BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
December 17, 2015 (KTan)
[Segue: So we have come to the end. Our first exam should
cover until Section 22.]
So now, we will take the next part which is Board of Trustees,
Directors or Officers.
Now, Board of Directors. Section 23 defines the body of the
Board of Directors. It says:
Section 23. The board of directors or trustees. Unless
otherwise provided in this Code, the corporate powers of
all corporations formed under this Code shall be
exercised, all business conducted and all property of
such corporations controlled and held by the board of
directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one
(1) year until their successors are elected and qualified.
(28a)
Every director must own at least one (1) share of the capital
stock of the corporation of which he is a director, which share
shall stand in his name on the books of the corporation. Any
director who ceases to be the owner of at least one (1) share
of the capital stock of the corporation of which he is a
director shall thereby cease to be a director. Trustees of non-
stock corporations must be members thereof. A majority of
the directors or trustees of all corporations organized under
this Code must be residents of the Philippines.
Suppose, you are the owner of the 99% of the outstanding
capital stock of the corporation. But because the corporation
requires at least 5 to be incorporators, you have nomineesat
least 4 peopleto have at least 1 share. And then, when the
corporation articles are approved (you now have a certificate
of incorporation), the you will also create a board. You have
the articles, and 5 members of the board of directors.
Now, since you don't want to be stuck with meetings, you ask
somebody to be in the board. You are not in the board but you
own the 99% of the outstanding capital stock of the
corporation.
Now, when the board meets, you do not like their decision.
Can you override the decision of the board? Muingon kag,
Unsa man lang ning 99% shares nako sa sa corporation? I will
override the board. Can you do it? That is the first question.
Second question: Suppose, you'd hear something that the
board was meeting [about]. And you want to influence their
decision because it is crucial to this company where the 99%
of the capital stock is owned by you. And you'll say, Gusto
nako naa ko sa meeting. I demand it by right! I am not a
member of the board, but I own 99% of the capital stock. So I
have the right to attend the meeting! Do you have the right to
attend the meeting?
If the answer in the first two questons are in the negative, how
does an overwhelming majority stockholder control the board?
1
There is a January 21, 1992 SEC Opinion. [Segue: the
Securities and Exchange Commission writes opinions because
you can write the SEC an ask for what they think.] And this is
what the SEC says:
The Corporation Code does not confirm upon any stockholder
the right to attend board meetings. The matter of allowing or
refusing a stockholder's request to attend and observe board
meetings is discretionary on the part of the board of directors.
So, bisan pag 99% owner ka, you cannot demand as a matter
of right if the board does not allow you.
Now, how does the majority owner or the controlling owner
control meetings of the board? I will refer to section 28
Removal of Directors or Trustees:
Section 28. Removal of directors or trustees. Any
director or trustee of a corporation may be removed
from office by a vote of the stockholders holding or
representing at least two-thirds (2/3) of the
outstanding capital stock, or if the corporation be a
non-stock corporation, by a vote of at least two-
thirds (2/3) of the members entitled to vote: Provided,
That such removal shall take place either at a regular
meeting of the corporation or at a special meeting called for
the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention
to propose such removal at the meeting. A special meeting of
the stockholders or members of a corporation for the
purpose of removal of directors or trustees, or any of them,
must be called by the secretary on order of the president or
on the written demand of the stockholders representing or
holding at least a majority of the outstanding capital stock,
or, if it be a non-stock corporation, on the written demand of
a majority of the members entitled to vote. Should the
secretary fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there is no
secretary, the call for the meeting may be addressed directly
to the stockholders or members by any stockholder or
member of the corporation signing the demand. Notice of the
time and place of such meeting, as well as of the intention to
propose such removal, must be given by publication or by
written notice prescribed in this Code. Removal may be with
or without cause: Provided, That removal without cause may
not be used to deprive minority stockholders or members of
the right of representation to which they may be entitled
under Section 24 of this Code. (n)
So the removal can be done by stockholders or members. 2/3
votes is needed. Does it have to be for a cause?
xxx Provided, That such removal shall take place either
at a regular meeting of the corporation or at a special
meeting called for the purpose
So when it is a special meeting called for that purpose, the
stockholders are given a special notice and it is a qualified
notice. It contains the time, place, plus the item of the
agendawhich is to remove the Director so-and-so.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
And then:
xxx and in either case, after previous notice to
stockholders or members of the corporation of the
intention to propose such removal at the meeting. A
special meeting of the stockholders or members of a
corporation for the purpose of removal of directors or
trustees, or any of them, must be called by the
secretary on order of the president or on the written
demand of the stockholders representing or holding at
least a majority of the outstanding capital stock, xxx
And so there, you have the control. Because you are 99%
owner, you can write and demand a meeting for the removal of
directors.
Now, the problem with that is this. The last sentence says:
Removal may be with or without cause: Provided, That
removal without cause may not be used to deprive
minority stockholders or members of the right of
representation to which they may be entitled under
Section 24 of this Code.
So, you own 99% of the outstanding capital stock. The other
stockholders are the __ of the board. They are representing
the minority. You can actually remove only 1. Kanang uban,
minority na man na. Kanang usa nga imong gipili, imo na nang
gibutang dira. The other 4, they represent the minority
because they are the only stockholders. Do you see the
problem?
That is why tudluan ta mo kung unsaon pagcontrol ana. 99%
owner ha. Before they are elected, you make them sign an
undated resignation letter. Kuptan na na nimo. Ilaha na nang
signature. Now, di na gani ka gusto, butngan na na nimog
petsa. Isubmit na na nimo sa secretary. Karon wa na. Ugma
resign na. Di na ni kinahanglan ang Section 28. That is how
you control the board. Those who you put there, you make 28
unneccessary __ and make them all sign the resignation.
Now, naa pa gyud lain. Kini kang Gokongwei ni. Gokongwei
does not only sign an undated resignation. They are even
made to endorse the certificate of stock. So tangtang jud sila
sa board sa corporation. In the books of the corporation, you
are a stockholder. But you have already transacted your shares
with him because you endorsed it in blank and he holds it as if
it isin his own name.
So what was the requirement in Section 23? To be a director,
you must: (Second pararaph of Section 23)
Every director must own at least one (1) share of the
capital stock of the corporation of which he is a director,
which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner
of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease
to be a director. Trustees of non-stock corporations
must be members thereof. A majority of the directors or
2
trustees of all corporations organized under this Code
must be residents of the Philippines.
[Segue: Diba sayon ra na hinudumon kung buhatan nimog
problema? Dili na sig basa-basa. Mabuntagan na lang ka sig
basa pero wa gyud. Di gyud ka kahinumdom ani. But when
you put it in terms of control, makahinumdom ka.]
Now, what is the term of directors? Muingon kag, 1 Year!
Because the first pararaph says:
Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall
be exercised, all business conducted and all property of
such corporations controlled and held by the board of
directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from
among the members of the corporation, who shall
hold office for one (1) year until their successors are
elected and qualified. (28a)
But then again, there is this phrase:
Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall
be exercised, all business conducted and all property of
such corporations controlled and held by the board of
directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold
office for one (1) year until their successors are
elected and qualified. (28a)
What is the meaning of that? Is it 1 year or is it more than 1
year?
If there is no director that is elected, 1 year. Maupos na imong
1 year. So sa annual stockholders' meeting, muboto nasad og
lain, unya ikaw man gihapon ang gipili. So, you sit again for 1
year. The following year's stockholder's meeting, ikaw man
gihapon ang gipili. So 1 year gihapon. Another 1 year. There is
no limit.
But then, you'd call a meeting and there is no quorum. What
happens? Can you still have an election of the board? Muingon
kg, Gihatagan na mag notice kana tanang mga stockholders,
pero wa may mutungha so walay quorum.
Unsa may quorum? Unless as otherwise provided for in the
articles of incorporation, the quorum is 50% of the
stockholders voting (not including the non-voting ha because
the election of directors is not one of those8 instances
mentioned in Section 6. Mao gani memoriza na.).
Now, gipatawag ang meeting pero not enough quorum. What
happens? Ah! Di na nato na sala. Mag-eleksyon ra gihapon
ta! Pwede? DILI! That's when the continuation of that
sentence takes effect.
xxx and until their successors are elected and
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
qualified. (28a)
Ipadayon ang director. Unsa may pagpadayon anang director?
That os no longer part of the 1 year term. That is an added
extension. Next year, kung mag-meeting nasad unya wala
nasad quorum, nah! Binuang na man na nga walay quorum.
[Segue: Tan-awa nang board meeting sa homeowners anang
Las Terrasas kung diba kung maka-quorum ba na sila. Tan-awa
ra na dira sa Insular kung maka-quorum pa na sila. Di na sila
makaquorum! Naa pa nay proxy ha! I'm telling you from
experience, it is very difficult to get a quorum for the annual
meeting of the stockholders of an ordinary corporation. Kung
dako nga corporation, dako ang kwarta. Ah~ Kurog! Naa kay
quorum! Kung ang imong corporation kay pipichugin ka, lisod
maka-quorum. Nganong wala man sila mutungha? Tua sila sa
Star Wars o kung unsa ang naa sa primiere. Wala sila
mutungha. There is always something better or more
important to attend to than this stockholder's meeting of the
corporation where they feel that they have a very limited say.
Unsa man? Kung di ko muattend ana, ig-on nimo akong
balay?! Sigi na kog bayad anang kung unsay fee ba na! Ang
proxy ay among maid. Paadtuon na nimo sila sa meeting, na
apay pagkaon.]
Karon, muingon kag kataw-anan man kaayo ka father. Now,
what happened in BelAir? [Segue: Mao nay ikatulong
subdivision nga gibuhat ni Ayala after Forbes and San
Lorenzo.] Every year, wala man silay quorum. So sigi rag
extend-extend. Karon, namatay na man jud ang usa ka
director.
Kung naay mamatay, how are vacancies filled up? Section 29:
Section 29. Vacancies in the office of director or trustee.
Any vacancy occurring in the board of directors or trustees
other than by removal by the stockholders or members or by
expiration of term, may be filled by the vote of at least a
majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or special meeting
called for that purpose. A director or trustee so elected to fill
a vacancy shall be elected only or the unexpired term of his
predecessor in office.
Any directorship or trusteeship to be filled by reason of an
increase in the number of directors or trustees shall be filled
only by an election at a regular or at a special meeting of
stockholders or members duly called for the purpose, or in
the same meeting authorizing the increase of directors or
trustees if so stated in the notice of the meeting. (n)
So death, resignation, incapacity of a director during his term
kung mawagtang syaonce the vacancy occurs, the secretary
(of the corporation) has 30days to inform the SEC. And then
the directors meet and they will elect the successor to fill-up
the unexpired portion of the term.
O sa BelAir, nagmeeting na ba para maelect ang successor sa
board? Nagquestion ang usa ka stockholder, How can you
elect to fill up the vacancy when there is no unexpired term?
3
He is extended! Di man sya regular director na napili during
an annual meeting of the stockholders. What did the Supreme
Court say?
The SC said, CORRECT! You cannot elect a director whhen
there is no unexpired term. According to Section 29, when an
extended director dies or resigns, then you have to have a
stockholder's meeting. So when is it necessary for the
stockholders to elect directors or trustees?
Mao ni ang inyong hinumduman. Dili na section 29. Because,
in ordinary cases, it's just the board of directors that will elect
the replacement to serve the unexpired term. So when can
that not be done?
In 3 instances:
1. expiration of the term
2. removal of a directoronce a director is removed, it
must be the stockholders who will elect his or her
replacement, whether it is for cause or not. And the
replacement can be elected in the same meeting
where the director was removed.
3. When there is death, resignation, incapacity, and the
board of directors no longer constitute as a quorum.
And therefore, in the case where an extended director resigns,
dies or is incapacitated, because there is no term that is
unexpired, mao nay hinumdumi. The rest, it is all the directors.
Now, give an instance where resignation, incapacity or death
of a director and the board of directors cannot elect the
representative because there is no quorum. This is what
happened in Texas Instruments Philippines Inc. Nag-
inauguration sila sa Bagiuo. [Segue: Texas Instruments is one
of the reasons why the number 1 export in the Philippines is
no longer coconut or abaca or kung unsa ba na diha. Ang
number 1 kay unsa man? Electronics. Chips!] Namatay man
ang directors sa plane crash. Dili na man kaabot sa 50%+1. So
they had to call a stockholders meeting. They could have just
elected a replacement for the unexpired portion of the term IF
there was a quorum. But since there was no quorum anymore,
patay.
[Segue: Now, sultian tamo ani aron dili mo kaagi sa kasakit sa
kasing-kasing nga akong giagian. Kanang corporation nga
ginadali-dali, wa gyuy hinungdan. So ikaw, gather all the
members. So members are back to back with the directors. 5
directors and 5 members. So mahimog meeting sa members
and sa directors sad. Karon kung mamatay ang tulo, duha na
lang ang nabilin. May tag stockholders kay kung mamatay na
sila, naa may musucceedtestate or intestate. Ang
membership, wala man na. Hain na man nang tulo? Majikon
nimo? So what happens? Dissolved ang corporation! Human!
*Father continues talking about ready-made A4 forms.* Have a
ready-made forms. The moment it is already accepted, have all
the necessary corrections. Mao man na. So make sure that you
put down all necessary corrections ha.]
Directors. Now, very important now is the special feature of
the so-called independent director. It is not here in the
corporation code. Where is it? It is in the SEC! RA 8799,
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016

Section 38:
Section 38. Independent Directors. Any corporation with
a class of equity securities listed for trading on an Exchange
or with assets in excess of Fifty million pesos
(P50,000,000.00) and having two hundred (200) or more
holders, at least of two hundred (200) of which are holding
at least one hundred (100) shares of a class of its equity
securities or which has sold a class of equity securities to the
public pursuant to an effective registration statement in
compliance with Section 12 hereof shall have at least two (2)
independent directors or such independent directors shall
constitute at least twenty percent (20%) of the members of
such board whichever is the lesser. For this purpose, an
"independent director" shall mean a person other than an
officer or employee of the corporation, its parent or
subsidiaries, or any other individual having a relationship
with the corporation, which would interfere with the exercise
of independent judgement in carrying out the responsibilities
of a director.
There are certain corporations that are required to have an
independent director. What are those corporations?
1. Corporations that are listed in the stock market
the moment you are a corporation that sells
securities required to be listed and registered, you
must have an independent incorporator. So mufloat
kag bond, you cannot do it if you do not have an
independent director. Bond are popular because they
are cheaper than bank borrowings. Kung makafloat
kag bond, mao nay maguwang sa shares of stock.
Shares of stock are the cheapest capital. Mubaligya
na gani kag shares of stock, wala kay obligasyon sa
ilaha nga ibalik ug di ka kaginansya di ka kinahanglan
nga muhatag ug dividends. But if you now sell shares
of stock, you must now have an independent director
and you must register with the SEC. So if you sell
shares, bonds, or any security that requires
legislation, you must have an independent director.
2. If you are a corporation with at least 50Mil in
assets, and you have 200 or more stockholders
and then at least 200 of those stockholders
own at least 100 shares of any class
3. Banks.
4. Financial institutions
5. Insurance corporations
Mao jud to ang original partner sa SGV. Anderson! Biggest. Sila
may auditor sa ENRON which became top 10 corporation on
Forbes and in the US in a matter of less than 10 years. And
then wwhen it was on top, it suddenly disappeared. Why?
Because they say, it was engaged in creative accounting. Read
about it an learn.]
January 6, 2016 (KT)
[Segue: Justice Frankfurt (that is not the sausage ha.)
responded to a xxx on how to prepare for the study of law. He
said, Forget about law. Read novels. Classical Novels. Go into
poetry. Get a good collection of classic paintings and go to the
appreciation of Arts. That was in the 1950s. That is still true
today. You will know wel if you have a very good exposure to
the arts. But today, it will be good if you have a good exposure
to the scientific method. If you do not, then you will be
crippled. If you don't believe to what I say, read this pathetic
decision of the Supreme Court, promulgated on December 8,
2015, where the Supreme Court stops the Genetically Modified
crops. Unbelievable. Pathetic!]
Okay let us go back to this boring subject on the Board of
Directors.
They said that for purposes of selecting the board of of
directors, there are 5 instances where it must be the
stockholders or members of the corporation that must elect
the board of directors.
First is during the annual meetings of the corporation upon the
expiration of the term of its directors. You will later on see that
for stock and profit corporations, the term of a director is 1
year. But foor non-stock, non-profit corporations, the term is
staggard. Normally, the directors are divided into three groups.
The first ones elected will have a 1-year term for the first
group, a 2-year term for the secon group and a 3-year term for
the third group. Why is that?
It is so that there will be what is called a carry-over. It is
difficult in a non-stock, non-profit corporation for a director to
have a compelling interest in the corporation. Because there is
no proprietary connection. Do you believe in that? That you
have no interest if you have no proprietary connection? If you
dont, then just go to the sidewalk. In there, you will find out
that it is the most abused piece of real property in the city
because nobody has a proprietary interest in a res nullius
ground. Who cares about the sidewalk?! Magkalisod na gani,
ihian pa na sa taxi driver. Wa may maglagot dinha. Kung imo
nang lugar, wa may mangihi dira.

6. Public utilities
Who introduced this? Sarbanes-Oxley law. And we copied it
from there. Sarbanes-Oxley was necessitated by the excess of
corporate financial statements in the 1990s. That is ENRON.
[Segue: Muingon ka How big was that disaster? That disaster
was so big that it wiped out the biggest accountin firm in the
world. What is the biggest accounting firm in the world?
Kaniadto Big 5 man na. Karon kay Big 4 na lang. Unsa man to?
So, that is the basis why there is a staggard terms for
members of the board of trustees of the non-stock, non-profit
corporation.
But for a stock and profit corporation, the term is just 1 year.
That is for everyone. But then you have to add that section 23
says:
xxx or until their successors are elected and qualified.

4
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Now, talking about stock and profit corporations, the
requirement in relation to shareholdings is that you must have
at least 1 share in the corporation [in which] you are made a
director of and that 1 share of capital stock of the corporation,
the director shall have standing in his name of the books of the
corporation.
Question: When should you have that share? Is it before you
are elected or after? Can you buy the shares after you are
elected? You can do that! That is common. You're elected, and
then if you'd say yes, then they'd put down that you will have
a 1 share. And that person who wants to be a director will pay
the treasury of the corporation for the consideration of that 1
share. So now, you are listed and that you own at least 1
share. But you can be elected even if you don't have [the
share]. Yet, you cannot sit down as a director until you have at
least share.
Now, that is the firststockholders or members elect the board
of directors or board of trustees during the annual meeting of
the corporation. Precisely, it is an annual meeting and it is
reconstituting the corporation. What happens if there is no
quorum in the annual meeting? When the stockholders or
members of the corporation during the annual meeting do not
constitute at least 50% of the issued shares or 50% of the
membership of the non-stock non-profit corporation?
Remember ha. How do you determine the quorum in a stock
and profit corporation? The quorum is determined by the
issued shares. Issued shares for voting as to directors. Why?
Because non-voting shares do not vote for directors. That is
not one of those instances mentioned in Section 6.
So, if one of the directors owns 90% of the outstanding issued
shares of a corporation, his mere presence already constitutes
a quorum. Because he is 90%. All you need is 50% + 1,
UNLESS the by-laws of the corporation prescribes for a higher
degree of quorum.
Now, for purposes of non-stock non-profit corporation, how is
the quorum determined? It is determined not according to
shares because there are no shares! It is on a per head basis,
with respect to members. It is similar in determining a quorum
in a cooperative. That is, if it is non-stock non-profit
corporation.
Now, suppose there is no quorum. What happens? If there is
no quorum, then there is no election. Now if there is no
election, does it result in no directors? The result is a hold-over
directors. The directors continue to act as directors because
the law says:
who shall hold office for one (1) year until their
successors are elected and qualified.
So that is the first ha. When the stockholders or members elect
the board of directors or trustees during the annual meeting of
the corporation.
You will later on find out that the annual meeting of the
corporation is not a decision of the directors or of the
stockholders. The annual meeting is prescribed by the by-laws.
5
The annual meeting is determined by its by-laws. It might say
for a definite date or it may provide for an ascertainable date
like the last thursday of April or of the last thursday of
June. So it is movable. But it is determinable.
Now, the second instance that the stockholders and members
elect is this: Upon the removal of the director. It is the
replacement of a director that is removed with or without
cause.
How do you remove a director? You remove a ddirector in a
meeting duly called for that purposein which case, there
must be a quorum. You cannot remove a director if you had a
meeting where there was no quorum. And you remove a
director by a qualified majority.
What is the qualified majority? The vote of 2/3 of outstanding
capital stock or 2/3 of the members of the corporation entitled
to vote. Are non-voting stockholders, are they voting in cases
of removal? The answer is NO because that is not one of the
instances mentioned in Section 6.
Can you remove a director because you just do not like his
face? YES YOU CAN! Provided that the director represents the
majority interest. If he represents the minority interest, then
he cannot be removed except for a cause. Because, if you can,
then it is very easy to disenfranchise the minority stockholders.
How does the minority elect their representative? They elect
their representative by cumulating their votes. What is the
meaning of cumulating of votes. It is provided by the
corporation code, and it cannot be removed from the
stockholders. Please take note ha. The by-laws of the stock
and profit corporation cannot provide for non-cumulation of
votes. Because, if it did, then it will deprive the minority from
representation in the board of directors. Cumulating of votes
means that you have as many votes as you have shares of
voting stock multiplied by the number of vacancies that are to
be elected.
Let us say, there are 11 directors of this corporation. And you
have 10 shares. Then there is an election for 11 directors. How
many votes do you have? Dili man ni scientific. Simple
arithmetic ra. Pila man ang imong votes? 111. Diba? 10 man
ag imong shares unya i-multiply nimog 11. O diba 111?
Now, you can either divide it equally among the 11ibutang
na nimog tagsa-tagsa (in which case, that makes you stupid)
or you can lock it altogether and place it in one member only
so that you have a chance to sit there. That is called
cumulating the vote. And you cannot be deprived of that!
In non-stock non-profit corporations, the rules are the
opposite! Unless the by-laws provide for cumulation, then
there is no cumulation of votes. There is only 1 vote per
vacancy, per person because there are no shares; Only
members.
Now, simple ra kaayo na. 11 kabuok opening. Onse kabuok
directors in this corporation. Naa nay tao nga tag-iya syag 90%
of the outstanding voting shares. The rest are 10% scattered
shares. Now, these 10% cumulated votes and vote for only 1
ang makadaog. Kaning naay 10%. So the only way that these
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
people (10%) can have a representation is by cumulating their
votes and just vote for 1 person in the elction of corporate
directors. So they have at least 1 director out of the 11.
Now, if the representative of the minority can be removed
without cause, then the following day that he is elected, they
will call a meeting for the removal of the minority
representative. And then when they will elect the replacement,
of course, the 90% of the owner of the outstanding voting
shares will vote. That is the representation of the minority.
That is why, you cannot unseat or remove the representative
of the minority unless it is for cause.
If it is the majority, you can remove the representative of the
majority with or without a cause. And by so doing, you must
do it in accordance with the rules. Section 28:
Section 28. Removal of directors or trustees. Any director
or trustee of a corporation may be removed from office by a
vote of the stockholders holding or representing at least two-
thirds (2/3) of the outstanding capital stock, or if the
corporation be a non-stock corporation, by a vote of at least
two-thirds (2/3) of the members entitled to vote: Provided,
That such removal shall take place either at a regular
meeting of the corporation or at a special meeting called for
the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention
to propose such removal at the meeting. A special meeting of
the stockholders or members of a corporation for the
purpose of removal of directors or trustees, or any of them,
must be called by the secretary on order of the president or
on the written demand of the stockholders representing or
holding at least a majority of the outstanding capital stock,
or, if it be a non-stock corporation, on the written demand of
a majority of the members entitled to vote. Should the
secretary fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there is no
secretary, the call for the meeting may be addressed directly
to the stockholders or members by any stockholder or
member of the corporation signing the demand. Notice of the
time and place of such meeting, as well as of the intention to
propose such removal, must be given by publication or by
written notice prescribed in this Code. Removal may be with
or without cause: Provided, That removal without cause may
not be used to deprive minority stockholders or members of
the right of representation to which they may be entitled
under Section 24 of this Code. (n)
Qualified notice. And in that meeting itself, in the removal, you
can elect the replacement. Provided that if it (the removal) is
without cause, then it is a represenative of the majority faction
of the corporation.
Nganong giremove man na sya, unsa may cause? Naglaway-
laway na man na sya. 94 years old! Mao na dili sila muadto sa
meeting kay lud-on! Sala ba diay na kanang mag-laway-laway
ka? Sala na? That is not the cause! When you say cause, that
is attributable to the fault of the individual.
Alright that is the second instance whre the stockholders would
vote.
6
The third instance is: When the corporation articles are
amended to increase the members of the board of directors.
As to the increase, even if it is in the middle of the term, it
must be the stockholders or the members who must vote. It is
not the directors or the trustees.
What is the fourth instance? The fourth instance is: In cases of
death, resignation, incapacity of a director, and the remaining
members of the board of the board of trustees no longer
constitute a quorum for a valid meeting of the board. In which
case, it must me the stockholders or the members of the
corporation who will elect the replacement of the resigned,
dead, or incapacitated director.
Because usually, when the director dies, incapacitated, or
resigns, it will be just the directors who will elect for a
replacement to serve the unexpired portion of the term. But, if
the directors or trustees no longer constitute a quorum, then it
must be the stockholders or members of the corporation who
must elect the replacement.
Now, the fifth instance: When it is a holdover direcctor who
resigns or dies or is incapacitated, the board of directors or
board of trusteeseven if constitutinng a quorumcannot
vote for his replacement. It must be the stockholders or the
members of the corporation. Why? Because the resigned,
dead, or incapacitated director or trustee no longer has an
unexpired portion of his term. He is just a holdover. That is the
recent decision of the Supreme Court in the BelAir case.
So, those are the 5 instances. You must remember ha. The
rest, it would be just the directors who will vote.
Now, let me tell you this because your commentators will not.
In vacany in the board of directors or board of trustees, it is
not the obligation for the board to fill up just because there is
a vacancy. The board of directors or board of trustees still
constitute a quorum and can carry out the normal business of
the corporation. Normally, the chairman shall declare the
vacancy. And they will go to the corporate secretary who is
normally a lawyer. They will say O what shall we do? Then
the secretary will give an advice: You can elect. But don't
have to because you can still carry out the business. There is a
quorum. If wala, then let is elect the substitute. But if you
want a bigger savings, then you will do with one less a director
and the director's fees as to the vacancy will not be disbursed.
Muingon kag Pila man diay ang director's fees? Ah~ Then let
us go to the compensation of the directors.
COMPENSATION OF DIRECTORS
The law provides for a limit to the compensation of the
directors, and this limit is non-sensical. Look at the limit:
Section 30. Compensation of directors. In the absence of
any provision in the by-laws fixing their compensation, the
directors shall not receive any compensation, as such
directors, except for reasonable per diems: Provided,
however, That any such compensation other than per diems
may be granted to directors by the vote of the stockholders
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
representing at least a majority of the outstanding capital
stock at a regular or special stockholders meeting. In no
case shall the total yearly compensation of directors,
as such directors, exceed ten (10%) percent of the
net income before income tax of the corporation
during the preceding year. (n)
10% of net income before tax! Can you imagine that amount?
And this is the limit. It cannot go higher than that. PLDT'S net
income after tax is expected to be 35Bil. Before tax is slightly
higher than 40Bil. 10% of that is 4Bil. Kung ikaw ang director,
di na ka kinahanglan mutrabaho in a single day in your life.
4Bil divided by 15. Pila man intawn ang ilahang makuha?
267Million! Pila ka million ang month? Di na na ila kinahanglan
manrabaho ana. Di man gani nila kinahanglan og interest.
So this is crazy! This is not a limit. Remember, this is your
director's fees. Your fees as a director. The decided cases say
that if you are a director and you are assigned by the board to
do a specific task for the corporationsay, you are a human
resource expert. And the corporation wants a complete
assessment and restructure oof the human resource
department and you are asked to oversee the consultant that
they have hired, is that still part of the director's fees? NO!
That is not a job of the director. That is already a job in the
operations. So you can be paid a separate and distinct fee for
that. A director's fee is for attending board meetings and
committee meetings. And then, that does not include per
diems. What is a per diem? The usual and necessary expense
that is open to reimbursement because you need to extend
that in order to attend the meeting.
Nia ka nipuyo sa Davao. Member ka sa board of directors
Philipine National Bank. You fly there and you go there. Unsa
man? You fly there! Magtrisikad ka? You'd stay in a hotel.
[Segue: That is what Mr. Lizada did for 6 years. He's dead now.
But because he's the only one who threw a party for Fidel
Ramos when he decided to run, Ramos remembered him. So
he was the first one to be appointed as director of Philippine
National Bank. He runs a business but he does not necessarily
possess a monetary expertise. P200,000 per meeting director's
fee.]
So remember, this limit in compensation of directors does not
cover per diems.
Now what if you are a director and also at the same time an
officer of the corporation? If you are the president of the
corporation and your salary as president of the corporation, it
is not covered by the limit here under Section 30. This is
because this is just true for director's fees. [Segue: If you want
to know the salararies of executies, you will have some idea if
it is listed. The Philippine Stock Exchange now requires the
information discloses the sum paid cumulatively or in the
aggregate to the top 3 of the officers or employees of the
publicly listed corporation. So kita na kag basic salary of the
Ayala corporation. P178Million a year. Divide that a year but I
think the CEO gets more. So that is their basic salary. Why is
the law like that? In the US, it is required that you must reveal
the actual salary. In the Philippines, we do not want to be
known as to how much are we receiving because we don't
7
want to be a victim of kidnapping syndicates. O edi nakit-an na
man mo? But at least they are not sure! P187Million ba? Dili
kay tulo mi ana nagabahin.] So the Philipppine Stock exchange
only requires the disclosure of the combined compensation of
the top 3 officers of the corporation. It is also in there as to
how much are the director's fees. Now, the directors assign
themselves to different committees. And kada committee, they
are paid a compensation for directors.
xxx at least a majority of the outstanding capital stock
at a regular or special stockholders meeting. In no case
shall the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the
preceding year.
Jan 7, 2016 (LJQuidet)
Does a director represent a particular segment of the
corporation? The good or the interest of the particular
segment? The well-known authority on the corporation, Mr.
Fletcher. You go to our library and there are 2 sets of Fletcher
there. There is Fletcher Cyclopedia of Corporations, and then
there is this Cyclopedia of Corporate forms. Looking for a form
used in corporations, that is where you will find it. It is very
thick.
The directors are supposed to think of the corporation as a
whole. They are servants of the corporation as a whole to and
on behalf of the corporation because the corp. by its very
nature cannot act for itself. That is the primary duty of the
corp. that is why its task or duty is fiduciary in nature.
Kanang mga minors, mura kag nag bantay og walay buot. Ang
corp. way buot, way kamot, way tiil, way paghuna-huna. Sobra
pa sa way buot. Mao nang naay board of directors (BOD)
according to fletcher. That is why you are not there fighting fo
the various constituents of the corp. No you are acting for and
in behalf of this OW helpless being known as a corp.
So what are the liabilities of the directors of a corp.?
There are several art.
Sec. 31 Liability of Directors, Trustees or Officers.
Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of
the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors, or trustees shall be
liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and
other persons.
When a director, trustee or officer attempts to acquire or
acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed
in him in confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable as a
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation. (n)
SECTION 32. Dealings of Directors, Trustees or Officers
with the Corporation. A contract of the corporation with
one or more of its directors or trustees or officers is voidable,
at the option of such corporation, unless all the following
conditions are present:
1. That the presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary
for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in the case of an officer, the contract with the officer
has been previously authorized by the Board of Directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds (2/3) of the members
in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: Provided, however, That the
contract is fair and reasonable under the circumstances. (n)
SECTION 33. Contracts Between Corporations with
Interlocking Directors. Except in cases of fraud, and
provided the contract is fair and reasonable under the
circumstances, a contract between two or more corporations
having interlocking directors shall not be invalidated on that
ground alone: Provided, That if the interest of the interlocking
director in one corporation is substantial and his interest in the
other corporation or corporations is merely nominal, he shall
be subject to the provisions of the preceding section insofar as
the latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the
outstanding capital stock shall be considered substantial for
purposes of interlocking directors. (n)
This(sec. 33) is the one more common, not so much w/ the
Dealings of Directors, Trustees or Officers with the
Corporation.
Remember, a director is somehow an agent of a corporation, is
prevented from entering into contract w/ the corporation. But
if & when he does it, there are certain formalities that have to
be followed.
Why? Because he is entering into contract w/ someone who is
defenseless. He is worse than a minor . so there are certain
safeguards.
Then sec. 34. There is this disloyalty of a director.
SECTION 34. Disloyalty of a Director. Where a
director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby
8
obtaining profits to the prejudice of such corporation, he must
account to the latter for all such profits by refunding the same,
unless his act has been ratified by a vote of the stockholders,
owning or representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked his own funds
in the venture.
So these articles, of sensitive nature of the directors duties.
SECTION 31. Liability of Directors, Trustees or Officers.
Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of
the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors, or trustees shall be
liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and
other persons.
When a director, trustee or officer attempts to acquire or
acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed
in him in confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable as a
trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation. (n)
There are 3 kinds of liabilities here.
1. the director or trustee who willfully and knowingly
vote for or assent to patently unlawful acts of
the corporation.
You cannot assent to or vote for a patently unlawful
act. *** the corporation do something w/c is patently
unlawful, if you do, you are the one liable. The corp.
might pay, but the corp. is not readily liable, it cannot
be put in jail, it is you the director.
Wa ka mo vote, but you assented to it. Nag hilom-
hilom ka lang, patently unlawful. You are liable.
2. who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or you
should have known that it is unlawful. Now what
happened, ng tinanga ka.
Director ka niining shipping company, naay lease gi-
approve nimo approve nimo ang lease w/o thinking,
kay kaila mn nimo, gitagaan mn kag commission.
Unya diay kargahan na og contraband, weapons, mga
surplus weapon gikan sa Vietnam, mga opium gikan
sa Triangle. Ingon ka unsa mai hala-an nako. Nya kai
gikan didto, unsa pa mai kargahon ana. Ngano gipili
man imo mn bapor? kay ng kagang-kagng naman imo
bapor, mao ra may maka atraka didto.
You should have known. Your duty is to know
because the corp. cannot know. He does not have a
mind.
3. acquire any personal or pecuniary interest in conflict
with their duty as such directors, or trustees
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Whats an example of this? Director ka, you are in a
meeting how to solve this defaulting debtor of the
corp. Damage control na ni. Why? Obviously this
debtor cannot pay so the corp. should try to minimize
the damage. Then one of the director says: naa nay
eroplano, naa na sa California, mutawag tag abogado
ato nang ipa attach.
Ikaw contakon man sad to nimo tong naka utang sa
corp. gawas ka dayn kuha ka dayn sa imo cellphone,
tawgan dayn nimo imo abogado sa California: attch
that plane aron makuha na nato.
Unsa mn ang nahitabo dra? Violation of your fiduciary
duty. You cannot allow your interest to be paramount,
to be more important than the interest of the corp.
You set aside your interest. The corporations
interest in your duty now to defend and your
interest is secondary.
Doctrine of Corporate Opportunity
xxx When a director, trustee or officer attempts to
acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any
matter which has been reposed in him in confidence,
as to which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a trustee
for the corporation and must account for the profits
which otherwise would have accrued to the
corporation
What is this? Ing ani ang storya ini. BOD mo of a corp. that is
into importation of livestock. What do you do w/ the livestock?
You fatten the livestock, you slaughter it, you sell it. That is
how to make money.
Where do you go? Adto sa New Zealand, Australia, mangita ko
og livestock nga i.import. in the course of going around naay
ni duol nimo. Sila sad diay nangita sad diay silag cattle, mi
ingon sila : ang amo interest dili mn ang karne, ang panit
man. Kamo pg import nimo unsa man imong buhaton anang
panit? ingon ka kita nlng mag sabot ayaw nlng nang corp.
Gusto man kaha kag panit, daghan mn kaayo mig panit imbis
buhaton to namog chicharon ihatag nlng na namo sa imo,
bayran nimo. Gamiton man kaha na nimo sa Louis Vuitton. So
kamo nlng mg sabot.
Is that a violation of the 2nd part of this liability clause of sec.
31? You acquire, in violation of you duty, any interest adverse
to the corporation in respect of any matter which has
been placed in him in confidence, as to which equity
imposes a disability upon him to deal in his own behalf. Is
that a violation?
The SC says: NO it is not a violation. Because the interest of a
livestock company that is dealing w/ the meat carcass of the
livestock not the skin, not the hide, the interest of the
company is still _ it must be a concrete interest.
9
When does that happen? That happens in case of Bitong(?)
v. Jaka Corp.
Bitong was the Pres. and Gen. Mgr. of the Real district arm of
Jaka. Jaka is the holding company of Juan Ponce Enrile named
after Jackie Enrile & Katrina Enrile that is why it is called Jaka.
Bitong was commissioned by the BOD president to look for a
piece of property in Cavite that will be used as low-cost
housing development. Jaka is in the high-end real property
development. There is now a law, real property corp. that
engage in real property development, vertical condo,
horizontal devt. subdivisions that are high-end must also
devote 10% to low-cost housing. So gipa pangita si Bitong.
She was able to find 3 pcs. of real property.
What did she do? The best piece of real property Bitong
contracted for herself. Why was it the best? Because it is
already w/ infrastructure, naa nay dalan, naa nay tubig.
Katong uban medyo niog pa to.
SC: There is a violation of sec. 31, 2nd par. of the Corporation
Code because it is no longer speculative. Mao man gyud nang
kinahanglan nila, kanang yutaa. So whenever you are
presenting a case whether that is violation of acquiring adverse
interest on a matter that duty reposes upon the director to
work for the corporations interest. That is the crucial. Is it a
speculative interest or is it already real interest. Because if it is
not yet a real interest, then there is no violation in this
particular section. That is called the doctrine of corporate
opportunity.
2nd Paragraph sec. 31 is called the Doctrine of Corporate
Opportunity.
The best case they say about this is it is going on between
apple and Samsung. It has been going on w/o stop for more
than 10 yrs. now. Samsung is the biggest supplier of apple,
and Samsung is saying that Apple stole several of its
techniques and these are patented. Apple also says in the
course of supplying, Samsung also stole from Apple. So
tinudlu-ay nlng sila.
Ngano man? Kay ang ilang key personnel kay mg kuros-kuros
man. Ngano mn ang iphone di man ka maka dretso sa
another, kay mubayad man sila sa atong device sa Samsung
mismo. Ngano ang Samsung mu hanap-hanap man pag
change nimo? Kai ang Apple maoy nag kupot anang patent
ana.
They say that if you study that case(it is already voluminous)
ma master na nimo ang 2nd par. sa sec. 31.
SECTION 32. Dealings of Directors, Trustees or Officers
with the Corporation. A contract of the corporation with
one or more of its directors or trustees or officers is voidable,
at the option of such corporation, unless all the following
conditions are present:
1. That the presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
2. That the vote of such director or trustee was not necessary
for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in the case of an officer, the contract with the officer
has been previously authorized by the Board of Directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds (2/3) of the members
in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees
involved is made at such meeting: Provided, however, That the
contract is fair and reasonable under the circumstances. (n)
There is a director, can he enter into contract w/ the corp.?
YES he can. provided sec. 32 is followed.
There is no prohibition for a director who is the guardian itself
of this principal that is in need, helpless.
What are these conditions?
1. That the presence of such director or trustee in the
board meeting in which the contract was approved
was not necessary to constitute a quorum for such
meeting;
So the self-dealing director is not necessary to
determine the quorum.
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
How do you determine that it is fair & reasonable?
WON the corp. has entered into a similar contract
under the same similar terms and conditions.
If there is a contract that decided that is similar terms
& conditions to the contract entered into w/ the self-
dealing director, then that contract is presumed to be
arms length.
Unsa man buot pasabot anang arms length? Wa pa
mo mg gakos ba, distansya. In other words it is fair
even it is not a sweethear contract, it is arms length.
4. That in the case of an officer, the contract with the
officer has been previously authorized by the Board of
Directors.
What happens if the 1st 2 are not officer? That is what the 2nd
par. says, last par.
If you have at least 2/3 of the outstanding capital stock and
you are self-dealing director, tag-iya ka, bisag dili pa ka mg
comply ining 1st two dretso kana sa contract dayn walay
meeting-meeting, walay quorum, walay approval, it can be
10
ratified by the stockholder, 2/3 kay ikaw ra man sad ang
stockholder 2/3.
Why is that the thinking of the law? The thinking of the law is
if you are 2/3 owner of the corp., you are least likely to harm
the corp. because you stand to lose more. 2/3 ownership of
most if not all of the outstanding capital stock, dissuades
director or officer of a corp. from harming the corp.
That is not the thinking behind the independent director. If you
are an independent director, you do not own more than 5% of
the outstanding capital stock. You are more likely to think good
of the corporation than if you own more than 5%.
There is now a need for an independent director certain
corporations, ALL publicly listed corporations, banks,
corporations that sell securities that are registered under the
securities & exchange code like a bond, shares-of-stock, & so
on.
What is the thinking behind that? If you are least connected in
the corporation, you are more objective __ of the good(?) of
the corporation.
Are not those 2 underlying premises contrary to each other?
Are they not?
Think about them because you use different principles under
diff. circumstances.
SECTION 33. Contracts Between Corporations with
Interlocking Directors. Except in cases of fraud, and
provided the contract is fair and reasonable under the
circumstances, a contract between two or more corporations
having interlocking directors shall not be invalidated on that
ground alone:
Provided, That if the interest of the interlocking director in one
corporation is substantial and his interest in the other
corporation or corporations is merely nominal, he shall be
subject to the provisions of the preceding section insofar as
the latter corporation or corporations are concerned.
Stockholdings exceeding 20% of the outstanding capital stock
shall be considered substantial for purposes of interlocking
directors. (n)
Interlocking directors, you have at least 2 corp. then there is at
least 1 person who is a director the in the boards of both corp.
so ng interlocking nana sila.
Are they prevented from entering into contract w/ each other?
NO. they can enter provided that they will follow the
formalities prescribed in sec. 33.
What are those formalities?
1. the contract is fair and reasonable under the
circumstances,
2. a contract between two or more corporations having
interlocking directors shall not be invalidated on that
ground alone:
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Provided, That if the interest of the interlocking
director in one corporation is substantial and his
interest in the other corporation or corporations is
merely nominal, he shall be subject to the
provisions of the preceding section insofar as the
latter corporation or corporations are concerned
How much is substantial? Stockholdings exceeding 20% of
the outstanding capital stock shall be considered substantial
for purposes of interlocking directors
When should we comply w/ the requirements of sec. 32? It
should be in the corp. where his interest is only nominal? His
presence is not needed for quorum, his vote is not needed for
approval, fair & reasonable contract, and if you were an officer
there must be prior approval of the BOD.
Substantial and nominal. Hinumdumi ning percentage sa
substantial and nominal kai kung mu abot ta sa Securities and
exchange code lain na ang porsyento anang substantial &
nominal.
Under the securities regulation code the moment it is a listed
corp., if you are at least 5% of the outstanding capital stock,
listed, then you must disclose to the SEC the beneficial owners
of the shares-of-stock because it is considered as substantial.
Unsa man meaning sa substantial sa Securities Regulation
Code? The meaning sa Corp. Code when the percent are
substantial for purposes of interlocking corp. entering into
contract w/ each other.
Bachellor Bus. Can you imagine how many tires they need.
Naay director danha naa silay dealership of tires. Di syempre
didto siya mu supply og tires dinha sa Bachellor bus. Mayo
lang og ing ana, naa man sad lain director, importer sad siya
og winter tires gikan sa Japan. Gusto sad na siya mo supply.
Anha man na diha ang away. Each one will invoke sec. 32 w/c
has not been followed because it is a mere nominal interest in
Bachellor bus.
Kay wa man siya ka kuha sa contract, mao nang nahimo na
nga intra corporate dispute. Mag away na gani, anha na mo
gawas, naa nay problema, interlocking contracts that means at
least 2 directors were interlocking & 1 was left out. That is
normally the case.
Disloyalty of a Director
SECTION 34. Disloyalty of a Director. Where a director,
by virtue of his office, acquires for himself a business
opportunity which should belong to the 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 his act has been ratified by a vote of the
stockholders, owning or representing at least two-thirds (2/3)
of the outstanding capital stock. This provision shall be
applicable, notwithstanding the fact that the director risked his
own funds in the venture. (n)
Again ratification of 2/3. What is the underlying assumption? If
you own more than 2/3 you will not grant a business
11
opportunity away from the corp. because you stand to lose.
The loss of the corp. is your loss, you have 2/3 of the
outstanding capital stock. That is why the corp. code allows a
ratification of such.
In the event that this particular director is charged w/
acquiring a business opportunity that should belong to the
corp. Remember the consequences? What is the _ he can
account for the profits even if he spent his own money in the
undertaking w/c became profitable. The latter must account to
the later for all the profits by refunding the same, unless his
act has been ratified by a vote of the stockholders, owning or
representing at least 2/3 of the outstanding capital stock.
Executive Committee
SECTION 35. Executive Committee. The by-laws of a
corporation may create an executive committee, composed of
not less than three members of the board, to be appointed by
the board. Said committee may act, by majority vote of all its
members, on such specific matters within the competence of
the board, as may be delegated to it in the by-laws or on a
majority vote of the board, except with respect to:
(1) approval of any action for which shareholders' approval is
also required;
(2) the filling of vacancies in the board;
(3) the amendment or repeal of by-laws or the adoption of
new by-laws;
(4) the amendment or repeal of any resolution of the board
which by its express terms is not so amendable or
repealable; and
(5) a distribution of cash dividends to the shareholders.
EXECOM. That is the correct term. Many corp. called it
MANCOM management committee. Mgt. Committee is a
technical term.
Where is ManCom found? It is found in PD 902-A when the
SEC appoints the mgt. committee when the corp. is in distress,
it is paralyzed because of internal bickering. That is when the
SEC can appoint a ManCom. You go through PD 902-A. it is a
remedial measure imposed on a corp.
ExeCom under 35 is intended to remedy that situation in
between board meetings. Board meeting are far between. That
is why the by-laws of a corp. may create a ExeCom composed
of not less than 3 members of the board to be appointed by
the board. Said committee may act, by majority vote of all its
members, on such specific matters within the competence of
the board, as may be delegated to it in the by-laws or on a
majority vote of the board, except with respect to, and here
are the exceptions which the ExeCom cannot decide upon
(1) approval of any action for which shareholders'
approval is also required;
amendment of the article, unless there is also a
written assent or vote of 2/3 of the stock holders so
that is not included in its power.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
(2) the filling of vacancies in the board;
that is assigned to the BOD or Trustees.
(3) the amendment or repeal of by-laws or the adoption
of new by-laws;
(4) the amendment or repeal of any resolution of the
board which by its express terms is not so amendable
or repealable; and
(5) a distribution of cash dividends to the shareholders.
The very famous story of execom is the story of PCI Bank.
The PCI Bank was sold, offered to the public in 1986 just after
the EDSA Revolution and were the way able to buy the
sequestered shares or the shares owned by the govt. was by
the Debt Equity Swap Scheme of the govt.
In other words you pay the loan govt. and the amount
equivalent is used to pay, to buy the shares of stock of the
govt. w/ PCI Bank. It required a large amount but Eugenio
Lopez, the head of the Lopez Group and John Gokongwei
teamed up together. 30-30 sila. 20% was owned by the public
because it was listed. 10% was owned by the Romualdez,
cousins of Marcos by affinity.
Katong 30-30 na nullified to kai gibaligya sa gobyerno. When
there be sharing power, how do they share power? Ingon si
Gokongwei
G (Gokongwei): nga ikaw nlng Chairman, President, ako
Execom Chair man ko. Di man ko gusto anang mga PR nga
public, kaw nlng ana kai anad man ka ana. Ako execom lng ko.
Ksabot sila si Lopez mao ang most visible head as chairman of
the BOD. What happened? As they went on, ang mga loans lng
ni Gokongwei ang ma approve. Wa man gyud maka lusot nga
loans sa Lopez.
Kai ngano man? Ang execom man primi. Kada-adlaw gud mag
meeting ang execom. Until Lopez said dili nani mahimo put an
end to this. Naisahan siya ni John Gokongwei.
L (Lopez): I want to sell(ng lagot na siya)
G: NO, we have a good business, the networth of PCI Bank is
growing by leaps & bounds, we should not sell.
L: it is now time to sell
G: I will not sell.
If Lopez sold, he would get a very poor price because the
buyer would not gain control of PCI Bank. They need to sell
together because that is 60% of outstanding capital stock,
then they will be able to take control of the Bank.
So what did Lopez do? He went to the Romualdez, his worst
enemy.
L: Are you with me we will unseat Gokongwei?
Lipay kaayo si Romualdez kai nakipag amigo na si Lopez sa
iya.
R (Romualdez): yes I am with you!
12
So R handed over to him the proxies to L. then L scheduled a
meeting
L: tangtangon nato si G from his office & position.
But then L gave him an ultimatum, he told G
L: next week, in the meeting of the stockholders, you do not
need to attend because you will just be embarrassed. I already
have the proxies of the Rs & you will be unseated.
G: how can you change this.
L: If you will sell, then we can change this
G: okay! I will sell together w/ you.
Baligya nlng ko. Kuyog nlng ta.
So who was stab in the back? R was stab in the back, he is left
holding 14% and no value anymore. Siya maoy katapusang
naghilak kai siya mai nabilin.
Who was the buyer? The buyer was Go of Equitable Bank w/c
became Equitable PCI Bank. Mr. Go of the Go family was able
to swing that deal, a small bank buy a bigger bank because he
had SSS & GSIS money w/ him.
That was the time of Erap. Erap, gi-mandarin man niya nga
pautangon siya. Mao na tong sinugdanan. Pagka-discover
atong Velarde account, mao na tong *** it all began w/ an
executive committee.
January 8, 2016 (NDBajenting)
Before we leave this directors of corporation, I would like to
discuss this certain feature of compensation of directors. There
are certain items in most compensation of the directors.
Sometimes they want to lure directors whom they co-opt as
officers of the corporation. So now, if you are a start-up
corporation, you have not yet made your money, you are just
beginning, but you are on to a good thing, you will need talent
to run the corporation. Who starts corporations, especially
high-tech corporations? Its the science people but they dont
know anything about business. So, many times the corporation
falters because they do not have the managerial talent. How
do you invite first class talent? You will not get a first class
talent to leave his post, let us say he is a CEO of Pepsi Cola,
you want to bring him over to Apple. He will not leave that
unless you give an attractive compensation package. The cash
component of the attractive compensation package might be
very little, but the practice of corporations, is they give what
they call options. Like, if you join, you will be given an option
to buy let us say a million shares at par value, which is divided
into four (4) parts. For every year that you stay, you will get to
exercise 250,000 options. You buy it at par value. Now, if the
shares of stock of the corporation is traded in the stock
market, and you succeed in running the business, then the
price of the stock will go up! Lets say the par value is just
$5.00. By the way, how much is Apple? Apple just reached
$100.00, but has gone down later now because of the havoc
that is happening in the Chinese stock markets. It has gone
down. But can you imagine, if you have an option to buy
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
250,000 shares of Apple at $5 per share when the going price
in the stock market is $100?! Unya ug gakinahanglan ka ug
kwarta karon aron ka-exercise ka, kapalit ka ug shares. Mag
ilog na nimo mga brokers. Pahuwamon ka ug kwarta aron
makapalit ka ana.
Q: Now, why is that incentive the most advantageous of many
start up corporations?
A: Because it is not out of their pocket expense. It is on
balance sheet.
In other words, the ones who will suffer are the general
stockholders. They will suffer the entrance of more shares, is it
not? So its a cheap way of purchasing talent.
Now, this experience began so many years back but then there
are so many abuses. Why? Just like what happened to Enron.
They manipulated. They called it creative accounting, such
that the net profits were very high in the books, when in fact,
they were just playing on numbers. So the price of the shares
of stock goes up, and then, the executive is entitled to exercise
his options. And then, he exercises his options. After he buys
the shares at par value, he sells it immediately, in the open
market and he makes his money. Then he leaves!
So, here comes Sarbanes-Oxley law. After the excesses of the
Enron era, Sarbanes-Oxley law, now says: If you grant
executives options, either way, you must reflect it in the profit
and loss statement. It must be quantified. It must be costed.
And then, if your costing is conservative the following year,
you must make up for it.
Way kahunungan ba ang costing ana. So what happened
now? Since you have to cost it, the corporations have resorted
to what is called restricted stock compensation.
Q: What is the meaning of restricted stock compensation?
A: Instead of granting this executive that they want to bring in
to the Board, options, they buy existing shares in the
open market. And then they put it in escrow and then there
is this instrument in the escrow it says, According to their
agreement that every year that he stays with the company, he
gets a certain portion of these shares provided that the selling
price of the shares reach this much in the open market.
Mas klaro pa na because the cost of these distributed stock is
the amount the company spends in buying those shares in the
open market. Get it? That is the practice now. Kay mag
option2x ka, lisod kaayo.
Now, I told you yesterday, that there was this record loss of
share loss in the stock market in the shortest time. Because
for the past three (3) days, the Shanghai and the Chinese
shares market has been pummeled on the big board, in the
venture board, in all the stock markets. So, as far as last
August, the Chinese government said, all the eight (8) spots
that are registered in China, they cannot sell their shares until
six (6) months after. Yesterday was the end of the sixth
month. Maong nagka-gidlay. Wa naman, di naman
mapugngan. So, first 15 minutes of trading, the market went
down already by 3%. And the only thing that kept it from
cascading very fast, is the speed of the transactions. Record,
13
mao na naKung paspas pa unta to mas musamot pa gyud.
Now the Chinese officials, before the stocks were traded, they
called it the circuit breaker. Stop! Wala say trading.
Pahunong nila ug 15 minutes. To give a chance daw to these
people who were in the panic stage to get hold of themselves,
and maybe think it over about selling. Then when they opened
the market, again nisamot man nuon kay nag andam naman
diay sila sa ilang order ato nga 15 minutes. The stock market
went down by 7%. The Chinese authorities said, NO MORE
TRADING. Gi hunong nalang gyud nila.
One of the biggest losers is Saudi Arabia because it has many
investments with the Chinese to explore natural gas, oil in
China Mongolia, asa na dapita, South China Sea. China is
claiming the whole of China Sea because it has the word
China. Mao man na ilang argument. Ngano mang dili man ni
amo, gipanganlan ni ninyog China, di amo na! You know
Saudi Arabia, because the price of oil has gone down, Brent,
the benchmark for EU, sweet crude, is already trading at
US$32 per barrel. West Texas crude, samot. Its already traded
at US$30. Remember, a little over a year ago, it was traded at
more than US$100 per barrel. Now Saudi Arabia, one of the
few countries in the world that has no income tax. Why? Its
useless daw because most of the subjects of the king have no
work. Theyre all subsidized by the kingdom. Pakaonon ra na
sila sa hari. There are twice as many people in Saudi Arabia
who are foreign workers than the population and serving the
population. Sometime in the 1980s Saudi Arabia nationalized
Aramco (Saudi Arabian Oil Company) so its no longer traded in
the stock market. Since Saudi Arabia is bent on not reducing
their production of oil because if they reduce, according to
them, we will never get it back, somebody else will take over
our market share. And we will lose in the long run. So, patas
anay nig utong, hantod nga kanang uban nga ga produce ug
oil, matangtang na sila, pabilin mi, we still have our market
share. Thats why the price of oil is going down. Now, how
long can they afford because their 1 trillion dollar reserve
surplus has gone down to about already? How long can
they stay? One of the thinkers of the royal family said, We
have a solution. We can get free money. How is this possible?
Aramco which is completely nationalized, will sell shares to the
public. Mag initial public offer (IPO) ang Aramco. So, ma-listed
na siya. Then everybody is saying, if Aramco will be listed in
the stock market, it will be the biggest corporation that has
been listed so far. Its oil reserve alone that are not speculative
ha, known reserves is worth US$270 billion, plus its facilities, it
can easily be worth US$3 trillion. Ang Apple, its supposed to
be the most expensive company by market value, it
approached US$1 trillion, its more valuable than Exxon Mobil,
but Aramco is US$3 trillion. The question is, At what value?
How will you value the oil reserves? (1) According to the price
now, or (2) according to the price at which it was explored?
Thats actual cost. Or, is it according to the average of
historical cost, from the time Aramco started up to now, the
average cost per barrel? Which is the correct valuation? So,
that is the big news now, if Aramco goes on an IPO. Once
again, it will invite a lot of money from the traditional
institutions, the retirement funds. Adto gyud sila mutapot ani
kay oil man. Lig-on man kaayo. Exxon Mobil, the price of oil
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
went from over US$100 to US$30, and the price of the shares
of stock of Exxon Mobil only went down by 15%. Ngano man?
Because they are a complete oil corporation. They have a very
extensive refining capacity. Ang ilang ma-lose sa exploration or
extraction, mabawi nila sa refining kay barato ra mang oil nga
ilang gi-refine. So, they do not suffer as much loss as you think
they would be.
GOING BACK, if you have an executive that will be given an
option to buy Aramco shares, how will it be costed as required
by International Financial Reporting Standard (IFRS)? How will
it be? Thats a big debate. Mu-reklamo man na sila, especially
if the corporations price of shares goes down. And it was
costed at a very high price. Ang ato ra bang BIR dili ra ba gyud
mubalik. That will be reflected at the year the option is granted
at a very high costing, and then the next year, when the price
of the shares of stock goes down, there is no corresponding
reduction in taxes. Because the BIR will not allow a reduction.
So, these are problems associated with directors
compensation. Thats just one. There are many other
problems.
So, executive compensation is one of the biggest accounting
controversies. How do you record it, how will you account for
it?
Let us go to: POWERS OF A CORPORATION.
TITLE IV
POWERS OF CORPORATIONS
Section 36. Corporate powers and capacity. Every
corporation incorporated under this Code has the power and
capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of
time stated in the articles of incorporation and the
certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with
the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public
policy, and to amend or repeal the same in accordance with
this Code;
6. In case of stock corporations, to issue or sell stocks to
subscribers and to sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this
Code; and to admit members to the corporation if it be a
non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such real
and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business
of the corporation may reasonably and necessarily require,
subject to the limitations prescribed by law and the
Constitution;
14
8. To enter into merger or consolidation with other
corporations as provided in this Code;
9. To make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural, scientific,
civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any
political party or candidate or for purposes of partisan
political activity;
10. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and employees;
and
11. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated in
the articles of incorporation. (13a)
The difference between a natural person and a juridical person
is, if you are a natural person, if no law prohibits it, you have
the power to do it, is it not?
For a juridical person, if there is no law that provides for it, or
it cant be traced back to law, you cannot do it. Its the
opposite! If there is no law that prohibits it, you can do it if
you are a natural person. There has to be a law that prohibits
it. Otherwise, you have your limit. But, for a corporation,
the powers that it exercises must ultimately be traced
back to law, there must be a law that grants you the powers.
So, if it is clearly granted by law, it is express powers.
If, it is implied by the law, in other words, you cannot exercise
express powers without exercising these powers, then it is
implied.
Then there is the inherent powers.
Q: What is that inherent power?
A: Part of personality is exercising these powers. If you do not
exercise these powers, you are not a person. Those are
incidental powers or inherent powers.
Pare-pareho ra nang duha, ha? Incidental powers, or inherent
power. Its called incidental because it is part and parcel of
your being a person. Being a person is, a person is one that is
the subject of rights and obligations. Diba? That is the
definition of a person. If you do not have that right, you are
not a person.
Q: The power to purchase personal and real property is
part of being a person. Do you have to put it into law?
A: NO, you do not have to, because it is part and parcel of
being a person.
But it is here, in Section 36, No. 7:
Section 36. Corporate powers and capacity.
xxx
7. To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such real
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
and personal property xxx
Q: What has happened to the incidental powers?
A: Nothing. The fact that it is provided here in the Code does
not make it any stronger. You remove this, it still remains,
because it is part and parcel of being a person.
If you should amend Section 36, and remove this, you still
have the power to purchase, sell, lease exchange, mortgage,
pledge personal real property, because that is the nature of
being a person. Muingon kag, tinuod ba gyud na, is that the
nature of being a person? Suppose you are vowed to poverty
and you live in a cave, wala na gyud ka tawon, tu-a na ka
didto, gitalikdan nimo ang kalibutan. Wa na gyud kay property
ana, tinuod ba na? Magdala man siguro kag toothbrush, diba?
Naa gihapon kay toothbrush, naa siguro ka tingali sabon,
ambot lang ug maligo ka pa ba ana. <Mao Tse-tung stories>
CORPORATE POWERS
1. Inherent powers.
2. Express powers.
3. Implied powers.
You should be able to identify what are inherent, what are
express, what the implied powers are.
Express Powers
The clearest express powers of a corporation is its purpose
clause. You know from Section 14, that a purpose clause is a
sine qua non of the Articles of Incorporation of a corporation.
There must be a purpose clause. And if you are a stock and
profit corporation, you must distinguish between your primary
purpose and your secondary purposes. You need to distinguish
the two because the law says that if you engage in the
secondary purpose, under Section 42, you need the two-thirds
(2/3) ratification vote of stockholders who owns shares, voting
and non-voting. So, it must be clear, whether this is primary or
this is the secondary purpose.
Section 42. Power to invest corporate funds in
another corporation or business or for any other
purpose. Subject to the provisions of this Code, a private
corporation may invest its funds in any other corporation or
business or for any purpose other than the primary purpose
for which it was organized when approved by a majority of
the board of directors or trustees AND ratified by the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or by at least two thirds (2/3) of
the members in the case of non-stock corporations, at a
stockholders or members meeting duly called for the
purpose. Written notice of the proposed investment and the
time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown
on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder shall
15
have appraisal right as provided in this Code: Provided,
however, That where the investment by the corporation is
reasonably necessary to accomplish its primary purpose as
stated in the articles of incorporation, the approval of the
stockholders or members shall not be necessary. (17 1/2a)
Implied Powers
Now, let us say your purpose is: To establish, operate and
maintain a cement factory. That is your purpose as a
corporation, cement factory. If you are to branch out and go
into the extraction of gravel and sand, because all those who
want to buy your cement are naturally looking for gravel and
sand, that is not included in the primary purpose. In human
logic, in human life, it is natural, is it not? Wala may semento
nga imo lang i-bubo dinha, butangan lang nimog tubig unya
mahimo na na. Gawas kung mag tile ka tingali.
Pero ug mag semento ka, magkinahanglan gyud kag gravel
and sand. Can you say that it is implied? That, because you
are granted authority to make cement, it follows that you are
deemed implied to engage in a quarry of gravel and sand? Can
you do that? Ah, you must understand the meaning of
implied:
Nowhere does it say in the Articles of Incorporation
that you have the power to hire people and yet,
because you are granted the power to establish,
maintain and operate a cement factory, you
necessarily have the implied power to hire personnel
to establish, operate and maintain a cement
company.
That is the meaning of implied power!
Gravel and sand? But you have already made the cement! It is
no longer implied because the cement is already made, and
then you mix it with gravel and sand. So it cannot be implied.
Remember implied means you cannot accomplish the
purpose unless you exercise this implied power.
Importante gyud na ha.
Like this Central Azucarera case. This corporation makes sugar
and also refines the sugar. The board of directors, without
resorting to a ratification vote of 2/3 of the stockholders
representing the outstanding capital stock, they invested
money in a jute sacks factory. Wa mo kadungog anang jute
sacks? Ang sako karon kay plastic naman wa may jute sack.
Asa nalang man na makit-i ron ang jute sack? Makit-an na
nimo sa mga pangpang ron, ila nang gipangbutang dira aron
dili muligid nang pangpang, kanang mga gipang bulldoze nila
dinha butangan na nila, kay mukupot ra na sa yuta unya
tubuan na ug mga sagbot. Now, they invested in a company
that makes jute sacks because that used to be the sack that
would contain the sugar. Nobody opposed them, no
stockholder cried out against them. Now, what happens? The
whole idea was so that we will not run out of jute sacks. Thats
why they invested there. Then the corporation went bankrupt.
Their investment was lost. So the stockholders complained.
The stockholders said, You should have submitted it to us for
approval because that is not in the purpose! That cannot be
implied in the purpose.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Q: Is it implied? Did the BOD have to go to the stockholders?
Can you make sugar without jute sacks?
A: The Supreme Court said, it is implied! Because where will
you put the sugar, unsa man ibutang na nimo sa bulsa?
Alamigason unya ka. You have to have some container for the
sugar that you produce. So, honest mistake! They lost money,
thats an honest mistake. If it is an investment, you either win
or you lose. So it is implied power to invest in a jute sack
factory if you have an express purpose to manufacture sugar
and refine sugar. So, bantayi na ninyo unsay pasabot anang
implied powers. Thats a question of logic. Wala gani kay logic,
ambot bisan unsaon nimo ug memorize dili na nimo matuhog.
Most of the powers that are discussed in this Title IV are
seminally found in Section 6 in those eight (8) instances where
even non-voting shares have the power to exercise a vote.
Take a look at Section 37, the first power that is discussed.
1st POWER: To extend or shorten corporate term (S
37)
Section 37. Power to extend or shorten corporate
term. A private corporation may extend or shorten its
term as stated in the articles of incorporation when
approved by a majority vote of the board of directors or
trustees AND ratified at a meeting by the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the members
in case of non-stock corporations. Written notice of the
proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That in
case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right under the
conditions provided in this code. (n)
Remember in the discussion of the term here, term of a
corporation, Section 11, the longest term that you can provide
for a corporation is fifty (50) years. And then, you cannot
extend the term unless it is already 5 years to go before the
end. You cannot just extend the term before the five years
unless there is a compelling reason.
Section 11. Corporate term. A corporation shall exist
for a period not exceeding fifty (50) years from the date of
incorporation unless sooner dissolved or unless said period
is extended. The corporate term as originally stated in the
articles of incorporation may be extended for periods not
exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance
with this Code; Provided, That no extension can be made
earlier than five (5) years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an
earlier extension as may be determined by the Securities
and Exchange Commission.
16
Now, even after the term has ended, you have three (3) years
to close, liquidate the corporation and during those three
years, you can no longer extend the corporate term. That is
Section 122.
Section 122. Corporate liquidation. Every corporation
whose charter expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate existence for
other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3)
years after the time when it would have been so dissolved,
for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business
for which it was established.
xxx
So during those three (3) years nag-liquidate ang corporation,
wala nay Board of Directors (BOD). Receiver in dissolution
nalang nang nahibilin dinha. Unsa may trabaho niya diha?
Manilhig, manglimpyo, manglabay nalang na siya, mang
dispose nalang na siya. Wala nay corporation thats why you
can no longer extend the term because the corporation does
not exist anymore as an ongoing concern/enterprise. It exists
only to close. Mao na. Thats why you are not allowed to
extend the term.
Q: What will you do to extend?
A: Section 37 says, xxx when approved by a majority vote of
the BOD or trustees xxx. SEC says that this is absolute
majority. Not majority of the quorum, but absolute majority.
Then, this must be xxx ratified at a meeting by the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock (OCS) or by at least two-thirds (2/3)
of the members in case of non-stock corporations.
Section 37. xxx Written notice of the proposed action
and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage
prepaid, or served personally: xxx
So you have qualified notice. Not just time, place and date
of the meeting but also the purpose: to extend the corporate
term.
You must put down there, Agenda for this meeting is the
term.
xxx Provided, That in case of extension of corporate term,
any dissenting stockholder may exercise his appraisal right
under the conditions provided in this code. xxx
So if you disagree to the extension, you no longer want to
continue, you can exercise your appraisal right. You ask the
corporation, Buy me out! How much is the value of my
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
shares? Pay me because I dont want to have anything to do
with you if you extend the term of this corporation.
This Section 37 provision, implies that if it is shortening of the
term, there is no exercise of appraisal right. It is only in the
extension of the term that there is exercise of the appraisal
right. Take a look at Section 120:
Section 120. Dissolution by shortening corporate
term. A voluntary dissolution may be effected by
amending the articles of incorporation to shorten the
corporate term pursuant to the provisions of this Code. A
copy of the amended articles of incorporation shall be
submitted to the Securities and Exchange Commission in
accordance with this Code. Upon approval of the amended
articles of incorporation of the expiration of the shortened
term, as the case may be, the corporation shall be deemed
dissolved without any further proceedings, subject to the
provisions of this Code on liquidation. (n)
Section 120 says that the shortening of a corporate term is
actually a form of dissolution. So now you understand why
there is no appraisal right when it is shortening but only in
extension. Diba?
Q: Why?
A: Because if shortening the term is dissolution, the value of
your shares will be known during dissolution.
Ipamaligya naman tanan mga butang, pamayran naman dinha
ang mga utang. Unya pagkahuman naa pa gani mahibilin, mao
na nang imong bahin bahinon sa mga shareholders so you will
get the value of your shares if the corporation is dissolved, if
there is still something remaining there. That is why there is
no appraisal right in shortening the term of a corporation.
Bantayi na because many commentators think that there is
appraisal right when it comes to shortening the term.
Q: Why do they say that, that there is appraisal right given in
shortening the term?
A: Because the Corporation Code itself misleads you! Section
81 enumerates the instances of appraisal right:
Section 81. Instances of appraisal right. Any
stockholder of a corporation shall have the right to dissent
and demand payment of the fair value of his shares in the
following instances:
1. In case any amendment to the articles of incorporation
has the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing preferences
in any respect superior to those of outstanding shares of
any class, or of extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of the
corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
17
Shortening the corporate term means you amend the articles
of incorporation!
Look at No. 1 of Sec 81:
1. xxx of authorizing preferences in any respect superior
to those of outstanding shares of any class, or of
extending or shortening the term of corporate
existence;
In this particular article, it seems there is appraisal right even
in shortening the term. There is none! Because, when you are
allowed to shorten, you are dissolved. Therefore, the value of
your shares will be known and you will receive the value of
your shares, which is the same as appraisal right.
Alright? <tan-aw si Fr. sa mga (?_?) faces nato> Murag wa
man gyud inyong mgawa gyud! Balika na ninyog basa.
2nd POWER: To increase or decrease capital stock;
incur, create or increase bonded indebtedness (S
38)
Section 38. Power to increase or decrease capital
stock; incur, create or increase bonded
indebtedness. No corporation shall increase or decrease
its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the
board of directors and, at a stockholders meeting duly
called for the purpose, two-thirds (2/3) of the outstanding
capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating or increasing of any
bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholders
meeting at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to
each stockholder at his place of residence as shown on the
books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the
directors of the corporation and countersigned by the
chairman and the secretary of the stockholders meeting,
setting forth:
(1) That the requirements of this section have been
complied with;
(2) The amount of the increase or diminution of the capital
stock;
(3) If an increase of the capital stock, the amount of capital
stock or number of shares of no-par stock thereof actually
subscribed, the names, nationalities and residences of the
persons subscribing, the amount of capital stock or number
of no-par stock subscribed by each, and the amount paid by
each on his subscription in cash or property, or the amount
of capital stock or number of shares of no-par stock allotted
to each stock-holder if such increase is for the purpose of
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or
increased;
(5) The actual indebtedness of the corporation on the day
of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the
capital stock, or the incurring, creating or increasing of any
bonded indebtedness.
Any increase or decrease in the capital stock or the
incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the Securities
and Exchange Commission.
One of the duplicate certificates shall be kept on file in the
office of the corporation and the other shall be filed with the
Securities and Exchange Commission and attached to the
original articles of incorporation. From and after approval by
the Securities and Exchange Commission and the issuance
by the Commission of its certificate of filing, the capital
stock shall stand increased or decreased and the incurring,
creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided,
That the Securities and Exchange Commission shall not
accept for filing any certificate of increase of capital stock
unless accompanied by the sworn statement of the
treasurer of the corporation lawfully holding office at the
time of the filing of the certificate, showing that at least
twenty-five (25%) percent of such increased capital stock
has been subscribed and that at least twenty-five (25%)
percent of the amount subscribed has been paid either in
actual cash to the corporation or that there has been
transferred to the corporation property the valuation of
which is equal to twenty-five (25%) percent of the
subscription: Provided, further, That no decrease of the
capital stock shall be approved by the Commission if its
effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded
indebtedness, or increase the same, with the approval by a
majority vote of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting duly called for the
purpose.
Bonds issued by a corporation shall be registered with the
Securities and Exchange Commission, which shall have the
authority to determine the sufficiency of the terms thereof.
(17a)
Unya karon, I will ask you a question. In terms of capital stock,
you need the vote of the stockholders if it is increase or
decrease of capital stock. But with bonded indebtedness, its
only in incurring, creating, or increasing bonded
indebtedness. It is not in decreasing bonded indebtedness.
Q: Why is decreasing bonded indebtedness not included?
18
A: Because decreasing bonded indebtedness is contained in
increasing bonded indebtedness.
Q: How do you decrease bonded indebtedness?
A: Bayran nimo ang imong mga utang, diba? You decrease
bonded indebtedness by paying your debts. It is already
contained in the increasing the bonded indebtedness.
Muingon ba diay ka, Mangutang ta, pero dili ta mubayad.
Dili! Included na na. Pag increase nimo sa imong bonded
indebtedness, you also are given the authority to pay it.
Implied na, importante kaayo nang implied. Logic na, logic!
That is why there is no special procedure for incurring bonded
indebtedness.
Take a look at the process in Section 38:
xxx Written notice of the proposed increase or
diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness
and of the time and place of the stockholders
meeting at which the proposed increase or
diminution of the capital stock or the incurring or
increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder
xxx
There is qualified notice. You must give to stockholders,
voting and non-voting, ha. The information as to time, date
and place of the meeting. Not only that, but also that the item
in the agenda is bonded indebtedness or increase or decrease
in capital stock.
Now do you mean to tell me that San Miguel Corporation or
PLDT, every time they float a bond, they have to call a
meeting of the stockholders?
PLDT has two million stockholders. Magpadala kag notice kada
mangutang ka by way of a bond. Because its not just
incurring, also increasing! Mudugang gani kag utang, two-
thirds (2/3) ratification vote of the stockholders is needed.
Kana ang problema, ha. You read your commentators.
Q: Why is it needed if you borrow by way of a bond to have
this cumbersome procedure in Section 38? Whereas if you
borrow from a bank, you do not need this! Why do you need
this?
A: Ah, you have to have some idea of how to borrow by way
of a bond. Many commentators will say, Because bonds
involve a big amount and then some would say, It will entail
the corporation borrowing a much bigger amount.
No! You can borrow just as big an amount with a syndicated
loan. Kung ang imong huwamon is in excess of a single
borrowers limit of a bank; that does not stop you from
borrowing from a bank. You just ask for a syndication. There
will be a lead bank. He will contact the other banks and say,
O, mupahuwam ka ba sa PLDT? Pila may kaya nimo ining i-
lump sum? Siyay mag organize, because hes the lead bank,
he holds the collateral of the loan. And it is annotated on the
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
loan and all the other members of the syndicate are included
in the annotation, so dili sila mawala. Kinsa may gakupot sa
titulo? Ang lead bank. Ngano man siya nga mu-lead man siya?
Usually, because he has the biggest amount in the total
syndicated loan. Mao na nga siyay lead. Dagko nang mga
amount.
But in a bond, you know when you borrow by means of a
bond, you need three (3) practices right away. <Fr. drew on
the board>
Say PLDT. Huwam siya ug, Php 10 Billion and it will be a bond.
Now, in a bond, guhay guhayon ni into smaller denominations.
Now, what kind of bond will it be? Will it be a no-interest-
bearing bond, or an interest-bearing bond? If it is a no-interest
bond, then it will be like this:
Lets say the smallest denomination will be 1 Million. That will
be the denomination here. If it is no interest, and it is payable
in ten (10) years, then this will be released in the market at a
discount. So to get this 1 Million bond, all you have to pay is
300,000. When this bond ripens, it matures, then kubra ka ug
1 Million. Ang imong gi-capital, 300,000. Sugot ka ana?
Muatang kag ten years, 300,000 wala kay dawat2x ug
interest. Karon pangutan-on taka: What is the effective rate of
interest of this? I-solve na nimo, finance na! Unya ingon sila, a
good bond rate is that your money doubles every five (5)
years. Shorthand for determining how many years it will take
for your money to double on the basis of annual interest rate is
the so-called Rule of 72.
RULE OF 72: (Years required to double investment = 72
annual interest rate)
Let us say the rate of interest is 12%. 72 divided by 12%. Pila
man? 6. Thats the number of years it would take your money
to double at 12% interest. Rule of thumb na.
Now, mao ni gitawag na zero coupon bond. Discounted,
nominal. Unya, ingon kag Sus! Kagamay gyud diay sa nakuha
nako. Wa may interest.
There is another kind of bond with an interest. And bonds with
interest, normally they pay interest twice a year. It will have a
nominal sum and also an interest rate. Some of this interest-
bearing bonds will even have coupons attached to the bond:
P 1M
PLDT
Kung ten (10) years na unya kaduha na siya mubayad sa usa
ka tuig ug interest, pila man ka coupons dinhi? Twenty (20) ka
coupons diba, kay kaduha man mubayad ug interest rate.
Every six (6) months mubayad ug interest rate. Kinsa may
mubayad? Adto ka muadto sa trustee kay daghan man mo
kaayo, tibuok kalibutan man imong coverage. Kinsa man
mukupot sa collateral anang bond? It is the trustee.
19
Come maturity date dili makabayad, dagan ang tanan didto sa
trustee because he will sell the security and distribute it to the
bond holders. Thats why there is trustee because its so
scattered that none of them can hold the collateral. You need
a trustee.
Mao nay reason nganong bonded indebtedness has to be
approved by the stockholders. Because you have to deal
with the public. The name of the corporation is at
stake. You are actually borrowing from the public. You are like
a bank asking for deposit.
Katong question sa BAR:
Q: What is a coupon bond?
A: Mao ni! <Fr. pointed to the drawing> It is a bond to
which attached coupons corresponding to the number of times
the interest is paid. Upon the maturity of each period, you
detach the coupon, and you go to the trustee, you ask for
payment. Mao nay buot pasabot ana.
Magkaanam kahurot ang bond. Remember the bond has a
secondary market. The primary market of the bond are
the buyers of the bond. They are the actual lenders. But
then, within ten (10) years the bonds can be bought and sold
depending on the interest rates that are benchmarked.
Kung mas maayo kag interest nga makuha sa imong bond
unya nagkaanam ug kaubos ang interest, bond rate sa gawas,
edi mas mahal ang imong bond. Mas muginansiya ka pa tingali
ug ibaligya nimo nga dili pa mahinog ang imong bond kay
nitaas na ang value sa imong bond kay taas mag interest sa
bangko. Pero kung ang imong bond barato diay, unya nisaka
nang interest sa gawas? Ang imong bond kung imong i-
dispatsa, barato kaayo, lugi ka! Thats the secondary market of
bonds. Just like equities, just like shares of stocks, if it is
bought and sold.
The primary market are the original subscribers pag release sa
issuer corporation. Thats the primary market. After that, you
can sell or buy from each other; that is the secondary market.
If you are PLDT, every time you issue a bond do you have to
call the stockholders? Pagka dako ug gasto ana. So, how do
you solve that in order to escape this cumbersome procedure
in Section 38?
What happens is, PLDT will create a new corporation, a
subsidiary. <Fr. wrote> I am just inventing a name, ha.
Might not be the true name, but there is this. So, this will be
the actual principal who will issue the bond. Now, nganong
tuohan man ni siya sa publiko? Because PLDT itself will issue a
guarantee that this bond that will be issued by PLDT, a bond
holding corporation is 100% guaranteed by PLDT.
Q: What does this holding corporation need to issue the bond?
A: two-thirds (2/3) ratification of its stockholders.
Q: Who are its stockholders?
A: Lima (5) ra ka tao ang stockholders ini. The president, the
chairman of PLDT itself. O, ratify lang sila. Then you fulfill
Section 38.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Q: Now, does PLDT have to have a ratification by two-thirds
(2/3) of the stockholders in order to guarantee this bond?
A: NO. There is no such provision. It is considered an implied
power in order to be able to raise funds. So, there is no
cumbersome procedure of holding a stockholders meeting.
Remember this two-thirds (2/3) ratification cannot be
accomplished by written assent. There must be a meeting and
then there must be voting by secret ballot. That is how you
ratify bonded indebtedness.
There is a corporate decision. There is a Philippine Supreme
Court Decision mainly that a corporation cannot enter into
a usufruct agreement in excess of fifty (50) years. Why?
Because the longest term that a corporation has is 50 years.
To me, it is an ignorant Decision. Maka extend gud ka anang
50 years. There are bonds now that are issued 50 years, 70-
year bonds. There are now 100-year bonds that are issued. I
dont know if you have taken that up in accounting, and how
that is treated. But according to US standards of accounting
which is not IFRS yet, 100-year bonds are treated as equity.
Receivables or debts (?).
Q: Is it possible for a corporation in the Philippines to issue a
100 year bond?
A: I doubt, because of that Decision that you cannot enter into
an agreement of usufruct in excess of 50 years because under
the law, 50 years is the maximum term of the corporation. And
yet one of the characteristics of a corporation is perpetual
succession. San Miguel is already more than 100 years.
Technically speaking, it could have issued at the time of its
inception, a 100-year bond and it would still be around to pay
the bond. But anyway, those are the issues that attend to this
part.
Now, you know of course the requirement for an increase in
capital stock. As to the increase, the secretary certifies that at
least 25% of the increase has been subscribed, and at least
25% of the subscribed has been paid-up. That is the
requirement with the SEC.
I just want to point out that Section 38 has just created a new
officer which a corporation can have even if there is no
such officer provided in the by-laws because it is
recognized by the Corporation Code. Take a look at the second
paragraph of Section 38:
xxx A certificate in duplicate must be signed by a
majority of the directors of the corporation and
countersigned by the chairman and the secretary
of the stockholders meeting, setting forth: xxx
Q: When is it effective, the increase or decrease of capital or
incurring or increasing bonded indebtedness?
A: Still in Section 38
xxx From and after approval by the SEC and the
issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or decreased
20
and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may
declare: xxx
Later on we will study Securities and Regulations Code on the
need for registration of securities, and a bond is certainly a
security that requires registration because it is sold to the
public.
Section 38. xxx
Bonds issued by a corporation shall be registered
with the SEC, which shall have the authority to
determine the sufficiency of the terms thereof.
Now, the issuer of a bond, just like the issuing of shares of
stock, may accept whatever is acceptable for the issuance of
the shares of stock by way of consideration. In other words,
you can issue a bond in exchange for property, not cash
in the same way that you can issue shares of stock in
exchange for real property. Whatever consideration is allowed
for shares of stock, is also allowed for a bond.
3rd POWER: To deny pre-emptive right.
Pre-emptive right is applicable only to a stock and profit
corporation.
Q: What is pre-emptive right?
A: It is the right to subscribe to new shares of stock in order to
maintain your proportionate share of the outstanding capital
stock.
Let us say the outstanding capital stock is 100 shares. You are
the owner of 10 shares.
Q: What is your proportionate ownership of the corporations
shares?
A: Your proportionate ownership is 10% of the outstanding
capital stock.
Suppose the corporation decides to double its capital and now
issues another 100 shares. You have pre-emptive right if that
pre-emptive right is not denied in the by-laws and articles of
incorporation.
When a corporation says: We have a rights issue of 100
shares. They call that a rights issue in the stock market.
Remember outstanding shares is 100. Unya muingon ang
corporation nga we have rights issue 100 shares. Muingon ka
dayog I will exercise my right! This means you are willing to
pay for ten (10) shares. Kay 10 plus 10, 10% ka sa 200
shares. That is pre-emptive right.
Q: What happens if there is nothing in the articles or by-laws
that says whether you have pre-emptive right?
A: The assumption is you have pre-emptive right. In
other words for you to be denied pre-emptive right, it must be
explicit in the articles of incorporation or by-laws.
Q: Are there instances when you are denied by law of the
exercise of pre-emptive right?
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
A: YES, Section 39.
Section 39. Power to deny pre-emptive right. All
stockholders of a stock corporation shall enjoy pre-emptive
right to subscribe to all issues or disposition of shares of any
class, in proportion to their respective shareholdings, unless
such right is denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-emptive right
shall not extend to shares to be issued in compliance with
laws requiring stock offerings or minimum stock ownership
by the public; or to shares to be issued in good faith with
the approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock, in exchange for
property needed for corporate purposes or in payment of a
previously contracted debt.
Because Section 39 says:
Provided, That such pre-emptive right shall not
extend to shares to be issued in compliance with
laws requiring stock offerings or minimum stock
ownership by the public; or to shares to be issued
in good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding
capital stock, in exchange for property needed for
corporate purposes or in payment of a previously
contracted debt.
Laws in the Philippines with respect to public utilities: Within
five (5) years from the inception of a public utility, it must sell
10% of its outstanding capital stock to the public. Mao na ni
ron ang Shell, dugay naman kaayo ning Shell, sige silag
balhin2x ug corporation, sige silag merge2x ug corporation
kay aron ma-postpone nila pagbaligya ug 10% sa public. Shell
Refining Petroleum, ug Shell Corporation, gi-merge nila. Ingon
dayon silag, Karon pa mi magsugod so amo lang sang i-
postpone ang 10%. Karon wala na gyud sila kalikay, mu-IPO
na gyud sila ug 10%. Why? Public utility man sila, required to
sell 10%.
xxx in exchange for property needed for corporate
purposes or in payment of a previously contracted
debt.
Dacion en pago gani, or in exchange for real property, you
require two-thirds (2/3) vote of the outstanding capital stock of
the corporation.
Q: Does it include non-voting shares to deny pre-emptive
right?
A: NO. Because it is not included in those eight (8) instances
mentioned in Section 6 of the Corporation Code.
So, even if the articles and by-laws say there is pre-emptive
right, if there is property that is needed by the corporation, or
the corporation is in debt to a financial institution and it can no
longer pay the debt, and the creditor is willing to take shares
of stock (dacion en pago), the corporation will just issue
shares of stock to the creditor and transform his debt into an
21
investment in the corporation. That will require 2/3 vote of the
voting shares of the corporation.
Nagkinahanglan ang corporation ug property unya dili gusto
nga mubuhi ang major stockholders because they do not want
to be diluted mao man nang termino ana. If you do not
exercise your pre-emptive right, you will be diluted. New
stockholders will come in. Imbis 10% ka, muubos ka. Mura ba
ug kape nga mulapsaw. Nipasulod pa man ka. Kay kung wala
pa mupasulod permanente unta ka.
Now here is the question. IPO, outstanding capital stock is
already 100 shares. Exercise ka sa imong pre-emptive right, so
10 shares. Ang 90 wala man mu-exercise, so ang corporation
ibaligya niya ni sa uban.
Q: Do you still have pre-emptive right over that 90 shares that
should have been pre-emptive right of existing stockholders,
but which they did not exercise and its now made available to
the public? Aduna pa ba ka?
A: SC says, NO more! You do not have pre-emptive right
because are already 10% of the new outstanding capital
stock. Ug naa pa kay 90, kuha ka ug 10% ana = 9. Wa na,
pila naman imong shares? 29 na imong shares. Nahimo nang
duol ka sa 15% higher than your proportionate share of the
outstanding capital stock. So you do not have pre-emptive
right over the shares subject to pre-emptive rights which the
other co-shareholders have forfeited because they did not
exercise their pre-emptive right.
Now, its a different issue if you have a right of first refusal
(ROFR).
Pre-emptive and the right of first refusal are not the
same thing.
ROFR might be in the articles or by-laws. What does the ROFR
say? It could say the most burdensome ROFR is this way:
Where stockholder wishes to dispose of his shares, he must
first offer it to the corporation or if the corporation will not buy
it, to the stockholders. And, failing that then to any third
party.
Now, kaingon nimo ang process ana kung gusto ka mubaligya
muadto lang ka sa corporation, Palita ko. Ah, di diay mo?
Adto ka sa stockholders. Palita ko. Ah, dili diay mo? Una pa
ka mu-third party.
Dili man, the process is like this: Mubaligya ka sa third party.
Hoy! Kinsa gusto mupalit ninyo? Third party says, Palit mi
ana at this price. And then you go to the corporation, SWISS
CHALLENGE. Palit ka ini, aning presyoha? Dili gani sila
mupalit, ngadto nasad ka sa stockholders. Kinsa ninyo ang
mupalit at this price? Wa gani musukol, GOODBYE! Thats
the process. Thats why its called a Swiss challenge. Dili na
kay Suez Canal, Swiss na, from the history of Switzerland.
Challenge nila. Walay ni-challenge nila kay neutral man sila.
Alright! I hope you remember this ha, muingon mog paspas ra
kaayo ni.
Q: What is the difference between ROFR and pre-emptive
right?
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016

stocks are in dividends.

As to Pre-emptive ROFR
right 2. Second, interest of bonds are paid whether or not the
issuer makes profits. But in stocks, dividends are paid
Subject Matter covers issued - Walay only from surplus profits.
shares, virgin giingon si Fr. 3. Another difference is interest in bonds is fixed while
shares dividends in stocks are variable depending on the
financial condition of the issuing corporation.
Exercise and has limit as to its No limit
Coverage exercise and 4. In bonds, the creditor gets his investent back on a
It could be as specific period upon maturity thereof; whereas for
coverage
many shares as stocks, the stockholder gets back his investment only
Its coverage is there are when all the creditors are paid in case of dissolution.
not to exceed available shares. SO it is not fixed, unless you sell your shares. In
your which case, you'd get back your principal. You sell
proportionate your shares of stock at a loss because the price of the
share in the shares of the corporation has gotten down.
outstanding
capital stock. Like Glencore and BHP Corporation, it has gone down already.
And I am not talking here about individuals ha. I am talking
Pre-emptive right, you only have a limit to purchase the shares about retirement funds, hedge funds, mutual funds that are
to maintain your proportionate share of the outstanding capital invested in these corporations because these corporations are
stock. 10% ka. Karon naa koy pangutana. 100 ang the number 1 and number 2 mining conglomerate in the world.
outstanding capital stock. Then the new shares to be issued Rio Tinto is the second. Extrata, the one who owns the most
are 100. Now, you are a stockholder but you have 11 shares. huge copper and gold mine in South Cotabato. It is just part of
So, your percentage is 11%. What is 11% of 100 shares? 11 Rio Tinto. Rio Tinto is now in trouble because it bought its
also! Wa pa nay problema. Pag-abot ana, nga ang imong assets property. And the peak was when China was the
shares let us say <pause si Fr. diri> hungriest xxx.

You know, it really becomes a problem when it is stock
dividends. And then stock dividend is declared on a percentage
basis, in which case it results in what is called fractional
shares. Kung eleven (11) shares ka unya mu-issue ang
corporation ug 10% stock dividend. So, pila may gawas ana?
Nahimong 10 shares .10 (or 10.1), so you have a fractional
share of 10% of the shares! The company cannot release a
fractional share. Kinsa may muboto ana, duha mo kabuok ana,
idugtong dugtong na? Mao nang usa sa mga problema. Mao
nang paliton na tanan sa corporation that is the so-called
enforced treasury shares. Mapugos ang corporation ana
pagpalit ug balik anang tanang fractional shares because its
not viable. Paliton nilag balik and then that becomes treasury
shares. The corporation has really no choice. That is when you
learn that whenever a corporation issues stock dividend, it has
no choice but to also issue cash dividend kay paliton man nila
nang fractional shares.
January 13, 2016 (KT)
But to illustrate how bonds and stocks are not really far apart,
let me go through this illustration.
This is a holding company. What is a holding company? It is
the company that holds shares of stock in other corporations.
So, it is the one that controls the other corporations. Let us
say, this company is listed in the stock exchange. Let is say
that this is MPICMetroPacific Investment Corporation. What
does it hold? It holds half the shares of stock of Meralco. What
else? It holds the controlling shares of stock of NCLEXthe
highway from Balintawak to Tarlac. It is the longest Toll
highway in the Philippines. Bayad ug P60 ang at least 100 cars
in it. So what is that? Again, it holds the controlling shares of
MetroPacific and Hospitals, Incorporated which owns about 7
or 8 hospitals. One of them is Davao Doctors Hospitallegally
known as Clinica Hilario Incorporation. Makati Med. Riverside
Hospiptal in Bacolod. All these different hospitals.
Naa pa gyud lain! It holds the controlling shares of Maynilad.
What is Maynilad? It supplies 2/3 of the water of Greater
Manila.

[Segue: I have here with me a grid. These are the powers and
these are the requirements for the exercise of the powers. So
title 4 and 1 is here. Just picture this grid and know whether
there should be a majority vote of the board, etc. Get one and
pass.]
Now, we have taken up shares of stock and bonds. And we
went through the distinctions of the shares of stock and bonds.
Like for instance:
1. one distinction is interest is __ in bonds where in
Now, the story is this. [Father illustrated something on the
board. So when he says this, I do not know as to what he
was referrring to.]
When MPIC applied this, here is the problem. MPIC is listed in
the stock exchange and for it to control herethis was
formerly owned by Lopez Group (Meralco, MPC, etc). But then,
this was under receivership because it failed to pay its debts.
The government did not approve its increase as well of the
tarifs for water. They bidded and their bidding price was for 10
years. Because of competition, they won. But they could not

22
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
make a go of the old 2/3 of NAWASA. So what happened? If
MPIC submits a plan to the court (because the court had it in
receivership), it says I will buy up all the shares of the
controlling owner. And once he puts his shares, what happens?
Surely, the price at which the MPIC placed in the stock market
will go down! Because this is losing! Namalit kag losing nga
negosyo and naa kay negosyo nga wala nagkagidlay. So karon
nagkagidlay na sad ka, diba? Pareha ra nag naa kay kwadra
unya gwapo kaayo imong mga naa dira. Pero namalit kag
masakiton. Kana! Masakiton na hinuon tanan!
So what do you do? You want to apply this because there is a
good future in water, is it not? Naa gyud na. Can you imagine
when they bought Maynilad? What is NRW? Non revenue
water! Walay bayad. It was 50% of their water before of
Maynilad was non revenue. Pero 80% of the non-revenue
water was faciliteted by the NAWASA employees themselves.
Gobyerno man. Mubayad ba ka? Dili kay sweldohan man ka.
Mao nay problema sa gobyerno. When the government runs
something proprietary, it will certainly lose because there is no
incentive that is received.
So, what did they do? MPIC injects monoey to Maynilad by
way of advances. What is the difference between an advance
and a note? [Segue: A note has a specific purpose. You cannot
just borrow money from the bank and say Maghuwam kog
kwarta. Ngano man? Kay nanginahanglan ko. Will you buy
machinery or buy a piece of property? You have to specify. In a
note, you have to specify the use of the money. But in an
advance, there is no specification. It is just granted there. It
could be used as a shares of stock. In this case, they will
specify. It is specifically covered by a memorandum. The
Holding company hereby grants the possesor hereof an
advance... it is either for shares of stock or for a loan to be
later on covered by a collateral. If you already gave a loan, it
will be later on be expensive to convert it into a shares of
stock. Pagkatinunto! Awa ra karon. Kanang documentary
stamps ha. Kanang loan, pabuhaton nimo. Mubayad na kag
doc stamps. In fact, the most common way to escape
documentary stamp tax before, is just to fly to HongKong and
do there the documentation there for the loan since you do not
pay in there the docstamps. How much is a doc stamp? Naa
man dira ang rate sa Notarial Law. Be familiar with this kay
gatuon mo sa law unya wala mo kaybaw. Mura ra mog parrot
ga-yawyaw dira!
Kung mu-loan ka, mubayad na kag P200 per P100,000. Maayo
ra na kay thousands ra. But suppose it is P2Billion. Pila may
imong ibayad sa doc stamps? Unya pagkataod-taod, muingon
kag Ato na lang ni buhaton ug shares of stock. So mubayad
nasad kag doc stamps para sa shares of stock. As you also
know, a deed of sale of deal property also has doc stamps. Pila
may doc stamps sa real property? 1.5%. Mao bitaw na nga
6.5% na ang makaltas nimo kung mubaligya kag real property.
Kay 5% is capital gains tax!]
So, advances. What is the net effect of the advances? It is
already giving resuscitation to Maynilad to enable it to come as
close possible to its rehabilitation plan that is approved by the
court. And then, as a consideration for the advances, the
controlling stockholders here, who will eventually sell their
23
shares, they gave already their vote! Proxy vote. Gi assign na
nila ang ilahang voting rights diri. So ilaha na ni gicontrol ang
corporation.
Now, you must have questioned: Why did they not buy the
shares here so that they will really have a control over it?
Because once you have the 50% + 1 of the outstanding capital
stock of a corporation, and the owner is a holding corporation,
what happens to the financial statement of the subsidiary?
Consolidated with the holding corporation's financial
statement! In which case, wa pa unta ni manil-ad(?) ning
ilahang financial statement! Mubaba ang price at which it was
traded. So to postpone the ill-effect of the effective acquisitio
of Maynilad, they depended on an advance.
In some instances where it went into a receivership, it would
have been a loan or a convertible bond. Convertible to what?
Convertible to shares of stock of the acquired corporation.
Unsaon na nimo? Pag timing na, muginansya na ni, mahimo na
ning i-consolidate diri nga dili na ni mangil-ad, mu-exercise na
ka sa imong option to convert the bond into common shares.
Ang utang? Imo na nang proprietary ownership. So dili
gihapon ni mangil-ad.
So unsa man? These two kinds of bond, they are useless in
actual practice. That is what they do. You will later on find out
that in the stock exchange, the moment you buyjust like
thisand this is traded, then you have to make a disclosure.
Paliton nig 5% diri. Kinsa may tinuod tag-iya? Idisclose na. The
holding companyMPIC.
When Maynilad was already approved (that means that all of
its obligations are already paid) and finally the advances are
converted) then the court orders for its dismissal. It is not
dismissed by the court because it is now no longer under
receivership. Then it functions as a regular ___ without the
supervision of the courts. So now, Maynilad is controlled by
MPIC and DMCI. What is DMCI? David M. Consunji
Incorporated. Silang duha.
Now, depending on its purpose, there are different kinds off
bonds. It is classified into different kinds such as:
1. mortgage bonds the mortgage bond is a bond tat
is secured by a lien or a mortgage on specific real
property. Building, land, or other assets that are
classified as real property.
2. Collateral Trust Bond secured by a pledge or a
personal property which may consist of shares of
stock, bonds, or both which are deposited with a
trustee. [Segue: Donald Trump. Wala pa ko kakitag
tawo nga mas kapayason pa ani niya. I AM RICH! I
AM REALLY RICH! Pero naglisod na sya karon
because of the Collateral Trust Bond.]
High financing man na sya. Muhuwam sya from CreditSwiss
Incorporated. Unsa man ni iyahang collateral sa CreditSwiss
Inc? He put in 2/3 of his shares of stock in __ Incorporated.
Kuha niya ang 2/3 shares unya naa may certificate na. And this
is pledge. Prenda. Pareho ra na kung muadto kag pawnshop
unya itag-tag na nimo dira. Mao na ang iyahang gibuhat. Flip
niya. Hapin. Now, ang 1/3 nga iyahang negosyo are solid real
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
property. Iyahang gi-tag-iya. But 2/3 is just his name.
Gipahuwam niya didto sa Dubai. TrumpTowers. Pag gamit ana
nila ana, gabayad man jud na sila. Bisag sa UK. Karon kay
niingon man sya nga I propose for no Muslim to come in! UY!
Gi-withdraw sa Dubai! Hastang UK ug US. Ngano man? Hastan
sa CreditSwiss nga gibutangan niyang shares of stock niya na
nagpahuwam niya, niingon nag Dungagi ni imong collateral
kay ninaog na ang presyo sa imong shares of stock.
So you see the connection between loan and shares of stock?
Can you see now why the people are worried on the prices of
the shares of stock? Ang imong gicollateral didto kay di na
maigo. It is either you add to the collateral or pay that much of
your loan that cannot be anymore covered by the collateral.
That is the problem about pledges. Pledge gani ka and your
value is variable, patay! But you and I both know that when
you go to the pawnshop, then that is the end. :) That is the
last straw that breaks the camel's back. (Google: It is an idiom
which describes the seemingly minor or routine action which
causes an unpredictably large and sudden reaction because of
the cumulative effect of small actions. In short, it is the final
limit of capacity.) Pero that is the idea. That is why, no more
collateral value is way way smaller than the cost of the
valuation of the pledge.
3. Debentures it is a certain type of bond.
Debentures do not have a specific bond or property
as a security for te payment. They rest on the credit
of a corporation and not on security. The usual
protection given is a negative pledge clause against
new mortgages covering for their assets. Naa moy
idea unsa nang debentures? Mudrawing nasad ta. :)
Victoria's Milling (still under receivership). Kinsa may ga-control
ana karon? LT Group. Unsa may LT group? Lucio Tan. Nganong
na-control man na ni Lucio Tan? Kay long before Victoria's
Milling was in trouble, Allied Bank and PNB gave them money.
Pagkagidlay na, iyaha man unta nang i-execute. Unya ang
collateral kay ang planta man jud. Ah nakuyawan kayon ang
owners nga tinunto. Ana siya, Hala sige. We will convert your
debt into shares of stock. So Lucio Tan, from being a creditor,
has become the owner. Proprietary interest. Now, why is Lucio
Tan also acceding into doing that? Banko man kaha siya diba?
Because Lucio tan needs sugar! Diabetic ba sya kay nganong
kinahanglan man syag sugar? (LOL) Ang Tanduay diay o unsa
ba na. Kinahanglan man nag sugar. So, nalipay na sya karon
nga part owner na man sya.
Now, there was another group that lent money nga nauna
kang Lucio Tan. Kinsa man? FilInvest. Kinsa man nang
FilInvest? Mao nay tag-iya sa EastWest bank, sa BUSCO, sa
Matalam Sugar, Botigom(?) Sugar Mill. Tulo man na sila. Siya
sad kay gusto sad na niya i-convert into equity. xxx Unsay
kulang ninyo sa working capital? Diri ra gihapon na sa PNB. I
am willing to give and extenda loan. But time, the loan will be
covered by Debentures. Negative purchase. Ana si Lucio Tan,
Napautang na ninyo nang property. Na-mortgage na man na
ninyo sa FilInvest o sa kung asa man tong bangkuha. Pero
mudawat ra gihapon ko ana. Second, third, fourth, or fifth. For
as long as there is a negative pledge. What is the negative
pledge? An Agreement. I will put my man there as assitant
24
treasurer inside the ____. All amounts that are not in the
budget cannot be released unless there is his counter-
signature.
So capitalist debentures which are not in the operational
budget cannot be released. Kintahay, mupalit mmog dugang
yuta or planta. It cannot be approved unless his man decides.
Because he checks now the funds. That is his collateral.
Asa man ka musugotcollateral sa yuta or ana na collateral?
Asa may mas lig-on? Mao na. Kung sa basketball pa na, man
to man na na. Naa na na sa sulod. Kadaghan pa mog bugas
kaunon.
Muingon kag, Wala may property collateral na. Buang-buang
man na si Lucio Tan. Nakamenos ra ni sya ba. Pero
nagkamang ka na, siya nagdagan na. Wa man kay nahot,
wala na na sya. Ayawg siguraduha. Kung tan-awon lang nimo
sa papel, wala na syay collateral. Pero sa tinuod, mas maayo
pa sya kaysa kang FilInvest. Wala syay collateral pero ang
iyaha kay naa sa sulod! Mas makaybaw pa syag una kung wala
nay kwarta ang Victoria's kay naa man syay tao sa sulod. So
that is called a negative covenant. (Google: Negative Covenant
is a bond covenant preventing certain activities unless agreed
to by the bondholders. They are written directly into the
agreement creating the bond issue, and are legally binding on
the issuer, and they exist to protect the best interests of the
bondholders.)
Victoria's Milling cannot issue dividends, bisang unsa pa
kagadhan na, without the countersignature of Lucio's man nga
naa inside. They cannot purchase any capital equipment
without that guy signing. That constitutes more in securing his
credit than any other physical contract. So that is a debenture.
Ikaw, maghuna-huna ka. Kung third mortgagee na ka,
nganong mudawat pa man ka ana? Nganong magpautang pa
man kag tao nga third in line ka na man? Kaybaw man mo nga
ang first mortgagor, mao nay most senior. I-forclose na niya
ang mortgage unya ang proceeds kay kuhaon na niya kung
what is owed to him. Kung naa pa gani mabilin, maadto sa
second mortgagor. Ikaw kay third mortgagor ka na! Nganong
musulod pa man ka ana? Mukuha ka ana kay tua na man ka sa
sulod. Tig pirma na man ka sa cheke. Victoria's used to be the
biggest refiner of sugar. I will give you the article.
4. Callable or Redeemable bond this you
understand. Callable is an english term. (Google:
Callable Bond is a bondd that can be redeemed by the
issuer prior to its maturity. Usually, a premium is paid
to the owner when the bond is called.)
5. Coupon Bond (Google: An Investment bond on
which interest is paid by presenting coupons. It is a
debt obligation with coupons attached that represent
semiannual interest payments. It is also known as a
bearer bond.)
6. Detachable Bond Warrants What is a warrant? It
is a right to purchase shares of stock at a given strike
price. Magpahuwam ka. Naa kay bond. What is an
attractive feature(?)? There is an attached warrant.
You have an option to buy shares of stock at this low
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
rate. Now when it improves and the net profits
increases so the accumulated unrestrained net profits
also increases. Musaka ang uban shares of stock,
musaka nasad ang price. Unya ikaw naa kay warrant
nga pwede ka makapalit og shares of stocks at of
the increased price. Labi na kung detachable
warrant! What is the meaning of detachable warrant?
Kanang mabulag nimo sa bond mismo! Karon kay
ibaligya na sad nimo because you can exercise it
independent of the bond.
Kanang common, attached man sad na. Pero interest. Kini,
warrant. You have an option to buy the shares of stock of the
issuer. And you can exercise that option independent of the
bond because it is detachable.
7. Convertible bonds (Google: A convertible bond is
a bond that can e converted into a predetermined
amount of the company's equity at certain times
during its life, usually at the discretion of the bond
holder.)
8. Registered Bonds What is a registered bond?
There is a registry for the issuer. Palista ka didto.
What is its significance? The registry is binding and
final. Sa ato pa, kung mawala na imong bond, kung
nakalimot ka unya gii-lo nimo dayon kay imong gi-
flush so wala na. Pero ikaw gihapon ang tag-iya
anang bond kay naregister na na. File kay affidavit of
loss.
January 14, 2016 (KT)
[Segue: Before we leave bonds, I would like to bring up to you
that unlike going to a bank or borrow money to a bank, if you
are going to float a bond, you normally need a financial
adviser. Hardly anyone now who floats a bond without going to
a financial adviser. What is the reason? Most of the time, those
who bought bonds are already listed in the list in the stock
market. And because you are already listed in the stock
market, your floating of the bond could affect your market
price, xxx of your fundamentals. You might be a very
profittable corporation. But because you float a bond wrongly,
and you are not able to explain it to an invessting public, then
that affects the price of your shares of stock. And as I have
told you, the price of the shares of stock is material, not only
for your desirability in the investment market but also for your
credit rating. You might be using your shares when you
borrow, and your collateral decreases in value because the
price of your stocks in the stock market have just gone down.
So, you employ a financial adviser to advise you on what kind
of bond or whether it is timely to float a bond. And the
financial advisers now are so sophisticated that they are able
to predict whether your bond will float or not. Kung mubaligya
kag bond unya wala diay mupalit? That affects your price.
Because the other parties in the investment world would say,
There must be something wrong with you because nobody is
buying it for that amount. When you have more sellers than
buyers, muubos ang presyo.
25
How are they able to predict it? Ah~ Then they come to a very
sophisticated world of the so-called QUANTS. What is a
Quant? (Google: As financial securities become increasingly
complex, demand has grown steadily for people who not only
understand the complex mathematical models that price these
securities, but who are able to enhance them to generate
profits and reduce risk. These indiviuals are known as
quantitative analysts or simply quants.)
Because bonds are registered in the securities, then almost all
bonds are already on record. And given the financial market,
given the resources of investorsprivate funds, hedge funds,
retirement funds, mutual fundsilista na nila tanan. How much
are their resources, their fixedd income, equity, etc. Then they
can predict by modeling on whether or not your bond will
grow. So what is a definition of a quant? Quantitavive Analysts.
Statistical Arbitrage. You know for instance that PLDT shares
are traded here in the PhilippinesPhilippine Stock exchange
and in the New York stock exchange. You might not make
money because the price is practically the same. But
sometimes, there is a rise in the price in the market. And the
market does not react as soon as there is an increase in the
exchange rate. The difference in an hour or less than an hour,
xxx. Why? Because of the exchange rate. In selling dollars in
the New York stock exchange, it is sold here in pesos. Unya
overnight man na. Pagpalit nimo didto barato, unta pagbaligya
nimo diri kay mahal. Pero ang diperensya ra kay puntos. But if
you go by volume and you do it repeated times, then that is
arbitrage.
So, who will do it? They will be able to tellthose who are
advising. Mutawag silag analyst. But if they will tell you that
your bond is over subscribed, what is the meaning of that?
That there are more takers to your bond than you have a
bond! Nanobra ang mamalit sa imong bond. Sa ato pa, mas
daghan magpautang nimo kaysa sa imong kwarta nga gusto
nimo utangon. Kay daghan mag mamalit. So much so that the
issuer changes his mind as to how much he is willing to float
his bond. He can double it because there are so many takers.
Remember this, and as the banks will always tell you: The
moment that you need to borrow, it should not be xxx that you
should borrow. The moment you don't need to borrow, daghan
gusto mupaborrow nimo. Ngano man? Kay maayo man ang
dagan sa imong kompanya.
You might think that it is only for profit corporations. Some of
the key players now are non-profit organizations. Give an
example. Universities when they have endowment funds and
they would invest it in the market. (Google: An endowment
fund is an investment fund set up by an institution in which
regular withdrawals from the invested capital are used for
ongoing operations or other specified purposes. They are often
used by nonprofits, universities, hospitals, and churches.) The
biggest endowment fund in America is the University of Texas.
Then you have retirement funds. Last time I read, it is already
1/3 of the size of their GDPs. Mao ni sila ang nagapalit ug
funds. They meet. And they are basically not for profit.
Because the number 1 rule in retirement funds is to protect the
owners of the fund. Earnings is secondary.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
So this whole world of bonds is not just a question of directors,
board of directors, voting of a qualified majority vote to float a
bond, and then going to the stockholders. NO. If it is just that
without first getting sound financial advicein fact, the
corporation code requirements ___ the moment there is sound
financial advice. Unless kanang sa sigi nimog tutok sa bonds,
naa na kay sixth sense. Unless you are like that, do not
attempt to foresee the future of a bond. That is a very
complicted thing.
That is what differs it when you are borrowing from a bank.
Kung muhuwam ka sa bangko diri sa Pilipinas, you will issue
on how much higher than the rates. Pila? +1,2, or 3?
Depende na kung unsa kakung prime client ka sa bank.
Nagtuo ba ang banks niini? You have a bench rate and
depending on who you are on how much higher you are in the
bench. The bench mark in the Philippines is 180-day treasury
bills issuedd by the Republic of the Philippines. That is the
benchmark in the Philippines. That is the same benchmark in
the US. In Europe, the benchmark is the so-called LIBOR
London InterBank Offered Rate. It is used when banks borrow
from each other in order to meet their certain liabilities. A
certain portion of the deposits of a bank must be kept in a
vault in cash. So if you lack cash, and you must that
requirement daily, then you must borrow from the other banks.
And that they'd get the best lending term that they can get. So
that is London InterBank Offered Rate.
So that is how you borrow from a bank. Kung pilay hatag
nimo.
Suppose, you borrrow against your deposits. Naa kay time
deposit sa bankoP3Million. Muborrow ka sa bangko ug
P1Million. Muingon ka, Nganong muhuwam man kag P1million
nga naa man kay P3Million? Can you give me one good
reason why you should borrow when you already have more
than P1Million? Mura man tag financial analyst ani. Let us go
ahead. (?)]
Pre-emptive right. This so-called pre-emptive right, you can
exercise pre-emptive right under this new Corporation code
over more shares than the old corporation law allowed. Why?
Because xxx pre-emptive rights over treasury shares. Why is
treasury shares included in pre-emtive right? Because of this
precise configuration of the language of the law. Section 39:
Section 39. Power to deny pre-emptive right. All
stockholders of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the
articles of incorporation or an amendment thereto:
Provided, That such pre-emptive right shall not extend
to shares to be issued in compliance with laws requiring
stock offerings or minimum stock ownership by the
public; or to shares to be issued in good faith with the
approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock, in exchange for
property needed for corporate purposes or in payment
of a previously contracted debt.
So not only all issues, but also it says or disposition of shares
26
of any class xxx. So the new law now covers not only brand
new shares and issued shares, but also treasury shares. That
has not yet been vested into a Supreme Court case. This case
is not in the law but in the advisories in the Securities and
Exchange Commission.
Pre-emptive right is the right to purchase shares in the
corporation in such a manner as to maintain your
proportionate share of holdings in the outstanding capital stock
of the corporation. When can you be denied pre-emptive right?
1. If there is a proviso in the articles of the by-laws that
there is no pre-emptive right.
2. In instances whre the corporation is in need of
property, so that it is willing to receive this property in
exchange for new shares and this is recommended by
the majority vote of the stockholders comprising at
least 2/3 of the outstanding capital stock.
Who proposes this? The board of directors after voting, by
absolute majority, that this property is needed by the
corporation.
So 2/3 vote of the outstanding capital stock. Question: Is the
2/3 based on all sharesvoting and non-votingor, is it just
for voting shares? It is just voting shares because it is not one
of the 8 instances mentioned in section 6.
Again, pre-emptive right may be denied if the corporation is
under obligation under the law to lease (?) and sell part of its
shares to the general public. In which case, the original
stockholders cannot demand that they'd be given the umber of
shares so as to maintain their proportionate shares in the
outstanding capital stock of the corporation. So, pre-emptive
right. Take note that pre-emptive right is not the same as right
of first refusal. Right of first refusal is a property of an existing
share that has been issued. It must be provided in the articles
and by-laws. And then, it must aslo be clearly stated in the
stocks and xxx so as to make innocent third parties aware of
such a limitation on transferability of shares.
The articles might say, Shares issued by the corporation is
subject to right of first refusal on the part of the corporation
and absent that, other stockholders. So, you will first offer
your shares to the corporation. Then if the corporation does
not buy the shares, then you offer it to other stockholders
existing stockholders. Then if there are no buyers and takers in
the existing stockholders, then you can go to the publicthird
parties.
That seems to be the logic of the law. But in practice how do
you do it? You already look for a buyer in the general pubic.
Then you give the price at which they are willing to buy the
shares. The moment you have done that commitment, then
you go to the corporation. Are you willing to buy it at this
price? And then the corporation tells you, I cannot buy it
because I have no unrestricted retained earnings. That is one
of the reasons why the corporation cannot buy. It is because
the corporation can only acquire its own shares if it has surplus
earningsunrestricted retained earnings.
So, if the corporation does not buy it, you will announce it to
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
the other stockholders. Somebody is willing to buy it at this
price. All the stockholders will say that they are willing to meet
the same price. Then, you sell it to them. But if wala gani, then
you can sell it to the third party. That is how pre-emptive right
works.
Here comes the case of JG Summit vs. NIDC [Note: There is
no JG Summit vs NIDC. Only JG Summit vs CA, in which NIDC
is also a party in the case.]
Bataan Shipyardthe product of behest loans of Marcos. They
were cronies of Marcos, who was given the privilege of
financing to be ablee to set up Bataan Shipyard. It was a
repair yard of ships. Mangayo silag barko ba. He put up his
own capital nga hhinulaman sa bangko. What bank? The usual
bank that is source of behest loans at that timethat is,
Philippine National Bank (PNB). So he got money from PNB.
40% of the money was supplied by the JapaneseMitsubishi.
Now, the shipyard could not pay the debts that it had incurred.
And the majority stockolders could not meet their debts. So
what happened? Nothing happened when Marcos was still
around. But when Marcos fled, that is when as they say the
ship xxx. Wala na.
Foreclosed ang shares of of stock. Kinsa may nag-take over?
NIDC. What is it? National Investment and Development
Corporationthe investment arm of PNB. NDC tried to run it.
Government appointees gud ang nag-run ana, so dili jud na
nila patayon dayon kay nag sigi ra man na silag lingkod sa
baord. So naa dayon director's fees, etc. gisagad jud nila.
So NDC foreclosed all the collaterals of the Romualdez family.
But it still short. So they decided to sell his shares. When they
auctioned it in public, whoo won? JG Summit which is John
Gokongwei, Jr. Now, when he was about to take possession of
Bataan Shipyard (because he got the 60% of the outstanding
capital stock, that is when Mitsubishi raised an objection.
Mistubishi said, Wait a minute. Look at the Articles of the
Charter and the Articles of the Bataan Shipyard. We have a
right of first refusal. We are going to exercise our right of first
refusal. In what price is JG Summit willing to buy it? That is
the same price that we will take it.
What did JG Summit do? It went to the Court of Appeals for a
restraining order. Stop this because it is a violation of the
Constitution! If the Right of first refusal will be exercised, then
it will be 100% owned by a foreign corporation. What happens
to the lands owned by the Bataan Shipyard? Can it still hold a
land? The right of first refusal cannot be allowed if it results in
the violation of the Constitution.
And the Court of Appeals says, CORRECT! So the CA issued a
restraining order. So the lawyers of Mitsubishi went to the
Suupreme Court on a question of law: Is a right of first refusal
between local interest and foreign interest valid, if in the
exercise of that right results in the 100% ownership of the
corporation in foreign hands?
That is the question. What was the ruling of the Supreme
Court? There is nothing wrong with the right of first refusal. If
it results in 100% ownership, then the government can ask
them to ___ according to the contitutional limits. Or the
27
foreign interest can already sell their right to purchase the
60% interest to another qualified buyer. Because the right of
first refusal is a negotiable righta right that can be bought
and sold, separate and distinct right. So there is nothing
wrong. Timan-i na ha kay there are so many ignorant
perceptions moving around.
Naay foreigner nga mupalit ug yuta. Can you as a xxx Harry
file a case to stop him because he is a foreigner and he is
owning a land? You cannot! Only the government can assert
that right. You cannot. Gobyerno ra. Ang Solicitor general ray
makafile. Ikaw, dili! Kanang DENR, wala na! All others, they
cannot.
[Segue: Muingon kag, Tinuod na Father? Tan-awa nang
SUMIFRU. Unsa man na? Dili na saging. The Sumitomo Fruits,
International. Nag-incorporate na sila dinhi. Pilay yuta ana?
Magsigi man na silag palit ug yuta. Have you ever wondered?
Giunsa man nila ang pagrehistro sa ilahang title? What do they
do about their land papers? SUMIFRU buys the property. What
they have is a deed of sale. Kuhaon na nila ang title. Silay
mukupot ana. Nganong mangadto man na sila sa Register of
Deeds? Kay kung muadto ang tag-iya anang title sa ROD, unya
magpa-ilis silag title nila, unsaon man na nila? Wala na. Kay
tua nay annotation ana sa ilahang deed of sale. Gibutang na
na.
Now, with that mode of acquisition (because a sale is a mode
of acquisition), unsa may naa nimo? It is just a piece of paper.
That is the difference with the one who owns it in fee simple.
Mao ra nay diprensya ninyopapel. But if you are the one
occupying it, the mode of acquisition, that is 99.99% of
ownership. And ownership is a bundle of rights. Wa may
gobyreno na mag-question ana.]
So, pre-emptive right and right of first refusal. Pre-emptive
right is basically to secure the stockholder of his proportionate
ownership in the outstanding capital stock. The right of first
refusal has to do with restrictions on transferability of shares.
As a general rule, transferability of shares is preferred by law
to restriction. That is why, pre-emptive right must be in the
articles, in the by-laws and in the stocks ___. you are missing
one, chances are the right of first refusal is defeated. Right of
first refusal bears the burden of the doubt. The corporation os
for transferability. That is the big difference between the
corporation and the partnership.
However, for the good of the corporation, pre-emptive right
must take a subordinate risk. Like for instance, when there is
an obligation of the corporation to sell the property. Public
utilities must be __ based on ownership because it deals with
the public. In other words, to forstall possible exploitation by
the corporation of public matterslike electricity,
transportation, etcthe law requires that the ownership itself
of the public utility must be public. So, regardless of the right
of the stockholders, a certail portion of that stock should be
owned by the public even though they are not ann origiinal
stockholder. For the good of the corporation.
Again, if a corporation is in need for certain properties, sa
atong huna-huna kay mga kuan man na real properties. Now,
it is more in need of intellectual properties. And the
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
corporation wants to acquire this intellectual property. And the
owner of the IP is willing to take shares or stocks in exchange
for the intellectual property. Then, the board of directorsthe
absolute marjoritycan recommend to the stockholders. And
the stockholders can vote by 2/3 to deny or accept it.
So, that type of denial is case ot case. It is not whole __
denial. Such as could happen if it were provided in the articles
of incorporation or by-laws and the certificate of stock.
Section 40:
Section 40. Sale or other disposition of assets. Subject to
the provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially
all of its property and assets, including its goodwill, upon
such terms and conditions and for such consideration, which
may be money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as its
board of directors or trustees may deem expedient, when
authorized by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, or in
case of non-stock corporation, by the vote of at least to two-
thirds (2/3) of the members, in a stockholders or members
meeting duly called for the purpose. Written notice of the
proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right under
the conditions provided in this Code.
A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if thereby
the corporation would be rendered incapable of continuing
the business or accomplishing the purpose for which it was
incorporated.
After such authorization or approval by the stockholders or
members, the board of directors or trustees may,
nevertheless, in its discretion, abandon such sale, lease,
exchange, mortgage, pledge or other disposition of property
and assets, subject to the rights of third parties under any
contract relating thereto, without further action or approval
by the stockholders or members.
Nothing in this section is intended to restrict the power of
any corporation, without the authorization by the
stockholders or members, to sell, lease, exchange, mortgage,
pledge or otherwise dispose of any of its property and assets
if the same is necessary in the usual and regular course of
business of said corporation or if the proceeds of the sale or
other disposition of such property and assets be appropriated
for the conduct of its remaining business.
In non-stock corporations where there are no members with
voting rights, the vote of at least a majority of the trustees in
office will be sufficient authorization for the corporation to
28
enter into any transaction authorized by this section.
Memoryahon na ninyo. Litanya ni. Sale, lease, exchange,
transfer. When does this happen? Second paragraph says:
The moment it can no longer perform its primary purpose,
then what the company has done is section 40 that reuires
absolute majority of the directors and 2/3 voote of the
outstandng capital stock, voting and non-voting. That is what
happens.
Can there be an instance where the corporation sells all or
substantially all of their capital properties and yet section 40 is
not applicable? You want to know what is applicable? San
Miguel Corporation just did it. But is there an instance where
you sell all your property and by so doing you are in able to
perform the primary function even better? In which case, you
do not have to go to section 40. Nahitabo na ba na? That is
what happened to Bharti Corporation of India. In India,
daghan kag celluar phone companies. Nag sigi ra na silag away
pero wala jud madaog ana nila. Why? Because the same
amount of capital and force. Wla jud dako na magtake-over.
Until Bharti took over. Gibaligya nya tanan iyahang cell sites,
iyahang mga switches, etc. Kinsa may iyahang gibaligyaan?
Ang supplier sad. Ang Semendili na ang liquid pero kanang
kompanya. (LOL) Semen ra man ang nagsupply. Unya
gipapirma nya ang supplier of long-term lease under the
obligation that they must keep up with the increase the
numder of subscribers.
So what did he do with the money? Marketing campaign sya.
Bharti Corporation. He sold all or substantially all of its
property assets to concentrate on subscribers. It even became
better. So there is no need for stockholders.
Now, there was an issue because there was an earlier law.
What is that earlier law? Bulk sales law. If by one transaction
you sell all your goods in one throw, not in the ordinary course
of business, then there are certain requisites that you are
required to do. But mind you, many mistake the application of
the Bulk Sales Law. It applies only to merchants. It does not
apply to industrial corporations or non-merchant corporations.
So it is a Middle Ages law, to protect the supplies of these
merchants who travels from town to town, selling their goods
and running away from their creditors by so-called simulated
sales. Nowadays, merchant is the ukay-ukay. Credit man tanan
na iyahang goods nga iyahang baligya. Kaisahon na gani nag
baligya tanan, di na mahimo na nila ug dili ka mu-comply with
the Bulk Sales Law. Mao na na sila karon.
(ADD SHELUs)
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
January 20 (LJSy)
Father refers the Sarbanes Oxley Act for the class to read.
The first section says This law shall be referred to as the
Sarbanes Oxley Act of 2002. It is called Sarbanes Oxley
because of the co-sponsors of the law. Sarbanes is the senator
who is the chairman of the finance committee. Oxley is also a
finance committee head in the house of representatives. So I
will be assigning you ____ sections to make more
understandable the provisions of the corporation code as the
corporation code has been further regulated in the Securities
Regulations Code.
They are now complaining against the Sarbanes Oxley because
the compliance of this Act in the US has this auditing fees from
50% to 100%. Nisaka ilang gasto because the whole ____ of
Sarbanes Oxley is disclosure. You have to disclose. If you have
nothing to disclose, you also have to disclose that I have
nothing further to disclose. When the examiners find out that
you have something to disclose but you did not, then it
becomes a _____ and the officers are CEOs.
The trouble with this is, if you are a corporation in the
Philippines and there is a major investor in the US, they will
ask you to comply with the Sarbanes Oxley law because you
are not covered. They are very serious about this because they
are saying that in the US, there is no one who is not involved.
You may not be, but indirectly, your client is involved there.
You have a mutual fund, it is invested in this various forms of
investment that involves public corporations so that is why it is
a public concern.
Section 43. Power to declare dividends. - The board of
directors of a stock corporation may declare dividends out of
the unrestricted retained earnings which shall be payable in
cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits
in excess of one hundred (100%) percent of their paid-in
capital stock, except: (1) when justified by definite corporate
expansion projects or programs approved by the board of
directors; or (2) when the corporation is prohibited under any
loan agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends without
its/his consent, and such consent has not yet been secured; or
(3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for
29
probable contingencies. (n)
A corporation that has no profits cannot declare dividends.
Can the corporation guaranty dividends?
A corporation can guaranty dividends not of its own but of
others dividends because if that corporations shares do not
make money then the corporation cannot be (?). But the
corporation issuing the shares (the issuer), they cannot
guaranty dividends. They cannot guaranty profits.
The issue has been raised: Suppose, when you sell the
shares, you already sell it at above par value. Now
assume: One million authorized capital stock divided
into one million shares par value of 1 peso per share.
When you issue the shares, the issued price cannot be
lower than one peso because you cannot issue shares
that are par value at lower than par. Suppose, even if
you have issued it there are so many people who want
to buy your shares and an announcement is made, it is
100% over subscribed. So the analysts tells you, ayaw
na pag buang2 dira. 100%? dobleha na na. So instead
of one peso par value, you have issued it for two pesos
which means that you are issuing your shares at 100%
premium. Wa pa man kay profits, nagsugod pa man ka.
Is that not fooling the public? Wa pa gani ka nag
sugod. So you issued the shares at an issued rice of
double the par value.
Pag lakra ana sa balance sheet:
Common stock: 1M common stock
Premium on stock: 1M pud
The question is: Diba ginansya man to? You are telling
the public that you have 1M stated par value in your
possession and control to answer for the debts and
obligations of the corporation. Your 1M is over and
above what is required (?) Can you now release it to
your stockholders as dividends? Wa pa man kay
ginansya, pero wa pa pud ka nakuhaan. Pero naa na
man kay premium on stock na one million over and
above what you have guaranteed to the public under
the so-called Trust Fund Doctrine. Can you now declare
the premium as dividend? That is the issue.
In the beginning, the ruling of the Court is you cannot declare
any dividend from premium on stock. Why? Because those are
not owned dividends. Profits result from the ordinary day to
day operation of the corporation and realizing more in
revenues than costs. That is profit. You cannot declare
dividends.
But now, the Courts say, you can declare dividends but only
STOCK DIVIDENDS.
Now, if you have issued the whole 1M authorized capital stock
even if you have premium of double the par value, you still
cannot issue stock dividend unless you will amend the
authorized capital stock and add such number of shares as will
allow you to issue new shares as dividend.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
So please remember, you cannot issue as dividends out of
premium stock.
What is premium on stock?
Amounts received by the corporation for the issuance of shares
higher than the par value to the extent that the amount
received is higher than the par value, that is the premium on
stock.
What is unrestricted retained earnings out of which
you can declare dividends?
This term first came out at the provisions on redeemable
shares. Unrestricted retained earnings is the accumulated
profits realized out of normal and strenuous operations of the
business after deducting therefrom distribution to stockholders
and transfer to capital stock.
Is capital gains profit?
Under this law (BP 68), it is not profit. But in accounting, it is
profit only that it is called other income. Its not coming from
the normal and strenuous undertaking of the business. Unsa
may business nimo? Pamaligya ug panakton(?) If your receipts
exceed your costs, the excess is your profit after you deduct all
other expenses. Now, you have this big land where you have
this big building where you have this big store and the building
is already 20 years old. Originally, when you bought that piece
of land, it was only P1,000/sqm. How much is it now? Now it is
P50,000/sqm. It has become the main ____ profit because it is
close to where the city hall is, where the bus station is, etc.
Now you sell this piece of land for P50,000/sqm and you have
1000 sqm. Pila man na? 50M? Profit na, ginansya na. The
trouble is, how much is the capital gains tax for sale of
property?
Now can you declare dividends out of capital gains?
It seems you cannot because capital gains is not considered as
part of unrestricted retained earnings. But NOW, the BIR made
a declaration of dividends out of capital gains because now it is
considered as part of profits.
How about capital appraisal increments? Assuming
Ateneo is a declared corporation that is stock profit
just like UM? Now for purposes of responsible
governance, it is the managements duty that the
physical assets of Ateneo should be adequately
insured. Kaning buildinga, gitukod ni in the 70s. Every
10 years this building is reappraised kay kung maguba
ning buildinga, unsa man imong buhaton? There will be
replacement costs. So mu-depreciate ang building pero
musaka na sad kay imo man ning i-insure. You get an
appraiser, he will ask, how much did it cost to replace
this building today at this cost? Pila na ang cement?
200 ang sako. Pila ang gravel and sand? So isulat nimo
sa imong books:
Original price: 150M. What is the difference now? That
is the appraisal increment. Question, can you declare
dividends from that?
30
No you cannot because there is really no increment there.
Theres no new money that came in. It is not fiction, it is based
on possible contingency that will require you to spend that
much and is, therefore, covered by insurance, but you cannot
declare dividends from that.
But you know what, there are schools of thought in the US
that say that certain capital appraisal increment can be the
subject of distribution of dividends if it is realized.
What is an example? Intellectual Property. You see that, duha
mo kabuok medisina nag compete, pa-appraise mo. Pareha
anang Lipitor, kinsa kaila anang Lipitor? Wala pa anay
nagtumar dinhi? Lipitor is for hypertension, unsa ni, kanang
cholesterol. Mao nay number one pambato sa Pfizer. After
clinical trial, duha na sila nakalusot, kadtong isa competing sa
Lipitor. Kanang naa (competitor) that is already appraised ha,
nganong appraised man na? Because it _______ a lot by
spending R&Ds which is part of the cost of this issuer. Part of
this cost, because it is so big, he can finance the research. You
add up all expense, that is the initial value of this ______.
Then you register it with patents. After you have register it,
the sum total of the warranties spent, you put as the cost of
this and you sell it to another corporation which is overseas.
Normally, lets say, in Puerto Rico or Virgin Islands. Why
Puerto Rico? Because Puerto Rico does not tax the earnings of
its corporations outside of its territorial jurisdiction.
You are a corporation in Puerto Rico and you have a business
in the US, Puerto Rico will not tax you the business in the US.
Mao nang, ibalhin na nila nganhi sa Puerto Rico, kani sya
binuhat ra gihapon ni sa Pfizer. Pfizer is the controlling owner
of this corporation. Get it?
Now, Puerto Rico starts billing Pfizer for using the patent
because he is now the owner if the patent. Ang kwarta
paingon sa Puerto Rico. Kanang ginansya sa Pfizer is taxed in
the US but kanang royalty received by Puerto Rico is not taxed
by Puerto Rico because it is a gain from business in the US.
Diba?
Now, suppose ang kalaban sa Lipitor madaot ba, there is a
complaint of a pregnant mother, complaint nga nadaot man
nuon ang fetus nga ako gidala kay nag-inom ko anti-
cholesterol. So the Food and Drugs in the US, orders the
restitution from the public. No more, you cannot sell. So,
misaka ang presyo ani (sa Lipitor), kay wala man lain nga
imnon, ang Lipitor lang man ug kadtong kompetensya. Lahi
naman ning nia, ang Pfizer kay Puerto Rico naman ang tag-iya
pero ang control naa ghapon sa Pfizer.
Kaning Pfizer mangayo ug enhancement of the patent because
it now has sole control of the market. So ginansya. Pfizer will
now say when I sold it to you, it was undervalued. Unya pag
baligya adto, naa may sabot adto that future enhancements
of Lipitor should redound to the benefit of its original
inventor. So, mangayo sya. Kana na ang bag-ong kwarta
musulod because of the new appraisal based on the prospect
that Lipitor now is the only medicine in the market that
answers the problem. That is realized capital. Remember, that
is not out of the normal and strenuous activity of the business.
This is not capital.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Remember, physical assets if you will not replace it, it
decreases in value, recorded in the books. Pag mag increase,
unsa may result ana? Diba musaka ang depreciation? Buildings
are classified as real property but they are depreciated. Land it
is real property but its not depreciated. Other real properties
kay depreciated. Pag depreciate nimo ini, hapit na unta
mahurot kay fifty ra to, ire-appraise man nimo so musaka.
Remember, depreciation is not out of the pocket expense. It is
a number nga gi-hinay2 ug kuha gikan sa valuation sa assets.
January 21, 2016 (NDB)
Theres a new law allowing foreign ownership of financial
institutions other than banks and quasi-banks. So we will be
complete. We will not be kicked out of ASEAN. Who is the
sponsor of this Bill No. 3023? The great legal luminary, Joseph
Victor G. Ejercito. I have been looking for a copy of the bill,
there is none. Even in the Senate website, there is none. There
are just this few details, the title: AN ACT AMENDING
FOREIGN OWNERSHIP RESTRICTIONS IN SPECIFIC LAWS
GOVERNING ADJUSTMENT COMPANIES, LENDING
COMPANIES, FINANCING COMPANIES AND INVESTMENT
HOUSES CITED IN THE FOREIGN INVESTMENT NEGATIVE
LIST, EXCEPT THOSE IN THE CONSTITUTION & FOR OTHER
PURPOSES.1
List of who voted in favor; Against: None; Abstentation: None.
You would think that the Senate was voting for motherhood.
Nobody can be against this. Its high time to throw out all
these nationalistic laws. Nationalistic laws protect no Filipino
except the inefficient Filipino. Media has been 100% Filipino
for how many years? 40 years, ha. They do not allow foreign.
If they allowed, the format of Eat Bulaga would have been
gone a long time ago. <Yawyaw about Eat Bulaga and Filipino
TV> That was concession of Marcos in the 1973 Constitution
to the Lopezes, 100% Filipino media. Then, education has to
be 100% Filipino. Ugok! In the U.S. you are a university and if
2/3 of the faculty in higher education are not Ph.D.s, you are
shit! Unless its a professional school.
POWERS
There is a distinction between the exercise of power that is
illegal, and therefore the effect is void, as contrasted with an
ultra vires exercise of power. Ultra, is the opposite of infra.
Infra is below, ultra is above. Thats why, vires in Latin is
power.
Q: Ultra vires is beyond the power to exercise. What is the
effect?
A: The effect is it is voidable BUT it can be ratified by a
subsequent requirement.
Q: What is that subsequent requirement?
1
https://www.senate.gov.ph/lisdata/2260319313!.pdf
https://www.senate.gov.ph/lis/bill_res.aspx?congress=16&q=SBN-
3023
31
A: If it is done by an unauthorized officer, then you just let the
authorized officer do it. Then it is as they say in Latin,
sanated, cured from its defect. Or in many instances, the
vote of 2/3 of the stockholders to sanate an otherwise ultra
vires act, voidable act.
If the act is in itself illegal, there is no question. You cannot
sanate it. If it is illegal, that means that the corporation is
made to do an illegal act. In which case, any stockholder may
bring what is called a derivative suit because in doing the
act, the corporation is injured, suffers loss.
Q: Who perpetrated that loss?
A: Not the third party, but the agent itself of the corporation.
Q: Who is that agent?
A: The BODs, the officers. Now, you know of course that a
corporation can act only through its officers and directors.
Q: When the actors themselves, the agents are the ones who
harm the corporation who will stand to protect the
corporation?
A: Any stockholder can file a derivative suit.
The title of the derivative suit is: XYZ Corporation by
stockholder so and so, against the officers. Thats the title.
In Nestor Ching and Andrew Wellington vs. Subic Bay
Golf and Country Club, Inc. et al, G.R. No. 174353,
September 10, 2014, this is what the SC says as to the
origin of the derivative suit: It is settled that a stockholders
right to institute a derivative suit is not based on any express
provision of the Corporation Code or even the Securities
Regulation Code, but is impliedly recognized when the said
laws made corporate directors and officers liable for damages
suffered by the corporation and stockholders for violation of
their fiduciary duties.
So it is a law on equity.
Ching and Wellington vs. Subic Bay Golf and Country
Club, Inc. et al.
September 10, 2014
RULING: The legal standing of minority stockholders to
bring derivative suits is not a statutory right, there being no
provision in the Corporation Code or related statutes
authorizing the same, but is instead a product of
jurisprudence based on equity. However, a derivative suit
cannot prosper without first complying with the legal
requisites for its institution.
I urge you to read the case of San Miguel Corporation by
Eduardo delos Angeles vs. Ernest Khan, et al. Ernest Khan at
the time was the treasurer of San Miguel Corporation. Who are
the et al.? They are Andres Soriano III, Benigno Toda, Jr.,
Roxas, all these different Kastilaloys that used to be the
officers and directors of San Miguel. What happened in that
case?
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
This is what happened. Sometime before 1986, which was the
EDSA Revolution, Soriano group that controlled San Miguel
called it quits and decided to sell out. Now he sold out to
Eduardo Danding Cojuangco Jr. Danding had already his
right foot in San Miguel. How? Because he bought the shares
of Ayala Corporation in San Miguel. Enrique Zobel de Ayala,
former head of Ayala Corporation sold the shares of Ayala,
20% to Danding Cojuangco. Why is that? You know the Ayalas
and the Sorianos, theyre first cousins. Andres Soriano II, was
already sick in his hospital bed in San Francisco when Enrique
Zobel paid him a visit sometime in the late 1970s. He visited
him to make an offer. He said, I would like to buy your shares
because I would like to take over San Miguel. But then Andres
Soriano II told Enrique Zobel, Are you going to take over as
Ayala, or are you taking over for yourself? Enrique Zobel
replied, For myself! So he was splitting off from Ayala, taking
over San Miguel. Then Andres Soriano II said, Dont you think
it is beyond you now? Your children finished college, and you
are taking over San Miguel Corporation? Enrique Zobel was
insulted. He left, then he called Danding Cojuangco. Do you
want a piece of San Miguel? Danding says, Yes! I will sell
you the Ayala Corporations 20% of San Miguel. So Danding
bought that and that was recently declared by the Supreme
Court as really Dandings. Why? Because the proof of Danding
was this: I incurred a loan from the Coconut Planters Bank in
order to buy that, and I am still paying the loan. Its my money
that bought that, not Marcoss money. So, that is how
Danding got his foot inside. After that, Mercedes McMicking,
Chairman and President of Mermac Inc., the controlling owner
of Ayala Corporation, fired Enrique Zobel and installed Jaime
Zobel de Ayala as the head of Ayala. At that time, Jaime Zobel
de Ayala has just finished his tint as ambassador to UK. So he
took over, because Enrique Zobel was fired by this old woman
who controlled Ayala Corporation. Her shares now have been
divided per stirpes and the irony of it all is because Enrique
Zobel was prevailed upon to marry his first cousin to keep the
wealth, he has two (2) children. Iigo Zobel de Ayala and
Mercedes Zobel de Ayala. The guardian of Mercedes is Iigo.
So Iigo Zobel, the son of Enrique Zobel who was kicked out is
now the biggest stockholder of Ayala, because he holds on his
own and his sisters share as guardian so he is the owner of
the most number of shares in Ayala. I dont know what kind of
arrangements they have made because he has not entered
into the Ayala management. His playground is now San Miguel
Corporation, Del Monte Philippines.
Just before the EDSA Revolution, Andres Soriano III raised the
white flag and said, Surrender! No more! Marcos was putting
so much pressure on San Miguel, he decided to sell out. The
brother already sold out Atlas Mining Corporation. The third
brother already sold out Picop. The last one who surrendered
was Andres III, the flagship San Miguel Corporation. When
Andres III sold out, the sum was so big that Danding could not
come across too big an amount. So what did he do? He gave
the downpayment, and out of which, he entered into a Voting
Trust Agreement. Titular ownership to the shares went to
the thirteen (13) corporations of Danding Cojuangco, all oil
mills. The voting rights remained with Andres III because he
was not yet fully paid. So Andres III continued to run San
Miguel and Danding was made the chairman.
32
Come February 1986, there was the revolution, Marcos fled
and Marcos insisted that Danding go with him on the same
plane. Danding also fled. The so-called questionable shares
right away were declared as sequestered shares. The Cory
government appointed one-half of the board of San Miguel.
Andres Soriano III was still the president. Half of the board
was already PCGG and one of the nominees of Cory Aquino
was Eduardo delos Angeles. Who was Eduardo Dindo delos
Angeles? Dindo delos Angeles was at that time Dean of the
School of Law of Ateneo and he sat there together with the
PCGG lawyers.
Andres III then saw a hope of getting back his shares from
Danding. But the trouble is, half of the consideration he
already received and divided among his brother and sisters.
Some were in Spain, some were in the U.S., France. He could
not bring it back anymore and give it back to Danding. With
the help of his finance friends they said, Lets make San
Miguel borrow the money that we will use to pay Danding
Cojuangco. But then the board did not acquiesce. San Miguel
Corporation will borrow money from the bank, to pay Danding
and then Andres III will get back the shares?! It will not be
treasury shares, it will still be shares of Andres Soriano III.
They had a second plan, it was this. Andres III and the other
directors and allies of Andres III will borrow money from
Hongkong-Shanghai Bank in Hongkong. Then, San Miguel will
guarantee the loan. And they will give it to Danding and then
Andres III will consolidate its ownership over the shares which
would otherwise be sold completely, absolutely to Danding.
Come the voting, everyone agreed including the PCGG
represented by lawyers, except Dindo delos Angeles. Why
would San Miguel guarantee a third party loan when it does
not stand to benefit from it? That is why Dindo filed this
derivative suit. San Miguel Corporation is the
complainant. But since San Miguel Corporation does not
have a mouth, does not have a hand to sign the document, it
is by Eduardo delos Angeles. That is why it is called a
derivative suit.
One of the defenses that was raised is this: How many shares
do you have in San Miguel? Can you stop a transaction that
will redound to the benefit of San Miguel just on the basis of
your shares which are nominal shares? You were just given
those shares in order to qualify to become elected to the
board.
What was the defense of Dindo? He says, the number of
shares, is immaterial as long as I am a stockholder. As
long as I am a director, I have standing to file a derivative suit.
That is why it went all the way to the Supreme Court. And
because the SC upheld Dindo thats why it became
sequestered shares. And finally the SC in a civil case ha, not a
criminal case because PCGG was not going anywhere with
their criminal suits. The quantum of proof was just too much,
very difficult to prove. Marcos committing anything wrong?!?
Very difficult to prove. That is why God rest her soul, it was
this new PCGG head, this lady lawyer Haydee Yorac. She was
already at an advance stage of cancer when she was still
preparing the briefs. She did not live to see the result of the
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
cases. Those were the cases that got back the shares, the
PLDT shares, San Miguel Corporation. You should read those
cases because its public record. The Supreme Court said,
Never in the world has such a kleptocracy/thievery ever been
committed. Official na, angay na basahon kung magtindog si
Bongbong Marcos, imo na siyang basahan. <nagrecite si Fr. ug
Tragedy of Hamlet, sunggo! Then he lectured about Martial
Law> You might think Dindo delos Angeles taught very big
subjects. He only taught two subjects: Land Titles & Deeds
and Sales. But he taught it for 30 years and he knew it at the
back of his hand. Land Titles & Deeds, mag dala siyag tracing
cloth.
Note: This is lifted from the first exam TSN:
SAN MIGUEL CORPORATION, represented by
EDUARDO DE LOS ANGELES, petitioners,
vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO
TODA, JR., ANTONIO ROXAS, ANTONIO PRIETO,
FRANCISCO EIZMENDI, JR., EDUARDO SORIANO,
RALPH KAHN and RAMON DEL ROSARIO, JR.,
respondents.
RULING: The theory that de los Angeles has no personality
to bring suit in behalf of the corporation because his
stockholding is minuscule, and there is a "conflict of
interest" between him and the PCGG cannot be
sustained.
No. of shares does not determine right to file suit
It is claimed that since de los Angeles 20 shares (owned by
him since 1977) represent only. 00001644% of the total
number of outstanding shares (121,645,860), he cannot be
deemed to fairly and adequately represent the interests of
the minority stockholders.
The implicit argument that a stockholder, to be
considered as qualified to bring a derivative suit, must hold
a substantial or significant block of stock finds no support
whatever in the law. The requisites for a derivative suit are
as follows:
a) the party bringing suit should be a shareholder as of
the time of the act or transaction complained of, the
number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e.,
has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to
heed his plea; and
c) the cause of action actually devolves on the
corporation, the wrongdoing or harm having been, or
being caused to the corporation and not to the
particular stockholder bringing the suit.
The bona fide ownership by a stockholder of stock in his
own right suffices to invest him with standing to bring a
33
derivative action for the benefit of the corporation. The
number of his shares is immaterial since he is not suing in
his own behalf, or for the protection or vindication of his
own particular right, or the redress of a wrong committed
against him, individually, but in behalf and for the benefit of
the corporation.
No Conflict of Interest
Neither can the "conflict-of-interest" theory be upheld. From
the conceded premise that de los Angeles now sits in the
SMC BOD by the grace of the PCGG, it does not follow that
he is legally obliged to vote as the PCGG would have him
do, that he cannot legitimately take a position inconsistent
with that of the PCGG, or that, not having been elected by
the minority stockholders, his vote would necessarily never
consider the latter's interests. The proposition is not only
logically indefensible, non sequitur, but also constitutes an
erroneous conception of a director's role and function, it
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 company. Moreover, it is
undisputed that apart from the qualifying shares given to
him by the PCGG, he owns 20 shares in his own right,
as regards which he cannot from any aspect be deemed to
be "beholden" to the PCGG, his ownership of these shares
being precisely what he invokes as the source of his
authority to bring the derivative suit.
Other discussions
It is also theorized that the PCGG has no power to vote
sequestered shares of stock as an act of dominion but only
in pursuance to its power of administration. The
inference is that the PCGG's act of voting the stock to elect
de los Angeles to the SMC BOD was unauthorized and void;
hence, the latter could not bring suit in the corporation's
behalf. The argument is strained and obviously of no merit.
As already more than plainly indicated, it was not necessary
for de los Angeles to be a director in order to bring a
derivative action; all he had to be was a stockholder, and
that he was owning in his own right 20 shares of stock, a
fact not disputed by the respondents.
There is a difference between ultra vires acts, and illegal,
void acts.
Ultra vires as applied to the act of the corporation simply
means an act which is beyond the powers conferred upon the
corporation by its charter, as distinguished from an act which
is authorized by its charter. The act need not necessarily be
prohibited by the charter or by any statute nor need it be in
any sense immoral or injurious to others.
On the other hand, an illegal act or contract is one expressly
prohibited by the charter or a general statute, or which is
immoral or against public policy. An ultra vires act is only
voidable, while an illegal act is void.
An ultra vires act which is also contrary to law, morals
or public policy is void and cannot be ratified. Only ultra
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
vires acts which is not contrary to law or morals can be
ratified.
So, if Andres Soriano III owned two-thirds (2/3) of the
outstanding capital stock of San Miguel, he could have ratified
his act. Diba? That is a director entering into a transaction with
the corporation. But San Miguel Corporations stockholder base
is so broad that he did not have even the majority. He only
had the majority if his allies came together and supported him.
But he certainly did not have the two-thirds (2/3) vote.
Subsequently, those questionable shares were declared as
belonging to the coconut farmers and the Supreme Court
placed it in the hands of the Philippine Coconut Authority to
_____ those shares.
Q: What happened to those shares?
A: Because of a weak PCGG, Danding Cojuangcos group got
two-thirds (2/3) vote of the stockholders and amended the
articles to reclassify those shares from common shares to
preferred non-voting shares.
Preference of what? 6%.
Muingon ka, Pagka anugon. Nalipat! Now nobody wants to
buy those shares. Why? Nobody understands San Miguel
anymore. What is San Miguel? An energy company? A food
company? Its all over the place. God knows how much debt
Ramon Ang is incurring. Nobody knows, it just has preferred.
And sometimes it cannot declare dividends, it does not receive
dividends. Nobody wants to buy.
It was neutralized, and then people came, they were
convinced because it was 6% preference, but people forget
that preference is only good if you make profits. If you do not
make profitsSan Miguel has a lot of sales but it does not
make profits.
That is the sad story.
I am morally convinced that all those PCGG lawyers were
bought. If they acted for the good of the public they would
have not allowed that. It could have not passed the BOD, they
could have voted against it. You need at least majority of the
board to endorse an amendment of the articles of
incorporation, then you call a stockholders meeting. In that
case, there was no need to call a stockholders meeting. Why?
Because its not one of the instances mentioned in Section 6.
So all you need was stockholders two-thirds (2/3) written
assent.
Who are the losers? Directly, the coconut farmers.
Jan. 22, 2016 (JTan)
I have 2 articles here before and after the Sarbanes-Oxley
Law:
(1) Learning to Live with the Changes; and
(2) Reflections on Sarbanes-Oxley: Lessons learned and
Implications for the future by Mr. Oxley himself. (When he
gave a lecture before a Japanese society in the US)
34
Also, for your perusal: The Ten Worst Accounting Irregularities
or Crimes recorded. Very readable, it is in color with bullet
points: What happened? How was it discovered? The amounts
involved etc.
Sec. 46. Adoption of by-laws. - Every corporation formed
under this Code must, within one (1) month after receipt of
official notice of the issuance of its certificate of incorporation
by the Securities and Exchange Commission, adopt a code of
by-laws for its government not inconsistent with this Code. For
the adoption of by-laws by the corporation the affirmative vote
of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the
members in case of non-stock corporations, shall be necessary.
The by-laws shall be signed by the stockholders or members
voting for them and shall be kept in the principal office of the
corporation, subject to the inspection of the stockholders or
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, shall be filed with the Securities
and Exchange Commission which shall be attached to the
original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-
laws may be adopted and filed prior to incorporation; in such
case, such by-laws shall be approved and signed by all the
incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance
by the Securities and Exchange Commission of a certification
that the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for
filing the by-laws or any amendment thereto of any bank,
banking institution, building and loan association, trust
company, insurance company, public utility, educational
institution or other special corporations governed by special
laws, unless accompanied by a certificate of the appropriate
government agency to the effect that such by-laws or
amendments are in accordance with law. (20a)
So now we begin with by-laws we are finished with corpo
powers so we are now in By-Laws. Remember, you have 2
choices when to complete the requirement for by-laws.
1. You can submit it together with the articles of incorporation
when you file said articles with the SEC in which case the by-
laws will be largely decided by the incorporators. But if not
then;
2. You will have to draw up the by-laws as part of the duty to
organize but after the issuance of the Certificate of
Incorporation you have 30 days to come up with the by-laws.
How will you come up with the by-laws? You adopt it in a
meeting duly called for that purpose it is decided upon:
First: By the Board of Directors by absolute majority vote
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Second: And then it is voted upon by the majority of the
stockholders or members. Stockholders include voting and
non-voting.
However, the stockholders can delegate the board of directors
or the board of trustees to draw up the by-laws in which case
you will need 2/3 votes of the stockholders or members of the
corporation. This is so in order to properly delegate to the
board the job of drawing up the by-laws.
To take away this delegation it just needs absolute majority of
the vote of the stockholders or members. So to delegate you
need 2/3 votes of the stockholders including non-voting shares
if it is a stock corpo because under Section 6 that is one of the
instances where the non-voting shares can vote. But to rescind
the delegation you need only the vote of the majority the
stockholders or members.
SEC Opinion: Feb 4, 1994: Here is an authority granted by the
stockholders for the BOD to amend the by-laws 64 years ago
and the BOD invokes that authority to institute another
amendment. Is that valid? According to the SEC, there is no
certainty that after 64 years the delegated power of the BOD is
still effective considering the length of time the stockholders
grant such being the case the new stockholders should pass a
new resolution delegating the BOD the authority to amend the
by-laws or the amendments must be approved by the
stockholders in accordance with the law.
For the directors to be delegated the power, that is
extraordinary and that is not presumed because the by-laws
are the internal rules of the corpo. You have there the officers
of the corpo, what are their duties, if they are not there or
they are not mentioned in the AOI as well then you cannot
create that particular officers position. So it must be there.
Sec. 47. Contents of by-laws. - Subject to the provisions of
the Constitution, this Code, other special laws, and the articles
of incorporation, a private corporation may provide in its by-
laws for:
1. The time, place and manner of calling and conducting
regular or special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or
special meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or
members and the manner of voting therein;
4. The form for proxies of stockholders and members and the
manner of voting them;
5. The qualifications, duties and compensation of directors or
trustees, officers and employees;
6. The time for holding the annual election of directors of
trustees and the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of
office of all officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing
35
stock certificates; and
10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and affairs.
(21a)
The form and time requirements for notices of meetings are in
the by-laws. The quorum required is in the by-laws. The place
of the meetings, what are the so-called regular meetings they
are all provided in the by-laws.
Question: Are third parties bound by the by-laws? This issue
came about when an instructor who has been teaching for 2
semesters and then all of a sudden he was told that his
engagement is not valid because the President did not sign, it
was only the Registrar. In the by-laws it is the President alone
who can hire and engage in a contract of employment. So in
the middle of the semester he was told that he had to quit
because there was no valid contract.
Answer: the SC says that the by-laws operate mainly as
internal rules amongst stockholders and they cannot affect or
prejudice third persons who deal with the corpo unless they
(3rd persons) have specific knowledge of the particular item in
the by-laws. The by-laws therefore are just upon the
stockholders. If there is an apparent authority and the 3rd
party relied on said authority then he cannot be faulted even if
there is really no authority coming from the by-laws because
he is not bound to know the internal rules of the corpo.
Requisites for a valid by-laws:
1. Must not contrary to law, morals, public
order or public policy;
2. Must not impair the obligations and
contracts or rights;
3. Must be general and uniform in its
operation and effect;
4. Must be reasonable and not arbitrary or
oppressive;
5. Must be consistent with the charter or the
Articles of Incorporation. (If there is a conflict
between the by-laws and AOI, the AOI will
prevail)
When are the by-laws effective? Ans. Upon the certification
from the SEC that it is not inconsistent with the corpo code.
The SEC will issue that certification within a reasonable period
of time from the filing of the by-laws.
So we are through with the by-laws. We are now in the
meetings.
Meetings in the Corpo Code are either BOD or BOT,
stockholders meeting and meetings of the members of the
corpo.
Sec. 49. Kinds of meetings. - Meetings of directors,
trustees, stockholders, or members may be regular or special.
(n)
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
When they say it is the meeting of the corpo that is
understood to be a meeting of the stockholders or members.
When the by-laws provide that the meeting of the BOD may be
held outside the country, is that allowed? The answer is YES,
directors lang. Its the company who will spend for the
meeting. When the by-laws provide that the stockholders
meeting can be held outside the Philippines, is that allowed?
The answer is NO because that might be a way of
disenfranchising the stockholders. So as much as possible
meetings of stockholders or members should be held in the
place where the principal office of the corpo is. Many times in
the case of a publicly listed corpo it is not possible. If you have
2 million stockholders like PLDT, there is no place where you
can hold the meeting.
Meetings of directors are now allowed on a physical meeting
basis or on a teleconferencing basis or it can be through video
conference basis. That is now allowed by the SEC through a
memorandum circular. Your commentators should have that
appended already. (Father illustrates how a teleconference can
be done between directors and talks about the Ayalas). You
can have a meeting even if the directors are at different places
and the Secretary just has to make sure that there is really
communication which shall be noted in the minutes of the
meeting.
But stockholders meeting must be actual physical meeting and
also members of the corpo. There is no excuse, if you cannot
come you can issue a proxy. So it must be a physical meeting.
Although in the memo or circular of the SEC it says if the
matter sought to be approved can be done by written consent
you can also have a teleconferencing meeting of the
stockholders and of the members of the corpo. So if it only
requires written consent, padala nalang ug sulat ngano mag-
teleconference pa man mo gasto2x lang.
What is meant by a regular and a special meeting?
Sec. 50. Regular and special meetings of stockholders
or members. - Regular meetings of stockholders or members
shall be held annually on a date fixed in the by-laws, or if not
so fixed, on any date in April of every year as determined by
the board of directors or trustees: Provided, That written
notice of regular meetings shall be sent to all stockholders or
members of record at least two (2) weeks prior to the meeting,
unless a different period is required by the by-laws.
Special meetings of stockholders or members shall be held at
any time deemed necessary or as provided in the by-laws:
Provided, however, That at least one (1) week written notice
shall be sent to all stockholders or members, unless otherwise
provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly,
by any stockholder or member.
Whenever, for any cause, there is no person authorized to call
a meeting, the Secretaries and Exchange Commission, upon
petition of a stockholder or 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
corporation by giving proper notice required by this Code or by
36
the by-laws. The petitioning stockholder or member shall
preside thereat until at least a majority of the stockholders or
members present have been chosen one of their number as
presiding officer. (24, 26)
A regular meeting is a meeting that is demanded by the by-
laws. When is an annual meeting of the stockholders? It is
written in the by-laws and the SEC will want a definite date or
a determinable date like every 3rd Thursday of June. Normally
it is held a few months after the end of the fiscal year. If the
fiscal year is calendar year and is just 1 corpo normally you
just need about 1 month. But if it is a corpo that has so many
subsidiaries and in multiple jurisdictions then you need a
considerable amount of time for the accountants to consolidate
the financial statements and for the auditors to audit. It will
take time. And these big corporations will take their time in
preparing and consolidating the financial statement because
one of the most important purposes of the stockholders and
members annual meeting is to approve the financial
statements.
If the by-laws says that the board shall meet once a month
within the first week of each month that is a regular meeting.
What is a special meeting?
A special meeting is one that is called by the officer or officers
authorized to call meetings especially if it is not mentioned in
the by-laws. Suppose there is need to call a meeting of the
stockholders but the officers concerned do not call the
meeting, what happens? Any director or stockholder can
petition the SEC for authority to call the meeting and then the
SEC will authorize the issuance of notices and the meeting
shall be called. So the SEC may issue an order to the
petitioning stockholders or members directing him to call a
meeting by giving proper notice required by this code or by the
by-laws.
The petitioning member or stockholder shall preside thereat
until at least majority of the stockholders or members present
have chosen one of their members as the presiding officer. As
to the question of who can call a meeting: the officer
designated in the by-laws who is normally the President of the
corpo or the Chairman of the corpo or any stockholder for any
good reason he petitions with the SEC and it is granted.
Section 54. Who shall preside at meetings. The president
shall preside at all meetings of the directors or trustee as
well as of the stockholders or members, unless the by-laws
provide otherwise. (n)
It is not stated in the AOI but this the agenda and in the very
least it should be contained in the annual meetings of the
stockholders. What is the agenda?
1. You have an election. You elect directors. If it is a stock and
profit corpo all the positions for directors are open because the
term is only for 1 year.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
2. After the election of directors of course the directors will
elect the officers. In a stock and profit corpo it is the directors
who will elect the officers e.i. President or Chairman etc.
3. After elections you have the report of the President or the
board, financial report. They will explain how the corpo went.
Remember ha, it is a story of numbers it is not a narrative of
words. Unya naay magsyagit2x dira na dili uyon sa report,
naay magdiskurso2x unsaon man na nimo?
You should realize that the number 1 rule in the corporate
world, for me, is you never call anything if the voting
outcome of which you do not know. You must know
already.
Naa kay agenda na mag election ug directors. Before the
meeting you must already get the proxies and have the
stockholders choose already. Then you go to the Secretary and
present the pre-qualified votes. That is already unimpeachable.
You must already know what will happen in the meeting. All
the other things that need to be done must be done before the
meeting. When you get to the meeting all that is needed to do
is to vote and thats it.
If it is a qualified majority (2/3 vote) naa na kay listahan then
you must have 2/3 vote like amending the AOI you must get
2/3 manguha na ug proxy ana. So you must pre-qualify para
dili na malangan. Pag wala gani ka ana ayaw na lang ug tawag
ug meeting. You must get the majority para naay quorum.
Kung ikaw majority naka 50% + 1 unya dili ka mag pakita it is
not a valid meeting because there is no quorum.
If it is an annual meeting you do not need a call nor a notice
because it is in the by-laws. So that is the first rule, you must
have the votes before you call a meeting.
I refer you to the case of GSIS by Winston Garcia vs. The
Corporate Secretary of MERALCO Anthony Rocete et. at. This
was the time when MERALCO was up for grabs. You know
when Cory came after the February revolution because the
Lopezes were her close allies Cory vowed that she was going
to give back MERALCO. In the mean time the Romualdezes
have already controlled MERALCO because whatever remained
was they just increased the number of shares so that the
shareholdings of the Lopezes will be just a minority. So it was
given back to Lopez but he had a tenuous hold of MERALCO
only 20%. Then Lopez got Spains number 1 power distribution
corpo Madrid Power Corp to buy another 20% of the
sequestered shares. So Lopez together with Madrid Power and
some proxies, thats how they controlled MERALCO.
During this meeting it was clear that there were factions that
wanted to take over MERALCO. The Lopezes at this point
wanted to let go of running MERALCO. The trouble is that the
Lopez clan is not speaking with one voice. Manolo Lopez, the
younger Lopez, is the only one in the three brothers who did
not study abroad, he finished in FEU. The elder Lopez was
already in San Francisco dying of cancer. Gabby Lopez finished
in Harvard. Oscar Lopez, the one who heads the Company,
also finished in Harvard. Manolo said that they were subjected
to more difficulty and they no longer have the cash to buy
37
more shares. He said our hold is precarious we might as well
sell.
Manolo called Danding Cojuanco and Ramon Ang of San
Miguel. But then it was Oscar Lopez who said over my dead
body because these are the guys who ousted us during Martial
Law. So they called Manuel V. Pangilinan. So there is a hidden
battle between the Lopezes. Danding had the side of Gloria
Macapagal-Arroyo, why, because of the first gentleman. So the
office of the President caused a call to GSIS, SSS, Landbank
and DBP all your shares in MERALCO sell it to Danding. That
was the order of Mt. Olympus. But before they did that
Danding did not want to come out so he wanted to be in a
board meeting for that purpose and the proxy for the Danding
group was Winston Garcia manager of the GSIS. Winston says
this meeting should be postponed because he was not given
time to examine the proxies.
Under the SEC Code the sole and original jurisdiction for the
determination for the sufficiency of proxies is not in the hands
of the SEC. So therefore he said he should be given time. Then
what happened? Anthony Rosete, my classmate, said that
cannot be done because this is a regular meeting this will go
on. The proper votes more than the majority has already been
pre-qualified. I have asked the regularity of the proxies of the
Lopez group and they are all in order. You are welcome to
examine them but you cannot stop the election.
Whereupon Winston Garcia produces a restraining order issued
purportedly by the SEC but the trouble is it is only signed by
one commissioner. Winston Garcia said that it is only signed by
one because all the others delegated it to that one
commissioner. He said it is true that the SEC is collegiate body
and it must act as a Commission and it has acted as such by
ordering this one guy to sign it. So therefore you must stop
this meeting by virtue of this TRO.
Anthony Rosete says nothing doing, why, because PD 902-A,
Section 6 the list of cases there one of which is controversy in
the election of directors is how transferred to the regular intra-
corporate court and is no longer under the jurisdiction of the
SEC. So the meeting shall continue the election shall continue.
Mao na, gubot na.
The SEC order was appealed to the CA. They nullified the TRO
of the SEC and the case went to the SC. That is the case that
you should read because the SC said in this case that proxies,
it is true as proxies acting alone by itself if there is a
controversy the jurisdiction belongs to the SEC. But proxies
that intertwined in an election controversy they are part of the
jurisdiction of the intra-corporate court. That is the
pronouncement of the SC. Basaha na ninyo.
You will not get this in your commentators but this will be the
most important thing you need to know: Prepare a script.
Make sure that every word that is said there is in the script.
Ang Chairman will say, I call Mr. So and so for the prayer. Ang
prayer ibutang pud sa script. Word for word so that everybody
follows the script.
Disabuse your mind that this meeting is all about the exchange
of ideas. It is not. A corporation meeting is not an exchange of
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
ideas. The caucus is. You hold caucuses before the meeting. In
a caucus you will know if you can swing a particular action of
the corpo. Lets say you want to increase capital stock. You call
a caucus of those who are the big stockholders who want to
spend money. Magdiscuss mo diha kung unsa ila gusto, kung
naa ba sila kwarta.
These are leaders and they will be the ones who will convince
the other stockholders. When you have their okay then you
call the meeting because you already have the necessary
votes. But you do not have the votes forget it. Dont call the
meeting.
So you have a script. Each item in the agenda is already
reduced in resolution form. Nobody can write the resolution
except the officers so put it down already. Ibutang na na, e-
flash na na sa board. Wala nay laing gubot diha sa caucus pa
lang imu na na gipangutana ang legal language of the
resolution. And then you already have the controlling holder of
the proxies para usa lang muboto. He holds the proxies of
everybody who are in favor of a certain action. So the meeting
is just a formality. When you have more than 65% of votes in
your favor you do not even have to vote. You just let the
holder of the actual shares and proxies stand there and
manifest that he has the votes. Then thats it, pasabot ana
pildi na ang uban naa dinha.
That is how you do it. The script, you are responsible and you
write it word for word and then there will be no problem. You
will see this when you read that case. Winston Garcia really
wanted to disturb that meeting but they were prepared and
they had a script. Later on the SC validated the stand of
Anthony Rosete and like many of the cases of Winston Garcia,
he lost. Just like how he lost so many funds in the GSIS.
General assembly of the corpo must have elections, must have
approval of the financial statements and then, this is
important, make the stockholders ratify all the resolutions of
the BOD. Why is that? To close the door to all possible
litigations.
It might be that it requires qualified notice or whatever, there
may have been a failure in the issuance of notice but because
it has been unanimously ratified you close the door to future
litigations. No stockholder can question it. Why, because it is
ratified. Any defect is cured by the ratification.
How do you make them ratify? Daghan ra ba kayo na sila like
in the case of MERALCO or PLDT, wa pa nagsugod ang
meeting ipagawas na nang mga resolutions, eflash sa screens.
Unya magtabi man na sila kay bag-o lang nagkita-kita dili jud
na sila mubasa. But the resolutions are there for them to
apprise themselves and to know what those resolutions are all
about.
What else should be in the item of agenda in a general
assembly or a stockholders or members meeting? This is very
important and very few know this: The auditor is appointed by
the stockholders or members of the corpo. So you have a
proposal: Be it resolved as it is hereby resolved that Sycip
Gorres and Velayo be appointed as the external auditor of the
corpo for the succeeding fiscal year. Then you say: The board
38
is hereby delegated to negotiate the compensation of the
services of SGV Co. as independent external auditor.
Then you can adjourn the meeting after all these are done
until the next annual meeting. All the directors must sign and
in fact in all meetings of the directors you make them all sign.
(Father talks about his retired CEO of PLDT brother)
The formalities in the corporate world such as those in
meetings are more important than the facts. In litigation if you
have the facts you do not even have to argue. When you go to
court kanang ginadak-an ug tingog wa nay facts. Their false
thesis is: the volume of their voice as substitute for their lack
of facts. Naay kay resibo sa utang, unya wa nakabayad. Unsa
pa man imung e-argue ana? Ang pikas na party mao nay
masuko ug kusog ug tingog. Mu-ingon dayon ang client na
angayan gyud ni siya ma-abogado kay kusog kayo ug tingog
dapat hatagan ni ug dako na fees. That is associated with the
blissful ignorance of the pedestrian, they think that is what
wins a case.
What decides a meeting? A vote is an instrument of the
stockholders, remember directors cannot vote by proxy but
stockholders and members they can vote by proxy. The by-
laws of stock corporations cannot provide that there will be no
voting by proxy by stockholders. That is why the SEC issued
through a circular that you cannot deny the stockholder to
vote by proxy.
Section 58. Proxies. Stockholders and members may vote in
person or by proxy in all meetings of stockholders or members.
Proxies shall in writing, signed by the stockholder or member
and filed before the scheduled meeting with the corporate
secretary. Unless otherwise provided in the proxy, it shall be
valid only for the meeting for which it is intended. No proxy
shall be valid and effective for a period longer than five (5)
years at any one time. (n)
Non-stock non-profit corporations voting by proxy is not
allowed unless the by-laws explicitly grants the members that
right.
There is also another way of voting and that is through a
voting trust agreement. What is a voting trust agreement? This
is provided for in Section 59.
Section 59. Voting trusts. One or more stockholders of a
stock corporation may create a voting trust for the purpose of
conferring upon a trustee or trustees the right to vote and
other rights pertaining to the shares for a period not exceeding
five (5) years at any time: Provided, That in the case of a
voting trust specifically required as a condition in a loan
agreement, said voting trust may be for a period exceeding
five (5) years but shall automatically expire upon full payment
of the loan. A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions
thereof. A certified copy of such agreement shall be filed with
the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
by the voting trust agreement shall be cancelled and new ones
shall be issued in the name of the trustee or trustees stating
that they are issued pursuant to said agreement. In the books
of the corporation, it shall be noted that the transfer in the
name of the trustee or trustees is made pursuant to said
voting trust agreement.
You must follow this format if you want the voting trust to be
valid. If you want a voting trust agreement you surrender your
stock certificate. The certificate or certificates of stock covered
by the voting trust agreement shall be cancelled and new ones
shall be issued in the name of the trustee or trustees stating
that they are issued pursuant to said agreement. A certificate
of voting trust as trustee issued to one in whose favor the
voting trust agreement is entered.
Then the trustee or trustees shall execute and deliver to the
transferors voting trust certificates, which shall be transferable
in the same manner and with the same effect as certificates of
stock. But the transferor who holds the voting trust certificates
can no longer vote it is the trustee now who votes and can be
voted for with the directors. Wa na tong transferor.
What is the difference between a proxy and a voting
trust agreement? These are the distinctions:
1. The common denominator between the two is that the
original stockholder no longer votes it is the proxy and the
voting trustee.
2. In a proxy, it is the vote of the stockholder that is exercised.
So the proxy can be dictated upon by the stockholder to vote
in the way that he likes. If the proxy does not obey that is
between the proxy and the stockholder and the corpo is bound
by the vote.
3. In a voting trust agreement the voting trustee owns the
vote. He is not dictated upon by the transferor. It is his vote.
4. General rule: both are for a period of 5 years except in the
case of a voting trust agreement expiring upon the full
payment of the loan. These are the so-called debenture
loans. These are loans that are covered not by physical
collaterals but by negative agreements. Di na siya muboto ang
kadtong nagpahuwam ug kwarta mao nay muboto sa iyang
shares.
No voting trust agreement shall be entered into for the
purpose of circumventing the law against monopolies and
illegal combinations in restraint of trade or used for purposes
of fraud. Unless expressly renewed, all rights granted in a
voting trust agreement shall automatically expire at the end of
the agreed period, and the voting trust certificates as well as
the certificates of stock in the name of the trustee or trustees
shall thereby be deemed cancelled and new certificates of
stock shall be reissued in the name of the transferors.
The voting trustee or trustees may vote by proxy unless the
agreement provides otherwise. Kay iya man gyud tong vote,
he owns it therefore he can also vote by proxy. But the proxy
cannot appoint a proxy. This is what is called in Latin as:
delegata potestas non potest delegari, delegated power
39
cannot be further delegated. (Lesson on Latin and a little
history)
We are through with meetings, human na ang meetings. By
the way, teleconferencing has been approved by the SC in the
case of Expert Travel Tours vs. CA 459 SCRA 147 2005. The
SC said that this court takes judicial notice of teleconferencing
as a way of meeting of the directors. (Yaw-yaw si father about
judicial notice and talks about an astronomical find of another
planet in the solar system).
We are now in stocks and stockholder Title VII. It begins with
Section 60.
Section 60. Subscription contract. Any contract for the
acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription
within the meaning of this Title, notwithstanding the fact that
the parties refer to it as a purchase or some other contract.
Subscription in corpo law deals with unissued shares. All other
contracts of shares which are not unissued is not a
subscription. If the corpo should later on sell treasury shares
that is not a subscription because treasury shares are issued
shares but no longer outstanding. Please know the difference
between issued shares and shares that are not outstanding.
When I was in high school we had a rector who was a Chinese
Jesuit who came from mainland China and he was very fond of
mixing terms. We had a classmate who was so unruly most of
the time he was told get out of the room and stand there. So
the Chinese Jesuit says, Victor is a very outstanding student
always standing outside two meanings.
You might be issued but you are there because you have been
repurchased therefore you are in treasury. You have not been
issued but you are already a subject of a contract that is
subscription. Fulfillment of that contract makes it possible for
the issuance of the shares so that it becomes issued and at the
same time outstanding.
If the shares of stock are without par value the subscription
contract is necessarily a contract of purchase and there is no
installment, it happens once at the same time. The moment
the contract covers no par value shares the consideration
given is deemed complete and the subscription is no longer
assessable. There is no balance anymore that can be assessed
because you can only pay once. Subscription by installment
can only deal with par value shares.
Pre-incorporation subscription means a contract covering
issued shares of a corpo still to be formed. What is so special
about that? A subscription for shares of stock of a corpo still to
be formed shall be irrevocable for a period of at least 6 months
from the date of subscription. You cannot take it back, the
subscription. Why can you not take it back? Because it forms
part of the AOI and the sum total of the subscription is a
warrant to the public that there is this much money and that is
already promised for, already obliged to be paid.
If you withdraw that statement you renounce that warrant so
you are not to revoke that subscription. The SEC must be
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
given the chance to approve it. The organizers must be given
the change to complete the AOI, get the treasurers certificate
and file it.
Section 61. xxx unless all of the other subscribers consent to
the revocation, or unless the incorporation of said corporation
fails to materialize within said period or within a longer period
as may be stipulated in the contract of subscription: Provided,
That no pre-incorporation subscription may be revoked after
the submission of the articles of incorporation to the Securities
and Exchange Commission.
The moment it (AOI) is filed you cannot revoke it even if all
the subscribers unanimously approve that you withdraw the
subscription because that will falsify the public statement that
the investing public will rely upon.
Section 62. Consideration for stocks. Stocks shall not be
issued for a consideration less than the par or issued price
thereof. Consideration for the issuance of stock may be any or
a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of
the stock issued;
3. Labor performed for or services actually rendered to the
corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to
stated capital; and
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.
Where the consideration is other than actual cash, or consists
of intangible property such as patents of copyrights, the
valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval by
the Securities and Exchange Commission.
1. Can you pay by check? YES, you can because a check is as
good as cash and there is no prohibition.
2. Remember you can undervalue the real property or the
intangible property but you cannot overvalue it. Ang yuta na
imung ihatag naa sa recto ang valuation na imung gibutang
ana is 15k per square meter which is the zonal valuation by
the BIR. But the last transaction of land there where the
building of Ayala is now standing is 60k per square meter.
Namakak diay ka, pero maayo nang bakaka. That is a good lie
because the corpo gains. The copro gets 45k more because
that is much lower than the actual market value of that piece
of land. Kinsa may mabulahan ana? The stockholders because
the value spreads.
3. What is important here is the past tense. The labor is
already rendered not before it is rendered. Lets say a
40
geologist the mining company needs is given shares of stock
on the promise that he will serve for 5 years. That is not the
consideration talked about here.
First, he has to serve the 5 years and by virtue of that he is
issued shares of stock that is alright. But if he still needs to
serve that is not alright. Why? Ma-igo siya ug kilat then wala
na siya what happens to the consideration? Wala pud. Suppose
mu-ingon siya dili na ko muserve kay gikapoy na ko. You
cannot force him because that would be involuntary servitude.
So these are the problems with regards to issuing shares in
consideration of labor that is still to be performed because you
cannot enforce it.
That is why you have to do it first and then you are issued the
shares of stock.
4. This is dacion en pago.
5. This is stock dividends.
6. Shares of stock in exchange for shares of stock. Pila na ron
ang shares sa Microsoft? $100 let us say per share and then
Microsoft announces, give me your old shares and I will give
you in exchange for every 100 you have you will get another
100, why? Because they want to bring down the price of
shares to $50. So they will reduce the par value. So that it will
be more appealing to retail in the stock market. That is the 6th
acceptable consideration, other shares of stock.
January 27, 2016 (KT)
xxx contract, it has to be ___. Because Articles of
Incorporation in Section 15, is required to be with the
participation of the notarythe participation is notarial
acknowledgment.
Now, Pre-incorporation subscription.
If a subscriber withdraws, it is allowed if the other
incorporators or subsrcibers agree. So therefore, they will
change the articles of incorporation. They might retain the
authorized capital, but they will have to reduce the subscribed
and the paid-up capital if they withdraw.
Nibayad ka na sa imong installment. Unya muwwithdraw ka. It
must be with the consent of all of the subscribers. And then,
they must adjust to what is written in the articles of
incorporation.
But section 61 says:
Section 61. Pre-incorporation subscription. A subscription
for shares of 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 subscribers
consent to the revocation, or unless the incorporation of said
corporation fails to materialize within said period or within a
longer period as may be stipulated in the contract of
subscription: Provided, That no pre-incorporation
subscription may be revoked after the submission of the
articles of incorporation to the Securities and Exchange
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Commission. (n)
So from the moment that the articles of incorporation is
already submitted to the SEC, no pre-incorporaton subscription
may be revoked after the submission of the articles of
incorporation to the securities and exchance commission. Why
is that? Because the articles of incorporation no longer remains
just a contract between the incorporators. What happens to
the articles of incorporation? It becomes a public document. It
is now an official record of the acts of these 5-15 people who
have constituted themselves as a corporation. And, they make
certain warranties based on the declaration of an authorized
capital stock. That is the important thing that you have to
remember with respect to pre-incorporation subscription.
Section 62: Consideration for Stocks.
Section 62. Consideration for stocks. Stocks shall not be
issued for a consideration less than the par or issued price
thereof. Consideration for the issuance of stock may be any
or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received
by the corporation and necessary or convenient for
its use and lawful purposes at a fair valuation equal
to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered
to the corporation;
4. Previously incurred indebtedness of the
corporation;
5. Amounts transferred from unrestricted retained
earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the
event of reclassification or conversion.
Where the consideration is other than actual cash, or
consists of intangible property such as patents of copyrights,
the valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval
by the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for
promissory notes or future service.
The same considerations provided for in this section, insofar
as they may be applicable, may be used for the issuance of
bonds by the corporation.
The issued price of no-par value shares may be fixed in the
articles of incorporation or by the board of directors pursuant
to authority conferred upon it by the articles of incorporation
or the by-laws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding capital
stock at a meeting duly called for the purpose. (5 and 16)
Stocks are issued in exchange of any of the following listed in
Section 62:
41
1. Actual cash paid to the corporation.
Can you issue shares of stock on the basis of a check? Of
course! Provided, that the check is ultimately cashed.
2. Property, tangible or intangible, actually received by
the corporation and necessary or convenient for its
use and lawful purposes at a fair valuation equal to
the par or issued value of the stock issued.
So, property. Tangible propertyit can be personal or real
property. It can also be patents, trademarks. Intangible man
na. But the key is that it must be fairly valued. Property which
is overvalued is what is prohibited in the issuance of stock. You
issue actually more shares than what is warranted by the fair
value of the consideration. So the property that is given in
exchnage of the shares is overvalued.
There is no problem if it is undervalued. It is the corporation
that benefits. Barato ra gani nang imong pagkahatag sa imong
property, dili na ___. Naa kay property. Ang zonal valuation sa
BIR for purposes of capital gains is P12,000/sqm. So, if it is
subject of a sale, you cannot price the sale of that priperty at
less than P12,000. Bisan mamakak pa ka, P12,000 ra jud na
imong dawaton. Pugos sa BIR na nga value. Bisan pag
mudawat kag P10,000 dayon kay tan-awon man na sa BIR, O!
Nganong P10,000 man ni nga P12,000 man dapat na? So, ang
basis sa imong capital gains kay P12,000 jud. Ang computation
sa doc stamp kay P12,000.
But, if you barter it to a corporation and you'll value that at
P12,000, that does not violate the law. Is that the fair
valuation? It is not unfair! It is for the benefit of the
corporation. Who benefits from that? The one who benefits is
the other stockholders because the assets of the corporation
grows by the real fair value of the corporation. It grows.
Now, if you overvalue property, it means that the corporation is
issuing more shares than what is warranted by the fiar value.
What happens then? What happens is the issuance of what is
called watered stocks. That is Section 65:
Section 65. Liability of directors for watered stocks. Any
director or officer of a corporation consenting to the issuance
of stocks for a consideration less than its par or issued value
or for a consideration in any form other than cash, valued in
excess of its fair value, or who, having knowledge thereof,
does not forthwith express his objection in writing and file
the same with the corporate secretary, shall be solidarily,
liable with the stockholder concerned to the corporation and
its creditors for the difference between the fair value
received at the time of issuance of the stock and the par or
issued value of the same. (n)
So if you are a director of a corporation unya nakahibaw ka ug
naghilom-hilom lang gihapon ka, liable. You voted to approve
the issuance of share in excess of the fair value received, you
are also liable. Doing nothing, you are liable. Consenting to it,
you are liable. What are you liable for? The water in the
stockthe difference in the stock.
That is also the same in case of a bank. Where a bank
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
approves a loan and the collateral is overvalued, so the bank is
not protected. The directors who apporoved or who vote to
approved that loan are liable.
Magpahulam kag kwarta. Ang iyahang collateral kay ang yuta.
Ang fair market value kay P100M. Muhuwam syag P200M aron
magbuhat syag building anang yutaa. Mao na iyahang
collateral. Giapprove sa bangko. All the directors will be liable?
Common sense!
Ang building nga naa sa yuta di na man na matangtang. Di na
na mabutang sa iyahang bulsa unya iyahang idagan!
Overvalued na ang collateral. Ang P100M butngan nimog
P200M, edi P300M na. Diba? That is a loan. In here, you
received the land as is and you issued shares in exchange for
the land.
3. Labor performed for or services actually received by
the corporation and necessary or convenient for its
use and lawful pirposes at a fair valuation equal to
the par or issued value of the stock issued.
Alright. Labor is an accepted consideration for the issuance of
new shares. But it must be labor that is already rendered. The
emphasis here is labors performed for or services aactually
rendered. Past tense! That can be an object for the
consideration of the issuance of shares. That labor still to be
renderedthat which is still to be practiced (?). Because there
is difficulty in promise thereof. Remember that personal
obligation cannot be the subject of a suit for specific
performance. Labor is a personal obligation. That is by virtue
of common law. You cannot exact personal obligation by
specific performance. Transalated in political law, you cannot
order someonoe to perform an obligation. Diba? A personal
obligation. Trabahui ni kay mao baya ang atong nasabutan.
You cannot! That is involuntary servitude.
That is why, labor has been performed or already performed.
Ingnon nimo, Ikaw Geologist. Ang sweldo nimo ato lang ilista.
Wala lang kay sweldo-sweldo. Allowance lang na. Tagaan kag
transportation allowance, etc. Unya makaigo na gani ka, xxx ka
na. Xxxx. Shares of stock at par value! Ang kana imong
gitrabahuan, naa man tay labor contract. P100,000/month ka.
Ilista lang na. Unya isyuhan kag shares of stock sa tulo ka-tuig
nga walay swledo. Bayran ka sa kumpanya og shares of stock
at par value. P2.00 ang ihatag nimo. Unya kay ang shares of
stock karon is already trading at P50.00. Is that violation? Are
you not overvaluing his services? NO! You are not overvauing
because you can issue par value shares at par value. You
cannot issue shares lower than par value. You can issue shares
at par value or higher than par value. So there is no violation.
Bulahan sya. Ginansya sya. P2.00 ra ang ihayang capital per
share. Pero diha-diha dayon pag dawat niya, mahimo na ihaya
na na ibaligya sa P50.00. Ginansya syag P48.00. Di ba
mugawas ang iyahang bitok ani. That is not a violation. Balik
ta didto sa Section 6. you can issue par value shares at par
value, not lower. You can issue it for more than par value. But
if it is no par value shares, you cannot issue the shares lower
than the issued value.
The mining company, in the beginning. No par value shares.
42
The original pre-incorporators issued it at the lowest possible
issued price of no par value shares, which is how much? P5.00.
So they issued it at P5.00. Now that they have the loan (?), it
is now trading at the stock market at P50.00that is, 10 times
the original issued price. Unya muingon sila ron, Mu-issue
nasad tag bag-ong shares. Unya muingon ang mga
stockholders nga, Dili mi musugot nga P5.00 ra ang issued
price. Kay ngano man? Alkansi mi. Diluted mi. We, the
stockholders, if we divide the net assets and write the book
value of our shares, the book value of our shares is about
P45.00. And in the market, they are willing to buy it at P5.00
higher than the book value. Dili mi musugot nga ang issued
price will be P5.00. The lowest that we will alllow is P45.00 so
that when the new shareholders come in, we will still be at
P45.00 book value per share. But outside, it is being sold at
P50.00. Karon, mahimo na nimo nga i-issue sa Geologist,
together with his offer to the public, with us issuing you your
shares. And we are valuing your shares that we issued at
P20.00. Issued price of the first issuance. So, mahimo?
You cannot do that! Because the issued price agreed upon by
the board is P45.00, which is the book value. So you cannot.
The lowest that you can in exchange for labor performed is
P45.00. Because, that is the new issued price of the shares of
stock.
So, you can nnow see the problem between par value shares
and no par value shares. Mao nay problema sa mga par value
shares.
4. previously incurred indebtedness of the corporation
Ah~ The corporation is indebted to a creditor. The corporation
proposes to the creditor, How would you like to become a
stockholder and have a share in the dividends? Normally, the
corporation will do that if it is having problems to pay their
debt because a loan will require interest payments that are
included (?). That is called debt servicingyou service the
debt. If you have problems, you tell the creditor, Would you
like to convert? What will convince the creditor to convert his
debt into shares of stock? Ug nangandoy syag makarecover
sya niining corporation, well, good. You can giive him
proprietary interest. You can issue him his shares. And if he
xxx in that corporation, he will grant that opportunity if he
wants to control that corporation.
But if he does not believebecause he is just that plain
lenderwhat will convince him to change his credit into
proprietary interest? Preferred shares. By how much? Preferred
na pareha sa interest nga imong gibayran.
Now, what is the difference between preferred shares and that
he incurred as a creditor?
The difference is a creditor, whether he makes money orr not,
you must pay the interest. In preferred shares, you only pay
the preference of dividends if there is profits. If there is none,
muingon syag, Cumulative. So ma-carry-over to his share.
Dili kaayo bug-at ang obligasyon diba?
Kung mukupot kaag papel, unya dugay na ka kaayog sig kupot
ana. Kapoy! Kapoy mukupot sa papel.That is the way Gaisano
explained to me when he bought John Gaisano in Illustre.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
[Segue: I had forgotten him already. We were classmates in
grade school. Ana sya, Ang mukupot og papel, kapoy ra kaayo
na kay dili ka makakuot sa imong bulsa. Kay nag sigi ra man
kag kupot sa papel. He advanced money. Wala na man. Di na
man makabayad. Convert. Sya na ron ang tag-iya.]
[Segue continues about Apple corporation, having sold the
highest number of Iphones sold ever. They had P15B income in
the quarter. So their shares of stock in the market went down
by 2 lower. Muingon kag, nabuang man ning mga analysts!
They said that with that, they had the smallest increase of
profits. So this is the mark that the world has reached the peak
of satisfaction for smartphones.
And I am bring these to you because all of these have
implications that these laws were not invented out of nowhere.
They began somewhere. And it better be situated because you
cannot put it into context kung wala kay hanger sa imong ulo
kung wala kay han-ay ana. Wala ka makaybaw kung bulingon
ni (sa imong utok) o dili. Although, I understand nga common
ra na sa mga estudyante nga mamili na silag the lease dirty
shirt. Pareha ra na sa economy. Mas bulingon ang Europe. Mas
nagkagidlay ang Japan kaysa sa US. Ang China, within 8
months, naay 1.3Tril ang nawala sa ilahang foreign reserves.
Nagkagidlay na ang mga pikot ug mata. Niabot na sa ilaha.]
5. Amounts transferred from unrestricted retained
earnings to stated capital
That is what happens in stock and profit.
Unrestricted retained earnings. Kuhaan nimo na. Ang gikuha
nimo ibalin nimo sa covered stock. Kanang mga xxx. That
means that there are now more common shares. Shares
issuedwhat is the consideration? Unrestricted retained
earnings. Surplus or accumulated profits.
Sa ato pa, mudaghan gani ang common stock pero walay
gibalhinan dira ug wala sad nisulod nga kwarta, inimbento na
nga mga shares. Wala na. Ghost shares na. Wala moy increase
sa cash, gi-magic ra na.
Remember, when you do this, you need 2/3 stockholders vote.
This is the only time of consideration that needs 2/3
stockholders vote because this is a declaration of
stockdividends.
2/3 stockholders votemeaning, that the stockholders there
do not include non-voting shares. So only voting shares.
Muingon kag, unsa man gyud anang voting shares?
Kinahanglan nga sa meeting sa stockholders, let's say your
authorized capital is already paid up. Can you still issue
shares? No more. You cannot because your authorized capital
is already fully paid
Naa kay daghan nga accumulated profits. Muingon kag, We
want to keep the accumulated profits within the company. So
let us issue, instead of cash dividends, we will issue stock
dividends. Can you accomplish that in one voting? Naa na
man gyud na sa stockholders meeting. Can you accomplish
that in one voting? Increase capital stock2/3 stockholders
vote. Declaration of stock dividends2/3 ratificaiton of
stockholders. Can you accomplish that with one voting? NO.
43
You must have 2 votings.
First voting is increase of capital stock. And it must be 2/3 on
the basis of an expanded stockholders xxx. Because it includes
non-voting shares.
Second vote: You restrict it to voting stockholders. Then, you'll
reckon the 2/3 on the voting stockholders, excluded non-
voting.
So you need 2 votes and that must be properly recorded in the
minutes of the stockholders meeting. Dili gani na nimo ir-
record na, questionable ang imong quorum. Pareho na sa
Congress ug Senate. Each house makes its vote. They must
vote separately. You cannot make that one vote.
Jan 28, 2015 (LJQ)
The certificate of stock & the share of stock are not identical.
Certificate of stock constitutes a right to receive the shares
of stock and in intangible _. The cert. of stock somehow
represents the shares of stock but is not an _ evidence of
shares of stock. It is not even the ultimate evidence of a share
of stock because when the corp. issues shares of stock in
excess of the authorized capital, then the issuance is VOID.
Even if you completely pay the subscription & you received a
cert. of stock, there is no share behind that cert.
When can you demand a cert. of stock? The cert. of stock is
demandable after full payment of the subscription.
Partial payment of the subscription does not entitle you to a
cert. corresponding to the number of shares covered by the
partial payment.
You can never demand a cert. of stock even if the corp. goes
bankrupt.
Why is that? Because the cardinal rule in Corp. Law is that a
subscription is an indefeasible contract.
A loan is also an indefeasible contract. if you have 2 or 3
collaterals to a loan & you have partially paid a loan, a& the
partial payment is equivalent to a value of 1 of the collaterals,
you cannot ask that 1 of the collateral is to be freed unless the
bank allows you because that constitutes 1 contract even if
there are 3 or more than 1 collaterals secured to it.
A subscription is indivisible contract and there is only 1
exception.
That exception is allowed in delinquency sale of a
subscription. When a subscription becomes delinquent & it is
sold then the bidder bids for the sale amount w/c I explained
to you: balance of the subscription plus accrued interest plus
cost of the sale and he bid for the amount of the lowest
amount of shares. If he wins, he gets a cert. of stock for the
no. of shares that he __.
Sale amount = Balance of subscription + Accrued interest +
cost of sale
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
The net no. of shares after that is given out of the entire
subscription is given to the original subscriber who will be _.
So as you can see there is a division of the subscription. That
only happens in an execution sale that is borne out of a
delinquency sale.
What can be a stronger evidence of shares of stock than cert.
of stock? Nakabayad kana sa whole subscription, wa kai cert.
in the books of subscription, it is not recorded that you own
this no. of shares.
There is a meeting of the stock holders & it is crucial that you
exercise your vote because there is a right of appraisal in this
particular question. You go over there and you say I want to
vote because I have fully paid my shares, it is not only that I
am not delinquent, I am paid.
If you are not delinquent, you can go over there & vote. Is it
not? Vote to the equivalent no. of your partial payment of the
entire subscription. You have the right to vote for the entire
subscription even if it is not fully paid.
Now, you go there & you ask the secretary. The sec. say there
is no record on the stock & transfer book that you are the
owner of the shares. You: But I paid.
Then you show your receipt for payment of such no. of shares
according to your subscription signed by the treasurer of the
corp. That is proof. That is primary document on the basis of
which a certificate of stock can be issued. That is the basis of
the issuance of the cert. of stock. Your receipt that payment
has been received by the corp.
Hinumdumi na ha kai pareha na sa Land titles & deeds, the
title is the evidence of ownership but to own
something(to own land) there must be a mode of
acquisition.
What is the mode of acquisition? The deed of sale. If you have
the deed of sales, wa pa kai titulo, gi kuptan na nimo ang
karaang titulo, your title to the questioned piece property has
been perfected. It is just a mere formality for the issuance of
the title.
The title is the recognition of ownership. The mode of
acquisition is the basis of that ownership. And the basis
is more important. Naa kai titulo pero wala diay kay mode of
acquisition. Kai ngano man? Gi lipat-lipat lng na nimo dugay na
kaayo nang titulo gi-entrust sa imo.
50 anyos na di ka maka-produce og mode. Can you produce a
mode from the Register of Deeds? YES. Because the RD keeps
the deeds. Kuhaon na nimo didto, wa gani ka makuha diha,
meaning ang imo titulo ... Minao-mao omo titulo. Your title has
no leg to stand on.
So make sure you know that about cert. of stock.
Take a look at sec. 63
SECTION 63. Certificate of Stock and Transfer of Shares.
The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or vice-
president, xxx
44
That is why we know there is an officer known as vice-
president. You do not need a specific provision in the by-laws
to appoint a vice-pres. because it is provided in the corporation
code.
Xxx countersigned by the secretary or assistant secretary,
xxx
So you know there is an assistant secretary. You can appoint
an assistant sec. even if the by-laws does not provide for such
because it is allowed by the corp. code.
Xxx and sealed with the seal of the corporation shall be issued
in accordance with the by-laws.
Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed
by the owner or his attorney-in-fact or other person legally
authorized to make the transfer.
No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the
corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporation.
How are we going to understand this particular mode of
transferring ownership of shares? Is this the preferred mode of
transferring shares? Is this the exclusive mode of transferring
shares? You get the certificate, you endorse at the back, &
then you hand it over to the transferee & the transferee goes
over to the sec. of the corp. & effects the transfer.
In other words, is it okay, here it is I will pay the capital gains
tax, docs. Stamps, & I will pay the transfer fee & give me the
new cert. of stock because I am the new owner.
The SC has said that the duty of the sec. of the corp. is purely
ministerial. So you can compel the secretary. Provided there is
a record of that cert. there. Provided that in the books of corp.
there are no questionable entries made therein the particular
shares of stock covered by the cert. of stock.
Now, you endorse it at the bank, question, is this cert. of stock
a negotiable instrument because it is common in corporate
lingo to call those shares once they are endorsed, they are
called street certificates.
Why are they called street certificates? Because the transferee
can further negotiate those shares, sell those shares by just
delivering it to the succeeding transferee.
_ the transferor, the _ receives consideration& the transfer is
complete.
What is the diff. between the physical handing over of a
personal property to a transferee and the delivery of a title of a
personal property to the transferee? Longa manu, brevi manu,
constructive delivery, actual delivery what is the diff.?
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
The diff., there is no diff. in the act, the diff. lies in the intent.
When you just plainly transfer something, it is just physical
possession. When you deliver something after you have
endorsed it, it is w/ the intent of making the transferee the
owner of that thing that is transferred. There is that an intent.
How is that intent shown? That intent is shown only by the
surrounding circumstances of the transaction.
Kai naa mai consideration imo gi hatag unya imo naman gi
pirmahan ang likod blank, gi dunol nimo ang sert. Of stock
ngadto sa ni bayad sa imo. Di ang imo tumong ana nga siya
nga nidawat mao na manag-iya sa shares of stock kanhi imong
gi garantiya ihatag nimo niya kai nakadawat man ka sa kwarta.
There must be an intent.
Kung ikaw mulangyaw ka ngadto sa US ingon ka nga dugay
man ko didto nya ang corp. naa sa PH. Mu ingon ka sa imo
igsoon ikaw ako binlan ni ining shares of stock. Unsa man na
delivery nan a? dili na delivery that is a mere transfer of the
physical possession. He does not become the owner it is the
same thing when you buy shares of stock in the stock
exchange.
When you buy shares of stock in the stock exchange & you do
not pay for the cert. of stock, what happens? The old cert. of
stock is cancelled & is handed over to your broker, & the
broker holds it in trust for you. He is not the owner, he is only
a strict certificate, you must trust your broker.
Why? because the law says, that once that certificate is
endorsed in blank, it may be further be negotiated by mere
delivery. Pag tawag nimo sa telephone sa imo broker: oh sell
San Miguel at the market, at any price in the market, you sell
it. You are ordering him. iya na dayn to ideliver tong
endorsed certificate. Kuhaon ang bayad nya iahatag na nimo
ang net proceeds after deducting docs stamps, capital gains,
transfer fees. That is how the transaction occurs.
Must all transfers of shares of stock be conducted in the
manner prescribed in sec. 63? Not necessarily. This is
recommended but there are certain situations where you
cannot transfer stocks in this manner for a consideration.
Example: supposed you have 1M shares of San Miguel, & you
only want to sell 100K shares out of that 1M. How will you say
that? By just endorsing it blank & hand it over to your broker?
That would mean you are selling the entire 1M shares.
Kung mubaligya kag 100k ra do you still need to endorse this
certificate in blank? YES you still have to because it has to be
cancelled & subsequently San Miguel has to issue you a __
certificate, a new certificate covering 900k shares & your
transferee will get a new certificate covering 100k shares. How
do you effect that? You effect that by drawing up a deed of
sale.
xxx know all men by these presents this contract of sale
entered into by & in between so and so, absolute owner 1M
shares of San Miguel Corp. represented by this stock cert. no.
0000 and Mr. So and so hereafter referred to as buyer. __ is
selling 100k of 1M xxx
45
Naa kai deed of sale, katong endorsed cert. of stock __ mo
ana. Hatag nimo sa broker mubalik nimo ang new cert.
covering 900k share. That is another way of transferring
shares of stock.
Street Certificate. The certificate covering shares w/c are
endorsed in blank & therefore transferable by mere delivery
until it reaches the hands of a transferee who deciding to
effect registration on the books of corp. & just place his name
his name as transferee in the proper space provided for in the
cert. of stock.
May I invite you attention to the last of sec. 63
xxx No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporation.
The leading case here is China Banking v. CA; 270 SCRA
503; 1997.
The certificate in question however is not a cert. of stock. It is
a cert. of membership. Stock and profit corporation, they
have shares of stock. Non-stock non-profit corp. they have
membership. But if you are non-stock non-profit corp., for the
purpose of recreation this corp. although non-stock non-profit
can provide certificate of membership w/c is transferable.
Transferable cert. of membership_. In w/c case the BIR has
said & it has been affirmed by the SC that when you transfer
cert. of membership, it is like transferring shares of stock. You
pay capital gains, doc stamp, transfer fees.
In this case we are talking about the Capitol Golf & Country
Club. Mr. X is a member of Capitol Golf & Country Club. He
went to Phil. Bank of Communications & borrowed money
against his cert. of membership of Capitol. Pledge ang iyang
security. He endorses it in blank his cert. of membership &
hands it over to Phil. Bank.
Wa man siya ika bayad sa iya utang sa banko, the bank
foreclosed on his cert of membership. Auction sale, there was
no buyer so the bank became the winning buyer in default.
Armed w/ the certification of the auctioneer , the bank goes to
Capitol Golf. The secretary of the corp. asks for __ presenting
the old certificate w/ the endorsement of the borrower. Capitol
golf received the certificate but then it denied issuance of the
new cert. Why? According to Capitol this borrower, Mr. X has
unpaid claims w/ the corp. daghan kaayo na siya mga monthly
dues wala niya bayari, nikaon pa na siya diri sa country club
walay bayad-bayad taas na kaayo iya utang. So we are going
to compensate, legal compensation, is it not? Iyang utang, naa
siya __ mahimong tabla. Unya too bad you cannot proceed.
Why? Because the last sentence of sec. 63 says that.
That was challenged by the Phil. Bank. What is the meaning of
unpaid claim, is it _? Finally after 10 yrs., the SC comes w/ a
decision & said that unpaid claims is a technical term.
What does it mean? It means only that unpaid claims that
are connected w/ the subscription. It is not any other
claim. This must be substantial claims. wala pa gani ka
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
kabayad fully sa imo subscription, dili mo issue ang corp. og
cert. of stock. That is the meaning.
The term "unpaid claim" refers to "any unpaid claim arising
from unpaid subscription, and not to any indebtedness which a
subscriber or stockholder may owe the corporation arising
from any other transaction."
So keep that in mind because this is a landmark case.
SECTION 64. Issuance of Stock Certificates. No
certificate of stock shall be issued to a subscriber until the full
amount of his subscription together with interest and expenses
(in case of delinquent shares), if any is due, has been paid.
So not just balance of the subscription but the interest.
If a subscription does not mention anything about interest, do
take interest on the balance of the subscription? You look at
the by-laws. If the bay-laws do not say that you pay interest
on the balance of the subscription, you do not pay. If the
subscription contract also says you do not pay. But if it says
you pay interest on the balance of the subscription, but it does
not mention the rate of interest, what is it? It is legal rate of
interest. You know very well that legal rate of interest now is
just 1 rate. Whether it is forbearance of money or any other __
it is just 6%. So that is the legal rate of interest that you
should pay if the subscription of the by-laws provide for the
payment of interest on the balance of subscription but do not
specify the interest.
SECTION 66. Interest on Unpaid Subscriptions.
Subscribers for stock shall pay to the corporation interest on all
unpaid subscriptions from the date of subscription, if so
required by, and at the rate of interest fixed in, the by-laws. If
no rate of interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate.
SECTION 67. Payment of Balance of Subscription.
Subject to the provisions of the contract of subscription, the
board of directors of any stock corporation may at any time
declare due and payable to the corporation unpaid
subscriptions to the capital stock and may collect the same or
such percentage of said unpaid subscriptions, in either case
with interest accrued, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage thereof,
together with the interest accrued, if any, shall be made on the
date specified in the contract of subscription or on the date
stated in the call made by the board. Failure to pay on such
date shall render the entire balance due and payable and shall
make the stockholder liable for interest at the legal rate on
such balance, unless a different rate of interest is provided in
the by-laws, computed from such date until full payment. If
within thirty (30) days from the said date no payment is made,
all stocks covered by said subscription shall thereupon become
delinquent and shall be subject to sale as hereinafter provided,
unless the board of directors orders otherwise.
Remember that just like a borrower from the bank, he can pre
pay or pre-terminate his loan. If you are a subscriber to a
share of stock, even of the subscription balance is not due, you
46
can pay it. You can pay to the corp., & the corp. cannot refuse
acceptance.
Why? Because it is already an unconditional provision. If you
are a subscriber, it is procured to be paid. Those shares are
your liability, the subscribers liability. So you can pre pay it
even before the balance is due.
I leave you to go over sec. 68 delinquency sale. Ingon ang
corp. bayad na wala gihapon mu bayad. Another 30 days,
bayda na! di pa gani gihapon mu bayad, then the corp. can
declare the subscription as delinquent. Once it is declared as
delinquent, not earlier than 30 days, & not longer than 60-days
from the declaration, they can conduct sale. Then the winning
bidder is the same amount or the lesser no. of shares.
What is the effect of delinquency the moment the corp. has
declared the subscription as delinquent?
SECTION 71. Effect of Delinquency. No delinquent
stock shall be voted for or be entitled to vote or to
representation at any stockholders' meeting, nor shall the
holder thereof be entitled to any of the rights of a stockholder
except the right to dividends in accordance with the
provisions of this Code, until and unless he pays the amount
due on his subscription with accrued interest, and the costs
and expenses of advertisement, if any.
The right to dividends, if it is cash dividends, it will not be
given to the delinquent owner. It will be kept to satisfy the
subscription.
If it is stock dividend, it is also held in escrow. It will be given,
if there is a delinquency sale, to its successful bidder in
proportion to the no. of shares that he has bided out of the
subscription. That is what happens to the stock dividends.
Rights of Unpaid Shares
SECTION 72. Rights of Unpaid Shares. Holders of
subscribed shares not fully paid which are not delinquent shall
have all the rights of a stockholder.
So he can vote the entire subscription, he can collect all the
dividends even if he has not completely paid the subscription
and he can receive even the stock dividend as long as it is not
delinquent.
What happens if you lose the cert.? that is the last sec. lost or
destroyed certificates.
SECTION 73. Lost or Destroyed Certificates. The
following procedure shall be followed for the issuance by a
corporation of new certificate(s) of stock in lieu of those
which have been lost, stolen or destroyed:
1. The registered owner of certificate(s) of stock
in a corporation or his legal representative
shall file with the corporation an affidavit in
triplicate setting forth, if possible, the
circumstances as to how the certificate(s)
were lost, stolen or destroyed, the number of
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
shares represented by each certificate, the
serial number(s) of the certificate(s) and the
name of the corporation which issued the
same. He shall also submit such other
information and evidence which he may
deem necessary;
2. After verifying the affidavit and other
information and evidence with the books of
the corporation, said corporation shall
publish a notice in a newspaper of general
circulation published in the place where the
corporation has its principal office, once a
week for three (3) consecutive weeks at the
expense of the registered owner of the
certificate(s) of stock which have been lost,
stolen or destroyed.
The notice shall state the name of said
corporation, the name of the registered owner
and the serial number(s) of said certificate(s),
and the number of shares represented by
such certificate(s), and
that after the expiration of one (1) year from
the date of the last publication, if no contest
has been presented to said corporation
regarding said certificate(s) of stock, the right
to make such contest shall be barred and
said corporation shall cancel in its books the
certificate(s) of stock which has been lost,
stolen or destroyed and issue in lieu thereof
new certificate(s) of stock, unless the
registered owner files a bond or other
security in lieu thereof as may be required,
running for a period of one (1) year for a sum
and in such form and with such sureties as
may be satisfactory to the board of directors,
in which case a new certificate may be issued
even before the expiration of the one (1) year
period provided herein:
Provided, That if a contest has been presented
to said corporation or if an action is pending in
court regarding the ownership of said
certificate(s) of stock which have been lost,
stolen or destroyed, the issuance of the new
certificate(s) of stock in lieu thereof shall be
suspended until the final decision by the court
regarding the ownership of said certificate(s)
of stock which have been lost, stolen or
destroyed.
Except in case of fraud, bad faith, or negligence on the
part of the corporation and its officers, no action may be
brought against any corporation which shall have issued
certificate(s) of stock in lieu of those lost, stolen or
destroyed pursuant to the procedure above-described.
(R.A. 201a)
47
Leading case here is Philex Mining Corp. vs Reyes; 118
SCRA 602; 1982
Reyes is an old time stockholder of Philex, by the way there
are something like 8% of the outstanding capital stock of
Philex can no longer be accounted for. Shares have been
issued but this 8% have never attended meeting, have not
confirmed receipt of dividends, wa gyud. Mamalik nlng ang
cheke.
Ngano man unsa mai nahitabo? There was a time when Philex
issues shares of stock w/ below par. wan a gipang gisi na
siguro sa mga tao o gipang ilo o unsa nang naihtabo sa cert.
Wa naunya karon nibalik man.
So you dont really need a strict 50% + 1 to control the corp.
because of this 8% that is unaccounted for. You can have
control even if you just have 40% of the outstanding capital
stock.
This Reyes, is a stock holder of Philex, nakabasa siya sa
newspaper nga Philex issued stock dividend so nagpaabot siya
sa iya stock dividend. 6 mos. nalng wa pa gyud siya
nakadawat. Gi sulatan niya ang secretary, where is my stock
dividend? And they answered we have mailed to you, just wait
because it is mailed to you w/ return address. Naghuwat siya.
Wa pa man gihapon mo abot. Gi sulatan nasad niya ang
Philex. Ingon ang Philex naan a lagi, we mailed it. Ingon siya
ako pangitaon sa post office. Gipangita niya, wa man gyud
makita. So ingon siya tagai kog lain cert. of stock.
Philex: NO! you read sec. 73 of the Corp. Code, that is the
procedure if you lose the cert. of stock.
Reyes: I did not lose it. You lost it. Kamo mai ngpadala, wala
pa man ko naka obtain possession sa cert. of stock. Nya ngano
pasundon man ko nimo aning sec 73? Kamo may nakawala
ilisdi ninyo.
Kaso sila all the way to the SC.
SC said, sec. 73 prescinds from who is at fault as to the of the
lost cert.
What do you mean by prescind? What happens when you
prescind? let us prescind over as to who is at lost over the
loss of the cert. when you prescind, you neither affirm nor
deny. You are neutral.
What is the material fact for the application of sec. 73? The
material fact is that the cert. has been issued and it is lost.
Once it is issued & lost, 73 has to be followed. Because it could
be somewhere out there floating around & then when it comes
back to the sec. it is still a good cert. because it is in the
records that it has been validly issued. So WON the
stockholder or the corp. is at fault it doesnt matter. What
matter is it has been issued & it is out there & it is lost.
So you are forced to follow 73. Execute affidavit in triplicate
then publication. 3 consecutive weeks at the expense of the
registered owner of the cert. of stock, once a week for 3
consecutive weeks.
How do you prove publication? By submitting the facsimile of
what has been published, & an affidavit of the publisher that
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016

he has indeed published it upon the orders of the party
seeking its publication. Once you have the publication it is an
action in rem binding against the whole world.
After 1 yr.,wan a patay na tong cert. bisan mubalik pa siya.
nara nakitan na diay nako dudto diay sa ilalom katre
gitaguan wa na, goodbye, no more, it has been cancelled.
6.
January 29, 2016 (CGonzales)
Stocks and Stockholders. Before we leave it, let us summarize
the rights of the stockholders. There are at least 10 rights of a
stockholder
1. Right to vote at stockholders meetings either
in person or by proxy (sec.50)
- A stockholder has a right to be present in
meeting either in person or by proxy to vote IF it
is a voting share.
- If it is not a voting shares, then, he has no right
to vote BUT in those eight instances mentioned
in Section 6, he cannot be prevented from voting.
2. Right to receive his/ her proportionate share in
the profits of the corporation by way of
dividends if the corporation declares dividends.
- It is not the stockholder who decides to declare
dividends, it is the Board of Directors.
otherwise the incompetent stockholders to make
sense with the corporate books and records that
he/she inspects. REASON: because if he cannot
bring along with him a CPA or a lawyer, the right
to inspection is rendered nugatory. It is the same
as if he has no right.
Right to financial statements (sec. 75)
- I told you that it is the stockholders who approve
the financial statements of the corporation.
(father reads par. 2 of Sec. 75)
At the regular meeting of stockholders or
members, the board of directors or trustees shall
present to such stockholders or members a
financial report of the operations of the
corporation for the preceding year, which shall
include financial statements, duly signed and
certified by an independent certified public
accountant.
- that is why during the annual meeting you must
present financial statements and the stockholders
vote to approve it.
- But read par. 3 of sec. 75, if the paid- up capital
of the corporation is less than P50,000.00, the
financial statements may be certified under oath
by the treasurer, no need for an independent
external auditor.

3. Right to vote to ratify by 2/3 votes of the
voting stockholders the decision of the board
to distribute stock dividends
- But if the BOD choses to distribute stock
dividends, then it must have the ratification of
the 2/3 votes of the voting stockholders. (Sec.
43)
4. Pre- emptive right. The right to subscribe to
shares that the corporation issues.
- This includes treasury shares. Remember,
treasury shares are not issued because they have
been already issued. Treasury shares are
disposed of as re-sold. Stockholders have the
right to buy over those shares because sec. 39
says that, all issues or dispositions of shares of
any class, in proportion to their respective
shareholdings, unless such right is denied by the
articles of incorporation or an amendment
thereto, which is differently worded from the old
corporation code.
5. Right to inspect corporate books and records
Q: Suppose the stockholder is illiterate, can he
bring along with him an accountant to help him
inspect the books?
A: the SC said that the stockholder has the right
to bring along with him a CPA to help and
7. Right to appraisal (sec. 81)
- In the instances provided by law, the stockholder
can exercise his opposition to a particular
corporate action to be taken and he votes against
it, then he can exercise his right to appraisal.
buy me out because I do not agree with this
fundamental action, ex: amendment of the
articles of incorporation, extending the corporate
term, investing into another corporation, creating
new class of shares with higher privileges and
benefits that the existing class of shares and
other that is provided for in section 81.
8. Right to participate in proportionately in the
distribution of corporate assets upon
liquidation following the dissolution and
winding up of the corporation. (sec. 122)
- This is what you call RIGHT TO RECEIVE
LIQUIDATED DIVIDENDS
9. Right to file a derivative suit
- The SC said that this right is not granted
expressly in law, it is not found in the corporation
code or in the SRC or other special law. It is not
an implied right. This is an EQUITABLE RIGHT. It
is a right in equity. If it is not there then the
society is unjust by a corporation, a juridical
person, who cannot defend himself in suit

48
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
against its agents or officers who seeks to harm
it.
10. Right to be issued stock certificate after
complying the requirements, which the
stockholder is entitled to it, according to SEC
Opinion January 8, 1986.
- Now, what if you are a stockholder in your
familys corporation, wala gyud moy meeting2x
kay family lage, mangutana ka, kanusa man ta
magmeeting sa corporation? Then your father
will say, diba nagsige naman tag- meeting kada
kaun nato magsabay ta, kita2x ra man naa sa
corporation, wa ba moy salig nako? What will you
do? Its not in the corporation code, diba.
Mangamatay nalang imong parents then mabal-
an nalang nimu na inyong mga yuta nabaligya na
didto pero wa kay kalibutan. You only know that
all the family assets are reduced in the
corporation and you have been issued shares of
stock.
What is your remedy na di man ka makademand na
tagaan kag dividend because that will be premature.
Magfile kag derivative suit? Di gihapon. Madismiss na
because there is no prima facie evidence that the
officers are doing harm to the corporation. So
magstart ka sa uno. How?
1. Write a letter to the corporate secretary that you are
exercising your right to inspection
2. Ask for financial statements
3. Write that the president, secretary and the treasure
render an account of their duties
4. Go to court to ask for an order for the issuance of the
various documents you want to inspect
5. If there is a finding of loss or harm, then file for a
derivative suit. If there is unrestricted retained
earnings, ask for the issuance of dividends.
- If you find out in the records that there are no
records, then file to ask for the financial
statements. If wa gihapon, file that the president,
treasurer, secretary and its officers to render and
account the exercise of their duties, such as the
expenses they incurred, the prospects of the
corporation and etcetera. If they still do not do it,
then go to the court and file a suit to issue an
order to compel these people to issue you the
various documents that you are asking. This is
for the purpose that you can see if there are loss
or harm done to the corporation to let you file a
derivate suit or if there are so much unrestricted
retained earnings then ask for distribution of
dividends especially if the amount of UREs is
already approaching the original paid up capital.
No shortcut. You cannot go directly to court.
Exhaust all means first.
49
We are done with stocks and stockholders. We now go to title
8 corporate books and records.
How many corporate books and records are there?
(section 74)
1. Book of business transactions
- This book is scattered. Like the receipts and all.
its not like the record book or log book sa mga
security guard.
2. Book of minutes of all meetings
3. Stock and transfer book
- If it is a non- stock, non- profit corporation, its
equivalent is the BOOK OF MEMBERSHIP
Take note that the stockholder may be prevented from
inspecting the books but you must have a good reason.
Section 74 provides that: Provided, That if such refusal is
made pursuant to a resolution or order of the board of
directors or trustees, the liability under this section for such
action shall be imposed upon the directors or trustees who
voted for such refusal: and Provided, further, That it shall be a
defense to any action under this section that the person
demanding to examine and copy excerpts from the
corporations records and minutes has improperly used any
information secured through any prior examination of the
records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate
purpose in making his demand.
So you can thwart the stockholder from inspecting the records
provided that you can show that in the past he has abused his
right, that he is sharing it to other competing corporations to
the detriment of the corporation and acting in bad faith. That
is the only reason that the stockholder may be prevented from
inspecting the book.
Whose responsibility is the Stock and transfer book?
- Corporate Secretary is responsible for the
custody of the stock and transfer book or the
assistant secretary.
- Normally in practice however, the physical
possession of the stock and transfer book is in
the hands of the chief financial officer/
comptroller or chief accountant. But actually it
should be the corporate secretary.
There is only one instance that the corporate secretary is
excused from holding the stock and transfer book:
1. when the corporation engages the services
of a stock- transfer agent or when engaged
in the principally in the business of
registering transfer of stocks of a
corporation,
a. who is under license with the SEC to
operate in the Phils., and
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
b. who has paid a fee as maybe fixed by
the commission.
- The stock corporation is not precluded from
transferring its shares of stock in which case all
rules and regulations imposed on stock transfer
agents, except the payment of a license fee
herein provided, shall be applicable.
Ex: PLDT. Over 2M stockholders. Always buying
and selling its own shares. It is no longer the
PLDT who takes into possession its book, it is
another corporation licensed to do so.
GENERAL RULE: Corporate Secretary must keep in custody
the books of the corporation
Exception: corporation engages the services of a stock
transfer agent/ corporation.
Book of membership- it is for non- stock, non- profit
corporation wherein the members, when it entered the
corporation or when it seized to be a member and its reasons
are listed. There is no shares to talk about or even the
monetary consideration unless a civic organization or
recreational non- stock, non- profit organization wherein its
membership is transferrable.
Now lets go to title IX. Merger and consolidation:
What is written here for all purposes, for me, are formalities
for merger and consolidation? They are formalities only.
Why? Because the plan of merger is voted upon. Then the
actual articles for merger must be voted upon. Not only that,
any other amendment of the articles of merger even the
smallest detail must be voted upon.
Who votes?
1st- absolute (not quorum) majority of the directors or trustees
2nd- qualified majority (2/3 votes) of the stockholders or
members of the corporation
So do you always call for a meeting? Ang buhaton nimu,
makuha gani nimu ang boto sa mga stockholders, pangayuan
na nimu sila ug IRREVOCABLE APPOINTMENT OF PROXY. The
president who pushed for the merger will be made the proxy.
So, if mupirma xa mao na to kay naa man sa iyaha ang 2/3
proxy votes. So you only have one and only one meeting and
that is you explain to everybody. But you and I know that that
cannot be done. First, you must call for a caucus to those who
have controlling shares then kadto nasad mga gagmay ug
shares hangtod makuha ilang proxy.
How do you arrive at that? Normally, a merger or consolidation
never begins from below. Didto gyud na magsugod sa taas
nga naay say, dili didto sa mga nagatando2x lang. if you have
convinced them, you now go to VALUATION.
Be familiar with these terms:
1. Acquiring corporation- it is the corporation that
survives
50
2. Target corporation mao nay kuhaunon na
corporation
Merger is when two or more corporations and one of its
constituent corporations survives and the rest dies.
Corporation is when two or more corporations are coming
together and dies and another corporation emerges.
Now, you need to value each corporation.
If it is a merger, the acquiring corporation may pay in cash to
the target corporations stockholders or shares of stock.
If cash, the only thing to be valued is the target corporation.
If it will be acquired and the currency used are the shares of
stock of the acquiring corporation, then the acquiring
corporation must be valuated to validate the shares of stock to
pay the stockholders of the target corporation. To do the
valuation, there is what is called DUE DILIGENCE PERIOD. This
was already asked once in the bar examination, 2 years ago.
Due diligence under the Civil Code is not the same in
Corporate- Commercial Lingo is this, target corporation, you
will be acquired so we will value you. Show me your latest
financial statement and your historical financial statements of
up to 10 years. If the acquiring corporation pay in cash, it
does not need to show its financial statement but if it pays in
shares of stocks, the shares of stocks must be valued with the
correct par value. So, the acquiring corporation must show to
the target corporations stockholders its financial statements.
They will exchange with each other. When there is exchange,
there is what we call as COLLATERAL AGREEMENT. Collateral
agreement is the non- disclosure agreement. we vouch that
this financial statements with supporting documents we are
presenting to you are the true historical financial statements of
the corporation. In the exercise of due diligence, we will not
reveal to anyone until there is a definitive agreement. If the
press will come, we have nothing to say. Kung nay
mangutana, are you in the advance stage of merger and
consolidation? Mutubag silag, our lips are sealed. Read my
lips. Lol. They need to do this because the public will
investigate but they have an obligation under the Non-
disclosure agreement. You cannot take advantage.
Now, what is the main agreement since it is only the collateral
agreement? The main agreement is, while we are in talks,
although we already agreed in principle to merge or
consolidate, we agree to will keep the corporation as close as
possible up to the last financial statements, that we do not
make an extra-ordinary move to fundamentally alter the
financial statements. Ihatag nimu imong financial statements
unya naa diray item nga nay kay 100M in cash, di na nimu
hilabtan if di necessary to the ordinary course of business of
the corporation. Di ka magsugod ug bagong business unya sa
sunod na meeting for merger, muingon nalang, oi ha-I naman
tong 100M na cash na nawagtang naman?! That is a violation
of the due diligene period.
The due diligence agreement says that you as a target
corporation will exercise due diligence to keep the corporation
as close as possible to the latest financial statement. The
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
acquiring corporation will also way, we will exercise due
diligence to maintain the corporation as close as possible to
the latest financial statement we issued. You must appreciate
it that merger is not same with static objects like pirit na
makit-an dayon nimu ang hasang. The corporation is bovine.
Everyday, you can produce different financial statement
because your profit and loss today is different tomorrow. That
is why when you look at financial statements it says: balance
sheet as of December 30, 2015. So, the financial statement is
only true up to the following dates. It is because a corporation
is an on- going entity. There is a going concern, there are
transactions everyday that changes the corporation. Meaning
galihok xa. That is why it is necessary to enter into due
diligence, into non- disclosure agreement.
During the due diligence, each must verify the veracity of the
financial statements. If you are not doing your duty then you
are not serving the interest of your constituents. Let us say,
mutanaw xa sa target corporation and there is an item there
on retirement fund. Is this adequate as to its liabilities? How
do you measure up retirement fund as to its accrued liability?
This what happens during the due diligence because it is the
closest auditing that you get next to audit for fraud. It is finer
than the year- end auditing. Auditing na gani, busisihon bisag
gamay if what is in the financial statement is real. So, kadtong
retirement fund, pila man ka- milyon ang amount sa fund?
How many employees are there, the list of employees, the
schedule of salaries and the record of their accrued years of
service. The accountant now will compute the accrued
liabilities since it is part of liabilities. If the retirement fund is
not enough to answer the liabilities, the difference will be
deducted from the price of the target corporation. Why? Since
it will be the burden of the acquiring corporation to add the
retirement fund. Another example, you have an inventory of
10,000 piculs of sugar but placed in different bodegas. What
will happen now? The accountants will check one by one if
indeed there are these piculs of sugar because these are listed
assets. So, you need to count it one by one if indeed there is
10,000 piculs. Its more tedious accounting unlike in year- end
accounting, you will just have sampling. Same with
machineries listed which need adjustment to reflect the true
value of the assets. All these things happen even before you
meet to approve a plan of merger.
Now. Let me tell you this. Maybe in your mind, merger and
consolidation is like getting married, wherein there is a need
for understanding, na parehas mog level and expectations.. its
not like that. In a merger and consolidation, it does not work if
you are of the same size. It will just result into bickering who
will take control/ in charge. It will be more effective if one is
smaller and the other is bigger who buys you, then it is
obvious that it is the bigger corporation who will take control in
the merger.
Why do you think that the Golden State Warriors wins? It is
because they know that whatever happens during the last 3
seconds Stephen Curry has a legitimate title over the ball.
Merger and consolidation is like that. It is a question of control.
I just like to point out differences in transactions that people
mistaken as merger and consolidation.
51
1st- For instance, the corporation may purchase all the assets
of another corporation and still leave the target corporation
behind as an empty shell, it takes all the assets. That is not a
merger or a consolidation. That is sale- lease exchange,
mortgage- pledge or disposition of all or substantially all of the
corporate property.
(fathers personal account) I have gone through some of that.
You purchase all the assets of a bank but you do not merge
with the acquiring bank. You just purchase all its assets. By
assets you mean all of its debts, all of its depositors, all its
buildings and lands and you leave the bank license of that
acquired bank because it is location specific. You do not need
it because you have a branch of your bank in that company.
But you still need 2/3 vote of the stockholders of the voting
and non- voting stockholders of the acquiring corporation.
2nd- REORGANIZATION
- This what happened to One Network Bank.
- What happened was BDO bought all the shares
of ONB. They bought it from stockholders. After
the transaction, ONB continued to exist. The
buyer, BDO, continued to exist. If you were an
employee of ONB, your employer still remains
ONB. There is a reorganization because the
stockholders of ONB were replaced by a new set
of stockholders by the BDO. It is important
because you cannot change the terms in the
employment of ONB just because there are new
controlling interests. The controlling stockholders
are not the employer but the ONB, a juridical
person. If you change the terms and conditions,
it might be diminution of benefits.
Merger- the constituent corporation or most of the
constituent corporation die and only one survives.
Consolidation- all the constituent corporations die
and a new one is born. (phoenix lang ang peg. Lol)
Ex. 3 banks consolidated, namely: insular bank, Asian
bank and Bank of America. When they merged, all the
banks died. A new bank emerged and named Insular
Bank of Asia and America.
You pay attention to this because this is where the lawyer
makes his bread and butter.
After the consolidation or merger, what happens to the
properties of the constituent corporation? This is where section
80 comes in:
Section 80. Effects of merger or consolidation. The merger
or consolidation shall have the following effects:
1. The constituent corporations shall become a single
corporation which, in case of merger, shall be the surviving
corporation designated in the plan of merger; and, in case of
consolidation, shall be the consolidated corporation designated
in the plan of consolidation;
2. The separate existence of the constituent corporations shall
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
cease, except that of the surviving or the consolidated
corporation;
3. The surviving or the consolidated corporation shall possess
all the rights, privileges, immunities and powers and shall be
subject to all the duties and liabilities of a corporation
organized under this Code;
- example of this is the merger of BPI and Far Eastern Bank.
BPI Davao is the only segment of BPI national that is
unionized. All of the BPI of the Davao Region are organized
labor. FEBTC is not organized. So when merged, the
employees of the FEBTC do not want to be part of the union.
What is BPI going to do? It cancelled all the duplicating
branches. The case was brought to court because of the
branch of FEBTC there at JP Laurel corner San Pedro. BPI kept
some of the FEBTCs employees. They said that they do not
want to be organized sine they have always been unorganized.
What is the duty of the ER? That is the problem/ The problem
would have not arisen if not for the merger. All titles of the
properties of the constituent corporation are under the name
of the constituent corporation. FEBTC owns the land. What will
happen to that? Refer to number 4.
4. The surviving or the consolidated corporation shall
thereupon and thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent
corporations; and all property, real or personal, and all
receivables due on whatever account, including subscriptions
to shares and other choses in action, and all and every other
interest of, or belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in such
surviving or consolidated corporation without further act or
deed; and
- emphasis on the phrase without further act or deed. Does it
mean that BPI can now go to the ROD and present the titles of
the properties under FEBTC and have it transferred under BPI
without further act and deed? Is that the meaning of provision
4? No. the act of merger or consolidation is not a deed. What
you do is, have the article of merger/ consolidation annotated
at the back of the title of all the properties of the target
corporation. That will be an indication that there is a new
owner, the surviving corporation or the consolidated
corporation and the constituent corporations rights to that
properties have already ended with the annotated merger.
5. The surviving or consolidated corporation shall be
responsible and liable for all the liabilities and obligations of
each of the constituent corporations in the same manner as if
such surviving or consolidated corporation had itself incurred
such liabilities or obligations; and any pending claim, action or
proceeding brought by or against any of such constituent
corporations may be prosecuted by or against the surviving or
consolidated corporation. The rights of creditors or liens upon
the property of any of such constituent corporations shall not
be impaired by such merger or consolidation.
- Pending cases which the FEBTC is the complainant. BPI will
now file a motion to intervene by the reason of merger, saying
that FEBTC is now defunct and it is BPI that is the surviving
52
corporation by presenting the Articles of Merger.
- The articles of merger approved by the SEC is the key to be a
party in interest in the case.
- if there is a union with the constituent corporation that now
cease to exist, then it is now transferred to the surviving
corporation and the negotiation continues.
Those are the effects and the actual repercussions(? Di ko
sure kay nay nag-ubo). What is issued now is the Certificate
of Merger or/of Consolidation, and all other certificates issued
by the SEC are superseded by the new certificate of merger/
consolidation.
Title X: Appraisal Right
Section 81. Instances of appraisal right. Any stockholder of
a corporation shall have the right to dissent and demand
payment of the fair value of his shares in the following
instances:
1.In case any amendment to the articles of incorporation has
the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares of any
class, or of extending or shortening the term of corporate
existence;
- It must be this kind of amendment in the articles
of incorporation that effects a change in the
rights of the original stockholder or it creates a
class superior than the existing stockholder or
extends the term of corporate existence, then
you can exercise the right of appraisal. in other
amendments, you can oppose but you cannot
exercise the right to appraisal.
2. In case of sale, lease, exchange, transfer, mortgage, pledge
or other disposition of all or substantially all of the corporate
property and assets as provided in the Code; and
3. In case of merger or consolidation.
- Also in section 42, investments in other
corporation or business, you can also exercise
the right of appraisal. It must be added here in
section 81.
Section 42. Power to invest corporate funds in another
corporation or business or for any other purpose. Subject to
the provisions of this Code, a private corporation may invest its
funds in any other corporation or business or for any purpose
other than the primary purpose for which it was organized
when approved by a majority of the board of directors or
trustees and ratified by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, or by at least
two thirds (2/3) of the members in the case of non-stock
corporations, at a stockholders or members meeting duly
called for the purpose. Written notice of the proposed
investment and the time and place of the meeting shall be
addressed to each stockholder or member at his place of
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That any
dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where
the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated
in the articles of incorporation, the approval of the
stockholders or members shall not be necessary.
How do you exercise your right of appraisal? Section 82
Section 82. How right is exercised. The appraisal right may
be exercised by any stockholder who shall have voted against
the proposed corporate action, by making a written demand on
the corporation within thirty (30) days after the date on which
the vote was taken for payment of the fair value of his shares:
Provided, That failure to make the demand within such period
shall be deemed a waiver of the appraisal right. If the
proposed corporate action is implemented or affected, the
corporation shall pay to such stockholder, upon surrender of
the certificate or certificates of stock representing his shares,
the fair value thereof as of the day prior to the date on which
the vote was taken, excluding any appreciation or depreciation
in anticipation of such corporate action.
If within a period of sixty (60) days from the date the
corporate action was approved by the stockholders, the
withdrawing stockholder and the corporation cannot agree on
the fair value of the shares, it shall be determined and
appraised by three (3) disinterested persons, one of whom
shall be named by the stockholder, another by the corporation,
and the third by the two thus chosen. The findings of the
majority of the appraisers shall be final, and their award shall
be paid by the corporation within thirty (30) days after such
award is made: Provided, That no payment shall be made to
any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such
payment: and Provided, further, That upon payment by the
corporation of the agreed or awarded price, the stockholder
shall forthwith transfer his shares to the corporation.
How exercised?
1. vote against the proposed corporate action,
2. make a written demand on the corporation within
thirty (30) days after the date on which the vote was
taken for payment of the fair value of his shares
- This is assuming that the action vote against
prevailed. If it did not prevail in the voting, no
right of appraisal because the action voted
against is not to be carried out.
3. failure to make the demand within such period shall
be deemed a waiver of the appraisal right. If the
proposed corporate action is implemented or affected,
the corporation shall pay to such stockholder, upon
surrender of the certificate or certificates of stock
representing his shares, the fair value thereof as of
53
the day prior to the date on which the vote was
taken, excluding any appreciation or depreciation in
anticipation of such corporate action.
4. If within a period of sixty (60) days from the date the
corporate action was approved by the stockholders,
the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall
be determined and appraised by three (3)
disinterested persons, one of whom shall be named
by the stockholder, another by the corporation, and
the third by the two thus chosen.
5. The findings of the majority of the appraisers shall be
final, and their award shall be paid by the corporation
within thirty (30) days after such award is made
6. no payment shall be made to any dissenting
stockholder unless the corporation has unrestricted
retained earnings in its books to cover such payment.
7. That upon payment by the corporation of the agreed
or awarded price, the stockholder shall forthwith
transfer his shares to the corporation.
- The stockholder exercising his right of appraisal
must surrender his certificate of stocks and from
the time he surrenders, all his rights ceases as a
stockholder of the stock corporation, except his
right to be paid.
Who bears the consequence of appraisal?
Section 85. Who bears costs of appraisal. The costs and
expenses of appraisal shall be borne by the corporation, unless
the fair value ascertained by the appraisers is approximately
the same as the price which the corporation may have offered
to pay the stockholder, in which case they shall be borne by
the latter. In the case of an action to recover such fair value,
all costs and expenses shall be assessed against the
corporation, unless the refusal of the stockholder to receive
payment was unjustified.
- If the fair value ascertained is closer than the
stockholder prefers, then the corporation bares
the expenses of the appraisal.
- Now, the corporation may unilaterally not go
ahead with the action. He can without need of
the vote. If it does so, then, the stockholder who
exercises that right, ceases to have that right and
the certificate is returned to him and no need to
continue. That is the jist of Section 84.
Section 84. When right to payment ceases. No demand for
payment under this Title may be withdrawn unless the
corporation consents thereto. If, however, such demand for
payment is withdrawn with the consent of the corporation, or if
the proposed corporate action is abandoned or rescinded by
the corporation or disapproved by the Securities and Exchange
Commission where such approval is necessary, or if the
Securities and Exchange Commission determines that such
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016

stockholder is not entitled to the appraisal right, then the right - It is not, not to make profit because it can make
of said stockholder to be paid the fair value of his shares shall profit. The essence is not distributing that income
cease, his status as a stockholder shall thereupon be restored, to its members.
and all dividend distributions which would have accrued on his
- Section 87 says, where no part of its income is
shares shall be paid to him.
distributable as dividends to its members,
trustees, or officers, subject to the provisions of
- From the time of demand of payment for the fair this Code on dissolution. It can therefore have
value of the stockholders shares, until either by income but its essence is not to distribute that
abandonment of the corporate action involved or income to its members.
purchase of shares of the said corporation or
rights accruing to such shares including voting Where shall it distribute its profits?
dividend rights shall be suspended in accordance
- It is put into the corporations operation. Profit
with this code except the right of such
back to the corporation. No distribution to its
stockholder to receive payment of the fair value
members, officers and et cetera.
thereof.
- Section 87 says: That any profit which a non-
- If the dissenting stockholder is not paid of the
stock corporation may obtain as an incident to its
fair value of shares within 30 days, after the
operations shall, whenever necessary or proper,
award, his voting and dividend rights shall
be used for the furtherance of the purpose or
immediately restored.
purposes for which the corporation was
- The solution of this appraisal right is listing the organized, subject to the provisions of this Title.
corporation in the stock market. If the shares is
- The landmark case is San Juan de Dios
listed, there is no need to exercise this right.
Hospital v. CIR. You also have Cebu Country
Why? It is because the price to which the stocks
Club v CIR.
are traded is the value of the shares and it is
open to everyone. If you oppose, then you sell it - The San Juan de Dios Hospital is a non- stock
to the public since the price is there. profit. It has charity and paying works. The
hospital came out of profits. That is revenues
- Question: are the stockholders still entitled to
minus expenses. The BIR slapped an income tax
right of appraisal if the stocks are listed? YES, but
claim against San Juan de Dios. The BIR
you are crazy if you do not accept the price that
contends that if it is really a charitable
is already stated in the stock market because it is
corporation, then you shall not have paying
not debate anymore, it is dictated by the market.
clients. The SC came out of the decision that, a
Unless, if you are a controlling stockholder and
non- stock, non- profit corporation does not
there is premium in buying your shares, then
mean that it cannot have profit. You can but
maybe you can increase the pay. That is what
provided it is not distributed among members. It
you call the CONTROL PREMIUM. So ngano pa
will be used for its charitable purpose.
man ka magpa- appraisal if listed na? ibaligya
nlng nimu. There is no proxy voting or accumulated voting in non- stock
non- profit corporation.
Take note of the grounds of appraisal and the actions taken. It
is very narrow, to be exercised by the stockholder.
Section 89. Right to vote. The right of the members of any
Non- stock corporations, Title XI. class or classes to vote may be limited, broadened or denied to
the extent specified in the articles of incorporation or the by-
You must have to have familiarity of Section 88 because if it
laws. Unless so limited, broadened or denied, each member,
does not have one of these purposes then it is not a non-
regardless of class, shall be entitled to one vote.
stock corporation.
Unless otherwise provided in the articles of incorporation or
Section 88. Purposes. Non-stock corporations may be the by-laws, a member may vote by proxy in accordance with
formed or organized for charitable, religious, educational, the provisions of this Code. (n)
professional, cultural, fraternal, literary, scientific, social, civic
Voting by mail or other similar means by members of non-
service, or similar purposes, like trade, industry, agricultural
stock corporations may be authorized by the by-laws of non-
and like chambers, or any combination thereof, subject to the
stock corporations with the approval of, and under such
special provisions of this Title governing particular classes of
conditions which may be prescribed by, the Securities and
non-stock corporations.
Exchange Commission.

What is the essence of a non- stock, non- profit

FGN: if the members are allowed to vote by mail, then the SEC
corporation?
should allow teleconference meeting of members of non- stock
non- profit corporation. That is why I do not believe that

54
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
January 01 2016 SEC memo prohibiting it. It is so
SOPHOMORIC. here, they are allow voting by mail then
ngano dili pwede teleconferencing na wala man gani mo
nagkita.
Section 91. Termination of membership. Membership shall
be terminated in the manner and for the causes provided in
the articles of incorporation or the by-laws. Termination of
membership shall have the effect of extinguishing all rights of
a member in the corporation or in its property, unless
otherwise provided in the articles of incorporation or the by-
laws.
- This is what is lacking in the forms of SEC Non-
Stock Non- Profit Corporation. This is disastrous
because you do not know how many are the
members already, some of them may be away
already then they will be part of the
determination of a quorum. You must always put
the provision on the configuration of the
members.
CHAPTER II
TRUSTEES AND OFFICES
Section 92. Election and term of trustees. Unless otherwise
provided in the articles of incorporation or the by-laws, the
board of trustees of non-stock corporations, which may be
more than fifteen (15) in number as may be fixed in their
articles of incorporation or by-laws, shall, as soon as
organized, so classify themselves that the term of office of
one-third (1/3) of their number shall expire every year; and
subsequent elections of trustees comprising one-third (1/3) of
the board of trustees shall be held annually and trustees so
elected shall have a term of three (3) years. Trustees
thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the
unexpired period.
No person shall be elected as trustee unless he is a member of
the corporation.
Unless otherwise provided in the articles of incorporation or
the by-laws, officers of a non-stock corporation may be directly
elected by the members. (n)
- Trustees does not have a one year term. It is
staggered so that there will be remaining
trustees.
Section 93. Place of meetings. The by-laws may provide
that the members of a non-stock corporation may hold their
regular or special meetings at any 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 date, time and place of the meeting: and Provided, further,
That the place of meeting shall be within the Philippines.
(no further explanation. FGN only read the provision)
55
CHAPTER III
DISTRIBUTION OF ASSETS IN NON-STOCK
CORPORATIONS
Section 94. Rules of distribution. In case dissolution of a
non-stock corporation in accordance with the provisions of this
Code, its assets shall be applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid,
satisfied and discharged, or adequate provision shall be made
therefore;
2. Assets held by the corporation upon a condition requiring
return, transfer or conveyance, and which condition occurs by
reason of the dissolution, shall be returned, transferred or
conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to
limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes, but not held upon
a condition requiring return, transfer or conveyance by reason
of the dissolution, shall be transferred or conveyed to one or
more corporations, societies or organizations engaged in
activities in the Philippines substantially similar to those of the
dissolving corporation according to a plan of distribution
adopted pursuant to this Chapter;
4. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or the by-laws, to the
extent that the articles of incorporation or the by-laws,
determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and
5. In any other case, assets may be distributed to such
persons, societies, organizations or corporations, whether or
not organized for profit, as may be specified in a plan of
distribution adopted pursuant to this Chapter. (n)
- This is very easily. Assets na gihuram, ibalik. Pay
your debts and obligations. If after paying, naa
gihapon mabilin, give the remaining amount to
another non- stock non- profit that has a similar
purpose.
Ex: If the non- stock non- profit corporation is an
orphanage but dissolved, give back what does not
belong to the orphanage. After, those that were
borrowed, return it. If there is still remaining, pay the
just debts, if there still remains, then, liquidate it and
turn over the remaining assets to another orphanage.
UNLESS, there is plan of asset distribution pre-
approved by the SEC, that the remaining assets will
be transferred to mother non- stock non- profit
corporation. That is allowable!
FGN: I do not know whether the AOI of a non- stock
non- profit corporation binds all the universities
already gone through the amendment that in case of
dissolution, the remaining assets will be transferred to
another Jesuit organization or turned over to Isabela
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Cultural Corporation, the corporate name of the Jesuit
Provincial in the Philippines.
So, we are pretty close because our next topic will be
CLOSE CORPORATION.
February 04, 2016 (ELGuiritan)
We begin with this new section in the corporation code which
was not present in the law
What is this particular section? This is the close corporation.
This is supposed to be an entity with hybrid characteristics.
The characteristics of a corporation and the characteristics of a
partnership.
What is a closed corporation? There are three characteristics
that makes a close corporation.
Section 96. Definition and applicability of Title.
xxx
(1) All the corporations issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20);
So the most number of shareholders in a closed corporation is
twenty or such number not exceeding twenty that is provided
for under the articles of incorporation
(2) all the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this Title;
and
So there are restriction on the transfer of a close corporation.
(3) The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class.
Question: can another corporation be a shareholder of a close
corporation? Yes. Provided that the owning corporation is also
a close corporation
There is this limitation:
Section 96. xxx Any corporation may be incorporated as a
close corporation, except mining or oil companies, stock
exchanges, banks, insurance companies, public utilities,
educational institutions and corporations declared to be vested
with public interest in accordance with the provisions of this
Code.
The basic provisions governing close corporations are the
provisions in title XII of the corporation code but all other
provisions are suppletory in character applicable to the close
corporations.
What are the features that you may provide in the articles of
incorporation of a close corporation? The three feature we said
are essential so it must be there. What other feature can you
add? It is provided under section 97
56
Section 97. Articles of incorporation. The articles of
incorporation of a close corporation may provide:
1. For a classification of shares or rights and the qualifications
for owning or holding the same and restrictions on their
transfers as may be stated therein, subject to the provisions of
the following section;
Ex. Only those persons who can trace their lineage by blood or
affinity to the Rodriguez-Gutierrez clan, you can provide for
that, a new qualification. And it may also provide for
restrictions on transfer as maybe stated therein.
2. For a classification of directors into one or more classes,
each of whom may be voted for and elected solely by a
particular class of stock; and
Ex. Suppose this comes from two lineages of families Gutierrez
and Rodriguez, you say that in the board of directors there
must be out of nine, 4 directors taken from the line of
Gutierrez and elected by the Gutierrez stockholders and 5
chosen from the Rodriguez line of elected by the Rodriguez
shareholder, you can provide for that.
3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
This is dangerous because the ordinary stockholders as stock
corporations, have sometimes difficulty in mustering the
minimum quorum. If you require a minimum you might not be
able to meet it.
What happens if you will not be able to meet the quorum?
Even if you continue to call, adjourn, then call, adjourn but still
cannot meet the quorum then the corporation is reduced to
paralysis, so its difficult.
xxx
The articles of incorporation of a close corporation may provide
that the business of the corporation shall be managed by the
stockholders of the corporation rather than by a board of
directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed to be directors
for the purpose of applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all
liabilities of directors.
The articles of incorporation may likewise provide that all
officers or employees or that specified officers or employees
shall be elected or appointed by the stockholders, instead of by
the board of directors.
No more board of directors, stockholders themselves, if you
just have 10 stockholders then, only the stockholders will
constitute and they run the corporation just like a partnership.
This is the particular feature that is the hybrid feature.
Here is a restriction on the restriction as to transfer shares
provided under Section 98
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Section 98. Validity of restrictions on transfer of shares.
Restrictions on the right to transfer shares must appear in the
articles of incorporation and in the by-laws as well as in the
certificate of stock; otherwise, the same shall not be binding
on any purchaser thereof in good faith. Said restrictions shall
not be more onerous than granting the existing stockholders or
the corporation the option to purchase the shares of the
transferring stockholder with such reasonable terms, conditions
or period stated therein. If upon the expiration of said period,
the existing stockholders or the corporation fails to exercise
the option to purchase, the transferring stockholder may sell
his shares to any third person.
Please do not confuse this with qualification of shareholders,
because you can see only the following can hold the shares
Gutierrez family, Rodriguez family, thats a qualification of a
stockholder.
Now, restriction as to transfer, you cannot transfer the shares
unless you first give the existing stockholders or the
corporation the right to purchase the shares, if they do not
exercise, then they can transfer this to any Gutierrez and
Rodriguez, thats the meaning of that. So, do not confuse
qualification with restriction.
Reasonable period of time, SC held that one month notice is
considered a reasonable period of time. If after one month
they failed to exercise, then you can sell to another qualified
Rodriguez or Gutierrez, even if he is not yet an existing
stockholder.
Section 99. Effects of issuance or transfer of stock in breach of
qualifying conditions. - xxx
This is a series of presumptions and this can be used only in
controversies.
1. If stock of a close corporation is issued or transferred to any
person who is not entitled under any provision of the articles
of incorporation to be a holder of record of its stock, and if the
certificate for such stock conspicuously shows the qualifications
of the persons entitled to be holders of record thereof, such
person is conclusively presumed to have notice of the fact of
his ineligibility to be a stockholder.
So, the stockholder will just simply be cancelled and a new one
will be issued to a qualified transferee. Muingon unya sya bayri
sa ko, now thats your problem because you are presumed to
be at fault, it is there in the stock certificate the qualifications
of the stockholder it should be a Gutierrez or Rodriguez unya
unsa man iyahang pangalan, Daguhoy man so not qualified,
you are presumed to be at fault.
2. If the articles of incorporation of a close corporation states
the number of 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 the stock to be held by more than such number of
persons, the person to whom such stock is issued or
transferred is conclusively presumed to have notice of this fact.
57
Again, as to the corporation. Now these are so called voluntary
transfers. If it is a voluntary transfer and there is a limit to the
number, not exceeding 20, you as a transferee must verify will
the transfer to me cause the number of shareholders to
exceed the limit, you must verify because it is there in stock
certificate. Now if you did not then you are presumed to be
negligent, the certificate issued to you will just be cancelled,
unya nibayad naman ko unsaon man nako pag kuha ug balik
sa bayad? Problema na nah nimo, because you are at fault.
What happens if the transfer is not voluntary, its not an
onerous transfer but a gratuitous transfer, such as when there
is a death of a decedent. For example, maximum number of
this close corporation 20 stockholders, then 1 stockholder dies.
The problem is he dies and he has a wife and 3 children where
the shares of this person is transferred. That is the issue. As of
now the SC has not yet given the answer because there is no
case yet.
I suspect that the equitable of that particular dilemma will be,
that the heirs will be given sufficient time to settle among
themselves who will remain as stockholder or they will
constitute themselves as another close corporation, so that all
of them will hold indirective title of the shares. Mag form sila
ug ilahang kaugalingon na close corporation, then those shares
will be transferred to the corporation, so it will still be 20
because they become one corporate person.
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 is conclusively presumed to have notice
of the fact that he has acquired stock in violation of the
restriction, if such acquisition violates the restriction.
4. Whenever any person to whom stock of a close corporation
has been 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 of the
corporation, or (b) that transfer of stock to him would cause
the stock of the corporation to be held by more than the
number of persons permitted by its articles of incorporation to
hold stock of the corporation, or (c) that the transfer of stock
is in violation of a restriction on transfer of stock, the
corporation may, at its option, refuse to register the transfer of
stock in the name of the transferee.
Again, this is because of the presumption.
5. The provisions of subsection (4) shall not be applicable if
the transfer of stock, though contrary to subsections (1), (2) or
(3), has been consented to by all the stockholders of the close
corporation, or if the close corporation has amended its articles
of incorporation in accordance with this Title.
6. The term "transfer", as used in this section, is not limited to
a transfer for value.
7. The provisions of this section shall not impair any right
which the transferee may have to rescind the transfer or to
recover under any applicable warranty, express or implied.
There is another feature of the close corporation. Survival of
pre-existing agreements before the incorporation. These pre-
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
existing agreements ** not as stockholders but as counter
parties in the agreement before they became stockholders.
This kind of agreement survive the incorporation of the parties
into a close corporation.
What are these agreements?
Section 100. Agreements by stockholders. -
1. Agreements by and among stockholders executed before
the formation and organization of a close corporation, signed
by all stockholders, shall survive the incorporation of such
corporation and shall continue to be valid and binding between
and among such stockholders, if such be their intent, to the
extent that such agreements are not inconsistent with the
articles of incorporation, irrespective of where the provisions of
such agreements are contained, except those required by this
Title to be embodied in said articles of incorporation.
So, even if the agreements are entered into under a separate
contract of instrument without any reference to the articles of
incorporation or the articles of incorporation are formed
without any reference as to those agreements, those
agreements survive. An example:
2. An agreement between two or more stockholders, if in
writing and signed by the parties thereto, may provide that in
exercising any voting rights, the shares held by them shall be
voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by
them.
What does that mean? We are two stockholders in a close
corporation and we entered into an agreement, alternate year,
I vote the totality of our shares, next year you vote the totality
of our shares, alternate voting, that survives, that is valid. This
year ako proxy nimo, next year ikaw na pud proxy nako,
indefinite. That is an agreement as to the voting rights.
3. No provision in any written agreement signed by the
stockholders, relating to any phase of the corporate affairs,
shall be invalidated as between the parties on the ground that
its effect is to make them partners among themselves.
For instance, there are two stockholders in a close corporation,
you are abroad and the other partner is here. For as long as
you are abroad when the dividend comes out, I receive the
dividends and I can invest it together with my dividends and
act as if I am managing it. What does that mean? That means
that there is a partnership between you two stockholders, as
long as this other stockholder is abroad.
Does the fact that it this two stockholders are constituted as
partners among themselves, does that invalidate their written
agreement? No, that is allowed.
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 conduct of the business and affairs of
the corporation as to restrict or interfere with the discretion or
powers of the board of directors: Provided, That such
agreement shall impose on the stockholders who are parties
58
thereto the liabilities for managerial acts imposed by this Code
on directors.
5. To the extent that the stockholders are actively engaged in
the management or operation of the business and affairs of a
close corporation, the stockholders shall be held to strict
fiduciary duties to each other and among themselves. Said
stockholders shall be personally liable for corporate torts
unless the corporation has obtained reasonably adequate
liability insurance.
Section 101, there are no directors because the corporation is
managed directly by the stockholders limited in number, then
there is no need to call a meeting of directors.
Section 101. When board meeting is unnecessary or
improperly held. - Unless the by-laws provide otherwise, any
action by the directors of a close corporation without a
meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto
is signed by all the directors; or
Papirmahon nalang nimo, this is the structuralization of what is
called table minutes, pro-forma minutes. Papirmahon lang ka
daan unya pasa daun ug resolution, walay meeting na
nahitabo.
2. All the stockholders have actual or implied knowledge of the
action and make no prompt objection thereto in writing; or
Wala sya na present sa meeting, wala sad sya nataga-I ug
notice, unya naay resolution dinha na pass nah, ignon nimo
copy received huh kahibalo naka ani, so naa naka knowledge.
Then later, oi! Gibaligya naman ni ninyo nga wala man ko
nisugot anah. Muingon daun ka, you have knowledge but you
did not said anything, and he says unsay knowledge nga wala
man kabalo anah. Then you will say nah ni pirma na gani ka
nga copy received.
The transaction of business with a little bit less formalities than
is required of a corporation.
3. The directors are accustomed to take informal action with
the express or implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the
action in question and none of them makes prompt objection
thereto in writing.
If a directors meeting is held without proper call or notice, an
action taken therein within the corporate powers is deemed
ratified by a director who failed to attend, unless he promptly
files his written objection with the secretary of the corporation
after having knowledge thereof.
New rules with regards to pre-emptive right in close
corporation
Section 102. Pre-emptive right in close corporations. The
pre-emptive right of stockholders in close corporations shall
extend to all stock to be issued, including reissuance of
treasury shares, whether for money, property or personal
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
services, or in payment of corporate debts, unless the articles
of incorporation provide otherwise.
You know this provision, the proof cited by some
commentators, that the ordinary stockholder in an ordinary
corporation, not a close corporation, does not have pre-
emptive right over the reissuance of treasury shares because it
is explicit here that close corporation stockholders have pre-
emptive right to disposition of the treasury shares. Because I
told you pre-emptive right says, issuance of shares and other
disposition of shares.
Power to deny pre-emptive right
Section 39. Power to deny pre-emptive right. All stockholders
of a stock corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right
is denied by the articles of incorporation or an amendment
thereto: xxx
The SC has not yet come up with an inquiry. Most
commentators will say, the stockholder now, has pre-emptive
right as to the new shares and treasury shares. Stockholders of
close corporation have pre-emptive right as to new shares and
reissuance of treasury shares.
Section 103. Amendment of articles of incorporation. Any
amendment to the articles of incorporation which seeks to
delete or remove any provision required by this Title to be
contained in the articles of incorporation or to reduce a
quorum or voting requirement stated in said articles of
incorporation shall not be valid or effective unless approved by
the affirmative vote of at least two-thirds (2/3) of the
outstanding capital stock, whether with or without voting
rights, or of such greater proportion of shares as may be
specifically provided in the articles of incorporation for
amending, deleting or removing any of the aforesaid
provisions, at a meeting duly called for the purpose.
Commentators say, that as far as a close corporation is
concerned, if they wish to amend the articles, it is only
amended in one way, that is, ratification vote of 2/3 of the
stockholders. Written assent is not one of those ways if it a
close corporation because, there is no provision here that says,
written assent rather it must be in a meeting duly called for
that purpose.
Section 104. Deadlocks. Notwithstanding any contrary
provision in the articles of incorporation or by-laws or
agreement of stockholders of a close corporation, if the
directors or stockholders are so divided respecting the
management of the corporations business and affairs that the
votes required for any corporate action cannot be obtained,
with the consequence that the business and affairs of the
corporation can no longer be conducted to the advantage of
the stockholders generally, the Securities and Exchange
Commission, upon written petition by any stockholder, shall
have the power to arbitrate the dispute. xxx
Section 104, Deadlocks, it explains why there are not too many
close corporation. It so dangerous to have close corporation,
59
why? Because the Securities and Exchange Commission
according to section 104, upon written petition by any
stockholder, shall have the power to arbitrate the dispute. If
there is an intra-corporate dispute, sulat lang ang stockholder,
takeover ang SEC.
xxx In the exercise of such power, the Commission shall have
authority to make such order as it deems appropriate,
including an order:
(1) cancelling or altering any provision contained in the articles
of incorporation, by-laws, or any stockholders agreement;
kuyaw kaau ang SEC, sya ra man ang mag amend, dili sya
stockholder, wala syay labot, dili sya ma prejudice pero maka
amend sya sa articles.
(2) cancelling, altering or enjoining any resolution or act of the
corporation or its board of directors, stockholders, or officers;
Can you imagine, he can countermand any decision of
stockholders
(3) directing or prohibiting any act of the corporation or its
board of directors, stockholders, officers, or other persons
party to the action;
(4) requiring the purchase at their fair value of shares of any
stockholder, either by the corporation regardless of the
availability of unrestricted retained earnings in its books, or by
the other stockholders;
The SEC can order the purchase of the disagreeing,
disgruntled stockholder by the corporation even if the
corporation does not have unrestricted retained earnings. This
is an exception to the general rule.
(5) appointing a provisional director;
Stockholders have to elect director, the commission who is not
stockholder can appoint a director
(6) dissolving the corporation; or
It can even order the dissolution of the corporation
(7) granting such other relief as the circumstances may
warrant.
This is the overall covering providing power of the commission,
granting such other relief as the circumstances allow. No
wonder there are no close corporations because its very
difficult.
The corporation law, if you use the corporate vehicle can only
enhance whatever unit you have, if you do not have it, it will
not substitute for the unit that you do not have.
Here is another provision, section 105
Section 105. Withdrawal of stockholder or dissolution of
corporation. In addition and without prejudice to other rights
and remedies available to a stockholder under this Title, any
stockholder of a close corporation may, for any reason, compel
the said corporation to purchase his shares at their fair value,
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
which shall not be less than their par or issued value, when the
corporation has sufficient assets in its books to cover its debts
and liabilities exclusive of capital stock: Provided, That any
stockholder of a close corporation may, by written petition to
the Securities and Exchange Commission, compel the
dissolution of such corporation whenever any of acts of the
directors, officers or those in control of the corporation is
illegal, or fraudulent, or dishonest, or oppressive or unfairly
prejudicial to the corporation or any stockholder, or whenever
corporate assets are being misapplied or wasted.
For any reason he can compel the purchase of his share, ang
appraisal right niya walay kinahanglan nah rason, kay for any
reason man. For any reason he can ask for the dissolution,
bungkag na hinuon, dili lang iyaha gub-on pa niya ang tibuok
corporation. What is the reason? Any reason, nasungha na ko
sa inyohang nawong.
Close corporation an unsuccessful experiment of the law to
combine partnership and corporation, because I have not seen
this work, this close corporation.
FEB. 5, 2016 (DMSolano)
I would like to give you a rundown on the tax considerations of
mergers and acquisitions. And these all here plus the latest
decided case of Commissioner of Internal Revenue vs.
Filipinas Shell Petroleum Corporation promulgated on
September 29, 2014.
When there is a transaction by which it is not a complete
merger in other words, the corporation merely purchases all
the property and assets of the target corporation but instead
of paying cash they pay shares of stock and the two corporate
entities still survive, the commissioner was of the belief that it
is not a merger and therefore it is subject to tax.
The Supreme Court says NO it is not subject to tax so tikakang
na sad si Henares. Henares does not give a damn. She collects
the tax ____ forbearances sa court, she just says tax credit na
lang. Government will already keep the cash, your future tax
liabilities will be just deducted from the cash that I am
supposed to return to you because the collection of the tax is
not warranted by law. She has already collected and satisfied
her quota. So the ruling of the court is even if it is not a
complete and whole merger as provided by the Corporation
Code namely the constituent corporation lose its corporate
existence and the surviving constituent corporation remains or
a new consolidated corporation remains and the others die
that is true merger. Supreme Court says even if it is not a true
merger, Filipinas Shell buys Filipinas Petroleum Oils assets
Filipinas Petroleum Oil continues to exist, its not the merger
that is talked of here. If what happens is there a payment by
way of shares of stock not cash so theres no realized income.
Therefore there is no tax. That means there is no doc stamps.
In the deed of transaction, there is no documentation. There is
no capital gains tax. You have to follow strictly Section 40
paragraph C of NIRC of the 1997.
60
So here it is, read it because it is the soul of mergers and
consolidation. Mas makahinumdum ka sa merger kung
maconnect nimo sa taxation. Mas makahinumdum ka.
So alright we finish merger and consolidation. We also finish
appraisal right. We are now in non-stock corporation. We
finished that also non stock corporations. We finished also
closed corporations.
Where are we now? special corporations. What so special
about these? Actually they are species of non-stock non-profit
corporation.
The first special corporation, educational corporation is
governed by special laws and by the general provisions
of the Corporation Code.
So you cannot incorporate a school unless the DECS endorses
your incorporation. That is one of the Articles of Incorporation,
it must be endorsed by the proper government entity that has
oversight powers of this special corporation. So you procure an
endorsement by the CHED if it is higher education, college and
above. You procure an endorsement from the DECS if it is
primary education, elementary and now it is K to 12. Actually
the classification there in the US review , there is elementary
up to K6 , then there is the middle school which K7 to K8 and
then there is the high school, thats why its called high
because it is now K9 to K12. Four years, 9, 10,11,12. For those
schools, you need a DECS to endorse it. How about this pre-
school? You do not need any endorsement because it is not
included in the normal pathway education.
That is why you have all sorts of pre-school all over the place,
its mushrooming all over the place, every Tom, Dick & Harry
puts a playschool, a kid school. The more highfalutin the
name, it seems to be the name that justifies its existence. We
have one school going to the Shrine, one of these days, I want
to file a petition removing that school from that place. And
there is already a president to that school, ruling.
***Stories about school in Alabang, from being a house it was
transformed into full blown school. The residents in Alabang
where the school was located filed a petition to transfer the
school to other place because it was forming a school zone out
of the residential area which caused heavy traffic especially in
the early morning. Finally, the Supreme Court ordered that the
school either has to close or transfer to other area. ***
You do not need endorsement for pre-school, pre Grade 1. You
do not need endorsement to open an educational institution
because technically speaking, it is not yet an educational
institution. Grade 1 is an educational institution. It says except
upon favorable recommendation of the Ministry of Education
and Culture, the Securities and Exchange Commission shall not
accept or approve the Articles of Incorporation and by-laws of
any educational institution. This law was passed Batas
Pambansa Bilang Anim na put walo (BP Blg. 68), this law was
passed before the formation of the CHED, now it is the CHED
that has oversight over tertiary level institutions with the
exception of a law school.
A law school is now under the oversight of the LEB (Legal
Education Board). You know that LEB took 10 years to be
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
formed. Why? It requires members to be appointed by the
Supreme Court and the Supreme Court refused to constitute
an appointee board of the LEB, why? Because the original law
creating the LEB, you might want to remember the name of
Senator Lina, the Laguna senator, who suddenly became an
expert in legal education. He wanted to and he incorporated in
the law that there must be a representative from the law
students. And the Supreme Court did not like that. According
to the Supreme Court, under the Constitution, it is the
Supreme Court that is given the task of determining who can
be admitted to the practice of law including legal education.
Why is the one that is going to be tested, why is he having a
hand in his own testing so for that reason the Supreme Court
refused to constitute the LEB, that is the reason. Now it has
been amended and the student representative has been
removed that is the only time when the Supreme Court
constituted LEB. Natangtang naman tong student by an
amendment introduced by the court. So now the Supreme
Court, we have appointed the LEB.
So for something like five years, there was a moratorium on
the granting of permits to law schools. After five years when
the system was again opened for the formation of law schools,
all of a sudden there was a mushrooming of law schools all
over the place. And last year was the fifth year of that new
freedom to allow law schools to be established. How many
signed up to take the bar examination last year, the highest
number ever six thousand people, six thousand applied to take
the bar examination.
***Stories about Justices Sarmiento and Leonens beliefs that
only UP graduates are worthy to become lawyers***
The LEB people are saying theyre going to be strict. If two
successive years, nobody passes from your law school, you are
already on probation. Third time, nobody passes, then you can
no longer enrolled new students, you just have to finish
this____. Paingun ka na ba na sira na. So what will be
operative with you is from 2nd year up to 4th year. You cannot
accept new students anymore. So you still have three years.
Naa gani makapasa usa, balik na sad pagka probation. Thats
how it is. Thats the same thing with accountancy. Their
problem was how do we close these accountancy schools that
have no graduates that are successful in passing CPA board
exams, daghan man kayo nya di man sila makasira so they
instituted a rule. The accountancy now is a separate college
and it is no longer chairman of the accountancy department
but dean. She must have a PhD. Its hard to find PhD now and
accountancy is now five years. That is really the more difficult
exam to pass considering the passing percentage, naa naman
na sa 15, 16, taas na 19%.
***Father says, if you cannot produce passers, then you have
to be closed immediately because this is a professional track.
You let loose somebody to the public and he could make
mistakes. The public will suffer. So no one has the benefit of
the doubt to practice profession. You have to prove that you
can competently practice the profession. Knowledge is not
presumed, ignorance is presumed.***
61
Now, you know very well that educational institution must be
100% Filipino. Why is it that? I do not know. Mao nay kinadag-
ang binuang. Because you are not a Filipino, you cannot
teach. You cannot educate. Pagka way hinundang. Thats why
its crucial. Father Macnamara, PhD in Astophysics, University
of Colorado. Di na sya katudlo kay di man sya Filipino. Pagka
way hinundang. PagFilipino citizen untaon sya aron makatudlo
sya. It did not make him more qualified because he is Filipino.
These are policies in law which as soon as possible should be
eliminated.
Now two kinds of corporation that are educational:
1) Stock corporation and
2) Non-stock non-profit corporation.
Stock corporation or profit, you do not enjoy tax exemption
that are enjoyed by non-stock non-profit educational
corporations. What are those? They are tax exempt from real
property tax, income tax, tariffs and assessments (you import
some goods, you are exempt from paying tariffs if you are
non-stock non-profit). Schools must be profitable. Why?
Because all the big tycoons in the Philippines are now engaged
in the business of running schools. Henry Sy, reputed to be
the richest person in the Philippines to the tune of something
30 billion US Dollars net worth is now the controlling owner of
National University, its going to be a sport powerhouse.
***Stories about scouting by NU of taller players thru the
assisstance of SMs security guards all over the Philippines***
Lucio Tan, what is the University of Lucio Tan, University of
the East is controlled by Lucio Tan. Mr. Yuchengco, controlling
owners of RCBC, Malayan Insurance, what is his school?
Mapua who would have change the name of Mapua if the
alumni had not raised an alarm. He wanted to change into
Malayan University. The Thing Bak group is now into
university, they just bought Centro Escolar University and so
on. Everybody thinks running the university is profitable, stock
and profit university.
If you are stock and profit, then you have to pay taxes, real
property tax, income tax. What if the school engages in
business like this university, it is a non-stock non-profit then it
has a food court, is the income of the food court just like the
tuition fees of students exempt from tax? That is the issue.
The ruling of the BIR was secured by the school after putting
up the guidelines that none of the income of the food court or
whatever proprietary activity in the school goes to any other
purpose than scholarship, money for scholarship. So it is
accounted for the books and it should go to scholarship
because otherwise there are so many tax implications.
Lucio tan says Philippine Airlines may be losing but the
corporations of Lucio tan are not losing. The corporation that
supplies foods to Philippine Airlines is not losing. The
corporation that supplies spare parts to its planes is not losing.
Many other things that supply its airlines are not losing. The
airlines is losing. You are not losing too much if it is traded in
the stock market because you have 50%+1 you can control it.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016

Here it says, the board of trustees of educational institution ***Stories of Father about his experience with a cooperative
organized as non-stock corporations shall not be less than five whose properties such as money and piggery were run away
(5) nor more than fifteen provided however that the number of and the Samahan in Ateneo whose funds were not properly
trustees shall be in multiples of five. Why? Because they are accounted for and remained unaudited, that these things arose
arranged into three groups. One fifth of the number, their term due to absence of control.***
expires every year. So there is always a hold-over. Non-stock
If you are educational institution and you are a stock
non-profit, this is a Jesuit university, how do the Jesuits control
corporation, then the number of terms of directors should be
Ateneo de Davao University? The board of trustees is 50%+1,
governed by the provision on Stock corporation. Technically
Jesuit, the rest are lay, non Jesuit. But who elects board of
speaking, UM has a better cash flow than this institution but
trustees? The members of the corporation. The members of
because it is a stock corporation, not all of that cash goes into
the corporation except for those of the board are all Jesuits.
education. That is why it is into real property, Baguio in other
Because you cannot be a member of the board of trustees
places. That is why it used to have a van. That is why it has
unless you are a member of the corporation. Remember you
other businesses. In US, if you open up a school unless you
cannot be elected as trustee unless you are a member in the
are a specialized school like Catla, things of that nature for
same fashion that you cannot be elected as a member of the
review. If you are a university, you can only be a non stock
board of directors unless you are a stockholder holding at least
non-profit institution. You are a university in the US, you are
one share. So how are the members chosen? In the Articles of
either government or in private and you are non stock. Then
Incorporation of Ateneo, the members are elected by the
they have system, donations are not only tax free, they are tax
members but only upon nomination by the Provincial Superior
deductible. So they have endowment funds. Not the oldest
of the Jesuits in the Philippines. First, he has to be nominated
schools have the biggest endowment funds because the
by the Provincial Superior then he is elected by the members,
biggest endowment funds belong to the universities in Texas,
then he becomes a member. Thats how Jesuits control Ateneo
not Harvard, not MIT but Texas. Where most millionaires are
de Davao University, an educational institution that is non-
because of oil. The problem is if you are a sectarian university,
stock non-profit. Timani na kay, you might be asked to form a
you are religious unless you shed off your religious charter you
non-stock non-profit institution. The worst thing that can
cannot receive government research funding. You have to
happen to a non-stock non-profit corporation is nobody is in
cease to be sectarian because they believe that if you are a
control. Unsa may imong gibuhat, the more money it has, the
sectarian, you cannot truly do research. Kung religious ka ana,
more dangerous it becomes. Its like letting loose an elephant
you cannot do research that is the bias of the history of the US
in a China shop. So as I say it again and again to you,
which is really dominated by the wasp. What is wasp? Wasp in
corporation is all about control, who is in control and your job
the US, this white anglo-saxon protestant that is the history of
as legal counsel is to safely ensure that the control is set first
the US.
in the statute, its articles and by-laws, it is there. Kalisud ana
kung way control, unsaon mana. That is why no cooperative is Second special corporation is religious corporation
successful until the control is safely set. The moment the asset again divided into two kinds:
which is 5 million, wa na. Its a dangerous entity. Haya na na
ma wagtang na sad kay wa may control. If you take a look at 1) corporation sole and
all the cooperatives that are 10 million and above in assets, 2) religious societies.
they are not true cooperative. They are affiliates of existing
permanent corporations. Example, Ateneo Credit Cooperative. Corporation sole, one person, corporation sole is the holder of
Tan-awa na, 10 million rana ang asset ana, one of their the office, religious societies are constituent corporations.
valuable assets is the lot across the street, rented out for a Corporation sole is an anomaly because its only one therefore
quarter, unsa may eatery dinha? Pareho na presyo ini taal ini. why you form a corporation if you are only one.
Thats one of their assets. Their assets more than 10 million. Is
What is the Articles of Incorporation (AOI) like in a corporation
that a true cooperative? No, its not true, people are not
sole? The regular AOI is KNOW ALL MEN BY THESE
paying their loans out of the fear in their heart, no. Its
PRESENTS: The undersigned all residents of the Philippines,
deducted at source from their salaries. So Ateneo de Davao
have on this day incorporated this corporation. Since you are
University is their collector. Its not a true cooperative,
only one, what does the AOI of a Corporation Sole looks like?
mamayad sa tao tungod sa spirit of cooperation. Di na tinuod.
It is actually an affidavit, that is what Section 111 says:
Makaikyas pa na sila di mubayad, di na mubayad. Another big,
Davaos Fruits Cooperative, twenty million in assets. Ingon Sec. 111. Articles of incorporation. - In order to become a
ka______, deduction sa salary tanan. Nakasandal sa pader, corporation sole, the chief archbishop, bishop, priest, minister,
another institution. Ingon ka ng way institution, give an rabbi or presiding elder of any religious denomination, sect or
example, Cooperative Rural Bank of Davao City. Hain na mana church must file with the Securities and Exchange Commission
ron. Wana, tan-awa dako kaayo na building nila nisirado. articles of incorporation setting forth the following:
Wana, gigaga ng kwarta. Bangko pa na, naa pay oversight sa
BSP. Another big cooperative, Cooperative Rural Bank of 1. That he is the chief archbishop, bishop, priest, minister,
Tagum, wagtang sad nisirado na. Because no one is in control. rabbi or presiding elder of his religious denomination, sect or
Do not toofoo(?) control. Im telling you because ni agi ko church and that he desires to become a corporation sole;
ana,hastang.

62
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
2. That the rules, regulations and discipline of his religious
denomination, sect or church are not inconsistent with his
becoming a corporation sole and do not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi
or presiding elder, he is charged with the administration of the
temporalities and the management of the affairs, estate and
properties of his religious denomination, sect or church within
his territorial jurisdiction, describing such territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of
chief archbishop, bishop, priest, minister, rabbi of presiding
elder is required to be filled, according to the rules, regulations
or discipline of the religious denomination, sect or church to
which he belongs; and
5. The place where the principal office of the corporation sole
is to be established and located, which place must be within
the Philippines.
The articles of incorporation may include any other provision
not contrary to law for the regulation of the affairs of the
corporation.
Nationality of a Corporation Sole
Now, what is the nationality of a corporation sole? Is it
determined by the nationality of the chief archbishop or
bishop? Or is determined by the nationality of the person who
incorporates himself as a corporation sole?
That is the issue in the landmark case of Roman Catholic
Apostolic Administrator of Davao vs. The Land Registration
Commission and the ROD of Davao City. Read that. The
Roman Catholic Apostolic Administrator of Davao City at that
time was Clovis Thibault. Now, he is an old Canadian bishop
who belongs to the French speaking Canadians, so Montreal,
that part. Thibault was brought here, he was appointed
apostolic administrator. He organized a seminary for their
future priests. Now, the old property of the church was the
property in Bangkerohan where UIC is now. He said that he
cannot take his seminarians there because it is in the heart of
the city, he wants them outside. The sisters have this property
from the Sorianos in Catalunan Grande. They decided to
exchange property. The sisters got the property in
Bangkerohan and the diocese got the property in Catalunan
Grande. They executed a Deed of Exchange. The sisters went
to the ROD, they registered the property, and there was no
problem. Now, when the lawyer of Thibault went to register
the property in the name of the Roman Catholic Apostolic
Administrator of Davao, the ROD refused. The Director of the
ROD at that time was the mother of Judge Quitain who
belonged to the first graduates of law at UP. She was a good
catholic but she believed that because the corporation sole is
not Filipino, it is not qualified to hold title to a property. So,
Thibault went up to the Land Registration Commission. The
Commission said that the ROD was correct. So they went to
the SC, question of law, and what did the SC say? The bishop,
archbishop or head who has constituted himself as a
corporation sole does not own the property. He is a mere
63
administrator. Who owns the property? It is the congregation.
How is the nationality of a corporation sole determined? It is
determined by the nationality of the majority of the
corporation. If the majority of the citizens of the congregation
is Filipino, then it can hold title to real properties. The SC takes
judicial notice that the majority of the Catholics in Davao are
not monkeys but Filipinos. Therefore, it can be registered
under the name of the Roman Catholic Apostolic Administrator
of Davao even if the corporation sole office is held by a
Canadian national.
Then there is a long disposition of the SC about the
importance of the corporation sole not only as an administrator
but as a fulcrum for succession of properties. If the owner is a
congregation and there are no corporation sole, how is that
passed? Di bahin-bahinon lang na sa congregation, dili ra
kaabot tig ang isa. That is why there is the Roman Catholic
Bishop who is the fulcrum for succession. It will continue to
remain a communal property because it is under the name of
the corporation sole.
So, acquisition and alienation of property under Section 113:
Sec. 113. Acquisition and alienation of property. - Any
corporation sole may purchase and hold real estate and
personal property for its church, charitable, benevolent or
educational purposes, and may receive bequests or gifts for
such purposes. Such corporation may sell or mortgage real
property held by it by obtaining an order for that purpose from
the Court of First Instance of the province where the property
is situated upon proof made to the satisfaction of the court
that notice of the application for leave to sell or mortgage has
been given by publication or otherwise in such manner and for
such time as said court may have directed, and that it is to the
interest of the corporation that leave to sell or mortgage
should be granted. The application for leave to sell or
mortgage must be made by petition, duly verified, by the chief
archbishop, bishop, priest, minister, rabbi or presiding elder
acting as corporation sole, and may be opposed by any
member of the religious denomination, sect or church
represented by the corporation sole: Provided, That in cases
where the rules, regulations and discipline of the religious
denomination, sect or church, religious society or order
concerned represented by such corporation sole regulate the
method of acquiring, holding, selling and mortgaging real
estate and personal property, such rules, regulations and
discipline shall control, and the intervention of the courts shall
not be necessary.
The corporation sole must first go to the RTC of the province
or place where the property is situated to ask permission to
sell, mortgage, or otherwise dispose of the property. The court
determines whether it is favourable or against the corporation.
Exception? Unless the laws of the particular church gives the
bishop, priest, minister, or rabbi the authority to do so without
need of consultation.
I have encountered a lawyer in one of these banks, he
probably knows his corporation code from the book. So, he
disapproves a mortgage of a property of the diocese because it
did not undergo publication, court order, etc., under Section
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
113. However, if the rules, regulation and discipline of the
religious denomination, sect or church, religious society or
order concerned represented by such corporation sole regulate
the method of acquiring, holding, selling and mortgaging real
estate and personal property, such rules, regulations and
discipline shall control, and the intervention of the courts shall
not be necessary.
*Father talking about the long history of investiture
controversy and the origin of the corporation sole
The origin of corporation sole is Napoleon Bonaparte.
Napoleon Bonaparte provided for the corporation sole in the
Napoleon Code and because it is the basis of the Civil Code,
then, it was carried to common law practice and Philippine
practice. Napoleon, with all his powers, did not oppose or go
head to head against the Church. He said one less enemy is
good enough for me. He established the Corporation Sole
which is exempt from the formalities of the Corporation Law.
Legally, it does not make sense. Unsaon man na
pagkacorporation nga isa lang man ka tawo? You incorporate
only one? That is a contradiction in terms. Pareha ra na sa
Liwalwal. Mag-ingon sila, corpo man na pero dili na corporation
ha!
Now, dissolution of the corporation sole:
Section 115. Dissolution. A corporation sole may be
dissolved and its affairs settled voluntarily by submitting to the
Securities and Exchange Commission a verified declaration of
dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by
the particular religious denomination, sect or church;
4. The names and addresses of the persons who are to
supervise the winding up of the affairs of the corporation.
Upon approval of such declaration of dissolution by the
Securities and Exchange Commission, the corporation shall
cease to carry on its operations except for the purpose of
winding up its affairs.
Can a corporation sole be dissolved by creditors? Yes. Why
not? But that would be in accordance with FRIA, the new law,
Financial Rehabilitation and Insolvency Act of 2010.
Now, lets go to religious societies.
Section 116. Religious societies. Any religious society or
religious order, or any diocese, synod, or district organization
of any religious denomination, sect or church, unless forbidden
by the constitution, rules, regulations, or 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 vote at a meeting called for the purpose of at
least two-thirds (2/3) of its membership, incorporate for the
administration of its temporalities or for the management of its
64
affairs, properties and estate by filing with the Securities and
Exchange Commission, articles of incorporation verified by the
affidavit of the presiding elder, secretary, or clerk or other
member of such religious society or religious order, or diocese,
synod, or district organization of the religious denomination,
sect or church, setting forth the following:
1. That the religious society or religious order, or diocese,
synod, or district organization is a religious organization of a
religious denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have given
their written consent or have voted to incorporate, at a duly
convened meeting of the body;
3. That the incorporation of the religious society or religious
order, or diocese, synod, or district organization desiring to
incorporate is not forbidden by competent authority or by the
constitution, rules, regulations or discipline of the religious
denomination, sect, or church of which it forms a part;
4. That the religious society or religious order, or diocese,
synod, or district organization desires to incorporate for the
administration of its affairs, properties and estate;
5. The place where the principal office of the corporation is to
be established and located, which place must be within the
Philippines; and
6. The names, nationalities, and residences of the trustees
elected by the religious society or religious order, or the
diocese, synod, or district organization to serve for the first
year or such other period as may be prescribed by the laws of
the religious society or religious order, or of the diocese,
synod, or district organization, the board of trustees to be not
less than five (5) nor more than fifteen (15).
So, youre religious society members, you form yourselves into
a corporation, just like a non-stock non-profit corporation, 2/3
of the members vote.
Normally, these are new religious groups because the old
ones, they are still corporation sole. Originally, in the beginning
of a corporation sole, the chief archbishop submits this
affidavit, I am the duly appointed xxx. How do you prove
that you are duly appointed?
1. You attach to this affidavit the appointment, if it is in Latin
you also attach a translation of the appointment.
2. You also attach the affidavit of the translator to the effect
that he knows how to translate and that his translation is
a true and faithful rendering of the original appointment in
Latin.
Now, mamatay napud tong original, isubmit nasad nimo sa
SEC kadtong bag-o nga appointment together with the
translation and the affidavit of the translator. That is how it is
done.
Now, if you are the son of god and you want to constitute
yourself as a corporation sole, what happens? You put in your
affidavit that I am the appointed son of God. Ha? Unsa man
imong appointment ibutang dinha? Ha? You try to find out
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
whether Quibuloy is a corporation sole or a corporation
religious society.
So, we are finished with religious corporation, educational
corporation. Now, we are going to dissolution.
DISSOLUTION
There are two (2) kinds of dissolution:
1. Voluntary Dissolution
2. Involuntary Dissolution
In voluntary dissolution, the one who files is the
corporation thru its BOD. If it is involuntary dissolution,
who files? It is the creditors but sometimes it is the Solicitor
General in a quo warranto proceeding, Sec. 5 of PD 912-A. So,
the SolGen can also procure your dissolution for serious
violation of the Corporation Law, etc. And the proceeding is
called a quo warranto proceeding.
Do not confuse dissolution with rehabilitation or declaration of
bankruptcy. When you are declared bankrupt, you have no
money, you are stripped with all your assets but you still have
the corporate franchise, you still exist as a corporation, and,
just like a natural person who has been declared bankrupt, you
can start anew if the banks believe in you again and the
investing public trusts you again with new money. In
dissolution, who declares that you are dissolved? The SEC. The
moment the SEC dissolves you, it has to pass it on to the
regular courts because after the declaration of dissolution,
what follows is liquidation. Why cant the SEC also take charge
of the liquidation? Because the SEC is not a forum of general
jurisdiction. It only has jurisdiction over the contract of
incorporation, it does not have jurisdiction over the contract of
sale, the contract of exchange, the contract of lease, all of
which, probably, the corporation to be dissolved is a party to.
Only the courts can look into these contracts, swipe out the
properties of the corporation, sell the same and, with the
proceeds, distribute the proceeds in accordance with the rules
on concurrence and preference of credits. Concurrence and
preference of credit is just the hierarchy of the creditors, who
is the most senior, who is the next in line, who is junior, who is
ordinary creditor. Remember, in concurrence and preference of
credits, it does not change the number one creditor. Who is
that number one? The State, it will always collect taxes even if
nothing is left for the others. The State is the first because its
claim is not based on contract, it is based on sovereignty.
No dissolution can occur without the assistance of the court.
The SEC can only declare dissolution once the petition for
dissolution is found to be sufficient in form and substance.
What is the form? The form that is needed is:
1. In the provision (?);
2. Attached to it is the list of creditors;
3. Proof that the creditors have been notified;
4. Proof that the BIR is informed because there is a service
copy to the BIR of the petition. Tagaan nimo ug copy ang
65
BIR nga naa na kay pending application for clearance.
Mao nay pangitaon, nibayad ka na ba sa BIR.
5. Proof that the local government is informed. The BIR can
give you clearance that you have paid taxes but only from
the NIRC. There are other taxes, there are taxes coming
from the LGC. What are these? Ha? Real property taxes in
the LGC! The real property taxes are collected by the city
government. They are not collected by the BIR. So the
local government shall also be informed so that you will be
given clearance nga nakabayad ka na.
Then the final order is you are discharged. If it is dissolution,
after liquidation, the Court issues an order dismissing the
petition for dissolution. Mao ra, human na. Mao na ang final
order. These are all petitions and proceedings in rem, binding
against the whole world. Naa may publication.
Section 118. Voluntary dissolution where no creditors
are affected. If 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 the board
of directors or trustees, and by a resolution duly adopted by
the affirmative vote of the stockholders owning at least two-
thirds (2/3) of the outstanding capital stock or of at least two-
thirds (2/3) of the members of a meeting to be held upon call
of the directors or trustees after publication of the notice of
time, place and object of the meeting for three (3) consecutive
weeks in a newspaper published in the place where the
principal office of said corporation is located; and if no
newspaper is published in such place, then in a newspaper of
general circulation in the Philippines, after sending such notice
to each stockholder or member either by registered mail or by
personal delivery at least thirty (30) days prior to said meeting.
A copy of the resolution authorizing the dissolution shall be
certified by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation. The
Securities and Exchange Commission shall thereupon issue the
certificate of dissolution. (62a)
Section 119. Voluntary dissolution where creditors are
affected. Where the dissolution of a corporation may
prejudice the rights of any creditor, the petition for dissolution
shall be filed with the Securities and Exchange Commission.
The petition shall be signed by a majority of its board of
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 shall set forth all claims and
demands against it, and that its dissolution was resolved upon
by the affirmative vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or by at
least two-thirds (2/3) of the members at a meeting of its
stockholders or members called for that purpose.
If the petition is sufficient in form and substance, the
Commission shall, by an order reciting the purpose of the
petition, fix a date on or before which objections thereto may
be filed by any person, which date shall not be less than thirty
(30) days nor more than sixty (60) days after the entry of the
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
order. Before such date, a copy of the order shall be published
at least once a week for three (3) consecutive weeks in a
newspaper of general circulation published in the municipality
or city where the principal office of the 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
be posted for three (3) consecutive weeks in three (3) public
places in such municipality or city.
Upon five (5) days notice, given after the date on which the
right to file objections as fixed in the order has expired, the
Commission shall proceed to hear the petition and try any
issue made by the objections filed; and if no such objection is
sufficient, and the material allegations of the petition are true,
it shall render judgment dissolving the corporation and
directing such disposition of its assets as justice requires, and
may appoint a receiver to collect such assets and pay the
debts of the corporation. (Rule 104, RCa)
This distinction - Voluntary dissolution where no creditors
are affected and Voluntary dissolution where creditors are
affected wala na. Whether you have creditors or not, you
still have to publish to let everyone know that you are
committing suicide.
Within three years after the time when it would have been so
dissolved, you have to liquidate.
Section 122. Corporate liquidation. Every corporation
whose charter expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless
be continued as a body corporate for three (3) years after the
time when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and enabling it
to settle and close its affairs, to dispose of and convey its
property and to distribute its assets, but not for the purpose of
continuing the business for which it was established.
At any time during said three (3) years, the corporation is
authorized and empowered to convey all of its property to
trustees for the benefit of stockholders, members, creditors,
and other persons in interest. From and after any such
conveyance by the corporation of its property in trust for the
benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the property
terminates, the legal interest vests in the trustees, and the
beneficial interest in the stockholders, members, creditors or
other persons in interest.
Upon the winding up of the corporate affairs, any asset
distributable to any creditor or stockholder or member who is
unknown or cannot be found shall be escheated to the city or
municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed
by this Code, no corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of
all its debts and liabilities.
What happens if, after three years, nakadaog ug kaso to
recover property of a corporation. What happens? The SC said,
66
the lawyer handling the case is a de facto receiver of the
dissolved corporation after the 3-year liquidation period.
Please do not confuse it with the end of the term of the
corporation. Pagka end sa term sa corporation, it still has 5
years to liquidate its assets. (cf: Section 11)
Section 11. Corporate term. A corporation shall exist for
a period not exceeding fifty (50) years from the date of
incorporation unless sooner dissolved or unless said period is
extended. The corporate term as originally stated in the
articles of incorporation may be extended for periods not
exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance with
this Code; Provided, That no extension can be made earlier
than five (5) years prior to the original or subsequent expiry
date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Securities and
Exchange Commission.
Now, according to the SEC Opinion of July 5, 1979, what is
needed in liquidation are the following:
1. directors certification that the vote has been
taken for the dissolution, absolute majority of the
board;
2. certification that no right of the creditors has
been affected;
3. list of creditors;
4. consent of the creditors to the dissolution;
5. affidavit of stockholders that there has been a
valid meeting and there has been a vote of 2/3;
6. latest balance sheet;
7. notice of dissolution;
8. publishers affidavit that it has been published;
9. BIR Tax Clearance
So many requisites in dissolution. Just remember, it is the
courts that liquidates, not the SEC.
So what is left? Foreign Corporations and Miscellaneous
Corporations.
FOREIGN CORPORATIONS
Foreign Corporations are not the same as the foreign
corporations in the Constitution. Foreign corporations are
meant those incorporated under the laws other than Filipinos.
So you could be all Filipinos but you are still a foreign
corporation. Because you are foreign, then, to be able to do
business in the Philippines you must obtain license to do
business.
Then there is the exception of the Isolated Transaction
Rule. If you are to do just one transaction, you are considered
to be doing business. If you are doing business without a
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
license, you can be sued but you cannot sue in the Philippines.
The trouble is if you obtain a license to do business in the
Philippines, you must put up two kinds of bonds primary
bond and secondary bond. A bond to be able to be allowed, it
must be one that increases with the increase in your revenues.
That is why, very few apply as foreign corporations.
Foreign corporations that own shares with local corporations,
that is not yet doing business, but if you have a seat in the
board, that is already doing business. So you have to register.
February 10, 2016 (ELG)
I am giving you a copy of this July 10, 2014 Securities and
Exchange Commission Office of the General Counsel Opinion
No. 14-18. The opinion is to the effect that a religious
corporation, whether a corporation sole or a corporation
society is not required in the articles of incorporation to
provide for a corporate term; hence, the interpretation is that
the religious corporation has no term, but is allowed by law to
exist, not just for 50 years but in perpetuity. This is the opinion
of the Office of the Solicitor General citing previous opinions.
The one who asked for an opinion here is the Iglesia ni Cristo.
And they cite an opinion which is 1995, an opinion addressed
to the United Evangelical Church of the Philippines and a SEC
Opinion dated 15 May 1991, addressed to Atty. Eduardo D.
Estorres, one of our alumnus who asked also for an opinion.
So, if you are a religious corporation, you exist in perpetuity,
you are not required under Title XIII to put a term in your
articles of incorporation. If you put a term, then you are bound
by it.
While the present Corporation Code provides for a term for
corporation in general, this does not apply to religious
corporations. The Corporation Code has specific provisions for
religious corporations set out in Title XIII on special
corporations, particularly in Sections 110 and 116. Both of
which, do not provide for a term of existence of religious
corporations, whether classified as corporation sole or
corporation society. The law never intended to limit the
corporate life of religious corporations; hence, they may be
allowed to exist perpetually. It must also be noted that
religious corporations may limit their corporate term by
providing a specific term in their articles of incorporation.
However, absent such specification, it shall be understood that
the corporation intended to exist for an indefinite period.
Now the old opinion says that even if you have a corporate
term, and you are a religious corporation, you can still exist
perpetually beyond your term. That was an old opinion, 1995,
1991, 1981. Now, there is a change here. If you put a term,
you are bound by the term, so you might as well not put any
term. Pay attention to this because very few notice.
Section 110. Corporation sole. For the purpose of
administering and managing, as trustee, the affairs, property
and temporalities of any religious denomination, sect or
church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi or other presiding
67
elder of such religious denomination, sect or church.
Section 116. Religious societies. Any religious society or
religious order, or any diocese, synod, or district organization
of any religious denomination, sect or church, unless
forbidden by the constitution, rules, regulations, or 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 vote at a meeting called for the
purpose of at least two-thirds (2/3) of its membership,
incorporate for the administration of its temporalities or for
the management of its affairs, properties and estate by filing
with the Securities and Exchange Commission, articles of
incorporation verified by the affidavit of the presiding elder,
secretary, or clerk or other member of such religious society
or religious order, or diocese, synod, or district organization
of the religious denomination, sect or church, setting forth
the following:
1. That the religious society or religious order, or
diocese, synod, or district organization is a religious
organization of a religious denomination, sect or
church;
2. That at least two-thirds (2/3) of its membership
have given their written consent or have voted to
incorporate, at a duly convened meeting of the
body;
3. That the incorporation of the religious society or
religious order, or diocese, synod, or district
organization desiring to incorporate is not forbidden
by competent authority or by the constitution, rules,
regulations or discipline of the religious
denomination, sect, or church of which it forms a
part;
4. That the religious society or religious order, or
diocese, synod, or district organization desires to
incorporate for the administration of its affairs,
properties and estate;
5. The place where the principal office of the
corporation is to be established and located, which
place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees
elected by the religious society or religious order, or the
diocese, synod, or district organization to serve for the first
year or such other period as may be prescribed by the laws
of the religious society or religious order, or of the diocese,
synod, or district organization, the board of trustees to be
not less than five (5) nor more than fifteen (15). (160a)
Now, we are already through with religious corporations,
educational corporations. We are now in DISSOLUTION.
Two Kinds of Dissolution: Voluntary and Involuntary.
Section 117. Methods of dissolution. A corporation
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
formed or organized under the provisions of this Code may
be dissolved voluntarily or involuntarily. (n)
Voluntary, that means that it is the corporation that petitions
for dissolution.
Involuntary, that means a party, other than the corporation
petitions for the dissolution of a corporation. Who can that
party be? Sometimes, it is the State itself represented by the
Office of the Solicitor General. The Office of the Solicitor
General can file a petition quo warranto and after citing the
defects and serious violations of the corporation, they will ask
for its dissolution.
There is another proceeding which is found in PD 902-A
Section 5 and that is the petition for cancellation of the
certificate of incorporation. So the proceeding is in the SEC.
Now, if the respondent corporation is found to be fatally
defective, it can be ordered dissolved and the corporation
might appeal. If it appeals, then it is the Court of Appeals, then
the Supreme Court that will review. That is the situation.
Voluntary dissolution can be accomplished in either of the
two ways:
(1) You petition for voluntary dissolution, or
(2) You file a certificate of amendment of the articles
of incorporation, specifically the term, that is in
Section 120 (Dissolution by Shortening the Corporate
Term). So it is still the corporation that petitions. But
indirectly, it is just asking the Securities and Exchange
Commission to shorten the term, that is actually a
prayer for dissolution.
Section 120. Dissolution by shortening corporate term. A
voluntary dissolution may be effected by amending the
articles of incorporation to shorten the corporate term
pursuant to the provisions of this Code. A copy of the
amended articles of incorporation shall be submitted to the
Securities and Exchange Commission in accordance with this
Code. Upon approval of the amended articles of
incorporation of the expiration of the shortened term, as the
case may be, the corporation shall be deemed dissolved
without any further proceedings, subject to the provisions of
this Code on liquidation. (n)
The decree of dissolution is issued by the Securities and
Exchange Commission. After that, there is liquidation. The SEC
will then endorse the case to the Special Intracorporate or
Intercorporate Court, Regional Trial Court. That is what
happens.
Section 117: Methods of Dissolution, voluntary and
involuntary.
Section 117. Methods of dissolution. A corporation
formed or organized under the provisions of this Code may
be dissolved voluntarily or involuntarily. (n)
68
Section 118: Voluntary dissolution where no creditors are
affected. That is an allegation. You will be asked to prove that
and so you will have to publish the contents of the petition for
dissolution.
Section 118. Voluntary dissolution where no creditors are
affected. If 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 the board of
directors or trustees, and by a resolution duly adopted by
the affirmative vote of the stockholders owning at least two-
thirds (2/3) of the outstanding capital stock or of at least
two-thirds (2/3) of the members of a meeting to be held
upon call of the directors or trustees after publication of the
notice of time, place and object of the meeting for three (3)
consecutive weeks in a newspaper published in the place
where the principal office of said corporation is located; and
if no newspaper is published in such place, then in a
newspaper of general circulation in the Philippines, after
sending such notice to each stockholder or member either by
registered mail or by personal delivery at least thirty (30)
days prior to said meeting. A copy of the resolution
authorizing the dissolution shall be certified by a majority of
the board of directors or trustees and countersigned by the
secretary of the corporation. The Securities and Exchange
Commission shall thereupon issue the certificate of
dissolution. (62a)
Dissolution therefore, whether voluntary or involuntary, is in
rem. It involves publication. Why? So that the whole world will
know. So that whoever is minded to oppose or claim an
interest before you are dissolved is given an ample opportunity
to do so. That is the whole idea. So with or without creditors,
there is still publication. What is the difference? The difference
is if it is without creditors, the creditors you actually have
because nobody can say he has no creditor. Naa man gyud
nay creditors; otherwise, he did not go through any
transaction. When you say there are no creditors, there are no
unsatisfied creditors. So if you say no creditors together with
your petition is the list of your creditors and in fact, their
consent that you be allowed to be dissolved because they are
already satisfied. You list down together with your petition,
your creditors, how they are satisfied and their consent, their
waiver because they are already fully satisfied. You have a list.
Given as it may, you still have to publish. Namakak unya ka,
naa pa diay kay uban creditors nga wala nimo giapil. That why
you are still ordered to publish.
Voluntary dissolution where creditors are affected. They are
given time to report to the SEC and to register their claims.
First, they have to prove that their claims are valid and
existing. It might be a valid claim, but it has already been
satisfied, so it is no longer existing. So, those are the two
things that you have to prove. That is one of the most
frustrating proceedings that you will ever encounter.
Section 119. Voluntary dissolution where creditors are
affected. Where the dissolution of a corporation may
prejudice the rights of any creditor, the petition for
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
dissolution shall be filed with the Securities and Exchange
Commission. The petition shall be signed by a majority of its
board of 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 shall set
forth all claims and demands against it, and that its
dissolution was resolved upon by the affirmative vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of
the members at a meeting of its stockholders or members
called for that purpose.
If the petition is sufficient in form and substance, the
Commission shall, by an order reciting the purpose of the
petition, fix a date on or before which objections thereto
may be filed by any person, which date shall not be less than
thirty (30) days nor more than sixty (60) days after the entry
of the order. Before such date, a copy of the order shall be
published at least once a week for three (3) consecutive
weeks in a newspaper of general circulation published in the
municipality or city where the principal office of the
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 be posted for three (3) consecutive
weeks in three (3) public places in such municipality or city.
Upon five (5) days notice, given after the date on which the
right to file objections as fixed in the order has expired, the
Commission shall proceed to hear the petition and try any
issue made by the objections filed; and if no such objection
is sufficient, and the material allegations of the petition are
true, it shall render judgment dissolving the corporation and
directing such disposition of its assets as justice requires,
and may appoint a receiver to collect such assets and pay
the debts of the corporation. (Rule 104, RCa)
Now, Section 122: Corporate Liquidation.
Section 122. Corporate liquidation. Every corporation
whose charter expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate existence for
other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3)
years after the time when it would have been so dissolved,
for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for
which it was established. xxx
By this time, the three years of extension, there is no more
board of directors of the corporation. Who is there left? It is
the receiver in liquidation, that is the technical term. The court
should appoint a receiver in liquidation. It says,
xxx
At any time during said three (3) years, the corporation is
authorized and empowered to convey all of its property to
trustees for the benefit of stockholders, members, creditors,
69
and other persons in interest. From and after any such
conveyance by the corporation of its property in trust for the
benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members,
creditors or other persons in interest.
Upon the winding up of the corporate affairs, any asset
distributable to any creditor or stockholder or member who is
unknown or cannot be found shall be escheated to the city
or municipality where such assets are located. xxx
Remember, the one who escheats this property, is actually the
local government. Because where the property is, the local
government takes over. It is the city or municipality where
such property is located.
xxx
Except by decrease of capital stock and as otherwise allowed
by this Code, no corporation shall distribute any of its assets
or property except upon lawful dissolution and after payment
of all its debts and liabilities. (77a, 89a, 16a)
It does not mention here, but this is really the part of the
courts. The SEC can no longer handle this corporate
dissolution. The SEC cannot handle this anymore. It is the
regular court. The competence of the SEC is up to the
declaration of dissolution, the decree of dissolution. After that,
it must be the courts. Remember, the approval of dissolution is
majority of the board of directors and then qualified notice and
then meeting of the stockholders or members duly called for
the purpose and then secret ballot, 2/3 vote, voting and non-
voting shares included in the computation of the 2/3 majority.
That is what is required. And then, you can now file a petition
for dissolution of a corporation. That is what happens.
We are through with dissolution.
Next is FOREIGN CORPORATION.
What is the definition of a foreign corporation? Section 123.
Section 123. Definition and rights of foreign corporations.
For the purposes of this Code, a foreign corporation is one
formed, organized or existing under any laws other than
those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country or
state. It shall have the right to transact business in the
Philippines after it shall have obtained a license to transact
business in this country in accordance with this Code and a
certificate of authority from the appropriate government
agency. (n)
So, local corporation, domestic corporation is the opposite of
foreign corporation in the Corporation Code. Foreign
Domestic.
In the Constitution, the classification is Filipino versus Foreign
corporation. And that is what is used for the Omnibus
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Investments Code. For purposes of investment, whether this
corporation is entitled to invest in this particular business, it all
depends on the composition of ownership of its capital. 60%
Filipino, maximum 40% foreign, that is a Filipino Corporation
for the purposes of the Omnibus Investments Code.
Also for the Constitution, you are a corporation that can now
own a real property because you are Filipino.
Here, this is the corporation formed under Corporation Law of
the Philippines. If you are not organized under the laws of the
Philippines, what happens? You are a foreign corporation, not
a domestic corporation.
A Filipino corporation is 60% Filipino-owned, 40% Foreign and
also it must be incorporated in the Philippines, that is a Filipino
corporation.
Now, if you read Section 125, the application for a license, it is
more difficult than organizing a corporation under Sections 14
and 15 of the Corporation Code. More complicated. You have
to register with the SEC and shall submit to the Securities and
Exchange Commission a copy of its articles of incorporation
and by-laws, certified in accordance with law, and their
translation to an official language of the Philippines, if
necessary. The application shall be under oath and, unless
already stated in its articles of incorporation, shall specifically
set forth the following:
1. The date and term of incorporation;
2. The address, including the street number, of the
principal office of the corporation in the country or
state of incorporation;
3. The name and address of its resident agent
authorized to accept summons and process in all legal
proceedings and, pending the establishment of a local
office, all notices affecting the corporation; xxx
So you have to appoint a resident agent. What is the purpose
of a resident agent? It is the entity or person, because you can
have a resident agent that is a natural person or a resident
agent that is a juridical person. You are a resident agent if you
have a license from the SEC to act as a resident agent. Then,
you become the focus for court processes or legal processes. If
the foreign corporation is served with summons by the court,
they go to this corporations address. If it is not there, it is
closed, then you go to the resident agent. Then, you are
served with summons.
Section 125. Application for a license. A foreign
corporation applying for a license to transact business in the
Philippines shall submit to the Securities and Exchange
Commission a copy of its articles of incorporation and by-
laws, certified in accordance with law, and their translation
to an official language of the Philippines, if necessary. The
application shall be under oath and, unless already stated in
its articles of incorporation, shall specifically set forth the
following:
1. The date and term of incorporation;
70
2. The address, including the street number, of the principal
office of the corporation in the country or state of
incorporation;
3. The name and address of its resident agent authorized to
accept summons and process in all legal proceedings and,
pending the establishment of a local office, all notices
affecting the corporation;
4. The place in the Philippines where the corporation intends
to operate;
5. The specific purpose or purposes which the corporation
intends to pursue in the transaction of its business in the
Philippines: Provided, That said purpose or purposes are
those specifically stated in the certificate of authority issued
by the appropriate government agency;
6. The names and addresses of the present directors and
officers of the corporation;
7. A statement of its authorized capital stock and the
aggregate number of shares which the corporation has
authority to issue, itemized by classes, par value of shares,
shares without par value, and series, if any;
8. A statement of its outstanding capital stock and the
aggregate number of shares which the corporation has
issued, itemized by classes, par value of shares, shares
without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary or
appropriate in order to enable the Securities and Exchange
Commission to determine whether such corporation is
entitled to a license to transact business in the Philippines,
and to determine and assess the fees payable.
Attached to the application for license shall be a duly
executed certificate under oath by the authorized official or
officials of the jurisdiction of its incorporation, attesting to
the fact that the laws of the country or state of the applicant
allow Filipino citizens and corporations to do business
therein, and that the applicant is an existing corporation in
good standing. If such certificate is in a foreign language, a
translation thereof in English under oath of the translator
shall be attached thereto.
The application for a license to transact business in the
Philippines shall likewise be accompanied by a statement
under oath of the president or any other person authorized
by the corporation, showing to the satisfaction of the
Securities and Exchange Commission and other
governmental agency in the proper cases that the applicant
is solvent and in sound financial condition, and setting forth
the assets and liabilities of the corporation as of the date not
exceeding one (1) year immediately prior to the filing of the
application.
Foreign banking, financial and insurance corporations shall,
in addition to the above requirements, comply with the
provisions of existing laws applicable to them. In the case of
all other foreign corporations, no application for license to
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
transact business in the Philippines shall be accepted by the
Securities and Exchange Commission without previous
authority from the appropriate government agency,
whenever required by law. (68a)
Now, who may be a resident agent? Section 127.
Section 127. Who may be a resident agent. A resident
agent may be either an individual residing in the Philippines
or a domestic corporation lawfully transacting business in the
Philippines: Provided, That in the case of an individual, he
must be of good moral character and of sound financial
standing. (n)
Duties of a resident agent? Section 128.
Section 128. Resident agent; service of process. The
Securities and Exchange Commission shall require as a
condition precedent to the issuance of the license to transact
business in the Philippines by any foreign corporation that
such corporation file with the Securities and Exchange
Commission a written power of attorney designating some
person who must be a resident of the Philippines, on whom
any summons and other legal processes may be served xxx
That is one of the purposes of a resident agent.
xxx
in all actions or other legal proceedings against such
corporation, and consenting that service upon such resident
agent shall be admitted and held as valid as if served upon
the duly authorized officers of the foreign corporation at its
home office. Any such foreign corporation shall likewise
execute and file with the Securities and Exchange
Commission an agreement or stipulation, executed by the
proper authorities of said corporation, in form and substance
as follows:
"The (name of foreign corporation) does hereby stipulate
and agree, in consideration of its being granted by the
Securities and Exchange Commission a license to transact
business in the Philippines, that if at any time said
corporation shall cease to transact business in the
Philippines, or shall be without any resident agent in the
Philippines on whom any summons or other legal processes
may be served, then in any action or proceeding arising out
of any business or transaction which occurred in the
Philippines, service of any summons or other legal process
may be made upon the Securities and Exchange Commission
and that such service shall have the same force and effect as
if made upon the duly-authorized officers of the corporation
at its home office."
Whenever such service of summons or other process shall be
made upon the Securities and Exchange Commission, the
Commission shall, within ten (10) days thereafter, transmit
by mail a copy of such summons or other legal process to
the corporation at its home or principal office. The sending
of such copy by the Commission shall be necessary part of
71
and shall complete such service. All expenses incurred by the
Commission for such service shall be paid in advance by the
party at whose instance the service is made.
In case of a change of address of the resident agent, it shall
be his or its duty to immediately notify in writing the
Securities and Exchange Commission of the new address.
(72a; and n)
What happens if the resident agent terminates his relationship
with the principal which is a foreign corporation? Who will be
served the processes? It will have to be the SEC because
before a corporation signs an undertaking agreeing to make
the SEC the default resident agent if the resident agent resigns
from his being a resident agent of a foreign corporation.
Issuance of a license to conduct business. If you are a foreign
corporation, you have to put up a bond before you are given a
license to conduct business.
Section 133. This is the consequence if you do business, you
are a foreign corporation and you have not been issued a
license to do business.
Section 133. Doing business without a license. No foreign
corporation transacting business in the Philippines without a
license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any
court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws. (69a)
So what is the rule? You are a foreign corporation and you do
business in the Philippines without a license? You cannot sue,
but you can be sued.
There is under jurisprudence a rule known as the ISOLATED
TRANSACTION RULE. What is the isolated transaction rule?
If you are a foreign corporation and you entered into one
transaction which is isolated, it is not meant to carry out
business in the Philippines, you can still sue on that transaction
because you were not doing business illegally without a
license, you were just engaged in an isolated transaction.
Now the question is what is an Isolated Transaction? One of
the cases to illustrate isolated transaction is the case of a
candy factory in Malabon. He orders by mail for artificial
sweeteners from a California sugar sweetener company. They
opened a letter of credit, the company from California sends
him the sweeteners. The letter of credit was only partial
payments, so there was still a balance to be paid. The candy
factory in Malabon failed to pay. Several demand letters from
California Sweetener Company, they were left unanswered. So
finally, the California company hired a lawyer in Manila. Upon
making the demand, the candy factory said, much as I want to
pay, I cannot really pay because I do not have sales. The
proceeds of the previous sales of my candies that were
sweetened by the sweetener of the California Sweetener
Company were already sold. I cannot raise money to pay. That
is why you have to help me so that I can pay you. Send me
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
another order of sweeteners so I can continue to make candy,
realize proceeds and pay you. What did the California
Company do? They agreed and sent another batch of
sweeteners.
After that, the Malabon Candy Factory still failed to pay, wa pa
man gihapon kabayad, so finally the California Sweetener
Company gave the go signal to its lawyers to file a suit and
when they filed a suit, the defense of the candy factory is they
cannot sue me because he is conducting business in the
Philippines without a license from the Securities and Exchange
Commission. The reply of the California Sweetener, I am not
doing business, I am engaged in an isolated transaction. The
return of the Malabon Candy Factory, how can you claim that
this is an isolated transaction when you have already sent
twice sweeteners to us, covered by 2 purchasing orders, so it
is not an isolated transaction.
And the regular courts upheld the Malabon Candy Factory.
Affirmed by the Court of Appeals. But when it reached the
Supreme Court, it was overturned. The Supreme Court says it
is still an isolated transaction. It is an isolated transaction
because the second sale is in view of the first. Actually, a
continuation of the first and the penalty of the prohibition from
suing for doing a business in the Philippines should not favor
the ____ debtor, like the Malabon Candy Factory. You are
estopped from claiming that because you entered in into
transaction. That is the rule in de facto corporations. If you
conduct business where a corporation is de facto, on the
assumption that it is a corporation and later on you find out
that his incorporation papers is fatally defective, you cannot
claim that you are excused from payment because it is a de
jure, not a corporation, because you cannot attack his
registration collaterally. You must bring a separate and distinct
action. So, in that case, the Supreme Court said that it is an
isolated transaction and the sweetener company in California
can still sue for satisfaction against the debtor.
But then, it has also been held by the Supreme Court that if
you are a foreign corporation, let us say incorporated in the
State of Delaware, you come to the Philippines and you enter
into one transaction namely, contract of lease for office space,
that is not an isolated transaction. That is doing business.
Before you can enter a contract of lease for office space, you
have to have a license from the SEC to do business. It is only
one act, but it is already preparatory. It is presumed that there
will be other acts of business because you are putting up an
office. So doing business in the Philippines does not depend on
its interpretation, on the number of acts, it depends upon the
intent.
Suppose you are an investor in the Philippines, let us say you
are an FDI (Foreign Direct Investor). What is the characteristic
of a foreign direct investor? How do you distinguish foreign
direct investor and a foreign indirect investor (FII)?Foreign
direct investor, magdala kag kwarta dinhi, magtukod kag
planta aron magbuhat ka ug filters gikan sa coconut shell
charcoal, direct investment nah.
Muanhi ka diri sa Pilipinas, unya mupalit lang kag shares sa
stock market, unya ibaligya na sad nimo, unya mugawas na
72
sad ka, that is FII (Foreign Indirect Investor). Musulod gawas
ka ba.
The question is, if you are a foreign investor in the Philippines,
when are you considered doing business? Daghan man ug
funds all over the world. I told you about CalPERS, they are in
the Philippines. California Public Employees Retirement Fund.
They have made investments in so called emerging markets of
emerging economies. Niadto kay underdeveloped countries,
wala na man nah karon nga termino kay insult man nah. Mao
na nah karon ang ilang ginatawag nga emerging economies.
You make investments here and you are just interested in the
return, does CalPERS have to register? Wala ra ba silay
masubmit nga articles of incorporation because CalPERS is in
between being a person and a non-person because it is a
fund. It is an extension of the California State Government. Do
you have to get a license?
I will give you the SEC Opinion 14-01 dated February 21, 2014.
So this is the controlling opinion. The gist of the opinion is this,
it is clear that the subject foreign corporation, being a member
of the operating committee, takes active part in the
management and control of the business operation of the
partnership, indeed in the consortium agreement positively
stipulates that the operating committee shall exercise overall
supervision and control of all matters pertaining to the
operations and has the specific power to determine all matters
relating to the general policies, procedures, and methods of
operating the business. Finally, the service agreement shows
that the governments petroleum board can require the subject
foreign corporation to perform any or all obligations of the
partnership under the contract. Accordingly, the subject
foreign corporation is doing business in the Philippines as
provided in Section 3 subparagraph (d) of the Foreign
Investments Act and hence, it must secure a license to do
business in the Philippines.
Please pay attention to this, because he has not yet
participated in the management. Niinvest siya ug kwarta aron
mamember siya ining consortium. He is not a member of the
board, nagbutang siya ug kwarta. But then, in the agreement,
it says that the government can require you to put somebody
there as a policy-determining member of the board. Because
you already agreed to that, you are not just a passive investor,
you are doing business in the Philippines. And therefore, you
are required to obtain a license to do business in the
Philippines.
What is the principle? The principle is mere investment in a
corporation without participation in the management and
board of directors and investing in a partnership as a limited
partner without participating in the management is not
considered doing business and hence, is not required to obtain
a license. But, if in your agreement, even if you are passive,
contains a provision that you can be made to participate in the
management and you agree to that because you signed the
consortium agreement, you are doing business and therefore,
you must obtain a license. (February 2014)
We are through with Foreign Corporations. Miscellaneous na
lang then we will go to PD 902-A and then we will go to
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Securities Regulation Code. And then we will go to some of the
provisions in the special rule of the Supreme Court on
intracorporate rules or the intracorporate code. You must know
whether it is an intracorporate or it is an ordinary case.
February 17, 2016 (LJS)
FOREIGN CORPORATIONS
If you have done any proceedings in the Board of Investment,
you come around so many terms. FDI, FII. FDI is Foreign
Direct Investment. FII is Foreign Indirect Investment. What is
the difference between the two? The difference between the
two has a lot to do with Title 15 of the Corporation Code,
which is Foreign Corporations.
Section 123. Definition and rights of foreign corporations.
For the purposes of this Code, a foreign corporation is one
formed, organized or existing under any laws other than those
of the Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state. It shall
have the right to transact business in the Philippines after it
shall have obtained a license to transact business in this
country in accordance with this Code and a certificate of
authority from the appropriate government agency.
Corporations that are incorporated under the laws other than
the Philippines, they are Foreign Corporations. It does not
matter if all stockholders are Filipinos, it is still a Foreign
Corporation. And the opposite of a Foreign Corporation under
Corporation Law is a Domestic Corporation a corporation that
is incorporated under the laws of the Philippines.
How about the terminology of Filipino Corporation and Foreign
Corporation under the Constitution. The assumption is,
whether you are a Filipino Corporation or a Foreign
Corporation, under the constitution, you are incorporated
under the laws of the Philippines. That is the presumption of
the constitution. The test there is Control. Control Test. And
the control test is elaborated by the SC in the latest case of
NARRA Nickel Mining vs. Redmont Consolidated Mines,
GR 195580, 3rd Div., penned by Justice Velasco, April 21, 2014.
And this is further quoted under the SEC Opinion #14-12,
Rules that determine whether investment in a foreign
corporation in a business would require a license from the SEC
to do business in the Philippines.
What is the rule? If you are a Foreign Corporation, you cannot
do business in the Philippines, without first obtaining a license
to do so.
Section 124. Application to existing foreign corporations.
Every foreign corporation which on the date of the effectivity
of this Code is authorized to do business in the Philippines
under a license therefore issued to it, shall continue to have
such authority under the terms and condition of its license,
subject to the provisions of this Code and other special laws.
Section 125. Application for a license. A foreign corporation
applying for a license to transact business in the Philippines
73
shall submit to the Securities and Exchange Commission a
copy of its articles of incorporation and by-laws, certified in
accordance with law, and their translation to an official
language of the Philippines, if necessary. The application shall
be under oath and, unless already stated in its articles of
incorporation, shall specifically set forth the following:
1. The date and term of incorporation;
2. The address, including the street number, of the
principal office of the corporation in the country or
state of incorporation;
3. The name and address of its resident agent
authorized to accept summons and process in all legal
proceedings and, pending the establishment of a local
office, all notices affecting the corporation;
4. The place in the Philippines where the corporation
intends to operate;
5. The specific purpose or purposes which the
corporation intends to pursue in the transaction of its
business in the Philippines: Provided, That said
purpose or purposes are those specifically stated in
the certificate of authority issued by the appropriate
government agency;
6. The names and addresses of the present directors
and officers of the corporation;
7. A statement of its authorized capital stock and the
aggregate number of shares which the corporation
has authority to issue, itemized by classes, par value
of shares, shares without par value, and series, if
any;
8. A statement of its outstanding capital stock and the
aggregate number of shares which the corporation
has issued, itemized by classes, par value of shares,
shares without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary
or appropriate in order to enable the Securities and
Exchange Commission to determine whether such
corporation is entitled to a license to transact
business in the Philippines, and to determine and
assess the fees payable.
Attached to the application for license shall be a duly
executed certificate under oath by the authorized
official or officials of the jurisdiction of its
incorporation, attesting to the fact that the laws of
the country or state of the applicant allow Filipino
citizens and corporations to do business therein, and
that the applicant is an existing corporation in good
standing. If such certificate is in a foreign language, a
translation thereof in English under oath of the
translator shall be attached thereto.
The application for a license to transact business in
the Philippines shall likewise be accompanied by a
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
statement under oath of the president or any other
person authorized by the corporation, showing to the
satisfaction of the Securities and Exchange
Commission and other governmental agency in the
proper cases that the applicant is solvent and in
sound financial condition, and setting forth the assets
and liabilities of the corporation as of the date not
exceeding one (1) year immediately prior to the filing
of the application.
Foreign banking, financial and insurance corporations
shall, in addition to the above requirements, comply
with the provisions of existing laws applicable to
them. In the case of all other foreign corporations, no
application for license to transact business in the
Philippines shall be accepted by the Securities and
Exchange Commission without previous authority
from the appropriate government agency, whenever
required by law. (68a)
Section 126. Issuance of a license. If the Securities and
Exchange Commission is satisfied that the applicant has
complied with all the requirements of this Code and other
special laws, rules and regulations, the Commission shall issue
a license to the applicant to transact business in the Philippines
for the purpose or purposes specified in such license. Upon
issuance of the license, such foreign corporation may
commence to transact business in the Philippines and continue
to do so for as long as it retains its authority to act as a
corporation under the laws of the country or state of its
incorporation, unless such license is sooner surrendered,
revoked, suspended or annulled in accordance with this Code
or other special laws.
Within sixty (60) days after the issuance of the license to
transact business in the Philippines, the license, except foreign
banking or insurance corporation, shall deposit with the
Securities and Exchange Commission for the benefit of present
and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange Commission,
consisting of bonds or other evidence of indebtedness of the
Government of the Philippines, its political subdivisions and
instrumentalities, or of government-owned or controlled
corporations and entities, shares of stock in "registered
enterprises" as this term is defined in Republic Act No. 5186,
shares of stock in domestic corporations registered in the stock
exchange, or shares of stock in domestic insurance companies
and banks, or any combination of these kinds of securities,
with an actual market value of at least one hundred thousand
(P100,000.) pesos; Provided, however, That within six (6)
months after each fiscal year of the licensee, the Securities
and Exchange Commission shall require the licensee to deposit
additional securities equivalent in actual market value to two
(2%) percent of the amount by which the licensees gross
income for that fiscal year exceeds five million (P5,000,000.00)
pesos. The Securities and Exchange Commission shall also
require deposit of additional securities if the actual market
value of the securities on deposit has decreased by at least ten
(10%) percent of their actual market value at the time they
were deposited. The Securities and Exchange Commission may
74
at its discretion release part of the additional securities
deposited with it if the gross income of the licensee has
decreased, or if the actual market value of the total securities
on deposit has increased, by more than ten (10%) percent of
the actual market value of the securities at the time they were
deposited. The Securities and Exchange Commission may,
from time to time, allow the licensee to substitute other
securities for those already on deposit as long as the licensee
is solvent. Such licensee shall be entitled to collect the interest
or dividends on the securities deposited. In the event the
licensee ceases to do business in the Philippines, the securities
deposited as aforesaid shall be returned, upon the licensees
application therefor and upon proof to the satisfaction of the
Securities and Exchange Commission that the licensee has no
liability to Philippine residents, including the Government of the
Republic of the Philippines.
How do you obtain a license to do business in the Philippines?
There is an application process set out in Sec. 124, 125 and
126. That is the procedure, a very cumbersome procedure.
Then it requires of a filing of a bond. There is a minimum bond
that you have to post in the SEC and the bond is increased
proportionately to the increase of your revenues in the Phil.
What is the bond for? The bond is an undertaking by the
surety to answer for whatever liabilities that may arise from
the Foreign Corporations dealings in case that Foreign
Corporation does not settle such just and valid claims.
Then, the foreign corporation must appoint a resident agent.
Who may be a resident agent? Sec. 127.
Section 127. Who may be a resident agent. A resident
agent may be either an individual residing in the Philippines or
a domestic corporation lawfully transacting business in the
Philippines: Provided, That in the case of an individual, he
must be of good moral character and of sound financial
standing.
What is the function of the resident agent? The function of the
resident agent is to receive legal processes, compulsory
summons. In other words, if the foreign corporation should
abscond and leave and be beyond the reach of Philippine laws,
it is the resident agent that is served the compulsory processes
of the law.
Besides that, the foreign corporation executes an undertaking,
that if for one reason or another, the resident agent, fails to
function, ceases to exist or if himself, if he be a natural person,
goes beyond the reach of the laws of the Philippines, the
resident agent in default would be the SEC. So the SEC is the
universal resident agent in case of default of the legal resident
agent.
Remember that the principal office of foreign corporations is
not in the Philippines. It is outside. So it is very easy for the
foreign corporation to leave the jurisdiction and be beyond our
laws, so there must be a resident agent.
Section 133. Doing business without a license. No foreign
corporation transacting business in the Philippines without a
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any
court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid cause
of action recognized under Philippine laws.
Now, if you are Foreign Corporation, and you conduct business
in the Philippines. The rule is you can be sued, but you
yourself, you cannot sue.
In one case, the SC took exception to the rule, and said; If
you are a foreign corporation and you do not have a license to
do business in the Philippines, but you are involved in what the
SC calls an isolated transaction, you can sue. An example is
a common carrier not registered in the Philippines, it goes to
the Philippines and lands in cebu, unloads a cargo and the
cargo is misdelivered and the common carries goes. Now, the
consignee of the cargo is suing this common carrier not
registered in the Philippines. Question, can he sue the 3rd party
from whom the cargo was mistakenly delivered to recover the
cargo and deliver it to the proper party? YES, he can sue,
according to the SC. That is an isolated transaction.
Question, in order for it be an isolated transaction, is it
necessary that it is only 1 transaction?
The SC said NO in another case. Here is a Candy
manufacturing company in the Philippines and it orders
sweeteners from a California corporation that makes
sweeteners, they opened letters of credit and the California
corporation sends these sweeteners. Next, the 1st letters of
credit was good, and accepted but the second letters of credit
was revoked. So, the California sweetener corporation was left
unpaid. So the California corporation engages a lawyer in
Makati to sue. When it filed a suit, the candy factory in
Malabon, entered into a compromise and ask the lawyer to
withdraw this and that they would pay them provided that the
sweetener corporation sends another batch of sweeteners so
that they can manufacture more to generate proceeds to pay
them. Now the California sweetener corporation agreed and
sends another batch. Again the Malabon candy company did
not pay. So the counsel finally sued, the defense was that you
cannot sue because you are doing business in the Philippines
without a license. And the contention of California sweetener
was that it was only isolated transaction. Is it an isolated
transaction? The SC said YES. It is an isolated transaction
because the second one was merely a continuation of the 1st.
So that is the idea. Each case, according to the SC, must be
judged on the peculiar factual configuration of the case. For
instance, if the corporation even before it obtains license to do
business in the Philippines, enters into a lease agreement with
another corporation in order to lease office space. Is it already
doing business in the Philippines? The SC said YES. That is
only 1 transaction and yet the SC said that is doing business.
Why? Because necessarily that transaction is preparatory to
the succeeding transactions. You opened an office, so
meaning, the transactions will come after. So even if it just 1
transaction, it is not isolated. It is preparatory to the
following business transactions.
75
Suppose you are a foreign corporation, and then you contract
a broker in Makati, and you are a fund manager say in
California. Then you decided to invest in a few corporations in
the Philippines, because the Philippines is an emerging
economy. GDP growth in the states is anemic. GDP growth in
Europe is dead. GDP growth in Japan is already in limbo. So it
puts several orders, but meralco, buy BDO, so many shares. Is
he doing business in the Philippines? And before doing that,
does he need to obtain a license to do business in the
Philippines? The SC said NO. That is not doing business in the
Philippines because that is Foreign Indirect Investment
(FII). That is just putting money in the bank. But if you
engage in Foreign Direct Investment (FDI) when you
put up a firm or a factory here in the Philippines, by putting up
your own corporation or buying an equity shares in a
corporation engaged in the creation of a factory in the
Philippines and you participate in the management, you have a
representative in the directors in the corporation. Once you do
that, you are already engaged in business in the Philippines
and then you must get a license to do business in the
Philippines. That is the standard ruling.
But SEC Opinion 14-01, adds a new nuisance. The nuisance is
that it is clear that the subject foreign corporation, being a
member of the operating committee, takes active part in the
management and control of the partnership. Indeed the
consortium agreement positively stipulates that the operating
committee shall exercise control and supervision in all manners
pertaining to the operation and has the specific power to
determining operating policies and procedures and all matters
relating to the operation of the business. Finally, the service
agreement shows that the governments petroleum board can
required the subject foreign corporation to perform any
obligations of the partnership in the contract. So if you are a
foreign corporation, passive ka. But when there is need in the
management of the corporation, you participate. That what
makes you considered as doing business in the Philippines, and
that requires you to obtain a license to do business in the
Philippines even before entering into that contract.
Accordingly, the subject foreign corporation is doing business
in the Philippines, as provided for in Sec. 39(d) of the Foreign
Investment Act and hence it is required to obtain a license to
do business in the Philippines. (Fr. Gives a copy of the Opinion
14-01 the latest on doing business in the Philippines)
If you look at the procedure in Title 15, its easier to just form a
Filipino Corporation and then you layer it. And layering has
been allowed. And it owns the shares of stock that you have
that is in another corporation that is actually doing the
business. So you set up a holding company. So you dont have
to put up a bond. You dont have to assign a resident agent
and to submit reports to the SEC. You only have to hire
lawyers to set up what they call a P.O. box corporation and the
lawyers will set themselves as incorporators, and the lawyers
will file the financial statements and hire the auditors. That is
called warehousing your corporation entity.
Revocation of license, I leave that to you.
Section 134. Revocation of license. Without prejudice to
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
other grounds provided by special laws, the license of a foreign
corporation to transact business in the Philippines may be
revoked or suspended by the Securities and Exchange
Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as
required by this Code;
2. Failure to appoint and maintain a resident agent in
the Philippines as required by this Title;
3. Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange
Commission a statement of such change as required
by this Title;
4. Failure to submit to the Securities and Exchange
Commission an authenticated copy of any
amendment to its articles of incorporation or by-laws
or of any articles of merger or consolidation within
the time prescribed by this Title;
5. A misrepresentation of any material matter in any
application, report, affidavit or other document
submitted by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to the
Philippine Government or any of its agencies or
political subdivisions;
7. Transacting business in the Philippines outside of
the purpose or purposes for which such corporation is
authorized under its license;
8. Transacting business in the Philippines as agent of
or acting for and in behalf of any foreign corporation
or entity not duly licensed to do business in the
Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines. (n)
Section 135. Issuance of certificate of revocation. Upon the
revocation of any such license to transact business in the
Philippines, the Securities and Exchange Commission shall
issue a corresponding certificate of revocation, furnishing a
copy thereof to the appropriate government agency in the
proper cases.
The Securities and Exchange Commission shall also mail to the
corporation at its registered office in the Philippines a notice of
such revocation accompanied by a copy of the certificate of
revocation. (n)
Section 136. Withdrawal of foreign corporations. Subject to
existing laws and regulations, a foreign corporation licensed to
transact business in the Philippines may be allowed to
withdraw from the Philippines by filing a petition for
withdrawal of license. No certificate of withdrawal shall be
issued by the Securities and Exchange Commission unless all
the following requirements are met;
1. All claims which have accrued in the Philippines
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have been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties, if
any, lawfully due to the Philippine Government or any
of its agencies or political subdivisions have been
paid; and
3. The petition for withdrawal of license has been
published once a week for three (3) consecutive
weeks in a newspaper of general circulation in the
Philippines.
MISCELLANEOUS PROVISIONS
The most important provision here is Sec. 137. Outstanding
Capital stock.
Section 137. Outstanding capital stock defined. The term
"outstanding capital stock", as used in this Code, means the
total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully
or partially paid, except treasury shares.
Outstanding capital stock is defined as common share of
stocks issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially
paid, except treasury shares. What are treasury shares?
Treasury shares are issued shares subsequently reacquired by
the corporation either by onerous or gratuitous title.
Unya muingon ka kinsa may buang nga stockholder nga mu
donate sa iyang shares sa corporation? Kinsa mana? Who is
that crazy fellow? Ayaw mo ug saba hah. Here is a corporation,
XYZ corporation, it is owned 80% by Mr. Yu. 20% is owned by
Martin Yu, Luisa Yu, Felisa Yu and Leonard Yu. 4 children.
Mr.Yu is already old, approaching 86. Suddenly he discovers he
has a big tumor. Now, this corporation of which 80% of the
corporation is owned by Mr. Yu who is about to die. And the
book value of the corporation is about P400. Imagine the
inheritance tax when he dies. So if you are the attorney, what
are you going to do? What is 80% of 400 Million? That is
320M. As attorney, you tell Mr. Yu, for tax avoidance, to
donate his shares to the corporation, no consideration. What is
the tax for that? Only gift tax which is very low because it will
be based on par value. Then the corporation issue shares to
the remaining stockholders, sells it to them at less than par
value. Why? Because treasury shares can be disposed of at
any price that the board of directors decide even lower than
par value. Lower cost. Pay doc stamps and gift tax. Upon
reissuance, pay doc stamps. And then they can issue shares in
whatever proportion. Mr. Yu can give more to the favorite
child.
That is why you need to know what this OCS means
Outstanding Capital Stock. That is net of treasury shares.
Is it possible that you sell the entire OCS and you are still in
control of the corporation? You sell it all and yet you still have
control. Is that possible? (Fr. Illustrates)
Let say this is a 1 Billion corporation, engaged in the
manufacturing of noodles and you own 99% of the shares of
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016

stock. Noodles, only P6 per pack. But you control 90% of the So we are through with the Corporation Code. And we now go
market of about 250 million people. Then you are asked by to P.D. 902-A.
your investment bankers, do you want to realize the value of
your corporation? Let us reengineer it. Put up a corporation.
Let say 10 Million corporation. 99.9% of the OCS is yours. You END OF KILLER SECOND EXAM.
also own the 1 Billion corporation. So you get 50% +1 shares GOOD LUCK SA ATIN T_T KJ
of stock in the 1 billion corporation, then donate it to the
10Million corporation. So that is already inside that
corporation. So you went to the bank, and loan for P500
Millions pesos. Why will the bank give you that money,
because you will pledge the shares of stock of the 10 million
corporation because it owns 50% of the 1 billion. So you
already have a P500 Million. Then you offer the remaining
49% of the 1 Billion corporation to the public. When you sell,
the public you are paid by the public. So look at the
transaction. You actually realized the value of the corporation
and yet you are still in control of the corporation because you
still own that 50%+1 in the other corporation. Then you are
ready to start another business.
That is the wonder of the corporate vehicle as a business
entity.
Annual report for corporations.

Section 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.

Before, the fine for failure to comply with the implementing

rules of the SEC is annual. So many people would rather pay
the fine than submit reports on time and be published. That is
what Lucio Tan used to do. But now, the fine is daily. If you
fail to submit it within 30 days of the end of the fiscal year,
you are now subsequently fined on a daily basis and the fine is
measured according to a percentage against your gross
revenues. That is why Mr. Lucio Tan is now on time when he
files the financial statements.
When are you exempt in hiring an independent certified public
accountant? If youre paid up capital is not more than P50,000,
you need not employ an independent public accountant. The
financial statement need only be certified under oath by the
treasurer and the chief accountant of your corporation.

Section 139. Incorporation and other fees. The Securities

and Exchange Commission is hereby authorized to collect and
receive fees as authorized by law or by rules and regulations
promulgated by the Commission.

Sec. 139 gives the SEC authority to collect and receive fees
and implement rules and regulations. That is the basis of their
rule making power.

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