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CORPORATION CODE of the 1.

Those implied from its express


Philippines powers;
(BP Blg. 68, effective May 01, 1980) 2. Those fairly related or incidental to
--------------------------------------------------------------- its existence, direct or immediate to
I. GENERAL PROVISIONS the furtherance of the corporations
business.
A. CORPORATION DEFINED Requirements so that a private
corporation could hold real
Corporation properties in the Philippines:
-It is an artificial being created by 1. 60% shareholdings should at least
operation of law, having the right of belong to Filipinos. It is the extent
succession and the powers, attributes and of shareholdings and not the
properties expressly authorized by law or number of persons. 40%
incident to its existence (Sec. 2). shareholdings for aliens;
2. Place of incorporation should be in
the Philippines. If incorporated
Attributes of a Corporation (CAPS)
outside the Philippines even if 60%
1. Created by operation of law
of the shareholdings is Filipino
2. Artificial being
owned, it is a foreign corporation.
3. Powers, attributes and properties
If incorporated in the
expressly authorized by law or incident to
Philippines but less 60% stock
its existence
is Filipino owned it is a
4. Right to Succession
Philippine (domestic)
corporation, but it could not
a. Created by operation of law. No Private
acquire real properties in the
Corporation could validly exist unless
Philippines.
there is a law that creates it. Consent of
Acquired properties belong to
the state is needed. If not made by
the corporation, not to the
operation of law, it becomes a corporation
stockholders/members, because
by estoppel.
of its separate and distinct
b. Artificial being. It is not a natural person.
personality.
It is not liable for the acts of its
d. Right to succession. The corporation is
stockholders or members.
not affected by anything that happens
c. Powers, attributes and properties. Acquire
to its stockholders (insolvency, death,
real/personal properties.
incapacity, etc). It continues to exist
Powers:
for the term stated in its articles of
(a) Those expressly authorized by law.
incorporation except when earlier
1. Secs. 36-44 Corporation Code;
dissolved.
2. Articles of Incorporation/By laws;
(b) Those incidental to its existence;

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Right of Stockholders in Corporate 2. Entitlement to constitutional
Property rights; eg. Due process, equal
a. There is no real interest in the protection;
corporate property. It is a mere 3. Liability for crimes or torts;
expectancy inchoate in nature; 4. Cannot always claim equal
b. It ripens into real right only upon rights with natural persons; i.e.
dissolution of the corporation on the entitlement to moral damages.
assumption that all debts are already
paid; Piercing the veil of corporate fiction
- This doctrine allows the State to
Suit disregard the fiction of juridical
- A corporation cannot represent its personality of the corporation where the
stockholders in a suit. entity is formed or used for non-legitimate
- Gen. Rule: A corporation is not entitled purposes.
to a claim for moral damages. - Grounds:
Reason: Being an artificial person, it 1. Where corporate fiction is used to
cannot experience physical suffering or defeat public convenience;
such sentiments as wounded feelings, Corporate Fiction is a personality
serious anxiety, mental anguish or separate from the
moral shock. Mental suffering can be stockholders/members.
experienced only by one having a Public Convenience: Instead of
nervous system. dealing with all the individual
- Exception: If the good reputation of a stockholders, it is for public
corporation is debased or besmirched convenience to deal with the
resulting in social humiliation, this may corporation alone.
be a ground for recovery of moral damages 2. Where corporate fiction is used to
and attorneys fees. justify a wrong, to protect fraud, or to
defend a crime;
Doctrine of separate personality 3. Where the corporation serves as a
- A corporation has a juridical personality mere alter ego of another person;
separate and distinct from that of its 4. Where the corporation serves merely
stockholders or members. as an instrument of another
- Used for purposes of convenience and to corporation.
subserve the ends of justice 5. Where the corporation is controlled by
- Consequences: aliens, in violation of the law as where
1. Ownership of property, it was organized under Philippine laws
capacity to sue and be sued in its own but most of its stockholders are
right (Art. 46, NCC); Germans (normally a Filipino
corporation), the Supreme Court went
beyond the corporate fiction during the

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war and considered it as an enemy B. Is there a misuse of corporate
corporation. fiction?
- The mere control by a single person
Alter Ego or Instrumentality Rule of the majority shares is not a
- Requisites: ground to pierce the veil [Sunio vs.
1. There must be control, not merely NLRC, 127 SCRA 390 (1984)]
majority or complete stock control, but - Evidence of fraud must be proven
complete domination, not only of clearly and convincingly [Del Rosario
finances but of policy and business vs. NLRC, 182 SCRA 777 (1990)]
practice in respect to the transaction
attacked so that the corporate entity Purpose of Piercing the Veil
as to this transaction had at the time 1. To seek satisfaction of an
no separate mind, will or existence of obligation directed against the
its own; (control) stockholders;
2. Such control must have been used by 2. Direct always the action
the defendant to commit fraud or against the stockholders: If directed
wrong, to perpetuate the violation of a against the corporation, you cannot
statutory or other positive legal duty, anymore pierce the veil. A suit cannot be
or dishonest and unjust act in brought against the corporation to satisfy
contravention of plaintiffs legal right the obligation of its stockholders. {Umali
(breach of duty) ; and case [182 SCRA 529 (1990)]}
3. Such control and breach of duty must
proximately cause the injury to the Net Effect of Piercing the Veil
plaintiff. a) Only One Corporation:
Liability attaches to its stockholders;
In piercing the veil, the stockholders b) Two or more Corporations: The
become liable instead of the corporation. court treats them as only one.

Do not immediately pierce the veil just


because a ground exists. Determine first B. CLASSES OF CORPORATIONS
the facts and circumstance.
1. As to existence of shares of stock
Steps: a. Stock Corporation
A. Determine first the following Items: a corporation (1) which has capital
1. Common Ownership
stock divided into shares and (2) is
2. Identity of directors;
authorized to distribute to the
3. Manner of keeping records;
shareholders dividends or allotments
4. Manner of conducting business.
of the surplus profits on the basis of
the shares held. (Sec. 3)

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b. Non-Stock Corporation 3. The rule is in the interest of
a corporation which does not issue the public and is essential to
stock and distribute dividends to its the validity of business
members. transactions with corporations.

2. As to number of persons composing the How can there be a de facto status?


corporation 1. Defect in the acknowledgement;
a. Corporation Aggregate 2. Incomplete requirements;
a corporation consisting of more than 3. Residency requirement is
one member or corporator. overlooked;
b. Corporation Sole but it was still issued a
a religious corporation which certificate of incorporation.
consists of one member or corporator
only and his successors, such as a Requisites of a de facto corporation:
bishop. (Sec. 110) 1. Existence of a valid law under
which it may be incorporated;
3. As to legal status 2. A bona fide attempt in good faith to
a. De Jure Corporation organized in incorporate under such law;
3. Actual use or exercise in good faith
accordance with the requirements of
of corporate powers; and
law; existing both in fact and in law.
4. Issuance of a certificate of
b. De Facto Corporation organized
incorporation by the SEC as a
with a colorable compliance with the
minimum requirement of good
requirements of a valid law; existing in
faith.
fact but not in law. Its existence
cannot be inquired collaterally. Such
A de jure corporation can
inquiry may be made by the Solicitor
successfully resist a suit by the
General in a quo warranto proceeding.
State brought to challenge its
(Sec. 20)
existence; a de facto cannot sustain
Why quo warranto?
its right to exist.
1. It is the States right and
authority which are invaded
c. Corporation by Estoppel
and usurped;
2. It would produce endless - a group of persons that assumes to
confusion and hardship and act as a corporation knowing it to be
probably destroy the without authority to do so, and enters
corporation if the legality of its into a transaction with a third person
existence could be questioned on the strength of such appearance. It
in every suit; is precluded to deny its existence in an
action under said transaction. It is

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neither a de jure nor de facto companies subject to the common
corporation. (Sec. 21) control of the Holding Corporation.
Doctrinal Basis:It is founded on
principles of equity and is designed d. Parent and Subsidiary
to prevent injustice and Corporation
unfairness. It applies when separate entities with power to
persons assume to form a contract with each other. The BOD of
corporation and exercise corporate the Parent Company determines its
functions and enter into business representatives to attend and vote in
relations with third persons. the stockholders meeting of its
subsidiary. The stockholders of the
d. Corporation by Prescription one Parent company demand
which has exercised corporate powers representation in the Board meetings
for an indefinite period without of its subsidiary.
interference on the part of the
sovereign power and which by fiction 5. As to place of incorporation
of law is given the status of a a. Domestic Corporation
corporation, e.g. Roman Catholic a corporation formed, organized, or
Church. existing under Philippine laws.
b. Foreign Corporation
4. As to relationship of management and
a corporation formed, organized or
control
existing under any laws other than
a. Parent/Holding Corporation
those of the Philippines. (Sec. 123)
one which controls another as a
subsidiary by the power, either 6. As to Functions
directly or indirectly, to elect
a. Public Corporation
management. It is one that holds
one formed or organized for the
stocks in other companies for purposes
government of a portion of the State
of control rather than for mere
for the general good and welfare.
investment.
b. Private Corporation
those formed for private purpose,
b. Subsidiary Corporation
usually for profit-making.
i. Majority-owned Subsidiary
Private corporation includes:
its capital stock (51% to 94%) is
1. Government owned or
owned by another corporation.
controlled corporation one
ii. Wholly-Owned Subsidiary
created or organized by the
its capital stock (95% to 100%) is
government or of which the
owned by another corporation.
government is the majority
c. Affiliates
stockholder; it is not for the

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government of a portion of the
State, e.g. GSIS, SSS, PNRC Domicile
2. Quasi-Public Corporation the domicile of a corporation is the place
(a.k.a. public utility or fixed by law creating or recognizing it, in the
public service corporation) a absence thereof, it shall be understood to be
private corporation which have the place where its legal representation is
accepted from the State the established or where it exercises its principal
grant of franchise or contract functions (Art. 51, New Civil Code)
involving the performance of
public duties but which are Corporation as a Philippine national
organized for profit. e.g. (under RA 7042, Foreign Investment Act
electric, water, telephone and of 1991)
transportation companies. 1. A corporation organized under the law
Officers and employees of of the Philippines of which at least 60% of
GOCCs with original the outstanding capital stock entitled to
Charter (created by special vote is owned by Filipino citizens;
law) = under Civil Service 2. A foreign corporation licensed as doing
Those incorporated under business in the Philippines of which 100%
the Corporation Code, of the outstanding capital stock entitled to
governed by the Labor vote is wholly owned by Filipinos; and
Code. (Const., Art IX- B, 3. Where a corporation and its non-
Sec. 2 [1]) Filipino stockholders own stocks in a
SEC-registered enterprise, at least 60% of
the capital stock outstanding and entitled
to vote of both corporations and at least
Tests to determine the nationality of 60 % of the members of the Board of
corporations Directors of both corporations must be
1. INCORPORATION TEST Filipino citizens (Double 60% Rule)
determined by the state of The law applies the Control Test
incorporation, regardless of the both with respect to the ownership
nationality of the stockholders. of shares entitled to vote and the
2. DOMICILE TEST membership in the BOD.
determined by the State where it is
domiciled. Grandfather rule
3. CONTROL TEST or WAR-TIME - The method by which the percentage of
TEST Filipino equity in a corporation engaged
determined by the nationality of the in nationalized and/or partly nationalized
controlling stockholders or members. It is areas of activities, provided for under the
applied in times of war. constitution and other nationalization

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laws, is computed, where there are f. Educational institutions other than
corporate shareholders. those established by religious groups
- Shares belonging to corporations or g. Any business reserved by Congress
partnerships at least 60 % of the capital of 4. Majority Owned by Filipinos
which is owned by Filipino citizens shall a. Investment House
be considered as of Philippine nationality.
- But if the percentage of Filipino Advantages of a corporation over an
ownership in the corporation or unregistered association
partnership is less than 60%, only the 1. Enjoys perpetual succession under
number of shares corresponding to such corporate name and in an artificial form;
percentage shall be counted as of 2. Can take and grant property;
Philippine nationality. 3. Can contract obligations;
4. Can sue and be sued in its corporate
Nationalized corporations: name as a juridical person;
1. 100% Filipino owned: 5. Capacity to receive and enjoy common
a. Mass media (radio, TV, and printed) grants and privileges and immunities;
b. Rural Banks 100% of its capital 6. No personal liability beyond value of their
stock shares.
c. Rice and corn industry
d. Security, watchman, and detective
agency C. CLASSIFICATION OF SHARES
2. 70% Filipino owned
a. Advertising Industry 1. Common Shares
b. Banks other than rural banks and the basic class of stock ordinarily and
new banks established by usually issued without extraordinary
consolidation of branches or agencies rights and privileges, and the owners
of foreign banks in the Philippines thereof are entitled to a pro rata share in
c. Private development Banks the profits of the corporation and in its
d. Savings and Loan associations assets upon dissolution and, likewise, in
3. 60% Filipino owned the management of its affairs without
a. Financing companies - 60 % of its preference or advantage whatsoever.
capital stock
b. Fishing and business activity 2. Preferred Shares
relating to fishing Industry 60% of those issued wit par value, and
its capital stock preferences either with respect to (a)
c. Exploration, Development, and payment of dividends (b) distribution of
Utilization of Natural Resources assets after dissolution, or (c) such other
d. Owners of lands preferences as may be stated in the
e. Operation of Public Utility

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Articles of Incorporation which are not - Cumulative Participating
violative of the Corporation Code. Preferred Share
Kinds of Preferred Shares: The holder is entitled not only to
a) Preferred share as to assets dividends in arrears but also, after
b) Preferred share as to Dividends receiving his preferred share of
- Cumulative Preferred Share dividends, to participation with the
a share which entitles the holder holders of common stocks in the
thereof not only to the payment of remaining profits.
current dividends but also to
dividends in arrears. If the 3. Deferred Shares
stipulated dividend is not paid in a Those shares in which the payment of
given year, it shall be added to the dividends upon them is expressly
dividend which shall be due the postponed until the preferred and
following year and the accumulated common shares are paid.
dividends must be paid to the
shareholder before any dividend may 4. Redeemable Shares
be paid to common stockholders. those which permit the issuing
- Non-Cumulative Preferred Share corporation to redeem or purchase its own
It is a share which entitles the shares.
holder thereof to the payment of Limitations:
current dividends only in preference a. Redeemable shares may be
to common stockholders. issued only when expressly
- Participating Preferred share provided for in the Articles of
A share which gives the holder Incorporation;
thereof not only the right to receive b. The terms and conditions
the stipulated dividends but also to affecting such shares must be
participate with the holders of stated both in the articles of
common shares in the remaining Incorporationand in the
profits pro rata after the common certificates of stock representing
shares have been paid the amount of such shares;
the stipulated dividend at the same c. Redeemable shares may be
preferred rate. deprived of voting rights in the
- Non-Participating Preferred Articles of Incorporation, unless
Share otherwise provided in the
It is a share which entitles the Corporation Code.
holder thereof to receive the Redeemable shares may be redeemed
stipulated preferred dividends and regardless of the existence of
no more. The balance, if any, is given unrestricted retained earnings
entirely to the common stocks. provided that the corporation has,

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after such redemption, sufficient because such watering contemplates
assets in its books to cover debts and an original issuance of shares.
liabilities inclusive of capital stock.
Redemption may not be made where 6. Founders Shares
the corporation is: shares issued to organizers and
a. insolvent; or promoters of a corporation in
b. if such redemption would cause consideration of some supposed right or
insolvency or inability of the property. Shares classified as such in the
corporation to meet its debts as AI which may be given special preference
they mature. in voting rights and dividend payments.
But if an exclusive right to vote and be
5. Treasury Shares voted for as director is granted, it needs
Shares which have been lawfully issued the approval of the SEC, and cannot
by the corporation and fully paid for and exceed 5 years from the date of approval.
later reacquired it either by purchase,
redemption, donation, forfeiture or other 7. Par Value Shares
lawful means. Shares with a value fixed in the
If purchased from stockholders: The certificates of stock and in the Articles of
transaction in effect is a return to the Incorporation.
stockholders of the value of their
investment in the company and a 8. No Par Value Shares
reversion of the shares to the Shares having no par value but have
corporation. The corporation must issued value stated in the certificate or AI.
have surplus profits with which to buy Limitations:
the shares so that the transaction will a. No par value shares cannot have
not cause impairment of the capital. an issued price less than P5.00;
If acquired by donation from the b. The entire consideration for its
stockholders: The act would amount to issuance constitutes capital so that
surrender of their stock without no part of it should be distributed
getting back their investments that as dividends;
are, instead voluntary given to the c. They cannot be issued as preferred
corporation. stocks;
Treasury shares need not be sold at d. They cannot be issued by banks,
par or issued value but may be sold at trust companies, insurance
the best price obtainable, provided it is companies, public utilities and
reasonable. When treasury shares are building and loan associations;
sold below their par or issued value, e. The AI must state the fact that it
there can be no watering of stock issued no par value shares as well
as the number of shares;

9
f. Once issued, they are deemed fully a stock issued not in exchange for its
paid and non-assessable. (Sec. 6) equivalent either in cash, property, share,
stock dividends, or services.
9. Voting Shares Water in stock represents the
shares with a right to vote. difference between the fair market
value at the time of the issuance of the
10. Non-Voting Shares stock and the par or issued value of
shares without right to vote. said stock. Both par and no par stocks
The law only authorizes the denial can thus be watered stocks.
of voting rights in the case of
redeemable shares and preferred 12. Escrow stock
shares, provided there shall always deposited with a third person to be
be a class or series of shares which delivered to a stockholder or his assign
have complete voting rights. after complying with certain conditions,
These redeemable or preferred usually payment of subscription price.
shares, when such voting rights
are denied, are still entitled to vote 13. Convertible Shares
on the following: shares that are changeable by the
a. Amendment of Articles of stockholder from one class to another at
Incorporation; certain price and within a certain period.
b. Adoption and amendment of Convertibility of Shares
by-laws; a. Preferred to Common in
c. Sale or disposition of all or the absence of an express provision
substantially all of corporate in the AI as to that convertibility,
property; preferred shares cannot be
d. Incurring, creating or converted to common.
increasing bonded b. No Par Value to Par Value
indebtedness; allowed by SEC provided there
e. Increase or decrease of capital would be no change in the
stock; stockholders percentage interest
f. Merger or consolidation or in the total assets of the
corporations; corporation.
g. Investments of corporate funds
14. Street Certificate
in another corporation;
h. Dissolution of corporation. a stock certificate endorsed by the
(Sec. 6) registered holder in blank and the
transferee can command its transfer to his
name from the issuing corporation.
11. Watered Stock

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15. Over-issued/Spurious Stock - is a number of business operations
stock issued in excess of the authorized peculiar to the business world by
capital stock. Its issuance is null and void. which the company is brought into
existence.
16. Fractional Share - Procuring necessary legislation;
a share with a value less than one full - Getting incorporations together;
share. - Procuring necessary subscribers to the
articles of incorporation.
Doctrine of equality of shares This can, however, be dispensed
- Where the Articles of Incorporation do not with if the persons promoting have
provide for any distinction of the shares of sufficient capital or funds; hence,
stock, all shares issued by the corporation there is no need to attract
are presumed to be equal and enjoy the prospective investors to come in.
same rights and privileges and are also
subject to the same liabilities (Sec. 6). 2 Incorporation Proper(Sec. 10):
- Drafting and execution of the
II. INCORPORATION AND Articles of Incorporation
ORGANIZATION OF PRIVATE - Filing with the SEC of the Articles
of Incorporation accompanied by an
CORPORATIONS
affidavit showing that at least 25% of
the entire authorized shares has been
A. Theories on the Formation of a
subscribed and at least 25% of the
Corporation
entire subscription has been paid in
1. Concession Theory
cash.
espouses that a corporation is an
- If governed by a special law, a
artificial creature without any
favorable recommendation of the
existence until it has received the
appropriate government agency is
imprimatur of the State acting
needed in filing the Articles of
according to law, through the SEC.
Incorporation.
2. Theory of corporate enterprise or
- Payment of filing and publication
economic unit
fees.
espouses that the corporation is not
- Issuance of Certificate of
merely an artificial being, but more of
Incorporation by the SEC (within a
an aggregation of persons doing
period of two years).
business, or an underlying business
unit.
3 Formal Organization and Commencement
of Business Operations (Sec.22):
B. Steps in the Creation of a Corporation
- Election of Board of
(Sec. 10)
Directors/Trustees, its corporate
1 Promotion
officers (President, Vice President,

11
Secretary, Treasurer) within 2 years
from date of incorporation. C. Franchises of a Corporation
- If it fails, then: 1. Primary Franchise
a. corporate powers cease; - Right or privilege granted by the State
b. corporation can be to individuals to exist and act as a
deemed dissolved. corporation after its incorporation. It
- If it commenced transaction of is inalienable. It is a part of the
business but subsequently becomes corporation and cannot be sold or
inoperative for a period of at least 5 assigned; otherwise, a corporation
years, the same shall be a ground for would be created without the consent
the suspension of its corporate of the legislature.
franchise (Certificate of 2. Secondary Franchise
Incorporation). - The special right or privilege conferred
upon an existing corporation to the
Promoter business for which it was created. May
a person who, acting alone or with ordinarily be conveyed/mortgaged
others, takes initiative in founding and under the general power granted to a
organizing the business or enterprise corporation to dispose of its property,
of the issuer and receives except such franchises charged with a
consideration therefor. public use (e.g., to operate a
Incorporators messenger and express delivery
They are those mentioned in the service, to use the streets of a city to
article of Incorporation as originally lay pipes or tracks).
forming and composing the
corporation, having signed the AI and Primary Franchise vs. Secondary
acknowledged the same before a Franchise
notary public. They have no powers
beyond those vested in them by the
statute.
Stockholders/Shareholders
owners of shares in a corporation
which has a capital stock.
Members
corporators of a corporation which
has no capital stock.
Corporators
those whose comprise the
corporation whether as stockholders or
members.

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Primary Franchise Secondary Franchise stocks for the power of one corporation
1. refers to the 1. refers to the to own a stock in another corporation
franchise of being or exercise of rights. is entirely different from its power to
existing as a Example: eminent create or itself become one of the
corporation domain incorporators of another corporation.
2. vested in the 2. deemed vested in - A cooperative cannot be a
individuals who the corporation corporation because a corporation
compose the must be formed under the Corporation
corporation Code, but it has a separate legal
3. It cannot be sold or 3. It may be sold or existence from its members.
transferred because transferred, subject
it is inseparable from to sale on execution 2. Incorporators must have the
the corporation itself. or levy capacity to enter into a valid
contract.
D. Number & Qualifications of - Reason: an act of forming a
Incorporators corporation is contractual in nature.
1. Not less than 5 but not more than 15 - It must be acknowledged before
incorporators who must be natural a notary public (its articles of
persons incorporation).
- It is also to secure the State
- Reason: Artificial persons,
without brain or body and existing and all concerned individuals against
the possibility of any fictitious name
only on paper through legislative
command, cannot create other being subscribed to the articles and to
furnish proof of the genuineness of the
artificial persons.
- Exception: Rural Banks Act of signatures.
1992 (Sec. 4, RA No. 7353). Duly
established cooperatives and 3. Majority of the incorporators
corporations primarily organized to must be residents of the Philippines.
hold equities in rural banks and/or - A corporation composed of
subscribe shares of stocks of a rural entirely aliens may be incorporated as
bank can be incorporators of rural long as a majority of the incorporators
banks. are residents of the Philippines, except
- Exception to the number in cases of nationalized corporations.
requirement: a corporation sole which - Reasons for Residence
is incorporated by only one person, Requirement:
e.g., bishop, priest, rabbi a. Because they transact
- A corporation may become a business in the Philippines.
stock holder in another corporation by
subscribing or purchasing the latters

13
b. So that they could be a. Amendment of the Articles
easily notified (as when there are of Incorporation to be approved by
special or regular meetings). a majority vote of the Board of
Directors/Trustees (board
4. Citizenship Requirement resolution) and ratified at a
- It is a necessary qualification for meeting of stockholders
incorporators in corporations in which representing at least 2/3 of the
a certain percentage of the capital capital stock (or 2/3 of the
stock is required to be owned by members).
Filipino Citizens. This rule applies to b. Written notice of the
directors and trustees. proposed action, time, place of the
- Reason: Certain nationalized activities meeting must be addressed to each
are exclusively reserved to Filipino stockholder as shown in the
Citizens like quasi-public corporations. corporate books;
c. Delivery of the notice to
5. Each of the incorporators of a the stockholder by depositing the
Stock Corporation must own or be a same to the addressee in the post
subscriber to at least one (1) share of office with postage prepaid, or
the capital stock of the corporation. served personally
- Reason: The presumption is that d. Amendments (with
where an incorporator has a pecuniary appropriate markings) will be
interest in the corporation, he will be submitted to the SEC attached to
concerned with the management of its the original copy.
affairs. e. Amendment is effected
before the corporate term of
E. Corporate term (limitations [sec. 11]) existence, for after dissolution by
1. Shall not exceed 50 years at any given expiration of the corporate term,
time. no more corporate life to extend:
2. Extension may be made by
amendment of the Articles of Doctrine of Relation: Where the
Incorporation. delay in effecting the amendment is
- When: due to the neglect of the officer with
a. Within the period of 5 years before whom the application is required to be
the expiry date. filed or to a wrongful refusal on his
b. Earlier than 5 years could be made part to receive it, the same will be
if there is a justifiable reason as treated as having been filed before the
determined by the SEC. expiry date. But the occurrence of a
- Procedure for Extension (Sec. 37) fortuitous event or force majeure may
justify the doctrine. The doctrine does

14
not apply if the delay is attributable to 5. PAID-UP CAPITAL STOCK The
the corporation. amount paid by the stockholders on
Appraisal Right of Dissenting subscriptions from unissued shares of the
Stockholder: corporation.
He can demand payment for the full 6.OUTSTANDING CAPITAL STOCK
value of his share if he does not wish The total amount of the capital stock issued
to join. to subscribers except treasury shares.
7.UNISSUED CAPITAL STOCK That
F. Corporate Structure of a Stock portion of the capital stock that is not issued
Corporation or subscribed. It does not vote and draws no
Definition of Terms: dividends.
1.CAPITAL The value of the actual 8. LEGAL CAPITAL The amount equal to
property or estate of the corporation whether the aggregate par value and/or issued value
in money or property. Its net worth or of the outstanding capital stock.
stockholders equity is its assets less
liabilities. (1) Minimum Capital Stock
2.CAPITAL STOCK The amount fixed in a. General Rule: No minimum capital
the articles of incorporation, to be subscribed stock is required for stock corporations
and paid in or agreed to be paid in by the incorporated under the Corporation
stockholders of a corporation, in money, Code as long as the paid-up capital is
property, services, or other means at the not less than P5,000.00
organization of the corporation or afterwards Exception: Filipino percentage
and upon which it is to conduct its business, ownership requirement regarding
such contribution being made either through corporate capital in nationalized
directly through stock subscription or indirect corporations.
through the declaration of stock dividends.
3. AUTHORIZED CAPITAL STOCK The (2) Minimum Subscription and Paid-Up
capita stock divided into shares with par Capital for Incorporation
values. Par value stocks are required in the a. Minimum Subscribed Capital At
case of corporations issuing preferred shares, least 25% of the authorized capital
as well as in the case of banks, trust stock as stated in the Articles of
companies, insurance companies, building Incorporation must be subscribed at
and loan associations, and public utilities. It the time of incorporation;
is the total amount in the charter which may Computation of the 25% subscription
be raised by the corporation for its operations. requirement:
4.SUBSCRIBED CAPITAL STOCK The 1. Where capital stock consists of par
total amount of the capital stock subscribed value shares:
whether fully paid or not. The minimum subscription should
be 25% of the amount of the

15
authorized capital stock or 25% of to do business as they arise from the
the aggregate value of all the start of its operations.
shares of stock the corporation is - Exception: when special laws require
authorized to issue. higher minimum capitalization such
In par value stock corporations, as:
the percentage subscription 1 Insurance Corporations P5
requirement shall always be based million
on the amount of the authorized 2 Pawnshop established as a
capital stock irrespective of the corporation P100,000.00
class, number, and par value of the 3 Financial Intermediary applying
shares. for authority to perform quasi-
2. Where the capital stock consist of banking functions P50 million
no par value shares:
The 25% requirement shall be Ways of increasing capital stock:
computed on the basis of the entire 1. By increasing the number of shares and
number of authorized shares. retaining the par value;
Corporations whose shares have no 2. By retaining the number of shares and
par value have no authorized increasing the par value;
capital stock the issued price of no 3. By increasing the number of shares and
par value shares need to be fixed in increasing the par value;
the articles of incorporation. 4. By reinvesting retained earnings to the
3. Where the capital stock is divided capital and issuing stock dividends.
into par value shares and no par
value shares: Tools available to the stockholders to
The requirement as to par value replenish capital
shares is as indicated above and 1. Additional subscription to shares of stock
for the no par value shares, the of the corporation by the stockholders or
25% is based on the number of the by investors;
said no par value shares. 2. Advances by the stockholders to the
corporation;
b. Minimum Paid-Up Capital At 3. Payment of unpaid subscription by the
least 25% of the total subscription stockholders.
must be paid upon subscription but
must not be less than P5, 000.00.
- Reason: To give assurance to the G. Articles of incorporation (AI)
investing public dealing with the new
corporation that it is financially and Articles of Incorporation
actually able to operate and undertake - The document prepared by the persons
establishing a corporation and filed with

16
the SEC containing the matters required original subscriber, the amount
by the Corporation Code. subscribed and paid;
4. If some or all of
Significance the shares are without par value.
- Its issuance signals the birth of the - If non-stock corp:
corporations juridical personality. 1. The amount of its capital;
2. Names, nationalities, and residences
Language Used of the contributors; and
- Any of the official languages duly signed 3. The amount contributed by each.
and acknowledged by all of the 4. The articles of incorporation must
incorporators. state the amount of its capital or
money contributed or donated by
Contents: specified persons.
- Generally 5. Sworn statement of the treasurer
1. Name of the corporation; elected by the subscribers showing
2. Specific purpose for which the corp. is a. A copy of the articles filed
being incorporated; which is returned with the
3. Location of principal office which must certificate of incorporation issued
be within the Philippines; by the SEC under its official seal
4. Corporate term; becomes its corporate charter.
5. Incorporators names, nationalities b. Corporation created by special
and residences; law has no articles of
6. Number of Directors or trustees, incorporation. It draws its life not
which shall not be less than 5 nor from a general law, but from a
more than 15; direct act of Congress.
7. Names, nationalities and residences of c. If that corporation is regulated
persons acting as directors/trustees by a government agency, submit
until the first regular also a favorable recommendation of
directors/trustees are duly elected and that agency.
qualified;
- If stock corp: Corporate name
1. Amount of its - Necessity of putting the corporate name:
authorized capital stock in lawful 1. The corporation acquires juridical
money of the Philippines; personality under the name stated in
2. Number of the articles of Incorporation;
shares into which it is divided; 2. The corporation has the power to
3. If par value succession thru that name;
shares, the par value of each, names, 3. It identifies and distinguishes it
nationalities and residences of the from other corporations;

17
4. By its name it is authorized to d. Using the words Rural Bank,
transact business; when not authorized under the
5. Corporate/trade name is a property Rural Banks Act (RA No. 7353);
right, a right in which it may assert e. Using the term savings and loan
and protect against the whole world. association when not organized
- Guidelines for Corporate Name (Sec. under the Savings and Loan
18) Association Act (RA No. 3779), or
1. Not identical or deceptively or the term development bank
confusingly similar to that of another unless organized under the Private
existing corporation or to any other Development Banks Act (RA No.
name already protected by law. 4093);
2. Not patiently deceptive or contrary to f. Using the word National as
existing law; portion of their name or title,
3. The name of the corporation must end except the Philippines National
with word Incorporated or Inc. Bank (PD 694), due to its
unless it includes the word connotation of being a government
corporation. agency or a government-owned or
4. Prohibited Use of Certain Words: controlled corporation;
a. Emblem, official seal, and the g. UN, Olympic, and Bureau in
name of the United Nations both in full or abbreviated form or
its full or abbreviated form for business purposes;
commercial purposes (RA No. 226); h. Financing Company, Finance
b. Unlawful to use the word Investment Company, unless
Bonded, in part or in whole as organized as a financing company
business name of those (RA No. 5980);
maintaining any warehouse not i. Engineer, or Architect unless
licensed under the General Bonded used by persons properly
Warehouse Act (Act No. 3893). registered and licensed as civil
c. Using the word bank, banking, engineers or architects (RA Nos.
banker, building and loan 544, 545);
association, trust corporation, j. Geodetic Engineers is prohibited
trust company, or words of except when majority of the
similar import, when not members of the partnership or
conducting the business of corporation are properly registered
commercial banking corporation, and licensed as geodetic engineers
trust corporation, savings and (RA No. 4374);
mortgage bank, or building and k. subsidiary corporation of a foreign
loan association; firm may carry the name of the
principal company with the word
Phil. Or Philippines affixed to

18
the firm name, with the written
consent of the mother company. Corporate purpose:
l. The name of an internationally - It must be specified with sufficient clarity
known foreign corporation or one to define with certainty the scope of its
similar to it may not be used by a business. If more than one purposes, state
domestic corporation without the the primary and the secondary purpose.
prior consent of the former; - The law allows a corporation to have
m. If the full name of a person forms secondary purposes because the primary
part of the corporate name, the purpose may not turn out to be profitable,
consent of such person or his heir and in such case, all it has to do is to
must be obtained; and invest its funds in any such purposes
n. The word State, National, instead of organizing a new corporation.
Maharlika and the Barangay Reasons:
cannot be used as part of the a. A person who intends
corporate name since these are to invest his money in the business
reserved for the exclusive use of corporation will know where and in
the government. what kind of business or activity
his money will be invested;
Doctrine of secondary meaning b. The directors and
- A word or phrase originally incapable of officers of the corporation will
exclusive appropriation with reference to know within what scope of
an article on the market, because business are they authorized to
geographically, or otherwise descriptive, act; and
might nevertheless have been used so long c. A third person who has
and so exclusively by one producer with dealings with the corporation will
reference to his article, that in that trade know by perusal of the articles
or to that branch of the purchasing public, whether the transaction or dealing
the word or phrase has come to mean that he has with the corporation is
the article was his product. Ex. Ang within the authority of the
Tibay, merely descriptive, but its corporation or not.
products are already associated with it.
- Test of infringement: Whether the Principal place
similarity is such as to mislead a person - The articles of incorporation must state
using ordinary care and discrimination. the principal place where the principal
The right to the exclusive use of a office of the corporation is to be
corporate name with freedom from established or located, in which place,
infringement is determined by priority of must be within the Philippines. The place
adoption. to be designated is the city or
Remedy in case of infringement: municipality where the principal office is
Injunction. to be located.

19
- Purpose of the requirement for definite has been duly approved by the required
place: For effective regulation and vote of the stockholders/members.
supervision of the corporation. 6. Submission to the SEC; and
7. It takes effect upon approval
AMENDMENTS OF THE ARTICLES OF by the SEC or from the date of filing if not
INCORPORATION (PROCEDURE): (Sec. acted upon within 6 months if the delay is
16) not attributable to the corporation.
1. Board of Directors convene to This rule does NOT apply if the
a meeting and make a proposal for amendment is intended to dissolve the
amendments to be converted into a board corporation. You have to wait for the
resolution; approval of the SEC. There can be no
2. The resolution stating such presumption that when 6 months have
amendments must be approved by a already lapsed, it is deemed approved.
majority vote of the Board of The reason being that dissolution
Directors/Trustees; must be made at the consent of the
3. The approved resolution State.
must be submitted to the stockholders for
ratification; Non-amendable Facts in the Articles of
4. The required vote for Incorporation
ratification is the approval of stockholders - Those matters referring to facts
representing at least 2/3 of the existing as of the date of the
outstanding capital stock or 2/3 of the incorporations such as:
members (for non-stock); a meeting to 1 Names of incorporators;
that effect may not be necessary since 2 Names of original subscribers to the
they can just submit their written assent capital stock and their subscribed and
representing at least 2/3 of the paid-up capital;
outstanding capital stock. 3 Treasurer elected by the original
Note: Written assent is not allowed in (a) subscribers;
extending or shortening the corporate 4 Members who contributed to the
term (Sec. 37); (b) decreasing or initial capital of a non-stock
increasing the capital stock and (c) in corporation;
close corporations (Sec. 103), a meeting of 5 Date and place of execution of the AI;
the stockholders is always necessary. 6 Witnesses to the signing and
5. The articles, as amended, acknowledgment of the AI.
must be indicated by underscoring the
change or changes made, a copy thereof Grounds for the Disapproval of the
must be certified under oath by the Articles of Incorporation
corporate secretary and the fact that it 1. Not substantially in compliance with
the form prescribed by the Code;

20
2. Purpose/purposes are patently ARTICLES OF INCORPORATION vs. BY-
unconstitutional, illegal, immoral or LAWS
contrary to government rules and
regulations;
3. Treasurers affidavit concerning the
amount of capital stock subscribed
and/or paid is false;
4. Required percentage of ownership of
the capital stock to be owned by
citizens of the Philippines has not
been complied with as required by
existing laws or the Constitution. Ex.
Monetary Board of the Central Bank
for banking institutions.
However, if the corporation is involved
in a public utility the SEC may give
such corporation a reasonable time to
modify the objectionable portion.

Grounds for Suspension/Revocation of


Certificate
1. Fraud in procuring the
certificate of incorporation (ex. Paid-
up capital);
2. Serious
misrepresentation causing great
damage and prejudice to the public;
3. Refusal to comply with a
lawful order of the SEC;
4. Continuous inoperation
for a period of at least 5 years;
5. Failure to file by-laws
within the required period; and
6. Failure to file required
reports in appropriate forms as
determined by the SEC within the
prescribed period.

21
ARTICLES OF BY-LAWS
INCORPORATION
1. It constitutes the 1. It is merely for
charter or the internal
fundamental law of government of the
Rules on conversion(SEC Opinion)
the corporation; a corporation but has
1. Stock to non-stock corporation
contract between: the force and effect
- May be made by mere amendment of
a. the corporation and of a contract
the articles of Incorporation.
the between:
2. Non-stock to stock corporation
stockholders/members; a. the corporation
- The corporation must first be
b. between and among and the
dissolved; mere amendment of the AI
the stockholders/ stockholders
would not suffice because the
members; and /members; and
conversion would change the corporate
c. the corporation and b. between and
nature from non-profit to monetary
the State among the
gain.
stockholders/
members
The conversion without dissolving it first
2. It is executed before 2. It may be
would be tantamount to distribution of its
incorporation executed after
assets or income to its members inasmuch
incorporation; it
as after its conversion, the asset of the
may be filed
non-stock corporation would now be
simultaneously
treated as payment to the subscriptions of
with the AI
the members who will now become
stockholders of the corporation.

3. It is a condition 3. It is a condition
Formal organization and
precedent in the subsequent; its
commencement of the transaction of the
acquisition of absence merely
business (sec. 22)
corporate existence furnishes a ground
- These are conditions subsequent which
for the revocation
may be satisfied by substantial
of the franchise.
compliance in order that a corporation
4. It is amended by a 4. It may be
may legally continue as such.
majority vote of the amended by a
- Acts of Constituting Formal Organization
BOD/BOT, and majority vote of the
1. Adoption of by-laws and filing of
stockholders BOD/BOT, and
the same with the SEC;
representing at least majority vote of the
2. Election of the Board of Directors
2/3 of the outstanding outstanding capital
and officers by the board pursuant to
capital, or 2/3 of the stock, or a majority
the by-laws;
members in case of of members in case
3. Establishment of principal office;
non-stock corporations of non-stock
4. Subscription and payment of the
corporations
capital stock, etc
5. The power to 5. The power to
amend/repeal the AI amend/repeal the
cannot be delegated by by-laws or adopt
the stockholders/ new by-laws may
members to the be delegated by the 22
BOD/BOT 2/3 of the
outstanding capital
stock or 2/3 of the
Effects of Subsequent Continuous 3. Corporators
Inoperation a. Stockholders
1. If the corporation does not formally b. Members
organize and commence transaction 4. Governing Body (absolute control and
within a period of 2 years, corporate direction)
powers cease and corporation is a. Board of Directors
deemed dissolved; b. Board of Trustees
2. If it commenced transaction but 5. Managing and Administrative Body
subsequently becomes continuously a. Executive committee
inoperative for a period of 5 years, it b. Contracted Mangers
serves as a ground for the suspension 6. Corporate Officers
or revocation of its corporate franchise
(certificate of incorporation). A. Qualifications of Directors/Trustees
1. Every director (including incorporating
The rule that a corporation must formally director) must own at least one share of
organize and commence the transaction of the capital stock, and if ceases to own at
its business or the construction of its least one share in his own name, he
works within 2 years from the date of its automatically ceases to be a director (Sec
incorporation (the exercise of its 23). For non-stock corporation, only
secondary franchise) does not apply to: members of the corporation can be elected
1. Special to seat in the Board of Trustees.
Corporations, because the law creating Person in whose name it has been
them provides for the commencement issued is the one to be elected
of their juridical personality; Q. When is it necessary that he is the
2. Corporati owner?
on Sole, the person incorporating is A: At the time of assumption of office
not required to wait for the certificate Note: Both husband and wife own
of incorporation. Mere filing of the share either can be elected at any
Articles of Incorporation makes it given time.
incorporated already. 2. A majority of the directors/trustees must
be residents of the Philippines
--------------------------------------------------------------- 3. He must not have been convicted by final
III. BOARD OF judgment of an offense punishable by
DIRECTORS/TRUSTEES/OFFICERS imprisonment for a period exceeding 6
years or a violation of the Corporation
Subject structure: components of a Code committed within 5 years from the
corporation date of his election (Sec. 27).
1. Promoter 4. Only natural persons can be elected
2. Incorporators directors/trustees.

23
5. Other qualifications as may be prescribed 3. They are directly conferred by statute;
in the by-laws of the corporation (e.g. 4. Can bind the corporation only by action
must not be engaged in business in taken at a board meeting.
competition with the corporation) Reasons:
(Gokongwei case, 89 SCRA 336) a. A meeting is necessary in order
that any action may be deliberately
B. BOD/BOT as repository of corporate adopted, after opportunity for
powers discussion and an interchange of
- Gen. Rule: views, and
The corporate powers of the b. As agents of the corporation
corporation, all business conducted managing its affairs,
and all property of such corporation directors/trustees have no power to
controlled and held by the BOD/BOT act other than as a board.
(Sec. 23)
- Exceptions: Business judgment rule
1. In case of an Executive Committee The BOD/BOT is the body entrusted with the
duly authorized in the by-laws; general control and management of the
2. In case of a contracted manager business of the corporation having plenary
which may be an individual, a power and authority to transact the ordinary
partnership, or another corporation. business of the corporation within the scope
(Note: In case the contracted manager of its charter power. The SEC, court, and
is another corporation special rule: stockholders cannot overrule a pure business
Sec. 44 applies) judgment.
3. In case of close corporations, the
stockholders may manage the business Three-Fold Duties of Directors
of the corporation instead by a board 1. Duty of Obedience
of directors, if the Articles of - To direct the affairs of the corporation
Incorporation provide. only in accordance with the purposes
for which it was organized
C. Nature of Powers of the Board 2. Duty of Diligence
1. They are original and undelegated 3. Duty of Loyalty
Theory of Original Power: the powers
of the board are original and Obligation and liabilities of the board of
undelegated. The stockholders or directors, trustees and officers (sec. 31)
members do not confer, nor can they 1. Liability for Damages (director/trustee)
revoke, those powers. - Solidary liability
2. They are derivative only in the sense of a. Willfully and knowingly votes or
being received from the State in the act of assents to patently unlawful acts of
incorporation the corporation,

24
b. Gross negligence or bad faith in 4. Dissolution if the abuse amounts to a
directing the affairs of the corporation; ground for quo warranto but the Solicitor
c. Acquiring any personal or general refuses to act
pecuniary interest in conflict with his
duty as such director or trustee. Special fact doctrine
d. Agreeing or stipulating in a - Director takes advantage of an
contract to hold himself liable with the information by virtues of his office to the
corporation disadvantage of the corporation.
e. Consenting to the issuance of a
watered stocks, or, having knowledge Inherent power of amotion
thereof, failing to file objections with - It is the power to remove directors,
the corporate secretary (Sec.65) trustees or officers prior to the expiration
(Personal Liability) of their term
f. By virtue of specific provision of
law. D. Election of directors or trustees (sec.
24)
2. Liability for Bad Faith or Gross a. Stock Corporation
Negligence (BOD/trustees/officers) - directors elected among the holders of
- Personal Liability stocks
a. Any wrongful disposition of b. Non-stock corporation
corporate assets and for any loss or - trustees elected from among the members
injury to the corporation arising from of the corp.
their gross negligence or unauthorized
acts of violation of their duties; Requirements
b. Termination of employees which 1. Presence of majority
are done with malice or in bad faith. stockholders/members in person or by
proxy (written/authorized)
3. Liability for secret profit (BOD/ 2. By balloting if requested by any voting
Trustees/officers) stockholders/members, otherwise by viva
a. Profits which otherwise would have voice
accrued to the corporation;
b. Profits derived from ultra vires Methods of Voting
transaction. 1. Straight Voting
- Every stockholder may vote such
Remedies in case of mismanagement: number of shares for as many persons
1. Derivative suit or complaint as there are directors to be elected.
2. Injunction, if the act has not yet been - Illustration:
done X owns 100 shares in ABC
3. Receivership Corporation. If there are 5 directors to

25
be chosen, X is entitled to 500 votes - As many votes as there are trustees to be
obtained by multiplying 100 by 5. He elected but can give only 1 vote per
may give to the 5 candidates he wants trustee
to be elected 100 votes each. - If shares are delinquent-cant vote
Under this method, the votes - Q. Can a holder of preferred shares vote?
are distributed equally among the 5 A. No, not allowed to vote in the
candidates without preference. election of BOD
- Q. Can one vote by zones:
2. Cumulative Voting A. No, implied from Sec. 24-election
a. Cumulative Voting for one requires the majority of the capital
candidate stock or majority of the members
- A stockholder gives to one entitled to vote.
candidate as many votes as the - TERM: shall hold office for 1 year until
number of directors to be elected their successors are elected and qualified.
multiplied by the number of his
shares shall equal. Hold-over principle
- In the above example, X gives 500 Upon failure of a quorum at any meeting of
votes to one candidate. the stockholders or members called for an
b. Cumulative Voting by Distribution election, the directorate naturally holds over
- A stockholder cumulates his shares and continuous to function until another
by multiplying also the number of directorate is chosen and qualified. The
his shares by the number of failure to elect does not terminate the terms
directors to be elected and of incumbent officers nor dissolve the
distribute the same among as corporation.
many candidates as he shall see fit.
- Also in the illustration above, with Corporate Elections - only means by
100 shares, X is entitled to 500 which stockholders can control the
votes if there are 5 directors to be composition and the action of the Board.
elected. X may distribute his votes
to candidates D= 100; E=100; Number
F=100; G = 150; H = 250. Any a. Stock Corporation not less than 5 but
combination is allowed provided not more than 15 (Sec. 14[6])
the total of votes cast by him does b. Non-Stock Corporation not less than 5
not exceed 500 votes. (or 3?) but may be more than 15 with the
- Rationale: To enable minority term of office of 1/3 of their number
stockholders to have adequate expiring every year (Sec. 92 [1])
representation in the board. c. Close Corporation no board (no limit) or
can have if pass a resolution
Non stock corporation d. Corporation Sole =1

26
- Gen. Rule: Simple majority can act on
Corporate officers(Sec. 25) any matter.
- Those whose offices are created by the - Exception: in the election of corporate
Corporation Code or the corporations officers which shall require the vote of a
by-laws. They do not enjoy security of majority of all the members of the Board
tenure, and their incumbency is (all of them are present)
within the business judgment
discretion of the BOD/BOT. Their Requisites for a valid board meeting
removal is considered an intra- 1. Meeting of the directors or trustees
corporate controversy and beyond the duly assembled as a board;
reach of labor tribunals. 2. Presence of the required quorum;
- Immediately after their election, the 3. Decision of the majority of quorum or,
directors must formally organize by in other cases, a majority of the entire
the election of: board; and
1. President must be a director 4. Meeting at the place, time and manner
2. Treasurer may or may not be a provided in the by-laws.
director; as a matter of sound
corporate practice, must be a No proxy in a board meeting
resident of the Philippines - directors or trustees cannot validly act
3. Secretary must be a resident and by proxy on account of
citizen of the Phils.; need not be a a. their responsibility to the
director unless required by the by- corporation and
laws b. their being voted into office
4. Other officers provided for in the presumably because of their
by-laws personal qualifications.

Two or more position maybe held For spouses who own the same share
concurrently by the same person jointly, only one of them can be elected on
President and Treasurer at the the board.
same time but NOT President and
Secretary. Valid corporate acts
- Gen. Rule: All corporate acts to be valid
Officers are elected by the Board in a must be from a board meeting.
valid meeting. - Exceptions: (Board meeting not required
for validity)
Quorum
1. Directors are the only stockholders
- Such number of the membership of a 2. When a corporate act is undertaken by
collective body as is competent to transact a person already authorized by the
its business or do any other corp. act. Board

27
3. If the necessity of a Board meeting is A special meeting called for the removal of
waived. a director/trustee must be called
4. Act done or authorized by the BOD 1. By the SECRETARY on order of the
without a valid board meeting is President, or
ratified unanimously by the 2. On the written demand of
stockholders. stockholders holding or representing
5. Management contract at least a MAJORITY of the
6. Executive Committee acts within the outstanding capital stock (or on the
power delegated to it. written demand of at least
MAJORITY members entitled to vote)
Report of election of BOD/BOT and
Officers(Sec. 26) If the Secretary fails or refuses to call
- Secretary or other officer of the a special meeting upon such demand
corporation to submit with SEC the or refuses to give the notice, or if there
names, nationalities, and residences of is no Secretary, the call for the
the directors, trustees and officers elected meeting may be addressed directly to
within 30 days after the election. the stockholders or members by ANY
- Director/trustee/officer dies, resigns or stockholder or member signing the
in any manner ceases to hold office his demand.
heir, the secretary or any other officer of
corporation or the director, trustee or The vacancy resulting from the removal
officer himself, to immediately report such may be filled:
fact to the SEC. (as the case may be) a. by
election at the same meeting without
Removal of directors or trustees(Sec. 28) further notice, or
1. Hold a meeting regular or special b. at any
Regular meeting as provided in the by- regular or special meeting called for
laws/AI the purpose, after giving notice
2. Prior notice to stockholders of the
intention to remove a director Removal may be with or without cause;
-by the SEC upon orders of the President BUT a minority director can only be
or majority of members removed with cause.
3. Notice must contain the particular
purpose-removal specified Vacancies in the office of
4. Vote stockholders representing 2/3 of director/trustee(Sec. 29)
outstanding capital stock, or in non-stock - Vacancy other than removal by the
corporations, by 2/3 of the members SH/member (Death, Resignation,
entitled to vote Abandonment, Disqualification, or
Expiration of term) is filled by at least
majority of the remaining

28
directors/trustees, if still constituting a provision to the contrary in the by laws
quorum. and subject to the limitation.

Vacancies to be filled by a vote of Liability of directors/trustees (Sec. 31)


stockholders or members: - Nature of Directors/Trustees Position
1. In case of removal of a director or trustee; They are agents of the corporation;
2. If the remaining directors or trustees do they also occupy a fiduciary relation to
not constitute a quorum and therefore the corporation.
could not fill the vacancies created by
death, resignation, disqualification, Instances when directors/trustees
abandonment or expiration of the term of maybe held liable for damages
a director or trustee; 1. He willfully and knowingly votes or
3. If the vacancy is created because of assents to patent unlawful acts of the
increase in the number of corporation
directors/trustees at any time of the year. 2. He is guilty of gross negligence or bad
faith in directing the affairs of the
Compensation of directors(Sec. 30) corporation-refuse to make a
- Gen. Rule: BOD/BOT are not entitled to decision/withholds the vote required.
compensation except for reasonable per 3. He acquires any personal or pecuniary
diems. interest in conflict with his duty as such
- Exceptions (that they can receive director/trustee. (investment in another
compensation): corporation competing directly with the
1. If provided for in the by-laws; or corporation.)
2. By a vote of stockholders representing
at least a majority of the outstanding The erring board members shall be held
capital stock. jointly and severally liable for all the
- Limitation (in case they are damages resulting therefrom suffered by
compensated): the corporation, its SH/members or other
The yearly compensation of directors shall persons.
in no case exceed 10% of the NET income
before income tax of the corporation Liability of a director/trustee, or officer
during the preceding year. as a trustee for the corporation
Buta corporate officer who is not a 1. When a director, trustee or
director may be compensated as an officer attempts to acquire or acquires, in
employee of the corporation. violation of his duty, any interest adverse
A corporate officer who is also a director to the corporation
may likewise be compensated, in addition 2. In respect to any matter which
to his per diems, the amount to be fixed by has been reposed in him in confidence, as
a board resolution in the absence of

29
to which equity imposes a disability upon meeting approving the contract
him to deal in his own behalf. was not necessary for the approval
he must account for the profits which of the contract;
otherwise would have accrued to the c) The contract is fair and
corporation. reasonable under the
circumstances;
The effects under Sec. 31 and 34 d) In case of an officer, there
applies even if he uses his own money; was previous authorization by the
if violated, no ratification BOD/BOT.
SEC 31: Violated is a specific trust - If any of the first 2 conditions is
reposed upon a director absent, in the case of a contract with a
SEC 34: Violated is general trust director/trustee, the contract may be
reposed on all directors ratified by the vote of the stockholders
Applies also if no specific instructions representing at least 2/3 of the OCS or
given (no decision made by Board) of 2/3 of the members in a meeting
Doctrine of Corporate opportunity will not called for the purpose, PROVIDED:
apply if the director acted in good faith a) That full disclosure of
Acquisition is not vested to any activity of the adverse interest of the
the corporation dir/trustee involved is made at
If corporation is unable to acquire such meeting.
opportunity no prohibition imposed b) That the contract is fair
upon him and reasonable under the
circumstances
Special rules on contracts entered into - Although not all the said conditions
by directors/trustees or officers: are present, the corporation may elect
NOT to attack or question the validity
1. Contracts of Self-Dealing of the contract, without prejudice,
Directors (Sec. 32) however , to the liability of the
- Contracts which are entered into by director/trustee for damages under
the corporation with one or more of its Sec. 31.
own directors/trustees, or officers are
voidable, UNLESS: 2. Contracts of Interlocking
a) The presence of such Directors (Sec. 33)
director/trustee in the board - Contracts entered into between
meeting approving the contract corporations with interlocking
was not necessary to constitute a directors (interest of said directors is
quorum for such meeting; substantial exceeding 20% of the
b) The vote of such outstanding capital stock) are VALID
director/trustee in the board provided that:

30
a) The contract is not c. If the corporation is unable to
fraudulent; and acquire the opportunity
b) The contract is fair and d. If no prohibition is imposed
reasonable under the upon him
circumstances. e. If the prohibition imposed upon
- If interest in both corporation are him is related but there is
nominal (less than 20% of OCS), the ratification
contract is valid
- If both substantial, the contract is Rationale of applying sec. 32
valid - As if the corporation is dealing with its
- If one is nominal and the other is own directors
substantial , the contract is valid if all
the conditions set in Sec 32 are Section 35: ExecutiveCommittee
present with respect to the corporation - Body given corporate powers which is
in which he has nominal interest composed of not less than 3 as provided
for in the by-laws to assume
3. Doctrine of Corporate Opportunity - Provided for in the by-laws
(Sec. 34) - Not less than 3 members of the board to
- Disloyalty of a Director be appointed by the board.
- Unless his act is ratified, a director - Gen. Rule: An act by majority vote, all
shall refund to the corporation all the other matters delegated by the by-laws or
profits he realizes on a business on a majority vote of the board.
opportunity which: - Exceptions:
a) The corporation is financially 1. approval of any action for which
able to undertake; shareholders approval is also required
b) from its nature, is in line with 2. the filling of vacancies in the board
the corporations business and 3. the amendment or repeal of by-laws in
is of practical advantage to it; the adoption of new by laws
and 4. the amendment or repeal of any
c) the corporation has an interest resolution of the board or by its
or a reasonable expectancy. express terms is not so amendable or
- The rule shall apply notwithstanding repealable
the fact that the director risked his 5. a distribution of cash dividends to the
own funds in the venture. shareholders.
- When doctrine is NOT applicable:
a. If the director acted in good Purpose of creating executive committee
faith - To assure prompt and speedy action and
b. Acquisition is not related to any solution to important matters with the
activity of the corporation

31
need for a board meeting especially where 7. To purchase, receive, take or grant,
such meeting cannot readily be held hold, convey, sell, lease, pledge,
mortgage and otherwise deal with
such real and personal property,
--------------------------------------------------------------- including securities and bonds;
IV. POWERS OF CORPORATION 8. To enter into merger or consolidation;
9. To make reasonable donations to
- EXPRESS POWERS a. public welfare
- granted by law, Corporation Code, and b. hospital
its Articles of Incorporation c. charitable
- INHERENT/INCIDENTAL POWERS d. cultural
- not expressly stated but are deemed to e. scientific
be within the capacity of corporate f. civic
entities. g. similar purposes
- IMPLIED/NECESSARY POWERS Provided NO donation is given to any:
- exist as a necessary consequence of a. Political party
the exercise of the express powers of b. Candidates
the corporation or the pursuit of its c. Partisan political activity
purposes as provided for in the 10. To establish pension, retirement, and
Articles of Incorporation. other plans for the benefit of directors,
trustees, officers and employees
Theory of general capacity 11. To exercise other powers essential or
- A corporation is said to hold such necessary to carry out its purposes.
powers as are not prohibited or withheld
from it by general law (everything is Two sources of express powers of a
allowed except when prohibited) corporation:
1. Those enumerated in Sec. 36
General Powers and Capacity (Sec 36) 2. Purpose clause of the AI
Express powers:
1. To sue and be sued Theory of special capacity
2. Of succession - A corporation cannot exercise powers
3. To adopt and use of corporate seal except those expressly or impliedly given
4. To amend its Articles of (everything is prohibited except when
Incorporation allowed)
5. To adopt its by-laws
6. For stock corporation to issue and
sell stocks to subscribers and treasury Special powers (Secs. 37 44)
stock, for non-stock corporations to 1. To extend or shorten corporate
admit members; term

32
Requirements: Right of appraisal is available in
a. Amendment of articles of case of extension (Sec. 37) and also
incorporation available in shortening the corporate
b. Approval of the amendment by term (Sec. 81[1]).
majority vote of the BOD/BOT
c. Written notice of the proposed Sec. 38 Power to increase or decrease
action and of the time and place of capital stock; incur, create or increase
the meeting to each stockholder or bonded indebtedness
member. - Requires:
d. Ratification in the meeting by 1. Proposed action approved by a majority
stockholders representing at least vote of the BOD
2/3 of OCS or at least 2/3 of 2. Written notice of the proposed action and
members of the time and place of the stockholders
2. To increase or decrease capital meeting to be addressed to each
stock; stockholder
3. To incur, create or increase bonded 3. Approved by stockholders representing 2/3
indebtedness of OCS
4. To deny pre-emptive right 4. A certificate in duplicate of said corporate
5. To sell, dispose, lease, encumber act shall be signed by majority of the BOD
all or substantially all of corporate assets; and and countersigned by the Chairman
6. To purchase or acquire own shares and the Secretary of the stockholders
provided: meeting
a. there is an unrestricted 5. A certificate of increase must be
retained earnings accompanied by the Treasurers affidavit
b. it is for a legitimate purpose showing that at least 25% of such
7. To invest corporate funds in increased capital stock has been
another corporation or business for other subscribed and that at least 25% of the
purpose other than primary purpose; amount subscribed has been paid.
8. To declare dividends out of
unrestricted earnings Corporate act to take effect from and after
9. Enter into management contract the approval of the SEC.
with another corporation (not with an No decrease in capital stock shall be
individual or a partnership within approved by SEC if it will prejudice
general powers) whereby one corporation corporate creditors
undertakes to manage all or substantially Bonds issued by the corporation shall be
all of the business of the other corporation registered with the SEC which is given
for a period not longer than 5 years for the power to determine the sufficiency of
any one term. (Sec. 37) the terms of such bonds

33
Where a corporation increase capital - The stockholders right to subscribe to all
stock. SH are entitled to a pre-emptive issues or disposition of shares of any class
right to subscribe to a sufficient number of in proportion to his stockholdings, the
shares in order to maintain their previous purpose being to enable the shareholder
relative voting power. The corporation to retain his proportionate control in the
must give the SH a reasonable period corporation and to retain his equity in the
which to exercise such right. surplus.
Right of appraisal NOT available in this - Pre-emptive right granted in favor of the
Sec. 38. corporation only is null and void, because
it unduly inhibits the SHs right to
Non-stock corporation may incur or create dispose of their shares in the manner they
bonded indebtedness, or increase the desire. However, if in the subscription
same with the approval of: agreement, the SH waives his pre-emptive
1. majority vote of the BOT and right, this is valid because this has been
2. at least 2/3 vote of the members in a individually and freely bargained for.
meeting duly called for the purpose. Waiver of a right is valid and is not
prohibited. What is prohibited is the
Power to deny pre-emptive right(Sec. 39) blanket restriction in the by-laws.
- All SH of a stock corporation shall enjoy - A contract entered into between the two
pre-emptive right to subscribe to all majority SH of the corporation providing
issues or disposition of shares on any for suspension of the right to dispose
class, in proportion to their respective shareholding during the limited period
shareholdings. provided for in the agreement and
imposes a penalty if any of the parties
Pre-emptive right shall not extend to: should dispose of their shareholdings
1. Shares to be issued in compliance with within the limited period, is a valid
laws requiring stock offering or minimum agreement and not violative of the policy
stock ownership by the public; against restraint of trade since it is
2. Shares issued in good faith with the reasonable in purpose (to ensure the
approval of the SH representing 2/3 of the stability of the corporation during the
OCS, in exchange for property needed for critical period of development) and is
corporate purposes reasonable in period.
3. Shares issued in payment of a previously - By-laws of a corporation cannot be the
contracted debt. source of limit to restrict the right of the
4. In case the right is denied in the AI. SH to transfer shares of stocks which are
personal property. Restrictions on transfer
*Pre-emptive right includes re-issuance of of shares can be provided only in the law
treasury shares. or the charter of the corporation, and
Pre-emptive right or right of pre-emption would be invalid if provided for in the by-
laws.

34
- Pre-emptive right is not available in case - It is personal property and be mortgaged
of shares issued to obtain loans or to or pledged.
obtain the services of technical men.

Sale or other disposition of assets(Sec. Power to acquire own shares (Sec. 41)
40) - When may a corporation reacquire its own
- Requisites: stocks?
1. The sale or other disposition must be 1. To eliminate fractional shares arising
approved by a majority vote of the out of stock dividends
BOD/BOT; 2. To collect or compromise an
2. The action of the board must be indebtedness to the corporation,
authorized by the vote of stockholders arising out of unpaid subscription, in a
representing at least 2/3 of OCS delinquency sale, and to purchase
including holders of non-voting shares delinquent shares sold during said
or 2/3 of the members; and sale; and
3. The authorization must be done at a 3. To pay dissenting or withdrawing SH
stockholders or members meeting entitled to payment for their shares
duly called for the purpose after under the provisions of this Code.
written notice. - Other instances when the corporation
may acquire its own shares:
Appraisal right can be exercised 1. Reacquisition of treasury shares (Sec.
Despite approval by the SH or members, 9);
it is not mandatory for the board to 2. Purchase of redeemable shares by the
continue with the disposition. corporation regardless of the existence
Substantially all where the sale or other of unrestricted retained earnings
disposition would render the corporation (URE) in its books (Sec. 8);
incapable of continuing the business or 3. To effect a decrease in the capital
accomplishing the purpose for which it as stock of the corporation (Sec. 38);
incorporated. 4. In a close corporation, where there is
This section covers not only sale but also deadlock respecting the management
lease, exchange, mortgage or pledge. But of its business, the SEC may order the
disposition of properties in the course of purchase at their fair value of shares
business does not need approval by or of any stockholder by the corporation
authority of SH members. regardless of the availability of URE
in its books (Sec. 104, par. 1[4]).
Stock Certificate
- Written acknowledgement by the Trust fund doctrine
corporation of the stockholders interest in - The subscribed capital stock of the
the corporation. corporation is a trust fund for the

35
payment of debts of the corporation which
the creditors have the right to look up to Exceptions to the Trust Fund Doctrine:
satisfy their credits, and which the 1. Redemption of redeemable shares
corporation may not dissipate. The (Sec. 8)
creditors may sue the stockholders 2. In close corporation, when there is a
directly for the latters unpaid deadlock and the SEC orders the
subscription. payment of the appraised value of the
- The capital stock, property and other stockholders share (Sec. 104).
assets of a corporation are regarded as
equity in trust for the payment of
corporate creditors. Power to invest corporate funds in
- Hence, dividends are declared only if another corporation or business for any
there is an unrestricted retained other purpose(Sec. 42)
earnings, and that no distribution of - Requires majority vote of BOD, ratified by
corporate property except upon 2/3 OCS/members, to invest for purposes
dissolution and after payment of all its other than primary purpose. But where
debts and liabilities. the investment (even in another
corporation) is reasonably necessary to
Application of the Trust Fund Doctrine: accomplish the primary purpose, a board
1. Where the corporation has distributed resolution is sufficient.
its capital among the stockholders - Example: A sugar company invests in
without providing for the payment of another company engaged in the
creditors; manufacture of sacks for sugar, this was
2. Where the corporation has transferred done pursuant to its primary purpose so a
its property in fraud of its creditors; Board resolution will do.
3. Where the corporation had released - BUT where the purchase of another
the subscribers to the capital stock corporations shares is done solely for
from their subscriptions; and investment and not to accomplish the
4. Where the corporation is insolvent. purpose of its incorporation, the 2/3 vote
of SH is required.
Coverage of the Trust Fund Doctrine:
1. If the corporation is solvent, the TFD Power to declare dividends(Sec. 43)
extends to the capital stock - The BOD of a stock corporation may
represented by the corporations legal declare dividends out of the unrestricted
capital. retained earnings which shall be payable
2. If the corporation is insolvent, the in cash, in property, or in stock to all SH
TFD extends to the capital stock of the on the basis of outstanding stock held by
corporation and to all of its property them:
and assets.

36
a) Provided, that any cash dividends due Dividends
on delinquent stock shall first be - Thatpart of the profits or unrestricted
applied to the unpaid balance, while returned earnings of a corporation set
stock dividends shall be withheld from aside, declared and ordered by the
the delinquent stockholder until his directors to be paid ratably to the
unpaid subscription is fully paid: stockholders on demand or at a fixed time,
b) Provided further, that no stock in the form of cash, property or stocks.
dividend shall be issued without the Kinds of Dividends:
approval of SH representing not less 1. Cash Dividend payable in cash.
than 2/3 of the OCS at a regular or 2. Property Dividend distributed to
special meeting duly called for the stockholders in the form of property, real
purpose. or personal, such as warehouse receipts,
or shares of stock of another corporation.
- Stock corporations are prohibited from 3. Stock dividend payable in
retaining surplus profit in excess of unissued or increased or additional shares
100% of their paid-in capital stock, of the corporation.
EXCEPT: 4. Optional Dividend gives the
1. When justified by definite stockholder an option to receive cash or
corporate expansion program or stock dividend.
programs approved by the BOD 5. Composite Dividend partly in
2. When the corporation is prohibited
cash and partly in stocks. Here, there is
under any loan agreement with
no option involved.
any financial institution or
6. Preferred or Preferential
creditor, whether local or foreign,
Dividend payable, by virtue of contract,
from declaring dividends without
to one class of stockholders in priority to
its/his consent, and such consent
that to be paid to another class.
has not yet been secured.
7. Cumulative Dividend contracted
3. When it can be clearly shown that
to be paid at a certain rate at stated times
such retention is necessary under
and, if net earnings at any dividend period
special circumstances obtaining in
are insufficient to pay the contract
the corporation, such as when
dividend, it is to be made out of subsequent
there is a need for special reserve
net earnings.
for probable contingencies.
8. Scrip Dividend one in the form of a
writing or certificate issued to a
- It is mandatory to declare dividends:
stockholder entitling him to the payment of
a) Cash dividends declared by the
money, stock or other benefit at some
BOD only
future time inasmuch as the corporation at
b) Stock dividends BOD, approved
the time such dividends are declared has
by 2/3 OCS
profits not in cash or has no sufficient cash,

37
or has the cash but wishes to reserve it for a) has sufficient income from
some corporate purposes. It is in the form operations from which the
of a promissory note or a promise to pay depreciation on the appraisal
and may be issued to bear interest. increase was charged;
9. Bond Dividend A dividend b) has no deficit at the time the
distributed in bonds of the corporation to depreciation on the appraisal
the stockholders. The bondholder becomes increase was charged to
a creditor of the corporation to the extent operations; and
of the amount of the bond. c) such depreciation on appraisal
10. Liquidating Dividends These are increase previously charged to
actually distributions of assets of the operations has not been
corporation upon dissolution or winding of impaired by losses.
the same. They are not paid on account of 3. Dividends can be declared out of the
earnings or profits, but as a return of amount received in excess of the par
capital invested. value of shares (paid-in surplus)
when:
-The right to dividends is based on duly a) They are declared only as stock
recorded stockholdings; accordingly, the dividends and not cash;
corporation is prohibited from entitling b) No creditors are prejudiced;
thereto to anyone else. and
c) There is no impairment of
Sources of Dividends: capital.
- Gen. Rule: Dividends can only be
declared and paid out of actual and bona - Note that unlike par value shares,
fid unrestricted retained earnings. when no par shares are sold at a
- Special Rules: premium, the entire consideration
1. Where a corporation sold its real paid is considered capital, hence the
property, which is not being used for same cannot be declared as dividends.
business, at a gain, the income derived 4. Reduction surplus can be a source of
therefrom may be availed of for dividends. Rule on paid-in surplus is
dividend distribution. applicable.
2. Increase in the value of a fixed asset 5. Money cannot be borrowed for the
as a result of its revaluation is NOT payment of dividends because an
retained earning. However, increase in indebtedness is not a retained earning
the value of fixed assets as a result of o f the corporation.
revaluation (revaluation surplus) 6. Corporate earnings which have not yet
may be declared as cash or stock been received even though they consist
dividends provided that the company: in money which is due, cannot be
included in the profits out of which
dividends may be paid.

38
7. Profits realized from sale of Treasury deducting expenses and debts and a
Shares are part of capital and cannot reasonable fund for contingencies.
be declared as cash or stock dividend
as purchase and sale of such shares Power to enter into management
are regarded as contractions and contract(Sec. 44)
expansions of paid-in capital. - Requires:
8. No dividends can be declared out of 1. Resolution of the BOD/Trustees, and
capital except only in two instances: 2. Majority vote of the OCS/members
a) liquidating dividends; and Except: (2/3 vote shall be necessary
b) dividends from investments in if:)
wasting asset corporation. a) The SH represents the interest of
both corporations owns 1/3 of the
- Retained earnings = Assets OCS of the managing corporation.
liabilities and legal capital b) Majority of the members of he
board of the managing corporation
Wasting assets doctrine compose also majority of the
- A wasting assets corporation, such as members of the board of the
a mining or timbercutting company, the managed corporation.
capital of which is necessarily exhausted
in the carrying on of its operations, may - Management contract is a device for tax
rightfully declare and pay dividends out of avoidance, resulting in splitting of income.
net income without making up for the loss But when the conditions set herein are
of its capital which is thus being complied with, then there is no legal basis
constantly diminished. to pierce the veil of corporate entity.
- A mining company, for example, is not
formed for the purpose of permanently Ultra vires acts of corporations(Sec. 45 )
using the property in which its capital is - No corporation under this Code shall
invested, but for the purpose of investing possess or exercise any corporate power
in property which, in the nature of things, except those conferred by this Code or by
will be gradually consumed in making its AOI and except such as are necessary
profits, and in estimating the profits of or incidental to the exercise of the powers
such company for the purpose of so conferred.
determining whether it may lawfully
declare a dividend, no deduction is to be Ultra vires act
made for depreciation in the value of its
- beyond powers
mine by reason of its use and consumption
- An act which although not prohibited by
in taking out the ore or other minerals.
law, the corporation cannot perform
Dividends may be lawfully declared out of
because it is not within its express,
the net proceeds of its operations after
incidental or implied powers. It is not

39
necessarily illegal although an illegal act 2. Wholly executory contracts
is always ultra vires. - cannot be enforced, even at the suit of
- An ultra vires act may be that of: either party (void and unenforceable)
1. The corporation; nor can damages be recovered for its
2. The Board of Directors; and breach.
3. The corporate officers. 3. Part executed and part executory
- principle of no unjust enrichment at
Types of Ultra Vires Cases the expense of another shall apply,
1. Acts done beyond the powers of the and recovery can be had by one or
corporation as provided in the law or whose part it was executed.
its AI; 4. Executory contracts apparently
2. Acts or contracts entered into in authorized but ultra vires
behalf of a corporation by persons who - the principle of estoppel shall apply
have nor corporate authority (This is and the title of a corporation to
technically ultra vires acts of officers property cannot be questioned on the
and not of the corporation); ground that it was acquired through
3. Acts and contracts which are per se an ultra vires contract of transfer.
illegal as being contrary to law. Ratification of ultra vires acts
1. If act or contract is illegal per se, it is
Test whether a corporation may perform null and void and cannot be ratified.
an act: 2. If act or contract is bot illegal per se
- Consider the logical and necessary but merely beyond the power of a
relation between the act questioned and corporation, the same is merely
the corporate purpose expressed by law or VOIDABLE
in the charter. If the act is lawful in itself
and not prohibited, and is done for the Requirements for the ratification of an
purpose of serving corporate ends, and ultra vires act:
reasonably contributes to the promotion of 1. The act must be consummated, not
those ends in a substantial and not in a executory
remote and fanciful sense (Montelibano 2. The creditors are not prejudiced, or all
Doctrine) of the creditors have given their
consent
Effects of Ultra Vires Act on: 3. The rights of the public or the State
1. Wholly executed contract are not involved
- shall not be interfered with as between 4. All the SH must give their consent
the parties or persons whose rights
are derived therefrom, but the State - Corporations cannot validly enter into a
can always question said contract or partnership because in a partnership, all
act. the other partners can bind the

40
partnership and the other partners, which - Held: The corporate secretary is the
would be violative of the principle in custodian of corporate records and if
Corporation Law that only the BOD can she certifies that a certain action had
bind the corporation. been taken by the board, such
certification is binding upon the
Case: corporation although the same may
- X company agreed to post a bond for a have been erroneously made. The
postmaster in case of malversation for reason for this is that the corporate
the opening of a post office within X secretary is clothed with apparent
Companys compound to facilitate mail authority.
of the employees living therein, after
conferring with the Postmaster Derivative suit
General. The postmaster malversed - the principal defense of the minority SH
public funds, so the Postmaster against the abuses of the majority. It is a
General sued on the bond posed by X remedy designed by equity for those
Co. but X Co. raised the defense of situations where the management,
ultra vires act, that it was not through fraud, neglect of duty, or other
authorized to file a bond for a public cause, declines to take the proper and
officer such as the postmaster and, necessary step to assert the corporations
therefore, such act did not bind the rights.
corporation.
- Held: The filing of the surety bond is Requisites for the proper filing of a
ultra vires, but not illegal per se, and derivative suit:
which was ratified by the acceptance 1. The party bringing suit should be a
by X company of the benefits SH as of the time of the act or transaction
attendant to the opening of a post complained of
office in its compound, is binding on 2. He has exhausted intra-corporate
the corporation. remedies (i.e., has made a demand on the
BOD for the appropriate relief but the
Case:
latter has failed or refused to heed his
- Y cannot pay her loan from the GSIS
plead.)
with her house as mortgage so she
3. The cause of action actually devolves
proposed a scheme to the GSIS Board
on the corporation, the wrongdoing or
by which she can liquidate her claim.
harm having been caused to the
It was rejected by the Board, but the
corporation and not the particular SH
secretary erroneously sent a message to
bringing the suit.
Y that the proposal was accepted.
Subsequently, Y received a summons
---------------------------------------------------------------
for foreclosure. Y sued GSIS for
damages. ----

41
-However, by-laws may be adopted and filed
V. BY-LAWS prior to incorporation; in such case, such
by-laws shall be approved and signed by all
By laws the incorporators and submitted to the
These are rules of action adopted by a SEC, together with the Articles of
corporation for its internal government and Incorporation.
for the government of its stockholders or
members and those having the direction, When by-laws are effective
management and control of its affairs in their -In all cases, by-laws shall be effective only
relation to the corporation and as among upon the issuance by the SEC of a
themselves. certification that the by-laws are not
inconsistent with this Code.
Binding Effect of by-laws:
1. As to members and corporation How by-laws are adopted
- They have the force of contract a) Affirmative vote of majority of the
between the members themselves. OCS/members
- They are binding only upon the b) Signed by stockholders/members voting
corporation and on its members and for them and shall be kept in the principal
those having direction, management office of the corporation, subject to
and control of its affairs. inspection of the stockholders or members
2. As to third persons during office hours
- Third persons are not bound to know c) Duly certified to by a majority of the
the by-laws which are merely directors or trustees and countersigned by
provisions for the government of a the secretary of the corporation.
corporation and notice to them will not d) Filed with the SEC, which shall be
be presumed. attached to the original articles of
-Why? By-laws have no extra-corporate incorporation.
force and are not in the nature of
legislative enactments so far as third
persons are concerned.
Special Corporations
When by-laws are adopted - SEC not to accept for filing the by- laws of
-It may be before or after incorporation. any special corporation governed by
-Generally every corporation formed under special laws unless accompanied by a
this Code must, within one (1) month after certificate of the appropriate government
receipt of official notice of the issuance of agency to the effect that such are in
its Certificate of Incorporation by the SEC accordance with law.
adopt a code of by-laws for its government
not inconsistent with this Code. Validity of By-Laws

42
1. They must not be contrary to law and not regular or special meeting must be duly
inconsistent with the Corporation Code; called for the purpose.
Not contrary to law although allowed
in the by-laws, a BOD must always be Effectivity of amended by-laws
a natural person. He cannot be a - The amended or new by-laws shall only be
representative of a juridical person effective upon the issuance by the SEC of
(Grace Nat. High vs. CA 281 SCRA a Certification that the same are not
133). inconsistent with the Code.
2. Must not be contrary to morals and public
policy; ---------------------------------------------------------------
3. Must not impair obligations of contracts; ------
4. Must be general and uniform in their VI. MEETINGS
operation and not directed against
particular individuals;
5. Must be consistent with the charter or
articles of incorporation;
6. Must be reasonable (capable of
compliance).

Amendments to by-laws(Sec. 48)


- By a vote of the majority of the BOD/BOT
and the owners of at least a majority of
the OCS/members, at a regular or special
meeting DULY called for the purpose.

May the voting right of the SH be delegated?


- Yes. The owners of 2/3 of the OCS or
members may delegate to the BOD or
trustees the power to amend or repeal any
by-laws PROVIDED, the power delegated
is deemed revoked whenever the
stockholders owning or representing a
majority of the OCS or a majority of the
members in non-stock corporations, shall
so vote at a regular or special meeting.

- The power to revoke may happen at any


time even if not among the agenda in a
regular or special meeting. Notice that the
rule did not specifically provide that the

43
4. Special meeting for the removal of
- Notice of any meeting, either director/trustee may be called by the
SH/Members or BODs meeting, may be Secretary or by the SH/member as
waived, expressly or impliedly by the provided by Sec. 28.
SH/Member or BOD/trustee.

Who presides at meetings MEETIN


SH/MEMBERS BOD
- The President G
- Exceptions: Held annually
a) When the by -laws provide on a date fixed
otherwise; in the by- laws; Held monthly
b) the petitioning if not so fixed, on or as provided
Regular
stockholder/member When there is any date in April in the by
no person authorized to call a meeting, of every year as laws.
a SH/member may petition the SEC determined by
upon showing of good cause therefor. the Board
SEC to issue an order to the Special Held at any time Held at
petitioning stockholder or member deemed anytime upon
directing him to call a meeting of the necessary or as the call of the
corporation by giving proper notice provided in the President or
required by the Corporation Code or by- laws. as provided in
the by-laws. The petitioning the by- laws.
stockholder or member shall preside NOTICE SH/MEMBERS BOD
thereat until at least a majority of the Regular 2 weeks prior to 1 day notice
SH/members present have chosen one the meeting prior to the
of their number as presiding officer unless a scheduled
(Sec. 50(4)). different period meeting
is required by unless
Proper Person to Call the Meeting the by-laws. otherwise
1. Person designated in the by-laws provided in
normally it is the Corporate Secretary the by-laws.
2. In the absence of the secretary, a Special 1 week written 1 day notice
director/trustee or by an officer with notice, unless prior to the
interest in the management of the otherwise scheduled
corporation unless there is a provided in the meeting
prohibition in the by-laws. by-laws. unless
3. A SH or member on order of the SEC otherwise
whenever for any cause, no person provided in
authorized to call a meeting. the by-laws.
(the same as
in regular
44
meeting)
Place and Time of Meetings/Quorum 1. It must be held at the proper place;
SH/MEMBER BOD/BOT
Requisites of Notice of Meeting (Regular or May be held
1. Issued by one who has authority to special) -city or anywhere in
issue it; municipality or outside of
2. Must be in writing; where the the
3. Must state the time, date and place of principal office of Philippines,
the meeting, unless otherwise provided in PLACE the corporation is unless the
the by-laws; located, and if by-laws
4. Must state the business to be practicable in the provide
transacted thereat; principal office of otherwise
5. Must be sent at a certain time before the corporation (Sec. 53)
the scheduled meeting as fixed by law, (Sec. 51)
unless a different period is required by the Majority of the Majority of
by-laws. OCS or members all
6. The notice must comply with any other in case of non- members*
requirements prescribed by the law or by stock unless of the Board
QUORUM
the by-laws of the Corporation. otherwise of directors
provided for in the or trustees.
May the BOD change or postpone the date of Corporation Code (actual and
meetings fixed in the by-law? or in the by-laws. living)
- Yes, but not the annual meeting. 2. It must be held on stated date and at
- Exception: Annual meetings may be the appointed time or at a reasonable
postponed if there are justifiable reasons time thereafter;
for its postponement as when the annual 3. It must be called by the proper person;
meetings cannot be held in the date fixed 4. There must be a previous notice of
by the by -laws for some valid or meeting;
justifiable reasons. However, no 5. There must be a quorum.
postponement is allowed if the effect is to
prolong the term of the directors. When a meeting is not required
1. Amendment of the AI (sec. 16)
- Meetings held in the absence of some of 2. Sec. 101 action by the directors of a
the directors and without any notice to close corporation without a meeting but
them is illegal and the action at such ratified
meeting is invalid, unless subsequently 3. When there is agreement.
ratified or waived.
Right to vote
Requisites for a valid meeting of
Stockholders or members:

45
- An inherent right of the stockholders or
members in the management of the 2 Ways of Voting By the Stockholder or
corporation. member
1. In person
May a stockholder be compensated for his 2. By proxy
time in coming to the corporation to vote?
- No, because voting is a right hence one is Proxy
not paid for exercising such right. - Is the formal authority given by the
holder of the stock, who has a right to vote
Who are entitled to vote it, or by a member, to another person to
- The SH/Members (record date). exercise the voting rights of the former.
- Except the ff.
1. Delinquent Requisites/limitations of a valid Proxy
2. Treasury shares 1. It shall be in writing and signed by the
3. Non -voting shares, except under those SH or member;
8 instances enumerated under sec. 6 2. It must be filed before the scheduled
A2MI3DS meeting with the corporate secretary;
3. Unless otherwise provided in the
The following persons are not proxy, it shall be valid only for the
stockholders or members but may vote. meeting for which it is intended or valid
1. Pledgor or mortgagor under only for the specified meeting;
sec. 55 4. A continuing proxy may be for a period
- A pledgor or mortgagor of shares not exceeding five (5) years at any one
remain entitled to vote on shares time, otherwise it shall not be a valid and
given as security unless an express effective after such period.
written authority to vote is given to Directors or trustees cannot attend or
pledgee or mortgagee this authority vote by proxy at Board meetings. (Sec.
being required by law to be 25, last paragraph)
registered in corporate books at the
instance of the pledgor or mortgagor. Kinds of Proxy
2. Executors, administrators, 1. General Proxy
receivers, and the other legal - Confers a general discretionary power
representatives duly appointed by of attorney to attend and vote at an
the court (sec. 55) annual meeting with all the powers the
- Legal representatives (like undersigned would possess if
executors, receivers, etc.) vote by personally present, to vote for directors
legal mandate (without need of and all ordinary matters that may
proxy) on shares subject to their properly come before a regular meeting.
administration. 2. Limited Proxy

46
- The power has a limited. - Gen. Rule:
Revocation takes place at any time.
Rules on Proxy - Exception:
1. 1 proxy is given to 2 or more persons: When the proxy is coupled with an
- Gen. Rule: interest (Proxy has parted with value
All must agree upon the vote. or incurred liability at the SHs
If they cannot agree, rule of the request, looking to the exercise or the
majority applies. proxy as the means of reimbursement
- Exception: or indemnity. E.g. Where D borrows
if the proxies discriminate money from C and D pledges his
This means that the proxies certificates of stock to C for the debt,
determined the manner on how giving C a written continuing proxy to
they should vote. attend and vote the shares at meetings
- The stockholders instruction, if any, of stockholders until the debt is paid.
prevails. It is clear that D cannot revoke the
2. When several proxies are submitted: proxy unless he first pays C.)
a. Where proxies are dated
Latest proxy revokes the earlier How to revoke a proxy agreement
proxy. - In any manner either expressly or
b. Where proxies are undated impliedly, hence notice is not actually
If proxy is mailed to the required as when it was orally revoked
corporation the one having the 1. Formal notice/expressly;
latest time of day of postmark 2. Orally/impliedly;
If submitted in person one presented 3. By conduct, as when during the
latest. meeting the SH appears, in this
Dated proxies prevail over undated case the proxy is deemed
proxies revoked;
4. Issuance of a subsequent proxy;
Right to appoint a proxy OR
- The right to appoint a proxy cannot be 5. Sale of shares of stockholder.
denied in a stock corporation but maybe
denied in a non-stock corporation. VOTING TRUST AGREEMENT (VTA)
- Reason for the distinction: - It is an agreement in writing whereby one
In a stock corporation, the stockholder or more stockholders of a stock
has an investment that he is corporation transfer his or their shares to
protecting; the same is not true in a any person or persons or to a corporation
non-stock corporation. having authority to act as a trustee for the
purpose of vesting or conferring upon a
Revocation of proxies trustee or trustees the right to vote and

47
other rights pertaining to the shares for a corporate books and records in accordance
period not exceeding 5 years at any one with the provision of the code;
time. 6. Unless expressly renewed, all rights
granted in a VTA shall automatically
Rationale of VTA expire at the end of the agreed period, and
a) Such an agreement makes possible a the voting trust certificates as well as the
unified control of the affairs of the certificates of stock in the name of the
corporation and consistent policy by trustees shall thereby be deemed
binding the SH to vote as a unit. cancelled and new certificates of stock
b) It also makes it possible for a majority shall be reissued in the name of the
group of shareholders to dispose of the transferors.
beneficial interest in a large proportion of
their shares and still retains control of the How VTA works
corporation through the voting trustee. 1. Certificate of stock covered by the VTA
shall be cancelled and new ones shall
Limitations of a VTA be issued in the name of the trustee or
1. It shall be good for a period not trustees stating that they are issued
exceeding five (5) years at any one time pursuant to said agreement.
BUT if required by a loan agreement, the NOTE: In the books of the corporation,
period may go beyond five (5) years but it shall be noted that the transfer in
the trust shall automatically cease upon the name of the trustee or trustees is
full payment of the loan; made pursuant to said VTA.
2. It must be in writing and duly EFFECT: The trustor becomes the
notarized; beneficial owner. A stockholder of a
3. It shall not be entered to circumvent stock corporation parts with the voting
laws against monopolies and illegal power only but retains the beneficial
combinations in restraint of trade nor ownership of the stock. A voting
shall it be used for purposes of fraud; trustee therefore is only a share owner
4. A certified copy of such agreement vested with apparent legal title for the
shall be filed with the corporation and sole purpose of voting upon stocks that
with the SEC, otherwise said agreement he does not own.
is ineffective and unenforceable; HOWEVER, the transferring
5. It shall be subject to examination by stockholder, although he has ceased to
any stockholder of the corporation in the be the stockholder of record, retains
same manner as any other corporate book the right of inspection of corporate
or record: Provided that both the books, which he can exercise
transferor and the trustee or trustees may concurrently with the voting trustee.
exercise the right of inspection of all 2. Trustee(s) shall execute and deliver to
the transferor a voting trust certificates
(VTC), which shall be transferable in the

48
same manner and with the same effect as 4. He is the legal title holder or owner of
certificates of stock. the shares so transferred under the
EXPLANATION: In return for the agreement. Hence he can be voted. If so
certificates of stock, the voting trustee then he is also qualified to be a director
executes and delivers to the (Sec. 23)
stockholders voting trust certificates
to show that the latter are in reality Cancellation of the VTA
the owners of the shares held by the - Unless expressly renewed, all rights
voting trustee. The owners are thus granted in a voting trust agreement shall
enabled to claim the dividends when automatically expire at the end of the
they are collected by the trustee and to agreed period, and the voting trust
recover their stocks at the expiration certificates as well as the certificates of
of the trust. stock in the name of the trustee or
trustees shall thereby be deemed
Effects of the executing and delivering cancelled and new certificates of stocks
VTA to the Stockholder (transferor) shall be reissued in the name of the
1. To show that the SH is in reality the transferors.
owner of the shares held by the voting
trustee VOTING TRUST vs. PROXY
2. To enable him to claim the right to the
dividend when they are collected by the VOTING TRUST
trustee. 1. Trustee acquires legal title to the 1. Proxy
3. To inspect corporate books shares of the transferring stockholder shares of t
4. To recover his shares of stock at the 2. Generally, the agreement is 2. Genera
expiration of the trust. irrevocable for a definite and limited coupled w
period of time.
Rights of voting trustee(s) 3. Trustee can act in all meetings during 3. Proxy
1. The trustee(s) shall possess the right the lifetime of the VTA. meeting
to vote and other rights pertaining to the (continuin
shares so transferred and registered in his 4. Trustee can vote and exercise all the 4. Proxy
or their names subject to the terms and rights of the transferring stockholder absence of
conditions of and for the period specified even when the latter is present. Reason: P
in the agreement. is an impl
2. When he votes, he may vote in person
or by proxy unless the agreement provides 5. A VTA must not exceed 5 years at any 5. A pro
otherwise. one time except when the same is made a duration a
3. They may exercise, like the transferor, condition of a loan. years at a
the rights of inspection of all corporate 6. There is transfer of share 6. No tran
booked and records.

49
7. Filed with the SEC otherwise it is A subscription
7. Filed only with the Corporate for shares of stock
ineffective and unenforceable. of athe
secretary. Filing with corporation
SEC notstill to be formed
needed. shall be irrevocable for a period of
8. The agreement must be notarized atbe
8. The proxy need not least 6 months from the date of
notarized
9. The voting right is divorced from the 9. The right to votesubscription.
is inherent and
ownership of stocks inseparable fromthe right toofstock
Rationale the GR: To ensure
ownership. that the corporation shall have the
10. The trustee votes as owner rather 10. The proxy holdercapital
votes astoagent
undertake the business
than as mere agent of which it is established.
- Exceptions:
The maximum duration of both cannot a. When all of the other
exceed five (5) years at any one time. subscribers consent to the
revocation; or
--------------------------------------------------------------- b. The incorporation of the
------- corporation fails to materialize
within said period or within a
VII. STOCKS AND STOCKHOLDERS longer period as may be stipulated
in the contract of subscription.
Ways by which a person becomes a - Notice that the 6 months period as
Stockholder provided in the Gen. Rule applies only
1. By Subscription if no stipulation is made in the
2. By Purchase/transfer subscription contract. The 6 months
may also be shortened if so stipulated
in the subscription contract.
Subscription contract
- When is the Pre-incorporation
- It is any contract for the acquisition of
Subscription Contract absolutely
unissued stock in an existing corporation
irrevocable?
or a corporation still to be formed.
After the submission of the AI to
- Subscription pertains only to unissued
the SEC.
stocks.
In Ong Yong vs. CA (02/01/02),
the SC allowed the rescission of a
Kinds of Subscription
pre-incorporation subscription
1. Pre-incorporation subscription
contract on the ground of
contract (Sec. 61)
substantial breach of obligations as
- One entered into before incorporation.
provided in Art. 1191 of the NCC.
It constitutes a binding contract
The SC recognized the nature of a
among the subscribers. (Sec. 61) This
pre-incorporation subscription
is mandatory. (Sec. 13) [25%/25%
contract as a reciprocal obligation
requirement]
by the original subscribers with
- Gen. Rule: the corporation intended to be

50
formed as a beneficiary of pour whether detachable or not, which may be
autri stipulation in such soled or offered for sale to the public.
agreement.
Shares of stock
2. Post-incorporation subscription - Interest or right which the owner has in
contract the management of the corporation, and
- One entered into after the its surplus, profits, and, on dissolution, in
incorporation for the acquisition of all of its assets remaining after the
unissued stock. payment of its debt.

Stock option Consideration for stocks (sec. 62)


- Is a privilege granted to a party to -Rule:
subscribe to a certain portion of the Stocks shall not be issued for a
unissued capital stock of a corporation consideration less than the par or
within a certain period and under the issued price thereof.
terms and conditions of the grant If less than its par or issued price
exercisable by the grantee at any time watered stock
within the period granted. It is a contract -Consideration for the issuance of stock
to buy or purchase whereas in may be any or a combination of any two or
SUBSCRIPTION, the contract is already more of the following:
executed. 1. Actual cash;
2. Property, tangible or intangible,
Purchase or transfer a. actually received by the
- Buying issued shares from a stockholder corporation
or from the corporation itself. b. and necessary or convenient for
- Pertains to issued shares in its use and lawful purposes
contradistinction with subscription. c. at a fair valuation equal to the
par or issued value of the stock
Sources of Corporate Capital issued;
1. Funds furnished by shareholders 3. Labor performed for, or services
2. Borrowings actually rendered to, the corporation;
3. Profits and stock dividends 4. Previously incurred indebtedness by
the corporation;
Warrant 5. Amounts transferred from
- A type of security which entitles the unrestricted retained earnings to
holder the right to subscribe to the stated capital; (increase of capital by
unissued capital stock of a corporation OR declared stock dividends)
to purchase issued shares in the future, 6. Outstanding shares exchanged for
evidenced by a Warrant Certificate, stocks in the event of reclassification

51
or conversion, e.g. common shares of of the OCS at a meeting duly
stock. called for the purpose

Promissory notes or future services Bonds


cannot be made as payment for shares of - The same consideration as provided for in
stock. this section (Sec. 62) insofar as they may
be applicable, may be used for the
May postdated checks be accepted as issuance of bonds by the corporation.
payment?
- No. As a rule the corporation must When one is supposed to pay?
actually receive the cash or property. - At the date fixed in the subscription
contract or, if no date is fixed, upon CALL
Who determines the valuation if the (demand to pay) by the board.
consideration is other than cash?
- Where the consideration is other than What happens if there was failure to pay on
cash or consists of intangible property the date fixed or upon call?
such as patents or copyrights, the - Failure to pay on such date shall render
valuation thereof shall initially be the entire balance due and payable and
determined by the incorporators or the shall make the stockholder liable for
board of directors, subject to approval by interest at the legal rate of interest as
the SEC. provided in the by-laws, computed from
- Hence, there must be a valuation fixed by such date until full payment.
the Board, approved by the SEC before - Within 30 days after the call or after the
the property is accepted as consideration. date fixed in the by-laws, there was still
If accepted as consideration and no failure to pay, the shares shall become
valuation, the stock is considered as delinquent shares.
watered. (sec. 65)
Purpose of a call
What about no par value shares, how are - To fix the date of payment
their issued price determined?
- The issued price of no-par value shares Requisites of a valid call
may be: 1. It must be made by the board through
a. fixed in the Articles of a resolution
Incorporation; or 2. It must operate uniformly either to all
b. by the BOD pursuant to or a particular class or species of share.
authority conferred upon it by
the AI or the by-laws or in the Is a call absolutely necessary?
absence thereof, - No, call is not necessary in the following
c. by the stockholders instances:
representing at least a majority

52
a. If corporation is already insolvent; 3. Issued in accordance with the
b. Subscriber is insolvent; by-laws.
c. If there is a date fixed in the 4. It contains the corporate seal.
subscription contract.
Where the stock certificate reflects a
What one is supposed to pay greater volume of shares than the actual
a. Amount of unpaid subscription number of shares issued or to be issued,
b. The interest on all unpaid the following rules may be considered:
subscriptions from the date of 1. To the extent that there was an over-
subscription, if so required by, and at issue, the excess issuance (over the
the rate of interest fixed in, the by- authorized capital stock or stated
laws. If no rate of interest is fixed in capital) shall be void as being ultra
the by-laws, such rate shall be deemed vires.
to be the legal rate. 2. If there is no over-issue, but no
payment has been made to cover the
Now that one has paid, he is now entitled par or stated value of the excess
to shares of stocks and the corresponding shares, the latter would constitute
certificate of stocks. watered stocks.
3. If there is no over-issue and watering
Stock certificate of stocks, the corporation may be
- This is a written instrument signed by the bound to honor the certificate (if duly
proper officer (president or the vice signed and released by its authorized
president) of a corporation stating or officers) in the hands of a holder in
acknowledging that the person named good faith, reserving a right of
thereon is the owner of a designated recourse that an aggrieved party may
number of shares of its stock. pursue against the culpable or
unjustly enriched party.
Stockholder has the right to a certificate
of stock How partial payments are treated
Upon full payment of the amount of - Partial payment must be applied on the
the subscription together with the number of shares covered by it BUT in the
interest and expenses (in case of case of Baltazar (14 SCRA 522); Partial
delinquent shares) if any. payment must be pro-rated among all the
shares
Formal requisites of a certificate of - Eg. If A subscribed 500 shares at 100 peso
stock per share and he paid only 25,000 pesos.
1. Signed by the President or VP. He is deemed to have paid only 50 pesos of
2. Countersigned by the Secretary the 100 peso per share subscription price.
or asst. secretary. This doctrine was however decided under
the old laws but there may still be

53
corporations existing that are governed by - Yes, but the unpaid claims as hereto
the old law. referred arises from instances where by
honest mistake the corporation issued a
Once the stocks are issued in the name of stock certificate to a subscriber
the stockholder, the shares of stocks so unknowingly that he has not yet fully paid
issued become his personal property. his subscription.

Effect: It being his personal property, How transfer is made


he may transfer the same if he wants - Transfer is made by endorsement and
to (remember that transfer or delivery of the certificate.
purchase is one of the modes by which
one becomes a stockholder) Reasons for Requiring Registration of
Stock transfer
Requisite of a valid transfer 1. To enable the corporation to know at
- It should be recorded in the books of the all times who are its stockholders because
corporation. mutual rights and obligations exist
- Exception: Sole Corporation between the corporation and its
stockholders.
Who should do the recording? 2. To afford the corporation an
- The corporate secretary. Other than him opportunity to object or refuse to the
the recording is ineffective. transfer in case it has a claim against the
- However, another person may do it stock sought to be transferred, or for any
provided it is done under his supervision. valid reason.
(278 SCRA 792) 3. To avoid fictitious or fraudulent
transfers.
When may the corporate secretary refuse the
recording? Can a subscription be transferred?
- Corporate secretary may refuse or the - Yes, but with consent of the corporation.
corporation may oppose recording or This is in effect a novation.
transfer when the corporation holds an
unpaid claim against the shares of stocks. Effects of Unregistered Transfer
(sec. 63) 1. Valid only between transferor and
- In the Chinabank case (270 SCRA 503) transferee
the shares of stock against which the 2. Invalid as against the corporation
corporation holds an unpaid claim is until notice is given.
defined as a delinquency. 3. Invalid as against the corporate
creditors.
Is it not that under section 64 stock certificate - Under the doctrine of Piercing the Veil
shall be issued only when they are fully paid? of Corporate Entity. Remember that

54
the purpose of the same is to make the 2. Appraisal Rights
stockholders liable. 3. Proprietary Rights
4. Invalid as against creditors of a. Right to dividends;
transferor b. Right to issuance of certificate
5. Transferor continues the right to vote of stock for fully paid shares;
and be voted until he is challenged. c. Proportionate participation in
6. Transferor continues to enjoy the right the distribution of assets in
to receive the dividends until there is liquidation;
recording. d. Right to transfer of stocks in
corporate books;
Subscriber vs. Stockholder e. Pre-emptive right;
a) A subscriber is one who has not yet fully f. Right to recover stocks
paid his subscription, whereas a unlawfully sold for delinquent
stockholder is one who has paid his payment of subscription;
subscription. g. Right to be furnished of the
b) Holders of subscribed shares not fully most recent financial statement/
paid which are not delinquent (CF) shall financial report.
have all the rights of a stockholder (Sec. 4. Inspection Right right to inspect
72) books and records
5. Remedial rights
In the case of First Phil. Holding, 253 a. Individual suit a suit
SCRA, a stock certificate is not necessary instituted by a shareholder for his own
to establish the relationship of a behalf against the corporation;
Stockholder with the corporation. The b. Representative suit a suit filed
evidence is now the receipt of payment. by a shareholder in his behalf and in
behalf of other stockholders similarly
If the stocks are fully paid but the certificate of situated and with a common cause
stocks is not yet issued is one already against the corporation; and
considered a stockholder? c. Derivative suit a suit filed in
- Yes, because if section 72 considers one to behalf of the corporation by its
be a stockholder even if he has not yet stockholders (not creditors whose
fully paid then with more reason that a remedies are merely subsidiary such
person who has fully paid his subscription as accion subrogatoria and accion
be considered a stockholder. pauliana) upon a cause of action
belonging to the corporation, but not
Rights of stockholders duly pursued by it, against any person,
1. Managerial Rights director, officer and/or controlling
a. Voting rights; and shareholders of the corporation.
b. Right to remove directors

55
What is the presumption if one is issued his liability arising from the issuance of a
certificate of stock? watered stock of which he has knowledge.)
- The presumption is that he has fully paid
his subscription. Extent of liability in these instances
- The director or officer shall be
Watered stocks solidarily liable with the stockholder
- These are stocks issued not in exchange concerned to the corporation and its
for its equivalent. creditors for the difference between
- Includes: the fair value received at the time of
1. Stock issued without consideration issuance of the stock and the par or
2. Issued as fully paid when the issued value of the same.
corporation has received a less sum of - Section 64 does not apply.
money than its par or issued value - Section 65 does not also distinguish
3. Other than cash but valuation less whether the issuance of a watered
than the par or issued value stock is deliberate or not.
4. Issued as stock dividend when
there are no sufficient retained Coverage of watered stocks
earnings or surplus (as if not paid the - Only originally issued shares may be
full amount of subscription) watered. Hence, it arises only in a
transaction between the corporation and a
Who are primarily liable? subscriber.
- The holder of the watered stock shall be - Any subsequent appreciation in value of
liable to the corporation and its creditors the shares will not cure the defect.
for the difference between the fair values Reason: The liability for watered
received at the time of issuance of the stocks arises from the time the stocks
stock and the par or issued value of the are issued.
same.

Instances when not only the SH is liable DELINQUENT SHARES


1. When a director or officer of a
corporation consented to the issuance of Effects of Declaration of Delinquency
stocks for a consideration less than its par (Sec. 71)
or issued value or for a consideration in 1. Delinquent stocks cannot be voted for
any form other than cash, valued in excess 2. Cannot vote in any election
of its fair value, or 3. No representation at any stockholders
2. Who having knowledge thereof, does meeting
not forthwith express his objection in 4. Not entitled to any of the right of the
writing and file the same with the stockholder except the right to receive
corporate secretary (This is the remedy of
a director or officer if he wants to avoid

56
dividends but subject to the rules under The stock so purchased shall be
sec. 43. transferred to such purchaser in the books
of the corporation and a certificate for
Procedure for delinquency sale: (Sec 68) such stock shall be issued in his favor.
1. There must be a board resolution The remaining shares, if any, shall be
ordering the sale stating the amount due credited in favor of the delinquent
on each subscription plus all accrued stockholder who shall likewise be entitled
interest and the date, time and place of to the issuance of a certificate of stock
the sale which shall not be less than 30 covering such shares.
days nor more than 60 days from the date
the stocks became delinquent. When auction may be cancelled
2. Notice of sale, with a copy of the 1. If the delinquent SH pays to the
resolution given to the delinquent SH corporation, on or before the date specified
personally or by registered mail. This for the sale, the balance due on his
must also be published once a week for 2 subscription plus accrued interest, cost of
consecutive weeks in the province or city advertisement plus expenses of the sale.
where the principal office of the 2. If the Board otherwise orders.
corporation is located.
3. Auction sale whereby the stocks are What happens if there are no bidders?
sold to the highest bidder. - The corporation may purchase the
- HIGHEST BIDDER delinquent stocks. The purchase must be
He is the person offering at the made out of its net earnings in view of the
sale to pay the full amount of the trust fund doctrine (Sec. 41[2]).
balance on the subscription - Advertisements for bidders are simply
together with the accrued interest invitations to make proposals, and the
if any, cost of advertising and advertiser is not bound to accept the
expenses of the sale, for the highest or lowest bidder, unless the
smallest number of shares or contrary appears (Art. 1326,NCC)
fraction of a share (Why smallest
number of share to give When may the auction sale be questioned?
possibility for the subscriber to - When there is irregularity or defect in the
have something left for him). notice of sale, or in the sale itself of the
Illustration:At public auction sale, delinquent stock.
M offers to pay P800 for 1,000 - Remedy: Recovery of the stocks
shares, L, P800 for 900 shares and
T, P800 for 800 shares. T is the Requisites before one may file an action
highest bidder and the remaining to recover
200 shares shall go to X, the a. The party seeking to maintain
original subscriber. such action must first pay or tender to the

57
party holding the stocks the sum for a week for 3 consecutive weeks at the
which the same was sold with interest expense of the registered owner.
from the date of sale at the legal rate.
b. The action must be filed within When a corporation may issue a new
6 months from the date of sale. certificate of stock
- After the expiration of 1 year from the
Can the corporation dispense with the auction date of last publication.
sale as a remedy? - If no contest has been
- Yes, by first filing a judicial action to presented to said corp. after the
collect the amount due in any unpaid expiration of 1 year the right to make
subscription with accrued interest, costs the contest shall be barred.
and expenses. Call is still necessary. - If contest has been presented to
Rights of Unpaid Shares (Sec. 72) the corp. or an action is pending in court
- Holders of subscribed shares not fully regarding the ownership, the issuance of a
paid which are not delinquent shall have new certificate shall be suspended until
all the rights of a stockholder. final determination by the court regarding
the ownership of the lost, stolen or
destroyed certificate.
Lost, stolen or destroyed certificate of
stock (sec. 73) Gen. Rule: No action may be brought
Procedure: against any corp. for the issuance of a new
1. The registered owner of the certificate certificate
or his legal representative shall file with Exceptions: in case of fraud, bad faith or
the corporation an affidavit in triplicate, negligence on the part of the corp. and
setting forth if possible, the circumstances officers.
as to:
a) how the certificates May the requirement of publication be
were lost, stolen or destroyed, dispensed with?
b) the number of - Yes, if bond or surety is filed by
shares represented by each shareholder running for a period of 1 year,
certificate, in which case a new certificate may be
c) the name of the issued even before the expiration of 1 year
corporation which issued the same,
and ---------------------------------------------------------------
d) Such other ---
information and evidence which he
may deem necessary. VIII. CORPORATE BOOKS AND
2. The corporation shall publish a notice RECORDS
in a newspaper of general circulation once

58
Books and Records to be Kept by the
Corporation(Sec. 74): OFFICER/AGENT of corp. who refuses to
1. A record of all business transactions; allow examination and copying of excerpts
2. Minutes of all meetings contents liable for damages and guilty of
- set forth in details the time and violation of the Corporation Code;if acting
place of meeting whether regular or based on a board resolution or order of
special directors, liability attaches to the
- those present and absent directors who voted for the refusal.
- every act ordered at the Mandamus available remedy of the
meeting stockholder or member if wrongfully
- upon demand, time when refused to exercise the right.
director/shareholder/members entered
or left, yes or no vote or protest Stocks and transfer agent
3. Stock and transfer books, in case of - One engaged principally in the business of
stock corporation registering transfer of stocks in behalf of a
- records of all stocks and names stock corp.
of shareholder - Allowed to operate in the Philippines if he
- installments paid and unpaid secures a license from the SEC and pays a
in all stock for which subscription has fee which shall be renewed annually.
been made
- Kept in principal office of the Stock corp is not precluded from making
corp. or office of the stock or transfer transfer of its own stocks
agent
A Corp. B Corp.: X shareholder of A Corp.;
Non-stock corp. do not have stock and A Corp. is a shareholder of B Corp
transfer books. - Gen Rule: No right of inspection by X to
Sole corp. may not have all these books the books of B Corp.
- Except: If it is wholly owned subsidiary
Inspection rights of a stockholder - Conditions: (89 SCRA 336)
Limitations: 1. If owned entirely by the corp. of which
a. The right must be exercised during he is a shareholder
reasonable hours on business days; 2. Both corporations use the same office
b. The person demanding the right has 3. Both corporations have identical
not improperly used any information directors
obtained through any previous
examination of the books and records of Rights to financial statements(Sec. 75)
the corporation; and When is a corp. mandated to furnish its recent
c. The demand is made in good faith or financial statement?
for a legitimate purpose.

59
- Within 10 days from receipt of - The union of two or more existing
a written request of any shareholder or corporations to form a new corporation
member called the consolidated corporation.
- Reasons:
What are included in the written 1. expansion,
statement 2. profitability,
1. Balance sheet as of the end of the last 3. effective loss management,
taxable year 4. lesser cost
2. Profit or loss statement for said
taxable year showing in reasonable Procedure(Sec. 76-79)
details its assets and liabilities and 1. Board of each constituent corp. execute a
result of its operation plan of merger or consolidation contents
of plan
OBLIGATION OF THE BOARD a. Names of the corporations proposing
- Financial report of the operations of to merge/consolidate
the corp. for the preceding year, which b. The terms of the merger or
shall include financial statement, duly consolidation and the mode of
signed and certified by an independent carrying the same into effect
CPA c. A statement in the changes of AI of
the surviving corp. in case of merger
PAID- UP CAPITAL OF CORP. and with respect to the consolidated
- Less than 50T, financial statements corp., in case of consolidation, all the
may be certified under oath by the statements required to be set forth in
treasurer or any responsible officer of the AI
the corporation. d. Such other provisions with respect
to the proposed merger or
-------------------------------------------------------------- consolidation as are deemed
------ necessary or desirable
2. Approval by majority of each of the board
IX. MERGER AND CONSOLIDATION of the constituent corporations
3. Submitted for approval to
Merger shareholders/members of each of such
- A union whereby one or more existing corporations at separate meetings
corporations are absorbed by another - notice given at least 2 weeks
corporation which survives and continues prior to the date of the meeting /
the combined business. include a summary of the plan
- Q: May the right of Appraisal
Consolidation be taken away?

60
A: Yes when the board decided to If SEC has reason to believe that the
abandon the plan after approval by proposed merger or consolidation is
the shareholder of such plan contrary law:
- Amendment to the plan of - set a hearing for the corp. to be
merger or consolidation heard
a) approval of majority vote of the - notice be given at least 2 weeks
boards of all constituent corps. prior to the hearing
b) ratified by the shareholder
representing 2/3 of the OCS Effects of Merger or Consolidation(Sec.
4. Execution of articles of merger or 80)
consolidation by each of the constituent 1. The constituent corporations shall become
corp. a single corporation which, in case of
- signed by the President or VP and merger shall be the surviving corporation,
certified by the Secretary or Asst. and in case of consolidation, shall be the
Secretary by each corp. setting forth: consolidated corporation;
a) the plan of merger or 2. Separate existence of the constituent
consolidation corporations shall cease, except that of the
b) as to stock corp., the number of surviving or consolidated corporation;
shares outstanding, in case of non- 3. The surviving or consolidated corporation
stock the number of members shall possess all the rights, privileges,
c) as to each corp. the number of immunities and powers and shall be
shares or members voting for or subjected to all the duties and liabilities
against such plan of a corporation;
5. Approval by the SEC (in 4. The surviving or consolidated corporation
quadruplicate) shall possess all the rights, privileges,
- if banks or banking institutions, immunities and franchise of each of the
building and loan associations, trust constituent corporations;
co., insurance co,. public utilities, 5. All property, real or personal, and all
educational institutions and other receivables due to, and all other interest
special corps. governed by special of, each constituent corporation shall be
laws, FAVORABLE recommendation of deemed transferred to and vested in such
the appropriate government agency be surviving or consolidated corporation
obtained first. without further act or deed (transfer is
6. Issuance of the certificate of merger / automatic);
consolidation 6. The surviving or consolidated corporation
- upon such time merger or shall be responsible for all the liabilities
consolidation shall be effective and obligations of each of the constituent
corporations.
7. Any claim, action or proceeding pending
by or against any of such constituent

61
corporations may be prosecuted by or 4.The title to the assets of the corp. is by 4
against the surviving or consolidated operation of law transferred to the new corp. o
corporation;
8. The rights of creditors or lien upon the 5. Constituent corps. are automatically dissolved 5
property of any of each of the constituent d
corporations shall NOT be impaired by o
such merger or consolidation

SALE ---------------------------------------------------------------
- Gen. Rule: When one corporation buys --------
all the shares of another corporation, this
will not operate to dissolve the other IX. APPRAISAL RIGHT
corporation and as the two corporations
still maintaining their separate corporate Appraisal right (Sec. 81)
entities, one will not answer for the debts - right of shareholder to demand payment
of the other. of the fair value of his shares after
- Exceptions as to non-assumption of dissenting from a proposed corporate
liabilities: action involving a fundamental change in
1. If there is an express assumption of the corporation in the cases provided by
liabilities; law.
2. If there is a consolidation or merger;
3. If the purchase was in fraud of Instances when the appraisal right may
creditors; and be exercised
4. If the purchaser is merely a 1. In case of any amendment to the AI
continuation of the seller. which has the effect of changing or
restricting the rights of any shareholder
MERGER/CONSOLIDATION vs. SALE or class of shares, or authorizing
OF ASSETS preferences in any respect superior to
those of outstanding shares of any class;
Merger/Consolidation 2. Amendment which has the effect of
extending or shortening the term of
1. Sale of assets is not always involved
corporate existence;
3. In case of sale, lease, exchange, transfer,
2. There is automatic assumption by the
mortgage, pledge, or other disposition of
surviving/ consolidated corp of the liabilities of
all or substantially all of corporate
the constituent corp.
property and assets;
4. In case of merger or consolidation;
3.There is a continuance of the enterprise and of
the shareholders thereon though in an altered
form

62
5. Investment of corporate funds to another award be paid by the corp within 30
corporation or business for any purpose days after award is made.
other than its primary purpose; 5. Corp. pays the shareholder the fair
6. Shareholder of any close corporation market value of the share
may compel the corporation to allow him fair value as of the day prior to the
to exercise the right when the corporation date on which the vote was taken,
has sufficient assets in the books to cover excluding any appreciation or
its debts and liabilities exclusive of capital depreciation in anticipation of such
stock. (Sec. 85) corporate action
6. Upon payment, shareholder shall
How to exercise appraisal right(Sec. 82) transfer his shares to the corp.
1. By voting against the proposed action effect if dissenting shareholder
2. By making a written demand within Is not paid the value of his shares
30 days after the vote was taken. within 30 days after the award
3. By surrendering the Certificate of His voting and dividend rights
Stock within 10 days from demand shall immediately be received (back as
for notation only that such is shareholder)
dissenting share, once noted, return to
shareholder Extinguishment of right of payment
importance of surrender Sec. 86: so - Gen Rule: No demand of payment of the
that shareholder rights will not be FV of shares may be withdrawn
terminated - Exceptions:
4. All rights accruing to the shares from 1. Such shareholder withdraws his
demand for payment until either demand for payment and the
abandonment of the corporate action corporation consents thereto;
involved or the purchase of said shares by 2. Proposed corporate action is
the corp. shall be suspended (30 days) abandoned or rescinded by the
including voting and dividend rights corporation;
EXCEPT the right to receive the 3. The proposed corporate action is
payment of fair value. disapproved by SEC, where its
Note: Failure to make a written approval is necessary;
demand within 30 days shall be 4. The SEC determines that such
deemed a waiver of appraisal right shareholder is not entitled to
If the withdrawing shareholder and appraisal right.
corp. cannot agree on the fair value of
the shares within 60 days appraised Effects when right of payment has
by 3 disinterested persons (1 by ceased
shareholder, 1 by corp, 1 chosen by the 1. Restored as shareholder
2) findings of the majority of the
appraisers shall be final and the

63
2. All dividends which would have contrast to the right of
accrued in his shares shall be paid to appraisal.
him
---------------------------------------------------------------
Who bears the cost of appraisal(Sec. 85) -------
1. the corporation
a. Where the price offered by the XI. NON-STOCK CORPORATIONS
stockholder is approximately
the same as the FV ascertained Non-stock corporation (Sec. 87)
by the appraisers; or - one where no part of its income is
b. In case of an action to recover distributable as dividends to its members,
such FV is filed by the trustees, or officers, subject to the
dissenting shareholder and his provisions of the Corporation Code on
refusal to accept payment is dissolution
found by the court to be - Any profit obtained as an incident to its
justified. operations shall be used for the
2. the Stockholder furtherance of the purpose(s) for which it
a. Where the price offered by the was organized.
corporation is approximately - Purposes (Sec. 88): charitable, religious,
the same as the FV ascertained educational, professional, cultural,
by the appraisers; or recreational, fraternal, literary, scientific,
b. In case of an action to recover social, civil service, or similar purposes,
such FV is filed by the like trade, industry, agricultural and like
dissenting shareholder and his chambers or combination thereof.
refusal to accept payment is
found by the court to be NSCs are governed by the same rules
unjustified. established for stock corporations,
whenever pertinent, subject, however, to a
Effects of Transfer of Shares/COS number of special features.
1. The rights of transferor as dissenting
shareholder shall cease and transferee STOCK CORPORATION vs. NON-STOCK
shall have all the rights of a regular CORPORATION
shareholder.
2. All dividends which or would have SC
accrued to such shares shall be paid to 1. Has capital stock divided into 1. Does not
transferee. shares and with authority to distribute pr
- purchasing the dissenting distribute to its stockholders
shares is an indication on the
2. Stockholders may transfer their 2. Member
part of the transferee to become
shares membership
a shareholder which is in

64
or by-laws - Members meeting
3. Cumulative voting is available in 3. cumulative In ornotoutavailable
voting of the place where the
the election of directors principal
unless otherwise provided office
in the AI of
or the corporation is
by-laws located, so long as it is within the
4. Directors cannot exceed 15 in Philippines
4. Trustees may exceed 15 in number
number - Notice
5. The term of a director is 1 year sent is
5. The term of atrustee to 3 all members
years; 1/3 indicating the
date,
of the Board shall be time annually
elected and place of meeting.
Distribution of assets(Sec. 93)
6. Stockholders may vote by proxy 6. Members- may be deprived of execute
Dissolution the a plan of
right to vote bydistribution
proxy in theofAI or by-
assets
laws
- Procedure:
7. Officers are elected by the Board of 7. Officers may be directly elected by
1. Adoption of a resolution
Directors the members unless otherwise
recommending a plan of distribution
provided in the AI or by-laws
by or majority vote of the BOT.
8. Stockholders and directors must act 8. Members may be allowed by the
2. Submission by-
for voting at a regular or
in a meeting, except where a mere laws to vote by mail or other
special meeting.similar
written assent is sufficient or a formal means. 3. Written notice to each member
meeting unnecessary entitled to vote, set forth the proposed
9. Stockholders meeting to be held at 9. Members meeting planin or
or summary
out of the thereof; date, time
the place where the principal office is place where the and principal
place ofoffice is
meeting.
located located. 4. Adoption of the plan upon approval of
at least 2/3 of the members having
voting rights present or by proxy.
Right to vote(Sec. 89)
- Gen Rule: Each member regardless of Conversion of NSC to SC
class, shall be entitled to 1 vote - Dissolution of NSC before organizing a
- Except: If limited, broadened or denied stock corporation.
by the AI or by-laws
- Power of Courts:Courts have no power Conversion of SC to NSC
to strip a member of his membership - Mere amendment of AI
therein without cause.
Rules on distribution(Sec. 94)
Who can be trustees? 1. All liabilities shall be paid or satisfied
- Any member of the NSC for adequate provisions.
- Vacancy filled by election only for 2. Assets held subject to return upon
unexpired term dissolution shall be delivered back to their
respective transferors;
Place of meetings (Sec. 93:)

65
3. Assets held for charitable, religious, - Any restriction provided it does not violate
etc, without a condition for their return on Sec. 98:
dissolution shall be conveyed to one or 1. Restrictions on the right to transfer
more organizations engaged in similar shares must appear in the AI or By-
activities as the dissolved corporation; Laws and in the Certificate of Stock,
4. Other assets shall be distributed to otherwise not binding upon a
members as provided for in the AI or by- purchaser in good faith.
laws; 2. Restrictions shall not be more onerous
5. In any other case, assets may be than granting the existing shareholder
distributed as provided in the plan of or the corporation the option to
distribution. purchase the shares of the
transferring shareholder with such
--------------------------------------------------------------- reasonable terms, conditions or period
-------- stated thereon.
e.g.
XII. CLOSE CORPORATIONS a) FMV of shares = 100 if sold less
10% ( cant because it is more
Close corporation(Sec. 96) burdensome)
- A special kind of stock corporation: b) Transferring without prior
1. whose Articles of Incorporation consent of the board
provide that: If corp. fails to exercise the option
a) all shares except treasury Shareholder may now transfer to third
shares are held on record by person who wishes to buy.
persons not exceeding 20; 3. Close Corp. may not list in a stock
b) issued stock s are subject to one exchange or make any public offering
or more restrictions, with a of its shares.
right of preemption in favor of - Corp. must be listed in the Phil Stock
the stockholders or the Exchange (reason: shares may be held
corporation; and by anybody who is unknown/not
c) the corporation shall not be denied)
listed in the stock exchange or
its stocks should not be publicly Public Offering offering ones share
offered; AND for the unknown public
2. whose 2/3 of the voting stocks or
voting rights is NOTowned or Can a corp. be part of a close corp.?
controlled by another corporation - Yes, provided it does not own or control
which is not a close corporation. 2/3 of OCS of a close corporation or control
2/3 of stocks having voting rights.
What kind of restrictions can the corporation
put? Right of First Refusal

66
- The shareholder who wants to sell his 6. Preemptive right extends to all stock
shares must first offer it either to the issues;
corporation or to the other existing 7. Deadlocks in board are settled by the
shareholders. If the corporation or SEC, on the written petition by any
existing shareholders fail to exercise the stockholder; and
option to purchase within the period 8. A stockholder may withdraw and avail
stated (1 month) the transferring of his right of appraisal.
shareholder may sell his shares to any
third person. Articles of Incorporation (Sec. 97):
- Gen Rule: Any corporation may be - Aside from the general matters of Art. 14,
incorporated as a close corporation the AI of a close corporation may provide:
- Exceptions: 1. For a
1. mining companies; a) classification of shares or rights
2. oil companies; b) prescribe qualification for
3. stock exchanges; owning/holding shares
4. banks; c) restrictions on their transfer
5. insurance companies; 2. For a classification of directors into
6. public utilities; one or more classes, each of which may
7. education institutions; be voted for and elected solely by a
8. other corporations declared to be particular class of stocks;
vested with public interest 3. For a greater quorum or voting
requirements in meetings of
Characteristics of close corporations: stockholders or directors
1. Stockholders may act as directors 4. That the business of the corporation
without need of election and therefore are shall be managed by the stockholders
liable as directors; rather than the BOD so long as this
2. Stockholder who are involved in the provision continues in effect:
management of the corporation are liable a) No meeting of stockholders need be
in the same manner as directors are; called to elect directors;
3. Quorum may be greater than mere b) Unless the context clearly requires
majority; otherwise, the stockholders shall
4. Transfers of stocks to others, which be deemed to be directors for all
would increase the number of intents
stockholders to more than the maximum, c) The stockholders and the
are invalid; corporation shall be subject to all
5. Corporate actuations may be binding liabilities of directors.
even without a formal board meeting, if 5. That all officers or employees or that
the stockholder had knowledge or ratified specified officers or employees shall be
the informal action of the others; elected or appointed by the
stockholders instead of the BOD.

67
The corporation may at its option,
Terms of directors refuse to register the transfer of the
- 1 year stock in the name of the transferee
- Except:
Issuance or Transfer of Stock of a Close 1. if the transfer of the stock has been
Corporation in Breach of Qualifying consented to by all shareholders of the
Conditions (Sec. 99): close corporation; or
1. A person holding stocks 2. if the corporation has amended its AI.
- if the qualification for
ownership is conspicuously stated in Transfer not limited to a transfer for
the certificate of stock, the person value
holding such certificate is conclusively
presumed to have knowledge of such Note: It is better to dissolve the corp.
qualification. and incorporate again if it wants to
- Effect: Corp at its option may convert it into another kind
refuse the transfer in its favor
2. If the AI states the number of persons not Amendment that may terminate the
in excess of 20 to be entitled to be holders status of a close corporation
on record of its stock and the certificate 2 kinds:
conspicuously states such numbers, the 1. To delete/remove any of the
person to whom such stock is issued in provisions under the title;
excess of the nos. required is conclusively 2. To reduce the quorum or voting
presumed to have knowledge of the fact. requirement
- Effect: Corp. may refuse to record the - reduction of what is required by
transfer to its books law to ordinary shareholder 2/3
3. If a stock certificate conspicuously shows to effect amendment
a restriction on transfer of stocks, - include all shareholder with or
transferee is conclusively presumed to without voting rights
have notice of the fact that he has
acquired stock in violation of the Rights of transferee not impaired by the
restriction, if such acquisition violates the provisions of this section
restriction. 1. Right to rescind the transaction; or
- If transfer actually violates the 2. Right to recover under any applicable
restriction without prejudice to the warranty, express or implied.
right of transferee to proceed against
transferor Rules on Agreements By Stockholders
(Sec. 100)
Effect of Violation of the Presumption 1. Agreements by and among shareholders
- Gen. Rule: before the formation and organization of a

68
close corporation signed by all of the BOD it will not be invalidated but
stockholders: the stockholders who are parties thereto
- survive the incorporation of shall be liable for managerial acts
such corporation and imposed by the Corporation Code on
- valid and binding, if not directors
inconsistent with the AI, irrespective 5. Stockholders who actively engage in the
if embodied in AI or not, except those management or operation of the business
required by the Corporation Code to be and affairs of the corporation shall be held
embodied in the AI. to strict fiduciary duties to each other and
Prior to incorp. Shareholder can among themselves
enter into any agreement as long as it Corporate torts shareholders are
is legal. personally liable UNLESS the
After incorp. agreement continues to corporation has obtained
subsist/ valid and binding reasonably adequate liability
2. Shareholders agreement, in writing and insurance
signed by the parties thereto, may provide
that in exercising any voting rights, the
shares held by them shall be voted:
a) as therein provided; When Board Meeting Is Unnecessary Or
b) as they may agree; or Improperly Held(Sec. 101)
c) as determined in accordance
with a procedure agreed upon - Gen Rule: Any action by the director
by them without a meeting shall be valid if the
How shares will be voted? following conditions are present:
- Agree at the time of voting how 1. Before or after such action is taken,
to vote written consent thereto is signed by all
- Procedure to determine how the directors; or
they will vote 2. All the stockholders have actual or
- Voting trust / voting by proxy implied knowledge of the action and
as equivalent in ordinary situation make no prompt objection thereto in
writing; or
3. No provision in any written agreement 3. The directors are accustomed to take
signed by stockholders, relating to any informal action with the express or
phase of the corporate affairs, shall be implied acquiescence of all
invalidated between the parties on the stockholders; or
ground that its effect is to make them 4. All the directors have express or
partners among themselves. implied knowledge of the action in
must be consistent with the AI question and none of them makes
4. Shareholders agreement restricting or prompt objection thereto in writing.
interfering with the discretion and powers

69
- Exception: If by- laws provide otherwise corporation or its BOD, officers or
stockholders;
Ordinary corp. without / improper 3. Directing or prohibiting any act of the
meeting question of impropriety corporation or its BOD, stockholders,
If a directors meeting is held without a officers or other persons party to the
proper call or notice, an action taken action;
therein within the corporate powers is 4. Requiring the purchase at their fair
deemed ratified by a director who failed value of shares of any stockholder,
to attend UNLESS he promptly files his either by the corporation regardless of
written objection with the Secretary of the the availability of unrestricted
corporation after having knowledge retained earnings in its books, or by
thereof. other stockholders;
5. Appointing a provisional director;
Preemptive Right In Close 6. Dissolving the corporation; OR
Corporation(Sec. 102) 7. Granting such other relief as the
- Extend to all kinds of stock, including circumstances may warrant.
reissuance of treasury shares, unless the
AI provide otherwise (ordinary corp. Provisional director (Sec. 104)
extend only to new issuances) - An impartial person who is neither a
stockholder nor a creditor of the
Deadlocks (Sec. 104) corporation, and whose further
- If the directors or stockholders are so qualifications, if any, may be determined
divided respecting the management of the by the SEC.
corporations business and affairs that the - He is NOT a receiver of the corporation
votes required for any corporate action and does not have the title and powers of
cannot be obtained with the consequence a custodian or receiver.
that the business and affairs of the - He shall have all the rights and powers of
corporation can no longer be conducted to a duly elected director, including the right
the advantage of the shareholders to notice of and to vote at meetings of
generally. The SEC, with the power to directors, until such time as he shall be
arbitrate, upon written petition of any removed by order of the SEC or by all the
shareholder shall have authority to make stockholders.
such orders as it deems appropriate,
including an order: Remedies in case of deadlocks
1. Canceling or altering any provision 1. Written petition with SEC for it to
contained in AI or By-Laws or any arbitrate
stockholders agreement; 2. Withdrawal Shareholder may for any
2. Canceling, altering, or enjoining any reason compel the corporation to purchase
resolution, or other act of the his shares at the FMV provided the close
corp. has sufficient assets in its books to

70
cover its debts and liabilities exclusive of by a stockholder only in the case and compe
capital stocks (Sec 105) provided in Secs. 81 and 42 of the by a stockh
3. Written petition with SEC to compel Corporation Code
dissolution on grounds of the acts of the 8. Except as regards redeemable shares, 8. In case
directors, officers or those in control of the the purchase of the corporation of its corporate
corporation is : own stock must always be made from corporation
a) Illegal, the unrestricted retained earnings its own s
b) fraudulent, regardless
c) dishonest, unrestricte
d) oppressive or unfairly prejudicial to 9. Arbitration of intra-corporate 9. Arbit
the corporation or any stockholder, or deadlock by the SEC is not a remedy in deadlock b
e) whenever corporate assets are being case the directors or stockholders are so remedy i
misappropriated or wasted. divided respecting management of the stockholde
corporation the manag
ORDINARY STOCK CORPORATION VS.
CLOSE CORPORATION ---------------------------------------------------------------
--------
ORDINARY STOCK
CORPORATION XIII. SPECIAL CORPORATIONS
1. Its AI need only contain the general 1. Aside from the general matters in
matters enumerated in Sec. 14 of the Sec. 14, its1.AI
EDUCATIONAL
must contain theCORPORATION
special (Sec.
Corporation Code 106)
matters prescribed by Sec. 97. Failure to
A
do so precludes a
- stock or non-stock corporation
organized to provide facilities for teaching
corporation status
2. Its status as an ordinary stock 2. The 2/3 of or itsinstructions
voting stock or voting
corporation is not affected by the rights must must
- not obtain orfavorable
be owned controlledrecommendation
ownership of its voting stock or voting from DECSwhich
by another corporation for theis approval
not a of its AI and
rights By-Laws by SEC. [DepEd = Elementary
close corporation
3. Its AI cannot classify its directors and High
3. Its AI may classify itsSchool;
directorsCHED = Tertiary]
4. Business of the corporation is 4. Business - ofit the
is primarily
corporation governed
may beby special laws
managed by the BOD managed by the and, suppletorily,
stockholders by the
if the AI soprovisions of the
Corporation
provide, but they are liableCode
as directors
5. The corporate officers and employees - Board
5. Its AI may provideofthatTrustees
any or (NSEC)
all of not less than
are elected by a majority vote of all the the corporate 5officers
members and not more
or employees may than 15 the
directors be elected term or of office is 5 years
appointed by the
stockholders It is different from an ordinary non-stock
6. The pre-emptive right is subject to corporation
6. The pre-emptive right is organized
subject to nofor educational
the exceptions found in Sec. 39 purposes.
exceptions unless denied in the AI
7. The appraisal right may be exercised 7. The appraisal right may be exercised

71
2.RELIGIOUS CORPORATION (Sec. 109) Dissolution
- A corporation composed entirely of - refers to the extinguishment of its
spiritual persons which is organized for franchise to be a corp. and the
the furtherance of a religion or for termination of its corporate existence
perpetuating the rights of the church or - Corp ceases its operation altogether, BUT
for the administration of church or it continues to exist for 3 years for
religious work or property purposes of winding up of its affairs
- It is different from an ordinary non-stock - Steps:
corporation organized for religious 1. Termination
purposes, like the Knights of Columbus, 2. Winding up
Opus Dei etc. 3. Liquidation
- Kinds:
a. Corporation Sole Kinds of dissolution
- incorporated by one person and 1. Voluntary dissolution
consist of one member or 2. Involuntary dissolution
corporator only and his
successors, such as a bishop Voluntary dissolution
a) can sell, acquire, encumber - by the act of the corporation
property
b) to dissolve, file a declaration a. If there are no creditors who are
to that effect prejudiced, dissolution may be effected:
b. Religious Society i. by the majority vote of BOD/BOT, and
-a non-stock corporation governed ii. by a resolution duly adopted by the
by a board but with religious affirmative vote of the stockholders
purposes. It is incorporated by an owning at least 2/3 of the OCS or of at
aggregate of persons, e.g. least 2/3 members at a meeting duly
religious order, diocese, synod, called for the purpose after notice of
sect, etc. the meeting was published in a
- Articles of incorporation - submit to SEC newspaper of general circulation.
with affidavit of affirmations
Procedure
i. File with the SEC the resolution
duly certified by the Board and
countersigned by the Secretary
ii. Issuance by the SEC of a
--------------------------------------------------------------- certificate of dissolution
-------- dissolution takes effect
XIV. DISSOLUTION
b. If there are creditors affected, by
judgment of the SEC after hearing of the

72
petition for voluntary dissolution. (Sec. The Rule that when the SEC
119) does not take action in 6
Procedure: months from the date of filing
1. Petition filed with SEC for a cause not attributable to
2. If petition is sufficient in form and the corporation the amendment
substance, the SEC, by an order is deemed effective, is not
reciting the purpose of the petition, applicable in this case.
shall fix a date on or before which Submit also an affidavit of
objections thereto may be filed, but publication setting forth that
which shall not be less than 30 the corporation has amended
days nor more than 60 days after its articles to shorten the term
the entry of the order; to effect dissolution upon
3. Publication of the SEC order at arrival of date stated
least once a week in 3 consecutive 3. Dissolution takes effect upon
weeks in a newspaper of general approval of the amendment or
circulation, and a similar copy expiration of the shortened term.
shall be posted for 3 consecutive
weeks in 3 public places, in the If there are creditors what is the proper way of
municipality or city where the dissolving?
principal office of the corporation is - Any of the 3 ways so long as creditors are
situated; not prejudiced.
4. Five days after the expiration of - In case of corporation sole, dissolution is
the date set for filing objections, effected by submitting to the SEC a
the SEC shall hear the petition verified declaration of dissolution for
and try any issue made by approval.
objections filed;
5. Dissolution takes effect upon
judgment by SEC ordering Involuntary dissolution
distribution of assets of corp. - Brought about by filing of a verified
complaint with SEC and after proper
c. by amending the AI to shorten the notice and hearing on the grounds
corporate term (Sec. 120) provided for by existing laws, rules and
regulations.
Procedure: - Grounds:
1. Amendment of the AI approved 1. Violation of the corporation code
by the Board and ratified by 2. When there is a deadlock in a
stockholders owning at least 2/3 of close corp.
OCS or 2/3 of the members 3. When a close corp. is mismanaged
2. Submit the amended AI to the
SEC

73
4. When the certificate of registration 4. Dissolution by judicial decree
is suspended or revoked in ff. forfeiture of its privilege or franchise as
instances: non user
a) when there is fraud in processing 5. Quo warranto suit against a de
its certificate of registration facto corporation
b) when there is serious 6. Minority stockholders suit for
misrepresentation as to what the dissolution on justifiable grounds
corp. can do or is doing to the great 7. SEC dissolution, upon complaint and
prejudice of or damage to the after notice and hearing, on the following
general public grounds:
c) refusal to comply or defiance of any a) The corporation was illegally
lawful order of the commission organized;
restraining the commission of an b) Continuous inactivity
act which would amount to a grave (subsequent to incorporation,
violation of its franchise organization and commencement of
d) continuous inoperation for 5 years business) for at least 5 years;
e) failure to file BL within the c) Serious dissension in the
required period corporation; or
f) failure to file reports in d) Commission by the corporation
appropriate form within the of illegal or ultra vires acts or
presented period violations of the Corporation Code.

Kinds of Involuntary Dissolution Effects of dissolution


1. Expiration of the corporate term 1. Legal title to corporate assets is vested
corp. continues to operate for a period of 3 in the shareholder, who become co-owners
years for purposes of winding up its thereof
affairs 2. The corporation ceases as a body
2. Legislative enactment except: it politic or to continue the business for
must not impair any right or remedy which it was established
3. Failure to organize and commence 3. Can no longer be revived (but may
transaction within 2 years from reincorporated by filing a new AI and BL)
incorporation (However, the SEC has 4. The dissolution does not by itself imply
opined that the dissolution in this case is the extinction of rights demandable
not automatic. The corporation continues against the corporation
to exist as such, notwithstanding its non- 5. Ceases to have any personality
operational status until the SEC orders whatsoever after the expiration of the
its dissolution after notice and hearing) 3-year winding period and as a general
rule it can no longer sue or be sued as
such

74
The termination of the life of a juridical
LIQUIDATION entity does not by itself cause the
- The winding up of the affairs of the extinction or diminution of the rights and
corporation by reducing its assets in liabilities of such entity nor those of its
money, settling with creditors and owners and creditors alike (Sec. 145).
debtors, and apportioning the amount of Where, in the case of a corporation, the 3-
profit and loss. year extended life has expired without a
trustee or receiver having been expressly
Methods of Liquidation designated within the said period, those
1. Liquidation by the corporation itself who have been charged to wind up its
- converts assets with cash, settle with affairs or, in their absence, the BOD/BOT
creditors, apportion profit and loss should be permitted to continue as
2. Liquidation by a duly appointed trustees by legal implication to complete
trustee the corporate liquidation.
- transfer assets in the name of the
trustee, has responsibility to liquidate the How to Distribute Assets
corporation. In the following order:
3. Liquidation by a management 1. Creditors
committee or rehabilitation receiver 2. Shareholders/members who are likewise
appointed by the SEC. creditors
3. Shareholders in proportion to their
The 3-year period of liquidation does not shareholding preference
apply to Methods 2 and 3 as long as the
trustee or receiver is appointed within the Amount shareholder is entitled to
said period. -Fair Market Value of the shares of stock.
-If there is a loss below FMV.
If corp. cannot wind up its affairs -If there are profits in proportion to their
within 3 years shareholdings
a. It is best to appoint a trustee or
receiver because he can act as such even Upon winding up of the corporate affairs,
beyond 3 years, (the corp. can only act for any asset distributable to any creditor of
3 years) shareholder or member who is unknown
b. If the property liquidation is or cannot be found shall be escheated to
transmitted to a trustee or a receiver, the the city or municipality where such asset
corporation ceases, legal interest vests in is located.
the trustee and beneficial interest in the
stockholders, members, or creditors. General Rule:

75
Dissolution authority given to the obtaining a license to transact business in
corporation to distribute assets to this country and a certificate of authority
shareholders or members from the appropriate government agency
Except: (even if no dissolution, the corp. concerned. (Sec. 123)
can distribute assets) - Test: Incorporation Test (Place of
Exceptions to the Trust Fund Doctrine incorporation), regardless of the
1. Decrease of capital stock (Sec. 38) nationality of the shareholders
2. When corp. is redeemed by - During wartime, the control test will
redeemable shares apply, that is, a domestic corp. controlled
3. When corporation is purchasing by enemy aliens shall be deemed a foreign
treasury shares (Sec. 42) corporation with a nationality identical
4. When the corporation is acquiring its with that of its controlling shareholder
own shares, converting it into treasury - becomes a Philippine resident the moment
shares (Sec. 42) it is granted a license to transact business
5. When declared as dividends (Sec 43) in the Philippines. Corporate residence is
6. When there is withdrawal from a close where its business is transacted
corp (Sec 105)
Objectives of regulation of foreign
--------------------------------------------------------------- corporation
-------- 1. To place them in equal footing with
domestic corporation;
XV. FOREIGN CORPORATION 2. To subject them to inspection so that their
condition may be known;
Foreign corporation 3. To protect the residents of the State doing
- One formed, organized or existing under business with them by subjecting them to
any laws other than those of the the courts of the State.
Philippines, and whose laws allow
Filipino citizens and corporations to do
business in its own country or State. (Sec. FOREIGN INVESTMENT ACT OF 1991
123) (RA 7092)
- This definition espouses the incorporation - A foreign corporation may now acquire
test and the reciprocity rule and is and own 100% Filipino corporation.
significant for licensing purposes. It does - Except when limited by Constitution
not say that it is required that the laws (owning land)
under which foreign corporations are
formed give Philippine national reciprocal Problem: Corporation A with Shareholder
rights. = 31% Filipino and 69% owned by
- A foreign corporation shall have the right Corporation B ( 47% Fil and 53% Alien),
to transact business in the Phil. after engaged in partially nationalized industry

76
Q: Is the 60% requirement met? 6. The names and addresses of the
A: Yes, requirement met present directors and officers of the
corporation;
Because a FC cannot extend its 7. A statement of its authorized
jurisdiction beyond its limits, it exist only capital stock and the aggregate
in contemplation of law and by the number of shares which the
consent of such state or country corporation has authority to issue;
8. A statement of its OCS and the
APPLICATION FOR A LICENSE(Sec. 125) aggregate number of shares which
the corp. has issued;
Procedure for the Issuance of License 9. A statement of the amount
I. Submit application with SEC which shall actually paid in; and
be under oath and specifically set forth the 10. Such additional information as
following unless stated in its AI: may be necessary in order to
1. The date and term of enable the SEC to determine
incorporation; whether such corp. is entitled to a
2. The address including the street license to transact business in the
number of the principal office of Philippines and to determine and
the corporation in the country or assess the fees payable.
state of incorporation;
3. Name and address of its resident II. Submit Articles of Incorporation and By-
agent authorized to accept laws, duly certified and their translation to
summons and process in all legal an official language in the Phil.
proceedings and, pending the
establishment of a local office, all III. Submit and attach a certificate under
notices affecting the corporation; oath by an authorized official of the
4. The place in the Philippines where jurisdiction of its incorporation attesting to
the corporation intends to operate; the fact that the laws of the country or state
5. The specific purposes of the of the applicant allow Filipino citizens and
corporation which it intends to corporation to do business therein and the
pursue in the transactions of its applicant is an existing corp. of good standing
business in the Philippines. with a translation of the certificate in English
Provided that said purpose are under oath of the translator if it is in foreign
those specifically stated in the language
certificate of authority issued by
the appropriate government IV. A statement under oath of the President
agency; or any authorized officer of the corp. showing
to the satisfaction of the SEC and other
government agency in proper cases that the
applicant is solvent and in sound financial

77
condition and setting forth its assets and 1. Resident agent exclusive
liabilities for the previous year 2. SEC ( If no resident agent and the
corp ceases to transact business
V. Other requirement provided by law a SEC transmit within 10 days from
certificate of Authority from the appropriate receipt a copy of such summons to
government agency whenever required by law the corp. at its home or principal
office (act of mailing within 10 days
VI. Power (written) of Attorney designating a complete the service expenses born
resident agent on whom summons and other by the party on whose instance the
legal processes against the corp. may be service is made)
served and a written agreement and 3. Officers or agent in the
stipulation consenting that such services may Philippines.
be made upon the SEC, if anytime, it shall
cease to transact business in the Phils. or Note: the above order of examination
shall be without resident agent (Rule XIV, is to be followed only if a foreign corp.
Sec 13). is transacting business in the Phils.
with a license (Wang Labora vs.
Resident agent Mendoza)
- An individual, who must be of good moral
character and of sound financial standing, If without license service be made
residing in the Philippines, or a domestic upon any agent of the corp.
corporation lawfully transacting business If domestic corp. Rules of Court will
in the Philippines, designated by a apply
written power of attorney by a foreign
corporation authorized to do business in Conditions imposed subsequent to the
the Philippines, on whom any summons issuance of license:
and other legal processes may be served in 1. The FC shall transact business and
all actions or other legal proceedings for the purpose/s for which it is
against the foreign corporation. (Secs. 127 authorized under its license;
-128) 2. Within 60 days after the issuance of
its license, it shall deposit with SEC
When a corporation has designated a satisfactorily securities in the actual
person to receive service of summons market value of at least P100k
pursuant to the Corporation Code, that consists of:
designation is exclusive and service of a. bonds or other evidence of
summons on any other person is indebtedness of the
inefficacious. government of the Phils, its
political subdivisions and
Service of summons to a corp. with license (In instrumentalities or of
the ff. order)

78
government owned or the Phils. provided it is able to
controlled corporation; show the absence of any
b. shares of stock in Registered liability to Phil residents
Enterprises (registered under including the Government of
Omnibus Investment Code) the Pgils.
c. Shares of stock in domestic 4. It must comply with the provisions of
corporation registered in the existing laws, rules and regulations
stock exchange otherwise its license may be revoked,
d. Shares of stock in domestic suspended or annulled by SEC
insurance co. and banks
e. Any combination of these Effect of issuance of license:
kinds of securities EXCEPT - FC may now commence to transact its
foreign banking or insurance business in the Philippines for as long the
corp. corporation continues to exist as a
3. Within 6 months after the end of each corporation under the laws of its State of
fiscal year of the license incorporation EXCEPT when the license
a. additional deposit of securities is surrendered, revoked, suspended, or
equivalent in actual market annulled.
value of 2% of the amount by
which the licenses gross
income for that fiscal year
exceeds 5M if less than 5M TESTS OF DOING OR TRANSACTING
no additional BUSINESS IN THE PHILIPPINES:
b. If the market value of the
deposit decreased by at least A. JURSIPRUDENTIAL TESTS:
10% of such value at the time 1. Twin Characterization Test
they were deposited , the
a) Whether the foreign corporation is
deposit shall be increased; if
maintaining or continuing in the Philippines
the deposit increased by 10% -
the body or substance of the business for
allowed to withdraw
which it was organized or whether it has
Can you exchange the
substantially retired from it and turned it
deposits with another one? Yes,
over to another (Substance Test); and
substitution can be allowed
b) Whether there is continuity of
provided the corp. is solvent.
commercial dealings and arrangements,
c. If there are dividends/interest
contemplating to some extent the
due on the deposited
performance of acts or works or the exercise
securities, the license shall be
of some functions normally incident to and in
entitled to collect
progressive prosecution of the purpose and
d. Deposits be returned when the
object of its organization (Continuity Test).
license ceases to do business in

79
b) Appointing a representative or
2. Contract Test distributor domiciled in the
- Whether the contracts entered into Philippines which transacts business
by the foreign corporation, or by an agent in its own name and for its own
acting under the control and direction of the account;
foreign corporation, are consummated in the c) Publication of a general
Philippines. advertisement through any print or
broadcast media;
B. STATUTORY TESTS d) Maintaining a stock of goods in the
1. Foreign Investment Act of 1991 (RA Philippines solely for the purpose of
7042) having the same processed by another
Acts constituting doing business: entity in the Philippines;
a) Soliciting orders, service contracts, e) Consignment by the foreign
opening offices, whether called corporation of equipment with a local
liaison offices or branches; company to be used in the processing
b) Appointing representatives or of products for export;
distributors domiciled in the f) Collecting information in the
Philippines or who in any calendar Philippines; and
year stay in the country for a period or g) Performing services auxiliary to an
periods totaling to 180 days or more; existing isolated contract of sale which
c) Participating in the management, are not on a continuing basis.
supervision or control of any domestic
business, firm or entity or corporation
in the Philippines;
d) Any other act or acts that imply a Law Applicable (Sec 129)
continuity of commercial dealings or - Gen. Rule:
arrangements, and contemplate to Any FC lawfully doing business in the
that extent the performance of acts or Phils. shall be bound by all laws, rules
works, or the exercise of some of the and regulations applicable to domestic
functions normally incident to, and in corporation.
progressive prosecution of, commercial - Except: (Governed by the state of Incorp.)
gain or of the purposes of the business 1. Matters relative to formation,
organization. creation, organization or dissolution of
corporation
2. Implementing Rules of RA 7042 2. The relations, liabilities,
- Acts NOT constituting doing business: responsibilities or duties of
a) Mere investment as a shareholder shareholders, members or officers of
in a domestic corporation and/or the corp. to each other or to the corp.
exercise of the rights of such investor; (Citibank vs. Chilia)

80
- By laws of a FC can be given - If FC with another FC such
application without approval FC licensed to do business in
by the SEC since the SEC the Phil. within 60 days after
grants a license only when the such merger/consolidation
FC has complied with all the becomes effective, file with the
requirements of law, it follows SEC and in appropriate cases,
that when it decides to issue with the proper government
such license, it is deemed to agency, a copy of the articles of
have approved its foreign merger or consolidation duly
enacted by laws authenticated by the proper
official of the State under the
Amendments to articles of incorporation laws of which such merger or
or by-laws of foreign corporations (Sec. consolidation was effected.
130) - If FC with another FC if the
- Note: The law that governs the one absorbed is the corp.
amendment of AI of the FC is the law of licensed to do business in the
State of its incorporation Phils. it shall file a petition
- Limitation in the amendments of AI/BL for the withdrawal of its
of FC: it shall not of itself enlarge or alter license.
the purpose/s for which such corporation
is authorized to transact business in the REVOCATION OF LICENSE(Sec. 135)
Philippines. Grounds
1. Failure to file annual report or pay
Amended license (Sec 131) any fees required by this Code.
Q: When is it required? 2. Failure to appoint and maintain a
A: 1. The FC changes its corporate name resident agent in the Philippines;
2. The FC desires to pursue in the Phils. 3. Failure after change of its resident
other or additional purposes agent or of his address to submit to the
How by submitting an application SEC a statement of such change;
thereof to the SEC favorably endorsed 4. Failure to submit to the SEC an
by the appropriate government authenticated copy of any amendments to
agency in the proper cases its AIC or BL or any articles of merger or
Merger/Consolidation involving a FC consolidation;
licensed in the Phils. 5. A misrepresentation of any material
- FC merged/consolidated with a matter in any application, report, affidavit
domestic corp laws of the or other documents submitted by such
Phils will be followed as to corporation pursuant to this title;
requirements or merger or 6. Failure to pay any and all taxes
consolidation imposed, penalties and assessments, if

81
any, lawfully due to the Philippine 2. Foreign corporation NOT doing business in
government or any of its agencies or the Philippines:
political subdivisions; a) Generally, it may not sue and be
7. Transacting business in the sued in any court or administrative agency of
Philippines outside of the purpose/s for the Philippines;
which such corp. is authorized under its b) However, it may sue and be sued on
license; isolated transactions, as well as for those
8. Transacting business in the which are casual or incidental thereto.
Philippines as agent of or acting for and
in behalf of any foreign corp. or entity not Doctrine of Isolated Transactions
duly licensed to do business in the -Foreign corporations, even unlicensed ones,
Philippines; can sue or be sued on a transaction or series
9. Any other ground as would render it of transactions set apart from their common
unfit to transact business in the business in the sense that there is no
Philippines. intention to engage in a progressive pursuit
of the purpose and object of business
What happens when there is revocation of transaction.
license? - However, it is not the lack of the prescribed
- The SEC will issue a certificate of license to do business in the Philippines but
revocation, furnishing a copy thereof to the doing of business without license which
the appropriate government agency in the bars a foreign corporation from access to
proper cases. SEC shall mail to the corp. Philippine courts. An unlicensed foreign
at its registered office in the Phils. a corporation is not ipso facto barred from
notice of such revocation accompanied by bringing an action. The legal prohibition is
a copy of the certificate of revocation confined to cases relating to its business
activity in the country.
EFFECTS OF LACK OF LICENSE
A. On suits Instances when a foreign corporation
1. Foreign corporation doing business in the may sue in the Philippines whether or
Philippines: not licensed to do business thereat:
a) may not sue in any action in any 1. To seek redress for isolated business
court or administrative agency of the transaction;
Philippines; and 2. To protect its corporate name,
b) may be sued on any valid cause of reputation or goodwill;
action recognized in the Philippines (under 3. To enforce a right not arising out of a
the doctrine of quasi-estoppel by acceptance business transaction in the
of benefits). (Sec. 133) Philippines;

82
4. When the parties have contractually Formal Requirements to Legally Effect
stipulated that the Philippines is the the Withdrawal of Foreign Corporations
venue of actions; and License
5. When the party sued is barred by the The following must be submitted to the SEC:
principle of estoppel and/or principle 1. The letter petition of the Resident
of unjust enrichment from questioning Agent requesting the withdrawal of
the capacity of the foreign corporation. the license to do business
2. Filing fee of P10.00
B. On contracts 3. A copy of the resolution of the BOD
- The contracts contemplated are those that authorizing the closing of the Phil.
satisfy the contract test or those that make branch and empowering the RA to
a foreign corporation as one doing business effectuate the withdrawal thereof, duly
in the Philippines. authenticated in accordance with law
to be submitted in triplicate
General Rule: The contracts are 4. Latest balance sheet and sworn
unenforceable. They are enforceable only statement that no creditors will be
upon securing a license. prejudiced by the withdrawal also to
Exception: However, the contracts are null be submitted in triplicate
and void if they are contrary to law, morals, 5. Proof of publication of the Notice of
good customs, public policy and public order. withdrawal once a week for 3
consecutive weeks in a newspaper of
WITHDRAWAL OF FOREIGN general circulation in the Phil.
CORPORATIONS (Sec. 136) 6. The license issued by the commission
- How to effect surrender/ withdrawal: by to the corp. which shall be
filing a petition for withdrawal of license surrendered

Essential Requirements for Withdrawal 2 Things to Consider to Determine


1. All claims which have accrued in the Whether a FOREIGN CORPORATION
Philippines have been paid, compromised has Access to Phil Courts
or settled; 1. Does it have license
2. All taxes, imposts, assessments and 2. Is it transacting business in the
penalties, if any, lawfully due the Phil. Phil.
government or any of its agencies or - How to determine no hard and fast
political subdivisions have been paid; rule but there are guidelines provided
3. The petition for withdrawal of license a. If the FC is continuing
has been published once a week for 3 the business for which it was
consecutive weeks in a newspaper of created in the Phil. then it is
general circulation in the Phil. transacting business
(Menthrelatura case)

83
b. If acts of the corp. And it is suing under the
indicates a purpose by the corp. to isolated business transaction
engage in some parts of its regular disclose in complaint
business, then doing business 2. Suing entity must be a FC
(Microwe____ case) 3. Name its duly authorized
c. When a single act is not representative or RA for
merely incidental or casual but purposes of action, it must
such but of such character as to appoint a resident agent to
distinctly indicate its intention to whom notice upon the FC must
perform other business in the Phils be served for the purpose of pre
(Way lab) trial
d. The volume of the
business does not matter, it is the II. To protect corporate name, reputation
performance of acts for which the and goodwill ( Puma vs. IAC)
corp. was created that determines - Rule NOW, foreign trademarks/ trade
whether it was transacting names
business (Granger) 1. owner of the same is domiciled in the
e. The continuity of conduct country of which it is a member of
of which an intention can be the treaty agreement on trademarks
inferred of establishing a business 2. widely known in the Phils.
in the Phils (JAL)
2 Requirements BEFORE ( no longer
4 Exceptions when FC Without license applied)
can sue 1. Trade name/trademark registered in
I. Isolated business transaction the Phils.
single transaction 2. Country of the FC allows or gives
- solicited by domestic corp., Filipino Corp/citizen reciprocal rights
entity or person
- Note: If FC who solicits the III.To enforce a right not arising out of
transaction then it is already Business Transaction
transacting business in the - Bulakhidas and Universal
Phils. Shopping transaction
Rationale for the exceptions: not between 2 foreign entities
the intention of law to favor IV. Intends to hold person/entity for
domestic corp. actionable acts or omission
3 Requisites (to file an action - Rule on equity allows Filipino
based on this) to sue FC
1. FC must disclose that it is not - Lack of license is not an excuse
doing business in the Phils. for its non-suability (FBA)

84
RULES
1. Burden of proof that it is FC OCS Subscribed
transacting business without a Not all OCS are All subscribed capital
license suing under the 4 exceptions considered stocks are considered
is on the FC subscribed outstanding
2. The defendant must specifically
deny the allegation of FC capacity to Reason:Because it is possible that
sue shares of stock are fully paid. If fully
3. Proof of doing business is not paid, no longer considered as
necessary to confer jurisdiction on th subscribed.
FC (Marubers case and Signetics
vs, CA) Sec. 138
--------------------------------------------------------------- - Q: Is it possible for a corp. to have its
affairs managed by Board of Governors?
XVI. MISCELLANEOUS PROVISIONS A: Yes, but only limited to non-stock and
special corp. who may designate another
Sec 137 name for its BOT
- OCS all shares of stock issued to
subscribers or shareholders of a stock Sec 142
corp. whether or nor fully paid or partially - Gen Rule: Examination results of the
as long as there is a bonding subscription operation, books and records of any corp
agreement, except treasury shares. are strictly confidential
- All OCS are issued because not - Except: When a law requires disclosure
outstanding if not issued but not all
issued shares of stocks are outstanding
(e.g. treasury shares issued but not OCS)

85