
AMENDMENT OF THE CORPORATION TERM
For purposes of amending the corporate term, the following procedure is to OTHER MATTERS SUBJECT TO AMENDMENT:
be observed (Sec. 37): 1. Purpose clause – by changing, altering or including other purpose or
1. Approval by a majority vote of the board of directors or trustees; purposes;
2. Written notice of the proposed action and the time and place of 2. Principal Office;
meeting shall be served to each stockholder or member either by mail or 3. Number of Directors;
by personal service; 4. Shares of stock and their classification;
3. Ratification by the stockholders or members representing at least 5. Restrictions as well as preference;
2/3;
4. In case of extension of corporate term, it should be for periods not
exceeding 50 years in any single instance, and provided that no CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
extension can be made earlier than 5 years prior to the original or
subsequent expiry date(s) unless there are justifiable reasons for an A. POWERS OF THE BOARD
earlier extension as may be determined by the SEC.
5. In cases of extension of corporate term, a dissenting stockholder Sec. 23. The board of directors or trustees. - Unless otherwise provided
may exercise appraisal rights under the conditions prescribes by in this Code, the corporate powers of all corporations formed under this Code
Sec. 81 and 82 of the 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
ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC., elected from among the holders of stocks, or where there is no stock, from
petitioner, among the members of the corporation, who shall hold office for one (1) year
vs. until their successors are elected and qualified.
SECURITIES & EXCHANGE COMMISSION, respondent
(G.R. No. L-23606 July 29, 1968) 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 ISSUE: WON the corporation could be held liable for the contract?
corporations must be members thereof. a majority of the directors or trustees
of all corporations organized under this Code must be residents of the HELD: Yes. The public is not supposed nor required to know the transactions
Philippines. which happen around the table where the corporate board of directors or the
stockholders are from time to time convoked. In dealing with
The Board of Directors (or trustees or other designation allowed under Sec. corporations, the public at large is bound to rely to a large extent
138) is the supreme authority in matter of management of the regular and upon outward appearances. If a man is acting for a corporation with the
ordinary business affairs of the corporation. 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
However, this authority does not extend to the fundamental changes in the the directors had permitted the agent to exercise that authority and thereby
corporate charter such as amendments or substantial changes thereof, which held him out as a person competent to bind the corporation, or had
belong to the stockholders as a whole. The equitable principle therefore acquiesced in a contract and retained the benefit supposed to have been
is that the stockholders may have all the profits but shall turn over conferred by it, the corporation will be bound, notwithstanding the actual
the management of the enterprise to the Board of Directors. authority may ever have been granted.
CLASSIFICATION OF POWERS OF CORPORATE AGENTS/OFFICERS The failure of the defendant corporation to make an issue in its answer with
regard to the authority of Ramon Fernandez to bind it, and particularly to
Unless the law so provides, corporate powers may be delegated to deny specifically under oath the genuineness and due execution of the
individual directors or other officers or agents. Whether or not the acts contracts sued upon have the effect of eliminating the question of his
of the individual director, officer or agent would bind the corporation depend authority from the case.
on the nature of the agency created or the poers conferred upon such person
by the statute, the corporate charter, the by-laws, the corporate action of the It is declared under Sec. 28 (now 23) that corporate powers shall be
board or stockholders, or whether it is necessary or incidental to one’s office. exericsed, and all corporate business conducted by the board of
directors, and this principle is recognized in the by-laws of the
The general rule is that a corporation is bound by the acts of its corporation in question which contain a provision declaring that the
corporate officers who act within the scope of the 5 classification of power to make contracts shall be vested in the board of directors.
powers of corporate agents, which are:
1. Those expressly conferred or those granted by the articles of It is true that it is also true in the by-laws, that the president shall have the
incorporation, corporate by-laws or by the official act of the board of power and it shall be his duty, to sigh contract; but this has reference
directors; rahter to the formality of reducing to proper form the contract which
2. Those that are incidental or those acts as are naturally and ordinarily are authorized by the board and is not intended to confer an independent
done which are reasonable and necessary to carry out the corporate power to make contract binding on the corporation.
purpose or purposes;
3. Those that are inherent or acts that go with the office; The fact that the power to make corporate contracts is thus vested in the
4. Those that are apparent or those acts which although not actually board of directors does not signify that a formal vote of the board must
granted, the principal knowingly allows or permits it to be done; and always be taken before contractual liability can be fixed upon a corporation;
5. Powers arising out of customs, usage or emergency. for a board can create liability, like an individual, by other means
than by a formal expression of its will.
J. F. RAMIREZ, plaintiff-appellee,
vs. Participation of the stockholders. The letter accepting the offer was
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants- dispatched in a meeting of the board called by Ramon Fernandez, where 4
appellants members, including the president was present. The minutes add that terms
(G.R. No. 11897 September 24, 1918) of this offer were approved; but at the suggestion of Fernandez it was
decided to call a special meeting of the stockholders to consider the matter
FACTS: The Board of Directors were apprised of the fact the plaintiff JF and definite action was postponed. From the meeting of the stockholders, it
Ramirez, who is based in Paris and represented by his son Jose Ramirez, had can be inferred that this body was then cognizant that the offer had already
control of agencies for two different marks of films, ―Éclair Films‖ and ―Milano been accepted. It is not, however, necessary to find the judgment of the
Films‖. stockholder proceedings, even if the assumption is that they did not approve
of the contract.
Negotiations began between Jose Ramirez and the board of directors of
Orientalist Co. where Ramon Fernandez, one of the members of the board Both upon the principle and authority it is clear that the action of the
and TOC’s treasurer was chiefly active. stockholders, whatever its character, must be ignored. The theory of
a corporation is that the stockholders may have all the profits but shall
Near the end of July 1913, Jose Ramirez offered to supply from Paris the turn over the complete management of the enterprise to their
aforesaid films to TOC through Fernandez. Accordingly, Fernandez had an representatives and agents, called directors. Accordingly, there is little
informal conference with the BOD except one, and with approval of those for the stockholders to do beyond electing directors, making by-laws, and
whom he had communicated, accepted the offer through letters signed by exercising certain other special powers defined by law. In conformity with
Fernandez in his capacity as treasurer. this idea, it is settled that contract between a corporation and third
person must be made by the director and not by the stockholders.
Upon arrival of the said films, it turned out that TOC was without funds, so The corporation, in such matters, is represented by the former and not by the
the first drafts, taken in the name of TOC were received and paid by its latter. It results that where a meeting of the stockholders is called for the
president, Hernandez, through his own funds and such films were treated by purpose of passing on the propriety of making a corporate contract, its
him as his own property; and in fact, they never came into the possession of resolutions are at most advisory and not in any wise binding on the board.
TOC and were rented by Hernandez to TOC as they are exhibited in the
Oriental Theater. BARRETO VS. LA PREVISORY FILIPINA (57 Phil. 649; Dec. 8, 1932) –
Petitioners, directors of respondent upto March 1929, sought to recover 1%
Other films arrived together with their drafts, taken in the name of TOC (to each plaintiff) of the profits of the copany for the year 1929, under and in
through its president, which were not paid and gave rise to the present accordance with an amendment to the by-laws which was made at the
action. TOC was declared the principal debtor and Ramon Fernandez, the general meeting of the stockholders on Feb. 1929, to which the lower court
guarantor. rendered in their favor.

in order to distinguish a VTA from proxies and other voting pool and
ISSUE: WON the amendment has a binding effect as to grant plaintiffs’ agreements, it must pass three criteria or tests, namely: (1) the voting rights
claim? of the stock are separated from other attributes or ownership; (2) that the
voting right granted are intended to be irrevocable for a definite period of
HELD: No. Sec. 20 of the Corporation Law limits the authority of a time; and (3) that the principal purpose of the grant of voting rights is to
corporation to adopt by-laws which are not consistent with the provisions of acquire voting control of the corporation.
the law. The appellees contend that the articled in question is merely a
provision of the compensation of directors which is not only consistent with The execution of VTA, therefore, may create a dichotomy between
but expressly authorized by Sec. 21 of the Corporation Law. the equitable and beneficial ownership of the corporate shares of
stockholder, on the one hand and the legal title thereto, on the
We cannot agree with this contention. The authority conferred upon other hand.
corporations in that section refers only to providing compensation for the
future services of directors, officers, and employees thereof after the By virtue of the VTA, the petitioners are no longer directors. Under the old
adoption of the by-law or other provisions in relation thereto, and cannot in and new Corporation Code, the most immediate effect of a VTA on the status
any sense be held to authorize the giving, as in this case, of continuous of a stockholder who is a party to its execution is that he becomes only an
compensation to particular directors after their employment has terminated equitable or beneficial owner, from being the legal titleholder or owner of the
for part services rendered gratuitously by them to the corporation. To permit shares subject of the VTA.
the transaction involved in this case would be to create an obligation
unknown to law, and to countenance a misapplication of the funds of the Under the old code, the eligibility of a director, strictly speaking, cannot be
defendant building and loan association to the prejudice of the substantial adversely affected by a VTA inasmuch as he remains the owner (although
rights of its shareholders. beneficial or equitable only) of the shares subject of the VTA pursuant to
which a transfer of the stockholder’s shares in favor of the trustee is
Irrespective of the above, the conclusion is the same. The article which the required. No disqualification arises by virtue of the phrase ―in his own right‖
appellees rely upon is merely a by-law provision adopted by the stockholders provided under the Old Code, which has been omitted.
of the defendant corporation, without any action having been takin in relation
thereto by its board of directors. The law is settled that contracts between Hence, this omission requires that in order to be eligible as director, what is
a corporation and third person must be made by or under the material is the legal title to, not beneficial ownership, of the stock as
authority of its board of directors and not by its stockholders. Hence, appearing on the books of the corporation.
the action of the stockholders in such matters is only advisory and not in any
wise binding on the corporation. There could not be a contract without The petitioners ceased to be the owners of at least one share standing in
mutual consent, and it appears that the plaintiffs did not consent to their names on the books of Alfa as required under Sec. 23 of the new Code.
the provisions of the by-law in question, but, on the contrary, they They also ceased to have anything to do with the management of the
objected to and voted against it in the stockholders‘ meeting in enterprise. The petitioners ceased to be directors.
which it was adopted.
Considering the VTA, DBP as trustee, became the stockholder of record with
QUALIFICATIONS AND DISQUALIFICATIONS (see discussion under respect to the said shares of stocks.
DIRECTORS/TRUSTEES in chapter 4)
DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26 SCRA 256;
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners, Nov. 29, 1968) – A complaint was filed by herein petitioner-plaintiff Detective
vs. and Protective Bureau against defendant-respondent Fausto Alberto, alleging
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., that defendant illegally seized and took control of all the assets as well as the
PABLO GONZALES, JR. and THOMAS GONZALES, respondents. books, records, vouchers and receipt of the corporation from the accountant-
(GR No. 93695; 205 SCRA 752; Feb. 4, 1992) cashier, concealed them illegally and refused to allow any member of the
corporation to see and examine the same. That on a meeting, the
FACTS: A complaint for a sum of money was filed by International Corporate stockholders removed defendant as managing director and elected Jose dela
Bank, Inc. against the private respondents who, in turn, filed a third-party Rosa.
complaint against Alfa Integrated Textile Mills, Inc.
Alberto, on the other hand, stated that Jose dela Rosa could not be elected
The trial court ordered the issuance of alias summons upon Alfa through managing director because he did not own any stock in the corporation.
DBP, who is said to be the transferee of Alfa’s management by virtue of a
voting trust agreement. ISSUE: WON dela Rosa may be elected managing director?
DBP declined to receive the summons saying it is not authorized, Alfa having HELD: No. There is no record showing that Jose dela Rosa owned a share of
a personality separate and distinct. The trial court, in turn ordered private stock in the corporation. If he did not own any share of stock, certainly he
respondents to take the appropriate steps to serve the summons to Alfa could not be a director pursuant to Sec. 30 of the Corporation Law and
which they made through the officers and later on, was later on declared to consequently he cannot be a managing director by virtue of the by-laws of
be proper service of summons. the corporation that the manager shall be elected by the BOD among its
members.
After the second motion for reconsideration, the trial court reversed itself,
saying that the service of summons upon the petitioners were not proper, Accordingly, Faustino Alberto could not be compelled to vacate his office and
them not being officers of the corporation anymore. On appeal, the CA cede the same to dela Rosa because the by-laws provide that the Directors
reversed the trial court. shall serve until the election and qualification of their duly qualified successor.
ISSUE: WON the petitioners can still be authorized to receive the summons ELECTION AND VOTING
despite the voting trust agreement with DBP?
Sec. 24. Election of directors or trustees. - At all elections of directors or
HELD: No. Sec. 59 of the Code expressly recognizes VTAs and gives a more trustees, there must be present, either in person or by representative
definitive meaning. By its very nature, a VTA results in the separation of the authorized to act by written proxy, the owners of a majority of the
voting right of a stockholder from his other rights such as the right to receive outstanding capital stock, or if there be no capital stock, a majority of the
dividends, the right to inspect the books of the corporation, the right to sell members entitled to vote. The election must be by ballot if requested by any
certain interests in the assets of the corporation and other rights to which a voting stockholder or member. In stock corporations, every stockholder
stockholder may be entitled until the liquidation of the corporation. However, entitled to vote shall have the right to vote in person or by proxy the number
of shares of stock standing, at the time fixed in the by-laws, in his own name
on the stock books of the corporation, or where the by-laws are silent, at the Sec. 25. Corporate officers, quorum
time of the election; and said stockholder may vote such number of shares
for as many persons as there are directors to be elected or he may cumulate xxx
said shares and give one candidate as many votes as the number of directors The directors or trustees and officers to be elected shall perform the duties
to be elected multiplied by the number of his shares shall equal, or he may enjoined on them by law and the by-laws of the corporation. Unless the
distribute them on the same principle among as many candidates as he shall articles of incorporation or the by-laws provide for a greater majority, a
see fit: Provided, That the total number of votes cast by him shall not exceed majority of the number of directors or trustees as fixed in the articles of
the number of shares owned by him as shown in the books of the corporation incorporation shall constitute a quorum for the transaction of corporate
multiplied by the whole number of directors to be elected: Provided, business, and every decision of at least a majority of the directors or trustees
however, That no delinquent stock shall be voted. Unless otherwise provided present at a meeting at which there is a quorum shall be valid as a corporate
in the articles of incorporation or in the by-laws, members of corporations act, except for the election of officers which shall require the vote of a
which have no capital stock may cast as many votes as there are trustees to majority of all the members of the board.
be elected but may not cast more than one vote for one candidate.
Candidates receiving the highest number of votes shall be declared elected. QUORUM: requirement for a valid board meeting is the majority of the
Any meeting of the stockholders or members called for an election may number of the board fixed in the AOI, and a decision of at least a majority of
adjourn from day to day or from time to time but not sine die or indefinitely the directors/trustees present in a meeting at which there is a quorum shall
if, for any reason, no election is held, or if there not present or represented be a valid corporate act, except:
by proxy, at the meeting, the owners of a majority of the outstanding capital 1. Election of officers, which shall require the majority of all the members
stock, or if there be no capital stock, a majority of the member entitled to of the board; and
vote. 2. Unless the AOI or the by-laws provide for a greater quorum/voting
requirement.
NOTE:
1. Majority of the outstanding capital stock, whether in person or by Every action of the board without a meeting and without the required voting
written proxy must be present at the election of the directors; or and quorum requirement will not bind the corporation unless subsequently
majority of members entitled to vote, in the case of a non-stock ratified, expressly or impliedlly.
corporation. If the required quorum is not obtaining, the meeting may
be adjourned; Individual directors, however, can rightfully be considered as agents of the
2. On the request of any voting stockholder or member, the election may corporation. And although they cannot bind the corporation by their
be held by ballot otherwise viva-voce would suffice. individual acts, this is subject to certain EXCEPTIONS: (1) by delegation of
3. The candidates receiving the highest number of votes shall be elected. authority; (2) when expressly conferred; or (3) where the officer or agent is
clothed with actual or apparent authority.
CUMULATIVE VOTING:
1. Cumulative voting gives the stockholder entitled to vote the right to give YAO KA SIN TRADING VS. CA (209 SCRA 763; June 15, 1992) – Constacio
a candidate as many votes as the number of directors to be elected B. Malagna, President and Chairman of the Board of private respondent
multiplied by the number of his shares shall equal or he may distribute Prime White Cement Corporation (PWCC), sent a letter-offer (Exhibit A) to
them among the candidates as he may see fit. Mr. Yao for the delivery of cement, which was accepted by the latter by
2. This is granted by law to each stockholder with voting rights. However, delivering a check for P243,000.
in non-stock corporations, cumulative voting is generally not allowed,
UNLESS allowed by the AOI or by-laws. ISSUE: WON the letter-offer sent by Malagna binds the corporation?
3. Under this method, if there are 10 directors to be elected, a holder of
1,000 shares will have 10,000 votes which he may cast in favor of one HELD: No. A corporation can act only through its officers and agents, all acts
candidate or may apportion to any number of candidate he may wish; within the powers of said corporation may be performed by agents of his
4. PURPOSE: to allow the minority to have a rightful representation in the selection and except in so far as limitations or restrictions may be imposed by
board of directors. special charter, by-law or statutory provisions, the same general provision of
law which govern the relation of agency for natural person govern the officer
Sec. 25. Corporate officers, quorum. - Immediately after their election, or agent of a corporation, of whatever status or rank, in respect to his power
the directors of a corporation must formally organize by the election of a to act for the corporation; and the agents once appointed, or members acting
president, who shall be a director, a treasurer who may or may not be a in their stead, are subject to the same rules, liabilities and incapacities as are
director, a secretary who shall be a resident and citizen of the Philippines, agents of individuals and private persons.
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 Moreover, a corporate officer or agent may represent and bind the
one shall act as president and secretary or as president and treasurer at the corporation in transactiosn with third person to the extent that authority has
same time. been conferred upon him, and this includes powers which have been (1)
intentionally conferred, and (2) also such powers as, in the usual course of
NOTE: business, are incidental thereto, or may be implied therefrom, (3) powers
1. Except in a close corporation where the corporate officers may be added by custom and usage, as usually pertaining to the particular officer
elected directly by the stockholders, the Code requires the BOD to elect or agent, and (4) such apparent powers as the corporation has caused
the said officers; persons dealing with the officer or agent to believe that it has conferred.
2. The officers that may be elected are the:
a. President – who must be a director; While Mr. Maglana was an officer, the by-laws do not in any way confer upon
b. Treasurer – who may or may not be a director; the president the authority to enter into contracts for the corporation
c. Secretary – who should be a resident and citizen of the independently of the BOD. That power is expressly lodged in the latter.
Philippines;
d. Such other officers as may be provided for in the by-laws. Nevertheless, to expedite or facilitate the execution of the contract, only the
3. Any two or more positions may be held concurrently by the same President shall sign the contact for the corporation. No greater power can be
person, except: implied from such express, but limited delegated authority. Neither can it be
a. The president and the secretary; logically claimed that any power greater than that expressly conferred is
b. The president and the treasurer. inherent in Mr. Maglana’s position as president and chairman of the
corporation.
B. VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE
OFFICERS
Although there is authority "that if the president is given general control and directors must act as a body in a meeting called pursuant to the law or the
supervision over the affairs of the corporation, it will be presumed that he corporation’s by-laws, otherwise, any action taken therein may be questioned
has authority to make contract and do acts within the course of its ordinary by any objecting director or shareholder.
business," We find such inapplicable in this case. We note that the private
corporation has a general manager who, under its By-Laws has, inter Be that as it may, jurisprudence tells us that an action of the board of
alia, the following powers: "(a) to have the active and direct management of directors during a meeting, which was illegal for lack of notice, may
the business and operation of the corporation, conducting the same be ratified either (1) expressly, by the action of the directors in
accordingly to the order, directives or resolutions of the Board of Directors or subsequent legal meeting, or (2) impliedly, by the corporations‘
of the president." It goes without saying then that Mr. Maglana did not have subsequent conduct.
a direct and active and in the management of the business and operations of
the corporation. Ratification by directors may be by an express resolution or vote to that
effect, or it may be implied from adoption of the act, acceptance or
Petitioner's last refuge then is his alternative proposition, namely, that private acquiescence. Moreover, the unauthorized acts of an officer of a corporation
respondent had clothed Mr. Maglana with the apparent power to act for it may be ratified by the corporation by conduct implying approval and adoption
and had caused persons dealing with it to believe that he was conferred with of the act in question. Such ratification may be expressed or may be inferred
such power. The rule is of course settled that "[a]lthough an officer or from silence and inaction.
agent acts without, or in excess of, his actual authority if he acts
within the scope of an apparent authority with which the In the case at bench, it was established that petitioner corporation did not
corporation has clothed him by holding him out or permitting him to issue any resolution revoking nor nullifying the board resolution granting
appear as having such authority, the corporation is bound thereby gratuity pay to private respondents. Instead, they paid the gratuity pay,
in favor of a person who deals with him in good faith in reliance on particularly, the first two installments thereof.
such apparent authority, as where an officer is allowed to exercise a
particular authority with respect to the business, or a particular Despite lack of notice to Asuncion, we can glean from the records that she
branch of it, continuously and publicly, for a considerable time." was aware of the corporation’s obligations under the said resolution. More
Also, "if a private corporation intentionally or negligently clothes its importantly she acquiesced thereto by affixing her signature on two cash
officers or agents with apparent power to perform acts for it, the vouchers. The conduct of petitioners had estopped them from assailing the
corporation will be estopped to deny that such apparent authority in validity of the said board resolutions.
real, as to innocent third persons dealing in good faith with such
officers or agents." This "apparent authority may result from (1) the PUA CASIM & CO. VS. NEUMARK AND CO. (46 Phil. 242; Oct. 2, 1924) –
general manner, by which the corporation holds out an officer or agent as W. Neumark, president of defendant corporation borrowed P15000 from
having power to act or, in other words, the apparent authority with which it plaintiff which was delivered by means of a check in favor of defendant and
clothes him to act in general or (2) acquiescence in his acts of a particular deposited in BPI and the amount of it credited to the corporation’s current
nature, with actual or constructive knowledge thereof, whether within or account.
without the scope of his ordinary powers.
ISSUE: WON the corporation is responsible for the money borrowed by its
It was incumbent upon the petitioner to prove that indeed the private president?
respondent had clothed Mr. Maglana with the apparent power to execute
Exhibit "A" or any similar contract. This could have been easily done by HELD: Yes. W. Neumark is the principal stockholder, president and general
evidence of similar acts executed either in its favor or in favor of business manager of the defendant corporation. On behalf of the corporation,
other parties. Petitioner miserably failed to do that. Upon the other hand, he solicited a loan and was given a check, which was endorsed by him in his
private respondent's evidence overwhelmingly shows that no contract can be capacity as president and deposited to the corporation’s account. It may be
signed by the president without first being approved by the Board of true that a large part of the amount so deposited was diverted by Neumark
Directors; such approval may only be given after the contract passes to his own use, but that does not alter that the money was borrowed for the
through, at least, the comptroller, who is the NIDC representative, and the corporation and was placed in its possession.
legal counsel.
It is conceded that Neumark was not expressly authorized by the board of
directors to borrow the money in question and the general rule is that a
LOPEZ REALTY, INC. VS. FOTENCHA (147 SCRA 183; Aug. 11, 1995) – business manager or other officer of a corporation, has no implied power to
Petitioner corporation approved two resolutions providing for the gratuity pay borrow money on its behalf. But much depends upon the circumstances of
of its employees. Except for Asuncion Lopez-Gonzales, who was then abroad, each particular case and the rule state is subject to important exceptions.
the remaining member of the board convened a special meeting and passed Thus, where a general business manager of a corporation is clothed
a resolution adopting the above-mentioned resolutions. Private respondents with apparent authority to borrow money and the amount borrowed
requested for the full payment of the gratuity pay which was granted. does not exceed the ordinary requirements of the business, it has
often been held that the authority is implied and that the
At that time, however, petitioner Asuncion was still abroad, and allegedly corporation is bound.
sent a cablegram objecting to certain matters taken up by the board in her
absence. YU CHUCK VS. KONG LI PO (46 Phil. 608; Dec. 3, 1924) – CC Chen or TC
Chen, General Manager of defendant corporation Kong Li Po, entered into an
Notwithstanding a corporate squabble between Asuncion and Arturo Lopez, agreement with the plaintiffs by which the latter bound themselves to do the
the first two installments of the gratuity pay of private respondents were necessary printing for the newspaper. Later on, the new general manager,
paid. Also, petitioner corporation had prepared the cash vouchers and checks Tan Tian Hong, discharged plaintiffs with no special reasons. Aggrieved,
for the thir installment. For some reason, said voucher was cancelled by plaintiffs sought to recover full payment of the remaining term of the
petitioner Asuncion. contract, which was originally for 3 years, as stated therein.
A complaint was filed before the labor arbiter who decided in favor of private ISSUE: WON Chen had the power to bind the corporation under a contract
respondents. of that character?
ISSUE: WON the gratuity pay should be paid? HELD: No. The general rule is that the power to bind a corporation by
contract lies with its board of directors or trustees, but this power may either
HELD: Yes. The general rules is that a corporation, through its board of be expressly or impliedly be delegated to other officers or agents of the
directors, should act in the manner and within the formalities, if corporation, and it is well settled that except where the authority of
any, prescribed by its charter or by the general law. Thus, the employing servants and agents is expressly vested in the BOD/T, an

officer or agent who has general control and management of the The buyers threated damage suits, but some were settled. Louis Dreyfus &
corporation‘s business, or a specific part thereof, may bind the Co. Ltd. Actually sued but was also culminated in an out-of-court settlement.
corporation as are usual and necessary in th conduct of such
business. But the contracts of employment must be reasonable. NACOCO now seeks to recover the sum paid to Louis from general manager
and board chairman Kalaw and the other members who approved the
Chen, as general manager of Kong Li Po, had implied authority to bind the contracts. It charges Kalaw with negligence and bad faith and/or breach of
defendant corporation by a reasonable and usual contract of employment trust for having approved the contracts, which was dismissed by the trial
with the plaintiffs, but we do not think that contract here in question can be court.
so considered. Not only is the term of employment usually long, but the
conditions are otherwise so onerous to the defendant that the possibility of ISSUE: WON the contracts executed by Kalaw binds the corporation?
the corporation being thrown into insolvency thereby is expressly
contemplated in the same contract. This fact, in itself was, in our opinion, HELD: Yes. A rule that has gained acceptance through the years is that a
sufficient to put the plaintiffs upon inquiry as to the extent of the business corporate officer ―entrusted‖ with the general management and
manager’s authority; they had not the right to presume that he or any other control of its business, has implied authority to make any contract
single officer or employee of that corporation had implied authority to enter or do any other act which is necessary or appropriate to the conduct
into a contract of employment which might bring about its ruin. of the ordinary business of the corporation. As such officer, he may,
without any special authority from the BOD perform all acts of an
TRINIDAD J. FRANCISCO VS. GSIS (7 SCRA 557; March 30, 1963) – ordinary nature, which by usage or necessity are incident to his
Trinidad Francisco, in consideration of loan extended by GSIS, mortgaged her office, and may bind the corporation by contracts in matters arising
property in QC. For being in arrears in her installments, GSIS extrajudicially in the usual course of business.
foreclosed the mortgage.
Long before the disputed contracts came into being, Kalaw contracted by
Plaintiff’s father, Atty. Vicente Francisco sent a letter to Rodolfo Andal, himself alone as general manager – for forward sales of corpra (which is a
general manager of GSIS, offering to redeem the property which was replied necessity in the business) which were profitable. So pleased was NACOCO;s
to by Andal through a telegram saying ―GSIS BOARD APPROVED YOUR BOD that it voted to grant Kalaw special bonus in recognition of the signal
REQUEST RE REDEMTPION OF FORECLOSED PROPERTY OF YOUR achievement rendered by him.
DAUGHTER‖
These previous contacts, it should be stressed, were signed by Kalaw without
Later, inasmuch as, according to the defendant GSIS, the remittances made prior authority from the board. Said contracts were known all along to the
by Atty. Francisco were allegedly not sufficient to pay off her daughter’s board members. Nothing was said by them. The aforesaid contracts stand to
arrears, the one year redemption period has expired, said defendant prove one thing. Obviously, NACOCO’s board met difficulties attendant to
consolidated title to the property in its name. forward sales by leaving the adoption of means to end, to the sound
discretion of NACOCO’s general manager Maximo Kalaw.
ISSUE: WON the telegram sent by the Andal binds the corporation?
Where similar acts have been approved by the directors as a matter
HELD: Yes. The terms of the offer were clear and over the signature of of general practice, custom, and policy, the general manager may
Andnal, plaintiff was informed that the proposal has been accepted. There bind the company without formal authorization of the BOD. In
was nothing in the telegram that hinted at any anomaly, or gave grounds to varying language, existence of such authority is established, by proof of the
suspect its veracity, and the plaintiff, therefore, cannot be blamed for relying course of business, the usages and practices of the company and by the
upon it. There is no denying that the telegram was within Andal’s apparent knowledge which the BOD has, or must be presumed to have, of acts and
authority, but eh defense is that he did not sign it, but that it was sent by the doings of its subordinates in and about the affairs of the corporation.
board secretary in his name and without his knowledge. Assuming this to be
true, how was appellee to know it? Corporate transactions would In the case at bar, the practice of the corporation has been to allow its
speedily come to a standstill were every person dealing with a general manager to negotiate and execute contracts in its copra trading
corporation were held duty-bound to disbelieve every act of its activities for and in NACOCO’s behalf without prior board approval. If the by-
responsible officers, no matter how regular they should appear on laws were to be literally followed, the board should give its stamp of prior
their face. approval on all corporate contracts. But the Board itself, by its acts and
through acquiescence, practically laid aside the by-law requirement of prior
Indeed, it is well-settled that If a private corporation intentionally or approval.
negligently clothes its officers or agents with apparent power to
perform acts for it, the corporation will be estopped to deny that BUENASEDA VS. BOWEN & CO., INC. (110 Phil. 464; Dec. 29, 1969) – As
such apparent authority is real, as to innocent third persons dealing a consequence of P200,000 worth of ECA allocated to the Bowen & Co., Inc.,
in good faith with such officers or agents. it required a letter of credit in the amount of P100,000 with the PNB. As the
corporation did not have at the time the necessary funds to put up the
Hence, even if it were the board secretary who sent the telegram, the required cash marginal deposit of P60,000, its president Geoffrey Bowen,
corporation could not evade the binding effect produced by the telegram. obligating the corporation and himself in his personal capacity, offered to pay
Fracisco Buenaseda 37 ½% of the profits to be realized from the sale of the
The error in the wording cannot be taken seriously. All the while GSIS ECA procurement materials, should he be able to obtain and produce the
pocketed the various remittances, and kept silent as to the true facts as it amount necessary to cover the cash marginal deposit – which Buenaseda
now alleges. This silence, taken together with the unconditional acceptance was able to do.
of three other subsequent remittances from plaintiff constitutes in itself a
binding ratification of the original agreement. The corporation refused to pay, Buenaseda filed an action in the CFI to
recover the same.
THE BOARD OF LIQUIDATORS VS. KALAW (20 SCRA 987; Aug. 10,
1965) – National Coconut Corporation (NACOCO) embarked on copra trading ISSUE: WON the agreement was binding?
activities led by its General Manager Maximo Kalaw and the other defendants
as members of the board. Due to natural calamities, the business of copra HELD: Yes. It is not here pretended that the BOD of the defendant
became unprofitable. Kalaw made a full disclosure of the situation and corporation had no knowledge of the agreement between Bowen and
apprised the baord of the impending losses on the contracts already entered plaintiff. Indeed, at the time the said Agreement was made, the BOD of the
into, but no action was taken. But later on, the contracts were unanimously corporation was composed of Bowen himself, his wife, Buenaseda and two
approved by the Board. others, with Bowen and his wife controlling the majority of the stocks of the
corporation. The Board did not repudiate the agreement but on the contrary,

acquiesced in and took advantage of the benefits afforded by said directors or ―directing or prohibiting‖ any act the corporation or the other
agreement. Such acts are equivalent to an implied ratification of the board of directors thereby effectively taking away the rights of the directors
agreement by the BOD and bound the corporation even without formal to act as manager of the corporation.
resolution passed and recorded.
VACANCY:
It is agreed by the respondents, defendants below, that the profits of the 1. If a vacancy occurs by virtue of REMOVAL, Sec. 28 authorizes the
corporation form part of its assets and payment of a certain percentage of filling of the vacancy by the election of a replacement at the same
the profits requires a declaration of dividends and/or resolution of the BOD. meeting;
The agreement is untenable. Although the plaintiff is a stockholder of the 2. If it occurs NOT by removal, Sec. 29 applies.
corporation he does not, however, claim a share of the profits as such
stockholder, but under the agreement between him and the president of the Sec. 29. Vacancies in the office of director or trustee. - Any vacancy
corporation which has been impliedly ratified by the BOD. 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
IN SUMMARY: An unauthorized act, or the act of a single director, officer or of at least a majority of the remaining directors or trustees, if still constituting
agent of a corporation may be ratified either expressly or impliedly. a quorum; otherwise, said vacancies must be filled by the stockholders in a
1. Express ratification is made through a formal board action; regular or special meeting called for that purpose. A director or trustee so
2. Implied ratification can either be (a) silence or acquiescence; (b) elected to fill a vacancy shall be elected only or the unexpired term of his
acceptance and/or retention of benefits, or (c) by recognition or predecessor in office.
adoption.
A directorship or trusteeship to be filled by reason of an increase in the
C. REMOVAL AND FILLING UP OF VACANCIES 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
Sec. 28. Removal of directors or trustees. - Any director or trustee of a purpose, or in the same meeting authorizing the increase of directors or
corporation may be removed from office by a vote of the stockholders trustees if so stated in the notice of the meeting.
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 If the VACANCY is either resulting from (1) expiration of term; or (2) other
two-thirds (2/3) of the members entitled to vote: Provided, That such causes other than removal, the BOARD OF DIRECTORS, if still constituting a
removal shall take place either at a regular meeting of the corporation or at a quorum, may fill the vacancy.
special meeting called for the purpose, and in either case, after previous
notice to stockholders or members of the corporation of the intention to VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY
propose such removal at the meeting. A special meeting of the stockholders GAMBOA, AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO SUNICO,
or members of a corporation for the purpose of removal of directors or VICTOR SALTA, FRANCISCO ORTIGAS III, ERIC ROXAS, in their capacities as
trustees, or any of them, must be called by the secretary on order of the members of the Board of Directors of Valle Verde Country Club, Inc., and
president or on the written demand of the stockholders representing or JOSE RAMIREZ, Petitioners
holding at least a majority of the outstanding capital stock, or, if it be a non- vs.
stock corporation, on the written demand of a majority of the members Victor Africa, Respondend
entitled to vote. Should the secretary fail or refuse to call the special meeting (GR No. 151969; Sept. 4, 2009)
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  FACTS: February 27, 1996: Ernesto Villaluna, Jaime C. Dinglasan
stockholders or members by any stockholder or member of the corporation (Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor
signing the demand. Notice of the time and place of such meeting, as well as Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray
of the intention to propose such removal, must be given by publication or by Gamboa were elected as BOD during the Annual Stockholders’ Meeting
written notice prescribed in this Code. Removal may be with or without of petitioner Valle Verde Country Club, Inc. (VVCC). From 1997-2001, the
cause: Provided, That removal without cause may not be used to deprive requisite quorum could not be obtained so they continued to act as directors
minority stockholders or members of the right of representation to which they in a hold-over capacity.
may be entitled under Section 24 of this Code. 
 On September 1, 1998, Dinglasan resigned, BOD still constituting a
NOTE: quorom elected Eric Roxas (Roxas) followed by Macalintal.
1. By-laws may provide for casues or grounds for removal of a director; 
2. A director representing the minority may not be removed except for
those causes;
 On March 6, 2001, Jose Ramirez (Ramirez) was elected by the remaining
BOD. Respondent Africa (Africa), a member of VVCC, questioned the election
3. A director NOT representing the minority may be removed even without
of Roxas and Ramirez as members of the VVCC Board with the Securities and
a cause.
Exchange Commission (SEC) and the Regional Trial Court (RTC) as contrary
to Sec. 23 and 29 of the Corporation Code.
REQUIREMENTS FOR A VALID REMOVAL:
1. The removal should take place at a general or special meeting duly call
The RTC decided in favor of Africa.
for that purpose;
2. The removal must be by the vote of the stockholders holding or
ISSUE: WON the appointment of Roxas and Ramirez made by the remaining
representing 2/3 of the outstanding capital stock or the members
members of the Board, still constituting a quorum, were valid?
entitled to vote in cases of non-stock corporations; and
3. There must be a previous notice to the stockholders or members of the
HELD: No. The resolution of this legal issue is significantly hinged on the
intention to propose such removal at the meeting either by publication
determination of what constitutes a director’s term of office.
or on written notice to the stockholders or members.
The holdover period is not part of the term of office of a member of
JURISDICTION OF THE COURT: The law, as it stands now, grants the
the board of directors. The word ―term‖ has acquired a definite meaning in
proper court, the power and authority to hear and decide cases ―involving
jurisprudence. In several cases, we have defined ―term‖ as the time
controversies in the election or appointment of directors, trustees, officers, or
during which the officer may claim to hold the office as of right, and
managers of such corporation, partnership or association.‖
fixes the interval after which the several incumbents shall succeed one
another. The term of office is not affected by the holdover. The term is
DEADLOCK: In the case of deadlock in a close corporation, the SEC is also
fixed by statute and it does not change simply because the office may have
authorized to issue an Order as it deems appropriate ―canceling, altering or
become vacant, nor because the incumbent holds over in office beyond the
enjoining any resolution or other act of the corporation or its board of
end of the term due to the fact that a successor has not been elected and has officers, of the nature of the business, financial condition and operational
failed to qualify. status of the company together with information on its key officers or
managers so that hose dealing with it and those who intend to do business
Term is distinguished from tenure in that an officer’s ―tenure‖ represents with it may know or have the means of knowing facts concerning the
the term during which the incumbent actually holds office. The corporation’s financial resources and business responsibility‖
tenure may be shorter (or, in case of holdover, longer) than the term for
reasons within or beyond the power of the incumbent. D. COMPENSATION OF DIRECTORS
Based on the above discussion, when Section 23 of the Corporation Code Sec. 30. Compensation of directors. - In the absence of any provision in
declares that ―the board of directors…shall hold office for one (1) year until the by-laws fixing their compensation, the directors shall not receive any
their successors are elected and qualified,‖ we construe the provision to compensation, as such directors, except for reasonable per diems: Provided,
mean that the term of the members of the board of directors shall be however, That any such compensation other than per diems may be granted
only for one year; their term expires one year after election to the office. to directors by the vote of the stockholders representing at least a majority of
The holdover period – that time from the lapse of one year from a member’s the outstanding capital stock at a regular or special stockholders' meeting. In
election to the Board and until his successor’s election and qualification – is no case shall the total yearly compensation of directors, as such directors,
not part of the director’s original term of office, nor is it a new term; the exceed ten (10%) percent of the net income before income tax of the
holdover period, however, constitutes part of his tenure. Corollary, when an corporation during the preceding year.
incumbent member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has expired, GENERALLY: Directors are not entitled to receive any compensation,
and the incumbent is holding the succeeding term. EXCEPT:
1. Reasonable per diems;
After the lapse of one year from his election as member of the VVCC Board in 2. As provided in the by-laws or upon a majority vote of the stockholders;
1996, Makalintal’s term of office is deemed to have already expired. That he and
continued to serve in the VVCC Board in a holdover capacity cannot be 3. If they are performing functions other than that of a director.
considered as extending his term. This holdover period is not to be
considered as part of his term, which, as declared, had already expired. (3) above: Sec. 30 is clear on the point when it provides ―as such directors‖.
Therefore, special and extraordinary service rendered, outside of the regular
With the expiration of Makalintal’s term of office, a vacancy resulted which, duties, may form the basis for a claim of special compensation, such as when
by the terms of Section 29 of the Corporation Code, must be filled by the a director acts as a general counsel.
stockholders of VVCC in a regular or special meeting called for the purpose.
To assume – as VVCC does – that the vacancy is caused by Makalintal’s REASON: the office of a director is usually filled up by those chiefly
resignation in 1998, not by the expiration of his term in 1997, is both illogical interested in the welfare of the institution by virtue of their interest in stock
and unreasonable. His resignation as a holdover director did not change the or other advantages and such interests are presumed to be the motive for
nature of the vacancy; the vacancy due to the expiration of Makalintal’s term executing duties of the office without compensation.
had been created long before his resignation.
MAY THE COURTS LOOK INTO THE REASONABLENESS OF
The powers of the corporation‘s board of directors emanate from COMPENSATION? The courts will not generally undertake to review the
its stockholders fairness of official salaries, at the suit of a stockholder unless wrongdoing and
oppression or possible abuse of fiduciary position are shown.
This theory of delegated power of the board of directors similarly explains
why, under Section 29 of the Corporation Code, in cases where the vacancy When the recipient does not stand in the dual relation of the (1) one
in the corporation’s board of directors is caused not by the expiration of a compensated and (2) a participant in fixing his own compensation, it is
member’s term, the successor ―so elected to fill in a vacancy shall be elected considered outside the proper judicial function to go into business policy
only for the unexpired term of the his predecessor in office.‖ The law has question of the fairness or reasonableness of compensation as fixed by the
authorized the remaining members of the board to fill in a vacancy only in board. Otherwise, it will call for a scrutiny of the reasonableness or fairness
specified instances, so as not to retard or impair the corporation’s operations; of the compensation. Likewise, even if consented to by the majority of
yet, in recognition of the stockholders’ right to elect the members of the stockholders, the courts may still look into such reasonableness if: (1) it
board, it limited the period during which the successor shall serve only to the would amount to giving away corporate funds in the guise of compensation
―unexpired term of his predecessor in office.‖ as against the interest of the dissenting minority; or (2) in fraud of creditors,
either amounting to wastage of assets.
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 CENTRAL COOPERATIVE EXCHANGE (CCE) VS. TIBE, JR. (33 SCRA
vacancy is created by the expiration of a term, logically, there is no more 593; June 30, 1970) – This is a complaint filed by herein petitioner CCE for
unexpired term to speak of. Hence, Section 29 declares that it shall be the the refund of certain amounts received by respondent when he served as
corporation’s stockholders who shall possess the authority to fill in a vacancy member of the board of directors of CCE, which were said t be per diems and
caused by the expiration of a member’s term. transportation expenses, representation expenses and cummutable
discretionary funds.
CHANGE IN CONSTITUTION OF THE BOARD: must be reported by the ISSUE: WON the BOD had the power to appropriate funds for the expenses
BOD to the SEC: claimed by respondent?
Sec. 26. Report of election of directors, trustees and officers. - Within HELD: No. The by-laws expressly reserved unto the stockholders the power
thirty (30) days after the election of the directors, trustees and officers of the to determine the compensation of the members of the BOD, and the
corporation, the secretary, or any other officer of the corporation, shall stockholders did restrict such compensation to (1) actual transportation
submit to the Securities and Exchange Commission, the names, nationalities expenses plus (2) per diems of P30 and (3) actual expenses while waiting.
and residences of the directors, trustees, and officers elected. Should a Even without the express prohibition, the directors are not entitled to
director, trustee or officer die, resign or in any manner cease to hold office, compensation for ―The law is well-settled that directors of
his heirs in case of his death, the secretary, or any other officer of the corporations presumptively serve without compensation and in the
corporation, or the director, trustee or officer himself, shall immediately absence of an express agreement or a resolution thereto, no claim
report such fact to the Securities and Exchange Commission can be asserted therefor. Thus it has been held that there can be no
recovery of compensation, unless expressly provided for, when
PURPOSE: to give public information, under sanction of oath responsible director serves as president or vice-president, as secretary or
treasurer or cashier, as member of an executive committee, as to secure adequate service from them is matter that cannot be
chairman of a building committee, or similar offices. corrected in this action; nor can it properly be made a basis for depriving
the respondent of its franchise, or even for enjoining it from compliance with
Thus, the directors, in assigning themselves additional duties, such as the the provisions of its own by-laws. If a mistake has been made, or the rule
visitation of FACOMAS, acted within their power, but, by voting for adopted in the by-laws has been found to work harmful results, the remedy
themselves compensation for such additional duties, they acted in excess of is in the hands of the stockholders who have the power at any lawful meeting
their authority, as express in the by-laws. to change the rule. The remedy, if any, seems to lie rather in publicity and
competition, rather than in a court proceeding. The sixth cause of action is in
WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS, our opinion without merit.
DIMAS ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F. VILLASIS,
petitioner, E. LIBABILITY OF CORPORATE OFFICERS
vs.
RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALAS- The general rule is that unless the law specifically provides a corporate officer
TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS & HON. JUDGE or agent is not civilly or criminally liable for acts done by him as such officer
PORFIRIO PARIAN, respondents or agent, or when absent bad faith or malice.
(GR No. 113032; 278 SCRA 216; Aug. 21, 1997)
TRAMAT MERCANTILE, INC. VS. CA (238 SCRA 14; Nov. 7, 1994) –
FACTS: In a special board meeting, a resolution was passed providing for Melchor dela Cuesta, doing business under the name Farmers Machineries,
compensation of officers. A few years later, petitioners Homero Villasis, sold a tractor to Tramat Mercantile, Inc. In payment, David Ong, Tramat’s
Prestod Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit- president and manager issued a check for P33,500. Tramat sold the tractor,
complaint for falsification of public documents (for submission of an income together with an attached lawn mower fabricated by it, to NAWASA. David
reflecting the resolution as passed on 1985, when in fact it was passed in Ong put a stop payment on the check when NAWASA refused to pay on the
1986) and estafa (for the disbursement of funds by effecting payment to the account that aside from the defects on the lawn mower, the engine (sold by
aforesaid salaries) against herein respondents who were members of the dela Costa) was a reconditioned unit.
Board of Trustees who were also officers of the corporation. The trial court
acquitted respondents in both charges without civil liability. The motion for De la Costa filed an action for recovery of money which was granted by the
reconsideration on the civil aspect being denied, petitioners filed this petition. court.
ISSUE: WON the resolution granting compensation to OFFICERS of the ISSUE: WON Ong should be held jointly and severally liable?
corporation is valid?
HELD: No. It was an error to hold David Ong jointly and severally liable with
HELD: Yes. The proscription under Sec. 30, is against granting compensation TRAMAT to de la Cuesta under the questioned transaction. Ong had there so
to directors/trustees of a corporation is not a sweeping rule. Worthy of note acted, not in his personal capacity, but as an officer of a corporation,
is the clear phraseology of Sec 30 which states ―… [T]he directors shall not TRAMAT, with a distinct and separate personality. As such, it should only be
receive any compensation, as such directors, …‖ The phrase as such the corporation, not the person acting for and on its behalf, that properly
directors is not without significance for it delimits the scope of the could be made liable thereon.
prohibition to compensation given to them for services performed
purely in their capacity as directors or trustees. The unambiguous Personal liability of a corporate director, trustee or officer along
implication is that members of the board may receive compensation, in (although not necessarily) with the corporation may so validly
addition to reasonable per diems, when they render services to the attach, as a rule, only when —
corporation in a capacity other than as directors/trustees. In the case
at bench, the Resolution granted monthly compensation to private 1. He assents (a) to a patently unlawful act of the corporation, or
respondents not in their capacity as members of the board, but rather as (b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict
officers of the corporation, more particularly as Chairman, Vice-Chairman, of interest, resulting in damages to the corporation, its stockholders or other
Treasurer and Secretary of WIT. persons;
Clearly Sec. 30 is not violated. Consequently, the last sentence limiting the 2. He consents to the issuance of watered stocks or who, having knowledge
compensation to 10% of the net income before income tax does not likewise thereof, does not forthwith file with the corporate secretary his written
find application in this case since the compensation is being given to private objection thereto;
respondents in their capacity as officers of WIT and not as board members.
3. He agrees to hold himself personally and solidarily liable with the
GOVERNMENT VS. EL HOGAR FILIPINO (50 Phil. 399; July 14, 1927) – corporation;
The members of the board of El Hogar Filipino receives 5% of the net profit
as shown in the balance sheet and is distributed in proportion to their 4. He is made, by a specific provision of law, to personally answer for his
attendance to meetings of the board. A complaint was filed against the, and corporate action.
the sixth cause of action alleged that the directors, instead of serving without
pay, or receiving nominal pay or a fixed salary - as the complainant In the case at bench, there is no indication that petitioner David Ong could
supposes would be proper – have been receiving large compensation in be held personally accountable under any of the abovementioned cases.
varying amounts.
RICARDO A. LLAMADO, petitioner,
ISSUE: WON the courts may declared the by-law provision null and void? vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents
HELD: No. The Corporation Law does not undertake to prescribe the (GR No. 99032; 270 SCRA 423; March 26, 1997)
rate of compensation for the directors of corporations. The power to
fixed the compensation they shall receive, if any, is left to the corporation, to FACTS: Private complainant Leon Gaw delivered to the accused Ricardo
be determined in its by-laws (Act No. 1459, sec. 21). Pursuant to this Llamado and Jacinto Pascual the amount of P180,000 which is to be repaid in
authority the compensation for the directors of El Hogar Filipino has been 6 months with 12% interest. As security, the accused issued and signed a
fixed in section 92 of its by-laws, as already stated. The justice and postdated check which was later on stopped and dishonored for being drawn
propriety of this provision was a proper matter for the shareholders against insufficient funds. Gaw filed a complaint for violation of BP Blg. 22.
when the by-laws were framed; and the circumstance that, with the Pascual remained at large and the trial on the merits against Llamado was
growth of the corporation, the amount paid as compensation to the conducted. The trial court convicted Llamado.
directors has increased beyond what would probably be necessary

ISSUE: WON petitioner, treasurer of Pan Asia Finance Corporation could be ranking officers and directors of Crispa, Inc., signed the Board Resolution
held civilly and criminally liable? retrenching the private respondents on the feigned ground of serious
business losses that had no basis apart from an unsigned and unaudited
HELD: Yes. Petitioner denies knowledge of the issuance of the check without Profit and Loss Statement which, to repeat, had no evidentiary value
sufficient funds and involvement in the transaction with private complainant. whatsoever. This is indicative of bad faith on the part of petitioners for which
However, knowledge involves a state of mind difficult to establish. Thus, the they can be held jointly and severally liable with Crispa, Inc. for all the money
statute itself creates a prima facie presumption, i.e., that the drawer had claims of the illegally terminated respondent employees in this case.
knowledge of the insufficiency of his funds in or credit with the bank at the
time of the issuance and on the check's presentment for payment. Petitioner F. THREE-FOLD DUTY OF DIRECTORS
failed to rebut the presumption by paying the amount of the check within five
(5) banking days from notice of the dishonor. His claim that he signed the Directors owe a three-fold duty to the corporation: (1) Obedience; (2)
check in blank which allegedly is common business practice, is hardly a Diligence and (3) Loyalty.
defense. If as he claims, he signed the check in blank, he made himself
prone to being charged with violation of BP 22. It became incumbent upon Sec. 31. Liability of directors, trustees or officers. - Directors or
him to prove his defenses. As Treasurer of the corporation who signed the trustees who willfully and knowingly vote for or assent to patently unlawful
check in his capacity as an officer of the corporation, lack of involvement in acts of the corporation or who are guilty of gross negligence or bad faith in
the negotiation for the transaction is not a defense. 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
Petitioner's argument that he should not be held personally liable for the jointly and severally for all damages resulting therefrom suffered by the
amount of the check because it was a check of the Pan Asia Finance corporation, its stockholders or members and other persons.
Corporation and he signed the same in his capacity as Treasurer of the
corporation, is also untenable. The third paragraph of Section 1 of BP Blg. 22 When a director, trustee or officer attempts to acquire or acquires, in
states: 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
―Where the check is drawn by a corporation, company or entity, imposes a disability upon him to deal in his own behalf, he shall be liable as a
the person or persons who actually signed the check in behalf of trustee for the corporation and must account for the profits which otherwise
such drawer shall be liable under this Act‖ would have accrued to the corporation.
ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F. BASILIO, petitioners, OBEDIENCE: as stated in the first part of Sec. 31 refers to the act of voting
vs. or assenting, either willfully or knowingly, to patently unlawful acts thereby
NATIONAL LABOR RELATIONS COMMISSION, LUZVIMINDA SANTOS, making the responsible director liable for damages resulting therefrom;
SHIRLEY PORRAS, CARMEN ELIZARDE, ET. AL., respondents
(GR No. 121434; 273 SCRA 35; June 2, 1997) DILIGENCE: Under the second part of Sec. 31, the directors are required to
manage the corporate affairs with reasonable care and prudence. This is
FACTS: Private respondents were employees of Crispa, Inc. who were because the liability of a corporation is not limited to willful breach of trust or
dismissed due to alleged retrenchment. They filed an illegal dismissal excess of power, but extends also to negligence. Their liability rests upon the
complaint with the NLRC against Crispa, Inc., Valeriano Floro (major common law rule which renders liable every agent who violates his authority
stockholder, incorporation and director of Crispa) and petitioners, who were or neglects his duty to the damage of his principal.
high ranking officials and directors of Crispa. The Lbor Arbiter dismissed the
complaint but ordered petitioners, Floro and Crispa to pay separation pay. The degree of diligence is relative. The more fair and satisfactory rule is that
degree of care and diligence which an ordinary prudent director could
ISSUE: WON petitioners can be held liable? reasonably be expected to exercise in a like position under similar
circumstances.
HELD: Yes. A corporation is a juridical entity with legal personality separate
and distinct from those acting for and in its behalf and, in general, from the BUSINESS JUDGMENT RULE: Although directors are commonly said to be
people comprising it. The general rule is that obligations incurred by the responsible both for reasonable care and also prudence, the formula is
corporation, acting through its directors, officers and employees, are its sole continually repeated that they are not liable for losses due to imprudence or
liabilities. There are times, however, when solidary liabilities may be incurred honest error of judgment. The business judgment rule in effect states that
but only when exceptional circumstances warrant such as in the following questions of policy and management are left solely to the honest decision of
cases: the board of directors and the courts are without authority to substitute its
judgment as against the former. The directors are business managers and as
―1. When directors and trustees or, in appropriate cases, the long as they act in good faith, its actuations are not subject to judicial review.
officers of a corporation: (a) vote for or assent to patently
unlawful acts of the corporation; (b) act in bad faith or with ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
gross negligence in directing the corporate affairs; (c) are vs.
guilty of conflict of interest to the prejudice of the BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
corporation, its stockholders or members, and other persons; (GR No. L-15092; 5 SCRA 36; May 18, 1962)
2. When a director or officer has consented to the issuance of
watered stocks or who, having knowledge thereof, did not FACTS: Appellants have been sugar planter adhered to defendat-appellees
forthwith file with the corporate secretary his written sugar central mill under identical milling contracts with a 55% share of the
objection thereto; resulting product. There was a proposal to increase the planter’s share to
3. When a director, trustee or officer has contractually agreed 60% which was adopted by defendant in an Amended Milling Contract and
or stipulated to hold himself personally and solidarily liable consequently a Board Resolution.
with the corporation; or
4. When a director, trustee or officer is made, by specific In 1953, the appellants initiated the present action, contending that three
provision of law, personally liable for his corporate action.‖i Negros sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a
total annual production exceeding one-third of the production of all the sugar
In labor cases, particularly, corporate directors and officers are central mills in the province, had already granted increased participation (of
solidarily liable with the corporation for the termination of 62.5%) to their planters, and that under paragraph 9 of the resolution of
employment of corporate employees done with malice or in bad August 20, 1936, heretofore quoted, the appellee had become obligated to
faith. In this case, it is undisputed that petitioners have a direct hand in the grant similar concessions to the plaintiffs (appellants herein). The appellee
illegal dismissal of respondent employees. They were the ones, who as high- Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging
that the stipulations contained in the resolution were made without be applicable, notwithstanding the fact that the director risked his own funds
consideration; that the resolution in question was, therefore, null and void ab in the venture.
initio, being in effect a donation that was ultra vires and beyond the powers
of the corporate directors to adopt. The trial court decided in favor of Apparent from Sec. 31 and 34, the duty of loyalty is violated in the following
defendant, thus the present appeal. instances:
1. When a director or trustee ―acquires any personal or pecuniary interest
ISSUE: WON the resolutions passed by the bard are valid and binding? in conflict with (his) duty as such director or trustee‖;
2. When he ―attempts to acquire or acquires, in violation of his duty, any
HELD: Yes. There can be no doubt that the directors of the appellee interest adverse to the corporation in respect to any matter which has
company had authority to modify the proposed terms of the Amended Milling been reposed in him in confidence, as to which equity imposes a
Contract for the purpose of making its terms more acceptable to the other disability upon him to deal in his own behalf‖; and
contracting parties. 3. When he, ―by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining
As the resolution in question was passed in good faith by the board profit to the prejudice of such corporation‖.
of directors, it is valid and binding, and whether or not it will cause
losses or decrease the profits of the central, the court has no FORBIDDEN PROFITS: Forbidden in the sense that directors and officers
authority to review them. are fiduciary representatives of the corporation and as such they are not
allowed to obtain any personal profit, commission, bonus or gain for their
―They hold such office charged with the duty to act for the corporation official actions. This may also refer to those arising from transactions of
according to their best judgment, and in so doing they cannot be directors with third persons which may involve misappropriation of corporate
controlled in the reasonable exercise and performance of such duty. opportunities and disloyal diverting of business. Directors and officers are
Whether the business of a corporation should be operated at a loss during corporate insiders and cannot, therefore, utilize their strategic position for
depression, or close down at a smaller loss, is a purely business and their own preferment or use their powers and opportunities for their personal
economic problem to be determined by the directors of the corporation advantage to the exclusion of the interest which they represent.
and not by the court. It is a well-known rule of law that questions of policy
or of management are left solely to the honest decision of officers and CORPORATE OPPORTUNITY DOCTRINE: it places a director of a
directors of a corporation, and the court is without authority to substitute corporation in the position of a fiduciary and prohibits him from seizing a
its judgment of the board of directors; the board is the business manager business opportunity and/or developing it at the expense and with the
of the corporation, and so long as it acts in good faith its orders are not facilities of the corporation. He cannot appropriate to himself opportunity
reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).‖ which in fairness should belong to the corporation.
And it appearing undisputed in this appeal that sugar centrals of La Carlota, RATIFICATION:
Hawaiian Philippines, San Carlos and Binalbagan (which produce over one- 1. The second paragraph of Sec. 31 which makes a director liable to
third of the entire annual sugar production in Occidental Negros) have account for profits if he attempts to acquire or acquires any interest
granted progressively increasing participations to their adhered planter at an adverse to the corporation in respect to any matter reposed in him in
average rate of confidence as to which equity imposes a disability upon him to deal in
his own behalf is not subject to ratification.
62.333% for the 1951-52 crop year;
2. Whereas, in Sec. 34, if a director acquires a business opportunity which
64.2% for 1952-53; should belong to the corporation, he is bound to account for such profits
unless his act is ratified by the stockholders owing or representing at
64.3% for 1953-54; least 2/3 of the outstanding capital stock.
64.5% for 1954-55; and Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to sell
his property with a fair market value of P100M for P90M.
63.5% for 1955-56, a. If it was offered first to A, and A made a profit of P90M, this would fall
under Sec. 34 and may be subject to ratification; A merely acquired a
the appellee Bacolod-Murcia Milling Company is, under the terms of its business opportunity owing to the corporation.
Resolution of August 20, 1936, duty bound to grant similar increases to b. If it was offered to REALTY CORP., and A, later on offered to buy it for
plaintiffs-appellants herein. P95 and sold it making a profit of P5M, it would fall under Sec. 31 and
not subject to ratification, A should return the profits to REALTY CORP.
It was a matter reposed in him in confidence.
LIABILITY OF DIRECTORS FOR ACTS OF THEIR CO-DIRECTORS:
Generally: a director is not liable for the acts of their co-directors, unless: (1) STRONG VS. REPIDE (41 Phil. 947; May 3, 1909) – the Governor of the
He connives or participates; or (2) He is negligent in not discovering or acting Philippine Islands, on behalf of the government, made an offer of purchase
to prevent it. Thus, absent of actual knowledge of the wrongful activities, on for the total sum of $6,,043,219.47 in gold for all the friar lands, though
the part of the co-directors, the same cannot be imputed to the other director owned by different owners.
unless in the exercise of reasonable care attending his responsibilities, he
should have been aware of suspicious circumstances demanding correlative While this state of things existed, and before the final offer had been made
action. by the Governor, the defendant, although still holding out for a higher price
for the lands, took steps to purchase the 800 shares of stock in his own
LOYALTY: refers to the proscription imposed on directors on acquiring any company from Mrs. Strong, which he knew were in the possession of F.
personal or pecuniary interest in conflict with their duty as director. Their Stuart Jones, as her agent. The defendant employed Krauffman and the
relationship is regarded as ―fiduciary relation‖. As fiduciaries, they are obliged latter employed Mr. Sloan, a broker, to purchase the stock for him. Mr. Sloan,
to act with utmost candor and fair dealing for the interest of the corporation the husband, did not know who wanted to buy the shares nor did Jones
and without selfish motives. when he was spoken to. Jones would not have sold at the price he did had
he known it was the defendant who was purchasing, because, as he said, it
Sec. 34. Disloyalty of a director. - Where a director, by virtue of his would show increased value, as the defendant would not be likely to
office, acquires for himself a business opportunity which should belong to the purchase ore stock unless the price was going up.
corporation, thereby obtaining profits to the prejudice of such corporation, he
must account to the latter for all such profits by refunding the same, unless ISSUE: WON it was the duty of the defendant to disclose to the agent of the
his act has been ratified by a vote of the stockholders owning or representing plaintiff the facts bearing upon or which might affect the value of the stock?
at least two-thirds (2/3) of the outstanding capital stock. This provision shall

HELD: Yes. A director upon whose action the value of the shares depends which there is no yardstick. Every case stands upon its own bottom, and the
cannot avail of his knowledge of what his own action will be to acquire shares ultimate question is whether the contract was honest and beneficial which is
from those whom he intentionally keeps in ignorance of his expected action always a question of fact.
and the resulting value of the shares.
PRIME WHITE CEMENT CORPORATION, petitioner,
Even though a director may not be under the obligation of a fiduciary nature vs.
to disclose to a shareholder his knowledge affecting the value of the shares, IAC and ALEJANDRO TE, respondents
that duty may exist in special cases, and did exist upon the facts in this case. (GR No. L-68555; 220 SCRA 103; March 19, 1993)
In this case, the facts clearly indicate that a director of a corporation owning FACTS: Respondent Alejandro Te, a director of petitioner corporation, was
friar lands in the Philippine Islands, and who controlled the action of the awarded a dealership agreement whereby Te would be the exclusive dealer
corporation, had so concealed his exclusive knowledge of the impending sale and/or distributor of the corporation in the entire Mindanao. As a
to the government from a shareholder from whom he purchased, through an consequence, Te entered into different contracts for selling white cement.
agent, shares in the corporation, that the concealment was in violation of his Laer on, defendant corporation decided to impose certain conditions upon the
duty as a director to disclose such knowledge, and amounted to deceit dealership agreement.
sufficient to avoid the sale; and, under such circumstances, it was immaterial
whether the shareholder's agent did or did not have power to sell the stock. Several demands to comply with the agreement were made by Te to the
corporation but was refused and Te was constrained to cancel the contracts
In addition to his ownership of almost three-fourths of the shares of the stock he entered into.
of the company, the defendant was one of the five directors of the company,
and was elected by the board the agent and administrator general of such Defendant corporation entered into an exclusive dealership agreement with
company, "with exclusive intervention in the management" of its general Napoleon Co for the marketing of white cement in Mindanao. Hence, this
business. suit.
Concealing his identity when procuring the purchase of stock, by his agent, ISSUE: WON the dealership agreement entered into by Te with his own
was in itself stock evidence of fraud on the part of the defendant. The corporation is valid and binding?
concealment was not a mere inadvertent omission but was a studied and
intentional omission, to be characterized as part of the deceitful machination HELD: No. In the instant case respondent Te was not an ordinary
to obtain the purchase without giving information whatever as to the state stockholder; he was a member of the Board of Directors and Auditor of the
and probable result of the negotiations, to the vendor of the stock, and to, in corporation as well. He was what is often referred to as a "self-dealing"
that way, obtain the same at a lower price. director.
G. SELF-DEALING DIRECTORS A director of a corporation holds a position of trust and as such, he owes a
duty of loyalty to his corporation. In case his interests conflict with those of
The self-dealing director is one who deals or transacts business with his own the corporation, he cannot sacrifice the latter to his own advantage and
corporation. benefit. As corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust relationship "is not
Sec. 32. Dealings of directors, trustees or officers with the a matter of statutory or technical law. It springs from the fact that directors
corporation. - A contract of the corporation with one or more of its directors have the control and guidance of corporate affairs and property and hence of
or trustees or officers is voidable, at the option of such corporation, unless all the property interests of the stockholders.
the following conditions are present:
Granting arguendo that the "dealership agreement" involved here would be
1. That the presence of such director or trustee in the board meeting in valid and enforceable if entered into with a person other than a director or
which the contract was approved was not necessary to constitute a quorum officer of the corporation, the fact that the other party to the contract was a
for such meeting; Director and Auditor of the petitioner corporation changes the whole
2. That the vote of such director or trustee was nor necessary for the situation. First of all, We believe that the contract was neither fair nor
approval of the contract; reasonable. The "dealership agreement" entered into in July, 1969, was to
3. That the contract is fair and reasonable under the circumstances; and sell and supply to respondent Te 20,000 bags of white cement per month, for
4. That in case of an officer, the contract has been previously authorized by five years starting September, 1970, at the fixed price of P9.70 per bag.
the board of directors. Respondent Te is a businessman himself and must have known, or at least
must be presumed to know, that at that time, prices of commodities in
Where any of the first two conditions set forth in the preceding paragraph is general, and white cement in particular, were not stable and were expected
absent, in the case of a contract with a director or trustee, such contract may to rise. At the time of the contract, petitioner corporation had not even
be ratified by the vote of the stockholders representing at least two-thirds commenced the manufacture of white cement, the reason why delivery was
(2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the not to begin until 14 months later. He must have known that within that
members in a meeting called for the purpose: Provided, That full disclosure period of six years, there would be a considerable rise in the price of white
of the adverse interest of the directors or trustees involved is made at such cement. In fact, respondent Te's own Memorandum shows that in
meeting: Provided, however, That the contract is fair and reasonable under September, 1970, the price per bag was P14.50, and by the middle of 1975,
the circumstances. it was already P37.50 per bag. Despite this, no provision was made in the
"dealership agreement" to allow for an increase in price mutually acceptable
Generally: A contract entered into by a director with his own corporation is to the parties. Instead, the price was pegged at P9.70 per bag for the whole
voidable at the latter’s option, except when all the conditions laid down in five years of the contract. Fairness on his part as a director of the corporation
Sec. 32 are met. On the other hand, where any of the first two conditions is from whom he was to buy the cement, would require such a provision. In
absent, the contract becomes voidable subject to the ratification of the fact, this unfairness in the contract is also a basis which renders a contract
stockholders representing 2/3 of the outstanding capital stock – the entered into by the President, without authority from the Board of Directors,
requirements of which are: (1) there must be a meeting called for that void or voidable, although it may have been in the ordinary course of
purpose; (2) full disclosure of the adverse interest of the director; and (3) the business. We believe that the fixed price of P9.70 per bag for a period of five
contract is fair and reasonable under the circumstances. years was not fair and reasonable. Respondent Te, himself, when he
subsequently entered into contracts to resell the cement to his "new dealers"
If the self-dealing director owns all or substantially all of the shares of stock, Henry Wee and Gaudencio Galang stipulated as follows:
thereby making ratification easily possible, the last sentence of Sec. 32 The price of white cement shall be mutually determined by us but in no
should be made to apply by determining reasonableness of the transaction to case shall the same be less than P14.00 per bag (94 lbs)
The sale or transfer of the corporate property in the case at bar was made by
As director, especially since he was the other party in interest, respondent three directors who were at the same time a majority of stockholders. If a
Te's bounden duty was to act in such manner as not to unduly prejudice the majority of the stockholders have a clear and a better right to sell the
corporation. In the light of the circumstances of this case, it is to Us quite corporate property than a majority of the directors, then it can be said that a
clear that he was guilty of disloyalty to the corporation; he was attempting in majority of the stockholders made this sale or transfer to the defendant
effect, to enrich himself at the expense of the corporation. There is no McCullough.
showing that the stockholders ratified the "dealership agreement" or that
they were fully aware of its provisions. The contract was therefore not valid What were the circumstances under which said sale was made? The
and this Court cannot allow him to reap the fruits of his disloyalty. corporation had been going from bad to worse. The work of trying to raise
the sunken Spanish fleet had been for several months abandoned. The
CHARLES W. MEAD, plaintiff-appellant, corporation under the management of the plaintiff had entirely failed in this
vs. undertaking. It had broken its contract with the naval authorities and the
E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING $10,000 Mexican currency deposited had been confiscated. It had no money.
AND CONSTRUCTION COMPANY, defendant-appellants It was considerably in debt. It was a losing concern and a financial failure. To
(GR No. 6217; 21 Phil. 95; Dec. 26, 1911) continue its operation meant more losses. Success was impossible. The
corporation was civilly dead and had passed into the limbo of utter
FACTS: Herein plaintiff-appellant Mead with defendant McCullough formed insolvency. The majority of the stockholders or directors sold the assets of
the Philippine Engineering and Construction Company, the incorporators this corporation, thereby relieving themselves and the plaintiff of all
being the only stockholders and directors of the company. When Mead left responsibility. This was only the wise and sensible thing for them to do. They
for China, the other directors entered into an agreement where all the rights acted in perfectly good faith and for the best interests of all the stockholders.
in a ―wrecking contract‖ with the naval authorities were sold to defendant. "It would be a harsh rule that would permit one stockholder, or any minority
The defendant, in turn, sold these rights with R.W. Brown, HDC jones, John of stockholders to hold a majority to their investment where a continuation of
Macleod and TH Twentyman, and retaining one sixth interest, formed Manila the business would be at a loss and where there was no prospect or hope
Salvage Association. that the enterprise would be profitable."
ISSUE: WON officers or directors of the corporation may purchase the We therefore conclude that the sale or transfer made by the quorum of the
corporate property? board of directors — a majority of the stockholders — is valid and binding
upon the majority-the plaintiff.
HELD: Yes. While a corporation remains solvent, we can see no reason why
a director or officer, by the authority of a majority of the stockholders or H. INTERLOCKING DIRECTORS
board of managers, may not deal with the corporation, loan it money or buy
property from it, in like manner as a stranger. So long as a purely private An interlocking director is a director in one corporation who deals or transacts
corporation remains solvent, its directors are agents or trustees for the with another corporation of which he is also a director. In such case, there
stockholders. They owe no duties or obligations to others. But the moment may effectively be a dual agency, a divided allegiance where allegiance in
such a corporation becomes insolvent, its directors are trustees of all the one corporation may subordinated to the other.
creditors, whether they are members of the corporation or not, and must
manage its property and assets with strict regard to their interest; and if they The prevailing view is that these contracts entered into where there is an
are themselves creditors while the insolvent corporation is under their interlocking director is not voidable merely by reason of conflicting duties or
management, they will not be permitted to secure to themselves by interest as to corporations represented, even when a majority or all of the
purchasing the corporate property or otherwise any personal advantage over directors are common to both corporations. It is recognized that such will be
the other creditors. Nevertheless, a director or officer may in good faith and upheld if there is no bad faith or unfairness or collusion.
for an adequate consideration purchase from a majority of the directors or
stockholders the property even of an insolvent corporation, and a sale thus Sec. 33. Contracts between corporations with interlocking directors.
made to him is valid and binding upon the minority. (Beach et al. vs. Miller, – (1) Except in cases of fraud, and provided (2) the contract is fair and
supra; Twin-Lick Oil Company vs. Marbury, supra; Drury vs. Cross, 7 Wall., reasonable under the circumstances, a contract between two or more
299; Curran vs. State of Arkansas, 15 How., 304; Richards vs. New corporations having interlocking directors shall not be invalidated on that
Hamphshire Insurance Company, 43 N. H., 263; Morawetz on Corporations ground alone: Provided, That if the interest of the interlocking director in
(first edition), sec. 579; Haywood vs. Lincoln Lumber Company et al., 64 one corporation is substantial and his interest in the other corporation or
Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott vs. Shaw Carriage corporations is merely nominal, he shall be subject to the provisions of the
Company, 21 Fed. Rep., 577.) preceding section insofar as the latter corporation or corporations are
concerned.
In the case of the Twin-Lick Oil Company vs. Marbury, he court said:
Stockholdings exceeding twenty (20%) percent of the outstanding capital
That a director of a joint-stock corporation occupies one of those stock shall be considered substantial for purposes of interlocking directors.
fiduciary relations where his dealings with the subject-matter of his trust
or agency, and with the beneficiary or party whose interest is confided NOTE:
to his care, is viewed with jealousy by the courts, and may be set aside 1. The contract between corporations with interlocking director is valid
on slight grounds, is a doctrine founded on the soundest morality, and absent fraud and provided it is reasonable under the circumstances;
which has received the clearest recognition in this court and others. 2. If the interest of the interlocking director in one corporation exceeds
(Koehler vs. Iron., 2 Black, 715; Drury vs. Cross, 7 Wall., 299; R.R. Co. 20% and in the other merely nominal, the contract becomes voidable at
vs. Magnay, 25 Beav., 586; Cumberland Co vs. Sherman, 30 Barb., 553; the latter corporation’s option. In effect, the director would be treated
Hoffman S. Coal Co. vs. Cumberland Co., 16 Md., 456.) The general as a self-dealing director under Sec. 32;
doctrine, however, in regard to contracts of this class, is, not that they 3. If the interest in both companies is either both substantial or both
are absolutely void, but that they are voidable at the election of the nominal, Sec. 33 will apply.
party whose interest has been so represented by the party claiming
under it. We say, this is the general rule; for there may be cases where I. DERIVATIVE SUIT
such contracts would be void ab initio; as when an agent to sell buys of
himself, and by his power of attorney conveys to himself that which he In case of a wrongful or fraudulent act of a director, officer or agent,
was authorized to sell. but even here, acts which amount t a ratification stockholders have the following options:
by the principal may validate the sale 1. Individual or Personal Action – for direct injury to his rights, such as
denial of his right to inspect corporate books and records or pre-emptive
rights;
2. Representative or Class Suit – in which one or more members of a class bank, but the extent of such a right must depend upon when, how, and for
sue for themselves as a class or for all to whom the right was denied, what purpose he acquired the shares which he now owns. In the
either as an individual action or a derivative suit; and a determination of these questions we can not see how, if it be true that the
3. Derivative Suit – an action based on injury to the corporation – to bank is a quasi-public institution, it can affect in any way the final result.
enforce a corporate right – wherein the corporation itself is joined as a
necessary party, and recovery is in favor of and for the corporation. It is It is alleged that the plaintiff became a stockholder on the 13th of November,
a suit granted to any stockholder to institute a case to remedy a wrong 1903; that the defendants, as members of the board of directors and board
done directly to the corporation and indirectly to stockholders. of government, respectively, during each and all the years 1903, 1904, 1905,
1906, and 1907, did fraudulently, and to the great prejudice of the bank and
CANDIDO PASCUAL, plaintiff-appellant, its stockholders, appropriate to their own use from the profits of the bank
vs. sums of money amounting approximately to P20,000 per annum.
EUGENIO DEL SAZ OROZCO, ET AL, defendants-appellees
(GR No. L-5174; 19 Phil. 83; March 17, 1911) It is self-evident that the plaintiff in the case at bar was not, before he
acquired in September, 1903, the shares which he now owns, injured or
FACTS: During 1903-1907, the defendant-appellees, without the knowledge affected in any manner by the transactions set forth in the second cause of
and acquiescence of the stockholders deducted their compensation from action. His vendor could have complained of these transactions, but he did
gross income instead of from the net profits of the bank, the same with their not choose to do so. The discretion whether to sue to set them aside, or to
predecessors for the years 1899-1902. acquiesce in and agree to them, is, in our opinion, incapable of transfer. If
the plaintiff himself had been injured by the acts of defendants' predecessors
Plaintiff-appellant brings this action in his own right as a stockholder of the that is another matter. He ought to take things as he found them when he
bank, for the benefit of the bank and all the stockholders, in behalf of the voluntarily acquired his ten shares. If he was defrauded in the purchase of
corporation, which, even though, nominally a defendant, is to all intents and these shares he should sue his vendor. (Thus, he may sue for the second half
purposes the real plaintiff in this case as shown in the prayer of the of 1903 to 1907 but not for the years 1989 to the first half of 1903.)
complaint.
So it seems to be settled by the Supreme Court of the United States, as a
ISSUE: WON plaintiff has capacity to sue? matter of substantive law, that a stockholder in a corporation who was not
such at the time of the transactions complained of, or whose shares had not
HELD: Yes. In suits of this character the corporation itself and not the devolved upon him since by operation of law, cannot maintain suits of this
plaintiff stockholder is the real party in interest. The rights of the individual character, unless such transactions continue and are injurious to the
stockholder are merged into that of the corporation. It is a universally stockholder, or affect him especially and specifically in some other way.
recognized doctrine that a stockholder in a corporation has no title legal or
equitable to the corporate property; that both of these are in the corporation HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W.
itself for the benefit of all the stockholders. Text writers illustrate this rule by ROBINSON, plaintiffs-appellants,
the familiar example of one person or entity owning all the stock and still vs.
having no greater or essentially different title than if he owned but one single THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC
share. Since, therefore, the stockholder has no title, it is evident that what he BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D. MACINTOSH,
does have, with respect to the corporation and his fellow stockholder, are defendants-appellees.
certain rights sui generis. These rights are generally enumerated as being, (GR No. L-25241; 49 Phil. 512; Nov. 3, 1926)
first, to have a certificate or other evidence of his status as stockholder
issued to him; second, to vote at meetings of the corporation; third, to FACTS: Plaintiffs, stockholders (together with Barclay) of Teal and Company
receive his proportionate share of the profits of the corporation; and lastly, to (Company), entered into a Memorandum of Agreement and Voting Trust
participate proportionately in the distribution of the corporate assets upon the Agreement with defendant Asia Banking Corporation (Bank) with the
dissolution or winding up. (Purdy's Beach on Private Corporations, sec. 554.) understanding that it was intended for the protection of all parties thereto
from outside creditors, but that they were not intended to be enforced
The right of individual stockholders to maintain suits for and on behalf of the according to the letter thereof, and that they did not contain the true
corporation was denied until within a comparatively short time, but his right agreement between the Bank and the Company which was to finance the
is now no longer doubted. Accordingly, in 1843, in the leading case of Foss company without interference from the above-named creditors.
vs. Harbottle, a stockholder brought suit in the name of himself and other
defrauded stockholders, and for the benefit of the corporation, against the That shortly after, Mullen caused the removal of the plaintiffs as directors of
directors, for a breach of their duty to the corporation. This case was decided the Company and their replacement. The defendants thereafter gave pledges
against the complaining stockholder, on the ground that the complainant had and mortgages from the Company to the Bank and entered into contracts as
not proved that the corporation itself was under the control of the guilty directed by the Bank, and permitted the Bank to foreclose the same and to
parties, and had not proved that it was unable to institute suit. The court, sell the property of the Company itself and permitted the Bank to institute
however, broadly intimated that a case might arise when a suit instituted by suits against the Company, in which the Company was not represented by
defrauded stockholders would be entertained by the court and redress given. anyone having its interest at heart and in which reason the Bank occupied
Acting upon this suggestion, and impelled by the utter inadequacy of suits both plaintiff and defendant and tricked and deluded the courts into giving
instituted by the corporation, defrauded stockholders continued to institute judgment in which the rights of the real parties were concealed and unknown
these suits and to urge the courts of equity to grant relief. These efforts were to the courts.
unsuccessful in clearly establishing the right of stockholders herein until the
cases of Atwol against Merriwether, in England, 1867, and of Dodge vs. Thereafter, defendants incorporated Philippine Motors Corporation where all
Woolsey, in this country, in 1855. These two great and leading cases have the assets and goodwill of the Company were transferred by the Bank.
firmly established the law for England and America, that where corporate
directors have committed a breach of trust either by their frauds, ISSUE: WON the plaintiffs have the legal capacity to bring an action?
ultra vires acts, or negligence, and the corporation is unable or
unwilling to institute suit to remedy the wrong, a single stockholder HELD: Yes. Invoking the well-known rule that shareholders cannot ordinarily
may institute that suit, suing on behalf of himself and other sue in equity to redress wrongs done to the corporation, but that the action
stockholders and for the benefit of the corporation, to bring about a must be brought by the Board of Directors, the appellees argue — and the
redress of the wrong done directly to the corporation and indirectly court below held — that the corporation Teal and Company is a necessary
to the stockholders. party plaintiff and that the plaintiff stockholders, not having made any
demand on the Board to bring the action, are not the proper parties plaintiff.
So it is clear that the plaintiff, by reason of the fact that he is a stockholder in But, like most rules, the rule in question has its exceptions. It is alleged in the
the bank (corporation) has a right to maintain a suit for and on behalf of the complaint and, consequently, admitted through the demurrer that the

corporation Teal and Company is under the complete control of the Republic Bank and the damage caused to it. The action he has
principal defendants in the case, and, in these circumstances, it is brought is a derivative one, expressly manifested to be for and in
obvious that a demand upon the Board of Directors to institute an behalf of the Republic Bank, because it was futile to demand action
action and prosecute the same effectively would have been useless, by the corporation, since its Directors were nominees and creatures
and the law does not require litigants to perform useless acts. of defendant Pablo Roman (Complaint, p. 6). The frauds charged by
(Exchange bank of Wewoka vs. Bailey, 29 Okla., 246; Fleming and Hewins vs. plaintiff are frauds against the Bank that redounded to its prejudice.
Black Warrior Copper Co., 15 Ariz., 1; Wickersham vs. Crittenden, 106 Cal., The complaint expressly pleads that the appointment of Cuaderno as
329; Glenn vs. Kittaning Brewing Co., 259 Pa., 510; Hawes vs. Contra Costa technical consultant, and of Bienvenido Dizon to head the Board of Directors
Water Company, 104 U. S., 450.) of the Republic Bank, were made only to shield Pablo Roman from criminal
prosecution and not to further the interests of the Bank, and avers that both
The conclusion of the court below that the plaintiffs, not being stockholders men are Roman's alter egos. There is no denying that the facts thus pleaded
in the Philippine Motors Corporation, had no legal right to proceed against in the complaint constitute a cause of action for the bank: if the questioned
that corporation in the manner suggested in the complaint evidently rest appointments were made solely to protect Roman from criminal prosecution,
upon a misconception of the character of the action. In this proceeding it was by a Board composed by Roman's creatures and nominees, then the moneys
necessary for the plaintiffs to set forth in full the history of the various disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or
transactions which eventually led to the alleged loss of their property and, in diversion of corporate funds, since the Republic Bank would have no interest
making a full disclosure, references to the Philippine Motors Corporation in shielding Roman, and the directors in approving the appointments would
appear to have been inevitable. It is to be noted that the plaintiffs seek no be committing a breach of trust; the Bank, therefore, could sue to nullify the
judgment against the corporation itself at this stage of the proceedings. appointments, enjoin disbursement of its funds to pay them, and recover
those paid out for the purpose, as prayed for in the complaint in this case
In our opinion the plaintiffs state a good cause of action for equitable relief (Angeles vs. Santos, supra.).
and their complaint is not in any respect fatally defective. The judgment of
the court below is therefore reversed, the defendants demurrer is overruled, Defendants urge that the action is improper because the plaintiff was not
and it is ordered that the return of the record to the Court within ten days authorized by the corporation to bring suit in its behalf. Any such authority
from the return of the record to the Court of First Instance. So ordered could not be expected as the suit is aimed to nullify the action taken by the
manager and the board of directors of the Republic Bank; and any demand
REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., for intra-corporate remedy would be futile, as expressly pleaded in the
plaintiff-appellant, complaint. These circumstances permit a stockholder to bring a derivative
vs. suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has
MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN, chosen to make common cause with plaintiff Perez is irrelevant,
THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY since the smallness of plaintiff's holdings is no ground for denying
BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early
(GR No. L-22399; 19 SCRA 671; March 30, 1967) in the proceedings for the absence of other stockholders to be of any
significance, no issues having even been joined.
FACTS: Damaso Perez, a stockholder of Republic Bank, instituted a
derivative suit against defendant Pablo Roman, then President of the Bank, ISSUE2: WON the Corporation should be a plaintiff or defendant?
for granting certain loans to fictitious and non-existing persons and to their
close friends, relatives and/or employees, who were in reality their dummies HELD2: The English practice is to make the corporation a party plaintiff,
on the basis of fictitious or inflated appraised value of real estate properties, while in the United States, the usage leans in favor of its being joined as
in connivance with other officials. party defendant (see Editorial Note, 51 LRA [NS] 123). Objections can be
raised against either method. (1) Absence of corporate authority would
The complaint alleged that Miguel Cuaderno, then Central Bank Governor, seem to militate against making the corporation a party plaintiff,
acting upon the complaint, and the Monetary Board ordered an investigation while (2) joining it as defendant places the entity in the awkward
and found violations of the General Banking Act, but no information was filed position of resisting an action instituted for its benefit. What is
until his retirement; that to neutralize the impending action against him, important is that the corporation' should be made a party, in order
Pablo Roman engaged Miguel Cuaderno as technical consultant and selected to make the Court's judgment binding upon it, and thus bar future
Bienvenido Dizon as Chairman of the Board of the Bank; that such relitigation of the issues. On what side the corporation appears
appointment was done in bad faith and without intention to protect the loses importance when it is considered that it lay within the power
interest of the Bank but were only prompted to protect Pablo Roman. of the trial court to direct the making of such amendments of the
pleadings, by adding or dropping parties, as may be required in the
The complaint, therefore, prayed for a writ of preliminary injunction against interest of justice (Revised Rule 3, sec. 11). Misjoinder of parties is not
eh Monetary Board in confirming such appointments, but was dismissed by a ground to dismiss an action. (Ibid.)
the lower court.
ISSUE3: WON the action of the plaintiff amounts to a quo warranto
ISSUE: WON the court below erred in dismissing the complaint? proceeding?
HELD: Yes. The defendants mainly controvert the right of plaintiff to HELD: No. Plaintiff Perez is not claiming title to Dizon's position as head of
question the appointment and selection of defendants Cuaderno and Dizon, the Republic Bank's board of directors. The suit is aimed at preventing the
which they contend to be the result of corporate acts with which plaintiff, as waste or diversion of corporate funds in paying officers appointed solely to
stockholder, cannot interfere. Normally, this is correct, but Philippine protect Pablo Roman from criminal prosecution, and not to carry on the
jurisprudence is settled that an individual stockholder is permitted to corporation's bank business. Whether the complaint's allegations to such
institute a derivative or representative suit on behalf of the effect are true or not must be determined after due hearing.
corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever (1) the officials of the corporation WESTERN INSTITUTE OF TECHNOLOGY, INC., vs. SALAS (supra, under
refuse to sue, or (2) are the ones to be sued or (3) hold the control Compensation of Directors) – Petitioners assert that the motion for
of the corporation. In such actions, the suing stockholder is reconsideration of the civil aspect of the RTC decision acquitting respondents
regarded as a nominal party, with the corporation as the real party is a derivative suit brought by them as minority stockholders of WIT for and
in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia on behalf of the corporation
Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs.
Santos, 86 Phil. 388). Plaintiff-appellant's action here is precisely in ISSUE: WON the appeal may be considered as a derivative action?
conformity, with these principles. He is neither alleging nor vindicating
his own individual interest or prejudice, but the interest of the

HELD: No. A derivative suit is an action brought by minority b) he has tried to exhaust intra-corporate remedies, i.e., has made a
shareholders in the name of the corporation to redress wrongs demand on the board of directors for the appropriate relief but the latter has
committed against it, for which the directors refuse to sue. It is a failed or refused to heed his plea; and
remedy designed by equity and has been the principal defense of c) the cause of action actually devolves on the corporation, the
the minority shareholders against abuses by the majority. Here, wrongdoing or harm having been, or being caused to the corporation and not
however, the case is not a derivative suit but is merely an appeal on the civil to the particular stockholder bringing the suit.
aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for
estafa and falsification of public document. Among the basic The bona fide ownership by a stockholder of stock in his own right
requirements for a derivative suit to prosper is that the minority suffices to invest him with standing to bring a derivative action for
shareholder who is suing for and on behalf of the corporation must the benefit of the corporation. The number of his shares is
allege in his complaint before the proper forum that he is suing on a immaterial since he is not suing in his own behalf, or for the
derivative cause of action on behalf of the corporation and all other protection or vindication of his own particular right, or the redress
shareholders similarly situated who wish to join. This is necessary to of a wrong committed against him, individually, but in behalf and
vest jurisdiction upon the tribunal in line with the rule that it is the allegations for the benefit of the corporation.
in the complaint that vests jurisdiction upon the court or quasi-judicial body
concerned over the subject matter and nature of the action. This was not Neither can the "conflict-of-interest" theory be upheld. From the conceded
complied with by the petitioners either in their complaint before the court a premise that de los Angeles now sits in the SMC Board of Directors by the
quo nor in the instant petition which, in part, merely states that "this is a grace of the PCGG, it does not follow that he is legally obliged to vote as the
petition for review on certiorari on pure questions of law to set aside a PCGG would have him do, that he cannot legitimately take a position
portion of the RTC decision in Criminal Cases Nos. 37097 and 37098" since inconsistent with that of the PCGG, or that, not having been elected by the
the trial court's judgment of acquittal failed to impose any civil liability against minority stockholders, his vote would necessarily never consider the latter's
the private respondents. By no amount of equity considerations, if at all interests. The proposition is not only logically indefensible, non sequitur, but
deserved, can a mere appeal on the civil aspect of a criminal case be treated also constitutes an erroneous conception of a director's role and function, it
as a derivative suit. being plainly a director's duty to vote according to his own independent
judgment and his own conscience as to what is in the best interests of the
Granting, for purposes of discussion, that this is a derivative suit as insisted company. Moreover, it is undisputed that apart from the qualifying shares
by petitioners, which it is not, the same is outrightly dismissible for having given to him by the PCGG, he owns 20 shares in his own right, as regards
been wrongfully filed in the regular court devoid of any jurisdiction to which he cannot from any aspect be deemed to be "beholden" to the PCGG,
entertain the complaint. The ease should have been filed with the Securities his ownership of these shares being precisely what he invokes as the source
and Exchange Commission (SEC) which exercises original and exclusive of his authority to bring the derivative suit.
jurisdiction over derivative suits, they being intra-corporate disputes, per
Section 5 (b) of P.D. No. 902-A. ELTON W. CHASE, as minority Stockholder and on behalf of other
Stockholders similarly situated and for the benefit of AMERICAN MACHINERY
SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS AND PARTS MANUFACTURING, INC., plaintiff-appellant,
ANGELES, petitioners, vs.
vs. DR. VICTOR BUENCAMINO, SR., VICTOR BUENCAMINO, JR., JULIO B.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO FRANCIA and DOLORES A. BUENCAMINO, respondents.
ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, (GR No. L-20395; 136 SCRA 365; May 13, 1985)
RALPH KAHN and RAMON DEL ROSARIO, JR., respondents.
(GR No. 85339; 176 SCRA 447; Aug. 11, 1989) FACTS: Herein plaintiff-appellant Elton Chase, entered into an agreement
with Dr. Buencamino and William Cranker (already business partners) for the
FACTS: Eduardo de los Angeles was a director appointed by PCGG who establishment of a factory in Manila called American Machinery Engineering
sequestered the shares of Andres Soriano III claiming it to belong to Eduardo Parts, Inc. (Amparts), where chase was to transfer his tractor plant, ship his
Conjuangco, a close associate and dummy of then President Marcos. De los machineries from his former plant in America to Manila, install said
Angeles initiated a derivative suit against herein respondents, in behalf of machineries at Amparts plant and he is to be the production manager of
SMC, for the revocation of a Board Resolution adopted to assume the loans Amparts.
incurred by Neptunia Corporation, a foreign company, said to be a wholly-
owned subsidiary of SMC. The action was dismissed by the SEC on the For some time the three maintained harmonious relations until Chase
grounds that De los Angeles does not have adequate shares to represent the tendered his resignation which was accepted by Buencamino and Cranker.
interest of the stockholders and that his assumed role as a PCGG appointed Chase initially filed a case in California against Cranker for the recovery of the
director is inconsistent with his assumed role as a representative of minority purchase price of his plant, but this died a natural death. Eventually, he filed
stockholders. a case before the CFI alleging various acts of frauds allegedly committed by
the other two.
ISSUE: WON De Los Angeles can institute a derivative suit?
ISSUE: WON Chase has capacity to institute a derivative suit?
HELD: Yes. The theory that de los Angeles has no personality to bring suit in
behalf of the corporation — because his stockholding is minuscule, and there HELD: Yes. The evidence of defendants proves very clearly that right from
is a "conflict of interest" between him and the PCGG — cannot be sustained. the start, Chase was by them recognized as a stockholder and initial
incorporator with 600 paid up shares representing a 1/3 interest in Amparts,
It is claimed that since de los Angeles 20 shares (owned by him since 1977) and that would be enough for Chase to have the correct personality to
represent only. 00001644% of the total number of outstanding shares (1 institute this derivative suit; the second place, it also appears apparently
21,645,860), he cannot be deemed to fairly and adequately represent the undenied that Chase did not win in California so that he did not recover the
interests of the minority stockholders. The implicit argument — that a $150,000.00 that he had prayed for there against Overseas, which if he had
stockholder, to be considered as qualified to bring a derivative suit, must hold would really in the mind of the Court have put him in estoppel to intervene in
a substantial or significant block of stock — finds no support whatever in the any manner as incorporator or stockholder of Amparts; and in the third place
law. The requisites for a derivative suit are as follows: and most important it should not be forgotten that Chase has filed the
present case not for his personal benefit, but for the benefit of Amparts, so
a) the party bringing suit should be a shareholder as of the time of the act that to the Court the argument of estoppel as against him would appear to
or transaction complained of, the number of his shares not being be out of place; the estoppel to be valid as a defense must be an estoppel
material; against Amparts itself; the long and short of it is that the Court is impelled
and constrained to discard all the other defenses set up by Dr. Buencamino
on the principal complaint; the result of all these would be to sustain so far,

the position of Chase that Dr. Buencamino must account for the P570,000.00
used to pay the second series of payment on the subscription, the We are led to agree with the judge below that the appointment of a receiver
P330,000.00 used in paying the lsst series on the subscription, plus another was not only expedient but also necessary to restore the faith and confidence
sum of P245,000.00 entered as loan on his favor and against Amparts, for of the Central Bank authorities in the administration of the affairs of the
the sum of P434,000.00 earned in the blackmarketing of the excess of corporation, thus ultimately leading to a restoration of the dollar allocation so
$140,000.00 dollars on the forwarding costs and promotional expenses, for essential to the operation of the textile mills.
the sum of P391,200.00 earned in the blackmarketing of the excess of
$117,000.00 in the transaction with Bertoni and Cotti, and all these would RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA,
reach a total of P1,970,200.00; and as the appropriation of the profits for EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES DE LA RAMA-
himself was a quasi-delict, the liability therefore assuming that it had been BORROMEO, petitioners,
done with the cooperation of Cranker would have to be solidary, 2194 New vs.
Civil Code. HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First
Instance of Negros Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN
CATALINA R. REYES, petitioner, LOPUE, JR., LEONITO LOPUE, and LUISA U. DACLES respondents.
vs. (GR No. -40620; 90 SCRA 40; May 6, 1979)
HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of
Manila, Branch XIII and FRANCISCA R. JUSTINIANI, respondents. FACTS: A writ of prelimiary injunction was filed by herein respondents as
(GR No. L-16982; 3 SCRA 198; Sept. 30, 1961) purchasers of 1,328 shares of stock of Inocented De La Rama, inc. after
herein petitioners surreptitiously met and authorized the sale of 823 shares to
FACTS: Several purchases were made by Roxas-Kalaw Textile Mills in New forestall the petitioner’s takeover from the previous president and vice-
York for raw materials but were found out to consist of already finished president (sellers of the 1,328 shares), in violation of their pre-emptive right.
product for which reason the Central Bank of the Philippines stopped all The trial court ruled in favor of respondents. Later on, private respondents
dollar allocations for raw materials for the corporation which necessarily led entered into a compromise agreement with the recipients for the transfer of
to the paralyzation of the operations. It was alleged that the supplier of the the 823 shares, against which the petitioners filed a motion to dismiss which
said finished goods was United Commercial Company of New York in which was denied.
Dalamal, appointed by the BOD of the Textile Mills as co-manager, had
inrterests and that the letter of credit for said goods were guaranteed by the ISSUE: WON a derivative suit is the more proper action that should have
Indian Commercial Company and Indian Traders in which Dalamal likewise been filed by respondents?
has interests. It was further alleged that the sale of the finished products was
the business of Indian Commercial Company of Manila who cannot obtain HELD: No. The petitioners contend that the proper remedy of the plaintiffs
dollar allocations for imporations of finished goods. would be to institute a derivative suit against the petitioners in the name of
the corporation in order to secure a binding relief after exhausting all the
An action for the appointment of a receiver was filed before the trial court possible remedies available within the corporation.
after the BOD refused to proceed against Dalamal, which was granted.
An individual stockholder is permitted to institute a derivative suit on behalf
ISSUE: WON Justiniani may be allowed to institute the case for receivership of the corporation wherein he holds stock in order to protect or vindicate
and damages? corporate rights, whenever the officials of the corporation refuse to sue, or
are the ones to be sued or hold the control of the corporation. In such
HELD: Yes. It is not denied by petitioner that the allocation of dollars to the actions, the suing stockholder is regarded as a nominal party, with the
corporation for the importation of raw materials was suspended. In the eyes corporation as the real party in interest. In the case at bar, however, the
of the court below, as well as in our own, the importation of textiles instead plaintiffs are alleging and vindicating their own individual interests
of raw materials, as well as the failure of the Board of Directors to take action or prejudice, and not that of the corporation. At any rate, it is yet too
against those directly responsible for the misuse of dollar allocations early in the proceedings since the issues have not been joined. Besides,
constitute fraud, or consent thereto on the part of the directors. Therefore, a misjoinder of parties is not a ground to dismiss an action.
breach of trust was committed which justified the derivative suit by a
minority stockholder on behalf of the corporation. JUAN D. EVANGELISTA, et. al., plaintiff-appellant VS. RAFAEL SANTOS,
defendant-appelle (86 Phil. 387; May 19, 1950) – Juan D. Evangelista, et. al.
―It is well settled in this jurisdiction that where corporate directors are are minority stockholders of the Vitali Lumber Company, Inc., while Rafael
guilty of a breach of trust — not of mere error of judgment or abuse Santos holds more than 50% of the stocks of said corporation and also is and
of discretion — and intracorporate remedy is futile or useless, a always has been the president, manager, and treasurer thereof. Santos, in
stockholder may institute a suit in behalf of himself and other such triple capacity, through fault, neglect, and abandonment allowed its
stockholders and for the benefit of the corporation, to bring about a lumber concession to lapse and its properties and assets, among them
redress of the wrong inflicted directly upon the corporation and machineries, buildings, warehouses, trucks, etc., to disappear, thus causing
indirectly upon the stockholders. An illustration of a suit of this kind is the complete ruin of the corporation and total depreciation of its stocks.
found in the case of Pascual vs. Del Saz Orozco (19 Phil. 82), decided by this
Court as early as 1911. In that case, the Banco Español-Filipino suffered Evangelista, et. al. therefore prays for judgment requiring Santos: (1) to
heavy losses due to fraudulent connivance between a depositor and an render an account of his administration of the corporate affairs and assets:
employee of the bank, which losses, it was contended, could have been (2) to pay plaintiffs the value of their respective participation in said assets
avoided if the president and directors had been more vigilant in the on the basis of the value of the stocks held by each of them; and (3) to pay
administration of the affairs of the bank. The stockholders constituting the the costs of suit. Evangelista, et. al. also ask for such other remedy as may
minority brought a suit in behalf of the bank against the directors to recover be and equitable. The trial court dismissed the action on the ground of
damages, and this over the objection of the majority of the stockholders and improper venue and lack of cause of action.
the directors. This court held that the suit could properly be maintained.‖ (64
Phil., Angeles vs. Santos [G.R. No. L-43413, prom. August 31, 1937] p. 697). ISSUE: WON plaintiffs have a right to bring the action for their benefit?
The claim that respondent Justiniani did not take steps to remedy the illegal HELD: No. The complaint shows that the action is for damages resulting
importation for a period of two years is also without merit. During that period from mismanagement of the affairs and assets of the corporation by its
of time respondent had the right to assume and expect that the directors principal officer, it being alleged that defendant's maladministration has
would remedy the anomalous situation of the corporation brought about by brought about the ruin of the corporation and the consequent loss of value of
their own wrong doing. Only after such period of time had elapsed could its stocks. The injury complained of is thus primarily to that of the
respondent conclude that the directors were remiss in their duty to protect corporation, so that the suit for the damages claimed should be by the
the corporation property and business. corporation rather than by the stockholders (3 Fletcher, Cyclopedia of

Corporation pp. 977-980). The stockholders may not directly claim within the power of the court to direct the making of amendment of the
those damages for themselves for that would result in the pleading, by adding or dropping parties, as may be required in the
appropriation by, and the distribution among them of part of the interest of justice. Misjoinder of parties is not a ground to dismiss
corporate assets before the dissolution of the corporation and the action; and,
liquidation of its debts and liabilities, something which cannot be 5. Any benefit or damages recovered shall pertain to the
legally done in view of section 16 of the Corporation Law. corporation. This is so because in all instances, derivative suit is
instituted for and in behalf of the corporation and not for the protection
But while it is to the corporation that the action should pertain in cases of this or vindication of a right or rights of a particular stockholder, otherwise,
nature, however, if the officers of the corporation, who are the ones called the aggrieved stockholder should institute, instead, an individual or
upon to protect their rights, refuse to sue, or where a demand upon them to personal suit to vindicate his personal or individual right. Or, for that
file the necessary suit would be futile because they are the very ones to be matter, representative or class suit for all other stockholders whose
sued or because they hold the controlling interest in the corporation, then in rights are similarly situated, injured or violated, personally or
that case any one of the stockholders is allowed to bring suit (3 Fletcher's individually.
Cyclopedia of Corporations, pp. 977-980). But in that case it is the
corporation itself and not the plaintiff stockholder that is the real property in J. EXECUTIVE COMMITTEE
interest, so that such damages as may be recovered shall pertain to the
corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In other words, it is Sec. 35. Executive committee. - The by-laws of a corporation may create
a derivative suit brought by a stockholder as the nominal party plaintiff for an executive committee, composed of not less than three members of the
the benefit of the corporation, which is the real property in interest (13 board, to be appointed by the board. Said committee may act, by majority
Fletcher, Cyclopedia of Corporations, p. 295). 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
In the present case, the plaintiff stockholders have brought the action not for the board, except with respect to: (1) approval of any action for which
the benefit of the corporation but for their own benefit, since they ask that shareholders' approval is also required; (2) the filing of vacancies in the
the defendant make good the losses occasioned by his mismanagement and board; (3) the amendment or repeal of by-laws or the adoption of new by-
pay to them the value of their respective participation in the corporate assets laws; (4) the amendment or repeal of any resolution of the board which by
on the basis of their respective holdings. Clearly, this cannot be done until all its express terms is not so amendable or repealable; and (5) a distribution of
corporate debts, if there be any, are paid and the existence of the cash dividends to the shareholders
corporation terminated by the limitation of its charter or by lawful dissolution
in view of the provisions of section 16 of the Corporation Law.
CHAPTER 7: CORPORATE POWERS AND AUTHORITY
It results that plaintiff's complaint shows no cause of action in their favor so
that the lower court did not err in dismissing the complaint on that ground. Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
While plaintiffs ask for remedy to which they are not entitled unless the 1. To sue and be sued in its corporate name;
requirement of section 16 of the Corporation Law be first complied with, we
note that the action stated in their complaint is susceptible of being 2. Of succession by its corporate name for the period of time stated in the
converted into a derivative suit for the benefit of the corporation by a mere articles of incorporation and the certificate of incorporation;
change in the prayer. Such amendment, however, is not possible now, since
the complaint has been filed in the wrong court, so that the same last to be 3. To adopt and use a corporate seal;
dismissed.
4. To amend its articles of incorporation in accordance with the provisions of
The order appealed from is therefore affirmed, but without prejudice to the this Code;
filing of the proper action in which the venue shall be laid in the proper
province. Appellant's shall pay costs. So ordered 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;
IN SUMMARY:
1. That the party bringing the suit should be a stockholder as of the 6. In case of stock corporations, to issue or sell stocks to subscribers and to
time the act or transaction complained of took place, or whose shares sell stocks to subscribers and to sell treasury stocks in accordance with the
have evolved upon him since by operation of law. This rule, however, provisions of this Code; and to admit members to the corporation if it be a
does not apply if such act or transaction continues and is injurious to the non-stock corporation;
stockholder or affect him specifically in some other way.
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
The number of his shares is immaterial since he is not suing in his mortgage and otherwise deal with such real and personal property, including
own behalf or for the protection or vindication of his own right, or the securities and bonds of other corporations, as the transaction of the lawful
redress of a wrong done against him, individually, but in behalf and for business of the corporation may reasonably and necessarily require, subject
the benefit of the corporation. to the limitations prescribed by law and the Constitution;
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 8. To enter into merger or consolidation with other corporations as provided
had failed or refused to heed his plea. Demand, however, is not in this Code;
required if the company is under the complete control of the
directors who are the very ones to be sued (or where it becomes 9. To make reasonable donations, including those for the public welfare or for
obvious that a demand upon them would have been futile and useless) hospital, charitable, cultural, scientific, civic, or similar purposes: Provided,
since the law does not require a litigant to perform useless acts; That no corporation, domestic or foreign, shall give donations in aid of any
3. The stockholder bringing the suit must allege in his complaint that political party or candidate or for purposes of partisan political activity;
he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated, 10. To establish pension, retirement, and other plans for the benefit of its
otherwise, the case is dismissible. This is because the cause of action directors, trustees, officers and employees; and
actually devolves on the corporation and not to a particular stockholder.
4. The corporation should be made a party, either as party-plaintiff or 11. To exercise such other powers as may be essential or necessary to carry
defendant, in order to make the court’s judgment binding upon it, and out its purpose or purposes as stated in the articles of incorporation.
thus, bar future litigation of the same issues. On what side the
corporation appears loses importance when it is considered that it lay The statement of the objects, purposes or powers in the AOI results
practically in defining the scope of the authorized corporate enterprise or made be one who is named in the statute; otherwise the service is
undertaking. This statement both confers and also limits the actual authority insufficient. So, where the statute required that in the case of a domestic
of the corporation. corporation summons should be served on "the president or head of the
corporation secretary treasurer, cashier or managing agent thereof", service
Along with the powers indicated in the AOI, a corporation can also exercise of summons on the secretary's wife did not confer jurisdiction over the
powers that may be granted by law, particularly those provided under Sec. corporation in the foreclosure proceeding against it. Hence, the the decree of
36 and 44 of the Corporation Code and those which may be necessary or forclosure and the deficiency judgment were void and should be vacated.
incidental to tis existence. (Reader vs. District Court, 94 Pacific 2nd 858).
In short, corporate authority may be classified as: The purpose is to render it reasonably certain that the corporation
1. Express powers – those expressly granted by law inclusive of the will receive prompt and proper notice in an action against it or to
corporate charter or AOI; insure that the summons be served on a representative so
2. Implied Powers – those impliedly granted as are essential or reasonably integrated with the corporation that such person will know what to
necessary to the carrying out of the express powers; and do with the legal papers served on him. In other words, "to bring
3. Incidental Powers – those incidental to its existence. home to the corporation notice of the filing of the action". (35A C.J.S.
288 citing Jenkins vs. Lykes Bros. S.S. Co., 48 F. Supp. 848; MacCarthy vs.
A. POWER TO SUE AND BE SUED Langston D.C. Fla., 23 F.R.D. 249).
A corporation may sue and be sued in its corporate name just like any other In the instant case the Manila court did not acquire jurisdiction over Delta
person. Motor because it was not properly served with summons. The service of
summons on Dionisia G. Miranda, who is not among the persons mentioned
VENUE: the action filed against it must be instituted at the place of principal in section 13 of Rule 14, was insufficient. It did not bind the Delta Motor.
office of the corporation. Courts acquire jurisdiction over the person of a party defendant and of the
subject-matter of the action by vertue of the service of summons in the
SERVICE OF SUMMONS: Sec. 11, Rule 14 of the Rules of Court provide: manner required by law. Where there is no service of summons or a
voluntary general appearance by the defendant, the court acquires no
Sec. 11. Service upon domestic private juridical entity. When the jurisdiction to pronounce a judgment in the cause. (Syllabi Salmon and Pacific
defendant is a corporation, partnership or association organized under the Commercial Co. vs. Tan Cueco, 36 Phil. 556).
laws of the Philippines with a juridical personality, service may be made on
the president, managing partner, general manager, corporate secretary, Consequently, the order of default, the judgment by default and the
treasurer, or in-house counsel. execution in Civil Case No. 97373 are void and should be set aside.
Service of summons upon persons other than those named under than those E. B. VILLAROSA & PARTNER CO., LTD., petitioner,
named in the above provision is without force and effect. vs.
HON. HERMINIO I. BENITO, in his capacity as Presiding Judge, RTC,
DELTA MOTOR SALES CORPORATION, petitioner, Branch 132, Makati City and IMPERIAL DEVELOPMENT CORPORATION,
vs. respondent.
HON. JUDGE IGNACIO MANGOSING, Branch XXIV, Court of First (GR No. 136426; Aug. 6, 1999)
Instance of Manila, THE CITY SHERIFF OF MANILA, and JOSE LUIS
PAMINTUAN, respondents FACTS: Petitioner is a limited partnership with principal office address at
(GR No. L-41667; April 30, 1976) Davao City and with branch offices at Parañaque, Metro Manila and Lapasan,
Cagayan de Oro City.
FACTS: Herein respondent Pamintuan initiated an action against petitioner
Delta Motors for the alleged defective Toyota car sold to him and for failure Petitioner and private respondent executed a Deed of Sale with Development
to fulfill the warranty obligation by not repairing the car. Agreement wherein the former agreed to develop certain parcels of land
located at Cagayan de Oro belonging to the latter into a housing subdivision
The summons were served on Dionisia Miranda, employee of the petitioner. for the construction of low cost housing units. They further agreed that in
Delta Motors failed to answer the complaint and was declared in default and case of litigation regarding any dispute arising therefrom, the venue shall be
evidence was presented and a decision was rendered against herein in the proper courts of Makati.
petitioner.
Private respondent, as plaintiff, filed a Complaint for Breach of Contract and
Petitioner filed a motion to lift the order of default and to set aside the Damages against petitioner, as defendant, before the RTC Makati for failure
judgment and for new trial, which was denied. of the latter to comply with its contractual obligation in that, other than a few
unfinished low cost houses, there were no substantial developments therein.
ISSUE: WON there was proper service of summons?
Summons, together with the complaint, were served upon the defendant,
HELD: No. Rule 14 of the Revised Rules of Court provides: through its Branch Manager at the stated address at Cagayan de Oro City but
the Sheriff's Return of Service stated that the summons was duly served
SEC. 13. Service upoin private domestic corporation or partnership. — If "upon defendant E.B. Villarosa & Partner Co., Ltd. thru its Branch Manager
defendant is a corporation organized under the laws of the Philippines or a Engr. at their new office Villa Gonzalo, Nazareth, Cagayan de Oro City, and
partnership duly registered, service may be made on the president, evidenced by the signature on the face of the original copy of the summons.
manager, secretary, cashier, agent, or any of its directors.
Defendant filed a motion to dismiss on the ground of improper service of
For the purpose of receiving service of summons and being bound summons which was denied.
by it, a corporation is identified with its agent or officer who under
the rule is designated to accept service of process. "The corporate ISSUE: WON the court acquired jurisdiction?
power to receive and act on such service, so far as to make it known
to the corporation, is thus vested in such officer or agent." (Lafayette HELD: No. Earlier cases have uphold service of summons upon a
Insurance Co. vs. French, 15 L. Ed. 451, 453). construction project manager; a corporation's assistant manager; ordinary
clerk of a corporation; private secretary of corporate executives; retained
A strict compliance with the mode of service is necessary to confer counsel; officials who had charge or control of the operations of the
jurisdiction of the court over a corporation. The officer upon whon service is corporation, like the assistant general manager; or the corporation's Chief

Finance and Administrative Officer. In these cases, these persons were greater function than to impart prima facie evidence of the due execution by
considered as "agent" within the contemplation of the old rule. Notably, the corporation of a written document or obligation.
under the new Rules, service of summons upon an agent of the corporation
is no longer authorized. D. POWER TO AMEND ITS ARTICLES OF INCORPORATION
The designation of persons or officers who are authorized to accept summons The procedures for the exercise of this right are provided under Sec. 16, Sec.
for a domestic corporation or partnership is now limited and more clearly 37 and 38 as discussed earlier under CHAPTER 5: CORPORATE CHARTER
specified in Section 11, Rule 14 of the 1997 Rules of Civil Procedure. The rule AND ITS AMENDMENTS.
now states "general manager" instead of only "manager"; "corporate
secretary" instead of "secretary"; and "treasurer" instead of "cashier." The As far as corporations created by special law are concerned, amendment may
phrase "agent, or any of its directors" is conspicuously deleted in the new NOT be considered as a matter of right. The law creating it may or may not
rule. authorize or empower the corporation to make any changes in its AOI or
charter. However, whether empowered or not, Congress may amend or
The particular revision under Section 11 of Rule 14 was explained by retired repeal a corporate charter by virtue of its inherent authority to amend or
Supreme Court Justice Florenz Regalado, thus: repeal laws under the Consitution.
. . . the then Sec. 13 of this Rule allowed service upon a
defendant corporation to "be made on the president, manager, E. POWER TO ADOPT BY-LAWS
secretary, cashier, agent or any of its directors." The aforesaid
terms were obviously ambiguous and susceptible of broad and The Corporation Code actually REQUIRES a corporation to adopt by-laws, not
sometimes illogical interpretations, especially the word "agent" contrary to law, morals, or public policy, within 1 month from receipt of
of the corporation. The Filoil case, involving the litigation official notice of the issuance of the certificate of incorporation or registration
lawyer of the corporation who precisely appeared to challenge (Sec. 46).
the validity of service of summons but whose very appearance
for that purpose was seized upon to validate the defective Amendment of the by-laws are allowed subject to the procedure and
service, is an illustration of the need for this revised section requirement provided under Sec. 48.
with limited scope and specific terminology. Thus the absurd
result in the Filoil case necessitated the amendment permitting F. POWER TO ISSUE OR SELL STOCKS AND TO ADMIT MEMBERS
service only on the in-house counsel of the corporation who is
in effect an employee of the corporation, as distinguished from The power of a corporation to issue or sell its stocks is an inherent right of
an independent practitioner. (emphasis supplied). any stock corporation except only as it may be regulated by law or by the
AOI.
Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court
Revision Committee, stated that "(T)he rule must be strictly observed. Admission, as well as termination of members is a prerogative granted by law
Service must be made to one named in (the) statute . . . to non-stock corporations and the manner, requirements or procedures for
such admission or termination may be contained in the AOI or by-laws.
It should be noted that even prior to the effectivity of the 1997 Rules of Civil
Procedure, strict compliance with the rules has been enjoined. In the case of G. POWER TO ACQUIRE OR ALIENATE REAL OR PERSONAL
Delta Motor Sales Corporation vs. Mangosing, the Court held: PROPERTY
A strict compliance with the mode of service is necessary to When a corporation is expressly empowered by law to acquire or alienate real
confer jurisdiction of the court over a corporation. The officer and/or personal properties, the limitations imposed by Sec. 36 are as follows:
upon whom service is made must be one who is named in the
statute; otherwise the service is insufficient. . . . Sec. 36. Xxx
The purpose is to render it reasonably certain that the corporation will 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
receive prompt and proper notice in an action against it or to insure that mortgage and otherwise deal with such real and personal property, including
the summons be served on a representative so integrated with the securities and bonds of other corporations, (1) as the transaction of the
corporation that such person will know what to do with the legal papers lawful business of the corporation may reasonably and necessarily
served on him. In other words, "to bring home to the corporation notice require, (2) subject to the limitations prescribed by law and the
of the filing of the action." . . . . Constitution.
The liberal construction rule cannot be invoked and utilized as a The first limitation practically sets the limit of the corporate authority to
substitute for the plain legal requirements as to the manner in acquire, own, hold or alienate property. As it has been said the purpose
which summons should be served on a domestic corporation. . . clause in the AOI grants as well as limits the powers which a corporation may
. . (emphasis supplied). exercise. Verily, WON the acquisition of such property is within the corporate
powers or authority may reasonably be determined from the purpose or
Accordingly, we rule that the service of summons upon the branch manager purposes indicated in the AOI.
of petitioner at its branch office at Cagayan de Oro, instead of upon the
general manager at its principal office at Davao City is improper. LUNETA MOTOR COMPANY, petitioner, vs. A.D. SANTOS, INC., ET AL.,
Consequently, the trial court did not acquire jurisdiction over the person of respondents (Gr No. 17716; July 31, 1962) – Nicolas Concepcion executed a
the petitioner. chattel mortgage covering a certificate of public convenience grnted to him to
operate taxicab service of 27 units in Manila, in favor of petitioner, to secure
B. POWER OF SUCCESSION a loan evidenced by a promissory note guaranteed by Concepcion and one
Placido Esteban.
This right basically means that the corporation persists to exist despite death,
incapacity, civil interdiction, or withdrawal of the stockholders or members Concepcion mortgaged the same certificate to cover a second loan with
thereof. Rehabilitation Finance.
C. POWER TO ADOPT AND USE A COMMON SEAL Petitioner filed an action to foreclose the mortgage. While it was pending, RF
also foreclosed the second chattel mortgage where the certificate was sold at
This right has be expressly granted by law. However, it is not mandatory but a public auction in favor of AD Santos who applied for the approval of the
merely permissive. This is because the corporate seal performs no further or sale which was granted by the Public Service Commission.
Later on, the CFI rendered a judgment in favor of petitioner, where the It would seem to be unnecessary to extend the opinion by lengthy citations
certificate was sold at a public auction in favor of the petitioner who upon the point under consideration, but Brown vs. Schleier (118 Fed., 981),
immediately filed for approval with the Commission. AD Santos Inc., recipient may be cited as being in harmony with the foregoing authorities. In dealing
of the certificate from AD Santos, opposed the application for approval. with the powers of a national bank the court, in this case, said:
ISSUE: WON Petitioner may acquire the certificate of public convenience? When an occasion arises for an investment in real property for either of
the purposes specified in the statute the national bank act permits
HELD: No. Petitioner claims in this regard that its corporate purposes are to banking associations to act as any prudent person would act in making
carry on a general mercantile and commercial business, etc., and that it is an investment in real estate, and to exercise the same measure of
authorized in its articles of incorporation to operate and otherwise deal in and judgment and discretion. The act ought not to be construed in such a
concerning automobiles and automobile accessories' business in all its way as to compel a national bank, when it acquires real property for a
multifarious ramification (petitioner's brief p. 7) and to operate, etc., and legitimate purpose, to deal with it otherwise than a prudent land owner
otherwise dispose of vessels and boats, etc., and to own and operate would ordinarily deal with such property.
steamship and sailing ships and other floating craft and deal in the same and
engage in the Philippine Islands and elsewhere in the transportation of At any rate the weight of judicial opinion is so overwhelmingly in favor of
persons, merchandise and chattels by water; all this incidental to the sustaining the validity of the acts alleged in the second cause of action to
transportation of automobiles (id. pp. 7-8 and Exhibit B). have been done by the respondent in excess of its powers that we refrain
from commenting at any length upon said cases. The ground stated in the
We find nothing in the legal provision and the provisions of petitioner's second cause of action is in our opinion without merit.
articles of incorporation relied upon that could justify petitioner's contention
in this case. To the contrary, they are precisely the best evidence that it has THE DIRECTOR OF LANDS, petitioner,
no authority at all to engage in the business of land transportation and vs.
operate a taxicab service. That it may operate and otherwise deal in THE HONORABLE COURT OF APPEALS and IGLESIA NI CRISTO,
automobiles and automobile accessories; that it may engage in the respondents
transportation of persons by water does not mean that it may engage in the (GR No. L56613; March 14, 1988)
business of land transportation — an entirely different line of business. If it
could not thus engage in the line of business, it follows that it may not FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite for
acquire an certificate of public convenience to operate a taxicab service, such registration of a parcel of land which it claimed to have acquired by virtue of
as the one in question, because such acquisition would be without purpose a Deed of Absolute Sale from Aquelina de la Cruz, alleging that the applicant
and would have no necessary connection with petitioner's legitimate and its predecessors-in-interest have been in actual, continuous, public,
business. peaceful and adverse possession and occupation of the said land for more
than 30 years, which was opposed by the Government as represented by the
GOVERNMENT VS. EL HOGAR FILIPINO (supra) – the directors of El Director of Lands. The CFI and the CA ruled in favor of INC.
Hogar Filipino erected a modern reinforced concrete office building at the site
of its old building. The acquisition of the lot and the construction of the new ISSUE: WON the corporation may acquire the land in question?
office building thereon is not the subject of the second cause of action for
being ultra vires on the part of the corporation. HELD Yes. As observed at the outset, had this case been resolved
immediately after it was submitted for decision, the result may have been
ISSUE: WON the erection of the building was reasonable? quite adverse to private respondent. For the rule then prevailing under the
case of Manila Electric Company v. Castro-Bartolome et al., 114 SCRA 799,
HELD: Yes. With this contention we are unable to agree. Under the reiterated in Republic v. Villanueva, 114 SCRA 875 as well as the other
Corporation Law, every corporation has the power to purchase, hold and subsequent cases involving private respondent adverted to above', is that a
lease such real property as the transaction of the lawful business of the juridical person, private respondent in particular, is disqualified under the
corporation may reasonably and necessarily require. When this property was 1973 Constitution from applying for registration in its name alienable public
acquired in 1916, the business of El Hogar Filipino had developed to such an land, as such land ceases to be public land "only upon the issuance of title to
extent, and its prospects for the future were such as to justify its directors in any Filipino citizen claiming it under section 48[b]" of Commonwealth Act No.
acquiring a lot in the financial district of the City of Manila and in constructing 141, as amended. These are precisely the cases cited by petitioner in support
thereon a suitable building as the site of its offices; and it cannot be fairly of its theory of disqualification.
said that the area of the lot — 1,413 square meters — was in excess of its
reasonable requirements. The law expressly declares that corporations may Since then, however, this Court had occasion to re-examine the rulings in
acquire such real estate as is reasonably necessary to enable them to carry these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41
out the purposes for which they were created; and we are of the opinion that Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among
the owning of a business lot upon which to construct and maintain its offices others. Thus, in the recent case of Director of Lands v. Intermediate
is reasonably necessary to a building and loan association such as the Appellate Court, 146 SCRA 509, We categorically stated that the majority
respondent was at the time this property was acquired. A different ruling on ruling in Meralco is "no longer deemed to be binding precedent", and that
this point would compel important enterprises to conduct their business "[T]he correct rule, ... is that alienable public land held by a possessor,
exclusively in leased offices — a result which could serve no useful end but personally or through his predecessors-in-interest, openly, continuously and
would retard industrial growth and be inimical to the best interests of society. exclusively for the prescribed statutory period [30 years under the Public
Land Act, as amended] is converted to private property by mere lapse or
We are furthermore of the opinion that, inasmuch as the lot referred to was completion of said period, ipso jure." We further reiterated therein the
lawfully acquired by the respondent, it is entitled to the full beneficial use timehonored principle of non-impairment of vested rights.
thereof. No legitimate principle can discovered which would deny to one
owner the right to enjoy his (or its) property to the same extent that is The crucial factor to be determined therefore is the length of time private
conceded to any other owner; and an intention to discriminate between respondent and its predecessors-in-interest had been in possession of the
owners in this respect is not lightly to be imputed to the Legislature. The land in question prior to the institution of the instant registration proceedings.
point here involved has been the subject of consideration in many decisions The land under consideration was acquired by private respondent from
of American courts under statutes even more restrictive than that which Aquelina de la Cruz in 1947, who, in turn, acquired by same by purchase
prevails in this jurisdiction; and the conclusion has uniformly been that a from the Ramos brothers and sisters, namely: Eusebia, Eulalia, Mercedes,
corporations whose business may properly be conducted in a populous center Santos and Agapito, in 1936. Under section 48[b] of Commonwealth Act No.
may acquire an appropriate lot and construct thereon an edifice with facilities 141, as amended, "those who by themselves or through their predecessors-
in excess of its own immediate requirements in-interest have been in open, continuous, exclusive and notorious possession

and occupation of agricultural lands of the public domain, under a bona fide ISSUE: WON the subject resolution is within the powers of the company to
claim of acquisition or ownership, for at least thirty years immediately adopt?
preceding the filing of the application for confirmation of title except when
prevented by war or force majeure" may apply to the Court of First Instance HELD: Yes. The opening of the post office branch was undertaken because
of the province where the land is located for confirmation of their claims, and of a request submitted by respondent company to promote the convenience
the issuance of a certificate of title therefor, under the Land Registration Act. and benefit of its employees. The idea did not come from the government
Said paragraph [b] further provides that "these shall be conclusively and the Director of Posts was prevailed upon to agree to the request only
presumed to have performed all the conditions essential to a Government after studying the necessity for its establishment and after imposing upon the
grant and shall be entitled to a certificate of title under the provisions of this company certain requirements intended to safeguard and protect the interest
chapter." Taking the year 1936 as the reckoning point, there being no of the government. Accordingly, the company cannot now be heard to
showing as to when the Ramoses first took possession and occupation of the complain of its liability upon the technical plea that the resolution is ultra
land in question, the 30-year period of open, continuous, exclusive and vires. The least that can be said is that it cannot now go back on its plighted
notorious possession and occupation required by law was completed in 1966. word on the ground of estoppel.
The completion by private respondent of this statutory 30-year period has The resolution covers a subject which concerns the benefit, convenience and
dual significance in the light of Section 48[b] of Commonwealth Act No. 141, welfare of the company’s employees and their families. There are certain
as amended and prevailing jurisprudence: [1] at this point, the land in corporate acts that may be performed outside of the scope of the powers
question ceased by operation of law to be part of the public domain; and [2] expressly conferred if they are necessary to promote the interest or welfare
private respondent could have its title thereto confirmed through the of the corporation. Thus, it has been held that ―although not expressly
appropriate proceedings as under the Constitution then in force, private authorized to do so a corporation may become a surety where the particular
corporations or associations were not prohibited from acquiring public lands, transaction is reasonably necessary or proper to the conduct of its business‖,
but merely prohibited from acquiring, holding or leasing such type of land in and here it is undisputed that the establishment of the local post office is a
excess of 1,024 hectares. vital improvement in the living condition of its employees and laborers who
came to settle in it mining camp which is far removed from the postal
If in 1966, the land in question was converted ipso jure into private land, it facilities or means of communication accorded to people living in a city or
remained so in 1974 when the registration proceedings were commenced. municipality.
This being the case, the prohibition under the 1973 Constitution would have
no application. Otherwise construed, if in 1966, private respondent could IMPLIED POWERS
have its title to the land confirmed, then it had acquired a vested right
thereto, which the 1973 Constitution can neither impair nor defeat. Sec. 36. Xxx
H. POWER TO ENTER INTO MERGER OR CONSOLIDATION 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
This is an express power granted by the law under the Code, particularly Title
IX thereof. It is a question, in each case, of the logical relation of the act to the
corporate purpose expressed in the charter. For if the act is one
I. POWER TO MAKE REASONABLE DONATIONS which is lawful in itself and not otherwise prohibited, and is done
for the purpose of serving corporate ends, and reasonably
Ordinarily, a pure gift of funds or property by a corporation not created for contributes to the promotion of those ends in a substantial and not
charitable purpose is not authorized and would constitute a violation of the in a remote and fanciful sense, it may be fairly considered within
rights of its stockholders unless it is empowered by statute. There are the corporation‘s charter powers (Montelibano vs. Bacolod-Murcia Milling
circumstances, however, under which a donation by a corporation may be to Co., Inc. as cited in NPC vs. VERA)
it benefit as a means of increasing its business or promoting patronage.
I. POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR
Thus, Sec. 36 (9) expressly authorizes a corporation to make donations, NECESSARY TO CARRY OUT ITS PURPOSES
subject to the following limitations:
1. The donation must be reasonable; TERESA ELECTRIC AND POWER CO., INC. VS. P.S.C (21 SCRA 198;
2. It must be for public welfare, or for hospital, charitable, scientific, Sept. 25, 1967) – Respondent Filipinas Cement Corporation filed an
cultural or similar purpose; and application with herein respondent PSC for a certificate of public convenience
3. It shall not be in aid of political party or candidate, or for purposes of to install, maintain and operate an electric plant in Teresa, Rizal for the
partisan political aactivity. purpose of supplying electric power and light to its cement factory and its
employees living within its compound. Herein petitioner, operating an electric
J. POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER plant in Teresa Rizal filed an opposition claiming that Filipinas is not
PLANS authorized to operate the proposed electric plant under its articles of
incorporation. PSC decided in favor of Filipinas.
It is now generally recognized in almost all jurisdiction to empower a
corporation to establish pension plans, pension trust, profit sharing plans, ISSUE: WON under its articles of incorporation, Filipinas is authorized to
stock bonus or stock option plans and other incentive plans to directors, operate and maintain an electric plant?
officers and employees. In fact, the power may include any act to promote
convenience, welfare and benefit of the employees or officers. HELD: Yes. Paragraph 7 of the AOI of Filipinas provides for authority to
secure from any governmental, state, municipality, or provincial, city or other
REPUBLIC VS. ACOJE MINING COMPANY INC. (7 SCRA 361; Feb. 28, authority, and to utilize and dispose of in any lawful manner, rights, powers,
1963) - A post office branch was opened in herein respondent’s mining camp privileges, franchises and concessions – obviously necessary or at least
at Sta. Cruz Zambales, at its request, where Hilario M. Sanchez, an employee related to the operation of its cement factory. Moreover, said AOI also
of such company, was the postmaster. Prior to the opening the company, at provide that the corporation may generally perform any and all acts
the request of the Bureau of Posts, adopted a resolution that the former connected with the business of manufacturing portland cement or arising
would assume full responsibility for all cash received by the postmaster. On therefrom or incidental thereto.
May 11, 1954, the postmaster went on a three day leave but never returned.
As a result, an action was brought by the government to recover P13,867.24, It cannot be denied that the operation of an electric light, heat and power
the amount of shortage in the accounts of the postmaster, from the plant is necessarily connected with the business of manufacturing cement. If
company. in the modern world where we live today electricity is virtually a necessity for
our daily needs, it is more so in the case of industries like the manufacture of
cement.
J. POWER TO EXTEND OR SHORTEN CORPORATE TERM
NPC VS. VERA (170 SCRA 721; Feb. 27, 1989)
This has been discussed in Chapter 5: CORPORATE CHARTER AND ITS
FACTS: Private Respondent Sea Lion International Port Terminal Services AMENDMENTS.
Inc. filed a complaint for prohibition and mandamus with damages against
petitioner NPC and Philippine Ports Authority after NPC did not renew its Sec. 37. Power to extend or shorten corporate term. - A private
Contract for Stevedoring Services for coal-handling of NPC’s plant and in corporation may extend or shorten its term as stated in the articles of
taking over its stevedoring services. 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
ISSUE: WON NPC may embark in stevedoring and arrastre services? 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
HELD: Yes. The NPC was created and empowered not only to construct, proposed action and of the time and place of the meeting shall be addressed
operate and maintain power plants, reservois, transmission lines and other to each stockholder or member at his place of residence as shown on the
works, but also: books of the corporation and deposited to the addressee in the post office
with postage prepaid, or served personally: Provided, That in case of
…to exercise such powers and do such things as may be reasonably extension of corporate term, any dissenting stockholder may exercise his
necessary to carry out the business and purposes for which it was organized, appraisal right under the conditions provided in this code.
or which, from time to time, may be declared by the Board to be necessary,
useful, incidental or auxiliary to accomplish said purpose… (Sec. 3[1] of RA From the above-provision and jurisprudence, the requirements and procedure
6395, as amended) for extending or shortening the corporate term are as follows:
1. Approval by the majority vote of the BOD/T;
To determine whether or not the NPC act falls within the purview of the 2. Ratification by the stockholders representing at least 2/3 of the
above provision, the Court must decide whether or not a logical and outstanding capital stock (including non-voting shares) or 2/3 of the
necessary relation exists between the act questioned and the members in case of non-stock corporations;
corporate purpose expressed in the NPC charter. For if the act is one 3. The ratification must be made at a meeting duly called for that purpose;
which is lawful in itself and not otherwise prohibited, and is done 4. Prior written notice of the proposal to extend or shorten the corporate
for the purpose of serving corporate ends, and reasonably term must be made stating the time and place of meeting addressed to
contributes to the promotion of those ends in a substantial and not each stockholder or member at his place of residence, either by mail or
in a remote and fanciful sense, it may be fairly considered within personal service;
the corporation‘s charter powers (Montelibano vs. Bacolod-Murcia Milling 5. In case of extension, the same cannot be made earlier than 5 years
Co., Inc.) prior to the original or subsequent expiry date unless there are
justifiable reasons for an earlier extension;
In the instant case, it is an undisputed fact that the pier owned by NPC, 6. In case of extension, the same must be made during the lifetime of the
receives various shipment of coal which is used exclusively to fuel the corporation;
Batangas Coal-Fired Thermal Power Plant of the NPC for the generation of 7. Any dissenting stockholder may exercise his appraisal right;
electric power. The stevedoring services which involve the unloading of the 8. Submission of the amended articles with the SEC; and
coal shipments into the NPC pier for its eventual conveyance to the power 9. Approval thereof by the SEC (as required under Sec. 37 for extension,
plant are incidental and indispensable to the operation of the plant. The and Sec. 120 for shortening the term with the effect of dissolution)
Court holds that NPC is empowered under its Charter to undertake such
services, it being reasonably necessary to the operation and maintenance of READ: Alhambra Cigar and Cigarette Manufacturing, Inc. vs. SEC
the power plant.
K. POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR,
POWERS VS. MARSHALL (161 SCRA 176; May 9, 1988) CREATE OR INCREASE BONDED INDEBTEDNESS
FACTS: 14 plaintiffs, all associate members of the International School, Inc. Sec. 38. Power to increase or decrease capital stock; incur, create or
brought an action for injunction against 10 members of the Board of increase bonded indebtedness. - No corporation shall increase or
Trustees, after a letter of Donal Marshall, president of the board, was sent decrease its capital stock or incur, create or increase any bonded
stating that the school would be collecting a ―development fee‖ of P2,625 per indebtedness unless approved by a majority vote of the board of directors
enrollee for the purpose of constructing new buildings and remodel existing and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3)
ones to accommodate the increasing enrollment in the school which would of the outstanding capital stock shall favor the increase or diminution of the
need P35M. The CFI of Manila dismissed the complaint. capital stock, or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or diminution of the
ISSUE: WON the imposition of the development fee is within the powers of capital stock or of the incurring, creating, or increasing of any bonded
the school? 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
HELD: Yes. Section 2(b) of PD No. 732 granting certain rights to the sch0ol, increasing of any bonded indebtedness is to be considered, must be
expressly authorized the Board of Trustees ―upon consultation with the addressed to each stockholder at his place of residence as shown on the
Secretary of Education and Culture‖ to determine the amount of fees and books of the corporation and deposited to the addressee in the post office
assessments which may be reasonably imposed upon its students, to with postage prepaid, or served personally.
maintain or conform to the school’s standard of education. Such consultation
complied with and the Secretary expressed his conformity with the A certificate in duplicate must be signed by a majority of the directors of the
reasonableness of the assessment. The lower court observed that: corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
Xxx the expansion of the school facilities, which is to be done by improving
old buildings and/or constructing new ones, is an ordinary business (1) That the requirements of this section have been complied with;
transaction well within the competence of the Board of Trustees to act upon. (2) The amount of the increase or diminution of the capital stock;
Xxx Being directly related to the purpose of elevating and maintaining the (3) If an increase of the capital stock, the amount of capital stock or number
school’s standard of instruction, which is ordained in fact by PD 732, the of shares of no-par stock thereof actually subscribed, the names, nationalities
expansion cannot result in any radical or fundamental change in the kind of and residences of the persons subscribing, the amount of capital stock or
activity being conducted by the school that might require the consent of the number of no-par stock subscribed by each, and the amount paid by each on
members composing it. 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 2. Payment of Debt Obligations;
the purpose of making effective stock dividend therefor authorized; 3. To acquire additional assets such as providing cars to employees to
(4) Any bonded indebtedness to be incurred, created or increased; distribute the goods;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and *Nothing in law prohibits increase of capital stock
(7) The vote authorizing the increase or diminution of the capital stock, or
the incurring, creating or increasing of any bonded indebtedness. REASONS FOR DECREASE:
1. To reduce or wipe out existing deficit where no creditors would thereby
Any increase or decrease in the capital stock or the incurring, by affected;
creating or increasing of any bonded indebtedness shall require 2. When the capital is more than what is necessary to procreate the
prior approval of the Securities and Exchange Commission. business or reduction of capital surplus;
3. To write down the value of its fixed assets to reflect their present actual
One of the duplicate certificates shall be kept on file in the office of the value in case where there is a decline in the value of the fixed assets of
corporation and the other shall be filed with the Securities and Exchange the corporation.
Commission and attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission and the issuance TRUST FUND DOCTRINE: The subscriptions to capital stock of the
by the Commission of its certificate of filing, the capital stock shall stand corporation constitute a fund which the creditors have a right to look up for
increased or decreased and the incurring, creating or increasing of any the satisfaction of their claims. Accordingly, if the decrease would affect the
bonded indebtedness authorized, as the certificate of filing may declare: rights of creditors, the same would not be approved by the SEC.
Provided, That the Securities and Exchange Commission shall not accept for
filing any certificate of increase of capital stock unless accompanied by the PHILIPPINE TRUST COMPANY VS. RIVERA (44 Phil. 469; Jan. 29, 1923)
sworn statement of the treasurer of the corporation lawfully holding office at - Shortly after its incorporation, the stockholders of Cooperativa Naval
the time of the filing of the certificate, showing that at least twenty-five Filipina, adopted a resolution to the effect that the capital should be reduced
(25%) percent of such increased capital stock has been subscribed and that by 50% and the subscribers be released from the obligation to pay their
at least twenty-five (25%) percent of the amount subscribed has been paid unpaid balance.
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%) In the course of time, the company became insolvent and went into the
percent of the subscription: Provided, further, That no decrease of the capital hands of Philippine Trust Company (Philtrust), as assignee in bankruptcy, and
stock shall be approved by the Commission if its effect shall prejudice the by it this action was instituted to recover ½ of the stock subscription of
rights of corporate creditors. herein defendant who subscribed to 450 of the 1,000 authorized capital
stock.
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 It does not appear that the formalities under the Corporation Code for the
of at least two-thirds (2/3) of the members in a meeting duly called for the reduction of capital stock were observed and in particular it does not appear
purpose. that any certificate was at any time filed in the Bureau of Commerce and
Industry, showing such reduction.
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the Respondent judge ruled in favor of Philtrust and directed respondent to pay
sufficiency of the terms thereof. ½ of the subscription price of his shares.
The following requirements or procedure should be complied with: ISSUE: WON the reduction is valid and proper?
1. Approval by the majority vote of the BOD/T;
2. Ratification by the stockholders representing at least 2/3 of the HELD: No. A corporation has no power to release an original subscriber to its
outstanding capital stock (including non-voting shares) or 2/3 of the capital stock from the obligation of paying for his shares, without a valuable
members in case of non-stock corporations at a meeting duly called for consideration for such release; and as against creditors a reduction of the
that purpose; capital stock can take place only in the manner and under the conditions
3. Prior written notice of the proposal to extend or shorten the corporate prescribed by the statute or the charter or the AOI. Moreover, strict
term must be made stating the time and place of meeting addressed to compliance with the statutory regulations is necessary. In the case before us,
each stockholder or member at his place of residence, either by mail or the resolution releasing the shareholders from their obligation to pay 50% of
personal service; their respective subscriptions was an attempted withdrawals of so much
4. A certificaate in duplicate must be signed by a majority of the directors capital from the fund upon which the company’s creditors were entitled
of the corporation, countersigned by the chairman and the secretary of ultimately to rely and, having been effected without compliance with the
the stockholders meeting, setting forth the matters contained in statutory requirements, was wholly ineffectual.
subsection 1 to 7 of Sec. 38;
5. In case of increase in capital stock, 25% of such increased capital must MADRIGAL & COMPANY VS. ZAMORA (151 SCRA 355; June 30, 1987) -
be subscribed and that at least 25% of the amount subscribed must be The Madrigal Central Office Employees Union sought for the renewal of its
paid either in cash or property; CBA, proposing a P200 wage increase and an allowance of P100 a month.
6. In case of decrease of capital stock, the same must not prejudice the Petitioner company requested for the deferment of its negotiation.
right of the creditors;
7. Filing of the certificate of increase and amended AOI with the SEC; and Meanwhile, the company effected two reductions of its capital stock by
8. Approval thereof by the SEC. issuing marketable securities owned by petitioner in exchange for
shareholders’ shares.
METHODS OF INCREASING CAPITAL STOCK:
1. Increase the par value of the existing number of shares without After the petitioner’s failure to sit down with the respondent union, the latter
increasing the number of shares; commenced a case with the NLRC for unfair labor practice. In due time,
2. Increase the number of existing shares without increasing the par value petitioner filed its position paper, alleging operating losses.
thereof;
3. Increasing the number of shares and at the same time increasing the The Labor Arbiter rendered a decision in favor of respondent Union.
par value of the shares
ISSUE: WON the decrease in capital stock is valid and binding?
REASONS/PURPOSE FOR THE INCREASE:
1. Expansion; HELD: No. What clearly emerges from the recorded facts is that the

petitioner, awash with profits from its business operations but confronted original unsubscribed shares, but can exercise such right with regards the
with the demand of the union for wage increase, decided to evade its increase capitalization.
responsibility towards the employees by a devised capital reduction. While
the reduction in capital stock created an apparent need for retrenchment, it ISSUE: WON the above ruling is correct?
was, by all indications, just a mask for the purge of union members, who, by
then, had agitated for wage increases. In the face of the petitioner HELD: Yes. The issuance of the unsubscribed portion of the capital stock or
company’s piling profits, the unionists had the right to demand for such P110,980 is valid even if assuming that it was made without notice to the
salary adjustments. stockholders as claimed by petitioner. The power to issue shares of stocks in
a corporation is lodged in the bard of directors and no stockholders’ meeting
That the petitioner made quite handsome profits is clear from the records. is necessary to consider it because such issuance does not need approval of
stockholders.
This court is convinced that the petitioner’s capital reduction efforts were, to
begin with, a subterfuge, a deception as it were, to camouflage the fact that The general rule is that pre-emptive right is recognized only with respect to
it had been making profits, and consequently, to justify the mass layoff in it new issue of shares, and not with respect to additional issues of originally
employee ranks, especially the union members. They were nothing but a authorized shares. This is on theory that when a corporation, at its inception
premature and plain distribution of corporate assets to obviate a just sharing offers its first shares, it is presumed to have offered all of those which it is
to labor of the vast profits obtained by its joint efforts with capital through authorized to issue. An original subscriber is deemed to have taken his shares
the years. Surely, we can neither countenance nor condone this. It is an knowing that they form a definite proportionate part of the whole number of
unfair labor practice. authorized shares. When the shares left unsubscribed are reoffered, he
cannot therefore claim a dilution of interest.
L. POWER TO DENY PRE-EMPTIVE RIGHT
With respect to the claim that the increase in the authorized capital stock was
PRE-EMPTIVE RIGHT is a right granted by law to all existing stockholders without consent, expressed or implied, of the stockholder, it was the finding
of a stock corporation to subscribe to all issues or disposition of shares of any of the Commission that a meeting was called for the purpose. The petitioner
class, in proportion to their respective holdings, subject only to the limitation had not sufficiently overcome the evidence of respondent that such meeting
imposed under Sec. 39, which provides: was in fact held. What petitioner successfully proved, however, was the fact
that he was not notified of said meeting and that he never attended the
Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock same as he was out of the country at the time, attending the Mecca
corporation shall enjoy pre-emptive right to subscribe to all issues or pilgrimage. Another thing that petitioner was able to disprove was the
disposition of shares of any class, in proportion to their respective allegation that all stockholders who did not subscribe to the increase have
shareholdings, unless such right is denied by the articles of incorporation or waived their pre-emptive right. As far as petitioner is concerned, he had not
an amendment thereto: Provided, That such pre-emptive right shall not waived his pre-emptive right to subscribe as he could not have done so for
extend to shares to be issued in compliance with laws requiring stock the reason that he was not present at the meeting and had not executed a
offerings or minimum stock ownership by the public; or to shares to be waiver, thereof. Not having waived such right and for reasons of equity, he
issued in good faith with the approval of the stockholders representing two- may still be allowed to subscribe to the increased capital stock proportionate
thirds (2/3) of the outstanding capital stock, in exchange for property needed to his present shareholdings.
for corporate purposes or in payment of a previously contracted debt.
M. POWER TO SELL OR DISPOSE OF ASSETS
BASIS OF RIGHT: The grant of this right is for the preservation, unimpaired
and undiluted, of the old stockholders’ relative and proportionate voting Sec. 40. Sale or other disposition of assets. - Subject to the provisions
strength and control, that is, the existing ratio of their property interest and of existing laws on illegal combinations and monopolies, a corporation may,
voting power in the corporation. 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
EXCEPTIONS (Under Sec. 39): property and assets, including its goodwill, upon such terms and conditions
1. When shares to be issued is in compliance with laws requiring stock and for such consideration, which may be money, stocks, bonds or other
offerings or minimum stock ownership by the public; or instruments for the payment of money or other property or consideration, as
2. Shares to be issued in good faith with the approval of the stockholders its board of directors or trustees may deem expedient, when authorized by
representing 2/3 of the outstanding capital stock either: the vote of the stockholders representing at least two-thirds (2/3) of the
a. In exchange for property needed for corporate purpose; or outstanding capital stock, or in case of non-stock corporation, by the vote of
b. In payment of a previously contracted debt. 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
The exceptions will not apply to stockholders of close corporation whose pre- and of the time and place of the meeting shall be addressed to each
emptive right, is broader if not absolute. See Sec. 102. 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
The right may likewise be lost by waiver, express or implied or inability or postage prepaid, or served personally: Provided, That any dissenting
failure to exercise it having been notified of the proposed disposition of stockholder may exercise his appraisal right under the conditions provided in
shares. this Code.
BENITO VS. SEC (123 SCRA 722; July 25, 1983) -Respondent Jamiatul A sale or other disposition shall be deemed to cover substantially all
Philippines – Al Islamia, Inc. was incorporated with P2,000,000 authorized the corporate property and assets if thereby the corporation would
capital stock divided into 20,000 shares, of which 460 belong to herein be rendered incapable of continuing the business or accomplishing
petitioner. In a stockholders meeting, an increase of the authorized capital the purpose for which it was incorporated.
stock to P1,000,000 was approved, where the previously unissued shares
were all issued. After such authorization or approval by the stockholders or members, the
board of directors or trustees may, nevertheless, in its discretion, abandon
Petitioner Datu Tagoranao Benito filed a petition with herein respondent SEC such sale, lease, exchange, mortgage, pledge or other disposition of property
alleging that the additional issue of previously unissued shares was made in and assets, subject to the rights of third parties under any contract relating
violation of his pre-emptive right and that the increase of capital stock was thereto, without further action or approval by the stockholders or members.
illegal considering that the stockholders on record were not notified, and that
such issuance be cancelled. Nothing in this section is intended to restrict the power of any corporation,
without the authorization by the stockholders or members, to sell, lease,
SEC Ruling: Benito is not entitled to pre-emptive right with respect to the exchange, mortgage, pledge or otherwise dispose of any of its property and
assets if the same is (1) necessary in the usual and regular course of members of the IDP as they were made to appear to be.
business of said corporation or (2) if the proceeds of the sale or
other disposition of such property and assets be appropriated for EDWARD J. NELL CO. VS. PACIFIC FARMS, INC. (15 SCRA 415; Nov. 29,
the conduct of its remaining business. 1965) - The appellant secured in a civil case against Insular Famrs, Inc. a
judgment for the balance of the price of a pump sold by the former to the
In non-stock corporations where there are no members with voting rights, latter. A writ of execution was issued but was returned unsatisfied, saying
the vote of at least a majority of the trustees in office will be sufficient that Insular Farms had no leviable property. Soon after appelant filed with
authorization for the corporation to enter into any transaction authorized by the same Municipal Court the present action against Pacific Farms claiming it
this section. to be an alter ego of Insular Farms, which the court denied. On appeal, the
CFI and CA also denied the petition.
The conditions for the valid exercise of this power are thus as follows:
1. Resolution by a majority of the BOD/T; ISSUE: WON Pacific Farms should answer for the liability of Insular Farms?
2. Authorization from the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members; HELD: No. It appears on record that the appellee purchase 1,000 shares of
3. The ratification of the stockholders or member must be made at a stock of Insular Farms, and thereupon sold said shares of stock to certain
meeting duly called for that purpose; individuals, who forthwith reorganized said corporation and that the board of
4. Prior written notice of the proposed action and of the time and place of directors thereof, as reorganized, then caused its assets, including its
meeting must be made addressed to all stockholders of record, either by leasehold right over a public land in Pangasinan to be sold to herein appellee.
mail or personal service; These facts do not prove that the appellee is an alter ego of Insular Farms, or
5. The sale of the assets shall be subject to the provisions of existing laws is liable for its debts.
on illegal combinations and monopolies; and
6. Any dissenting stockholder shall have the option to exercise his appraisal Generally where on corporation sells or otherwise transfers all o its assets to
right. 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
The above requirements will not apply: assumes such debts; (2) where the transaction amounts to a consolidation or
1. In case the sale is NOT covering all or substantially all of the assets of a merger of the corporations; (3) where the purchasing corporation is merely a
corporation as to render it incapable of continuing the business continuation of the selling corporation; and (4) where the transaction is
or accomplishing the purpose for which it was incorporated; or entered into fraudulently in order to escape liability for such debts.
if the proceeds are to be used to continue the conduct of the remaining
business of the company; In the case at bar, there is neither proof nor allegation of the foregoing
2. If the sale is in the usual and regular course of business of the exceptions. In fact, these sales took place not only over 6 months before the
company. rendition of the judgment sought to be collected in the present action, but
also, appellee purchase the shares of stock of Insular Farms as the highest
ISLAMIC DIRECTORATE OF THE PHILIPPINES VS. CA (272 SCRA 454; bidder at an auction sale held at the instance of a bank to which said shares
May 4, 1997) – The Islamic Directorate of the Philippines received two had been pledged as security for the obligation of Insular Farms in favor of
parcels of land from the Libyan government for the purpose of putting up a said bank.
Mosque, Madrasah (arabic school) and other religious infrastructures. In
1972, Martial Law was declared, most of the members of the Board of N. POWER TO ACQUIRE OWN SHARES
Trustees, together with petitioner Sen. Mamintal Tamano, fled to the middle-
east to escape political prosecution. Sec. 41. Power to acquire own shares. - A stock corporation shall have
the power to purchase or acquire its own shares for a legitimate corporate
Thereafter, two Muslim groups sprung claiming to be the legitimate IDP. One purpose or purposes, including but not limited to the following cases:
headed by Engr. Farouk Caprizo, not having been properly elected as new Provided, That the corporation has unrestricted retained earnings in its books
members of the Board of Trustees caused to be sold, through a resolution of to cover the shares to be purchased or acquired:
IDP, the two lots to respondent Iglesia Ni Cristo.
1. To eliminate fractional shares arising out of stock dividends;
The 1971 Board of Trustees now filed a petition to declare the sale null and 2. To collect or compromise an indebtedness to the corporation, arising out
void. of unpaid subscription, in a delinquency sale, and to purchase delinquent
shares sold during said sale; and
ISSUE: WON the sale is valid? 3. To pay dissenting or withdrawing stockholders entitled to payment for
their shares under the provisions of this Code.
HELD: No. The Caprizo Group is a fake board of trustees. IDP never gave its
consent through a legitimate Board of Trustees. Therefore, this is not a case The limitation that the corporation must at all times have ―unrestricted
of vitiated consent, but one where consent on the part of one of the retained earnings‖ is a condition for the exercise of this power, EXCEPT:
contracting parties is totally wanting. Ineluctably, the subject sale is void and 1. Redemption of redeemable shares under Sec. 8;
produces no effect whatsoever. 2. Exercise of stockholders right to compel a close corporation to purchase
his shares for any reason under Sec. 105 when the corporation has
The Caprizo group-INC sale is further deemed null and void ab initio because sufficient assets in its book to cover its debts and liabilities exclusive of
of the Caprizo Group’s failure to comply with Sec. 40 of the Corporation Code capital stock;
pertaining to the disposition of all or substantially all assets of the 3. In case of deadlocks under Sec. 104.
corporation.
Once purchased, the shares are considered as treasury shares and while they
The Tandang Sora property, it appears from the records, constitutes the only remain so, they have no voting rights and dividend rights. The corporation
property of the IDP. Hence, its sale to a third-party is a sale or disposition of may (1) re-issue them even below par; (2) issue them as stock dividends; (3)
all the corporate property and assets of IDP falling squarely within the retire or cancel them and thereby remove from issue effectively reducing the
contemplation of Sec. 40. For the sale to be valid, the majority vote of the number of shares issued stated in the AOI.
legitimate Board of Trustees, concurred in by vote of at least 2/3 of the bona
fide members of the corporation should have been obtained. These twin STEINBERG VS. VELASCO (52 Phil 953; March 12, 1929) - the Board of
requirements were not met as the Caprizo Groups which voted to sell the Directors of Trading Company approved and authorized the purchases of the
property was a fake Board and those whose names and signatures were capital stock of the company from its various stockholder, herein
affixed by the Caprizo Group together with the sham Board Resolution respondents, at par value amounting to P3,300. Petitioner assails the
authorizing negotiation for the sale were, from all indications, not bona fide recovery of the amount paid to such stockholders and the P3,000 dividends
declared which were claimed to be made to the injury and in fraud of its
creditors. The complaint was dismissed. RATIFICATION: as a requirement, applies only to investments that are
beyond the corporation’s primary purpose, or outside the express or implied
ISSUE: WON recovery can be made? powers of the investing corporation. Thus, if the investment is reasonably
necessary to accomplish its primary purpose, the approval of the stockholders
HELD: Yes. The Board of Directors acted on the assumption that it had or members is not required.
accounts receivable of the face value of P19,126.02 but there was no
stipulation as to the value of such accounts and P12,512.47 of which had but DELA RAMA VS. MA-AO SUGAR CENTRAL CO., INC. (27 SCRA 247; Feb.
little, if any value. The purchase of the stocks and the dividend declaration 28, 1969) - Defendant Ma-ao Sugar Central Co, Inc., engaged in the
further decreased the assets of the corporation. The profits amounted only to manufacture of sugar, invested P655,000 in shares of stock of Philippine
P3,314.72. In other words, that the corporation did not then have actual Fiber Processing Co., Inc., which is engaged in the manufacture of sugar
bona fide surplus from which the dividends could be paid, and that the bags. The sale, though not previously authorized, was ratified by the 2/3 vote
payment of them in full at the time would ―affect the financial condition of of the stockholders. Claiming the business of defendant is not related to that
the corporation‖. of Philippine Fiber, such sale was attacked but the trial court decided on its
legality.
It is indeed peculiar that the action of the board in the assailed acts was all
done at the same meeting of the board of directors, and it appears that the ISSUE: WON the investment by Ma-ao Sugar constitutes a violation of Sec.
stockholders, whose shares were purchased, were former directors and 17-1/2 of the Corporation Law?
resigned before the board approved the purchase and declaration of
dividends. In other words, the directors were permitted to resign so that they HELD: Yes. In his work entitled ―The Philippine Corporation Law‖, Professor
could sell their stock to the corporation. In this situation and upon this state Sulpicio S. Guevarra of the UP College of Law, reconciled par. (9) and (10) of
of facts, it is very apparent that the directors did not act in good faith or that Sec. 13, as follows:
they were grossly ignorant of their duties.
―j. Power to acquire or dispose of shares or securities. – A private
Creditors of a corporation have the right to assume that so long as there are corporation, in order to accomplish it purpose as stated in its articles of
outstanding debts and liabilities, the board of directors will not use the assets incorporation, and imposed by the Corporation Law, has the power to
of the corporation to purchase its own stock, and that it will not declare acquire, hold, mortgage, pledge or dispose of shares, bonds, securities,
dividends to stockholders when the corporation is insolvent. and other evidences of indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of the corporate
The amount involved in this case is not large, but the legal principles are purpose, does not need the approval of the stockholders; but
important and we have given them consideration which they deserve. when the purchase of shares of another corporation is done solely
for investment and not to accomplish the purpose of its
O. POWER TO INVEST FUNDS incorporation, the vote of approval of the stockholders is
necessary‖
Sec. 42. Power to invest corporate funds in another corporation or
business or for any other purpose. - Subject to the provisions of this ―40. Power to invest corporate funds. – A private corporation has the
Code, a private corporation may invest its funds in any other corporation or power to invest its corporate funds in any other corporation or business, or
business or for any purpose other than the primary purpose for which it was for any other purpose other than the main purpose for which it was
organized when approved by a majority of the board of directors or trustees organized, provided that its board of directors has been authorized in a
and ratified by the stockholders representing at least two-thirds (2/3) of the resolution by the affirmative vote of stockholders holding shares in the
outstanding capital stock, or by at least two thirds (2/3) of the members in corporation entitling them to exercise at least two-thirds of the voting
the case of non-stock corporations, at a stockholder's or member's meeting power on such a proposal at a stockholders’ meeting called for that
duly called for the purpose. Written notice of the proposed investment and purpose. When the investment is necessary to accomplish its purpose or
the time and place of the meeting shall be addressed to each stockholder or purposes as stated in its articles of incorporation, the approval of the
member at his place of residence as shown on the books of the corporation stockholders is not necessary‖
and deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting stockholder shall have We agree with Professor Guevarra. We therefore agree with the finding of
appraisal right as provided in this Code: Provided, however, That where the the lower court that the investment in question does not fall under the
investment by the corporation is reasonably necessary to accomplish its purview of Sec. 17 ½ fo the Corporation Law.
primary purpose as stated in the articles of incorporation, the approval of the
stockholders or members shall not be necessary. JOHN GOKONGWEI, JR., petitioner,
vs.
―MAY INVEST FUNDS‖ has been held by the SEC to mean an investment in SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO,
the form of money, stock, bonds and other liquid assets and does not include JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO,
real properties or other fixed assets, otherwise the law would have phrased WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL
Sec. 42 to include ―assets‖ rather than ―to invest funds‖. CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA,
respondents.
SECONDARY PURPOSE: the law uses the phrase ―for any purpose other (GR No. L-45911; April 11, 1979)
than the primary purpose‖ signifying that even if the business or undertaking
is allowed or authorized in the secondary purpose or purposes of the FACTS: Petitioner John Gokongwei alleged that the respondent corporation
corporation, the provision of Sec. 42 would apply. has been investing corporate funds in other corporations or business outside
of its primary purpose in violation of Sec. 17 ½ of the Corporation Law.
REQUIREMENTS FOR A VALID INVESTMENT OF CORPORATE FUNDS:
1. Resolution by a majority of the BOD/T; Respondents sent notices of the annual stockholders’ meeting including in the
2. Ratification by the stockholders representing 2/3 of the outstanding agenda thereof the re-affirmation of the authorization of the BOD by the
capital stock (or 2/3 of members); stockholders at the meeting to invest corporate funds in other companies or
3. The ratification must be made at a meeting duly called for that purpose; businesses or for purposes other than the main purpose. An injunction was
4. Prior written notice of the proposed investment and the time and place prayed for by petitioner, but the date of hearing originally set was cancelled.
of the meeting shall be made, addressed to each stockholder or member No action was taken up to the date of the filing of the instant petition.
by mail or by personal service; and
5. Any dissenting stockholder shall have the option to exercise his appraisal ISSUE: WON respondent SEC committed grave abuse of discretion in
right. allowing the above agenda to be taken up in the stockholders’ meeting?

dividends due on delinquent stock shall first be applied to the unpaid balance
HELD: No. Section 17-1/2 of the Corporation Law allows a corporation to on the subscription plus costs and expenses, while stock dividends shall be
"invest its funds in any other corporation or business or for any purpose withheld from the delinquent stockholder until his unpaid subscription is fully
other than the main purpose for which it was organized" provided that its paid: Provided, further, That no stock dividend shall be issued without the
Board of Directors has been so authorized by the affirmative vote of approval of stockholders representing not less than two-thirds (2/3) of the
stockholders holding shares entitling them to exercise at least two-thirds of outstanding capital stock at a regular or special meeting duly called for the
the voting power. If the investment is made in pursuance of the purpose. (16a)
corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done solely Stock corporations are prohibited from retaining surplus profits in excess of
for investment and not to accomplish the purpose of its one hundred (100%) percent of their paid-in capital stock, except: (1) when
incorporation that the vote of approval of the stockholders holding justified by definite corporate expansion projects or programs approved by
shares entitling them to exercise at least two-thirds of the voting the board of directors; or (2) when the corporation is prohibited under any
power is necessary. loan agreement with any financial institution or creditor, whether local or
foreign, from declaring dividends without its/his consent, and such consent
As stated by respondent corporation, the purchase of beer manufacturing has not yet been secured; or (3) when it can be clearly shown that such
facilities by SMC was an investment in the same business stated as its main retention is necessary under special circumstances obtaining in the
purpose in its Articles of Incorporation, which is to manufacture and market corporation, such as when there is need for special reserve for probable
beer. It appears that the original investment was made in 1947-1948, when contingencies.
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong
(Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of UNRESTRICTED RETAINED EARNINGS: the undistributed earnings of the
San Miguel beer thereat. Restructuring of the investment was made in 1970- corporation which have not been allocated for any managerial, contractual or
1971 thru the organization of SMI in Bermuda as a tax free reorganization. legal purposes and which are free for distribution to the stockholders as
dividends.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central
Co., Inc., supra, appears relevant. In said case, one of the issues was the TYPES OF DIVIDENDS:
legality of an investment made by Manao Sugar Central Co., Inc., without 1. Cash dividends – payable in lawful money or currency;
prior resolution approved by the affirmative vote of 2/3 of the stockholders' 2. Property dividends - those paid in the form property (e.g., bonds, notes,
voting power, in the Philippine Fiber Processing Co., Inc., a company shares in another corporation);
engaged in the manufacture of sugar bags. The lower court said that "there 3. Stock dividends – corporation’s own shares of stock out of the remaining
is more logic in the stand that if the investment is made in a unissued shares which would require the approval of the stockholders
corporation whose business is important to the investing representing 2/3 of the outstanding capital stock at a regular or special
corporation and would aid it in its purpose, to require authority of meeting duly called for that purpose. This is to be valued at par value or
the stockholders would be to unduly curtail the power of the Board issue price.
of Directors.‖
Cash and property dividends have the effect of reducing corporate assets to
Assuming arguendo that the Board of Directors of SMC had no authority to the extent of the dividends declared. In stock dividends, it would generally
make the assailed investment, there is no question that a corporation, like an not increase the proportionate interest of the stockholders of the corporation
individual, may ratify and thereby render binding upon it the originally although it will have the effect of increasing the subscribed and paid-up
unauthorized acts of its officers or other agents. This is true because the capital (exception is when the stock dividend declaration would result in
questioned investment is neither contrary to law, morals, public order or fractional shares like when 1 share is declared as dividend for every 9 shares
public policy. It is a corporate transaction or contract which is within the held)
corporate powers, but which is defective from a supported failure to observe
in its execution the. requirement of the law that the investment must be OVERISSUANCE OF SHARES: happens when a corporation issues shares
authorized by the affirmative vote of the stockholders holding two-thirds of beyond its authorized capital stock, even in the form of stock dividends.
the voting power. This requirement is for the benefit of the stockholders. The
stockholders for whose benefit the requirement was enacted may, therefore, DELINQUENCY: is a requirement for the application of the second part of
ratify the investment and its ratification by said stockholders obliterates any the first paragraph of Sec. 43. Such that, cash dividends declared are first
defect which it may have had at the outset. "Mere ultra vires acts", said applied on the unpaid balance on the subscription plus costs and expenses
this Court in Pirovano, "or those which are not illegal and void ab and stock dividends are withheld until the subscription is fully paid.
initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and WHO CAN DECLARE DIVIDENDS? The BOD. They cannot be compelled to
enforceable when ratified by the stockholders. declare dividends, except: (1) When the unrestricted retained earnings is in
excess of 100% of the paid-up capital; and (2) In the case of Mandatory If
Besides, the investment was for the purchase of beer manufacturing and Earned Preference Shares.
marketing facilities which is apparently relevant to the corporate purpose.
The mere fact that respondent corporation submitted the assailed investment The judgment of the BOD is conclusive, EXCEPT: (1) when they act in bad
to the stockholders for ratification at the annual meeting of May 10, 1977 faith; (2) for a dishonest purpose; (3) they act fraudulently, oppressively,
cannot be construed as an admission that respondent corporation had unreasonably or unjustly; or (4) abuse of discretion can be shown as to
committed an ultra vires act, considering the common practice of impair the rights of the complaining shareholders. The TEST of bad faith is to
corporations of periodically submitting for the gratification of their determine if the policy of the directors is dictated by their personal interest
stockholders the acts of their directors, officers and managers. rather than the corporate welfare.
P. POWER TO DECLARE DIVIDENDS WHEN DIVIDENDS RIGHTS VEST: It has been succinctly said that the
right of the stockholders to be paid dividends vest as soon as they have been
DIVIDENDS are corporate profits set aside, declared and ordered by the lawfully and finally declared by the BOD. It is not revocable unless: (1) it has
BOD to be paid to the stockholders. It is a fruit of investment, the recurrent not been officially communicated to the stockholders; or (2) it is in the form
return, analogous to interest and rent upon other forms of invested capital. of stock dividends which is revocable any time prior to distribution because
this does not result in the distribution of assets but merely the division of
Sec. 43. Power to declare dividends. - The board of directors of a stock existing shares of a stockholder into smaller units or integers.
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 TRANSFER OF SHARES: The dividends already declared belong to the
the basis of outstanding stock held by them: Provided, That any cash owner at the time of declaration. Usually, however, the dividends are payable
to stockholders of record on a specific future date and as far as the The term "dividend" both in the technical sense and its ordinary acceptation,
corporation is concerned, the registered owner is the one entitled to is that part or portion of the profits of the enterprise which the corporation,
dividends. As against his transferor, however, the transferee has presumably by its governing agents, sets apart for ratable division among the holders of
the right to such dividends and is oftentimes taken into account in entering the capital stock. It means the fund actually set aside, and declared by the
effecting the transfer of shares. directors of the corporation as dividends and duly ordered by the director, or
by the stockholders at a corporate meeting, to be divided or distributed
NIELSON & COMPANY, INC., plaintiff-appellant, among the stockholders according to their respective interests.
vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee It is Our considered view, therefore, that under Section 16 of the Corporation
(GR No. L-21601; Dec. 28, 1968) Law stock dividends cannot be issued to a person who is not a stockholder in
payment of services rendered. And so, in the case at bar Nielson can not be
FACTS: This is a motion for reconsideration filed by respondent Lepanto paid in shares of stock which form part of the stock dividends of Lepanto for
contending that the order of the SC to pay Nielson 10% of the stock services it rendered under the management contract. We sustain the
dividends, declared by Lepanto during the extension of the contract, as contention of Lepanto that the understanding between Lepanto and Nielson
compensation for services under a management contract is in violation of the was simply to make the cash value of the stock dividends declared as the
Corporation Law and that it could not be the intention of the parties that the basis for determining the amount of compensation that should be paid to
services of Nielson should be paid in stock dividends. Nielson, in the proportion of 10% of the cash value of the stock dividends
declared. And this conclusion of Ours finds support in the record.
ISSUE: WON Nielson & Co. is entitled to receive stock dividends?
Q. POWER TO ENTER INTO MANAGEMENT CONTRACT
HELD: No. The consideration for which shares of stock may be issued are:
(1) cash; (2) property; and (3) undistributed profits. Shares of stock are Sec. 44. Power to enter into management contract. - No corporation
given the special name "stock dividends" only if they are issued in lieu of shall conclude a management contract with another corporation unless such
undistributed profits. If shares of stocks are issued in exchange of cash or contract shall have been approved by the board of directors and by
property then those shares do not fall under the category of "stock stockholders owning at least the majority of the outstanding capital stock, or
dividends". A corporation may legally issue shares of stock in consideration of by at least a majority of the members in the case of a non-stock corporation,
services rendered to it by a person not a stockholder, or in payment of its of both the managing and the managed corporation, at a meeting duly called
indebtedness. A share of stock issued to pay for services rendered is for the purpose: Provided, That (1) where a stockholder or stockholders
equivalent to a stock issued in exchange of property, because services is representing the same interest of both the managing and the managed
equivalent to property. Likewise a share of stock issued in payment of corporations own or control more than one-third (1/3) of the total
indebtedness is equivalent to issuing a stock in exchange for cash. But a outstanding capital stock entitled to vote of the managing corporation; or (2)
share of stock thus issued should be part of the original capital stock of the where a majority of the members of the board of directors of the managing
corporation upon its organization, or part of the stocks issued when the corporation also constitute a majority of the members of the board of
increase of the capitalization of a corporation is properly authorized. In other directors of the managed corporation, then the management contract must
words, it is the shares of stock that are originally issued by the corporation be approved by the stockholders of the managed corporation owning at least
and forming part of the capital that can be exchanged for cash or services two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by
rendered, or property; that is, if the corporation has original shares of stock at least two-thirds (2/3) of the members in the case of a non-stock
unsold or unsubscribed, either coming from the original capitalization or from corporation. No management contract shall be entered into for a period
the increased capitalization. Those shares of stock may be issued to a person longer than five years for any one term.
who is not a stockholder, or to a person already a stockholder in exchange
for services rendered or for cash or property. But a share of stock coming The provisions of the next preceding paragraph shall apply to any contract
from stock dividends declared cannot be issued to one who is not a whereby a corporation undertakes to manage or operate all or substantially
stockholder of a corporation. all of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise: Provided, however,
A "stock dividend" is any dividend payable in shares of stock of the That such service contracts or operating agreements which relate to the
corporation declaring or authorizing such dividend. It is, what the exploration, development, exploitation or utilization of natural resources may
term itself implies, a distribution of the shares of stock of the corporation be entered into for such periods as may be provided by the pertinent laws or
among the stockholders as dividends. A stock dividend of a corporation is a regulations.
dividend paid in shares of stock instead of cash, and is properly payable only
out of surplus profits. So, a stock dividend is actually two things: (1) a This provision was inserted to assure not only technical competence but
dividend, and (2) the enforced use of the dividend money to continuity in management policy in running corporate affairs which can be
purchase additional shares of stock at par. When a corporation achieved through a management contract.
issues stock dividends, it shows that the corporation's accumulated
profits have been capitalized instead of distributed to the REQUIREMENTS OF A VALID MANAGEMENT CONTRACT:
stockholders or retained as surplus available for distribution, in 1. Resolution of the BOD;
money or kind, should opportunity offer. Far from being a realization of 2. Approval by the stockholders representing a majority of the outstanding
profits for the stockholder, it tends rather to postpone said realization, in that capital stock or majority of the members of both the managing and the
the fund represented by the new stock has been transferred from surplus to managed corporation;
assets and no longer available for actual distribution. Thus, it is apparent 3. The approval of the stockholders or members must be made at the
that stock dividends are issued only to stockholders. This is so meeting called for that purpose; and
because only stockholders are entitled to dividends. They are the only ones 4. The contract shall not be for a period longer than 5 years for any one
who have a right to a proportional share in that part of the surplus which is term, except those which relate to exploration, development or
declared as dividends. A stock dividend really adds nothing to the interest of utilization of natural resources which may be entered into for such
the stockholder; the proportional interest of each stockholder remains the periods as may be provided by pertinent laws and regulations;
same. If a stockholder is deprived of his stock dividends - and this 5. 2/3 of the stockholders or members would be required, where:
happens if the shares of stock forming part of the stock dividends a. The stockholders representing the same interest of both the
are issued to a non-stockholder — then the proportion of the managing and the managed corporation own or control more than
stockholder's interest changes radically. Stock dividends are civil 1/3 of the total outstanding capital stock of the managing
fruits of the original investment, and to the owners of the shares corporation;
belong the civil fruits. b. A majority f the members of the BOD of the managing corporation
also constitute a majority of the directors of the managed
corporation;
c. The contract would constitute the management or operation of all which it was organized among them, (1) ―to invest and deal with the money
or substantially all of the business of another corporation, whether of the company not immediately required, in such manner as fro time to time
such contracts are called service contracts. If it will not constitute may be determined‖ and (2) ―to aid in any manner any person association, or
the management of all or substantially all of the business of corporation or in the affairs of the property of which this corporation has
another corporation, the first paragraph of Sec. 44 will apply and lawful interest‖. The donation in question undoubtedly comes within the
not that of the second, that is, only the vote of the majority is scope of this broad power for it is a fact appearing in the evidence that the
required. insurance proceeds were not immediately required when they were given
away.
R. ULTRA VIRES ACTS
We don‘t see much distinction between the acts of generosity of the
Sec. 45. Ultra vires acts of corporations. - No corporation under this benevolence extended to some employees of the corporation, and
Code shall possess or exercise any corporate powers except those conferred even to some in whom the corporation was merely interested
by this Code or by its articles of incorporation and except such as are because of certain moral or political consideration, and the
necessary or incidental to the exercise of the powers so conferred. donations which the corporation has seen fit to give the children of
the late Enrico Privano from the point of view of the power of the
ULTRA VIRES ACTS are those which cannot be executed or performed by a corporation as expressed in the AOI. And if the former had been sanctioned
corporation because they are not within its express, inherent, or implied and had been valid and intra-vires, we see no plausible reaons why the latter
powers as defined by its charter or AOI. Accordingly, it may be subject to a should now be deemed ultra-vires. It may perhaps be argued that the
collateral attack questioning the authority of the corporation to engage in donation given to the children of the late Enrico Privano is so large and
such particular endeavor. disproportionate that it can hardly be considered a pension or gratuity that
can be placed ona par with the instances above-mentioned, but this
CONSEQUENCES: argument overlooks one consideration: the gratuity here given was not
1. On the Corporation itself: The proper forum may suspend or revoke, merely motivated by pure liberality or act of generosity, but by a deep sense
after proper notice and hearing, the franchise or certificate of of recognition of the valuable services rendered by the late Enrico Privano
registration of the corporation for serious misrepresentation as to what which had immensely contributed to the growth of the corporation to the
the corporation can do or is doing to the great damage or prejudice of extent that from its humble capitalization it blossomed into a multi-million
the general public. corporation that it is today.
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 Granting that it was ultra-vires, it may be said that the same cannot
contract. If already performed, a derivative suit against the directors be invalidated, or declared legally ineffective for that reason alone,
may be filed, but their liability will depend on whether they acted in it appearing that the donation represents not only the act of the
good faith and with reasonable diligence in entering into the contract. BOD but of the stockholders themselves as shown by the fact the
3. On the immediate parties: same has been expressly ratified in a resolution duly approved by
a. If the contract is fully executed in both sides, the contract is the latter. By this ratification, the infirmity of the corporate act, if
effective and the courts will not interfere to deprive either party of any has been obliterated thereby making the act perfectly valid and
what has been acquired under it; enforceable. This is specially so if the donation is not merely executory but
b. If the contract is executory on both sides,, as a rule, neither party executed and consummated and no creditors are prejudiced, or if there are
can maintain an action for its non-performance; and creditors affected, the latter has expressly given their conformity.
c. Where the contract is executory on one side only, and has been
fully performed on the other, the courts differ as to whether an ISSUE2: What is the difference between an illegal act and that which is
action will lie on the contract against the party who has received ultra-vires?
benefits of performance under it. Majority of the courts, however,
hold that the party who has received benefits from the HELD: The former contemplates the doing of an act which is contrary to law,
performance is ―estopped‖ to set up that the contract is ultra vires morals, or public order or contravene some rules of public policy or public
to defeat an action on the contract. duty, and are, like similar transactions between the individuals, void. They
cannot serve as basis of a court action, nor acquire validity by performance,
READ AGAIN: Government vs. EL Hogar and Republic vs. Acoje Mining (both ratification or estoppel. Mere ultra-vires acts, on the other hand, or those
in this chapter) which are not illegal and void ab initio, but are merely beyond the scope of
the AOI, are merely voidable and may become binding and enforceable when
PRIVANO, ET AL. VS. DE LA RAMA STEAMSHIP CO. (96 Phil. 335; Dec. ratified by the stockholders.
29, 1954) - The Board of directors of defendant company adopted a
resolution wherein the proceeds of the insurance taken on the life of its Since it is not contended that the donation under consideration is illegal, or
previous President and General Manager Enrico Privano be set aside and contrary to any of the express provisions of the AOI, nor prejudicial to the
used to purchase 4,000 shares to be given to Privano’s heirs, which was creditors of the defendant corporation, we cannot but logically conclude that
approved by the stockholders in a meeting duly called for the purpose. said donation, even if ultra vires in the supposition we have
adverted to, is not void, and if voidable its infirmity has been cured
The donation of the shares was later on modified to transfer all the proceeds by ratification and subsequent acts of the defendant corporation.
directly to the heirs which would become a loan of the company with 5% The corporation is now prevented or estopped from contesting the validity of
interest per annum and payable after the settlement of its bonded the donation.
indebtedness, and still later, modified to be payable ―whenever the company
is in a position to meet said obligation‖. IRINEO CARLOS, plaintiff-appellant VS. MINDORO SUGAR CO., ET AL.,
defendant-appellees (57 Phil. 343; Oct. 26, 1932) - Mindoro Sugar Company
On an opinion by the SEC, sought by the President of the corporation, Sergio (MSC) transferred all of its property to Philippine Trust Company (PTC) in
Osmena, Jr., it was opined by the SEC that the donation was void for being consideration of the bonds it had issued to the value of P3,000,000, each
ultra vires. The Board planned to adopt a different resolution to effect the bond being $1,000, which par value, with interest at 8% per annum, PTC
donation but failed to act on it. The heirs, through Mrs. Estefania R. Privano, guaranteed to the holders.
acting as guardian, demanded the settlement of the obligation.
PTC paid Ramon Diaz upon presentation of the coupons, the stipulated
ISSUE: WON the donation was an ultra vires act? interest from the date of maturity until July 1, 1928, when its stopped
payments, alleging that it did not deem itself bound to pay such interest or to
HELD: No. After a careful perusal of the AOI, we find that the corporation redeem the obligation because the guarantee given for the bonds was illegal
was given broad and almost unlimited powers to carry out the purposes for and void.

HELD: No. The articles authorize collection of fees from members; but they
The CFI of Manila absolved the defendants from the complaint except MSC do not authorize the corporation to engage in the business of registering and
which was sentenced to pay the value of the bond. accepting war notes for deposit and collecting fees from such services. This
was the ruling of the Commission and this we find to be correct.
ISSUE: WON PTC’s act was ultra-vires?
Neither do we find any merit in the third contention that the association has
HELD: No. Firstly, PTC although secondarily engaged in banking, was authority to accept and collect fees for reparation claims for civilian casualties
primarily organized as a trust corporation with full power to acquire personal and other injuries. This is beyond any of the powers of the association as
property such as the bonds in question according to both sec. 13 (par. 5) of embodied in its articles and have absolutely no relation to the avowed
the Corporation Law and its duly registered by-laws and AOI; Secondly, that purpose of the association to work for the redemption of war notes.
being thus authoriezd to acquire the bonds, it was given implied power to
guarantee them in order to place them upon the market under better, more ERNESTINA CRISOLOGO-JOSE VS. CA (GR No. 80599; Sept. 15, 1989) -
advantageous conditions, and thereby secure the profit derived from their The Vice-president of Mover Enterprises, Inc. issued a check drawn against
sale. Traders Royal Bank, payable to petitioner Ernestina Crisologo-Jose, for the
accommodation of his client. Petitioner-payee was charged with the
―It is not, however, ultra vires for a corporation to enter into knowledge that the check was issued at the instance and for the personal
contracts of guaranty where it does so in the legitimate furtherance account of the President who merely prevailed upon respondent vice-
of its purposes and business. And it is well settled that where a president to act as co-signatory in accordance with the arrangement of the
corporation acquires commercial papers or bonds in the legitimate transaction corporation with its depository bank. While it was the corporation's check
of its business it may sell them, and in furtherance of such a sale, it may in which was issued to petitioner for the amount involved, petitioner actually
order to make them more readily marketable, indorse or guarantee their had no transaction directly with said corporation.
payment.‖
ISSUE: WON private respondent, one of the signatories of the check issued
Even if PTC did not acquire the bonds in question, but only guaranteed them, under the account of Mover Enterprises, Inc., is an accommodation party
it would at any rate, be valid and the said corporation is bound to pay the under NIL and a debtor of petitioner to the extent of the amount of said
appellant their value with the accrued interest in view of the fact that they check?
become due on account of the lapse of 60 days, without the accrued interest
due having been paid; and the reason is that it is estopped from denying the HELD: Yes. The liability of an accommodation party to a holder for value,
validity of its guarantee. although such holder does not include nor apply to corporations which are
accommodation parties. This is because the issue or indorsement of
The doctrine of ultra vires as a defense, is by some courts regarded as an negotiable paper by a corporation without consideration and for the
ungracious and odious one, to be sustained only where the most persuasive accommodation of another is ultra vires. One who has taken the
consideration of public policy are involved, and there are numerous decisions instrument with knowledge of the accommodation nature thereof cannot
and dicta to the effect that the plea should not as a general rule prevail recover against a corporation where it is only an accommodation party. By
whether interposed for or against the corporation, where it will not advance way of exception, an officer or agent of a corporation shall have the power to
justice but on the contrary will accomplish a legal wrong. execute or indorse a negotiable paper in the name of the corporation for the
accommodation of a third person only if specifically authorized to do so.
When a contract is not on its face necessarily beyond the scope of the power Corollarily, corporate officers, such as the president and vice-president, have
of the corporation by which it was made, it will, in the absence of proof to no power to execute for mere accommodation a negotiable instrument of the
the contrary, be presumed to be valid. Corporations are presumed to contract corporation for their individual debts or transactions arising from or in relation
within their powers. The doctrine of untra vires, when invoked for or against to matters in which the corporation has no legitimate concern. Since such
a corporation, should not be allowed to prevail where it would defeat the accommodation paper cannot thus be enforced against the corporation,
ends of justice or work a legal wrong. especially since it is not involved in any aspect of the corporate business or
operations, the signatories thereof (president and vice-president) shall be
JAPANESE WAR NOTES CLAIMANTS ASSOC., INC. VS. SEC (101 Phil personally liable therefor, as well as the consequences arising from their acts
540; May 23, 1957) - The SEC issued an order requiring petitioner herein and in connection therewith.
its President Alfredo Abcede to show cause why it should not be proceeded
against for making misrepresentations to the public about the need of
registering and depositing war notes, with a view of probable redemption as CHAPTER 8: BY-LAWS
contemplated in Senate Bill No. 163 and in Senate Concurrent Resolution No.
14, for otherwise they would be valueless. BY-LAWS are rules and ordinances made by a corporation for its own
government; to regulate the conduct and define the duties of the
Petitioner contended that the statement was made in good faith as President stockholders or members towards the corporation and among themselves.
Magsaysay would soon make representations to the US to have the war notes They are the rules and regulations or private laws enacted by the corporation
redeemed. to regulate, govern and control its own actions, affairs and concerns and tis
stockholder or members and directors and officers with relation thereto and
Respondent SEC found that according to its AOI, the petitioner has the among themselves in their relation to it.
privilege to work for the redemption of the war notes of its members alone,
but that it cannot offer its services to the public for a valuable consideration, Sec. 46. Adoption of by-laws. - Every corporation formed under this Code
because there is nothing definite and tangible about the redemption of the must, within one (1) month after receipt of official notice of the issuance of
war notes and its success is speculative that any authority given to offer its certificate of incorporation by the Securities and Exchange Commission,
services can easily degenerate into a racket; that under its AOI the petitioner adopt a code of by-laws for its government not inconsistent with
is a civic and non-stock corporation and upon should not engage in business this Code. For the adoption of by-laws by the corporation the affirmative
for profit; that it has received war notes for deposit, upon payment of fees, vote of the stockholders representing at least a majority of the outstanding
without authority in its articles to do so; that it had previously been rendered capital stock, or of at least a majority of the members in case of non-stock
to desist from collecting from those registering the war notes, but corporations, shall be necessary. The by-laws shall be signed by the
notwithstanding this prohibition it has done so in the guise of service fees. stockholders or members voting for them and shall be kept in the principal
Hence the Commission ordered to stop receiving war notes, receiving same office of the corporation, subject to the inspection of the stockholders or
for deposit and chargin fees therefore. members during office hours. A copy thereof, duly certified to by a majority
of the directors or trustees countersigned by the secretary of the corporation,
ISSUE: WON the SEC erred in issuing the questioned order? shall be filed with the Securities and Exchange Commission which shall be
attached to the original articles of incorporation.
revoked whenever stockholders owning or representing a majority of the
Notwithstanding the provisions of the preceding paragraph, by-laws may be outstanding capital stock or a majority of the members in non-stock
adopted and filed prior to incorporation; in such case, such by-laws shall be corporations, shall so vote at a regular or special meeting.
approved and signed by all the incorporators and submitted to the Securities
and Exchange Commission, together with the articles of incorporation. 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
In all cases, by-laws shall be effective only upon the issuance by the corporation, and a copy thereof, duly certified under oath by the corporate
Securities and Exchange Commission of a certification that the by-laws are secretary and a majority of the directors or trustees, shall be filed with the
not inconsistent with this Code. Securities and Exchange Commission the same to be attached to the original
articles of incorporation and original by-laws.
The Securities and Exchange Commission shall not accept for filing the by-
laws or any amendment thereto of any bank, banking institution, building and The amended or new by-laws shall only be effective upon the issuance by the
loan association, trust company, insurance company, public utility, Securities and Exchange Commission of a certification that the same are not
educational institution or other special corporations governed by special laws, inconsistent with this Code.
unless accompanied by a certificate of the appropriate government agency to
the effect that such by-laws or amendments are in accordance with law. TWO MODES OF AMENDMENT:
1. By a majority vote of the directors or trustees and the majority vote of
EFFECTIVITY: After approval of the SEC. the outstanding capital stock or members, at a regular or special
meeting called for that purpose; or
BY-LAWS PRIOR TO INCORPORATION: it must be signed by all the 2. By the board of directors alone when delegated by stockholders owning
incorporators without the need of the affirmative vote of the majority of the 2/3 of the outstanding capital stock or 2/3 of the members. This power,
outstanding capital stock or the members provided it is submitted together however, is considered revoked, when so voted by a majority of the
with the AOI. outstanding capital stock or members in a regular or special meeting.
AFTER INCPORPORATION: Must be submitted one month after the LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION,
issuance of the certificate of incorporation and must be approved by a INC., petitioner,
majority of the outstanding capital stock or members and signed by such vs.
stockholders or members voting for them. Failure to file within 1 month may HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY
result to suspenion or revocation of corporate franchise. CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO,
respondents.
THIRD PERSONS: are generally not bound, affected or prejudiced the by- (GR No. 117188; Aug. 7, 1997)
laws, it being merely internal rules of the corporation, EXCEPT: if they have
knowledge of its existence and contents. FACTS: Petitioner Association was organized on Feb. 8, 1983, but for some
reason failed to file its corporate by-laws. Victorio Soliven, himslef the owner
CONTENTS: and developer of the subdivision was the first president of the Association.
Later on, asking on the status of petitioner, Soliven discovered that the said
Sec. 47. Contents of by-laws. - Subject to the provisions of the association was already dissolved (according to the head of the legal
Constitution, this Code, other special laws, and the articles of incorporation, a department of HIGC), and accordingly caused the registration of HIGC as the
private corporation may provide in its by-laws for: association covering Phases West I, East I and East II of the subdivision.
1. The time, place and manner of calling and conducting regular or special ISSUE: WON the Association can be considered dissolved for non-adoption
meetings of the directors or trustees; of by-laws?
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members; HELD: Yes. As correctly postulated by the petitioner, interpretation of this
3. The required quorum in meetings of stockholders or members and the provision of Sec. 46 begins with the determination of the meaning and import
manner of voting therein; of the word "must" in this section. Ordinarily, the word "must" connotes an
4. The form for proxies of stockholders and members and the manner of imperative act or operates to impose a duty which may be enforced. It is
voting them; synonymous with "ought" which connotes compulsion or mandatoriness.
5. The qualifications, duties and compensation of directors or trustees, However, the word "must" in a statute, like "shall," is not always imperative.
officers and employees; It may be consistent with an exercise of discretion. In this jurisdiction, the
6. The time for holding the annual election of directors of trustees and tendency has been to interpret "shall" as the context or a reasonable
the mode or manner of giving notice thereof; construction of the statute in which it is used demands or requires. This is
7. The manner of election or appointment and the term of office of all equally true as regards the word "must." Thus, if the languages of a statute
officers other than directors or trustees; considered as a whole and with due regard to its nature and object reveals
8. The penalties for violation of the by-laws; that the legislature intended to use the words "shall" and "must" to be
9. In the case of stock corporations, the manner of issuing stock directory, they should be given that meaning.
certificates; and
10. Such other matters as may be necessary for the proper or convenient In this respect, the following portions of the deliberations of the Batasang
transaction of its corporate business and affairs. Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
AMENDMENT: On page 34, referring to the adoption of by-laws, are we made to
understand here, Mr. Speaker, that by-laws must immediately be filed
Sec. 48. Amendments to by-laws. - The board of directors or trustees, by within one month after the issuance? In other words, would this be
a majority vote thereof, and the owners of at least a majority of the mandatory or directory in character?
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, MR. MENDOZA. This is mandatory.
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 MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the
members in a non-stock corporation may delegate to the board of directors effect of the failure of the corporation to file these by-laws within one
or trustees the power to amend or repeal any by-laws or adopt new by-laws: month?
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
MR. MENDOZA. There is a provision in the latter part of the Code which of such power essential to its corporate life, or to the validity of
identifies and describes the consequences of violations of any provision any of its acts.
of this Code. One such consequences is the dissolution of the
corporation for its inability, or perhaps, incurring certain penalties. Although the Corporation Code requires the filing of by-laws, it does not
expressly provide for the consequences of the non-filing of the same within
MR. FUENTEBELLA. But it will not automatically amount to a dissolution the period provided for in Section 46. However, such omission has been
of the corporation by merely failing to file the by-laws within one month. rectified by Presidential Decree No. 902-A, the pertinent provisions on the
Supposing the corporation was late, say, five days, what would be the jurisdiction of the SEC of which state:
mandatory penalty?
Sec. 6. In order to effectively exercise such jurisdiction, the Commission
MR. MENDOZA. I do not think it will necessarily result in the automatic shall possess the following powers:
or ipso facto dissolution of the corporation. Perhaps, as in the case, as xxx xxx xxx
you suggested, in the case of El Hogar Filipino where a quo warranto (1) To suspend, or revoke, after proper notice and hearing, the
action is brought, one takes into account the gravity of the violation franchise or certificate of registration of corporations, partnerships or
committed. If the by-laws were late — the filing of the by-laws were late associations, upon any of the grounds provided by law, including the
by, perhaps, a day or two, I would suppose that might be a tolerable following:
delay, but if they are delayed over a period of months — as is xxx xxx xxx
happening now — because of the absence of a clear requirement that Failure to file by-laws within the required period.
by-laws must be completed within a specified period of time, the
corporation must suffer certain consequences. Even under the foregoing express grant of power and authority,
there can be no automatic corporate dissolution simply because the
This exchange of views demonstrates clearly that automatic corporate incorporators failed to abide by the required filing of by-laws
dissolution for failure to file the by-laws on time was never the intention of embodied in Section 46 of the Corporation Code. There is no
the legislature. Moreover, even without resorting to the records of outright "demise" of corporate existence. Proper notice and hearing
deliberations of the Batasang Pambansa, the law itself provides the answer to are cardinal components of due process in any democratic
the issue propounded by petitioner. institution, agency or society. In other words, the incorporators
must be given the chance to explain their neglect or omission and
Taken as a whole and under the principle that the best interpreter of a remedy the same.
statute is the statute itself (optima statuli interpretatix est ipsum statutum),
Section 46 aforequoted reveals the legislative intent to attach a directory, and That the failure to file by-laws is not provided for by the Corporation Code
not mandatory, meaning for the word "must" in the first sentence thereof. but in another law is of no moment. P.D. No. 902-A, which took effect
Note should be taken of the second paragraph of the law which immediately after its promulgation on March 11, 1976, is very much apposite
allows the filing of the by-laws even prior to incorporation. This to the Code.
provision in the same section of the Code rules out mandatory
compliance with the requirement of filing the by-laws "within one Accordingly, the provisions abovequoted supply the law governing the
(1) month after receipt of official notice of the issuance of its situation in the case at bar, inasmuch as the Corporation Code and P.D. No.
certificate of incorporation by the Securities and Exchange 902-A are statutes in pari materia. Interpretare et concordare legibus est
Commission." It necessarily follows that failure to file the by-laws optimus interpretandi. Every statute must be so construed and harmonized
within that period does not imply the "demise" of the corporation. with other statutes as to form a uniform system of jurisprudence.
By-laws may be necessary for the "government" of the corporation but these
are subordinate to the articles of incorporation as well as to the Corporation As the "rules and regulations or private laws enacted by the corporation to
Code and related statutes. There are in fact cases where by-laws are regulate, govern and control its own actions, affairs and concerns and its
unnecessary to corporate existence or to the valid exercise of corporate stockholders or members and directors and officers with relation thereto and
powers, thus: among themselves in their relation to it," by-laws are indispensable to
corporations in this jurisdiction. These may not be essential to corporate birth
In the absence of charter or statutory provisions to the contrary, by- but certainly, these are required by law for an orderly governance and
laws are not necessary either to the existence of a corporation or to the management of corporations. Nonetheless, failure to file them within the
valid exercise of the powers conferred upon it, certainly in all cases period required by law by no means tolls the automatic dissolution of a
where the charter sufficiently provides for the government of the body; corporation.
and even where the governing statute in express terms confers upon
the corporation the power to adopt by-laws, the failure to exercise the In this regard, private respondents are correct in relying on the
power will be ascribed to mere nonaction which will not render void any pronouncements of this Court in Chung Ka Bio v. Intermediate Appellate
acts of the corporation which would otherwise be valid. (Emphasis Court, as follows:
supplied.)
―Non-filing of the by-laws will not result in automatic
As Fletcher aptly puts it: dissolution of the corporation. Under Section 6(I) of PD 902-A, the
SEC is empowered to "suspend or revoke, after proper notice and
It has been said that the by-laws of a corporation are the rule of its life, hearing, the franchise or certificate of registration of a corporation" on
and that until by-laws have been adopted the corporation may not be the ground inter alia of "failure to file by-laws within the required
able to act for the purposes of its creation, and that the first and most period." It is clear from this provision that there must first of all be a
important duty of the members is to adopt them. This would seem to hearing to determine the existence of the ground, and secondly,
follow as a matter of principle from the office and functions of by-laws. assuming such finding, the penalty is not necessarily revocation but may
Viewed in this light, the adoption of by-laws is a matter of be only suspension of the charter. In fact, under the rules and
practical, if not one of legal, necessity. Moreover, the peculiar regulations of the SEC, failure to file the by-laws on time may be
circumstances attending the formation of a corporation may impose the penalized merely with the imposition of an administrative fine without
obligation to adopt certain by-laws, as in the case of a close corporation affecting the corporate existence of the erring firm.‖
organized for specific purposes. And the statute or general laws from
which the corporation derives its corporate existence may expressly HENRY FLEISCHER, plaintiff-appellee,
require it to make and adopt by-laws and specify to some extent what vs.
they shall contain and the manner of their adoption. The mere fact, BOTICA NOLASCO CO., INC., defendant-appellant.
however, of the existence of power in the corporation to adopt (GR No. L-23241; March 14 ,1925)
by-laws does not ordinarily and of necessity make the exercise
FACTS: Manuel Gonzales, the original owner of 5 shares of stock in question property. A shareholder is under no obligation to refrain from selling his
of Defendant Company, assigned and transferred to herein plaintiff Fleischer. shares at the sacrifice of his personal interest, in order to secure the
Two days after, Dr. Miciano, secretary-treasurer of the company, offered to welfare of the corporation, or to enable another shareholder to make gains
buy from Fleischer the said shares in behalf of the corporation, contending and profits. (10 Cyc., p. 577.)
that Art. 12 of the by-laws grants the company preferential right to buy
Gonzales’ shares. Plaintiff refused and requested Dr. Miciano to register said It follows from the foregoing that a corporation has no power to prevent or
shares in his name, and the latter refused to do so. to restrain transfers of its shares, unless such power is expressly conferred in
its charter or governing statute. This conclusion follows from the further
ISSUE: WON Fleischer is bound by the provisions of the corporation’s by- consideration that by-laws or other regulations restraining such
laws? transfers, unless derived from authority expressly granted by the
legislature, would be regarded as impositions in restraint of trade.
HELD: No. Section 13, paragraph 7 (of Act 1459), empowers a corporation (10 Cyc., p. 578.)
to make by-laws, not inconsistent with any existing law, for the transferring
of its stock. It follows from said provision, that a by-law adopted by a The foregoing authorities go farther than the stand we are taking on this
corporation relating to transfer of stock should be in harmony with the law on question. They hold that the power of a corporation to enact by-laws
the subject of transfer of stock. The law on this subject is found in section 35 restraining the sale and transfer of shares, should not only be in
of Act No. 1459. Said section specifically provides that the shares of stock harmony with the law or charter of the corporation, but such power
"are personal property and may be transferred by delivery of the certificate should be expressly granted in said law or charter.
indorsed by the owner, etc." Said section 35 defines the nature, character
and transferability of shares of stock. Under said section they are personal The only restraint imposed by the Corporation Law upon transfer of shares is
property and may be transferred as therein provided. Said section found in section 35 of Act No. 1459, quoted above, as follows: "No transfer,
contemplates no restriction as to whom they may be transferred or sold. It however, shall be valid, except as between the parties, until the transfer is
does not suggest that any discrimination may be created by the corporation entered and noted upon the books of the corporation so as to show the
in favor or against a certain purchaser. The holder of shares, as owner of names of the parties to the transaction, the date of the transfer, the number
personal property, is at liberty, under said section, to dispose of of the certificate, and the number of shares transferred." This restriction is
them in favor of whomsoever he pleases, without any other necessary in order that the officers of the corporation may know who are the
limitation in this respect, than the general provisions of law. stockholders, which is essential in conducting elections of officers, in calling
Therefore, a stock corporation in adopting a by-law governing transfer of meeting of stockholders, and for other purposes. but any restriction of the
shares of stock should take into consideration the specific provisions of nature of that imposed in the by-law now in question, is ultra vires, violative
section 35 of Act No. 1459, and said by-law should be made to harmonize of the property rights of shareholders, and in restraint of trade
with said provisions. It should not be inconsistent therewith.
And moreover, the by-laws now in question cannot have any effect on the
As a general rule, the by-laws of a corporation are valid if they are appellee. He had no knowledge of such by-law when the shares were
reasonable and calculated to carry into effect the objects of the corporation, assigned to him. He obtained them in good faith and for a valuable
and are not contradictory to the general policy of the laws of the land. consideration. He was not a privy to the contract created by said by-law
(Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth, 71 between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said
Ala., 436; 46 Am. Rep., 332.) by-law cannot operate to defeat his rights as a purchaser.
On the other hand, it is equally well settled that by-laws of a corporation GOVERNMENT VS. EL HOGAR (supra) - Fourth cause of action. — It
must be reasonable and for a corporate purpose, and always within the appears that among the by-laws of the association there is an article (No. 10)
charter limits. They must always be strictly subordinate to the constitution which reads as follows:
and the general laws of the land. They must not infringe the policy of the
state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not ―The board of directors of the association, by the vote of an absolute
disturb vested rights or impair the obligation of a contract, take away or majority of its members, is empowered to cancel shares and to return to
abridge the substantial rights of stockholder or member, affect rights of the owner thereof the balance resulting from the liquidation thereof
property or create obligations unknown to the law. (People's Home Savings whenever, by reason of their conduct, or for any other motive, the
Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. continuation as members of the owners of such shares is not desirable.‖
Globe Milling Co., 79 Am. St. Rep., 769.)
ISSUE: WON the above provision is valid?
The validity of the by-law of a corporation is purely a question of law. (South
Florida Railroad Co. vs. Rhodes, 25 Fla., 40.) HELD: No. This by-law is of course a patent nullity, since it is in
direct conflict with the latter part of section 187 of the Corporation
―The power to enact by-laws restraining the sale and transfer of stock Law, which expressly declares that the board of directors shall not
must be found in the governing statute or the charter. Restrictions upon have the power to force the surrender and withdrawal of unmatured
the traffic in stock must have their source in legislative enactment, as the stock except in case of liquidation of the corporation or of forfeiture
corporation itself cannot create such impediments. By-laws are intended of the stock for delinquency. It is agreed that this provision of the by-
merely for the protection of the corporation, and prescribe regulation and laws has never been enforced, and in fact no attempt has ever been made by
not restriction; they are always subject to the charter of the corporation. the board of directors to make use of the power therein conferred. In
The corporation, in the absence of such a power, cannot ordinarily November, 1923, the Acting Insular Treasurer addressed a letter to El Hogar
inquire into or pass upon the legality of the transaction by which Filipino, calling attention to article 10 of its by-laws and expressing the view
its stock passes from one person to another, nor can it question that said article was invalid. It was therefore suggested that the article in
the consideration upon which a sale is based. A by-law cannot question should be eliminated from the by-laws. At the next meeting of the
take away or abridge the substantial rights of stockholder. Under a board of directors the matter was called to their attention and it was resolved
statute authorizing by- laws for the transfer of stock, a corporation can do to recommend to the shareholders that in their next annual meeting the
no more than prescribe a general mode of transfer on the corporate books article in question be abrogated. It appears, however, that no annual meeting
and cannot justify an unreasonable restriction upon the right of sale. (4 of the shareholders called since that date has been attended by a sufficient
Thompson on Corporations, sec. 4137, p. 674. number of shareholders to constitute a quorum, with the result that the
provision referred to has not been eliminated from the by-laws, and it still
The jus disponendi, being an incident of the ownership of property, the stands among the by-laws of the association, notwithstanding its patent
general rule (subject to exceptions hereafter pointed out and discussed) is conflict with the law.
that every owner of corporate shares has the same uncontrollable right to
alien them which attaches to the ownership of any other species of
It is supposed, in the fourth cause of action, that the existence of this article nomination or election to the BOD are valid and reasonable?
among the by-laws of the association is a misdemeanor on the part of the
respondent which justifies its dissolution. In this view we are unable to HELD: Yes. The validity or reasonableness of a by-law of a corporation in
concur. The obnoxious by-law, as it stands, is a mere nullity, and could not purely a question of law. Whether the by-law is in conflict with the law of the
be enforced even if the directors were to attempt to do so. There is no land, or with the charter of the corporation, or is in a legal sense
provision of law making it a misdemeanor to incorporate an invalid provision unreasonable and therefore unlawful is a question of law. This rule is subject,
in the by-laws of a corporation; and if there were such, the hazards incident however, to the limitation that where the reasonableness of a by-law is a
to corporate effort would certainly be largely increased. There is no merit in mere matter of judgment, and one upon which reasonable minds must
this cause of action. necessarily differ, a court would not be warranted in substituting its judgment
instead of the judgment of those who are authorized to make by-laws and
ISSUE2: Owing to the failure of a quorum at most of the general meetings who have exercised their authority.
since the respondent has been in existence, it has been the practice of the
directors to fill vacancies in the directorate by choosing suitable persons from It is a settled state law in the United States, according to Fletcher, that
among the stockholders. This custom finds its sanction in article 71 of the by- corporations have the power to make by-laws declaring a person employed in
laws, which reads as follows: the service of a rival company to be ineligible for the corporation's Board of
Directors. ... (A)n amendment which renders ineligible, or if elected, subjects
―ART. 71. The directors shall elect from among the shareholders members to to removal, a director if he be also a director in a corporation whose business
fill the vacancies that may occur in the board of directors until the election at is in competition with or is antagonistic to the other corporation is valid." This
the general meeting‖ is based upon the principle that where the director is so employed in
the service of a rival company, he cannot serve both, but must
WON Art. 71 is valid? betray one or the other. Such an amendment "advances the benefit
of the corporation and is good." An exception exists in New Jersey,
HELD: Yes. We are unable to see the slightest merit in the charge. No fault where the Supreme Court held that the Corporation Law in New Jersey
can be imputed to the corporation on account of the failure of the prescribed the only qualification, and therefore the corporation was not
shareholders to attend the annual meetings; and their non-attendance at empowered to add additional qualifications. This is the exact opposite of the
such meetings is doubtless to be interpreted in part as expressing their situation in the Philippines because as stated heretofore, section 21 of the
satisfaction of the way in which things have been conducted. Upon failure of Corporation Law expressly provides that a corporation may make by-laws for
a quorum at any annual meeting the directorate naturally holds over and the qualifications of directors. Thus, it has been held that an officer of a
continues to function until another directorate is chosen and qualified. corporation cannot engage in a business in direct competition with that of the
Unless the law or the charter of a corporation expressly provides corporation where he is a director by utilizing information he has received as
that an office shall become vacant at the expiration of the term of such officer, under "the established law that a director or officer of a
office for which the officer was elected, the general rule is to allow corporation may not enter into a competing enterprise which cripples or
the officer to holdover until his successor is duly qualified. Mere injures the business of the corporation of which he is an officer or director.
failure of a corporation to elect officers does not terminate the
terms of existing officers nor dissolve the corporation (Quitman Oil It is also well established that corporate officers "are not permitted to use
Company vs. Peacock, 14 Ga. App., 550; Jenkins vs. Baxter, 160 Pa. State, their position of trust and confidence to further their private interests." In a
199; New York B. & E. Ry. Co. vs. Motil, 81 Conn., 466; Hatch vs. Lucky Bill case where directors of a corporation cancelled a contract of the corporation
Mining Company, 71 Pac., 865; Youree vs. Home Town Matual Ins. Company, for exclusive sale of a foreign firm's products, and after establishing a rival
180 Missouri, 153; Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. business, the directors entered into a new contract themselves with the
L. R., 486). The doctrine above stated finds expressions in article 66 of the foreign firm for exclusive sale of its products, the court held that equity would
by-laws of the respondent which declares in so many words that directors regard the new contract as an offshoot of the old contract and, therefore, for
shall hold office "for the term of one year on until their successors shall have the benefit of the corporation, as a "faultless fiduciary may not reap the fruits
been elected and taken possession of their offices." of his misconduct to the exclusion of his principal.
It result that the practice of the directorate of filling vacancies by the action The doctrine of "corporate opportunity" is precisely a recognition by the
of the directors themselves is valid. Nor can any exception be taken to then courts that the fiduciary standards could not be upheld where the fiduciary
personality of the individuals chosen by the directors to fill vacancies in the was acting for two entities with competing interests. This doctrine rests
body. Certainly it is no fair criticism to say that they have chosen competent fundamentally on the unfairness, in particular circumstances, of an officer or
businessmen of financial responsibility instead of electing poor persons to so director taking advantage of an opportunity for his own personal profit when
responsible a position. The possession of means does not disqualify a man the interest of the corporation justly calls for protection.
for filling positions of responsibility in corporate affairs.
It is not denied that a member of the Board of Directors of the San Miguel
READ AGAIN: BARRETO VS. LA PREVISORA FILIPINA (CHAPTER 6) Corporation has access to sensitive and highly confidential information, such
as: (a) marketing strategies and pricing structure; (b) budget for expansion
GOKONGWEI VS. SEC (supra) - As additional causes of action, it was and diversification; (c) research and development; and (d) sources of
alleged that corporations have no inherent power to disqualify a stockholder funding, availability of personnel, proposals of mergers or tie-ups with other
from being elected as a director and, therefore, the questioned act is ultra firms.
vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while
representing other corporations, entered into contracts (specifically a It is obviously to prevent the creation of an opportunity for an officer or
management contract) with respondent corporation, which was allowed director of San Miguel Corporation, who is also the officer or owner of a
because the questioned amendment gave the Board itself the prerogative of competing corporation, from taking advantage of the information which he
determining whether they or other persons are engaged in competitive or acquires as director to promote his individual or corporate interests to the
antagonistic business; that the portion of the amended bylaws which states prejudice of San Miguel Corporation and its stockholders, that the questioned
that in determining whether or not a person is engaged in competitive amendment of the by-laws was made. Certainly, where two corporations are
business, the Board may consider such factors as business and family competitive in a substantial sense, it would seem improbable, if not
relationship, is unreasonable and oppressive and, therefore, void; and that impossible, for the director, if he were to discharge effectively his duty, to
the portion of the amended by-laws which requires that "all nominations for satisfy his loyalty to both corporations and place the performance of his
election of directors ... shall be submitted in writing to the Board of Directors corporation duties above his personal concerns.
at least five (5) working days before the date of the Annual Meeting" is
likewise unreasonable and oppressive. Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require
ISSUE: WON the amended by-laws of SMC disqualifying a competitor from that he disclose this information to a competitive arrival. These dangers are

enhanced considerably where the common director such as the petitioner is a may be considered to have "parted with his personal right or privilege to
controlling stockholder of two of the competing corporations. It would seem regulate the disposition of his property which he has invested in the capital
manifest that in such situations, the director has an economic incentive to stock of the corporation, and surrendered it to the will of the majority of his
appropriate for the benefit of his own corporation the corporate plans and fellow incorporators. ... It cannot therefore be justly said that the contract,
policies of the corporation where he sits as director. express or implied, between the corporation and the stockholders is infringed
... by any act of the former which is authorized by a majority ... ."
Indeed, access by a competitor to confidential information regarding
marketing strategies and pricing policies of San Miguel Corporation would Under section 22 of the same law, the owners of the majority of the
subject the latter to a competitive disadvantage and unjustly enrich the subscribed capital stock may amend or repeal any by-law or adopt new by-
competitor, for advance knowledge by the competitor of the strategies for laws. It cannot be said, therefore, that petitioner has a vested right to be
the development of existing or new markets of existing or new products elected director, in the face of the fact that the law at the time such right as
could enable said competitor to utilize such knowledge to his advantage. stockholder was acquired contained the prescription that the corporate
charter and the by-law shall be subject to amendment, alteration and
Neither are We persuaded by the claim that the by-law was Intended to modification.
prevent the candidacy of petitioner for election to the Board. If the by-law
were to be applied in the case of one stockholder but waived in the case of It being settled that the corporation has the power to provide for the
another, then it could be reasonably claimed that the by-law was being qualifications of its directors, it has also been settled that the disqualification
applied in a discriminatory manner. However, the by law, by its terms, of a competitor from being elected to the Board of Directors is a reasonable
applies to all stockholders. The equal protection clause of the Constitution exercise of corporate authority.
requires only that the by-law operate equally upon all persons of a class.
Besides, before petitioner can be declared ineligible to run for director, there CHAPTER 9: MEETINGS
must be hearing and evidence must be submitted to bring his case within the
ambit of the disqualification. Sound principles of public policy and Meetings applies to every duly convened assembly either of stockholders,
management, therefore, support the view that a by-law which disqualifies a members, directors or trustees, managers, etc. for any legal purpose or the
competition from election to the Board of Directors of another corporation is transaction of business of common interest.
valid and reasonable.
Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders,
ISSUE2: WON the Corporation has the power to prescribe qualifications? or members may be regular or special.
HELD2: Yes. Private respondents contend that the disputed amended by A. STOCKHOLDERS‘ MEETING
laws were adopted by the Board of Directors of San Miguel Corporation a-, a
measure of self-defense to protect the corporation from the clear and present Sec. 50. Regular and special meetings of stockholders or members. -
danger that the election of a business competitor to the Board may cause Regular meetings of stockholders or members shall be held annually on a
upon the corporation and the other stockholders inseparable prejudice. date fixed in the by-laws, or if not so fixed, on any date in April of every year
Submitted for resolution, therefore, is the issue — whether or not respondent as determined by the board of directors or trustees: Provided, That written
San Miguel Corporation could, as a measure of self- protection, disqualify a notice of regular meetings shall be sent to all stockholders or members of
competitor from nomination and election to its Board of Directors. record at least two (2) weeks prior to the meeting, unless a different period
is required by the by-laws.
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 Special meetings of stockholders or members shall be held at any time
conduct and prescribe the rights and duties of its members towards itself and deemed necessary or as provided in the by-laws: Provided, however, That at
among themselves in reference to the management of its affairs. At common least one (1) week written notice shall be sent to all stockholders or
law, the rule was "that the power to make and adopt by-laws was inherent in members, unless otherwise provided in the by-laws.
every corporation as one of its necessary and inseparable legal incidents. And
it is settled throughout the United States that in the absence of positive Notice of any meeting may be waived, expressly or impliedly, by any
legislative provisions limiting it, every private corporation has this inherent stockholder or member.
power as one of its necessary and inseparable legal incidents, independent of
any specific enabling provision in its charter or in general law, such power of Whenever, for any cause, there is no person authorized to call a meeting, the
self-government being essential to enable the corporation to accomplish the Securities and Exchange Commission, upon petition of a stockholder or
purposes of its creation. member on a showing of good cause therefor, may issue an order to the
petitioning stockholder or member directing him to call a meeting of the
In this jurisdiction, under section 21 of the Corporation Law, a corporation corporation by giving proper notice required by this Code or by the by-laws.
may prescribe in its by-laws "the qualifications, duties and compensation of The petitioning stockholder or member shall preside thereat until at least a
directors, officers and employees ... " This must necessarily refer to a majority of the stockholders or members present have been chosen one of
qualification in addition to that specified by section 30 of the Corporation their number as presiding officer.
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 ... The stockholders have no power to act as or for the corporation except at a
" In Government v. El Hogar, the Court sustained the validity of a provision in corporate meeting called and conducted according to law. This rule arises
the corporate by-law requiring that persons elected to the Board of Directors from the need to protect the stockholder by providing them with notice of
must be holders of shares of the paid up value of P5,000.00, which shall be meeting and giving them opportunity to attend the meeting, discuss the
held as security for their action, on the ground that section 21 of the issues and vote (an exception would be an ordinary amendment where
Corporation Law expressly gives the power to the corporation to provide in its ―written asset‖ is acceptable).
by-laws for the qualifications of directors and is "highly prudent and in
conformity with good practice DATE OF REGULAR MEETING: The date so fixed in the by-laws, if not
fixed, on any date of April of very year as the BOD/T may determine. April,
ISSUE3: WON stockholders have the vested right to be elected a director? because this is the time the Audited Financial Statements are already
available.
HELD: No. Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the stockholders DATE OF SPECIAL MEETING: At any time deemed necessary or as
and that he impliedly contracts that the will of the majority shall govern in all provided for in the by-laws.
matters within the limits of the act of incorporation and lawfully enacted by-
laws and not forbidden by law." To this extent, therefore, the stockholder REQUIREMENTS FOR A VALID STOCKHOLDERS‘ MEETING:
1. It Must Be Held On The Date Fixed In The By-Laws Or In therein.
Accordance With The Law.
All proceedings had and any business transacted at any meeting of the
The date required, as previously discussed, admits of an exception, as stockholders or members, if within the powers or authority of the
when the annual meeting cannot be held on the appointed time for corporation, shall be valid even if the meeting be improperly held or called,
some valid and meritorious reasons. provided all the stockholders or members of the corporation are present or
duly represented at the meeting.
2. Prior Notice Must Be Given
Meeting must, at all times, be held in the city or municipality where the
Sec 50 and 51 requires that written notice of regular meeting shall be principal office is located, or if practicable at the principal office of the
sent at least 2 weeks prior to the meeting, whereas, 1 week prior notice corporation. For this purpose, Metro Manila is considered as one city or
is required for special meetings. municipality.
EXCEPTIONS: (a) If the by-laws provide for a different period for While there is no law allowing a STOCK corporation to hold a meeting outside
sending out notice for regular or special meetings (failure to comply the city or municipality where the principal office is located, NON-STOCK
would render the resolutions adopted at the option of the stockholder corporations are allowed to provide a provision in its by-laws any place of
who was not notified); (b) Waiver, either express or implied. members’ meeting provided there is proper notice (Sec. 93)
The Notice must contain the agenda or business matter/s that may be 4. It Must Be Called by the Proper Party
taken up before the meeting otherwise it may become voidable at the
instance of any objecting stockholder or member. DOMINGO PONCE AND BUHAY L. PONCE, petitioners,
vs.
THE BOARD OF DIRECTORS AND ELECTION COMMITTEE OF THE DEMETRIO B. ENCARNACION, Judge of the Court of First Instance of
SMB WORKERS SAVINGS AND LOAN ASSOCIATION, INC., ET AL., Manila, Branch I, and POTENCIANO GAPOL, respondents
petitioners, (GR No. L-5883; Nov. 28, 1953)
vs.
HON. BIENVENIDO A. TAN, ETC., ET AL., respondents. FACTS: It was agreed by the stockholders of Daguhoy Enterprises at a
(GR No. L-12282; March 31, 1959) stockholder’s meeting that the said corporation shall be voluntarily dissolved,
and was placed under the receivership of Gapol, the largest stockholder. A
FACTS: A meeting electing the BOD of herein petitioner was declared null petition for voluntary dissolution was drafted and signed by Ponce, which was
and void by the Court in a suit filed by John Castillo, et. al. to be filed with the appropriate authorities. It was found out that instead of
filing the petition, Gapol filed a complaint in the CFI for the accounting of the
In compliance with the order, another election was scheduled on March 28 at funds and assets of the corporation, and to reimburse it the amounts
5:30. On March 27, the plaintiff filed an ex-parte motion alleging that the expended for the purchase of a parcel of land, a loan extended to the wife of
meeting is composed of the same people that had conducted and supervised Ponce, and an amount spent by Ponce in a trip to the US. Gapol contends
the previously nullified meeting; that the election to be conducted did not that such amount, taken from the corporation, was misapplied,
comply with the 5 day notice requirement required by the by-laws and the misappropriated and misspent by Ponce to his own use and benefit, thus he
constitution of the association, since the notice was posted and sent out only prayed for the removal of Ponce as a member of the board of directors. Such
on March 26 and the election was to be held on March 28. removal was rejected by the court, but Gapol’s petition for the calling of a
stockholders’ meeting, was granted. At said meeting, a new set of board of
ISSUE: WON the notice requirement is complied with? directors was elected. Ponce filed a petition in the lower court seeking to set
aside its order, but the same was denied. Thus, they filed for an appeal to
HELD: No. Section 3, article III, of the constitution and by-laws the the SC.
association provides:
ISSUE: WON the Court may issue such order directing a stockholder to call a
―Notice of the time and place of holding of any annual meeting, or any meeting of the stockholders of a corporation?
special meeting, the members, shall be given either by posting the same in
a postage prepaid envelope, addressed to each member on the record at HELD: Yes. The corporation law provides that ―whenever, from any cause,
the address left by such member with the Secretary of the Association, or there is no person authorized to call a meeting, or when the officer
at his known post-office address or by delivering the same person at least authorized to do so refuses, fails or neglects to call a meeting, any judge of a
(5) days before the date set for such meeting. . . . In lieu of addressing or CFI on the showing of a good cause therefore, may issue an order to any
serving personal notices to the members, notice of the members, notice of stockholder or member of a corporation, directing him to call a meeting of
a regular annual meeting or of a special meeting of the members may be the corporation by giving the proper notice required‖. Thus, on the showing
given by posting copies of said notice at the different departments and of good cause therefore, the court may authorize a stockholder to
plants of the San Miguel Brewery Inc., not less than five (5) days prior to call a meeting and to preside thereat until the majority stockholders
the date of the meeting. (Annex K.)‖ representing a majority of the stock present and permitted to be
voted shall have chosen one among them to preside. This showing
Notice of a special meeting of the members should be given at least five days of good cause exists when the court is apprised of the fact that the
before the date of the meeting. Therefore, the five days previous notice by-laws of the corporation require the calling of a general meeting
required would not be complied with. of the stockholders to elect the board of directors but the call of the
meeting has not been done. There is no need to issue a notice of hearing,
nor is there any necessity to hold a hearing, upon the board of directors. The
3. It Must Be Held at the Proper Place court here found good cause in calling the meeting for the election of a new
board, because the chairman of the board of directors who is so authorized
Sec. 51. Place and time of meetings of stockholders or members. - to call such meeting, failed, neglected or refused to perform his duty. Having
Stockholders' or members' meetings, whether regular or special, shall be held the authority to grant such relief, the lower court did not exceed its
in the city or municipality where the principal office of the corporation is jurisdiction nor did it abuse its discretion in granting it.
located, and if practicable in the principal office of the corporation: Provided,
That Metro Manila shall, for purposes of this section, be considered a city or NOTE: In a case decided by the SEC, it rules that under the present state of
municipality. law, the Ponce case will apply ONLY ―where there is no person authorized to
call the meeting:, thus an ex-parte proceeding may be allowed as obviously
Notice of meetings shall be in writing, and the time and place thereof stated there is no person to summon and no person whose right to due process will
be violated. However, where there is an officer authorized to call the meeting
and that officer refuses, fails or neglects to call a meeting then the Ponce NOTICE REQUIREMENT: is necessary for the purpose of determining the
case WILL NOT APPLY. This is so, because the phrase ―or when the officer legality of and binding effect of the resolution/s passed, EXCEPT:
authorized to do so refuses, or fails, or neglects to call a meeting‖ has been 1. When subsequently ratified;
deliberately omitted in Sec. 50 of the Corporation Code. 2. In close corporations where a director may bid the corporation even
without a meeting;
Likewise, in the same ruling of the SEC, the Ponce case likened the 3. When the right to a notice is waived.
questioned order to a writ of preliminary injunction which may be issued ex
parte, the said PI can no longer be issued without notice and hearing under The SEC has ruled that a special meeting conducted in the absence of some
Sec. 5 of Rule 58 of the Rules of Court. Mandamus is the proper remedy. of the directors and without any notice to them is illegal and the action at
such meeting although by a majority of the directors is invalid, unless ratified.
IN SUMMARY: The following are authorized to call a meeting:
a. The person or persons authorized under the by-laws; However, if all the directors are present, their presence at the meeting
b. Absent any provision in the by-laws, it may be called by the waives the want of notice.
President;
c. By the secretary on order of the president or on written demand of PRESIDING OFFICER: Unless the by-laws otherwise provide, the presidnet.
the stockholders representing at least a majority of the outstanding
capital stock or majority of the members entitled to vote, or the Sec. 54. Who shall preside at meetings. - The president shall preside at
stockholder or member making the demand if there is no secretary all meetings of the directors or trustee as well as of the stockholders or
or he refuses to do so, under Sec. 28; and members, unless the by-laws provide otherwise.
d. A stockholder as empowered by the proper forum pursuant to Sec.
50 QUORUM: Unless the AOI or by-laws provide for a greater majority, a
majority of the members of the BOD/T as fixed in the AOI will constitute a
5. Quorum and Voting Requirement Must Be Met quorum for the transaction of corporate business and the decision of the
majority of those present shall be valid as a corporate act. EXCEPT: election
Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code of corporate officers as provided under Sec. 25 which required the vote of a
or in the by-laws, a quorum shall consist of the stockholders representing a majority of all the members of the board.
majority of the outstanding capital stock or a majority of the members in the
case of non-stock corporations. PROXY VOTING: is not allowed for a director or trustee, since he was
supposedly elected because of his expertise in management or his business
A by-law provision may provide for a higher quorum requirement than that acumen such that he is expected to personally attend and vote on matters
prescribed in the Code, but not less. Otherwise, the by-law provision brought before the meeting.
providing for a lesser quorum requirement have no force and effect since a
by-law provision is subordinate to the statute and could not defeat the C. STOCKHOLDERS‘ RIGHT TO VOTE AND MANNER OF VOTING
requirements of the law. The same goes for a by-law provision providing for
a voting requirement less than that provided in the Code. Being a property right, a stockholder can vote his share the way he pleases
except in the following:
If the voting requirement is met, any resolution passed in the meeting, even 1. Non-voting shares are not entitled to vote except in those instances
if improperly held or called will be valid if ALL the stockholders or members provided in the penultimate paragraph of Sec. 6 of the Code;
are present or duly represented thereat, as provided under the last 2. Treasury shares have no voting rights while they remain in the treasury
paragraph of Sec. 51: (Sec. 57);
3. Shares of stock declared delinquent are not entitled to vote at any
All proceedings had and any business transacted at any meeting of the meeting; and
stockholders or members, if within the powers or authority of the 4. Unregistered transferee of shares of stock.
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 PROXY VOTING: is allowed or through a voting trust agreement, or by the
duly represented at the meeting. executor, administrator, receiver or other legal representative appointed by
the court.
B. DIRECTORS‘/TRUSTEES‘ MEETING
PLEDGED OR MORTGAGED SHARES: the pledgor or mortgagor are
Sec. 53. Regular and special meetings of directors or trustees. - entitled to vote in the absence of an agreement to the contrary:
Regular meetings of the board of directors or trustees of every corporation
shall be held monthly, unless the by-laws provide otherwise. Sec. 55. Right to vote of pledgors, mortgagors, and administrators. -
In case of pledged or mortgaged shares in stock corporations, the pledgor or
Special meetings of the board of directors or trustees may be held at any mortgagor shall have the right to attend and vote at meetings of
time upon the call of the president or as provided in the by-laws. stockholders, unless the pledgee or mortgagee is expressly given by the
pledgor or mortgagor such right in writing which is recorded on the
Meetings of directors or trustees of corporations may be held anywhere in or appropriate corporate books.
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 Executors, administrators, receivers, and other legal representatives duly
must be sent to every director or trustee at least one (1) day prior to the appointed by the court may attend and vote in behalf of the stockholders or
scheduled meeting, unless otherwise provided by the by-laws. A director or members without need of any written proxy.
trustee may waive this requirement, either expressly or impliedly.
SHARES OWNED BY TWO OR MORE PERSONS JOINTLY:
REGULAR MEETINGS: those held monthly or as the by-laws may provide;
SPECIAL MEETINGS: those that are held at any time upon call of the Sec. 56. Voting in case of joint ownership of stock. - In case of shares
President or the person authorized to do so as may be provided in the by- of stock owned jointly by two or more persons, in order to vote the same, the
laws. consent of all the co-owners shall be necessary, unless there is a written
proxy, signed by all the co-owners, authorizing one or some of them or any
PLACE: Unlike the meeting of stockholders, the meetings of other person to vote such share or shares: Provided, That when the shares
directors/trustees may be held anywhere, within or even outside the are owned in an "and/or" capacity by the holders thereof, any one of the
Philippines, except when the by-laws provide otherwise. joint owners can vote said shares or appoint a proxy therefor.
D. PROXY AND OTHER REPRESENTATIVE VOTING The trustee or trustees shall execute and deliver to the transferors voting
trust certificates, which shall be transferable in the same manner and with
PROXY: is a species of absentee voting by mail by a one way ballot for the the same effect as certificates of stock.
slate or proposals suggested by the management or even perhaps, the
solicitor thereof. It is the authority given by the stockholder or member to The voting trust agreement filed with the corporation shall be subject to
another to vote for him at a stockholders’ or members’ meeting. The term is examination by any stockholder of the corporation in the same manner as
also used to refer to the instrument or paper which is evidence of the any other corporate book or record: Provided, That both the transferor and
authority of an agent or the holder thereof to vote for and in behalf of the the trustee or trustees may exercise the right of inspection of all corporate
stockholder or member. books and records in accordance with the provisions of this Code.
Sec. 58. Proxies. - Stockholders and members may vote in person or by Any other stockholder may transfer his shares to the same trustee or trustees
proxy in all meetings of stockholders or members. Proxies shall be in writing, upon the terms and conditions stated in the voting trust agreement, and
signed by the stockholder or member and filed before the scheduled meeting thereupon shall be bound by all the provisions of said agreement.
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 No voting trust agreement shall be entered into for the purpose of
and effective for a period longer than five (5) years at any one time. circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.
PROXY VOTING: is a right granted by law to all stockholders entitled to
vote in stock corporations and cannot, therefore, be denied. EXCEPT: In a Unless expressly renewed, all rights granted in a voting trust agreement shall
non-stock corporation with by-laws providing for a prohibition on the use of automatically expire at the end of the agreed period, and the voting trust
proxies (Sec. 89). certificates as well as the certificates of stock in the name of the trustee or
trustees shall thereby be deemed canceled and new certificates of stock shall
REQUIREMENTS: In the absence of a by-law provision regulating the form be reissued in the name of the transferors.
and execution of proxy, Sec. 58 requires:
1. The proxy must be in writing; The voting trustee or trustees may vote by proxy unless the agreement
2. It is signed by the stockholder or member or his duly authorized provides otherwise.
representative; and
3. It is filed on or before the schedule meeting with the corporate VOTING TRUSTS DISTINGUISHED FROM PROXY
secretary.
VOTING TRUST PROXY
It is to be noted, however, that publicly listed companies are requreid to The beneficial owner of the shares Legal title to the shares remain with
observe and comply with SEC Memorandum Circular No. 5 -1996, ceased to be stockholder of record of the beneficial owner
the corporation since the shares are
TYPES OF PROXIES: transferred to the trustee
1. General – gives a general discretionary power of attorney to vote for Trustee votes as owner of the shares Proxy votes merely as an agent
directors and all ordinary matters that my properly come before a The beneficial owner is disqualified The owner of the shares may be
meeting. It is not an authority, however, to vote for fundamental to be a director elected as such since legal title
changes in the corporate charter or for other unusual transactions, thereof remains with him
unless so specified; Purpose is to acquire voting control Generally used to secure voting an
2. Special – restricts the authority to vote on specified matters only and of the corporation quorum requirements or merely for
may direct the manner in which the vote will be cast. the purpose of representing an
absent stockholder
DURATION: May be fixed by the proxy’s own terms but it cannot exceed 5 Irrevocable Revocable anytime unless coupled
years and for not more than 5 years for each renewal. Otherwise, it expires with an interest
after the meeting for which it was given. The trustee can act and vote at any Proxy can generally act as such only
meeting during the duration of the at a particular meeting
VOTING TRUST: is one created by an agreement between a group of VTA
stockholders of a corporation and a trustee, or a group of identical Trustee may vote in person or by Proxy holder must vote in person
agreements between individual stockholders and a common trustee, whereby
proxy
it is provided that for a term of years, or for a period contingent upon a
Duration may exceed five years Proxy is of a shorter duration and
certain event, or until the agreement is terminated, control over the stock
may not exceed 5 years
owned by such stockholders, shall be lodged in the trustee, either with or
VTA to be valid and effective, must Unless required by the by-laws,
without reservation to the owners or persons designated by them the power
be notarized and filed with the SEC proxies need not be notarized nor is
to direct how such control shall be issued.
it required to be filed with the SEC.
Sec. 59. Voting trusts. - One or more stockholders of a stock corporation
READ AGAIN: LEE VS. CA
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
NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION,
period not exceeding five (5) years at any time: Provided, That in the case of
EUSEBIO VILLATUYA MARIO Y. CONSING and ROBERTO S. BENEDICTO,
a voting trust specifically required as a condition in a loan agreement, said
petitioners,
voting trust may be for a period exceeding five (5) years but shall
vs.
automatically expire upon full payment of the loan. A voting trust agreement
HON. BENJAMIN AQUINO, in his official capacity as Presiding Judge of
must be in writing and notarized, and shall specify the terms and conditions
Branch VIII of the Court of First Instance of Rizal, BATJAK INC., GRACIANO
thereof. A certified copy of such agreement shall be filed with the corporation
A. GARCIA and MARCELINO CALINAWAN JR., respondents.
and with the Securities and Exchange Commission; otherwise, said
(G.R. No. L-34192 June 30, 1988)
agreement is ineffective and unenforceable. The certificate or certificates of
stock covered by the voting trust agreement shall be cancelled and new ones
PHILIPPINE NATIONAL BANK, petitioner,
shall be issued in the name of the trustee or trustees stating that they are
vs.
issued pursuant to said agreement. In the books of the corporation, it shall
HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge of the
be noted that the transfer in the name of the trustee or trustees is made
pursuant to said voting trust agreement.
Court of First Instance of Rizal, Branch VIII and BATJAK INCORPORATED, of 60% of the paid-up and outstanding shares of stock in Batjak. This is
respondents confirmed by paragraph No. 9 of the Voting Trust Agreement, thus:
(G.R. No. L-34213 June 30, 1988)
9. TERMINATION — Upon termination of this Agreement as heretofore
FACTS: On Oct. 26, 1965, private respondent Batjak, Inc. entered into a provided, the certificates delivered to the TRUSTEE by virtue hereof
Voting Trust Agreement with petitioner NIDC, in order to assist the former shall be returned and delivered to the undersigned stockholders as the
with its financial obligations. The VTA was for a period of 5 years constituting absolute owners thereof, upon surrender of their respective voting trust
60% of the outstanding paid-up and subscribed shares of Batjak. 5 years certificates, and the duties of the TRUSTEE shall cease and terminate.-
therafter, or on Aug. 31, 1970, Batjak represented by majority stockholders,
through Atty. Amado Duran, legal counsel, wrote to NIDC inquiring if the Under the aforecited provision, what was to be returned by NIDC as trustee
atter was still interest in negotiating the renewal of the VTA, but there was to Batjak's stockholders, upon the termination of the agreement, are the
no reply even with the second letter sent on Sept. 22, 1970. certificates of shares of stock belonging to Batjak's stockholders, not the
properties or assets of Batjak itself which were never delivered, in the first
On Sept. 23, 1970, legal counsel of Batjak wrote another letter asking for a place to NIDC, under the terms of said Voting Trust Agreement.
complete accounting of the assets, properties, management and operation of
Batjak, preparatory to their turn-over and transfer to the stockholders of In any event, a voting trust transfers only voting or other rights pertaining to
Batjak. the shares subject of the agreement or control over the stock. The law on the
matter is Section 59, Paragraph 1 of the Corporation Code (BP 68) which
NIDC replied that it had no intention to comply with such demand. Batjak provides:
filed an action for mandamus with preliminary injunction which was granted. Sec. 59. Voting Trusts — One or more stockholders of a stock
corporation may create a voting trust for the purpose of confering upon
ISSUE: WON Batjak has the personality to enforce the voting trust a trustee or trusties the right to vote and other rights pertaining to the
agreement executed by its stockholders and whether it may compel the shares for a period not exceeding five (5) years at any one time: ...
trustee to turn over the assets of the corporation?
The acquisition by PNB-NIDC of the properties in question was not made or
HELD: No. In support of the third ground of their motion to dismiss, PNB and effected under the capacity of a trustee but as a foreclosing creditor for the
NIDC contend that Batjak's complaint for mandamus is based on its claim or purpose of recovering on a just and valid obligation of Batjak.
right to recovery of possession of the three (3) oil mills, on the ground of an
alleged breach of fiduciary relationship. Noteworthy is the fact that, in the
Voting Trust Agreement, the parties thereto were NIDC and certain CHAPTER 10: STOCKS AND STOCKHOLDERS
stockholders of Batjak. Batjak itself was not a signatory thereto. Under Sec.
2, Rule 3 of the Rules of Court, every action must be prosecuted and A person may become a stockholder in a corporation in either of three ways:
defended in the name of the real party in interest. Applying the rule in the 1. By a contract of subscription with the corporation;
present case, the action should have been filed by the stockholders of Batjak, 2. By purchase of treasury shares from the corporation; and
who executed the Voting Trust Agreement with NIDC, and not by Batjak itself 3. By purchase or acquisition of shares from existing stockholders.
which is not a party to said agreement, and therefore, not the real party in
interest in the suit to enforce the same. A. SUBSCRIPTION CONTRACT
In addition, PNB claims that Batjak has no cause of action and prays that the A ―subscription‖, properly speaking, is the mutual agreement of the
petition for mandamus be dismissed. A careful reading of the Voting Trust subscribers to take and pay for the stocks of the corporation. A ―subscription
Agreement shows that PNB was really not a party thereto. Hence, mandamus contract‖, on the other hand is specifically defined in Sec. 60:
will not lie against PNB.
Sec. 60. Subscription contract. - Any contract for the acquisition of
Batjak has no clear right to be entitled to the writ prayed for. What unissued stock in an existing corporation or a corporation still to be formed
Batjak seeks to recover is title to, or possession of, real property shall be deemed a subscription within the meaning of this Title,
(the three (3) oil mills which really made up the assets of Batjak) notwithstanding the fact that the parties refer to it as a purchase or some
but which the records show already belong to NIDC. It is not disputed other contract.
that the mortgages on the three (3) oil mills were foreclosed by PNB and
NIDC and acquired by them as the highest bidder in the appropriate SUBSCRIPTION VS. PURCHASE: In the latter, the buyer becomes a
foreclosure sales. Ownership thereto was subsequently consolidated by PNB shareholder only upon full payment of the price. UNISSUE shares cannot be
and NIDC, after Batjak failed to exercise its right of redemption. The three the subject of a ―purchase‖.
(3) oil mills are now titled in the name of NIDC. From the foregoing, it is
evident that Batjak had no clear right to be entitled to the writ prayed for. In ―We may add that the law in force in this jurisdiction makes no distinction, in
Lamb vs. Philippines (22 Phil. 456) citing the case of Gonzales V. Salazar vs. respect to the liability of the subscriber, between shares subscribed before
The Board of Pharmacy, 20 Phil. 367, the Court said that the writ of incorporation is effected and shares subscribed thereafter. All like are bound
mandamus will not issue to give to the applicant anything to which he is not to pay full value in cash or its equivalent, and any attempt to discriminate in
entitled by law. favor of one subscriber by relieving him of this liability wholly or in part is
forbidden. In what is here said we have reference of course primarily to
Batjak premises its right to the possession of the three (3) off mills on the subscriptions to shares that have not been previously issued. It is conceivable
Voting Trust Agreement, claiming that under said agreement, NIDC was that the power of the corporation to make terms with the purchaser would be
constituted as trustee of the assets, management and operations of Batjak, greater where the shares which are the subject of the transaction have been
that due to the expiration of the Voting Trust Agreement, on 26 October acquired by the corporation in course of commerce, after they have already
1970, NIDC should tum over the assets of the three (3) oil mills to Batjak been once issued. But the shares with which are here concerned are not of
From the foregoing provisions, it is clear that what was assigned to NIDC was this sort.‖ (National Exchange Co., Inc. vs. Dexter)
the power to vote the shares of stock of the stockholders of Batjak,
representing 60% of Batjak's outstanding shares, and who are the signatories EXAMPLE: If X corporation had P1M authorized capital divided into 1M
to the agreement. The power entrusted to NIDC also included the authority shares with a par value of P1. 500,000 has already been subscribed:
to execute any agreement or document that may be necessary to express the 1. Z ―purchased‖ 100,000 of the UNISSUED shares paying 50% down
consent or assent to any matter, by the stockholders. Nowhere in the said payment and the balance payable after 6 months, with a condition that
provisions or in any other part of the Voting Trust Agreement is mention he will not be considered a shareholder until full payment. – He is still
made of any transfer or assignment to NIDC of Batjak's assets, operations, liable for the balance because this will be considered a subscription no
and management. NIDC was constituted as trustee only of the voting rights matter how the parties refer to it and accordingly, Z is liable as a
shareholder therein. proceedings for P20,000 which was opposed by the administrator, and
2. Z was declared a delinquent shareholder and X Co. was declared as the dismissed by the CFI.
winning bidder by paying P100,000 and acquired the delinquent shares.
Later on, 20,000 of the shares were sold to Y – here, the shares being ISSUE: WON the subscription is valid and enfroceable?
from treasury and not from unissued shares, may be the proper subject
of a ―purchase‖ and thus, a condition that Y would not became a HELD: No. It appears that the application sent by Damasa Crisostomo to the
shareholder until full payment may be valid. Quezon College, Inc. was written on a general form indicating that an
applicant will enclose an amount as initial payment and will pay the balance
ORAL: A subscription contract need not be in writing such that an oral in accordance with law and the regulations of the College. On the other hand,
contract of subscription is valid and enforceable under the Statute of Frauds. in the letter actually sent by Damasa Crisostomo, the latter (who requested
Thus, it was ruled by the SC that such an agreement does not seem to fall that her subscription for 200 shares be entered) not only did not enclose any
within the definition of a sale under our substantive law, and is therefore initial payment but stated that "babayaran kong lahat pagkatapos na ako ay
believed that an oral subscription agreement as distinguished from sale of makapagpahuli ng isda." There is nothing in the record to show that the
stock is valid and enforceable. Quezon College, Inc. accepted the term of payment suggested by Damasa
Crisostomo, or that if there was any acceptance the same came to her
CONDITION: Subscriptions may be made upon a condition precedent or knowledge during her lifetime. As the application of Damasa Crisostomo is
upon special terms (condition subsequent). A conditional subscription, or obviously at variance with the terms evidenced in the form letter issued by
one made upon a condition precedent, does not make the subscriber a the Quezon College, Inc., there was absolute necessity on the part of the
stockholder, or render him to pay the amount of his subscription, until College to express its agreement to Damasa's offer in order to bind the latter.
performance of the condition. A subscription upon special terms, on the Conversely, said acceptance was essential, because it would be unfair to
other hand, is an absolut subscription, making the subscriber a stockholder, immediately obligate the Quezon College, Inc. under Damasa's promise to
and rendering him liable as such, as soon as the subscription is accepted, the pay the price of the subscription after she had caused fish to be caught. In
special term being an independent stipulation. other words, the relation between Damasa Crisostomo and the
Quezon College, Inc. had only thus reached the preliminary stage
In case of doubt in the intention of the parties, a subscription should be whereby the latter offered its stock for subscription on the terms
considered as an absolute subscription upon special terms, rather than stated in the form letter, and Damasa applied for subscription fixing
conditional. The policy of giving protection to creditors and other subscribers her own plan of payment, — a relation, in the absence as in the
has led to the adoption of this rule of construction favoring the immediate present case of acceptance by the Quezon College, Inc. of the
liability of the subscriber. counter offer of Damasa Crisostomo, that had not ripened into an
enforceable contract.
Conditional Subscriptions are valid provided: (1) there is nothing in the
charter or enabling act prohibiting the same; and (2) providing the conditions Indeed, the need for express acceptance on the part of the Quezon College,
are not such as to render their performance beyond the powers of the Inc. becomes the more imperative, in view of the proposal of Damasa
corporation or in violation of law or contrary to public policy. Crisostomo to pay the value of the subscription after she has harvested fish,
a condition obviously dependent upon her sole will and, therefore, facultative
NAZARIO TRILLANA, administrator-appellee, in nature, rendering the obligation void, under article 1115 of the old Civil
vs. Code which provides as follows: "If the fulfillment of the condition should
QUEZON COLLEGE, INC., claimant-appellant depend upon the exclusive will of the debtor, the conditional obligation shall
(GR No. L-5003; June 27, 1953) be void. If it should depend upon chance, or upon the will of a third person,
the obligation shall produce all its effects in accordance with the provisions of
FACTS: Damasa Crisostomo sent the following letter to the Board of this code." It cannot be argued that the condition solely is void, because it
Trustees of the Quezon College: would have served to create the obligation to pay, unlike a case, exemplified
by Osmeña vs. Rama (14 Phil., 99), wherein only the potestative condition
June 1, 1948 was held void because it referred merely to the fulfillment of an already
The BOARD OF TRUSTEES existing indebtedness.
Quezon College
Manila In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879), this Court
already held that "a condition, facultative as to the debtor, is obnoxious to
Gentlemen: the first sentence contained in article 1115 and renders the whole obligation
Please enter my subscription to dalawang daan (200) shares of void."
your capital stock with a par value of P100 each. Enclosed you will
find (Babayaran kong lahat pagkatapos na ako ay makapag-pahuli B. PRE-INCORPORATION SUBSCRIPTION
ng isda) pesos as my initial payment and the balance payable in
accordance with law and the rules and regulations of the Quezon Pre-incorporation subscriptions make reference to subscriptions for shares of
College. I hereby agree to shoulder the expenses connected with stock of a corporation still to be formed while post-incorporation subscriptions
said shares of stock. I further submit myself to all lawful demands, are those made or executed after the formation or organization of the
decisions or directives of the Board of Trustees of the Quezon corporation.
College and all its duly constituted officers or authorities (ang nasa
itaas ay binasa at ipinaliwanag sa akin sa wikang tagalog na aking Sec. 61. Pre-incorporation subscription. - A subscription for shares of
nalalaman). stock of a corporation still to be formed shall be irrevocable for a period of at
least six (6) months from the date of subscription, unless all of the other
Very respectfully,
subscribers consent to the revocation, or unless the incorporation of said
(Sgd.) DAMASA CRISOSTOMO
corporation fails to materialize within said period or within a longer period as
Signature of subscriber
may be stipulated in the contract of subscription: Provided, That no pre-
incorporation subscription may be revoked after the submission of the articles
Nilagdaan sa aming harapan: of incorporation to the Securities and Exchange Commission.
JOSE CRISOSTOMO
EDUARDO CRISOSTOMO IMMEDIATE BINDING EFFECT: This new provision gives an immediate
binding effect on pre-incorporation subscriptions as against the subscribers of
the capital stock of a corporation still to be formed. Pre-incorporation
On Oct. 26, 1948, Crisostomo died. As no payment on the subscriptions subscriptions are, in fact, mandatory as may be culled from the provisions of
appear to have been made, herein appellant filed a claim in her testate Sec. 13 and 14 of the Code which mandates that a corporation may be
registered as such only if at least 25% of its authorized capital stock has TRUE VALUE RULE: the motives and intent of those making the valuation
been subscribed and that at least 25% of the subscribed capital has been are disregarded and the sole and decisive factor or question is whether or not
paid. the property or services are in fact worth the value placed on them.
IRREVOCABLE: Pre-incorporation subscriptions are irrevocable: GOOD FAITH RULE: is based on the proposition that the value of the
1. For a period of at least 6 months from the date of subscription unless property or services is a matter about which there can be an honest
(a) all the subscribers consent to the revocation; or (b) the incorporation difference of opinion. Therefore, if the parties have acted in good faith
fails to materialize within said period or within a longer period as may without fraud or intentional over-valuation, the transaction cannot be
stipulated in the contract of subscription; and overturned even if it later becomes evident that the property or services were
2. After submission of the AOI to the SEC. in fact worth much less than the value fixed on them initially.
C. STOCK ISSUANCE Most jurisdiction follow the GOOD FAITH rule.
Stock issuance is generally the initial and primary source of corporate capital. STOCK DIVIDENDS: Sec. 62(5) which states that ―amounts transferred
Other sources may include corporate borrowings, loans and advances from from unrestricted retained earnings to stated capital‖ refer to stock dividends
creditors or stockholders. Corporate earnings may also be a source of where corporate earnings are capitalized rather than being distributed as
corporate funds if it is reinvested or ploughed back to the company. cash dividend. It merely converts income into capital, the consideration being
the retained earnings itself which would have accrued to the stockholders in
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a proportion to their respective stockholdings.
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 NO CONSIDERATION: stocks may not be issued without consideration for
following: the following reasons: (1) it is discriminatory against other stockholders; and
(2) it prejudices the rights of creditors under the Trust Fund Doctrine.
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and RECLASSIFICATION: Sec. 62(6) which provides that ―outstanding shares
necessary or convenient for its use and lawful purposes at a fair valuation exchanged for stocks in the event of reclassification or conversion‖ speaks of
equal to the par or issued value of the stock issued; shares of stock surrendered to the corporation in exchange for new or
3. Labor performed for or services actually rendered to the corporation; different type of shares. Example: Found Shares which, after 5 years, may be
4. Previously incurred indebtedness of the corporation; converted to common stocks.
5. Amounts transferred from unrestricted retained earnings to stated capital;
and PROHIBITED CONSIDERATIONS: Shares of stock may not be issued in
6. Outstanding shares exchanged for stocks in the event of reclassification or exchange for (1) promissory notes; or (2) future services – as their
conversion. realization are not certain.
Where the consideration is other than actual cash, or consists of intangible THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee,
property such as patents of copyrights, the valuation thereof shall initially be vs.
determined by the incorporators or the board of directors, subject to approval I. B. DEXTER, defendant-appellant
by the Securities and Exchange Commission. (GR No. L-27872; Feb. 25, 1928)
Shares of stock shall not be issued in exchange for promissory notes or FACTS: On August 10, 1919, the defendant, I. B. Dexter, signed a written
future service. subscription to the corporate stock of C. S. Salmon & Co. in the following
form:
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. I hereby subscribe for three hundred (300) shares of the capital stock of C.
S. Salmon and Company, payable from the first dividends declared on any
The issued price of no-par value shares may be fixed in the articles of and all shares of said company owned by me at the time dividends are
incorporation or by the board of directors pursuant to authority conferred declared, until the full amount of this subscription has been paid
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 Upon subscription, defendant Dexter paid P15,000 from the dividends
outstanding capital stock at a meeting duly called for the purpose. declared by the company and supplemented by money supplied personally be
the subscriber. No other payment was made.
―ISSUE‖: is generally employed to indicate the making of a share contract or
contract of subscription, that is, transaction by which a person becomes the ISSUE: WON the subscription to be paid out of the dividends declared on the
owner of shares and by which new share contracts are created. It is often shares has the effect of relieving the subscriber from personal liability in an
associated with the execution and delivery of a share certificate but the action to recover the value of the shares?
issuance of the shares is not dependent on the delivery of a certificate of
stock. HELD: No. Under the American regime corporate franchises in the Philippine
Islands are granted subject to the provisions of section 74 of the Organic Act
―PAR‖ or ―ISSUED PRICE‖: while it may not reflect the true value of the of July 1, 1902, which, in the part here material, is substantially reproduced
shares which constantly fluctuates, merely indicates the amount which the in section 28 of the Autonomy Act of August 29, 1916. In the Organic Act it is
original subscribers are supposed to contribute to the corporate capital as the among other things, declared: "That all franchises, privileges, or concessions
basis of the privilege of profit sharing with limited liability. granted under this Act shall forbid the issue of stock or bonds except in
exchange for actual cash or for property at a fair valuation equal to the par
PROPERTY: If shares are issued in exchange for property, the value of such value of the stock or bonds so issued; . . . ." (Act of Congress of July 1, 1902,
should at least be equal to the par or issued value of the stocks. Such value, sec. 74.)
may be determined with reference to
a. REAL PROPERTY - (1) independent appraiser’s appraisal report; (2) BIR Pursuant to this provision we find that the Philippine Commission inserted in
Zonal Valuation; or (3) Market Value indicated in the Real Estate Tax the Corporation Law, enacted March 1, 1906, the following provision: ". . .
Declaration. no corporation shall issue stock or bonds except in exchange for
b. INTANGIBLE PROPERTY – as determined by the incorporators or the actual cash paid to the corporation or for property actually received
BOD subject to the approval of the SEC. by it at a fair valuation equal to the par value of the stock or bonds
so issued." (Act No. 1459, sec. 16 as amended by Act No. 2792, sec. 2.)

by the president or vice president, countersigned by the secretary or
The prohibition against the issuance of shares by corporations except for assistant secretary, and sealed with the seal of the corporation shall be
actual cash to the par value of the stock to its full equivalent in property is issued in accordance with the by-laws. Shares of stock so issued are personal
thus enshrined in both the organic and statutory law of the Philippine Islands; property and may be transferred by delivery of the certificate or certificates
and it would seem that our lawmakers could scarcely have chosen language endorsed by the owner or his attorney-in-fact or other person legally
more directly suited to secure absolute equality stockholders with respect to authorized to make the transfer. No transfer, however, shall be valid, except
their liability upon stock subscriptions. Now, if it is unlawful to issue stock as between the parties, until the transfer is recorded in the books of the
otherwise than as stated it is self-evident that a stipulation such as that corporation showing the names of the parties to the transaction, the date of
now under consideration, in a stock subscription, is illegal, for this the transfer, the number of the certificate or certificates and the number of
stipulation obligates the subscriber to pay nothing for the shares shares transferred.
except as dividends may accrue upon the stock. In the contingency
that dividends are not paid, there is no liability at all. This is a No shares of stock against which the corporation holds any unpaid claim shall
discrimination in favor of the particular subscriber, and hence the be transferable in the books of the corporation.
stipulation is unlawful.
REQUISITES FOR THE ISSUANCE OF CERTIFICATE OF STOCK:
The general doctrine of corporation law is in conformity with this conclusion, 1. It must be signed by the president or vice-president and countersigned
as may be seen from the following proposition taken from the standard by the secretary or assistant secretary;
encyclopedia treatise, Corpus Juris: 2. It must be sealed with the corporate seal, and
3. The entire value thereof (together with the interest or expenses, if any)
Nor has a corporation the power to receive a subscription upon should have been paid.
such terms as will operate as a fraud upon the other subscribers
or stockholders by subjecting the particular subcriber to lighter RIGHTS OF SUBSCRIBERS: While it appears, that a subscriber to shares
burdens, or by giving him greater rights and privileges, or as a of stock cannot be entitled to the issuance of a certificate of stock until the
fraud upon creditors of the corporation by withdrawing or full amount of his subscription together with interest and expenses (in case of
decreasing the capital. It is well settled therefore, as a general rule, delinquent shares) if any is due, has been paid, a subscriber, even if not yet
that an agreement between a corporation and a particular subscriber, by fully paid, is entitled to exercise all the rights of a stockholder and the
which the subscription is not to be payable, or is to be payable in part corresponding liability that attach thereunder:
only, whether it is for the purpose of pretending that the stock is really
greater than it is, or for the purpose of preventing the predominance of Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully
certain stockholders, or for any other purpose, is illegal and void as in paid which are not delinquent shall have all the rights of a stockholder.
fraud of other stockholders or creditors, or both, and cannot be either
enforced by the subscriber or interposed as a defense in an action on the In essence, the issuance of a certificate of stock is not a condition sine qua
subscription. (14 C. J., p. 570.) non to consider a subscriber a stockholder. To all intents and purposes, a
subscriber is a shareholder upon subscription and entitled to the all the rights
The rule thus stated is supported by a long line of decisions from numerous as such, except:
courts, with little or no diversity of opinion. As stated in the headnote to the 1. For the issuance of a certificate of stock;
opinion of the Supreme Court of United States in the case of Putnan vs. New 2. If his shares are declared delinquent; or
Albany, etc. Railroad Co. as reported in 21 Law. ed., 361, the rule is that 3. When he exercises appraisal right under Sec. 83.
"Conditions attached to subscriptions, which, if valid, lessen the
capital of the company, are a fraud upon the grantor of the NEGOTIABILITY: A certificate of stock is not regarded as ―negotiable‖ in
franchise, and upon those who may become creditors of the the sense same sense as a bill or a not, even if its endorsed in blank. Thus,
corporation, and upon unconditional stockholders." while it may be transferred by endorsement coupled with delivery thereof, it
is nonetheless non-negotiable in that the transferee takes it without prejudice
In the appellant's brief attention is called to the third headnote to Bank vs. to all the rights and defenses which the true and lawful owner may have
Cook (125 Iowa, 111), where it is stated that a collateral agreement with a except in so far as the principles governing estoppel may apply.
subscriber to stock that his subscription shall not be collectible except from
dividends on the stock, is valid as between the parties and a complete NON-REGISTRATION: of shares disposed of by the holder will not affect
defense to a suit on notes given for the amount of the subscription. A careful the validity of the transfer at least in so far as the contracting parties are
perusal of the decision will show that the rule thus broadly stated in the concerned. As regards, the corporation, the transferee will not be recognized
headnote is not justified by anything in the reported decision; for what the as such stockholder and could not exercise the rights until the transfer has
court really held was that the making of such promise by the agent of the been duly recorded in the stock and transfer book. As such, ―he cannot vote
corporation who sold the stock is admissible in evidence in support of the or be vote for, and he will not be entitled to dividends. The corporation may
defense of fraud and failure of consideration. Moreover, even if the decision be protected when it pays dividends to the registered owner despite a
had been to the effect supposed, the rule announced in the headnote, could previous transfer of which it had no knowledge. The purpose of registration
have no weight in a jurisdiction like this where there is a statutory provision therefore is two-fold: (1) to enable the transferee to exercise all the rights of
prohibiting such agreements. stockholder, and (2) to inform the corporation of any change in share
ownership so that it can ascertain the person entitled to the rights and
D. CERTIFICATE OF STOCK AND THEIR TRANSFER subject to the liabilities of a corporation‖ (De Erquiga vs. CA)
Share of Stock: may rightfully be described as a profit sharing contract, a REGISTRATION: is necessary to:
series of units of interest and participation in a corporation in consideration of 1. Enable the corporation to know who its stockholders are;
a proportionate right to participate in dividend and other distributions. They 2. Enable the transferee to exercise his rights as a stockholder;
are personal properties and the owners thereof have the unbridled right to 3. Afford the corporation an opportunity to object or refuse registration of
transfer the same to anyone they please subject only to reasonable charter the transfer in cases allowed by law (as when it has unpaid claims on
provisions. the shares transferred);
4. Avoid fictitious and fraudulent transfers; and
Certificate of Stock: is the piece of paper or document which evidences 5. Protect creditors who have the right to look upon stockholders, in case
the ownership of shares and a convenient instrument in the transfer of the of non-payment or watered shares, for the satisfaction of their claims.
title.
MANDAMUS: If the corporate secretary refuses to registered or record the
Sec. 63. Certificate of stock and transfer of shares. - The capital stock transfer, mandamus will lie to compel the registration. This is because such
of stock corporations shall be divided into shares for which certificates signed duty is ministerial. HOWEVER, he cannot be compelled to do so when the
transferee’s title to said shares has no prima facie validity or is uncertain. public auction.
TWO MODES OF TRANSFERRING STOCKS: Monserrat claims ownership over the shares and the lower court rendered
1. Endorsement and delivery of certificate of stock; judgment in his favor, holding that the mortgage on the shares was null and
2. Notarized deed. void, but the mortgage on the usufruct is valid.
The SEC has, however, ruled that when a corporation has already issued ISSUE: WON it is necessary to enter upon the books of the corporation a
stock certificates, any transfer of the shares can only be effectively made by mortgage constituted on shares of stock in order that such mortgage may be
endorsement and delivery of the stock certificate. A deed of transfer, sale or valid and may have force and effect as against third persons?
assignment alone would not suffice (as affirmed by the SC in Rural Bank of
Lipa City, Inc. vs. CA) for to rule otherwise would open the door to fraudulent HELD: No. Section 35 of the Corporation Law provides the following:
or fictitious transfer which the SEC seeks to avoid. In effect, while a formal
contract of sale in a notarized document is equivalent to actual delivery of the SEC. 35. The capital stock of stock corporations shall be divided into
certificate itself, this mode of transfer is available only if no certificate of shares for which certificates signed by the president or the vice-president,
stock has been issued. counter signed by the secretary or clerk and sealed with the seal of the
corporation, shall be issued in accordance with the by-laws. Shares of
RIGHT TO TRANSFER SHARES OF STOCK: may not be unreasonably stock so issued are personal property and may be transferred by delivery
restricted prohibited. Thus, in Padgett vs. Bobcock & Templeton and Fleischer of the certificate indorsed by the owner or his attorney in fact or other
vs. Botica Nolasco, the SC held that every owner of corporate shares has the person legally authorized to make the transfer. No transfer, however, shall
same uncontrollable right to alienate them and is under no obligation from be valid, except as between the parties, until the transfer is entered and
selling them at his sacrifice and for the welfare and benefit of the corporation noted upon the books of the corporation so as to show the names of the
and other stockholders. But while unreasonable restrictions may not be parties to the transaction, the date of the transfer the number of the
allowed, the right to transfer may be ―regulated‖ to give the corporation certificate, and the number of shares transferred.
protection against colorable or fraudulent transfer or to enable it to know
who its stockholders are. Also, as a matter of policy, the SEC allows the grant No share of stock against which the corporation hold, any unpaid claim
of ―preferential rights‖ to existing stockholders and/or the corporation, giving shall be transferable on the books of the corporation.
them the first option to purchase the shares of a selling stockholder within a
reasonable period not exceeding thirty days provided that the same is The legal provision just quoted does not require any entry except of transfers
contained in the AOI and in all the stock certificates to be issued. This is of shares of stock in order that such transfers may be valid as against third
considered ―reasonable‖ since it merely suspends the right to transfer within persons. Now, what did the Legislature mean in using the word "transfer"?
the period specified.
Inasmuch as it does not appear from the text of the Corporation Law that an
OTHER RESTRICTIONS: attempt was made to give a special signification to the word "transfer", we
1. It is not valid, except as between the parties, until recorded in the books shall construe it according to its accepted meaning in ordinary parlance.
of the corporation;
2. Shares of stock against which the corporation holds any unpaid claim The word "transferencia" (transfer) is defined by the "Diccionario de la
shall not be transferrable in the books of the corporation. Unpaid claims, Academia de la Lengua Castellana" as "accion y efecto de transferir" (the act
refer to claims arising from unpaid subscription and not to any and effect of transferring); and the verb "transferir", as "ceder o renunciar en
indebtedness which a stockholder may owe the corporation such as otro el derecho o dominio que se tiene sobre una cosa, haciendole dueno de
monthly dues; ella" (to assign or waive the right in, or absolute ownership of, a thing in
3. Restrictions required to be indicated in the AOI, bylaws and stock favor of another, making him the owner thereof).
certificates of a close corporation;
4. Restrictions imposed by special law, such as the Public Service Act In the Law Dictionary of "Words and Phrases", third series, volume 7, p. 589,
requiring the approval of the government agency concerned if it will vest the word "transfer" is defined as follows:
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 "Transfer" means any act by which property of one person is vested in
Nationalization Laws; and another, and "transfer of shares", as used in Uniform Stock Transfer Act
6. Those covered by reasonable agreement of the parties. (Comp. St. Supp., 690), implies any means whereby one may be divested
of and another acquire ownership of stock. (Wallach vs. Stein [N.J.], 136
TRANSFER: as used in the Corporation Code, refers to absolute and A., 209, 210.)"
unconditional transfer to warrant registration in the books of the corporation
in order to bind the latter and other third persons. In view of the definitions cited above, the question arises as to whether or
not a mortgage constituted on certain shares of stock in accordance with Act
ENRIQUE MONSERRAT, plaintiff-appellee, No. 1508, as amended by Act No. 2496, is a transfer of such shares in the
vs. abovementioned sense.
CARLOS G. CERON, ET AL., defendants.
ERMA, INC., and, THE SHERIFF OF MANILA, respondents Section 3 of the aforesaid Act No. 1508, as amended by Act No. 2496,
(G.R. No. 37078; September 27, 1933) defines the phrase "hipoteca mobiliaria" (chattel mortgage) as follows:
FACTS: Enrique Monserrat, president and manager of the Manila Yellow SEC. 3. A chattel mortgage is a conditional sale of personal property as
Taxicab Co., Inc. (MYTC), assigned to Carlos G. Ceron the usufruct of his security for the payment of a debt, or the performance of some other
1,200 shares in consideration of the interest shown and the financial aid obligation specified therein, the condition being that the sale shall be
extended him (Monserrat) in the organization of the corporation. This avoided upon the seller paying to the purchaser a sum of money or doing
assignment allowed Ceron to derive the right to enjoy the profits (during his some other act named. If the condition is performed according to its terms
lifetim) that may be derived from the shares but prohibited him from acts of the mortgage and sale immediately become void, and the mortgage is
absolute ownership, such acts and the right to vote, reserved to Monserrat hereby divested of his title.
and his heirs. Such assignment was recorded in the books of the corporation
and the corresponding shares certificate was issued to Ceron. According to the legal provision just quoted, although a chattel mortgage,
accompanied by delivery of the mortgaged thing, transfers the title and
Later on, Ceron mortgaged the shares to herein defendant Eduardo Matute, ownership thereof to the mortgage creditor, such transfer is not absolute but
the latter without knowledge of the existence of the assignment. Due to non- constitutes a mere security for the payment of the mortgage debt, the
payment, Matute foreclosed the mortgage and the shares were sold at a

transfer in question becoming null and void from the time the mortgage whether or not shares of a corporation could be hypothecated by placing a
debtor complies with his obligation to pay his debt. chattel mortgage on the certificate representing such shares we now regard
as settled by the case of Monserrat vs. Ceron, supra. But that case did not
In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127 Pac., 14, 17; deal with any question relating to the registration of such a mortgage or the
34 Okl., 662; 46 L. R. A. [N.S.], 455), cited in Words and Phrases, second effect of such registration. Nothing appears in the record of that case even
series, vol. 4, p. 978, the following appears: tending to show that the chattel mortgage there involved was ever registered
anywhere except in the office of the corporation, and there was no question
A "transfer" is the act by which owner of a thing delivers it to another with involved there as to the right of priority among conflicting claims of creditors
the intent of passing the rights which he has in it to the latter, and a of the owner of the shares
chattel mortgage is not within the meaning of such term.
Section 4 of Act No. 1508 provides two ways for executing a valid chattel
Therefore, the chattel mortgage is not the transfer referred to in mortgage which shall be effective against third persons. First, the possession
section 35 of Act No. 1459 commonly known as the Corporation law, of the property mortgage must be delivered to and retained by the
which transfer should be entered and noted upon the books of a mortgagee; and, second, without such delivery the mortgage must be
corporation in order to be valid, and which, as has already been recorded in the proper office or offices of the register or registers of deeds. If
said, means the absolute and unconditional conveyance of the title a chattel mortgage of shares of stock of a corporation may validly be made
and ownership of a share of stock. without the delivery of possession of the property to the mortgagee and the
mere registration of the mortgage is sufficient to constructive notice to third
If, in accordance with said section 35 of the Corporation Law, only the parties, we are confronted with the question as to the proper place of
transfer or absolute conveyance of the ownership of the title to a registration of such a mortgage. Section 4 provides that in such a case the
share need be entered and noted upon the books of the corporation mortgage resides at the time of making the same or, if he is a non-resident,
in order that such transfer may be valid, therefore, inasmuch as a in the province in which the property is situated; and it also provides that if
chattel mortgage of the aforesaid title is not a complete and the property is situated in a different province from that in which the
absolute alienation of the dominion and ownership thereof, its entry mortgagor resides the mortgage shall be recorded both in the province of the
and notation upon the books of the corporation is not necessary mortgagor's residence and in the province where the property is situated.
requisite to its validity.
If with respect to a chattel mortgage of shares of stock of a corporation,
It is obvious, therefore, that the defendant entity Erma, Inc., as a conditional registration in the province of the owner's domicile should be sufficient, those
purchaser of the shares of stock in question given as security for the who lend on such security would be confronted with the practical difficulty of
payment of his credit, acquired in good faith Carlos G. Ceron's right and title being compelled not only to search the records of every province in which the
to the 600 common shares of stock evidenced by certificate No. 7 of the mortgagor might have been domiciled but also every province in which a
MYTC, and as such conditional purchaser in good faith, it is entitled to the chattel mortgage by any former owner of such shares might be registered.
protection of the law. We cannot think that it was the intention of the legislature to put this almost
prohibitive impediment upon the hypothecation of shares of stock in view of
In view of the foregoing considerations, we are of the opinion and so hold the great volume of business that is done on the faith of the pledge of shares
that, inasmuch as section 35 of the Corporation Law does not require of stock as collateral.
the notation upon the books of a corporation of transactions
relating to its shares, except the transfer of possession and It is a common but not accurate generalization that the situs of shares of
ownership thereof, as a necessary requisite to the validity of such stock is at the domicile of the owner. The term situs is not one of fixed of
transfer, the notation upon the aforesaid books of the corporation, invariable meaning or usage. Nor should we lose sight of the difference
of a chattel mortgage constituted on the shares of stock in question between the situs of the shares and the situs of the certificates of shares.
is not necessary to its validity. The situs of shares of stock for some purposes may be at the domicile of the
owner and for others at the domicile of the corporation; and even elsewhere.
(Cf. Vidal vs. South American Securities Co., 276 Fed., 855; Black Eagle Min.
GONZALO CHUA GUAN, plaintiff-appellant, Co. vs. Conroy, 94 Okla., 199; 221 Pac,, 425 Norrie vs. Kansas City Southern
vs. Ry. Co., 7 Fed. [2d]. 158.) It is a general rule that for purposes of
SAMAHANG MAGSASAKA, INC., and SIMPLICIO OCAMPO, ADRIANO G. execution, attachment and garnishment, it is not the domicile of the
SOTTO, and EMILIO VERGARA, as president, secretary and treasurer owner of a certificate but the domicile of the corporation which is
respectively of the same, defendants-appellees decisive. (Fletcher, Cyclopedia of the Law of Private Corporations, vol. 11,
(G.R. No. L-42091; November 2, 1935) paragraph 5106. Cf. sections 430 and 450, Code of Civil Procedure.)
FACTS: To secure the payment of a debt, Gonzalo H. Co Toco mortgage his By analogy with the foregoing and considering the ownership of shares in a
shares to Chua Chiu, such assignment recorded in the Office of the Register corporation as property distinct from the certificates which are merely the
of Deeds and the books of the corporation. For non-payment, the mortgage evidence of such ownership, it seems to us a reasonable construction of
was foreclosed and the shares were sold at a public auction with plaintiff section 4 of Act No. 1508 to hold that the property in the shares may be
Chua Guan as the highest bidder. deemed to be situated in the province in which the corporation has
its principal office or place of business. If this province is also the
The Company refused to cancel the certificates of stock and issue new ones province of the owner's domicile, a single registration sufficient. If
to herein plaintiff alleging that prior to the date of plaintiff’s demand, nine not, the chattel mortgage should be registered both at the owner's
attachments had been issued and served and noted on the books of the domicile and in the province where the corporation has its principal
corporation. Thus, a prayer for a writ of mandamus. office or place of business. In this sense the property mortgaged is
not the certificate but the participation and share of the owner in
The validity of the assignments and the mortgage is not in question. the assets of the corporation.
ISSUE: WON the registration of the mortgage in the registry of chattel In view of the premises, the attaching creditors are entitled to priority over
mortgage in the office of the register of deeds give constructive notice to the the defectively registered mortgage of the appellant and the judgment
said attaching creditors and thus gave preference to the mortgage over the appealed from must be affirmed without special pronouncement as to costs
other debts? in this instance.
HELD: No. In passing, let it be noted that the registration of the said chattel TORIBIA USON, plaintiff-appellee,
mortgage in the office of the corporation was not necessary and had no legal vs.
effect. (Monserrat vs. Ceron, 58 Phil., 469.) The long mooted question as to VICENTE DIOSOMITO, ET AL., defendants.

VICENTE DIOSOMITO, EMETERIO BARCELON, H.P.L. JOLLYE and NORTH
ELECTRIC COMPANY, INC., appellants. FACTS: The appellee was an employee of the appellant corporation and
(G.R. No. L-42135; June 17, 1935) rendered services as such from January 1, 1923, to April 15, 1929. During
that period he bought 35 shares thereof at P100 a share at the suggestion of
FACTS: In a civil action filed by herein plaintiff-appellee Uson, an attachment the president of said corporation. He was also the recipient of 9 shares by
was levied on Jan. 18, 1932 upon the property of defendant Vicente way of bonus during Christmas seasons. In this way the said appellee
Diosmomito including the question 75 shares of North Electric Company, Inc.. became the owner of 44 shares for which the 12 certificates, Exhibits F to F-
On March 20, 1933, the said shares were sold at a public auction to satisfy 11, were issued in his favor. The word "nontransferable" appears on each
the claim of Uson. and every one of these certificates. Before severing his connections with the
said corporation, the appellee proposed to the president that the said
In the present action, appellant HPL Jollye claims ownership of said shares. corporation buy his 44 shares at par value plus the interest thereon, or that
Apparently, these shares were sold by Diosomito to Emetertio Barcelon on he be authorized to sell them to other persons. The corporation bought
Feb. 3, 1931 but the certificates were cancelled and a new one issued only similar shares belonging to other employees, at par value. Sometime later,
on Sep. 16, 1932. Later on, the same shares were sold to Jollye and the said president offered to buy the appellee's shares first at P85 each and
registered in the books on Feb. 13, 1933. then at P80. The appellee did not agree thereto.
ISSUE: WON a bona fide transfer of the shares of a corporation, not ISSUE: WON the restriction imposed on the right to transfer the shares is
registered or noted on the books of the corporation, is valid as against a valid?
subsequent lawful attachment of said shares, regardless of whether the
attaching creditor had actual notice of said transfer or not? HELD: No. The opinion seems to be unanimous that a restriction imposed
upon a certificate of shares, similar to the ones under consideration,
HELD: Section 35 of the Corporation Law is as follows: is null and void on the ground that it constitutes and unreasonable
limitation of the right of ownership and is in restraint of trade.
SEC. 35. The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or the vice-president, Shares of corporate stock being regarded as property, the owner of such
countersigned by the secretary or clerk and sealed with the by-laws. shares may, as a general rule, dispose of them as he sees fit, unless the
Shares of stock so issued are personal property and may be transferred by corporation has been dissolved, or unless the right to do so is properly
delivery of the certificate indorsed by the owner or his attorney in fact or restricted, or the owner's privilege of disposing of his shares has been
other person legally authorized to make the transfer. No transfer, however, hampered by his own action. (14 C. J., sec. 1033, pp. 663, 664.)
shall be valid, except as between the parties, until the transfer is entered
and noted upon the books of the corporation so as to show the names of Any restriction on a stockholder's right to dispose of his shares must be
the parties to the transaction, the date of the transfer, the number of the construed strictly; and any attempt to restrain a transfer of shares is
certificate, and the number of shares transferred 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
We prefer to adopt the line followed by the Supreme Courts of Massachusetts agreements exist and are applicable. Subject only to such restrictions, a
and of Wisconsin. (See Clews vs. Friedman, 182 Mass., 555; 66 N.E. 201, and stockholder cannot be controlled in or restrained from exercising his right
In re Murphy, 51 Wis., 519; 8 N.W., 419.) In this case the court had under to transfer by the corporation or its officers or by other stockholders, even
consideration a statute identical with our own section 35, supra, and the though the sale is to a competitor of the company, or to an insolvent
court said: person, or even though a controlling interest is sold to one purchaser.
(Ibid., sec. 1035, pp. 665, 666.)
We think the true meaning of the language is, and the obvious intention of
the legislature in using it was, that all transfers of shares should be In the case of Fleischer vs. Botica Nolasco Co. (47 Phil., 583), we have
entered, as here required, on the books of the corporation. And it is discussed the validity of a clause in the by-laws of the defendant corporation,
equally clear to us that all transfers of shares not so entered are which provided that, under the same conditions, the owner of a share of
invalid as to attaching or execution creditors of the assignors, as stock could not sell it to another person except to the defendant corporation.
well as to the corporation and to subsequent purchasers in good In deciding the legality and validity of said restriction, we held:
faith, and indeed, as to all persons interested, except the parties
to such transfers. All transfers not so entered on the books of the The only restraint imposed by the Corporation Law upon transfer
corporation are absolutely void; not because they are without of shares is found in section 35 of Act No. 1459. This restriction is
notice or fraudulent in law or fact, but because they are made so necessary in order that the officers of the corporation may know
void by statute. who are the stockholders, which is essential in conducting
elections of officers, in calling meetings of stockholders, and for
To us the language of the legislature is plain to the effect that the right of other purposes. But any restriction of the nature of that imposed
the owner of the shares of stock of a Philippine corporation to in the by-law now in question, is ultra vires, violative of the
transfer the same by delivery of the certificate, whether it be property rights of shareholders, and in restraint of trade. (Id., p.
regarded as statutory on common law right, is limited and restricted 592.)
by the express provision that "no transfer, however, shall be valid,
except as between the parties, until the transfer is entered and It is obvious, therefore, that the restriction consisting in the word
noted upon the books of the corporation." Therefore, the transfer of "nontransferable", appearing on the 12 certificates, Exhibits F to F-11, is
the 75 shares in the North Electric Company, Inc., made by the illegal and should be eliminated.
defendant Diosomito to the defendant Barcelon was not valid as to
the plaintiff-appellee, Toribia Uson, on January 18, 1932, the date ISSUE2: WON the corporation may be compelled to buy the shares of a
on which she obtained her attachment lien on said shares of stock selling stockholder?
which still stood in the name of Diosomito on the books of the
corporation. HELD: No. There is no existing law nor authority in support of the plaintiff's
claim to the effect that the defendants are obliged to buy his shares of stock
value at par value, plus the interest demanded thereon. In this respect, we
CYRUS PADGETT, plaintiff-appellee, hold that there has been no such contract, either express or implied, between
vs. the plaintiff and the defendants. In the absence of a similar contractual
BABCOCK & TEMPLETON, INC., and W. R. BABCOCK, defendants- obligation and of a legal provision applicable thereto, it is logical to conclude
appellants that it would be unjust and unreasonable to compel the said defendants to
(G.R. No. L-38684; December 21, 1933) comply with a non-existent or imaginary obligation. Whereupon, we are

likewise compelled to conclude that the judgment originally rendered to that capital stock of P10M which upon registration will take over all the
effect is untenable and should be set aside rights and liabilities of Asuncion.
LEON J. LAMBERT, plaintiff-appellant, Effective control and management of the piggery at Embassy Farms, Inc. was
vs. transferred by Evangelista to Asuncion pursuant to clause 8 of the MOA. In
T. J. FOX, defendant-appellee accordance with clause 15, Evangelista served as President and Chief
(G.R. No. L-7991; January 29, 1914) Executive of Embassy Farms.
FACTS: Defendant and plaintiff, became two of the largest shareholders of Evangelista also endorsed in blank all his shares of stock including that of his
John R. Edgar & Co., Inc. was incorporated. They were former creditors who wife and three nominees with minor holdings but retained possession of said
agreed to aid the financially distressed predecessor John R. Edgar & Co.. shares and opted to deliver to Asuncion only upon full compliance of the
They entered into an agreement a few days after incorporation as follows: latter of his obligations under the MOA.
Whereas the undersigned are, respectively, owners of large amounts of For failure to comply with his obligations, Evangelista intimated the institution
stock in John R. Edgar and Co, Inc; and, of the appropriate legal action. But Asuncion eventually filed for the
rescission of the MOA.
Whereas it is recognized that the success of said corporation depends, now
and for at least one year next following, in the larger stockholders ISSUE: WON Evangelista has a better right to the shares and control of the
retaining their respective interests in the business of said corporation: corporate affairs?
Therefore, the undersigned mutually and reciprocally agree not to sell,
transfer, or otherwise dispose of any part of their present holdings of stock HELD: Yes. From the pleadings submitted by the parties it is clear that
in said John R. Edgar & Co. Inc., till after one year from the date hereof. although Evangelista has indorsed in blank the shares outstanding in his
Either party violating this agreement shall pay to the other the sum of one name he has not delivered the certificate of stocks to Asuncion because the
thousand (P1,000) pesos as liquidated damages, unless previous consent latter has not fully complied with his obligations under the MOA. There
in writing to such sale, transfer, or other disposition be obtained. being no delivery of the indorsed shares of stock Asuncion cannot
therefore effectively transfer to other person or his nominees the
Notwithstanding this contract the defendant Fox on October 19, 1911, sold undelivered shares of stock. For an effective transfer of shares of stock
his stock in the said corporation to E. C. McCullough of the firm of E. C. the mode and manner of transfer as prescribed by law must be followed
McCullough & Co. of Manila, a strong competitor of the said John R. Edgar & (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under Section 3
Co., Inc. of Batas Pambansa Bilang 68, otherwise known as the Corporation Code of
the Philippines, shares of stock may be transferred by delivery to the
A complaint was filed and the trial court decided in favor of defendant. transferree of the certificate properly indorsed. Title may be vested
in the transferree by the delivery of the duly indorsed certificate of
ISSUE: WON the stipulation in the contract is valid? stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However,
no transfer shall be valid, except as between the parties until the transfer is
HELD: Yes. It is urged by the appellee in this case that the stipulation in the properly recorded in the books of the corporation (Sec. 63, Corporation Code
contract suspending the power to sell the stock referred to therein is an of the Philippines).
illegal stipulation, is in restraint of trade and, therefore, offends public policy.
We do not so regard it. The suspension of the power to sell has a In the case at bar the indorsed certificate of stock was not actually delivered
beneficial purpose, results in the protection of the corporation as to Asuncion so that Evangelista is still the controlling stockholder of Embassy
well as of the individual parties to the contract, and is reasonable as Farms despite the execution of the memorandum of agreement and the turn-
to the length of time of the suspension. We do not here undertake to over of control and management of the Embassy Farms to Asuncion on
discuss the limitations to the power to suspend the right of alienation of August 2, 1984.
stock, limiting ourselves to the statement that the suspension in this
particular case is legal and valid. When Asuncion filed on April 10, 1986 an action for the rescission of
contracts with damages, the Pasig Court merely restored and established the
EMBASSY FARMS, INC., petitioner, status quo prior to the execution of the MOA by the issuance of a restraining
vs. order on July 10, 1987 and the writ of preliminary injunction on July 30,
HON. COURT OF APPEALS (INTERMEDIATE APPELLATE COURT), HON. 1987. It would be unjust and unfair to allow Asuncion and his nominees to
ZENAIDA S. BALTAZAR, Judge of the Regional Trial Court, Branch CLVIII, control and manage the Embassy Farms despite the fact that Asuncion, who
(158), Pasig, Metro Manila, VOLTAIRE B. CRUZ, Deputy Sheriff, Branch is the source of their supposed shares of stock in the corporation, is not
CLVIII, Regional Trial Court, Pasig, Metro Manila and EDUARDO B. asking for the delivery of the indorsed certificate of stock but for the
EVANGELISTA, respondents rescission of the MOA. Rescission would result in mutual restitution
(G.R. No. 80682 August 13, 1990) (Magdalena Estate v. Myrick, 71 Phil. 344) so it is but proper to allow
Evangelista to manage the farm. Compared to Asuncion or his nominees
FACTS: Alexander G. Asuncion and Eduardo B. Evangelista entered into a Evangelista would be more interested in the preservation of the assets,
Memorandum of Agreement (MOA) with the following obligations: equipment and facilities of Embassy Farms during the pendency of the main
case.
 EVANGELISTA:
1. To transfer to Asuncion 19 parcels of agricultural land registered in ENRIQUE RAZON, petitioner,
his name, together with the stocks, equipment and facilities of vs.
Embassy Farms, Inc. wherein 90% of the shares of stock is owned INTERMEDIATE APPELLATE COURT and VICENTE B. CHUIDIAN, in his
by Evangelista; capacity as Administrator of the Estate of the Deceased JUAN T. CHUIDIAN,
2. To cede, transfer and convey ―in a manner absolute and respondents.
irrevocable any and all of his shares of stocks‖ in Embassy Farms, (G.R. No. 74306 March 16, 1992)
Inc. to Asuncion or his nominees ―until the total of said shares of
stock so transferred shall constitute 90% of the paid-in equity of VICENTE B. CHUIDIAN, petitioner,
said corporation‖ within a reasonable time from signing the vs.
document. INTERMEDIATE APPELLATE COURT, ENRIQUE RAZ0N, and E. RAZON,
 ASUNCION: INC., respondents
1. To pay Evangelista P8,630,999; (G.R. No. 74315 March 16, 1992)
2. To organize and register a new corporation with an authorized

FACTS: E. Razon, Inc. was organized by petitioner Enrique Razon in 1962. legal services to the corporation. Petitioner Razon failed to overcome this
However, it began operations only in 1966 since the other incorporators testimony.
withdrew from the said corporation. The petitioner then distributed the stocks
previously placed in the names of the withdrawing nominal incorporators to
some friends, among them the late Juan T. Chuidian to whom he gave 1,500 RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS
shares. and FRANCISCO TRIAS, petitioners,
vs.
The shares of stocks were registered in the name of Chuidian only as nominal COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION,
stockholder and with the agreement that the said shares of stock were MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES,
owned and held by the petitioner but Chuidian was given the option to buy FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO , SR.,
the same respondents
(G.R. No. 96674 June 26, 1992)
Chuidian delivered to petitioner the stock certificate in 1966, and since then
petitioner had in his possession such certificate, until the time, he delivered it FACTS: On June 10, 1979, Clemente G. Guerrero, President of the Rural
for deposit with PBCom under the parties’ joint custody pursuant to their Bank of Salinas, Inc., executed a Special Power of Attorney in favor of his
agreement embodied in the trial court’s order. wife, private respondent Melania Guerrero, giving and granting the latter full
power and authority to sell or otherwise dispose of and/or mortgage 473
ISSUE: WON petitioner Razon is the rightful owner of the shares? shares of stock of the Bank registered in his name (represented by the Bank's
stock certificates nos. 26, 49 and 65), to execute the proper documents
HELD: No. In the case of Embassy Farms, Inc. v. Court of Appeals (188 therefor, and to receive and sign receipts for the dispositions.
SCRA 492 [1990]) we ruled:
Pursuant to said SPA, private respondent Melania Guerrero, as Attorney-in-
. . . For an effective, transfer of shares of stock the mode and manner of Fact, executed the following assignments of shares of stocks: Luz Andico
transfer as prescribed by law must be followed (Navea v. Peers Marketing (457 shares); Wilhelmina Rosales (10 shares); Francisco Guerrero, Jr. (5
Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa shares); and Francisco Guerrero, Sr. (1 share). The last share was
Bilang, 68 otherwise known as the Corporation Code of the Philippines, transferred 2 months before the death of Clemente.
shares of stock may be transferred by delivery to the transferee of the
certificate properly indorsed. Title may be vested in the transferee by the Subsequently, Melania Guerrero presented the Deeds of Assignments and
delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited in requested for the cancellation of the certificates of stock and new ones to be
Rivera v. Florendo, 144 SCRA 643). However, no transfer shall be valid, issued in the name of transferees. However, petitioner Bank refused.
except as between the parties until the transfer is properly recorded in the
books of the corporation (Sec. 63, Corporation Code of the Philippines; Melania Guerrero filed for an action for mandamus with the SEC. Maripol
Section 35 of the Corporation Law) Guerrero, a legally adopted daughter of Melania and Clemente filed for
intervention claiming that two weeks before filing the action for mandamus, a
In the instant case, there is no dispute that the questioned 1,500 shares of petition for the administration of the estate of Celemente has been filed and
stock of E. Razon, Inc. are in the name of the late Juan Chuidian in the books that the deeds of assignment were fictitious and antedated. SEC denied the
of the corporation. Moreover, the records show that during his lifetime motion for intervention.
Chuidian was elected member of the Board of Directors of the corporation
which clearly shows that he was a stockholder of the corporation. (See Maripol filed a complaint before the CFI for the annulment of the Deeds of
Section 30, Corporation Code) From the point of view of the corporation, Assignment.
therefore, Chuidian was the owner of the 1,500 shares of stock. In such a
case, the petitioner who claims ownership over the questioned shares of Later on, the SEC rendered a decision granting the action for mandamus
stock must show that the same were transferred to him by proving that all which was affirmed by the SEC en banc and still later, by the CA.
the requirements for the effective transfer of shares of stock in accordance
with the corporation's by laws, if any, were followed (See Nava v. Peers ISSUE: WON the mandamus was properly granted for the registration of the
Marketing Corporation, 74 SCRA 65 [1976]) or in accordance with the transfer of the 473 shares in question?
provisions of law.
The petitioner failed in both instances. The petitioner did not present any by- HELD: Yes. Respondent SEC correctly ruled in favor of the registering of the
laws which could show that the 1,500 shares of stock were effectively shares of stock in question in private respondent's names. Such ruling finds
transferred to him. In the absence of the corporation's by-laws or rules support under Section 63 of the Corporation Code, to wit:
governing effective transfer of shares of stock, the provisions of the
Corporation Law are made applicable to the instant case. Sec. 63. . . . Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed by the
The law is clear that in order for a transfer of stock certificate to be owner or his attorney-in-fact or other person legally authorized to make
effective, the certificate must be properly indorsed and that title to the transfer. No transfer, however, shall be valid, except as between the
such certificate of stock is vested in the transferee by the delivery of parties, until the transfer is recorded in the books of the corporation . . .
the duly indorsed certificate of stock. (Section 35, Corporation Code)
Since the certificate of stock covering the questioned 1,500 shares of stock In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court
registered in the name of the late Juan Chuidian was never indorsed to the interpreted Sec. 63 in his wise:
petitioner, the inevitable conclusion is that the questioned shares of stock
belong to Chuidian. The petitioner's asseveration that he did not require an Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation
indorsement of the certificate of stock in view of his intimate friendship with Code]) contemplates no restriction as to whom the stocks may
the late Juan Chuidian cannot overcome the failure to follow the procedure be transferred. It does not suggest that any discrimination may
required by law or the proper conduct of business even among friends. To be created by the corporation in favor of, or against a certain
reiterate, indorsement of the certificate of stock is a mandatory requirement purchaser. The owner of shares, as owner of personal property,
of law for an effective transfer of a certificate of stock. is at liberty, under said section to dispose them in favor of
whomever he pleases, without limitation in this respect, than
Moreover, the preponderance of evidence supports the appellate court's the general provisions of law. . . .
factual findings that the shares of stock were given to Juan T. Chuidian for
value. Juan T. Chuidian was the legal counsel who handled the legal affairs of The only limitation imposed by Section 63 of the Corporation
the corporation. We give credence to the testimony of the private respondent Code is when the corporation holds any unpaid claim against the
that the shares of stock were given to Juan T. Chuidian in payment of his shares intended to be transferred, which is absent here.

At the time the Bragas questioned the validity of the sale, the contract had
A corporation, either by its board, its by-laws, or the act of its officers, cannot already been perfected, thereby demonstrating that Telectronic Systems, Inc.
create restrictions in stock transfers, because: was already the prima facie owner of the shares and, consequently, a
stockholder of Pocket Bell Philippines, Inc. Even if the sale were to be
. . . Restrictions in the traffic of stock must have their source in annulled later on, Telectronic Systems, Inc. had, in the meantime, title over
legislative enactment, as the corporation itself cannot create such the shares from the time the sale was perfected until the time such sale was
impediment. By-laws are intended merely for the protection of the annulled. The effects of an annulment operate prospectively and do not, as a
corporation, and prescribe regulation, not restriction; they are always rule, retroact to the time the sale was made. Therefore, at the time the
subject to the charter of the corporation. The corporation, in the Bragas questioned the validity of the tranfers made by the Abejos,
absence of such power, cannot ordinarily inquire into or pass upon the Telectronic Systems, Inc. was already a prima facie shareholder of the
legality of the transactions by which its stock passes from one person to corporation, thus making the dispute between the Bragas and the Abejos
another, nor can it question the consideration upon which a sale is "intra-corporate" in nature. Hence, the Court held that "the issue is not on
based. . . . (Tomson on Corporation Sec. 4137, cited in Fleisher vs. ownership of shares but rather the non-performance by the corporate
Nolasco, Supra). secretary of the ministerial duty of recording transfers of shares of stock of
the corporation of which he is secretary."
The right of a transferee/assignee to have stocks transferred to his name is
an inherent right flowing from his ownership of the stocks. Thus: Unlike Abejo, however, petitioner's ownership over the shares in this
case was not yet perfected when the Complaint was filed. The
Whenever a corporation refuses to transfer and register stock contract of pledge certainly does not make him the owner of the
in cases like the present, mandamus will lie to compel the shares pledged. Further, whether prescription effectively transferred
officers of the corporation to transfer said stock in the books of ownership of the shares, whether there was a novation of the contracts of
the corporation" (26, Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; Fleisher pledge, and whether laches had set in were difficult legal issues, which were
vs. Botica Nolasco, 47 Phil. 583, 594). unpleaded and unresolved when herein petitioner asked the corporate
secretary of Go Fay to effect the transfer, in his favor, of the shares pledged
The corporation's obligation to register is ministerial. to him.
In transferring stock, the secretary of a corporation acts in purely
ministerial capacity, and does not try to decide the question of In Rural Bank of Salinas: Melenia Guerrero executed deeds of assignment
ownership. (Fletcher, Sec. 5528, page 434). for the shares in favor of the respondents in that case. When the corporate
secretary refused to register the transfer, an action for mandamus was
The duty of the corporation to transfer is a ministerial one and instituted. Subsequently, a motion for intervention was filed, seeking the
if it refuses to make such transaction without good cause, it annulment of the deeds of assignment on the grounds that the same were
may be compelled to do so by mandamus. (See. 5518, 12 Fletcher fictitious and antedated, and that they were in fact donations because the
394) considerations therefor were below the book value of the shares.
For the petitioner Rural Bank of Salinas to refuse registration of the Like the Abejo spouses, the respondents in Rural Bank of Salinas were
transferred shares in its stock and transfer book, which duty is ministerial on already prima facie shareholders when the deeds of assignment were
its part, is to render nugatory and ineffectual the spirit and intent of Section questioned. If the said deeds were to be annulled later on, respondents
63 of the Corporation Code. Thus, respondent Court of Appeals did not err in would still be considered shareholders of the corporation from the time of the
upholding the Decision of respondent SEC affirming the Decision of its assignment until the annulment of such contracts.
Hearing Officer directing the registration of the 473 shares in the stock and
transfer book in the names of private respondents. At all events, the ISSUE2: WON petitioner is entitled to the relief of mandamus as against the
registration is without prejudice to the proceedings in court to determine the company?
validity of the Deeds of Assignment of the shares of stock in question.
HELD: No. Petitioner prays for the issuance of a writ of mandamus, directing
LIM TAY, petitioner, the corporate secretary of respondent corporation to have the shares
vs. transferred to his name in the corporate books, to issue new certificates of
COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE ESTATE stock and to deliver the corresponding dividends to him.
OF ALFONSO LIM, respondents
(G.R. No. 126891; August 5, 1998) In order that a writ of mandamus may issue, it is essential that the
person petitioning for the same has a clear legal right to the thing
FACTS: To secure their separate loans, respondent Sy Guiok and Alfonso demanded and that it is the imperative duty of the respondent to
Lim, each executed a contract of pledge covering their respective 300 shares perform the act required. It neither confers powers nor imposes
in favor of petitioner Lim Tay where they indorsed in blank and delivered duties and is never issued in doubtful cases. It is simply a command
their shares of stock to Tay. to exercise a power already possessed and to perform a duty
already imposed.
For non-payment, Lim Tay filed a Petition for Mandamus in the SEC against
Go Fay & Compny, Inc. to cancel the old certificates and issue a new one in In the present case, petitioner has failed to establish a clear legal right.
his name, which was granted by the SEC but reversed by the CA. Petitioner's contention that he is the owner of the said shares is completely
without merit. Quite the contrary and as already shown, he does not have
ISSUE: WON the rulings in the Abejo case and the Rural Bank of Salinas any ownership rights at all. At the time petitioner instituted his suit at the
case will apply? SEC, his ownership claim had no prima facie leg to stand on. At best, his
contention was disputable and uncertain Mandamus will not issue to establish
HELD: No. Petitioner's reliance on the doctrines set forth in Abejo v. De la a legal right, but only to enforce one that is already clearly established.
Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is misplaced.
ISSUE3: WON by Guiok and Lim’s failure to pay, the ownership of the shares
ABEJO: the Abejo spouses sold to Telectronic Systems, Inc. shares of stock automatically passed to Lim Tay?
in Pocket Bell Philippines, Inc. Subsequent to such contract of sale, the
corporate secretary, Norberto Braga, refused to record the transfer of the HELD: No. On appeal, petitioner claimed that ownership over the shares had
shares in the corporate books and instead asked for the annulment of the passed to him, not via the contracts of pledge, but by virtue of prescription
sale, claiming that he and his wife had a pre-emptive right over some of the and by respondents' subsequent acts which amounted to a novation of the
shares, and that his wife's shares were sold without consideration or consent. contracts of pledge. We do not agree.

At the outset, it must be underscored that petitioner did not acquire
ownership of the shares by virtue of the contracts of pledge. Article 2112 of As a rule, the shares which may be alienated are those which are
the Civil Code states: covered by certificates of stock, as shown in the following provisions of
the Corporation Law and as intimated in Hager vs. Bryan, 19 Phil. 138
―The creditor to whom the credit has not been satisfied in due time, may (overruling the decision in Hager vs. Bryan, 21 Phil. 523. See 19 Phil. 616,
proceed before a Notary Public to the sale of the thing pledged. This sale notes, and Hodges vs. Lezama, 14 SCRA 1030).
shall be made at a public auction, and with notification to the debtor and
the owner of the thing pledged in a proper case, stating the amount for SEC. 35. The capital stock of stock corporations shall be divided into
which the public sale is to be held. If at the first auction the thing is not shares for which certificates signed by the president or the vice-president,
sold, a second one with the same formalities shall be held; and if at the countersigned by the secretary or clerk and sealed with the seal of the
second auction there is no sale either, the creditor may appropriate the corporation, shall be issued in accordance with the by-laws. Shares of
thing pledged. In this case he shall be obliged to give an acquittance for stock so issued are personal property and may be transferred by delivery
his entire claim.‖ of the certificate indorsed by the owner or his attorney in fact or other
person legally authorized to make the transfer. No transfer, however, shall
Furthermore, the contracts of pledge contained a common proviso, which we be valid, except as between the, parties, until the transfer is entered and
quote again for the sake of clarity: noted upon the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of the
―3. In the event of the failure of the PLEDGOR to pay the amount within a certificate, and the number of shares transferred.
period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby No share of stock against which the corporation holds any unpaid claim
created by selling the same at public or private sale with or without notice shall be transferable on the books of the corporation.
to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his
option; and "the PLEDGEE is hereby authorized and empowered at his SEC. 36. (re voting trust agreement) ...
option to transfer the said shares of stock on the books of the corporation
to his own name, and to hold the certificate issued in lieu thereof under The certificates of stock so transferred shall be surrendered and cancelled,
the terms of this pledge, and to sell the said shares to issue to him and to and new certificates therefor issued to such person or persons, or
apply the proceeds of the sale to the payment of the said sum and corporation, as such trustee or trustees, in which new certificates it shall
interest, in the manner hereinabove provided;‖ appear that they are issued pursuant to said agreement.
xxx xxx xxx
There is no showing that petitioner made any attempt to foreclose
or sell the shares through public or private auction, as stipulated in As prescribed in section 35, shares of stock may be transferred by delivery to
the contracts of pledge and as required by Article 2112 of the Civil the transferee of the certificate properly indorsed. "Title may be vested in the
Code. Therefore, ownership of the shares could not have passed to transferee by delivery of the certificate with a written assignment or
him. The pledgor remains the owner during the pendency of the pledge and indorsement thereof" (18 C.J.S. 928). There should be compliance with the
prior to foreclosure and sale, as explicitly provided by Article 2103 of the mode of transfer prescribed by law (18 C.J.S. 930).
same Code:
The usual practice is for the stockholder to sign the form on the back of the
―Unless the thing pledged is expropriated, the debtor continues to be the stock certificate. The certificate may thereafter be transferred from one
owner thereof.‖ person to another. If the holder of the certificate desires to assume the legal
rights of a shareholder to enable him to vote at corporate elections and to
RICARDO A. NAVA, petitioner-appellant. receive dividends, he fills up the blanks in the form by inserting his own
vs. name as transferee. Then he delivers the certificate to the secretary of the
PEERS MARKETING CORPORATION, RENATO R. CUSI and AMPARO corporation so that the transfer may be entered in the corporation's books.
CUSI, respondents-appellees The certificate is then surrendered and a new one issued to the transferee.
(G.R. No. L-28120; November 25, 1976) (Hager vs. Bryan, 19 Phil. 138, 143-4).
FACTS: Teofilo Po was an incorporator who subscribed to 80 shares and paid That procedure cannot be followed in the instant case because, as already
25% of the subscription. No certificate of stock was issued to him. noted, the twenty shares in question are not covered by any certificate of
stock in Po's name. Moreover, the corporation has a claim on the said
Later on, Po sold to herein petitioner Nava 20 of the 80 shares at par value of shares for the unpaid balance of Po's subscription. A stock
P100, or P2,000. Nava requested herein private respondents, officers of Peers subscription is a subsisting liability from the time the subscription is
Marketing Corporation, to register him as owner of the shares, but they made. The subscriber is as much bound to pay his subscription as he
refused, Po being delinquent in the payment of the balance due his would be to pay any other debt. The right of the corporation to
subscription. demand payment is no less incontestable. (Velasco vs. Poizat, 37 Phil.
802; Lumanlan vs. Cura, 59 Phil. 746).
Po filed an action for mandamus in the CFI of Negros but it was dismissed.
A corporation cannot release an original subscriber from paying for
Po claims that the trial court erred in applying the ruling in Fua Cun vs. his shares without a valuable consideration (Philippine National Bank
Summers and China Banking Corporation wherein it was ruled that the vs. Bitulok Sawmill, Inc., L-24177-85, June 29, 1968, 23 SCRA 1366) or
payment of one-half of the subscription does not entitle the subscriber to a without the unanimous consent of the stockholders (Lingayen Gulf
certificate for one-half of the number of shares subscribed. Electric Power Co., Inc. vs. Baltazar, 93 Phil 404).
ISSUE: WON Peers Marketing Corporation may be compelled by mandamus Under the facts of this case, there is no clear legal duty on the part of the
to enter in its stock and transfer book the sale made by Po to Nava of the 20 officers of the corporation to register the twenty shares in Nava's name,
shares forming part of Po’s subscription of 80 shares, it being admitted that Hence, there is no cause of action for mandamus
the corporation has an unpaid claim of P6,000 as the balance on said
subscription? As already stressed, in this case no stock certificate was issued to Po.
Without stock certificate, which is the evidence of ownership of
HELD: No. We hold that the transfer made by Po to Nava is not the corporate stock, the assignment of corporate shares is effective
"alienation, sale, or transfer of stock" that is supposed to be recorded in the only between the parties to the transaction (Davis vs. Wachter, 140 So.
stock and transfer book, as contemplated in section 52 of the Corporation 361).
Law.

The delivery of the stock certificate, which represents the shares to be a fatal defect. The rule is that the delivery of the stock certificate duly
alienated , is essential for the protection of both the corporation and its endorsed by the owner is the operative act of transfer of shares
stockholders (Smallwood vs. Moretti, 128 So. 2d 628). from the lawful owner to the transferee. Thus, title may be vested in
the transferee only by delivery of the duly indorsed certificate of
stock.
THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS,
BERNARDO BAUTISTA, JAIME CUSTODIO, OCTAVIO KATIGBAK, FRANCISCO We have uniformly held that for a valid transfer of stocks, there must be
CUSTODIO, and JUANITA BAUTISTA OF THE RURAL BANK OF LIPA CITY, strict compliance with the mode of transfer prescribed by law. The
INC., petitioners, requirements are: (a) There must be delivery of the stock
vs. certificate: (b) The certificate must be endorsed by the owner or his
HONORABLE COURT OF APPEALS, HONORABLE COMMISSION EN BANC, attorney-in-fact or other persons legally authorized to make the
SECURITIES AND EXCHANGE COMMISSION, HONORABLE ENRIQUE L. transfer; and (c) To be valid against third parties, the transfer must
FLORES, JR., in his capacity as Hearing Officer, REYNALDO VILLANUEVA, SR, be recorded in the books of the corporation. As it is, compliance with
AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES GONZALES, any of these requisites has not been clearly and sufficiently shown.
AURORA LACERNA, CELSO LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN
and ELENA USI, respondents It may be argued that despite non-compliance with the requisite
(G.R. No. 124535; September 28, 2001) endorsement and delivery, the assignment was valid between the parties,
meaning the private respondents as assignors and the petitioners as
FACTS: Private respondent Reynaldo Villanueva Sr., a stockholder of Rural assignees. While the assignment may be valid and binding on the petitioners
Bank of Lipa City, Inc. executed a Deed of Assignment wherein he assigned and private respondents, it does not necessarily make the transfer effective.
his shares, as well as those of eight stockholders under his control with a Consequently, the petitioners, as mere assignees, cannot enjoy the
total of 10,457 shares, in favor of stockholders of the Bank represented by its status of a stockholder, cannot vote nor be voted for, and will not be
BOD. At the same time, He and his wife executed an agreement wherein he entitled to dividends, insofar as the assigned shares are concerned.
acknowledge their indebtedness of P4M and stipulated that the said debt will Parenthetically, the private respondents cannot, as yet, be deprived of their
be paid out of the proceeds of the sale of their real property described in the rights as stockholders, until and unless the issue of ownership and transfer of
agreement. the shares in question is resolved with finality.
The Villanueva spouses failed to settle their obligation on the due date, and There being no showing that any of the requisites mandated by law was
the BOD sent a demand letter for the surrender of the said shares and for the complied with, the SEC Hearing Officer did not abuse his discretion in
delivery of sufficient collateral to cover the balance of the debt, which the granting the issuance of the preliminary injunction prayed for by petitioners
Villanueva spouses ignored. Their shares were converted into Treasury in SEC Case No. 02-94-4683 (herein private respondents). Accordingly, the
shares. order of the SEC en banc affirming the ruling of the SEC Hearing Officer, and
the Court of Appeals decision upholding the SEC en banc order, are valid and
The Villanueva spouses questioned the legality of the such conversion and in accordance with law and jurisprudence, thus warranting the denial of the
filed with the SEC a petition for annulment of the stockholders’ meeting and instant petition for review.
election of directors and officers because they were not notified of such
meeting. ALFONSO S. TAN, Petitioner,
vs.
The SEC hearing officer dismissed the application for issuance of a SECURITIES AND EXCHANGE COMMISSION, VISAYAN EDUCATIONAL
preliminary injunction, but was granted on reconsideration. The decision was SUPPLY CORP., TAN SU CHING, ALFREDO B. UY, ANGEL S. TAN and
affirmed by the SEC en banc and later by the CA. PATRICIA AGUILAR, Respondents
(G.R. No. 95696; March 3, 1992)
ISSUE: WON the transfer of the shares is ineffective for non-indorsement
and non-delivery of the certificate of stocks? FACTS: With the withdrawal of two of the original incorporators, petitioner
Alfonso Tan assigned 50 of his 400 shares (covered by Stock Certificate No.
HELD: Yes. The Corporation Code specifically provides: 2) to his brother Angel S. Tan, private respondent.
SECTION 63. Certificate of stock and transfer of shares. — The capital Petitioner’s stock certificate was cancelled by the corporate secretary, Patricia
stock of stock corporations shall be divided into shares for which Aguilar, by virtue of Resolution No. 1981(b), while petitioner was still the
certificates signed by the president or vice president, countersigned by the president and member of the board.
secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of With the cancellation of Certificate of stock No. 2 and the subsequent
stocks so issued are personal property and may be transferred by delivery issuance of Stock Certificate No. 6 in the name of Angel S. Tan and for the
of the certificate or certificates indorsed by the owner or his attorney-in- remaining 350 shares, Stock Certificate No. 8 was issued in the name of
fact or other person legally authorized to make the transfer. No transfer, petitioner Alfonso S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29),
however, shall be valid, except as between the parties, until the transfer is alleging that:
recorded in the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of the 9. That in view of his having taken 33 1/3 interest, I was personally
certificate or certificates and the number of shares transferred. requested by Mr. Tan Su Ching to request Mr. Alfonso Tan to make proper
endorsement in the cancelled Certificate of Stock No. 2 and Certificate No.
No shares of stock against which the corporation holds any unpaid claim 8, but he did not endorse, instead he kept the cancelled (1981) Certificate
shall be transferable in the books of the corporation. (Emphasis ours) of Stock No. 2 and returned only to me Certificate of Stock No. 8, which I
delivered to Tan Su Ching.
Petitioners argue that by virtue of the Deed of Assignment, private
respondents had relinquished to them any and all rights they may have had 10. That the cancellation of his stock (Stock No. 2) was known by him in
as stockholders of the Bank. While it may be true that there was an 1981; that it was Stock No. 8 that was delivered in March 1983 for his
assignment of private respondents' shares to the petitioners, said endorsement and cancellation.
assignment was not sufficient to effect the transfer of shares since
there was no endorsement of the certificates of stock by the Petitioner filed with the SEC a case questioning the cancellation of the
owners, their attorneys-in-fact or any other person legally aforesaid Stock Nos. 2 and 8.
authorized to make the transfer. Moreover, petitioners admit that the
assignment of shares was not coupled with delivery, the absence of which is ISSUE: WON the cancellation and transfer of stock certificate no. 2 was

valid? have under the law, except insofar as such rights or defenses are
subject to the limitations imposed by the principles governing
HELD: Yes. Petitioner claims that "(T)he cancellation and transfer of estoppel." (De los Santos vs. McGrath, 96 Phil. 577)
petitioner's shares and Certificate of Stock No. 2 (Exh. A) as well as the
issuance and cancellation of Certificate of Stock No. 8 (Exh. M) was patently To follow the argument put up by petitioner which was upheld by the Cebu
and palpably unlawful, null and void, invalid and fraudulent." (Rollo, p. 9) SEC Extension Office Hearing Officer, Felix Chan, that the cancellation of
And, that Section 63 of the Corporation Code of the Philippines is "mandatory Stock Certificate Nos. 2 and 8 was null and void for lack of delivery of the
in nature", meaning that without the actual delivery and endorsement of the cancelled "mother" Certificate No. 2 whose endorsement was deliberately
certificate in question, there can be no transfer, or that such transfer is null withheld by petitioner, is to prescribe certain restrictions on the transfer of
and void. stock in violation of the corporation law itself as the only law governing
transfer of stocks. While Section 47(s) grants a stock corporation the
Contrary to the understanding of the petitioner with respect to the use of the authority to determine in the by-laws "the manner of issuing certificates" of
word "may", in the case of Shauf v. Court of Appeals, (191 SCRA 713, 27 shares of stock, however, the power to regulate is not the power to
November 1990), this Court held, that "Remedial law statues are to be prohibit, or to impose unreasonable restrictions of the right of
construed liberally." The term 'may' as used in adjective rules, is only stockholders to transfer their shares. (Emphasis supplied)
permissive and not mandatory.
In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law which
This Court held in Chua v. Samahang Magsasaka, that "the word "may" prohibits a transfer of stock without the consent or approval of all the
indicates that the transfer may be effected in a manner different from that stockholders or of the president or board of directors is illegal as constituting
provided for in the law." (62 Phil. 472) undue limitation on the right of ownership and in restraint of trade. (47 Phil.
583)
Moreover, it is safe to infer from the facts deduced in the instant case that,
there was already delivery of the unendorsed Stock Certificate No. 2, which is LEE E. WON alias RAMON LEE, plaintiff-appellant,
essential to the issuance of Stock Certificate Nos. 6 and 8 to angel S. Tan and vs.
petitioner Alfonso S. Tan, respectively. What led to the problem was the WACK WACK GOLF and COUNTRY CLUB, INC., defendant-appellee
return of the cancelled certificate (No. 2) to Alfonso S. Tan for his (G.R. No. L-10122; August 30, 1958)
endorsement and his deliberate non-endorsement.
FACTS: The defendant corporation issued membership certificate no. 201 to
For all intents and purposes, however, since this was already cancelled Iwao Teruyama which on April 1944, was assigned to MT Reyes and on the
which cancellation was also reported to the respondent same year assigned to herein plaintiff-appellant. On April 26, 1955, the
Commission, there was no necessity for the same certificate to be plaintiff filed an action against the defendant alleging that shortly after its
endorsed by the petitioner. All the acts required for the transferee rehabilitation after the war, plaintiff asked that the assignment be registered
to exercise its rights over the acquired stocks were attendant and in the books of the defendant and that the latter refused and still refuses to
even the corporation was protected from other parties, considering do so unlawfully.
that said transfer was earlier recorded or registered in the corporate
stock and transfer book. Defendant filed a motion to dismiss on the ground that 11 years have
elapsed from the time of the assignment upto the time of the filing of the
Following the doctrine enunciated in the case of Tuazon v. La Provisora complaint, beyond the 5 year period provided under Art. 1149 of the Civil
Filipina, where this Court held, that: Code. The trial court dismissed the action and denied reconsideration.
But delivery is not essential where it appears that the persons ISSUE: WON plaintiff was bound to present and register the certificate
sought to be held as stockholders are officers of the corporation, assigned to him within any definite or fixed period?
and have the custody of the stock book . . . (67 Phi. 36).
HELD: No. The defendant has not made herein any pretense to that effect;
Furthermore, there is a necessity to delineate the function of the stock itself but it contends that from the moment the certificate was assigned to the
from the actual delivery or endorsement of the certificate of stock itself as is plaintiff, the latter's right to have the assignment registered commenced to
the question in the instant case. A certificate of stock is not necessary to exist. This contention is correct, but it would not follow that said right
render one a stockholder in corporation. should be exercised immediately or within a definite period. The
existence of a right is one thing, and the duration of said right is
Nevertheless, a certificate of stock is the paper representative or another.
tangible evidence of the stock itself and of the various interests
therein. The certificate is not stock in the corporation but is merely On the other hand, it is stated in the appealed order of dismissal that the
evidence of the holder's interest and status in the corporation, his plaintiff sought to register the assignment on April 13, 1955; whereas in
ownership of the share represented thereby, but is not in law the plaintiff's brief it is alleged that it was only in February, 1955, when the
equivalent of such ownership. It expresses the contract between defendant refused to recognize the plaintiff. If, as already observed, there is
the corporation and the stockholder, but is not essential to the no fixed period for registering an assignment, how can the complaint
existence of a share in stock or the nation of the relation of be considered as already barred by the Statute of Limitations when it was
shareholder to the corporation. (13 Am. Jur. 2d, 769) filed on April 26, 1955, or barely a few days (according to the lower court)
and two months (according to the plaintiff), after the demand for registration
Under the instant case, the fact of the matter is, the new holder, Angel S. and its denial by the defendant. Plaintiff's right was violated only sometime in
Tan has already exercised his rights and prerogatives as stockholder and was 1955, and it could not accordingly have asserted any cause of action against
even elected as member of the board of directors in the respondent the defendant before that.
corporation with the full knowledge and acquiescence of petitioner. Due to
the transfer of fifty (50) shares, Angel S. Tan was clothed with rights and The defendant seems to believe that the plaintiff was compelled immediately
responsibilities in the board of the respondent corporation when he was to register his assignment. Any such compulsion is obviously for the benefit
elected as officer thereof. of the plaintiff, because it is only after registration that the transfer would be
Besides, in Philippine jurisprudence, a certificate of stock is not a binding against the defendant. But we are not here concerned with a
negotiable instrument. "Although it is sometime regarded as quasi- situation where the plaintiff claims anything against the defendant allegedly
negotiable, in the sense that it may be transferred by endorsement, accruing under the outstanding certificate in question between the date of
coupled with delivery, it is well-settled that it is non-negotiable, the assignment to the plaintiff and the date of the latter’s demand for
because the holder thereof takes it without prejudice to such rights registration and issuance of a new certificate.
or defenses as the registered owner/s or transferror's creditor may

APOLINARIO G. DE LOS SANTOS and ISABELO ASTRAQUILLO, plaintiffs- parties to said alleged transaction. What is more, the same is "not valid," or,
appellees, in the words of the Supreme Court of Wisconsin (Re Murphy, 51 Wisc. 519, 8
vs. N. W. 419) — which were quoted approval in Uson vs. Diosomito (61 Phil.,
J. HOWARD MCGRATH ATTORNEY GENERAL OF THE UNITED 535) — "absolutely void" and, hence, as good as non-existent, insofar as
STATES, SUCCESSOR TO THE PHILIPPINE ALIEN PROPERTY Madrigal and the Mitsuis are concerned. For this reason, although a stock
ADMINISTRATION OF THE UNITED STATES, defendant-appellant. certificate is sometimes regarded as quasi-negotiable, in the sense
REPUBLIC OF THE PHILIPPINES, intervenor-appellant that it may be transferred by endorsement, coupled with delivery, it
(G.R. No. L-4818; February 28, 1955) is well settled that the instrument is non-negotiable, because the
holder thereof takes it without prejudice to such rights or defenses
FACTS: Plaintiff delos Santos alleges that he purchased 55,000 shares of as the registered owner or creditor may have under the law, except
Lepanto Consolidated Mining Co., Inc. from Juan Campos, and later 200,000 insofar as such rights or defenses are subject to the limitations
shares from Carl Hess and much later 800,000 still from Hess (for the imposed by the principles governing estoppel.
account and benefit of Astraquillo). Both of the supposed vendors, now
deceased. Certificates of stock are not negotiable instruments (post, Par. 102),
consequently, a transferee under a forged assignment acquires no title
By virtue of vesting order P-12, title to the 1,600,000 shares in dispute was, which can be asserted against the true owner, unless his own negligence
however, vested in the Alien Property Custodian of the US. In due course, the has been such as to create an estoppel against him (Clarke on
Vested Property Claims Committee of the Philippine Alien Property Corporations, Sec. Ed. p. 415). If the owner of the certificate has endorsed
Administration made a ―determination‖ allowing said claims, which were it in blank, and it is stolen from him, no title is acquired by an innocent
considered and hear jointly. But upon personal review of the Philippine Alien purchaser for value (East Birmingham Land Co. vs. Dennis, 85 Ala. 565, 2
Property Administrator, the ―determination‖ was reversed and decreed that L.R.A. 836; Sherwood vs. mining co., 50 Calif. 412).
―title to the shares in question shall remain in the name of the Philippine
Alien Property Administrator‖. In the case at bar, neither madrigal nor the Mitsuis had alienated shares of
stock in question. It is not even claimed that either had, through negligence,
Consequently, plaintiffs instituted the present action to establish title to the given — occasion for an improper or irregular disposition of the
aforementioned shares of stock. corresponding stock certificates.
Defendant Attorney General of the US contends that the shares were bought E. FORGED AND UNAUTHORIZED TRANSFERS
by Vicente Madrigal, in trust and for the benefit, of the Mistsui Bussan,
abranch office of a Japanese company; and that Madrigal endorsed in blank FORGED AND UNAUTHORIZED TRANSFERS VS. UNAUTHORIZED
and delivered the shares to Mistsui for safe keeping; that Mitsui never sold or ISSUANCE OF STOCK CERTIFICATE: In the former, what is forged or
otherwise disposed of the said shares; and that the stock certificates must unauthorized is the transfer of the certificate from the true and lawful owner
have been stolen or looted during the emergency from the liberation. to another person. While the latter refers to the act of the corporation in
issuing the certificate, either fraudulently or by mistake.
ISSUE: WON plaintiffs are the rightful owners of the shares?
In forged or unauthorized transfer:
HELD: No. Even, however, if Juan Campos and Carl Hess had sold the shares 1. The purchaser or purchasers, no matter how innocent they may have
of stock in question, as testified to by De los Santos, the result, insofar as been, will acquire no title as against the lawful owner by virtue of the
plaintiffs are concerned, would be the same. It is not disputed that said doctrine of non-negotiability of certificates of stock;
shares of stock were registered, in the records of the Lepanto, in the name of 2. The purchaser will have no right or remedy against the corporation
Vicente Madrigal. Neither is it denied that the latter was, as regards said because he took the shares not by virtue of a misrepresentation made
shares of stock, a mere trustee for the benefit of the Mitsuis. The record by the corporation but on the faith of a forged endorsement or
shows — and there is no evidence to the contrary — that Madrigal had never unauthorized transfer;
disposed of said shares of stock in any manner whatsoever, except by turning 3. The corporation incurs no liability to the person in whose favor the
over the corresponding stock certificates, late in 1941, to the Mitsuis, the certificate is endorsed or issued.
beneficial and true owners thereof. It has, moreover, been established, by 4. If the old certificate is cancelled and new one is issued by the
the uncontradicted testimony of Kitajima and Miwa, the managers of the corporation, the holder thereof may be required to return the same for
Mitsuis in the Philippines, from 1941 to 1945, that the Mitsuis had neither its cancellation;
sold, conveyed, or alienated said shares of stock, nor delivered the 5. However, if new certificates are issued and passes into the hands of a
aforementioned stock certificates, to anybody during said period. Section 35 subsequent bona fide purchaser, the latter may rightfully acquire title
of the Corporation Law reads: thereto since the corporation will be estopped to deny the validity
thereof;
The capital stock corporations shall be divided into shares for which 6. The subsequent purchaser in good faith took the shares, not by virtue of
certificates signed by the president or the vice-president, countersigned by a forged or unauthorized transfer but on reliance to the genuineness of
the secretary or clerk and sealed with the seal of the corporation, shall be the certificate issued by the corporation or by virtue of the
issued in accordance with the by-laws. Shares of stock so issued are representation made by the corporation that the same is valid and
personal property and may be transferred by delivery of the certificate therefore, compel the corporation to recognize him as a stockholder or
endorsed by the owner or his attorney in fact or other person legally claim reimbursement and damages against the latter.
authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is entered and Example: A owns 100 shares of X Co., B stole the stock certificate and forged
noted upon the books of the corporation so as to show the names of A’s signature:
the parties to the transaction, the date of the transfer, the number of the a. If B indorsed and sold it to C:
certificate, and the number of shares transferred. 1. C will not acquire title to the shares whether he is innocent or not;
2. C cannot compel the corporation to register him as stockholder;
Pursuant to this provision, a share of stock may be transferred by 3. X Co. does not incur any liability in favor of C
endorsement of the corresponding stock certificate, coupled with its b. If X Co. cancelled the certificate and issued a new one to C:
delivery. However, the transfer shall "not be valid, except as 1. If A later on finds out that his certificate was stolen, C may still be
between the parties," until it is "entered and noted upon the books required to return the new certificate;
of the corporation." no such entry in the name of the plaintiffs herein 2. If C sold it to D, an innocent purchaser, D may rightfully acquire
having been made, it follows that the transfer allegedly effected by Juan thereto since X Co. is estopped to deny the validity of the
Campos and Carl Hess in their favor is "not valid, except as between" certificate;
themselves. It does not bind either Madrigal or the Mitsuis, who are not 3. If A later on finds out that his certificate was stole, X Co. may be

compelled to recognize both A and D as stockholders.*
In the meantime, Chua Soco became indebted to the bank, and in the action
*This is so because the A cannot be deprived of his rights as owner by virtue for recovery of money, his 500 shares were attached.
of a forged transfer, and B, because of X Co.’s representation that the person
named therein is the owner of shares in the corporation. Fua Cun thereupon instituted the present action maintaining that the
payment of 50% of the subscription entitled Chua Soco to 250 shares and
c. If (b3) above would result in over-issuance of shares prayed that his lien on the shares by virtue of the chattel mortgage be
1. Only A, the rightful owner may be recognized and A will have a declared to have priority over the claim of defendant Bank.
right to compel X Co. to issue him a new certificate;
2. D will be entitled to damages from the X Co.; The trial court rendered judgment in favor of plaintiff.
3. X Co. will have a right of action against the who made false
representation and in whose favor a new certificate is issued.** ISSUE: (1) WON Chua Soco became entitled to 250 shares or the
proportionate share to his partial payment? (2) WON plaintiff had a superior
**In this sense, if D sues X Co., the latter will have no valid defense, but he claim over that of the Bank?
may institute a third party complaint against C. If C is an innocent purchaser,
X Co., may file a fourth party complaint against B. HELD: (1) No. (2) Yes. Though the court below erred in holding that Chua
Soco, by paying one-half of the subscription price of five hundred shares, in
ISSUANCE OF STOCK CERTIFICATION effect became the owner of two hundred and fifty shares, the judgment
appealed from is in the main correct.
Subscriptions to shares of stock are indivisible such that a subscriber to such
shares will not be entitled to the issuance of a stock certificate until he has The claim of the defendant Banking Corporation upon which it brought the
paid the full amount of his subscription. action in which the writ of attachment was issued, was for the non-payment
of drafts accepted by Chua Soco and had no direct connection with the
Sec. 64. Issuance of stock certificates. - No certificate of stock shall be shares of stock in question. At common law a corporation has no lien upon
issued to a subscriber until the full amount of his subscription together with the shares of stockholders for any indebtedness to the corporation (Jones on
interest and expenses (in case of delinquent shares), if any is due, has been Liens, 3d ed., sec. 375) and our attention has not been called to any statute
paid. creating such lien here. On the contrary, section 120 of the Corporation Act
provides that "no bank organized under this Act shall make any loan or
INDIVISIBILITY: As the law stands now, subscription to shares of stock discount on the security of the shares of its own capital stock, nor be the
are deemed indivisible and no certificate of stock can be issued unless and purchaser or holder of any such shares, unless such security or purchase
until the full amount of his subscription including interest and expenses, if shall be necessary to prevent loss upon a debt previously contracted in good
any is paid. faith, and stock so purchased or acquired shall, within six months from the
time of its purchase, be sold or disposed of at public or private sale, or, in
The ruling, therefore, in Baltazar vs. Lingayen Gulf Electronic Power Co where default thereof, a receiver may be appointed to close up the business of the
a subscriber may opt to apply his partial payment to a corresponding number bank in accordance with law."
of shares, will not hold true. Thus, even if under the old law, where a
corporation may, under a by-law provision or by custom, practice or tradition, There can be no doubt that an equity in shares of stock may be assigned and
issue stock certificates covering the number of shares that might have been that the assignment is valid as between the parties and as to persons to
correspondingly paid, this authority or practice is valid only two years after whom notice is brought home. Such an assignment exists here, though it was
the effectivity of the Corporation Code and after which corporations, made for the purpose of securing a debt. The endorsement to the plaintiff of
registered under the said law should comply with the mandatory requirement the receipt above mentioned reads:
of Sec. 64. The Corporation Code thus provides:
For value received, I assign all my rights in these shares in favor of
Sec. 148. Applicability to existing corporations. - All corporations Mr. Tua Cun.
lawfully existing and doing business in the Philippines on the date of the
effectivity of this Code and heretofore authorized, licensed or registered by Manila, P. I., May 18, 1921.
the Securities and Exchange Commission, shall be deemed to have been (Sgd.) CHUA SOCO
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 This endorsement was accompanied by the delivery of the receipt to the
provisions hereof: Provided, That if any such corporation is affected by the plaintiff and further strengthened by the execution of the chattel mortgage,
new requirements of this Code, said corporation shall, unless otherwise which mortgage, at least, operated as a conditional equitable assignment.
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. As against the rights of the plaintiff the defendant bank had, as we have
seen, no lien unless by virtue of the attachment. But the attachment was
MANDAMUS: Once a subscriber has paid his subscription in full, he becomes levied after the bank had received notice of the assignment of Chua Soco's
entitled to be issued a stock certificate and in the event that the corporation interests to the plaintiff and was therefore subject to the rights of the latter.
refuses to do so, the stockholder may institute a case for mandamus with It follows that as against these rights the defendant bank holds no lien
damages, such issuance being ministerial. whatever.
As we have already stated, the court erred in holding the plaintiff as the
FUA CUN (alias Tua Cun), plaintiff-appellee, owner of two hundred and fifty shares of stock; "the plaintiff's rights consist
vs. in an equity in five hundred shares and upon payment of the unpaid portion
RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the City of of the subscription price he becomes entitled to the issuance of certificate for
Manila, and the CHINA BANKING CORPORATION, defendants-appellants said five hundred shares in his favor."
(G.R. No. L-19441; March 27, 1923)
The judgment appealed from is modified accordingly, and in all other
FACTS: Chua Soco subscribed to 500 shares of defendant Bank paying 50% respects it is affirmed, with the costs against the appellants Banking
of the subscription price and a corresponding receipt being issued therefor. Corporation. So ordered.
Such shares were mortgaged to plaintiff Fua Cun to secure a loan evidenced
by a promissory note, together with the receipt, which was endorsed and F. WATERED STOCKS
delivered to plaintiff mortgagee. Plaintiff informed the manager of the Bank
about the transaction but was told to await action by the BOD. DEFINITION: Watered stocks may be defined as one which is issued by the
corporation as fully paid-up shares, when in fact the whole amount of the 3. Present and future creditors are deprived of the corporate assets for the
value thereof has not been paid. If the shares have thus been issued by the protections of their interest.
corporation as fully paid, when in fact it has intentionally and knowingly
received or agreed to receive nothing at all for them, or less than their par BASIS OF LIABILITY:
value, either in money, property or services, the shares are said to be 1. ―Trust Fund Doctrine‖ – the capital stock of the corporation is treated as
―watered‖ or ―fictitiously paid-up‖ to the extent to which they have not been inclusive of the unpaid portion of subscriptions to said capital, as a ―trust
issued or are not to be paid for‖ fund‖ which the creditors have a right to look up to for the satisfaction
of their claims. Stockholders, therefore, are mandated to pay the full
Sec. 65. Liability of directors for watered stocks. - Any director or value of their shares.
officer of a corporation consenting to the issuance of stocks for a 2. ―Fraud or Misrepresentation Theory‖ – liability is based on the false
consideration less than its par or issued value or for a consideration in any representation made by the corporation and the stockholder concerned
form other than cash, valued in excess of its fair value, or who, having to the creditors that the true par value or issued price of the shares has
knowledge thereof, does not forthwith express his objection in writing and been paid or promised to be paid in full.
file the same with the corporate secretary, shall be solidarily liable with the
stockholder concerned to the corporation and its creditors for the difference CONSEQUENCES OF ISSUANCE OF WATERED STOCKS (FLETCHER):
between the fair value received at the time of issuance of the stock and the 1. As to the corporation – when a corporation is guilty of ultra-vires or
par or issued value of the same. 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
RIGHT OF CORPORATION AND CREDITORS: The law does not make quo-warranto proceeding to forfeit its charter for the misuse or abuse of
any distinction as to the right of the corporation and its creditors to enforce its franchise;
payment of the water in the stocks issued, thus, it applies to all creditors 2. As between the corporation and the subscriber – the subscription is
whether prior or subsequent to the issuance of the watered stock. void. Such being the case, the subscriber is liable to pay the full or par
or issued value thereof, to render it valid and effective;
SOLIDARY LIABILITY: All consenting directors and officers are solidarily 3. As to the consenting stockholders – they are estopped from raising any
liable for the ―water‖ in the stock. objection thereto;
4. As to dissenting stockholders – in view of the dilution of their
NON-CONSENTING DIRECTORS: may be absolved of liability by their proportionate interest in the corporation, they may compel the payment
written dissent. Otherwise, if they did not issue such written dissent or are of the ―water‖ in the stock solidarily against the responsible and
passive, they may be held liable for not objecting thereto. consenting directors and officers inclusive of the holder of the watered
stock;
ISSUANCE OF WATERED STOCKS: may be effected in the following ways: 5. As to creditors – they may enforce payment of the difference in the
1. For a monetary consideration less than its par or issue value; price, or the water in the stock, solidarily against the responsible
2. For a consideration in property, tangible or intangible, valued in excess directors/officers and the stockholders concerned; and
of its market value; 6. As against the transferees of the watered stocks – his right is the same
3. Gratuitously or under an agreement that nothing shall be paid at all; or as that of his transferor. If, however, a certificate of stock has been
4. In the guise of stock dividends when there are no surplus profits of the issued and duly indorsed to a bona fide purchaser, without knowledge,
corporation. actual or constructive, the latter cannot be held liable, at least as
against the corporation, since he took the shares on reliance of the
ILLUSTRATION: X Co. has P10M Authorized Capital Stock divided into: (1) misrepresentation made by the corporation that the stock certificate is
5M shares at P1.00 par value; and (2) 1M no par value shares with issued valid and subsisting. This is because a corporation is prohibited from
value at P5.00. A acquired 1M of the par value shares for P.80 and 100,000 issuing certificates of stock until the full value of the subscriptions have
no par value shares at P4.00: been paid and could not, therefore, deny the validity of the stock
1. WATERED STOCK: There is stock watering for both shares. Sec. 65 certificate it issued as against a purchaser in good faith. Thus, Ballantine
speaks of issuance of shares at ―less than its par or issued value‖; states that whether there is any liability on the part of the transferee of
2. LIABILITY FOR PAR VALUE SHARES: The directors who consented to the watered stock is made to depend upon whether he acquired the same
issuance or were passive about it, without written dissent, are solidarily without notice, either as purchaser or donee. If he had knowledge
liable with A for the difference of P.20; thereof, he is subject to the same liability as his transferor.
3. LIABILITY FOR NO PAR VALUE SHARES: A cannot be held liable because
the no par value shares are ―deemed fully paid and non-assessable‖ LIABILITY FOR INTEREST: Aside from the value of their subscription,
(Sec. 6). Accordingly, only the directors or officers consenting to the subscribers may likewise be required to pay interest on all unpaid
issuance are liable. 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 so not fixed. Unless so
ILLUSTRATION2: X Co. has P100M Authorized Capital Stock divided into required or provided, however, the subscribers to shares of stock, not fully
100M shares at P1.00 par value, there is a provision in the by-laws denying paid, are not liable to pay interest on their unpaid subscriptions.
the pre-emptive right of the shareholders. The Board of Directors subscribed
to 1M of the unissued shares at P2.00 each when the fair market value of the Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall
shares was P12.00. pay to the corporation interest on all unpaid subscriptions from the date of
1. WATERED STOCK: No stock watering, since the shares were subscribed subscription, if so required by, and at the rate of interest fixed in the by-laws.
for more than the par value, notwithstanding if it less than the fair If no rate of interest is fixed in the by-laws, such rate shall be deemed to be
market value; the legal rate.
2. If 3 days later, the members of the Board sold those purchased shares
at P12.00 per share, making a profit of P10.00 per share, they cannot G. ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS
be held liable for stock watering but they can be question on their duty
of loyalty. Since the whole P12.00 per share could’ve gone to the coffers TIME OF PAYMENT: Unpaid subscription or any percentage thereof,
of the corporation instead of them reaping the profits for themselves. together with interest if required by the by-laws or the contract of
subscription, shall be paid either:
EFFECTS OF ISSUANCE OF WATERED STOCKS: 1. On the date or dates fixed in the contract or subscription;
1. The corporation is deprived of its capital thereby hurting its business 2. On the date or dates that may be specified by the BOD pursuant to a
prospects, financial capability and responsibility; ―call‖ declaring any or all unpaid portion thereof to be so payable.
2. Stockholder who paid their subscriptions in full, or promised to pay the
same, are injured and prejudiced by the reduction of their proportionate REMEDIES TO ENFORCE PAYMENT ON UNPAID SUBSCRIPTION:
interest in the corporation; and 1. By board action in accordance with the procedure laid down in Sec. 67
to 69 of the Code; and payment is due, no ‖call‖ or declaration by the board is necessary;
2. By a collection case in court as provided for in section 70. 2. The stockholders concerned are given notice of the board resolution by
the corporation either personally or by registered mail. Publication of the
CREDITOR/RECEIVER: Failure or refusal of the BOD to enforce or collect notice of call is not required unless the by-laws provide otherwise.
payment of unpaid subscription will not prevent the creditors or the receiver Notice is not likewise necessary if the contract of the subscription
of the corporation to institute a court action to collect the unpaid portion stipulates a specific date when any unpaid portion is due and payable;
thereof. This is because the capital of the corporation is the basis of the 3. Payment shall be made on the date specified in the call or on the date
credit of and financial responsibility of the corporation. Persons dealing with a provided for in the contract of subscription;
corporation and extending credit to it have a right to insist that the unpaid 4. Failure to pay on the date required in the call or as specified in the
subscription shall be paid in when this becomes necessary for the satisfaction contract of subscription will render the entire balance due and payable
of their claims. This is otherwise known as the Trust Fund Doctrine which and making the stockholder liable for the interest;
states that subscriptions to the capital of a corporation constitute a fund to 5. If within 30 days from the date, no payment is made, all the stock
which creditors have the right to look up to for the satisfaction of their covered by the subscription shall become delinquent and shall be
claims. subject to a delinquency sale;
6. The board, by resolution, orders the sale of the delinquent stock stating
Sec. 67. Payment of balance of subscription. - Subject to the provisions the amount due and the date, time and place of the sale;
of the contract of subscription, the board of directors of any stock corporation 7. The sale shall be made not less than 30 days nor more than 60 days
may at any time declare due and payable to the corporation unpaid from the date the stocks become delinquent;
subscriptions to the capital stock and may collect the same or such 8. Publication of the notice of sale must be made once a week for 2
percentage thereof, in either case with accrued interest, if any, as it may consecutive weeks in the newspaper of general circulation in the
deem necessary. province or city where the principal office is located;
9. Sale at public auction, if no payment is made by the delinquent
Payment of any unpaid subscription or any percentage thereof, together with stockholder, in favor of the bidder who offered to pay the full amount of
the interest accrued, if any, shall be made on the date specified in the the balance in the subscription, inclusive of interest, cost of
contract of subscription or on the date stated in the call made by the board. advertisement and expenses for the smallest number of shares;
Failure to pay on such date shall render the entire balance due and payable 10. Registration or transfer of the shares of stock in the name of the bidder
and shall make the stockholder liable for interest at the legal rate on such and corresponding issuance of the stock certificate covering the shares
balance, unless a different rate of interest is provided in the by-laws, successfully bidded;
computed from such date until full payment. If within thirty (30) days from 11. If there be any remaining shares, the same shall be credited in favor of
the said date no payment is made, all stocks covered by said subscription the delinquent stockholder who shall be entitled to the issuance of a
shall thereupon become delinquent and shall be subject to sale as hereinafter certificate of stock covering such shares;
provided, unless the board of directors orders otherwise. 12. If there is no bidder at the public auction, the corporation may, subject
to the provisions of the Code, bid for the same and the total amount
Sec. 68. Delinquency sale. - The board of directors may, by resolution, due shall be credited or paid in full in the corporate books; and
order the sale of delinquent stock and shall specifically state the amount due 13. The shares so purchased by the corporation shall be vested in the latter
on each subscription plus all accrued interest, and the date, time and place of as treasury shares.
the sale which shall not be less than thirty (30) days nor more than sixty (60)
days from the date the stocks become delinquent. HIGHEST BIDDER: in the case of sale of delinquent stock, and as indicated
in number 10 above, is such bidder who shall offer to pay the full amount of
Notice of said sale, with a copy of the resolution, shall be sent to every the balance on the subscription together with accrued interest, cost of
delinquent stockholder either personally or by registered mail. The same shall advertisement and expenses of sale, for the smallest number of shares or
furthermore be published once a week for two (2) consecutive weeks in a fraction of a share. It should be properly termed ―Lowest‖ Bidder because the
newspaper of general circulation in the province or city where the principal bidders are offering to pay the same amount, and their bids are based on the
office of the corporation is located. number of shares they are willing to receive, the lowest of which is the
winning bid.
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 Ex. A subscribed to 100 shares of stock for P100.00 each and paid only 50%
subscription, plus accrued interest, costs of advertisement and expenses of and later on declared to be delinquent. For the full amount of P5,000 (unpaid
sale, or unless the board of directors otherwise orders, said delinquent stock balance) and the interests, costs, and expenses, the following bidders are
shall be sold at public auction to such bidder who shall offer to pay the full willing to accept - X: 70 shares; Y: 80 shares; Z: 90 shares. In this case, X
amount of the balance on the subscription together with accrued interest, would be the highest bidder. The remaining 30 shares would be credited to
costs of advertisement and expenses of sale, for the smallest number of A.
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 *NO BIDDER: If there was no bidder, the company has to have unrestricted
stock shall be issued in his favor. The remaining shares, if any, shall be retained earnings in order to acquire the shares as thus provided under Sec.
credited in favor of the delinquent stockholder who shall likewise be entitled 41 of the Corporation Code (Power to Acquire Own Shares). Accordingly, if
to the issuance of a certificate of stock covering such shares. the company has no unrestricted retained earnings, it cannot acquire the said
shares by virtue of a delinquency sale, however, it may institute an action for
Should there be no bidder at the public auction who offers to pay the full the recovery of the subscription price under Sec. 70.
amount of the balance on the subscription together with accrued interest,
costs of advertisement and expenses of sale, for the smallest number of MAY A DIRECTOR DECLARED TO BE DELINQUENT ON HIS
shares or fraction of a share, the corporation may, subject to the SUBSCRIPTION BE ALLOWED TO CARRY OUT HIS FUNCTIONS AS
provisions of this Code*, bid for the same, and the total amount due shall SUCH DIRECTOR? Yes. He is still a shareholder entitled to all the rights as
be credited as paid in full in the books of the corporation. Title to all the such, and pending the sale, the shares still stand in his name. Even after the
shares of stock covered by the subscription shall be vested in the corporation sale, he may still be credited to some of the shares and he only needs 1 to
as treasury shares and may be disposed of by said corporation in accordance qualify as a director.
with the provisions of this Code.
QUESTIONING A SALE ON IRREGULARITY OR DEFECT IN THE
PROCEDURE: NOTICE OR IN THE SALE ITSELF:
1. The BOD, by a formal Resolution, declares the whole or any percentage
unpaid subscriptions to be due and payable on a specified date. Sec. 69. When sale may be questioned. - No action to recover
However, if the contract of subscription provides the date or dates when delinquent stock sold can be sustained upon the ground of irregularity or
defect in the notice of sale, or in the sale itself of the delinquent stock, unless subscription, together with accrued interest and costs and expenses
the party seeking to maintain such action first pays or tenders to the party incurred.‖
holding the stock the sum for which the same was sold, with interest from
the date of sale at the legal rate; and no such action shall be maintained ARNALDO F. DE SILVA, plaintiff-appellant,
unless it is commenced by the filing of a complaint within six (6) months from vs.
the date of sale ABOITIZ & COMPANY, INC., defendant-appellee
(G.R. No. L-19893; March 31, 1923)
TWO CONDITIONS:
1. The party seeking to maintain such action first pays or tenders to the FACTS: Plaintiff de Silva subscribed to 650 shares of defendant company and
party holding the stock the sum for which the same was sold, with paid 200 of such subscription leaving a balance of P225,000. On April 22,
interest from the date of the sale at the legal rate; and 1922, he was informed by the corporate secretary that he has been declared
2. The action shall be commenced by the filing of a complaint within 6 delinquent by the BOD and that he should pay the unpaid subscription
months from the date of sale. otherwise such shares shall be sold at a public auction.
ACTION BY THE CORPORATION: De Silva filed a complaint in the CFI of Cebu, contending among others that
the resolution adopted was violative of Art. 46 of the by-laws stating that all
Notwithstanding the provisions of Sec. 67 to 69, the corporation may enforce shares subscribed and were not paid at the time of the incorporation shall be
payment of unpaid subscriptions by court action. paid out of the 70% of the profit obtained until such shares are paid in full.
De Silva contends that such article provides for the operative method of
Sec. 70. Court action to recover unpaid subscription. - Nothing in this payment of the shares, and by declaring the unpaid subscription to have
Code shall prevent the corporation from collecting by action in a court of become due and payable on May 31st and in publishing the notice declaring
proper jurisdiction the amount due on any unpaid subscription, with accrued his shares to be delinquent, the company has exceeded its executive
interest, costs and expenses. authority.
CALL: Consistent with Art. 1169 of the Civil Code, a ―call‖ is a condition ISSUE: WON the BOD may declare the unpaid shares delinquent or collect or
precedent before the right of action to institute a recovery suit accrues. This enforce payment of the same despite the provision of the by-laws?
is because a demand is required before a debtor may incur a delay in the
performance of his obligation. As earlier said however, a call is not necessary HELD: Yes. It is discretionary on the part of the board of directors to do
if the contract of subscription provides for a date or dates when payment is whatever is provided in the said article relative to the application of a part of
due, or when the corporation has become insolvent. the 70 percent of the profit distributable in equal parts on the payment of the
shares subscribed to and not fully paid.
MIGUEL VELASCO, assignee of The Philippine Chemical Product Co.
(Ltd.), plaintiff-appellant, If the board of directors does not wish to make, or does not make, use of
vs. said authority it has two other remedies for accomplishing the same purpose.
JEAN M. POIZAT, defendant-appellee As was said by this court in the case of Velasco vs. Poizat (37 Phil., 802):
(G.R. No. L-11528; March 15, 1918)
―The first and most special remedy given by the statute consists in
FACTS: Defendant Jean M. Poizat subscribed to 20 shares of stock of The permitting the corporation to put the unpaid stock for sale and dispose of
Philippine Chemical Product Co., of which 5 were paid. In an action instituted it for the account of the delinquent subscriber. In this case the provisions
by Miguel Velasco as assignee of the company, he seeks to recover the of sections 38 to 48, inclusive, of the Corporation Law are applicable and
balance of the subscription. The CFI rendered a judgment dismissing the must be followed. The other remedy is by action in court.‖
complaint. Hence, this appeal.
Admitting that the provision of article 46 of the said by-laws maybe regarded
ISSUE: WON defendant is liable for the balance? as a contract between the defendant corporation and its stockholders , yet as
it is only to the board of directors of the corporation that said articles gives
HELD: Yes. We think that Poizat is liable upon this subscription. A stock the authority or right to apply on the payment of unpaid subscriptions such
subscription is a contract between the corporation on one side, and the amount of the 70 percent of the profit distributable among the shareholders
subscriber on the other, and courts will enforce it for or against either. It is a in equal parts as may be deemed fit, it cannot be maintained that the said
rule, accepted by the Supreme Court of the United States, that a article has prescribe an operative method for the payment of said
subscription for shares of stock does not require an express promise subscription continuously until their full amortization.
to pay the amount subscribed, as the law implies a promise to pay
on the part of the subscriber. (7 Ruling Case Law, sec. 191.) Section 36 In the instant case, the defendant corporation, through its board of directors,
of the Corporation Law clearly recognizes that a stock subscription is made use of its discretionary power, taking advantage of the first of the two
subsisting liability from the time the subscription is made, since it requires remedies provided by the aforesaid law. On the other hand, the plaintiff has
the subscriber to pay interest quarterly from that date unless he is relieved no right whatsoever under the provision of the above cited article 46 of the
from such liability by the by-laws of the corporation. The subscriber is as said by-laws to prevent the board of directors from following, for that
much bound to pay the amount of the share subscribed by him as he purpose, any other method than that mentioned in the said article, for the
would be to pay any other debt, and the right of the company to very reason that the same does not give the stockholders any right in
demand payment is no less incontestable. connection with the determination of the question whether or not there
should be deducted from the 70 percent of the profit distributable among the
The provisions of the Corporation Law (Act No. 1459) has given recognition stockholders such amount as may be deemed fit for the payment of
of two remedies for the enforcement of stock subscriptions. The first and subscriptions due and unpaid. Therefore, it is evident that the defendant
most special remedy given by the statute consists in permitting the corporation has not violated, nor disregarded any right of the plaintiff
corporation to put up the unpaid stock for sale and dispose of it for recognized by the said by-laws, nor exceeded its authority in the discharge of
the account of the delinquent subscriber. In this case the provisions of its executive functions, nor abused its discretion when it performed the acts
section 38 to 48, inclusive of the Corporation Law are applicable and must be mentioned in the complaint as grounds thereof, and, consequently, the facts
followed. The other remedy is by action in court, concerning which we therein alleged do not constitute a cause of action.
find in section 49 the following provision:
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-
―Nothing in this Act shall prevent the directors from collecting, by action appellant,
in any court of proper jurisdiction, the amount due on any unpaid vs.
IRINEO BALTAZAR, defendant-appellee.

(G.R. No. L-4824; June 30, 1953) In particular circumstances, as where it is given pursuant to a bona fide
compromise, or to set off a debt due from the corporation, a release,
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellee, supported by consideration, will be effectual as against dissenting
vs. stockholders and subsequent and existing creditors. A release which might
IRINEO BALTAZAR, defendant and appellant originally have been held invalid may be sustained after a considerable lapse
(G.R. No. L-6244; June 30, 1953) of time. (18 C.J.S. 874).‖
FACTS: Herein defendant Irineo Baltazar subscribed to 600 shares, at In the present case, the release claimed by defendant and appellant does not
P100.000 par value per share, of the plaintiff corporation paying P15,000 and fall under the exception above referred to, because it was not given pursuant
making further payments leaving a balance of P18,500. to a bona fide compromise, or to set off a debt due from the corporation, and
there was no consideration for it.
On July 23, 1946, the stockholders, including herein defendant, approved
Resolution No. 17 agreeing: (1) to ―call‖ of the balance of the unpaid In conclusion we hold that under the Corporation Law, notice of call for
subscription to be paid: 50% within 60 days beginning Aug. 1, 1946; the payment for unpaid subscribed stock must be published, except
remaining 50% 60 days beginning October 1, 1946; (2) that all unpaid when the corporation is insolvent, in which case, payment is
unpaid subscriptions after the due dates of both calls to be subject to 12% immediately demandable. We also rule that release from such
interest per annum; (3) that after the expiration of a grace period of 60 days, payment must be made by all the stockholders.
all unpaid subscribed shares would revert to the corporation.
ERNESTO M. APODACA, petitioner,
A demand was made against defendant, but was ignored. Hence this action. vs.
NATIONAL LABOR RELATIONS COMMISSION, JOSE M. MIRASOL and
ISSUE: WON Baltazar is liable to pay the unpaid portion of his subscription INTRANS PHILS., INC., respondents
(G.R. No. 80039; April 18, 1989)
HELD: No. We agree with the lower court that the law requires that
notice of any call for the payment of unpaid subscription should be FACTS: Petitioner, an employee of respondent company, subscribed to 1,500
made not only personally but also by publication. This is clear from the shares at P100 per share. He paid an initial payment P37,500. On Sept. 1,
provisions of section 40 of the Corporation Law, Act No. 1459, as amended. 1975, he was appointed President and General Manager of the company but
on Jan. 2, 1986, he resigned.
It will be noted that section 40 is mandatory as regards publication, using the
word "must". As correctly stated by the trial court, the reason for the He filed a complaint with the NLRC claiming unpaid wages, cost of living
mandatory provision is not only to assure notice to all subscribers, but also to allowance, the balance of his gasoline and representation expenses and his
assure equality and uniformity in the assessment on stockholders. (14 C.J. bonus compensation for 1986. Respondent admitted that petitioner was
639). entitled to P17,060.07 but the same was already set-off against his unpaid
subscription. Petitioner questioned such set-off claiming that no call or notice
We find the citation of authorities made by the plaintiff and appellant was made.
inapplicable. In the case of Velasco vs. Poizat (37 Phil. 805), the corporation
involved was insolvent, in which case all unpaid stock subscriptions become The Labor Arbiter decided in favor of petitioner. On appeal, such decision was
payable on demand and are immediately recoverable in an action instituted reversed by the NLRC.
by the assignee. Said the court in that case:
ISSUE: WON the set-off was properly made?
―. . . . it is now quite well settled that when the corporation becomes
insolvent, with proceedings instituted by creditors to wind up and HELD: No. Firstly, the NLRC has no jurisdiction to determine such intra-
distribute its assets, no call or assessment is necessary before the corporate dispute between the stockholder and the corporation as in the
institution of suits to collect unpaid balance on subscription.‖ matter of unpaid subscriptions. This controversy is within the exclusive
jurisdiction of the Securities and Exchange Commission.
But when the corporation is a solvent concern, the rule is:
Secondly, assuming arguendo that the NLRC may exercise jurisdiction over
―It is again insisted that plaintiffs cannot recover because the suit was the said subject matter under the circumstances of this case, the unpaid
not proceeded by a call or assessment against the defendant as a subscriptions are not due and payable until a call is made by the
subscriber, and that until this is done no right of action accrues. In a corporation for payment. Private respondents have not presented a
suit by a solvent going corporation to collect a subscription, and in certain resolution of the board of directors of respondent corporation calling for the
suits provided by statute this would be true;. . . . . (Id.)‖ payment of the unpaid subscriptions. It does not even appear that a notice of
such call has been sent to petitioner by the respondent corporation.
ISSUE 2: WON the Baltazar is correct in claiming that Resolution No. 17 of
1946 of the BOD released him from the obligation to pay for his unpaid What the records show is that the respondent corporation deducted the
subscription? amount due to petitioner from the amount receivable from him for the unpaid
subscriptions. No doubt such set-off was without lawful basis, if not
HELD: No. There must be unanimous consent of the stockholders of the premature. As there was no notice or call for the payment of unpaid
corporation. We quote some authorities: subscriptions, the same is not yet due and payable.
Subject to certain exceptions, considered in subdivision (3) of this section, BONIFACIO LUMANLAN, plaintiff-appellee,
the general rule is that a valid and binding subscription for stock of vs.
a corporation cannot be cancelled so as to release the subscriber JACINTO R. CURA, ET AL., defendants.
from liability thereon without the consent of all the stockholders or DIZON & CO., INC., ETC., appellant.
subscribers. Furthermore, a subscription cannot be cancelled by the (G.R. No. L-39861; March 21, 1934)
company, even under a secret or collateral agreement for
cancellation made with the subscriber at the time of the FACTS: Lumanlan subscribed to 300 shares of stock of appellant company at
subscription, as against persons who subsequently subscribed or a par value of P50.
purchased without notice of such agreement. (18 C.J.S. 874).
Layag was appointed the receiver of said company, at the instance of its
―(3) Exceptions. creditors Julio Valenzuela, Pedro Santos and Francisco Escoto, to collect the
unpaid subscriptions, there appearing that the company had no assets except

the credits against those who had subscribed for shares of stock. chairman of the BOD of PNB to grant an overdraft of P250,000 (later
increased to P350,000) which was approved by the BOD of PNB with interest
The CFI rendered a decision in favor of Julio Valenzuela and held Lumanlan at 6%.
liable for the unpaid subscription and loans and advances together with
interests. The Philippines did not invest the P9.00 for every peso coming from
defendant lumber producers. The loan extended by PNB was not paid.
Pending appeal, the parties entered into an agreement where Lumanlan Hence, these suits which the trial court dismissed.
would dismiss the appeal and the corporation would collect only 50% of the
amount subscribed by him for stock, provided that in case the 50% was ISSUE: WON the lumber producers are liable for the full value of their
inufficient to pay Valenzuela he should pay an additional amount not to subscriptions?
exceed the judgment against him in that case. Lumanlan paid Valenzuela the
sum of P11,840 including interest. HELD: Yes. In Philippine Trust Co. v. Rivera, citing the leading case of
Velasco v. Poizat, this Court held: "It is established doctrine that subscriptions
Disregarding the agreement, appellant company asked for and order of to the capital of a corporation constitute a fund to which creditors have a
execution of the CFI decision which was granted and the provincial sheriff right to look for satisfaction of their claims and that the assignee in
levied upon two parcels of land of Lumanlan. insolvency can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debt.... A corporation has no
ISSUE: WON Lumanlan is still liable to the corporation? 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;
HELD: Yes. In the promissory note given by the corporation to Valenzuela and as against creditors a reduction of the capital stock can take place only in
the former obligated itself to pay Valenzuela the sum of P8,000 with interest the manner and under the conditions prescribed by the statute or the charter
at 12 per cent per annum and, upon failure to pay said sum and interest or the articles of incorporation. Moreover, strict compliance with the statutory
when due, 25 per cent of the principal as expenses of collection and judicial regulations is necessary...." The Poizat doctrine found acceptance in later
costs in case of litigation. cases. One of the latest cases, Lingayen Gulf Electric Power v. Baltazar,
Speaks to this effect: "In the case of Velasco v. Poizat, the corporation
By virtue of these facts Lumanlan is entitled to a credit against the judgment involved was insolvent, in which case all unpaid stock subscriptions become
in case No. 37492 for P11,840 and an additional sum of P2,000, which is 25 payable on demand and are immediately recoverable in an action instituted
per cent on the principal debt, as he had to file this suit to collect, or receive by the assignee."
credit for the sum which he had paid Valenzuela for and in place of the
corporation, or a total of P13,840. This leaves a balance due Dizon & co., It would be unwarranted to ascribe to the late President Roxas the view that
Inc., of P1,269 on that judgment with interest thereon at 6 per cent per the payment of the stock subscriptions, as thus required by law, could be
annum from August 30, 1930. condoned in the event that the counterpart fund to be invested by the
Government would not be available. Even if such were the case, however,
It appears from the record that during the trial of the case now under and such a promise were in fact made, to further the laudable purpose to
consideration, the Bank of the Philippine Islands appeared in this case as which the proposed corporation would be devoted and the possibility that the
assignee in the "Involuntary Insolvency of Dizon & Co., Inc. That bank was lumber producers would lose money in the process, still the plain and
appointed assignee in case No. 43065 of the Court of First Instance of the specific wording of the applicable legal provision as interpreted by
City of Manila on November 28, 1932. It is therefore evident that there are this Court must be controlling. It is a well-settled principle that with
still other creditors of Dizon & Co., Inc. This being the case that corporation all the vast powers lodged in the Executive, he is still devoid of the
has a right to collect all unpaid stock subscriptions and any other amounts prerogative of suspending the operation of any statute or any of its
which may be due it. terms.
It is established doctrine that subscriptions to the capital of a EDWARD A. KELLER & CO., LTD., petitioner-appellant,
corporation constitute a fund to which the creditors have a right vs.
to look for satisfaction of their claims and that the assignee in COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE
insolvency can maintain an action upon any unpaid stock CASTRO, JOHNNY DE LA FUENTE, SERGIO C. ORDOÑEZ, TRINIDAD C.
subscription in order to realize assets for the payment of its ORDOÑEZ, MAGNO C. ORDOÑEZ, ADORACION C. ORDOÑEZ, TOMAS C.
debts. (Philippine Trust Co. vs. Rivera, 44 Phil., 469, 470.) LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO, ASUNCION
MANAHAN and INTERMEDIATE APPELLATE COURT, respondents-appellees.
PHILIPPINE NATIONAL BANK, plaintiff-appellee, (G.R. No. L-68097; January 16, 1986)
vs.
BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC., SIERRA MADRE FACTS: Petitioner-appellant appointed defendant COB Group Marketing, Inc.
LUMBER CO., INC., NASIPIT LUMBER CO., INC., WOODWORKS, INC., as exclusive distributor of its household products in Panay and Negros. Under
GONZALO PUYAT, TOMAS B. MORATO, FINDLAY MILLAR LUMBER CO., INC., its sales agreement, Keller sold on credit its products to COB Group
ET AL., INSULAR LUMBER CO., ANAKAN LUMBER CO., AND CANTILAN Marketing.
LUMBER CO., INC., defendants-appellees.
(G.R. Nos. L-24177-85; June 29, 1968) The BOD of COB Group Marketing were apprised by Jose E. Bax that the firm
owed Keller about P179,000.
FACTS: In various suits decided jointly, PNB as creditor, and therefore the
real party in interest, was allowed by the lower court to substitute the Keller sued COB Marketing and its stockholders.
receiver of the Philippine Lumber Distributing Agency in these respective
actions for the recovery from the defendant lumber producers the balance of ISSUE: WON Keller can collect the unpaid subscriptions of the stockholders?
their stock subscriptions.
HELD: Yes. It is settled that a stockholder is personally liable for the
The defendant lumber producers were convinced by the late President financial obligations of a corporation to the extent of his unpaid
Manuel Roxas to form a cooperative and ensure the stable supply of lumber subscription (Vda. de Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs
in the country and to eliminate alien middlemen. To induce them, the 1311-2).
president promised and agreed to invest P9.00 for every P1.00 that the
members would invest therein. GERARDO GARCIA, plaintiff-appellee,
vs.
There was no appropriation made by congress for the P9.00 investment. The ANGEL SUAREZ, defendant-appellant
President then instructed Hon. Emilio Abello, then Executive Secretary and (G.R. No. L-45493; April 21, 1939)
FACTS: Appellant Suarez subscribed to 16 shares of Compania Hispano- RIGHTS OF UNPAID SHARES: If the shares are not delinquent, however,
Filipina, Inc. and paid the value of 4 shares, at P100 par value each, or P400. subscribers to the capital stock of a corporation though not fully paid, are
entitled to all the rights of a stockholder (Sec. 72) EXCEPT the issuance of
Plaintiff-appellee Garcia was appointed by the court as receiver of the certificate of stocks (Sec. 64). They can vote and be voted upon and entitled
company, to collect the unpaid subscription, among others. On June 18, to receive all dividends due their shares.
1931, Garcia brought an action to recover from Suarez and other
shareholders the balance of their subscriptions, but the complaint was Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully
dismissed for lack of prosecution. paid which are not delinquent shall have all the rights of a stockholder.
On Oct. 10, 1935, a similar action was instituted which was granted by the NON-STOCK CORPORATIONS: The rules on delinquent shareholders
CFI holding defendant liable for the balance of his unpaid subscription and applies to non-stock corporations, such as when members are delinquent in
interest. On appeal, the defendant raises the issue of prescription. paying membership dues.
ISSUE: WON defendant Suarez is liable? RIGHT TO SECURE THE ISSUANCE OF A NEW STOCK CERTIFICATE:
HELD: Yes. The premise of the argument is wrong because it confuses two Sec. 73. Lost or destroyed certificates. - The following procedure shall
distinct obligations: the obligation to pay interest and that to pay the amount be followed for the issuance by a corporation of new certificates of stock in
of the subscription. The said section 37 of the Corporation Law provides lieu of those which have been lost, stolen or destroyed:
when the obligation to pay interest arises and when payment should be
made, but it is absolutely silent as to when the subscription to a stock should 1. The registered owner of a certificate of stock in a corporation or his legal
be paid. Of course, the obligation to pay arises from the date of the representative shall file with the corporation (A) an affidavit in triplicate
subscription, but the coming into being of an obligation should not setting forth, if possible, (1) the circumstances as to how the certificate
be confused with the time when it becomes demandable. In a loan was lost, stolen or destroyed, (2) the number of shares represented by
for example, the obligation to pay arises from the time the loan is taken; but such certificate, (3) the serial number of the certificate and (4) the
the maturity of that obligation, the date when the debtor can be compelled to name of the corporation which issued the same. He shall also submit such
pay, is not the date itself of the loan, because this would be absurd. The date (B) other information and evidence which he may deem necessary;
when payment can be demanded is necessarily distinct from and subsequent
to that the obligation is contracted. 2. After verifying the affidavit and other information and evidence with the
books of the corporation, said corporation shall publish a notice in a
By the same token, the subscription to the capital stock of the newspaper of general circulation published in the place where the corporation
corporation, unless otherwise stipulation, is not payable at the has its principal office, once a week for three (3) consecutive weeks at the
moment of the subscription but on a subsequent date which may be expense of the registered owner of the certificate of stock which has been
fixed by the corporation. Hence, section 38 of the Corporation Law, lost, stolen or destroyed. The notice shall state (1) the name of said
amended by Act No. 3518, provides that: corporation, (2) the name of the registered owner and (3) the serial
number of said certificate, and (4) the number of shares represented by
―The board of directors or trustees of any stock corporation formed, such certificate, and that after the expiration of one (1) year from the date of
organized, or existing under this Act may at any time declare due and the last publication, if no contest has been presented to said corporation
payable to the corporation unpaid subscriptions to the capital stock . . . .‖ 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
The board of directors of the Compañia Hispano-Filipino, Inc., not having which has been lost, stolen or destroyed and issue in lieu thereof new
declared due and payable the stock subscribed by the appellant, the certificate of stock, unless the registered owner files a bond or other security
prescriptive period of the action for the collection thereof only commenced to in lieu thereof as may be required, effective for a period of one (1) year, for
run from June 18, 1931 when the plaintiff, in his capacity as receiver and in such amount and in such form and with such sureties as may be satisfactory
the exercise of the power conferred upon him by the said section 38 of the to the board of directors, in which case a new certificate may be issued even
Corporation Law, demanded of the appellant to pay the balance of his before the expiration of the one (1) year period provided herein: Provided,
subscription. The present action having been filed on October 10, 1935, the That if a contest has been presented to said corporation or if an action is
defense of prescription is entirely without basis. 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
DELINQUENT: Shares of stock become delinquent when no payment is regarding the ownership of said certificate of stock which has been lost,
made on the balance of all or any portion of the subscription on the date or stolen or destroyed.
dates fixed in the contract of subscription without need of call, or on the date
specified by the BOD pursuant to a call made by it in accordance with the Except in case of fraud, bad faith, or negligence on the part of the
provisions of Sec. 67. corporation and its officers, no action may be brought against any
corporation which shall have issued certificate of stock in lieu of those lost,
EFFECT OF DELINQUENCY: The stockholder thereof immediately loses the stolen or destroyed pursuant to the procedure above-described.
right to vote and be voted upon or represented in any stockholders meeting
as well as all the rights pertaining to a stockholder except the right to receive RATIONALE:
dividends in accordance with the Code. 1. To avoid duplication of certificates of stock;
2. To avoid fictitious and fraudulent transfers; and
Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be 3. To protect the corporation against damage from whatever source arising
entitled to vote or to representation at any stockholder's meeting, nor shall from the issuance of the duplicate certificate inluding liability to the
the holder thereof be entitled to any of the rights of a stockholder except the holder of the original certificate or to innocent holders of certificate
right to dividends in accordance with the provisions of this Code, until and based on the duplicate.
unless he pays the amount due on his subscription with accrued interest, and
the costs and expenses of advertisement, if any. Thus, the BOD has the authority to decide the amount and the kind of surety
bond that may be required for the issuance of a certificate of stock, in liey of
RIGHT TO RECEIVE DIVIDENDS: Sec. 43 provides that ―any cash the lost or destroyed one, if the same is to be issued prior to the expiration of
dividend due on delinquent stockholders shall first be applied to the unpaid the 1 year period provided by Sec. 73.
balance on his subscription plus cost and expenses, while stock dividends
shall be withheld until his unpaid subscription is paid in full‖ ISSUANCE OF NEW CERTIFICATES:
1. After the above procedures have been complied with, the new certificate demand of any director, trustee, stockholder or member, the time when any
will be issued 1 year from the date of the last publication; director, trustee, stockholder or member entered or left the meeting must be
2. Nevertheless, the stockholder may file a bond or other security to have noted in the minutes; and on a similar demand, the yeas and nays must be
the shares issued before the 1 year prescribed. taken on any motion or proposition, and a record thereof carefully made. The
3. If a contest has been present to the corporation or an action is pending protest of any director, trustee, stockholder or member on any action or
in court, the issuance of the new certificate shall be suspended until proposed action must be recorded in full on his demand.
final decision.
The records of all business transactions of the corporation and the minutes of
H. RIGHTS AND LIABILITIES OF STOCKHOLDERS 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
RIGHTS OF A STOCKHOLDER: may demand, writing, for a copy of excerpts from said records or minutes, at
1. Participation in the management of the corporate affairs by his expense.
exercising their right to vote and be voted upon either personally or by
proxy as provided for under Sec. 50 and 58 of the Code; Any officer or agent of the corporation who shall refuse to allow any director,
2. To enter into a voting trust agreement subject to the procedure, trustees, stockholder or member of the corporation to examine and copy
requirements and limitations imposed under Sec. 50; excerpts from its records or minutes, in accordance with the provisions of this
3. To receive dividends and to compel their declaration if warranted Code, shall be liable to such director, trustee, stockholder or member for
under Sec. 43; damages, and in addition, shall be guilty of an offense which shall be
4. To transfer shares of stock subject only to reasonable restrictions punishable under Section 144 of this Code: Provided, That if such refusal is
such as the options and preferences as may be allowed by law inclusive made pursuant to a resolution or order of the board of directors or trustees,
of the right of the transferee to compel the registration of the transfer in the liability under this section for such action shall be imposed upon the
the books of the corporation as provided for in Sec. 63; directors or trustees who voted for such refusal: and Provided, further, That
5. To be issued a certificate of stock for fully paid-up shares in it shall be a defense to any action under this section that the person
accordance with Sec. 64; demanding to examine and copy excerpts from the corporation's records and
6. To exercise pre-emptive rights as provided for in Sec. 39; minutes has improperly used any information secured through any prior
7. To exercise their appraisal right in accordance with the provision of examination of the records or minutes of such corporation or of any other
Sec. 81 and in those instance allowed by law such as Sec. 42 and 105; corporation, or was not acting in good faith or for a legitimate purpose in
8. To institute and file a derivative suit; making his demand.
9. To recover shares of stock unlawfully sold for delinquency as
may be allowed under Sec. 69; Stock corporations must also keep a book to be known as the "stock and
10. To inspect the books of the corporation subject only to the transfer book", in which must be kept a record of all stocks in the names of
limitations imposed by Sec. 75; the stockholders alphabetically arranged; the installments paid and unpaid on
11. To be furnished by the most recent financial statement of the all stock for which subscription has been made, and the date of payment of
corporation as by Sec. 75; any installment; a statement of every alienation, sale or transfer of stock
12. To be issued a new stock certificate in lieu of the lost or destroyed made, the date thereof, and by and to whom made; and such other entries
one subject to the procedure laid down in Sec. 73; as the by-laws may prescribe. The stock and transfer book shall be kept in
13. To have the corporation dissolved under Sec. 118 to 121, and Sec. the principal office of the corporation or in the office of its stock transfer
105 in a close corporation; agent and shall be open for inspection by any director or stockholder of the
14. To participate in the distribution of assets of the corporation upon corporation at reasonable hours on business days.
dissolution under Sec. 122;
15. In the case of a close corporation, to petition the SEC to arbitrate in No stock transfer agent or one engaged principally in the business of
the event of a deadlock as allowed under Sec. 104; and registering transfers of stocks in behalf of a stock corporation shall be
16. Also in the case of a close corporation, to withdraw therefrom, for allowed to operate in the Philippines unless he secures a license from the
any reason, and compel the corporation to purchase his shares as Securities and Exchange Commission and pays a fee as may be fixed by the
provided for in Sec. 105. Commission, which shall be renewable annually: Provided, That a stock
corporation is not precluded from performing or making transfer of its own
OBLIGATIONS AND LIABILITIES: stocks, in which case all the rules and regulations imposed on stock transfer
1. To pay the corporation the balance of his unpaid subscriptions agents, except the payment of a license fee herein provided, shall be
subject to the provision of Sec. 67-70; applicable.
2. To pay interest on his unpaid subscription, if required by the by-
laws or by the contract of subscription in accordance with Sec. 66; THE FOLLOWING SHALL BE KEPT AND MAINTAINED BY THE
3. To answer to the creditor for the unpaid portion of his CORPORATION:
subscription under the Trust Fund Doctrine; 1. Records of all business transactions which include, among others,
4. To answer the ―water‖ in his stocks as provided for in Sec. 65; (1) journals, (2) ledger, (3) contracts, (4) vouchers and receipts, (5)
5. To be liable, as general partners, for all debts, liabilities and financial statements and other books of accounts, (6) income tax
damages of determinable corporation as envisioned under Sec. 21 returns, and (7) voting trust agreements - which must be kept and
(corporation by estoppel); and carefully preserved at its principal office;
6. To be personally liable for torts, in the event that a stockholder in a 2. Minutes of all meetings of stockholders or members and of the
close corporation actively participates in the management of corporate directors or trustees setting forth in detail (1) the date, time and place
affairs. of meeting, (2) how authorized, (3) the notice given, (4) whether the
same be regular or special, and if special, the purpose thereof shall be
CHAPTER 11: CORPORATE BOOKS AND RECORDS specified, (5) those present and absent, and (6) every act done or
ordered done thereat - which must likewise be kept at the principal
A. BOOKS AND RECORDS TO BE KEPT office of the said corporation; and
3. Stock and Transfer Book showing the (1) names of the stockholders,
Sec. 74. Books to be kept; stock transfer agent. - Every corporation (2) the amount paid or unpaid on all stocks for which the subscription
shall keep and carefully preserve at its principal office a record of all business has been made, (3) a statement of every alienation, sale or transfer of
transactions and minutes of all meetings of stockholders or members, or of stock made, if any (4) the date thereof, and (5) by whom and to whom
the board of directors or trustees, in which shall be set forth in detail the time - which must also be kept at the principal office of the corporation or in
and place of holding the meeting, how authorized, the notice given, whether the office of its stock transfer agent.
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 STOCK AND TRANSFER AGENT: is the person who records every
movement of the shares by the minute or by the hour. all documents or records of the corporation and against whom personal
order of the court would be made;
NON-STOCK CORPORATIONS: can also have a stock and transfer agent 2. Damages either against the corporation or the responsible officer who
for purposes of the club share-membership. refused the inspection; or
3. Criminal complaint for violation of his right to inspect and copy
INSPECTION & COPIES: These books are subject to inspection by any of excerpts of all business transactions and minutes of meetings. The
the directors, trustees, stockholders or members of the corporation at officer or agent who refused the examination or copying thereof, shall
reasonable hours on business days and a copy of excerpts of said records be guilty and liable of an offense punishable under Sec. 144 of the
may be demanded. In fact, in so far as Financial Statements are concerned, Code. Sec. 144 imposes a penalty of a fine of not less than P1,000 but
the Code provides: not more than P10,000 or an imprisonment for not less than 30 days but
not more than 5 years, or both, at the discretion of the court. If the
Sec. 75. Right to financial statements. - Within ten (10) days from refusal is pursuant to a resolution or order of the board, the liability shall
receipt of a written request of any stockholder or member, the corporation be imposed upon the directors/trustees who voted for such refusal.
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 DEFENSE OF CORPRATE OFFICERS: (INL)
statement for said taxable year, showing in reasonable detail its assets and 1. That the person demanding has improperly used any information
liabilities and the result of its operations. secured through any prior examination of the records or minutes of such
corporation or any other corporation;
At the regular meeting of stockholders or members, the board of directors or 2. That he was not acting in good faith or for a legitimate purpose in
trustees shall present to such stockholders or members a financial report of making his demand; or
the operations of the corporation for the preceding year, which shall include 3. The right is limited or restricted by special law or the law of its
financial statements, duly signed and certified by an independent certified creation.
public accountant.
W. G. PHILPOTTS, petitioner,
However, if the paid-up capital of the corporation is less than P50,000.00, the vs.
financial statements may be certified under oath by the treasurer or any PHILIPPINE MANUFACTURING COMPANY and F. N. BERRY,
responsible officer of the corporation. respondents.
(G.R. No. L-15568; November 8, 1919)
BASIS OF RIGHT: 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 FACTS: Petitioner seeks to obtain a writ of mandamus to compel the
his company are being conducted by its directors and officers is founded by respondents to permit him, in person or by some authorized agent or
his beneficial interest through ownership of shares and the necessity of self- attorney, to inspect and examine the records of the business by Philippine
protection. Managers of some corporations deliberately keep the shareholders Manufacturing Company, of which he is a stockholder.
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 Respondents interposed a demurrer.
management and the condition of the business. Those in charge of the
company may be guilty of gross incompetence or dishonesty for years and ISSUE: WON the right the law concedes to a stockholder may be exercised
escape liability if the shareholders cannot inspect the records and obtain by a proper agent or attorney?
information.‖
HELD: Yes. The right of inspection given to a stockholder can be
BOOKS OF SUBSIDIARY: The right of the stockholder to examine exercised either by himself or by any proper representative or
corporate books extends to a wholly owned subsidiary which is completely attorney in fact, and either with or without the attendance of the
under the control and management of the parent company where he is such stockholder. This is in conformity with the general rule that what a man
a stockholder. But if the two entities are legally being operated as separate may do in person he may do through another; and we find nothing in the
and distinct entities, there is no such right of inspection on the part of the statute that would justify us in qualifying the right in the manner suggested
stockholder of the parent company. by the respondents.
INSPECTION BY AGENT: while the right is founded on stock ownership, This conclusion is supported by the undoubted weight of authority in the
thus personal in nature, it may be made by the stockholder’s agent or United States, where it is generally held that the provisions of law conceding
representative since it may be unavailing in many instances. the right of inspection to stockholders of corporations are to be liberally
construed and that said right may be exercised through any other properly
INSPECTION BY DIRECTOR/TRUSTEE: As compared to a stockholder or authorized person. As was said in Foster vs. White (86 Ala., 467), "The right
member, the right of a director or trustee to inspect and examine corporate may be regarded as personal, in the sense that only a stockholder
books and records is considered absolute and unqualified and without regard may enjoy it; but the inspection and examination may be made by
to motive. This is because a director supervises, directs and manages another. Otherwise it would be unavailing in many instances." An
corporate business and it is necessary that he be equipped with all observation to the same effect is contained in Martin vs. Bienville Oil Works
the information and data with regard to the affairs of the company Co. (28 La., 204), where it is said: "The possession of the right in question
in order that he may manage and direct its operations intelligently would be futile if the possessor of it, through lack of knowledge necessary to
and according to this best judgment in the interest of all the exercise it, were debarred the right of procuring in his behalf the services of
stockholders he represents. Thus, while stockholders and mmebers are one who could exercise it." In Deadreck vs. Wilson (8 Baxt. [Tenn.], 108),
entitled to inspect and examine the books and records as provided in Sec. 74 the court said: "That stockholders have the right to inspect the books
and 75 they may not gain access to highly sensitive and confidential of the corporation, taking minutes from the same, at all reasonable
information. In the case of directors, ―it is not denied‖ that they have such times, and may be aided in this by experts and counsel, so as to
access. This would include, among others, (a) marketing strategies and make the inspection valuable to them, is a principle too well settled to
pricing structure; (b) budget for expansion and diversification; (c) need discussion." Authorities on this point could be accumulated in great
research and development; and (d) sources of funding, availability abundance, but as they may be found cited in any legal encyclopedia or
of personnel, proposals for mergers or tie-ups with other firms. treaties devoted to the subject of corporations, it is unnecessary here to refer
to other cases announcing the same rule.
REMEDIES OF STOCKHOLDERS UNJUSTIFIABLY REFUSED THE
RIGHT TO INSPECT THE CORPORATE BOOKS: (MDC) The demurrer is overruled; and it is ordered that the writ of mandamus shall
1. Mandamus. In such event, the corporate secretary shall be included as issue as prayed, unless within 5 days from notification hereof the
a party respondent since he is customarily charged with the custody of respondents answer to the merits.

present and absent, and every act done or ordered done at the meeting. .
ANTONIO PARDO, petitioner, ..
vs.
THE HERCULES LUMBER CO., INC., and IGNACIO FERRER, The record of all business transactions of the corporation and the minutes
respondents of any meeting shall be open to the inspection of any director, member, or
(G.R. No. L-22442; August 1, 1924) stockholder of the corporation at reasonable hours.‖
FACTS: Petitioner Antonio Pardo seeks to obtain a writ of mandamus to The above puts in statutory form the general principles of Corporation Law.
compel respondent company to permit petitioner and his duly authorized Directors of a corporation have the unqualified right to inspect the books and
agent and representative to examine the records and business transactions of records of the corporation at all reasonable times. Pretexts may not be put
said company. forward by officers of corporations to keep a director or shareholder from
inspecting the books and minutes of the corporation, and the right of
Respondents raised the defense that under Art. 10 of the by-laws, it is inspection is not to be denied on the ground that the director or shareholder
declared that ―every shareholder may examine the books of the company and is on unfriendly terms with the officers of the corporation whose records are
other documents pertaining to the same upon the days which the board of sought to be inspected. A director or stockholder cannot of course make
directors’ shall annually fix‖. And thus was set from 15th to 25th of March by copies, abstracts, and memoranda of documents, books, and papers as an
virtue of a board resolution. incident to the right of inspection, but cannot, without an order of a court, be
permitted to take books from the office of the corporation. We do not
ISSUE: WON the BOD may choose specific performance and particular dates conceive, however, that a director or stockholder has any absolute
when the right of inspection may be exercised? right to secure certified copies of the minutes of the corporation
until these minutes have been written up and approved by the
HELD: No. The general right given by the statute may not be lawfully directors. (See Fisher's Philippine Law of Stock Corporations, sec. 153, and
abridged to the extent attempted in this resolution. It may be Fletcher Cyclopedia Corporations, vol. 4, Chap. 45.)
admitted that the officials in charge of a corporation may deny inspection
when sought at unusual hours or under other improper conditions; but Combining the facts and the law, we do not think that anything improper
neither the executive officers nor the board of directors have the occurred when the secretary declined to furnish certified copies of minutes
power to deprive a stockholder of the right altogether. A by-law which had not been approved by the board of directors, and that while so
unduly restricting the right of inspection is undoubtedly invalid. Authorities to much of the last resolution of the board of directors as provides for prior
this effect are too numerous and direct to require extended comment. (14 approval of the president of the corporation before the books of the
C.J., 859; 7 R.C.L., 325; 4 Thompson on Corporations, 2nd ed., sec. 4517; corporation can be inspected puts an illegal obstacle in the way of a
Harkness vs. Guthrie, 27 Utah, 248; 107 Am., St. Rep., 664. 681.) stockholder or director, that resolution, so far as we are aware, has not been
enforced to the detriment of anyone. In addition, it should be said that this is
The demurrer is, therefore, sustained; and the writ of mandamus will issue as a family dispute, the petitioner and the individual respondents belonging to
prayed, with the costs against the respondent. the same family; that a test case between the petitioner and the respondents
has not been begun in the Court of First Instance of Occidental Negros
EUGENIO VERAGUTH, Director and Stockholder of the Isabela Sugar involving hundreds of thousands of pesos, and that the appellate court
Company, Inc., petitioner, should not intrude its views to give an advantage to either party. We rule
vs. that the petitioner has not made out a case for relief by mandamus.
ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting President, and
AGUSTIN B. MONTILLA, Secretary of the same corporation, respondents. GOKONGWEI VS. SEC (supra, CHAPTER 7 and 8) – ISSUE: WON
(G.R. No. L-37064; October 4, 1932) petitioner may be properly denied examination of the books and records of
San Miguel International, Inc., a fully owned subsidiary of SMC?
FACTS: Petitioner Eugenio Veraguth seeks to obtain a final and absolute writ
of mandamus to be issued to each and all of the respondents to, among HELD: No. Pursuant to the second paragraph of section 51 of the
others, place at his disposal at reasonable hours the minutes, documents and Corporation Law, "(t)he record of all business transactions of the corporation
books of Isabela Sugar Company, Inc. (which he is a director and and minutes of any meeting shall be open to the inspection of any director,
stockholder) for his inspection and to issue immediately, upon payment of member or stockholder of the corporation at reasonable hours."
the fees, certified copies of any documentation in connection with said
minutes, documents and the books of the aforesaid corporation. The stockholder's right of inspection of the corporation's books and records is
based upon their ownership of the assets and property of the corporation. It
Director Veraguth telegraphed the secretary of the company, asking the latter is, therefore, an incident of ownership of the corporate property, whether this
to forward in the shortest possible time a certified copy of the resolution of ownership or interest be termed an equitable ownership, a beneficial
the board of directors concerning the payment of attorney's fees in the case ownership, or a ownership. This right is predicated upon the necessity of self-
against the Isabela Sugar Company and others. To this the secretary made protection. It is generally held by majority of the courts that where the right
answer by letter stating that, since the minutes of the meeting in question is granted by statute to the stockholder, it is given to him as such and must
had not been signed by the directors present, a certified copy could not be be exercised by him with respect to his interest as a stockholder and for
furnished and that as to other proceedings of the stockholders a request some purpose germane thereto or in the interest of the corporation. In
should be made to the president of the Isabela Sugar Company, Inc. It other words, the inspection has to be germane to the petitioner's
further appears that the board of directors adopted a resolution providing for interest as a stockholder, and has to be proper and lawful in
inspection of the books and the taking of copies "by authority of the character and not inimical to the interest of the corporation. In Grey
President of the corporation previously obtained in each case." v. Insular Lumber, this Court held that "the right to examine the books
of the corporation must be exercised in good faith, for specific and
ISSUE: WON the corporate secretary is justified in refusing to furnish copies honest purpose, and not to gratify curiosity, or for specific and
of the minutes of the meeting of the BOD? honest purpose, and not to gratify curiosity, or for speculative or
vexatious purposes. The weight of judicial opinion appears to be, that on
HELD: Yes. The Corporation Law, section 51, provides that: application for mandamus to enforce the right, it is proper for the court to
inquire into and consider the stockholder's good faith and his purpose and
―All business corporations shall keep and carefully preserve a record of all motives in seeking inspection. Thus, it was held that "the right given by
business transactions, and a minute of all meetings of directors, members, statute is not absolute and may be refused when the information is
or stockholders, in which shall be set forth in detail the time and place of not sought in good faith or is used to the detriment of the
holding the meeting was regular or special, if special its object, those corporation." But the "impropriety of purpose such as will defeat
enforcement must be set up the corporation defensively if the Court is to take

cognizance of it as a qualification. In other words, the specific provisions take Inc.; and (3) the construction of Passi Sugar Mill at Iloilo by the Homion
from the stockholder the burden of showing propriety of purpose and place Philippines, Inc.; as well as (4) to inquire into the validity of said transactions.
upon the corporation the burden of showing impropriety of purpose or
motive. It appears to be the general rule that stockholders are entitled to full The CFI dismissed the special civil action.
information as to the management of the corporation and the manner of
expenditure of its funds, and to inspection to obtain such information, Assailing the conclusions of the lower court, the petitioner has assigned the
especially where it appears that the company is being mismanaged or that it single error to the lower court of having ruled that his alleged improper
is being managed for the personal benefit of officers or directors or certain of motive in asking for an examination of the books and records of the
the stockholders to the exclusion of others." respondent bank disqualifies him to exercise the right of a stockholder to
such inspection under Section 51 of Act No. 1459, as amended. Said
While the right of a stockholder to examine the books and records provision reads in part as follows:
of a corporation for a lawful purpose is a matter of law, the right of
such stockholder to examine the books and records of a wholly- Sec. 51. ... The record of all business transactions of the corporation and
owned subsidiary of the corporation in which he is a stockholder is a the minutes of any meeting shall be open to the inspection of any director,
different thing. member or stockholder of the corporation at reasonable hours.
Some state courts recognize the right under certain conditions, while others Petitioner maintains that the above-quoted provision does not justify the
do not. Thus, it has been held that where a corporation owns approximately qualification made by the lower court that the inspection of corporate records
no property except the shares of stock of subsidiary corporations which are may be denied on the ground that it is intended for an improper motive or
merely agents or instrumentalities of the holding company, the legal fiction of purpose, the law having granted such right to a stockholder in clear and
distinct corporate entities may be disregarded and the books, papers and unconditional terms. He further argues that, assuming that a proper motive
documents of all the corporations may be required to be produced for or purpose for the desired examination is necessary for its exercise, there is
examination, and that a writ of mandamus, may be granted, as the records nothing improper in his purpose for asking for the examination and inspection
of the subsidiary were, to all incontents and purposes, the records of the herein involved.
parent even though subsidiary was not named as a party. Mandamus was
likewise held proper to inspect both the subsidiary's and the parent
corporation's books upon proof of sufficient control or dominion by the parent ISSUE: WON Petitioner is correct in saying that he has an unqualified right
showing the relation of principal or agent or something similar thereto. to inspect the books as provided under Sec. 51 of the Corporation Law?
On the other hand, mandamus at the suit of a stockholder was refused where HELD: No. Petitioner may no longer insist on his interpretation of Section 51
the subsidiary corporation is a separate and distinct corporation domiciled of Act No. 1459, as amended, regarding the right of a stockholder to inspect
and with its books and records in another jurisdiction, and is not legally and examine the books and records of a corporation. The former Corporation
subject to the control of the parent company, although it owned a vast Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg.
majority of the stock of the subsidiary. Likewise, inspection of the books of 68, otherwise known as the "Corporation Code of the Philippines."
an allied corporation by stockholder of the parent company which owns all
the stock of the subsidiary has been refused on the ground that the The right of inspection granted to a stockholder under Section 51 of Act No.
stockholder was not within the class of "persons having an interest." 1459 has been retained, but with some modifications. The second and third
paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the following:
In the Nash case, The Supreme Court of New York held that the contractual
right of former stockholders to inspect books and records of the corporation ―The records of all business transactions of the corporation and the
included the right to inspect corporation's subsidiaries' books and records minutes of any meeting shall be open to inspection by any director,
which were in corporation's possession and control in its office in New York." 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
In the Bailey case, stockholders of a corporation were held entitled to inspect said records or minutes, at his expense.
the records of a controlled subsidiary corporation which used the same
offices and had identical officers and directors. Any officer or agent of the corporation who shall refuse to allow any
director, trustee, stockholder or member of the corporation to examine and
In the case at bar, considering that the foreign subsidiary is wholly owned by copy excerpts from its records or minutes, in accordance with the
respondent San Miguel Corporation and, therefore, under its control, it would provisions of this Code, shall be liable to such director, trustee, stockholder
be more in accord with equity, good faith and fair dealing to construe the or member for damages, and in addition, shall be guilty of an offense
statutory right of petitioner as stockholder to inspect the books and which shall be punishable under Section 144 of this Code: Provided, That if
records of the corporation as extending to books and records of such refusal is made pursuant to a resolution or order of the board of
such wholly-owned subsidiary which are in respondent directors or trustees, the liability under this section for such action shall be
corporation's possession and control. 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
The Court voted unanimously to grant the petition insofar as it prays that section that the person demanding to examine and copy excerpts from the
petitioner be allowed to examine the books and records of San Miguel corporation's records and minutes has improperly used any information
International, Inc., as specified by him. 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
RAMON A. GONZALES, petitioner, for a legitimate purpose in making his demand.‖
vs.
THE PHILIPPINE NATIONAL BANK, respondent. As may be noted from the above-quoted provisions, among the changes
(G.R. No. L-33320; May 30, 1983) introduced in the new Code with respect to the right of inspection
granted to a stockholder are the following (1) the records must be
FACTS: Petitioner Ramon A. Gonzales instituted in the CFI of Manila a special kept at the principal office of the corporation; (2) the inspection
civil action for mandamus against the herein respondent PNB praying that the must be made on business days; (3) the stockholder may demand a
latter be ordered to allow him to look into the books and records of PNB to copy of the excerpts of the records or minutes; (4) and the refusal
satisfy himself as to the truth of the published report that (1) the respondent to allow such inspection shall subject the erring officer or agent of
has guaranteed the obligation of South Negros Development Corporation in the corporation to civil and criminal liabilities.
the purchase of a US$ 23M sugar-mill to be financed by Japanese suppliers
and financiers; that the respondent; (2) the respondent is financing the However, while seemingly enlarging the right of inspection, the new Code
construction of the P21M Cebu-Mactan Bridge to be constructed by VC Ponce, has prescribed limitations to the same. It is now expressly required as a

condition for such examination that (1) the one requesting it must SEC. 4. Corporations created by special laws or charters. — Corporations
not have been guilty of using improperly any information through a created by special laws or charters shall be governed primarily by the
prior examination, and (2) that the person asking for such provisions of the special law or charter creating them or applicable to them.
examination must be "acting in good faith and for a legitimate supplemented by the provisions of this Code, insofar as they are applicable.
purpose in making his demand."
The provision of Section 74 of Batas Pambansa Blg. 68 of the new
The unqualified provision on the right of inspection previously contained in Corporation Code with respect to the right of a stockholder to
Section 51, Act No. 1459, as amended, no longer holds true under the demand an inspection or examination of the books of the
provisions of the present law. The argument of the petitioner that the right corporation may not be reconciled with the abovequoted provisions
granted to him under Section 51 of the former Corporation Law should not be of the charter of the respondent bank. It is not correct to claim,
dependent on the propriety of his motive or purpose in asking for the therefore, that the right of inspection under Section 74 of the new
inspection of the books of the respondent bank loses whatever validity it Corporation Code may apply in a supplementary capacity to the
might have had before the amendment of the law. If there is any doubt in charter of the respondent bank.
the correctness of the ruling of the trial court that the right of inspection
granted under Section 51 of the old Corporation Law must be dependent on a
showing of proper motive on the part of the stockholder demanding the CHAPTER 12: MERGER AND CONSOLIDATION
same, it is now dissipated by the clear language of the pertinent provision
contained in Section 74 of Batas Pambansa Blg. 68. Sec. 36, par. 8 of the Corporation Code of the Philippines expressly
empowers a corporation to merge or consolidate with another corporation
ISSUE2: WON petitioner is in good faith in the exercise of his right to subject to the requirements and procedure prescribed in TITLE IX.
inspect the books of PNB?
Sec. 76. Plan or merger of consolidation. - Two or more corporations
HELD: No. Although the petitioner has claimed that he has justifiable may merge into a single corporation which shall be one of the constituent
motives in seeking the inspection of the books of the respondent bank, he corporations or may consolidate into a new single corporation which shall be
has not set forth the reasons and the purposes for which he desires such the consolidated corporation.
inspection, except to satisfy himself as to the truth of published reports
regarding certain transactions entered into by the respondent bank and to The board of directors or trustees of each corporation, party to the merger or
inquire into their validity. The circumstances under which he acquired one consolidation, shall approve a plan of merger or consolidation setting
share of stock in the respondent bank purposely to exercise the right of forth the following: (NTSO)
inspection do not argue in favor of his good faith and proper motivation.
Admittedly he sought to be a stockholder in order to pry into transactions 1. The names of the corporations proposing to merge or consolidate,
entered into by the respondent bank even before he became a stockholder. hereinafter referred to as the constituent corporations;
His obvious purpose was to arm himself with materials which he can use
against the respondent bank for acts done by the latter when the petitioner 2. The terms of the merger or consolidation and the mode of carrying the
was a total stranger to the same. He could have been impelled by a laudable same into effect;
sense of civic consciousness, but it could not be said that his purpose is
germane to his interest as a stockholder. 3. A statement of the changes, if any, in the articles of incorporation of
the surviving corporation in case of merger; and, with respect to the
ISSUE3: WON the right of a stockholder to inspect the books provided under consolidated corporation in case of consolidation, all the statements required
Sec. 74 of the Corporation Code is applicable to PNB? to be set forth in the articles of incorporation for corporations organized
under this Code; and
HELD: No. We also find merit in the contention of the respondent bank that
the inspection sought to be exercised by the petitioner would be violative of 4. Such other provisions with respect to the proposed merger or
the provisions of its charter. (Republic Act No. 1300, as amended.) Sections consolidation as are deemed necessary or desirable.
15, 16 and 30 of the said charter provide respectively as follows:
Sec. 77. Stockholder's or member's approval. - Upon approval by
Sec. 15. Inspection by Department of Supervision and Examination of the majority vote of each of the board of directors or trustees of the constituent
Central Bank. — The National Bank shall be subject to inspection by corporations of the plan of merger or consolidation, the same shall be
the Department of Supervision and Examination of the Central submitted for approval by the stockholders or members of each of such
Bank' corporations at separate corporate meetings duly called for the purpose.
Notice of such meetings shall be given to all stockholders or members of the
Sec. 16. Confidential information. —The Superintendent of Banks and the respective corporations, at least two (2) weeks prior to the date of the
Auditor General, or other officers designated by law to inspect or meeting, either personally or by registered mail. Said notice shall state the
investigate the condition of the National Bank, shall not reveal to any purpose of the meeting and shall include a copy or a summary of the plan of
person other than the President of the Philippines, the Secretary merger or consolidation. The affirmative vote of stockholders representing at
of Finance, and the Board of Directors the details of the least two-thirds (2/3) of the outstanding capital stock of each corporation in
inspection or investigation, nor shall they give any information the case of stock corporations or at least two-thirds (2/3) of the members in
relative to the funds in its custody, its current accounts or the case of non-stock corporations shall be necessary for the approval of
deposits belonging to private individuals, corporations, or any such plan. Any dissenting stockholder in stock corporations may exercise his
other entity, except by order of a Court of competent jurisdiction,' appraisal right in accordance with the Code: Provided, That if after the
approval by the stockholders of such plan, the board of directors decides to
Sec. 30. Penalties for violation of the provisions of this Act.— Any director, abandon the plan, the appraisal right shall be extinguished.
officer, employee, or agent of the Bank, who violates or permits the
violation of any of the provisions of this Act, or any person aiding or Any amendment to the plan of merger or consolidation may be made,
abetting the violations of any of the provisions of this Act, shall be provided such amendment is approved by majority vote of the respective
punished by a fine not to exceed ten thousand pesos or by imprisonment boards of directors or trustees of all the constituent corporations and ratified
of not more than five years, or both such fine and imprisonment. by the affirmative vote of stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of two-thirds (2/3) of the members of
The Philippine National Bank is not an ordinary corporation. Having a charter each of the constituent corporations. Such plan, together with any
of its own, it is not governed, as a rule, by the Corporation Code of the amendment, shall be considered as the agreement of merger or
Philippines. Section 4 of the said Code provides: consolidation.

Sec. 78. Articles of merger or consolidation. - After the approval by the aim of corporate reorganization or combination is generally to put the
stockholders or members as required by the preceding section, articles of company upon a sound financial basis and to enable it to take care of its
merger or articles of consolidation shall be executed by each of the obligations thereby avoiding liquidation or bankruptcy. But in some cases, a
constituent corporations, to be signed by the president or vice-president and reorganization is effected notwithstanding the fact that the corporation is
certified by the secretary or assistant secretary of each corporation setting solvent.
forth:
ILLEGAL COMBINATIONS: While a merger or consolidation is a right,
1. The plan of the merger or the plan of consolidation; granted by law, to corporations registered under the Code, Act 3518
proscribes illegal combination. It provides, under Sec. 20 thereof that ―no
2. As to stock corporations, the number of shares outstanding, or in the case corporation engaged in commerce may acquire, directly or indirectly, the
of non-stock corporations, the number of members; and whole or any part of the stock or other share capital of another corporation
or corporations engaged in commerce, where the effect of such acquisitions
3. As to each corporation, the number of shares or members voting for and may be to substantially lessen competition between the corporation or
against such plan, respectively. corporations whose stock is so acquired and the corporation making the
acquisition, or between any of them, or to restrain such commerce in any
Sec. 79. Effectivity of merger or consolidation. - The articles of merger section community, or ten to create a monopoly of any line of commerce.‖
or of consolidation, signed and certified as herein above required, shall be Corollary to this is Art. 186 of the Revised Penal Code which imposes a
submitted to the Securities and Exchange Commission in quadruplicate for its penalty of imprisonment and/or fine on any person who enters into a
approval: Provided, That in the case of merger or consolidation of banks or contract or conspiracy to create monopolies and combinations in restraint of
banking institutions, building and loan associations, trust companies, trade.
insurance companies, public utilities, educational institutions and other
special corporations governed by special laws, the favorable recommendation MERGER: is a union effected by absorbing one or more existing corporations
of the appropriate government agency shall first be obtained. If the by another which survives and continues the combined business. It is the
Commission is satisfied that the merger or consolidation of the corporations uniting of two or more corporations by the transfer of property to one of
concerned is not inconsistent with the provisions of this Code and existing them which continue in existence, the other or the others being dissolved and
laws, it shall issue a certificate of merger or of consolidation, at which time merged therein.
the merger or consolidation shall be effective.
Example: It was agreed that B Company will take over and acquire all the
If, upon investigation, the Securities and Exchange Commission has reason to business, assets, properties, rights and liabilities of C Corporation and by
believe that the proposed merger or consolidation is contrary to or virtue of which B will absorb C which is to be dissolved.
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. CONSOLIDATION: is the uniting or amalgamation of two or more existing
Written notice of the date, time and place of hearing shall be given to each corporations to form a new corporation. It signifies a union as necessarily
constituent corporation at least two (2) weeks before said hearing. The results in the creation of a new corporation and the termination of existence
Commission shall thereafter proceed as provided in this Code. of old ones. The united concern resulting from such union is called
consolidated corporation.
Sec. 80. Effects of merger or consolidation. - The merger or
consolidation shall have the following effects: Thus, in the example given, if B and C agreed to form a new corporation, A
Company, which will absorb both business, and all of B’s and C’s assets,
1. The constituent corporations shall become a single corporation which, in properties, rights and liabilities are transferred to A which will continue their
case of merger, shall be the surviving corporation designated in the plan of combined business while B and C will be dissolved, a consolidation takes
merger; and, in case of consolidation, shall be the consolidated corporation place.
designated in the plan of consolidation;
In effect, in a consolidation, the constituent corporations are all dissolved,
2. The separate existence of the constituent corporations shall cease, except while in a merger, the absorbing or surviving corporation is not, only the
that of the surviving or the consolidated corporation; absorbed.
3. The surviving or the consolidated corporation shall possess all the rights, REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR
privileges, immunities and powers and shall be subject to all the duties and CONSOLIDATION:
liabilities of a corporation organized under this Code; 1. The BOD/T of each constituent corporations shall approve a plan or
merger or consolidation setting for the matters required in Sec. 76;
4. The surviving or the consolidated corporation shall thereupon and 2. Approval of the plan by the stockholders representing 2/3 outstanding
thereafter possess all the rights, privileges, immunities and franchises of each capital stock or 2/3 of the member in non-stock corporations of each of
of the constituent corporations; and all property, real or personal, and all such corporations at separate corporate meetings called for the
receivables due on whatever account, including subscriptions to shares and purpose;
other choses in action, and all and every other interest of, or belonging to, or 3. Prior notice of such meeting, with a copy or summary of the plan of
due to each constituent corporation, shall be deemed transferred to and merger or consolidation shall be given to all stockholders or members at
vested in such surviving or consolidated corporation without further act or least 2 weeks prior to the scheduled meeting, either personally or by
deed; and registered mail stating the purpose thereof;
4. Execution of the articles of merger or consolidation by each constituent
5. The surviving or consolidated corporation shall be responsible and liable corporations to be signed by the president or vice-president and
for all the liabilities and obligations of each of the constituent corporations in certified by the corporate secretary or assistant secretary setting forth
the same manner as if such surviving or consolidated corporation had itself the matters required in Sec. 78;
incurred such liabilities or obligations; and any pending claim, action or 5. Submission of the articles of merger or consolidation in quadruplicate to
proceeding brought by or against any of such constituent corporations may the SEC subject to the requirement of Sec. 79 that if it involve
be prosecuted by or against the surviving or consolidated corporation. The corporations under direct supervision of any other government agency
rights of creditors or liens upon the property of any of such constituent or governed by special laws the favorable recommendation of the
corporations shall not be impaired by such merger or consolidation. government agency concerned shall first be secured; and
6. Issuance of the certificate of merger or consolidation by the SEC at
REASON FOR REORGANIZATION: The reasons inducing a reorganization which time the merger or consolidation shall be effective. If the plan,
are not in every case the same, but for the most part, they are to be found in however, is believed to be contrary to law, the SEC shall set a hearing to
the weak financial or insolvent condition of the particular corporations. The give the corporations concerned an opportunity to be heard upon notice

and thereafter, the Commission shall proceed as provided in the Code. effectivity date of the merger is crucial for determining when the
merged or absorbed corporation ceases to exist; and when its
EFFECTS OF MERGER OR CONSOLIDATION: rights, privileges, properties as well as liabilities pass on to the
1. There will only be a single corporation. In case of merger, the surviving surviving corporation.
corporation or the consolidate corporation in case of consolidation;
2. The termination of corporate existence of the constituent corporations, Consistent with the aforementioned Section 79, the September 16, 1975
except that of the surviving corporation or the consolidated corporation; Agreement of Merger, which Associated Banking Corporation (ABC) and
3. The surviving corporation or the consolidated corporation will possess all Citizens Bank and Trust Company (CBTC) entered into, provided that its
the rights, privileges, immunities and powers and shall be subject to all effectivity "shall, for all intents and purposes, be the date when the necessary
the duties and liabilities of a corporation organized under the Code; papers to carry out this [m]erger shall have been approved by the Securities
4. The surviving or consolidated corporation shall possess all the rights, and Exchange Commission." As to the transfer of the properties of CBTC to
privileges, immunities and franchises of the constituent corporations, ABC, the agreement provides:
and all property and all receivables due, including subscriptions to
shares and other choses in action, and every other interest of, or ―10. Upon effective date of the Merger, all rights, privileges, powers,
belonging to or due to the constituent corporations shall be deemed immunities, franchises, assets and property of [CBTC], whether real,
transferred to and vested in such surviving or consolidated corporation personal or mixed, and including [CBTC's] goodwill and tradename, and all
without further act or deed; and debts due to [CBTC] on whatever act, and all other things in action
5. The rights of creditors or any lien on the property of the constituent belonging to [CBTC] as of the effective date of the [m]erger shall be
corporations shall not be impaired by the merger or consolidation. vested in [ABC], the SURVIVING BANK, without need of further act or
deed‖
LIQUIDATION: There would be no need to liquidate or wind-up the affairs The records do not show when the SEC approved the merger. Private
of the corporation because (1) there are no assets to distribute; (2) no debts respondent's theory is that it took effect on the date of the execution of the
and liabilities to pay – since all these are transferred to the surviving or agreement itself, which was September 16, 1975. Private respondent
consolidated corporation. contends that, since he issued the promissory note to CBTC on September 7,
1977 — two years after the merger agreement had been executed — CBTC
ASSOCIATED BANK, petitioner, could not have conveyed or transferred to petitioner its interest in the said
vs. note, which was not yet in existence at the time of the merger. Therefore,
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents. petitioner, the surviving bank, has no right to enforce the promissory note on
(G.R. No. 123793; June 29, 1998) private respondent; such right properly pertains only to CBTC.
FACTS: Associated Banking Corporation and Citizens Bank and Trust Assuming that the effectivity date of the merger was the date of its
Company merged to form Associated Citizens Bank which subsequently execution, we still cannot agree that petitioner no longer has any interest in
changed its corporate name to Associate Bank. the promissory note. A closer perusal of the merger agreement leads to a
different conclusion. The provision quoted earlier has this other clause:
The defendant Lorenzo Sarmiento Jr. executed a promissory note in favor of
Associated Bank for P2.5M of which P2.25M remains unpaid. Despite Upon the effective date of the [m]erger, all references to [CBTC] in any
repeated demands, the defendant failed to pay the sum due. deed, documents, or other papers of whatever kind or nature and
wherever found shall be deemed for all intents and purposes, references to
Defendant denied all pertinent allegations in the complaint and alleged as [ABC], the SURVIVING BANK, as if such references were direct references
affirmative and/or special defense that Associated Bank is not the real party to [ABC]. . . .
in interest because the promissory note was executed in favor of Citizens
Bank and Trust Company. Thus, the fact that the promissory note was executed after the
effectivity date of the merger does not militate against petitioner.
Defendant was declared in default for not appearing in the Pre-Trial The agreement itself clearly provides that all contracts —
Conference and the plaintiff was allowed to present evidence ex-parte, the irrespective of the date of execution — entered into in the name of
Motion to Life Order of Default and or Reconsideration of the Order being CBTC shall be understood as pertaining to the surviving bank,
dismissed. The trial court ruled in favor of Associated Bank. On appeal, the herein petitioner. Since, in contrast to the earlier aforequoted provision,
CA reversed the trial court. the latter clause no longer specifically refers only to contracts existing at the
time of the merger, no distinction should be made. The clause must have
ISSUE: WON Associated Bank, the surviving corporation, may enforce the been deliberately included in the agreement in order to protect the interests
promissory note made by Sarmiento in favor of CBTC, the absorbed company of the combining banks; specifically, to avoid giving the merger agreement a
after the effectivity of the merger? farcical interpretation aimed at evading fulfillment of a due obligation.
HELD: Yes. Ordinarily, in the merger of two or more existing Thus, although the subject promissory note names CBTC as the payee, the
corporations, one of the combining corporations survives and reference to CBTC in the note shall be construed, under the very provisions
continues the combined business, while the rest are dissolved and of the merger agreement, as a reference to petitioner bank, "as if such
all their rights, properties and liabilities are acquired by the reference [was a] direct reference to" the latter "for all intents and
surviving corporation. Although there is a dissolution of the purposes."
absorbed corporations, there is no winding up of their affairs or
liquidation of their assets, because the surviving corporation No other construction can be given to the unequivocal stipulation. Being
automatically acquires all their rights, privileges and powers, as clear, plain and free of ambiguity, the provision must be given its literal
well as their liabilities. meaning and applied without a convoluted interpretation. Verba lelegis non
est recedendum.
The merger, however, does not become effective upon the mere
agreement of the constituent corporations. The procedure to be In light of the foregoing, the Court holds that petitioner has a valid cause of
followed is prescribed under the Corporation Code. Section 79 of said Code action against private respondent. Clearly, the failure of private respondent to
requires the approval by the Securities and Exchange Commission (SEC) of honor his obligation under the promissory note constitutes a violation of
the articles of merger which, in turn, must have been duly approved by a petitioner's right to collect the proceeds of the loan it extended to the former.
majority of the respective stockholders of the constituent corporations. The
same provision further states that the merger shall be effective only BANK OF THE PHILIPPINE ISLANDS, Petitioner,
upon the issuance by the SEC of a certificate of merger. The

vs. There appears to be no dispute that with respect to FEBTC employees that
BPI EMPLOYEES UNION-DAVAO CHAPTER-FEDERATION OF UNIONS BPI chose not to employ or FEBTC employees who chose to retire or be
IN BPI UNIBANK, Respondent separated from employment instead of "being absorbed," BPI‘s assumed
(G.R. No. 164301; August 10, 2010) liability to these employees pursuant to the merger is FEBTC’s liability to
them in terms of separation pay, retirement pay or other benefits that may be
FACTS: On March 23, 2000, the Bangko Sentral ng Pilipinas approved the due them depending on the circumstances.
Articles of Merger executed on January 20, 2000 by and between BPI, herein
petitioner, and FEBTC. This Article and Plan of Merger was approved by the Although not binding on this Court, American jurisprudence on the
Securities and Exchange Commission on April 7, 2000. consequences of voluntary mergers on the right to employment and seniority
rights is persuasive and illuminating. We quote the following pertinent
Pursuant to the Article and Plan of Merger, all the assets and liabilities of discussion from the American Law Reports:
FEBTC were transferred to and absorbed by BPI as the surviving corporation.
FEBTC employees, including those in its different branches across the Several cases have involved the situation where as a result of mergers,
country, were hired by petitioner as its own employees, with their status and consolidations, or shutdowns, one group of employees, who had accumulated
tenure recognized and salaries and benefits maintained. seniority at one plant or for one employer, finds that their jobs have been
discontinued except to the extent that they are offered employment at the
BPI has an existing Union Shop Clause agreement with the BPI Employees place or by the employer where the work is to be carried on in the future.
Union-Davao Chapter-Federation of Unions in BPI Unibank (BPI Union) Such cases have involved the question whether such transferring employees
whereby it is a pre-condition that new employees must join the union before should be entitled to carry with them their accumulated seniority or whether
they can be regularized otherwise they will not have a continued they are to be compelled to start over at the bottom of the seniority list in the
employment. By reason of the failure of the FEBTC employees to join the "new" job. It has been recognized in some cases that the accumulated
union, BPI Union recommended to BPI their dismissal. BPI refused. The issue seniority does not survive and cannot be transferred to the "new" job.
went to voluntary arbitration where BPI won but the Court of Appeals
reversed the Voluntary Arbitrator. Hence, this petition. In Carver v Brien (1942) 315 Ill App 643, 43 NE2d 597, the court saying that,
absent some specific contract provision otherwise, seniority rights were
ISSUE: WON employees of a dissolved corporation in a merger are ordinarily limited to the employment in which they were earned, and
considered absorbed by the surviving corporation? concluding that the contract for which specific performance was sought was
not such a completed and binding agreement as would support such
HELD: No. Absorbed FEBTC Employees are neither assets nor equitable relief, since the railroad, whose concurrence in the arrangements
liabilities. In legal parlance, however, human beings are never embraced in made was essential to their effectuation, was not a party to the agreement.
the term "assets and liabilities." Moreover, BPI’s absorption of former FEBTC
employees was neither by operation of law nor by legal consequence of Indeed, from the tenor of local and foreign authorities, in voluntary mergers,
contract. There was no government regulation or law that compelled absorption of the dissolved corporation‘s employees or the
the merger of the two banks or the absorption of the employees of recognition of the absorbed employees‘ service with their previous
the dissolved corporation by the surviving corporation. Had there employer may be demanded from the surviving corporation if
been such law or regulation, the absorption of employees of the required by provision of law or contract. The dissent of Justice Arturo D.
non-surviving entities of the merger would have been mandatory on Brion tries to make a distinction as to the terms and conditions of
the surviving corporation. In the present case, the merger was voluntarily employment of the absorbed employees in the case of a corporate merger or
entered into by both banks presumably for some mutually acceptable consolidation which will, in effect, take away from corporate management the
consideration. In fact, the Corporation Code does not also mandate the prerogative to make purely business decisions on the hiring of employees or
absorption of the employees of the non-surviving corporation by the will give it an excuse not to apply the CBA in force to the prejudice of its own
surviving corporation in the case of a merger. Section 80 of the employees and their recognized collective bargaining agent. In this regard,
Corporation Code provides. we disagree with Justice Brion.
This Court believes that it is contrary to public policy to declare the former Justice Brion takes the position that because the surviving corporation
FEBTC employees as forming part of the assets or liabilities of FEBTC that continues the personality of the dissolved corporation and acquires all the
were transferred and absorbed by BPI in the Articles of Merger. Assets and latter’s rights and obligations, it is duty-bound to absorb the dissolved
liabilities, in this instance, should be deemed to refer only to property rights corporation’s employees, even in the absence of a stipulation in the plan of
and obligations of FEBTC and do not include the employment contracts of its merger. He proposes that this interpretation would provide the necessary
personnel. A corporation cannot unilaterally transfer its employees to another protection to labor as it spares workers from being "left in legal limbo."
employer like chattel. Certainly, if BPI as an employer had the right to choose
who to retain among FEBTC’s employees, FEBTC employees had the However, there are instances where an employer can validly discontinue or
concomitant right to choose not to be absorbed by BPI. Even though FEBTC terminate the employment of an employee without violating his right to
employees had no choice or control over the merger of their employer with security of tenure. Among others, in case of redundancy, for example,
BPI, they had a choice whether or not they would allow themselves to be superfluous employees may be terminated and such termination would be
absorbed by BPI. Certainly nothing prevented the FEBTC’s employees from authorized under Article 283 of the Labor Code.
resigning or retiring and seeking employment elsewhere instead of going
along with the proposed absorption. The lack of a provision in the plan of merger regarding the transfer of
employment contracts to the surviving corporation could have very well been
Employment is a personal consensual contract and absorption by BPI of a deliberated on the part of the parties to the merger, in order to grant the
former FEBTC employee without the consent of the employee is in violation surviving corporation the freedom to choose who among the dissolved
of an individual’s freedom to contract. It would have been a different matter corporation’s employees to retain, in accordance with the surviving
if there was an express provision in the articles of merger that as a condition corporation’s business needs. If terminations, for instance due to redundancy
for the merger, BPI was being required to assume all the employment or labor-saving devices or to prevent losses, are done in good faith, they
contracts of all existing FEBTC employees with the conformity of the would be valid. The surviving corporation too is duty-bound to protect the
employees. In the absence of such a provision in the articles of merger, then rights of its own employees who may be affected by the merger in terms of
BPI clearly had the business management decision as to whether or not seniority and other conditions of their employment due to the merger. Thus,
employ FEBTC’s employees. FEBTC employees likewise retained the we are not convinced that in the absence of a stipulation in the merger plan
prerogative to allow themselves to be absorbed or not; otherwise, that would the surviving corporation was compelled, or may be judicially compelled, to
be tantamount to involuntary servitude. absorb all employees under the same terms and conditions obtaining in the
dissolved corporation as the surviving corporation should also take into

consideration the state of its business and its obligations to its own B. WHEN EXERCISED
employees, and to their certified collective bargaining agent or labor union.
Sec. 81. Instances of appraisal right.- Any stockholder of a corporation
Even assuming we accept Justice Brion’s theory that in a merger situation the shall have the right to dissent and demand payment of the fair value of his
surviving corporation should be compelled to absorb the dissolved shares in the following instances:
corporation’s employees as a legal consequence of the merger and as a social
justice consideration, it bears to emphasize his dissent also recognizes that 3. In case any amendment to the articles of incorporation has the effect of
the employee may choose to end his employment at any time by voluntarily changing or restricting the rights of any stockholder or class of shares,
resigning. For the employee to be "absorbed" by BPI, it requires the or of authorizing preferences in any respect superior to those of
employees’ implied or express consent. It is because of this human element outstanding shares of any class, or of extending or shortening the term
in employment contracts and the personal, consensual nature thereof that we of corporate existence;
cannot agree that, in a merger situation, employment contracts are
automatically transferable from one entity to another in the same manner 4. In case of sale, lease, exchange, transfer, mortgage, pledge or other
that a contract pertaining to purely proprietary rights – such as a promissory disposition of all or substantially all of the corporate property and assets
note or a deed of sale of property – is perfectly and automatically as provided in the Code; and
transferable to the surviving corporation.
3. In case of merger or consolidation.
That BPI is the same entity as FEBTC after the merger is but a legal fiction
intended as a tool to adjudicate rights and obligations between and among ENUMERATION NOT EXCLUSIVE: it may also cover:
the merged corporations and the persons that deal with them. Although in a 1. Investment of funds in another corporation or business or for any other
merger it is as if there is no change in the personality of the employer, there purpose other than its primary purpose as provided in Sec. 42;
is in reality a change in the situation of the employee. Once an FEBTC 2. Likewise, in a close corporation, a stockholder has the unbridled right to
employee is absorbed, there are presumably changes in his condition of compel the corporation ―for any reason‖ to purchase his shares at their
employment even if his previous tenure and salary rate is recognized by BPI. fair value which shall not be less than the par or issued value, when the
It is reasonable to assume that BPI would have different rules and corporation has sufficient assets to cover its debts and liabilities,
regulations and company practices than FEBTC and it is incumbent upon the exclusive of capital stock (Sec. 105).
former FEBTC employees to obey these new rules and adapt to their new
environment. Not the least of the changes in employment condition that the NOT ALL AMENDMENTS: the right may only be exercised in cases of
absorbed FEBTC employees must face is the fact that prior to the merger amendment which ―has the effect of changing or restricting the rights of any
they were employees of an unorganized establishment and after the merger stockholder or class of shares, or of authorizing preferences in any respect
they became employees of a unionized company that had an existing superior to those of outstanding shares of any class, or of extending or
collective bargaining agreement with the certified union. This presupposes shortening the term of corporate existence‖.
that the union who is party to the collective bargaining agreement is the
certified union that has, in the appropriate certification election, been shown Accordingly, if the amendment is to increase or decrease the number of
to represent a majority of the members of the bargaining unit. directors, or change the corporate name, or change of principal office, the
appraisal right is not available.
Likewise, with respect to FEBTC employees that BPI chose to employ and
who also chose to be absorbed, then due to BPI’s blanket assumption of STOCKHOLDER WITH UNPAID SUBSCRIPTION: He MAY exercise the
liabilities and obligations under the articles of merger, BPI was bound to appraisal right, since the subscriber is entitled to all the rights of a
respect the years of service of these FEBTC employees and to pay the same, stockholder under Sec. 72 and although Sec. 82 provides for the submission
or commensurate salaries and other benefits that these employees previously of certificate of stock, Sec. 86 provides that the notation to such certificate of
enjoyed with FEBTC. stock is OPTIONAL at the instance of the corporation.
As the Union likewise pointed out in its pleadings, there were benefits C. REQUIREMENTS AND PROCEDURE
under the CBA that the former FEBTC employees did not enjoy with
their previous employer. As BPI employees, they will enjoy all these CBA Sec. 82. How right is exercised. – The appraisal right may be exercised
benefits upon their "absorption." Thus, although in a sense BPI is continuing by any stockholder who shall have voted against the proposed corporate
FEBTC’s employment of these absorbed employees, BPI’s employment of action, by making a written demand on the corporation within thirty (30)
these absorbed employees was not under exactly the same terms and days after the date on which the vote was taken for payment of the fair value
conditions as stated in the latter’s employment contracts with FEBTC. This of his shares: Provided, That failure to make the demand within such period
further strengthens the view that BPI and the former FEBTC employees shall be deemed a waiver of the appraisal right. If the proposed corporate
voluntarily contracted with each other for their employment in the surviving action is implemented or affected, the corporation shall pay to such
corporation. 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
CHAPTER 13: APPRAISAL RIGHT anticipation of such corporate action.
A. DEFINITION If within a period of sixty (60) days from the date the corporate action was
approved by the stockholders, the withdrawing stockholder and the
Appraisal Right is the method of paying a shareholder for the taking of his corporation cannot agree on the fair value of the shares, it shall be
property. It is a statutory means whereby a stockholder can avoid the determined and appraised by three (3) disinterested persons, one of whom
conversion of this property into another property not of his own choosing and shall be named by the stockholder, another by the corporation, and the third
is given to a shareholder as compensation for the abrogation of the common- by the two thus chosen. The findings of the majority of the appraisers shall
law rule that a single stockholder could block a certain corporate act such as be final, and their award shall be paid by the corporation within thirty (30)
merger. days after such award is made: Provided, That no payment shall be made to
any dissenting stockholder unless the corporation has unrestricted retained
PURPOSE: is to protect the property rights of dissenting stockholders from earnings in its books to cover such payment: and Provided, further, That
actions by the majority shareholders which alters the nature and character of upon payment by the corporation of the agreed or awarded price, the
their investment. In effect, it is a right granted to dissenting stockholders on stockholder shall forthwith transfer his shares to the corporation.
certain corporate or business decisions to demand payment of the fair market
value of their shares. REQUIREMENTS AND PROCEDURE FOR THE VALID EXERCISE OF
THIS RIGHT ARE:
1. The stockholder must have voted against the proposed corporate action demand to the corporation for notation that such shares are dissenting
in any of the instances allowed by law for the exercise of the right of shares; and,
appraisal; 6. If the shares are transferred and the certificate subsequently cancelled.
2. The written demand for payment must be made by the dissenting
stockholder within 30 days after the date on which the vote was taken. F. COST OF APPRAISAL
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 If the corporation and the dissenting stockholder do not agree, an appraisal
right; to be made by three disinterested person may be made.
3. Surrender of the certificate of stock by the dissenting stockholder for
notation in the corporate books and the payment of the corporation of Sec. 85. Who bears costs of appraisal. - The costs and expenses of
the fair market value of the said shares as of the day prior to the date appraisal shall be borne by the corporation, unless the fair value ascertained
on which the vote was taken. If the stockholder and the corporation by the appraisers is approximately the same as the price which the
cannot agree on the fair market value thereof, the same shall be corporation may have offered to pay the stockholder, in which case they shall
determined in accordance with the provisions of par.2 of Sec. 82; be borne by the latter. In the case of an action to recover such fair value, all
4. The fair value of the shares of the dissenting stockholder must be paid costs and expenses shall be assessed against the corporation, unless the
by the corporation only if it has ―unrestricted retained earnings‖ in its refusal of the stockholder to receive payment was unjustified.
books to cover such payment. If the corporation has no unrestricted
retained earnings, the dissenting stockholder may not, therefore, be THE CORPORATION BEARS THE COST IF:
able to effectively exercise his appraisal right, EXCEPT in the case of a a. The price offered by the corporation is lower than the fair value of the
close corporation under Sec. 105; shares of the dissenting stockholder as determined by the appraisers;
5. Upon payment of the shares by the corporation, the dissenting b. Where an action is filed by the dissenting stockholder to recover such
stockholder shall transfer his shares to the corporation. fair value and the refusal of the stockholder to receive payment is found
by the court to be justified.
D. EFFECT OF EXERCISE OF APPRAISAL RIGHT
DISSENTING STOCKHOLDER WILL BE LIABLE FOR THE COST AND
Sec. 83. Effect of demand and termination of right. - From the time of EXPENSES OF APPRAISAL WHEN:
demand for payment of the fair value of a stockholder's shares until either a. When the price offered by the corporation is approximately the same as
the abandonment of the corporate action involved or the purchase of the said the fair value ascertained by the appraisers;
shares by the corporation, all rights accruing to such shares, including voting b. Where the action filed by the dissenting stockholder and his refusal to
and dividend rights, shall be suspended in accordance with the provisions of accept payment is found by the court to be unjustified.
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 G. NOTATION
value of his shares within 30 days after the award, his voting and dividend
rights shall immediately be restored. Sec. 86. Notation on certificates; rights of transferee. - Within ten
(10) days after demanding payment for his shares, a dissenting stockholder
SUSPENSION OF STOCKHOLDER RIGHTS: Upon completion of the steps shall submit the certificates of stock representing his shares to the
provided in Sec. 82, the stockholder concerned is regarded as having made corporation for notation thereon that such shares are dissenting shares. His
an election to withdraw from the corporate enterprise and take the value of failure to do so shall, at the option of the corporation, terminate his rights
his stock. Such a procedure suspends (for a maximum period of 30 days) under this Title. If shares represented by the certificates bearing such
certain ownership rights associated with stockholder status, such as the right notation are transferred, and the certificates consequently cancelled, the
to receive dividends or distribution and the right to vote which cannot be rights of the transferor as a dissenting stockholder under this Title shall cease
restored without compliance with the governing statutory conditions. 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
DIRECTOR EXERCISING APPRAISAL RIGHT: may still continue to to the transferee.
function as such, prior to payment, unless there is a contrary provision in the
by-laws. PURPOSE: to give notice and guide to the corporation to determine the
respective rights of stockholder.
E. WHEN RIGHT TO PAYMENT CEASES
SALE: The law does not prohibit the dissenting stockholder to sell, transfer
Sec. 84. When right to payment ceases. - No demand for payment or assign his shares. If such be the case, the right of the dissenting
under this Title may be withdrawn unless the corporation consents thereto. stockholder to be paid the fair value of his shares shall cease and the
If, however, such demand for payment is withdrawn with the consent of the transferee will acquire all the rights of a regular stockholder inclusive of all
corporation, or if the proposed corporate action is abandoned or rescinded by dividends which would have accrued on such shares.
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 CHAPTER 14: NON-STOCK CORPORATIONS (TITLE XI)
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 A. DEFINITION
dividend distributions which would have accrued on his shares shall be paid
to him. Sec. 87. Definition. - For the purposes of this Code, a non-stock
corporation is one where no part of its income is distributable as dividends to
INSTANCES WHEN THE RIGHT OF A DISSENTING STOCKHOLDER TO its members, trustees, or officers, subject to the provisions of this Code on
BE PAID THE FAIR VALUE OF HIS SHARES CEASES: dissolution: Provided, That any profit which a non-stock corporation may
1. When he withdraws his demand for payment and the corporation obtain as an incident to its operations shall, whenever necessary or proper,
consents thereto; be used for the furtherance of the purpose or purposes for which the
2. When the proposed action is abandoned or rescinded by the corporation was organized, subject to the provisions of this Title.
corporation;
3. When the proposed action is disapproved by the SEC where such The provisions governing stock corporation, when pertinent, shall be
approval is necessary; applicable to non-stock corporations, except as may be covered by specific
4. When the SEC determines that he is not entitled to exercise his provisions of this Title.
appraisal right;
5. When he fails to submit the stock certificate within ten (10) days from
CAPITAL STOCK: the old notion is that a non-stock corporation is one
which has no capital stock divided into shares – this may no longer hold true PROXY VOTING: Generally, allowed unless disallowed by the AOI or the by-
under the definition provided by Sec. 87. Thus, even if it may have capital laws.
stock divided into shares, proprietary or otherwise, a corporation is
considered ―non-stock‖ so long as it does not distribute dividends to its VOTING OTHER THAN IN PERSON: may also be allowed by the AOI or
members and officers. We have, for instance, Club shares issued t the by-laws. Contrary to a stock corporation, a stockholder has to vote in the
members, the totality of which may rightfully represent ―capital‖ of the meeting called for the purpose except in case of a general amendment where
corporation but whose income (if there be any) is not distributed by way of ―written assent‖ is allowed.
dividends during its corporate existence. The corporation, in such a case, is
legally ―non-stock‖. Sec. 90. Non-transferability of membership. - Membership in a non-
stock corporation and all rights arising therefrom are personal and non-
PROFITS: A non-stock corporation is generally not allowed to engage in any transferable, unless the articles of incorporation or the by-laws otherwise
business undertaking or activity for profit as it would run counter to its very provide.
nature as a non-profit entity. However, as may be allowed and specified in
its AOI or incidental to the objects and purposes indicated therein, it may Sec. 91. Termination of membership. - Membership shall be terminated
engage in certain money-making ventures or economic activities provided in the manner and for the causes provided in the articles of incorporation or
that any profits derived therefrom shall be used for the furtherance of the the by-laws. Termination of membership shall have the effect of
purposes for which the corporation was organized or to defray the operating extinguishing all rights of a member in the corporation or in its property,
expenses of the entity. It has thus been said that the fact that a non-profit unless otherwise provided in the articles of incorporation or the by-laws.
corporation earns a profit, gain or income for the corporation or members
does not make it a profit-making corporation where such profit or income is MEMBERSHIP: non-stock corporations have the right to adopt rules
used for the purpose set forth in the AOI and is not distributable to its prescribing the mode and manner in which membership thereat can be
incorporators, members or officers, since mere intangible or pecuniary obtained or maintained. This includes the right to limit membership. In other
benefits to the members do not change the nature of the corporation. words, membership in non-stock corporations may be acquired by complying
with the provisions of its rules prescribed in the by-laws. This is in
The determination of whether or not a non-stock corporation can engage in consonance with the express power granted by law under Sec. 36, par. 6 of
profit-making business or activity depends largely on the purpose or purposes the Code, authorizing them to admit members thereof and that authority
indicated in the AOI. If the business activity is authorized in the said articles, carries with it the power to prescribe rules on membership.
necessary, incidental or essential thereto, the same may be undertaken by
the corporation, otherwise, not, as it would be an ultra-vires act under Sec. It has thus been stated that in the absence of charter or statutory
45 restrictions, non-stock corporations may determine who shall be admitted to
membership and how they shall be admitted. It may exclude any person
B. PURPOSE whom it deems unfit for membership. Indeed, in the absence of restrictions,
it may act arbitrarily and exclude any persons it may see fit, and the courts
Sec. 88. Purposes. - Non-stock corporations may be formed or organized have no power to interfere. In other words, it is free to fix qualifications for
for charitable, religious, educational, professional, cultural, fraternal, literary, membership and to provide for termination of membership.
scientific, social, civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof, subject to the AUTHORITY TO ADMIT MEMBERS: the provisions in the by-laws, if any,
special provisions of this Title governing particular classes of non-stock shall govern. Absent any provision to the contrary, it must necessarily be
corporations. lodged with the BOT since it is the body that exercises all corporate powers
as enunciated in Sec. 23 of the Code.
Non-stock corporations may be organized or formed for any purpose or
purposes allowed or indicated in the above provision. The enumeration, SPECIAL CASES: the law itself may provide certain limitations or even
however, is not exclusive as the law itself recognizes similar or allied purpose perhaps proscription on transfer of membership. Thus, RA 4726, otherwise
or purposes for which non-stock corporations may be organized. known as the Condominium Act requires that membership therein shall not
Recreational, sports club, athletic or allied activities of similar import, for be transferred separately from the condominium unit of which it is
instance, may likewise be lawful purpose of a non-stock corporation. appurtenant and that when a member ceases to own a unit, he shall
automatically cease to be a member.
C. MEMBERSHIP AND VOTING RIGHTS
TERMINATION OF MEMBERSHIP: Membership may be terminated in the
Sec. 89. Right to vote. - The right of the members of any class or classes manner and for causes provided in the AOI or by-laws and when a member is
to vote may be limited, broadened or denied to the extent specified in the so terminated it shall extinguish all his rights in the corporation or in its
articles of incorporation or the by-laws. Unless so limited, broadened or property unless otherwise provided in the said articles or by-laws.
denied, each member, regardless of class, shall be entitled to one vote.
The power or authority to terminate members in non-stock corporations is
Unless otherwise provided in the articles of incorporation or the by-laws, a said to be inherent but strict compliance with the manner and procedure laid
member may vote by proxy in accordance with the provisions of this Code. down in the by-laws must be observed, otherwise it may render the expulsion
ineffective and invalid.
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 In the absence of any provision in the AOI or by-laws relative to the manner
approval of, and under such conditions which may be prescribed by, the and causes of termination or expulsion of member, the decided weight of
Securities and Exchange Commission. authority is to the effect that the power is inherent and may be exercised in
certain situations, namely:
CUMULATIVE VOTING: GENERAL RULE: Cumulative voting is not 1. When an offense is committed which, although it has no immediate
allowed, accordingly, even if the members may cast as many votes are there relation to a member’s duty as such, it is so infamous as to render him
are trustees to be elected, he may not cast more than one vote for one unfit for society of honest men, and which is indictable at common law;
candidate, UNLESS: allowed in the AOI or the by-laws. 2. When the offense is a violation of his duty as member of the
corporation; and
CLASSIFICATION: The by-laws or the AOI may provide for classification as 3. When the offense is of a mixed nature, being both against his duty as a
to members with voting or non-voting rights, since it is provided that ―the member of the corporation, and also indictable at common law.
right of the members of any class or classes to vote may be limited,
broadened or denied‖.
As to whether or not a member should be expelled or maintained is the just be deemed a waiver on its part of any technicality or requirement of
established right of the corporation to determine and the courts are without form, since otherwise the association would be practically paralyzed and
authority to strip a member of his membership without cause. deprived of the substantial revenues from the membership dues of
P17,400.00 (at P100.00 per application).
CHINESE YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE
PHILIPPINE ISLANDS, WILLIAM GOLANGCO, in his capacity as Director WHEREFORE the respondent court's decision is hereby set aside and in lieu
and President of the said Association, and JUANITO K. TAN, in his capacity as thereof judgment is rendered dismissing private respondent's petition in the
Recording Secretary of the said Association, petitioners, Court of First Instance of Manila and dissolving the preliminary injunction,
vs. with costs against private respondent.
VICTOR CHING and THE COURT OF APPEALS, respondents
(G.R. No. L-36929; June 18, 1976) CEBU COUNTRY CLUB, INC., SABINO R. DAPAT, RUBEN D. ALMENDRAS,
JULIUS Z. NERI, DOUGLAS L. LUYM, CESAR T. LIBI, RAMONTITO* E. GARCIA
FACTS: Respondent Ching, a member of the BOD of petitioner Chinese and JOSE B. SALA, petitioners,
YMCA, filed an action in the CFI, alleging that on the Membership Campaign vs.
of the Chinese YMCA held from Sept. 27, 1965, only 175 applicants were RICARDO F. ELIZAGAQUE, respondent
submitted, canvassed and accepted on the last day of the membership (G.R. No. 160273 ; January 18, 2008)
campaign, which was Nov. 26, 1965, NOT more than 240, as reported in the
Nov. 28, 1965 issue of the Chinese Commercial News. FACTS: Cebu Country Club, Inc. (CCCI), petitioner, is a domestic corporation
operating as a non-profit and non-stock private membership club, having its
The trial court rendered a decision in favor of herein respondent declaring principal place of business in Banilad, Cebu City. Petitioners herein are
that only 174 applications constitute the present active membership of the members of its Board of Directors.
association.
Sometime in 1987, San Miguel Corporation, a special company proprietary
ISSUE: WON the trial court is justified in stripping members of their member of CCCI, designated respondent Ricardo F. Elizagaque, its Senior
membership in a non-stock corporation? Vice President and Operations Manager for the Visayas and Mindanao, as a
special non-proprietary member. The designation was thereafter approved by
HELD: No. The documentary evidence itself as cited by the trial court, the CCCI’s Board of Directors.
consisting of the applications and the receipts for payment of the
membership fees show that they were filed and paid not later than the In 1996, respondent filed with CCCI an application for proprietary
November 26, 1965 deadline, and this was further supported by the bank membership. The application was indorsed by CCCI’s two (2) proprietary
statement of the petitioner YMCA deposit account with the China Banking members, namely: Edmundo T. Misa and Silvano Ludo.
Corporation and the checks paid by certain members to the YMCA which
show that the application fees corresponding to the questioned 74 As the price of a proprietary share was around the P5 million range, Benito
applications (that raised the total to 249 from 175) were already paid to Unchuan, then president of CCCI, offered to sell respondent a share for only
petitioner YMCA as the time of the said deadline. (Exhibits 4, 6, 6-A, 6-B and P3.5 million. Respondent, however, purchased the share of a certain Dr.
6-C). No evidence could be cited by the trial court to rebut this well nigh Butalid for only P3 million. Consequently, on September 6, 1996, CCCI issued
conclusive documentary evidence other than respondent's unsupported Proprietary Ownership Certificate No. 1446 to respondent.
suspicion which the trial court adopted in a negative manner with its
statement that it is "not improbable" that "some of those applications filed During the meetings dated April 4, 1997 and May 30, 1997 of the CCCI Board
after said deadline". If there were indeed any applications filed after the of Directors, action on respondent’s application for proprietary membership
deadline, they certainly should have been positively pin-pointed and was deferred. In another Board meeting held on July 30, 1997, respondent’s
specifically annulled. application was voted upon. Subsequently, or on August 1, 1997, respondent
received a letter from Julius Z. Neri, CCCI’s corporate secretary, informing
What is worse, 175 membership applications were undisputedly filed within him that the Board disapproved his application for proprietary membership.
the deadline (including the 75 withdrawn by respondent) and yet the 100
remaining unquestioned memberships were nullified by the questioned On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote CCCI a
decision without the individuals concerned ever having been impleaded or letter of reconsideration. As CCCI did not answer, respondent, on October 7,
heard (except the individual petitioners president and secretary). 1997, wrote another letter of reconsideration. Still, CCCI kept silent. On
November 5, 1997, respondent again sent CCCI a letter inquiring whether
The appealed decision thus contravened the established principle that the any member of the Board objected to his application. Again, CCCI did not
courts cannot strip a member of a non-stock non-profit corporation reply.
of his membership therein without cause. Otherwise, that would be
an unwarranted and undue interference with the well-established Consequently, on December 23, 1998, respondent filed with the Regional
right of a corporation to determine its membership, as announced by Trial Court (RTC), Branch 71, Pasig City a complaint for damages against
Fletcher, as follows: petitioners, docketed as Civil Case No. 67190.
Compliance with provisions of charter, constitution or by-laws. —In order After trial, the RTC rendered its Decision dated February 14, 2001 in favor of
that membership may be acquired in a non-stock corporation and valid by- respondent.
laws must be complied with, except in so far as they may be and are
waived. *** But provisions in the by-laws as to formal steps to be taken to On appeal by petitioners, the Court of Appeals, in its Decision dated January
acquire membership may be waived by the corporation, or it may be 31, 2003, affirmed the trial court’s Decision and denied the Motion for
estopped to assert that they have not been taken. [12A Fletcher Reconsideration subsequently filed.
Cyclopedia Corporations, Perm. ed., pp. 583-585; emphasis supplied.]
Hence, the present petition.
Finally, the appealed decision did not give due importance to the undisputed
fact therein stated that "at the board meeting of the association held on ISSUE: WON in disapproving respondent’s application for proprietary
December 7, 1965, a list of 174 applications for membership, old and new, membership with CCCI, petitioners are liable to respondent for damages?
was submitted to the board and approved by the latter, over the objection of
the petitioner [therein private respondent] who was present at said meeting." HELD: Yes. Petitioners contend, inter alia, that the Court of Appeals erred in
Such action of the petitioner association's board of directors approving the awarding exorbitant damages to respondent despite the lack of evidence that
174 membership applications of old and new members constituting its active they acted in bad faith in disapproving the latter’s application; and in
membership as duly processed and screened by the authorized committee disregarding their defense of damnum absque injuria.

Generally, an action for damages under either Article 20 or Article 21
For his part, respondent maintains that the petition lacks merit, hence, should would be proper. (Emphasis in the original)‖
be denied.
In rejecting respondent’s application for proprietary membership, we find that
CCCI’s Articles of Incorporation provide in part: petitioners violated the rules governing human relations, the basic principles
to be observed for the rightful relationship between human beings and for
SEVENTH: That this is a non-stock corporation and membership therein as the stability of social order. The trial court and the Court of Appeals aptly
well as the right of participation in its assets shall be limited to qualified held that petitioners committed fraud and evident bad faith in disapproving
persons who are duly accredited owners of Proprietary Ownership respondent’s applications. This is contrary to morals, good custom or public
Certificates issued by the corporation in accordance with its By-Laws. policy. Hence, petitioners are liable for damages pursuant to Article 19 in
relation to Article 21 of the same Code.
Corollary, Section 3, Article 1 of CCCI’s Amended By-Laws provides:
It bears stressing that the amendment to Section 3(c) of CCCI’s Amended By-
SECTION 3. HOW MEMBERS ARE ELECTED – The procedure for the Laws requiring the unanimous vote of the directors present at a special or
admission of new members of the Club shall be as follows: regular meeting was not printed on the application form respondent filled and
(a) Any proprietary member, seconded by another voting proprietary submitted to CCCI. What was printed thereon was the original provision of
member, shall submit to the Secretary a written proposal for the admission Section 3(c) which was silent on the required number of votes needed for
of a candidate to the "Eligible-for-Membership List"; admission of an applicant as a proprietary member.
(b) Such proposal shall be posted by the Secretary for a period of thirty
(30) days on the Club bulletin board during which time any member may Petitioners explained that the amendment was not printed on the application
interpose objections to the admission of the applicant by communicating form due to economic reasons. We find this excuse flimsy and unconvincing.
the same to the Board of Directors; Such amendment, aside from being extremely significant, was introduced
(c) After the expiration of the aforesaid thirty (30) days, if no objections way back in 1978 or almost twenty (20) years before respondent filed his
have been filed or if there are, the Board considers the objections application. We cannot fathom why such a prestigious and exclusive golf
unmeritorious, the candidate shall be qualified for inclusion in the "Eligible- country club, like the CCCI, whose members are all affluent, did not have
for-Membership List"; enough money to cause the printing of an updated application form.
(d) Once included in the "Eligible-for-Membership List" and after the
candidate shall have acquired in his name a valid POC duly recorded in the It is thus clear that respondent was left groping in the dark
books of the corporation as his own, he shall become a Proprietary wondering why his application was disapproved. He was not even
Member, upon a non-refundable admission fee of P1,000.00, provided that informed that a unanimous vote of the Board members was
admission fees will only be collected once from any person. required. When he sent a letter for reconsideration and an inquiry
whether there was an objection to his application, petitioners
On March 1, 1978, Section 3(c) was amended to read as follows: apparently ignored him. Certainly, respondent did not deserve this
(c) After the expiration of the aforesaid thirty (30) days, the Board may, by kind of treatment. Having been designated by San Miguel Corporation as a
unanimous vote of all directors present at a regular or special special non-proprietary member of CCCI, he should have been treated by
meeting, approve the inclusion of the candidate in the "Eligible-for- petitioners with courtesy and civility. At the very least, they should have
Membership List". informed him why his application was disapproved.
As shown by the records, the Board adopted a secret balloting known as the The exercise of a right, though legal by itself, must nonetheless be in
"black ball system" of voting wherein each member will drop a ball in the accordance with the proper norm. When the right is exercised arbitrarily,
ballot box. A white ball represents conformity to the admission of an unjustly or excessively and results in damage to another, a legal wrong is
applicant, while a black ball means disapproval. Pursuant to Section 3(c), as committed for which the wrongdoer must be held responsible. It bears
amended, cited above, a unanimous vote of the directors is required. When reiterating that the trial court and the Court of Appeals held that petitioners’
respondent’s application for proprietary membership was voted upon during disapproval of respondent’s application is characterized by bad faith.
the Board meeting on July 30, 1997, the ballot box contained one (1) black
ball. Thus, for lack of unanimity, his application was disapproved. As to petitioners’ reliance on the principle of damnum absque injuria or
damage without injury, suffice it to state that the same is misplaced. In
Obviously, the CCCI Board of Directors, under its Articles of Incorporation, Amonoy v. Gutierrez, we held that this principle does not apply when there
has the right to approve or disapprove an application for proprietary is an abuse of a person‘s right, as in this case.
membership. But such right should not be exercised arbitrarily. Articles 19
and 21 of the Civil Code on the Chapter on Human Relations provide As to the appellate court’s award to respondent of moral damages, we find
restrictions. the same in order. Under Article 2219 of the New Civil Code, moral damages
may be recovered, among others, in acts and actions referred to in Article 21.
In GF Equity, Inc. v. Valenzona, we expounded Article 19 and correlated it We believe respondent’s testimony that he suffered mental anguish, social
with Article 21, thus: humiliation and wounded feelings as a result of the arbitrary denial of his
application.
―This article, known to contain what is commonly referred to as the
principle of abuse of rights, sets certain standards which must be observed ISSUE2: WON the liability is solidary considering that only one voted for
not only in the exercise of one's rights but also in the performance of one's disapproval?
duties. These standards are the following: to act with justice; to give
everyone his due; and to observe honesty and good faith. The law, HELD: Yes. Section 31 of the Corporation Code provides:
therefore, recognizes a primordial limitation on all rights; that in their
exercise, the norms of human conduct set forth in Article 19 must be SEC. 31. Liability of directors, trustees or officers. — Directors or trustees
observed. A right, though by itself legal because recognized or who willfully and knowingly vote for or assent to patently unlawful acts of
granted by law as such, may nevertheless become the source of the corporation or who are guilty of gross negligence or bad faith in
some illegality. When a right is exercised in a manner which does directing the affairs of the corporation or acquire any personal or pecuniary
not conform with the norms enshrined in Article 19 and results in interest in conflict with their duty as such directors, or trustees shall be
damage to another, a legal wrong is thereby committed for which liable jointly and severally for all damages resulting therefrom suffered
the wrongdoer must be held responsible. But while Article 19 lays by the corporation, its stockholders or members and other persons.
down a rule of conduct for the government of human relations and for the (Emphasis ours)
maintenance of social order, it does not provide a remedy for its violation.

WHEREFORE, we DENY the petition. The challenged Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 71506 are AFFIRMED LIONS CLUBS INTERNATIONAL and JAMES L. SO, petitioners,
with modification in the sense that (a) the award of moral damages is vs.
reduced from P2,000,000.00 to P50,000.00; (b) the award of exemplary HON. AUGUSTO M. AMORES, Presiding Judge of the Court of First
damages is reduced from P1,000,000.00 to P25,000.00; and (c) the award of Instance of Manila, Branch XXIV, COURT OF APPEALS and VICENTE JOSEFA,
attorney’s fees and litigation expenses is reduced from P500,000.00 and respondents.
P50,000.00 to P50,000.00 and P25,000.00, respectively. (G.R. No. L-61259; April 26, 1983)
D. TRUSTEES AND OFFICERS FACTS: Vicente Josefa and James L. So entered into an agreement whereby
So would withdraw his candidacy for the post of Governor of District 301-A of
The word ―trustees‖ as used in Sec. 92 makes reference to the governing herein petitioner Lions Club International. Such withdrawal was accepted by
board or body in a non-stock corporation. Governor Huang, however news items were published conveying the idea
that So had not withdrawn from the gubernatorial race.
Sec. 92. Election and term of trustees. - Unless otherwise provided in
the articles of incorporation or the by-laws, the board of trustees of non- Josefa filed a complaint before the CFI for quo warranto, injunction or at
stock corporations, which may be more than fifteen (15) in number as may least a temporary restraining order alleging irregularities in the election; that
be fixed in their articles of incorporation or by-laws, shall, as soon as although at the old site of the election, Josefa won, the Lions Club
organized, so classify themselves that the term of office of one-third (1/3) of Internation unlawfully recognized So as the winner.
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 The trial court issued the TRO which was later on lifted and on appeal, the
trustees so elected shall have a term of three (3) years. Trustees thereafter CA issued a new TRO.
elected to fill vacancies occurring before the expiration of a particular term
shall hold office only for the unexpired period. ISSUE: WON the dispute between petitioners and Josefa is a justiciable issue
cognizable by the courts?
No person shall be elected as trustee unless he is a member of the
corporation. HELD: No. We adopt the general rule that "... the courts will not
Unless otherwise provided in the articles of incorporation or the by-laws, interfere with the internal affairs of an unincorporated association
officers of a non-stock corporation may be directly elected by the members. so as to settle disputes between the members, or questions of
policy, discipline, or internal government, so long as the
QUALIFICATIONS OF TRUSTEES: government of the society is fairly and honestly administered in
1. He is a member of the association; conformity with its laws and the law of the land, and no property or
2. Majority thereof must be residents of the Philippines; and civil rights are invaded. Under such circumstances, the decision of the
3. Other qualifications as may be provided for in the by-laws. governing body or established private tribunal of the association is binding
and conclusive and not subject to review or collateral attack in the courts. "
DISQUALIFICATIONS and REMOVAL: Sec. 27 as to disqualifications, and (7 C.J.S. pp. 38- 39).
Sec. 29 and 30 as to removal also apply to Trustees.
The general rule of non-interference in the internal affairs of associations is,
NUMBER OF TRUSTEES: may exceed 15 as may be fixed in the AOI or by- however, subject to exceptions, but the power of review is extremely
laws, contrary to a stock corporation whose BOD must not exceed 15 limited. Accordingly, the courts have and will exercise power to
members. interfere in the internal affairs of an association where (1) law and
justice so require, and (2) the proceedings of the association are
TERM: Sec. 92 allows the AOI or by-laws to provide a desired term of office subject to judicial review where there is fraud, oppression, or bad
and may vary depending on the needs of a specific corporation. By analogy faith, or (3) where the action complained of is capricious, arbitrary,
of the provisions of Sec. 7, however, a term in excess of 5 years is not or unjustly discriminatory. Also, the courts will usually entertain
allowed as it would unduly deprive other members to take active part in jurisdiction to grant relief (4) in case property or civil rights are
corporate management. invaded, although it has also been held that the involvement of property
rights does not necessarily authorize judicial intervention, in the absence of
STAGGERED TERM: The term of office may also be staggered unless the arbitrariness, fraud or collusion. Moreover, the courts will intervene (5)
AOI or by-laws otherwise provide. If such be the case, the board shall classify where the proceedings in question are violative of the laws of the
themselves in order that 1/3 of their number shall expire every year and society, or the law of the land, as by depriving a person of due
subsequent elections of trustees comprising 1/3 shall be held annually. The process of law. Similarly, judicial intervention is warranted (6) where
trustees so elected to fill up any vacancy occurring before the expiration of a there is a lack of jurisdiction on the part of the tribunal conducting
particular term shall hold office only for the unexpired portion of his the proceedings, where the organization exceeds its powers, or
predecessor. where the proceedings are otherwise illegal. (7 C.J.S., pp. 39-41).
GOVERNING BOARDS: While the Code speaks of the BOT as the governing In accordance with the general rules as to judicial interference cited above,
board or body in a non-stock corporation the same law allows a non-stock the decision of an unincorporated association on the question of an election
corporation or any other special corporation to designate their governing to office is a matter peculiarly and exclusively to be determined by the
board by any other name other than BOD/T. The Rotary Club for instance, association, and, in the absence of fraud, is final and binding on the courts.
designates it as Board of Governors while the Evangelica Independence (7 C.J.S., p. 44).
Metodista En Las Islas Filipinas calls it as the Consistory of Elders.
The instant controversy between petitioner So and respondent Josefa falls
ELECTION BY MEMBERS OF OFFICERS: One of the significant features of squarely within the ambit of the rule of judicial non-intervention or non-
a non-stock corporation is that it allows the AOI or by-laws to provide that interference. The elections in dispute, the manner by which it was conducted
the officers thereof shall be directly elected by the members. Unlike in a stock and the results thereof, is strictly the internal affair that concerns only the
corporation where corporate officers are elected by the BOD. Lions association and/or its members, and We find from the records that the
same was resolved within the organization of Lions Clubs International in
Section 138. Designation of governing boards. - The provisions of specific accordance with the Constitution and By-Laws which are not immoral,
provisions of this Code to the contrary notwithstanding, non-stock or unreasonable, contrary to public policy, or in contravention of the laws of the
special corporations may, through their articles of incorporation or land
their by-laws, designate their governing boards by any name other
than as board of trustees.
At the meeting of the International Board of Directors held on June 27, 1982,
the election of petitioner James L. So to serve as District Governor of District Sec. 95. Plan of distribution of assets. - A plan providing for the
301-Al for the fiscal year 1982-83 was approved and said petitioner was duly distribution of assets, not inconsistent with the provisions of this Title, may
informed thereof by Richard G. Rice, Manager, District Operations be adopted by a non-stock corporation in the process of dissolution in the
Department, Lions Clubs International in his letter dated July 8, 1982 and following manner:
marked Annex "K" to the petition, p. 79, Records. Petitioner attended and
completed the District Governors' Executive Seminar as District Governor of The board of trustees shall, by majority vote, adopt a resolution
301-Al (see Annex "L", P. 80, Records). On June 29, 1982, petitioner So was recommending a plan of distribution and directing the submission thereof to
proclaimed, sworn to and installed to office as District Governor of District a vote at a regular or special meeting of members having voting rights.
301-Al by the President of Lions International at the close of the 65th Lions Written notice setting forth the proposed plan of distribution or a summary
Clubs International Convention held in Atlanta, Georgia, U.S.A 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
The findings upon the evidence submitted and examined at the hearing of Code for the giving of notice of meetings to members. Such plan of
the election protest before the Committee personally attended by both distribution shall be adopted upon approval of at least two-thirds (2/3) of the
petitioner So and respondent Josefa may not be disturbed by the courts. The members having voting rights present or represented by proxy at such
decision of the Association's tribunal, the International Board of Directors, is meeting.
controlling since respondent Josefa alleges no invasion of this property or civil
rights and neither is it claimed that the government of the Association is not Culled from the law is that non-stock corporations may provide in the AOI or
fairly and honestly administered in conformity with its laws and the law of the by-laws, for the distribution of its assets among its members subject to the
land. provisions of Sec. 94 and 95. That is, the exception relative to assets which it
holds upon some trust. In which event, the claims of the state, beneficiaries,
E. PLACE OF MEETINGS rightful owners or donors will have to be considered. Thus, assets not subject
to the provisions of number 2-4 of Sec. 94 may be distributed in accordance
Sec. 93. Place of meetings. - The by-laws may provide that the members with a plan of distribution thereof in accordance with the rule established in
of a non-stock corporation may hold their regular or special meetings at any Sec. 95 of the Code.
place even outside the place where the principal office of the corporation is
located: Provided, That proper notice is sent to all members indicating the CHAPTER 15: CLOSE CORPORATION
date, time and place of the meeting: and Provided, further, That the place of
meeting shall be within the Philippines. A. DEFINITION
PLACE OF MEETING: another distinctive feature of a non-stock corporation
is that membership meeting may be held anywhere in the Philippines Sec. 96. Definition and applicability of Title. - A close corporation,
whereas in a stock corporation, the stockholders’ meeting is mandated to be within the meaning of this Code, is one whose articles of incorporation
held or conducted within the city or municipality where the principal office is provide that: (1) All the corporation's issued stock of all classes, exclusive of
located, and as far as practicable, within the principal office of the treasury shares, shall be held of record by not more than a specified number
corporation. 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
F. DISTRIBUTION OF ASSETS UPON DISSOLUTION 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
Corporations, stock and non-stock, may be dissolved in accordance and foregoing, a corporation shall not be deemed a close corporation when at
pursuant to the provisions of Sections 118 to 121 of the Corporation Code least two-thirds (2/3) of its voting stock or voting rights is owned or
and the pertinent provisions of P.D. 902-A, as amended. If such be the case, controlled by another corporation which is not a close corporation within the
the assets of the corporation are to be distributed in accordance with law and meaning of this Code.
established jurisprudence.
Any corporation may be incorporated as a close corporation, except mining or
Sec. 94. Rules of distribution. - In case dissolution of a non-stock oil companies, stock exchanges, banks, insurance companies, public utilities,
corporation in accordance with the provisions of this Code, its assets shall be educational institutions and corporations declared to be vested with public
applied and distributed as follows: interest in accordance with the provisions of this Code.
1. All liabilities and obligations of the corporation shall be paid, satisfied and The provisions of this Title shall primarily govern close corporations:
discharged, or adequate provision shall be made therefore; Provided, That the provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise provides.
2. Assets held by the corporation upon a condition requiring return, transfer
or conveyance, and which condition occurs by reason of the dissolution, shall The ultimate effect of the special provisions of the law on close corporations
be returned, transferred or conveyed in accordance with such requirements; is to furnish another form of business organization – a ―de facto corporation
with a corporate shell‖. It is referred to sometimes as a hybrid of both the
3. Assets received and held by the corporation subject to limitations corporate and partnership forms, an ―incorporated partnership‖ or
permitting their use only for charitable, religious, benevolent, educational or ―corporation de jure but a de facto partnership‖.
similar purposes, but not held upon a condition requiring return, transfer or
conveyance by reason of the dissolution, shall be transferred or conveyed to This is because a close corporation may partake the nature of a partnership
one or more corporations, societies or organizations engaged in activities in in that the stockholders thereof take an active role in the management of the
the Philippines substantially similar to those of the dissolving corporation corporate affairs either as directors, officers or even perhaps as partners in
according to a plan of distribution adopted pursuant to this Chapter; management which is akin to the partnership form of business. This, in fact,
is the main distinction between a close corporation and the ordinary stock
4. Assets other than those mentioned in the preceding paragraphs, if any, corporation where, in the latter, the stockholders have hardly a voice in
shall be distributed in accordance with the provisions of the articles of management except perhaps to elect the directors.
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 Despite this, the stockholders who are active in management still enjoy
classes of members, or provide for distribution; and limited liability to the extent of their subscription in so far as corporate
obligations are concerned. It will be noted, however, that under no. 5 of Sec.
5. In any other case, assets may be distributed to such persons, societies, 100 of the Code, they are made personally liable for corporate torts unless
organizations or corporations, whether or not organized for profit, as may be they have obtained a reasonably adequate insurance liability.
specified in a plan of distribution adopted pursuant to this Chapter.
CLOSE CORPORAIONS: must contain the three provisions required to be shares, having 2,500 votes can vote 2 members and Class C shares having
indicated in the AOI as provided by Sec. 96. Absent any of the provisions only 1,000 votes cannot be guaranteed to any seat in the board.
required by the said section, the corporation, will not, for all legal intents and
purposes, be considered as a close corporation and would thus not be QUORUM AND VOTING REQUIREMENT: a close corporation may provide
governed by TITLE XII of the Code, but by the general provisions governing for a greater quorum or voting requirement under no. 3 above. Although the
ordinary corporation. ―A corporation does not become a close corporation just AOI or by-laws of other stock corporations may provide for greater quorum
because man and his wife owns 99.86% if the capital stock‖ (San Juan and voting requirements in directors’ meeting as provided in Sec. 25 of the
Structural Steel vs. CA). The qualifying conditions requreid by law must be Code, those for stockholder’ meeting, unlike in a close corporation, may not
complied with. be altered or increased. This provisions in effect, increases the veto power of
the minority stockholders.
2/3 OWNED BY ANOTHER CORPORATION: Even if another corporation
owns or controls 2/3 of the ―voting‖ stocks of a close corporation, the latter DIRECT MANAGEMENT BY STOCKHOLDERS: the AOI of the close
may still be considered as such close corporation if the corporation owning or corporation may provide that the corporation shall be managed by the
controlling the shares is also a close corporation. stockholders rather than by the BOD. If such be the case, the stockholders
are deemed directors and are subject to all the rights and liabilities of a
BUSINESS WITH PUBLIC INTEREST: may not be formed as close director. However, their liability would be more extensive in that they are
corporation under the second paragraph of Sec. 95. Sec. 140 of the Code personally lilable for torts unless, again, the corporation has obtained
lays down a similar policy authorizing NEDA to recommend to the legislature reasonably adequate liability insurance. As distinguished from the ordinary
the setting of maximum limits to family or group ownership of stock in stock corporation, directors hereof are liable for corporate torts only if they
corporations vested with public interest, and the determination of whether or have been negligent or acted fraudulently in the performance of their
not it should be vested with public interest within its domain. functions. As to what is ―reasonably adequate liability insurance‖ would vary
depending on the facts and circumstances of the case.
B. PERMISSIVE PROVISIONS
In order that the provision allowing a close corporation to do away with a
Sec. 97. Articles of incorporation. - The articles of incorporation of a BOD may be effective, the same must contain the continuing provisions
close corporation may provide: required in par. 2 of Sec. 97:
1. No meeting of stockholders need be called to elect directors;
1. For a classification of shares or rights and the qualifications for owning or 2. Unless the context clearly requires otherwise, the stockholders of the
holding the same and restrictions on their transfers as may be stated therein, corporation shall be deemed to be directors for the purpose of applying the
subject to the provisions of the following section; provisions of this Code; and
2. For a classification of directors into one or more classes, each of whom 3. The stockholders of the corporation shall be subject to all liabilities of
may be voted for and elected solely by a particular class of stock; and directors.
3. For a greater quorum or voting requirements in meetings of stockholders
or directors than those provided in this Code. ELECTION OF OFFICERS: Sec. 97 likewise allows the AOI of a close
corporation to provide that all officers or employees shall be elected or
The articles of incorporation of a close corporation may provide that the appointed by the stockholders instead of the BOD.
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 C. EFFECT OF BREACH OF QUALIFYING CONDITIONS
continues in effect:
Sec. 98. Validity of restrictions on transfer of shares. - Restrictions on
1. No meeting of stockholders need be called to elect directors; the right to transfer shares must appear in the articles of incorporation and in
2. Unless the context clearly requires otherwise, the stockholders of the the by-laws as well as in the certificate of stock; otherwise, the same shall
corporation shall be deemed to be directors for the purpose of applying the not be binding on any purchaser thereof in good faith. Said restrictions shall
provisions of this Code; and not be more onerous than granting the existing stockholders or the
3. The stockholders of the corporation shall be subject to all liabilities of corporation the option to purchase the shares of the transferring stockholder
directors. with such reasonable terms, conditions or period stated therein. If upon the
expiration of said period, the existing stockholders or the corporation fails to
The articles of incorporation may likewise provide that all officers or exercise the option to purchase, the transferring stockholder may sell his
employees or that specified officers or employees shall be elected or shares to any third person.
appointed by the stockholders, instead of by the board of directors.
The restriction must be indicated not only in the AOI and the stock
CLASSIFICATION OF SHARES: Under no. 1 above, the close corporation certificates but also in the by-laws. The restrictions, however, shall not be
may classify its shares into different classes to be held of record only by more onerous than granting existing stockholders or the corporation the
specified persons. Example: Classes A, B and C. Class A is to be held only by option to purchase the shares of the selling or transferring stockholder within
the incorporators; Class B by their relatives within the third civil degree of reasonable terms, conditions and period. If, after the expiration of the period,
consanguinity or affinity; Class C by their close business associates. the existing stockholders or the corporation fails to exercise the option, the
stockholder concerned may transfer his shares to any third person subject to
CLASSIFICATION OF DIRECTORS: Under no. 2 above, a close the provisions, however, of Sec. 99:
corporation may provide for a classification of directors into one or more
class, each of whom may be voted for and elected solely by a particular class Sec. 99. Effects of issuance or transfer of stock in breach of
of stock. Example: 1,000 Class A shares; 500 Class B shares; and 200 Class C qualifying conditions. –
shares. The AOI may provide that each class shall have a representation in
the BOD regardless of the number of shares within each class. So, if the close 1. If stock of a close corporation is issued or transferred to any person who is
corporation has 5 directors, then the AOI may allocate 3 directors for Class A not entitled under any provision of the articles of incorporation to be a holder
shares, 1 for B and 1 for C. Within each class, cumulative voting may also be of record of its stock, and if the certificate for such stock conspicuously
exercised by the stockholders of such class to elect their representative in the shows the qualifications of the persons entitled to be holders of record
board. But to the extent that each class can elect its own directors regardless thereof, such person is conclusively presumed to have notice of the
of the number of shares in such class, cumulative voting may, in effect be fact of his ineligibility to be a stockholder.
restricted. This is so because if there is no provision for a classification of
directors, then Class A stockholders, by cumulating their votes (5x1000) will 2. If the articles of incorporation of a close corporation states the number of
have 5,000 votes and can elect 3 directors with 1,666 votes each. Class B persons, not exceeding twenty (20), who are entitled to be holders of record
of its stock, and if the certificate for such stock conspicuously states such
number, and if the issuance or transfer of stock to any person would cause conduct of the business and affairs of the corporation as to restrict or
the stock to be held by more than such number of persons, the person to interfere with the discretion or powers of the board of directors:
whom such stock is issued or transferred is conclusively presumed to Provided, That such agreement shall impose on the stockholders who are
have notice of this fact. parties thereto the liabilities for managerial acts imposed by this Code on
directors.
3. If a stock certificate of any close corporation conspicuously shows a
restriction on transfer of stock of the corporation, the transferee of the stock 5. To the extent that the stockholders are actively engaged in the
is conclusively presumed to have notice of the fact that he has management or operation of the business and affairs of a close
acquired stock in violation of the restriction, if such acquisition corporation, the stockholders shall be held to strict fiduciary duties to each
violates the restriction. other and among themselves. Said stockholders shall be personally
liable for corporate torts unless the corporation has obtained
4. Whenever any person to whom stock of a close corporation has been reasonably adequate liability insurance.
issued or transferred has, or is conclusively presumed under this section to
have, notice either (a) that he is a person not eligible to be a holder of stock PRE-INCORPORATION AGREEMENTS: under par.1 do not ordinarily
of the corporation, or (b) that transfer of stock to him would cause the stock survive the corporation in ordinary stock corporations unless it has been
of the corporation to be held by more than the number of persons permitted ratified or adopted by the corporation after incorporation. Only in such case
by its articles of incorporation to hold stock of the corporation, or (c) that the may the corporation be bound by said agreement. In a close corporation,
transfer of stock is in violation of a restriction on transfer of stock, the these pre-incorporation agreements survive and continue to be valid and
corporation may, at its option, refuse to register the transfer of binding, if such be the intent of the stockholders, provided that the
stock in the name of the transferee. agreement is not inconsistent with the AOI
5. The provisions of subsection (4) shall not applicable if the transfer of VOTING AGREEMENTS or rights or the manner of exercising voting rights
stock, though contrary to subsections (1), (2) of (3), has been consented under par. 2 may be the subject of agreement of stockholders, such as to
to by all the stockholders of the close corporation, or if the close vote for a specific person or group or to maintain a certain stockholder as
corporation has amended its articles of incorporation in accordance their president or chairman.
with this Title.
CONDUCT OF CORPORATE AFFAIRS under par. 3 and 4, may be the
6. The term "transfer", as used in this section, is not limited to a transfer for subject of an agreement, in writing, and will be effective and binding despite
value. the fact that it may make them partners among themselves. Agreements may
also be entered into by and between the stockholders of a close corporation
7. The provisions of this section shall not impair any right which the which relates to the management of the corporate affairs which would not
transferee may have to rescind the transfer or to recover under any otherwise be valid and binding in other corporations. This is because
applicable warranty, express or implied. stockholders’ agreement in the latter cannot limit or restrict the discretion
and powers of the BOD to manage the corporate affairs.
SALE OF SHARES: Apparently, a selling stockholder may not be able to
transfer his shares if to do so would violate the qualifying conditions indicated E. WHEN BOARD MEETINGS NOT NECESSARY:
in the AOI unless of course, all the stockholder consents to the transfer or
the AOI is amended (no. 5 above). As a rule, directors in ordinary stock corporations must act as a body at a
duly constituted meeting to have a valid corporate transaction. In a close
STOCKHOLDER: concerned is not, however, left without any recourse as he corporation, directors may validly act even without a meeting subject only to
may compel the close corporation to purchase his shares at their fair value the conditions laid down in the Code under Sec. 101:
for any reason subject only to the condition laid down in Sec. 105.
Sec. 101. When board meeting is unnecessary or improperly held. -
TRANSFEREE: may rescind the transaction or to recover from the transferor Unless the by-laws provide otherwise, any action by the directors of a close
under any applicable warranty, express or implied. corporation without a meeting shall nevertheless be deemed valid if:
D. STOCKHOLDERS‘ AGREEMENT 1. Before or after such action is taken, written consent thereto is signed by all
the directors; or
Sec. 100. Agreements by stockholders. –
2. All the stockholders have actual or implied knowledge of the action and
1. Agreements by and among stockholders executed before the formation make no prompt objection thereto in writing; or
and organization of a close corporation, signed by all stockholders, shall
survive the incorporation of such corporation and shall continue to be valid 3. The directors are accustomed to take informal action with the express or
and binding between and among such stockholders, if such be their intent, implied acquiescence of all the stockholders; or
to the extent that such agreements are not inconsistent with the articles
of incorporation, irrespective of where the provisions of such agreements 4. All the directors have express or implied knowledge of the action in
are contained, except those required by this Title to be embodied in said question and none of them makes prompt objection thereto in writing.
articles of incorporation.
If a director's meeting is held without proper call or notice, an action taken
2. An agreement between two or more stockholders, if in writing and signed therein within the corporate powers is deemed ratified by a director who
by the parties thereto, may provide that in exercising any voting rights, the failed to attend, unless he promptly files his written objection with the
shares held by them shall be voted as therein provided, or as they may secretary of the corporation after having knowledge thereof.
agree, or as determined in accordance with a procedure agreed upon by
them. F. PRE-EMPTIVE RIGHTS
3. No provision in any written agreement signed by the stockholders, relating Sec. 102. Pre-emptive right in close corporations. - The pre-emptive
to any phase of the corporate affairs, shall be invalidated as between the right of stockholders in close corporations shall extend to all stock to be
parties on the ground that its effect is to make them partners among issued, including reissuance of treasury shares, whether for money, property
themselves. or personal services, or in payment of corporate debts, unless the articles of
incorporation provide otherwise.
4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to the G. AMENDMENTS TO ARTICLES OF INCORPORATION
stockholder in ordinary stock corporation only upon the exercise of his
Sec. 103. Amendment of articles of incorporation. - Any amendment to appraisal right in those instances allowed under Sec. 81 of the Code.
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 Likewise a corporation may be dissolved on petitioner of only one stockholder
reduce a quorum or voting requirement stated in said articles of incorporation on the grounds indicated in Sec. 105 which include even mere dishonesty. It
shall not be valid or effective unless approved by the affirmative vote of at provides:
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 Sec. 105. Withdrawal of stockholder or dissolution of corporation. -
specifically provided in the articles of incorporation for amending, deleting or In addition and without prejudice to other rights and remedies available to a
removing any of the aforesaid provisions, at a meeting duly called for the stockholder under this Title, any stockholder of a close corporation may, for
purpose. 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
H. DEADLOCKS corporation has sufficient assets in its books to cover its debts and liabilities
exclusive of capital stock: Provided, That any stockholder of a close
Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the corporation may, by written petition to the Securities and Exchange
articles of incorporation or by-laws or agreement of stockholders of a close Commission, compel the dissolution of such corporation whenever any of acts
corporation, if the directors or stockholders are so divided respecting the of the directors, officers or those in control of the corporation is illegal, or
management of the corporation's business and affairs that the votes required fraudulent, or dishonest, or oppressive or unfairly prejudicial to the
for any corporate action cannot be obtained, with the consequence that the corporation or any stockholder, or whenever corporate assets are being
business and affairs of the corporation can no longer be conducted to the misapplied or wasted.
advantage of the stockholders generally, the Securities and Exchange
Commission, upon written petition by any stockholder, shall have the power J. CLOSE CORPORATION VS. ORDINARY STOCK CORPORATION
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 CLOSE CORPORATION ORDINARY STOCK
order: (1) canceling or altering any provision contained in the articles of CORPORATION
incorporation, by-laws, or any stockholder's agreement; (2) canceling, The number of stockholders cannot No limitation as to number of
altering or enjoining any resolution or act of the corporation or its board of exceed 20 shareholder
directors, stockholders, or officers; (3) directing or prohibiting any act of the To the extent that all stockholders Maximum number of directors is 15
corporation or its board of directors, stockholders, officers, or other persons can be deemed directors, the
party to the action; (4) requiring the purchase at their fair value of shares of number of directors can effectively
any stockholder, either by the corporation regardless of the availability of be more than 15
unrestricted retained earnings in its books, or by the other stockholders; (5) Shares of stock are subject to Generally no restriction on transfer
appointing a provisional director; (6) dissolving the corporation; or (7) specified restrictions of shares
granting such other relief as the circumstances may warrant. Shares of stock are prohibited from No prohibition
being listed in the stock exchange or
A provisional director shall be an impartial person who is neither a offered for sale to the public
stockholder nor a creditor of the corporation or of any subsidiary or affiliate Stockholders may take an active part Management is lodged in the Board
of the corporation, and whose further qualifications, if any, may be in corporate management by vesting of Directors
determined by the Commission. A provisional director is not a receiver of the management to them rather than a
corporation and does not have the title and powers of a custodian or Board of Director
receiver. A provisional director shall have all the rights and powers of a duly Those active in management are Directors are liable for torts only if
elected director of the corporation, including the right to notice of and to vote personally liable for corporate torts they have acted negligently or
at meetings of directors, until such time as he shall be removed by order of unless the corporation has obtained fraudulently
the Commission or by all the stockholders. His compensation shall be an adequate liability insurance
determined by agreement between him and the corporation subject to Directors can validly act even without Directors must, as a rule, act as a
approval of the Commission, which may fix his compensation in the absence a meeting body at a duly constituted meeting
of agreement or in the event of disagreement between the provisional Agreements between stockholders Not valid and binding since
director and the corporation. regarding the operations of the stockholders’ agreement cannot limit
business can validly be made the discretion of the Board to
The provision above-quoted gives the SEC a very wide discretion in respect to manage corporate affairs
management of a close corporation in the event of a deadlock. It may: To the extent that directors may be Ordinarily, no such classification and
1. Cancel or alter any provision in the AOI, by-laws or any stockholders’ classified into one or more classes no restrictions on cumulative voting
agreement; and to be voted solely by a particular
2. Cancel, alter or enjoin any resolution or other act of the corporation or class of stock, cumulative voting
its BOD, stockholders or officers; may, in effect, be restricted
3. Prohibit any act of the corporation or its BOD, stockholders or officers or
The articles of incorporation may Officers are elected by the Board of
other persons party to the action;
provide that all officers shall be Directors
4. Requiring the purchase of the par value of the shares of any
elected or appointed by the
stockholders, either by the corporation regardless of availability of
stockholders
unrestricted retained earnings, or by the other shareholders;
It may provide for greater quorum Although the articles of incorporation
5. Appointment of a provisional director; - the second paragraph of Sec.
and voting requirements in meetings or by-laws may provide for greater
104 will govern. The provisional director may break the deadlock by
of stockholders and directors quorum and voting requirements in
casting the deciding vote.
directors’ meeting under section 25,
6. Dissolving the corporation; or
those for stockholders’ meeting
7. Other relief as the circumstances may warrant.
cannot generally be altered
Restriction on transfer of shares Valid and binding if indicated in the
I. WITHDRAWAL OF STOCKHOLDERS/DISSOLUTION
should be indicated in the articles of articles of incorporation and stock
incorporation, by-laws and stock certificates
If a stockholder wishes to withdraw therefrom, he may do so ―for any
certificates
reason‖ and compel the corporation to purchase his shares at their fair value
provided only that the corporation has sufficient assets in its books to cover Pre-emptive rights of stockholders is Pre-emptive rights may be denied as
its debts and liabilities exclusive of capital stock. This can be done by a broader as it include all issues provided for in section 39

without exception 3. The directors are accustomed to take informal action with the express or
A stockholder may withdraw and Unless he sells his shares, a implied acquiese of all the stockholders, or
compel the corporation to purchase stockholder cannot get back his 4. All the directors have express or implied knowledge of the action in
his shares for any reason with the investment nor compel the question and none of them makes prompt objection thereto in writing.
limitation only that the corporation corporation to buy his shares except
has sufficient assets to cover its in the exercise of his appraisal right If a directors' meeting is held without call or notice, an action taken therein
liabilities exclusive of capital stock within the corporate powers is deemed ratified by a director who failed to
The proper forum may interfere in Courts cannot interfere I the attend, unless he promptly files his written objection with the secretary of
the management of a close business judgment of the the corporation after having knowledge thereof.
corporation in case of deadlocks directors/stockholders ―BUSINESS
under Section 104, even of the JUDGMENT RULE‖ In the instant case, petitioner corporation is classified as a close corporation
directors/stockholders are acting in and consequently a board resolution authorizing the sale or mortgage
good faith of the subject property is not necessary to bind the corporation for
Any stockholder may petition the Dissolution may be had only on the the action of its president. At any rate, corporate action taken at a board
SEC for corporate dissolution on grounds provided by the provisions meeting without proper call or notice in a close corporation is deemed ratified
grounds among others, provides for of the Code on dissolution and P.D. by the absent director unless the latter promptly files his written objection
in section 105. 902-A, as amended with the secretary of the corporation after having knowledge of the meeting
which, in his case, petitioner Virgilio Dulay failed to do.
MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND
NEPOMUCENO REDOVAN, petitioners, Petitioners' claim that the sale of the subject property by its president,
vs. Manuel Dulay, to private respondents spouses Veloso is null and void as the
THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN, MANUEL alleged Board Resolution No. 18 was passed without the knowledge and
A. TORRES, JR., MARIA THERESA V. VELOSO AND CASTRENSE C. VELOSO, consent of the other members of the board of directors cannot be sustained.
respondents. As correctly pointed out by the respondent Court of Appeals:
(G.R. No. 91889; August 27, 1993)
Appellant Virgilio E. Dulay's protestations of complete innocence to the
FACTS: Manuel Dulay, president of petitioner Manuel Dulay Enterprises, Inc., effect that he never participated nor was even aware of any meeting or
through Board Resolution No. 18 sold the subject property, known as the resolution authorizing the mortgage or sale of the subject premises (see
Dulay Apartment, to private respondent Maria Theresa Veloso where a par. 8, affidavit of Virgilio E. Dulay, dated May 31, 1984, p. 14, Exh. "21")
Memorandum to the Deed of Absolute Sale was executed giving Manuel is difficult to believe. On the contrary, he is very much privy to the
Dulay within 2 years to repurchase the property. transactions involved. To begin with, he is a incorporator and one of the
board of directors designated at the time of the organization of Manuel R.
Respondent Veloso mortgaged said property to secure a loan from private Dulay Enterprise, Inc. In ordinary parlance, the said entity is loosely
respondent Manuel Torres. For non-payment of the said loan, Torres referred to as a "family corporation". The nomenclature, if imprecise,
foreclosed the mortgage and was declared the highest bidder in the public however, fairly reflects the cohesiveness of a group and the parochial
auction. instincts of the individual members of such an aggrupation of which
Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of its incorporators
For Dulay’s and Veloso’s failure to redeem said property, Torres applied for being close relatives namely, three (3) children and their father whose
consolidation of title, to which petitioner Virgilio Dulay, vice president of the name identifies their corporation (Articles of Incorporation of Manuel R.
corporation intervened alleging that Manuel Dulay was never authorized by Dulay Enterprises, Inc. Exh. "31-A").
the corporation to sell the property. Instead of impleading Virgilio Dulay,
Torres withdrew his petition and moved for its dismissal which was granted. Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an
affidavit that he was a signatory witness to the execution of the post-dated
Later on, Torres and Edgardo Pabalan, real estate administrator of Torres, Deed of Absolute Sale of the subject property in favor of private respondent
filed an action against petitioners (Redovan as tenant of Dulay Apartment) Torres indicates that he was aware of the transaction executed between his
for the recovery of possession, sum of money and damages with preliminary father and private respondents and had, therefore, adequate knowledge
injunction. about the sale of the subject property to private respondents.
Private respondents and Torres later on filed an action against spouses Consequently, petitioner corporation is liable for the act of Manuel Dulay and
Florentino Manalastas, a tenant of Dulay Apartment with petitioner the sale of the subject property to private respondents by Manuel Dulay is
corporation for ejectment. valid and binding. As stated by the trial court:
The MTC decided in favor of respondents which was affirmed by the RTC and . . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses
later by the CA. Maria Theresa V. Veloso and Castrense C. Veloso, was a corporate act of
the former and not a personal transaction of Manuel R. Dulay. This is so
ISSUE: WON the sale of the subject property between private respondents because Manuel R. Dulay was not only president and treasurer but also the
spouses Veloso and Manuel Dulay has no binding effect on petitioner general manager of the corporation. The corporation was a closed family
corporation as Board Resolution No. 18 which authorized the sale of the corporation and the only non-relative in the board of directors was Atty.
subject property was resolved without the approval of all the members of the Plaridel C. Jose who appeared on paper as the secretary. There is no
board of directors and said Board Resolution was prepared by a person not denying the fact, however, that Maria Socorro R. Dulay at times acted as
designated by the corporation to be its secretary? secretary. . . ., the Court can not lose sight of the fact that the Manuel R.
Dulay Enterprises, Inc. is a closed family corporation where the
HELD: No. Section 101 of the Corporation Code of the Philippines provides: incorporators and directors belong to one single family. It cannot be
concealed that Manuel R. Dulay as president, treasurer and general
Sec. 101. When board meeting is unnecessary or improperly held. Unless manager almost had absolute control over the business and affairs of the
the by-laws provide otherwise, any action by the directors of a close corporation.
corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by SERGIO F. NAGUIAT, doing business under the name and style SERGIO F.
all the directors, or NAGUIAT ENT., INC., & CLARK FIELD TAXI, INC., petitioners,
2. All the stockholders have actual or implied knowledge of the action and vs.
make no prompt objection thereto in writing; or NATIONAL LABOR RELATIONS COMMISSION (THIRD DIVISION),

NATIONAL ORGANIZATION OF WORKINGMEN and its members, LEONARDO HELD: Only Sergio F. Naguiat. Sergio F. Naguiat, in his capacity as president
T. GALANG, et al., respondents. of CFTI, cannot be exonerated from joint and several liability in the payment
(G.R. No. 116123; March 13, 1997) of separation pay to individual respondents.
FACTS: Private respondents were employed as taxi drivers of Clark Field Sergio F. Naguiat, admittedly, was the president of CFTI who actively
Taxi, Inc. which held a concessionaire’s contract with Army Air Force managed the business. Thus, applying the ruling in A.C. Ransom, he falls
Exchange Services (AAFES) for the operation of taxi services within the Clark within the meaning of an "employer" as contemplated by the Labor Code,
Air Base. who may be held jointly and severally liable for the obligations of the
corporation to its dismissed employees.
Due to the phase-out of the US Military Bases in the Philippines, which Clark
Air Base was not spared, the AAFES was dissolved and the services of Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises
individual respondents were officially terminated. were "close family corporations" owned by the Naguiat family. Section 100,
paragraph 5, (under Title XII on Close Corporations) of the Corporation Code,
The AAFES Taxi Drivers’ Association (drivers union) and CFTI agreed on a states:
separation pay of P500 per year of service to which private respondents did
not agree. (5) To the extent that the stockholders are actively engage(d) in the
management or operation of the business and affairs of a close
Private respondents filed a complaint against Sergio Naguiat, president of corporation, the stockholders shall be held to strict fiduciary duties to
CFTI, doing business under the name and style of Sergio F. Naguiat each other and among themselves. Said stockholders shall be personally
Enterprises, Inc., AAFES and the drivers’ union for separation pay which was liable for corporate torts unless the corporation has obtained reasonably
granted by the Labor Arbiter at P1,200 per year of service for humanitarian adequate liability insurance. (emphasis supplied)
considerations.
Nothing in the records show whether CFTI obtained "reasonably adequate
On appeal, the NLRC granted separation pay to private respondents. liability insurance;" thus, what remains is to determine whether there was
corporate tort.
ISSUE: WON Sergio F. Naguiat Enterprises, Inc., may be held solidarily liable
with CFTI? Our jurisprudence is wanting as to the definite scope of "corporate tort."
Essentially, "tort" consists in the violation of a right given or the omission of a
HELD: No. From the evidence proffered by both parties, there is no duty imposed by law. Simply stated, tort is a breach of a legal duty. Article
substantial basis to hold that Naguiat Enterprises is an indirect employer of 283 of the Labor Code mandates the employer to grant separation pay to
individual respondents much less a labor only contractor. On the contrary, employees in case of closure or cessation of operations of establishment or
petitioners submitted documents such as the drivers' applications for undertaking not due to serious business losses or financial reverses, which is
employment with CFTI, and social security remittances and payroll of Naguiat the condition obtaining at bar. CFTI failed to comply with this law-imposed
Enterprises showing that none of the individual respondents were its duty or obligation. Consequently, its stockholder who was actively engaged in
employees. Moreover, in the contract between CFTI and AAFES, the former, the management or operation of the business should be held personally
as concessionaire, agreed to purchase from AAFES for a certain amount liable.
within a specified period a fleet of vehicles to be "ke(pt) on the road" by
CFTI, pursuant to their concessionaire's contract. This indicates that CFTI As pointed out earlier, the fifth paragraph of Section 100 of the Corporation
became the owner of the taxicabs which became the principal investment Code specifically imposes personal liability upon the stockholder actively
and asset of the company. managing or operating the business and affairs of the close corporation.
Private respondents failed to substantiate their claim that Naguiat Enterprises The Court here finds no application to the rule that a corporate officer cannot
managed, supervised and controlled their employment. It appears that they be held solidarily liable with a corporation in the absence of evidence that he
were confused on the personalities of Sergio F. Naguiat as an individual who had acted in bad faith or with malice. In the present case, Sergio Naguiat is
was the president of CFTI, and Sergio F. Naguiat Enterprises, Inc., as a held solidarily liable for corporate tort because he had actively engaged in the
separate corporate entity with a separate business. They presumed that management and operation of CFTI, a close corporation.
Sergio F. Naguiat, who was at the same time a stockholder and director of
Sergio F. Naguiat Enterprises, Inc., was managing and controlling the taxi Antolin T. Naguiat was the vice president of the CFTI. Although he carried
business on behalf of the latter. A closer scrutiny and analysis of the records, the title of "general manager" as well, it had not been shown that he had
however, evince the truth of the matter: that Sergio F. Naguiat, in acted in such capacity. Furthermore, no evidence on the extent of his
supervising the taxi drivers and determining their employment terms, was participation in the management or operation of the business was proferred.
rather carrying out his responsibilities as president of CFTI. Hence, Naguiat In this light, he cannot be held solidarily liable for the obligations of CFTI and
Enterprises as a separate corporation does not appear to be involved at all in Sergio Naguiat to the private respondents.
the taxi business.
CHAPTER 16: SPECIAL CORPORATIONS (TITLE XIII)
And, although the witness insisted that Naguiat Enterprises was his employer,
he could not deny that he received his salary from the office of CFTI inside A. CHAPTER I – EDUCATIONAL INSTITUTIONS
the base.
Sec. 106. Incorporation. - Educational corporations shall be governed by
Another driver-claimant admitted, upon the prodding of counsel for the special laws and by the general provisions of this Code.
corporations, that Naguiat Enterprises was in the trading business while CFTI
was in taxi services. EDUCATIONAL INSTITUTIONS are those that provide facilities for
teaching or instruction. It includes both public and private schools or colleges
In addition, the Constitution of CFTI-AAFES Taxi Drivers Association which, and universities and are subject to the provisions of special laws and by the
admittedly, was the union of individual respondents while still working at general provisions of the Code.
Clark Air Base, states that members thereof are the employees of CFTI and
"(f)or collective bargaining purposes, the definite employer is the Clark Field PUBLIC SCHOOLS or those created by the government are, however,
Taxi Inc." subject to the law of their creation. UP for instance has its own special
charter and would thus be governed by the special law creating it. Insofar as
ISSUE2: WON Sergio F. Naguiat and his son Antolin Naguiat, officers of CFTI they may be applicable however, the provisions of any special law or the
may be solidarily liable with CFTI? Corporation Code supplement the law of their creation.

PRIVATE SCHOOLS OR COLLEGES include any private institutions for member of the governing board thereof. Neither may they act as an officer
teaching, managed by private individuals or corporations which offer courses with the power of control and administration of the institution. In effect their
of kindergarten, primary, intermediary or secondary instructions or superior ownership of any capital would be limited to ―non-controlling‖ interest.
courses in vocational, technical, professional or special schools by which
diploma or certificates are to be granted or titles and degrees conferred (Sec. B. CHAPTER II - RELIGIOUS CORPORATIONS
2, Act No. 2076, as amended by CA 180).
REGLIGIOUS CORPORATIONS are those composed entirely of spiritual
These instructions of learning once recognized by the government as such persons, which are created for the furtherance of religion or perpetuating the
are mandated by law to be incorporated within 90 days under the provisions rights of the church or for the administration of church or religious work or
of the Corporation Code and must, perforce, comply with the requirements property.
and procedure laid down thereunder. (Sec. 5, supra)
CLASSES OF RELIGIOUS CORPORATIONS:
Their failure to do so will not immune the educational institution from suit as
a corporation (Chang Kai Shek School vs. CA; April 18, 1989, supra) Sec. 109. Classes of religious corporations. - Religious corporations may
be incorporated by one or more persons. Such corporations may be classified
The SEC, however, shall not act on the incorporation of any educational into corporations sole and religious societies.
corporation, unless the provision of Sec. 107 is complied with:
Religious corporations shall be governed by this Chapter and by the general
Sec. 107. Pre-requisites to incorporation. - Except upon favorable provisions on non-stock corporations insofar as they may be applicable.
recommendation of the Ministry of Education and Culture, the Securities and
Exchange Commission shall not accept or approve the articles of C. CORPORATION SOLE
incorporation and by-laws of any educational institution
CORPORATION SOLE: consists of one person only and his successor in
BOARD OF DIRECTORS/TRUSTEES: or the governing board by any name some particular station, who are incorporated by law in order to give them
of an educational institution is similar in number as to any other corporation some legal capacities and advantages, particularly that of perpetuity, which in
except that in case it is non-stock, the number must be in multiples of five their natural persons they could not have had.
(5). As compared to stock corporation, their number may be within the
vicinity of five (5) to fifteen (15). PURPOSE OF INCORPORATION AND PERSONS WHO MAY
INCORPORATE:
TERM OF OFFICE: Members of the Board may hold office for five years but
they shall be staggered so that 1/5 of their number shall expire every year. Sec. 110. Corporation sole. - For the purpose of administering and
Sec. 108 provides: managing, as trustee, the affairs, property and temporalities of any religious
denomination, sect or church, a corporation sole may be formed by the chief
Sec. 108. Board of trustees. - Trustees of educational institutions archbishop, bishop, priest, minister, rabbi or other presiding elder of such
organized as non-stock corporations shall not be less than five (5) nor more religious denomination, sect or church.
than fifteen (15): Provided, however, That the number of trustees shall be in
multiples of five (5). CONTENTS OF THE ARTICLES OF INCORPORATION:
Unless otherwise provided in the articles of incorporation or the by-laws, the Sec. 111. Articles of incorporation. - In order to become a corporation
board of trustees of incorporated schools, colleges, or other institutions of sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of
learning shall, as soon as organized, so classify themselves that the term of any religious denomination, sect or church must file with the Securities and
office of one-fifth (1/5) of their number shall expire every year. Trustees Exchange Commission articles of incorporation setting forth the following:
thereafter elected to fill vacancies, occurring before the expiration of a
particular term, shall hold office only for the unexpired period. Trustees 1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding
elected thereafter to fill vacancies caused by expiration of term shall hold elder of his religious denomination, sect or church and that he desires to
office for five (5) years. A majority of the trustees shall constitute a quorum become a corporation sole;
for the transaction of business. The powers and authority of trustees shall be 2. That the rules, regulations and discipline of his religious denomination,
defined in the by-laws. sect or church are not inconsistent with his becoming a corporation sole and
do not forbid it;
For institutions organized as stock corporations, the number and term of 3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding
directors shall be governed by the provisions on stock corporations. elder, he is charged with the administration of the temporalities and the
management of the affairs, estate and properties of his religious
CONSTITUTIONAL PROVISION ON FILIPINO OWNERSHIP: par. 2, denomination, sect or church within his territorial jurisdiction, describing such
Sec. 4 of Article XIV (Education, Science and Technology, Arts, Culture and territorial jurisdiction;
Sports) 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
Educational institutions, other than those established by religious groups and filled, according to the rules, regulations or discipline of the religious
mission boards, shall be owned solely by citizens of the Philippines or denomination, sect or church to which he belongs; and
corporations or associations at least sixty per centum of the capital of which 5. The place where the principal office of the corporation sole is to be
is owned by such citizens. The Congress may, however, require increased established and located, which place must be within the Philippines.
Filipino equity participation in all educational institutions. The control and
administration of educational institutions shall be vested in citizens of the The articles of incorporation may include any other provision not contrary to
Philippines. law for the regulation of the affairs of the corporation.
No educational institution shall be established exclusively for aliens and no PROCEDURE FOR THE ORGANIZATION:
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 Sec. 112. Submission of the articles of incorporation. - The articles of
established for foreign diplomatic personnel and their dependents and, unless incorporation must be verified, before filing, by affidavit or affirmation of the
otherwise provided by law, for other foreign temporary residents. 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
Culled from this is that while foreigners may own a maximum of 40% of the or letter of appointment of such chief archbishop, bishop, priest, minister,
capital stock of an educational corporation, not one of them may sit as a rabbi or presiding elder, duly certified to be correct by any notary public.
public land may be subject to registration by a possessor if he, personally or
From and after the filing with the Securities and Exchange Commission of the through his predecessors-in-interest, had openly continuously and exclusively
said articles of incorporation, verified by affidavit or affirmation, and possessed the same for 30 years as the same is converted into private
accompanied by the documents mentioned in the preceding paragraph, such property by mere lapse or completion of the said period.
chief archbishop, bishop, priest, minister, rabbi or presiding elder shall
become a corporation sole and all temporalities, estate and properties of the THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO,
religious denomination, sect or church theretofore administered or managed INC., petitioner,
by him as such chief archbishop, bishop, priest, minister, rabbi or presiding s.
elder shall be held in trust by him as a corporation sole, for the use, purpose, THE LAND REGISTRATION COMMISSION and THE REGISTER OF
behalf and sole benefit of his religious denomination, sect or church, DEEDS OF DAVAO CITY, respondents
including hospitals, schools, colleges, orphan asylums, parsonages and (G.R. No. L-8451; December 20, 1957)
cemeteries thereof.
FACTS: Mateo Rodis executed a Deed of Sale in favor of the Roman Catholic
TERM OF EXISTENCE: As can be gleaned from the law, the AOI of a Apostolic Administrator of Davao, Inc., with Mgr. Clovit Thibault, a Canadian
corporation sole does not require a provision for its term of existence. For citizen, as actual incumbent. When the deed of sale was presented to the
obvious reasons, since a corporation sole is supposed to exist in perpetuity. It Register of Deeds of Davao for registration, the latter required the
may, however, be dissolved in accordance with Sec. 115 of the Code. corporation to submit an affidavit declaring that 60% of the members thereof
were Filipino citizens.
BEGINNING OF CORPORATE EXISTENCE: is upon filing of the verified
AOI with the SEC and the documents required under Sec. 112. This serves as Entertaining some doubts as to the registrability of the deed of sale, the
an exception to the rule that a corporation acquires juridical personality only Register of Deeds referred the matter to the Land Registration Commission
upon the issuance of a certificate of incorporation by the said government which held that by virtue of the provisions of Sec. 1 and 5 of Art. XIII of the
agency. Philippine Constitution, the vendee was not qualified to acquire private lands
in the Philippines in the absence of proof that at least 60% of the capital,
POWER TO ALIENATE PROPERTIES, LIMITATION: The extent of the its property, or assets of the Roman Catholic Apostolic Administrator of Davao,
power to mortgage or sell real properties is, however, subject to certain Inc. was actually owned or controlled by Filipino citizens.
restriction, that is, a proper court order must first be secured for that
purpose, which is not otherwise imposed in any other corporation. ISSUE: WON the corporation sole may register the property transferred?
Intervention of the court may dispensed with only if the rules, regulations
and discipline of the religious denomination, sect or church concerned HELD: Yes. In solving the problem thus submitted to our consideration, We
provide or regulate the manner or method of holding or alienating properties. can say the following: A corporation sole is a special form of
Sec. 113 provides: corporation usually associated with the clergy. Conceived and
introduced into the common law by sheer necessity, this legal creation which
Sec. 113. Acquisition and alienation of property. - Any corporation sole was referred to as "that unhappy freak of English law" was designed to
may purchase and hold real estate and personal property for its church, facilitate the exercise of the functions of ownership carried on by the clerics
charitable, benevolent or educational purposes, and may receive bequests or for and on behalf of the church which was regarded as the property owner
gifts for such purposes. Such corporation may sell or mortgage real property (See I Couvier's Law Dictionary, p. 682-683).
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 A corporation sole consists of one person only, and his successors
the satisfaction of the court that notice of the application for leave to sell or (who will always be one at a time), in some particular station, who
mortgage has been given by publication or otherwise in such manner and for are incorporated by law in order to give them some legal capacities
such time as said court may have directed, and that it is to the interest of the and advantages, particularly that of perpetuity, which in their
corporation that leave to sell or mortgage should be granted. The application natural persons they could not have had. In this sense, the king is a
for leave to sell or mortgage must be made by petition, duly verified, by the sole corporation; so is a bishop, or dens, distinct from their several chapters
chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as (Reid vs. Barry, 93 Fla. 849, 112 So. 846).
corporation sole, and may be opposed by any member of the religious
denomination, sect or church represented by the corporation sole: Provided, That leaves no room for doubt that the bishops or archbishops, as
That in cases where the rules, regulations and discipline of the religious the case may be, as corporation's sole are merely administrators of
denomination, sect or church, religious society or order concerned the church properties that come to their possession, in which they
represented by such corporation sole regulate the method of acquiring, hold in trust for the church. It can also be said that while it is true that
holding, selling and mortgaging real estate and personal property, such rules, church properties could be administered by a natural persons, problems
regulations and discipline shall control, and the intervention of the courts regarding succession to said properties can not be avoided to rise upon his
shall not be necessary. death. Through this legal fiction, however, church properties acquired by the
incumbent of a corporation sole pass, by operation of law, upon his death not
OWNERSHIP OF PROPERTY: does not vest unto the head upon his personal heirs but to his successor in office. It could be seen, therefore,
registration of real property in the name of the corporation sole, such that a corporation sole is created not only to administer the temporalities of
devolving upon the church or congregation acquiring it. the church or religious society where he belongs but also to hold and
transmit the same to his successor in said office. If the ownership or title to
CONSITUTIONAL LIMITATION, RE: 60% FILIPINO OWNED: does not the properties do not pass to the administrators, who are the owners of
apply to corporation sole with regards ownership of real property in its own church properties?.
name. It has thus been held that the Roman Catholic Church of the
Philippines, a corporation sole, has no nationality and that the framers of the Bouscaren and Elis, S.J., authorities on cannon law, on their treatise
Constitution did not have in mind the religious corporation sole when they comment:
provided that 60% of the capital of the corporation acquiring it must be
owned by Filipino citizens. In matters regarding property belonging to the Universal Church and to
the Apostolic See, the Supreme Pontiff exercises his office of supreme
CHARACTER OF THE LAND: at the time of institution of registration administrator through the Roman Curia; in matters regarding other church
proceedings must first be determined before a corporation sole, or any property, through the administrators of the individual moral persons in the
private corporation for that matter, can acquire the land must first be Church according to that norms, laid down in the Code of Cannon Law.
determined. If it does not form part of public domain, the constitutional This does not mean, however, that the Roman Pontiff is the owner of all
prohibition against its acquisition by private corporation will not apply. Thus, the church property; but merely that he is the supreme guardian
it has likewise been earlier held that under the Public Land Act, alienable (Bouscaren and Ellis, Cannon Law, A Text and Commentary, p. 764).

FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite for
We must therefore, declare that although a branch of the Universal Roman registration of a parcel of land which it claimed to have acquired by virtue of
Catholic Apostolic Church, every Roman Catholic Church in different a Deed of Absolute Sale from Aquelina de la Cruz, alleging that the applicant
countries, if it exercises its mission and is lawfully incorporated in accordance and its predecessors-in-interest have been in actual, continuous, public,
with the laws of the country where it is located, is considered an entity or peaceful and adverse possession and occupation of the said land for more
person with all the rights and privileges granted to such artificial being under than 30 years, which was opposed by the Government as represented by the
the laws of that country, separate and distinct from the personality of the Director of Lands. The CFI and the CA ruled in favor of INC.
Roman Pontiff or the Holy See, without prejudice to its religious relations with
the latter which are governed by the Canon Law or their rules and ISSUE: WON the registration of the land should be upheld?
regulations.
HELD: As observed at the outset, had this case been resolved immediately
The Corporation Law also contains the following provisions: after it was submitted for decision, the result may have been quite adverse to
private respondent. For the rule then prevailing under the case of Manila
SECTION 159. Any corporation sole may purchase and hold real estate and Electric Company v. Castro-Bartolome et al., 114 SCRA 799, reiterated in
personal; property for its church, charitable, benevolent, or educational Republic v. Villanueva, 114 SCRA 875 as well as the other subsequent cases
purposes, and may receive bequests or gifts of such purposes. Such involving private respondent adverted to above', is that a juridical person,
corporation may mortgage or sell real property held by it upon obtaining private respondent in particular, is disqualified under the 1973 Constitution
an order for that purpose from the Court of First Instance of the province from applying for registration in its name alienable public land, as such land
in which the property is situated; but before making the order proof must ceases to be public land "only upon the issuance of title to any Filipino citizen
be made to the satisfaction of the Court that notice of the application for claiming it under section 48[b]" of Commonwealth Act No. 141, as amended.
leave to mortgage or sell has been given by publication or otherwise in These are precisely the cases cited by petitioner in support of its theory of
such manner and for such time as said Court or the Judge thereof may disqualification.
have directed, and that it is to the interest of the corporation that leave to
mortgage or sell must be made by petition, duly verified by the bishop, Since then, however, this Court had occasion to re-examine the rulings in
chief priest, or presiding elder acting as corporation sole, and may be these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41
opposed by any member of the religious denomination, society or church Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among
represented by the corporation sole: Provided, however, That in cases others. Thus, in the recent case of Director of Lands v. Intermediate
where the rules, regulations, and discipline of the religious denomination, Appellate Court, 146 SCRA 509, We categorically stated that the majority
society or church concerned represented by such corporation sole regulate ruling in Meralco is "no longer deemed to be binding precedent", and that
the methods of acquiring, holding, selling and mortgaging real estate and "[T]he correct rule, ... is that alienable public land held by a possessor,
personal property, such rules, regulations, and discipline shall control and personally or through his predecessors-in-interest, openly,
the intervention of the Courts shall not be necessary. continuously and exclusively for the prescribed statutory period [30
years under the Public Land Act, as amended] is converted to
It can, therefore, be noticed that the power of a corporation sole to purchase private property by mere lapse or completion of said period, ipso
real property, like the power exercised in the case at bar, it is not restricted jure." We further reiterated therein the timehonored principle of non-
although the power to sell or mortgage sometimes is, depending upon the impairment of vested rights.
rules, regulations, and discipline of the church concerned represented by said
corporation sole. If corporations sole can purchase and sell real estate for its The crucial factor to be determined therefore is the length of time private
church, charitable, benevolent, or educational purposes, can they register respondent and its predecessors-in-interest had been in possession of the
said real properties? As provided by law, lands held in trust for specific land in question prior to the institution of the instant registration proceedings.
purposes me be subject of registration (section 69, Act 496), and the The land under consideration was acquired by private respondent from
capacity of a corporation sole, like petitioner herein, to register lands Aquelina de la Cruz in 1947, who, in turn, acquired by same by purchase
belonging to it is acknowledged, and title thereto may be issued in its name from the Ramos brothers and sisters, namely: Eusebia, Eulalia, Mercedes,
(Bishop of Nueva Segovia vs. Insular Government, 26 Phil. 300-1913). Indeed Santos and Agapito, in 1936. Under section 48[b] of Commonwealth Act No.
it is absurd that while the corporations sole that might be in need of 141, as amended, "those who by themselves or through their predecessors-
acquiring lands for the erection of temples where the faithful can pray, or in-interest have been in open, continuous, exclusive and notorious possession
schools and cemeteries which they are expressly authorized by law to acquire and occupation of agricultural lands of the public domain, under a bona fide
in connection with the propagation of the Roman Catholic Apostolic faith or in claim of acquisition or ownership, for at least thirty years immediately
furtherance of their freedom of religion they could not register said properties preceding the filing of the application for confirmation of title except when
in their name. As professor Javier J. Nepomuceno very well says "Man in his prevented by war or force majeure" may apply to the Court of First Instance
search for the immortal and imponderable, has, even before the dawn of of the province where the land is located for confirmation of their claims, and
recorded history, erected temples to the Unknown God, and there is no doubt the issuance of a certificate of title therefor, under the Land Registration Act.
that he will continue to do so for all time to come, as long as he continues Said paragraph [b] further provides that "these shall be conclusively
'imploring the aid of Divine Providence'" (Nepomuceno's Corporation Sole, VI presumed to have performed all the conditions essential to a Government
Ateneo Law Journal, No. 1, p. 41, September, 1956). Under the grant and shall be entitled to a certificate of title under the provisions of this
circumstances of this case, We might safely state that even before the chapter." Taking the year 1936 as the reckoning point, there being no
establishment of the Philippine Commonwealth and of the Republic of the showing as to when the Ramoses first took possession and occupation of the
Philippines every corporation sole then organized and registered had by land in question, the 30-year period of open, continuous, exclusive and
express provision of law the necessary power and qualification to purchase in notorious possession and occupation required by law was completed in 1966.
its name private lands located in the territory in which it exercised its
functions or ministry and for which it was created, independently of the The completion by private respondent of this statutory 30-year period has
nationality of its incumbent unique and single member and head, the bishop dual significance in the light of Section 48[b] of Commonwealth Act No. 141,
of the dioceses. It can be also maintained without fear of being gainsaid that as amended and prevailing jurisprudence: [1] at this point, the land in
the Roman Catholic Apostolic Church in the Philippines has no question ceased by operation of law to be part of the public domain; and [2]
nationality and that the framers of the Constitution, as will be private respondent could have its title thereto confirmed through the
hereunder explained, did not have in mind the religious appropriate proceedings as under the Constitution then in force, private
corporations sole when they provided that 60 per centum of the corporations or associations were not prohibited from acquiring public lands,
capital thereof be owned by Filipino citizens. but merely prohibited from acquiring, holding or leasing such type of land in
excess of 1,024 hectares.
THE DIRECTOR OF LANDS vs. CA (supra, POWER TO ACQUIRE
PROPERTY) If in 1966, the land in question was converted ipso jure into private land, it
remained so in 1974 when the registration proceedings were commenced.

This being the case, the prohibition under the 1973 Constitution would have then Justice, later Chief Justice Claudio Teehankee, tracing the line of cases
no application. Otherwise construed, if in 1966, private respondent could beginning with CARINO, in 1909, thru SUSI, in 1925, down to HERICO, in
have its title to the land confirmed, then it had acquired a vested right 1980, which developed, affirmed and reaffirmed the doctrine that open,
thereto, which the 1973 Constitution can neither impair nor defeat. exclusive and undisputed possession of alienable public land for the period
prescribed by law creates the legal fiction whereby the land, upon completion
REPUBLIC OF THE PHILIPPINES, petitioner, of the requisite period ipso jure and without the need of judicial or other
vs. sanction, ceases to be public land and becomes' private property. (DIRECTOR
INTERMEDIATE APPELLATE COURT, ROMAN CATHOLIC BISHOP OF OF LANDS vs. IAC, supra, p. 518).
LUCENA, represented by Msgr. Jose T. Sanchez, and REGIONAL
TRIAL COURT, BRANCH LIII, LUCENA CITY, respondents It must be emphasized that the Court is not here saying that a corporation
(G.R. No. 75042; November 29, 1988) sole should be treated like an ordinary private corporation.
FACTS: The ROMAN CATHOLIC BISHOP of Lucena, represented by Msgr. In Roman Catholic Apostolic Administration of Davao, Inc. vs. Land
Jose T. Sanchez, filed an application for confirmation of title to 4 parcels of Registration Commission, et al. (L-8451, December 20,1957,102 Phil. 596).
land which were said to have been obtained either by purchase or donation We articulated:
dating as far back as 1928, which was granted by the CFI.
In solving the problem thus submitted to our consideration, We can say
Against this decision, the Solicitor General filed a Motion for reconsideration the following: A corporation sole is a special form of corporation usually
on the following grounds: associated with the clergy. Conceived and introduced into the common law
by sheer necessity, this legal creation which was referred to as "that
1. Article XIV, Section 11 of the New Constitution(1973) disqualifies a private unhappy freak of English Law" was designed to facilitate the exercise of
corporation from acquiring alienable lands for the public domain; the functions of ownership carried on by the clerics for and on behalf of
the church which was regarded as the property owner (See 1 Bouvier's
2. In the case at bar the application was filed after the effectivity on the New Law Dictionary, p. 682-683).
Constitution on January 17, 1973;
A corporation sole consists of one person only, and his successors (who
which was denied by the lower court for lack of merit. 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
Still insisting of the alleged unconstitutionality of the registration (a point advantages, particulary that of perpetuity, which in their natural persons
which, incidentally, the appellant never raised in the lower court prior to its they could not have had.
Motion for Reconsideration), the Republic elevated this appeal, and the IAC
affirmed the lower court’s decision. There is no doubt that a corporation sole by the nature of its Incorporation is
vested with the right to purchase and hold real estate and personal property.
ISSUE: WON private respondent, corporation sole, is entitled to confirmation It need not therefore be treated as an ordinary private corporation because
of its title to the 4 parcels of land? whether or not it be so treated as such, the Constitutional provision involved
will, nevertheless, be not applicable.
HELD: The parties herein do not dispute that since the acquisition of the four
(4) lots by the applicant, it has been in continuous possession and enjoyment In the light of the facts obtaining in this case and the ruling of this Court in
thereof, and such possession, together with its predecessors-in-interest, Director of Lands vs. IAC, (supra, 513), the lands subject of this petition were
covering a period of more than 52 years (at least from the date of survey in already private property at the time the application for confirmation of title
1928) with respect to lots 1 and 2, about 62 years with respect to lot 3, all of was filed in 1979. There is therefore no cogent reason to disturb the findings
plan PSU-65686; and more than 39 years with respect to the fourth parcel of the appellate court.
described in plan PSU-11 2592 (at least from the date of the survey in 1940)
have been open, public, continuous, peaceful, adverse against the whole
world, and in the concept of owner. VACANCY: in the office of the ―head‖ of the corporation, the person
authorized by the rules, regulations or discipline of the denomination shall
Petitioner argues that considering such constitutional prohibition, private exercise all the powers and authority of the corporation sole during such
respondent is disqualified to own and register its title to the lots in question. vacancy and until such vacancy has been filled-up. The manner in which the
Further, it argues that since the application for registration was filed only on vacancy is to be filled in clearly spelled out in Sec. 114 of the Code:
February 2, 1979, long after the 1973 Constitution took effect on January 17,
1973, the application for registration and confirmation of title is ineffectual Sec. 114. Filling of vacancies. - The successors in office of any chief
because at the time it was filed, private corporation had been declared archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation
ineligible to acquire alienable lands of the public domain pursuant to Art. XIV, sole shall become the corporation sole on their accession to office and shall
Sec. 11 of the said constitution. (Rollo, p. 41) 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,
The questioned posed before this Court has been settled in the case of or letters of appointment, duly certified by any notary public.
DIRECTOR OF LANDS vs. Intermediate Appellate Court (146 SCRA 509
[1986]) which reversed the ruling first enunciated in the 1982 case of Manila During any vacancy in the office of chief archbishop, bishop, priest, minister,
Electric Co. vs. CASTRO BARTOLOME, (114 SCRA 789 [1982]) imposing the rabbi or presiding elder of any religious denomination, sect or church
constitutional ban on public land acquisition by private corporations which incorporated as a corporation sole, the person or persons authorized and
ruling was declared emphatically as res judicata on January 7, 1986 in empowered by the rules, regulations or discipline of the religious
Director of Lands vs. Hermanos y Hermanas de Sta. Cruz de Mayo, Inc., (141 denomination, sect or church represented by the corporation sole to
SCRA 21 [1986]). In said case, (Director of Lands v. IAC, supra), this Court administer the temporalities and manage the affairs, estate and properties of
stated that a determination of the character of the lands at the time the corporation sole during the vacancy shall exercise all the powers and
of institution of the registration proceedings must be made. If they authority of the corporation sole during such vacancy.
were then still part of the public domain, it must be answered in the
negative. Under the above-provision, it is required that the successor, in order to be
permitted to transact business as a corporation sole, must file with the SEC a
If, on the other hand, they were already private lands, the constitutional copy of his commission, certificate of election, or letter of appointment, duly
prohibition against their acquisition by private corporation or association certified by a notary public.
obviously does not apply. In affirming the Decision of the Intermediate
Appellate Court in said case, this Court adopted the vigorous dissent of the DISSOLUTION:
diocese, synod, or district organization, the board of trustees to be not less
Sec. 115. Dissolution. - A corporation sole may be dissolved and its affairs than five (5) nor more than fifteen (15).
settled voluntarily by submitting to the Securities and Exchange Commission
a verified declaration of dissolution. Apparent from the foregoing, is that a religious society is not mandated by
law to register as a corporation but may do so to acquire juridical personality
The declaration of dissolution shall set forth: (NRAN) and for the purpose of administration of its temporalities and properties and
1. The name of the corporation; even to acquire properties of its own. Thus, it has been held that an
2. The reason for dissolution and winding up; unincorporated religious association cannot acquire private agricultural lands
3. The authorization for the dissolution of the corporation by the particular in the Philippines (Register of Deeds vs. Ung Sui Temple)
religious denomination, sect or church;
4. The names and addresses of the persons who are to supervise the TERM OF EXITENCE: Like the corporation sole, the AOI of a religious
winding up of the affairs of the corporation. society need not contain a term of its existence as it is supposed to exist in
perpetuity.
Upon approval of such declaration of dissolution by the Securities and
Exchange Commission, the corporation shall cease to carry on its operations BEGINNING OF CORPORATE EXISTENCE: is upon issuance of the
except for the purpose of winding up its affairs. certificate of registration by the SEC. Absent any specific provision of the law,
it must be deemed to fall within the general rule under Sec. 19.
DISSOLUTION BY JUDICIAL DECREE: is generally not allowed because
of the doctrine of separation of the Church and the State. However, the State CHAPTER XVII: DISSOLUTION (TITLE XIV)
may exercise its police power if the corporation is being carried out and is
being used for illegal purposes. A. DISSOLUTION is the extinguishment of the corporate franchise and
the termination of corporate existence.
D. RELIGIOUS SOCIETIES
When a corporation is dissolved, it ceases to be a juridical entity and can no
Under common law, a religious society is a body of persons associated longer pursue the business for which it was incorporated. It will nevertheless
together for the purpose of maintaining religious worship. The religious continue as a body corporate for another period of three years from the time
society and the church are distinct bodies, independent of each other, though it is dissolved but only for the purpose of winding up its affairs and the
they may exist with each other. liquidation of its assets.
Under Philippine Law, a religious society, order, diocese, synod or district B. METHODS OF DISSOLUTION
organization of any religious denomination, sect or church may incorporate
for the administration of its temporalities or for the management of its affairs, THREE WAYS OF DISSOLUTION:
properties and estate in accordance with the Code: 1. Expiration of its corporate term;
2. Voluntary surrender of its primary franchise (voluntary dissolution); and
Sec. 116. Religious societies. - Any religious society or religious order, or 3. The revocation of its corporate franchise (involuntary dissolution)
any diocese, synod, or district organization of any religious denomination,
sect or church, unless forbidden by the constitution, rules, regulations, or Sec. 117, however, mentions only two methods:
discipline of the religious denomination, sect or church of which it is a part, or
by competent authority, may, upon written consent and/or by an affirmative Sec. 117. Methods of dissolution. - A corporation formed or organized
vote at a meeting called for the purpose of at least two-thirds (2/3) of its under the provisions of this Code may be dissolved voluntarily or
membership, incorporate for the administration of its temporalities or for the involuntarily.
management of its affairs, properties and estate by filing with the Securities
and Exchange Commission, articles of incorporation verified by the affidavit This is rightfully so, because the expiration of corporate term can be
of the presiding elder, secretary, or clerk or other member of such religious considered voluntary dissolution t being the intention of the stockholders that
society or religious order, or diocese, synod, or district organization of the it shall exist only for such period.
religious denomination, sect or church, setting forth the following:
C. EXPIRATION OF CORPORATE TERM
1. That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect or A corporation registered under the Corporation Code, with the exception of
church; religious ones, is required to indicate its term of existence in the AOI. It
ceases to exist and is deemed automatically dissolved upon the expiration of
2. That at least two-thirds (2/3) of its membership have given their written the term indicated thereat without the need of any formal proceedings.
consent or have voted to incorporate, at a duly convened meeting of the
body; EXTENSION: It is to be observed, however, that the original term of
existence indicated in the AOI is subject to extension in accordance with the
3. That the incorporation of the religious society or religious order, or provisions of Sec. 11 and 37 of the Code. If such be the case, the corporation
diocese, synod, or district organization desiring to incorporate is not continues to be possessed with juridical personality and may carry out its
forbidden by competent authority or by the constitution, rules, regulations or business for the period of time granted by virtue of such extension.
discipline of the religious denomination, sect, or church of which it forms a
part; The extension should nonetheless be made before the expiration of the
original term, but not earlier than 5 years prior to such expiration, otherwise
4. That the religious society or religious order, or diocese, synod, or district the corporation is dissolved, ipso facto.
organization desires to incorporate for the administration of its affairs,
properties and estate; PHILIPPINE NATIONAL BANK, petitioner,
vs.
5. The place where the principal office of the corporation is to be established THE COURT OF FIRST INSTANCE OF RIZAL, PASIG — BRANCH XXI,
and located, which place must be within the Philippines; and PRESIDED BY JUDGE GREGORIO G. PINEDA, CHUNG SIONG PEK @
BONIFACIO CHUNG SIONG PEK AND VICTORIA CHING GENG TY @
6. The names, nationalities, and residences of the trustees elected by the VICTORIA CHENG GENG TY, and THE REGISTER OF DEEDS OF RIZAL,
religious society or religious order, or the diocese, synod, or district PASIG, METRO MANILA AND/OR HIS DEPUTIES AND AGENTS, respondents
organization to serve for the first year or such other period as may be (G.R. No. 63201; May 27, 1992)
prescribed by the laws of the religious society or religious order, or of the
FACTS: Philippine Blooming Mills, Inc. (PBM), a corporation with corporate make an involuntary dissolution of a corporation whose corporate term had
existence of 25 years, entered into a lease contract with private respondents, ended because its articles of incorporation had in effect expired by its own
whereby the latter shall lease the parcels of land owned by them to PBM for limitation.
a period of 20 years, extendible to another 20 years, provided that PBM
extend its corporate existence in accordance with law. Considering the foregoing in relation to the contract of lease between the
parties herein, when PBM's corporate life ended on January 19, 1977 and its
PBM introduced improvements on the land which were annotated with the 3-year period for winding up and liquidation expired on January 19, 1980, the
Register of Deeds. option of extending the lease was likewise terminated on January 19, 1977
because PBM failed to renew or extend its corporate life in accordance with
Later on, PBM executed a deed of assignment in favor of PNB over its law. From then on, the respondents can exercise their right to terminate the
leasehold rights and later on a real estate mortgage covering all the lease pursuant to the stipulations in the contract.
improvements to secure a loan.
The rights of the lessor and the lessee over the improvements which the
PBM filed a petition for registration of improvements in the titles of real latter constructed on the leased premises is governed by Article 1678 of the
property of private respondents which was opposed by private respondents Civil Code.
on the ground that PBM failed to renew the contract of lease and apply for
extension of its corporate existence. 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
The CFI issued an order directing the cancellation of the inscriptions on at bar, the law will not apply because the parties herein have stipulated in
respondents’ certificates of title. the contract their own terms and conditions concerning the improvements, to
wit, that the lessee, namely PBM, bound itself to remove the improvements
ISSUE: WON the cancellation of entries on respondents’ title is valid and before the termination of the lease. Petitioner PNB, as assignee of PBM
proper? succeeded to the obligation of the latter under the contract of lease. It could
not possess rights more than what PBM had as lessee under the contract.
HELD: Yes. The contract of lease expressly provides that the term of the Hence, petitioner was duty bound to remove the improvements before the
lease shall be twenty years from the execution of the contract but can be expiration of the period of lease as what we have already discussed in the
extended for another period of twenty years at the option of the lessee preceding paragraphs. Its failure to do so when the lease was terminated
should the corporate term be extended in accordance with law. Clearly, the was tantamount to a waiver of its rights and interests over the improvements
option of the lessee to extend the lease for another period of twenty years on the leased premises.
can be exercised only if the lessee as corporation renews or extends its
corporate term of existence in accordance with the Corporation Code which is D. SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION)
the applicable law. Contracts are to be interpreted according to their literal
meaning and should not be interpreted beyond their obvious intendment. MODES OF VOLUNTARY DISSOUTION:
Thus, in the instant case, the initial term of the contract of lease which 1. Voluntary Dissolution where no creditors are affected (Sec. 118);
commenced on March 1, 1954 ended on March 1, 1974. PBM as lessee 2. Voluntary Dissolution where creditors are affected (Sec. 119);
continued to occupy the leased premises beyond that date with the 3. Shortening of corporate term (Sec. 120).
acquiescence and consent of the respondents as lessor. Records show
however, that PBM as a corporation had a corporate life of only twenty-five 1. VOLLUNTARY DISSOUTION WHERE NO CREDITORS ARE
(25) years which ended an January 19, 1977. It should be noted however AFFECTED:
that PBM allowed its corporate term to expire without complying with the
requirements provided by law for the extension of its corporate term of Sec. 118. Voluntary dissolution where no creditors are affected. - If
existence. dissolution of a corporation does not prejudice the rights of any creditor
having a claim against it, the dissolution may be effected by majority vote of
Section 11 of Corporation Code provides that a corporation shall exist for a the board of directors or trustees, and by a resolution duly adopted by the
period not exceeding fifty (50) years from the date of incorporation unless affirmative vote of the stockholders owning at least two-thirds (2/3) of the
sooner dissolved or unless said period is extended. Upon the expiration of the outstanding capital stock or of at least two-thirds (2/3) of the members of a
period fixed in the articles of incorporation in the absence of compliance with meeting to be held upon call of the directors or trustees after publication of
the legal requisites for the extension of the period, the corporation ceases to the notice of time, place and object of the meeting for three (3) consecutive
exist and is dissolved ipso facto (16 Fletcher 671 cited by Aguedo F. weeks in a newspaper published in the place where the principal office of
Agbayani, Commercial Laws of the Philippines, Vol. 3, 1988 Edition p. 617). said corporation is located; and if no newspaper is published in such place,
When the period of corporate life expires, the corporation ceases to be a then in a newspaper of general circulation in the Philippines, after sending
body corporate for the purpose of continuing the business for which it was such notice to each stockholder or member either by registered mail or by
organized. But it shall nevertheless be continued as a body corporate for personal delivery at least thirty (30) days prior to said meeting. A copy of the
three years after the time when it would have been so dissolved, for the resolution authorizing the dissolution shall be certified by a majority of the
purpose of prosecuting and defending suits by or against it and enabling it board of directors or trustees and countersigned by the secretary of the
gradually to settle and close its affairs, to dispose of and convey its property corporation. The Securities and Exchange Commission shall thereupon issue
and to divide its assets (Sec. 122, Corporation Code). There is no need for the certificate of dissolution.
the institution of a proceeding for quo warranto to determine the
time or date of the dissolution of a corporation because the period FORMAL AND PROCEDURAL REQUIREMENTS:
of corporate existence is provided in the articles of incorporation. 1. Majority vote of the board of directors or trustees;
When such period expires and without any extension having been 2. Sending of notice of each stockholders or member either by registered
made pursuant to law, the corporation is dissolved automatically mail or personal delivery at least thirty (30) days prior to the meeting
insofar as the continuation of its business is concerned. The quo (scheduled by the board for the purpose of submitting the board action
warranto proceeding under Rule 66 of the Rules of Court, as amended, may to dissolve the corporation for approval of the stockholder or
be instituted by the Solicitor General only for the involuntary dissolution of a members.);
corporation on the following grounds: a) when the corporation has offended 3. Publication of the notice of time, place and subject of the meeting for
against a provision of an Act for its creation or renewal; b) when it has three (3) consecutive weeks in a newspaper published in the place
forfeited its privileges and franchises by non-user; c) when it has committed where the principal office of said corporation is located or in a
or omitted an act which amounts to a surrender of its corporate rights, newspaper of general circulation in the Philippines;
privileges or franchises; d) when it has mis-used a right, privilege or franchise 4. Resolution adopted by the affirmative vote of the stockholders owning
conferred upon it by law, or when it has exercised a right, privilege or at least 2/3 of the outstanding capital stock or 2/3 of the members at
franchise in contravention of law. Hence, there is no need for the SEC to the meeting duly called for the purpose;
5. A copy of the resolution authorizing the dissolution must be certified by issue made by the objections filed.
a majority of the board of directors or trustees and countersigned by the 7. Judgment dissolving the corporation and directing of its assets as justice
corporate secretary; requires and the appointment of a receiver (if necessary in its discretion)
6. Issuance of a certificate of dissolution by the SEC. to collect such assets and pay the debts of the corporation
FAILURE TO COMPLY: with the above requirements will have no effect on APPOINTMENT OF A RECEIVER: While the foregoing are mandatory
the legal existence of the corporation. Elsewise stated, a corporation benig a requirements, the appointment of a receiver is only permissive. As can be
creation of the law by the grant of its existence by the State, may only be gleaned from the second paragraph of Sec. 119, it uses the phrase ―and may
dissolved in the manner prescribed by the law of its creation. Since it is the appoint a receiver‖, showing the clear intent of the aw that the same is
State that grants its right to exist, it is only through the State which can allow merely discretionary on the part of the proper forum. Such language, held by
th termination of existence. Unless dissolved pursuant thereto, a corporation the High Court, ―tends to recognize that in cases of voluntary dissolution,
does not cease to have a juridical personality. there is no occasion for the appointment of a receiver except under special
circumstances and upon proper showing‖ (China Bank vs. Michellin)
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, 3. DISSOLUTION BY SHORTENING CORPORATE TERM
administrative or judicial is necessary (Daguhoy Enterprises vs. Ponce)
Sec. 120 was inserted to incorporate the long standing practice of dissolving
2. VOLUNTARY DISSOLUTION WHERE CREDITORS ARE AFFECTED a corporation by amendment of the AOI by shortening the corporate
existence.
Sec. 119. Voluntary dissolution where creditors are affected. - Where
the dissolution of a corporation may prejudice the rights of any creditor, the A corporation may exist for 50 years, but there is no law which prevents the
petition for dissolution shall be filed with the Securities and Exchange shareholders thereof to shorten that period and effect a dissolution of the
Commission. The petition shall be signed by a majority of its board of corporation.
directors or trustees or other officers having the management of its affairs,
verified by its president or secretary or one of its directors or trustees, and PERPETUAL SUCCESSION: In fact, a corporation may be given the
shall set forth all claims and demands against it, and that its dissolution was capacity of ―perpetual succession‖ like the corporation sole and the religious
resolved upon by the affirmative vote of the stockholders representing at society. It does not mean, however, that it shall continue to exist forever. It
least two-thirds (2/3) of the outstanding capital stock or by at least two- merely means that it has the capacity of continuous existence during a
thirds (2/3) of the members at a meeting of its stockholders or members particular period or until dissolved in accordance with law.
called for that purpose.
It may thus amend its AOI and provide a term of existence or shorten it
If the petition is sufficient in form and substance, the Commission shall, by which may have the effect of a dissolution. Thus, while Sec. 115 of the Code
an order reciting the purpose of the petition, fix a date on or before which provides for the process and procedure for the dissolution of a corporation
objections thereto may be filed by any person, which date shall not be less sole, there is nothing in the law itself which would prohibit it from amending
than thirty (30) days nor more than sixty (60) days after the entry of the its AOI. It is believed, however, that authorization for the dissolution by the
order. Before such date, a copy of the order shall be published at least once particular religious denomination, sect or church, as required in sub-
a week for three (3) consecutive weeks in a newspaper of general circulation paragraph 3 of Sec. 115 would still be necessary in the case of amending the
published in the municipality or city where the principal office of the AOI to affect dissolution.
corporation is situated, or if there be no such newspaper, then in a
newspaper of general circulation in the Philippines, and a similar copy shall Sec. 120. Dissolution by shortening corporate term. - A voluntary
be posted for three (3) consecutive weeks in three (3) public places in such dissolution may be effected by amending the articles of incorporation to
municipality or city. 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
Upon five (5) day's notice, given after the date on which the right to file Exchange Commission in accordance with this Code. Upon approval of the
objections as fixed in the order has expired, the Commission shall proceed to amended articles of incorporation of the expiration of the shortened term, as
hear the petition and try any issue made by the objections filed; and if no the case may be, the corporation shall be deemed dissolved without any
such objection is sufficient, and the material allegations of the petition are further proceedings, subject to the provisions of this Code on liquidation.
true, it shall render judgment dissolving the corporation and directing such
disposition of its assets as justice requires, and may appoint a receiver to SPECIAL AMENDMENT: Shortening of the corporate term with the effect of
collect such assets and pay the debts of the corporation. dissolution is a special type of amendment covered and governed by the
special provisions of Sec. 37 of the Code. Thus, while the general provision
FORMAL AND PROCEDURAL REQUIREMENTS: on amendment under Sec. 16 allows ―written assent‖ in determining the
1. Affirmative vote of the stockholders representing at least 2/3 of the voting requirement for ordinary amendments, sec. 37 mandates that the vote
outstanding capital stock or at least 2/3 of the members at a meeting must be cast at a duly constituted meeting.
duly called for that purpose;
2. Petition for dissolution shall be filed with the SEC (the proper forum) Likewise, sec. 16 provides that amendment of the AOI is deemed approved if
signed by a majority of its board of directors or trustees or other officers not acted upon by the SEC within 6 months from the date of filing for a cause
having the management of its affairs, verified by the president or not attributable to the corporation. This is not applicable in case of
secretary or one of its directors or trustees, setting forth all claims and shortening the corporate term which will have the effect of dissolution in Sec.
demands against it. 120, which requires the approval of the SEC.
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 E. INVOLUNTARY DISSOLUTION
by any person, which date shall not be less than thirty days nor more
than sixty days after entry of the order. Sec. 121. Involuntary dissolution. - A corporation may be dissolved by
4. Before such date, a copy of the order must be published once a week the Securities and Exchange Commission upon filing of a verified complaint
for three (3) consecutive weeks in a newspaper of general circulation and after proper notice and hearing on the grounds provided by existing
published in the city or municipality where the principal office is situated laws, rules and regulations.
or in a newspaper of general circulation in the Philippines.
5. Posting of the same order for three (3) consecutive weeks in three (3) Culled from the above provision is that this is a dissolution is by judicial
public places in such city or municipality. decree.
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 JURISDICTION OVER DISSOLUTION CASES: In a ruling laid down by
the SC, actions, for quo warranto against corporations or against persons
who usurps an office in a corporation fall under the jurisdiction of the SEC These powers are necessarily limited by Sec. 75 of of the Act of Congress of
(Unilongo, et. al. vs. CA; GR No. 123910; April 5, 1999). July 1, 1902, and by the section 13 Act of 1459, the latter being a
reproduction of the former, which is as follows:
This, however, is no longer exclusive and absolute in view of the
amendments introduced by the Securities Regulations Code (SRC) of 2000, or That no corporation shall be authorized to conduct the business of buying
RA 8799, which transferred the jurisdiction of the SEC under Sec. 5 of PD and selling real estate or be permitted to hold or own real estate except
902-A to the regional trial courts as designated by the SC (Sec. 5.2, RA such as may be reasonably necessary to enable it to carry out the
8799). The jurisdiction of the courts and the SEC over revocation proceedings purposes for which it is created, . . . . Corporations, however, may loan
seems to be concurrent under the present set up since Sec. 5 of RA 8799, funds upon real estate, security, and purchase real estate when necessary
particularly par. (m) thereof, provides that the SEC has the power to for the collection of loans, but they shall dispose of real estate so obtained
―suspend, or revoke, after proper notice and hearing the franchise and within five years after receiving the title . . .
certificate of registration of corporations, partnership or associations, upon
any ground provided by law‖. This, despite the transfer of its jurisdiction The defendant corporation entered into a contract with The Tayabas Land
under the SRC. Company (TLC) where PSEC invested P400,000 in the TLC and that ―All lands
bought or which may be bought with the credit, which The Philippine Sugar
GROUNDS FOR INVOLUNTARY DISSOLUTION: as provided under Sec. brings to The Tayabas Land Company and which lie within and without the
6 of PD 902-A: (FSRCFF) railway line from Pagbilao to Lopez, shall be held as security for such credit,
at their respective cost price, until their alienation, except the part thereof
1. Fraud in procuring its certificate of registration; which pertains to D. Mariano Lim in The Tayabas Land Company‖ and that if
2. Serious misrepresentation as to what the corporation can do or is TLC is to sell the land and its improvements at a price lower than P0.50 per
doing to the great prejudice of or damage to the general public; square meter TLC is to obtain the consent of PSEC first.
3. Refusal to comply or defiance of any lawful order of the
Commission restraining commission of acts which would amount to a An action for quo warranto was brought by the Attorney General for and in
grave violation of its franchise; behalf of the Government of the Philippine Islands for the purpose of having
4. Continuous inoperation for a period of at least five (5) years; the charter of the defendant corporation PSEC declared forfeited for engaging
5. Failure to file by-laws within the required period; in the ―buying and selling of real estate‖ along the right of way of Manila
6. Failure to file required reports in appropriate forms as determined by Railroad Company with the view of reselling the same to Manila Railroad for a
the Commission within the prescribed period. profit; that it had continuously offended against the laws of the Philippine
Islands and had misused its corporate authority, franchise and privileges and
OTHER GROUNDS PROVIDED FOR IN THE CORPORATION CODE: had assumed privileges and franchises not granted.
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; ISSUE: WON defendant corporation should be dissolved?
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 HELD: No. Section 212 of Act No. 190 provides a judgment which may be
oppressive or unfairly prejudicial to the corporation or any stockholder rendered in said case:
or whenever corporate assets are being misapplied or wasted under
section 105. When in any such action, it is found and adjudged that the corporation
has, by any act done or omitted surrendered, or forfeited its corporate
INVOLUNTARY DISSOLUTION: is a harsh remedy akin to a capital rights, privileges, and franchise, or has not used the same during the term
punishment. Thus, it has been laid to rest in the case of Government vs. of five years, judgment shall be entered that it be ousted and excluded
Philippine Sugar Estate that courts proceed with extreme caution which have therefrom and that it be dissolved; but when it is found and adjudged
for their object the forfeiture of corporate franchise, and forfeiture will not be that a corporation has offended in any matter or manner which
allowed, except under express limitation, or for plain abuse of power by does not by law work as a surrender or forfeiture, or has misused
which the corporation fails to fulfil the design and purpose of its organization. a franchise or exercised a power not conferred by law, but not of
But when the abuse or violation constitutes or threatens a substantial injury such a character as to work a surrender or forfeiture of its
to the public or such as to amount to a violation of the fundamental franchise, judgment shall be rendered that it be ousted from the
conditions of its charter, or its conduct is characterized by ―obduracy or continuance of such offense or the exercise of such power.
pertinacity in contempt of law‖, dissolution will be granted.
It will be seen that said section (212) gives the court a wide discretion in its
Likewise, it has been held that the relief of dissolution will be awarded only judgment in depriving corporations of their franchise. High, in his work on
where no other adequate remedy is available and it will not be allowed where Extraordinary Legal Remedies, says at page 606:
the rights of the stockholders can be, or are, protected in some other way.
It is to be observed in the outset that the courts proceed with extreme
THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellant, caution in the proceeding which have for their object the
vs. forfeiture of corporate franchises, and a forfeiture will not be
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO. (LTD.) allowed, except under express limitation, or for a plain abuse of
defendant-appellant power by which the corporation fails to fulfill the design and
(G.R. No. L-11789; April 2, 1918) purpose of its organization.
FACTS: Defendant corporation by its charter is authorized among others: In the case of State of Minnesota vs. Minnesota Thresher Manufacturing Co.
(3 L.R.A. 510) the court said (p. 518):
j) To buy shares of the Compañia de Navegacion, Ferrocarriles, Diques, y
Almacenes de Depositos, and, in this manner or otherwise, to engage in The scope of the remedy furnished by its (quo warranto) is to forfeit the
any mercantile or industrial enterprise. franchises of a corporation for misuser or nonuser. It is therefore
necessary in order to secure a judicial forfeiture of respondent's charter to
(k) With no other restrictions than those provided by law, place funds of show a misuser of its franchises justifying such a forfeiture. And as already
the corporation in hypothecary or pignorative loans, in public securities of remarked the object being to protect the public, and not to redress private
the United States, in stocks or shares issued by firms, corporations, or grievances, the misuser must be such as to work or threaten a substantial
companies that are legally organized and operated, and in rural and urban injury to the public, or such as to amount to a violation of the fundamental
property. It may also contract and guarantee all kinds of obligations, in condition of the contract by which the franchise was granted and thus
conformity with existing laws

defeat the purpose of the grant; and ordinarily the wrong or evil must be HELD: No. It is evident that the strict letter of the law was violated by the
one remediable in no other form of judicial proceeding. respondent; but it is equally obvious that its conduct has not been
characterized by obduracy or pertinacity in contempt of the law. Moreover,
Courts always proceed with great caution in declaring a forfeiture of several facts connected with the incident tend to mitigate the offense.
franchises, and require the prosecutor seeking the forfeiture to bring the
case clearly within the rules of law entitling him to exact so severe a It has been held by this court that a purchaser of land registered under the
penalty. (People vs. North River Sugar Refining Co., 9 L.R.A., 33, 39; State Torrens system cannot acquire the status of an innocent purchaser for value
vs. Portland Natural Gas Co., 153, Ind., 483.) unless his vendor is able to place in his hands an owner's duplicate showing
the title of such land to be in the vendor (Director of Lands vs. Addison, 49,
While it is true that the courts are given a wide discretion in ordering the Phil., 19; Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to
dissolution of corporations for violations of its franchises, etc., yet May 7, 1921, El Hogar Filipino was not really in a position to pass an
nevertheless, when such abuses and violations constitute or threaten indefeasible title to any purchaser. In this connection it will be noted that
a substantial injury to the public or such as to amount to a violation section 75 of the Act of Congress of July 1, 1902, and the similar provision in
of the fundamental conditions of the contract (charter) by which the section 13 of the Corporation Law, allow the corporation "five years after
franchises were granted and thus defeat the purpose of the grant, receiving the title," within which to dispose of the property. A fair
then the power of the courts should be exercised for the protection interpretation of these provisions would seem to indicate that the date of
of the people. the receiving of the title in this case was the date when the
respondent received the owner's certificate, or May 7, 1921, for it
Under the law the people of the Philippine Islands have guaranteed the was only after that date that the respondent had an unequivocal
payment of the interest upon cost of the construction of the railroad which and unquestionable power to pass a complete title. The failure of
occupied or occupies at least some of the lands purchased by the defendant. the respondent to receive the certificate sooner was not due in any
Every additional dollar of increase in the price of the land purchased by the wise to its fault, but to unexplained delay on the part of the register
railroad company added that much to the costs of construction and thereby of deeds. For this delay the respondent cannot be held accountable.
increased the burden imposed upon the people. The very and sole purpose of
the intervention of the defendants in the purchase of the land from the The question then arises whether the failure of the respondent to get rid of
original owners was for the purpose of selling the same to the Railroad the San Clemente property within five years after it first acquired the deed
Company at profit — at an increased price, thereby directly increasing the thereto, even supposing the five-year period to be properly counted from that
burden of the people by way of additional taxation. The purpose of the date, is such a violation of law as should work a forfeiture of its franchise and
intervention of the defendant in the transactions in question, was to enrich require a judgment to be entered for its dissolution in this action of quo
itself at the expense of the taxpayers of the Philippine Islands, who had, by a warranto.
franchise granted, permitted the defendant to exist and do business as a
corporation. The defendant was not willing to allow the Railroad Company to Upon this point we do not hesitate to say that in our opinion the corporation
purchase the land of the original owners. Its intervention with The Tayabas has not been shown to have offended against the law in a manner that
Land Company was to obtain an increase in the price of the land in a resale should entail a forfeiture of its charter. Certainly no court with any discretion
of the same to the railroad company. The conduct of the defendant in the to use in the matter would visit upon the respondent and its thousands of
premises merits the severest condemnation of the law. shareholders the extreme penalty of the law as a consequence of the
delinquency here shown to have been committed.
The judgment of the lower court should be modified. It is hereby ordered and
decreed that the franchise heretofore granted to the defendant by which it The law applicable to the case is in our opinion found in section 212 of the
was permitted to exist and do business as a corporation in the Philippine Code of Civil Procedure, as applied by this court in Government of the
Islands, be withdrawn and annulled and that it be disallowed to do and to Philippine Islands vs. Philippine Sugar Estates Development Co. (38 Phil., 15).
continue doing business in the Philippine Islands, unless it shall within a This section (212), in prescribing the judgment to be rendered against a
period of six months after final decision, liquidate, dissolve and corporation in an action of quo warranto, among other things says:
separate absolutely in every respect and in all of its relations,
complained of in the petition, with The Tayabas Land Company, . . . When it is found and adjudged that a corporation has offended in any
without any findings to costs. matter or manner which does not by law work as a surrender or forfeiture,
or has misused a franchise or exercised a power not conferred by law, but
not of such a character as to work a surrender or forfeiture of its franchise,
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the judgment shall be rendered that it be outset from the continuance of such
Attorney-General), plaintiff, offense or the exercise of such power.
vs.
EL HOGAR FILIPINO, defendant This provision clearly shows that the court has a discretion with
(G.R. No. L-26649; July 13, 1927) respect to the infliction of capital punishment upon corporation and
that there are certain misdemeanors and misuses of franchises
FACTS: The Attorney General of the Government of the Philippine Islands which should not be recognized as requiring their dissolution.
instituted the present quo warranto for the purpose of depriving defendant
corporation of its franchise upon 17 distinct causes of action, the first of Government of the Philippine Islands vs. Philippine Sugar Estates
which is: Development Co.: (38 Phil., 15): In the PSEC, case, it was found that the
offending corporation had been largely (though indirectly) engaged in the
Plaintiff ―alleged illegal holding by the respondent of the title to real property buying and holding or real property for speculative purposes in contravention
for a period in excess of five years after the property had been bought in by of its charter and contrary to the express provisions of law. Moreover, in that
the respondent at one of its own foreclosure sales. The provision of law case the offending corporation was found to be still interested in the
relevant to the matter is found in section 75 of Act of Congress of July 1, properties so purchased for speculative at the time the action was brought.
1902 (repeated in subsection 5 of section 13 of the Corporation Law.) In both Nevertheless, instead of making an absolute and unconditional
of these provisions it is in substance declared that while corporations may order for the dissolution of the corporation, the judgment of ouster
loan funds upon real estate security and purchase real estate when necessary was made conditional upon the failure of the corporation to
for the collection of loans, they shall dispose of real estate so obtained within discontinue its unlawful conduct within six months after final
five years after receiving the title‖ decision. In the case before us the respondent appears to have rid itself of
the San Clemente property many months prior to the institution of this
ISSUE: WON the corporation should be dissolved on the first cause of action. It is evident from this that the dissolution of the respondent would not
action? be an appropriate remedy in this case. We do not of course undertake to say
that a corporation might not be dissolved for offenses of this nature

perpetrated in the past, especially if its conduct had exhibited a willful the part of the respondent which justifies its dissolution. In this view
obduracy and contempt of law. we are unable to concur. The obnoxious by-law, as it stands, is a mere
nullity, and could not be enforced even if the directors were to attempt to do
Third cause of action. — Under the third cause of action the so. There is no provision of law making it a misdemeanor to incorporate an
respondent is charged with engaging in activities foreign to the invalid provision in the by-laws of a corporation; and if there were such, the
purposes for which the corporation was created and not reasonable hazards incident to corporate effort would certainly be largely increased.
necessary to its legitimate ends. The specifications under this cause There is no merit in this cause of action.
of action relate to three different sorts of activities. The first consist
of the administration of the offices in the El Hogar building not used REPUBLIC OF THE PHILIPPINES, petitioner,
by the respondent itself and the renting of such offices to the vs.
public. SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T.
RESUELLO, PABLO TANJUTCO, ARTURO SORIANO, RUBEN BELTRAN,
The second specification under the third cause of action has reference to the BIENVENIDO V. ZAPA, PILAR G. RESUELLO, RICARDO D. BALATBAT,
administration and management of properties belonging to delinquent JOSE SEBASTIAN and VITO TANJUTCO JR., respondents.
shareholders of the association (G.R. No. L-20583; January 23, 1967)
The third specification under this cause of action relates to certain activities FACTS: The AOI of defendant corporation were registered with the SEC on
which are described in the following paragraphs contained in the agreed March 27, 1961. Based on the opinion of legal counsel of the Central Bank of
statements of facts: the Philippines, that the defendant corporation is a banking institution, the
Monetary Board promulgated Resolution No. 1095, declaring that the
El Hogar Filipino has undertaken the management of some parcels of corporation is performing banking operations without having first complied
improved real estate situated in Manila not under mortgage to it, but with the provisions of Sec. 2 and 6 of RA No. 337. Despite such resolution,
owned by shareholders, and has held itself out by advertisement as the company still continued with its operations and was able to establish 74
prepared to do so branches all over the Philippines and induced the public to open 59,643
savings deposit accounts.
For the services so rendered in the management of such properties El
Hogar Filipino receives compensation in the form of commissions upon the The Solicitor General initiated this quo warranto proceeding to dissolve said
gross receipts from such properties at rates varying from two and one-half company.
per centum to five per centum of the sums so collected, according to the
location of the property and the effort involved in its management. ISSUE: WON the company should be dissolved?
The administration of property in the manner described is more befitting to HELD: Yes. Although, admittedly, defendant corporation has not secured the
the business of a real estate agent or trust company than to the business of a requisite authority to engage in banking, defendants deny that its
building and loan association. transactions partake of the nature of banking operations. It is conceded,
however, that, in consequence of a propaganda campaign therefor, a total of
ISSUE2: WON the defendant should be dissolved on the above-ground? 59,463 savings account deposits have been made by the public with the
corporation and its 74 branches, with an aggregate deposit of P1,689,136.74,
HELD: No. It is a general rule of law that corporations possess only which has been lent out to such persons as the corporation deemed suitable
such express powers. The management and administration of the property therefor. It is clear that these transactions partake of the nature of banking,
of the shareholders of the corporation is not expressly authorized by law, and as the term is used in Section 2 of the General Banking Act.
we are unable to see that, upon any fair construction of the law, these
activities are necessary to the exercise of any of the granted powers. The Accordingly, defendant corporation has violated the law by engaging in
corporation, upon the point now under the criticism, has clearly extended banking without securing the administrative authority required in Republic
itself beyond the legitimate range of its powers. But it does not result that Act No. 337.
the dissolution of the corporation is in order, and it will merely be
enjoined from further activities of this sort. That the illegal transactions thus undertaken by defendant corporation
warrant its dissolution is apparent from the fact that the foregoing misuser
of the corporate funds and franchise affects the essence of its
Fourth cause of action. — It appears that among the by-laws of the business, that it is willful and has been repeated 59,463 times, and
association there is an article (No. 10) which reads as follows: that its continuance inflicts injury upon the public, owing to the
number of persons affected thereby.
The board of directors of the association, by the vote of an
absolute majority of its members, is empowered to cancel shares Wherefore, the writ prayed for should be, as it is hereby granted and
and to return to the owner thereof the balance resulting from the defendant corporation is, accordingly, ordered dissolved.
liquidation thereof whenever, by reason of their conduct, or for
any other motive, the continuation as members of the owners of REPUBLIC OF THE PHILIPPINES, petitioner-appellee,
such shares is not desirable. vs.
BISAYA LAND TRANSPORTATION CO., INC., MIGUEL CUENCO, MANUEL
ISSUE3: WON if the above by-law is invalid, the corporation may be CUENCO, LOURDES CUENCO, JOSE P. VELEZ, JESUS P. VELEZ and FEDERICO
dissolved? A. REYES (Original Respondents); and ANTONIO V. CUENCO, CARMEN
CUENCO, DIOSCORO B. LAZARO and MANUEL V. CUENCO, JR. (New
HELD: No. This by-law is of course a patent nullity, since it is in direct Directors of respondent corporation), respondent-appellees.
conflict with the latter part of section 187 of the Corporation Law, which MIGUEL CUENCO, respondent-crossclaimant-appellant.
expressly declares that the board of directors shall not have the power to (G.R. No. L-31490; January 6, 1978)
force the surrender and withdrawal of unmatured stock except in case of
liquidation of the corporation or of forfeiture of the stock for delinquency. It FACTS: The Solicitor General initiated this quo warranto proceedings against
is agreed that this provision of the by-laws has never been enforced, and in respondent corporation on the following nine causes of action:
fact no attempt has ever been made by the board of directors to make use of
the power therein conferred. 1. To conceal its illegal transaction, respondent corporation falsely
reconstituted its articles of incorporation in July 1948 by adding new
It is supposed, in the fourth cause of action, that the existence of this cattle ranch, agriculture, and general merchandise;
article among the by-laws of the association is a misdemeanor on

2. On May 25, 1948, respondent corporation through its Board of against each other, the order of the lower court embodied in its "Resolution"
Directors, adopted a resolution authorizing it to acquire 1,024 hectares dated April 3, 1968, granting the Solicitor General's motion to dismiss the quo
of public land in Zamboanga and 10,000 hectares of timber concession warranto proceedings is hereby upheld.
in Mindanao in violation of Section 6, Act No. 143);
3. In May, 1949, respondent office constituting themselves as Board of FINANCING CORPORATION OF THE PHILIPPINES and J. AMADO
Directors of respondent corporation, passed a resolution authorizing the ARANETA, petitioners,
corporation to lease a pasture land of 2,000 hectares of cattle ranch on vs.
a public land in Bayawan, Negros Occidental; HON. JOSE TEODORO, Judge of the Court of First Instance of Negros
4. From August 1946 to the end of 1952, respondent corporation operated Occidental, Branch II, and ENCARNACION LIZARES VDA. DE
a general merchandise store, a business which is neither for, nor PANLILIO, respondents
incidental to, the accomplishment of its principal business for which it (G.R. No. L-4900; August 31, 1953)
was organized, i.e., the operation of land and water transportation;
5. Respondent corporation snowed Mariano Cuenco and Manuel Cuenco to FACTS: In civil case No. 1924 of the Court of First Instance of Negros
act as president in 1945 to 1948 and 1953 to 1954, respectively, when Occidental, Asuncion Lopez Vda. de Lizares, Encarnacion Lizares Vda. de
at that time, neither of them owned a single stock; Panlilio and Efigenia Vda. de Paredes, in their own behalf and in behalf of the
6. In violation of its charter and articles of incorporation, as well as other minority stockholders of the Financing Corporation of the Philippines,
applicable statutes concerning its operation, it engaged in mining by filed a complaint against the said corporation and J. Amado Araneta, its
organizing the Jose P. Velez Coal Mines, and allowing said corporation to president and general manager, claiming among other things alleged gross
use the facilities and assets of respondent corporation; mismanagement and fraudulent conduct of the corporate affairs of the
7. It imported and sold at black market prices to third persons truck spare defendant corporation by J. Amado Araneta, and asking that the corporation
Parts, the of which were appropriated by respondent directors; be dissolved; that J. Amado Araneta be declared personally accountable for
8. It paid its laborers and employees wages below the minimum wage law the amounts of the unauthorized and fraudulent disbursements and
to the great prejudice of its labor force, and in violation of the laws of disposition of assets made by him, and that he be required to account for
the state, manipulating its books and records so as to make it appear said assets, and that pending trial and disposition of the case on its merits a
that its laborers and employees were and have been paid their salaries receiver be appointed to take possession of the books, records and assets of
and wages in accordance with the minimum wage law; the defendant corporation preparatory to its dissolution and liquidation and
9. It deliberately failed to maintain accurate and faithful stock and transfer distribution of the assets. Over the strong objection of the defendants, the
books since 1945 up to the filing of the petition, enabling it to defraud trial court granted the petition for the appointment of a receiver and
the state, mislead the general public, its creditors, investors and its designated Mr. Alfredo Yulo as such receiver with a bond of P50,000.
stockholders by not accurately and faithfully making
ISSUE: The main contention of the petitioners in opposing the appointment
a. an adequate, accurate and complete record of dividend distribution, and of a receiver in this case is that said appointment is merely an auxiliary
b. an adequate, accurate and complete record of transfers of its stocks remedy; that the principal remedy sought by the respondents in the action in
Negros Occidental was the dissolution of the Financing Corporation of the
Later on, the Solicitor General filed a motion for the dismissal of the Philippines; that according to the law a suit for the dissolution of a
complaint which was granted by the lower court. corporation can be brought and maintained only by the State through its
legal counsel, and that respondents, much less the minority stockholders of
ISSUE: WON the lower court is correct in not dissolving the corporation? said corporation, have no right or personality to maintain the action for
dissolution, and that inasmuch as said action cannot be maintained legally by
HELD: Yes. After a very careful and deliberate consideration of the evidence the respondents, then the auxiliary remedy for the appointment of a receiver
adduced by petitioner, the lower court came to the conclusion that the same has no basis.
did not really warrant a quo warranto by the State that could truly justify to
decapitate corporate life, and that the corporate acts or missions complained HELD: True it is that the general rule is that the minority stockholders of a
of had not resulted in substantial injury to the public, nor were they wilful corporation cannot sue and demand its dissolution. However, there are cases
and clearly obdurate. The court found that the several acts of misuse and that hold that even minority stockholders may ask for dissolution, this, under
misapplication of the funds and/or assets of the Bisaya Land Transportation the theory that such minority members, if unable to obtain redress and
Co., Inc. were committed new particularly by the respondent Dr. Manuel protection of their rights within the corporation, must not and should not be
Cuenco with the cooperation of Jose P. Velez, for the commission of which left without redress and remedy. This was what probably prompted this Court
they may be personally held liable. There appears to be no reason for us to to state in the case of Hall, et al. vs. Judge Piccio,* G.R. No. L-2598 (47 Off.
disregard the findings of the trial court, which, applying well settled Gaz. No. 12 Supp., p. 200) that even the existence of a de jure corporation
doctrines, ought to be given due weight and credit (De la Rama vs. Ma-ao may be terminated in a private suit for its dissolution by the stockholders
Sugar Central, L-17504 & L-17506, Feb. 28, 1969). Besides, the court a quo without the intervention of the State.
found that the controversy between the parties was more personal
than anything else and did not at all affect public interest. We repeat that although as a rule, minority stockholders of a
corporation may not ask for its dissolution in a private suit, and that
The Solicitor General himself asserts that the only purpose of his ration for such action should be brought by the Government through its legal
the of this quo warranto is to take the State out of an unnecessary court officer in a quo warranto case, at their instance and request, there
litigation, so that the dismissal of the case would result in the disposition might be exceptional cases wherein the intervention of the State,
solely of the quo warranto by and between petitioner Republic of the for one reason or another, cannot be obtained, as when the State is
Philippines and the respondents named therein. Other interested parties who not interested because the complaint is strictly a matter between
might feel aggrieved, therefore, would not be without their remedies since the stockholders and does not involve, in the opinion of the legal
they can still maintain whatever claims they may have against each other. It officer of the Government, any of the acts or omissions warranting
has been held that relief by dissolution will be awarded only where quo warranto proceedings, in which minority stockholders are entitled to
no other adequate remedy is available, and is not available where have such dissolution. When such action or private suit is brought by them,
the rights of the stockholders can be, or are, protected in some the trial court had jurisdiction and may or may not grant the prayer,
other way (16 Fletcher Cyc. Corporations, 1942 Ed., pp. 812-813, citing depending upon the facts and circumstances attending it. The trial court's
"Thwing vs. McDonald", 134 Minn. 148,156 N.W. 780,158 N.W. 820, 159 decision is of course subject to review by the appellate tribunal. Having such
N.W. 564, Ann. Cas. 1918 E 420; Mitchell vs. Bank of St. Paul, 7 Minn. 252, jurisdiction, the appointment of a receiver pendente lite is left to the sound
cited in De la Rama vs. Ma-ao Sugar Central, supra). discretion of the trial court. As was said in the case of Angeles vs. Santos (64
Phil., 697), the action having been properly brought and the trial court having
ACCORDINGLY, without prejudice to the rights of the private parties herein to entertained the same, it was within the power of said court upon proper
take proper steps to enforce whatever causes of action they may have showing to appoint a receiver pendente lite for the corporation; that although

the appointment of a receiver upon application of the minority stockholders is corporation ceases for all intent and purposes, and as a general rule, it can
a power to be exercised with great caution, nevertheless, it should be no longer sue and be sued (see Gelano vs. CA).
exercised necessary in order not to entirely ignore and disregard the rights of
said minority stockholders, especially when said minority stockholders are JAIME T. BUENAFLOR, petitioner,
unable to obtain redress and protection of their rights within the corporation vs.
itself. CAMARINES SUR INDUSTRY CORPORATION, respondent
(G.R. Nos. L-14991-94; May 30, 1960)
PRESENT STATE OF LAW: any stockholder or member of a corporation can FACTS: In Aug. and Sept. 1957, Jaime Buenaflor filed applications before the
institute a dissolution proceeding against his own corporation before the Public Service Commission for the construction of a 5-ton ice plant and to
proper forum. This is clear from the provisions of PD 902-A, as amended, establish a cold storage and refrigeration service of about 6,000 cubic feet
when it provides that the SEC, now the Special Commercial Courts, shall hear capacity in Sabang, respectively. After being served a copy of the application
and decide cases involving ―intra-corporate dispute or partnership relations of petitioner, respondent corporation also filed the same applications on Oct.
between and among stockholders, members or associates; between any or all 1957.
of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such Counsel for Buenaflor presented a motion to dismiss on the ground that the
corporations, partnerships or association and the State insofar as it concerns corporate life of respondent already expired in Nov. 1953. Respondent
their individual franchise or right to exist as such entity‖ (Sec. 5(b) as further Corporation then registered on Oct. 1957, a new AOI and transferred all
amended by Sec. 5.2 of RA 8799). Of note, however, is that under Sec. 5(m) assets of the old corporation together with existing certificate of public
of RA 8799, the SEC appears to have concurrent jurisdiction to ―suspend or convenience to the new corporation.
revoke, after proper notice and hearing, the franchise or certificate of
registration of corporations, partnerships or associations upon any of the The PSC provisionally approved the transfer of the assets, as well as the
grounds provided by law. certificate of public convenience to the new corporation.
It has thus been held as early as 1950 that ―even the existence of a de jure On Nov. 1957, the new corporation answered the motion to dismiss by
corporation may be determined in a private suit for its dissolution between alleging its recent incorporation.
stockholders, without the intervention of the state‖ (Hall vs. Piccio). Likewise,
in a close corporation, a petition for the dissolution of the corporation may be ISSUE: WON Buenaflor’s application should be approved?
instituted by any one individual shareholder on the ground, even by mere
dishonesty. HELD: Yes. It is admitted — and the Commission found – that the needs of
Sabang Barrio will be conveniently served with the establishment of a 5-ton
F. EFFECTS OF DISSOLUTION ice plant. But it elected to deny Buenaflor's application, even as it awarded
the privilege to the new Camarines Corporation on the ground that it (the old
Dissolution terminates its power to enter into contracts or to continue the corporation) had been serving ice in Sabang up to the time of Buenaflor's
business as a going concern. application, and was, consequently, the pioneer operator there.
The SC held that a corporation, whose corporate life expired, cannot lawfully The fact, however, is that since 1953, the old Corporation had been illegally
pursue the business for which it was organized. It cannot apply for a new plying its business of selling ice in Sabang because, under the Corporation
certificate or a secondary franchise for it is incapable of receiving a grant Law, Sec. 77, after November 1953, it could not lawfully continue the
(Buenaflor vs. Camarines Sur Industry Corp). Neither can it enforce a business for which it had been established (operate ice plant, sell ice, etc).
contract executed prior to its dissolution for the purpose of continuing the After November 1953, it could only continue to exist for three years for the
business of its organization (Cebu Ports vs. State Marine). purpose of prosecuting and defending suits by or against it, and of enabling it
gradually to settle and close its affairs, to dispose and convey its property
Debts due to or by a corporation are not extinguished. It has thus been held and to divide its capital stock. It could not, without violating the law, continue
that the termination of the life of a juridical entity does not, by itself, imply to sell ice. And yet, the Commission awarded the certificate on the basis of
the diminution or extinction of rights demandable against such juridical entity such serve and distribution of ice — applying the "prior operator" rule. In
(Gonzales vs. Sugar Regulatory Adm.) other words, the new Camarines Corporation is rewarded, precisely because
the old corporation, its predecessor, had violated the law during that period
Sec. 145. Amendment or repeal. - No right or remedy in favor of or (1953-1957). We cannot, and should not countenance such anomalous
against any corporation, its stockholders, members, directors, trustees, or result.
officers, nor any liability incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be removed or impaired either On the other hand, when the old Camarines Corporation docketed its
by the subsequent dissolution of said corporation or by any subsequent application October 1, 1957, it had no juridical personality, it had
amendment or repeal of this Code or of any part thereof. ceased to exist as a corporation and could not sue nor apply for
certificate, for it was incapable of receiving a grant. It was not even
PROPERTY RIGHTS: Thus, a lease to a corporation may, by its terms, a corporation de facto. And then, there is no application subscribed by the
terminate where the corporation cease to exist. But unless the lease so new Camarines Corporation. Far from being mere technicality, these point
provides, the rights and obligations thereunder are not extinguished by the support a conclusion which appears to be just and equitable, not only for the
corporation’s dissolution since leases affect property rights and survives the reasons already indicated, but also to compensate Buenaflor's diligence and
death of the parties. The stockholders succeed to the rights and liabilities of courage in exposing the irregular practice of a "ghost" corporation foisting its
the dissolved corporation in an unexpired leasehold state which may be services upon the unsuspecting public of Sabang and neighboring territory —
enforced by or against the receiver or liquidating trustee. enjoying a franchise without paying, perhaps, the corporate income tax and
other burdens attached to corporate existence.
CONTRACTS FOR PERSONAL SERVICE: This rule, however, may not hold
true in cases of contracts for personal services which are deemed terminated Remembering the Camarines Corporation's automatic cessation in November
by the dissolution of the corporation. In such cases, there is found an 1956 (three years after November 1953) we must decline to regard the new
―implied condition‖ that the contract shall terminate in such event. Camarines Corporation (formed October 30, 1957) as a continuation of the
old. At most, it is the transferee of the properties of the old corporation (or
PERIOD OF LIQUIDATION: Despite its dissolution, a corporation more properly, the assets of the stockholders) plus the certificate of public
nonetheless, continues to be a body corporate for a period of 3 years for convenience to operate the ice plant in Naga and Magarao. And yet, as
purposes of liquidation and winding up its affairs (Sec. 122). Upon expiration stated, the new corporation has not filed any application for certificate of
of the 3 year period to wind up its affairs, the juridical personality of the public convenience in Sabang, and has not published such application

unconstitutional and ineffective.
Wherefore, revoking the appealed decision in so far as it awarded the
certificate to said Corporation, we hereby approve Buenaflor's application for On Aug. 2, 1988, the trial court granted the motion to dismiss insofar as SRA
five tons, instead of one ton, subject to the usual conditions imposed by the is concerned while denying that same motion insofar as RP Bank and
Public Service Commission on ice plant establishments. Philsucom were concerned.
CEBU PORT LABOR UNION, represented by this President ALEJO ISSUE: WON SRA could be made a party-respondent liable to the claim of
CABABAJAY, petitioner, the petitioners?
vs.
STATES MARINE CORPORATION, NICASIO PANSACALA, HELD: Yes. The termination of the life of a juridical entity does not by itself
ANDRESTURA, ALFONSO VILLAJAS, and PERPETUO REGIS, imply the diminution or extinction of rights demandable against such juridical
respondents entity.
(G.R. No. L-9350; May 20, 1957)
Executive Order No. 18, promulgated on 28 May 1986, abolished the
FACTS: On Sept. 12, 1953, petitioner filed a petition for ―recognition of Philsucom, created the SRA and authorized the transfer of assets from
stevedoring services and injunction‖ against respondents claiming that it was Philsucom to SRA. Section 13 of Executive Order No. 18 reads in part:
awarded a contract for the exclusive right of loading and unloading of the
cargoes of the vessel MV Bisayas formerly owned by Elizalde & CO., though Assets and records that, as determined by the Sugar Regulatory
at the time of the filing of the petition it was owned and operated by the Administration, are required in its operation are hereby transferred to the
States Marine Corporaiton. Sugar Regulatory Administration.
Respondent corporation filed a motion to dismiss on the ground that it has no Although the Philsucom is hereby abolished, it shall nevertheless continue
legal capacity to sue or be sued, it having been dissolved on Oct. 17, 1952 as a juridical entity for three years after the time when it would have been
and therefore has no personality to enter or refuse to enter into any contract, so abolished, for the purpose of prosecuting and defending suits by or
much less of threatening the petitioner as alleged in the petition. 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
Petitioner relied on Sec. 77 to include said corporation as party respondent continuing the functions for which it was established, under the
despite the fact that counsel for the other respondents called already the supervision of the Sugar Regulatory Administration.
attention of the Court that the State Marine Corporation was non-existing and
suggested that proper substitution or amendment of the petition be made. We believe, that Section 13 of Executive Order No. 18 is not to be interpreted
as authorizing respondent SRA to disable Philsucom from paying Philsucom's
ISSUE: WON State Marine Corp can be made a party respondent? demandable obligations by simply taking over Philsucom's assets and
immunizing them from legitimate claims against Philsucom. The right of those
HELD: Section 77 of the Corporation Law reads as follows: who have previously contracted with, or otherwise acquired lawful claims
against, Philsucom, to have the assets of Philsucom applied to the
SEC. 77. Every corporation whose charter expires by its own limitation or is satisfaction of those claims, is a substantive right and not merely a
annulled by forfeiture or otherwise, or whose corporate existence for other procedural remedy. Section 13 cannot be read as permitting the SRA to
purposes is terminated in any other manner, shall nevertheless be destroy that substantive right. We think that such an interpretation would
continued as a body corporate for three years after the time when it would result in Section 13 of Executive Order No. 18 colliding with the non-
have been so dissolved, for the purpose of prosecuting and defending suits impairment of contracts clause of the Constitution insofar as contractual
by or against it and of enabling it gradually to settle and close its affairs, to claims are concerned, and with the due process clause insofar as the non-
dispose of and convey its property and to divide its capital stock, but not contractual claims are concerned. To avoid such a result, we believe and so
for the purpose of continuing the business for which it was established. hold that should the assets of Philsucom remaining in Philsucom at
the time of its abolition not be adequate to pay for all lawful claims
Even a cursory reading of the above-quoted provision would convey the idea against Philsucom, respondent SRA must be held liable for such
clearly manifested in the limitation "but not for the purpose of continuing the claims against Philsucom to the extent of the fair value of assets
business for which it was established", that the 3-year period allowed by the actually taken over by the SRA from Philsucom, if any. To this
law is only for the purpose of winding up its affairs. Petitioner-appellee extent, claimants against Philsucom do have a right to follow
prayed that it be declared to have the right to stevedoring work in question Philsucom's assets in the hands of SRA or any other agency for that
"thereby respecting the contract entered into by petitioner and the Elizalde & matter.
Co. and subsequently enforced and continued by the respondent States
Marine Corporation". It appearing that the said States Marine We conclude that dismissal of petitioners' complaint against respondent SRA
Corporation was already dissolved at the time said petition was was clearly premature. Petitioners have a cause of action against SRA to the
filed, and the vessel subject of the agreement having changed extent that they are able to prove lawful claims against Philsucom, which
hands, it cannot be compelled now to respect such agreement claims Philsucom is or may be unable to satisfy, and to the extent respondent
specially considering the fact that it cannot even be made a party to SRA did, or does, in fact take over all or some of the assets of Philsucom. At
this suit (See. 1, Rule 3, of the Rules of Court. the very least, the motion to dismiss was not shown to rest upon indubitable
grounds and should, therefore, have been denied not only in respect of
Philsucom but also in respect of respondent SRA.
SPOUSES RAMON A. GONZALES and LILIA Y. GONZALES, petitioners,
vs. G. LIQUIDATION AND WINDING UP
SUGAR REGULATORY ADMINISTRATION, respondent
(G.R. No. 84606; June 28, 1989) During the course of liquidation and winding up, the assets will be collected
and realized, the rights and claims of creditors will be settled or provided for
FACTS: Petitioner spouses file a complaint seeking cancellation of a and a distribution of the remaining assets to the shareholders who are
mortgage and recovery of a sum of money for the overpayment they made, entitled thereto.
on a loan secured from RP Bank, by virtue of an alleged deduction made by
Philippine Sugar Commission (Philsucom) of the proceeds of sugar exports. Therefore, liquidation or winding up of corporate affairs therefore means the
collection of all corporate assets, the payments of all its debts and settlement
Petitioners filed an amended complaint which assailed the constitutionality of of its obligations and the ultimate distribution of corporate assets, if any of it
EO No. 18 abolishing Philsucom which in effect destroyed petitioners’ right to remains, to all stockholders in accordance with their proportionate
recover from PSC. They assert that the transfer from Philsucom to SRA are stockholdings in the corporation or in accordance with their respective

contracts of subscription. d. Thus, it has been held that when a corporation is dissolved and the
liquidation of assets is placed in the hands of a receiver or assignee, the
After dissolution, a body corporate continues to exist for 3 years for the 3 year period is not applicable and the assignee may institute all actions
purpose of liquidation and winding up of its affairs: leading to the liquidation of the corporation even after the expiration of
3 years.
Sec. 122. Corporate liquidation. - Every corporation whose charter e. Note however, that a receiver may be appointed by the court even while
expires by its own limitation or is annulled by forfeiture or otherwise, or the corporation is a going concern and does not always imply dissolution
whose corporate existence for other purposes is terminated in any other of a corporation.
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 NATIONAL ABACA AND OTHER FIBERS CORPORATION, plaintiff-
prosecuting and defending suits by or against it and enabling it to settle and appellant,
close its affairs, to dispose of and convey its property and to distribute its vs.
assets, but not for the purpose of continuing the business for which it was APOLONIA PORE, defendant-appellee
established. (G.R. No. L-16779; August 16, 1961)
At any time during said three (3) years, the corporation is authorized and FACTS: On Nov. 3, 1953, plaintiff filed a complaint before the Municipal
empowered to convey all of its property to trustees for the benefit of Court of Tacloban, Leyte, against defendant for the recovery of advances the
stockholders, members, creditors, and other persons in interest. From and latter failed to account for, amounting to P1,213.34. The court rendered a
after any such conveyance by the corporation of its property in trust for the decision holding that defendant is liable for P272.49.
benefit of its stockholders, members, creditors and others in interest, all
interest which the corporation had in the property terminates, the legal Said court denying reconsideration, plaintiff appealed before the CFI to which
interest vests in the trustees, and the beneficial interest in the stockholders, a motion to dismiss was filed by defendant on the ground that EO No. 372
members, creditors or other persons in interest. abolished plaintiff and thus it no longer had capacity to sue.
Upon the winding up of the corporate affairs, any asset distributable to any Plaintiff objected there to on the ground that the said EO granted plaintiff to
creditor or stockholder or member who is unknown or cannot be found shall continue in existence for 3 years from Nov. 30, 1950, the effectivity date of
be escheated to the city or municipality where such assets are located. the EO, for the purpose of prosecuting and defending suits by or against it
and of enabling the Board of Liquidators to gradually settle the its affairs and
Except by decrease of capital stock and as otherwise allowed by this Code, that the case was filed on Nov. 14, 1953, or before the expiration of the 3
no corporation shall distribute any of its assets or property except upon year period.
lawful dissolution and after payment of all its debts and liabilities.
ISSUE: WON the action commenced within the 3 year period may be
LIQUIDATION MAY BE UNDERTAKEN IN EITHER OF THREE WAYS: continued after the expiration of the said period?
1. By the corporation itself through the BOD HELD: No. The rule appears to be well settled that, in the absence of
a. This is the usual method or procedure of liquidating a corporation (China statutory provision to the contrary, pending actions by or against a
Banking Corp vs. Michelin) and although there is no law authorizing it, corporation are abated upon expiration of the period allowed by law
neither is there anything that prohibits the BOD from undertaking the for the liquidation of its affairs.
same
b. If this method is resorted to, the board will only have a period of 3 years It is generally held, that where a statute continues the existence of a
to finish its task of liquidation corporation for a certain period after its dissolution for the purpose of
c. Claims for or against the corporate entity not filed within the period will prosecuting and defending suits, etc., the corporation becomes defunct
become unenforceable as there exist no corporate entity against which upon the expiration of such period, at least in the absence of a provision to
they can be enforced. the contrary, so that no action can afterwards be brought by or against it,
d. Actions pending for or against the corporation when the 3 year period and must be dismissed. Actions pending by or against the corporation
expires are abated, since after the period, the corporation ceases for all when the period allowed by the statute expires, ordinarily abate.
intents and purposes and is no longer capable of suing or being sued
(National Abaca & Other Fibers Co. vs. Pore) . . . This time limit does not apply unless the circumstances are
such as to bring the corporation within the provision of the
2. By a trustee appointed by the corporation statute. However, the wording of the statutes, in some jurisdictions
a. The corporation may opt to convey all corporate assets to a trustees authorize suits after the expiration of the time limit, where the statute
who will take charge of liquidation provides that for the purpose of any suit brought by or against the
b. If this method is used, the three year period limitation imposed by corporation shall continue beyond such period for a further named period
section 122 will not apply provided the designation of the trustee is after final judgment. (Fletcher's Cyclopedia on Corporations, Vol. 16, pp.
made within that period. 892-893.).
c. Thus, during the period of liquidation, but before the completion
thereof, a dissolved corporation is still liable for all its debts and Our Corporation Law contains no provision authorizing a corporation, after
liabilities in an action filed against it through its trustee even if the case three (3) years from the expiration of its lifetime, to continue in its corporate
is filed beyond the 3 year period of liquidation. name actions instituted by it within said period of three (3) years. In fact,
section 77 of said law provides that the corporation shall "be continued as a
3. By appointment of a receiver body corporate for three (3) years after the time when it would have been . .
a. A receiver may be appointed by the proper forum on petition or motu . dissolved, for the purpose of prosecuting and defending suits by or against
proprio upon the dissolution of the corporation (Sec. 119) it . . .", so that, thereafter, it shall no longer enjoy corporate existence for
b. The appointment of a receiver is, however, permissive rather than such purpose. For this reason, section 78 of the same law authorizes the
mandatory and the law tends to recognize that in cases of voluntary corporation, "at any time during said three years . . . to convey all of its
dissolution there is no occasion for the appointment of a receiver except property to trustees for the benefit of members, stockholders, creditors and
under special circumstances and upon proper showing (China Banking other interested", evidently for the purpose, among others, of enabling said
vs. Michelin) trustees to prosecute and defend suits by or against the corporation begun
c. If a receiver is appointed, the 3 year period fixed by law within which to before the expiration of said period. Hence, commenting on said sections,
complete the task of liquidation will not likewise apply because the Judge Fisher, in his work entitled Philippines Law on Stock Corporations
dissolved corporation is substituted by the receiver who may sue or be (1929 ed.), has the following to say:
sued even after that period (Sumera vs. Valencia).
It is to be noted that the time during which the corporation, through its
own officers, may conduct the liquidation of its assets and sue and be sued 6537. Effect of expiration of statutory extension of life. — In general. —
as a corporation is limited to three years from the time the period of The qualified existence after dissolution, as provided for by statute,
dissolution commences; but that there is no time limit within the terminates at the expiration of the time fixed, or, no time is fixed, at the
trustees must complete a liquidation placed in their hands. It is expiration of a reasonable time. Where the extreme limit to which the
provided only (Corp. Law, Sec. 78) that the conveyance to the statute has extended the life of a corporation after its dissolution has
trustees must be made within the three-year period. It may be expired, it has no offices which can bind it by agreement, but only has
found impossible to complete the work of liquidation within the three-year statutory trustees. After the expiration of such time, it is generally held not
period or to reduce disputed claims to judgment. The authorities are to the only that the corporation cannot sue or be sued but that actions pending
effect that suits by or against a corporation abate when it ceased to be an at such time are abated. But a statute authorizing the continuance of a
entity capable of suing or being sued (7 R.C.L. Corps., Par. 750); but corporation for three years to wind up its affairs, does not preclude an
trustees to whom the corporate assets have been conveyed pursuant to action to wind up brought after the three years.
the authority of section 78 may sue and be sued as such in all matters
connected with the liquidation. By the terms of the statute the effect of In the light of the legal provisions and authorities cited, interpretative of said
the conveyance is to make the trustees the legal owners of the laws, if the corporation carries out the liquidation of its assets
property conveyed, subject to the beneficial interest therein of through its own officers and continues and defends the actions
creditors and stockholders. (pp. 389-390; see also Sumera v. Valencia brought by or against it, its existence shall terminate at the end of
[67 Phil. 721, 726-727). three years from the time of dissolution; but if a receiver or
assignee is appointed, as has been done in the present case, with or
Obviously, the complete loss of plaintiff's corporate existence after the without a transfer of its properties within three years, the legal
expiration of the period of three (3) years for the settlement of its affairs is interest passes to the assignee, the beneficial interest remaining in
what impelled the President to create a Board of Liquidators, to continue the the members, stockholders, creditors and other interested persons;
management of such matters as may then be pending. The first question and said assignee may bring an action, prosecute that which has
must, therefore, be answered in the negative. already been commenced for the benefit of the corporation, or
defend the latter against any other action already instituted or
Wherefore, actions commenced within the 3 year period of liquidation may be which may be instituted even outside of the period of three years
continued by the trustee despite the expiration of the said period. fixed for the offices of the corporation.
For the foregoing considerations, we are of the opinion and so hold that
TIBURCIO SUMERA, as receiver of the corporation "Devota de when a corporation is dissolved and the liquidation of its assets is
Nuestra Señora de la Correa", plaintiff-appellant, placed in the hands of a receiver or assignee, the period of three
vs. years prescribed by section 77 of Act No. 1459 known as the
EUGENIO VALENCIA, defendant-appellee Corporation Law is not applicable, and the assignee may institute all
(G.R. No. 45485; May 3, 1939) actions leading to the liquidation of the assets of the corporation
even after the expiration of three years.
FACTS: Devota de Nuestra Senora de la Correa filed for a voluntary
dissolution which was approved by the CFI of Bulacan on Feb. 14, 1928 Wherefore, the order appealed from is reversed and it is ordered that the
appointing Damaso Nicolas as assignee to take charge of liquidation. Nicolas case be remanded to the court of origin to the end that it may decide the
was substituted by herein appellant Sumera who filed a motion with the court same on the merits, with costs against the appellee.
asking defendant Valencia to deliver to him the P400.00 funds of the
corporation which was denied, reserving, however to said assignee the right THE BOARD OF LIQUIDATORS representing THE GOVERNMENT OF THE
to bring the proper action. Accordingly, on June 5, 1936, Sumera filed the REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
present complaint for recovery of money. vs.
HEIRS OF MAXIMO M. KALAW, JUAN BOCAR, ESTATE OF THE DECEASED
The defendant interposed the defense that the right against him had already CASIMIRO GARCIA, and LEONOR MOLL, defendants-appellees
prescribed which was found by the lower court to be tenable, the case not (G.R. No. L-18805; August 14, 1967)
being filed within the 3 year period prescribed under Sec. 77 of Act No. 1459.
FACTS: A suit was filed by the Board of Liquidators for the recovery of a sum
ISSUE: WON the 3 year period prescribed by the Corporation Law is of money from National Coconut Corporation’s (NACOCO) general manager
applicable if the liquidation is placed on the hands of a receiver or assignee? and board chairman Maximo Kalaw and other defendants as directors.
HELD: No. Passing now to discuss the question raised by plaintiff and The defendants pose that since the three year period has elapsed since its
appellant in his sole assignment of alleged error, section 77 of Act No. 1459 abolition by virtue of EO 372, the Board of Liquidators may not now continue
provides that "Every corporation whose charter expires by its own limitation with, and prosecute, the present case to its conclusion.
or is annulled by forfeiture or otherwise, or whose corporate existence for
other purposes is terminated in any other manner, shall nevertheless be ISSUE: WON the Board of Liquidators has personality to proceed as party-
continued as a body corporate for three years after the time when it would plaintiff in this case?
have been so dissolved, for the purpose of prosecuting and defending suits
by or against it and of enabling it gradually to settle and close its affairs to HELD: Yes. The executive order abolishing NACOCO and creating the Board
dispose of and convey its property and to divide its capital stock, but not for of Liquidators should be examined in context. The proviso in Section 1 of
the purpose of continuing the business for which it was established." And Executive Order 372, whereby the corporate existence of NACOCO was
section 77 of the same Act provides, "At any time during said three years said continued for a period of three years from the effectivity of the order for "the
corporation is authorized and empowered to convey all of its property to purpose of prosecuting and defending suits by or against it and of enabling
trustees for the benefit of members, stockholders, creditors, and others the Board of Liquidators gradually to settle and close its affairs, to dispose of
interested. From and after any such conveyance by the corporation of its and convey its property in the manner hereinafter provided", is to be read
property in trust for the benefit of its members, stockholders, creditors, and not as an isolated provision but in conjunction with the whole. So reading, it
others in interest, all interest which the corporation had in the property will be readily observed that no time limit has been tacked to the
terminates, the legal interest vests in the trustees, and the beneficial interest existence of the Board of Liquidators and its function of closing the
in the members, stockholders, creditors, or other persons in interest. affairs of the various government owned corporations, including
NACOCO.
Fletcher, in volume 8, page 9226, of his Encyclopedia of Private Corporations,
says:

By Section 2 of the executive order, while the boards of directors of the that the corporation shall "be continued as a body corporate for three (3)
various corporations were abolished, their powers and functions and duties years after the time when it would have been ... dissolved, for the purpose of
under existing laws were to be assumed and exercised by the Board of prosecuting and defending suits By or against it ...," so that, thereafter, it
Liquidators. The President thought it best to do away with the boards of shall no longer enjoy corporate existence for such purpose. For this reason,
directors of the defunct corporations; at the same time, however, the Section 78 of the same law authorizes the corporation, "at any time during
President had chosen to see to it that the Board of Liquidators step into the said three years ... to convey all of its property to trustees for the benefit of
vacuum. And nowhere in the executive order was there any mention of the members, Stockholders, creditors and other interested," evidently for the
lifespan of the Board of Liquidators. A glance at the other provisions of the purpose, among others, of enabling said trustees to prosecute and defend
executive order buttresses our conclusions. suits by or against the corporation begun before the expiration of said period
Not that our views on the power of the Board of Liquidators to proceed to the When Insular Sawmill, Inc. was dissolved on December 31, 1960, under
final determination of the present case is without jurisprudential support. The Section 77 of the Corporation Law, it still has the right until December 31,
first judicial test before this Court is National Abaca and Other Fibers 1963 to prosecute in its name the present case. After the expiration of said
Corporation vs. Pore, L-16779, August 16, 1961. In that case, the period, the corporation ceased to exist for all purposes and it can no longer
corporation, already dissolved, commenced suit within the three-year sue or be sued.
extended period for liquidation. That suit was for recovery of money
advanced to defendant for the purchase of hemp in behalf of the corporation. However, a corporation that has a pending action and which cannot be
She failed to account for that money. We there said that "the rule appears to terminated within the three-year period after its dissolution is authorized
be well settled that, in the absence of statutory provision to the under Section 78 to convey all its property to trustees to enable it to
contrary, pending actions by or against a corporation are abated prosecute and defend suits by or against the corporation beyond the Three-
upon expiration of the period allowed by law for the liquidation of year period. Although private respondent did not appoint any trustee,
its affairs." We there said that "[o]ur Corporation Law contains no provision yet the counsel who prosecuted and defended the interest of the
authorizing a corporation, after three (3) years from the expiration of its corporation in the instant case and who in fact appeared in behalf of
lifetime, to continue in its corporate name actions instituted by it within said the corporation may be considered a trustee of the corporation at
period of three (3) years." However, these precepts notwithstanding, least with respect to the matter in litigation only. Said counsel had
we, in effect, held in that case that the Board of Liquidators escapes been handling the case when the same was pending before the trial
from the operation thereof for the reason that "[o]bviously, the court until it was appealed before the Court of Appeals and finally to
complete loss of plaintiff's corporate existence after the expiration this Court. We therefore hold that there was a substantial
of the period of three (3) years for the settlement of its affairs is compliance with Section 78 of the Corporation Law and as such,
what impelled the President to create a Board of Liquidators, to private respondent Insular Sawmill, Inc. could still continue
continue the management of such matters as may then be pending. prosecuting the present case even beyond the period of three (3)
years from the time of its dissolution.
CARLOS GELANO and GUILLERMINA MENDOZA DE GELANO,
petitioners, The word "trustee" as sued in the corporation statute must be
vs. understood in its general concept which could include the counsel
THE HONORABLE COURT OF APPEALS and INSULAR SAWMILL, INC., to whom was entrusted in the instant case, the prosecution of the
respondents suit filed by the corporation. The purpose in the transfer of the assets of
(G.R. No. L-39050; February 24, 1981) the corporation to a trustee upon its dissolution is more for the protection of
its creditor and stockholders. Debtors like the petitioners herein may not take
FACTS: Private respondent Insular Sawmill, Inc. lease the paraphernal advantage of the failure of the corporation to transfer its assets to a trustee,
property of petitioner-wife Guillermina Mendoza de Gelano. It was while assuming it has any to transfer which petitioner has failed to show, in the
private respondent was leasing the property that its officers and directors had first place. To sustain petitioners' contention would be to allow them to
come to know petitioner-husband Carlos Gelano who received from the enrich themselves at the expense of another, which all enlightened legal
corporation cash advances on account of rent to be paid by the corporation systems condemn.
to the land.
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
Despite repeated demands by the private respondent refused to pay the cash vs.
advances. Petitioner-wife refused to pay on the ground that the cash MARSMAN DEVELOPMENT COMPANY and/or F.H. BURGESS, in his
advances was for the personal account of her husband asked for by, and capacity as Liquidator of the Marsman Development Company,
given to him, without the knowledge and consent and did not benefit the defendants-appellants.
family. (G.R. No. L-18956; April 27, 1972)
On May 29, 1959, the corporation, through its lawyer, filed a complaint for FACTS: Sometime before Oct. 15, 1953, an investigation was conducted on
collection against petitioners. the business operation and activities of defendant corporation leading to the
discovery of deficiency taxes on logs produced from its concession.
Meanwhile, the corporation amended its AOI to shorten its term of existence
up to Dec. 31, 1960 only which was approved by the SEC but the trial court The Collector of Internal Revenue demanded payment for forest charges and
was not notified of such amendment. 25% surcharge. After further investigation, another assessment was sent to
the defendant by the BIR demanding a total sum of P45, 541.66 representing
On Nov. 20, 1964, almost 4 years after the dissolution, the trial court deficiency taxes, forest charges, surcharges and penalties. Later on, another
rendered a decision in favor of private respondent. assessment was sent to defendant corporation for discharging lumber
without permit.
ISSUE: WON a corporation whose corporate life had ceased by the
expiration of its term of existence, could still continue prosecuting and Defendant contend that the present action was barred by Sec. 77 of the
defending suits after its dissolution and beyond the period of 3 years to wind Corporation Law which allows corporate existence to continue after
up its affairs, without having undertaken any step to transfer its assets to a dissolution only for a period of 3 years. That the company was extra-judicially
trustee or assignee? dissolved on April 23, 1954, the orginal complaint was filed only on Sept. 8,
1958 and the amended complaint on Aug. 26, 1956.
HELD: Yes. In American corporate law, upon which our Corporation Law was
patterned, it is well settled that, unless the statutes otherwise provide, all The trial court ruled in favor of the government holding that the amended
pending suits and actions by and against a corporation are abated by a complaint was precisely to include FH Burgess, liquidator of the company, as
dissolution of the corporation. Section 77 of the Corporation Law provides party defendant.

CHUNG KA BIO, WELLINGTON CHUNG, CHUNG SIONG PEK, VICTORIANO
ISSUE: WON the case should prosper? CHUNG, and MANUEL CHUNG TONG OH, petitioners,
vs.
HELD: Yes. It is to be recalled that the assessments against appellant INTERMEDIATE APPELLATE COURT (2nd Special Cases Division),
corporation for deficiency taxes due for its operations since 1947 were made SECURITIES and EXCHANGE COMMISSION EN BANC, HON. ANTONIO R.
by the Bureau of Internal Revenue on October 15, 1953, September 13, 1954 MANABAT, HON. JAMES K. ABUGAN, HON. ANTERO F.L. VILLAFLOR, JR.,
and November 8, 1954, such that the first was before its dissolution and the HON. SIXTO T.J. DE GUZMAN, JR., ALFREDO CHING, CHING TAN, CHIONG
last two not later than six months after such dissolution. Thus, in whatever TIONG TAY, CHUNG KIAT HUA, CHENG LU KUN, EMILIO TAÑEDO, ROBERTO
way the matter may be viewed, the Government became the creditor of the G. CENON and PHILIPPINE BLOOMING MILLS COMPANY, INC., respondents
corporation before the completion of its dissolution by the liquidation of its (G.R. No. 71837; July 26, 1988)
assets. Appellant F.H. Burgess, whom it chose as liquidator, became
in law the trustee of all its assets for the benefit of all persons FACTS: Chung Ka Bio and other petitioners are stockholders of the old
enumerated in Section 78, including its creditors, among whom is Philippine Blooming Mills Company, Inc. (PBM) which has been
the Government, for the taxes herein involved. To assume reincorporated on July 14, 1977 after the old was dissolved on Jan. 19 1977.
otherwise would render the extra-judicial dissolution illegal and The assets and liabilities of the old PBM was transferred by the BOD to the
void, since, according to Section 62 of the Corporation Law, such new PBM.
kind of dissolution is permitted only when it "does not affect the
rights of any creditor having a claim against the corporation." It is Ching Ka Bio and other petitioners filed with the SEC a petition for liquidation
immaterial that the present action was filed after the expiration of three of both the old and new PBM (for non-usage of its charter and failure to
years after April 23, 1954, for at the very least, and assuming that judicial operate within 2 years).
enforcement of taxes may not be initiated after said three years despite the
fact that the actual liquidation has not been terminated and the one in charge ISSUE: WON the BOD was justified to convey all the assets of the old PBM
thereof is still holding the assets of the corporation, obviously for the benefit to the new corporation without the express consent of its stockholders?
of all the creditors thereof, the assessment aforementioned, made within the
three years, definitely established the Government as a creditor of the HELD: Yes. As the contention is based on the negative averment that no
corporation for whom the liquidator is supposed to hold assets of the stockholders' meeting was held and the 2/3 consent vote was not obtained,
corporation. And since the suit at bar is only for the collection of taxes finally there is no need for affirmative proof. Even so, there is the presumption of
assessed against the corporation within the three years invoked by regularity which must operate in favor of the private respondents, who insist
appellants, their assignment of error cannot be sustained. that the proper authorization as required by the Corporation Law was duly
obtained at a meeting called for the purpose. (That authorization was
Judgment of the trial court is affirmed. embodied in a unanimous resolution dated March 19, 1977, which was
reproduced verbatim in the deed of assignment.) Otherwise, the new PBM
would not have been issued a certificate of incorporation, which should also
STOCKHOLDERS UPON DISSOLUTION: Upon dissolution of a be presumed to have been done regularly. It must also be noted that under
corporation, it is considered in equity, even in the absence of a statute that Section 28-1/2, "any stockholder who did not vote to authorize the action of
its assets are held for the benefit of its stockholders after payment of its the board of directors may, within forty days after the date upon which such
debts and will be so distributed to the said stockholders in accordance with action was authorized, object thereto in writing and demand payment for his
their proportionate interest in the corporation or their contracts of shares." The record does not show, nor have the petitioners alleged or
subscription. proven, that they filed a written objection and demanded payment of their
shares during the reglementary forty-day period. This circumstance should
PREFERRED SHAREHOLDERS: It must herein be remembered that holders bolster the private respondents' claim that the authorization was unanimous.
of preferred shares may be granted certain rights or privileges upon
dissolution of the corporation. The preference may be in the form of receiving While we agree that the board of directors is not normally permitted
a certain part or portion of corporate assets upon dissolution. And, depending to undertake any activity outside of the usual liquidation of the
on their contracts of subscription, they may or may not be entitled to share business of the dissolved corporation, there is nothing to prevent
any of the assets remaining, after they may have received their respective the stockholders from conveying their respective shareholdings
preference in accordance therewith. toward the creation of a new corporation to continue the business
of the old. Winding up is the sole activity of a dissolved corporation
INCORPORATION OF A NEW CORPORATION: During the 3 year period that does not intend to incorporate anew. If it does, however, it is
granted to a corporation to liquidate or wind up its affairs, the BOD is not not unlawful for the old board of directors to negotiate and transfer
normally permitted to undertake any activity outside of the usual liquidation the assets of the dissolved corporation to the new corporation
of the corporation. There is, however, nothing to prevent the stockholders intended to be created as long as the stockholders have given their
from conveying their respective shareholdings toward the creation of a new consent. This was not prohibited by the Corporation Act. In fact, it
corporation to continue the business of the old. This is because winding up is was expressly allowed by Section 28-1/2.
the sole activity of a dissolved corporation that does not intend to incorporate
a new. If it does, however, it is not unlawful for the old BOD to incorporate What the Court finds especially intriguing in this case is the fact that although
and transfer the assets of a dissolved corporation to the new corporation the deed of assignment was executed in 1977, it was only in 1981 that it
intended to be created as long as the stockholders have given their consent occurred to the petitioners to question its validity. All of four years had
(Chung Ka Bio vs. IAC) elapsed before the petitioners filed their action for liquidation of both the old
and the new corporations, and during this period, the new PBM was in full
LAPSE OF THE THREE YEAR PERIOD: If the 3 year period of liquidation operation, openly and quite visibly conducting the same business undertaken
has elapsed and no effort to finally settle or close the corporate affairs was earlier by the old dissolved PBM. The petitioners and the private respondents
undertaken, those having pecuniary interest in the corporate assets, including are not strangers but relatives and close business associates. The PBM office
not only the stockholders but likewise the creditors, acting for and in behalf, is in the heart of Metro Manila. The new corporation, like the old, employs as
may make proper representations with the SEC for working out a final many as 2,000 persons, the same personnel who worked for the old PBM.
settlement of the corporate concern (Clemente vs. CA). Additionally, one of the petitioners, Chung Siong Pek was one of the directors
who executed the deed of assignment in favor of the old PBM and it was he
RECEPIENT UNKNOWN OR CANNOT BE FOUND: Any asset distributable also who received the deeded assets on behalf and as treasurer of the new
to any creditor or stockholders or member who is unknown or cannot be PBM. Surely, these circumstances must operate to bar the petitioners now
found shall be escheated to the city or municipality where such assets are from questioning the deed of assignment after this long period of inaction in
located (Sec. 122). the protection of the rights they are now belatedly asserting. Laches has
operated against them.

may still go to the SEC to make proper representations with the SEC for
LUIS C. CLEMENTE, LEONOR CLEMENTE DE ELEPAÑO, HEIRS OF ARCADIO working out a final settlement. Moreover, the corporation being non-existent
C. OCHOA, represented by FE O. OCHOA-BAYBAY, CONCEPCION, MARIANO, for all intents and purposes, after the expiration of the three year period
ARTEMIO, VICENTE, ANGELITA, ROBERTO, HERNANDO AND LOURDES, all provided by law, could not have legally transferred such property to any
surnamed ELEPAÑO, petitioners, person. The Gonzales case is misapplied, because SRA was a successor of
vs. Philsucom, while in the Gelano case, there was a lawyer who prosecuted the
THE HON. COURT OF APPEALS, ELVIRA PANDINCO-CASTRO AND VICTOR case who was deemed as trustee. In the Clemente case, there was no such
CASTRO, respondents. successor nor a lawyer who can be deemed a trustee.
(G.R. No. 82407; March 27, 1995)
CHAPTER 18: FOREIGN CORPORATIONS
FACTS: Petitioners herein initiated an action to be declared owners of the
property in question and to received rentals and other fruits as consequence A. DEFINITION: As to the Philippines, any corporation, which owe its
of such ownership. existence to the laws of another state, government or country is a
―foreign corporation‖. Elsewise stated, a foreign corporation is one
The trial court rendered a decision in favor of respondents holding, among created or organized under the laws of any state or government other
others, that since there is no liquidation, it is the corporation, not the than those of the forum.
stockholders, which can assert, if at all, any title to the corporate assets.
Sec. 123. Definition and rights of foreign corporations. - For the
ISSUE: WON petitioners can be held, given their submissions, to have purposes of this Code, a foreign corporation is one formed, organized or
succeeded in establishing for themselves a firm title to the property in existing under any laws other than those of the Philippines and whose laws
question? 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
HELD: No. Like the courts below, we find petitioners' evidence to be direly shall have obtained a license to transact business in this country in
wanting; all that appear to be certain are that the "Sociedad Popular accordance with this Code and a certificate of authority from the appropriate
Calambeña," believed to be a "sociedad anonima" and for a while engaged in government agency.
the operation and management of a cockpit, has existed sometime in the
past; that it has acquired the parcel of land here involved; and that the ―AND WHOSE LAWS ALLOW FILIPINO CITIZENS AND
plaintiffs' predecessors, Mariano Elepaño and Pablo Clemente, had been CORPORATIONS TO DO BUSINESS IN ITS OWN COUNTRY OR
original stockholders of the sociedad. Except in showing that they are the STATE‖: is not an accurate inclusion in the definition as any corporation
successors-in-interest of Elepaño and Clemente, petitioners have been unable registered or organized under the laws of another state is necessarily a
to come up with any evidence to substantiate their claim of ownership of the foreign corporation WON the state of its corporation allow Filipino citizens or
corporate asset. corporations to do business in that forum.
If, indeed, the sociedad has long become defunct, it should behoove The said phrase was inserted by framers of the law only as a condition
petitioners, or anyone else who may have any interest in the corporation, to precedent to the grant of a license to do business in the Philippines.
take appropriate measures before a proper forum for a peremptory
settlement of its affairs. We might invite attention to the various modes INCORPORATION TEST: is applied in determining whether a corporation is
provided by the Corporation Code (see Sees. 117-122) for dissolving, domestic or foreign. If it is incorporated in another state, it is a foreign
liquidating or winding up, and terminating the life of the corporation. Among corporation, while if it is registered under Philippine laws, it is deemed a
the causes for such dissolution are when the corporate term has expired or Filipino or domestic corporation irrespective of the nationality of its
when, upon a verified complaint and after notice and hearing, the Securities stockholders.
and Exchange Commission orders the dissolution of a corporation.
Thus, a corporation registered under the Foreign Investments Act of 1991
The corporation continues to be a body corporate for three (3) years after its (RA No. 7074) or the Trade Liberalization Law of 2000 (RA No. 8762) with
dissolution for purposes of prosecuting and defending suits by and against it 100% foreign equity is considered a Filipino or domestic corporation and not
and for enabling it to settle and close its affairs, culminating in the disposition foreign.
and distribution of its remaining assets. It may, during the three-year term,
appoint a trustee or a receiver who may act beyond that period. The CONTROL TEST: In times of war and for purposes of security of the state,
termination of the life of a juridical entity does not by itself cause however, the ―control test‖ would apply in determining the corporate
the extinction or diminution of the rights and liabilities of such nationality, i.e., the citizenship of the controlling stockholders determines the
entity (see Gonzales vs. Sugar Regulatory Administration, 174 SCRA 377) nationality of the corporation.
nor 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 CORPORATE PERSONALITY BEYOND BORDERS:
corporation within that period, the board of directors (or trustees) itself,
following the rationale of the Supreme Court's decision in Gelano vs. Court of B. APPLICATION FOR LICENSE
Appeals (103 SCRA 90) may be permitted to so continue as "trustees" by
legal implication to complete the corporate liquidation. Still in the absence Under Sec. 123, a foreign corporation cannot transact business in the
of a board of directors or trustees, those having any pecuniary Philippines unless it has obtained a license or permit to do so in accordance
interest in the assets, including not only the shareholders but with the laws of the country and a certificate of authority from the
likewise the creditors of the corporation, acting for and in its behalf, appropriate government agency such as the Banko Sentral ng Pilipinas for
might make proper representations with the Securities and banking institutions or the Office of the Insurance Commission for insurance
Exchange commission, which has primary and sufficiently broad companies, etc.
jurisdiction in matters of this nature, for working out a final
settlement of the corporate concerns. A certificate of authority from the Board of Investments is no longer required
under RA 7042. Said certificate of authority is only necessary for the purpose
WHEREFORE, the decision appealed from is AFFIRMED. of availing the incentives granted and allowed under the Omnibus
Investments Code.
ISSUE AS TO CLEMENTE CASE: The SC should have applied Sec. 122,
such that, in the absence of a known stockholder, member of the BOD or The manner in which a foreign corporation may obtain a license to do
creditor, the properties should have been escheated in favor of the local business in the Philippines is laid down in Sec. 125:
government. Following the rule laid down in Clemente will open the door to
fraud in a way that any person claiming interest as heir of the corporation Sec. 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, Upon compliance with the provision of Sec. 125, other special laws and the
certified in accordance with law, and their translation to an official language rules and regulations implementing them, the SEC shall thereafter issue the
of the Philippines, if necessary. The application shall be under oath and, license.
unless already stated in its articles of incorporation, shall specifically set forth
the following: 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
1. The date and term of incorporation; the benefit of creditors, securities consisting of (1) bonds or other evidence
of indebtedness of the Philippine government or its political subdivision, or of
2. The address, including the street number, of the principal office of the a GOCC, (2) shares of stock in ―registered enterprises‖ as this term is defined
corporation in the country or state of incorporation; under RA 5186, (3) shares of stock in domestic corporations registered in the
stock exchange and (4) shares of stock in domestic insurance companies and
3. The name and address of its resident agent authorized to accept summons banks or any combination thereof with an actual market value of
and process in all legal proceedings and, pending the establishment of a local P100,000.00.
office, all notices affecting the corporation;
Additional securities may be required by the SEC if the market value of the
4. The place in the Philippines where the corporation intends to operate; securities n deposit has decreased by at least 10%. Sec. 126 provides:
5. The specific purpose or purposes which the corporation intends to pursue Sec. 126. Issuance of a license. - If the Securities and Exchange
in the transaction of its business in the Philippines: Provided, That said Commission is satisfied that the applicant has complied with all the
purpose or purposes are those specifically stated in the certificate of authority requirements of this Code and other special laws, rules and regulations, the
issued by the appropriate government agency; Commission shall issue a license to the applicant to transact business in the
Philippines for the purpose or purposes specified in such license. Upon
6. The names and addresses of the present directors and officers of the issuance of the license, such foreign corporation may commence to transact
corporation; 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
7. A statement of its authorized capital stock and the aggregate number of incorporation, unless such license is sooner surrendered, revoked, suspended
shares which the corporation has authority to issue, itemized by classes, par or annulled in accordance with this Code or other special laws.
value of shares, shares without par value, and series, if any;
Within sixty (60) days after the issuance of the license to transact business in
8. A statement of its outstanding capital stock and the aggregate number of the Philippines, the license, except foreign banking or insurance corporation,
shares which the corporation has issued, itemized by classes, par value of shall deposit with the Securities and Exchange Commission for the benefit of
shares, shares without par value, and series, if any; present and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange Commission, consisting of bonds
9. A statement of the amount actually paid in; and or other evidence of indebtedness of the Government of the Philippines, its
political subdivisions and instrumentalities, or of government-owned or
10. Such additional information as may be necessary or appropriate in order controlled corporations and entities, shares of stock in "registered
to enable the Securities and Exchange Commission to determine whether enterprises" as this term is defined in Republic Act No. 5186, shares of stock
such corporation is entitled to a license to transact business in the in domestic corporations registered in the stock exchange, or shares of stock
Philippines, and to determine and assess the fees payable. in domestic insurance companies and banks, or any combination of these
kinds of securities, with an actual market value of at least one hundred
Attached to the application for license shall be a duly executed certificate thousand (P100,000.) pesos; Provided, however, That within six (6) months
under oath by the authorized official or officials of the jurisdiction of its after each fiscal year of the licensee, the Securities and Exchange
incorporation, attesting to the fact that the laws of the country or state of the Commission shall require the licensee to deposit additional securities
applicant allow Filipino citizens and corporations to do business therein, and equivalent in actual market value to two (2%) percent of the amount by
that the applicant is an existing corporation in good standing. If such which the licensee's gross income for that fiscal year exceeds five million
certificate is in a foreign language, a translation thereof in English under oath (P5,000,000.00) pesos. The Securities and Exchange Commission shall also
of the translator shall be attached thereto. 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
The application for a license to transact business in the Philippines shall actual market value at the time they were deposited. The Securities and
likewise be accompanied by a statement under oath of the president or any Exchange Commission may at its discretion release part of the additional
other person authorized by the corporation, showing to the satisfaction of the securities deposited with it if the gross income of the licensee has decreased,
Securities and Exchange Commission and other governmental agency in the or if the actual market value of the total securities on deposit has increased,
proper cases that the applicant is solvent and in sound financial condition, by more than ten (10%) percent of the actual market value of the securities
and setting forth the assets and liabilities of the corporation as of the date at the time they were deposited. The Securities and Exchange Commission
not exceeding one (1) year immediately prior to the filing of the application. may, from time to time, allow the licensee to substitute other securities for
Foreign banking, financial and insurance corporations shall, in addition to the those already on deposit as long as the licensee is solvent. Such licensee
above requirements, comply with the provisions of existing laws applicable to shall be entitled to collect the interest or dividends on the securities
them. In the case of all other foreign corporations, no application for license deposited. In the event the licensee ceases to do business in the Philippines,
to transact business in the Philippines shall be accepted by the Securities and the securities deposited as aforesaid shall be returned, upon the licensee's
Exchange Commission without previous authority from the appropriate application therefor and upon proof to the satisfaction of the Securities and
government agency, whenever required by law. Exchange Commission that the licensee has no liability to Philippine residents,
including the Government of the Republic of the Philippines.
Foreign corporations already issued a license to transact business in the
Philippine prior to the effectivity of the Code continues to have such authority OBJECTIVE OF LICENSE: is not to prevent the foreign corporation from
under the terms and conditions of the license. Sec. 124 provides: performing isolated or single act, but to prevent it from acquiring a domicile
for the purpose of pursuing its business without taking steps to render it
Sec. 124. Application to existing foreign corporations. - Every foreign amenable to suit in the local courts. If the foreign corporation transacts
corporation which on the date of the effectivity of this Code is authorized to business in the Philippines without the requisite license, its officers may be
do business in the Philippines under a license therefore issued to it, shall subjected to the penal provisions of Sec. 144 of the Code.
continue to have such authority under the terms and condition of its license,
subject to the provisions of this Code and other special laws.
C. MODE OF ENTRY OF FOREIGN CORPORATIONS constitute doing business as per the Implementing Rules and
Regulations of RA 7042 unless, of course, the foreign corporation
1. Branch Office – of a foreign corporation is one which carries out the actively participates in the management thereof.
business activities of the foreign corporation itself and derives income
from the Philippines (Sec. 1, C, IRR of RA No. 7042). As such, the D. RESIDENT AGENT
juridical entity involved is one and the same;
As a condition precedent to the grant of license to do or transact business in
2. Representative or Liason Office – one which deals directly with the the Philippines, the foreign corporation is required to designate its resident
clients of the parent company but does not derive income from the host agent on whom summons and other legal processes my be served in all
country and is fully subsidized by the head office. It undertakes activities actions or legal proceedings against such corporation. Sec. 128 provides:
such as but not limited to information dissemination and promotion of
the company’s products; Sec. 128. Resident agent; service of process. - The Securities and
Exchange Commission shall require as a condition precedent to the issuance
3. Local Subsidiary – A foreign corporation may form or organize a of the license to transact business in the Philippines by any foreign
separate corporation under the Foreign Investment Act (RA 7042) by corporation that such corporation file with the Securities and Exchange
making at least a majority of the investments therein. The corporation Commission a written power of attorney designating some person who must
thus formed becomes known as a local subsidiary of the investing be a resident of the Philippines, on whom any summons and other legal
foreign corporation which becomes a legally independent unit governed processes may be served in all actions or other legal proceedings against
by the laws of the Philippines. Ballantine calls it ―domestication‖ in the such corporation, and consenting that service upon such resident agent shall
sense that the foreign corporation is granted the right to obtain a be admitted and held as valid as if served upon the duly authorized officers
charter or organize itself into a domestic corporation under the general of the foreign corporation at its home office. Any such foreign corporation
laws of the other state; shall likewise execute and file with the Securities and Exchange Commission
an agreement or stipulation, executed by the proper authorities of said
4. Regional or Area Headquarters – is an office whose purpose is to corporation, in form and substance as follows:
act as an administrative branch of a multinational company engaged in
international trade which principally serves as a supervision, "The (name of foreign corporation) does hereby stipulate and agree, in
communications and coordinating center for its subsidiaries, branches or consideration of its being granted by the Securities and Exchange
affiliates in the Asia-Pacific Region and other foreign markets and which Commission a license to transact business in the Philippines, that if at any
does not earn or derive income in the Philippines (Sec. 2(2), RA 8756). time said corporation shall cease to transact business in the Philippines, or
It cannot in any manner, participate in the management of any shall be without any resident agent in the Philippines on whom any summons
subsidiary or branch office in the Philippines nor shall it market goods or other legal processes may be served, then in any action or proceeding
and services in behalf of its mother company, branches or affiliates. 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
5. Regional Operating Headquarters – is a foreign business entity Securities and Exchange Commission and that such service shall have the
which is allowed to derive income in the Philippines by performing same force and effect as if made upon the duly-authorized officers of the
qualifying services exclusively to its affiliates, subsidiaries or branches in corporation at its home office."
the Philippines, in the Asia-Pacific Region and in other foreign markets
(Sec. 2(3), RA 8756). Whenever such service of summons or other process shall be made upon the
Securities and Exchange Commission, the Commission shall, within ten (10)
Qualifying services, under RA 8756, include among others: general days thereafter, transmit by mail a copy of such summons or other legal
administration and planning, business planning and coordination, process to the corporation at its home or principal office. The sending of such
sourcing or procurement of raw materials and components, corporate copy by the Commission shall be necessary part of and shall complete such
finance advisory services, marketing control and sales promotion, service. All expenses incurred by the Commission for such service shall be
training and personnel management, logistic service, research and paid in advance by the party at whose instance the service is made.
development services and the like.
In case of a change of address of the resident agent, it shall be his or its duty
The Regional or Area Headquarters and Regional Operating to immediately notify in writing the Securities and Exchange Commission of
Headquarters are granted certain tax incentives such as exemption from the new address.
all kinds of local taxes, fees or charges imposed by local government
units except real property tax on land improvements; tax and duty-free As to who may be appointed as resident agent, the Corporation Code
importation of training materials and equipment; and importation of provides:
motor vehicles.
Sec. 127. Who may be a resident agent. - A resident agent may be
6. Regional Warehouse – one whose activities are limited to serving as either an individual residing in the Philippines or a domestic corporation
supply depot of Regional or Area Headquarters or Regional Operating lawfully transacting business in the Philippines: Provided, That in the case of
Headquarters in the Philippines, after securing a license therefor from an individual, he must be of good moral character and of sound financial
the Philippine Economic Zone Authority (PEZA) or the concerned standing.
ecozone authorities. The regional warehouse shall only be used for the
storage, deposit and safekeeping of its spare parts, components, Culled from the provisions of Sec. 128 is that the necessity of the
marking, labelling and cutting or altering to customer’s specifications but appointment of a resident agent is only for the purpose of receiving
shall not directly engage in trade nor solicit business, promote any sale summons and other legal processes in any legal action or proceeding against
nor enter into contracts for the sale or disposition of goods in the the foreign corporation. And, when a foreign corporation has designated a
Philippines, except those for delivery to an authorized distributor in the person to receive summons in judicial proceedings affecting the corporation
country. that designation is exclusive and service of summons is without force and
effect unless made on him (Poizat vs. Mogan). Thus, while the law allows
7. Joint Venture – is a one-time grouping of two or more persons, service upon the SEC (Sec. 128), or any of its officers or agents within the
natural or juridical, for carrying out a specified undertaking. Under Sec. Philippines (Sec. 13, Rule 14, Rules of Civil Procedure), the latter two modes
1, L of RA 7042, it is combination of property, money, efforts, skill or may become effective only if the foreign corporation failed or neglected to
knowledge to carry out a single business enterprise for profit, which is designate such a person or an agent. In a decision, therefore, rendered by
duly registered with the SEC as a corporation or partnership. No license the SC in the case of General Corporation of the Philippines vs. Union
to do business is required on the part of the foreign corporation entering Insurance Soc. Of Canton Ltd (87 Phil 313), it was held that ―where such
into such kind of a business venture since mere investment does no 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 such case must be judged in the light of its peculiar environmental
summons on it will be made pursuant to the provisions of the Rules of circumstance. However, the TRUE TEST seems to be whether the foreign
Court‖. If such foreign corporation has a license to do business, then corporation is continuing the body or substance of the business or enterprise
summons to it will be served on the agent designated by it for the purpose, for which it was organized or whether it has substantially retired from it and
or otherwise in accordance with the Corporation Law. turned it over to another. The term implies a continuity of commercial
dealings and arrangements and contemplates, to the extent, the performance
E. DOING BUSINESS WITHOUT LICENSE AND ITS EFFECT of acts or works or the exercise of some functions normally incident to and in
progressive prosecution of, the purpose and objects of its organization
A foreign corporation must secure the necessary license before it can transact (Metholatum, Inc. vs. Mangaliman)
or do business in the Philippines. This is the clear import of Sec. 123 when it
states that it shall have the right to transact business in the Philippines after PRESENT STATE OF LAW AS TO ―DOING BUSINESS‖: under the
it shall have obtained a license. Without such a license, the law provides for Foreign Investment Act (Sec. 3, d), ―doing business‖ would include:
certain consequences: 1. Soliciting orders, service contracts;
2. Opening offices, whether called ―liason offices‖ or branches;
Sec. 133. Doing business without a license. - No foreign corporation 3. Appointing representatives or distributor domiciled in the Philippines or
transacting business in the Philippines without a license, or its successors or who in any calendar year stay in the country for a period or periods
assigns, shall be permitted to maintain or intervene in any action, suit or totalling 180 days or more;
proceeding in any court or administrative agency of the Philippines; but such 4. Participating in the management, supervision or control of any domestic
corporation may be sued or proceeded against before Philippine courts or business, firm, entity or corporation in the Philippines;
administrative tribunals on any valid cause of action recognized under 5. Any other act that imply a continuity of commercial dealings or
Philippine laws. arrangements, and contemplate to that extent the performance of acts
or works, or the exercise of functions normally incident to and in
RESPONSIBLE OFFICERS: of a foreign corporation doing business in the progressive prosecution of commercial gain or of the purpose and object
Philippines without the requisite license may be subject to the penal of the business organization.
sanctions provided for in Sec. 144 of the Code which may either be
imprisonment or fine. Provided, however, that the phrase ―doing business‖ shall not be deemed to
include mere investment as a shareholder by a foreign entity in domestic
CAPACITY TO SUE and BE SUED: The corporation may not likewise sue or corporations duly registered to do business, and/or exercise of rights as such
intervene in any action, suit or proceeding in any court or administrative investor, nor having a nominee director or officer to represent its interest in
agency of the Philippines while it may be sued or proceeded against before such corporation; nor appointing a representative or distributor domiciled in
such court or agency on any valid cause of action recognized under the law. the Philippines which transacts business in its own name and for its own
account.
WHETHER OR NOT IT CAN SUE:
1. A foreign corporation transacting or doing business in the Philippines ISOLATED TRANSACTION: even if it is pursuant of the usual business
with a license can sue before Philippine Courts; does not constitute doing business the doing of which would not bar a
2. Subject to certain exceptions, a foreign corporation doing business in foreign corporation from access to Philippine Courts (Facilities Mgt. vs. Dela
the country without a license cannot sue in Philippine Courts; and Osa)
3. If it is not transacting business in the Philippines, even without a license,
it can sue before the Philippine Courts. THE MENTHOLATUM CO., INC., ET AL., petitioners,
vs.
―It is not the lack of required license but doing business without a ANACLETO MANGALIMAN, ET AL., respondents
license which bars a foreign corporation from access to our courts‖ (G.R. No. L-47701; June 27, 1941)
(Universal Shipping vs. IAC)
FACTS: A complaint was filed by herein petitioner, a foreign corporation
EXCEPTIONS: having Philippine-American Drug Co. as its sole distributor, for infringement
1. Foreign corporations can sue before the Philippine Courts if the act or of trademark for its product ―Mentholatum‖ and unfair competition alleging
transaction involved is an ―isolated transaction‖ or the corporation is that herein respondents Anacleto and Florencio Mangaliman prepared a
not seeking to enforce any legal or contractual rights arising from, or medicament and salve named ―Mentholiman‖ which they sold to the public
growing out of, any business which it has transacted in the Philippines packed in the same size, color and shape as its product Metholatum.
(Western Equipment Supply vs. Reyes)
2. Neither is a license required before a foreign corporation may sue before ISSUE: WON petitioner corporation is transacting business in the Philippines?
the forum if the purpose of the suit is to protect its trademark, trade
name, corporate name, reputation or goodwill; (Western Equipment HELD: No. No general rule or governing principle can be laid down
Supply vs. Reyes) as to what constitutes "doing" or "engaging in" or "transacting"
3. Or where it is based on a violation of the Revised Penal Code (Le business. Indeed, each case must be judged in the light of its
Chemise Lacoste, SA vs. Fernandez); peculiar environmental circumstances. The true test, however,
4. Or merely defending a suit filed against it (Time, Inc. vs. Reyes) seems to be whether the foreign corporation is continuing the body
5. Or where a party is estopped to challenge the personality of the or substance of the business or enterprise for which it was
corporation by entering into a contract with it (Communications organized or whether it has substantially retired from it and turned
Materials and Design, Inc. vs. CA and ITEC) it over to another. (Traction Cos. v. Collectors of Int. Revenue [C. C. A.
Ohio], 223 F. 984, 987.) The term implies a continuity of commercial dealings
WHETHER OR NOT IT CAN BE SUED: and arrangements, and contemplates, to that extent, the performance of acts
1. A foreign corporation transacting business in the Philippines with the or works or the exercise of some of the functions normally incident to, and in
requisite license can be sued in Philippine Courts; progressive prosecution of, the purpose and object of its organization. (Griffin
2. A foreign corporation transacting business in the Philippines without a v. Implement Dealers' Mut. Fire Ins. Co., 241 N. W. 75, 77; Pauline Oil & Gas
license can be sued in Philippine Courts; Co. v. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl. 111; Automotive
3. If it is not doing business in the Philippines, it cannot be sued in Material Co. v. American Standard Metal Products Corp., 158 N. E. 698, 703,
Philippine Courts for lack of jurisdiction. 327 III. 367.)
―DOING BUSINESS‖: As to what constitutes ―doing business‖ or In its decision of June 29, 1940, the Court of Appeals concluded that "it is
―transacting business‖ which would bar a foreign corporation from access to undeniable that the Mentholatum Co., through its agent, the Philippine-
our courts, no general rule or governing principle can be laid down. Indeed, American Drug Co., Inc., has been doing business in the Philippines by selling

its products here since the year 1929, at least." This is assailed by petitioners Court of First Instance of Rizal, Seventh Judicial District, Pasig,
as a pure conclusion of law. This finding is predicated upon the testimony of Metro Manila, Branch 11 and DIAMOND SHIPPING CORPORATION,
Mr. Roy Springer of the Philippine-American Drug Co., Inc., and the pleadings respondent.
filed by petitioners. The complaint filed in the Court of First Instance of (G.R. No. L-49695; April 7, 1986)
Manila on October 1, 1935, clearly stated that the Philippine-American Drug
Co., Inc., is the exclusive distributing agent in the Philippine Islands of the FACTS: Petitioner, a foreign partnership, filed a complaint for damages
Mentholatum Co., Inc., in the sale and distribution of its product known as against respondent Diamond Shipping Corporation having failed to deliver the
the ―Mentholatum." The object of the pleadings being to draw the lines of goods shipped to it by petitioner to their proper destination.
battle between litigants and to indicate fairly the nature of the claims or
defenses of both parties, a party cannot subsequently take a position Said complaint alleged that the plaintiff is ―not doing business in the
contradictory to, or inconsistent with, his pleadings, as the facts therein Philippines‖ and that it is ―suing under an isolated transaction‖.
admitted are to be taken as true for the purpose of the action. It follows that
whatever transactions the Philippine-American Drug Co., Inc., had executed Defendant filed a motion to dismiss on the ground that plaintiff has no
in view of the law, the Mentholatum Co., Inc., did it itself. And, the capacity to sue which was granted.
Mentholatum Co., Inc., being a foreign corporation doing business in the
Philippines without the license required by section 68 of the Corporation Law, ISSUE: WON a corporation not engaged in business in the Philippines can
it may not prosecute this action for violation of trade mark and unfair institute an action before our courts?
competition.
HELD: Yes. This issue is already well-settled in this jurisdiction. In Aetna
The writ prayed for should be, as it hereby is, denied, with costs against the Casualty and Surety Co. vs. Pacific Star Lines, 80 SCRA 635, is a case similar
petitioners. to the present one in that the action is also one for recovery of damages
sustained by cargo shipped on defendants' vessels. Defendants set up the
ISOLATED TRANSACTION defense that plaintiff is a foreign corporation not duly licensed to do business
in the Philippines and, therefore, without capacity to sue and be sued. In
MARSHALL-WELLS COMPANY, plaintiff-appellant, overruling said defense, this Court said:
vs.
HENRY W. ELSER & CO., INC., defendant-appellee It is settled that if a foreign corporation is not engaged in
(G.R. No. 22015; September 1, 1924) business in the Philippines, it may not be denied the right to file
an action in Philippine courts for isolated transactions.
FACTS: Plaintiff sued defendant for the unpaid balance of a bill of goods
amounting to P2,660.74, for which the plaintiff holds accepted drafts. The object of Sections 68 and 69 of the Corporation law was not to
prevent the foreign corporation from performing single acts, but to prevent
Defendant demurred on the ground that plaintiff had no capacity to sue it from acquiring a domicile for the purpose of business without taking the
which the trial court granted. And in as much as the plaintiff could not allege steps necessary to render it amenable to suit in the local courts. It was
compliance with the statute, the order was allowed to become final and no never the purpose of the Legislature to exclude a foreign corporation
appeal was perfected. which happens to obtain an isolated order for business from the
Philippines, from securing redress in the Philippine courts.
ISSUE: WON obtaining a license is required before a foreign corporation can
maintain any kind of action in the courts of the Philippine Islands? And in Eastboard Navigation, Ltd. et al vs. Juan Ysmael & Co., Inc., this Court
held that:
HELD: No. The object of the statute was to subject the foreign
corporation doing business in the Philippines to the jurisdiction of (d) While plaintiff is a foreign corporation without license to
its courts. The object of the statute was not to prevent the foreign transact business in the Philippines, it does not follow that it has
corporation from performing single acts, but to prevent it from no capacity to bring the present action. Such license is not
acquiring a domicile for the purpose of business without taking the necessary because it is not engaged in business in the Philippines.
steps necessary to render it amenable to suit in the local courts. The In fact, the transaction herein involved is the first business undertaken by
implication of the law is that it was never the purpose of the Legislature to plaintiff in the Philippines, although on a previous occasion plaintiff's vessel
exclude a foreign corporation which happens to obtain an isolated order for was chartered by the National Rice and Corn Corporation to carry rice
business from the Philippines, from securing redress in the Philippine courts, cargo from abroad to the Philippines. These two isolated transactions do
and thus, in effect, to permit persons to avoid their contracts made with such not constitute engaging in business in the Philippines within the purview of
foreign corporations. The effect of the statute preventing foreign corporations Sections 68 and 69 of the Corporation Law so as to bar plaintiff from
from doing business and from bringing actions in the local courts, except on seeking redress in our courts. (Marshall Wells Co. vs. Henry W. Elser & Co.
compliance with elaborate requirements, must not be unduly extended or 49 Phil., 70; Pacific Vegetable Oil Corporation vs. Angle O. Singson, G.R.
improperly applied. It should not be construed to extend beyond the plain No. L-7917, April 29, 1955.)
meaning of its terms, considered in connection with its object, and in
connection with the spirit of the entire law. Again, in Facilities Management Corporation vs. De la Osa 89 SCRA 131, 139,
following Aetna Casualty & Surety Co. vs. Pacific Star Line, supra, held a
The law simply means that no foreign corporation shall be foreign corporation not engaged in business in the Philippines is not barred
permitted "to transact business in the Philippine Islands," as this from seeking redress from the courts of the Philippines.
phrase is known in corporation law, unless it shall have the license
required by law, and, until it complies with the law, shall not be WHEREFORE, the order of respondent Court dismissing the petitioner's
permitted to maintain any suit in the local courts. A contrary holding complaint is hereby set aside and the case remanded for further proceedings,
would bring the law to the verge of unconstitutionality, a result which should with costs against private respondent.
be and can be easily avoided.
THE SWEDISH EAST ASIA CO., LTD., petitioner,
The order appealed from shall be set aside and the record shall be returned vs.
to the court of origin for further proceedings. Without special finding as to MANILA PORT SERVICE AND/OR MANILA RAILROAD COMPANY,
costs in this instance, it is so ordered. respondents
(G.R. No. L-26332; October 26, 1968)
HATHIBHAI BULAKHIDAS, petitioner,
vs. FACTS: MS SUDAN, owned and operated by petitioner, a swedish company
THE HONORABLE PEDRO L. NAVARRO, as Presiding Judge of the without license in the Philippines, discharged cargo to herein respondent. By

mistake, cargo destined for Hongkong consisting of 16 bundles of ―lifts and Petitioners filed a motion to dismiss the complaint on the ground that
mild steel tees window sections‖ covering which the petitioner had issued a respondent had no personality to maintain a suit which was denied. The
bill of lading to a Hongkong consignee, were also landed at Manila. The subsequent petition for certiorari was dismissed by the appellate court.
erroneous discharge was obviously engendered by the fact that the same
ship on the same day discharged 40 similar bundles destined for consignee in ISSUE: WON respondent is doing business in the Philippines?
the Philippines.
HELD: No. In the case of Top-Weld Manufacturing, Inc. v. ECED, S.A. (138
Petitioner, through a complaint filed in the CFI of Manila, sought for the SCRA 118,127-128), we stated:
recovery of the value of the missing goods which it paid to the Hongkong
consignee, which was granted by the lower court. There is no general rule or governing principle laid down as to
what constitutes ‗doing' or 'engaging in' or 'transacting business
On appeal, the CA reversed the trial court’s decision. in the Philippines. Each case must be judged in the Light of its
peculiar circumstance (Mentholatum Co. v. Mangaliman, 72 Phil.524).
ISSUE: WON petitioner should be barred from access to our courts? Thus, a foreign corporation with a settling agent in the Philippines which
issues twelve marine policies covering different shipments to the
HELD: No. The respondents challenge the petitioner's capacity to sue, it Philippines (General Corporation of the Philippines v. Union Insurance
being admittedly a foreign corporation without license to engage in business Society of Canton, Ltd., 87 Phil. 313) and a foreign corporation which had
in the Philippines, citing section 69 of the Corporation Law. It must be been collecting premiums on outstanding policies (Manufacturing Life
stated however that this section is not applicable to a foreign Insurance Co., v. Meer, 89 Phil. 351) were regarded as doing business
corporation performing single acts or "isolated transactions." There here. The acts of these corporations should be distinguished from a single
is nothing in the record to show that the petitioner has been in the or isolated business transaction or occasional, incidental and casual
Philippines engaged in continuing business or enterprise for which it was transactions which do not come within the meaning of the law. Where a
organized, when the sixteen bundles were erroneously discharged in Manila, single act or transaction , however, is not merely incidental or casual but
for it to be considered as transacting business in the Philippines. The fact is indicates the foreign corporation's intention to do other business in the
that the bundles, the value of which is sought to be recovered, were Philippines, said single act or transaction constitutes 'doing' or 'engaging in'
landed not as a result of a business transaction, "isolated" or or 'transacting' business in the Philippines. (Far East International Import
otherwise, but due to a mistaken belief that they were part of the and Export Corporation v. Nankai Kogyo, Co., 6 SCRA 725).
shipment of forty similar bundles consigned to persons or entities in
the Philippines. There is no justification, therefore, for invoking the In the Mentholatum Co. v. Mangaliman case earlier cited, this Court held:
provisions of section 69 of the Corporation Law. xxx xxx xxx
ACCORDINGLY, the judgment of the Court of Appeals is reversed, and ...The true test, however, seems to be whether the foreign
another judgment is hereby rendered ordering the respondents, jointly and corporation is continuing the body or substance of the business or
severally, to pay the petitioner the sum of P2,349.62 with interest thereon at enterprise for which it warning-organized or whether it has
the rate of 6% per annum from March 13, 1961, the date of the filing of the substantially was retired from it and turned it over to another.
complaint, until the amount shall have been fully paid, and the sum of P600 (Traction Cos. v. Collectors of Int. Revenue [CCA., Ohio], 223 F. 984, 987.)
as attorney's fees. Costs against the respondents. The term implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or workers or
ANTAM CONSOLIDATED, INC., TAMBUNTING TRADING the exercise of some of the functions normally incident to, and in
CORPORATION and AURORA CONSOLIDATED SECURITIES and progressive prosecution of, the purpose and object of its organization.
INVESTMENT CORPORATION, petitioners, (Griffin v. Implement Dealers' Mut. Fire Ins. Co., 241 N.W. 75, 77, Pauline
vs. Oil & Gas Co. v. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl. 111;
THE COURT OF APPEALS, THE HONORABLE MAXIMIANO C. Automotive Material Co. v. American Standard Metal Products Corp., 158
ASUNCION (Court of First Instance of Laguna, Branch II [Sta. Cruz]) N.E. 698, 703, 327 111. 367.) '
and STOKELY VAN CAMP, INC., respondents
(G.R. No. L-61523; July 31, 1986) In the case at bar, the transactions entered into by the respondent
with the petitioners are not a series of commercial dealings which
FACTS: Respondent Stokely Van Camp, Inc., a corporation organized and signify an intent on the part of the respondent to do business in the
existing under the laws of the state of Indiana, filed a complaint against Philippines but constitute an isolated one which does not fall under
Banahaw Milling Corporation, Antam Consolidated, Inc., Tambunting Trading the category of "doing business." The records show that the only reason
Corporation, Aurora Consolidated Securities and Investment Corporation and why the respondent entered into the second and third transactions with the
United Coconut Oil Mills, Inc. (Unicom) for collection of sum of money. petitioners 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
One of respondent’s subdivision ―Capital City Product Company‖ (Capital City) transaction and in order to give the latter a chance to make good on their
entered into a contracts where Coconut Oil Manufacturing (Phil), Inc. obligation. Instead of making an outright demand on the petitioners, the
(Comphil) were to sell to the former 500 long tons of crude coconut oil at respondent opted to try to push through with the transaction to recover the
US$0.30/lb, which it failed to comply with and Capital City was forced to buy amount of US$103,600.00 it lost. This explains why in the second
its coconut oil needs from the open market at a higher price resulting in a transaction, the petitioners were supposed to buy back the crude coconut oil
loss of US$103,600. they should have delivered to the respondent in an amount which will earn
the latter a profit of US$103,600.00. When this failed the third transaction
A 2nd contract was entered into to settle Capital City’s loss, Comphil was was entered into by the parties whereby the petitioners were supposed to sell
supposed to repurchase the coconut oil earlier purchased from the open crude coconut oil to the respondent at a discounted rate, the total amount of
market at a price of US$ 0.3925/lb, but the latter failed to pay. such discount being US$103,600.00. Unfortunately, the petitioners failed to
deliver again, prompting the respondent to file the suit below.
To compensate for the loss, Comphil entered into a 3rd contract agreeing to
sell the same quantity of coconut oil at a price of US$0.3425/lb which was From these facts alone, it can be deduced that in reality, there was only one
below the market price. That by the discounted amount, Comphil would have agreement between the petitioners and the respondent and that was the
compensated for the loss Capital City sustained. But still, Comphil failed to delivery by the former of 500 long tons of crude coconut oil to the latter, who
deliver. in turn, must pay the corresponding price for the same. 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. Indeed, the petitioner, in compliance with Act 2486 as implemented by
Thus, the trial court, and the appellate court did not err in denying the Department of Labor Order No. IV dated May 20, 1968 had to appoint Jaime
petitioners' motion to dismiss not only because the ground thereof does not V. Catuira, 1322 A. Mabini, Ermita, Manila as agent for FMC with authority to
appear to be indubitable but because the respondent, being a foreign execute Employment Contracts and receive, in behalf of that corporation,
corporation not doing business in the Philippines, does not need to obtain a legal services from and be bound by processes of the Philippine Courts of
license to do business in order to have the capacity to sue Justice, for as long as he remains an employee of FMC (Annex 'I', rollo, p.
56). It is a fact that when the summons for the petitioner was served on
We agree with the respondent that it is a common ploy of defaulting local Jaime V. Catuira he was still in the employ of the FMC.
companies which are sued by unlicensed foreign companies not engaged in
business in the Philippines to invoke lack of capacity to sue. The respondent In his motion to dismiss Annex B', p. 19, Rollo), petitioner admits that Mr.
cites decisions from 1907 to 1957 recognizing and rejecting the improper use Catuira represented it in this country 'for the purpose of making
of this procedural tactic. (Damfschieffs Rhedered Union v. Cia Trans-atlantica, arrangements for the approval by the Department of Labor of the
8 Phil. 766 11907]; Marshall-Wells Co. v. Henry W. Elser & Co., 49 Phil. 70 employment of Filipinos who are recruited by the Company as its own
[1924]; Western Equipment Co. v. Reyes, 51 Phil. 115 [1927]; Central employees for assignment abroad.' In effect, Mr. Catuira was an officer
Republic Bank v. Bustamante, 71 Phil. 359 [1941]; Pacific Vegetable Oil Co. representing petitioner in the Philippines.
v. Singson, 96 Phil.-986 [1955]; Eastboard Navigation, Ltd. v. Juan Ysmael
and Co., Inc., 102 Phil. 1 [1957]). The doctrine of lack of capacity to sue Under the rules and regulations promulgated by the Board of Investments
based on failure to first acquire a local license is based on considerations of which took effect Feb. 3, 1969, implementing Rep. Act No. 5455,
sound public policy. It intended to favor domestic corporations who enter was which took effect Sept. 30, 1968, the phrase 'doing business' has
never into solitary transactions with unwary foreign firms and then repudiate been exemption with illustrations, among them being as follows:
their obligations simply because the latter are not licensed to do business in
this country. The petitioners in this case are engaged in the exportation of xxx xxx xxx
coconut oil, an export item so vital in our country's economy. They filed this
petition on the ground that Stokely is an unlicensed foreign corporation (f) the performance within the Philippines of any act or combination of acts
without a bare allegation or showing that their defenses in the collection case enumerated in section l(l) of the Act shall constitute 'doing business'
are valid and meritorious. We cannot fault the two courts below for acting as therein. in particular, 'doing business includes:
they did.
(1) Soliciting orders, purchases (sales) or service contracts. Concrete and
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is DISMISSED for specific solicitations by a foreign firm, not acting independently of the
lack of merit. The Temporary Restraining Order dated February 2, 1983 is foreign firm amounting to negotiation or fixing of the terms and conditions
hereby DISSOLVED. Costs against the petitioners. of sales or service contracts, regardless of whether the contracts are
actually reduced to writing, shall constitute doing business even if the
enterprise has no office or fixed place of business in the Philippines. xxx
HAVING A REPRESENTATIVE IN THE PHILIPPINES
(2) Appointing a representative or distributor who is domiciled in
FACILITIES MANAGEMENT CORPORATION, J. S. DREYER, and J. V. the Philippines, unless said representative or distributor has an
CATUIRA, petitioners, independent status, i.e., it transacts business in its name and for
vs. its own account, and not in the name or for the account of the
LEONARDO DE LA OSA AND THE HONORABLE COURT OF principal.
INDUSTRIAL RELATIONS, respondents
(G.R. No. L-38649; March 26, 1979) xxx xxx xxx
(4) Opening offices, whether called 'liaison'offices, agencies or branches,
FACTS: Respondent Leonardo dela Osa filed a petition for reinstatement with unless proved otherwise.
recovery of his overtime compensation, swing shift and graveyard shift xxx xxx xxx
differentials.
(10) Any other act or acts that imply a continuity of commercial dealings or
Petitioner corporation filed a letter-answer interposing special defenses: arrangements, and contemplate to that extent the performance of acts or
1. Facilities Management Corporation and JS Deyer are domiciled in Wake works, or the exercise of some of the functions normally incident to, or in
Islands and is beyond the territorial jurisdiction of the Philippine the progressive prosecution of, commercial gain or of the purpose and
Government; and objective of the business organization
2. JV Catuira, though an employee of respondent corporation and
stationed in Manila does not have power and authority of legal Indeed, if a foreign corporation, not engaged in business in the Philippines, is
representation; and not banned from seeking redress from courts in the Philippines, a fortiori,
3. The employment of respondent is with approval of the Department of that same corporation cannot claim exemption from being sued in Philippine
Labor of the Philippines. courts for acts done against a person or persons in the Philippines.
Subsequently, a motion to dismiss was filed which was denied. WHEREFORE, THE PETITION IS HEREBY DENIED WITH COSTS AGAINST
THE PETITIONERS
ISSUE: WON petitioner, FMC, has been doing business in the Philippines to
vest the Philippine court with jurisdiction? SINGLE ACT WITH INTENTION TO CONTINUE DOING BUSINESS
HELD: Yes. From the facts of record, the petitioner may be considered as FAR EAST INTERNATIONAL IMPORT and EXPORT CORPORATION,
doing business in the Philippines within the scope of Section 14, Rule 14 of plaintiff-appellee,
the Rules of the Court which provide: vs.
NANKAI KOGYO CO. LTD., ET AL., defendants,
SEC 14. Service upon private foreign corporations. If the defendant is a NANKAI KOGYO CO., LTD., defendant-appellant
foreign corporation or a non-resident joint stock company or association: (G.R. No. L-13525; November 30, 1962)
doing business in the Philippines, service may be made on its resident agent
designated in accordance with law for that purpose or, if there be no such FACTS: Plaintiff Far East entered into a contract with herein appellant Nankai
agent, on the government official designated by law to that effect, or on any for the sale of steel scrap. Only 1,058.6 metric tons were delivered upon the
of its officers or agents within the Philippines. expiration of the export license of Far East.

Far East later on wrote to Everett Steamship Corporation, requesting the isolated one, incidental, or casual, and "not of a character to indicate a
issuance of a complete set of the Bill of Lading for the shipment, in order that purpose to engage in business" within the meaning of the rule. (Emphasis
payment thereof be effected against the letter of credit opened by Nankai. ours.)
For failure of Nankai and the shipping agent to comply, Far East filed a ISSUE2: WON the single act done in this case can be considered as doing
complaint for specific performance. business in the Philippines?
Nankai filed a motion to dismiss, on the ground of lack of jurisdiction over its HELD: Yes. In the instant case, the testimony of Atty. Pablo Ocampo that
person and the subject matter, which was denied. appellant was doing business in the Philippines corroborated by no less than
Nabuo Yoshida, one of appellant's officers, that he was sent to the Philippines
ISSUE: WON the trial court acquired jurisdiction over the subject matter and by his company to look into the operation of mines, thereby revealing the
over the person of the defendant-appellant through the proper service of defendant's desire to continue engaging in business here, after
summons? receiving the shipment of the iron under consideration, making the
Philippines a base thereof.
HELD: Yes. Defendant contends that Philippine Courts have no jurisdiction to
take cognizance of the case because the Nankai is not doing business in the The rule stated in the preceding section that the doing of a single act
islands; and that while it has entered into the transaction in question, same, doesnot constitute business within the meaning of statutes prescribing the
however, does not constitute "doing business", so as to make it amenable to conditions to be complied with the foreign corporations must be qualified
summons and subject it to the Court's jurisdiction. It bolstered this claim by a to this extent, that a single act may bring the corporation. In such a
provision in the contract which provides that "In case of disputes, Board of case, the single act of transaction is not merly incidental or casual, but is
Arbitration may be formed in Japan. Decision of the Board of Arbitration shall of such character as distinctly to indicate a purpose on the part of the
be final and binding on both BUYER and SELLER". foreign corporation to do other business in the state, and to make the
state a basis of operations for the conduct of a part of corporation's
The rule pertinent to the questions in issue provides — ordinary business. (17 Fletchers Cyc. of Corporations, sec. 8470, pp. 572-
573, and authorities cited therein.) (Emphasis ours.)
SEC. 14. Service upon private foreign corporations. — If the defendant is a
foreign corporation, or a non-resident joint stock company or association, WHEREFORE, the judgment appealed from is hereby affirmed, with costs
doing business in the Philippines, service may be made on its resident against defendant-appellant Nankai Kogyo.
agent designated in accordance with law for that purpose, or, if there be
no such agent, on the government official designated by law to that effect, ESTOPPED TO QUESTION PERSONALITY TO SUE
or on any officer or agent within the Philipines. (Rule 7).
COMMUNICATION MATERIALS AND DESIGN, INC., ASPAC MULTI-
The above rule indicates three modes of effecting service of TRADE, INC., (formerly ASPAC-ITEC PHILIPPINES, INC.) and
summons upon a private, foreign corporation, viz: (1) by serving FRANCISCO S. AGUIRRE, petitioners,
upon the agent designated in accordance with law to accept service vs.
of summons; (2) if there is no resident agent, by service on the THE COURT OF APPEALS, ITEC INTERNATIONAL, INC., and ITEC,
government cial designated by law to that effect; and (3) by serving INC., respondents
on any officer or agent of said corporation with Philippines. The (G.R. No. 102223; August 22, 1996)
plaintiff complied with the third stated above, for it has been shown that Mr.
Ishida, who personally signed the contract for the purchase of the scrap in FACTS: Respondent ITEC entered into a contract with petitioner ASPAC
question in behalf of the Nankai Kogyo, the Trade Manager of said Company, referred to as ―Representative Agreement‖ where ASPEC was assigned as
Mr. Tominaga the Chief of the Petroleum Section of the same company and ITEC’s ―exclusive representative‖ in the Philippines for the sale of ITEC’s
Mr. Yoshida was the man-in-charge of the Import Section of the company's products.
Tokyo Branch. All these three, including the first two who were served with
Summons, were officers of the defendant company. By virtue of said contract, ASPAC sold electronic products exported by ITEC,
to their sole customer PLDT. ASPAC and PLDT executed a document entitled
Not only did appellant allege non-jurisdictional grounds in its pleadings to ―PLDT-ASPAC/ITEC PROTOCOL‖ which defined the project detais for the
have the complaint dismissed, but it also went into trial on the merits and supply of ITEC’s Interface Equipment in connection with the 5th Expansion
presented evidence destined to resist appellee's claim. Verily, there could not Program of PLDT.
be a better situation of acquired jurisdiction based on consent. Consequently,
the provision of the contract wherein it was agreed that disputes should be ITEC later on terminated its representative agreement with ASPAC and fied a
submitted to a Board of Arbitration which may be formed in Japan (in the complaint alleging that the latter and another corporation Digital Base
supposition that it can apply to the matter in dispute - payment of the scrap), Communications, Inc. (DIGITAL), the president of which is Francisco Aguirre
seems to have been waived with appellant's voluntary submission. Apart from who is also the president of ASPAC, used knowledge and information of
the fact that the clause employs the word "may". ITEC’s product specifications to develop their own line of equipment and
product support, which are similar, if not identical to ITEC’s own and offering
From the proven facts obtaining in this particular case, the appellant's them to ITEC’s customers.
defense of lack of jurisdiction appears unavailing. The case of Pacific
Micronesian Line, Inc. v. Baens del Rosario, et al., G.R. No. L-7154, October Defendants filed a motion to dismiss on the ground that ITEC had no legal
23, 1954, relied upon in the Motion to Dismiss and other pleadings presented capacity to sue as it is a foreign corporation doing business in the Philippines
by defendant-appellant, stand on a different footing. Therein, We made the without the required license, which was denied. On appeal, the CA affirmed
following pronouncements: the decision of the trial court.
. . . . And the only act it did here was to secure the services of Luceno ISSUE: WON private respondents ITEC is an unlicensed corporation doing
Pelingon to act as cook and chief steward in one of its vessels authorizing business in the Philippines, and WON it is barred from invoking the injunctive
to that effect the Luzon Stevedoring Co., Inc., a domestic corporation, and authority of the courts?
the contract of employment was entered into on July 18, 1951. It further
appears that petitioner has never sent its ships to the Philippines nor has it HELD: Yes and No (by estoppel). Generally, a "foreign corporation" has
transported nor even solicited the transportation passengers and cargoes no legal existence within the state in which it is foreign. This
to and from the Philippines. In words, petitioner engaged the services of proceeds from the principle that juridical existence of a corporation
Pelingon not as part of the operation of its business but merely to employ is confined within the territory of the state under whose laws it was
him as member of the crew in one of its ships. That act apparently is an incorporated and organized, and it has no legal status beyond such

territory. Such foreign corporation may be excluded by any other state from These foregoing instances should be distinguished from a single or
doing business within its limits, or conditions may be imposed on the exercise isolated transaction or occasional, incidental, or casual transactions,
of such privileges. Before a foreign corporation can transact business in this which do not come within the meaning of the law, for in such case,
country, it must first obtain a license to transact business in the Philippines, the foreign corporation is deemed not engaged in business in the
and a certificate from the appropriate government agency. If it transacts Philippines.
business in the Philippines without such a license, it shall not be
permitted to maintain or intervene in any action, suit, or proceeding Where a single act or transaction, however, is not merely incidental or casual
in any court or administrative agency of the Philippines, but it may but indicates the foreign corporation's intention to do other business in the
be sued on any valid cause of action recognized under Philippine Philippines, said single act or transaction constitutes "doing" or "engaging in"
laws. or "transacting" business in the Philippines.
In a long line of decisions, this Court has not altogether prohibited foreign In determining whether a corporation does business in the Philippines or not,
corporation not licensed to do business in the Philippines from suing or aside from their activities within the forum, reference may be made to the
maintaining an action in Philippine Courts. What it seeks to prevent is a contractual agreements entered into by it with other entities in the country.
foreign corporation doing business in the Philippines without a license from Thus, in the Top-Weld case (supra), the foreign corporation's LICENSE AND
gaining access to Philippine Courts. TECHNICAL AGREEMENT and DISTRIBUTOR AGREEMENT with their local
contacts were made the basis of their being regarded by this Tribunal as
The purpose of the law in requiring that foreign corporations doing corporations doing business in the country. Likewise, in Merill Lynch Futures,
business in the Philippines be licensed to do so and that they appoint an Inc. vs. Court of Appeals, etc., the FUTURES CONTRACT entered into by the
agent for service of process is to subject the foreign corporation doing petitioner foreign corporation weighed heavily in the court's ruling.
business in the Philippines to the jurisdiction of its courts. The object
is not to prevent the foreign corporation from performing single acts, but to With the above-stated precedents in mind, we are persuaded to conclude
prevent it from acquiring a domicile for the purpose of business without that private respondent had been "engaged in" or "doing business" in the
taking steps necessary to render it amenable to suit in the local courts. The Philippines for some time now. This is the inevitable result after a scrutiny of
implication of the law is that it was never the purpose of the legislature to the different contracts and agreements entered into by ITEC with its various
exclude a foreign corporation which happens to obtain an isolated order for business contacts in the country, particularly ASPAC and Telephone
business from the Philippines, and thus, in effect, to permit persons to avoid Equipment Sales and Services, Inc. (TESSI, for brevity). The latter is a local
their contracts made with such foreign corporations. electronics firm engaged by ITEC to be its local technical representative, and
to create a service center for ITEC products sold locally. Its arrangements,
There is no exact rule or governing principle as to what constitutes "doing" or with these entities indicate convincingly ITEC's purpose to bring about the
"engaging" or "transacting" business. Indeed, such case must be judged in situation among its customers and the general public that they are dealing
the light of its peculiar circumstances, upon its peculiar facts and upon the directly with ITEC, and that ITEC is actively engaging in business in the
language of the statute applicable. The true test, however, seems to be country.
whether the foreign corporation is continuing the body or substance of the
business or enterprise for which it was organized. In its Master Service Agreement with TESSI, private respondent required its
local technical representative to provide the employees of the technical and
Article 44 of the Omnibus Investments Code of 1987 defines the service center with ITEC identification cards and business cards, and to
phrase to include: correspond only on ITEC, Inc., letterhead. TESSI personnel are instructed to
answer the telephone with "ITEC Technical Assistance Center.", such
―soliciting orders, purchases, service contracts, opening offices, telephone being listed in the telephone book under the heading of ITEC
whether called "liaison" offices or branches; appointing Technical Assistance Center, and all calls being recorded and forwarded to
representatives or distributors who are domiciled in the ITEC on a weekly basis.
Philippines or who in any calendar year stay in the Philippines for
a period or periods totalling one hundred eighty (180) days or What is more, TESSI was obliged to provide ITEC with a monthly report
more; participating in the management, supervision or control of detailing the failure and repair of ITEC products, and to requisition monthly
any domestic business firm, entity or corporation in the the materials and components needed to replace stock consumed in the
Philippines, and any other act or acts that imply a continuity or warranty repairs of the prior month.
commercial dealings or arrangements and contemplate to that
extent the performance of acts or works, or the exercise of some A perusal of the agreements between petitioner ASPAC and the respondents
of the functions normally incident to, and in progressive shows that there are provisions which are highly restrictive in nature, such as
prosecution of, commercial gain or of the purpose and object of to reduce petitioner ASPAC to a mere extension or instrument of the private
the business organization.‖ respondent.
Thus, a foreign corporation with a settling agent in the Philippines which The "No Competing Product" provision of the Representative Agreement
issued twelve marine policies covering different shipments to the Philippines between ITEC and ASPAC provides: "The Representative shall not represent
and a foreign corporation which had been collecting premiums on or offer for sale within the Territory any product which competes with an
outstanding policies were regarded as doing business here. existing ITEC product or any product which ITEC has under active
development." Likewise pertinent is the following provision: "When acting
The same rule was observed relating to a foreign corporation with an under this Agreement, REPRESENTATIVE is authorized to solicit sales within
"exclusive distributing agent" in the Philippines, and which has been selling the Territory on ITEC's behalf but is authorized to bind ITEC only in its
its products here since 1929, and a foreign corporation engaged in the capacity as Representative and no other, and then only to specific customers
business of manufacturing and selling computers worldwide, and had and on terms and conditions expressly authorized by ITEC in writing."
installed at least 26 different products in several corporations in the
Philippines, and allowed its registered logo and trademark to be used and When ITEC entered into the disputed contracts with ASPAC and
made it known that there exists a designated distributor in the Philippines. TESSI, they were carrying out the purposes for which it was
created, i.e., to market electronics and communications products.
In Georg Grotjahn GMBH and Co. vs. Isnani, it was held that the The terms and conditions of the contracts as well as ITEC's conduct indicate
uninterrupted performance by a foreign corporation of acts that they established within our country a continuous business, and not
pursuant to its primary purposes and functions as a regional area merely one of a temporary character.
headquarters for its home office, qualifies such corporation as one
doing business in the country.

Notwithstanding such finding that ITEC is doing business in the country, activities in the country, and is thus estopped from raising in defense such
petitioner is nonetheless estopped from raising this fact to bar ITEC from incapacity of ITEC, having chosen to ignore or even presumptively take
instituting this injunction case against it. advantage of the same.
A foreign corporation doing business in the Philippines may sue in Philippine In Top-Weld, we ruled that a foreign corporation may be exempted from the
Courts although not authorized to do business here against a Philippine license requirement in order to institute an action in our courts if its
citizen or entity who had contracted with and benefited by said corporation. representative in the country maintained an independent status during the
To put it in another way, a party is estopped to challenge the existence of the disputed contract. Petitioner is deemed to have acceded to
personality of a corporation after having acknowledged the same by such independent character when it entered into the Representative
entering into a contract with it. And the doctrine of estoppel to deny Agreement with ITEC, particularly, provision 6.2 (supra).
corporate existence applies to a foreign as well as to domestic corporations.
One who has dealt with a corporation of foreign origin as a corporate entity is IN VIEW OF THE FOREGOING PREMISES, the instant Petition is hereby
estopped to deny its corporate existence and capacity: The principle will be DISMISSED. The decision of the Court of Appeals dated June 7, 1991,
applied to prevent a person contracting with a foreign corporation from later upholding the RTC Order dated February 22, 1991, denying the petitioners'
taking advantage of its noncompliance with the statutes chiefly in cases Motion to Dismiss, and ordering the issuance of the Writ of Preliminary
where such person has received the benefits of the contract. Injunction, is hereby affirmed in toto.
The rule is deeply rooted in the time-honored axiom of Commodum ex injuria TRADEMARK INFRINGEMENT
sua non habere debet — no person ought to derive any advantage of his own
wrong. This is as it should be for as mandated by law, "every person must in WESTERN EQUIPMENT AND SUPPLY COMPANY, WESTERN
the exercise of his rights and in the performance of his duties, act with ELECTRIC COMPANY, INC., W. Z. SMITH and FELIX C. REYES,
justice, give everyone his due, and observe honesty and good faith." plaintiffs-appellees,
vs.
Concededly, corporations act through agents, like directors and officers. FIDEL A. REYES, as Director of the Bureau of Commerce and
Corporate dealings must be characterized by utmost good faith and fairness. Industry, HENRY HERMAN, PETER O'BRIEN, MANUEL B. DIAZ,
Corporations cannot just feign ignorance of the legal rules as in most cases, FELIPE MAPOY and ARTEMIO ZAMORA, defendants-appellants.
they are manned by sophisticated officers with tried management skills and (G.R. No. L-27897 December 2, 1927)
legal experts with practiced eye on legal problems. Each party to a corporate
transaction is expected to act with utmost candor and fairness and, thereby FACTS: The present case was filed and tried on the following facts:
allow a reasonable proportion between benefits and expected burdens. This 1. Petitioner Western Equipment and Supply Company, through its duly
is a norm which should be observed where one or the other is a foreign authorized agent, the plaintiff, Felix Reyes, applied to the defendant
entity venturing in a global market. Director of Bureau of Commerce and Industry (BCI) for the issuance of
a license to engage in business in the Philippine Islands which was
As observed by this Court in TOP-WELD (supra), viz: granted on Aug. 23, 1926.
The parties are charged with knowledge of the existing law at the time they 2. On the other hand, Western Electric Company, Inc, also organized and
enter into a contract and at the time it is to become operative. (Twiehaus v. existing under the laws of Nevada, was not issued such license but it
Rosner, 245 SW 2d 107; Hall v. Bucher, 227 SW 2d 98). Moreover, a person was alleged that it has never engaged in business herein.
is presumed to be more knowledgeable about his own state law than his alien
or foreign contemporary. In this case, the record shows that, at least, 3. That a Philippine corporation known as Electric Supply Company, Inc.,
petitioner had actual knowledge of the applicability of R.A. No. 5455 at the where defendant Henry Herman was president, has been importing the
time the contract was executed and at all times thereafter. This conclusion is manufactures of plaintiff Western Electric Company, Inc.
compelled by the fact that the same statute is now being propounded by the
petitioner to bolster its claim. We, therefore sustain the appellate court's view 4. That defendant Henry Herman signed and filed AOI with the defendant
that "it was incumbent upon TOP-WELD to know whether or not IRTI and Fidel Reyes, as Director of BCI, with the intention to organize a domestic
ECED were properly authorized to engage in business in the Philippines when corporation to be known as ―Western Electric Company, Inc.‖ for the
they entered into the licensing and distributorship agreements." The very purpose, among others things, of manufacturing, buying, selling and
purpose of the law was circumvented and evaded when the petitioner dealing generally in electrical and telephone apparatus and supplies‖ in
entered into said agreements despite the prohibition of R.A. No. 5455. The violation of a trademark over ―Western Electric‖ existing in Washington,
parties in this case being equally guilty of violating R.A. No. 5455, they are in DC.
pari delicto, in which case it follows as a consequence that petitioner is not
entitled to the relief prayed for in this case. The lower court decided in favor of plaintiffs.
The doctrine of lack of capacity to sue based on the failure to ISSUE: WON plaintiff corporation can maintain an action to restraint
acquire a local license is based on considerations of sound public residents and inhabitants of the Philippines from organizing a corporation,
policy. The license requirement was imposed to subject the foreign when said inhabitants have knowledge of the existence of such foreign
corporation doing business in the Philippines to the jurisdiction of its courts. corporation?
It was never intended to favor domestic corporations who enter
into solitary transactions with unwary foreign firms and then HELD: Yes. In the case of Marshall-Wells Co. vs. Henry W. Elser & Co. (46
repudiate their obligations simply because the latter are not Phil., 70, 76), this court held:
licensed to do business in this country.
The noncompliance of a foreign corporation with the statute may be
In Antam Consolidated Inc. vs. Court of Appeals, et al. we expressed our pleaded as an affirmative defense. Thereafter, it must appear from the
chagrin over this commonly used scheme of defaulting local companies which evidence, first, that the plaintiff is a foreign corporation, second, that it is
are being sued by unlicensed foreign companies not engaged in business in doing business in the Philippines, and third, that it has not obtained the
the Philippines to invoke the lack of capacity to sue of such foreign proper license as provided by the statute.
companies. Obviously, the same ploy is resorted to by ASPAC to prevent the
injunctive action filed by ITEC to enjoin petitioner from using knowledge If it had been stipulated that the plaintiff, Western Electric Company, Inc.,
possibly acquired in violation of fiduciary arrangements between the parties. had been doing business in the Philippine Islands without first obtaining a
license, another and a very different question would be presented. That
By entering into the "Representative Agreement" with ITEC, Petitioner is company is not here seeking to enforce any legal or contract rights arising
charged with knowledge that ITEC was not licensed to engage in business

from, or growing out of, any business which it has transacted in the (Secs. 68 and 69, Corporation Law) does not make respondent any less a
Philippine Islands. The sole purpose of the action: juridical person. Indeed an exception to the license requirement has been
recognized in this jurisdiction, namely, where a foreign corporation sues on
"Is to protect its reputation, its corporate name, its goodwill, an isolated transaction. As first enunciated in Marshall-Wells Co. v. Elser &
whenever that reputation, corporate name or goodwill have, Co. "the object of the statute (Secs. 68 and 69, Corporation Law) was not to
through the natural development of its trade, established prevent the foreign corporation from performing single acts, but to prevent it
themselves." And it contends that its rights to the use of its corporate from acquiring a domicile for the purpose of business without taking the
and trade name: steps necessary to render it amenable to suit in the local courts ... the
implication of the law (being) that it was never the purpose of the legislature
Is a property right, a right in rem, which may assert and protect against all to exclude a foreign corporation which happens to obtain an isolated order
the world, in any of the courts of the world — even in jurisdictions where it for business from the Philippines, from securing redress in the Philippine
does not transact business — just the same as it may protect its tangible Courts. ..." The principle has since then been applied in a number of other
property, real or personal, against trespass, or conversion. Citing sec. 10, cases.
Nims on Unfair Competition and Trade-Marks and cases cited; secs. 21-22,
Hopkins on Trade-Marks, Trade Names and Unfair Competition and cases A more or less analogous question arose in Western Equipment & Supply Co.
cited." That point is sustained by the authorities, and is well stated in v. Reyes, 51 Phil. 115. The syllabus of the report, which is a correct
Hanover Star Milling Co. vs. Allen and Wheeler Co. (208 Fed., 513), in which statement of the doctrine laid down in the decision, reads as follows:
they syllabus says:
A foreign corporation which has never done ... business in the Philippine
Since it is the trade and not the mark that is to be protected, a Islands and which is unlicensed and unregistered to do business here, but
trade-mark acknowledges no territorial boundaries of is widely and favorably known in the Islands through the use therein of its
municipalities or states or nations, but extends to every market products bearing its corporate and trade name has a legal right to maintain
where the trader's goods have become known and identified by an action in the Islands.
the use of the mark
Parenthetically, it may be stated that the ruling in the Mentholatum case was
It is very apparent that the purpose and intent of Herman and his associates subsequently derogated when Congress, purposely to "counteract the
in seeking to incorporate under the name of Western Electric Company, Inc., effects" of said case, enacted Republic Act No. 638, inserting Section
was to unfairly and unjustly compete in the Philippine Islands with the 21-A in the Trademark Law, which allows a foreign corporation or
Western Electric Company, Inc., in articles which are manufactured by, and juristic person to bring an action in Philippine courts for
bear the name of, that company, all of which is prohibited by Act No. 666, infringement of a mark or trade-name, for unfair competition, or
and was made known to the defendant Reyes by the letter known in the false designation of origin and false description, "whether or not it
record to the defendant Reyes by the letter known in the record as Exhibit A. has been licensed to do business in the Philippines under Act
Numbered Fourteen hundred and fifty-nine, as amended, otherwise
The plaintiff, Western Electric Company, Inc., has been in existence as a known as the Corporation Law, at the time it brings complaint."
corporation for over fifty years, during which time it has established a
reputation all over the world including the Philippine Islands, for the kind and Petitioner argues that Section 21-A militates against respondent's capacity to
quality of its manufactured articles, and it is very apparent that the whole maintain a suit for cancellation, since it requires, before a foreign corporation
purpose and intent of Herman and his associates in seeking to incorporate may bring an action, that its trademark or tradename has been registered
another corporation under the identical name of Western Electric Company, under the Trademark Law. The argument misses the essential point in the
Inc., and for the same identical purpose as that of the plaintiff, is to trespass said provision, which is that the foreign corporation is allowed there under to
upon and profit by its good name and business reputation. The very fact that sue "whether or not it has been licensed to do business in the Philippines"
Herman and his associates have sought the use of that particular name for pursuant to the Corporation Law (precisely to counteract the effects of the
that identical purpose is conclusive evidence of the fraudulent intent with decision in the Mentholatum case).
which it is done.
In any event, respondent in the present case is not suing for infringement or
The judgment of the lower court is affirmed, with costs unfair competition under Section 21-A, but for cancellation under Section 17,
on one of the grounds enumerated in Section 4. The first kind of action, it
GENERAL GARMENTS CORPORATION, petitioner, maybe stated, is cognizable by the Courts of First Instance (Sec. 27); the
vs. second partakes of an administrative proceeding before the Patent Office
THE DIRECTOR OF PATENTS and PURITAN SPORTSWEAR (Sec. 18, in relation to Sec. 8). And while a suit under Section 21-A requires
CORPORATION, respondents that the mark or tradename alleged to have been infringed has been
(G.R. No. L-24295; September 30, 1971) "registered or assigned" to the suing foreign corporation, a suit for
cancellation of the registration of a mark or tradename under Section 17 has
FACTS: Respondent Puritan Sportswear Corporation, a corporation organized no such requirement. For such mark or tradename should not have been
and exiting under the laws of the state of Pensylvania, USA filed a petition registered in the first place (and consequently may be cancelled if so
with the Philippine Patent Office for the cancellation of the petitioner’s registered) if it "consists of or comprises a mark or tradename which so
trademark ―Puritan‖, alleging ownership and prior use in the Philippines of resembles a mark or tradename ... previously used in the Philippines by
the said trademark for assorted men’s wear, such as sweaters, shirts, jackets, another and not abandoned, as to be likely, when applied to or used in
undershirts and briefs, which has not been abandoned. It further alleged that connection with goods, business or services of the applicant, to cause
the registration thereof by petitioner had been obtained fraudulently and in confusion or mistake or to deceive purchasers; ..."(Sec. 4d).
violation of Sec. 17(c) of RA 166, in relation to Sec. 4(d) thereof.
WHEREFORE, the petition is dismissed, and the resolution of the Director of
Petitioner filed a motion to dismiss on several grounds which may be Patents dated August 6, 1964 is affirmed, with costs.
synthesized to respondent’s lack of capacity to maintain suit in the Philippines
which was denied. PUMA SPORTSCHUHFABRIKEN RUDOLF DASSLER, K.G., petitioner
vs.
ISSUE: WON Respondent Puritan Sportswear can maintain the suit? THE INTERMEDIATE APPELLATE COURT and MIL-ORO
MANUFACTURING CORPORATION, respondents
HELD: Yes. That respondent is a juridical person should be beyond serious (G.R. No. 75067; February 26, 1988)
dispute. The fact that it may not transact business in the Philippines unless it
has obtained a license for that purpose, nor maintain a suit in Philippine
courts for the recovery of any debt, claim or demand without such license

FACTS: Petitioner, a corporation organized and existing under the laws of
the Federal Republic of Germany filed a complaint of patent or trademark The mandate of the aforementioned Convention finds implementation in
infringement against herein respondent before the RTC of Makati. Section 37 of RA No. 166, otherwise known as the trademark Law:
Private respondent filed a motion to dismiss on the ground that petitioner Rights of Foreign Registrants. — Persons who are nationals of, domiciled
had no capacity to sue which was denied. On appeal, the CA reversed the in, or have a bona fide or effective business or commercial establishment
trial court. in any foreign country, which is a party to an international convention or
treaty relating to marks or tradenames on the represssion of unfair
ISSUE: WON petitioner had capacity to sue? competition to which the Philippines may be party, shall be entitled to the
benefits and subject to the provisions of this Act ...
HELD: Yes. Petitioner maintains that it has substantially complied with the
requirements of Section 21-A of Republic Act R.A. No. 166, as amended. Tradenames of persons described in the first paragraph of this section shall
According to the petitioner, its complaint specifically alleged that it is not be protected without the obligation of filing or registration whether or not
doing business in the Philippines and is suing under the said Repulbic Act; they form part of marks.
that Section 21-A thereof provides that "the country of which the said
corporation or juristic person is a citizen, or in which it is domiciled, by treaty, We, therefore, hold that the petitioner had the legal capacity to file the action
convention or law, grants a similar privilege to corporate or juristic persons of below.
the Philippines" but does not mandatorily require that such reciprocity
between the Federal Republic of Germany and the Philippines be pleaded; SUING FOR VIOLATION OF THE PENAL CODE AND AGENT DOING
that such reciprocity arrangement is embodied in and supplied by the Union BUSINESS UNDER ITS OWN NAME
Convention for the Protection of Industrial Property Paris Convention) to
which both the Philippines and Federal Republic of Germany are signatories LA CHEMISE LACOSTE, S. A., petitioner,
and that since the Paris 'Convention is a treaty which, pursuant to our vs.
Constitution, forms part of the law of the land, our courts are bound to take HON. OSCAR C. FERNANDEZ, Presiding Judge of Branch XLIX,
judicial notice of such treaty, and, consequently, this fact need not be Regional Trial Court, National Capital Judicial Region, Manila and
averred in the complaint. GOBINDRAM HEMANDAS, respondents.
(G.R. No. L-63796-97; May 2, 1984)
We agree.
GOBINDRAM HEMANDAS SUJANANI, petitioner,
In the leading case of La Chemise Lacoste, S.A .v. Fernandez, (129 SCRA vs.
373), we ruled: HON. ROBERTO V. ONGPIN, in his capacity as Minister of Trade and
Industry, and HON. CESAR SAN DIEGO, in his capacity as Director of
But even assuming the truth of the private respondents allegation that the Patents, respondents
petitioner failed to allege material facto in its petition relative to capacity to (G.R. No. L-65659 May 2l, 1984)
sue, the petitioner may still maintain the present suit against respondent
Hernandes. As early as 1927, this Court was, and it still is, of the view that FACTS: Petitioner, a corporation organized and existing under the laws of
a foreign corporation not doing business in the Philippines needs France and not doing business in the Philippines, filed with the NBI a letter-
no license to sue before Philippine courts for infringement of complaint alleging therein the acts of unfair competition being committed by
trademark and unfair competition. Thus, in Western Equipment and respondent Hemandas and requesting their assistance in his apprehension
Supply Co. v. Reyes (51 Phil. 11 5), this Court held that a foreign and prosecution, after Hermandas acquired a patent for the use of ―CHEMISE
corporation which has never done any business in the Philippines and LACOSTE & DEVICE‖.
which is unlicensed and unregistered to do business here, but is widely
and favorably known in the Philippines through the use therein of its NBI filed with the respondent court for two search warrant which was issued
products bearing its corporate and tradename, has a legal right to maintain and for which a motion to quash was filed by Hermandas alleging that his
an action in the Philippines to restrain the residents and inhabitants thereof trademark is different from that of petitioner, which was granted by
from organizing a corporation therein bearing the same name as the respondent court.
foreign corporation, when it appears that they have personal knowledge of
the existence of such a foreign corporation, and it is apparent that the ISSUE: WON petitioner, having a representative, is doing business in the
purpose of the proposed domestic corporation is to deal and trade in the Philippines?
same goods as those of the foreign corporation.
HELD: No. Respondent states that not only is the petitioner not doing
Quoting the Paris Convention and the case of Vanity Fair Mills, Inc. v. T. business in the Philippines but it also is not licensed to do business in the
Eaton, Co. (234 F. 2d 633), this Court further said: Philippines. He also cites the case of Leviton Industries v. Salvador (114
SCRA 420) to support his contention The Leviton case, however, involved a
By the same token, the petitioner should be given the same treatment in complaint for unfair competition under Section 21-A of Republic Act No. 166
the Philippines as we make available to our own citizens. We are obligated which provides:
to assure to nationals of 'countries of the Union' an effective protection
against unfair competition in the same way that they are obligated to Sec. 21 — A. Any foreign corporation or juristic person to which a mark or
similarly protect Filipino citizens and firms. tradename has been registered or assigned under this Act may bring an
action hereunder for infringement, for unfair competition, or false
In the case of of Cerverse Rubber Corporation V. Universal Rubber Products, designation of origin and false description, whether or not it has been
Inc. (174 SCRA 165), we likewise re-aafirmed our adherence to the Paris licensed to do business in the Philippines under Act numbered Fourteen
Convention: Hundred and Fifty-Nine, as amended, otherwise known as the Corporation
Law, at the time it brings the complaint; Provided, That the country of
The ruling in the aforecited case is in consonance with the Convention of which the said foreign corporation or juristic person is a citizen, or in which
Converse Rubber Corporation v. Universal Rubber Products, Inc. (I 47 it is domiciled, by treaty, convention or law, grants a similar privilege to
SCRA 165), we likewise re-affirmed our adherence to the Paris Convention: corporate or juristic persons of the Philippines.
the Union of Paris for the Protection of Industrial Property to which the
Philippines became a party on September 27, 1965. Article 8 thereof We held that it was not enough for Leviton, a foreign corporation organized
provides that 'a trade name [corporation name] shall be protected in all and existing under the laws of the State of New York, United States of
the countries of the Union without the obligation of filing or registration, America, to merely allege that it is a foreign corporation. It averred in
whether or not it forms part of the trademark.' Paragraph 2 of its complaint that its action was being filed under the

provisions of Section 21-A of Republic Act No. 166, as amended. Compliance
with the requirements imposed by the above-cited provision was necessary HELD: Yes. But even assuming the truth of the private respondent's
because Section 21-A of Republic Act No. 166 having explicitly laid down allegation that the petitioner failed to allege material facts in its petition
certain conditions in a specific proviso, the same must be expressly averred relative to capacity to sue, the petitioner may still maintain the present suit
before a successful prosecution may ensue. It is therefore, necessary for the against respondent Hemandas. As early as 1927, this Court was, and it
foreign corporation to comply with these requirements or aver why it should still is, of the view that a foreign corporation not doing business in
be exempted from them, if such was the case. The foreign corporation may the Philippines needs no license to sue before Philippine courts for
have the right to sue before Philippine courts, but our rules on pleadings infringement of trademark and unfair competition.
require that the qualifying circumstances necessary for the assertion of such
right should first be affirmatively pleaded. Our recognizing the capacity of the petitioner to sue is not by any means
novel or precedent setting. Our jurisprudence is replete with cases illustrating
In contradistinction, the present case involves a complaint for violation instances when foreign corporations not doing business in the Philippines
of Article 189 of the Revised Penal Code. The Leviton case is not may nonetheless sue in our courts. In East Board Navigation Ltd, v. Ysmael
applicable. and Co., Inc. (102 Phil. 1), we recognized a right of foreign corporation to
sue on isolated transactions. In General Garments Corp. v. Director of
Asserting a distinctly different position from the Leviton argument, Hemandas Patents (41 SCRA 50), we sustained the right of Puritan Sportswear Corp., a
argued in his brief that the petitioner was doing business in the Philippines foreign corporation not licensed to do and not doing business in the
but was not licensed to do so. To support this argument, he states that the Philippines, to file a petition for cancellation of a trademark before the Patent
applicable ruling is the case of Mentholatum Co., Inc. v. Mangaliman: (72 Office.
Phil. 524) where Mentholatum Co. Inc., a foreign corporation and Philippine-
American Drug Co., the former's exclusive distributing agent in the Philippines More important is the nature of the case which led to this petition. What
filed a complaint for infringement of trademark and unfair competition preceded this petition for certiorari was a letter complaint filed before the NBI
against the Mangalimans. charging Hemandas with a criminal offense, i.e., violation of Article 189 of the
Revised Penal Code. If prosecution follows after the completion of the
The argument has no merit. The Mentholatum case is distinct from and preliminary investigation being conducted by the Special Prosecutor the
inapplicable to the case at bar. Philippine American Drug Co., Inc., was information shall be in the name of the People of the Philippines
admittedly selling products of its principal Mentholatum Co., Inc., in the and no longer the petitioner which is only an aggrieved party since
latter's name or for the latter's account. Thus, this Court held that "whatever a criminal offense is essentially an act against the State. It is the
transactions the Philippine-American Drug Co., Inc. had executed in view of latter which is principally the injured party although there is a private right
the law, the Mentholatum Co., Inc., did it itself. And, the Mentholatum Co., violated. Petitioner's capacity to sue would become, therefore, of not
Inc., being a foreign doing business in the Philippines without the license much significance in the main case. We cannot snow a possible violator
required by Section 68 of the Corporation Law, it may not prosecute this of our criminal statutes to escape prosecution upon a far-fetched contention
action for violation of trademark and unfair competition." that the aggrieved party or victim of a crime has no standing to sue.
In the present case, however, the petitioner is a foreign corporation not ISSUE3: WON petitioner has a right to maintain a suit for infringement of
doing business in the Philippines. The marketing of its products in the trademarks?
Philippines is done through an exclusive distributor, Rustan Commercial
Corporation. The latter is an independent entity which buys and then markets HELD: Yes. We are moreover recognizing our duties and the rights of foreign
not only products of the petitioner but also many other products bearing states under the Paris Convention for the Protection of Industrial Property to
equally well-known and established trademarks and tradenames. In other which the Philippines and France are parties. We are simply interpreting and
words, Rustan is not a mere agent or conduit of the petitioner. enforcing a solemn international commitment of the Philippines embodied in
a multilateral treaty to which we are a party and which we entered into
The rules and regulations promulgated by the Board of Investments pursuant because it is in our national interest to do so.
to its rule-making power under Presidential Decree No. 1789, otherwise
known as the Omnibus Investment Code, support a finding that the petitioner The Paris Convention provides in part that:
is not doing business in the Philippines. Rule I, Sec. 1 (g) of said rules
and regulations defines "doing business" as one" which includes, inter alia: ARTICLE 2
(2) Nationals of each of the countries of the Union shall as regards the
(1) ... A foreign firm which does business through middlemen protection of industrial property, enjoy in all the other countries of the
acting on their own names, such as indentors, commercial brokers or Union the advantages that their respective laws now grant, or may
commission merchants, shall not be deemed doing business in the hereafter grant, to nationals, without prejudice to the rights specially
Philippines. But such indentors, commercial brokers or commission provided by the present Convention. Consequently, they shall have the
merchants shall be the ones deemed to be doing business in the same protection as the latter, and the same legal remedy against any
Philippines. infringement of their rights, provided they observe the conditions and
formalities imposed upon nationals.
(2) Appointing a representative or distributor who is domiciled in
the Philippines, unless said representative or distributor has an xxx xxx xxx
independent status, i.e., it transacts business in its name and for its
account, and not in the name or for the account of a principal. Thus, ARTICLE 6
where a foreign firm is represented by a person or local company which (1) The countries of the Union undertake, either administratively if their
does not act in its name but in the name of the foreign firm the latter is legislation so permits, or at the request of an interested party, to refuse or
doing business in the Philippines. to cancel the registration and to prohibit the use of a trademark which
xxx xxx xxx constitutes a reproduction, imitation or translation, liable to create
confusion, of a mark considered by the competent authority of the country
Applying the above provisions to the facts of this case, we find and of registration or use to be well-known in that country as being already the
conclude that the petitioner is not doing business in the Philippines. mark of a person entitled to the benefits of the present Convention and
Rustan is actually a middleman acting and transacting business in its own used for Identical or similar goods. These provisions shall also apply when
name and or its own account and not in the name or for the account of the the essential part of the mark constitutes a reproduction of any such well-
petitioner. known mark or an imitation liable to create confusion therewith.
ISSUE2: WON the criminal case can be maintained even if the foreign xxx xxx xxx
corporation is doing business without a license?

ARTICLE 8
A trade name shall be protected in all the countries of the Union without FACTS: Plaintiff-appellants, organized and existing under the laws of the US,
the obligation of filing or registration, whether or not it forms part of a sued herein defendant-appellee, as subrogee to the shipper and consignee,
trademark. alleging that the latter undertook to carry a shipment of copra for delivery to
xxx xxx xxx P&G Company at Cebu City but upon discharge, a portion of the copra was
found damaged.
ARTICLE 10bis
(1) The countries of the Union are bound to assure to persons entitled to Defendant moved to dismiss on the ground that the complaints on the
the benefits of the Union effective protection against unfair competition ground of failure to allege compliance with Sec. 69 of the Corporation Law
which was granted after failure of the plaintiff to comply with the amendment
A treaty or convention is not a mere moral obligation to be enforced of the complaint.
or not at the whims of an incumbent head of a Ministry. It creates a
legally binding obligation on the parties founded on the generally ISSUE: WON plaintiff-appellants have the right to sue as to the defects n the
accepted principle of international law of pacta sunt servanda which pleadings and procedures?
has been adopted as part of the law of our land. (Constitution, Art.
II, Sec. 3). HELD: No. It should be noted that insofar as the allegations in the complaint
have a bearing on appellants' capacity to sue, all that is averred is that they
We have carefully gone over the records of all the cases filed in this Court are both foreign corporations existing under the laws of the United States.
and find more than enough evidence to sustain a finding that the petitioner is This averment conjures two alternative possibilities: either they are engaged
the owner of the trademarks "LACOSTE", "CHEMISE LACOSTE", the crocodile in business in the Philippines or they are not so engaged. If the first, they
or alligator device, and the composite mark of LACOSTE and the must have been duly licensed in order to maintain this suit; if the second, if
representation of the crocodile or alligator. Any pretensions of the private the transaction sued upon is singular and isolated, no such license is
respondent that he is the owner are absolutely without basis. Any further required. In either case, the qualifying circumstance is an essential part of
ventilation of the issue of ownership before the Patent Office will be a the element of plaintiffs' capacity to sue and must be affirmatively pleaded.
superfluity and a dilatory tactic.
To be sure, under the Rules of Court (Section 11, Rule 15) in force prior to
The records show that the goodwill and reputation of the petitioner's the promulgation of the Revised Rules on January 1, 1964, it was not
products bearing the trademark LACOSTE date back even before 1964 when necessary to aver the capacity of a party to sue except to the extent required
LACOSTE clothing apparels were first marketed in the Philippines. To allow to show jurisdiction of the court. In our opinion, however, such rule does not
Hemandas to continue using the trademark Lacoste for the simple reason apply in all situations and under all circumstances. The theory behind a
that he was the first registrant in the Supplemental Register of a trademark similar rule in the United States is "that capacity ... of a party for purpose of
used in international commerce and not belonging to him is to render suit is not in dispute in the great bulk of cases, and that pleading and proof
nugatory the very essence of the law on trademarks and tradenames. can be simplified by a rule that an averment of such matter is not necessary,
except to show jurisdiction."1 But where as in the present case, the law
WHEREFORE, the petition in G.R. NOS. 63797-97 is hereby GRANTED. The denies to a foreign corporation the right to maintain suit unless it has
order dated April 22, 1983 of the respondent regional trial court is REVERSED previously complied with a certain requirement, then such compliance, or the
and SET ASIDE. fact that the suing corporation is exempt therefrom, becomes a necessary
averment in the complaint. These are matters peculiarly within the
F. CAPACITY TO SUE 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
GENERAL RULE: A corporation’s capacity to sue must be affirmatively foreign corporations are allowed by law to seek redress in our courts under
pleaded in order that it may proceed and effectively institute a case in certain conditions: the interpretation of the law should not go so far as to
Philippine courts. Thus, in the case for instance of a complaint for unfair labor include, in effect, an inference that those conditions have been met from the
competition under Sec. 21-A of RA No. 166, it was held that it is necessary mere fact that the party suing is a foreign corporation.
for the foreign corporation to comply with the provision thereof or aver why it
should be exempted from them, if such be the case. The foreign corporation It was indeed in the light of these and other consideration that this Court has
may have the right to sue before our courts but our rules on pleadings seen fit to amend the former rule by requiring in the Revised Rules (Section
require that the qualifying circumstances necessary for the assertion of such 4, Rule 8) that "facts showing the capacity of a party to sue or be sued or the
right should first be affirmatively pleaded (Leviton Industries vs Salvador). authority of a party to sue or be sued in a representative capacity or the legal
existence of an organized association of persons that is made a party, must
EXCEPTIONS: be averred."
EFFECT OF NON-PLEADING: If the dismissal of the case is based on the The orders appealed from are affirmed, with costs against plaintiffs-
failure of the foreign corporation to aver its capacity to sue, would not, appellants
however, bar the institution of the same action, dismissal should not be
allowed, especially so if it would be an idle, circuitous ceremony considering OLYMPIA BUSINESS MACHINES CO. (PHIL.) INC. and CALIFORNIA
the absence of any meritorious substantial defense of the defendant. INSURANCE CO., LTD., petitioners,
Technical rules should not be accorded undue importance to frustrate and vs.
defeat a plainly valid claim (Olympia Business Machines vs. E. Razon, Inc.) E. RAZON, INC., TOYO LINE, LTD., and SEA BRIDGE CONTAINER
SHIPPING LINES, INC., respondents.
COMPLAINT BASED ON VIOLATION OF RPC OR THE CORPORATION (G.R. No. 75631; October 28, 1987)
IS MERELY DEFENDING ITSELF: averment of capacity to sue is not
likewise necessary as laid down in the case of Chemise Lacoste vs. FACTS: Olympia Office Machines, Ltd., a foreign corporation with offices at
Fernandez, or when the foreign corporation is not suing or maintaining a suit Hongkong, shipped 300 portable typewriters to its sister company in Manila,
but is merely defending itself from one filed against it (Times, Inc. vs. Olympia Business Machines Company (Phil.), Inc., such shipment insured
Reyes). with California Insurance Co., Ltd. another foreign corporation.
ATLANTIC MUTUAL INSURANCE COMPANY and CONTINENTAL The typewriters were discharged at North Harbor, Manila into the custody of
INSURANCE COMPANY, plaintiffs and appellants, the carrier’s agent which in turn turned it over to E. Razon, Inc. While in the
vs. latter’s possession, part of the shipment was stolen. California Insurance was
CEBU STEVEDORING CO., INC., defendant and appellee subrogated to the claim for loss after paying Olympia (Phil).
(G.R. No. L-18961; August 31, 1966)
Both Olympia (Phil.) and California thereafter brought a suit against E. Razon, publication of Time (Asia Edition) magazine, in its issue entitled ―Corruption
Inc., the carrier and the container company, which had earlier refused to in Asia‖.
make good the loss of the goods.
Petitioner filed a motion to dismiss on lack of jurisdiction and improper venue
For E.Razon’s failure to appear at the pre-trial and after ex-parte reception of which was deferred until after the trial of the case.
evidence, the trial court decided for California. On Razon’s motion, the order
was set aside and Razon amended his answer that California is a foreign ISSUE: WON the petition for certiorari and prohibition will prosper?
corporation doing business in the Philippines without a license to do so and
that it cannot maintain suit in this jurisdiction. But once again, Razon failed to HELD: The dismissal of the present petition is asked on the ground that the
appear at the pre-trial, as a result, the trial court revived the decision. petitioner foreign corporation failed to allege its capacity to sue in the courts
of the Philippines. Respondents rely on section 69 of the Corporation law,
On appeal, the IAC reversed the decision holding, among others, that which provides:
California failed to allege in the complaint its capacity to sue.
SEC. 69. No foreign corporation or corporations formed, organized, or
ISSUE: WON the failure of California to aver its capacity to sue is fatal? existing under any laws other than those of the Philippines shall be
permitted to ... maintain by itself or assignee any suit for the recovery of
HELD: The slightest reflection will however immediately make — Tear that any debt, claim, or demand whatever, unless it shall have the license
between the factual settings of the Atlantic Mutual case and the case at bar, prescribed in the section immediately preceding. ..." ...;
there are distinctions of no little significance. In the former, Atlantic Mutual
Insurance Co. and Continental Insurance Co., two (2) American firms, They also invoke the ruling in Marshall-Wells Co. vs. Elser & Co., Inc. 7 that
brought suit as subrogees of the shipper and/or consignee of the goods no foreign corporation may be permitted to maintain any suit in the local
ensured without joining the latter. In the case at hand, the action was courts unless it shall have the license required by the law, and the ruling in
instituted by both the subrogee, California Insurance Co., Ltd., and Atlantic Mutual Ins. Co., Inc. vs. Cebu Stevedoring Co., Inc. 8 that "where ...
the subrogor, a domestic corporation, Olympia (Philippines) about the law denies to a foreign corporation the right to maintain suit unless it has
whose capacity to sue no dispute exists. In Atlantic Mutual, the previously complied with a certain requirement, then such compliance or the
plaintiffs' lack of capacity to sue was raised by the defendant at the fact that the suing corporation is exempt therefrom, becomes a necessary
earliest opportunity, through a motion to dismiss filed within the averment in the complaint." We fail to see how these doctrines can be a
reglementary period to answer in accordance with Rule 16 of the propos in the case at bar, since the petitioner is not "maintaining
Rules of Court. In the case at bar, the defendant was twice declared any suit" but is merely defending one against itself; it did not file
in default, and the defense of lack of capacity to sue, was not raised any complaint but only a corollary defensive petition to prohibit the
until after 'the first declaration of default had been lifted. Moreover, lower court from further proceeding with a suit that it had no
there Is a pronouncement by the Court of Appeals in the instant case, that jurisdiction to entertain.
the defendant had no meritorious defenses save that of lack of capacity to
sue on the part of the plaintiff. Petitioner's failure to aver its legal capacity to institute the present petition is
not fatal, for ...
These circumstances proscribe the application to the controversy at bar of
the doctrine in Atlantic Mutual. The defendant's conduct in this case A foreign corporation may, by writ of prohibition, seek relief against the
strongly indicates the absence of any valid defense on its part wrongful assumption of jurisdiction. And a foreign corporation seeking
against the plaintiffs' claims: the defendant failed to appear for pre-trial a writ of prohibition against further maintenance of a suit, on the
despite notice, not once, but twice and was in consequence twice declared in ground of want of jurisdiction in which jurisdiction is not bound
default. The lack of any meritorious defense on its part was in fact confirmed by the ruling of the court in which the suit was brought, on a
by the declaration of the Court of Appeals, which it has not challenged, that motion to quash service of summons, that it has jurisdiction.
three (3) errors attributed by it to the Trial Court were "unmeritorious except
the second," i. e., plaintiff's lack of capacity to sue. Even assuming incapacity WHEREFORE, the writs applied for are granted: the respondent Court of First
on the part of California, no such incapacity may be attributed to its co- Instance of Rizal is declared without jurisdiction to take cognizance of its Civil
plaintiff, Olympia Business Machines Co. (Phil.), Inc. And if strictly necessary, Case No. 10403; and its orders issued in connection therewith are hereby
the latter could quite easily execute a cancellation of the deed of subrogation annulled and set aside,. Respondent court is further commanded to desist
or of re-assignment of the right of action from California back to Olympia. from further proceedings in Civil case No. 10403 aforesaid. Costs against
Moreover, the dismissal of the case at this stage, would not bar the private respondents, Antonio J. Villegas and Juan Ponce Enrile.
institution by California of the same action, this time alleging in its complaint
that it was suing on a single, isolated transaction. But this would be an Idle, G. LAWS GOVERNING FOREIGN CORPORATIONS
circuitous ceremony in the light of the unchallenged declaration by the Court
of Appeals of the absence of any meritorious substantial defense on the part Sec. 129. Law applicable. - Any foreign corporation lawfully doing
of defendant Razon. This would be to accord undue importance and business in the Philippines shall be bound by all laws, rules and regulations
significance to technical rules, to allow an inflexible, unreasoning adherence applicable to domestic corporations of the same class, except such only as
to such technical rules to frustrate and defeat a plainly valid claim. provide for the creation, formation, organization or dissolution of corporations
or those which fix the relations, liabilities, responsibilities, or duties of
WHEREFORE, the judgment of the Intermediate Appellate Court subject of stockholders, members, or officers of corporations to each other or to the
the appeal is reverse and that of the Trial Court, dated February 1, 1980 corporation.
reinstated and affirmed, with costs against the respondents.
M. E. GREY, plaintiff-appellant,
TIME, INC., petitioner, vs.
vs. INSULAR LUMBER COMPANY, defendant-appelle
HON. ANDRES REYES, as Judge of the Court of First Instance of (G.R. No. L-45144; April 3, 1939)
Rizal, ELISEO S. ZARI, as Deputy Clerk of Court, Branch VI, Court of
First Instance of Rizal, ANTONIO J. VILLEGAS and JUAN PONCE FACTS: Herein defendant-appellee Insular Lumber Company is a corporation
ENRILE, respondents. existing and organized under the laws of the State of New York licensed to
(G.R. No. L-28882; May 31, 1971) engage business in the Philippines.
FACTS: Herein respondents Antonio Villegas and Juan Ponce Enrile sought to The plaintiff-appellant Grey, holder of 57 shares (which is less than 3% of the
recover from herein petitioner damages upon an alleged libel arising from a outstanding capital stock of defendant corporation), was denied access to the
books and records of the company because, as alleged, the laws of New York
provide that only a stockholder who own at least 3% of the outstanding
capital stock of a corporation may make a written request to the treasurer or Sec. 132. Merger or consolidation involving a foreign corporation
other fiscal officer for a statement of its affairs; that plaintiff neither has the licensed in the Philippines. - One or more foreign corporations authorized
3% requirement nor made the written request. to transact business in the Philippines may merge or consolidate with any
domestic corporation or corporations if such is permitted under Philippine
Plaintiff raises the Corporation Law which does not provide such laws and by the law of its incorporation: Provided, That the requirements on
requirements and gives any stockholder the right to examine the books of the merger or consolidation as provided in this Code are followed.
corporation. Such law, being the law upon which the defendant corporation Whenever a foreign corporation authorized to transact business in the
was issued a license to do business in the Philippines. Philippines shall be a party to a merger or consolidation in its home country
or state as permitted by the law of its incorporation, such foreign corporation
ISSUE: WON appellant, as a stockholder, is entitled to inspect and examine shall, within sixty (60) days after such merger or consolidation becomes
the books and records of transactions of appellee? effective, file with the Securities and Exchange Commission, and in proper
cases with the appropriate government agency, a copy of the articles of
HELD: Under ection 77 Stock Corporation Law of New York. Under this law, merger or consolidation duly authenticated by the proper official or officials of
plaintiff has the right to be furnished by the treasurer or other fiscal officer of the country or state under the laws of which merger or consolidation was
the corporation with statement of its affairs embracing a particular account of effected: Provided, however, That if the absorbed corporation is the foreign
all its assets and liabilities. In the third place, inasmuch as plaintiff, either at corporation doing business in the Philippines, the latter shall at the same time
the hearing or in his motion for new trial, did not ask to have the stipulation file a petition for withdrawal of it license in accordance with this Title.
of facts altered or changed, he cannot now, for the first time on appeal, raise
the question that aside from the right conferred upon him by section 77 of K. REVOCATION OF LICENSE
the Stock Corporation Law of New York, he also entitled under the common
law to examine and inspect the books and records of the defendant Sec. 134. Revocation of license. - Without prejudice to other grounds
corporation. In the fourth place, neither can this right under the common law provided by special laws, the license of a foreign corporation to transact
be granted the defendant in the present case, since the same can only be business in the Philippines may be revoked or suspended by the Securities
granted at the discretion of the court, under certain conditions, to wit: and Exchange Commission upon any of the following grounds:
(a) That the stockholder of a corporation in New York has the right to 1. Failure to file its annual report or pay any fees as required by this Code;
inspect its books and records if it can be shown that he seeks information
for an honest purpose (14 C. J., 853), or to protect his interest as 2. Failure to appoint and maintain a resident agent in the Philippines as
stockholder. (In re Steinway, 159 N. Y., 250; 53 N. E., 1103; 45 L. R. A., required by this Title;
461 [aff. 31 App. Div., 70; 52 N. Y. S., 343]).
3. Failure, after change of its resident agent or of his address, to submit to
(b) That said right to examine and inspect the books of the corporation the Securities and Exchange Commission a statement of such change as
must be exercised in good faith, for a specific and honest purpose, and not required by this Title;
to gratify curiosity, or for speculative or vexatious purposes. (14 C. J., 854,
855.) 4. Failure to submit to the Securities and Exchange Commission an
authenticated copy of any amendment to its articles of incorporation or by-
The appellant has made no effort to prove or even allege that the information laws or of any articles of merger or consolidation within the time prescribed
he desired to obtain through the examination and inspection of defendant's by this Title;
books was necessary to protect his interests as stockholder of the
corporation, or that it was for a specific and honest purpose, and not to 5. A misrepresentation of any material matter in any application, report,
gratify curiosity, nor for speculative or vexatious purposes. affidavit or other document submitted by such corporation pursuant to this
Title;
In view of the foregoing, we affirm the judgment of the lower court, with
costs against the appellant. 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;
H. AMENDMENTS TO THE ARTICLES OF INCORPROATION
7. Transacting business in the Philippines outside of the purpose or purposes
Sec. 130. Amendments to articles of incorporation or by-laws of for which such corporation is authorized under its license;
foreign corporations. - Whenever the articles of incorporation or by-laws
of a foreign corporation authorized to transact business in the Philippines are 8. Transacting business in the Philippines as agent of or acting for and in
amended, such foreign corporation shall, within sixty (60) days after the behalf of any foreign corporation or entity not duly licensed to do business in
amendment becomes effective, file with the Securities and Exchange the Philippines; or
Commission, and in the proper cases with the appropriate government
agency, a duly authenticated copy of the articles of incorporation or by-laws, 9. Any other ground as would render it unfit to transact business in the
as amended, indicating clearly in capital letters or by underscoring the Philippines.
change or changes made, duly certified by the authorized official or officials
of the country or state of incorporation. The filing thereof shall not of itself Sec. 135. Issuance of certificate of revocation. - Upon the revocation of
enlarge or alter the purpose or purposes for which such corporation is any such license to transact business in the Philippines, the Securities and
authorized to transact business in the Philippines. Exchange Commission shall issue a corresponding certificate of revocation,
furnishing a copy thereof to the appropriate government agency in the proper
I. AMENDMENT OF LICENSE cases.
Sec. 131. Amended license. - A foreign corporation authorized to transact The Securities and Exchange Commission shall also mail to the corporation at
business in the Philippines shall obtain an amended license in the event it its registered office in the Philippines a notice of such revocation
changes its corporate name, or desires to pursue in the Philippines other or accompanied by a copy of the certificate of revocation.
additional purposes, by submitting an application therefor to the Securities
and Exchange Commission, favorably endorsed by the appropriate L. WITHDRAWAL OF FOREIGN CORPORATIONS
government agency in the proper cases.
Sec. 136. Withdrawal of foreign corporations. - Subject to existing laws
J. MERGER/CONSOLIDATION and regulations, a foreign corporation licensed to transact business in the
Philippines may be allowed to withdraw from the Philippines by filing a the answers thereto, as well as the results of any examination made by the
petition for withdrawal of license. No certificate of withdrawal shall be issued Commission or by any other official authorized by law to make an
by the Securities and Exchange Commission unless all the following examination of the operations, books and records of any corporation, shall be
requirements are met; kept strictly confidential, except insofar as the law may require the same to
be made public or where such interrogatories, answers or results are
1. All claims which have accrued in the Philippines have been paid, necessary to be presented as evidence before any court.
compromised or settled;
Sec. 143. Rule-making power of the Securities and Exchange
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Commission. - The Securities and Exchange Commission shall have the
Philippine Government or any of its agencies or political subdivisions have power and authority to implement the provisions of this Code, and to
been paid; and promulgate rules and regulations reasonably necessary to enable it to
perform its duties hereunder, particularly in the prevention of fraud and
3. The petition for withdrawal of license has been published once a week for abuses on the part of the controlling stockholders, members, directors,
three (3) consecutive weeks in a newspaper of general circulation in the trustees or officers.
Philippines.
CHAPTER 19: MISCELLANEOUS PROVISIONS (TITLE XVI) Sec. 144. Violations of the Code. - Violations of any of the provisions of
this Code or its amendments not otherwise specifically penalized therein shall
Sec. 137. Outstanding capital stock defined. - The term "outstanding be punished by a fine of not less than one thousand (P1,000.00) pesos but
capital stock", as used in this Code, means the total shares of stock issued not more than ten thousand (P10,000.00) pesos or by imprisonment for not
under binding subscription agreements to subscribers or stockholders, less than thirty (30) days but not more than five (5) years, or both, in the
whether or not fully or partially paid, except treasury shares. discretion of the court. If the violation is committed by a corporation, the
same may, after notice and hearing, be dissolved in appropriate proceedings
Sec. 138. Designation of governing boards. - The provisions of specific before the Securities and Exchange Commission: Provided, That such
provisions of this Code to the contrary notwithstanding, non-stock or special dissolution shall not preclude the institution of appropriate action against the
corporations may, through their articles of incorporation or their by-laws, director, trustee or officer of the corporation responsible for said violation:
designate their governing boards by any name other than as board of Provided, further, That nothing in this section shall be construed to repeal the
trustees. other causes for dissolution of a corporation provided in this Code.
Sec. 139. Incorporation and other fees. - The Securities and Exchange Sec. 145. Amendment or repeal. - No right or remedy in favor of or
Commission is hereby authorized to collect and receive fees as authorized by against any corporation, its stockholders, members, directors, trustees, or
law or by rules and regulations promulgated by the Commission. officers, nor any liability incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be removed or impaired either
Sec. 140. Stock ownership in certain corporations. - Pursuant to the by the subsequent dissolution of said corporation or by any subsequent
duties specified by Article XIV of the Constitution, the National Economic and amendment or repeal of this Code or of any part thereof.
Development Authority shall, from time to time, make a determination of
whether the corporate vehicle has been used by any corporation or by Sec. 146. Repealing clause. - Except as expressly provided by this Code,
business or industry to frustrate the provisions thereof or of applicable laws, all laws or parts thereof inconsistent with any provision of this Code shall be
and shall submit to the Batasang Pambansa, whenever deemed necessary, a deemed repealed.
report of its findings, including recommendations for their prevention or
correction. Sec. 147. Separability of provisions. - Should any provision of this Code
or any part thereof be declared invalid or unconstitutional, the other
Maximum limits may be set by the Batasang Pambansa for stockholdings in provisions, so far as they are separable, shall remain in force.
corporations declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to individuals or groups of individuals Sec. 148. Applicability to existing corporations. - All corporations
related to each other by consanguinity or affinity or by close business lawfully existing and doing business in the Philippines on the date of the
interests, or whenever it is necessary to achieve national objectives, prevent effectivity of this Code and heretofore authorized, licensed or registered by
illegal monopolies or combinations in restraint or trade, or to implement the Securities and Exchange Commission, shall be deemed to have been
national economic policies declared in laws, rules and regulations designed to authorized, licensed or registered under the provisions of this Code, subject
promote the general welfare and foster economic development. 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
In recommending to the Batasang Pambansa corporations, business or new requirements of this Code, said corporation shall, unless otherwise
industries to be declared vested with a public interest and in formulating herein provided, be given a period of not more than two (2) years from the
proposals for limitations on stock ownership, the National Economic and effectivity of this Code within which to comply with the same.
Development Authority shall consider the type and nature of the industry, the
size of the enterprise, the economies of scale, the geographic location, the Sec. 149. Effectivity. - This Code shall take effect immediately upon its
extent of Filipino ownership, the labor intensity of the activity, the export approval.
potential, as well as other factors which are germane to the realization and
promotion of business and industry.
Sec. 141. Annual report or corporations. - Every corporation, domestic

or foreign, lawfully doing business in the Philippines shall submit to the
Securities and Exchange Commission an annual report of its operations,
together with a financial statement of its assets and liabilities, certified by any
independent certified public accountant in appropriate cases, covering the
preceding fiscal year and such other requirements as the Securities and
Exchange Commission may require. Such report shall be submitted within
such period as may be prescribed by the Securities and Exchange
Commission.
Sec. 142. Confidential nature of examination results. - All

interrogatories propounded by the Securities and Exchange Commission and


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THE CORPORATION CODE OF THE PHILIPPINES

Cesar Nickolai F. Soriano Jr.

NATIONAL COAL COMPANY VS. COLLECTOR OF INTERNAL REVENUE

Cesar Nickolai F. Soriano Jr.

The name of the corporation is essential to its existence since it is through it

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

d. PRINCIPAL OFFICE NAME NATIONALITY RESIDENCE

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

C. STOCK ISSUANCE Most jurisdiction follow the GOOD FAITH rule.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.

Cesar Nickolai F. Soriano Jr.