Commercial Law Reviewer

May 8, 2017

Submitted By:

Alingcayon, Von Claude Gironella, Jsa Noble D.

Bello, Jaymart Lacasandile, Regine Anne B.
Bankey, Kathleen P. Mendiguarin, Nadia Christine
Cabradilla, Kriztel-Ann J. Rosario, Dyrene Mara S.
Dines, Victoria P. Solda, Ace Aries C.
Donato, Lucille Arianne Tacio, Zafhrulah C.
 FORMATION AND ORGANIZATION OF Exception: Officer acted with evident malice
CORPORATION or bad faith in terminating their employment.

General Principles
d) All contracts entered into in its
name by its regular appointed
CONSTITUTIONAL BASIS: Article XII, Section officers and agents are the contracts
16 of the corporation and not those of
the stockholders or members.
e) The property of the corporation is
The Congress shall not, except by general law, not the property of the stockholders
provide for the formation, organization, or or members
regulation of private corporations.
Government-owned or controlled corporations
may be created or established by special Constitutional rights of corporations
charters in the interest of the common good 1. Due process
and subject to the test of economic viability. 2. Equal protection
3. Protection against unreasonable
search and seizure
DEFINITION OF CORPORATION: A corporation is
an artificial being created by operation of
law, having the right of succession and the Note: corporation is not entitled to the
powers, attributes and properties expressly privilege against self-incrimination.
authorized by law or incident to its
existence.
CREATED BY OPERATION OF LAW: Corporations
cannot come into existence by mere agreement
ATTRIBUTES OF CORPORATIONS: of the parties as in the case of business
partnerships
1. It is an artificial being
2. Created by operation of law
3. With rights of succession General Rule: Corporation is created by law
4. Has powers, attributes and properties or operation of law
expressly authorized by law or
incident to its existence

Exception: Corporation by prescription

ARTIFICIAL BEING: it is the Capacity to
Contract and Transact Business"
Note: Corporations can only come into
existence in the manner prescribed by law.
Consequences of separate legal personality
of corporations
Theories on Corporate Existence and Powers
a) Obligations incurred by a
corporation, acting through its
authorized agents, are its sole
liabilities. A. Theory of Concession - Before a
b) A corporation may not, generally, be corporation may acquire juridical
made to answer for acts or personality, the State must give its
liabilities of its stockholders consent either in the form of a
(members) or those of the legal special law or a "general enabling
entities to which it may be connected act," and the procedure and
vice versa. conditions provided under the law for
c) A corporate officer is not personally the acquisition of such juridical
and solidarily liable with the personality must be complied with.
corporation for the money claims of
discharged or retrenched employees
B. Theory of Corporate Business
Enterprise or Economic Unit - Under
this theory, the Supreme Court has
 looked upon a corporation not merely
as an artificial being, but more as
an aggregation of persons doing
business, or an underlying economic
unit called the "business
enterprise."
Private Corporations Cannot Be Created
BySpecific Legislative Act - except for
government-owned or controlled corporations,
private corporation cannot be given a special
charter, but may incorporate only pursuant
to a general enabling law (i.e., Corporation
Code).
RIGHTS OF SUCCESSION:
A corporation has a capacity of continuous
existence irrespective of the death,
withdrawal, insolvency, or incapacity of the
individual stockholders or members and
regardless of the transfer of their interest
or shares of stock.
Limitation: Under the Corporation Code, the
life of the corporation is limited to the
period of time started in the AOI not
exceeding 50 years from the date of
incorporation unless sooner dissolved or
unless said period is extended.
POWERS, ATTRIBUTES, AND PROPERTEIS EXPRESSLY
AUTHORIZED BY LAW OR INCIDENT TO ITS
EXISTENCE:
Powers that may be exercised: Only such
powers as are granted by the law of its
creation.
Included: all powers which may be implied
from those expressly provided by law and
those which are incidental or essential to
the corporation's existence may also be
exercised.
Test to determine if it is within the power:
Whether the act of the corporation is in
direct and immediate furtherance of its
business, fairly incidental to the express
powers and reasonably necessary to their
exercise.
Note: The powers, attributes, and properties
of a corporation reinforces the theory of
special capacities.
- Thus, it cannot be said that a
corporation has fundamental rights
because these rights are sourced from
the law.
FOUR BASIC ADVANTAGES OF CORPORATE
ORGANIZATIONS
A. STRONG SEPARATE JURIDICAL PERSONALITY -
A corporation has a personality separate
and distinct from itsindividual
stockholders or members. Being an officer
or stockholder of a corporation does not
make one's property also that of the
corporation, and vice-versa, for they are
separate entities.
 The interest of shareholders in a
corporate entity is purely inchoate;
and this purely inchoate interest
will not entitle them to intervene in
a litigation involving corporate
property.
 Where a corporation buys all the
shares of another corporation, this
will not operate to dissolve the
bought corporation and as the two
corporations still maintain their
separate corporate entities.
Consequently, a corporation which
buys all the shares of another
corporation which becomes insolvent
will not be liable for the latter’s
debt
Exceptions:
(a) If there is an express assumption of
liabilities by the buying entity;
(b) If the purchase was in fraud of
creditors;
(c) When there is consolidation or
merger; or
(d) If the purchaser merely continues the
business enterprise of the seller
(i.e., when it amounts to a business
enterprise transfer).
B. LIMITED LIABILITY TO INVESTORS - As a
general rule, stockholders in a stock
corporation are personally liable for
corporate debts and liabilities only to
the extent of what they have invested
(paid-up capital) and what they have
promised to invest in the corporation
(unpaid subscriptions).
C. CENTRALIZED MANAGEMENT - Except when
otherwise provided in the Corporation
Code, all corporate powers and all
corporate properties are vested in the
Board of Directors or Trustees; and other
than electing directors or trustees, the
stockholders or members do not have
management powers relating to the
operations and assets of the corporation.
D. FREE TRANSFERABILITY OF UNITS OF
OWNERSHIP - The doctrine of delectus
personam in partnership is not applicable
to corporate setting, and that
stockholders hold their shares as
personal property with rights to dispose,
assign or encumber them as they may
desire.
Tri Level Existence
 First: a corporation is aggregation
of assets and resources
 Second: being a business enterprise
or economic union
 Third: privilege granted – juridical
personality
JOINT VENTURE – association of persons or
companies jointly undertaking some
commercial enterprise
SOCIEDAD ANONIMA – considered a commercial
partnership, a sort of a corporation. The
inscribing of its articles of agreement in
the commercial register was not necessary to
make it a juridical person – corporation.
CUENTAS EN PARTICIPACION – sort of accidental
partnership constituted in such a manner that
its existence was only known to those who had
an interest in the same, there being no
mutual agreement by the parties and without
a corporate name.
PETRON VS. NCMBA (2007)
Article 2208(5) contemplates a situation
where one refuses unjustifiably and in
evident bad faith to satisfy another’s
plainly valid, just and demandable claim,
compelling the latter needlessly to seek
redress from the courts. In such a case,
the law allows recovery of money the
plaintiff had to spend for a lawyer’s
assistance in suing the defendant –
expenses the plaintiff would not have
incurred if not for the defendant’s
refusal to comply with the most basic rules
of fair dealing. It does not mean, however,
that the losing party should be made to
pay attorney’s fees merely because the
court finds his legal position to be
erroneous and upholds that of the other
party, for that would be an intolerable
transgression of the policy that no one
should be penalized for exercising the
right to have contending claims settled by
a court of law.13 In fact, even a clearly
untenable defense does not justify an
award of attorney’s fees unless it amounts
to gross and evident bad faith.14
Petron’s claim to the V. Mapa properties,
founded as it was on final deeds of sale
on execution, was far from untenable. No
gross and evident bad faith could be
imputed to Petron merely for intervening
in NCBA’s suit against DBP and the
Monserrats in order to assert what it
believed (and had good reason to believe)
were its rights and to have the disputed
ownership of the V. Mapa properties
settled decisively in a single lawsuit.
APT vs. CA (1998)
The corporations must be joined as party
because it is its cause of action that is
being litigated and because judgment must
be a res judicata against it. In this case,
MMIC was not impleaded as a party and
therefore, it is not entitled to any moral
damages. Moreover, even if MMIC was
impleaded, how could the MMIC be entitled
to a big amount of moral damages when its
credit reputation was not exactly
something to be considered sound and
wholesome. Under Article 2217 of the Civil
Code, moral damages include besmirched
reputation which a corporation may
 possibly suffer. A corporation whose
overdue and unpaid debts to the Government
alone reached a tremendous amount of P22
Billion Pesos cannot certainly have a
solid business reputation to brag about.
Besides, it is not yet a well settled
jurisprudence that corporations are
entitled to moral damages. While the
Supreme Court may have awarded moral
damages to a corporation for besmirched
reputation in Mambulao vs. PNB, such
ruling cannot find application in this
case. It must be pointed out that when the
supposed wrongful act of foreclosure was
done, MMICs credit reputation was no
longer a desirable one. The company then
was already suffering from serious
financial crisis which definitely projects
an image not compatible with good and
wholesome reputation. So it could not be
said that there was a reputation
besmirches by the act of foreclosure.
SULO NG BAYAN VS. ARANETA (1976)
It is a doctrine well-established and
obtains both at law and in equity that a
corporation is a distinct legal entity to
be considered as separate and apart from
the individual stockholders or members who
compose it, and is not affected by the
personal rights, obligations and
transactions of its stockholders or
members. The property of the corporation
is its property and not that of the
stockholders, as owners, although they
have equities in it. Properties registered
in the name of the corporation are owned
by it as an entity separate and distinct
from its members. Conversely, a of the members of the board of directors of
corporation ordinarily has no interest in
the individual property of its
stockholders unless transferred to the
corporation, "even in the case of a one-
man corporation. The mere fact that one is
president of a corporation does not render
the property which he owns or possesses
the property of the corporation, since the
president, as individual, and the
corporation are separate similarities.
regardless of the nationality of its
stockholders.
2. Domicile Test – determined by the
state where it is domiciled.
The domicile of a corporation is the place
fixed by the creating or recognizing it;
in the absence thereof, it shall be
understood to be the place where its legal
representation is established or where it
exercise its principal functions (Art. 51,
NCC).
3. Control Test – determined by the
nationality of the controlling
stockholders or members. This test is
applied in times of war. Also known
as the WARTIME TEST.
“Philippine National” under the Foreign
Investment Act of 1991 (R.A. No. 7042):
A. A corporation organized under
Philippine laws of which 60% of the
capital stock outstanding and
entitled to vote is owned and held by
Filipino citizens;
B. A corporation organized abroad and
registered as doing business in the
Philippines under the Corporation
Code of which 100% of the capital
stocks entitled to vote belong to
Filipinos.
However, it provides that where a corporation
and its non-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 60%
both corporations must be Filipino citizens
(double 60% rule).
Note: The law applies the control test both
with respect to the ownership of shares
entitled to vote and the membership in the
board of directors.

CORPORATION DISTINGUISHED FROM PARTNERSHIP

TESTS TO DETERMINE NATIONALITY OF
CORPORATIONS
Partnership Corporation
Creation
1. Incorporation Test – determined by Created by mere Created by law or by
the state of incorporation, agreement of the operation of law
parties
 Number of incorporators existing partners based on this
May be organized by Requires at least because the principle
at least two persons five incorporators partnership is
(except a based on the
corporation sole) principle of
Commencement of juridical delectus personarum
personality Term of existence
Acquires juridical Acquires juridical Partnership may be Corporation may not
personality from personality from the established for any be formed for a term
the moment of date of issuance of period of time in excess of 50
execution of the the certificate of stipulated by the years extendible to
contract of incorporation by the partners not more than 50
partnership Securities and years in any one
Exchange Commission instance
Powers Firm name
Partnership may Corporation can Limited partnership Corporation may
exercise any power exercise only the is required by law adopt any name
authorized by the powers expressly to add the word provided it is not
partners (provided granted by law or “Ltd.” To its name the same as or
it is not contrary implied from those similar to any
to law, morals, good granted or incident registered firm name
customs, public to its existence Dissolution
order, public May be dissolved at Can only be
policy) any time by any or dissolved with the
Management all of the partners consent of the State
When management is The power to do Governing Law
not agreed upon, business and manage Governed by the NCC Governed by the
every partner is an its affairs is Corporation Code
agent of the vested in the board
partnership of directors or
trustees ADVANTAGES AND DISADVANTAGES OF A BUSINESS
CORPORATION
Effect of mismanagement
A partner as such The suit against a Advantages Disadvantages
can sue a co-partner member of the board 1. has a legal 1. complicated in
who mismanages of directors or capacity to act formation and
trustees who and contract as a management
mismanages must be distinct unit in 2. 2.high cost of
in the name of the its own name formation and
corporation 2. continuity of operations
Right of succession existence 3. its credit is
Partnership has no Corporation has 3. its credit is weakened by
right of succession right of succession strengthened by the limited
Extent of liability to third persons its continuity of liability
Partners are liable Stockholders are existence feature
personally and liable only to the 4. Centralized 4. Lack of
subsidiarily extent of the shares management in the personal
(sometimes subscribed by them board of element.
solidarily) for directors. 5. 5.greater
partnership debts 5. Its creation, degree of
to third persons management, governmental
Transferability of interest organization and supervision
Partner cannot Stockholder has dissolution are 6. Management and
transfer his generally the right standardized as control are
interest in the to transfer his they are governed separated from
partnership so as to shares without prior under one general ownership.
make the transferee consent of the other incorporation 7. 7.
a partner without stockholders because law. Stockholders
the unanimous corporation is not 6. limited have little
consent of all the liability voice in the
7. shareholders are conduct of the sustain its right to exist as against the
not the general business. State.
agents of the
business
8. transferability c. Corporation by estoppel –
of shares group of persons that assumes
to act as a corporation
knowing it to be without
Classification of Corporations
authority to do so, and enters
into a transaction with a
1. As to organizers: third person on the strength
of such appearance. It cannot
be permitted to deny its
a. Public – by State only;
existence in an action under
b. Private – by private persons
said transaction (Sec. 21). It
alone or with the State.
is neither de jure nor de
facto.
2. As to functions: d. Corporation by prescription –
a. Public - government of a one which has exercised
portion of the State; corporate powers for an
b. Private – usually for profit- indefinite period without
making functions. interference on the part of
the sovereign power, e.g.
Roman Catholic Church.
3. As to governing law:
a. Public – Special Laws and
Local Government Code; 5. As to existence of stocks:
b. Private – Law on Private a. stock corporation – a
Corporations. corporation which has capital
stock divided into shares and
is authorized to distribute to
4. As to legal status: holders of such shares,
a. De jure corporation – dividends or allotments of the
corporation created in strict surplus profits on the basis
or substantial conformity of the shares held (Sec. 3);
with the mandatory statutory
requirements for
incorporation and the right of Or: For a stock corporation to exist, the
which to exist as a above requisites must be complied with for
corporation cannot be even if there is a statement of capital stock,
successfully attacked or the corporation is still not a stock
questioned by any party even corporation if dividends are not supposed to
in a direct proceeding for be declared, i.e. there is no distribution
that purpose by the state; of retained earning (CIR vs. Club Filipino, Inc.
b. De facto corporation – de Cebu, 5 SCRA 321).

organized with a colorable

compliance with the
requirements of a valid law b. Non-stock Corporation – a
and its existence cannot be corporation which does not
inquired collaterally but issue stocks nor distribute
such inquiry may be made by dividends to their members
the Solicitor General in a quo (Sec. 87).
warranto proceeding (Sec.
20).
6. As to laws of incorporation:
a. domestic corporation –
The only difference between a de facto corporation formed, organized
corporation and a de jure corporation is that or existing under Philippine
a de jure corporation can successfully resist laws; or
a suit brought by the State challenging its b. foreign corporation – a
existence; a de facto corporation cannot corporation formed, organized
 or existing under any laws are the subsidiary
other than those of the corporations
Philippines and whose laws
allow Filipino citizens and
9. As to number of persons who compose
corporation to do business in
them:
its own country or state.
a. Aggregate corporation – a
corporation consisting of
7. As to whether they are open to the more than one person or
public or not: member;
a. open – one which is open to b. Corporation sole – a
any person who may wish to corporation consisting of
become a stockholder or member only one person or member; a
thereto; special form of corporation
b. close - those whose shares of usually associated with the
stock are held by limited clergy.
number of persons like the
family or other closely-knit 10. As to whether they are for religious
group purposes or not:
a. ecclesiastical corporation –
one organized for religious
8. As to relationship of management and
purposes; or
control:
b. Lay corporation – one
a. Holding corporation - it is
organized for a purpose other
one which controls another as
than for religion.
a subsidiary by the power to
elect management.
11. As to whether they are for charitable
purposes or not:
It is one that holds stocks in other
a. eleemosynary corporation –
companies for purposes of control rather than
one established for or devoted
for mere investment.
to charitable purposes or
those supported by charity; or
b. Civil Corporation – one
b. Subsidiary Corporation – one established for business or
which is so related to another profit.
corporation that the majority
of its directors can be
elected either directly or CONCEPT OF GOING PUBLIC AND GOING PRIVATE: A
indirectly by such other corporation is deemed to be “going public”
corporation. It is always when it decides to list its shares in the
controlled; stock exchange. These include corporations
c. Affiliate – one related to that will make initial public offering of its
another by owning or being shares. A corporation is said to be “going
owned by common management or private” when it would restrict the
by a long-term lease of its shareholders to a certain group. In a sense,
properties or other control these also include closed and closely held
device. corporation.

It may be the controlled or controlling

corporation, or under common control;
d. Parent and subsidiary
corporation – When a of
corporation has a controlling
financial interest in one or
more corporations , the one
having control is the parent
corporation, and the others
ONE-MAN CORPORATION: A corporation wherein
all or substantially all of the stocks is
held directly or indirectly by one person.
However, it should still follow the formal
requirements of a corporation (e.g. number
incorporators, board of directors
composed of stockholders owning shares in a
nominal capacity) in order to validly enjoy
the attributes of the corporation, so as to
avoid the application of the doctrine of
piercing the veil of corporate entity.

BOY SCOUTS OF THE PHILIPPINES vs. COA
(2011)
The BSP Charter created the BSP as a
“public corporation” to serve the
following public interest or purpose: xxx
to promote through organization and
cooperation with other agencies, the
ability of boys to do useful things for
themselves and others, to train them in
scout craft, and to inculcate in them
patriotism, civic consciousness and
responsibility, courage, self-reliance,
discipline and kindred virtues, and moral
values, using the method which are in
common use by boy scouts.
The purpose of the BSP as stated in its
amended charter shows that it was created
in order to implement a State policy
declared in Article II, Section 13 of the
Constitution. Evidently, the BSP, which
was created by a special law to serve a
public purpose in pursuit of a treated as an auxiliary of the State.
constitutional mandate, comes within the
class of “public corporations” defined by
paragraph 2, Article 44 of the Civil Code
and governed by the law which creates it,
pursuant to Article 45 of the same Code.
The Constitution emphatically prohibits
the creation of private corporations
except by a general law applicable to all
citizens. The purpose of this
constitutional provision is to ban private
corporations created by special charters,
which historically gave certain
individuals, families or groups special
privileges denied to other citizens.
The BSP is a public corporation or a
government agency or instrumentality with
juridical personality, which does not fall
within the constitutional prohibition in
Article XII, Section 16, notwithstanding
the amendments to its charter. Not all
corporations, which are not government
owned or controlled, are ipso facto to be
considered private corporations as there
exist another distinct class of
corporations or chartered institutions
which are otherwise known as “public
corporations.” These corporations are
treated by law as agencies or
instrumentalities of the government which
are not subject to the test of ownership
or control and economic viability but to
different criteria relating to their
public purposes/interests or
constitutional policies and objectives and
their administrative relationship to the
government or any of its Departments or
Offices.
Since BSP, under its amended charter,
continues to be a public corporation or a
government instrumentality, the Court
concludes that it is subject to the
exercise by the COA of its audit
jurisdiction in the manner consistent with
the provisions of the BSP Charter.
LIBAN vs. GORDON (2011)
The PNRC, as a National Society of the
International Red Cross and Red Crescent
Movement, can neither “be classified as an
instrumentality of the State, so as not to
lose its character of neutrality” as well
as its independence, nor strictly as a
private corporation since it is regulated
by international humanitarian law and is
Although the PNRC is neither a
subdivision, agency, or instrumentality of
the government, nor a GOCC or a subsidiary
thereof, so much so that respondent, under
the Decision, was correctly allowed to
hold his position as Chairman thereof
concurrently while he served as a Senator,
such a conclusion does not ipso facto imply
that the PNRC is a “private corporation”
within the contemplation of the provision
of the Constitution, that must be
organized under the Corporation Code. The
sui generis character of PNRC requires us
to approach controversies involving the
PNRC on a case-to-case basis.
In sum, the PNRC enjoys a special status
as an important ally and auxiliary of the
government in the humanitarian field in
accordance with its commitments under
international law. This Court cannot all
of a sudden refuse to recognize its
existence, especially since the issue of
the constitutionality of the PNRC Charter
was never raised by the parties. It bears
emphasizing that the PNRC has responded to
almost all national disasters since 1947,
and is widely known to provide a
substantial portion of the country’s blood
requirements. Its humanitarian work is
unparalleled. The Court should not shake
its existence to the core in an untimely
and drastic manner that would not only have
 negative consequences to those who depend
on it in times of disaster and armed
hostilities but also have adverse effects
on the image of the Philippines in the
international community. The sections of
the PNRC Charter that were declared void
must therefore stay.
FUNA vs. MANILA ECONOMIC and CULTURAL
OFFICE (2014)
MECO was organized as a non-stock
corporation under the Corporation Code.
Its organization is analogous to those of
trade, business or industry. The
categorical exclusion of MECO from a GOCC
also excludes it from any other form of
class of government instrumentality. MECO
cannot be any other instrumentality
because it was merely incorporated under
the Corporation Code. Under the peculiar
circumstances that surround MECO, it was
not intended to operate as any other
ordinary corporation. Despites it private
origins, MECO was entrusted with the
government with the delicate and
precautious responsibility of pursuing
unofficial relations with the people of
Taiwan whose government the Philippines is
prohibited from recognizing.
He is an agent of the incorporators but not
of the corporation.
Contracts by the promoter for and in behalf
of a proposed corporation generally bind only
him, subject to and to the extent of his
representations, and not the corporation,
unless and until after these contracts are
ratified, expressly or impliedly, by its
Board of Directors/Trustees (Cagayan Fishing
Development Co., Inc. v. Sandiko, 65 Phil.
223).
2. Incorporation
Steps:
a. Drafting and execution of Articles of
Incorporation by the incorporators
and other documents required for
registration of the corporation
b. Filing with the SEC of the articles
of incorporation
c. Payment of filing and publication
fees
d. Issuance by the SEC of the
certificate of incorporation

3. Formal Organization and Commencement

It is clear theat MECO is uniquely situated
of the Transaction of Business
as compares with other private
corporations. From its over-reaching
corporate objectives, its special duty and These are conditions subsequent, which may
authority to exercise certain consular be satisfied by substantial compliance in
functions, MECO for all intents and order that a corporation may legally continue
purposes is sui generis. as such.

Stages in the Formation / Organization

of a corporation Formal organization:

a. Adoption of By-Laws and filing of the

1. Promotion – A promoter is a person same with the
who, acting alone or with others, b. SEC;
takes initiative in founding and c. Election of board of
organizing the business or enterprise directors/trustees, and officers;
of the issuer and receives d. Establishment of principal office;
consideration therefor (Sec. 3.10, e. Providing for subscription and
SRC). payment of capital stock.

Promoter - A person who, acting alone or with FRANCHISES OF CORPORATION

others, takes initiative in founding and
1. Primary or corporate
organizing the business or enterprise of the
franchise/General franchise
issuer and receives consideration therefor
(Sec. 3, R.A. 8799).
The right or privilege granted by the State 1. The issuance of a certificate of
to individuals to exist and act as a incorporation signals the birth of
corporation after its incorporation. the corporation’s juridical
personality;
2. It is an essential requirement for
2. Secondary or special franchise the existence of a corporation, even
a de facto one.

The special right or privilege conferred upon

an existing corporation to the business for
which it was created. e.g. use of the streets Contents of the article:
of a municipality to lay pipes or tracks, or
1. The name of the corporation;
operation of a public utility or a messenger
2. The specific purpose or purposes for
and express delivery service.
which the corporation is being
incorporated. Where a corporation has
Primary Secondary more than one stated purpose, the
Refers to the Refers to the articles of incorporation shall state
franchise of being exercise of right or which is the primary purpose and
or existing as a privilege. e.g. which is/are he secondary purpose or
corporation public utility or purposes: Provided, That a non-stock
telecommunication corporation may not include a purpose
franchise which would change or contradict its
Vested in the Vested in the nature as such;
individuals who corporation after its 3. The place where the principal office
compose the incorporation and not of the corporation is to be located,
corporation upon the individuals which must be within the Philippines;
who compose the 4. The term for which the corporation is
corporation. to exist;
5. The names, nationalities and
Cannot be sold or May be sold or
residences of the incorporators;
transferred, in transferred under a
6. The number of directors or trustees,
the absence of general power granted
which shall not be less than five (5)
legislative to a corporation to a
nor more than fifteen (15);
authority to do so. corporation to
7. The names, nationalities and
This is because it dispose of its
residences of persons who shall act
is inseparable properties; may also
as directors or trustees until the
from the be subject to sale on
first regular directors or trustees
corporation execution or levy.
are duly elected and qualified in
itself.
accordance with this Code;
8. If it be a stock corporation, the
Articles of Incorporation amount of its authorized capital
stock in lawful money of the
Philippines, the number of shares
The document prepared by the persons
into which it is divided, and in case
establishing a corporation and filed with the
the share are par value shares, the
SEC containing the matters required by the
par value of each, the names,
Code.
nationalities and residences of the
original subscribers, and the amount
subscribed and paid by each on his
The Articles of Incorporation have been subscription, and if some or all of
described as one that defines the charter of the shares are without par value,
the corporation, and the contractual such fact must be stated;
relationships between the State and the 9. If it be a non-stock corporation, the
corporation, the stockholder and the State, amount of its capital, the names,
and between the corporation and its nationalities and residences of the
stockholders (Lanuza v. CA GR No.131394, contributors and the amount
March 28, 2005). contributed by each; and
10. Such other matters as are not
inconsistent with law and which the
Significance:
 incorporators may deem necessary and
convenient.
Corporate Name
The corporation acquires juridical
personality under the name stated in the
certificate of incorporation. It is the name
of the corporation which identifies and
distinguishes it from other corporations,
firms or entities.
A corporation’s right to use its corporate
and trade name is a property right, a right
in rem which it may assert or protect against
the whole world in the same manner as it may
protect its tangible property against
trespass or conversion (Philips Export B.V.
vs. CA, 206 SCRA 457).
Statutory limitation: The proposed name must
not be:
1. Identical; or
2. Deceptively or confusingly similar to
that of any existing corporation or
to any other name already protected
by law; or
3. Patently deceptive, confusing or
contrary to law.
Remedies of corporation whose name has been
adopted by another:
1. Injunction
2. De-registration
RULES: A corporation can change the name
originally selected by it after complying
with the formalities prescribed by law, to
wit: amendment of the articles of
incorporation and filing of the amendment
with the SEC (Sec. 16).
An authorized change in the name of the
corporation, whether effected by a special
act or under a general law, has no more
effect upon its identity as a corporation
than a change of name of natural person upon
his identity. It does not affect the property,
rights, or liabilities of the corporation,
nor lessen or add to its obligations. It is
in no sense a new corporation, nor the
successor of the original corporation. It is
the same corporation with a different name
and its character is in no respect changed
(Rep. Planters Bank vs. CA, 216 SCRA 738).
GSIS Family Bank v. BPI Family Bank
G.R. NO. 175278; September 23, 2015
In Philips Export v. CA, this Court ruled
that to fall within the prohibition of the
law on the right to the exclusive use of a
corporate name, two requisites must be
proven, namely:
1. that the complainant corporation
acquired a prior right over the use
of such corporate name; and
2. the proposed name is either
a. identical or
b. deceptive or confusingly
similar to that of any
existing corporation or to
any other name already
protected by law; or
c. Patently deceptive,
confusing or contrary to
existing law.
On the 1st requisite, in this case,
respondent was incorporated in 1969 as
Family Savings Bank and in 1985 as BPI
Family Bank. Petitioner, on the other
hand, was incorporated as GSIS Family –
Thrift Bank only in 2002, or at least 17
years after respondent started using its
name. Following the precedent in the IRCP
case, we rule that respondent has the prior
right over the use of the corporate name.
On the 2nd requisite, first point (a), the
words "Family Bank" present in both
petitioner and respondent's corporate name
satisfy the requirement that there be
identical names in the existing corporate
name and the proposed one. Section 3 states
that if there be identical, misleading or
confusingly similar name to one already
registered by another corporation or
partnership with the SEC, the proposed
name must contain at least one distinctive
word different from the name of the company
already registered. To show contrast with
respondent's corporate name, petitioner
used the words "GSIS" and "thrift." But
these are not sufficiently distinct words
that differentiate petitioner's corporate
name from respondent's. While "GSIS" is
merely an acronym of the proper name by
which petitioner is identified, the word
"thrift" is simply a classification of the
type of bank that petitioner is. Even if
the classification of the bank as "thrift"
is appended to petitioner's proposed
corporate name, it will not make the said
corporate name distinct from respondent's
because the latter is likewise engaged in
the banking business.
On the second point (b), there is a
deceptive and confusing similarity between
petitioner's proposed name and
respondent's corporate name, as found by
the SEC. In determining the existence of
confusing similarity in corporate names,
the test is whether the similarity is such
as to mislead a person using ordinary care
and discrimination. And even without such
proof of actual confusion between the two
corporate names, it suffices that
confusion is probable or likely to occur.
Petitioner's corporate name is "GSIS
Family Bank—A Thrift Bank" and
respondent's corporate name is "BPI Family
Bank." The only words that distinguish the
two are "BPI," "GSIS," and "Thrift." The
first two words are merely the acronyms of
the proper names by which the two
corporations identify themselves; and the
third word simply describes the
classification of the bank. The overriding
consideration in determining whether a
person, using ordinary care and
discrimination, might be misled is the
circumstance that both petitioner and
respondent are engaged in the same
business of banking. "The likelihood of
confusion is accentuated in cases where
the goods or business of one corporation
are the same or substantially the same to
that of another corporation."
Samahan ng Manggagawa ng Hanjin v. BLR
G.R. No. 211145, October 14, 2015
Based on the foregoing, the Court
concludes that misrepresentation, to be a
ground for the cancellation of the
certificate of registration, must be done
maliciously and deliberately. Further, the
mistakes appearing in the application or
attachments must be grave or refer to
significant matters. The details as to how
the alleged fraud was committed must also
be indubitably shown.
The records of this case reveal no
deliberate or malicious intent to commit
misrepresentation on the part of Samahan.
The use of such words "KAMI, ang mga
Manggagawa sa HANJIN Shipyard" in the
preamble of the constitution and by-laws
did not constitute misrepresentation so as
to warrant the cancellation of Samahan's
certificate of registration. Hanjin failed
to indicate how this phrase constitutes a
malicious and deliberate
misrepresentation. Neither was there any
showing that the alleged misrepresentation
was serious in character.
Misrepresentation is a devious charge that
cannot simply be entertained by mere
surmises and conjectures.
Even granting arguendo that Samahan's
members misrepresented themselves as
employees or workers of Hanjin, said
misrepresentation does not relate to the
adoption or ratification of its
constitution and by-laws or to the
election of its officers.
Purpose Clause
Significance:
a. A person who intends to invest his
money in the business corporation
will know where and in what kind of
business or activity his money will
be invested;
b. The directors and the officers of the
corporation will know within what
scope of business they are authorized
to act; and
c. A third person who has dealings with
the corporation may know by perusal
of the articles whether the
transaction or dealing he has with
the corporation is within the
authority of the corporation or not.
Limitations:
1. Purpose or purposes must be lawful;
2. Purpose or purposes must be stated
with sufficient clarity;
3. If there is more than one purpose,
the primary as well as the secondary
purpose must be specified; and
4. Purposes must be capable of being
lawfully combined.
Note: A corporation the primary object of
which is without statutory authority can have
no lawful existence, even though some of its
declared purposes may be lawful.
Illegal combinations
1. Banking + insurance
2. Life + non-life insurance
3. Two or more forms of transportation
4. Stock dealership + stock brokerage
5. Radio/TV + print
Gala vs Ellice Agro Industrial Corp., 418
SCRA 431
a perusal of the Articles of Incorporation
of Ellice and Margo shows no sign of the
allegedly illegal purposes that
petitioners are complaining of. And even
assuming that the petitioner’s allegations
were true, the legality of the purposes
for which the two corporations were formed
should be first threshed out in an
administrative case before the Securities
and Exchange Commission.
Moreover, on the contention that Ellice
and Margo were meant to be tools for the
avoidance of estate taxes, the court said
that “…the legal right of a taxpayer to
reduce the amount of what otherwise could
be his taxes or altogether avoid them, by
means which the law permits cannot be
doubted.
Principal office or domicile
The articles of incorporation must state the
place where the principal office of the
corporation is to be established or located,
which place must be within the Philippine
(Sec. 14 [3]).
Purpose: To fix the residence of the
corporation in a definite place, instead of
allowing it to be ambulatory
(Young Auto Supply Co. vs. CA, 223 SCRA 670).
NOTE: It is now required by the SEC that all
corporations and partnerships applying for
registration should state in their Articles
of Incorporation the specific address of
their principal office, which shall include,
if feasible, the strict number; street name;
barangay; city or municipality; and specific
residence address of each incorporator,
stockholder, director or trustee in line with
the full disclosure requirement of existing
laws (SEC Circ. No. 3, Series of 2006).
Clavecilla Radio System v. Antillon, 19
SCRA 379
Settled is the principle in corporation
law that the residence of a corporation is
the place where its principal office is
established. Since it is not disputed that
the Clavecilla Radio system has its
principal office in Manila, it follows
that the suit against it may properly be
filed in the City of Manila.
In the case of Cohen v. Benguet Commercial
Co., Ltd., 34 Phil. 526, the term "may be
served with summons" does not apply when
the defendant resides in the Philippines
for, in such case, he may be sued only in
the municipality of his residence,
regardless of the place where he may be
found and served with summons. As any other
corporation, the Clavecilla Radio System
maintains a residence which is Manila in
this case, and a person can have only one
residence at a time. The fact that it
maintains branch offices in some parts of
the country does not mean that it can be
sued in any of these places. To allow an
action to be instituted in any place where
a corporate entity has its branch offices
would create confusion and work untold
inconvenience to the corporation. Thus, in
the case of Evangelista v. Santos, Et Al.,
the laying of the venue of an action is
not left to plaintiff’s caprice because
the matter is regulated by the Rules of
Court. Applying the provision of the Rules
of Court, the venue in this case was
improperly laid.
Term
The corporation shall exist for the term
specified in the articles of incorporation
not exceeding 50 years, unless sooner legally
dissolved or unless its registration is
revoked upon any of the grounds provided by
law.
Note: The corporate life may be reduced or
extended by amendment of the articles of
incorporation by complying with the Those mentioned in the Articles of
procedural requirements laid down in Sec. 37. Incorporation as originally forming and
composing the corporation, having signed the
Articles and acknowledged the same before a
Rule on extension of corporate term: The notary public. They have no powers beyond
extension of corporate term is subject to the those vested in them by the statute.
following limitations:

1. The term shall not exceed 50 years in

There is only one set of incorporators, hence,
any one instance;
they will remain to be such incorporators up
2. The amendment is effected before the
to the termination of the life of the
expiration of the corporate term of
corporation.
existence, for after dissolution by
expiration of the corporation term
there is no more corporate life to
Qualifications:
extend (Alhambra Cigar vs. SEC, 24
SCRA 269). 1. natural person;
3. The extension cannot be made earlier 2. not less than 5 but not more than 15;
than 5 years prior to the expiration 3. of legal age;
date unless there are justifiable 4. majority must be residents of the
reasons therefore as may be Philippines; and
determined by the SEC. 5. each must own or subscribe to at least
one share (Sec. 10).

Note: The mere extension of the corporate

term of existence made before the expiration GENERAL RULE: Only natural persons can be
of the original term constitutes a incorporators.
continuation of the old, and not the creation
of a new corporation. (The Corporation Code
of the Philippines, Hector S. De Leon &
EXCEPTION: When otherwise allowed by law,
Hector M. De Leon, Jr., 2006 ed.)
e.g., Rural Banks Act of 1992, where
incorporated cooperatives are allowed to be
incorporators of rural banks.
Effect of expiration of term: The expiration
of the term for which the corporation was
created does not, however, produce its
Note: However, it is undeniable that
immediate dissolution for all purposes (Sec.
corporations can be corporators.
122).

Incorporating directors
DOCTRINE OF RELATION OR RELATING BACK
DOCTRINE

The Board of Directors is the governing body

in a stock corporation while Board of
The filing and recording of a certificate of
Trustees is the governing body in a non-stock
extension after the term cannot relate back
corporation. They exercise the powers of the
to the date of the passage of the resolution
corporation (Reviewer in Commercial Law,
of the stockholders to extend the life of the
Jose R. Sundiang & Timoteo Aquino, 2005 ed.).
corporation. However, the doctrine of
relations applies if the failure to file the
application for extension within the term of
Matters required to be stated in the AI:
the corporation is due to the neglect of the
officer with whom the certificate is required 1. a statement of the names,
to be filed or to a wrongful refusal on his nationalities and residences of the
part to receive it (Philippine Corporate Law incorporating directors or the
Compedium, Timoteo Aquino, 2006 ed.) persons who shall act as such until
the first regular directors or
trustees are duly elected and
Incorporators
qualified in accordance with the law
 2. The number of directors or trustees,
which shall not be less than 5 but
not more than 15.
Exceptions:
1. Educational corporations registered
as nonstock corporation whose number
of trustees though not less than five
and not more than fifteen should be
divisible by five; and
2. In close corporation where all the
stockholders are considered as
members of the board of directors
thereby effectively allowing twenty
members in the board (Corporation
Code of the Philippines,Ruben C.
Ladia, 2001 ed.).
Capital stock
Capital Stock or Legal Stock or Stated
Capital – The amount fixed in the corporate
charter to be subscribed and paid in cash,
kind or property at the organization of the
corporation or afterwards and upon which the
corporation is to conduct its operation.
Capital – The value of the actual property
or estate of the corporation whether in money
or property. Its net worth (or stockholder’s
equity) is its assets less its liabilities.
Authorized Capital Stock - The capital stock
divided into shares.
Subscribed Capital Stock - The total amount
of the capital stock subscribed whether fully
paid or not.
Outstanding Capital Stock - The portion of
the capital stock issued to subscribers,
whether fully paid or partially paid (as long
as there is a binding subscription contract)
except treasury stocks (Sec. 137).
Unissued Capital Stock – The portion of the
capital stock that is not issued or
subscribed. It does not vote and draws no
dividends.
Legal Capital - The amount equal to the
aggregate par value and/or issued value of
the outstanding capital stock.
Stated Capital – The capital stock divided
into no par value shares.
Paid-up Capital – The amount paid by the
stockholders on subscriptions from unissued
shares of the corporation.
Matters required to be stated in the AI:
a. The amount of its authorized capital
stock in lawful money of the
Philippines;
b. The number of shares and kind of
shares into which it is divided;
c. In case the shares are par value
shares, the par value of each;
d. The names, nationalities and
residences of the original
subscribers;
e. The amount subscribed and paid by
each on his subscription;
f. Sworn statement of the treasurer
elected by the subscribers showing
that at least 25% of the authorized
capital stock of the corporation has
been subscribed;
g. Sworn statement of the treasurer
elected by the subscribers showing
that at least 25% of the total
subscription has been fully paid to
him in actual cash and/or in property
the fair valuation of which is equal
to at least 25% of the said
subscription; and
h. Sworn statement of the treasurer
elected by the subscribers showing
that such paid-up capital being not
less than five thousand pesos.
FILIPINO PERCENTAGE OWNERSHIP REQUIREMENT
No Foreign Equity
1. Mass Media except recording (Art.
XVI, Sec. 11 of the Constitution;
Presidential Memorandum dated 04 May
1994)
2. Practice of all professions
3. Retail trade enterprises with paid-up
capital of less than
US$2,500,000(Sec. 5 of RA 8762)
 4. Cooperatives (Ch. III, Art. 26 of RA 1. Advertising (Art. XVI, Sec. 11 of the
6938) Constitution)
5. Private Security Agencies (Sec. 4 of
RA 5487)
Up to Forty Percent (40%) Foreign Equity
6. Small-scale Mining (Sec. 3 of RA
7076) 1. Exploration, development and
7. Utilization of Marine Resources in utilization of natural resources
archipelagic waters, territorial sea, (Art. XII, Sec. 2 of the
and exclusive economic zone as well Constitution)
as small-scale utilization of natural 2. Ownership of private lands (Art. XII,
resources in rivers, lakes, bays, and Sec. 7 of the
lagoons (Art. XII, Sec. 2 of the 3. Constitution; Ch. 5, Sec. 22 of CA
Constitution) 141; Sec. 4 of RA 9182)
8. Ownership, operation and management 4. Operation and management of public
of cockpits (Sec. 5 of PD 449) utilities (Art. XII, Sec. 11 of the
9. Manufacture, repair, stockpiling Constitution; Sec. 16 of CA 146)
and/or distribution of nuclear 5. Ownership/establishment and
weapons (Art. II, Sec. 8 of the administration of educational
Constitution) institutions (Art. XIV, Sec. 4 of the
10. Manufacture, repair, stockpiling Constitution)
and/or distribution of biological, 6. Culture, production, milling,
chemical and radiological weapons and processing, trading excepting
anti-personnel mines (Various retailing, of rice and corn and
treaties to which the Philippines is acquiring, by barter, purchase or
a signatory and conventions supported otherwise, rice and corn and the by-
by the Philippines) products thereof (Sec. 5 of PD
11. Manufacture of firecrackers and other 194;Sec. 15 of RA 8762
pyrotechnic devices (Sec. 5 of RA 7. Contracts for the supply of
7183) materials, goods and commodities to
government-owned or controlled
corporation, company, agency or
Up to Twenty Percent (20%) Foreign Equity
municipal corporation (Sec. 1 of RA
1. Private radio communications network 5183)
(RA 3846) 8. Project Proponent and Facility
Operator of a BOT project requiring a
public utilities franchise (Art. XII,
Up to Twenty-Five Percent (25%) Foreign
9. Sec. 11 of the Constitution; Sec. 2a
Equity
of RA 7718)
1. Private recruitment, whether for 10. Operation of deep sea commercial
local or overseas employment (Art. 27 fishing vessels
of PD 442) 11. (Sec. 27 of RA 8550)
2. Contracts for the construction and 12. Adjustment Companies (Sec. 323 of PD
repair of locally-funded public works 612 as amended by PD 1814)
(Sec. 1 of CA 541, LOI 630) except: 13. Ownership of condominium units where
a. infrastructure/development the common areas in the condominium
projects covered in RA 7718; project are co-owned by the owners of
and the separate units or owned by a
b. projects which are foreign corporation (Sec. 5 of RA 4726)
funded or assisted and
required to undergo
Up to Sixty Percent (60%) Foreign Equity
international competitive
bidding (Sec. 2a of RA 7718) 1. Financing companies regulated by the
3. Contracts for the construction of Securities and Exchange Commission
defense-related structures (Sec. 1 of (Sec. 6 of RA 5980 as amended by RA
CA 541) 8556)
2. Investment houses regulated by the
SEC (Sec. 5 of PD 129 as amended by
Up to Thirty Percent (30%) Foreign Equity
RA 8366)
 MISCI-NACUSIP Local Chapter v. NWPC, 269
SCRA 173
NWPC Guidelines No. 01, Series of 1992 as
well as the new NWPC Guidelines No. 01,
Series of 1996, define Capital as
referring to paid-up capital at the end of
the last full accounting period, in the
case of corporations; or total invested
capital at the beginning of the period
under review, in the case of partnerships
and single proprietorships. Paid-up
capital is that portion of the authorized
capital stock which has been both
subscribed and paid. In the case at bar,
MSCI was organized and incorporated on
February 15, 1990 with an authorized
capital stock of P60 million, P20 million
of which was subscribed. Of theP20 million
subscribed capital stock, P5 million was
paid-up.
The argument of the Board that the value
of the assets of ASCI transferred to MSCI
as well as the loans or advances made by
MTII to MSCI should have been taken into
consideration in computing the paid-up
capital of MSCI is unmeritorious. Not all
funds or assets received by the
corporation can be considered paid-up
capital, for this term has a technical
signification in Corporation Law. Such
must form part of the authorized capital
stock of the corporation, subscribed and
then actually paid up.
The loans and advances of MTII to
respondent MSCI cannot be treated as
investments, unless the corresponding
shares of stocks are issued. But as it
turned out, such loans and advances were
in fact treated as liabilities of MSCI to
MTII as shown in its 1990 audited financial
statements. The treatment by the Board of
these loans as part of MSCI’s capital stock
without satisfying certain mandatory
requirements is prohibited under Sec 38 of
the Corporation Code
Classification of shares
COMMON SHARES
The basic class of stock ordinarily and
usually issued without extraordinary rights
and privileges, and the owners thereof are
entitled to a pro rata share in the profits
of the corporation and in its assets upon
dissolution and, likewise, in the management
of its affairs without preference or
advantage whatsoever.
Nature: Common shares or stocks represent the
residual ownership interest in the
corporation.
Voting Rights: Common shares have complete
voting rights. They cannot be deprived of
said rights except as provided by law.
PREFERRED SHARES
Shares with a stated par value which entitle
the holder thereof to certain preferences
over the holders of common stock.
The preference may be
1. as to asset; or
2. as to dividends; or
3. as may be determined by the board of
directors when so authorized to do so
Purpose: To induce more persons to subscribe
for shares of a corporation.
Nature: Preferred shareholders are not
creditors of the corporation. Yet all
preferred stock contracts are, fundamentally
attempts to endow certain owners with rights
analogous to creditor rights and statutes and
court decisions on this matter have been
concerned, primarily, with the length to
which the preferred stock contract can go in
extending creditor rights to stockholder
Limitations:
1. If deprived of voting rights, it
shall still be entitled to vote on
matters enumerated in Section 6, par.
6.
2. Preference must not be violative of
the Code.
3. May be issued only with a stated par
value.
4. The board of directors may fix the
terms and conditions only when so
authorized by the articles of
 incorporation and such terms and the certificates of stock
conditions shall be effective upon representing such shares;
filing a certificate thereof with the 3. Redeemable shares may be deprived of
SEC. voting rights in the articles of
incorporation, unless otherwise
provided in the Code.
Kinds:

1. Cumulative – one which entitles the

Existence of unrestricted retained earnings:
owner thereof to payment not only of
Redeemable shares may be redeemed,
current dividends but also back
regardless of the existence of unrestricted
dividends not previously paid whether
retained earnings (Sec. 8), provided that the
or not during the past years
corporation has, after such redemption,
dividends were declared or paid.
sufficient assets in its books to cover debts
2. Non-cumulative – one which grants the
and liabilities inclusive of capital stock.
holders of such shares only to the
payment of current dividends but not
back dividends when and if dividends
When redemption cannot be made: Redemption
are paid to the extent agreed upon
may not be made where the corporation is
before any other stockholders are
insolvent or if such redemption would cause
paid the same.
insolvency or inability of the corporation
3. Participating - one which entitles
to meet its debts as they mature.
the shareholder to participate with
the common shares in excess - Such limitation is based on the
distribution at some predetermined or principle that corporate assets are a
at a fixed ratio as may be determined. trust fund for creditors.
4. Non-participating – one which
entitles the shareholder thereof to
receive the stipulated preferred Effect when redeemable shares are
dividends and no more. reacquired: the same shall be considered
5. Cumulative participating – share retired and no longer issuable unless
which is a combination of the otherwise provided for in the Articles of
cumulative share and participating Incorporation.
share.

Note: For tax purposes, there are cases when

redemption of shares is considered a scheme
to circumvent the tax consequences of cash
dividends.
REDEEMABLE SHARES
Hence, the amounts received by the
shareholders shall be treated as cash
Shares of stocks issued by the corporation dividends because proceeds of redemption in
which said corporation can purchase or take such a case is additional wealth and not
up from their holders as expressly provided merely a return of the capital
for in the articles of incorporation and
certificate of stock representing said
shares at a fixed date or at the option of TREASURY SHARES
the issuing corporation or the stockholder
or both at a certain redemption price.
Shares of stock which have been issued and
fully paid for, but subsequently reacquired
Limitations: by the issuing corporation by purchase,
redemption, donation or through some other
1. Redeemable shares may be issued only lawful means (Sec. 9).
when expressly provided for in the
articles of incorporation;
2. The terms and conditions affecting
said shares must be stated both in
the articles of incorporation and in Nature: Treasury shares are not retired
shares.
They do not form revert to the unissued
shares of the corporation but are regarded
as property acquired by the corporation which
may be reissued or resold at a price to be
fixed by the Board of Directors (SEC Rules
Governing Redeemable and Treasury Shares,
CCP No. 1-1982).
If purchased from stockholders: The
transaction in effect is a return to the
stockholders of the value of their investment
in the company and a reversion of the shares
to the corporation.
Condition: The corporation must have surplus
profits with which to buy the shares so that
the transaction will not cause an impairment
of the capital.
If acquired by donation from the
stockholders: The act would amount to a
surrender of their stock without getting back
their investments that are instead,
voluntarily given to the corporation.
Selling price: Treasury shares need not be
sold at par or issued value but may be sold
at the best price obtainable, provided it is
reasonable.
- When treasury shares are sold below
its par or issued value, there can be
no watering of stock because such
watering contemplates an original
issuance of shares.
Existence of voting right: Treasury shares
have no voting rights as long as they remain
in treasury (uncalled and subject to reissue)
(Sec. 57).
Reason: A corporation cannot in any proper
sense be a stockholder in itself and equal
distribution of voting rights will be
effectively lost.
Right to dividends: Neither are treasury
shares entitled to dividends or assets
because dividends cannot be declared by a
corporation to itself.
Note: Treasury shares may be declared as
property dividend to be issued out of the
retained earnings previously used to support
their acquisition provided that the amount
of the retained earnings has not been
subsequently impaired by losses.
FOUNDER’S SHARES
Shares classified as such in the articles of
incorporation and issued to organizers and
promoters of a corporation in consideration
of some supposed right or property such as
special preference in voting rights and
dividend payments.
But if an exclusive right to vote and be
voted for as director is granted, this
privilege is subject to approval by the SEC,
and cannot exceed 5 years from the date of
approval (Sec. 7).
VOTING SHARES
- Shares with a right to vote.
- Under the code, whenever a vote is
necessary to approve a particular
corporate act, such vote refers only
to stocks with voting rights except
in certain cases when even non-voting
shares may also vote (Sec. 6, par. 6
and last par.).
NON VOTING SHARES
- Shares without right to vote.
- The law only authorizes the denial of
voting rights in the case of
redeemable shares and preferred
shares, provided that there shall
always be a class or series of shares
which have complete voting rights.
These redeemable and preferred shares, when
such voting rights are denied, shall
nevertheless be entitled to vote on the
following fundamental matters:
1. amendment of Articles of
Incorporation
 2. adoption and amendment of by-laws; It includes stocks:
3. sale or disposition of all or
1. Issued without consideration (bonus
substantially all
share).
4. of corporate property;
2. Issued as fully paid when the
5. incurring, creating or increasing
corporation has received a lesser sum
bonded
of money than its par or issued value
6. indebtedness;
(discount share).
7. increase or decrease of capital stock
3. Issued for a consideration other than
8. merger or consolidation of capital
actual cash such as property or
stock
services, the fair valuation of which
9. investments of corporate funds in
is less than its par or issued value.
another
4. Issued as stock dividend when there
10. corporation or another business
are no sufficient retained earnings
purpose; and
to justify it.
11. corporate dissolution

PAR VALUE SHARES

SHARE IN ESCROW

Shares with a value fixed in the articles of

Share subject to an agreement by virtue of
incorporation and the certificates of stock.
which the share is deposited by the grantor
or his agent with a third person to be kept
by the escrow agent until the performance of Advantages Disadvantages
a certain condition or he happening of a Easily sold as the Subscribers are
certain event contained in the agreement public is more liable to the
(Cannon v. Handley, 12 Phil. 315). attracted to buy corporate creditors
this kind of share for their unpaid
subscription
Note: The escrow deposit makes the depository Greater protection The stated value of
a trustee under an express trust (Articles to the share is not an
1440 and 1441 of the New Civil Code). creditors accurate criterion
of its true value
Unlikelihood of
OVER-ISSUED STOCK sale of
subsequently issued
shares at a lower
Stock issued in excess of the authorized price
capital stock. Unlikelihood of
distribution of
- It is also known as spurious stock. dividends that are
- Its issuance is considered null and only ostensible
void. profits

WATERED STOCK NO PAR VALUE SHARES

A stock issued not in exchange for its Shares having no par value but have issued
equivalent value either in cash, property, value stated in the certificate or articles
share, stock dividends, or services. of incorporation.

“Water” in the stock represents the Advantages Disadvantages

difference between the fair market value at Issued as fully paid Legalizes issuance
the time of the issuance of the stock and the and nonassessable of large stock for
par or issued value of said stock. Both par property
and no par stocks can thus be watered stocks. Price is flexible Conceal money or
property
 represented by the
shares
WHEN CLASSIFICATION OF SHARES MAY BE MADE
Enjoy wider Lesser protection to
distribution creditors 1. By the incorporators – The classes
because of it being and number of shares which a
low-priced corporation shall issue are first
Tell no untruth determined by the incorporators as
concerning the value stated in the articles of
of the stockholder’s incorporation filed with the SEC.
contribution 2. By the Board of Directors and the
More easily issued, Stockholders – After the corporations
thereby simplifying comes into existence, they may be
accounting altered by the board of directors and
procedures the stockholders by amending the
articles of incorporation pursuant to
Sec. 16.
Limitations:

- No par value shares cannot have an

A corporation may issue such classes or
issued price of less than P5.00;
series of shares as the prospects and needs
- The entire consideration for its of its business may require. Furthermore, it
issuance constitutes capital so that may classify its shares for the purpose of
no part of it should be distributed insuring compliance with constitutional or
as dividends; legal requirements (Sec. 6, par. 4).
- They cannot be issued as preferred
stocks;
- They cannot be issued by banks, trust
Shares may also be issued in different
companies, insurance companies,
classes to create preferences or to deny or
public utilities and building and
grant certain rights e.g. voting or non-
loan association (BPI-TB);
voting shares.
- The articles of incorporation must
state the fact that it issued no par
value shares as well as the number of
DOCTRINE OF EQUALITY OF SHARES - Where the
said shares;
articles of incorporation do not provide for
- Once issued, they are deemed fully
any distinction of the shares of stock, all
paid and non-assessable
shares issued by the corporation are presumed
to be equal and enjoy the same rights and
STREET CERTIFICATE privileges and are also subject to the same
liabilities (Sec. 6, par. 5).

A stock certificate endorsed by the Subscribers

registered holder in blank and the transferee
can command its transfer to his name from the
issuing corporation.
A person who has agreed to take and pay for
original and unissued shares of a corporation
formed or to be formed.
CONVERTIBLE SHARES

A share that is changeable by the stockholder
from one class to another at a certain price
and within a certain period.
FRACTIONAL SHARES
A share with a value of less than one full
share.
Treasurer in trust
The person elected by the subscribers as
Treasurer of the corporation at the time of
the incorporation who is named as such in the
AoI and who has been authorized to receive
for and in the name of the corporation, all
subscriptions, fees, contributions or
donations paid of given by the subscribers directors or trustees stating the
or members. fact that such amendments have
been duly approved by the
- Not a regular treasurer required vote of the stockholders
- The treasurer who signs the or members; and
treasurer’s affidavit in Section 15. c. a favorable recommendation of the
appropriate government agency
Special provision concerned if required by law.

Limitations:
1. "No Transfer" Clause: Prohibition of
transfer of stock or interest which 1. The amendment of any provision or
will reduce the ownership of Filipino matters stated in the articles of
citizens to less than the required incorporation is not allowed when it
percentage of the capital stock as will be contrary to the provisions or
provided by existing laws requirement prescribed by the Code or
by special law or changes any
provision in the articles of
Must be stated not just in AoI but also in incorporation stating an accomplished
all certificate of stock. fact;
2. It must be for legitimate purposes;
2. Expanded Pre-emptive Rights: Pre-
3. It must be approved by the required
emptive right is the stockholder’s
vote of the board of directors or
right to SUBSCRIBE to all issues or
trustees and the stockholders or
disposition of shares of any class in
members;
proportion of his stockholdings.
4. The original articles and amended
articles together must contain all
3. Right of first refusal provisions required by law to be set
out in the articles of incorporation;
5. Such articles, as amended, must be
4. High quorum and/or high voting indicated by underscoring the changes
requirements made, and a copy thereof duly
certified under oath by the corporate
secretary and a majority of the
Amendment / rejection of the Articles of
directors or trustees stating that
Incorporation
the amendments have been duly
approved by the required vote of the
stockholders or members must be
Procedure:
submitted to the SEC;
1. Resolution by at least a majority of 6. The amendments shall take effect only
the board of directors or trustees; upon their approval by the SEC;
2. Vote or written assent of the
stockholders representing at least
However, express approval is not
2/3 of the outstanding capital stock
indispensable. This is because the amendment
s or 2/3 of the members in case of
shall also take effect from the date of
non-stock corporations.
filing with the said Commission if it is not
3. Submission and filing with the SEC
acted upon by the Commission within 6 months
of:
from the date of filing for a cause not
a. The original and amended articles
attributable to the corporation.
together containing all the
provisions required by law to be 7. If the corporation is governed by
set out in the articles of special law, the amendments must be
incorporation. Such articles, as accompanied by a favorable
amended, shall be indicated by recommendation of the appropriate
underscoring the change or government agency;
changes made; 8. No right or remedy in favor of or
b. a copy thereof, duly certified against any corporation, its
under oath by the corporate stockholders, members, directors,
secretary and a majority of the trustees, or officers, nor any
 liability incurred by any such
corporation, stockholders, members,
directors, trustees, or officers,
shall be removed or impaired either
by the subsequent dissolution of said
corporation or by any subsequent
amendment or repeal of this Code or
of any part thereof (Section 145 of
the Corporation Code).
- Any decision of the Commission
rejecting the articles of
incorporation or disapproving any
amendment thereto is appealable by
petition for review to the Court of
Appeals in accordance with the
pertinent provisions of the Rules of
Court.

All the grounds enumerated in Section 17 can

Facts not subject to amendments: be determined on the basis of the Articles
of incorporation itself and the other
1. Names of incorporators;
required documents. Generally, if the
2. Names of original subscribers to the
Articles of Incorporation and its supporting
capital stock of the corporation and
documents are in order, the SEC has no
their subscribed and paid up capital;
recourse but to issue the Certificate of
3. Treasurer elected by the original
Incorporation (Philippine Corporate Law
subscribers;
Compedium, Timoteo Aquino, 2006 ed.).
4. Members who contributed to the
initial capital of a nonstock
corporation;
5. Date and place of execution of the Grounds for Suspension or Revocation of
articles of incorporation; Certificate of Registration (Pres. Decree No.
6. Witnesses to the signing and 902 A)
acknowledgment of the articles 1. Fraud in procuring its certificate of
incorporation
Grounds for Rejection of the Articles of 2. Serious misrepresentation as to what
Incorporation or Amendment thereto (Sec. 17) the corporation can do or is doing to
the great prejudice of, or damage to,
1. That the articles of incorporation or the general public
any amendment thereto is not 3. Refusal to comply with or defiance of
substantially in accordance with the a lawful order of the SEC restraining
form prescribed therein; the commission of acts which would
2. That the purpose or purposes of the amount to a grave violation of its
corporation are patently franchise
unconstitutional, illegal, immoral, 4. Continuous inoperation for a period
or contrary to government rules and of at least 5 years
regulations; 5. Failure to file the by-laws within
3. That the Treasurer’s Affidavit the required period
concerning the amount of capital 6. Failure to file required reports
stock subscribed and/or paid is
false; Zuellig Freight v. NLRC
4. That the required percentage of G.R. No. 157900 July 22,
ownership of the capital stock to be 2013
owned by citizens of the Philippines
has not been complied with as The mere change in the corporate name is
required by existing laws or the not considered under the law as the
constitution. creation of a new corporation; hence, the
renamed corporation remains liable for the
illegal dismissal of its employee
Note: These grounds are not exclusive.
separated under that guise.
- Before rejecting the Articles of
Incorporation or its amendments, the The Labor Arbiter, the NLRC, and the CA
SEC should give the incorporators were united in concluding that the
reasonable time within which to cessation of business by Zeta was not a
correct or modify the objectionable bona fide closure to be regarded as a valid
portions of the articles or ground for the termination of employment
amendments. of San Miguel within the ambit of Article
283 of the Labor Code. The unanimous
conclusions of the CA, the NLRC and the which was to respect San Miguel's security
Labor Arbiter, being in accord with law, of tenure. The dismissal of San Miguel from
were not tainted with any abuse of employment on the pretext that petitioner,
discretion, least of all grave, on the part being a different corporation, had no
of the NLRC. obligation to accept him as its employee,
was illegal and ineffectual.
Verily, the amendments of the articles of
incorporation of Zeta to change the
corporate name to Zuellig Freight and Commencement of Corporate Existence
Cargo Systems, Inc. did not produce the
dissolution of the former as a A corporation commences to have juridical
corporation. For sure, the Corporation personality and legal existence only from the
Code defined and delineated the different moment the SEC issues to the incorporators a
modes of dissolving a corporation, and certificate of incorporation under its
amendment of the articles of incorporation official seal.
was not one of such modes. The effect of
the change of name was not a change of the
corporate being.
It is the certificate of incorporation that
gives juridical personality to a corporation
In Philippine First Insurance Co., Inc. v.
and placed it under the jurisdiction of the
Hartigan, the Court ruled; "The changing
commission.
of the name of a corporation is no more
the creation of a corporation than the
changing of the name of a natural person
In the case of religious corporations, the
is begetting of a natural person. The act,
Code does not require the SEC to issue a
in both cases, would seem to be what the
certificate of incorporation.
language which we use to designate it
imports – a change of name, and not a In fact, Sec. 112 clearly states that from
change of being." and after the filing with the Commission of
the articles of incorporation, the chief
The consequences, legal and otherwise, of archbishop shall become a corporation sole.
the change of name were similarly dealt
with in P.C. Javier & Sons, Inc. v. Court
of Appeals, with the Court holding thusly:
The issuance of the articles calls the
A change in the corporate name does not
corporation into being but it is not really
make a new corporation, whether effected
ready to do business until it is organized.
by a special act or under a general law.
The corporation must formally organized and
It has no effect on the identity of the
commence the transaction of its business or
corporation, or on its property, rights,
the construction of its works within two
or liabilities. The corporation, upon to
years from the date of its incorporation or,
change in its name, is in no sense a new
otherwise, its corporate powers shall cease
corporation, nor the successor of the
and it shall be deemed dissolved (Sec. 22.)
original corporation. It is the same
corporation with a different name, and its
character is in no respect changed.
Doctrine of Corporate Entity
In short, Zeta and petitioner remained one
and the same corporation. The change of A corporation comes into existence upon the
name did not give petitioner the license issuance of the certificate of incorporation
to terminate employees of Zeta like San (Sec. 19). Then and only then will it acquire
Miguel without just or authorized cause. a juridical personality to sue and be sued,
The situation was not similar to that of enter into contracts, hold or convey property
an enterprise buying the business of or perform any legal act, in its own name
another company where the purchasing (Corporation Code of the Philippines, Ruben
company had no obligation to rehire C. Ladia, 2001 Ed.).
terminated employees of the latter.
Petitioner, despite its new name, was the
mere continuation of Zeta's corporate Corporations cannot come into existence by
being, and still held the obligation to mere agreement of the parties as in the case
honor all of Zeta's obligations, one of
of business partnerships. They require
special authority or grant from the State.
This power is exercised by the State through
the legislature, either by a special
incorporation law or charter which directly
creates the corporation or by means of a
general corporation law under which
individuals desiring to be and act as a
corporation may incorporate (The Corporation
Code of the Philippines, Hector S. De Leon & Hector
M. De Leon, Jr., 2006 ed.).
Doctrine of Piercing the Veil of
Corporate Fictions
Definition: The doctrine that a corporation
is a legal entity distinct from the persons
composing is a theory introduced for purposes
of convenience and to serve the ends of
justice. But when the veil of corporate
fiction is used as a shield to defeat public
convenience, justify wrong, protect fraud,
or defend a crime, this fiction shall be
disregarded and the individuals composing it
will be treated identically (Cruz vs. Dalisay,
152 SCRA 487 [1987]).
The doctrine requires the court to see
through the protective shroud which exempts
its stockholders from liabilities that they
ordinarily would be subject to, or
distinguishes a corporation from a seemingly
separate one, were it not for the existing
corporate fiction (Lim vs. CA, 323 SCRA 102).
In any cases where the separate corporate
identity is disregarded, the corporation
will be treated merely as an association of
persons and the stockholders or members will
be considered as the corporation, that is,
liability will attach personally or directly
to the officers and stockholders (Umali vs.
Court of Appeals, 189 SCRA 529 [1990]).
However, mere ownership by a single
stockholder or by another corporation of all
or nearly all of the capital stock of a
corporation is not of itself sufficient
ground for disregarding the separate
corporate personality (Umali vs. Court of
Appeals, 189 SCRA 529 [1990])
- The doctrine aims to protect the
interest of innocent third person
dealing with the corporation.
Classification of facts on which corporate
entity may be disregarded:
1. Avoidance of redress of fraud;
2. Prevention of evasion of statute or
law;
3. Prevention of evasion of contract;
4. Internal corporate dealings
disregarding corporate entity where
third persons are not involved;
5. Corporation agencies or
instrumentalities of undisclosed
principals
NOTE: These enumerations are not exclusive
and sometimes two or more of these elements
concur.
Nature and Consequences of Piercing Doctrine
1. has only res judicata effect;
2. to prevent fraud or wrong and not
available for other purposes;
The doctrine could not be employed by a
corporation to complete its claims against
another corporation and cannot therefore be
employed by the claimant who does not appear
to be the victim of any wrong or fraud
(Traders Royal Bank vs. CA 269 SCRA 601 [1997]).
3. essentially a judicial prerogative
only
To pierce the veil of corporate fiction being
a power belonging to the courts, a sheriff
who has ministerial duty to enforce a final
and executory decision cannot pierce the veil
of corporate fiction by enforcing the
decision against the stockholders who are not
parties to the action (Cruz vs. Dalisay, 152
SCRA 487 [1987]).
4. must be shown to be necessary and with
factual basis
RULES: To disregard the separate juridical
personality of a corporation, the wrongdoing
must be clearly and convincingly established,
it cannot be presumed (Luxuria Homes, Inc. v.
CA, 302 SCRA 315 [1999]).
When directors and officers are unable to
compensate a party for a personal obligation,
it is far-fetched to allege that a
corporation is perpetuating fraud or
promoting injustice, and thereby could be
held liable for the personal obligations of
its directors and officers by piercing the
corporate veil (Francisco Motors, Inc. vs. CA,
G.R. No. 100812, June 25, 1999).
Classification:
1. Fraud Cases
When the corporate identity is used to
justify wrong, to commit fraud, or to defend
a crime.
There is always an element of malice or evil
motive in fraud cases.
Elements:
a. There must have been fraud or evil
motive in the affected transaction
and the mere proof of control of the
corporation by itself would not
authorize piercing.
b. The main action should seek for the
enforcement of pecuniary claims
pertaining to the corporation against
corporate officers or stockholders,
or viceversa; and
c. The corporate entity has been used in
the perpetration of the fraud or in
justification of wrong, or to escape
personal liability.
2. Alter Ego Cases (or Conduit Cases)
Fraud is not an element in these cases but
that the stockholders or those who compose
the corporation did not treat the corporation
as a separate entity but only as part of the
property or business of an individual or
group of individuals or another corporation.
Probative factors
a. Stock ownership by one or common
ownership of both corporations;
b. Identity of directors and officers;
c. The manner of keeping corporate books
and records; and
d. Methods of conducting the business
(Concept Builders, Inc. v. NLRC, 257
SCRA 149 [1996]).
Four Policy Bases in Piercing:
a. Even when the controlling stockholder
or managing officer intends
consciously to do no evil, the use of
the corporation as an alter ego is in
direct violation of a central
corporate law principle of treating
the corporation as a separate
juridical entity from its members and
stockholders;
b. If the stockholders do not respect
the separate entity, others cannot
also be expected to be bound by the
separate juridical entity;
c. Applies even when there are no
monetary claims sought to be enforced
against the stockholders or officers
of the corporation;
d. When the underlying business
enterprise does not really change and
only the medium by which that
business enterprise is changed.
Instrumentality or Alter Ego Rule: When one
corporation is so organized and controlled
and its affairs are conducted so that it is
in fact a mere instrumentality or adjunct of
the other, the fiction of the corporate
entity to the instrumentality may be
disregarded (Concept Builders Inc. vs. NLRC, 257
SCRA 149 [1996]).
Test:
a. Control, not mere majority or
complete stock control, but complete
dominion, not only of finances but of
policy and business in respect to the
transaction attacked so that the
corporate entity as to this
transaction had at the time no
separate mind, will, or existence of
its own;
b. Such control must have been used by
the defendant to commit fraud or
wrong in contravention of plaintiff’s
legal rights; and
 c. The aforesaid control and breach of
duty must proximately cause the
injury or unjust loss complained of
(Concept Builders Inc. vs. NLRC, 257
SCRA 149 [1996]).
3. Equity cases
When piercing the corporate fiction is
necessary to achieve justice or equity.
The “dumping ground” where no fraud or alter
ego circumstances can be culled to warrant
piercing.
PNB v. Hydro Resources
G.R. No. 167530 March 13,
2013
While ownership by one corporation of all
or a great majority of stocks of another
corporation and their interlocking
directorates may serve as indicia of
control, by themselves and without more,
however, these circumstances are
insufficient to establish an alter ego
relationship or connection between DBP and
PNB on the one hand and NMIC on the other
hand, that will justify the puncturing of
the latter’s corporate cover. The Court
has declared that "mere ownership by a
single stockholder or by another
corporation of all or nearly all of the
capital stock of a corporation is not of
itself sufficient ground for disregarding
the separate corporate personality." The
Court has likewise ruled that the
"existence of interlocking directors,
corporate officers and shareholders is not
enough justification to pierce the veil of
corporate fiction in the absence of fraud
or other public policy considerations."
In this case, nothing in the records shows
that the corporate finances, policies and
practices of NMIC were dominated by DBP
and PNB in such a way that NMIC could be
considered to have no separate mind, will
or existence of its own but a mere conduit
for DBP and PNB. On the contrary, the
evidence establishes that HRCC knew and
acted on the knowledge that it was dealing
with NMIC, not with NMIC’s stockholders.
HRCC has presented nothing to show that
DBP and PNB had a hand in the act
complained of, the alleged undue disregard
by NMIC of the demands of HRCC to satisfy
the unpaid claims for services rendered by
HRCC in connection with NMIC’s mine
stripping and road construction program in
1985. On the contrary, the overall picture
painted by the evidence offered by HRCC is
one where HRCC was dealing with NMIC as a
distinct juridical person acting through
its own corporate officers.
To disregard the separate juridical
personality of a corporation, the
wrongdoing or unjust act in contravention
of a plaintiff’s legal rights must be
clearly and convincingly established; it
cannot be presumed. Without a
demonstration that any of the evils sought
to be prevented by the doctrine is present,
it does not apply.
In the absence of both control by DBP and
PNB of NMIC and fraud or fundamental
unfairness perpetuated by DBP and PNB
through the corporate cover of NMIC, no
harm could be said to have been proximately
caused by DBP and PNB on HRCC for which
HRCC could hold DBP and PNB solidarily
liable with NMIC.
Livesey v. Binswanger
G.R. No. 177493, March 19, 2014
In the present case, there is an
indubitable link between CBB’s closure and
Binswanger’s incorporation. CBB ceased to
exist only in name; it re-emerged in the
person of Binswanger for an urgent purpose
to avoid payment by CBB of the last two
installments of its monetary obligation to
Livesey, as well as its other financial
liabilities. Freed of CBB’s liabilities
Binswanger can continue, CBB’s real estate
brokerage business. Livesey’s evidence
converged to show this continuity of
business operations from CBB to
Binswanger. It was not just coincidence
that Binswanger is engaged in the same line
of business CBB embarked on:
1. it even holds office in the same
building and on the very same floor
where CBB once stood;
2. CBB’s key officers, Elliot, no
less, and Catral moved over to
Binswanger, performing the tasks
they were doing at CBB;
3. notwithstanding CBB’s closure,
Binswanger’s Web Editor (Young), in
an e-mail correspondence, supplied
the information that Binswanger is
 "now known" as either CBB The evidence establishes that CLN and the
(Chesterton Blumenauer Binswanger respondent knew and acted on the knowledge
or as Chesterton Petty, Ltd., in that they were dealing with WPM for the
the Philippines; renovation of the latter’s restaurant, and
4. the use of Binswanger of CBB’s not with Manlapaz. That WPM later reneged
paraphernalia (receiving stamp) in on its monetary obligation to CLN,
connection with a labor case where resulting to the filing of a civil case
Binswanger was summoned by the for sum of money against the respondent,
authorities, although Elliot does not automatically indicate fraud, in
claimed that he bought the item the absence of any proof to support it.
with his own money; and
5. (5) Binswanger’s takeover of CBB’s The piercing of the veil of corporate
project with the PNB. While the fiction is frowned upon and thus, must be
ostensible reason for Binswanger’s done with caution. It can only be done if
establishment is to continue CBB’s it has been clearly established that the
business operations in the separate and distinct personality of the
Philippines, which by itself is not corporation is used to justify a wrong,
illegal, the close proximity protect fraud, or perpetrate a deception.
between CBB’s disestablishment and The court must be certain that the
Binswanger’s coming into existence corporate fiction was misused to such an
points to an unstated but urgent extent that injustice, fraud, or crime was
consideration which was to evade committed against another, in disregard of
CBB’s unfulfilled financial its rights; it cannot be presumed.
obligation to Livesey under the
compromise agreement.
Ramirez v. Mar Fishing, Inc.
G.R. No. 168208 June 13, 2012
WPM International v. Labayen
G.R. No. 182770 September Miramar and Mar Fishing are separate and
17, 2014 distinct entities, based on the marked
differences in their stock ownership.
In the present case, the attendant Also, the fact that Mar Fishing’s officers
circumstances do not establish that WPM is remained as such in Miramar does not by
a mere alter ego of Manlapaz. itself warrant a conclusion that the two
companies are one and the same. As this
The mere ownership by a single stockholder Court held in Sesbreo v. Court of Appeals,
of even all or nearly all of the capital the mere showing that the corporations had
stocks of a corporation is not by itself a a common director sitting in all the boards
sufficient ground to disregard the without more does not authorize
separate corporate personality. To disregarding their separate juridical
disregard the separate juridical personalities.
personality of a corporation, the
wrongdoing must be clearly and Neither can the veil of corporate fiction
convincingly established. between the two companies be pierced by
the rest of petitioners submissions,
The control necessary to invoke the namely, the alleged take-over by Miramar
instrumentality or alter ego rule is not of Mar Fishing’s operations and the
majority or even complete stock control evident similarity of their businesses. At
but such domination of finances, policies this point, it bears emphasizing that
and practices that the controlled since piercing the veil of corporate
corporation has, so to speak, no separate fiction is frowned upon, those who seek to
mind, will or existence of its own, and is pierce the veil must clearly establish
but a conduit for its principal. The that the separate and distinct
control must be shown to have been personalities of the corporations are set
exercised at the time the acts complained up to justify a wrong, protect a fraud, or
of took place. Moreover, the control and perpetrate a deception. This,
breach of duty must proximately cause the unfortunately, petitioners have failed to
injury or unjust loss for which the do.
complaint is made.
The fact that the businesses of private
respondent and Acrylic are related, that
some of the employees of the private
respondent are the same persons manning
and providing for auxiliary services to
the units of Acrylic, and that the physical
plants, offices and facilities are
situated in the same compound, it is our
considered opinion that these facts are
not sufficient to justify the piercing of
the corporate veil of Acrylic.
Sarona v. NLRC
GR no. 185280 January 18, 2012
Evidence abound showing that Royale is a
mere continuation or successor of Sceptre
and fraudulent objectives are behind
Royale’s incorporation and petitioner’s
subsequent employment therein.
First, It was Aida Tan who exercised
control and supervision over the affairs
of both Sceptre and Royale. In 1999, the
license to operate Sceptre was transferred
from Sabalones to Aida and in fact, Sceptre
was later registered under her name. On
the other hand, it was not disputed that
she has a hand in the management and
operation and possesses control and
supervision over the employees of Royale
and in fact, she was the one who decided
to stop giving any assignment to the
petitioner. Thus, the presence of actual
common control is patent.
The exercise of such control was attended
with fraudulent or illegal purpose. In
this case, the manner by which the
petitioner was made to resign from Sceptre
and how he became an employee of Royale
suggest the perverted use of the legal
fiction of the separate corporate
personality. They orchestrated the
petitioner’s resignation from Sceptre and
subsequent employment at Royale, taking
advantage of their ascendancy over the
petitioner and the latter’s lack of
knowledge of his rights and the
consequences of his actions. Furthermore,
that the petitioner was made to resign from
Sceptre and apply with Royale only to be
unceremoniously terminated shortly
thereafter leads to the ineluctable
conclusion that there was intent to
violate the petitioner’s right to security
of tenure.
Second, Sceptre and Royale have the same
principal place of business. By virtue of
a deed of absolute sale, Sabalones’
ownership over the property used by
Sceptre was transferred to Aida who then
used the same as the principal place of
business of Royale.
Third, Sceptre and Royale share same
officers and employees. Karen Tan was
Sceptre’s Operation Manager at the same
time, an incorporator of Royale.
Fourth, Royale also claimed a right to the
cash bond which the petitioner posted when
he was still with Sceptre. If Sceptre and
Royale are indeed separate entities,
Sceptre should have released the
petitioner’s cash bond when he resigned
and Royale would have required the
petitioner to post a new cash bond in its
favor.
Taking the foregoing in conjunction with
Aida’s control over Sceptre’s and Royale’s
business affairs, it is patent that Royale
was a mere subterfuge for Aida. Since a
sole proprietorship does not have a
separate and distinct personality from
that of the owner of the enterprise, the
latter is personally liable. This is what
she sought to avoid but cannot prosper.
Effectively, the petitioner cannot be
deemed to have changed employers as Royale
and Sceptre are one and the same. His
separation pay should, thus, be computed
from the date he was hired by Sceptre in
April 1976 until the finality of this
decision.
Gold Line Tours v. Heirs of Lacsa
G.R. No. 159108, June 18, 2012
The RTC had sufficient factual basis to
find that petitioner and Travel & Tours
Advisers, Inc., were one and the same
entity, specifically: (a) documents
submitted by petitioner in the RTC showing
that William Cheng, who claimed to be the
operator of Travel & Tours Advisers, Inc.,
was also the President/Manager and an
incorporator of the petitioner; and (b)
Travel & Tours Advisers, Inc., had been
known in Sorsogon as Goldline. On its part,
the CA cogently observed: as stated in the
RTC decision, William Cheng disclosed
during the trial of the case that defendant
Travel & Tours Advisers, Inc. (Goldline),
of which he is an officer, is operating
sixty (60) units of Goldline buses. The
Amended Articles of Incorporation of Gold
Line Tours, Inc., disclose that the
following persons are the original
incorporators: Antonio Cheng, Maribel Lim
Cheng, William Cheng, Anita Dy Cheng and
Zosimo Cheng.
Hacienda Luisita v. Presidential Agrarian
Reform Council
G.R. No. 171101, November 22, 2011
Absent any allegation or proof of fraud or
other public policy considerations, the
existence of interlocking directors,
officers and stockholders is not enough
justification to pierce the veil of
corporate fiction as in the instant case.
Moreover, it cannot be claimed that RCBC
and LIPCO acted in bad faith in acquiring
the lots that were previously covered by
the Stock Distribution Plan. To be sure,
intervenor RCBC and LIPCO knew that the
lots they bought were subjected to CARP
coverage by means of a stock distribution
plan. However, when RCBC and LIPCO
purchased the lots in question, they are
of honest belief that the subject lots were
validly converted to commercial or
industrial purposes by the Department of
Agrarian Reform (DAR) and for which said
lots were taken out of the CARP coverage,
hence, can be legally and validly acquired
by them.
Pantranco Employees Asso., et al. v. NLRC
G.R. No. 170689 March 17, 2009
The doctrine of piercing the corporate
veil applies only in three (3) basic areas,
namely:
1. defeat of public convenience as
when the corporate fiction is used
as a vehicle for the evasion of an
existing obligation;
2. fraud cases or when the corporate
entity is used to justify a wrong,
protect fraud, or defend a crime;
or
3. alter ego cases, where a
corporation is merely a farce since
it is a mere alter ego or business
conduit of a person, or where the
corporation is so organized and
controlled and its affairs are so
conducted as to make it merely an
instrumentality, agency, conduit
or adjunct of another
corporation.[54] In the absence of
malice, bad faith, or a specific
provision of law making a corporate
officer liable, such corporate
officer cannot be made personally
liable for corporate liabilities.
It would not be enough, then, for the
petitioners in this case, the PNEI
employees, to rest on their laurels with
evidence that PNB was the owner of PNEI.
Apart from proving ownership, it is
necessary to show facts that will justify
us to pierce the veil of corporate fiction
and hold PNB liable for the debts of PNEI.
The burden undoubtedly falls on the
petitioners to prove their affirmative
allegations. In line with the basic
jurisprudential principles we have
explored, they must show that PNB was using
PNEI as a mere adjunct or instrumentality
or has exploited or misused the corporate
privilege of PNEI.
In PNB v. Ritratto Group, Inc.,we outlined
the circumstances which are useful in the
determination of whether a subsidiary is
but a mere instrumentality of the parent-
corporation, to wit:
1. The parent corporation owns all or
most of the capital stock of the
subsidiary;
2. The parent and subsidiary
corporations have common directors
or officers;
3. The parent corporation finances the
subsidiary;
4. The parent corporation subscribes
to all the capital stock of the
subsidiary or otherwise causes its
incorporation;
5. The subsidiary has grossly
inadequate capital;
6. The parent corporation pays the
salaries and other expenses or
losses of the subsidiary;
7. The subsidiary has substantially no
business except with the parent
corporation or no assets except
those conveyed to or by the parent
corporation;
8. In the papers of the parent
corporation or in the statements of
its officers, the subsidiary is
described as a department or
division of the parent corporation,
or its business or financial
responsibility is referred to as
the parent corporations own;
 9. The parent corporation uses the
property of the subsidiary as its
own;
10. The directors or executives of the
subsidiary do not act independently
in the interest of the subsidiary,
but take their orders from the
parent corporation;
11. The formal legal requirements of
the subsidiary are not observed.
None of the foregoing circumstances is
present in the instant case. Thus,
piercing of PNB-Madecors corporate veil is
not warranted. Being a mere successor-in-
interest of PNB-Madecor, with more reason
should no liability attach to Mega Prime.
De Facto Corporation
A corporation which actually exists for all
practical purposes as a corporation but which
has no legal right to corporate existence as
against the State. It is one which has not
complied with all the requirements necessary
to be a de jure corporation but has complied
sufficiently to be accorded corporate status
as against third parties although not against
the state.
Requisites:
1. The existence of a valid law under
which it may be incorporated;
2. A bona fide attempt in good faith to
incorporate under such law;
3. Actual use or exercise in good faith
of corporate powers; and
4. Issuance of a certificate of
incorporation by the SEC as a minimum
requirement of continued good faith.
In the case of a de facto corporation, the
only way in which its corporate existence can
be questioned is in a direct proceeding by
the State, brought for that purpose. Private
individuals cannot raise the objection in
such a case, either directly or indirectly,
and nobody can raise the objection
collaterally (The Corporation Code of the
Philippines, Hector S. De Leon & Hector M. De Leon,
Jr., 2006 ed.).
Such a corporation is practically as good as
a de jure corporation. It is deemed to have
a substantial legal existence and ordinarily,
in its relation with all persons except the
State, has the same powers and is subject to
the same liabilities, duties and
responsibilities, as a corporation de jure,
and is bound by all such acts as it might
rightfully perform if it were a corporation
de jure (The Corporation Code of the Philippines,
Hector S. De Leon & Hector M. De Leon, Jr., 2006
ed.).
The officers and directors of a de facto
corporation are subject to all the
liabilities and penalties attending to
officers and directors duly chosen by a
corporation de jure, including the liability
under the criminal law, and their acts are
binding when such acts would be within the
power of such officers if the corporation
were one de jure (The Corporation Code of the
Philippines, Hector S. De Leon & Hector M. De Leon,
Jr., 2006 ed.).
Hall v. Piccio
G.R. No. L-2598 June 29, 1950
First, not having obtained the certificate
of incorporation, the Far Eastern Lumber
and Commercial Co. – even its stockholders
– may not probably claim “in good faith”
to be a corporation. There can be no good
faith unless the certificate of
incorporation is issued. The reason is
simple: without the certificate of
incorporation issued by the SEC, the
incorporators cannot claim to be in "good
faith" that they were duly incorporated.
The immunity of collateral attack is
granted to corporations “claiming in good
faith to be corporation under this act.”
Such a claim is compatible with the
existence of errors and irregularities but
not with a total or substantial disregard
of the law. Unless there has been an
evident attempt to comply with the law,
the claim to be a corporation “under this
act” could not be made “in good faith.”
Second, this is not a suit in which the
corporation is a party. This is a
litigation between stockholders of the
alleged corporation for the purpose of
obtaining its dissolution. Even the
existence of a de jure corporation may be
terminated in a private suit for its
dissolution between stockholders, without
the intervention of the state.
 The Browns are not estopped. Because the
SEC has not yet issued the corresponding
certificate of incorporation, all of them
know or ought to know that the personality
of a corporation begins to exist only from
the moment such certificate is issued and
not before.
The complaining associates have not
represented to the others that they were
incorporated any more than the latter had
made similar representations to them.
And as nobody was led to believe anything
to his prejudice and damage, the principle
of estoppel does not apply. This is not an
instance requiring the enforcement of
contracts with the corporation through the
rule of estoppel.
Corporation by Estoppel
An unincorporated association which
represented itself to be a corporation will
be estopped from denying its corporate
capacity in a suit against it by a third
person who relied in good faith on such
representation., liabilities and damages
incurred or arising as a result thereof.
A corporation by estoppel has no real
existence in law. It is neither a de jure
nor a de facto corporation, but is a mere
fiction existing for the particular case, and
vanishing where the element of estoppel is
absent. It exists only between the persons
who misrepresented their status and the
parties who relied on the misrepresentation.
Its existence may be attacked by any third
party except where the attacking party is
estopped to treat the entity other than as a
corporation.
All persons not stockholders or members who
assume to act as a corporation knowing it to
be without authority to do so shall be liable
as general partners for all debts,
liabilities, and damages incurred or arising
as a result thereof (Sec.21).
When any such ostensible corporation is sued
on any transaction entered by it as a
corporation or on any tort committed by it
as such, it shall not be allowed to use as a
defense its lack of corporate personality
(Sec. 21).
A third party who, knowing an association to
be unincorporated, nonetheless treated it as
a corporation and received benefits from it,
may be barred from denying its corporate
existence in a suit brought against the
alleged corporation (Lim Tong Lim vs. Phil.
Fishing Gear Industries, Inc. 317 SCRA 728).
International Express v. CA
GR NO. 119002. OCTOBER 19, 2000
It is a basic postulate that before a
corporation may acquire juridical
personality, the State must give its
consent either in the form of a special
law or a general enabling act. We cannot
agree with the view of the appellate court
and the private respondent that the
Philippine Football Federation came into
existence. Nowhere can it be found in R.A.
3135 or P.D. 604 any provision creating
the Philippine Football Federation. These
laws merely recognized the existence of
national sports associations and provided
the manner by which these entities may
acquire juridical personality.
It follows that private respondent Henry
Kahn should be held liable for the unpaid
obligations of the unincorporated
Philippine Football Federation. It is a
settled principal in corporation law that
any person acting or purporting to act on
behalf of a corporation which has no valid
existence assumes such privileges and
becomes personally liable for contract
entered into or for other acts performed
as such agent. As president of the
Federation, Henri Kahn is presumed to have
known about the corporate existence or
non-existence of the Federation. We cannot
subscribe to the position taken by the
appellate court that even assuming that
the Federation was defectively
incorporated, the petitioner cannot deny
the corporate existence of the Federation
because it had contracted and dealt with
the Federation in such a manner as to
recognize and in effect admit its
existence.
The doctrine of corporation by estoppel is
mistakenly applied by the respondent court
to the petitioner. The application of the
doctrine applies to a third party only when
 he tries to escape liability on a contract
from which he has benefited on the
irrelevant ground of defective
incorporation. In the case at bar, the
petitioner is not trying to escape
liability from the contract but rather is
the one claiming from the contract.
Non User of Charter vs. Continuous In
operation
Effect of nonuse of charter: If a corporation
does not formally organize and commence the
transaction of its business or the
construction of its works within 2 years from
the date of incorporation, its corporate
powers cease and the corporation shall be
deemed dissolved.
Effect of continuous inoperation: If a
corporation has commenced transaction of its
business but subsequently becomes
continuously inoperative for a period of at
least 5 years, the same shall be a ground for
the suspension or revocation of its corporate
franchise or certificate of incorporation.
Exception to the effects: If the non-use of
corporate charter or continuous inoperation
of a corporation is due to causes beyond its
control as found by the Commission, the
effects mentioned shall not take place.
Loyola Grand Villas v. CA
G.R. No. 117188 August 7, 1997
By-laws may be necessary for the
"government" of the corporation but these
are subordinate to the articles of
incorporation as well as to the
Corporation Code and related statutes.
In the absence of charter or statutory
provisions to the contrary, by-laws are
not necessary either to the existence of a
corporation or to the valid exercise of
the powers conferred upon it, certainly in
all cases where the charter sufficiently
provides for the government of the body;
and even where the governing statute in
express terms confers upon the corporation
the power to adopt by-laws, the failure to
exercise the power will be ascribed to mere
non-action which will not render void any
acts of the corporation which would
otherwise be valid.
Non-filing of the by-laws will not result
in automatic dissolution of the
corporation. Under Section 6(I) of PD 902-
A, the SEC is empowered to "suspend or
revoke, after proper notice and hearing,
the franchise or certificate of
registration of a corporation" on the
ground inter alia of "failure to file by-
laws within the required period." It is
clear from this provision that there must
first of all be a hearing to determine the
existence of the ground, and secondly,
assuming such finding, the penalty is not
necessarily revocation but may be only
suspension of the charter. In fact, under
the rules and regulations of the SEC,
failure to file the by-laws on time may be
penalized merely with the imposition of an
administrative fine without affecting the
corporate existence of the erring firm.
BOARD OF DIRECTORS
Sec. 23. The board of directors or
trustees. - Unless otherwise
provided in this Code, the corporate
powers of all corporations formed
under this Code shall be exercised,
all business conducted and all
property of such corporations
controlled and held by the board of
directors or trustees to be elected
from among the holders of stocks, or
where there is no stock, from among
the members of the corporation, who
shall hold office for one (1) year
until their successors are elected
and qualified.
Every director must own at least one
(1) share of the capital stock of the
corporation of which he is a director,
which share shall stand in his name
on the books of the corporation. Any
director who ceases to be the owner
of at least one (1) share of the
capital stock of the corporation of
which he is a director shall thereby
cease to be a director. Trustees of
non-stock corporations must be
members thereof. a majority of the
directors or trustees of all
corporations organized under this
Code must be residents of the
Philippines.
Doctrine of centralized management
– management of the board is
centralized in the BOD. The
corporation consents through its
board.
NATURE OF OFFICE
- The doctrine of centralized
management provides that the
corporate power is directly
vested to the board. The
corporate powers
- The power of the board is
directly conferred by law.
- The business of the
corporation is operated and
conducted by the collective
decision of a governing body
Bernas vs. Cinco : A corporation’s
board of directors is understood to
be that body which (1) exercises all
powers provided for under the
Corporation Code; (2) conducts all
business of the corporation; and (3)
controls and holds all the property
of the corporation. Its members
have been characterized as trustees
or directors clothed with fiduciary
character.
REQUIREMENTS
Qualifications
- Minimum qualifications are
stated in the corporation code
- Since they are the minimum, the
AOI or by laws cannot remove
or minimize further these
qualifications
What the by-laws can do is to add but
not diminish
1. Stock Corporation: must be an
owner of at least 1 share in
his/her name (qualifying
share)
- By laws can prescribe a
greater number of
qualifying shares
- Must be a stock holder in
his own right, must be a
legal title not
beneficial title.
- NS: must be a member.
Villafuerte v. CA :
Villafuerte was elected
as chairman of the board
of a NSC, but was found
out that he was not a
member. His election as
chair was nullified by
the SC
2. Shares of stocks held by the
director must be registered in
his name on the books of the
corporation
- Baguio vs. CA : the
election of a person to
the BOD of a corporation
does not necessarily mean
that he has paid for the
shares recorded in his
name. In most cases the
nominee directors do not
pay for the qualifying
shares assigned to them.
3. Must not have been convicted
by final judgment of any crime
being punishable by more than
6 years of more or a criminal
violation of the corporation
code committed within 5 years
preceding the elections
4. Must be of legal age
5. Majority of the directors or
trustees must be a resident of
the Philippines
- No nationality
requirement
- It should be noted that
there are certain
corporations or
nationalized industries
or businesses that have a
citizenship requirement.
6. Must possess other
qualifications as may be
prescribed in the bylaws of the
corporation
 7. Only natural persons can be
elected as directors or
trustees
Disqualifications
Sec. 27. Disqualification of
directors, trustees or officers. -
No person convicted by final
judgment of an offense punishable by
imprisonment for a period exceeding
six (6) years, or a violation of this
Code committed within five (5) years
prior to the date of his election or
appointment, shall qualify as a
director, trustee or officer of any
corporation.
ELECTION
Sec. 24. Election of directors or
trustees. - At all elections of
directors or trustees, there must be
present, either in person or by
representative authorized to act by
written proxy, the owners of a
majority of the outstanding capital
stock, or if there be no capital
stock, a majority of the members
entitled to vote. The election must
be by ballot if requested by any
voting stockholder or member. In
stock corporations, every
stockholder entitled to vote shall
have the right to vote in person or
by proxy the number of shares of
stock standing, at the time fixed in
the by-laws, in his own name on the
stock books of the corporation, or
where the by-laws are silent, at the
time of the election; and said
stockholder may vote such number of
shares for as many persons as there
are directors to be elected or he may
cumulate said shares and give one
candidate as many votes as the number
of directors to be elected
multiplied by the number of his
shares shall equal, or he may
distribute them on the same
principle among as many candidates
as he shall see fit: Provided, That
the total number of votes cast by him
shall not exceed the number of shares
owned by him as shown in the books
of the corporation multiplied by the
whole number of directors to be
elected: Provided, however, That no
delinquent stock shall be voted.
Unless otherwise provided in the
articles of incorporation or in the
by-laws, members of corporations
which have no capital stock may cast
as many votes as there are trustees
to be elected but may not cast more
than one vote for one candidate.
Candidates receiving the highest
number of votes shall be declared
elected. Any meeting of the
stockholders or members called for
an election may adjourn from day to
day or from time to time but not sine
die or indefinitely if, for any
reason, no election is held, or if
there not present or represented by
proxy, at the meeting, the owners of
a majority of the outstanding
capital stock, or if there be no
capital stock, a majority of the
member entitled to vote.
 Mere designation of directors or
trustees are not allowed
Quorum
- Stock: Majority of the
outstanding capital stock
- Non-stock: majority of the
members entitled to vote
Voting
The elections shall be made:
1. Manner as indicated in the by
laws
2. If by laws are silent, manner
prescribed by the corporation
code which is by raising of
hands
3. Upon request by any SH, by
secret ballot
How often should elections be
conducted?
- Stock: once a year, this is
because Sec. 23 fixes the
tenure of directors or
trustees at one year.
- Non-stock: once a year unless
the AOI prescribe a longer term
for the members of its board
Postponement of election
- GR: the board cannot postpone
the date of annual meeting
 prescribed in bylaws to has been held not to insure
lengthen their term of office minority stockholders of
- EXC: when there is justifiable proportional representation or
reason and proper notice of of representation in that BoD
postponement is given to the under all circumstances
stockholders or members. 3. Cumulative voting by
distribution - stockholder
Election contest cumulates his shares by
multiplying also the number of
Ricafort vs. Hon. Dicdican: SEC Case his shares by the number of
No. 11-164 is time-barred because it directors to be elected and
involves an election contest and distribute the same among as
therefore is subject to the 15-day many candidates as he shall see
prescription period.
fit.
Under Sections 1 to 3 of Rule
6 of the Interim Rules, SEC Case No. Voting in Non-stock – members of non-
11-164 should have been dismissed stock corporations may cast as many
for having been filed beyond the 15- votes as there are trustees to be
day prescriptive period allowed for elected but may not cast more than
an election protest. In substance, one for one candidate
the main issues therein are on all
fours with Yujuico, wherein the REPORT ON ELECTION
Court expressly ruled that where one Sec. 26. Report of election of
of the reliefs sought in the directors, trustees and officers. -
complaint is to nullify the election Within thirty (30) days after the
of the Board of Directors at the ASM, election of the directors, trustees
the complaint involves an election and officers of the corporation, the
contest. Both cases put in issue the secretary, or any other officer of
validity of the ASM and, expressly the corporation, shall submit to the
in Yujuico and indirectly below, the Securities and Exchange Commission,
election of the members of the Board the names, nationalities and
of Directors. The ostensible residences of the directors,
difference is that in SEC Case No. trustees, and officers elected.
Should a director, trustee or
11-164 the petitioners invoked lack
officer die, resign or in any manner
of notice of the August 15, 2011 ASM,
cease to hold office, his heirs in
while in Yujuico the ground invoked case of his death, the secretary, or
was improper venue. any other officer of the
corporation, or the director,
Methods of voting trustee or officer himself, shall
immediately report such fact to the
1. Straight voting – every Securities and Exchange Commission.
stockholder may vote such
number of shares for as many Report on Election
When: Within 30 days after the
persons as there directors to
election of the directors,
be elected
trustees and officers of the
2. Cumulative voting for one
corporation
candidate - stockholder gives Who: The secretary, or any other
to one candidate as many votes officer of the corporation
as the number of directors to What: Submit to the Securities
be elected multiplied by the and Exchange Commission, the
number of his shares shall names, nationalities and
equal. To give the minority residences of the directors,
stockholders representation in trustees, and officers elected
the BoD by electing one or more
directors BUT such a provision
 Report on death, resignation or
cessation from office of director,
trustee or officer
Who:
a) Heirs in case of death
b) Secretary or any other
officer of the corporation
c) Director, trustee or
officer himself
What: Report to SEC, fact of death,
resignation or cessation from
office
 NOTE: These reports are MANDATORY
and JURISDICTIONAL
TERM OF OFFICE/HOLDOVER
Term of office
- One year (term expires one
year after election to the
office) AND until their
successors are elected and
qualified.
- Permanent unelected seat in
BoD is PROHIBITED.
NOTE:
- Educational Non-stock
corporation - up to 5 years
- Other non-stock corporation –
up to 3p years
- Stock corporation – one year
subject to holdover
SEC vs. Baguio Country Club: whether
or not the Commission can call a
stockholders' meeting for the
purpose of conducting an election of
the BCCC board of directors.
As can be gleaned from the SEC's
Order, the calling of the meeting for
the conduct of an election was made
to rectify the inadvertent approval
of the 2 year term for the members
of the board. With the return of the
1 year term, there is no more actual
controversy that warrants the
exercise of our judicial power. Any
discussion by the Court of the SEC's
power to call for an election of the
board in case of a void term
prescribed by the by-laws, as well
as on the nature of the controversy,
and the other issues which are mere
offshoots of the void provision of
the by-laws would be merely
academic, opinions that would
neither adjudicate the rights of the
parties, nor grant them reliefs. As
we have previously held, courts have
no authority to pass upon issues
through advisory opinions or to
resolve hypothetical or feigned
problems. Courts do not sit to
adjudicate mere academic questions
to satisfy scholarly interest,
however intellectually
challenging. Even the other issues
raised by the Ilusorios in the
proceedings in the CA, being mere
offshoots of the main issue are
likewise mooted by the amendment.
Seneres vs. COMELEC : The purpose of
holdover is to accord validity to
what would otherwise be deemed as
dubious corporate acts and gives
continuity to a corporate enterprise
in its relation to outsiders. The old
holdover officer is a de facto
officer and by fiction of law, his
acts as such are considered valid and
effective.
HOW REMOVED
Sec. 28. Removal of directors or
trustees. - Any director or trustee
of a corporation may be removed from
office by a vote of the stockholders
holding or representing at least
two-thirds (2/3) of the outstanding
capital stock, or if the corporation
be a non-stock corporation, by a vote
of at least two-thirds (2/3) of the
members entitled to vote: Provided,
That such removal shall take place
either at a regular meeting of the
corporation or at a special meeting
called for the purpose, and in either
case, after previous notice to
stockholders or members of the
corporation of the intention to
propose such removal at the meeting.
A special meeting of the
stockholders or members of a
corporation for the purpose of
removal of directors or trustees, or
any of them, must be called by the
secretary on order of the president
or on the written demand of the
stockholders representing or holding
at least a majority of the
outstanding capital stock, or, if it
be a non-stock corporation, on the
written demand of a majority of the
members entitled to vote. Should the
secretary fail or refuse to call the
special meeting upon such demand or
fail or refuse to give the notice,
or if there is no secretary, the call
for the meeting may be addressed
directly to the stockholders or
members by any stockholder or member
of the corporation signing the
demand. Notice of the time and place
of such meeting, as well as of the
intention to propose such removal,
must be given by publication or by
written notice prescribed in this
Code. Removal may be with or without
cause: Provided, That removal
without cause may not be used to
deprive minority stockholders or
members of the right of
representation to which they may be
entitled under Section 24 of this
Code.
Requisites for removal
1. It must take place either at a
regular meeting or special
meeting of the stockholders or
members called for the
purpose;
2. There must be previous notice
to the stockholders or members
of the intention to remove;
3. The removal must be by a vote
of the stockholders
representing 2/3 of
outstanding capital stock or
2/3 members.
4. The director may be removed
with or without cause unless
he was elected by the minority,
in which case, it is required
that there is cause for
removal.
NOTE: In case of disqualification
by operation of law, there is no need
to follow the procedure under Sec.
28.
 mere declaration of such
disqualification is sufficient to
remove him from office.
Who has the power to remove?
 Officers deriving their title
from the stockholders (or
members), they can be removed
only by the power that
appointed them.
 Board has no power to remove:
The Board has no power to
remove one of its members as
director or trustee.
Resignation
 Right to resign anytime:
Nothing in the law prevents a
director or trustee from
resigning any time.
 Form: In the absence of express
provision, a resignation need
not be in any particular form.
It may be either oral or in
writing, but it must clearly
show an intent to resign.
 Resignation of director or
trustee to be immediately
reported to the SEC.
 Effectivity date: At the
moment the resignation is made
to the proper officer or body.
Bernas vs. Cinco: In the instant
case, there is no dispute that the
17 December 1997 Special
Stockholders’ Meeting was called
neither by the President nor by the
Board of Directors but by the
MSCOC. While the MSCOC, as its name
suggests, is created for the purpose
of overseeing the affairs of the
corporation, nowhere in the by-laws
does it state that it is authorized
to exercise corporate powers, such
as the power to call a special
meeting, solely vested by law and the
MSC by-laws on the President or the
Board of Directors. Thus the removal
of the sitting officers was null and
void.
HOW VACANCY FILLED
Sec. 29. Vacancies in the office of
director or trustee. - Any vacancy
occurring in the board of directors
or trustees other than by removal by
the stockholders or members or by
expiration of term, may be filled by
the vote of at least a majority of
the remaining directors or trustees,
if still constituting a quorum;
otherwise, said vacancies must be
filled by the stockholders in a
regular or special meeting called d) They are de facto officers
for that purpose. A director or
trustee so elected to fill a vacancy HOW COMPENSATED
shall be elected only or the Sec. 30. Compensation of
unexpired term of his predecessor in directors. - In the absence of any
office. provision in the by-laws fixing
A directorship or trusteeship to be their compensation, the directors
filled by reason of an increase in shall not receive any compensation,
the number of directors or trustees as such directors, except for
shall be filled only by an election reasonable per diems: Provided,
at a regular or at a special meeting however, That any such compensation
of stockholders or members duly other than per diems may be granted
called for the purpose, or in the to directors by the vote of the
same meeting authorizing the stockholders representing at least a
increase of directors or trustees if majority of the outstanding capital
so stated in the notice of the stock at a regular or special
meeting. stockholders' meeting. In no case
shall the total yearly compensation
of directors, as such directors,
VACANCY CAUSED VACANCY IS FILLED exceed ten (10%) percent of the net
BY: BY:
income before income tax of the
1. Death 1. By appointment:
corporation during the preceding
2. Resignation remaining members
from the Board of the board, if year.
3. Withdrawal still constituting GR: Board are not entitled to
or transfer a quorum compensation except for reasonable
4. They will choose per diems
Disqualificatio from the EXCEPTION:
n Stockholders a) If provided for in the by-
possessing laws; or
qualifications and b) By a vote of stockholders
not possessing representing at least a
disqualifications majority of the outstanding
2. By special capital stock.
elections: if no
quorum  A stockholder's resolution or
agreement for the payment of
compensation for such
5. Removal Special or regular services would be valid.
6. Expiration elections  BUT the stockholders CANNOT
of term Elections in a ratify a board of directors'
7. Increase in regular or special action fixing their own
number of meeting called for salaries.
directors/trust that purpose
ees Limitation: The yearly compensation
of directors shall in no case
exceed 10% of the NET income before
HOLDOVER PRINCIPLE – This occurs if income tax of the corporation
no election was held due to lack of during the preceding year.
quorum, or successors have not
elected or qualified AUTHORITY OF THE BOARD OF DIRECTORS
a) Their acts are binding against
the corporation GR: The corporate powers of the
b) They are entitled for all corporation, all business conducted
rights, monuments, etc. and all property of such
c) They will extend for another corporation controlled and held by
term otherwise they will the BOD/BOT (Sec. 23)
abandon their office
EXCEPTIONS:
 a) In case of an Executive
Committee duly authorized in
the by-laws;
b) In case of a contracted manager
which may be an individual, a
partnership, or another
corporation. (Note: In case
the contracted manager is
another corporation – special
rule: Sec. 44 applies)
c) In case of close corporations,
the stockholders may manage
the business of the
corporation instead by a board
of directors, if the Articles
of Incorporation provide.
Riosa vs. Tabaco La Suerte
Corporation: Whether there was a
perfected and valid contract of sale
for the subject property between
Aquiles and La Suerte, through its
Chief Executive Officer, Sia Ko Pio.
NO. There was no perfected contract
of sale. In this case, there was no
clear and convincing evidence that
Aquiles definitely sold the subject
property to La Suerte, nor was there
evidence that La Suerte authorized
its chief executive officer, Sia Ko
Pio, to negotiate and conclude a
purchase of the property. Sia Ko Pio,
although an officer of La Suerte, had
no authority from its Board of
Directors to enter into a contract
of sale of Aquiles’ property. It is,
thus, clear that the loan obtained
by Aquiles from Sia Ko Pio was a
personal loan from the latter, not a
transaction between Aquiles and La
Suerte. There was no evidence to show
that Sia Ko Pio was clothed with
authority to use his personal fund
for the benefit of La Suerte.
Evidently, La Suerte was never in the
picture.
DELEGATION OF AUTHORITY TO CORPORATE
OFFICERS
CORPORATE OFFICERS / OFFICE
a) The officers provided by the
Corporation Code, namely, the
President, Treasurer and
Secretary
b) Those provided for in the by-
laws of the corporation
 They do not enjoy security of
tenure, and their incumbency
is within the business
judgment discretion of the
Board.
 Their removal is considered
an intra-corporate
controversy and beyond the
reach of labor tribunals.
STATUTORY CORPORATE OFFICERS
1. President – must be a
director
- He executes or implements
policies, in-charge in
day-to-day operations
- Shall be selected in
accordance with: by-laws
(usually through election
by SH) or Board itself
from among themselves (if
by-laws is silent)
2. Treasurer – may or may not be
a director
- Custodian of money of
corporation
- Custodian of the trust
fund
- Duty to submit financial
statement to SEC and other
offices annually
3. Corporate Secretary (who
shall be a resident and
citizen of the Philippines)
- Custodian of all corporate
books and records
- His signature is required
in all stock certificates
and reports submitted to
government agencies
- Manages minutes of
meetings, stock and
transfer book
GR: Any two (2) or more positions
may be held concurrently by the
same person.
EXCEPTION: No one shall act as
President and Secretary or as
President and Treasurer, at the
same time.
AUTHORITY OF THE BOARD
1. Inherent authority or power
of an officer or agent is
taken to mean that authority
to act and bind the
corporation which the officer
has by reason of his office,
 although it may not be
sanctioned by express
authority.
2. Express authority of an
officer or agent includes
every power or authority
expressly conferred upon him
by law and the by-laws of the
corporation.
3. Implied authority of an
officer or agent of a
corporation includes all such
incidental authority as is
necessary, usual, and proper
to effectuate the main
authority expressly
conferred.
APPARENT OR OSTENSIBLE AUTHORITY -
naturally the same as and based
upon the same principle as
authority by estoppel.
Requisites:
a) Unauthorized person guilty of
misrepresenting himself as an
agent of a corporation with
knowledge that no such power
exists
b) Corporation also has
knowledge of such
misrepresentation and
acquiesce to the acts of its
unauthorized agent
 Corporation is bound by the
acts of its unauthorized
agent if an innocent third
party relied on such
misrepresentation in good
faith.
EXECUTIVE COMMITTEE (EXECOM)
Sec. 35. Executive committee. - The
by-laws of a corporation may create
an executive committee, composed of
not less than three members of the
board, to be appointed by the board.
Said committee may act, by majority
vote of all its members, on such
specific matters within the
competence of the board, as may be
delegated to it in the by-laws or on
a majority vote of the board, except
with respect to: (1) approval of any
action for which shareholders'
approval is also required; (2) the
filing of vacancies in the board; (3)
the amendment or repeal of by-laws
or the adoption of new by-laws; (4)
the amendment or repeal of any
resolution of the board which by its
express terms is not so amendable or
repealable; and (5) a distribution
of cash dividends to the
shareholders.
1. The by-laws of a corporation
may create an executive
committee
2. Composed of not less than
three members of the board,
3. To be appointed by the board.
 Actions of Execom - may act,
by majority vote of all its
members, on such specific
matters within the competence
of the board, as may be
delegated to it in the by-laws
or on a majority vote of the
board.
Prohibited acts
1. Approval of any action for
which shareholders’ approval
is also required;
2. The filing of vacancies in
the board;
3. The amendment or repeal of
by-laws or the adoption of
new by-laws;
4. The amendment or repeal of
any resolution of the board
which by its express terms is
not so amendable or
repealable; and
5. A distribution of cash
dividends to the
shareholders.
Membership of Execom
 Non-members of the Board may
be appointed as members of
the executive committee
provided that there are at
least 3 members of the Board
therein.
MANAGEMENT CONTRACT
- An agreement which a
corporation delegates the
management of its affairs to
another corporation for a
certain period of time.
- Instead of employing other
persons to manage the
corporation's business, it
employs another corporation.
- A corporation under
management is bound by the
 acts of the managing resources -> follow period
corporation and is estopped as provided for by law
to deny its authority.
3. Managerial power under the
NOTE: there is no need to amend the contract
AOI  Delegation of entire
supervision and control,
Management contract with Parent prohibited: A management
Corporation contract cannot delegate
 Valid - To provide more entire supervision and
efficient operation and control over the officers
greater convenience to both. and business of a
THUS, a holding company may, corporation to another as
in some cases, intervene in this will contravene
the management and affairs of Section 23.
its subsidiaries or  The board cannot surrender
affiliates PROVIDED the or abdicate its power and
management in those affairs duty of supervision and
will not affect the separate control for otherwise, it
and continuing existence of becomes a mere
the managed corporation. instrumentality of the
 Invalid - When there is fraud management company.
or bad faith  Note: Some powers may not
be delegated to the
managing corporation e.g.
LIMITATIONS: amendment of the AoI of
1. Ratification of the contract the managed corporation
 Both managing and managed
corporation: Majority
votes of quorum of BOD + THREE-FOLD DUTIES OF DIRECTORS AND
Majority votes of OFFICERS
respective shareholders 1. Diligence
representing the OCS 2. Obedience
 Interlocking interest: At 3. Loyalty
least one stockholder
represents interest in BUSINESS JUDGMENT RULE
both managing and managed - All corporate powers and
corporation and owns more prerogatives are vested
than 30% ownership of directly in the BoD.
either corporation Consequently, the rule has two
Additional requirement: consequences:
2/3 votes of OCS of a) The resolution,
managed corporation contracts, and
transactions of the
 Interlocking directors: Board, cannot be
Majority of BOD in both overturned or set aside
corporations are one and by the stockholders or
the same. members and not even by
Additional requirement: the courts under the
2/3 votes of OCS of principle that business
managed corporation of the corporation has
been left to the hands
2. Period of the contract of the Board; and
 GR: Must not exceed 5 b) Directors and duly
years authorized officers
 EXCEPTION: Contracts cannot be held
which relate to the personally liable for
exploration, development, acts or contracts done
exploitation or with the exercise of
utilization of natural their business
judgment.

EXCEPTIONS:
a) When the Corporation Code
expressly provides otherwise;
b) When the Directors or
officers acted with fraud,
gross negligence or in bad
faith; and
c) When Directors or officers
act against the corporation
in conflict of interest
situation.
DUTY OF DILIGENCE
Directors or trustee who:
 Willfully and knowingly vote
for or assent to patently
unlawful acts of the
corporation
 Guilty of gross negligence
 Guilty of bad faith in
directing the affairs of the
corporation
 Shall be liable solidarily for
all the damages resulting therefrom
suffered by the corporation, its
stockholders or members and other
persons.
DUTY OF OBEDIENCE
 The directors or trustees and
officers to be elected shall
perform the duties enjoined
on them by law and by the by-
laws of the corporation.
 They cannot exceed the powers
and authority limited by law,
AoI, or by-laws; otherwise,
they shall be liable.
SPI Technologies, Inc. vs. Victoria
K. Mapua : On the issue of the
solidary obligation of the corporate
officers impleaded vis-à-vis the
corporation for Mapua’s illegal
dismissal, "[i]t is hornbook
principle that personal liability of
corporate directors, trustees or
officers attaches only when: (a)
they assent to a patently unlawful
act of the corporation, or when they
are guilty of bad faith or gross
negligence in directing its affairs,
or when there is a conflict of
interest resulting in damages to the
corporation, its stockholders or
other persons; (b) they consent to
the issuance of watered down stocks
or when, having knowledge of such
issuance, do not forthwith file with
the corporate secretary their
written objection; (c) they agree to
hold themselves personally and
solidarily liable with the
corporation; or (d) they are made by
specific provision of law personally
answerable for their corporate
action.
DUTY OF LOYALTY
Sec. 31. Liability of directors,
trustees or officers. - Directors or
trustees who willfully and knowingly
vote for or assent to patently
unlawful acts of the corporation or
who are guilty of gross negligence
or bad faith in directing the affairs
of the corporation or acquire any
personal or pecuniary interest in
conflict with their duty as such
directors or trustees shall be
liable jointly and severally for all
damages resulting therefrom suffered
by the corporation, its stockholders
or members and other persons.
When a director, trustee or officer
attempts to acquire or acquires, in
violation of his duty, any interest
adverse to the corporation in
respect of any matter which has been
reposed in him in confidence, as to
which equity imposes a disability
upon him to deal in his own behalf,
he shall be liable as a trustee for
the corporation and must account for
the profits which otherwise would
have accrued to the corporation.
Instances of conflict of interest
a) Self-dealing director
b) Fixing compensation of
directors and officers
c) Interlocking directors
d) Seizing corporate
opportunity; Disloyalty
e) Using inside information
SELF-DEALING DIRECTOR
Sec. 32. Dealings of directors,
trustees or officers with
the corporation.- A contract of the
corporation with one or more of its
directors or trustees or officers is
voidable, at the option of such
corporation, unless all the
following conditions are present:
1. That the presence of such
director or trustee in the
board meeting in which the
 contract was approved was not d) In case of an officer, there
necessary to constitute a was previous authorization by
quorum for such meeting; the BOD/BOT.
2. That the vote of such
director or trustee was not Remedies to avoid annulment
necessary for the approval of
the contract; 1. Presence of the self-dealing
3. That the contract is fair and director is not necessary to
reasonable under the constitute quorum in the
circumstances; and meeting of the dealing of the
4. That in case of an officer, contract.
the contract has been 2. Vote of the self-dealing
previously authorized by the director is not necessary for
board of directors. the approval of the contract
3. Call for a stockholders or
Where any of the first two conditions members meeting. In that
set forth in the preceding paragraph meeting, self-dealing director
is absent, in the case of a contract must prepare full, fair,
with a director or trustee, such honest disclosure of the
contract may be ratified by the vote adverse interest. Then if
of the stockholders representing at ratified by 2/3 of OCS or
least two-thirds (2/3) of the members
outstanding capital stock or of at
least two-thirds (2/3) of the
members in a meeting called for the INTERLOCKING DIRECTORS
purpose: Provided, That full
disclosure of the adverse interest Sec. 33. Contracts between
of the directors or trustees corporations with
involved is made at such meeting: interlocking directors. - Except in
Provided, however, That the contract cases of fraud, and provided the
is fair and reasonable under the contract is fair and reasonable
circumstances. under the circumstances, a contract
between two or more corporations
Contracts of self-dealing director having interlocking directors shall
- Instance where a director of a not be invalidated on that ground
corporation personally enter alone: Provided, That if the
into contract with the same interest of the interlocking
corporation. director in one corporation is
- Contracts are VOIDABLE at the substantial and his interest in the
instance of the corporation other corporation or corporations is
because entered into with merely nominal, he shall be subject
undue influence. to the provisions of the preceding
section insofar as the latter
If these are present then there is a corporation or corporations are
valid contract concerned.
a) The presence of such Stockholdings exceeding twenty (20%)
director/trustee in the board percent of the outstanding capital
meeting approving the contract stock shall be considered
was not necessary to substantial for purposes of
constitute a quorum for such interlocking directors.
meeting; Contracts between corporations with
b) The vote of such interlocking directors
director/trustee in the board  Interlocking director - one
meeting approving the contract who sits on the Board of two
was not necessary for the or more corporations
approval of the contract; simultaneously.
c) The contract is fair and  Contract - Valid, provided
reasonable under the that there is no fraud and the
circumstances; contract is fair and
 reasonable under the
circumstances.
Rules on self-dealing directors is
applicable
 When interlocking director's
interest in one corporation is
SUBSTANTIAL and in the second
corporation NOMINAL.
 In this case, the INTERLOCKING
director is also a SELF-
DEALING director.
 Substantial: Stockholdings
exceed 20% of OCS
 Nominal: Stockholdings do not
exceed 20% of OCS (<=20)
DISLOYALTY
Sec. 34. Disloyalty of a director. -
Where a director, by virtue of his
office, acquires for himself a
business opportunity which should
belong to the corporation, thereby
obtaining profits to the prejudice
of such corporation, he must account
to the latter for all such profits
by refunding the same, unless his act
has been ratified by a vote of the
stockholders owning or representing
at least two-thirds (2/3) of the
outstanding capital stock. This
provision shall be applicable,
notwithstanding the fact that the
director risked his own funds in the
venture.
DOCTRINE OF CORPORATE OPPORTUNITY -
If there is presented to a
corporate officer or director a
business opportunity which:
a) Corporation is financially
able to undertake;
b) From its nature, is in line
with corporation’s business
and is of practically
advantage to it; and
c) One in which the corporation
has an interest or a
reasonable expectancy.
When doctrine not applicable
1. Director engaged in a
distinct enterprise of the
same general class of
business in good faith
2. Opportunity is one which is
not essential to the
corporation's business
3. Director or officer does not
exploit opportunity by
employment of company's
resources
4. If the corporation is unable
to acquire the opportunity
LIABILITY FOR WATERED STOCKS
Sec. 65. Liability of directors for
watered stocks. - Any director or
officer of a corporation consenting
to the issuance of stocks for a
consideration less than its par or
issued value or for a consideration
in any form other than cash, valued
in excess of its fair value, or who,
having knowledge thereof, does not
forthwith express his objection in
writing and file the same with the
corporate secretary, shall be
solidarily, liable with the
stockholder concerned to the
corporation and its creditors for
the difference between the fair
value received at the time of
issuance of the stock and the par or
issued value of the same.
 WATERED STOCKS - Shares issued
and fully-paid when in fact the
consideration agreed to and
accepted by the directors of
the corporation was something
known to be much less than the
par value or issued value of
the shares.
 The issuance of the
corporation of watered stock
is not merely ultra vires but
is illegal per se
Watered stock includes:
1. Bonus share: Issued without
consideration
2. Discount share Issued as fully
paid when the corporation has
received a lesser sum of money
than its par or issued value
3. Issued for a consideration
other than actual cash, such
as property or services, the
fair valuation of which is less
than the par or issued value;
or
4. Issued as stock dividend when
there are no sufficient
retained earnings or surplus
Persons liable
 1. Consenting director or officer
 Liability is solidary
with the participating
stockholder
2. Subscriber
 The holder of the
watered stock shall be
liable to the
corporation and its
creditors for the
difference between the
fair values received at
the time of issuance of
the stock and the par or
issued value of the
same.
 The holder of watered
stock cannot escape
liability by
transferring the same to
an irresponsible person
or to a bona fide
purchaser.
DERIVATIVE SUIT
Derivative suit - A derivative suit
is an action filed by stockholders
to enforce a corporate action. It is
an exception to the general rule that
the corporation's power to sue is
exercised only by the board of
directors or trustees.
 An action brought by minority
shareholders in the name of
the corporation to redress
wrongs committed against the
corporation, for which the
directors refuse to sue. It
is a remedy designed by
equity and has been the
principal defense of the
minority shareholders against
abuses by the majority.
 Those brought by one or more
stockholders/members in the
name and on behalf of the
corporation to redress wrongs
committed against it, or
protect/vindicate corporate
rights whenever the officials
of the corporation refuse to
sue, or the ones to be sued
has control of the
corporation.
Requisites
(1) The person filing the
suit must be a stockholder or
member at the time the acts
or transactions subject of
the action occurred and the
time the action was filed
(2) He must have exerted
all reasonable efforts, and
alleges the same with
particularity in the
complaint, to exhaust all
remedies available under the
articles of incorporation,
by-laws, laws or rules
governing the corporation or
partnership to obtain the
relief he desires
(3) No appraisal rights are
available for the act or acts
complained of; and
(4) The suit is not a
nuisance or harassment suit.
Who may file?
1. Stockholder, if private
injury
2. Third party, in cases of
unauthorized contracts
3. Corporation in a direct or
derivative suit
Ang vs. Ang : not a derivative suit.
Applying the requisites, the court
find that the Complaint is not a
derivative suit. The Complaint
failed to show how the acts of Rachel
and Roberto resulted in any
detriment to SMBI. The CA-Cebu
correctly concluded that the loan
was not a corporate obligation, but
a personal debt of the Ang brothers
and their spouses. The check was
issued to “Juanito Ang and/or
Anecita Ang and/or Roberto Ang
and/or Rachel Ang” and not SMBI. The
proceeds of the loan were used for
payment of the obligations of the
other corporations owned by the Angs
as well as the purchase of real
properties for the Ang brothers.
SMBI was never a party to the
Settlement Agreement or the Mortgage.
It was never named as a co-debtor or
guarantor of the loan. Both
instruments were executed by Juanito
and Anecita in their personal
capacity, and not in their capacity
as directors or officers of SMBI.
Thus, SMBI is under no legal
obligation to satisfy the obligation.
Villamor Jr. vs. Umali : not a
derivative suit. Respondent
Balmores' action in the trial court
failed to satisfy all the requisites
of a derivative suit. Respondent
Balmores failed to exhaust all
available remedies to obtain the
reliefs he prayed for. Though he
tried to communicate with PPC's
directors about the checks in
Villamor's possession before he
filed an action with the trial court,
respondent Balmores was not able to
show that this comprised -all the
remedies available under the
articles of incorporation, bylaws,
laws, or rules governing PPC.
BY-LAWS
It is relatively permanent and
continuing rules of action adopted by
the corporation for its own government
and that of the individuals composing it
and those having the direction,
management and control of its affairs,
in whole or in part, in the management
and control of its affairs and
activities. (China Banking Corp. vs. CA)
 The function of the by-laws is to
define rights and duties of
corporate officers and directors or
trustees, and of stockholders or
members towards the corporation and
among themselves with reference to
the management of corporate affairs
and to regulate transactions of the
business of the corporation in a
particular way.
KINDS OF BY-LAWS
(a) PRE-INCORPORATION BY-LAWS
 By-laws may be adopted and
filed prior to incorporation,
and in such case, such by-
laws shall be approved and
signed by all the
incorporators and submitted
to the SEC, together with the
Articles of Incorporation.
(b) POST-INCORPORATION BY-LAWS
 Every corporation formed
under the Code must, within
one (1) month from the
receipt of the official
notice of issuance of
certificate of incorporation
by SEC adopt a code of by-
laws for its government not
inconsistent with the Code.
REQUISITES OF A VALID BY-LAWS
1. It must be consistent with the
Corporation Code, other pertinent
laws and regulation.
 Any provision that is
contrary to law cannot attain
validity through acquiescence
or on basis of long practice,
nor give rise to any vested
right. (Grace Christian High
school vs. CA)
2. It must be consistent with the
Articles of Incorporation.
 In case of conflict, the
articles prevails.
 By-laws cannot enlarge the
rights and powers conferred
by the charter nor restrict
the duties and liabilities
imposed thereby, and in case
it attempts to do so, the
charter will prevail.
3. It must be reasonable and not
arbitrary or oppressive.
4. It must not disturb vested rights,
impair contract or property rights of
stockholders or members or create
obligations unknown to law.
5. It must be general and uniform in
their operations and not directed
against particular individuals.
CONTENTS OF BY-LAWS (Section 47)
1) Time, place and manner of calling
and conducting regular or special
meetings of the directors or
trustees
2) Time and manner of calling and
conducting regular and special
meetings of the stockholders or
members
3) The required quorum in meetings of
stockholders or members and the
manner of voting therein
4) Form of proxies of stockholders
and members and the manner of
voting them
5) Qualifications, duties and
compensation of directors or
trustees, officers and employees
6) Time for holding the annual
election of the directors of
trustees and the mode or manner of
giving notice thereof
7) Manner of election or appointment
and the term of office of all
officers other than directors or
trustees
8) Penalties for violation of the by-
laws
9) In case of stock corporations, the
manner of issuing stock
certificates
10) Other matters as may be necessary
for the proper or convenient
transaction of its corporate
business and affairs
ADOPTION OF BY-LAWS
  When to file: within one (1) month
from the receipt of the official
notice of issuance of certificate of
incorporation by SEC
 Non-filing within the
prescribed period is a ground
to forfeit franchise and will
not result in automatic
dissolution. (Loyola Grand
Villas vs. CA)
 A corporation which has failed to
file its by-laws does not ipso facto
lose its powers as such and may be
considered a de facto corporation
whose right to exercise corporate
powers may not be inquired into
collaterally in any private suit to
which such corporations may be a
party. (Sawadjaan vs CA)
 Requirements for adoption
(a) Approved by stockholders
constituting at least majority
of the outstanding capital
stock, or at least majority of
the members in non-stock
corporations
(b) Signed by the stockholders or
members voting for them
(c) Certified to by majority of the
directors or trustees
(d) Countersigned by the corporate
secretary
(e) Filed with SEC attached to the
Articles of Incorporation
 The by-laws shall be kept in the
principal office of the
corporation, subject to the
inspection of the stockholders or
members during office hours.
(Section 46, Corporation Code)
 Certificate of the appropriate
government agency that the by-
laws or amendments thereto are in
accordance with law is required
in:
1. Banks and banking
institutions
2. Building and loan
associations
3. Trust company
4. Insurance company
5. Public utility
6. Educational institution
7. Other special corporations
governed by special laws
(b) The Board as delegated by 2/3 of
outstanding capital stock or
members in a non-stock
corporation
 Any power delegated to the Board to
amend, repeal or adopt new by-laws
shall be considered as revoked
whenever stockholders owning
majority of the outstanding capital
stock or members shall so vote at a
regular or special meeting. (Sec.48)
 The right to amend the by-laws lies
in the discretion of the corporation,
this being in the exercise of
management prerogative or business
judgment. However, this right,
extensive as it may be, cannot impair
the obligations of existing contracts
or rights, such as right to security
of tenure as a regular employee
guaranteed by the Labor Code.
(Salafranca vs. Philamlife)
BINDING EFFECT OF PROVISIONS OF BY-LAWS
(a) As to the corporation –binding not
only upon the corporation but also on
its stockholders, members and those
having direction, management and
control of its affairs
(b) As to third persons –not binding
unless there is actual knowledge.
 Third persons are not bound to
investigate the contents of by-
laws because they are not bound
to know it which are merely
provisions for the government
of a corporation and notice to
them will not be presumed.
(China Banking Corp. vs. CA)
 Since by-laws operate merely as
internal rules among the
stockholders, they cannot
effect or prejudice third
persons who deal with the
corporation, unless they have
knowledge of the same.
(PMI Colleges vs. Galvan)
NOTE: The amended or new by-laws
shall only be effective upon the
issuance by SEC of a certification that
the same are not inconsistent with the
Code. (Section 48, Corporation Code)

AMENDMENTS TO BY-LAWS
May be made by: ARTICLES OF
BY-LAWS
(a) Majority vote by the Board and INCORPORATION
majority of the outstanding Merely rules and Charter or
capital stock or members at a regulations fundamental law
meeting called for that purpose
 adopted by the of the Filing of the
corporation corporation Condition same is a
Usually after the Executed before subsequent to condition
incorporation by the incorporation corporate precedent to
the stockholders by the existence corporate
or members incorporators existence

MEETINGS
BOARD MEETING STOCKHOLDERS MEETING
(a) Time and date under the by-
(a) Time and date under the by- laws, or
Regular laws, or (b) Annually –on any date of
(b) Monthly April of every year as
WHEN
determined by the board

Special at any time deemed necessary at any time deemed necessary

Place stated in the by-laws

Place stated in the by-laws
 Must be in the city or
 Can be even beyond the bounds
Regular municipality where the
of the state where the
WHERE or principal office is located
corporation exists, except
special  If practicable, in the
that meetings of trustees
principal office of the
cannot be conducted abroad
corporation
(a) Form prescribed by the by-
(a) Form prescribed by the by-
FORM OF Regular laws
laws
NOTICE (b) If none: in writing
(b) If none: in writing
Special Always in writing
(a) Time prescribed under the
by-laws
Regular
(b) If none: at least 2 weeks
WHEN TO (a) Time prescribed under the
prior to the meeting
GIVE by-laws
(a) Time prescribed under the
NOTICE (b) If none: in writing
by-laws
Special
(b) If none: at least 1 week
prior to the meeting
Regular (a) Prescribed by the by-laws
(a) Prescribed by the by-laws
QUORUM or (b) If none: majority of OCS
(b) If none: majority of BOD
Special (c) 2/3 OCS, if required
(a) By-laws
(b) President/Chairman
Regular
PRESIDING (a) By-laws (c) Petitioning Stockholder if
or
OFFICER (b) President there is no person
special
authorized to call a
meeting
Regular
It may either be
ATTENDANCE or Must be personally present
personal or by proxy
special
Regular GR: Majority of those present (a) By-laws
VOTE or EXCEPT: if ABISIMID —majority of (b) Majority of OCS
Special all members of the Board (c) 2/3 OCS if required
1. Meeting of the directors or
trustees duly assembled as a
board, i.e. as a body 1. Held at a proper place
2. Presence of the required 2. Held at the stated date and
Requisites quorum time, or reasonable time
Regular
for a 3. Decision of the majority of thereafter
or
valid the quorum, or majority of 3. Called by the proper person
special
meeting the entire board in certain 4. There must be previous
cases notice
4. Meeting at the place, time 5. There must be a quorum
and manner provided in the
by-laws

EFFECT OF FAILURE TO COMPLY WITH REQUISITES

 All proceedings had and any business transacted at any meeting of stockholders
shall be valid even if the meeting be improperly held or called if: (a) the
proceedings and business transactions had are not ultra vires, and (b) that all
 the stockholders are present or duly represented in the meeting. Otherwise, any
action taken at the meeting shall not be valid.

 If the meeting is held at an unauthorized place or without proper notice and not
all the stockholders or members are present, those who have a right to complain
may take steps to set aside any action taken at such meetings even though majority
of the stockholders were present in the absence of waiver, estoppel or
ratification.
WHEN STOCKHOLDERS’ MEETING IS MANDATORY
Lopez Realty vs. Spouses Tanjanco (2014)
1. Election of members of the board The Court agrees with the petitioners
2. Removal of directors or trustees that the August 17, 1981 Board Resolution did
3. Filling of vacancies not give Arturo the authority to act as LRI's
4. Ratification of contract with a self- representative in the subject sale, as the
meeting of the board of directors where such
dealing director was passed was conducted without giving any
5. Extension or reduction of the notice to Asuncion.
corporate term
6. Increase or decrease of the capital A meeting of the board of directors is
legally infirm if there is failure to comply
stock with the requirements or formalities of the
7. Creation or increase of bonded law or the corporation's by laws and any
indebtedness action taken on such meeting may be
8. Sale or disposition of all or challenged as a consequence:
The general rule is that a
substantially all of the corporate corporation, through its board of
assets directors, should act in the manner and
9. Investment of corporate funds in within the formalities, if any,
another corporation prescribed by its charter or by the
general law. Thus, directors must act as
10. Declaration of stock dividends a body in a meeting called pursuant to
11. Entering into a management contract the law or the corporation's bylaws,
with another corporation otherwise, any action taken therein may
12. Amendment to, repeal of or adoption be questioned by any objecting director
or shareholder.
of new by-laws
13. Fixing of the issued price of no par However, the actions taken in such a
value shares meeting by the directors or trustees may
14. Plan of merger or consolidation be ratified expressly or impliedly.
15. Amendment of AOI of close corporation In the present case, the ratification was
16. Voluntary dissolution of the expressed through the July 30, 1982 Board
corporation, whether or not there are Resolution.
creditors affected
sent by registered mail or
17. Dissolution by shortening corporate
personal delivery.
term

REQUISITES OF NOTICE (Section 53)

1. Issued by one who has authority to
issue it
2. Must be in writing
3. Must state the time, date, and place  RE: Board Meeting through
of the meeting Teleconference or Video Conference
- Unless otherwise provided in is allowed. (SEC MC No.15, Nov.20,2011)
the by-laws  The corporate secretary must
4. Must state the business to be include in the notice of meeting
transacted thereat an inquiry if the director or
5. Sent at least 1day prior to the trustee will attend physically or
scheduled meeting through video conferencing.
- Unless a different period is  A director must choose and give
required by the by-laws notice that he wants
6. Must comply with any other teleconferencing.
requirements prescribed by the law  The proceedings must be recorded
or the by-laws: and the recording shall be stored
(a) Notice of meeting for the approval by the corporate secretary.
of merger or consolidation shall
state the purpose of the meeting
 In the Philippines, teleconferencing
and shall include a copy or summary
of the plan of merger or
and videoconferencing of members of
consolidation, as the case may be. the board is a reality in light of
(b) In notice of meetings for RA8792. The SEC issued Memorandum
voluntary dissolution, it shall be Circular No.15 providing the
made by publication, in addition guidelines to be complied with
to written notice which shall be
 related to such conferences.
(Expertravel & Tours vs. CA, 2005)
s

QUORUM

Tan vs. Sycip (2006)

For stock corporations, the quorum referred

to in Sec.52 is based on the number of the
outstanding voting stocks. For non-stock, only
those who are actual, living members with
voting rights shall be counted in determining
the existence of quorum during member’s
meeting. Dead members shall not be counted.
VOTING
One of the rights of a stockholder is
the right to participate in the control
and management of the corporation that
is exercised through his vote.
 The right to vote is a right
inherent in and incidental to the
ownership of corporate stock and
as such is a property right.
(Castillo vs. Balinghasay, 2004)
 Although by their very nature common
shares have a right to vote, such
right does not guarantee that the vote
of a stockholder would prevail since
in a corporate setting, the rule of
the majority prevails. (COCOFED vs.
Republic, 2010)
MANNER OF VOTING
1) Personal
2) Through a representative
a. Proxy
b. Voting Trust Agreement
c. By executors, administrators,
receivers or other legal
representatives duly
appointed by the court.
WHO MAY EXERCISE
 Only stock actually issued and
outstanding may be voted.
- Neither the stockholders nor the
corporation can vote or
represent shares that have never
been passed to the ownership of
stockholders, or having so
passed, have again been
purchased by the corporation.
(Tan vs. Sycip, 2006)
 One who does not appear to be a
stockholder upon the books of the
corporation is not eligible to
vote a stock although he may be
entitled to the legal title to the
stock voted.
 Holders of stock declared delinquent
by the Board for unpaid subscriptions
are not entitled to vote or to
representation at any stockholder’s
meeting, but they may act as proxies
for stockholders whose shares are not
delinquent.
 Owners of shares not fully paid are
entitled to vote provided not
delinquent.
RIGHT TO VOTE
 No share may be deprived of voting
rights except those classified and
issued as preferred or redeemable
shares. (Sec.6, Corporation Code)
 There must always be a class or
series of shares which have
complete voting rights.
NON-VOTING SHARES
GR: not entitled to vote
EXCEPTIONS: (Sec.6, Corporation Code)
1) Amendment of the articles
2) Adoption and amendment of by-laws
3) Increase or decrease of capital stock
4) Sale, lease or other disposition of
all or substantially all of the
corporate property
5) Incur, create or increase bonded
indebtedness
6) Merger or consolidation
7) Investment of corporate funds in
another corporation or business
8) Dissolution of the corporation
TREASURY SHARES
Treasury shares shall have no voting
rights as long as such shares remain in
the treasury. (Sec.57, Corporation Code)
The only right of the corporation as to
treasury shares is to reissue the same for
valuable consideration.
- In case of sale or reissue,
treasury shares regain whatever
voting rights and dividends to
which they were originally
entitled.
PLEDGORS, MORTGAGORS and ADMINISTRATORS
GR: Pledgor and mortgagor remains the
owner of the stock pledged, thus they
have the right to vote
EXCEPT: The pledgee or mortgagee shall
have the right to attend and vote at
meetings of stockholders if expressly
given by the pledgor or mortgagor of
such rights in writing which is
recorded on the appropriate corporate
books. (Sec.55, Corporation Code)
 If the pledgor or mortgagor is
disqualified to vote, the
disqualification extends as well
to the pledgee or mortgagee.
Executors, administrators, receivers
and other legal representatives duly
appointed by the court may attend and
vote in behalf of the stockholder
without need of any written proxy.
 Proxy agreement is usually
Tan vs. Sycip (2006)
In stock corporations, shareholders may revocable, i.e. the stockholder can
generally transfer their shares. Thus, on always issue another proxy. The later
the death of a shareholder, the executor or proxy cancels the earlier one.
administrator duly appointed by the court However, if the proxy is coupled with
is vested with the legal title to the stock an interest, i.e. the proxy holder
and entitled to vote it. Until a settlement paid valuable consideration for the
and division of the estate is effected, the proxy form, then it is irrevocable.
stocks of the decedent are held by the
administrator or executor.
 PROXY AS A DOCUMENT
Membership in and all rights arising
A proxy form is the document that
from a non-stock corporations are personal
and non-transferrable, unless the articles embodies the proxy agreement.
of incorporation or the by-laws provides
otherwise. Thus, the determination of  Form and execution
whether or not dead members are entitled to 1. In writing and signed by the
exercise their voting rights through their stockholder or member
executor or administrator depends on those 2. It shall show an intention to
articled of incorporation or by-laws. empower the person to whom it is
given to act as agent in voting
the stock.
JOINT OWNERS OF STOCKS 3. By-laws may prescribe form
GR: consent of all the co-owners shall necessary for a valid proxy.
be necessary to vote the same 4. Filed before the scheduled
EXCEPT: (Sec.56, Corporation Code) meeting with the corporate
(a) When there is a written proxy, secretary
signed by all the co-owners,
authorizing one or some of them
or any other person to vote such The following deficiencies do NOT
share invalidate a proxy:
(b) When the shares are owned in an 1. One person acting as proxy for
“and/or” capacity by the holders different stockholders
thereof, any one of the joint 2. Not notarized, unless the by-laws
owners can vote said shares or so require
appoint a proxy therefor. 3. No documentary stamp taxes, unless
the by-laws so require
 When a certificate of stock is issued 4. Unattested by witness, unless the
with the conjunctive “and/or” placed by-laws so require
between the names of the parties who 5. Undated
are co-owners of said shares, it is 6. Authority is written in a
understood that the shares covered by different ink as that of the
the certificate may be transferred signature of the stockholder
upon the endorsement of both or either
of the stockholders and the right to
vote the shares may also be exercised  PROXY AS A PERSON
by both or any of them. (SEC Opinion, 9 May 1995) A proxy holder is the person or
agent who represents the principal
stockholder.
PROXIES
Proxy may either mean (a) a The proxy system allows a
relationship, (b) a legal document, or stockholder to send his
(c) a person. representative or agent to attend and
vote in a stockholder’s meeting. This
 PROXY AS A RELATIONSHIP is particularly important in large
A proxy agreement is a special type corporations were it would be
of agency relationship. The principal difficult to obtain a quorum if
is the stockholder and the agent is personal attendance by the
the proxy holder. The agency rules on stockholder is required.
the extent of the authority of the
agent and when the agent binds, or
does not bind the principal applies. NOTE: The appointment of proxy is purely
personal and to be valid, a proxy to vote
The proxy agreement may limit the stock must be given by the person who is
matters that the proxy holder may vote the legal owner of the stock entitled to
on. In the absence of any restriction, vote at the time it is voted.
the proxy is unrestricted.
KINDS OF PROXY
(a) General Proxy
-confers a general discretionary
power of attorney to attend and vote
at an annual meeting with all the
powers of the undersigned would
possess of personally present, to
vote for directors and all ordinary
matters that may properly come before
a regular meeting.
 Limitation: no authority to vote for
a fundamental change in the corporate
charter or other unusual transactions
such as merger or consolidation.
(b) Limited Proxy
-it limits the power conferred. It
may restrict the authority to vote to
specified matters only and may direct
the manner in which the vote shall be
cast.
(c) Specific Proxy
-it is stated that the proxy is for
a certain meeting.
(d) Continuing Proxy
-authorizes the holder thereof to
vote for the stockholder at any
meeting for an indefinite period of
time.
 Limitation: No proxy shall be
valid and effective for a period
longer than 5years at any one
time. (Sec.58, Corporation Code)
DENIAL OF RIGHT TO VOTE BY PROXY
 In stock corporations: provision in
the by-laws prohibiting the use of
proxy by stockholders is contrary to
law and hence, null and void.
 In non-stock corporations: it can be
denied to members in the articles or
the by-laws, provided that the denial
is not discriminatory.
RULE WHEN GIVEN TO TWO OR MORE PERSONS
1. One proxy given to two or more
(a) All must agree upon the vote
(b) If they cannot agree, rule of
the majority applies.
2. Several proxies for one stockholder
(a) When proxies are dated
- Latest proxy revokes the
earlier proxy
(b) Where proxies are undated
- If mailed: the one
having the latest time
of day of postmark
- If submitted in person:
one presented latest
VOTING TRUST AGREEMENT
GSIS vs. CA (2009)
 Proxy solicitation involves the
securing and submission of proxies,
while proxy validation concerns the
validation of such secured and submitted
proxies.
 The SEC’s power to pass upon the
validity of proxies in relation to
election controversies has effectively
been withdrawn, ties as it was to its
abrogated quasi-judicial powers and has
been transferred to the RTC special
commercial courts pursuant to the terms
of Section 5.2 of the Securities
Regulation Code.
 Although an intra-corporate controversy
may animate a disgruntled shareholder to
complain to SEC a corporation’s
violation of SEC rules and regulations,
but that motive alone should not be
sufficient to deprive SEC of its
investigatory and regulatory powers,
especially so since such powers are
exercisable on a motu propio basis.
SEC vs. CA (2014)
The Court explained that the power
of the SEC to regulate proxies remains
in place in instances when stockholders
vote on matters other than the election
of directors. The test is whether the
controversy relates to such election.
All matters affecting the manner and
conduct of the election of directors are
properly cognizable by the regular
courts. Otherwise, these matters may be
brought before the SEC for resolution
based on the regulatory powers it
exercises over corporations,
partnerships and associations.
Validation of proxies serves a
number of purposes, including
determining the existence of a quorum
and ascertaining the authenticity of
proxies to be used for the election of
directors at the stockholders’ meeting.
Section 2, Rule 6, of the Interim Rules
of Procedure Governing Intra-Corporate
Disputes provides that an election
contest covers any controversy or
dispute involving the validation of
proxies, in general. Thus, it can only
refer to all the beneficial purposes
that validation of proxies can bring
about when made in connection with a
forthcoming election of directors.
Thus, there is no point in making
distinctions between who has
jurisdiction before and who has
jurisdiction after the election of
directors, as all controversies related
thereto – whether before, during or
after – shall be passed upon by regular
courts as provided by law.
 Under the voting trust arrangement, 2. It must be in writing and duly
a stockholder of a corporation parts notarized.
with the naked or legal title, including 3. In writing and duly notarized.
the power to vote, of the shares and only 4. It shall not be entered to circumvent
retains the beneficial ownership of the laws against monopolies and illegal
stock. combinations in restraint of trade or
for purposes of fraud.
 A voting trust agreement results 5. A certified copy of such agreement
in the separation of the voting shall be filed with the corporation
rights of a stockholder from his and with SEC, otherwise said
other rights such as the right to agreement is ineffective and
receive dividends, the right to unenforceable.
inspect the books of the 6. Unless expressly renewed, all rights
corporation, the right to sell granted in a VTA shall automatically
certain interests in the assets of expire at the end of the agreed
the corporation and other rights period, and the voting trust
to which a stockholder may be certificates as well as the
entitled until the liquidation of certificates of stock in the name of
the corporation. (Lee vs. CA, 1992) the trustees shall thereby be deemed
cancelled and new certificates of
PROCEDURE: stock shall be reissued in the name
1. VTA is executed of the transferor.
2. Corporate secretary cancels the
certificate of stock covered by the VOTING TRUST
PROXY
VTA and issues a new one in the name AGREEMENT
of the trustee stating that they Trustee acquires Proxy has no legal
are issued pursuant to said legal title to the title to the shares
agreement. shares of the principal
3. The transfer through VTA shall be Generally
reflected in the stock and transfer irrevocable for a Generally revocable
definite and except when coupled
book with the trustee as the new
limited period of with interest
registered owner of the shares. time
4. The trustee shall execute and Can act in all
deliver to the transferor a voting Can only act at a
meetings during the
trust certificate, which shall be specified meeting
lifetime of VTA
transferrable in the same manner Can vote and can
and with the same effect as exercise all the
certificate of stock. rights of the Can vote only in
transferring the absence of the
stockholders even principal
when the latter is
VOTING TRUST CERTIFICATE
present
The voting trustee executes and Usually charter in
delivers to the stockholder VTC to show VTA must not exceed
duration although
that the latter are, in reality, the 5years at any one
it cannot exceed
owner of the shares held by the voting time
5years at one time.
trustee. There is transfer No transfer of
of share share
 A subsequent purchase of stock with Filed with SEC to File it only with
full knowledge of the agreement takes be effective and the corporate
enforceable secretary
it impressed with the trust and is
Need not be
bound thereby. Must be notarized
notarized
- A VTA not compliant with the Votes as owner
statutory requirements does not Proxy votes as
rather than mere
affect the right of the agent
agent
subsequent transferee to whom Has the right to
No right to inspect
the stock has been transferred. inspection of
corporate books.
corporate books.

LIMITATIONS ON VTA
1. It shall be good for a period not
exceeding 5years at any one time. CAPITAL STRUCTURE: STOCKS
 If required by a loan agreement,
the period may go beyond 5years A. Authorized Capital Stock (ACS)
but the trust shall automatically
This refers to the maximum
cease upon full payment of the
number of shares that a
loan.
corporation is legally
permitted to issue, as
 specified in its articles of 1. Authorized Capital Stock
incorporation.
No minimum authorized capital
B. Subscribed Capital Stock (SCS) stock is required for stock
corporations incorporated under the
It is the amount of capital Corporation Code. (Sec. 12)
stock subscribed, whether fully
paid or not. 2. Subscribed Capital Stock

C. Paid-Up Capital At least 25% of the Authorized

Capital Stock as stated in the
Also known as paid in articles of incorporation must be
capital, this represents the subscribed at the time of
amount of money that is actually incorporation.
received by the corporation from
its investors or shareholders in a. With Par value - 25% is
exchange for shares of stocks. It based on the amount of the
is that portion of the authorized ACS
capital stock which has been both b. No Par Value – based on the
subscribed and paid. entire number of authorize
shares
D. Outstanding Capital Stock (OCS) c. Mixed – follow rules above
This pertains to the total
3. Paid-up Capital Stock
shares of stock issued under
binding subscription agreements At least 25% of the total
to subscribers or stockholders, subscription must be paid upon
whether or not fully or partially subscription and in no case shall
paid, except treasury shares. it be less than five thousand
pesos.
E. Legal Capital
When to pay balance: on
It is that amount of a
date or dates fixed in the
corporation’s equity that cannot legally
contract of subscription without
be allowed to leave the business; it
need of call, or in the absence
cannot be distributed through a dividend
of fixed date or dates, upon call
or any other means. It is the par value
for payment by the board of
of common stock and the stated value of
directors.
the preferred stock that a corporation
has sold or otherwise issued to
investors.
Citizenship Requirement of a
Corporation

- There are industries which

require a certain percentage
Trust Fund Doctrine
in the capital to be owned and
- This term describes the controlled by Filipinos
principle that a corporation - Under the 1991 Foreign
must pay all its debts before Investment Act (FIA), there
it can distribute assets to are two negative lists also
stockholders (Black’s Law known as the “Foreign
Dictionary) Investment Negative List”
- The capital stock, property which defines the foreign
and other assets of a investments which are limited
corporation are regarded as or restricted by the
equity in trust for the constitution and specific
payment of corporate laws.
creditors, who are preferred
Summary of Percentages
in the distribution of
corporate assets. (Turner v 1. 100% Filipino owned
Lorenzo Shipping, G.R. No. a. Mass Media
157479, November 24, 2010) b. Rural Banks
c. Rice and Corn Industry
Minimum Requirements for Incorporation
 d. Security, Watchman, and
Detective Agency
2. 70% Filipino owned
a. Advertising Industry
b. Banks other than rural banks
and new banks established by
consolidation of branches or
agencies of foreign banks in
the Philippines
c. Private Development Banks
d. Savings and Loans
Associations
3. 60% Filipino owned
a. Financing Companies
b. Fishing and Business Activity
Relating to fishing industry
c. Exploration, Development, and
Utilization of Natural
Resources
d. Owners of Lands
e. Operation of Public Utility
f. Educational Institutions
Other than Those Established
by Religious Groups
g. Any business Reserved by
Congress
4. Majority Owned by Filipinos
a. Investment House
Tests in Determining the Nationality or
Citizenship of the Corporation (Gamboa
v. Tevez)
A) Voting Control Test
par % Vot Gamboa v. Tevez
val (AC ing
ue S) Rig
hts
Ruling: When the constitution or other
relevant law speaks of control, it means
the power to elect directors. In the case,
the preferred shareholders do not have
such power. Only the owners of the common
shares exercise the exclusive right to
elect directors.
Ruling on the MR: PLDT alleges that the
preferred shares are also voting shares
by referring to the Corporation Code
(right to vote ABISIMID). The SC held
that this is not the kind of control that
the constitution requires. Voting
control means right to vote directors.
 The 60%-40% requirement must be
observed for each class.
 Common shares: 60% - 40%
 Preferred Voting: 60 % -
40%
 Preferred Non-Voting: 60%
- %
B) Beneficial Ownership Test
 Aside from voting control,
it must also be established
that at least 60% of all
benefits must inure to
Filipinos.
Q: How manifested?
1) Dividend rights

Common 5.0 22% Vot FPIC (Bermuda): 2) Market value

0 ing 35%

Docomo (Japan):
15% Dividends Market Value

PTIC (Phil): Common 69/70th 2000

14%
Preferred 1/70th 10
 Acquired
by FPIC
(100% of  The SC did not immediately revoke
the the franchise of PLDT despite
PTIC) such factual findings. Instead,
Thus, FPIC is it ordered that the PLDT should
direct and take necessary steps to comply
indirect owner. with the decision.

Prefer 10. 78% Non Phil: 99% Case: Express Investments v. Bayantel
red 00 - Facts: Bayantel was undergoing judicial
Vot corporate rehabilitation. Because of
ing huge debt, it entered into an agreement
with a group of foreign banks in order
to pay off its liabilities. In a debt
for equity swap, the arrangement is as shall be considered as water-
follows: 77% of the OCS common voting down shares
shares shall be transferred to foreign
banks (dacion en pago). 2. No- Par Shares
- These are shares where the
Ruling: The SC nullified the agreement. value of the shares is not
Corporate Layering fixed in the AOI but fixed by
the Board whose decision
 A device whereby the should be concurred by at
ownership of the CS of a least 2/3 of the OCS
group of companies is - Note however that the
apportioned or allocated statutory minimum value of
when in truth, the owners of these shares is five pesos
said companies are one and - Benefits
the same. The ownership is a. the corporation is
layered thru various afforded flexibility in
companies. pricing these shares
especially when it needs
 This is not illegal per se.
additional funds
In fact, it is a useful
b. once no par shares are
device for some lawful
issued, they are
purposes including tax
considered as fully paid,
avoidance.
hence, subscriber cannot
 What makes it unlawful is be declared as delinquent
when corporate layering is - There are certain entities
used to circumvent which are not allowed to have
constitutional requirements no-par shares such as those
as to citizenship. The regulated by law or imbued
mechanism or device becomes with public interest, i.e.
NULL AND VOID. (Narra Nickel banks, quasi-banks, trusts,
v Redmont Consolidated) educational corporations,
insurance corporations – these
are allowed only to have par
Classifications of Shares shares for purposes of
transparency and monitoring
1. Par v No Par -
2. Common v Preferred 3. Common Shares
3. Voting v Non-voting - These are shares which do not
enjoy special rights but
Note: In stating the Authorized entitled to pro-rata
Capital Stock of the corporation, it distribution of profits.
must specify each class of shares:

e.g. Total: 1M shares

Preferred Shares (then state the 4. Preferred shares
privilege) – 300,000 - These are shares which enjoy
Common Shares – 700, 000 or are granted special rights
and privileges as to
dividends, voting rights or
1. Par Shares
assets
- These are shares with fixed
- The rights and privileges
nominal value stated in the
pertaining to these shares
articles of incorporation
must be expressly stated in
(AOI)
the AOI otherwise, the
- The amount stated in the AOI
doctrine of equality of shares
is the minimum value by which
shall apply
the corporation can sell its
shares; remember that the
Trust Fund Doctrine is based a. As to Dividends
on the par value of the shares - Holders of these preferred
- Corporation is prohibited from shares are first to be paid of
disposing its shares below par the dividends at the rate
value, otherwise, the shares specified in the AOI.

b. As to Voting Rights
*Founders Shares – these are
given to incorporators or initial
subscribers. Holders of these
shares enjoy the exclusive right
to vote and be voted upon for a
period not exceeding five years
from the establishment of the
corporation. After five years,
the power is deemed to have lapsed
ipso facto
- the privileges attached to the
founder’s shares must have been
expressly stated in the AOI .
otherwise, the term “founder’s
shares” alone will not be
sufficient for the holder to
exercise the rights mentioned
above
c. As to Assets
- upon dissolution and winding-up,
the holder of these shares shall be
paid next after corporate creditors
* Redeemable Shares
- special class of preferred
shares; these are interest bearing
shares when classified as such in
the AOI
- shares which are redeemable at
a fixed date or at the option of the
issuing corporation, or stockholder
or both at a certain redemption
price.
Redemption: It is the repurchase of
stock by a corporation which issued the
stock, whether or not the acquired stock
is cancelled, retired or held in the
treasury.
Effect of Redemption – Reacquired
redeemable shares are considered retired
and no longer issuable except is
provided otherwise by the AOI.
IIlustration:
1M shares
50,000 redeemable shares, par value at
P100/share
Maturity period: 5 years at 10%/annum
coupon rate or convertible to common
shares
X bought all the shares in 2014 for 5M
- At maturity period,
corporation may choose either
to redeem at 10% coupon rate
or convert the shares into
common shares making X a
shareholder of the corporation
Limitations:
1. Conversion to common shares of
the redeemable shares must be
expressly stated in the AOI.
2. Redeemable shares may be redeemed
regardless of the existence of
unrestricted retained earnings
provided that the corporation
has. After such redemption,
sufficient assets in its books to
cover debts and liabilities.
3. Corporation must set and maintain
a sinking fund to cover the
redemption price.
*Treasury Shares
- Shares of stock which have been
issued and fully paid for, but
subsequently reacquired by the
issuing corporation by purchase,
redemption, donation, or through some
other lawful means. Such shares may
again be disposed of for a reasonable
price fixed by the board of directors.
- they are called treasury shares
because after reacquisition, they
remain in the corporate treasury
until reissued; in case of purchase,
the corporation must have
unrestricted retained earnings with
which to buy the shares so that the
capital of the corporation will not
be impaired
- when these shares are reacquired,
they do not lose the status of issued
shares and therefore cannot be
regarded as new issues when reissued,
as such, it may be sold not
necessarily at par value
- these shares do not form part of
the Outstanding Capital Stock as they
are not considered liability of the
corporation
- Treasury shares cannot participate
in dividends and cannot be
represented during stockholders
meeting
5. Voting Shares
- Given the power to vote and
participate in the management
of the corporation
6. Non-Voting Shares
 - No right to vote as express
stated in the AOI; without an
express statement that the
shares are non-voting, they
are considered as voting
shares
- Only preferred and redeemable
shares may be deprived of
voting rights
Shareholders with Non-voting rights are
still entitled to vote in the following
instances: (ABISIMID)
1. Amendment of the AOI
2. Adoption and amendment of by-laws
3. Sale, lease, exchange, mortgage,
pledge or other disposition of
all or substantially all of the
corporate property
4. Incurring, creating or increasing
bonded indebtedness
5. Increase or decrease of capital
stock
6. Merger or consolidation of the
corporation with another
corporation or other corporations
7. Investment of corporate funds in
another corporation or business
in accordance with the
Corporation Code
8. Dissolution of the Corporation
Acquisition of Shares
Subscription
 Special kind of Contract of Sale
– Contract between the
corporation and another whereby
the latter agrees to take and pay
a specified number or shares
whether fully paid or not
 Object: shares of stocks which
are original but unissued or
new shares (sold for the first
time)
 Parties:
a) Issuer (seller/ originator/
maker) – the corporation
 ISSUE: first time
disposition of the CS
of the corporation. WON
an issue is to be made
is left by law to the
business judgment of
the board. Usually, an
issue is prompted by
the need of additional
capitalization.
b) Subscriber (buyer)
 Natural or juridical
person. HOWEVER, if the
subscription is a pre-
incorporation
subscription, the
subscriber must be a
natural person.
 Price
 Cannot fall below the
par value stated in the
AOI which in turn must
be reflected in the
written contract
between the parties.
 If no par value, write
the stated value (fixed
by the Board OR by the
Board and 2/3 of the OCS
if required by the by-
laws).
 Stipulations or Terms
and Conditions: parties
may provide
stipulations
 Where the condition in a
subscription contract is
potestative, it is
considered VOID. (e.g.
magbabayad ako kapag ako’y
nakapagpahuli nan ng isda).
Illustration:
A subscribed 1 Million common shares @
P10.00 (P10 Million) from Pogi Inc.
Rule 1: The P10 Million forms part of
the trust fund or legal capital of the
corporation WON fully or partially paid.
The corporation has NO power to condone
the obligation of the subscriber to pay
in full.
Rule 2: Consideration must exist at the
time of subscription. Such consideration
may be paid thru the following:
1) Cash
 Whether in Philippine
legal tender or in any
currency which the
parties may stipulate
as long as it will NOT
fall below par or
stated value.
  Promissory Notes or 6) In consideration of right of
similar negotiable conversion granted by the AOI or
instruments cannot be by-laws to a particular class of
accepted by the shares (CONVERTIBLE SHARES).
corporation in payment
of subscription because  Only if said class of shares
the encashment thereof are specified in the AOI.
is not certain. Conversion right is not a
matter to be decided by the
 Checks can be accepted board alone.
as payment IF the same
is allowed in the by-  Preferred or redeemable
laws. The rule is shares: not automatically
payment is made upon converted. The rate of
encashment. Date of conversion is left to the
encashment is the date sound judgment or discretion
of issuance of shares. of the Board.

2) Labor or similar service BUT only

for past services and not for e.g. 1 preferred share (OCS) convertible
future services to 5 common shares.
 Before the corporation can
agree in accepting labor as
payment, the services must be Rule 3: All subscription must have valid
first appraised by the Board consideration (because of the trust fund
(Board must come up with an doctrine).
inventory value of the
 If the subscriber did not pay, an
services already rendered).
Action for Rescission will NOT
3) Property other than cash prosper (though a subscription
belonging to the subscriber contract imposes reciprocal
obligation).
 Rule: Property must be one
which is needed by the Q: Why is rescission not a remedy?
corporation for its business
A: To cancel the contract is to impair
(tangible or intangible)
the trust fund. Remember that the
 The property must be first corporation has no power to release
appraised by the Board (Board subscribers from their obligation to pay
must come up with an the subscription price.
inventory)

 Upon appraisal by the Board,

Rule 4: Once the subscription contract
they must submit the same to
is perfected, the obligation to pay is
SEC for approval (purpose: to
unconditional AND mandatory.
prevent the issuance of
watered down share)  If there is a stipulation that
payment will be made out of future
4) Previously incurred indebtedness
dividends, it is absolutely VOID.
 Debts owed to its creditors This is tantamount to an absolute
may be converted into equity release given by the corporation
(DEBT FOR EQUITY SWAP or in to the subscriber. This also
civil law, dacion en pago). makes payment dependent to a
future, contingent or uncertain
5) Unrestricted retained earnings event (WON stock dividend be
(capitalization of surplus declared is uncertain).
profit)

 Thru declaration of stock

dividends (as if the Rule 5: The corporation is without
corporation is entering into a authority to condone in full or in part
new subscription contract with the price to be paid.
its existing stockholders).
Q: When must the consideration be paid?
 1) Stipulation of the parties
 With a period; OR
 Payable by installment
 If stipulated dates have been
agreed upon by the parties, upon
the arrival of the dates, NO
DEMAND for payment is necessary.
2) If silent, UPON CALL
 CALL: formal demand made by
the board to all affected
subscribers to pay the
entire balance or a portion
thereof at a specified date.
 The call must carry a
warning that if no payment
was made on the date
specified, the shares will
be declared delinquent.
The delinquency would
authorize or empower the
corporation to conduct
delinquency sale.
 The call must be contained
in a resolution adopted by
the board, copies of which
must be sent to all
affected subscribers to
their addresses reflected
in the books of the
corporation (NOTICE OF
CALL).
Q: When is call not necessary?
a) If there are stipulated dates
in the contract; OR
b) If the corporation is already
insolvent.
Illustration:
X subscribed to 1million shares
@P10.00/share
 Mandatory obligation: P10 Million.
 Down payment: P2 Million
 Balance: P8 Million
Rules:
1) Partial payment: apply pro-rata.
Thus, P2.00 per share is
considered paid. No share has
been fully paid.
2) If no payment has been made upon
arrival of the period or upon call,
all the shares will be considered
delinquent even if there is
partial payment.
3) Board thru resolution will
declare delinquency (DECLARATION
OF DELINQUENCY).
4) The declaration of delinquency
will suspend the voting rights of
the shares. All other rights will
not be suspended.
5) Should dividends be declared
during the period of delinquency,
the dividends will be treated as
follows:
 Cash: applied to the balance
 Stock: stock certificate will not
be issued until full payment
Q: What are the actions to be taken by
the corporation in case of delinquency?
1) To compel payment of the balance
by judicial action in an action
for collection of sum of money
(intra-corporate controversy).
2) Extrajudicial thru a delinquency
sale
Q: How conducted?
A: Thru private or public bidding in
accordance with what was prescribed in
the by-laws of the corporation.
 The highest bidder is the one
who offers the least number of
shares for the highest price.
Illustration:
A: 8M for all 1Million shares
B: 8M for 800,000 shares
C: 10M for 800,000 shares
 Once the highest bid is
received by the corporation,
then the highest bidder shall
pay and the corporation shall
issue the corresponding stock
certificate.
Q: What happens to the extra share if the subsequent notices because
not sold? the shareholder provided an
alternative address.
 Corporation will cancel or
retire the share; OR

 By way of compromise, the  Without delinquency, unpaid

corporation will issue a stock shares are entitled to all the
certificate to the delinquent rights that fully paid shares are
shareholder. accorded EXCEPT:

Q: Can the corporation acquire the 1) The right to transfer or assign;

delinquent shares? AND

A: YES, provided (justification to 2) The right to a stock certificate.

reacquire):

a) There are no bidders; AND

b) The corporation must have

unrestricted retained earnings
(the unrestricted earnings
necessary is the amount of the
unpaid balance only). THE RIGHT TO TRANSFER OR ASSIGN

Illustration:

Q: What happens to the reacquired 1Million common shares @P10.00/share

shares?
Mandatory obligation: P10 Million
A: They become treasury shares.
Down Payment: P2 Million
Q: Can the delinquency sale be assailed?
Balance: P8Million
A: YES, on the following grounds:
 Deed of Assignment from X to
a) Irregularity in the notice; OR Y.

b) Irregularity on the conduct of  Y presents to the Corporate

the sale itself. Secretary the Deed of
Assignment and demands that
the name of X be deleted and
Case: lieu thereof, his name be
inserted
Caram v. Calatagan

 The notices were sent by the

corporation to Caram in his
address as recorded in the stock
and transfer book after it
acquired knowledge that Caram has
died.
 The proper remedy for the
corporation would have been to
file a claim against the estate
of the deceased.
Q: Can the Corporate Secretary cancel
the name of X?
A: NO. For subscription contracts where
there is unpaid balance, novation
(substitution of the debtor) is NOT
allowed. Remember that it is the
mandatory obligation of X to pay the
P10Million. The corporation has no power
to release X from the obligation.

 The sale to the third person was  The contract is VOID as far as the
nullified. corporation is concerned. The
contract is valid only between X
and Y.

Valley Golf v. CA  Y cannot file an action to compel

the corporation for the
 The notice was sent to a P.O. Box registration of the shares in his
Address which is already inactive. name because there is no privity
 The corporation should have of transaction between him and
exerted greater effort in sending
 the corporation. X remains to be Contents of Stock Certificate:
the debtor.
Face Dorsal
 UNLESS the corporation gives its
consent subject to the condition -Name of issuing Blank lines to
of valuable consideration (Y will corporation accommodate
pay the P8Million unpaid balance). indorsements
-Name of shareholder (merely a
-Number of shares convenient tool
to transfer)
-Class of shares
Q: What is the remedy of Y upon denial
-Such other special
by the Corporate Secretary?
rights, privileges,
A: Appeal to the Board. Make an offer to or restrictions
pay valuable consideration (P8Million
-Par or stated value
unpaid balance). If allowed by the Board
of shares
and after payment, Y can now demand the
recording of the transfer in the books. -Serial number (for
monitoring purposes)

THE RIGHT TO A STOCK CERTIFICATE -Signatures of the No Transfer

President and Clause
 If there is full payment, the Secretary
subscriber is entitled to the
issuance of stock certificate. -Under the seal of
The duty to issue stock the corporation
certificate becomes ministerial.

 Issuance of the certificate of Q: Manner of transfer of stock

stock becomes ministerial once
fully paid
Stock Certificate:
a) The paper tangible evidence of
right of ownership over the
intangible property.
 Note: for exercise of rights, a
stock certificate is NOT
necessary. The book entry system
is controlling (as long as the
name of the subscriber has been
entered in the STB, whether or not
fully paid, he or she must be
accorded all the rights of a
subscriber or shareholder).
 Rule: If the name of the
subscriber or shareholder is
written in the STB, the title or
ownership of shares is
undisputable. The STB is a prima
facie evidence of ownership of
stocks.
b) It is a personal property of a
stockholder.
certificate
A: Two-step process: thru indorsement
coupled with delivery thereof UNLESS by-
laws provides other means of effecting
transfer (quasi-negotiable instrument).
Q: Who may indorse and deliver?
A: Only the owner OR his duly authorized
agent.
 If the agent is empowered thru SPA,
a copy thereof must be submitted
to the corporate secretary for
annotation or recording purposes.
This is to inform the corporation
that some other person was given
the authority to deal with the
certificate on behalf of the
owner.
 If the authority is by some other
power such as judicial
appointment of a guardian or the
executor or administrator of the
estate of the deceased, a copy of
the court order of final judgment
must be submitted to the
corporate secretary to inform the
latter as to who may exercise the
rights arising from the shares.
  Indorsement:
 Both the names of the transferor
and the transferee must be
contained in the indorsement. If
only the name of the indorser is
contained in the indorsement, the
stock certificate is converted
into a STREET CERTIFICATE.
 Street certificate: whoever holds
it is presumed to be the
transferee.
Q: Is there a need for the owner to
execute a separate instrument or
document of conveyance in case he
intends to transfer the certificate?
A: NO, unless the by-laws requires such
separate instrument. Mere indorsement
coupled with delivery of the certificate
is sufficient to transfer title in favor
of the transferee. The transferee ipso
facto acquires all the rights that the
transferor may have had in relation to
the certificate (physical property + all
intangible rights).
Illustration:
A --- indorsement + delivery --- B
 B is now considered as the lawful
owner of the property
 B acquires the right to have the
transfer registered in the books
of the corporation. It is
incumbent upon the transferee to
ensure that the transfer in his
favor is recorded in the books of
the corporation.
 The registration of the transfer
must be recorded to make it
binding upon the corporation;
OTHERWISE, the transfer is only
binding between the transferor
and transferee.
 Purpose/s of registration of the
transfer:
a) Allows the corporation to keep
track of the changes in the
ownership of the capital stock.
b) Enables the new owner to exercise
rights related to the shares of
stocks. The transferee is
entitled to demand such rights
against the corporation (rights
to vote, dividends, and assets).
c) Enables the government to monitor
movement in the shares of stocks
of a duly registered corporation.
This is necessary if the business
of the corporation is governed by
citizenship limitations.
 The power to have the transfer
registered is inherent upon the
transferee for as long as his
title is unassailable and without
any doubt.
 The duty of the secretary to
register the same becomes
ministerial and therefore
compellable by mandamus.
Q: Registration of transfer in the book,
how effected?
A: Two-step process:
1) Cancellation of the old
certificate and the cancellation
of the name of the transferor from
the books (on the assumption that
the transfer is for all the shares
covered by the certificate); AND
2) Issuance of a new certificate in
the name of the transferee and
entry of the name of the
transferee in the corporate books.
 Where the steps are complied with,
the transfer is valid, binding,
and enforceable not just between
the parties but also upon the
corporation and all third persons
(registration in the books
perfects the title).
 The right to have the transfer
recorded is imprescriptible
because it is related to
ownership of property.
 HOWEVER, only transfers that
convey absolute ownership over
the shares are registerable in
the books of the corporation.
 Mere encumbrances or liens
exercised over the shares of
stocks cannot be recorded.
Q: What are the transfers registerable
in the books of the corporation?
 1) Onerous transfers:
a) Sale
b) Assignment
c) Exchange (barter)
2) Gratuitous transfers:
a) Donation
b) Succession
 However, in case the shares of
stocks form part of the
hereditary estate of the decedent
or testator, the corporation will
cancel the name of the decedent
or testator if:
 Judicial settlement: there
must be a judicial partition
of the estate presented to the
corporation
 Extrajudicial settlement:
there is a proof of
publication of the notice of
such fact of judicial
partition.
 Pledge or chattel mortgage cannot
be recorded (no absolute transfer
of ownership). Note that only
when there is foreclosure and
ownership has passed to the
highest bidder is there transfer
of ownership.
 Unlike in the registry of
property, no annotation of liens
or encumbrances is allowed in the
STB.
 Not even a writ of attachment can
be annotated in the STB.
 If a creditor is successful in
obtaining a writ of attachment
over the shares of stocks and
subsequently is also successful
in having it registered in the STB,
his preferential right cannot be
derived from such annotation. BUT
his preferential right is by
virtue of the lien or encumbrance
(writ of attachment).
Q: Who has the preferential right
between the attaching creditor and a
subsequent buyer of shares of stocks?
A: The attaching creditor has
preferential rights whether the lien or
encumbrance (writ of attachment) is
registered or not.
 If the writ of attachment was not
recorded, the creditor remains to
have the preferential right by
virtue of the lien or encumbrance
 Registration is a matter of right
if the title of the transferee is
indubitable. If the title is in
doubt, the corporate secretary is
justified in refusing
registration of the transfer.
Q: When is the title of the transferee
“in doubt?”
A: When the transfer is effected thru
forgery or falsification, theft or by
any unauthorized transfer involving the
certificate.
Illustration:
 A ----- 1M shares in Pogi Inc.
 B stole the certificate of stock
and made it appear that the
certificate was indorsed to him
by A by forging A’s signature
Q: Did B acquire title over the stolen
certificate of stock?
A: NO. Thus, the shares cannot be
registered in his name (the corporate
secretary is justified in refusing
registration for as long as he has notice,
actual or constructive, that the
certificate is subject of theft and
forgery).
 B indorsed the certificate
and then physically delivered it
to C who paid valuable
consideration.
Q: Can C acquire title over the
certificate and therefore demand to the
corporate secretary to register the
transfer?
A: NO. B never acquired any title and
therefore has nothing to pass. Even if C
alleges that he acquired the certificate
in good faith and for valuable
consideration, C cannot defeat the
superior right of the registered owner
UNLESS the registered owner is guilty of
negligence creating estoppel (A indorses
the certificate to B out of kindness and
generosity with the agreement that B
will re-indorse it back to A. But B never
re-indorsed the same to A, instead sells
it to C for valuable consideration)
 A stock certificate is merely
a quasi-negotiable document.
The defense of “holder in due
course” is not available for
stolen, forged or certificates
which were transferred without
the authority of the owner.
Rule: Until the dispute concerning
certificate has been judicially settled,
no registration shall be made. This is
true to all subsequent transferees of
the same certificate.
Illustration:
 A ----- B (B falsified the
signature of A)
 B was able to have the
“transfer” registered with the
corporate secretary. A new
certificate was issued.
 B indorsed the new certificate
to C
Q: Between A and C, who has the better
right?
A: C has the better right because his
right is not derived from the stolen
certificate; rather it was derived from
a new certificate.
Q: What is the remedy of A?
A: Sue B for damages or sue the
corporation because it was the
corporation which issued the new
certificate.
LOST OR DESTROYED STOCK CERTIFICATES
Procedure for the Replacement of lost,
stolen or destroyed stock certificate:
1. The registered owner of the lost
stock certificate must file with
the corporation an affidavit of
loss.
2. The corporation will publish, at
the expense of the stockholder, a
notice in a newspaper of general
circulation in the place where
the corporation has its principal
office, once a week for three
consecutive weeks.
3. After a period of one year from
the date of last publication, the
corporation can cancel in its
books the lost certificate and
issue a new stock certificate if
n contest was presented to the
corporation regarding the lost
certificate. The corporation can
also issue the replacement stock
certificates prior to the lapse
of the one-year period if the
owner files a bond or other
security satisfactory to the
board of directors.
4. If a contest has been presented
to the corporation or if an action
is pending in court regarding the
ownership of said certificate,
the issuance of the new
certificate will be suspended
until the final decision by the
court regarding the ownership of
said certificate.
RIGHTS ARISING FROM OWNERSHIP OF SHARE
Proprietary Rights
A. RIGHT TO VOTE AND BE VOTED UPON
 Residual right of the
stockholders to participate in
the management of the
enterprise. It is residual
because the stockholders’
consent or assent is only
necessary in those instances
prescribed by the Corporation
Code (ABISIMID) or in those
instances prescribed by the
By-laws of the corporation.
 No treasury shares may enjoy
the right to vote.
Right to Vote: can be exercised by:
1) The owner: as long as the shares
are not classified as non-voting
(preferred or redeemable shares)
or even if the shares are
classified as voting if the
shares are considered as
delinquent or subject to
appraisal right.
 certificate issued in
his name.
2) Representative:
 The agreement cannot
Forms: exceed 5 years.
a) Proxy

 The legal authority given  Requirement for a valid and

by an existing
stockholder for another
to attend meetings and
vote therein on behalf of
the said stockholder.
 The formal instrument
executed between the
stockholder as the
principal and the proxy Illustration:
as the agent.
Sh X (trustor)
 Form: must be consistent with (trustee)
what was prescribed by the by-
laws (e.g. by SPA) BUT at
minimum, the Corporation Code
requires that the proxy must
be in writing and submitted to
the corporate secretary prior
to the meeting.
 Coverage: for one meeting only
UNLESS the proxy stipulates
otherwise BUT shall not exceed
5 years.
 The person empowered by
the stockholder to attend
and vote during meetings.
The proxy cannot be
elected as director.
binding VTA:
 It must be in a public
instrument. A copy of
which must be submitted
to the SEC and corporate
secretary for
registration.
----- VTA ----- Y
 A copy of the VTA must be
submitted to the
corporate secretary for
registration.
 Effects:
 The corporate secretary must
now cancel the certificate of
the trustor and delete the
name of the trustor in the STB.
 The corporate secretary will
issue a new certificate in the
name of the trustee.
 The trustee acquires legal
title over the shares.

 Securities and Regulations Code:  The trustee can vote and be

Proxy Solicitations for annual voted upon as a director.
and regular election must be
approved by the SEC
Q: What is the obligation of the trustee?

A: To execute a Voting Trust Certificate

in favor of the trustor. The trustor
b) Voting Trust Agreement becomes the passive owner of the shares
of stocks.
 Special form of an
express trust.

 Trustor: stockholder Q: What is the effect if the purpose of

or a group of the VTA has been accomplished or the
stockholders of a period of the VTA has elapsed?
corporation. He has
A: It will restore the trustor to the
the beneficial title
full rights over the shares and
evidenced by a voting
extinguish the rights of the trustee.
trust certificate.

 Trustee: stockholder
of a corporation OR a Note: VTA is a management control device.
stranger. He has the The voting power is concentrated or
legal title as given to certain people who are not
evidenced by the new necessarily the owners of the shares.
BUT it cannot be used to circumvent 2) Any other place within the city
citizenship requirements under the or municipality of the PO
Constitution.
3) At the place fixed by the by-laws
Illustration:

e.g. X Corp is engaged in EDU of natural

resources.  For meetings of members of non-
stock corporations, the law
A ----- 20M (Filipino) forbids that the same be
conducted abroad.
B ----- 20M (Filipino)

C ----- 20M (Filipino)

D ----- 40M (Chinese)
Q: Can C execute a VTA in favor of D?
A: NO. It will violate the Constitution.
Q: What are other requirements during
meetings?
A: Minutes must be taken and the required
number of vote must be reflected in said
minutes.

 Voting is normally exercised in

meetings. Mandatory Meetings Minimum Vote

Elections Plurality of
votes
Q: What are the requirements for the
conduct of meetings? Quorum: Majority
of those
 Prior written notice sent to the entitled to
address of the stockholder as vote.
found in the books of the
corporation UNLESS the To grant Majority
stockholder waives notice. compensation to the
directors
 If the corporation is a public
company, aside from individual To ratify contract 2/3
notices to the stockholders, the of a self-dealing
notice of meeting must be director
published in a newspaper of
To ratify profits 2/3
general circulation in the
of a disloyal
Philippines.
director
Q: How often must meetings be conducted?
To enter into a Majority UNLESS
A: As often as the by-laws require. If management contract interlocking
the by-laws is silent, it must be held directorship or
annually. Meetings must be held on the interlocking
date fixed by the by-laws; if not, on interest
the date fixed by the SEC.
To declare 2/3
 Usually, the annual stockholders’ dividends
meeting (ASM) is also the
election of directors. To fix value of no- 2/3
par value shares

To sell all or 2/3

Q: Who must preside the ASM? substantially all
of the assets
A: The President, UNLESS the by-laws
require a different presiding officer. To invest funds in 2/3
another corporation
or business
Q: Where is the venue of stockholders’
To deny pre-emptive 2/3
meetings?
right
1) In the principal office (PO)
 To approve merger 2/3 1) Cash: payable to the stockholders
or consolidation in the form of cash.

To approve a 2/3 2) Property: actually cash dividends

petition for except that they are not paid in
dissolution cash but some other properties no
longer needed for the business.
Under the FRIA, all 2/3
voluntary petitions 3) Stock: must come from the ACS of
the company not yet subscribed or
issued
B. DIVIDEND RIGHTS  If the entirety of the ACS has
been subscribed and the
 This is a right that becomes a
corporation subsequently declared
natural expectancy for
stock dividends, there is a need
shareholders of a stock
for the corporation to increase
corporation but is absolutely
the ACS by amending its AOI.
prohibited for members of a non-
stock corporation.

Rule 1: The power to declare dividends

Q: Can the members of a non-stock
corporation be accorded dividend rights?
A: NO, otherwise, there will be a
criminal violation of the Corporation
Code because by law, all profits
generated by a non-stock corporation
must devoted to further or promote the
purpose/s of such corporation. No
distribution of said profits to the
members.
is discretionary upon the board
regardless of the form of dividends. The
board cannot be compelled to declare
dividends by any action filed by a
stockholder.
Rule 2: When decided by the board,
property and cash dividends require only
board approval. Stock dividends must be
assented to by 2/3 of the OCS.

 Dividends are not profits. Rule 3: When cash or property dividends

are paid, the assets of the corporation
Profits Dividends
are reduced by such amount. The moment
Earnings They come from said that the cash or property dividend is
derived by the profits for as long paid to the stockholder, such cash or
corporation as they form part of property becomes his absolute property.
from the the unrestricted Once declared, cash or property dividend
operation of its retained earnings can no longer be revoked.
business. (URE).

 The URE is a portion of retained

Rule 4: For stock dividends, this will
earnings or surplus profits that
take place by merely transferring URE to
are not otherwise earmarked for
the legal capital. The amount declared
some managerial, contractual, or
as dividends never leaves the
legal purpose and is therefore
corporation. This will not increase the
free for distribution by way of
equity of the existing stockholders.
dividends to the owners of the
OCS.

 NOTE: the ONLY source of Q: What are the material dates in

dividends is the URE and never the dividends?
legal capital. The distribution
of dividends shall not result to 1) Declaration Date: the date when
the impairment of the trust fund the resolution of the Board in
reserved by law for the creditors. case of cash or property
dividends and resolution of the
stockholders by 2/3 vote in case
of stock dividends was passed and
Q: What are the valid forms of dividends?
approved.
  Under the SRC, from the
declaration date, a report must
be submitted to the SEC because
declaration of dividends is a
material and significant fact
that will affect the price of the
shares in the stock market.
shall be declared without the
consent of the creditor and the
creditor did not give his consent.
3) The retention is necessary to
answer for some possible or
imminent contingency.

 The declaration of dividends must

be publicly known thru
publication in a newspaper of
general circulation. C. ASSET RIGHTS

 Mere expectancy right during

the term of the corporation.
2) Record Date: the date during Stockholders have no
which the book of the corporation inherent right to corporate
shall be closed. No transfer assets because the assets
shall be recorded after the are needed for the business
record date to determine who are and said assets are reserved
actually entitled to the for the creditors.
dividends.

 Notwithstanding any transfer

after the record date, the G.R.: Distribution of assets is
owner as listed in the STB prohibited during the term of the
at the time of the record corporation.
date shall be entitled to the
Except: In case where there is surplus
dividends.
capital necessitating reduction of
capital stock.

3) Payment Date: Date of payment of

dividends.
Q: When can the stockholders demand
their asset rights?

Q: May the declaration of dividends be A: When the corporation has been

compelled by mandamus?
A: YES. While it’s true that declaration
of dividends is discretionary upon the
board, the board can be compelled to
declare mandamus if the value of the URE
or surplus profit is more than 100% of
the subscribed capital stock. The
corporation is not allowed to accumulate
for itself its earnings.
dissolved and after payment of its
outstanding debts to various creditors
(residual assets).
Note: The rights of the preferred
shareholders over common shareholders
must be respected.

e.g. CORPORATE BOOKS

SCS: 100 Million
Records/books which must be kept
URE: 150 Million by the Corporation: (Sec. 74)

1. Records of all business

Q: What are the defenses available to
transactions: These include,
the corporation in the mandamus case?
among others, journals,
1) The URE is necessary to be ledgers, contracts, vouchers
retained for some corporate and receipts, financial
expansion program already statements and other books of
approved by the board. accounts, income tax returns,
2) The corporation is the debtor and voting trust agreement
under a loan agreement which must be kept and
stipulating that no dividend
 carefully preserved at its
principal office.
2. Minutes of all meetings of
stockholders or members and of
the directors or trustees
setting forth in detail the
time and place of holding the
meeting, how authorized, the
notice given, whether the
meeting was regular or special,
if special its object, those
present and absent, and every
act done or ordered done
thereat which must likewise be
kept at the principal office of
the corporation.
3. A stock and transfer book (STB)
as defined in Section 74 of the
Corporation Code of the
Philippines, contains the
records of all stocks in the
names of the stockholders
alphabetically arranged; the
installment paid and unpaid on
all stock for which
subscription has been made, and
the date of payment of any
installment; a statement of
every alienation, sale or
transfer of stock made, the
date thereof, and by and to
whom made; and such other
entries as the by-laws may
prescribe.
The STB shall be kept in the
principal office of the
corporation or in the office of
its stock transfer agent and
shall be open for inspection by
any director or stockholder of
the corporation at reasonable
hours on business days. In
Torres Jr. vs. Court of
Appeals, the Court ruled that
it is the Corporate Secretary
who is responsible to serve as
custodian of all the records of
the corporation, to keep the
stock and transfer books, and
1
http://www.philstar.com:8080/business/2015/08/25
the only person authorized to
make the entries therein.
ALTERNATIVES WHEN STOCK AND
TRANSFER BOOK IS INACCESSIBLE:1
Citing the ruling enunciated
in Lanuza vs. Court of Appeals,
the SEC said that although the STB
is necessary as a measure of
precaution, expediency and
convenience since it provides the
only certain and accurate method
of establishing the various
corporate acts and transactions
and of showing the ownership of
stock, it is however, not a public
record, and thus is not exclusive
evidence of the matters and
things which ordinarily are or
should be written therein.
The SEC in its previous
opinions said that extrinsic
evidence of the acts or matters
which are or should be recorded
in the corporate books and
records may be admitted where the
original corporate records are
lost, mislaid or destroyed or are
otherwise inaccessible. But the
proper foundation or proof
explaining the failure to produce
the original books and records
must first be laid for the
introduction of the other
evidence. Such secondary evidence
ordinarily consists of copies of
the records, either certified or
sworn to, or parol testimony.
Hence, when the original stock
and transfer books of a
corporation has been lost,
destroyed, secondary or extrinsic
evidence may be introduced to
reconstitute its contents.
The SEC advised following
necessary measures to make the
STB accessible:
/1491789/alternatives-when-stock-and-transfer-
book-inaccessible
1.File an action in court to gain
access and assume custody of
the STB; or
2.Have the STB reconstituted if
appropriate, i.e. when it is
lost or destroyed.
 These corporate books and
records, inclusive of all
business transactions and
minutes of meetings, are
subject to inspection by any
director, trustee, stockholder
or member of the corporation
at reasonable hours on
business days and a copy of
excerpts of said records may
be demanded.
Stock transfer agent
 One engaged principally in
the business of registering
transfers of stocks in
behalf of a stock
corporation (licensed by
the SEC). The corporate
secretary is the one duly
authorized to make entries
in the stock and transfer
book. It is the corporate
secretary's duty and
obligation to register
valid transfers of stocks
and if said corporate
officer refuses to comply,
the transferor-stockholder
may rightfully bring suit
to compel performance.
(Torres et al. v. CA ,
1997)
Financial statements (Sec. 75)
Within 10 days from written
request, the corporation shall
furnish its most recent
financial statement (balance
sheet and profit or loss
statement as of last taxable
year) At a regular meeting, the
Board shall present a financial
report of the operations of the
corporation for the preceding
year, which shall include
financial statements duly signed
and certified by an independent
CPA.
Exception:
If the paid-up capital is
less than P50,000 – the
financial statements may be
certified under oath by the
treasurer or any responsible
officer of the corporation
(instead of an independent CPA).
Requirements for the exercise of
the right of inspection (Sec.
74)
1.It must be exercised at
reasonable hours on business
days and in the place where
the corporation keeps all its
records (i.e., principal
office).
2.The stockholder has not
improperly used any
information he secured through
any previous examination.
3.Demand is made in good faith
or for a legitimate purpose.
If the corporation or its
officers contest such purpose
or contend that there is evil
motive behind the inspection,
the burden of proof is with
the corporation or such
officer to show the same
 General rule: Any officer or
agent of the corporation who
refuses to allow the
inspection of corporate books
and records, or any director
or trustee who through a
resolution by the board votes
for such refusal shall be
liable for damages and shall
be guilty of an offense which
shall be punishable under Sec.
144.
 Exception. It shall be a
defense that the person
demanding inspection:
A. Has improperly used any
information secured through
any prior examination of
the records or minutes of
 such corporation or of any
other corporation; or
B. Was not acting in good
faith or for a legitimate
purpose in making his
demand.
 Within ten (10) days from
receipt of a written request
of any stockholder or member,
the corporation shall furnish
to him its most recent
financial statement, which
shall include a balance sheet
as of the end of the last
taxable year and a profit or
loss statement for said
taxable year, showing in
reasonable detail its assets
and liabilities and the result
of its operations.
 At the regular meeting of
stockholders or members, the
board of directors or trustees
shall present to such
stockholders or members a
financial report of the
operations of the corporation
for the preceding year, which
shall include financial
statements, duly signed and
certified by an independent
certified public accountant.
However, if the paid-up
capital of the corporation is
less than P50,000.00, the
financial statements may be
certified under oath by the
treasurer or any responsible
officer of the corporation.
 The basis of the right of the
stockholder to inspect the
books and records of the
corporation for a proper
purpose is to protect his
interest as a stockholder.
 General rule: The right of
stockholders to examine
corporate books extends to a
wholly owned subsidiary which
is completely under the
control and management of the
parent company where he is
such a stockholder.
(Gokongwei vs. SEC)
o Exception: The subsidiary
and the parent are
legally being operated as
separate and distinct
entities.
o The right to inspect
corporate books, although
personal, may be exercised
through an agent or
representative since it may
be unavailing in many
instances. (W.G. Philpotts
vs. Philippine Manufacturing
Co.)
o The corporation, or its
responsible directors and
officers cannot unduly
restrict the right of
inspection and may not
arbitrarily set a few days of
the year within which the
stockholder may make the
inspection. (Pardo vs.
Hercules Lumber, Co.)
o Directors of a corporation
have the unqualified right to
inspect the books and records
of the corporation at all
reasonable hours. However,
there is no absolute right to
secure certified copies of the
minutes of the corporation
until these minutes have been
written up and approved by the
directors. (Vegaruth vs.
Isabela Sugar Co., Inc.)
o It is a required condition for
the inspection of corporate
books that the one requesting
it must not have been guilty
of using improperly any
information secured through a
prior examination and that the
person asking for such
examination must be acting in
good faith and for a
legitimate purpose in making
his demand. (Gonzales vs. PNB)
Remedies of a stockholder who is
denied inspection of corporate
books:
1. Mandamus;
2. Damages either against the
corporate or the responsible
officer; or
3. Criminal complaint based on
Sec. 144 of the Code.
Cases:
1. Po vs DOJ and Tan
G.R. No. 195198, February 11,
2013, J. REYES
Facts:
Tan, a stockholder of Coastal
Highpoint Ventures, Inc.,
lamented that pertinent
information relative to CHVI’s
operations were withheld from
him. His repeated requests for
copies of financial statements
and allowance to inspect
corporate books proved futile.
Consequently, he filed before
the Office of the City
Prosecutor of Cebu a complaint
against Chiu, President of the
corporation, for violation of
Section 74(2) in relation to
Section 144 of the Corporation
Code of the Philippines.
Issue
Whether or not Chiu is guilty of
violating the Corporation Code
Held:
Yes. The Court has reviewed the
records and the pleadings of the
parties and found that the
requisites mentioned above are
present. It is noted that
private respondent on several
occasions had expressed in
writing his request to inspect
CHVI’s corporate books and
records but his written requests
were turned down on the pretext
that the petitioner needed more
time to prepare the documents
requested by the private
respondent. The initial written
demand was made on October 10,
2007 but it was only on April
24, 2008 that the audit team
sent by the private respondent
was able to inspect some of the
documents of CHVI. However, it
appears that the inspection was
ineffective since the petitioner
and Loreli Lim Po refused to
present the other documents
demanded by the inspection team.
PO even prevented the team from
copying the corporate books and
records.
2. Grace Insigne et al. vs Abra
Valley
July 29, 2015, G.R. No. 204089,
J. Bersamin
Facts:
Pedro was the founder, president
and majority stockholder of
respondent Abra Valley Colleges,
Inc. (Abra Valley), a stock
corporation. The petitioners,
Grace et al. are the children of
the late Pedro Borgoña (Pedro)
by his second wife, Teresita
Valeros, while Francis was
Pedro’s son by his first wife.
After Pedro’s death, Francis
succeeded him as the president
of Abra Valley. Petitioners
filed a case against Abra Valley
to allow them to inspect its
corporate books and records, and
the minutes of meetings, and to
provide them with its financial
statement.
Abra interposed the defense that
in asmuch as the originals of
the above enumerated
certificates of stock are still
in names of the original owners,
it is the conclusion that the
transfers or transactions, if
any, that may have transpired
between said owners and
plaintiffs are not yet recorded
and registered with the
corporation issuing the same and
that to avail of the rights of
stockholders, the plaintiffs
must present stock certificates
already in their names, and not
in the names of other persons
Since no stock certificates were
presented, according to Abra,
the rights accorded to
shareholders cannot be granted
to them.
Issue:
Whether or not presentation of a
stock certificate a condition
sine qua non for proving one's
shareholding in a corporation
Held:
No. A stock certificate is prima
facie evidence that the holder
is a shareholder of the
corporation, but the possession
of the certificate is not the
sole determining factor of one’s
stock ownership. A certificate
of stock is merely the paper
representative or tangible
evidence of the stock itself and
of the various interests
therein. The certificate is not
stock in the corporation but is
merely evidence of the holder's
interest and status in the
corporation, his ownership of
the share represented thereby,
but is not in law the equivalent
of such ownership. It expresses
the contract between the
corporation and the stockholder,
but it is not essential to the
existence of a share in stock or
the creation of the relation of
shareholder to the corporation.
A stock and transfer book, like
other corporate books and
records, is not in any sense a
public record, and thus is not
exclusive evidence of the
matters and things which
ordinarily are or should be
written therein. In fact, it is
generally held that the records
and minutes of a corporation are
not conclusive even against the
corporation but are prima facie
evidence only, and may be
impeached or even contradicted
by other competent evidence.
Thus, parol evidence may be
admitted to supply omissions in
the records or explain
ambiguities, or to contradict
such records.
3. Terelay vs Yulo
G.R. No. 160924, August 05,
2015, J. BERSAMIN
Facts:
Asserting her right as a
stockholder, Cecilia Teresita
Yulo wrote a letter, dated
September 14, 1999, addressed to
Terelay Investment and
Development Corporation
(TERELAY) requesting that she be
allowed to examine its books and
records. This was refused by the
corporation. Hence, Yulo filed a
case for mandamus.
Issue:
Whether or not Yulo has the
right to inspect the books
Held:
Yulo has presented enough
evidence that she is a
stockholder of TERELAY. The
corporate documents presented
support her claim that she is a
registered stockholder in
TERELAY's stock and transfer
book thus giving her the right,
under Section 74 par. 2 and
Section 75 of the Philippine
Corporation Law, to inspect
TERELAY's books, records, and
financial statements. Yulo as
the right to be fully informed
of TERELAY's corporate condition
and the manner its affairs are
being managed. It is well-
settled that the ownership of
shares of stock gives
stockholders the right under the
law to be protected from
possible mismanagement by its
officers. This right is
predicated upon self-
preservation. In any case,
TERELAY did not adduce
sufficient proof that Cecilia
Yulo was in bad faith or had an
ulterior motive in demanding her
right under the law.
4. Yujuico vs Quiambao
G.R. No. 180416, June 2, 2014,
J. Perez
Facts:
Yujuico-as newly elected
president and chairman of
STRADEC-demanded Quiambao for
the turnover of the corporate
records of the company,
particularly the accounting
files, ledgers, journals and
other records of the
corporation's business. Quiambao
refused. As it turns out, the
corporate records of STRADEC
were in the possession of
Casanova-the accountant of
STRADEC. Casanova was keeping
custody of the said records on
behalf of Quiambao, who
allegedly needed the same as
part of his defense in a pending
case in court. This was a case
which involved the refusal of
outgoing officers to turn over
documents to newly elected
officers.
Issue:
Whether Quiambao et al. are
guilty of Section 144 and Sec.
74 of the Corporation Code
Held:
No. It is clear then that a
criminal action based on the
violation of the second or
fourth paragraphs of Section 74
can only be maintained against
corporate officers or such other
persons that are acting on
behalf of the corporation.
Violations of the second and
fourth paragraphs of Section 74
contemplates a situation wherein
a corporation, acting thru one
of its officers or agents,
denies the right of any of its
stockholders to inspect the
records, minutes and the stock
and transfer book of such
corporation.
The problem with the
petitioners' complaint and the
evidence that they submitted
during preliminary investigation
is that they do not establish
that respondents were acting on
behalf of STRADEC. Quite the
contrary, the scenario painted
by the complaint is that the
respondents are merely outgoing
officers of STRADEC who, for
some reason, withheld and
refused to turn-over the company
records of STRADEC; that it is
the petitioners who are actually
acting on behalf of STRADEC; and
that STRADEC is actually merely
trying to recover custody of the
withheld records.
In other words, petitioners are
not actually invoking their
right to inspect the records and
the stock and transfer book of
STRADEC under the second and
fourth paragraphs of Section 74.
What they seek to enforce is the
proprietary right of STRADEC to
be in possession of such records
and book. Such right, though
certainly legally enforceable by
other means, cannot be enforced
by a criminal prosecution based
on a violation of the second and
fourth paragraphs of Section 74.
That is simply not the situation
contemplated by the second and
fourth paragraphs of Section 74
of the Corporation Code.
Merger and Consolidation
Definition:
1. Merger:
Merger – a corporation absorbs
the other and remains in
existence while the others are
dissolved. (Sec.76)
One of the constituent
corporations remains as an
existing juridical person,
whereas the other corporation
shall cease to exist. Merger is
the disappearance of one of the
corporations [generally by
amending the articles of
incorporation and shortening its
term of existence (Sec.40)] with
the other corporation acquiring
all the assets, rights of The surviving
action, and assuming all the corporation is
liabilities of the disappearing the one which
corporation. absorbs all
others.
It is a union effected by
absorbing one or more existing
corporations by another which Reasons behind merger or
survives and continues the consolidation:
combined business; the uniting
of two or more corporations by 1. Voluntary for the acquisition
the transfer of property to one of assets and expansion of the
of them which continues in business. This is meant to boost
existence, the other or others the competitiveness of the
being dissolved and merged business in a particular
therein. industry. The banking and cement
industries are prone to merger
2. Consolidation: and consolidation. An
illustration is when Equitable
The uniting or amalgamation of Bank merged with PCI bank. The
two or more existing smaller bank PCI bank became the
corporations to form a new surviving corporation.
corporation and the termination
of existence of the old ones. 2. When mandated by law
In essence, a new corporation is
created, and consolidating Under the rules of Bangko
corporations are extinguished Sentral ng Pilipinas, when one
(Sec.76) bank requires at least 67%
If there is consolidation, there (2/3’s) of the capital stock of
will be disappearance of both the bank, they are required to
the constituent corporations go through a formal statutory
with the emergence of a new merger or consolidation. The
corporate entity which shall merger or consolidation is
obtain all the assets of the mandated for the bank to
disappearing corporations, and maintain its rank and
likewise shall assume all their classification. To illustrate,
liabilities. to maintain a rank and
classification, and to shore up
Illustration: its assets, corporations go
MERGER CONSOLIDATION through a merger or
consolidation.
A corporation A corporation +
+ B B Corporation =
corporation = Requirements and procedure for
C corporation merger or consolidation:
A corporation
When two or Two or more 1. The board of directors or
more corporations trustees of each constituent
corporations form and corporation shall approve a plan
unite and the combine of merger or consolidation
corporations together to setting forth the following:
are absorbed bring about an a. The names of the constituent
into one of entirely new corporations;
them corporation
b. The terms of the merger or quadruplicate to the SEC subject
consolidation and the mode of to the requirement of that if it
carrying the same into effect; involves corporations under the
direct supervision of any other
c. A statement of changes, if
government agency or governed by
any, in the articles of
special laws the favorable
incorporation in the present
recommendation of the government
articles of the surviving
agency concerned shall first be
corporation to be formed in the
secured; and
case of merger; and with respect
to the consolidated corporation 6. Issuance of the certificate
in case of consolidation; of merger or consolidation by
d. Other provisions deemed the SEC at which time the merger
necessary and desirable. or consolidation shall be
effective. If the plan, however,
is believed to be contrary to
2. Approval of the plan by the
law, the SEC shall set a hearing
stockholders representing 2/3 of
to give the corporations
the outstanding capital stock or
concerned an opportunity to be
2/3 of the members in a non-
heard upon proper notice and
stock corporations of each
thereafter, the SEC shall
constituent corporation at
proceed as provided in the Code.
separate corporate meetings
called for the purpose;  Any amendment to the plan of
merger or consolidation must be
3. Prior notice of such meeting,
approved by majority vote of
with a copy or summary of the
the respective boards of
plan of merger or consolidation
directors or trustees of all
shall be given to all
the constituent corporations
stockholders or members at least
and ratified by the affirmative
2 weeks prior to the scheduled
vote of stockholders
meeting, either personally or by
representing at least 2/3 of
registered mail stating the
the outstanding capital stock
purpose thereof;
or of 2/3 of the members of
4. Execution of the articles of each of the constituent
merger or consolidation by each corporations.
constituent corporation to be
 Mergers and consolidations may
signed by the president or vice-
not be entered into for the
president and certified by the
purpose of circumventing the
corporate secretary or assistant
law against monopolies and
secretary setting forth the
illegal combinations in
following:
restraint of trade or for
a. The plan of the merger or
purposes of fraud.
consolidation;
b. As to stock corporations, the
number of shares outstanding, or
in the case of non-stock
Effects of merger or
corporations, the number of
consolidation:
members; and
1. There will only be a single
c. As to each corporation, the corporation. In case of merger,
number of shares or members the surviving corporation, or in
voting for and against such case of consolidation, the
plan, respectively. consolidated corporation;
2. Termination of the corporate
5. Submission of the articles of
existence of the constituent
merger or consolidation in
corporations, except that of the
surviving corporation;
3. The surviving or the
consolidated corporation will
possess all the rights,
privileges, immunities and
powers and shall be subject to
all the duties and liabilities
of a corporation organized under
the Code;
4. The surviving or the
consolidated corporation shall
possess all the rights,
privileges, immunities and
franchises of the constituent
corporations; and all property
and all receivables due on
whatever account, including
subscriptions to shares and
other choses in action, and all
and every other interest of, or
belonging to, or due to each
constituent corporation, shall
be deemed transferred to and
vested in such surviving or
consolidated corporation without
further act or deed;
5. The surviving or consolidated
corporation shall be responsible
and liable for all the
liabilities and obligations of
each of the constituent
corporations; and any pending
claim, action or proceeding
brought by or against any of
such constituent corporations
may be prosecuted by or against
the surviving or consolidated
corporation. The rights of
creditors or liens upon the
property of any of such
constituent corporations shall
not be impaired by such merger
or consolidation.
There will be transfer of all
assets, property, rights and
privileges including choses in
action in favor of the new
entity without further act or
deed necessary, subject only to
those which were excepted in
their plan of merger or
consolidation.
6. Transfer of all liabilities
subject only to those excepted
or reserved in their plan. For
example, as a rule, maturing
obligations are not included in
the plan.
Date of Effectivity of Merger or
Consolidation
Merger or Consolidation does not
become effective upon the mere
agreement of the constituent
corporations. Upon issuance of
the certificate of merger or
consolidation, such merger or
consolidation shall become
effective (Sec. 79). The
approval of the SEC is required.
Cases:
1. BPI v. BPI EMPLOYEES UNION-
DAVAO CHAPTER-FEDERATION OF
UNIONS IN BPI UNIBANK
G.R. No. 164301: October 19,
2011, J. LEONARDO-DE CASTRO
FACTS:
In 2000, Far East Bank and trust
Company (FEBTC) merged with Bank
of the Philippine Islands.
Petitioner had a Union Shop
agreement with respondent BPI
Employees Union-Davao Chapter-
Federation of Unions in BPI
Unibank (the Union).Pursuant to
the merger, respondent requested
BPI to terminate the employment
of those new employees from
FEBTC who did not join the
union.
BPI refused to undertake such
action and brought the
controversy before a voluntary
arbitrator. Although BPI won the
initial battle at the Voluntary
Arbitrator level, BPIs position
was rejected by the Court of
Appeals which ruled that the
Voluntary Arbitrators
interpretation of the Union Shop
Clause was at war with the
spirit and rationale why the
Labor Code allows the existence
of such provision.
This was followed and affirmed
by the Supreme Court of the CA
decision holding that former
employees of the Far East Bank
and Trust Company (FEBTC)
"absorbed" by BPI pursuant to
the two banks’ merger. The
absorbed employees were covered
by the Union Shop Clause in the
then existing collective
bargaining agreement (CBA)of BPI
with respondent BPI Employees
Union-Davao Chapter-Federation
of Unions in BPI Unibank (the
Union). Petitioners, despite the
August 2010 decision moved for a
Motion for reconsideration of
the decision.
ISSUE:
Whether or not the "absorbed"
FEBTC employees fell within the
definition of "new employees"
under the Union Shop Clause,
such that they may be required
to join respondent union or
suffer termination upon request
by the union.
HELD:
The court agreed with Justice
Brion’s view that it is more in
keeping with the dictates of
social justice and the State
policy of according full
protection to labor to deem
employment contracts as
automatically assumed by the
surviving corporation in a
merger, without break in the
continuity of their employment,
and even in the absence of an
express stipulation in the
articles of merger or the merger
plan.
By upholding the automatic
assumption of the non-surviving
corporations existing employment
contracts by the surviving
corporation in a merger, the
Court strengthens judicial
protection of the right to
security of tenure of employees
affected by a merger and avoid
confusion regarding the status
of their various benefits.
However, it shall be noted that
nothing in the Resolution shall
impair the right of an employer
to terminate the employment of
the absorbed employees for a
lawful or authorized cause or
the right of such an employee to
resign, retire or otherwise
sever his employment, whether
before or after the merger,
subject to existing contractual
obligations.
Another issue resolved by the
Court is whether those retained
by BPI are subject to close shop
agreement? Court answered in the
affirmative, as it could not
countenance a situation where
there are two classes of
employees: first those who are
required to join the union to
maintain their membership and
second, those who cannot be
compelled just because they
originally came from Far East
bank. Thus, the retained
employees are compelled to join
the union.
2. BANK OF COMMERCE vs. RADIO
PHILIPPINES NETWORK, INC.
G.R. No. 195615, April 21, 2014,
J. Abad
Facts:
In late 2001 the Traders Royal
Bank (TRB) proposed to sell to
petitioner Bank of Commerce
(Bancommerce) for P10.4 billion
its banking business consisting
of specified assets and
liabilities. Bancommerce agreed
subject to prior Bangko Sentral
ng Pilipinas' (BSP's) approval
of their agreement. The
agreement of the parties
specifically excluded TRB’s
contingent liabilities that the
latter might have arising from
pending litigations in court,
including the claims of
respondent RPN, et al.
Nevertheless, Radio Philippines
Network sought to hold Bank of
Commerce for the liabilities of
TRB.
Issue:
Whether or not Bank of Commerce
can be held liable
Held:
No. It is clear that no merger
took place between Bank of
commerce and TRB as the
requirements and procedures for
a merger were absent. A merger
does not become effective upon
the mere agreement of the
constituent corporations. All
the requirements specified in
the law must be complied with in
order for merger to take
effect. Section 79 of the
Corporation Code further
provides that the merger shall
be effective only upon the
issuance by the Securities and
Exchange Commission (SEC) of a
certificate of merger.
As such, since there had been no
merger, Bancommerce cannot be
considered as TRB’s successor-
in-interest and against which
the Court’s Decision of October
10, 2002 in G.R. 138510 may been
forced. Bancommerce did not hold
the former TRBs assets in trust
for it as to subject them to
garnishment for the satisfaction
of the latter’s liabilities to
RPN, et al. Bancommerce bought
and acquired those assets and
thus, became their absolute
owner.
De facto Merger: There is
transfer of all assets by one
corporation to another for
shares of stocks. It is
essentially a barter. No
automatic transfer. Once there
is transfer assets and get paid
via shares of stocks, then the
entity becomes a transferee.
A de facto merger can be pursued
by one corporation acquiring all
or substantially all of the
properties of another
corporation in exchange of
shares of stock of the acquiring
corporation. The acquiring
corporation would end up with
the business enterprise of the
target corporation; whereas, the
target corporation would end up
with basically its only re
maining assets being the shares
of stock of the acquiring
corporation. Bank of Commerce v.
Radio Philippines Network, Inc.,
et al., G.R. No. 195615, April
21, 2014
De facto Merger vs Business
Enterprise Transfer:
De Facto Business
Merger Enterprise
Transfer
One One corporation
corporation transfers all of
acquires its assets to
substantial another
ly all the corporation
assets of including the
another goodwill. As a
corporation consequence, the
in exchange creditors of the Code must 60 days from
for shares transferor are be followed. the effectivity
of stocks bereft of assets of the merger
and against which to or
therefore satisfy their consolidation
neither claims. Assets c. If the
will lose part of trust absorbed
the fund. If the corporation is
separate entire business is the foreign
and transferred to corporation
distinct another. The doing business
personality transferee is in the
originally deemed to assume Philippines, a
imbued upon all liabilities of petition for
each of transferor. withdrawal of
them Transferor has no its license
meaning the further business. must also be
one who filed.
acquires Similarity with
the assets merger/consolidati
of the on: automatically
other will liable because the
pay for transferee Appraisal right
such assets continues the
by way of business of the Definition:
its own transferor.
shares of Appraisal right is the method of
stock the paying a shareholder for the
transferor taking of his property; the
corporation statutory means whereby a
will be stockholder can avoid the
stockholder conversion of his property into
of another property not of his own
transferee choosing. The purpose of the
right is to protect the property
Requirements in a merger or rights of dissenting
consolidation of a foreign stockholders from actions by the
corporation licensed in the majority shareholders which
Philippines: alters the nature and character
of their investment. It is a
With a With a foreign right granted to dissenting
domestic corporation stockholders on certain
corporation a. Such must be corporate or business decisions
a. Such must permitted by to demand payment of the fair
be permitted the law of its market value of their shares.
under incorporation;
The right to withdraw from the
Philippines b. A duly
corporation and demand payment
laws and by authenticated
of the fair value of the shares
the law of its articles of
after dissenting from certain
incorporation merger or
corporate acts involving
b. the consolidation
fundamental changes in corporate
requirements must be filed
structure (Sec. 81).
on merger or with the SEC or
consolidation the appropriate
This implies the time when at
provided by government
the option of dissenting
agency within
shareholder the intra corporate
relation between that
shareholder and the corporation
shall be extinguished. But the
extinguishment of that
intracorporate relation requires
that the corporation pay back
the surrender value of the
shares of the stockholders.
All rights accruing to the
withdrawing stockholder’s
shares, including voting and
dividend rights, shall be
suspended from the time of
demand for the payment of the
fair value of the shares until
either the abandonment of the
corporate action involved or the
purchase of the shares by the
corporation, except the right of
such stockholder to receive
payment of the fair value of the
shares.
Instances when a stockholder may
have the right to dissent and
demand payment of the fair value
of his shares:
1. In case any amendment to the
articles of incorporation has
the effect of:
a. Changing or restricting the
rights of any stockholder or
class of shares;
Ex. An amendment in the Articles
of Incorporation denying a
preemptive right or inserting a
provision denying the exercise
of the right of preemption.
b. Authorizing preferences in
any respect superior to those of
outstanding shares of any class;
or
Ex. In the present Articles of
Incorporation, all shares of
stock coming from the authorized
capital stock are common shares
and so they enjoy equality in
all respects and then an
increase in authorized capital
stock is undertaken and the
additional new shares are
preferred shares. This would
grant preferences not currently
enjoyed by the existing
shareholders. Thus, the existing
shareholders can now exercise
appraisal right.
c. Extending or shortening the
term of corporate existence.
This is one way of transforming
the investment of the
shareholder by prolonging the
business or cutting it short.
2. In case of sale, lease,
exchange, transfer, mortgage,
pledge or other disposition of
all or substantially all of the
corporate property and assets as
provided in the Code;
In this case, the corporation is
rendered incapable of continuing
business for which it was
organized. It transforms the
character of the shareholder and
must be allowed to withdraw by
appraisal.
3. In case of merger or
consolidation.
This is corporate restructuring
because there is union or
combination of a corporation
with some other entity.
Other instances provided for in
the Corporation Code:
1. Investment of corporate funds
in another corporation or
business or for any other
purpose;
2. In a close corporation, a
stockholder has the right to
compel the corporation for any
reason to purchase his shares at
their fair value which shall not
be less than the par or issued
value when the corporation has
sufficient assets to cover it
debts and liabilities, exclusive
of capital stock.
Requirements and procedure for
the exercise of the appraisal
right:
1. The stockholder must have
voted against the proposed
corporate action in any of the
instances allowed by law for the
exercise of the appraisal right;
2. A written demand for payment
must be made by the dissenting
stockholder within 30 days after
the date on which the vote was
taken. Failure to make the
demand within the said period
shall be deemed a waiver of the
appraisal right;
3. Surrender of the certificate
of stock by the dissenting
stockholder for notation in the
corporate books and payment by
the corporation of the fair
market value of said shares as
of the day prior to the date on
which the vote was taken,
excluding any appreciation or
depreciation in anticipation of
such corporate action. If the
stockholder and the corporation
cannot agree on the fair market
value thereof, the same shall be
determined by appraisers;
4. The corporation must have
unrestricted retained earnings
in its books to cover the
payment of the fair value of the
shares of the dissenting
stockholder;
5. Upon payment of the shares by
the corporation, the dissenting
stockholder shall transfer his
shares to the corporation.
Effects of demand for payment of
the fair value of a
stockholder’s shares:
1. From the time of demand for
payment – all rights accruing to
such shares, including voting
and dividend rights, are
suspended, except the right to
receive payment.
2. After either the right ceases
or the purchase of the said
shares by the corporation – all
rights accruing to such shares
are restored and all dividend
distributions which would have
accrued on the shares shall be
paid to the holder thereof.
ssenting stockholder
is not paid the value of his
shares within 30 days after the
award, his voting and dividend
rights shall immediately be
restored.
withdrawn unless the corporation
consents thereto.
Instances when the right to
payment ceases:
1. The stockholder withdraws his
demand for payment with the
consent of the corporation;
2. The proposed corporate action
is abandoned or rescinded by the
corporation;
3. The proposed corporate action
is disapproved by the SEC where
such approval is necessary;
4. The SEC determines that such
stockholder is not entitled to
the appraisal right;
5. The stockholder fails within
10 days after demanding payment
for his shares to submit the
certificates of stock
representing his shares to the
corporation for notation and the
corporation, at its option,
terminates the right.
6. The shares represented by the
certificates bearing such
notation are transferred and the
certificates subsequently
canceled.

expenses of appraisal shall be
borne by the corporation.
ascertained by the appraisers is
approximately the same as the
price which the corporation
offered to pay the stockholder.
General rule: In an action to
recover the fair value of
stocks, all costs and expenses
shall be assessed against the
corporation.
stockholder to receive payment
is unjustified.
required within 10 days after
demanding payment for his shares
to submit the stock certificates
representing his shares to the
corporation for notation. His
failure to do so shall, at the
option of the corporation,
terminate his rights.
not prohibited from selling,
transferring or assigning his
shares. If such be the case,
once the certificates are
subsequently canceled, the
rights of the transferor as a
dissenting stockholder shall
cease and the transferee shall
have all the rights of a regular
stockholder; and all dividend
distributions which would have
accrued on such shares shall be
paid to the transferee.
appraisal right remain to be a
director until his shares are no
longer registered in his name.
subscription is not fully paid
is still entitled to exercise
his appraisal right.
What is the procedure for the
right of appraisal?
1. A written demand must be
given by the stockholder
addressed to the corporate
secretary. From the date of said
written demand, the suspension
of rights shall take effect.
This must be done within thirty
days from the time that the
objected corporate act was
adopted by the board.
Ex. Amendment to deny pre-
emptive right. This was approved
by the Board on March 31, 2017.
Within 30 days from said date,
the demand for appraisal must
have been brought to the
corporate secretary. Within 10
days from said demand, the
dissenting stockholder must
surrender the physical stock
certificate to corporate
secretary for annotation that it
is now subject to appraisal.
Thereafter, the corporation now
has the obligation to make
payment based on the fair value
of the shares of the dissenting
stockholder.
What is the basis of the fair
value?
1. The value as stipulated upon
by the parties
2. The value fixed by law
Under the Corporation Code, if
the proposed corporate action is
implemented or affected, the
corporation shall pay to such
stockholder, upon surrender of
the certificate or certificates
of stock representing his
shares, the fair value thereof
as of the day prior to the date
on which the vote was taken,
excluding any appreciation or
depreciation in anticipation of
such corporate action.
Ex. If the corporate act
objected to was adopted March
31, the value of the shares
subject to the appraisal right
shall be pegged at the value on
the day prior to the date of the
adoption of the corporate act,
which is on March 30.
3. If they still cannot agree,
they may ask for judicial action
or extrajudicial action
By judicial action: If the
corporation has offered a value
to dissenting stockholder at P50
but X wants P100 per share. The
corporation may initiate the
consignation complaint if the
corporation which initiates it.
The controversy is
intracorporate. If the
dissenting stockholder files the
action, it is one of specific
performance cognizable by
special commercial courts
because it is an intracorporate
controversy.
Another option is to seek
extrajudicial action by
convening an ad hoc committee of
appraisers. The members of the
adhoc committee are:
a. representative of corporation
b. representative of stockholder
c. an individual chosen by
corporation and stockholder
The findings of the majority of
the appraisers shall be final,
and their award shall be paid by
the corporation within thirty
(30) days after such award is
made
Case: Spouses Turner vs Lorenzo
Shipping, G.R. No. 157479,
November 24, 2010, J. Bersamin
Facts:
Lorenzo Shipping, by a majority
vote of its board and 2/3’s vote
of its outstanding capital,
approved the denial of
preemptive right to its
stockholders. It thought of
expanding its capital stock so
it decided to deny preemptive
rights to existing shareholders
and incorporate this into its
articles of incorporation.
The turner Spouses opposed the
amendment. Spouses demanded the
return of their surrender value
of their shares of stock and
payment of their shares at the
rate of P2.276/share based on
the book value of the shares, or
a total of P2,298,760.00 but the
corporation was willing to pay
only P0.41/share (or a total of
P414,100.00) as counteroffer.
The Spouses and the Corporation
established an ad hoc committee
which later on came up with the
final valuation of P2.54/share,
for an aggregate value of
P2,565,400.00 for the
petitioners . Pursuant to the
Corporation code, it was final
and executory so the spouses
demanded the value. They were
ignored by the corporation so
they were constrained to file an
action for specific performance.
The Corporation raised the
defense that it had no
unrestricted retained earnings.
Issues:
1. Whether or not the
Corporation must pay the
valuation despite lack of
unrestricted retained earnings
2. If they wait until the time
that the Corp has unrestricted
retained earnings may their
action be barred by
prescription?
Held:
1. Spouses Turner have no cause
of action against the
Corporation. As far as corporate
property is concerned, the
creditors should be preferred
and no distribution of assets
must be made in favor of
shareholders. It might be
prejudicial to the rights of
creditors to pay first to the
spouses when it cannot even
discharge its pending
liabilities.
The law expressly provides that
no payment shall be made to any
dissenting stockholder unless
the corporation has unrestricted
retained earnings in its books
to cover such payment and
provided, further, that upon
payment by the corporation of
the agreed or awarded price, the
stockholder shall forthwith
transfer his shares to the
corporation. In case the
corporation has no available
unrestricted retained earnings
in its books, Section 83 of
the Corporation Code provides
that if the dissenting
stockholder is not paid the
value of his shares within 30
days after the award, his voting
and dividend rights shall
immediately be restored.
Hence, in accordance with the
second paragraph of sec. 82, BP
68 supra, the Turners’ right to
payment had not yet accrued when
they filed their Complaint on
January 22, 2001, albeit their
appraisal right already existed.
2. Prescriptive period does not
begin to run until the
corporation has unrestricted
retaining earnings
In the meantime, what happens to
the shares of the Spouses
Turner? Under the provisions of
the Code, the failure to make
payment in due time, restores
the shareholders to his rights,
including voting rights. Unless,
the right to payment is legally
extinguished. When is the right
of payment legally extinguished?
a. when the corporate act is
abandoned by the corporation
b. if the SEC disapproves the
corporate act
c. if the SEC determines that
the shareholder is not entitled
to appraisal
d. if in the meantime, the
dissenting stockholder transfers
his shares to another. When he
transfers share to another, he
receives consideration. He
therefore will no longer be
entitled.
Note: Shares of stock of
corporation, once issued to
shareholders, they become
personal property of the
shareholders. The appraisal
right is tantamount to
expropriation. It is like
taking private property. Private
property is shares of stocks.
Owner is shareholder. The
obligation of the corporation is
to pay just compensation/
surrender value.
Why appraisal right not
available to dissenting
stockholders in increase of
capital stock:
The non-granting of appraisal
right to dissenting stockholders
in case of increase of capital
stock may be rationalized on two
grounds:
a) The increase in capital stock
does not prevent any
stockholder, including a
dissenting stockholder from
opting out of the contractual
relationship by simply selling
his shares in the corporation to
any interested buyer.
b) The grant of appraisal right
in case of increase of capital
stock would defeat the very
purpose for which the power is
exercised, i.e., to raise funds
for the operation or even
survival of the corporate
business.
NON-STOCK CORPORATIONS

Non-stock Stock Kinds of Non-Stock Corporation

Purpose Charity (all Profit
secondary (secondary
A) Religious
purposes purposes  Must always be non-stock
must be need not be 1) Corporation Sole (freak in
related to related to corporation law)
the primary the primary  Only one individual (chief of
purpose) purpose)
the religious church, sect or
Managing BOT unless BOD
Body other AoI denomination). He or she is
specifies the corporation.
other names  Purpose:
Members 5-beyond 15 5-15  Perpetuation of the rites
of the as well as tenets or
Board
(min- doctrines of the church.
max)  Management and
Term for 1 year (max 1 year administration of
the is 3 years properties of the church.
Board as long as  To organize a corporation
stated in
the AoI) It
sole, the appointment or
is permitted designation must be submitted
to divide to the SEC along with the AoI.
the  AoI need not follow the form
membership prescribed by the Corporation
in the board
so that
Code. What is necessary is
there will that it is consistent with
be elections the rules of the church.
every year.  The corporation sole is
merely a TRUSTEE of the
members of the church.
 Members of the Board may be  In case of conveyance or
elected by class (e.g. not all mortgage or otherwise a lien
members may be voting members). constituted on the property
 AoI may deny cumulative voting of the church, the
as well as proxies (if AoI is corporation sole must file a
silent, voting is cumulative). petition with the RTC not for
ONE member = ONE vote permission (this power
 Admission, retention, belongs to the church itself
expulsion as members shall be and not to the courts) BUT to
for grounds provided for in the enable the RTC to ensure that
AoI and By-laws. the rights and welfare of the
 Membership in the Board is church itself will be
purely personal and therefore protected.
non-transferable. It is
subject to the discretion of 2) Corporation Aggregate /
the corporation to determine Religious Society
who may be admitted as its  Two or more individuals can
members. form this kind of corporation
 A member of the Board has PROVIDED that the
duty to pay membership fee. incorporation is approved by
Consistent failure to comply a majority vote of the
with such obligation is a governing body or board and
valid ground for expulsion at least 2/3 of the
of the member. membership.

 All subsequent amendments to
the AoI must be approved by a
majority vote of the
governing board and at least
2/3 of the membership.
 Protected by the
Constitution. The SEC has no
power to reject the AoI.
Religious corporations are
deemed formed from the moment
of filing of the AoI with the
SEC.
 No involuntary dissolution
proceedings may be initiated
by the state against
religious corporations.
Case:
 The church was incorporated as
a corporation sole (the
Archbishop is the corporation.
The church later became a
corporation aggregate by
virtue of the ordinary
amendment of the corporation’s
AoI.
 A minister refused an order for
reassignment to another parish
and refused to give up the
residence (property of the
church) for the new minister.
The church filed an ejectment
case against him. Pending the
ejectment case, he was removed
as a minister and eventually as
a member of the church.
Q: As a member of the church,
being a non-stock corporation,
does the minister have the right
to use corporate properties at
will?
A: NO. The corporation has a
separate and distinct personality.
 The minister filed an illegal
dismissal case.
 Grounds:
 The authority of the
Archbishop to reassign him
has been lost by reason of
the fact that the amendment
of the AoI adopted by the
church is illegal (no
approval by the consistory).
A consistory equivalent to a
BOD.
 Since there was an illegal
transfer because of lack of
authority of the Archbishop,
he has a right to remain in
his original assignment.
 Ruling: The amendment of the
AoI is a valid one. What is
needed for a valid amendment is
the decision of the corporation
sole. The Archbishop is the
corporation; only he can decide
to amend himself. The amendment
is a mere continuation of the
church. There is no substantial
change in the church policies,
tenets, or doctrines as well as
rules and regulations of the
church.
B) Educational
 A non-stock corporation that
is empowered to confer
degrees or provide
educational courses.
 Regulator: CHED, DepEd, TESDA
 All educational corporations
are required to organize as
non-stock corporations (Basic
Education Act of 1982)
without prejudice to those
that already existed as stock
corporations.
 They can modify and innovate
from what is prescribed under
the Corporation Code for
their AoI.
Members of 5-15 in multiples of
the Board 5 (5, 10, 15) OR
divide into 1/5
Term 5 years (elections
may be held every
year but only for
the 1/5)
Citizenship 60% - 40% Rule
requirement EXCEPT: Schools
established for the
exclusive benefit of
expatriates and
their children.
CLOSE CORPORATION
 A stock corporation that
carries the following
characteristics:
1) Limited number of
shareholders. The number
must be specified in the AoI
that cannot go beyond 20.
2) Acquisition and ownership of
share shall be subject to
valid and reasonable
restrictions stated in the
AoI, by-laws and stock
certificates.
3) Prohibited form listing its
shares in stock exchange. A
close corporation cannot
publicly offer its shares.
 If at any time during its term
2/3 of the OCS is acquired by
an open corporation, the close
corporation ipso facto loses
its character as such.
Management of a Close Corporation
1) By Board of Directors
 The AoI may provide that the
board shall be elected by
specific class of shares
(e.g. 8/10 shall be elected
by Class A shares while 2/10
shall be elected by Class
B).
2) By the Shareholders
 All shareholders as the
directors (remember that the
maximum number of
shareholders is 20).
 It must be expressed in the
AoI. In this case, no
election is necessary.
Meetings, Voting, and Quorum
Requirements
 Informal actions (resolutions
adopted without a formal
meeting) taken by management
are already binding upon the
corporation. If it is customary
within the corporation that
such corporate acts are taken
without necessity of a meeting,
then the custom prevails over
the letter requirements of the
law UNLESS one of the directors
or shareholders should
question the acts taken.
 In case of objection, there is
necessity that the opposition
be in writing, OTHERWISE,
silence of the objecting
director is deemed
acquiescence of the informal
act.
 The AoI may prescribe a higher
quorum or voting requirement
for the management of the
corporation such as unanimous
consent (in an open
corporation: majority of the
number fixed in the AoI or
simple majority).
Capital Stock
 Ownership of shares in a close
corporation is subject to
eligibility requirements.
 To validly acquire shares, one
must be qualified in accordance
with the AoI and By-law of the
corporation. The
qualifications must also be
stated in the stock certificate
indorsed and delivered to the
transferee.
 The right to transfer shares is
NOT absolute or unbridled due
to the eligibility
requirements based on
qualifications or right of
first refusal (in an open
corporation, the right to
transfer cannot be restricted
as the same is a property
right).
Pre-emptive Rights
 Pre-emptive right v. Right of
first refusal:
 Pre-emptive: Corporation
offers to sell the shares to
the existing shareholders.
 First refusal: An existing
shareholder intending to
dispose of his shares must
offer first to the
corporation or to the other
existing shareholders.
 If an existing stockholder
sells his shares to another
without following the right of
first refusal, such sale is
VOID.
 A third person who acquires
shares of stocks of an existing  Appraisal rights: covers all
stockholder in violation of the instances where an existing
qualifications including right stockholder dissents from a
of first refusal CANNOT compel particular corporate act
registration of the transfer. whether or not the
The corporation can validly corporation has
refuse to acknowledge the unrestricted retained
transferee in its corporate earnings for as long as the
books and records because the corporation has sufficient
transferee is deemed to have assets (in open corporation,
conclusive knowledge of the grounds are limited-
restrictions and ABISIMID and can only be
qualifications that are exercised when the
written in the AoI, by-laws, corporation has URE).
and stock certificate.
 The corporation may, however,  Power to petition for the
give its consent to the dissolution of the
transfer PROVIDED that corporation: every
corresponding amendments to stockholder has the power to
the AoI and by-laws are file petition at any time
adopted. and for any cause especially
when there is proof that
Situation: those who are managing the
 X has 20M shares: stock corporation are guilty of
certificate shows 20th of 20 fraud or misrepresentation
shareholders of the company. or have wasted or dissipated
 X transferred 5M shares to Y the assets of the
(not an existing stockholder of corporation.
the corporation).
Remedies to Resolve Conflicts
Q: Can Y compel registration of
transfer? An order may be issued by the RTC
(intra-corporate controversies):
A: NO. Y has conclusive knowledge  directing the amendment of the
of the restrictions and AoI and By-laws of the
qualifications. If, however, the corporation
corporation gives his consent  amending, modifying, or
(unanimous) and the corresponding reversing any resolution of the
amendments are made. Effect: the board or stockholders’
close corporation becomes an open agreement
corporation.  requiring that the corporation
buy back the shares of its
 The rights of stockholders in shareholders
a close corporation are
restricted but broader.
 Pre-emptive rights:
existing stockholders are
entitled to pre-emptive
right (class-based) in all  appointing a provisional
issuances and re-issuances director (a judicially appointed
of shares of the corporation director entitled to the usual rights
including re-issuance of and emoluments to the office BUT who
is required to break any tie in case
treasury shares (in open of voting-to prevent disruption in
corporation, only with new management)
issuances).
 directing that the corporation dissolving corporation to
be dissolved ascertain whether the
corporation has enough
properties or assets to
DISSOLUTION satisfy creditors’ claims.
 Coincides with the time that  The creditors are
the legal personality of the required to prove their
corporation is extinguished. claim whether due or not.
 The corporation is forbidden to  The subsistence of unpaid
continue with the business or debt will not prevent the
purpose for which it was effectivity of the
organized. dissolution.
 Date of dissolution:
Causes: FINALITY OF ORDER OR
1) Expiration of Term JUDGMENT OF DISSOLUTION. The
 Lapse of term prescribed in order itself must be
the AoI (term not renewed or published in a newspaper of
extended) general circulation in the
 May be by way of shortening Philippines to notify
of the corporate term creditors.
(formal amendment approved
by the majority of the BOD 3) Involuntary Dissolution
and 2/3 of the OCS). From  Forfeiture of franchise
the approval of the initiated by the state.
shortened term by the SEC,  Date of dissolution:
the corporation is deemed FINALITY OF ORDER OR
dissolved as of the lapse JUDGMENT OF DISSOLUTION. The
thereof. order itself must be
published in a newspaper of
2) Voluntary Petition for
general circulation in the
Dissolution
 Surrender of franchise Philippines to notify
creditors.
Q: Where is the petition filed?
A: Concurrent jurisdiction of Grounds:
RTC and SEC (RA 8799) a) Fraud in procuring its
certificate of
Q: Approval of the petition incorporation;
A: Majority of the BOD and 2/3 b) Corporation is guilty with
of the OCS fraud or misrepresentation
as to what it can do or what
a) Creditors’ rights are not it was doing to the
affected: At the time of the prejudice of the public;
filing of the petition, the c) Non-user or continuous
corporation has no inoperation;
outstanding debts or d) Failure to file by-laws;
liabilities or has fully
paid the same. e) Willful disobedience to any
 Date of dissolution: DATE order including a cease and
OF FILING desist order issued by the
SEC or government regulator;
b) Corporation has outstanding f) Failure to comply
or unpaid liabilities: reportorial requirements:
Hearings must be conducted  General Information Sheet
upon prior notices to all  Audited Financial
the creditors of the Statement
  Statement of Assets, winding up, and settling or
Liabilities and Net worth closure of business?
 Amendments of AoI and By- 1) To sue and be sued: prosecute
laws, if any and defend suits in its name;
 Report on elections, if 2) To enter into contracts
any relating to liquidation,
winding up and closure of
Q: When are reports due? business; and
A: GIS and AFS: date coinciding 3) To convey or transfer its
with the foundation day of the property or assets to another
corporation OR within two (2) who will acquire the legal
weeks following the annual title thereto for the benefit
stockholders meeting (ASM). of all other persons who shall
retain the equitable or
Q: What proceeding will be beneficial title.
undertaken?  Legal title: transferee
A: QUALIFY  Beneficial title: creditors
 SEC if ground relied upon is (in case of residue, for
failure to file by-laws OR stockholders or members)
failure to comply with
reportorial requirements OR Q: Can the corporation perform the
willful disobedience. following in case of liquidation, winding
up, and closure of business?
 RTC for all other grounds
Sell or Purpose is to acquire
stated above by way of issue shares capital to finance the
petition for quo warranto of stocks business and in case of
initiated by the OSG as dissolution, there is no
counsel for the state. business anymore
 Both Sell assets
substantial and
or
 part of liquidation
procedural DP must be afforded properties process
to the corporation. Acquire new G.R.: 
 The degree of evidence assets Except: new assets are
necessary is substantial necessary for liquidation,
evidence winding up, or closure
New Contract Purpose:
of Lease Perpetuation of the
business: 
For liquidation, winding
up, or closure: 
Amend AoI 
Call Stockholders still have
stockholders remaining interest in the
meeting affairs of the corporation
Declare From profit or business:
dividends 
Liquidating dividends: 

LIQUIDATION FOREIGN CORPORATION

 Corporations organized under a
NOTE: Dissolution merely law other than Philippine law.
terminates the legal personality  The law of the place of
of the corporation for its incorporation determines
business or purpose. It does NOT whether the corporation is a
entail a complete cessation of Philippine national or a
corporation. foreign corporation.

Q: What are the limited powers of Q: What is Philippine national

the corporation for liquidation, under the Foreign Investment Act?
1) Formed and organized abroad  A foreign corporation is
where 100% of its capital treated as such only within the
stocks are owned and controlled territory granted it
by Filipino citizens. permission to exist (where
2) Formed and organized to manage formed and organized).
or administer retirement,  Foreign corporations must
pension and similar plans where apply for a license to do
at least 60% of its business in the Philippines.
beneficiaries are Filipino The requirement of a license is
citizens. not to prevent a foreign
3) Formed and organized under corporation in doing business
Philippine law where at least in the Philippines; rather, it
60% of the CS belongs to is to prevent it from
Filipino citizens. establishing a domicile in the
 BUT in case an SEC- Philippines for its business
registered enterprise also without rendering itself
owns shares of stocks in amenable to Philippine law,
another SEC-registered jurisdiction, and court
enterprise, the latter processes.
shall be considered as
Philippine national for as Q: When is a license (from the
long as: SEC) required of a foreign
 60% of its board is corporation?
composed of Filipino A: When it’s found to be doing,
directors; and engaging, or transacting in its
 60% of the shares of business thru the following:
stocks belongs to 1) Soliciting orders/purchases
Filipino citizens (core business) within the
Philippines.
 For as long as a corporation is  HOWEVER, when the
considered as a Philippine solicitation is done thru
national, it shall be entitled an independent contractor
to exercise similar rights and that maintains its own
privileges as those separate and distinct
corporation formed and personality, then the
organized entirely in the foreign corporation is NOT
Philippines. doing business in the
Philippines.
2) Foreign corporation opens and
maintains offices whether
they are called branches or
liaisons.

 Investment rights of former 3) Appointing an agent/

Filipino citizens representative for its
 Shares of stocks in business in the Philippines
Philippine nationalized where that agent or
companies (partially or representative is domiciled
fully) held by them are in the Philippines for at
considered held and owned by least 180 days in a year
Filipino citizens. (tantamount to establishing
 Right to acquire and own domicile in the Philippines).
urban land (not exceeding 4) Participating in the
5000 sqm) and rural land management of a domestic
(not exceeding 3 ha) business whether operated as
proprietorship, partnership
 or a corporation UNLESS the
participation is merely an
offshoot of its right as a
shareholder.
 Participation must be
active and influential
such as the power to:
 Appoint key officers
 Dictate policies and
practices
 Determine finances
 The foreign corporation
exercises a substantial
degree of control over the
domestic business
5) Engaging in a transaction or
series of commercial
transactions that imply a
continuity of commercial
dealings showing the intent
to perpetuate or prosecute
the main body of a business
in the Philippines.
 It is not the number of
transactions that
determine whether the
foreign corporation is
doing business in the
Philippines. It is the
NATURE and the APPARENT
INTENT of the transaction
which is controlling.
 The foreign corporation must
appoint and designate a
resident agent in the
Philippines:
 Resident Agent: a natural or
juridical person domiciled
in the Philippines tasked
with accepting or receiving
summons or other court or
legal processes on behalf of
the foreign corporation.
Q: What is the effect when the
resident agent dies, withdraws,
resign, or otherwise
disqualified?
A: The foreign corporation must
execute an undertaking that
service of summons and other
legal processes upon the SEC is
service upon the corporation.
 This rule applies only when
the foreign corporation is
subsequently registered or
licensed to do business in
the Philippines.

 The application for the license

in the SEC must contain the
following attachments:
1) Latest AoI including Q: What are the effects of
amendments thereto and by- issuance of license by the SEC to
laws; the foreign corporation?
2) Certification as to the list 1) Grants the foreign corporation
of incumbent officers and legal capacity in the
directors; Philippines.
3) Statement as to its 2) The foreign corporation
financial condition; becomes entitled to all the
4) Statement of its capital rights enjoyed by domestic
stock; and corporations as far as the
5) Statement of what particular business in the Philippines is
business it intends to concerned
pursue in the Philippines. 3) The foreign corporation shall
If the business is regulated also be subject to the same
under Philippine law, then a liabilities as any duly
secondary license must also organized domestic
be procured. corporation.

Q: May the license granted to the
foreign corporation be
surrendered?
A: YES. A voluntary surrender
means that foreign corporation,
after procuring the license,
intends to voluntary terminate
its business in the Philippines.
Q: What are the benefits of a license granted to a foreign corporation?
Doing Business in the Philippines
With license
To sue  Can maintain a suit. No legal capacity to sue  Can sue but limited to:
The foreign
corporation must
allege that the
plaintiff is a foreign
corporation formed and
organized under the
laws of a foreign
country duly licensed
to do business in the
Philippines under
license number
__________.
To be  It can be impleaded as
sued a defendant. Make same
allegations as above.
Case: Time Inc. v. CA
Facts: Enrile filed a libel case
against Time Inc. in the RTC of
Manila (Libel case is to be filed
in the RTC where the alleged
defamatory or libelous article
was first published). Time Inc.
moved to dismiss for lack of
jurisdiction alleging that the
place of first publication is in
Makati. The RTC denied the motion
which prompted Time Inc. to file
The SEC will approve such
surrender or voluntary withdrawal
ONLY upon proof that the foreign
corporation has no longer
outstanding liabilities in the
Philippines.
Q: May the license be forfeited
or revoked?
A: YES, if it is found that the
foreign corporation has offended
the license granted to it such as
when said corporation conducts
business outside that of which it
is authorized.
Not Doing Business in
Without license the Philippines
(not lack of personality to a) Protection of IP
sue). rights: IP rights must
EXCEPT: be recognized cross
a) Violation of RPC and boarders without need
other penal laws. To sue of registration, thus a
on a criminal case, the foreign corporation can
foreign corporation does commence suit for
not need to prove infringement or unfair
capacity to sue. competition.
b) When it is merely
defending itself in a Maximum damages to be
suit filed against it awarded: triple the
(Time Inc. v. Reyes) value of the goods or
c) Defendant is guilty of services.
estoppel (Communications
and Materials Design v. b) Isolated transaction:
CA) and (Steel Case Inc. Suit founded upon an
v. CA) act or contract that is
set apart from the
principal business of
the foreign
corporation.
 The corporation can be
sued as a sanction for
violating the Philippine
law.
a petition for certiorari (an
original action). Enrile moved to
dismiss the petition on the
ground that Time Inc. is doing
business in the Philippines
without a license and therefore
barred from availing the special
civil action of certiorari.
Ruling: The certiorari petition
is merely an offshoot of the libel
case filed by Enrile. Once a
foreign corporation (with or the ground that the foreign
without license) is impleaded in corporation is doing business in
the Philippines, it is entitled the Philippines without license
to avail of all remedies and therefore is barred from
available under Philippine law suing in the Philippines.
including questioning
jurisdiction in a certiorari Ruling: It is true that the
petition. foreign corporation is doing
business in the Philippines
without a license and is
Case: Communications and therefore barred from suing in
Materials Design v. CA the Philippines BUT the defendant
Facts: A Representative Agreement is also barred or estopped from
was entered into by a foreign repudiating the capacity of the
corporation and a domestic foreign corporation to file the
corporation. Contents are as present case. Having recognized
follows: the legal existence of the
 The domestic corporation will foreign corporation by way of the
be the exclusive dealer, seller representative agreement knowing
and retailer of the products of that the foreign corporation is
the foreign corporation in the unlicensed, the domestic
Philippines. corporation is barred by estoppel
 The domestic corporation in questioning the legal capacity
cannot sell products of other of the foreign corporation to sue.
companies.
 That every contract procured by
the domestic corporation for Q: How to acquire jurisdiction
the product must be approved by over unlicensed foreign
the foreign corporation and corporation? (Amendment to the
such contracts shall be in the Rules of Court)
name of the foreign 1) Personal service thru the DFA
corporation. in coordination with a foreign
 In case the computers sold court where the foreign
suffer technical breakdown, corporation is located.
the servicing and repair must 2) Summons by publication in a
be done by the domestic newspaper of general
corporation thru approved circulation abroad accompanied
technicians by the foreign by service of summons thru
corporation. registered mail to the last
 The employees of the domestic known address of the defendant
corporation must meet all the foreign corporation.
standards set by the foreign 3) Facsimile or any electronic
corporation. means provided that proof of
 In all communications by the receipt can be generated.
domestic corporation, the  A third party authenticating
letterhead of the foreign authority can issue a
corporation must be used. certificate stating time of
transmission and time of
After some time, the foreign receipt and a statement on
corporation discovered that the whether or not the
domestic corporation is selling electronic message or
computer products of other digital document was altered
companies prompting the former to in the process.
file a case of breach of contract 4) By any other means as may be
against the latter. The domestic considered practicable but
corporation moved to dismiss on with leave of court (e.g. the
 lawyer may ask the court that
he be appointed as special
sheriff so that he can go and
serve the summons abroad)
Isolated Transaction Cases
Facts: A foreign bank corporation
extended a loan to a domestic
corporation. The domestic
corporation failed to pay. The
foreign corporation sued the
domestic corporation but the
latter filed a motion to dismiss
on the ground that the former is
not doing business in the
Philippines and therefore not
entitled to sue. The foreign
corporation alleged that it was
suing in an isolated transaction.
Ruling: The court ruled that the
extension of loan is part and
parcel and inherent in the
banking business.
Facts: A foreign corporation
entered into an import
transaction (for raw materials
not necessary for its business)
from a domestic producer here in
the Philippines. The agreement
provided that the cargo will be
delivered at a particular address
abroad. There was mis-delivery
thus the foreign corporation
filed a suit against the domestic
corporation.
Ruling: The suit is for an
isolated transaction.
Facts: A US-based corporation
entered into an import-export
transaction with a Japan-based
corporation. The goods were
loaded in a vessel. The vessel
made a port of call in Manila.
While in the port, the entire
vessel as well as the cargoes
burned due to the negligence of
the arrastre operator. The two
foreign corporations sued the
arrastre operator in the
Philippines. The operator moved
to dismiss the case on the ground
that the foreign corporations are
doing business in the Philippines
without license and thus have no
right to file a suit.
Ruling: The corporations are not
doing business in the Philippines
at all and for which they are not
required to have license. The
suit is in fact for an isolated
transaction.
Facts: A foreign corporation (no
license) participated in bidding
for a government contract for
which it lost. The corporation
filed a case questioning the
result of the bidding.
Ruling: Participating in bidding
for a government contract even if
the foreign corporation lost in
said bidding means that the
foreign corporation is doing
business in the Philippines.
Taking part in bidding shows
intent to establish its business
here in the Philippines. The
foreign corporation in this case
is doing business without a
license and thus barred to file
an action. The single
participation in the bidding
process is not an isolated
transaction.
 The above rules will apply only
when the foreign corporation
does its business in the
Philippines directly and NOT
when it is doing its business
thru a subsidiary pursuant to
the DOMESTICATION THEORY (one
of the mode of entry for
foreign corporations by
 putting up a wholly owned  at least forty (40)
subsidiary in the Philippines) years of age for the
Chairperson and
 at least thirty-five
(35) years of age for
SECURITIES AND EXCHANGE the Commissioners,
COMMISSION LAW  of good moral
PD 902-A, as amended by RA 8799 character, or
or the SRC unquestionable
integrity, of known
 The SEC is formerly a probity and patriotism,
function of the Bureau of and
Commerce. It is tasked to  with recognized
implement the Corporation competence in social
Code. and economic
disciplines
I. STRUCTURE OF THE  Majority of
SECURITIES AND EXCHANGE Commissioners,
COMMISSION (Secs 4 and 7, including the
RA 8799) Chairperson, shall be
members of the
Section 4. Philippine Bar.
Administrative Agency:
4.1. Security and II. ENTITIES UNDER ABSOLUTE
Exchange Commission acts JURISDICTION,
as a Collegial body SUPERVISION AND CONTROL
 COMPOSITION: Composed OF THE SEC (Sec 3 PD 902-
of a chairperson and A)
(4) Commissioners
 Appointed by the Originally, SEC was a
President for a term of quasi-judicial body
(7) seven years each created to implement and
and who shall serves as enforce the Corporation
such until their Code and all the disputes
successor shall have between duly registered
been appointed and corporations.
qualified.
 A Chairperson Now, its promissory power
appointed to fill a increased but denied or
vacancy occurring deprived their quasi-
prior to the judicial authority. Thus,
expiration of the term the SEC exercises
for which his/her original and exclusive
predecessor was supervision over the
appointed, shall serve following entities:
only for the unexpired
portion of their terms a. Corporations,
under Presidential partnerships or
Decree No. 902-A. associations which
are grantees of
4.2. QUALIFICATIONS: primary franchises
 The Commissioners must (Sec 5a, RA 8799)
be natural-born
citizens of the b. Investment Houses
Philippines under PD 129,
 otherwise known as the borrower shall pay
Investment House Act periodic rent. The
rentals shall be
Investment House –a payable on the
corporation engaged in stipulated period.
the business of At the end of the
guaranteeing the sale period, the
of any class of borrower does not
securities in the become the owner.
Philippines. (Financial
Leasing)
Underwriter – an  It merely
entity engaged in enables the
underwriting borrower to use
securities the equipment.
Lender retains
c. Financing Companies the ownership
(co-jurisdiction with of the goods,
the BSP) material or
equipment.
Financing Companies –
lending institution Q: Which is the better
principally engaged in option? Weigh the
consumer loans purpose and benefits
including financing of the arrangement and
leasing. determine which is
more suitable to your
Financial leasing – needs.
refers to an activity
of a financial lending d. Over all entities
institution wherein it engaged in securities
gives the borrower one market transaction
of the following such as a security
options: dealer, security
broker including stock
 Advance the exchanges and self-
purchase price of regulating
a certain goods or organization.
materials payable
by installment on Stock dealer – a
a stipulated person engaged in the
period. At the end business of buying and
of the installment selling securities on
period, the its own account. Under
borrower becomes Investment House Act,
the owner of the an investment house
said goods, has also powers which
material or are similar to the
equipment powers of securities
(Traditional dealers.
Financing)
 For the lending Securities broker –
institution to one who buys or sells
advance the securities including
purchase price stocks on account of
upon which the other.
 including
Stock exchange – an Judicial
entity engaged in Dissolution of
providing facilities Corporation.
for the sale and
purchase of shares of 3. Promulgate rules and
stocks. regulations not just
 Public market pertaining to
for shares of corporation, in
stocks. general, but also
market development.
NOTE: Philippine Stock 4. Hear and decide
Exchange, Inc. – a disputes involving
self-regulating capital market.
organization operating 5. Issue subpoena.
the stock exchange in 6. Deputization powers -
the Philippines. It is Enlist the aid and
a merger between support of and/or
Makati Stock Exchange deputize any and all
and Manila Stock enforcement agencies
Exchange. of the Government,
civil or military as
III. POWERS AND FUNCTIONS OF well as any private
THE SEC (Sec 5, RA 8799 institution,
in rel to Sec 6, PD 902- corporation, firm,
A) association or person
Specific Powers of SEC in the implementation
1. To issue Certificate of its powers and
of Incorporation and functions under this
Registration including Code
license of a foreign  Employees and
corporations. officials of
2. To suspend or revoke SEC are immune
the Certificate of whenever they
Incorporation and are sued for
Registration. acts and
official
A & A Continental v SEC, discharge of
225 S 314: Section their given
6(L) of Presidential function. They
Decree No. 902-A enjoy immunity
clearly provides that from personal
the SEC shall possess liabilities.
the power to suspend
or revoke, after  The quasi-judicial
proper notice and functions of SEC had
hearing, the franchise been terminated and
or certificate of later on transferred
registration of to the RTC.
corporations,  RTCs generally
partnership or designated as Special
associations. Commercial Courts
 Grounds for (SCCs)
revocation and  SCCs are branches of
suspension may the RTC designated by
be used by SEC the Supreme Court to
 exercise special of Registration or
jurisdiction under RA misrepresentation as
8799 to what it can do to
the great damage or
IV. ORIGINAL AND EXCLUSIVE prejudice of the
JURISDICTION OF THE public.
REGIONAL TRIAL COURTS
(formerly of the SEC, Sec b. Between corporation
5.2, RA 8799) and the public at large
 Cases filed when
INTRA-CORPORATE CONTROVERSIES there is an
 How to determine? Two- allegation of
tiered test corporate fraud
 FIRST TEST: committed either by
Relationship Test the corporation
 SECOND TEST: Nature directly or through
of the Controversy its directors,
Test trustees, officers,
shareholders or
Relationship Test members or their
Case involving: known agents and
A. Relationship between associates. (Devices
Corporation and State; and schemes
B. Relationship between amounting to fraud
Corporation and public and
in general; misrepresentation)
C. Relationship between
shareholders, members c. Between shareholders,
and officers of the members against the
Corporation; corporation or vice versa
D. Relationship between or between officers
and among shareholders against their own
and members. shareholders/members.
 To grant
a. Between corporation jurisdiction to
and the State SCC, it is
 With respect to the required to
franchise granted by establish whether
the State or not the intra-
 Example: Quo warranto corporate
petitions, revocation relationship
of Certificate of between the
Incorporation and parties still
Revocation of subsists at the
secondary time the acts
license/franchise of complained of were
the Corporation. committed.
 Quo warranto –  It is important to
initiated by know when will
Solicitor General in intra-corporate
behalf of the relationship
Republic on such begins and ends.
grounds for
involuntary Q: When does the intra-
dissolution, fraud in corporate relationship
procuring Certificate begin?
A: Intra-corporate in blank and was
relationship begins from physically delivered to
the moment of the the transferee subject to
perfection of the full payment of the
subscription contract; or purchase price. However,
from admission as member; without paying in full,
or from the moment the the transferee-buyer goes
transfer is registered. to the corporate
secretary demanding that
Q: In a conditional sale the share be registered
of shares of stocks where under his name and that
prior to the full payment new stocks certificate be
of the price, the seller given in lieu of the old
agreed to indorse but not one. Transferor-seller
yet deliver the stocks opposed on the ground
certificate to the buyer. that they has been no
The buyer has already full payment yet. Buyer
paid in full the purchase filed an action to compel
price and has already met the registration of the
the condition for the transfer under his name.
sale to become an Is there an intra-
absolute one. However, corporate controversy?
the seller refuses to
physically transfer the A: The action
stocks certificate. The against the corporate
buyer complained to the secretary is an intra-
Corporate Secretary and corporate controversy
asked for the because at that point,
registration of the there is already a
transfer of the stocks complete transfer, that
under his name. Corporate is, indorsement coupled
Secretary refused. Thus, with delivery. The fact
an action for Mandamus that the indorsement was
was file in the RTC to made in blank does not
compel the corporate change the fact that
secretary to cause the there is already a
registration. Will the complete transfer.
action prosper?
As such, the mandamus
A: No. The case must be case compelling the
dismissed. The buyer is corporate secretary to
not yet a stockholder register the transfer is
because there is yet no one which is considered
delivery of the stocks as an intra-corporate
certificate. Mere controversy. Whatever is
indorsement without the issue between the
delivery does not make transferor and the
the transferee a transferee against one
shareholder of the another is purely private
corporation. Therefore, where the corporation is
he is not entitled to not involved.
demand registration from
the corporation. Nature of controversy test
 The cause of action must
Q: Stock arise from enforcement of
certificate was indorsed
 rights and obligations 1. President;
under: 2. Corporate
i. Corporation Code; Secretary;
ii. Articles of 3. Treasurer; and
Incorporation; 4. Directors/Trust
iii. By-laws. ees.
 If the intra-corporate
relationship is merely  If not stated in
incidental, it is not an or created by
intra-corporate controversy. Articles and/or
REAL TEST: Would the case by-laws, then it
survive without the is not a
intra-corporate corporate
relationship between the office. Whoever
parties? If the answer is occupies the
yes, the case is not an said office is
intra-corporate not a corporate
controversy. officer.
 For as long as it relates to Therefore, he
this, regardless of the must seek
amount involved, it is the recourse to NLRC
RTC designated by the and not to SCC.
Supreme Court can exercise Thus, the
jurisdiction. position of
Examples: comptroller and
1. A derivative suit is vice-president
exclusive to RTC. were held to be
2. Actions based on not corporate
illegal dismissal of officers because
corporate officers nowhere in the
 Dismissal of a by-laws of the
corporate officer said corporation
is considered as a provides for
corporate act. those positions.
 As long as the The by-laws
dismissed officer merely allows
questions the the creations of
manner by which he such other
was dismissed or offices when the
terminated from Board finds it
service, it is not necessary. The
a labor dispute. enabling
 It does not relate provision does
to an ordinary not create
employer-employee corporate
relationship office. (Matling
between the v. Coros)
parties.
 Corporate officers – Examples of cases between
those whose position is parties that would require
provided for by the jurisdiction of SCC:
Articles of i. Action to collect balance
Incorporation and/or of subscriptions
by-laws and the (Judicial)
Corporation Code, to
wit:
 ii. Action for Annulment of a
contract of a Self-
dealing Director
iii. Action to enforce
personal liability of
directors (Sec. 65, Corp.
Code)
iv. Actions arising from
appraisal right
v. Others which are
controversies relating to
rights and obligations
extrinsic from the intra-
corporate relationship
between the parties.
NOTE: In criminal cases,
even if the case arose from
an intra-corporate
relationship, regular
jurisdiction shall apply.
SPECIFIC CASES WHICH ARE UNDER
THE ORIGINAL AND EXCLUSIVE
JURISDICTION OF THE RTC
(designated as Special Commercial
Court)
Section 5 of Presidential
Decree (P.D.) No. 902-A vested
the original and exclusive
jurisdiction over cases involving
the following in the SEC. However,
with the advent of Republic Act
No. 8799 (The Securities
Regulation Code), effective on
August 8, 2000, the jurisdiction
of the SEC over intra-corporate
controversies and the other cases
enumerated in Section 5 of P.D.
No. 902-A was transferred to the
Regional Trial Court pursuant to
Section 5.2 of the law. These
cases are as follows:
A. Devises or schemes amounting
to fraud or
misrepresentation
o Devices or schemes employed
by, or any acts of the board
of directors, business
associates, its officers or
partners, amounting to fraud
and misrepresentation which
may be detrimental to the
interest of the public
and/or of the stockholder,
partners, members of
associations or
organization registered
with the Commission
i. Alleje v CA 240 S 495
The complaint filed by SHAPE
before the Pasig trial court
imputes unmistakable acts of
fraud to Alleje as an
officer of SHAPE which have
supposedly resulted in its
heavy financial losses. The
fraud committed is
detrimental to the interest
not only of the corporation
itself but also of its
members who have unselfishly
agreed among themselves that
no part of the net income of
the corporation shall inure
to any of them. As held in
Magalad v. Premier
Corporation 7, this (fraud)
encompasses a category of
relationship within the SEC
jurisdiction, despite the
fact that the complaint
ultimately involves
collection of money, the
recovery of which would
ordinarily fall within the
legal competence of the
regular courts.
ii. Bañez v Dimensional
Construction 140 S 249
In the promissory notes
issued by private respondent
corporation, it is clearly
indicated therein that the
sums by money received by
private respondent were in
the nature of investments of
the petitioners, agreed upon
by the parties to be
returned by the corporation
upon the maturity of said
promissory notes. As the
money received by private
respondent do (sic) not
constitute payment of
subscription of shares, the
petitioners herein did not
become members of respondent
 Dimensional Trade and i. Aguirre v. FQB+7, Inc.
Development Corporation. In G.R. no. 170770, January 9,
the case of Sunset View 2013
Condominium Corporation vs.
Facts: On October 5, 2004,
Hon. Jose C. Campos, Jr. et
Vitaliano filed, in his
al., 104 SCRA 295, it was
individual capacity and on
ruled that where the stated behalf of FQB+7, Inc., a
party-litigants "are not Complaint for intra-corporate
shareholders of the dispute, injunction,
condominium corporation, inspection of corporate books
the instant cases for and records, and damages,
collection cannot be "a against respondents Nathaniel
controversy arising out of D. Bocobo, Priscila D. Bocobo
intra-corporate or and Antonio De Villa. The
partnership relations Complaint alleged that FQB+7
was established in 1985 with
between and among
the following directors and
stockholders, members of
subscribers, as reflected in
associates. its Articles of Incorporation.

There is no allegation nor The substantive changes found

any mention whatsoever in in the GIS, respecting the
plaintiff's complaint that a composition of directors and
device or scheme was subscribers of FQB+7,
resorted to by private prompted Vitaliano to write to
respondent corporation the "real" Board of Directors
amounting to fraud and (the directors reflected in
the Articles of
misrepresentation. It is,
Incorporation), represented
therefore, difficult to
by Fidel N. Aguirre. In this
consider that petitioner's letter dated April 29, 2004,
case falls within the Vitaliano questioned the
jurisdiction of the validity and truthfulness of
Securities and Exchange the alleged stockholders
Commission pursuant to PD meeting held on September 3,
902-A 2002. He asked the "real"
Board to rectify what he
B. Controversies arising out of perceived as erroneous
intra-corporate or entries in the GIS, and to
allow him to inspect the
partnership relations
corporate books and records.
o Controversies arising out of
intra-corporate or Issue: Whether the RTC
partnership relations, has jurisdiction over an
between and among intra-corporate dispute
stockholders, members or involving a dissolved
associates; between any or corporation.
all of them and the
corporation, partnership or Held: Yes. Intra-corporate
association of which they disputes remain even when the
are stockholders, members or corporation is dissolved.
Jurisdiction over the subject
associates, respectively;
matter is conferred by law.
and between such
R.A. No. 8799 conferred
corporation, partnership or jurisdiction over intra-
association and the State corporate controversies on
insofar as it concerns their courts of general
individual franchise or jurisdiction or RTCs, to be
right as such entity designated by the Supreme
Court. Thus, as long as the
 nature of the controversy is brochures as to the
intra-corporate, the facilities or amenities
designated RTCs have the that would be available in
authority to exercise the condominium and failed
jurisdiction over such cases.
to perform its obligation
to comply with the MDDR.
Thus, to be considered as an
intra-corporate dispute, the
case: (a) must arise out of Issue: Whether the
intra-corporate or HLURB has jurisdiction over
partnership relations, and the complaint filed by the
(b) the nature of the question petitioners.
subject of the controversy
must be such that it is Held: The HLURB is
intrinsically connected with given a wide latitude in
the regulation of the characterizing or
corporation or the
categorizing acts which may
enforcement of the parties’
constitute unsound business
rights and obligations under
the Corporation Code and the practice or breach of
internal regulatory rules of contractual obligations in
the corporation. the real estate trade. This
grant of expansive
Examining the case before us jurisdiction to the HLURB
in relation to these two does not mean, however,
criteria, the Court finds and that all cases involving
so holds that the case is subdivision lots or
essentially an intra- condominium units
corporate dispute. It
automatically fall under
obviously arose from the
its jurisdiction. The mere
intra-corporate relations
between the parties, and the relationship between the
questions involved pertain to parties, i.e., that of
their rights and obligations being subdivision
under the Corporation Code and owner/developer and
matters relating to the subdivision lot buyer, does
regulation of the corporation. not automatically vest
We further hold that the jurisdiction in the HLURB.
nature of the case as an For an action to fall
intra-corporate dispute was within the exclusive
not affected by the subsequent
jurisdiction of the HLURB,
dissolution of the
the decisive element is the
corporation.
nature of the action.
ii. Philip Go v. Distinction
Properties Development In this case, the complaint
G.R. No. 194024, April 25, filed by petitioners
2012 alleged causes of action
that apparently are not
Facts: Petitioners, as cognizable by the HLURB
condominium unit-owners, considering the nature of
filed a complaint before the action and the reliefs
the HLURB against DPDCI for sought. A perusal of the
unsound business practices complaint discloses that
and violation of the MDDR, petitioners are actually
alleging that DPDCI seeking to nullify and
committed invalidate the duly
misrepresentation in their constituted acts of PHCC.
circulated flyers and This action, therefore,
partakes the nature of an
 "intra-corporate SCCs can focus only on a
controversy," the particular subject matter.
jurisdiction over which
used to belong to the The RTC exercising
Securities and Exchange jurisdiction over an intra-
Commission (SEC), but corporate dispute can be
transferred to the courts likened to an RTC
of general jurisdiction or exercising its probate
the appropriate Regional jurisdiction or sitting as
Trial Court (RTC), pursuant a special agrarian court.
to Section 5b of P.D. No. The designation of the SCCs
902-A,38 as amended by as such has not in any way
Section 5.2 of Republic Act limited their jurisdiction
(R.A.) No. 8799. to hear and decide cases of
all nature, whether civil,
iii. Strategic Alliance v. Star criminal or special
Infrastructure proceedings.
G.R. No. 187872, November
17, 2010 iv. GD Express v. CA
G.R. No. 136978, May 8,
Held: Pursuant to 2009
Section 5.2 of Republic Act
No. 8799, otherwise known Held: The RTC
as the Securities exercising jurisdiction
Regulation Code, the over an intra-corporate
jurisdiction of the SEC dispute can be likened to
over all cases enumerated an RTC exercising its
under Section 5 of probate jurisdiction or
Presidential Decree No. sitting as a special
902-A has been transferred agrarian court. The
to RTCs designated by this designation of the SCCs as
Court as SCCs pursuant to such has not in any way
A.M. No. 00-11-03-SC limited their jurisdiction
promulgated on 21 November to hear and decide cases of
2000. all nature, whether civil,
criminal or special
It should be noted that the proceedings.
SCCs are still considered
courts of general Incidentally, not all the
jurisdiction. Section 5.2 prayers and reliefs sought
of R.A. No. 8799 directs by respondent Filchart in
merely the Supreme Court's SEC Case No. 08-97-5746 can
designation of RTC branches be characterized as intra-
that shall exercise corporate in nature. For
jurisdiction over intra- instance, respondent
corporate disputes. Nothing Filchart’s petition does
in the language of the law not allege that the cause
suggests the diminution of of action for the
jurisdiction of those RTCs nullification of the
to be designated as SCCs. management contract between
The assignment of intra- PEAC and petitioner Amihan
corporate disputes to SCCs is being instituted as a
is only for the purpose of derivative suit. It is an
streamlining the workload ordinary action for the
of the RTCs so that certain nullification of a contract,
branches thereof like the which is cognizable by
 courts of general (4) among the
jurisdiction. stockholders, partners or
associates, themselves.
C. Controversies in the Settled jurisprudence,
election or however, qualifies that
appointment/dismissal of when the dispute involves
corporate officers a charge of illegal
o Controversies in the dismissal, the action may
election or appointment of fall under the
directors, trustees, jurisdiction of the LAs
officers or managers of such upon whose jurisdiction,
corporations, partnership as a rule, falls
or associations termination disputes and
claims for damages
i. Cosare v. Broadcom Asia arising from employer-
G.R. No. 201298, February employee relations as
5, 2014 provided in Article 217
of the Labor Code.
Issue: Whether the RTC Consistent with this
has jurisdiction over the jurisprudence, the mere
illegal dismissal case fact that Cosare was a
filed against Broadcom stockholder and an
Asia, Inc. (Broadcom) and officer of Broadcom at
Dante Arevalo (Arevalo), the time the subject
the President of controversy developed
Broadcom. failed to necessarily
make the case an intra-
Held: It is the LA, and corporate dispute.
not the regular courts,
which has the original There are two
jurisdiction over the circumstances which must
subject controversy. An concur in order for an
intra-corporate individual to be
controversy, which falls considered a corporate
within the jurisdiction officer, as against an
of regular courts, has ordinary employee or
been regarded in its officer, namely: (1) the
broad sense to pertain to creation of the position
disputes that involve any is under the
of the following corporation’s charter or
relationships: (1) by-laws; and (2) the
between the corporation, election of the officer
partnership or is by the directors or
association and the stockholders. It is only
public; (2) between the when the officer claiming
corporation, partnership to have been illegally
or association and the dismissed is classified
state in so far as its as such corporate officer
franchise, permit or that the issue is deemed
license to operate is an intra-corporate
concerned; (3) between dispute which falls
the corporation, within the jurisdiction
partnership or of the trial courts.
association and its Cosare, although an
stockholders, partners, officer of Broadcom for
members or officers; and being its AVP for Sales,
 was not a "corporate to prove that petitioner
officer" under the was appointed by the
contemplation of the law. board of directors.
Thus, we cannot subscribe
ii. Renato Real vs. Sangu to their claim that
Philippines, Inc. et petitioner is a corporate
al., officer. Having said
G.R. No. 168757, January this, we find that there
19, 2011. is no intra-corporate
relationship between the
Issue: Who can be parties insofar as
considered as “corporate petitioner’s complaint
officers”? for illegal dismissal is
concerned and that same
Held: ‘Corporate does not satisfy the
officers’ in the context relationship test.
of Presidential Decree
No. 902-A are those iii. March II Marketing, Inc.
officers of the and Lucila V. Joson vs.
corporation who are given Alfredo M. Joson
that character by the G.R. No. 171993,
Corporation Code or by December 12, 2011
the corporation’s by-
laws. There are three Issue: Is a general
specific officers whom a manager a corporate
corporation must have officer?
under Section 25 of the Held: In the context of
Corporation Code. These Presidential Decree No.
are the president, 902-A, corporate officers
secretary and the are those officers of a
treasurer. The number of corporation who are given
officers is not limited that character either by
to these three. A the Corporation Code or
corporation may have such by the corporation’s by-
other officers as may be laws. Section 25 of the
provided for by its by- Corporation Code
laws like, but not specifically enumerated
limited to, the vice- who are these corporate
president, cashier, officers, to wit: (1)
auditor or general president; (2) secretary;
manager. The number of (3) treasurer; and (4)
corporate officers is such other officers as
thus limited by law and may be provided for in
by the corporation’s by- the by-laws.
laws.
With the given
It has been circumstances and in
consistently held that conformity with Matling
“[a]n ‘office’ is created Industrial and Commercial
by the charter of the Corporation v. Coros,
corporation and the this Court rules that
officer is elected (or respondent was not a
appointed) by the corporate officer of
directors or Petitioner Corporation
stockholders.” Clearly because his position as
here, respondents failed General Manager was not
 specifically mentioned in G.R. No. 173115/G.R. No.
the roster of corporate 173163-64, April 16,
officers in its corporate 2009.
by-laws. The enabling
clause in petitioner Issue: Whether the
corporation’s by-laws dismissal of a vice-
empowering its Board of president be considered
Directors to create as an intra-corporate
additional officers, controversy.
i.e., General Manager,
and the alleged Held: Before a
subsequent passage of a dismissal or removal
board resolution to that could properly fall
effect cannot make such within the jurisdiction
position a corporate of the SEC, it has to be
office. Matling clearly first established that
enunciated that the board the person removed or
of directors has no power dismissed was a corporate
to create other corporate officer. “Corporate
offices without first officers” in the context
amending the corporate of Presidential Decree
by-laws so as to include no. 902-A are those
therein the newly created officers of the
corporate office. Though corporation who are given
the board of directors that character by the
may create appointive Corporation Code or by
positions other than the the corporation’s by-
positions of corporate laws. There are three
officers, the persons specific officers whom a
occupying such positions corporation must have
cannot be viewed as under Section 25 of the
corporate officers under Corporation Code. These
Section 25 of the are the president,
Corporation Code. In secretary and the
view thereof, this Court treasurer. The number of
holds that unless and officers is not limited
until petitioner to these three. A
corporation’s by-laws is corporation may have such
amended for the inclusion other officers as may be
of General Manager in the provided for by its by-
list of its corporate laws like, but not
officers, such position limited to, the vice-
cannot be considered as a president, cashier,
corporate office within auditor or general
the realm of Section 25 manager. The number of
of the Corporation Code. corporate officers is
thus limited by law and
iv. Atty. Virgilio R. Garcia by the corporation’s by-
vs. Eastern laws. A corporate
Telecommunications officer’s dismissal or
Philippines, Inc. et removal is always a
al./Eastern corporate act and/or an
Telecommunications intra-corporate
Philippines Inc. vs. controversy, over which
Atty. Virgilio R. Garcia the Securities and
Exchange Commission [SEC]
 (now the Regional Trial predictability in
Court) has original and commercial affairs;
exclusive jurisdiction. 2. Preserve and maximize the
value of the assets of the
D. Petitions for Declaration in debtors;
the state of suspension of 3. Recognize creditors’
payments rights;
o Petitions of corporations, 4. Respect priority of claims;
partnerships or 5. Ensure equitable treatment
associations to be declared of creditors who are
in the state of suspension similarly situated.
of payment in cases where (Section 2, FRIA)
the corporation,
partnership or association Debtor
possesses sufficient It shall refer to a sole
property to cover all its proprietorship duly registered
debts but foresees the with the DTI, a partnership duly
impossibility of meeting registered with the SEC, a
them when they respective corporation duly organized and
fall due or in cases where existing under Philippine Laws,
the corporation, or an individual debtor who has
partnership or association become insolvent.
has no sufficient assets to
cover its liabilities but is Insolvency
under the management of a It refers to the financial
Rehabilitation Receiver or condition of a debtor that is
Management Committee generally unable to pay its or his
created pursuant to this liabilities as they due in the
Decree. ordinary course of business or
has liabilities that are greater
Financial Rehabilitation and than its or his assets.
Insolvency Act of 2010 (R.A.
10142) Technical Insolvency
There are adequate assets but the
When individuals and Debtor has no sufficient cash to
corporations are financially pay its maturing liabilities.
distressed, the law gives them
debt relief methods by virtue of Excluded Debtors (Excluded from
the FRIA. the operation of FRIA, hence,
governed by their own special
Policy of FRIA laws.)
It expresses the policy of 1.Banks
the State to encourage debtors, 2.Pre-need companies
both juridical and natural 3.Insurance companies
persons, and their creditors to 4.National and local
collectively and realistically government agencies or
resolve and adjust competing units.
claims and property rights.
(Section 2, FRIA) Creditor
It refers to a natural or
Purposes: (Factors to consider juridical person which or who has
when there is Rehabilitation or a claim against the debtor that
Liquidation) arose on or before the
1. Ensure or maintain commencement date.
certainty and
General Unsecured Creditor
It refers to a creditor whose
claim or portion thereof is
neither secured, preferred nor
subordinated under the FRIA.
Debt Relief Methods
1.Out-of-Court-Rehabilitation
or Restructuring (OCRA)
(Section 84, Chapter IV,
FRIA)
Rehabilitation is not
necessarily court supervised. It
may be informal or extrajudicial
restructuring agreement or
rehabilitation plan provided that
it meets the minimum requirements
recognized under the FRIA. The
ultimate objective is to come up
with rehabilitation or
restructuring agreement. The
assumption is that debtor can no
longer meet its maturing
obligations.
It allows parties to make
agreements with various creditors
regarding on:
1. Deferment of payment;
2. Infusion of capital;
3. Condonation of some or all
of the debts;
4. Restructuring of the debts;
or
5. Similar arrangement that
will provide assistance to
the debtor.
The Court may however issue
orders in a Petition for
Assistance filed either by the
debtor or creditor who are
parties to on-going negotiation.
For an OCRA to be recognized
by the Court, the following
requirements must be complied
with: (C-67%-75%-85%)
1.Consent of the debtor to the
OCRA and Rehabilitation
Plan;
2.Approval of creditors
representing at least 67% of
the secured obligations of
the debtors (preferred
creditors);
3.Approval of the creditors
representing at least 75% of
the unsecured obligations of
the debtor (ordinary
creditors);
4.Approval of the creditors
holding at least 85% of the
total liabilities secured
and unsecured.
When is a creditor considered to
be vested a secured status?
Consider provisions of the Civil
Code under Articles 2241 and
2242: Re: Preference as to
Specific Movable and Immovable
Properties, and Article 2244 as
modified by Article 110 of the
Labor Code: Re: Order of
Preference with respect to Other
Properties.
What kind of assistance may the
Court may provide?
The Court may require Publication
of the Notice of the on-going
negotiation. FRIA expressly
provides that the notice must
invite creditors to participate
in the negotiation for out-of-
court rehabilitation or
restructuring agreement and
notify them that said agreement
will be binding on all creditors
if the required majority votes
prescribed above are met.
Cram-Down Effect
The Court may bind those
unwilling creditors to the
restructuring plan that may be
perfected. The notice of the
Rehabilitation Plan or
restructuring agreement shall be
published once a week for at least
three (3) consecutive weeks in a
newspaper of general circulation
in the Philippines.
A.Pre-Negotiated
Rehabilitation Plan
(Section 76, Chapter III,
FRIA)
 When the OCRA is successful new capital, increase of capital
but the creditors do not stock, sale of assets, sale of all
voluntarily implement the or some of the business,
Rehabilitation Plan, the retirement of some of the
necessary next step to be taken businesses, or new loans.
is to file a Petition for Approval
of the Pre-negotiated a.Voluntary (Debtor-
Rehabilitation Plan. The initiated)
insolvent debtor may seek court It must be alleged that
assistance for the implementation there is approval by the
and execution of the Majority of the Board of
Rehabilitation Plan. In which Directors and stockholders
case, the implementation and representing 2/3 of the OCS.
execution will be supervised by
the Regional Trial Court. (SCC) b.Involuntary (Creditor-
initiated)
For a Petition for Approval 1. The Petition for
of a Pre-Negotiated Plan, there Rehabilitation is filed
must be proof of the following: by any creditor or group
of creditors whose claims
 Consent of the Debtor must is a least either
be alleged and proved; P1,000,000.00 or debts
 Consent of the creditors equivalent to at least
representing at least 2/3 25% of the subscribed
of the total liabilities capital stock or
of the debtor including partner’s contributions
more than 50% of secured of the debtor, whichever
creditors and 50% of the is higher.
unsecured creditors. 2. A creditor may initiate
an Involuntary
The Rehabilitation Plan is proceedings against a
implemented through a Receiver. debtor if:
The Court issues an order  There is no genuine
appointing a Receiver. He is an issue of fact on law
officer of the Court whose main on the claims and
task is to ensure timely and that the due and
faithful compliance of the demandable payments
Rehabilitation Plan. The thereon have not been
Implementation and Execution does made at least 60 days
not require hearing unless there prior to the filing
is an allegation of bad faith on of the petition.
the part of the receiver.  A creditor, other
than the petitioner,
2.Court Supervised has initiated
Rehabilitation (Section foreclosure
12,Chapter II, FRIA) proceedings against
These are proceedings in the debtor that will
rem. Therefore, notice shall be prevent the debtor
made by Publication in a from paying its debts
newspaper of general circulation as they become due or
in the Philippines. The petition will render it
must contain a proposed insolvent. (Section
rehabilitation plan. The plan may 13, FRIA.)
include debt condonation, debt
restructuring, dacion en pago or For as long as the RP is
debt for equity swap, infusion of based on feasible assumptions,
the Court appoints a If there are oppositions, the
Rehabilitation Receiver. The
receiver may come from those
nominated by the parties, if none
is qualified; the court chooses
the receiver with the following
minimum qualifications: (Section
29, FRIA)
1. A FC, or a resident of the
Philippines in the 6 months
immediately preceding his
nomination;
2. Of good moral character and
with acknowledged integrity,
impartiality and
independence;
3. Expertise in the business,
insolvency and other
relevant commercial laws;
4. No conflict of interests.
There is conflict of
interest if:
 If he is a SH or a
former SH of the debtor
or any of the creditor;
 If he is related by
consanguinity or
affinity to the 4th civil
degree to any of the
individual creditor or
debtor, owners of a sale
of proprietorship-
debtor, partners of a
partnership-debtor or to
ay stockholder,
director, officer,
employee or underwriter
of a corporation-debtor.
(Section 40, FRIA).
Objections to the Rehabilitation
Plan
In a CSR, the plan itself is
negotiated and approved while the
case is already pending in court.
The RP requires the approval of
creditors representing at least
3/5 of the outstanding
liabilities. The Receiver shall
conduct series of meetings with
the creditors both secured and
unsecured in order to generate
the approval of the plan. Once
approved by the creditors, it
will be confirmed by the Court.
court will determine:
1.If there is legal basis;
2.Or that the opposition is
dilatory in character.
As to the valid basis of
opposition, it may involve lack
of adequate protection to the
creditors. However, such basis
may be overridden by the Court if
it finds that the objection is
lacking merit or the RP is a
better option or more feasible
way of solving the financial
distress. Hence, the Court may
confirm the RP as originally
submitted by the receiver.
Even if the RP involves
removal of the securities of the
certain class of creditors, the
law will not prevent the
enforcement of the RP. The RP may
involve condonation or
extinguishment of all liens or
encumbrances that grants
preferences to certain class of
creditors. A RP may still be
enforced on the basis of Pari
Passu.
Doctrine of Pari Passu of
Equality in Equity
The assets are held in trust
for the equal benefit of all
creditors to preclude one from
obtaining an advantage or
preference over another by the
expediency of attachment,
execution of otherwise. The court
held in the following cases:
i.Alemar’s Sibal and Sons,
Inc. vs. Elbinias, 1990.
“For what would prevent an
alert creditor, upon
learning of the
receivership, from rushing
posthaste to the courts to
secure judgments for the
satisfaction of its claims
to the prejudice of the less
alert creditors. When a
corporation threatened by
bankruptcy is taken over by
 a receiver, all the
creditors should stand on an
equal footing. Instead of
creditor vexing the courts
with suits against the
distressed firm, they are
directed to file their
claims with the receiver who
is duly appointed officer of
the SEC.”
ii. BPI vs. CA, 1994
Even foreclosure of mortgage
shall be disallowed so as not
to prejudice other creditors
or cause discrimination
among them. If foreclosure
is undertaken despite the
fact that a petition for
rehabilitation has been
filed, the certificate of
sale shall not be delivered
pending rehabilitation. If
that has already been done,
no transfer certificate of
title shall likewise be
effected within the period
of rehabilitation.”
iii. Express Investment vs.
BayanTel, 2012
Whether secured creditors
may enforce preference in
payment during
rehabilitation by virtue of
a contractual agreement?
Pari Passu- Equality in
Equity. All creditors will
be treated alike and in equal
footing as far as the
revenues and assets of the
creditor If the Court finds
that it is fair to treat all
as equals, the pari passu is
applied. It is not only
equality in suspension of
claims but also suspension
in payment. There is pro-
rata distribution of assets
among all creditors. This is
to alleviate the strict
application of the
Preference and Concurrences
of Credits in the Civil Code.
The power of the Court to
implement a Rehabilitation
Plan is part of the State’s
police power notwithstanding
the rights of the other class
of creditors. The Court may
also enforce its Cram Down
power.
iv. Pacific Wide vs. Puerto
Azul, November 2009.
Can a rehabilitation court
compel a lender to accept a
50% reduction in the
borrower’s principal
obligation? Would that
violate the non-impairment
of contracts clause of the
Constitution?
The Court found no merit in
PWRDC’s contention that
there is a violation of the
impairment clause. Section
10, Article III of the
Constitution mandates that
no law impairing the
obligations of contract
shall be passed. This case
does not involve a law or an
executive issuance declaring
the modification of the
contract among debtor PALI,
its creditors and its
accommodation mortgagors.
Thus, the non-impairment
clause may not be invoked.
Furthermore, as held in
Oposa v. Factoran, Jr. even
assuming that the same may be
invoked, the non-impairment
clause must yield to the
police power of the State.
Property rights and
contractual rights are not
absolute. The constitutional
guaranty of non-impairment
of obligations is limited by
the exercise of the police
power of the State for the
common good of the general
public.
Successful rehabilitation of
a distressed corporation
will benefit its debtors,
creditors, employees, and
the economy in general. The
 court may approve a creditors shall enjoy
rehabilitation plan even preference over unsecured
over the opposition of creditors; that giving
creditors holding a majority preference to TIDCORP would
of the total liabilities of violate the Stay Order and
the debtor if, in its impair the powers of the
judgment, the rehabilitation receiver; and that any
of the debtor is feasible and change in the contractual
the opposition of the relations between TIDCORP
creditors is manifestly and WGC relative to their
unreasonable. Indemnity Agreement comes as
a necessary consequence of
v.Robinson’s Bank vs. rehabilitation, which
Gaerlan, September 2014 TIDCORP may not be heard to
World Granary Corporation complain.
filed a Petition for
Rehabilitation with Prayer The RTC issued a decision
for Suspension of Payments, directing WGC to settle its
Actions and Proceedings. It obligations on a pari passu
incurred loans from RBC and basis. TIDCORP filed a
TIDCORP. It appears that RBC Petition for Review
is both a secured and assailing such decision. RBC
unsecured creditor, while on the other hand filed
TIDCORP is a secured Urgent Motion for
creditor. Both RBC and Intervention which is
TIDCORP filed their anchored on its original
respective claims. Later, claim and objection to
the Receiver proposed, among TIDCORP’s position – that
others, a pari passu– or the latter may not enjoy
equal – sharing between the preferential treatment over
secured and unsecured the other WGC creditors. In
creditors of the proceeds its opposition, TIDCORP
from WGC’s cash flow made maintained that intervention
available for debt is not allowed in
servicing. TIDCORP among rehabilitation proceedings,
others took exception to the citing Rule 3, Section 1 of
proposed pari passu sharing, the Interim Rules of
insisting that as a secured Procedure on Corporate
creditor, it should enjoy Rehabilitation. The CA held
preference over unsecured that RBC may not resort to
creditors. RBC filed an intervention as a substitute
Opposition arguing for a lost appeal,
pertinently that TIDCORP’s occasioned by its failure to
objection to a pari passu file a Petition for Review.
sharing of WGC’s cash flow
proceeds and insistence on SC: There is no visible
preferential treatment goes objection to RBC’s
against the legal principle participation as it stands
that during rehabilitation, to be injured or benefited by
both secured and unsecured the outcome o fTIDCORP’s
creditors stand on equal Petition for Review – being
footing, and that it is only both a secured and unsecured
when rehabilitation is no creditor of WGC. To recall,
longer feasible – and TIDCORP’s Petition for
liquidation is the remaining Review in CA-G.R. SP No.
option – that secured 104141 sought to 1) nullify
the pari passu sharing vi. Advent Capital vs.
scheme directed by the trial Alcantara, January 2012
court; 2) declare RBC and the The Alcantaras owe Advent
other creditor banks– which Capital trust fees that it
granted additional loans to supposedly earned for
WGC after the latter managing their several trust
executed its Indemnity accounts. The Rehabilitation
Agreement with TIDCORP – receiver filed a motion
guilty of violating before the rehabilitation
TIDCORP’s rights; and 3) court to direct Belson
grant preferential and Securities, Inc. to release
special treatment to TIDCORP the money to him.
over other WGC creditors. What court has jurisdiction
These remedies would to hear and adjudicate the
undoubtedly affect not conflicting claims of the
merely the rights of RBC, but parties over the dividends
of all the other WGC that Belson held in trust for
creditors as well, as their their owners?
standing or status as
creditors would be somewhat Certainly, not the
downgraded, and the manner rehabilitation court which
of recovery of their has not been given the power
respective credits will be to resolve ownership
altered if TIDCORP’s prayer disputes between Advent
is granted. While TIDCORP is Capital and third
correct in arguing that parties. Neither Belson nor
intervention is not the the Alcantaras are its
proper mode for RBC coming to debtors or creditors with
the CA since it is already a interest in the
party to the rehabilitation rehabilitation.
proceedings, this merely
highlights the former’s The real owner of the trust
error in not allowing the property is the trustor-
latter to participate in the beneficiary. In this case,
proceedings. And while RBC the trustors-beneficiaries
chose the wrong mode for are the Alcantaras. Thus,
interposing its comments and Advent Capital could not
objections, this does not dispose of the Alcantaras
necessarily warrant the portfolio on its own. The
outright denial of its income and principal of the
chosen remedy; the Court is portfolio could only be
not so rigid as to be withdrawn upon the
precluded from adopting Alcantaras written
measures to insure that instruction or order to
justice would be Advent Capital. Advent
administered fairly to all Capital must file a separate
parties concerned. If action for collection to
TIDCORP must pursue its recover the trust fees that
Petition for Review, then it allegedly earned.
RBC should be allowed to Rehabilitation proceedings
comment and participate in are summary and non-
the proceedings. There is no adversarial in nature, and
other solution to the do not contemplate
impasse. adjudication of claims that
must be threshed out in
ordinary court
 proceedings. Adversarial foreclosure of mortgages is
proceedings similar to that allowed.
in ordinary courts are
inconsistent with the The court held that the
commercial nature of a rationale behind the law
rehabilitation case. The (P.D. 902-A) is to effect a
latter must be resolved feasible and viable
quickly and expeditiously rehabilitation, which cannot
for the sake of the corporate be achieved if one creditor
debtor, its creditors and is preferred over the
other interested parties. others.”

Commencement Order c. Prohibit the debtor from

Immediately and within 5 days for selling, encumbering,
filing of the petition, the Rehab transferring or disposing in
Court is required to issue a any manner of its properties
Commencement Order which contains except in the ordinary course
therein a Suspension or Stay of business; and
Order. The rehabilitation
proceedings commences after the d. Prohibit the debtor from making
issuance of such order. The same any payment of its liabilities
is effective for the entire outstanding as of the
duration of the rehabilitation commencement date except as may
proceedings. be provided.

Stay or Suspension Order (like a Exceptions to the Suspension or

TRO): (Section 16, FRIA) Stay Order: (Section 18, FRIA)
The purpose is to preserve the a. To cases pending appeal in the
assets of the corporation. SC as of the commencement date.
 No two actions may be filed
a. Suspension of all actions or except if the case is
proceedings, in court or already pending in the
otherwise, for the enforcement Supreme Court. CA decisions
of claims against the debtor; must be suspended and wait
- All actions either pending in for the judgment of the
quasi-judicial or judicial rehabilitation proceedings
bodies are suspended. under the RTC.
- Claim shall refer to all
claims or demands of whatever b. Subject to the discretion of
nature or character against the the court, to cases pending or
debtor or its property; whether filed at a specialized court or
for money or otherwise, actual quasi-judicial agency which,
or contingent, liquidated or upon determination by the court
unliquidated, matured or is capable of resolving the
unmatured, the claim is clam more quickly, fairly, and
suspended. efficiently than the court.
 Upon waiver of the Special
b. Suspension of all actions to Commercial Court, cases
enforce any judgment, involving the corporate
attachment or other debtor but which are pending
provisional remedies against in highly specialized bodies
the debtor; may be retained by the
- Includes any enforcement of latter if the retention of
judgment against any creditor jurisdiction by these
even if there is a writ of specialized bodies such as
execution issued. No the NLRC or SEC would
 exercise better expertise debtor. Except if there is a
regarding the issues counterclaim for a claim
involved. (e.g. against the Corporate Debtor,
manipulation of security which may either be a
prices or insider trading) permissive or compulsory CC.

c. Payment of administrative Q: A writ of execution issued

expenses
 These are reasonable and
necessary expenses incurred
in relation to the:
A. On-going rehabilitation
proceedings;
B. Expenses incurred in the
ordinary course of business
of the debtor;
i.Rubberworld vs. NLRC
 Under the new language of
the FRIA, it is clear that
all expenses incurred prior
to the issuance of the stay
order are deemed to be
covered by the suspensive
effect of the order, and
that term “Administrative
expenses” can only cover
those types of expenses
incurred in the ordinary
course of business incurred
after the issuance of the
stay order.
Q: The Commencement Order
issued by the SCC took effect
on December 15, 2016. After
such date, can a new case of
collection by Creditor vs.
Corporate Debtor be filed
before another RTC?
A: No. The case is suspended.
Creditor should instead take
part in the rehabilitation
proceedings.
by NLRC in a Labor case that
has attained finality before
December 15, 2016?
A: This claim is suspended.
However, payroll covering the
period of suspension should be
paid because it is an
administrative expense.
“Upon the appointment of a
management committee,
rehabilitation receiver,
board or body pursuant to PD
902-A, all actions for claims
against corporations,
partnerships, or associations
under management or
receivership pending before
any court, tribunal, board or
body shall be suspended
accordingly, and among the
actions suspended are those
for money claims before the
labor arbiters.” The language
of Section 56, FRIA supports
the ruling in this case.
*Rentals accrued from December
2014 to December 15, 2016.
This is suspended. This was
incurred prior to the issuance
of the Commencement Order.
*Rentals from December 15,
2016 up to present are
considered administrative
expenses, hence, suspended.

Q: After December 15, 2016, d. to enforcement of claims

can the RTC continue to hear a
case of Pogi, Inc. vs. Debtor
filed before such date pending
in a separate branch?
A: Yes. This is not within the
coverage of the Suspension
Order. What are suspended are
claims against the corporate
against sureties and other
persons solidarily liable with
the debtor, and third party or
accommodation mortgagors as
well as issuers of letters of
credit, uncles the property
subject of the third party or
accommodation mortgage is
necessary for the
 rehabilitation of the debtor as  Dismissal of the petition
determined by the court upon upon showing that there is no
recommendation by the reasonable ground to
rehabilitation receiver. continue the corporation as
an on-going concern, that
e. To any criminal action against is, the rehabilitation
individual debtor or owner, proceeding is no longer
partner, director of a debtor feasible. In which case, the
shall not be affected by any Court may convert the
proceeding commend under this proceeding into a
Act. Liquidation Proceedings;
 Order the implementation or
i.Panlileo vs. RTC, 2011 enforcement of the RP. The
Panlileo did not pay SSS proceeding is deemed
contributions of its terminated. The
employees. According to them, implementation process shall
the Rehabilitation Proceeding now be considered extra-
should suspend the pending judicial. The RP is
criminal cases arguing that considered as novated.
the latter is a prejudicial  Order dismissal of the
question. The argument fails. petition if it is shown to be
The motion of the officers to for fraudulent purposes;
suspend the criminal
proceedings cannot prosper 3. Liquidation (Section 90,
simply because under the new Chapter V, FRIA)
law on corporate This is the most drastic
rehabilitation, which is the method.
Financial Rehabilitation and
Insolvency Act of 2010, a.Voluntary Liquidation
Section 18 (g) thereof It must be approved by the
explicitly provides that majority of the Board of
criminal actions against the Directors and stockholders
individual officer of a representing 2/3 of the OCS.
corporation are not subject to
the Stay or Suspension Order b.Involuntary Liquidation
in rehabilitation This is filed by any creditor or
proceedings. Further, the group of creditors whose claims
prosecution of the officers of is a least either P1,000,000.00
the corporation has no bearing or debts equivalent to at least
on the pending rehabilitation 25% of the subscribed capital
of the corporation, especially stock or partner’s contributions
since they are charged in of the debtor, whichever is
their individual capacities. higher.
The liability for the crimes
charged is personal to the Court Supervised Liquidation
offender. Rehabilitation
The due and The due and
Until when should the demandable demandable
Rehabilitation pend before the payments have payments have
Court? not been paid not been paid
As a rule, only up to a maximum for at least 60 for at least
of 1 year from the filing of the days 180 days.
case. Before the lapse of the 1- Appointment of Liquidator
year period, any of the following Rehabilitation
must be ordered by the Court: Receiver
(Section 74, FRIA)
Commencement Liquidation the blue sky. The law, like all
Order which Order which securities laws, has as one of its
includes does not only main purposes the protection of the
suspension of include public against fraudulent and
payments suspension of unscrupulous practices with respect
payments but to the sale and purchase of
also an order securities.
of The Securities Act (C.A. No. 83)
dissolution took effect in 1937. It was
and patterned after the 1933 Securities
extinction of Act and the 1934 Securities
the civil and Exchange Act of the U.S.A.
legal American jurisprudence and
personality securities practice are thus
of the illuminating in understanding our
corporate own securities laws.
debtor.
Doctrine of Pari Doctrine of B.P. Blg. 178 or the Revised
Passu is common. Pari Passu in Securities Act (RSA) took effect in
most cases is 1982. This was then superseded by
like R.A. No. 8799 or the Securities
mandatory or Regulation Code (SRC) which became
more effective in 8 August 2000.
prevalent
because the PURPOSE
corporation  Protection of the investing
is suffering public primarily through a
from heavy system of disclosure and the
insolvency. punishment of fraudulent
practices.
Under the Corporation Code,  Development of the capital and
Liquidation may be made in the securities market.
following methods: by 1) the
GOVERNMENT REGULATORY AGENCY
corporation itself through its
 The SEC. The Chairman and the
BOD/T; 2) the trustees to whom the
Commissioners given 7-year
corporate assets have been security of tenure in order to
conveyed; 3) by a management insulate them from political
committee or rehabilitation influence.
receiver appointed by SEC. Under  SEC has the power to issue CDOs,
the FRIA, it includes Liquidation punish for contempt, issue
by a Liquidator. subpoena duces tecum and summon
witnesses. (5.1).
Securities Regulation Code  SEC’s jurisdiction over cases
under Section 5 of PD 902-A
transferred to the special
commercial courts (RTCs).
HISTORY Purpose is to relieve the SEC of
quasi-judicial functions and
allow it to concentrate on its
The first securities law passed in
primary mandate of regulating and
the Philippines was Act No. 2581 developing the securities market.
which was passed in 1916. The law (5.2)
was popularly known as the Blue Sky  S5 PD 902-A: (FIES)
Law. The term Blue Sky is a play  Fraudulent devices or
on the term blue chips whereby schemes employed by the
unscrupulous persons would sell directors, business
securities with no more value than associates, officers or
 partners against the
public and the
stockholders, partners,
members of associations or
organizations registered
with SEC.
 Intra-corporate and intra-
partnership controversies;
and controversies between
the corporation,
partnership, or
association (CPA), on one
hand, and the state, on the
other, insofar as it
concerns their individual
franchise or right to exist
as such entity.
 Controversies in the
election or appointment of
directors, trustees,
officers or managers of
such CPAs. o Petitions of
CPAs to be declared in a
state of suspension of
payments in cases where the
CPA is illiquid, or where
it is insolvent but is
under the management of a
rehabilitation receiver or
management committee.
Q: The annual stockholder’s meeting
of Meralco for the election of
directors was set for 27 May 2008.
In connection therewith, proxies
were required to be submitted on or
before 17 May and the proxy
validation was slated for 22 May.
The proxy validation on 22 May was
undertaken by Meralco’s assistant
corporate secretary Atty. Rosete.
The GSIS, a major Meralco
stockholder, filed with the SEC an
urgent petition seeking to restrain
Atty. Rosete from validating
proxies in favor of Manuel Lopez
and other Meralco executives.
Meralco argues that the SEC does
not have jurisdiction as election
controversies are now cognizable by
the Special Commercial Courts under
Section 5.2 of the SRC. The GSIS
on the other hand argues that the
SEC has regulatory and
investigatory powers over the
issuance and solicitation of
proxies pursuant to Section 20 in
relation to Section 53 of the SRC.
Does the SEC have jurisdiction over
the petition?
A No. The SEC’s jurisdiction over
cases mentioned in Section 5 of PD
902-A was transferred to the
Special Commercial Courts. (S5.2)
Under Section 5(c) of PD 902-A, the
SEC had jurisdiction over cases
involving controversies in the
election or appointments of
directors, trustees, officers or
managers of corporations,
partnerships, or associations.
Section 6(g) of PD 902-A also
provides that in order to
effectively exercise its
jurisdiction under Section 5, the
SEC shall possess the power to pass
upon the validity of the issuance
and use of proxies and voting trust
agreements.
The SEC’s power to pass upon the
validity of proxies in relation to
election controversies has
effectively been withdrawn since
such power is connected to its
abrogated jurisdiction under
Section 5. The power now pertains
to the SCC in the exercise of its
jurisdiction under S5.2. Proxy-
solicitation issues in relation to
election controversies also fall
within the SCC’s jurisdiction
because the issue of proxy
solicitation and proxy validation
are antecedent matters intimately
related to such election
controversy. Here the proxies
were issued in relation to the
election of the directors of
Meralco. Hence the issue
concerning their solicitation and
validation falls within the
original and exclusive jurisdiction
of the SCC. The SEC however
retains regulatory and
investigatory powers over proxies
under Sections 20 and 53 of the SRC
if these are issued in connection
with matters other than the
election of directors, trustees,
officers, and managers. (GSIS v
CA, G.R. No. 183905, 16 April 2009;
reiterated in SEC v. CA, 22 October
2014).
Q: Feeling aggrieved, National Life
Insurance Company of the
Philippines (NLICP), a minority
shareholder corporation in Union
Cement Corporation, filed a
complaint with the SEC praying that
the mandatory tender offer rule be
applied to CEMCO. The SEC ruled in
favor of NLICP by ordering CEMCO to
make a tender offer for UCC shares
to NLICP and other UCC
shareholders. On appeal, CEMCO
argues that while the SEC can take
cognizance of NLICP’s complaint on
the alleged violation by CEMCO of
the tender offer rule under S19 of
the SRC, the SRC does not vest the
SEC with jurisdiction to determine
and adjudicate the rights and
obligations of the parties. CEMCO
argues that under the SRC, the
SEC’s authority is purely
administrative; hence the SEC can
only impose administrative
sanctions but not grant affirmative
relief. Is CEMCO’s argument
correct?
A: No. In taking cognizance of
NLICP’s complaint and eventually
rendering a judgment ordering CEMCO
to make a tender offer, the SEC was
acting pursuant to Rule 19(13) of
the Amended Implementing Rules and
Regulations of the SRC which
provides that upon complaint for a
violation of the tender offer rule,
the SEC may nullify the acquisition
of shares and direct the holding of
a tender offer. The basis for Rule
19(13) is Sec. 5.1(n) of the SRC
which provides that the SEC may
“[e]xercise such other powers as
may be provided by law as well as
those which may be implied from, or
which are necessary or incidental
to the carrying out of, the express
powers granted the Commission to
achieve the objectives and purposes
of these laws.” (Cemco Holding
Inc. v. National Life Insurance
Co., G.R. No. 171815, 7 August
2007).
An intra-corporate and an election
dispute (propriety of the election
of a party as a director) involving
a corporation under sequestration
of the Presidential Commission on
Good Government (PCGG) falls under
the jurisdiction of the Regional
Trial Court (RTC), not the
Sandiganbayan. (Phil. Overseas
Telecommunications Corp. v. Africa,
G.R. No. 184622, 3 July 2013).
Philcomsat’s complaint to make PCGG
withdraw its objection to the
listing in the PSE of PHC shares
owned by Philcomsat relates to an
intracorporate dispute within the
jurisdiction of the Special
Commercial Courts, since the
Republic is an indirect owner of
PHC. (Philippine Communications
Satellite Corp. v. Sandiganbayan,
17 June 2015).
SEC’s revocation of Universal
Rightfield’s registration of
securities and of its permit to
sell securities is not an exercise
of quasi-judicial but of regulatory
power. Hence the strict due
process requirement of a formal
hearing is not required and due
process is satisfied through
letters giving UR a chance to
explain why revocations should not
ensue. (SEC v. Universal
Rightfield Property Holdings, 20
July 2015).
CONCEPT OF SECURITIES
 A security is an interest in a
commercial enterprise or profit-
making venture and evidenced by
an instrument, whether written
or electronic in character.
(S3.1). The main feature of a
security is that a person
purchases or acquires the same
in the expectation of obtaining
passive income or asset
appreciation, that is income or
gain obtained through the effort
 of another person. This feature (Power Homes Unltd. Corp. v.
makes them attractive and SEC, G.R. No. 164182, 26
desirable and necessitates the February 2008). (Asked 2010
protection of the investing Bar).
public.  Sale by Prosperity.com of
websites to first-time buyers,
Howey Test with the latter earning
commissions from Prosperity.com
 Investment contracts are if they refer their own “down-
defined under the Implementing line buyers” not an investment
Rules and Regulations of the contract but network marketing.
SRC as “a contract, transaction, Last element in Howey Test not
or scheme whereby a person present. (SEC v.
invests his money in a common Prosperity.com, 25 January
enterprise and is led to expect 2012). An arguable ruling.
profits primarily from the  PDCs and “certificates of
efforts of others.” (Italics management” issued by Mateo
supplied). Group and Tibayan Group are
 What is the Howey test? It is securities since the holders
a test to determine an expect to gain from the
investment contract: “a increase in value of the same
contract whereby a person or from payment of interest or
invests his money in a common yield.
enterprise and is led to expect  PDCs issued by ASB Holdings Inc.
profits solely from the efforts to lenders may fall under
of others.” (ICES). In SEC v. “evidences of indebtedness” in
W.J. Howey Co., 328 US 293 RSA (SRC). The DOJ Resolution
(1946), a company selling makes out a prima facie case for
orange groves with accompanying violation of the RSA provision
service contracts for the requiring registration of
buyers wherein the produce securities. The CA should not
would be pooled and the profits have ordered the dismissal of
allocated to the buyers, was the criminal cases for
held to be selling investment violation of Sec. 4 in relation
contracts. to Sec. 56 of the RSA.
 In the Philippines, we follow a (Gabionza v. CA, G.R. No.
flexible or modified Howey test 161057, 12 September 2008).
which replaces the word “solely”  “Time-Share” contracts for
with “primarily.” (ICEP) occupancy of certain bungalows
 A real estate marketing company for a definite time and place
entertains applications for so- are securities. The people
called “Business Center Owners buying the same anticipate the
(BCOs), whereby the BCOs would increase in value thereof and
buy realty from accredited expect to profit from their
developers for $234 and then be resale.
entitled to a referral bonus of  “Securitization” refers to the
$92 if they referred other process of converting certain
applicants for BCOs. The BCOs types of assets or income into
would also be entitled to securities form. In the United
referral bonus from the States, banks and finance
recruits obtained by their companies aggressively lent to
referrals and so on down the the so-called “sub-prime”
line. The SC upheld the SEC’s borrowers. The mortgages
finding that the scheme was an issued by the borrowers were
investment contract. The SC packaged into so-called
rejected the argument that the collateralized mortgage
scheme was merely leveraged obligations (CMOs) and sold to
marketing and held that the investors, including big
applicant was led to expect investment banks like Bear
profits primarily from the Stearns and Citibank. When the
efforts of his recruits. borrowers could no longer pay
 the stiff interest rates, their Includes foreign
cascading defaults resulted to government under 9.2.
the subprime crisis in August 2. Receiver or trustee in
2007. bankruptcy issued
certificates.
BASIC TYPES OF SECURITIES 3. IC, HLURB, and BIR
supervised and regulated
securities.
1. Equity security. Shares of
stock in corporations.
4. Bank securities (note:
except the bank’s own
Gain is through dividends
shares). SRC Rule 9.2
and asset appreciation.
provides that evidences
2. Debt security. Promissory of indebtedness issued by
notes, commercial paper, a quasi-bank are also
bonds. Where there is a exempt from registration.
promise of payment of the
principal and interest.
SEC may by regulation and
Gain is through interest
after public hearing add to
and asset appreciation.
the foregoing list where
3. Derivatives. Options and registration of the security
warrants. Financial not necessary in the public
instruments whose value interest and protection of
depends on an underlying investors.
security but which does not
require any investment of EXEMPT TRANSACTIONS (10.1). JEMS
principal in the underlying SBC SPIEL
security.

REGULATORY THRUST OF THE SRC Automatic exemptions

a) Judicial & insolvency sale.

 Registration of Securities
b) Liquidation of security by
 Reportorial Requirements. lien-holder.
 Registration & Regulation of
c) Isolated transaction by
Securities Professionals.
owner.
 Regulation of Exchanges.
d) Stock dividend.
 Stiff sanctions and penalties on
securities fraud and violations.
e) Exclusive stockholders’
purchase.
REGISTRATION OF SECURITIES f) Mortgage-backed
securities sold to single
 Purpose: To protect the purchaser at single sale.
investing public by subjecting g) Conversion.
the securities to disclosure and h) Broker’s transactions.
reportorial requirements. The i) Subscription (Pre-
SEC may even audit the FS of the Incorporation or increase
firm applying for registration of authorized capital
of its securities. stock).
 The SEC does not guarantee the
j) Exchange of securities by
soundness of registered
issuer with stockholders
securities. Registration does
exclusively.
not guarantee the soundness of
the securities. Caveat emptor k) Private Placement (sale to
still applies but the investor is fewer than 20 in any 12-
now better guided in making his month period).
decision. l) Sophisticated
(financially) buyers.
EXEMPT SECURITIES (9.1) BRIG (BIRIPI)

1. Government issued or Nestle Phils. Inc. v. CA,

guaranteed securities. 203 SCRA 504 (1991). Issuance of
shares out of previously authorized
but un-issued capital stock not
considered as an automatic
exception under the RSA since the
exemption only applies to issuance
of shares as part of and in the
process of increasing the
authorized capital stock. Now
may be covered under S10.1(k) or
(e) of the SRC.
Application for exemptive
relief (10.2)
SEC may exempt other
transactions were not necessary in
public interest or for protection
of investors such as small amount
or limited character of public
offering. Exemption fee to be
paid. (10.2). an exemption fee of
1/10 of 1% of the maximum aggregate
price or issued value of the
securities should be paid. (10.3)2
 As a general rule, Section
8.1 of the Security Regulation
Code (SRC) provides that
securities shall not be sold or
offered for sale or distribution
to the public within the
Philippines, without a proper adjudicatory body.
registration statement duly filed
with and approved by the
Commission.
- The Securities Regulation
Code seeks to safeguard and
protect the investors against
unscrupulous promises. As such,
it seeks to regulate the trading
of investments in the Philippines.
 As an exemption to the rule
on registration, Section 9.1
of R.A. No. 8799 provides the
following Exempt Securities:
(a) Any security issued or
guaranteed by the Government of
the Philippines, or by any
political subdivision or agency
thereof, or by any person
2
Culled from Atty. Riguera Notes on SRC.
controlled or supervised by, and
acting as an instrumentality of
said Government.
NOTE: The government will always
be solvent as it never ceases to
raise revenue to guarantee its
obligations.
(b) Any security issued or
guaranteed by the government of
any country with which the
Philippines maintains diplomatic
relations, or by any state,
province or political subdivision
thereof on the basis of
reciprocity: Provided, That the
Commission may require compliance
with the form and content for
disclosures the Commission may
prescribe.
NOTE: This is founded on the
principle of international comity.
 Example: US issues treasury
bonds open to the public for
acquisition
(c) Certificates issued by a
receiver or by a trustee in
bankruptcy duly approved by the
NOTE: These are not public
offering.
(d) Any security or its
derivatives the sale or transfer
of which, by law, is under the
supervision and regulation of the
Office of the Insurance
Commission, Housing and Land Use
Rule Regulatory Board, or the
Bureau of Internal Revenue.
NOTE: As governmental agencies
funded by the government, the
investors are guaranteed by the
capability of the government to
fulfill its obligations.
(e) Any security issued by a
bank except its own shares of
stock.

(f) All other heretofore
securities exempt.
NOTE: Protection by Securities
and Exchange Commission (SEC) is
not necessary as Banks are under
the supervision of the Bangko
Sentral ng Pilipinas.
*The Commission may, by rule or
regulation after public hearing,
add to the foregoing any class of
securities if it finds that the
enforcement of this Code with
respect to such securities is not
necessary in the public interest
and for the protection of
investors. (Section 9.2.)
 There are also Exempt
Transactions enumerated under
Section 10.1 of R.A. No. 8799
which are not required to be
registered.
Section 10.1. The requirement of
registration under Subsection 8.1
shall not apply to the sale of any
security in any of the following
transactions:
(a) At any judicial sale, or
sale by an executor,
administrator, guardian or
receiver or trustee in insolvency
or bankruptcy.
(b) By or for the account of
a pledge holder, or mortgagee or
any of a pledge lien holder
selling of offering for sale or
delivery in the ordinary course
of business and not for the
purpose of avoiding the provision
of this Code, to liquidate a bona
fide debt, a security pledged in
good faith as security for such
debt.
(c) An isolated transaction
in which any security is sold,
offered for sale, subscription or
delivery by the owner therefore,
or by his representative for the
owner’s account, such sale or
offer for sale or offer for sale,
subscription or delivery not
being made in the course of
repeated and successive
transaction of a like character
by such owner, or on his account
by such representative and such
owner or representative not being
the underwriter of such security.
 There is a transfer of
existing securities from
current owner to another
which not done in the
ordinary course of business.
 Also known as “OVER THE
COUNTER TRANSACTIONS”
(d) The distribution by a
corporation actively engaged in
the business authorized by its
articles of incorporation, of
securities to its stockholders or
other security holders as a stock
dividend or other distribution
out of surplus.
(e) The sale of capital
stock of a corporation to its own
stockholders exclusively, where
no commission or other
remuneration is paid or given
directly or indirectly in
connection with the sale of such
capital stock.
(f) The issuance of bonds or
notes secured by mortgage upon
real estate or tangible personal
property, when the entire
mortgage together with all the
bonds or notes secured thereby
are sold to a single purchaser at
a single sale.
(g) The issue and delivery
of any security in exchange for
any other security of the same
issuer pursuant to a right of
conversion entitling the holder
of the security surrendered in
exchange to make such conversion:
Provided, that the security so
surrendered has been registered
under this Code or was, when sold,
exempt from the provision of this
Code, and that the security
issued and delivered in exchange,
if sold at the conversion price,
would at the time of such
conversion fall within the class
of securities entitled to
registration under this Code.
Upon such conversion the par
value of the security surrendered
in such exchange shall be deemed
the price at which the securities
issued and delivered in such
exchange are sold.
(h) Broker’s transaction,
executed upon customer’s orders,
on any registered Exchange or
other trading market.
 Here, it is not the broker
that reports but it is the
obligation of the
corporation which
securities are sold which
shall do the reporting.
(i) Subscriptions for shares
of the capitals stocks of a
corporation prior to the
incorporation thereof or in
pursuance of an increase in its
authorized capital stocks under
the Corporation Code, when no
expense is incurred, or no
commission, compensation or
remuneration is paid or given in
connection with the sale or
disposition of such securities,
and only when the purpose for
soliciting, giving or taking of
such subscription is to comply
with the requirements of such law
as to the percentage of the
capital stock of a corporation
which should be subscribed before
it can be registered and duly
incorporated, or its authorized,
capital increase.
(j) The exchange of
securities by the issuer with the
existing security holders
exclusively, where no commission
or other remuneration is paid or
given directly or indirectly for
soliciting such exchange.
(k) The sale of securities
by an issuer to fewer than twenty
(20) persons in the Philippines
during any twelve-month period.
(l) The sale of securities
to any number of the following
qualified buyers:
(i) Bank;
(ii)Registered
investment house;
(iii)Insurance company;
(iv)Pension fund or
retirement plan maintained
by the Government of the
Philippines or any political
subdivision thereof or
manage by a bank or other
persons authorized by the
Bangko Sentral to engage in
trust functions;
(v)Investment company or;
(vi)Such other person as
the Commission may rule by
determine as qualified
buyers, on the basis of such
factors as financial
sophistication, net worth,
knowledge, and experience in
financial and business
matters, or amount of assets
under management.
Section 10.2. The Commission may
exempt other transactions, if it
finds that the requirements of
registration under this Code is
not necessary in the public
interest or for the protection of
the investors such as by the
reason of the small amount
involved or the limited character
of the public offering.
 Section 10.3. Any person
applying for an exemption under
this Section, shall file with the
Commission a notice identifying
the exemption relied upon on such
form and at such time as the
Commission by the rule may
prescribe and with such notice
shall pay to the Commission fee
equivalent to one-tenth (1/10) of
one percent (1%) of the maximum
value aggregate price or issued
value of the securities.
 The Securities Regulation
Code applies to all Public
Companies.
 What are Public Companies?
a. Any corporation where any
class or shares of stock are
covered by registration
statement by the Securities
Regulation Code.
b. Any corporation having class
of equity securities which
are listed in the stock
exchange, the same being
traded therein.
c. One with assets valued at
more than Fifty Million
Pesos (Php50,000,000.00)
with at least Two Hundred
(200) shareholders wherein
at least Two Hundred (200)
shareholders own at least
One Hundred (100) shares in
their name.
NOTE: It is not limited to a
company whose shares of stock are
publicly listed.
 What is a Registration
Statement? (Section 3.12)
- It is an the application for
the registration of
securities required to be
filed with the Commission.
 Procedure for registration of
securities: (Section 12)
A. Filing of a sworn
registration statement with
the SEC.
B. Payment to the SEC of a fee
of not more than one-tenth
(1/10) of one per centum
(1%) of the maximum
aggregate price at which
such securities are proposed
to be offered
C. Publication of the notice of
the filing of registration
statement.
NOTE: publication must be in two
(2) newspapers of general
circulation in the Philippines,
once a week for two (2)
consecutive weeks, or in such
other manner as the Commission by
the rule shall prescribe
D. Declaration by the SEC
whether the registration
statement is effective or
rejected.
E. Statement under oath by the
issuer in all prospectus
that:
(i)registration requirements
have been met and
(ii)all information are true
and correct as represented by
the issuer or the one making
the statement.
 What must be contained in the
registration requirement?
- Sections 12.1 to 12.3
provides the following:
1. Section 12.1. All securities
required to be registered under
Subsection 8.1 shall be
registered through the filing by
the issuer in the main office of
the Commission, of a sworn
registration statement with the
respect to such securities, in
such form and containing such
information and document as the
Commission prescribe. The
registration statement shall
include any prospectus required (b) Investment contracts,
or permitted to be delivered certificates of interest or
under Subsections 8.2, 8.3, and participation in a profit
8.4. sharing agreement, certifies
of deposit for a future
- Section 8.2 The Commission may subscription;
conditionally approve the
registration statement under such  HOWEY TEST
terms as it may deem necessary. o It provides that the
Investment contract in
- Section 8.3 The Commission may our jurisdiction must be
specify the terms and conditions proved to be:
under which any written (1)An investment of money or
communication, including any property,
summary prospectus, shall be
deemed not to constitute an offer (2)In a common or commercial
for sale under this Section. enterprise,

- Section 8.4. A record of the (3)Investor has an

registration of securities shall expectation of profits,
be kept in Register of Securities
in which shall be recorded orders (4)Primarily or solely from
entered by the Commission with efforts of third persons.
respect to such securities
NOTE: Money is entrusted to
 Prospectus (Section 3.11) another where the investor
- It is the document made by expects passive income.
or on behalf of an issuer,
underwriter or dealer to (c) Fractional undivided
sell or offer securities for interests in oil, gas or other
sale to the public through mineral rights;
registration statement
filed with the Commission. (d) Derivatives like option and
warrants;
NOTE: The registration statement
must be filed before the class of (e) Certificates of
security is offered for sale to assignments, certificates of
the public anywhere. participation, trust
certificates, voting trust
 Securities (Section 3.1) certificates or similar
- shares, participation or instruments
interests in a corporation
or in a commercial (f) Proprietary or non-
enterprise or profit-making proprietary membership
venture and evidenced by a certificates in corporations;
certificate, contract, and participation or profit
instruments, whether sharing
written or electronic in
character. It includes: (g) Other instruments as may in
the future be determined by the
(a) Shares of stocks, bonds, Commission.
debentures, notes, evidences
of indebtedness, asset-backed 2. Section 12.2. In promulgating
securities; rules governing the content of
any registration statement
(including any prospectus made a
part thereof or annex thereto),
the Commission may require the  Purpose of Registration
registration statement to contain Statement:
such information or documents as - There is a need for
it may, by rule, prescribe. It may compliance to the
dispense with any such registration statement for
requirements, or may require the SEC to determine whether
additional information or or not any of the grounds
documents, including written for rejection is present.
information from an expert, - Here, the SEC is the one
depending on the necessity permitting the taking of
thereof or their applicability to money from the public.
the class of securities sought to
be registered.
 Grounds for Rejection and
3. Section 12.3. The information Revocation of Registration of
required for the registration of Securities: (Section 13)
any kind, and all securities,
shall include, among others, the  After the due notice and
effect of the securities issue on hearing:
ownership, on the mix of
ownership, especially foreign and (a) The issuer:
local ownership.
(i) Has been judicially
declared insolvent;
 Signatories needed for the
Registration Statement (ii) Has violated any of the
(Section 12.4) provision of this Code, the rules
promulgate pursuant thereto, or
12.4. The registration statement any order of the Commission of
shall be signed by the issuer’s which the issuer has notice in
executive officer, its principal connection with the offering for
operating officer, its principal which a registration statement
financial officer, its has been filed
comptroller, its principal
accounting officer, its corporate (iii) Has been or is engaged
secretary, or persons performing or is about to engage in
similar functions accompanied by fraudulent transactions;
a duly verified resolution of the
board of directors of the issuer (iv) Has made any false or
corporation. The written consent misleading representation of
of the expert named as having material facts in any prospectus
certified any part of the concerning the issuer or its
registration statement or any securities;
document used in connection
therewith shall also be filed. (v) Has failed to comply
Where the registration statement with any requirements that the
shares to be sold by selling Commission may impose as a
shareholders, a written condition for registration of the
certification by such selling security for which the
shareholders as to the accuracy registration statement has been
of any part of the registration filed; or
statement contributed to by such
selling shareholders shall be (b) The registration statement is
filed. on its face incomplete or
inaccurate in any material
respect or includes any untrue thereof contains on its
statements of a material fact effectivity:
required to be stated therein or 1. an untrue statement of
necessary to make the statement a material fact; or
therein not misleading; or 2. omits to state a
material fact required
(c) The issuer, any officer, to be stated therein
director or controlling person or necessary to make
performing similar functions, or such statements not
any under writer has been misleading, and who
convicted, by a competent suffers damage.
judicial or administrative body,
upon plea of guilty, or otherwise,  The following persons shall
of an offense involving moral be civilly liable: (Section
turpitude and /or fraud or is 56.1)
enjoined or restrained by the
Commission or other competent or (a) The issuer and every
administrative body for person who signed the
violations of securities, registration statement;
commodities, and other related
laws. (b) Every person who was a
director of, or any other
- It shall include manipulation person performing
of prices as well as insider similar functions, or a
trading. partner in, the issuer at
the time of the filing of
NOTE: In case there is no ground the registration
for disqualification, the SEC statement or any part,
shall issue the Primary as well supplement or amendment
as the Secondary license. thereof with respect to
which his liability is
 Primary License asserted;
- This proves that the
security has been approved. (c) Every person who is named
- It is not necessary for in the registration
exempt securities because it statement as being or
is not speculative in about to become a
character and it will not director of, or a person
prejudice the public performing similar
interest. Further, interest functions, or a partner
is more or less guaranteed. in, the issuer and whose
written consent thereto
 Secondary License is filed with the
- It is the one issued for registration statement;
the sale of the security
itself. (d) Every auditor or auditing
firm named as having
certified any financial
 Civil Liabilities on Account statements used in
of False Registration connection with the
Statement (Section 56) registration statement
- Section 56.1 provides that or prospectus;
civil liabilities attaches
when the registration (e) Every person who, with
statement or any part his written consent,
which shall be filed with
 the registration or omission. (Section
statement, has been named 56.1)
as having prepared or
certified any part of the  Defense: (Section 56.2)
registration statement, - If the person who acquired
or as having prepared or the security did so after
certified any report or the issuer has made
valuation which is used generally available to its
in connection with the security holders an income
registration statement, statement covering a period
with respect to the of at least twelve (12)
statement, report, or months beginning from the
valuation, which effective date of the
purports to have been registration statement,
prepared or certified by then the RIGHT OF RECOVERY
him; shall be conditioned on
proof that such person
(f) Every selling acquired the security
shareholder who relying upon such untrue
contributed to and statement in the
certified as to the registration statement or
accuracy of a portion of relying upon the
the registration registration statement and
statement, with respect not knowing of such income
to that portion of the statement, but such reliance
registration statement may be established without
which purports to have proof of the reading of the
been contributed by him; registration statement by
such person.
(g) Every underwriter with
respect to such security.  Damages to be Awarded
(Section 63.1)
 Underwriter (Section
3.15)  All suits to recover damages
- a person who guarantees on a pursuant to Sections 56, 57,
firm commitment and/or 58, 59, 60 and 61 shall be
declared best effort basis brought before the Regional
the distribution and sale of Trial Court, which shall
securities of any kind by have exclusive jurisdiction
another company. to hear and decide such
- Since he guarantees the suits. The Court is hereby
success of the transaction, authorized to award damages
the underwriter shall pay in an amount not exceeding
the unsold shares of the triple the amount of the
investing entity. transaction plus actual
damages.

 The following persons may be o Section 56. Civil

sued by ANY PERSON who Liabilities on Account of
acquires the security and who False Registration
suffers damage; Statement.
o UNLESS it is proved that
at the time of such o Section 57. Civil
acquisition he knew of Liabilities Arising in
such untrue statement Connection With Prospectus,
Communications and Reports.
  after the discovery of
o Section 58. Civil Liability the untrue statement,
of Fraud in Connection with or
Securities Transactions.  the omission, or, if
the action is to
o Section 59. Civil Liability enforce a liability
for Manipulation of Security created under
Prices. Subsection 57.1(a),

o Section 60. Civil Liability  UNLESS, brought within

with Respect to Commodity two (2) yeas after the
Futures Contracts and Pre- violation upon which it
need Plans. is based.

o Section 61. Civil Liability  In no event shall any

on Account of Insider such action be brought
Trading. to enforce a liability
created under Section
 Exemplary damages may also 56 or Subsection
be awarded in cases of bad 57.1(a)
faith, fraud, malevolence or  more than five (5)
wantonness in the violation years after the
of this Code or the rules security was bona fide
and regulations promulgated offered to the public,
thereunder. or
 under Subsection
 The Court is also authorized 57.1(b) more than five
to award attorney’s fees not (5) years after the
exceeding thirty percentum sale.
(30%) of the award.

 Those who are civilly liable  Security Transactions

under Sections. 57 to 61 of
the SRC shall be jointly and A. Primary market transactions
severally liable for the -Refers to the original
payment of damages. (Section disposition of a security covered
63.2) by a license or permit.
o However, the person
paying solely shall be  EXAMPLE: Initial public
allowed to make a offering
REIMBURSEMENT from those -Under the Corporation Code:
who have been liable to buying a subscription (by a
make the same payment. subscription contract)
-this involves the public,
thereby necessitating the
 Limitation of Actions issuance of a license.
(Section 62) -May be resold or
 No action shall be transferred by current owners to
maintained to enforce another.
any liability created
under Section 56 or 57 B. Secondary Market transactions
of this Code unless -It Refers to the subsequent
brought within two (2) sale or disposition of a covered
years: security, the same being
regulated by the Securities
Regulation Code by requiring (a)The issuer or originator
“SECOND REGISTRATION REQUIREMENT”. or maker of the security;
-Covered security: subject
of a license or permit from the (b)A director or officer (or
SEC thereby requiring that each any person performing
transaction be reported to the similar functions) of, or a
latter. person controlling the
issuer;
 “SECOND REGISTRATION
REQUIREMENT” (c)A person whose
-Each and every transaction relationship or former
involving licensed securities relationship to the issuer
must be reported to the SEC. gives or gave him access to
-The Securities Regulation material information about
Code requires the SEC to maintain the issuer or the security
a Registry of Securities akin to that is not generally
Registry of Property. available to the public;

 Registry of Security (d) A government employee,

-This is the centralized and director, or officer of an
consolidated registry of all exchange, clearing agency
licensed securities and/or self-regulatory
-When the security is organization who has access
registered, it means that there to material information
is a primary and secondary about an issuer or a
licensed issued by SEC concerning security that is not
the said security. generally available to the
-All changes in the public;
ownership thereof must be
reported in the registry.  EXAMPLE: SEC, BOI, Phil.
Competition Commission and
 Purpose: This is to allow Clearing houses and similar
SEC to monitor movement of entities that provide
shares and track changes as material services in
to its ownership. securities transaction
- It records the original and including depositaries or
subsequent registration. custodians of securities

 Secondary market transactions (e) a person who learns such

affect the public investors the information by a
most. Hence, Chapter VII of the communication from any
SRC imposes standards and forgoing insiders.
requirements for the
protection of the interest of  EXAMPLE: Relatives by
the investing public. affinity or consanguinity
whether legitimate or common
o Prohibitions on Fraud, law within 3rd civil degree,
Manipulation and are regarded as insider.
Insider Trading. They are presumed under the
SRC, to possess non-public
A. Prohibition on Insider material matters regarding
trading both issuer and the security
of the issuer.
 Insider (Section 3.8)
NOTE: The aforementioned
enumeration from (a) to (d)
constitutes the “TRADITIONAL e.Issuance or grant of
INSIDER” while (e) constitutes franchises by the State
the “CONSTRUCTIVE INSIDER”.
f.Joint venture with another
 Material Information corporation
(Section 27.2)
g.Sale of all or
(a) It has not been generally substantially all assets of the
disclosed to the public and would corporation
likely affect the market price of
the security after being h.Similar but objective
disseminated to the public and information relating to corp
the lapse of a reasonable time for
the market to absorb the  Material Non-Public
information; or Information
(b) Would be considered by a -Not yet covered by
reasonable person important under disclosure statement filed with
the circumstances in determining the SEC and the Regulator
his course of action whether to -Even if filed, it is not
buy, sell or hold a security. yet published in a newspaper of
general circulation within the
-Any information that will Philippines
affect or likely to affect the -Even if published, there is
price of the security once made no sufficient time that elapsed
known to the public as it is for the public to absorb the
traded in the stock exchange. information.

 Exchange (Section 3.7)  Purpose: insiders are

- an organized market place or prohibited from buying or
facility that brings selling securities while in
together buyers and sellers possession of material non-
and executes trade of public info.
securities and/or o They are not allowed to
commodities take unnecessary
advantage of the
 Once made public, it will confidential info under
increase or decrease the their possession to the
price of the security as it detriment of the
is currently traded in the investing public.
exchange. o They cannot take
advantage of the material
 EXAMPLE: non-public information
a.Proposed merger or obtained by them for
consolidation of a corporation to their own personal and
another corporation private interest

b.Reports of financial  Hence, the law requires the

condition
c.Results of elections and
their subsequent appointment
d.Reports on infusion of new
capital
insiders with material non-
public information to hold
on to their securities until
the public is given time to
absorb the information
NOTE: Not only material non-
public information should be
disclosed but also facts of
special significance must also be 3. Administrative
disclosed as per jurisprudence.

 Facts of Special  Defenses when prosecuted:

Significance
-Refer to facts or information 1. Prescription of the action
that a reasonable prudent (Section 62)
investor may consider significant - The action prescribes Within 2
in determining a specific course years from the perfection of the
of action whether to buy or to questioned transaction but not
sell securities. later than 5 years from the
-Such are considered discovery thereof.
subjective facts
2. Disclosure of material and
 EXAMPLE: Apple Inc. acquired significant information to other
patent for the use of retina party during the transaction
scanner to monitor health
condition. 3. Insider had reasonable ground
-The effect of such will to believe that the other party
increase the price of stocks of knew the material and significant
Apple. This is an example of a information.
“MATERIAL INFORMATION”
4. Insider did not know the
 EXAMPLE: Health condition or material and significant
the death of Steve Jobs, information.
Face of Apple Inc.
-The effect of such will B. Mechanisms punishing
result to Apple shares declining manipulation of security
in the market. prices (Section 24)
-It shall be unlawful for any
 What does the health or death person acting for himself or
of Steve Jobs have to do to through a dealer or broker,
the condition of the directly or indirectly:
corporation?
o Technically, none. (a) To create a false or
However for an investor, misleading appearance of active
the information is trading in any listed security
considered significant. traded in an Exchange of any other
Hence, it must also be trading market ("Exchange"):
disclosed.
- This is an example of “FACTS (i) By effecting any
OF SPECIAL SIGNIFICANCE” transaction in such security
which involves no change in the
NOTE: Both material non-public beneficial ownership thereof;
information and facts of special
significance must be published in (ii) By entering an order or
a newspaper of general orders for the purchase or sale
circulation. of such security with the
knowledge that a simultaneous
order or orders of substantially
 Liabilities of an Insider the same size, time and price, for
guilty of insider-trading: the sale or purchase of any such
-The Three-fold liability security, has or will be entered
applies: by or for the same or different
1. Criminal parties; or
2. Civil
 (iii) By performing similar allowed by this Code or by rules
act where there is no change in of the Commission.
beneficial ownership.
 In secondary market
(b) To affect, alone or with transactions including stock
others, securities or exchange, investors are
transactions in securities that: governed by “HERD MENTALITY”
(Motive is profit-making: buy
(i) Raises their price to shares when stocks are low
induce the purchase of a security, and intends to sell when the
whether of the same or a different price increases) in a stock
class of the same issuer or of market, where one goes the
controlling, controlled, or rest will follow because they
commonly controlled company by believe that the leader will
others; or lead them to profit.
 The one who makes profit
(ii) Creates active trading shall be the leader.
to induce such a purchase or sale However, the herd mentality
through manipulative devices such may be prompted by
as marking the close, painting the manipulations
tape, squeezing the float, hype
and dump, boiler room operations
and such other similar devices.  Forms of manipulation:
(Section 24.1(b))
(c) To circulate or
disseminate information that the (i) Raises their price to
price of any security listed in induce the purchase of a security,
an Exchange will or is likely to whether of the same or a different
rise or fall because of class of the same issuer or of
manipulative market operations of controlling, controlled, or
any one or more persons conducted commonly controlled company by
for the purpose of raising or others; or
depressing the price of the
security for the purpose of (ii)Depresses their price to
inducing the purchase or sale of induce the sale of a security,
such security. whether of the same or a different
class, of the same issuer or of a
(d) To make false or controlling, controlled or
misleading statement with respect commonly controlled company by
to any material fact, which he others; or
knew or had reasonable ground to
believe was so false or (iii) Creates active trading
misleading, for the purpose of to induce such a purchase or sale
inducing the purchase or sale of through manipulative devices such
any security listed or traded in as marking the close, painting
an Exchange. the tape, squeezing the float,
hype and dump, boiler room
(e) To effect, either alone operations and such other similar
or others, any series of devices.
transactions for the purchase
and/or sale of any security  EXAMPLES:
traded in an Exchange for the o By giving artificial
purpose of pegging, fixing or appearance of active trading
stabilizing the price of such of a security like a
security; unless otherwise movement of stock prices
which was made artificially.
 o By creating an artificial
increase/decrease in the
price of security.
 In a stock market, a security
is worth what another person
is willing to pay for it.
(Market-driven price based on
legitimate demand).
 Artificial price may be
caused by:
(Section 24.1(a))
1. “Wash sale”
-Transaction or a series of
transactions involving the same
security and the same volume
without a change in beneficial
ownership thereof;
2. “Illegal Matched orders”
- By entering an order or
orders for the purchase or sale
of such security with the
knowledge that a simultaneous
order or orders of substantially
the same size, time and price, for
the sale or purchase of any such
security, has or will be entered
by or for the same or different
parties;
-Takes place when a buy and
sell order is entered into at the
same time for the same principal.
 Example: Pogi Inc. shares
were dormant for 52 weeks. A
bought 60% of the voting
shares.
- Meanwhile at the stock
exchange:
- 9:15 am: Broker A:
received an order to sell 1
million Pogi Inc. shares at
a price of not less than
Php2.00 per share which will
be announced on the floor.
If the security is in
demand, brokers will have an
auction.
- 9:30 am: Broker B - Hence, people execute this
received an order to buy the
1 million Pogi Inc. shares
at Php5.00 per share.
“Call to execute the order” is a
Match order which is not illegal.
Here, the movement as an
indication of an active trading,
is apparent.
NOTE: If the principal of Broker
A and Broker B are one and the
same, it becomes an illegal match
order, a wash sale. There is no
change in the beneficial
ownership. It is akin to a sale
made to one’s self.
3. “Market Rigging or Jiggling”
- By performing similar act
where there is no change in
beneficial ownership.
4. “Daisy Chain”
– Refers to series of wash
sales
5. “Painting the Tape”
- Price fixing mechanism done
in the course of the trading
day.
- Price is manipulated not
based on legitimate demand.
6. “Marking the Close”
- Price fixing mechanism done
at the end or close of the trading
day.
- The closing price today is
the opening price tomorrow. Hence,
if the price is artificially
fixed yesterday, the price today
is also artificial. It
perpetuates the fraud.
7. “Hype and Dump” and
“Squeezing the Float”
- Both operates similarly and
for the same purpose.
 EXAMPLE: Dressed chicken is
always expensive during the
Christmas Season. Why?
- The principle here is that
the higher the demand, the
higher the price is.
kind of illegal act by
 continuously hoarding goods
or buying the same in bulk.
- To raise the price of
dressed chicken during the
Christmas Season, they start
buying or hoarding the same
from August for the purpose
of stocking them.
- The effect will be felt in
the coming months when the
supply is lessened or
limited thereby increasing
their respecting prices.
This is squeezing the float.
NOTE: In Squeezing the float,
current owner of securities are
made liable.
- With Hype, they will start
to circulate rumours or news
highlighting the company and
promoting their securities.
- It will then result to peak
interest causing them to
offer to sell to the public
their securities in
increased price. When such
happens, there will be
massive dumping of stocks
hoarded which will result to
a situation where the supply
is higher than the demand.
- When supply becomes higher
than the demand, the price
of stocks will drop.
C. Short Sales (Section 24.2)
- No short sale shall be
effected nor any stop-loss
order be executed in
connection with the purchase
or sale of any security
except if allowed by the
SEC.
- Here, there are transactions
wherein the seller does not
yet own or have the
securities he is selling. He
is required to show that he
has made arrangements to
effect delivery of such
securities on settlement
date. Otherwise, the sale
will not be allowed.
D. Fraudulent Transactions
(Section 26.1 to 26.3)
- It shall be unlawful for any
person, directly or
indirectly, in connection
with the purchase or sale of
any securities to:
Section 26.1 Employ any device,
scheme, or artifice to defraud;
Section 26.2 Obtain money or
property by means of any untrue
statement of a material fact of
any omission to state a material
fact necessary in order to make
the statements made, in the light
of the circumstances under which
they were made, not misleading;
or
Section 26.3 Engage in any act,
transaction, practice or course
of business which operates or
would operate as a fraud or deceit
upon any person.
 Protection of Shareholders
Interests
 “Tender Offer Rule” (Section
19)
- It is a published offer to
all the shareholders of the
company to tender their
shares at the price being
offered to the controlling
shareholders by a person or
a group of persons intending
and is in discussion with
certain shareholders of a
public company to acquire a
substantial stake in such
company.
- It is an offer to become
minority stockholders and
become controlling
stockholders.
- It protects minority
shareholders the chance to
exit the company under
reasonable terms, giving
them opportunity to sell
their shares at the same
price as those of the
majority shareholders.
  2 Kinds of Tender Offer
1. Mandatory Tender Offer
2. Voluntary Tender Offer
1. Mandatory Tender Offer
 3 instances when tender
offer is mandatory:
a. When any person or group of
persons acting in concert,
who intends to acquire
thirty-five percent (35%)
or more of equity shares in
a public company.
NOTE: Intention to acquire must
be disclosed concurrent with the
tender offer.
b. Any person or group of
persons acting in concert,
who intends to acquire
thirty-five percent (35%)
more of equity shares in a
public company in one or
more transactions within a
period of twelve (12)
months, shall be required
to make a tender offer to
all holders of such class
for the number of shares so
acquired within the said
period.
c. If any acquisition of even
less than thirty-five
percent (35%) would result
in ownership of over
fifty-one percent (51%) of
the total outstanding
equity securities of a
public company, the
acquirer shall be required
to make a tender offer for
all the outstanding equity
securities to all
remaining stockholders of
the said company at a price
supported by a fairness
opinion provided by an
independent financial
advisor or equivalent
third party. The acquirer
in such a tender offer
shall be required to
accept any and all
securities thus tendered.
NOTE: Tender offer applies to
direct and indirect acquisition
of control.
NOTE: For a person making a tender
offer, he or she must make an
announcement of his or her
intention in a newspaper of
general circulation prior to the
commencement of the offer. Two
(2) business days prior to the
commencement of the tender offer,
file with SEC the required form
for tender offer and hand deliver
a copy of such form to the target
company at its principal
executive office and to each
exchange where such class of the
target company’s securities are
listed for trading. Then Report
the results of the tender offer
with the SEC not later than 10
days after the offer.
 Margin Trading
- The customer purchases
stocks by advising only a
portion of the purchase
price with the broker
thereby extending credit or
making loan for balance due.
- It is the buying and selling
of credit furnished by the
broker.
 EXAMPLE: X investor wants to
buy 1 million SMC shares
currently trading Php10.00
per share.
o X calls Broker A telling
him to buy the 1 Million
SMC shares with only Php
1 Million cash on hand,
short of Php 9 Million.
o Broker A agrees to
furnish the deficient
amount. By doing this, X
will be indebted to
Broker A who will also be
paid with commission.
 This is regulated by the law
to prevent over extension of
credits. It is because the
same transaction is
 unsecured or even if  Remedies allowed to provide
secured, the value of additional protection to the
security is unstable. investors.
o Broker A will open a
margin account in the 1. “Chinese Wall”
name of X with an account - This is imposed to security
balance of Php 10 Million dealers or security brokers.
supplied by Broker A.
Section 3.3. "Broker" is a
o Here, 2 Standards are person engaged in the
followed: business of buying and
selling securities for the
a. The amount of credit must account of others.
not be more than sixty-
five percent (65%) of the Section 3.4. "Dealer" means
current market price of many person who buys sells
security. securities for his/her own
o Hence, in the account in the ordinary
example, there must course of business.
only be an amount of
Php 6.5 Million, the  EXAMPLE: Law Firm with two
amount allowed by law clients for the same purpose
to be supplied by the o The Law Firm cannot
Broker. represent both of
them unless there
b. One hundred percent is a chinese wall.
(100%) of the lowest o With the chinese
market price for the last wall, there shall
thirty-six (36) months be no free flow of
but not more than seventy information among
percent (70%) of the the designated
current market price. lawyers in the law
NOTE: With the two standards, use firm.
whatever amount is higher. In o This is to avoid
case of excessive amount conflict of
furnished, the same is subject to interest
proportionate reduction.
2. Nullu Contendere or Consent
 Remedy if asset is Decree or Settlement Offer
insufficient to buy shares: under the SRC.
o Reduce the volume of - It is applied in common law
shares to be bought jurisdiction
o Demand additional - Akin to a scenario where an
deposit from the accused neither enters a
investor plea of guilty nor plea of
not guilty.
NOTE: If the investor is not a - With the settlement offer,
professional investor, no account no criminal record will be
will be opened. entered nor will there be an
admission of guilt albeit
 This is regulated as it there is a promise not to
increases the likelihood of commit the same and payments
default which imposes great appurtenant thereto shall be
risk in the banking system. given.
 - It is a promise not to settlement cannot
commit the same violation in extinguish the criminal
the future. liabilities subject of
settlement offer.
 Considerations taken into
account: PRIMANILA PLANS, INC. VS.
a. Timing of settlement SECURITIES AND EXCHANGE
offer COMMISSION
o It must not be too
late. G.R. No. 193791 AUGUST 6, 2014
o Not reasonable to
make settlement FACTS:
offer the day
before the Primanila was registered
prosecution. with the SEC and was issued
Certificate of Registration. The
b. Public Interest company’s primary purpose was "to
o Violation under organize, establish, develop,
investigation conduct, provide, maintain,
covers limited operate, offer, issue, market and
person or part of sell pension plans under which
public interest. the savings of professionals,
o Minimal effect to officers, directors and other
the public personnel of corporations, firms,
or entities, and self-employed
c. Publish the Settlement individuals can be pooled
Offer together, accumulated and
invested in profitable placements
and productive enterprises so as
 Effect of Accepted Offer to build an Accumulated Fund for
1. There is a sealing of all each individual participant or
the records related to the planholder for his retirement,
investigation monthly pension or for other
o Akin to a self-issued foreseeable needs in the future."
restraining order
Primanila then operated as a
2. Prevents administrative pre-need company and maintained a
liability from being business office in Makati City.
imposed subject to the SEC issued the subject cease and
imposition of SEC in the desist order after an
settlement offer investigation conducted by the
SEC’s Compliance and Enforcement
 PROBLEM: Will the acceptance Department (CED) on Primanila, a
of settlement offer corporation operating as a pre-
extinguish criminal need company, yielded the
liability? following factual findings:
-Two views: Primanila’s website
a. (Opinion of Francis Lim) (www.primanila.com) was offering
Yes, as acceptance would a pension plan product called
extinguish civil, criminal Primasa Plan, that no
and administrative registration statement has been
liabilities. filed by Primanila for the
approval of said Primasa Plan,
b. (Opinion of Atty. Lulu) and that many of its planholders
Criminal liability is not mostly members of the PNP
extinguished. Amicable remitted the total amount of Php
2,072,149.38 to Primanila prospective plan holders,
representing the aforementioned prescribing advertising
premium collections guidelines, providing for uniform
via salary deductions, among plans, imposing capital, bonding
others. and other financial
responsibility, and establishing
ISSUE: trust funds for the payment of
benefits under such plans.”
Whether or not Primanila
violated Sec. 16 of SRC which
barred the sale or offer for sale SECURITIES AND EXCHANGE
to the public of a pre-need COMMISSION VS. PROSPERITY.COM,
product except in accordance with INC.
SEC rules and regulations.
G.R. NO. 164197 JANUARY 25, 2012
RULING:
FACTS:
The authority of the SEC and
the manner by which it can issue Prosperity.Com, Inc. (PCI)
cease and desist orders are sold computer software and hosted
provided in Section 64 of the SRC: websites without providing
Section 64. Cease and Desist internet service. To make a
Order. –The Commission, after profit, PCI devised a scheme in
proper investigation or which a buyer could acquire from
verification, motu proprio, or it an internet website of a 15-
upon verified complaint by any Mega Byte (MB) capacity. At the
aggrieved party, may issue a same time, by referring to PCI his
cease and desist order without own down-line buyers, a first-
the necessity of a prior hearing time buyer could earn commissions,
if in its judgment the act or interest in real estate in the
practice, unless restrained, will Philippines and in the United
operate as a fraud on investors States, and insurance coverage
or is otherwise likely to cause worth P50,000.00.
grave or irreparable injury or
prejudice to the investing public. To benefit from this scheme,
a PCI buyer must enlist and
It is beyond dispute that sponsor at least two other buyers
Primasa plans were not registered as his own downlines. These
with the SEC. Primanila was then second tier of buyers could in
barred from selling and offering turn build up their own downlines.
for sale the said plan product The For each pair of downlines, the
Court held that Primanila clearly buyer-sponsor receives a
violated Section 16 of the SRC commission. But referrals in a
which states that “no person day by the buyer-sponsor should
shall sell or offer for sale to not exceed 16 since the
the public any pre-need plan commissions due from excess
except in accordance with rules referrals inure to PCI, not to the
and regulations which the buyer-sponsor.
Commission shall prescribe. Such
rules shall regulate the sale of In 2001, disgruntled
pre-need plans by, among other elements of Golconda Ventures,
things, requiring the Inc. (GVI), filed a complaint
registration of pre-need plans, with the SEC against PCI,
licensing persons involved in the alleging that the latter had
sale of pre-need plans, taken over GVIs operations.
requiring the disclosures to ISSUE:
 Whether or not PCIs scheme G.R. No. 191995 AUGUST 3, 2011
constitutes an investment
contract that requires FACTS:
registration under R.A. 8799.
Justina F. Callangan, the
RULING: Director of the Corporation
Finance Department of the
An investment contract is a Securities and Exchange
contract, transaction, or scheme Commission (SEC), sent the
where a person invests his money Philippine Veterans Bank (PVB) a
in a common enterprise and is led letter informing it that it
to expect profits primarily from qualifies as a public company
the efforts of others. under the Securities Regulation
Code (SRC) and as such, it must
The United States Supreme comply with the reportorial
Court held in Securities and requirements under Section 17.1
Exchange Commission v. W.J. Howey of the SRC.
Co. that, for an investment
contract to exist, the following The Bank countered that it
elements, referred to as the should not be considered a public
Howey test must concur: (1) a company because it is a private
contract, transaction, or scheme; company whose shares of stock are
(2) an investment of money; (3) available only to a limited class
investment is made in a common or sector, i.e., to World War II
enterprise; (4) expectation of veterans, and not to the general
profits; and (5) profits arising public. Callangan rejected this
primarily from the efforts of and proceeded to assess it for a
others. Thus, to sustain the SEC penalty.
position in this case, PCIs
scheme or contract with its ISSUE:
buyers must have all these
elements. Whether or not the PVB is a
public company.
Here, PCIs clients do not
make such investments. They buy a RULING:
product of some value to them: an
Internet website of a 15-MB The Court ruled in the
capacity. The price of US$234.00 affirmative.
is what the buyer pays for the use
of the website, a tangible asset Subsection 17.1 of the SRC
that PCI creates, using its applies the following:
computer facilities and technical
skills. c) An issuer with assets of at
least Fifty million pesos
The commissions, interest in (P50,000,000.00) or such other
real estate, and insurance amount as the Commission shall
coverage worth P50,000.00 are prescribe, and having two hundred
incentives to down-line sellers (200) or more holders each
to bring in other customers. holding at least one hundred
These can hardly be regarded as (100) shares of a class of its
profits from investment of money equity securities: Provided,
under the Howey test. however, That the obligation of
such issuer to file reports shall
PHILIPPINE VETERANS BANK VS. be terminated ninety (90) days
JUSTINA CALLANGAN after notification to the
Commission by the issuer that the September of the same year, they
number of its holders holding at met again with Lim for another
least one hundred (100) shares is investment proposal, this time
reduced to less than one hundred for the purchase of USD
(100). 500,000.00 worth of Aeries
Finance II Ltd. Senior
Further, Rule 3(1)(m) of the Subordinated Income Notes. In
Amended Implementing Rules and 2003, their investments declined,
Regulations of the SRC, defines a until their account was totally
public company as any corporation wiped out. Upon verification with
with a class of equity securities the SEC, they learned that the
listed on an Exchange or with Ceres II Finance Ltd. Notes and
assets in excess of Fifty Million the Aeries Finance II Ltd. Notes
Pesos (P50,000,000.00) and having were not duly registered
two hundred (200) or more holders, securities.
at least two hundred (200) of
which are holding at least one ISSUE:
hundred (100) shares of a class
of its equity securities. Whether or not the criminal
action for offenses punished
The Bank has assets under the SRC filed by the
exceeding P50,000,000.00 and has respondents against the
395,998 shareholders. Hence, it petitioners has already
is considered a public company prescribed.
that must comply with the
reportorial requirements set RULING:
forth in Section 17.1 of the SRC.
The Court ruled in the
negative.

CITIBANK N.A. AND THE CITIGROUP Section 62 of the SRC

PRIVATE BANK and LIM VS. ESTER provides the limitation of
H. TANCO-GABALDON, et al. actions.

G.R. No.198444 SEPTEMBER 4, 2013 Section 62.1. No action shall be

maintained to enforce any
FACTS: liability created under Section
56 or 57 of this Code unless
On September 21, 2007, Ester brought within two (2) years
H. Tanco-Gabaldon, Arsenio Tanco after the discovery of the untrue
and the Heirs of Ku Tiong Lam, statement or the omission, or, if
having joint account with the action is to enforce a
Citigroup, filed with the liability created under
Securities and Exchange Subsection 57.1(a), unless
Commission’s Enforcement and brought within two (2) years
Prosecution Department1 (SEC-EPD) after the violation upon which it
a complaint for violation of the is based. In no event shall any
Revised Securities Act (RSA) and such action be brought to enforce
the Securities Regulation Code a liability created under Section
(SRC) against petitioners 56 or Subsection 57.1(a) more
Citibank N.A. (Citibank). In 2000, than five (5) years after the
Lim, who "induced" them into security was bona fide offered to
signing a subscription agreement the public, or under Subsection
for the purchase of USD 57.1(b) more than five (5) years
2,000,000.00 worth of Ceres II after the sale.
Finance Ltd. Income Notes. In
Section 62.2. No action shall be
maintained to enforce any
liability created under any other
provision of this Code unless
brought within two (2) years
after the discovery of the facts
constituting the cause of action
and within five (5) years after
such cause of action accrued.
The Court asserted that the
intent is to encompass in Section
62 the prescriptive periods, only
of the civil liability in cases
of violations of the SRC. The
phrase ‘any liability’ in
subsection 62.2 can only refer to
other liabilities that are also
civil in nature. The phrase could
not have suddenly intended to
mean criminal liability for this
would go beyond the context of the
other provisions among which it
is found. Given the absence of a
prescriptive period for the
enforcement of the criminal
liability in violations of the
SRC, Act No. 3326 now comes into
play. Applying Section 1 of Act
No.3326, a criminal prosecution
for violations of the SRC shall,
therefore, prescribe in twelve
(12) years.
JOSE U. PUA AND BENJAMIN HANBEN
U. PUA, VS. CITIBANK, N. A.
G.R.No.180064 SEPTEMBER 16, 2013
FACTS:
Jose and Benjamin Pua filed
a complaint for declaration of
nullity of contract and sums of
money with damages against
Citibank with the Regional Trial
Court (RTC). This arose when in
1999, Chingyee Yau, Vice-
President of Citibank Hongkong,
came to the Philippines to sell
securities to Jose. They averred
that Yau required Jose to open an
account with Citibank Hongkong as
it is one of the conditions for
the sale of the aforementioned
securities. After opening such
account, Yau offered and sold to
petitioners numerous securities
issued by various public limited
companies established in Jersey,
Channel I sands. The offer, sale,
and signing of the subscription
agreements of said securities
were all made and perfected at
Citibank Binondo in the presence
of its officers and employees.
Later on, petitioners discovered
that the securities sold to them
were not registered with the
Securities and Exchange
Commission (SEC) and that the
terms and conditions covering the
subscription were not likewise
submitted to the SEC for
evaluation, approval, and
registration. The respondent
opposed alleging that the RTC has
no jurisdiction over the same but
that SEC exercises primary
jurisdiction over the case.
ISSUE:
Whether or not the SEC
exercises primary jurisdiction
over the case at bar.
RULING:
The Court ruled in the
negative. Civil suits falling
under the SRC are under the
exclusive original jurisdiction
of the RTC and hence, need not be
first filed before the SEC,
unlike criminal cases wherein the
latter body exercises primary
jurisdiction.
Petitioners’ complaint in
the present case, constitutes a
civil suit for declaration of
nullity of contract and sums of
money with damages, which stemmed
from respondent’s alleged sale of
unregistered securities, in
violation of the various
provisions of the SRC and not a
criminal case.
 In the case of Baviera vs
Paglinawan (G.R. No. 168380, ISSUE:
February 8, 2007) it stated that
all complaints for any violation Whether or not Santos
of the SRC should be filed with violated Section 28 of SRC which
the SEC. However, it should be punishes unregistered broker or
construed as to apply only to dealer who engage in business of
criminal and not to civil suits buying or selling securities.
such as petitioners’ complaint.
RULING:

SECURITIES AND EXCHANGE The Court ruled in the

COMMISSION vs. OUDINE SANTOS affirmative contending that
G.R. No. 195542, March 19, 2014 Santos acted as an agent or
salesman of PIPC Corporation
FACTS: making her liable under Section
28 of SRC.
Sometime in 2007, yet
another investment scam was There is no question that
exposed with the disappearance of Santos was in the employ of PIPC
its primary perpetrator Liew, a and/or PIPC–BVI, a corporation
self–styled financial guru and which sold or offered for sale
Chairman of the Board of unregistered securities in the
Directors of Performance Philippines. To escape probable
Investment Products Corporation culpability, Santos claims that
(PIPC–BVI), a foreign corporation she was a mere clerical employee
registered in the British Virgin of PIPC and/or PIPC–BVI and was
Islands. To do business in the never an agent or salesman who
Philippines, PIPC–BVI actually solicited the sale of or
incorporated herein as Philippine sold unregistered securities
International Planning Center issued by PIPC and/or PIPC–BVI.
Corporation (PIPC).
Solicitation is the act of
Because the head of PIPC had seeking or asking for business or
gone missing and with it the information; it is not a
monies and investment of a commitment to an agreement.
significant number of investors, Santos, by the very nature of her
the SEC was flooded with function as what she now
complaints from 31 individuals unaffectedly calls an information
against PIPC Corporation, its provider, brought about the sale
directors, officers, employees, of securities made by PIPC and/or
agents and brokers for alleged PIPC–BVI to certain individuals
violation of certain provisions specifically complainants Sy and
of the SRC, including Section 28 Lorenzo by providing information
thereof. Santos was charged in on the investment products of
the complaints in her capacity as PIPC and/or PIPC–BVI with the end
investment consultant of PIPC in view of PIPC closing a sale.
Corporation, who supposedly
induced private complainants While Santos was not a
Lorenzo and Sy, to invest their signatory to the contracts on
monies in PIPC. Sy’s or Lorenzo’s investments,
Santos procured the sale of these
On her defense, Santos unregistered securities to the 2
alleged that she was merely an complainants by providing
employee of PIPC and should not information on the investment
be personally liable. products being offered for sale
by PIPC and/or PIPC–BVI and
convincing them to invest therein.
Thus, Santos violated
Section 28 of SRC. Its elements
are as follows:
1. Engaging in the business of
buying or selling securities in
the Philippines as a broker or
dealer;
2. Acting as a salesman; or
3. Acting as an associated person
of any broker or dealer, unless
registered as such with the SEC.
The transaction initiated by
the investment consultant of a
corporation is an investment
contract or participation in a
profit sharing agreement that
falls within the definition of
law which is an investment in a
common venture premised on a
reasonable expectation of profits
to be derived from the
entrepreneurial or managerial
efforts of others.
GOVERNMENT SERVICE INSURANCE
SYSTEM VS. COURT OF APPEALS
G.R. No. 183905 APRIL 16, 2009
FACTS:
In view of the resignation
of Camilo Quiason, the position
of corporate secretary of Meralco
became vacant. The board of
directors of Meralco designated
Jose Vitug to act as corporate
secretary for the annual meeting.
However, when the proxy
validation began, the proceedings
were presided over by respondent
Anthony Rosete, assistant
corporate secretary and in-house
chief legal counsel of Meralco.
The GSIS, a major
shareholder in Meralco, was
distressed over the proxy
validation proceedings and the
resulting certification of
proxies in favor of the Meralco
Management. The proceedings were
presided over by Meralco’s
assistant corporate secretary and
chief legal counsel instead of
the person duly designated by
Meralco’s Board of Directors.
Thus, GSIS moved before the SEC
to declare certain proxies, those
issued to herein private
respondents, as invalid.
Private respondents contend
that dispute in the validity of
proxies is an election contest
which falls under the trial
court’s jurisdiction. GSIS argues
there was no election yet at the
time it filed its petition with
the SEC, hence no proper election
contest over which the regular
courts may have jurisdiction.
ISSUE:
Whether or not the SEC has
jurisdiction over the petition
filed by GSIS against private
respondents.
RULING:
The court ruled in the
negative. When SEC has sought to
enjoin the use and annul the
validation, of the proxies issued
in favor of several of the private
respondents, particularly in
connection with the annual
meeting, the jurisdiction of Sec
over the case has been put into
question. The Court ruled that
the right of stockholder to vote
by proxy is generally established
by the Corporation Code, but it
is the SRC which specifically
regulates the form and use of
proxies, more particularly proxy
solicitation, a procedure that
antecedes proxy validation. When
proxies are solicited in relation
to the election of corporate
directors, the resulting
controversy, even if it
ostensibly raised the violation
of the SEC rules on proxy
solicitation, should be properly
seen as an election controversy The funds are obtained in the
within the original and exclusive public, which shall mean 20 or more
jurisdiction of the trial courts. lenders.

Jurisdiction is conferred by Notes:

 They funds are not obtained in any
no other source but law. Both
other manner other than by
sides have relied upon provisions deposit, otherwise it not a bank.
of Rep. Act No. 8799, otherwise  In banking, deposit is the
known as the Securities contract wherein a party lends
Regulation Code (SRC), its his funds to the banks.
o Not the contract of
implementing rules (Amended
depositum which is of
Implementing Rules or AIRR-SRC), safekeeping but rather it
and other related rules to is a mutuum. (Guingona v.
support their competing City Fiscal of Manila)
contentions that either the SEC o Historically safekeeping
of money was the purposes
or the trial courts has exclusive
of bank. However, it
original jurisdiction over the evolved into what we know
dispute. now as deposit as lending.
 Bank has ownership over the money
Section 6 of the deposited while on the other
hand, the lender has a right of
Presidential Decree No. 902-A is
credit or a right to collect, as
immediately preceded by Section 5, a creditor.
which originally conferred on the  Compensation is allowed in bank
SEC original and exclusive deposit because it is a contract
jurisdiction to hear and decide of mutuum. (Gullas v. PNB)
o However there shall be no
cases involving controversies in
compensation between
the election or appointments of foreign branches of US
directors, trustees, officers or banks. Under federal law of
managers of such corporations, the US, branches of banks
partnerships or associations. are treated as separate
entities from each other
Thus, such power of the SEC then
(Citibank N.A. v.
was incidental or ancillary to Sabeniano)
the exercise of such jurisdiction. o Mandamus does not lie to
The cases referred to in Section compel bank to pay deposit.
5 were transferred from the (Lucman v. Malawi)
jurisdiction of the SEC to the
regular courts with the passage Deposits, kinds:
1. Savings account
of the SRC, specifically Section
2. Time deposit
5.2. Thus, the SEC’s power to pass 3. Demand deposit
upon the validity of proxies in 4. Joint account
relation to election
controversies has effectively Notes:
been withdrawn, tied as it is to  Saving accounts and time deposits
its abrogated jurisdictional are similar but differ in that
powers. time accounts can be withdrawn
upon only after the lapse of a
certain period without incurring
penalties while savings account
can be withdrawn from anytime.
 Savings deposits are demandable
Banks, defined: only after notice while demand
deposits are demandable at once
An entity engaged in the
lending of funds obtained in the form  Joint account has two kinds:
of deposits. 1. Joint “And/Or” Accounts
this is an authorization by
the depositors to allow the
withdrawal of any or all of
 the amounts in the joint  In Islamic jurisprudence,
and/or accounts without collection of interest is
notice to or consent to the forbidden. Rather than collecting
other depositor. interest, the Islamic bank
 This does not invests in the borrower’s
establish co- undertaking or business.
ownership, but
rather of agency Quasi-banks, defined
between the
An entity engaged in the
depositors as far
as the bank is borrowing of funds through the
concerned. issuance, endorsement, assignment
2. Joint “And” Account the with recourse, or acceptance of
fund cannot be drawn by one deposit substitutes for purposes of
without the authorization relending or purchasing of
of the other. receivables and other obligation.
 This establishes a
presumption of co-
Notes:
ownership over the
 Banks obtain funds through
whole fund
deposit while quasi-banks obtain
deposited.
its funds through the issuance of
debt instruments called deposit
substitutes, primarily commercial
papers.
Interest-escalation clause, void
A stipulation in a loan  Banks deposits v. deposit
contract whereby the bank reserves substitute
the right to unilaterally increase 1. As to entity creating the
the interest rate “within the limit same. Bank deposits are
allowed by law” violates the created by banks while
principle of mutuality in contract deposit substitute are
in Art. 1308 (PNB v. CA, 1994) issued or dealt with by
quasi-banks.
2. As to evidence of the
Form of Banking Entities transaction. Bank deposits
The bank must be a stock are evidenced by passbooks
corporation and must not be a close or certificates while
corporation. It must issue par-value deposit substitutes are
stock only. evidenced by debt
instruments.
3. Party initiating the
Notes: transaction: the lenders
 An exception is a partnership in initiate a transaction by
the form of a banking going to the bank while on
cooperative. the other hand deposit
 Par-value is a necessity because substitutes are offered to
banks have capitalization the public.
requirement that must be
followed.
Authority from the Bangko
Types of Banks Sentral ng Pilipinas
1. Rural bank No person or entity shall
2. Thrift bank engage in banking operation or
3. Commercial bank quasi-banking function without
4. Universal bank authority from the BSP.
5. Cooperative bank
6. Islamic bank Fit and Proper Rule
It is the power of the Monetary
Notes: Board (MB) to pass upon the
 Universal banks are “expanded
qualification of individual elected
commercial banks”. It has both
the powers of a both a commercial or appointed as bank directors and
bank and an investment house. officers and to disqualify those
 Investment houses are entities found unfit.
engaged in the underwriting of
securities. The power include to suspend
the director.

Foreclosure of Real Estate
Mortgage
In extrajudicial foreclosure,
mortgagor has a one year redemption
period reckoned from registration of
the certificate of sale. (Act 3135)
In judicial foreclosure, no
right of redemption, only equity of
redemption. (R68, Rules of Court)
This is a right to pay of the
judgment award within a period
stated by the court which should not
be less than 90 days nor more than
120 days from the entry of judgment.
However, in foreclosure by
banks whether judicial or
extrajudicial, the mortgagor always
has a right of redemption of one year
from the registration of the
certificate of sale.
For extrajudicial foreclosure
by banks of the realty of a juridical
persons, the period for foreclosure
shall be whichever is earlier
between: (Sec. 47 of the GBL)
 The registration of the
certificate of foreclosure
sale; or
 Up to 3 months after the
foreclosure sale.
 Section 47 shall apply even
when the mortgage was entered
into prior the effectivity of
the GBL [22 June 2000] but
foreclosure took effect after
the GBL. (Goldenway
Merchandising v. Equitable
PCIB)
Notes:
Mortgagor should pay the bank the
following upon redemption: (AICE)
1. Amount due under the mortgage
deed;
2. Interest thereon at the rate
specified in the mortgage deed;
3. Costs and expenses incurred by
the bank from the sale and
custody of said property. LESS
any income derived from the
realty.
Outsourcing, prohibited
A bank is prohibited from
outsourcing inherent banking
functions, like lending, deposit-
taking, and trust services. Those
functions which are not inherent to
banking may be outsourced like
security mailing, marketing, and
collection.
Highest degree of diligence
Banking is a business
impressed with the highest public
interest. Therefore, the highest
degree of diligence is expected, and
high standards of integrity and
performance are required.
Fiduciary nature
By the nature of its functions,
the bank is under obligation to treat
the accounts of its depositors with
meticulous care, always having in
mind the fiduciary nature of their
relationship. (Citibank v. Spouses
Cabamongan)
Notes:
 Banks should exercise the highest
diligence in the selection &
supervision of employees. By the
very nature of their work, the
degree of responsibility expected
of their employees and officials
is far greater than those of
ordinary clerks and employees.
 In one case, even no malice or bad
faith was proven in a dishonor of
a check with sufficient funds
damages were awarded. (Prudential
Bank v. CA, 2000)
 In another case, where withdrawal
may be had only after the
presentation of the passbook, the
bypass of the requirement by a
bank employee shall hold the bank
liable for the loss. (BPI v. CA,
2000)
 The “Mirror Doctrine” does not
apply to banks. Banks cannot
merely rely on the certificates
of titles in ascertaining the
status of mortgaged properties;
they are expected to exercise
more care and prudence in their
dealings than private
individuals. (Ursal v. CA, 2005)
Interest Rates
In the absence of a stipulated
rate, the rate of interest on loan,
forbearance of money, goods, or
credit, and the rate on judgment
shall be 6% per annum. (BSP Circular
799, 1 July 2013)
Risk-based Capital (Net worth to 1. Liabilities of drawers and
risk asset ratio) indorsers of commercial
paper.
The MB shall prescribe the
2. Liabilities of a
minimum ratio which the net worth corporation, partnership,
(capital) of a bank must bear to its or association where an
total risk asset. (Sec. 34, GBL) individual owns or
controls a majority
Notes: interest.
 Risk asset are those which are 3. The liabilities of a
not easily converted to cash or corporation and its
collected by a bank. Hence, they subsidiaries
are risky in the sense that a 4. In case of a partnership,
association or other
bank cannot easily realize on entity, the liabilities of
them if claims or demands are their members to the bank.
made against the bank.
DOSRI Loans are regulated not
Contract of Guaranty are now prohibited
allowed to be entered by banks Loans or financial
A “letter of guaranty,” accommodations incurred by a
whereby a bank undertakes to release director, officer, stockholder, and
the loan proceeds to the landowner- his related interest.
prospective seller, is not a
contract of guaranty but an Notes:
innominate contract.  As for stockholder, your holdings
or interest must be 2% or more of
It is not actually a contract the subscribed capital stock to
of guaranty but a commitment on the come under the DOSRI. (Subsection
part of the bank that once the loan X326.1.c, MORB)
proceeds are released they are paid  Included in the DOSRI are the
directly to the seller. spouse or those related by first
degree by consanguinity or
affinity, or adoption to the
However, banks are now allowed
DOSRI.
to enter into contracts of guaranty.
(Games & Garment Developers v.  Restrictions to the DOSRI:
Allied Bank, 2015) (BaLLS)
1. Board Approval
Single Borrower’s Limit 2. Level Terms
The total amount of loans, 3. Limit
credit, accommodation, and 4. Secrecy
guarantees that may be extended by a  In the board approval, the vote
of the DOSRI concerned must be
bank to a single-borrower shall not
excluded. EXCEPT: Fringe-benefit
exceed 25% of the bank’s net worth. plans approved by the BSP.
 Level terms means that DOSRI’s
Notes: dealing with the bank shall be on
 As the saying goes, “don’t put terms not less favorable to the
your eggs in one basket.” Banks bank than those offered to
should not lend all their money others.
to a single borrower. If this one  Limit on the loan shall be
person shall default it shall equivalent to the amount of the
greatly affect the other unencumbered deposits and the
borrower and the bank as well. DOSRI’s paid-in capital
 The basis for determining contribution to the bank.
compliance with the SBL is the  The DOSRI should waive his bank
total credit commitment of the secrecy over all bank account in
bank to the borrower, not the the Philippines if he should
actual loan availment. incur a loan which is 5% of the
 Net worth is capital. bank’s net worth.
 ALL OF THE
 Inclusions to the SBL REQUIREMENT/RESTRICTIONS MUST
computation: MET.

New Central Bank Act (RA 7653)

 Constitutional basis of its BSP’s action is plainly arbitrary and in
independent status is Section 20, bad faith and the party posts a bond.
Article XII of the constitution. It
also provides that majority of the Conservatorship
members of the governing board must Whenever a bank or quasi-bank
come from the private sector. is in a state of continuing inability
or unwillingness to maintain a
Notes: condition of liquidity deemed
 The Bangko Sentral ng Pilipinas is adequate to protect the interest of
the central bank of the Philippines. depositors and creditors.
 The BSP has been relieved of its
fiscal responsibilities under the Notes:
new law, it now only has monetary  The following are the powers of the
responsibilities. conservator.
o Fiscal responsibility is the 1. Reorganize the management
raising of money for the 2. Take charge of the assets,
government. This is the liabilities, and management for
responsibility of the Department a period not exceeding one
of Finance through the Bureau of year.
Treasury and Bureau of Internal 3. Collect all moneys
Revenue. 4. Exercise all the powers
 BSP is a GOCC and enjoys fiscal and necessary to restore the bank
administrative autonomy. or quasi-bank to viability or
adequate level of liquidity;
BSP Responsibilities and
1. Provide policy directions in 5. Power to overrule/revoke the
the area of money, banking, and decisions and actions of the
credit. previous management or board of
directors.
2. Supervise the operations of
banks and quasi-banks.  Designation of a conservator or
3. Determine exchange rate appointment of a receiver shall be
policy. vested exclusively with the MB.
4. Management of Foreign currency
reserves  Conservatorship ends when the bank
5. Lender of last resort. or quasi-bank has been restored to
an adequate level of liquidity or if
Notes: the MB determines that continuance
 Foreign loans may be incurred of the business would involve
only in accordance with law and possible losses then place it in
BSP regulations. receivership or liquidation.
 The President may contract or
guarantee foreign loans in behalf Receivership
of the Philippines only with the Whenever the MB finds the Bank
prior concurrence of the MB. or quasi-bank:
 Under the Anti-Money Laundering 1. Is unable to pay its
Act, the BSP may in the course of liabilities as they become due
a periodic or special examination in the ordinary course of
check the compliance of a covered
business.
institution with the requirements
of the AMLA and its IRR. 2. Has sufficient realizable
assets to meet its
Ban on TRO and Preliminary liabilities.
3. Cannot continue in business
Injunction
without involving probable
A court may not issue a
losses to its depositors or
restraining order or preliminary
creditors.
injunction enjoining the BSP from
4. Willfully violated a cease and
examining any institution subject to
desist order if relates to
supervision or examination by the
fraud or dissipation of
BSP.
assets.
5. The bank publicly announces a
Notes:
The exception when the bank holiday.
presentment of convincing proof that the
Notes:
  The MB may summarily and without
the need of prior hearing, forbid
the institution from doing
business in the Philippines.
 Purpose of a receiver is to
preserve the assets.
 Generally, the receiver may do all
thing but he cannot pay or commit
any act which will involve
transfer or disposition of assets
of the institution.
 The receiver shall determine as
soon as possible, but not more than
90 days from the take over whether
or not the institution may be
rehabilitated.
Remedy of an aggrieved shareholder
from the MB order placing a bank under
receivership is a special civil action
for certiorari with the Court of Appeal,
not a prohibition.
 Must be filed by majority of the
stockholders of record within 10
days from receipt by the BOD of
the order placing the bank under
receivership.
Liquidation
If the receiver determines
that the institution cannot be
rehabilitated or permitted to resume
business, the MB shall direct the
receiver to proceed with the
liquidation of the institution.
Notes:
 The receiver must file a Petition
for assistance in the liquidation
with the RTC.
 Assets of the institution shall
be converted into money and
distributed to creditors in
accordance with the civil code
provisions on concurrence and
preference of credit.
Bank Secrecy Laws
The bank secrecy law primarily
consists of:
1. R.A. No. 1405 (1955)
2. R.A. No. 6426 (1972, 1977)
3. Sec. 55.1(b), GBL (2000)
Notes:
 Bank deposits, including
investments in government bonds,
are of an absolutely confidential
nature and may not be inquired
into, save for certain
exceptions.
 It shall be unlawful for any
official or employee of a bank to
disclose to any person any
information concerning said
deposit or investment. (RA 1405)
o Any information the term
“any information” should
mean even to include the
name of the depositor and
not only the amount of
money in the bank deposit.
o This act refers to bank
deposits. And includes
trust accounts. (Ejercito
v. Sandiganbayan)
o The fruit of the poisonous
tree doctrine does not
apply to RA 1405. (Ejercito
v. Sandiganbayan)
 No director, officer, employee,
or agent of any bank shall,
without order of a court of
competent jurisdiction, disclose
to any unauthorized person any
information relative to the funds
or properties in the custody of
the bank belonging to private
individuals, corporation, or any
other entity; provided that with
respect to bank deposits, the
provisions of existing laws shall
prevail.(GBL)
o Prevailing laws refer to RA
1405 and RA 6426.
Exception to the Bank Secrecy
(PIC PUTPUT TAGO)
1. Written permission of the
depositor/investor.
a. DOSRI Loan
b. SALN waiver
c. Tax Compromise
2. In cases of impeachment.
3. Upon order of a competent court in
cases involving (a) bribery or
dereliction of duty of public
officials; and (b) where the money
deposited or invested is the subject
matter of the litigation.
4. Authority of the CIR to inquire into
bank deposits of a decedent for
estate tax purposes or in case of a
tax compromise.
5. Prosecution for unexplained wealth
under the Anti-Graft and Corrupt
Practices Act.
6. Investigation of a person charged or
suspected of terrorist acts under the
Human Security act.
7. Incidental disclosure under the
Unclaimed Balances Law.
8. Authority of AMLC to inquire into
bank deposits and investments under
the Terrorism Financing Prevention &
Suppression Act of 2012.
9. Authority of AMLC to examine or
inquire into a deposit or investment
with any bank where there is probable
 cause that such deposit or unlawful
activity or money-laundering.
10. Incidental disclosure in
garnishment or execution of bank
deposits.
11. Power of the Ombudsman to examine
and have access to bank accounts and
records under RA 7680
12. PDIC/BSP may inquire into bank
deposits if there is finding of
unsound or unsafe banking practices.
(Sec.8[8] PDIC Charter)
Notes:
Mellon Bank v. Magsino
 In an action filed by a bank to
recover money it transmitted by
mistake, the records of the bank
accounts to which the proceeds were
deposited may be inquired into by
court order, since the money deposited
is the subject matter of litigation,
even if the money was deposited in the
names of persons other than the
recipient by mistake.
Onate v. Abrogar
 Examination of a bank account to which
the money paid by an insurance company
for purchase of T-bills was deposited
is prohibited even if the insurance
company sued the T-bill seller for
failure to deliver the T-bills. The
money deposited is not the “subject
matter of litigation.”
Union Bank v. Allied Bank
 The money deposited in the drawer’s
account was not the subject matter of
the litigation. A perusal of the
complaint filed by Union Bank against
Allied Bank before the PCHC shows that
it seeks to recover the P999,000 not
from the drawer’s account but from
Allied Bank itself because of the
latter’s refusal to honor the charge
slip.
Marquez v. Desierto
 Before an in camera inspection by the
Ombudsman may be allowed, there must
be a pending case before a court of
competent jurisdiction. Here there
was no such pending litigation case
but an investigation by the Ombudsman.
The inspection amounts to a fishing
expedition.
Anonymous & fictitious-name
accounts now absolutely
prohibited
Anonymous accounts, accounts
under fictitious names, and all
other similar accounts shall be
absolutely prohibited. Peso and
foreign currency non-checking
numbered accounts shall be allowed.
The BSP may conduct annual
testing solely limited to the
determination of the existence and
true identity of the owners of such
accounts.
Notes:
 Know-your-customer Rule. The
existence and the true identity of
the owners MUST be known.
Foreign Currency Deposit Act (RA
6426)
Exception: (WA BRA PT)
1. Depositor’s written consent.
2. Authority of the AMLAC to examine
or inquire into any particular
deposit or investment with any
banking institution upon order of
any competent court
3. BSP power to inquire into
deposit.
4. Reporting of covered or
suspicious transactions
5. AMLAC to inquire into deposits
under the provision of the
Terrorism Financing Suppression
and Prevention Act
6. PDIC’s power to inquire into a
bank deposit
7. Request for supply of tax
information from a foreign tax
authority.
Notes:
Van Twest v. CA
 A co-depositor who withdrew the money
deposited by her co-depositor in a
dollar account and used the same to
open a dollar account in her own name
is not entitled to the protection of
RA 6426 since she was not the owner
of the dollar account which was
opened.
Salvacion v. Central Bank
 Where a foreign tourist who had raped
a 12-year-old child and escaped was
held liable for damages to the victim,
the garnishment of the tourist’s
foreign currency deposit should be
allowed to prevent an injustice
notwithstanding the clear mandate of
the Foreign Currency Deposit Act
against garnishment.
China Bank v. CA
 Jose Gotianuy may be considered a
co-depositor in the China Bank
dollar account of his daughter,
 since he was a co-payee in the
Citibank dollar checks deposited Covered transaction which AMLAC can
therein. Hence he or his estate can inquire into:
validly inquire into the dollar bank  Transaction, on cash or other
accounts. equivalent monetary instrument
P500,000 (threshold amount)
PSBank v. Senate Impeachment Tribunal within one banking day.
 The main issue of whether the  Suspicious transactions,
Impeachment court acted arbitrarily regardless of amount of money
when it issued the assailed subpoena involved.
to obtain information concerning the
subject foreign currency deposits What are suspicious transactions? (ICU
notwithstanding the confidentiality SUDS)
of such deposits under RA 6426 has 1. No underlying legal or trade
been overtaken by events. This was obligation, purpose, or economic
actually not resolved by the SC. justification.
2. Client is not properly
Anti-Money Laundering Act (RA identified.
9160) 3. Amount involved not commensurate
with client’s business or
The law seeks to combat the
financial capacity.
crime of money-laundering 4. Transaction structured in order
essentially through the use of to avoid being subject of
mandatory reporting system, the reportorial requirements.
power to inquire into and to freeze 5. Transaction which deviates from
deposits and investments, and the client’s profile and/or client’s
imposition of stiff penalties. past transaction with covered
institutions.
Notes: 6. Transaction related to an
unlawful activity, including
Traditional definition of money those committed or about to be
laundering committed.
 Money laundering is the process of 7. Similar or analogous transaction.
making illegally-gained proceeds
(i.e. “dirty money”) appear legal
(i.e. “clean”). Typically, it INTELLECTUAL PROPERTY CODE (RA 8293)
involves three steps: placement,
layering and integration. State Policies
 Money laundering is committed by 1) The state recognizes that an
any person who, knowing that any effective intellectual and
monetary instrument or property industrial property system is:
relates to the proceeds of any (a) Vital to the development of
unlawful activity transacts, domestic and creative
converts, conceals, aids or abets activity
or counsels, facilitates, attempts (b) Facilitates transfers of
or conspires , fails to report any technology
act of money laundering. (c) Attracts foreign investments
(d) Insures market access for our
Predicate Crimes: (D HAM PERPEK SSS JQ products
GF) 2) The state likewise recognizes
1. Drug Crimes that the use of intellectual
2. Hijacking property bears social function.
3. Arson 3) It is also a state policy to
4. Murder streamline administrations of
5. Plunder administrative procedures
6. E-commerce violation concerning intellectual property,
7. Robbery liberalize registration of
8. Piracy transfer of technology and
9. Extortion enhance the enforcement of
10. Kidnapping for ransom intellectual property rights.
11. Securities fraud 4) Protection of intellectual
12. Swindling property is likewise mandated by
13. Smuggling the Constitution. Section 13 of
14. Jueteng Article XIV of the Constitution
15. Qualified Theft provides that: the State shall
16. Foreign Crimes which are similar protect and secure the exclusive
17. Graft and Corrupt Practices rights of scientists, inventors,
 artists and other gifted citizens
to their intellectual property
and creations, particularly when
beneficial to the people, for
such period as may be provided by
law.
5) Treaties are part of our laws,
hence various provisions of
treaties are incorporated in the
Intellectual Property Code.
 Intellectual property protection is a
means for making society benefit from
the creation of its men and women of
talent and genius. (ABS-CBN vs. Phil.
Multi-media System, 2009)
Emerald Garments vs. CA (1995)
Philippine municipal laws on
trademarks regarding the requirement
of actual use in Philippines must
subordinate an international
agreement inasmuch as the apparent
class is being decided by a municipal
tribunal. The fact that international
law has been made part of the law of
the land does not by any means imply
the primacy of the 1965 Paris
Convention for the Protection of
Industrial Property over Sec.31-A of
Trademark Law. Under the doctrine of
incorporation and international
comity as applied in most countries,
rules of international law are given
a standing, not superior, to national
laws.

RECIPROCITY RULE
 Any person who is a national of, or MOST FAVORED NATION CLAUSE
is domiciled in, or has a real and  With regard to the protection of
effective industrial establishment intellectual property, any
in, a country which is a party to any advantage, favor, privilege or
convention, treaty or agreement immunity granted by a member to the
relating to intellectual property nationals of another shall be
rights or the repression of unfair accorded immediately and
competition, to which the Philippines unconditionally to the nationals of
is also a party, or its laws extends all other members of WTO’s TRIPS.
reciprocal rights to Philippine (Art.4, TRIPS)
nationals shall be entitled to
benefits to the extent necessary to
give effect to such convention, treaty
or reciprocal law, in addition to the INTELLECTUAL PROPERTY OFFICE
rights to which any owner of an
intellectual property right is Powers of IPO (Sec.5, IPC)
otherwise entitled under IPC. 1. Examine applications for:
 Grant of letters patent
 However, any condition, restriction, for inventions and
limitation, diminution, requirement, register utility models
penalty or burden imposed by a foreign and industrial designs
country on a Philippine national  Registration of marks,
seeking protection of the geographic indications,
intellectual property rights in that integrated circuits
country shall reciprocally 2. Registers, settles disputes
enforceable upon that country’s relating to, develop and
nationals within Philippine implement strategies to promote
jurisdiction. and facilitate technology
transfer arrangements
3. Regularly publish in IPO Gazette
issue or approved intellectual
property rights and registered
technology transfer arrangements
4. Adjudicate contested proceedings
affecting intellectual property
rights applying when applicable
equitable principles of laches,
estoppel and acquiescence.

Disqualifications of IPO officers and

employees
 All IPO officers and employees
are disqualified from:
(a) Submitting any application with
the office
(b) Acting as an attorney or patent
agent of an IPO application
(c) Acquiring, except by hereditary
succession, any intellectual
property or any right, title,
interest therein during their
employment and for one year
thereafter.
JURISDICTION OVER IP CASES
 Jurisdiction over cases for
infringement of registered marks,
unfair competition, false designation
of origin and false description or
representation, is lodged with the
RTC. (Samson vs. Daway, 2004)
 Given its specific focus, a first test
that should be made when the question
whether a matter is covered by IPC is
to ask if it refers to an intellectual
property right as defined in the Code;
if a disputed matter does not
expressly refer to an intellectual
property right as defined, the second
test is whether it falls under the
general unfair competition concept
and definition under the Code. (Coca-
Cola Bottlers, Phils. vs. Gomez, 2008)
COVERAGE OF INTELLECTUAL
PROPERTY RIGHTS
 Patents
 Copyright
 Trademark and Service Marks
 Geographic Indications
 Layout designs of Integrated
Circuits
 Protection of Undisclosed
Information
 Industrial designs
I. GEOGRAPHIC INDICATIONS
 It is an indication which
identify as good as originating
in the territory or a region or
locality in that territory, where
a given quality, reputation or
other characteristics of the good
is essentially attributable to
its geographical origin. (Sec3,
Art.22[1], TRIPS)
II. PROTECTION OF UNDISCLOSED
INFORMATION
 Natural and legal persons shall
have the possibility of
preventing information lawfully
within their control from being
disclosed to, acquired by, or
used by others without their
consent in a manner contrary to
honest commercial practices so
long as the information:
(a) Is secret in the sense that
it is not, as a body or in
the precise configuration
and assembly of its
components, generally known
among or readily accessible
to persons within the
circles that normally deal
with the kind of information
in question
(b) Has commercial value
(c) Has been subject to
reasonable steps under the
circumstances, by the person
lawfully in control of the
information, to keep it
secret. (Sec.7, Art.39[2], TRIPS)
III. INDUSTRIAL DESIGN
 Any composition of lines or colors
or any three-dimensional form,
whether or not associated with
lines or colors. (Sec.112, ICP)
IV. PATENTS
 Patentable inventions refer to any
technical solution of a problem in
any field of human activity which
is new, involves an inventive step
and is industrially applicable.
 It may be or may be related to a
product, a process or an
improvement of any of the
foregoing.
 Inventor –any person who, at the filing
date of application, had the right to
the patent.
 Three-fold purpose of Patent law:
(Pearl & Dean Phils. Vs. Shoemart, 2003)
(a) It seeks to foster and reward
invention
(b) It promotes disclosure of
inventions to simulate further
innovation and to permit the
public to practice the invention
once the patent expires
(c) The stringent requirements of
patent protection seek to ensure
that ideas in the public domain
remain there for the free use of
the public.
 NOVELTY
  An invention shall not be practiced on the human or animal
considered new if it forms part of body
a prior art. 4. Plant varieties or animal breeds of
essentially biological process for
 PRIOR ART shall consist of: the production of plants or animals
(a) Everything made publicly 5. Aesthetic creations
available anywhere in the 6. Anything which is contrary to
world before filing or public order or morality
priority date of application (Sec.22,IPC)
claiming the invention 7. In case of drugs and medicines,
(b) Whole contents of an there is no patentable invention in
application for a patent, the following instances:
utility model or industrial a) Mere discovery of a new form or
designs registration, new property of a known
published in accordance with substance which does not result
IPC, filed or effective in in the enhancement of the known
the Philippines, with a efficacy of that substance
filing or priority date b) Mere discovery of any new
earlier that filing or property or new use for a known
priority date of substance
application, provided: c) Mere use of a known process
i. Application which has unless such known process
validly claimed results in a new product that
filing date of an employs at least one reactant.
earlier application (RA 9502)
under Sec.31, IPC
shall be prior art
with effect as of the NON-PREJUDICIAL DISCLOSURE
filing date of such  Disclosure of information contained
earlier application in application during 12months
ii. Applicant or inventor preceding filing date or priority
identified in both date of application shall not
applications are not prejudice applicant on the ground of
one and the same. lack of novelty if such disclosure
was made by:
a) Inventor
 INVENTIVE STEP b) A patent officer and the
 An invention involves an inventive information was contained:
step if having regard to prior art,  In another application filed
it is not obvious to a person by inventor and should not
skilled in the art at filing date have been disclosed by the
or priority date of application office
claiming the invention.  In an application filed
without the knowledge or
 Person skilled in the art consent of the inventor by a
- Presumed to be an ordinary third party which obtained
practitioner aware of what was the information from the
common general knowledge in the inventor.
art at the relevant date. c) Third party who obtained
information directly from
 INDUSTRIALLY APPLICABLE inventor
 An invention that can be produced RIGHT TO PATENT
and used in any industry shall be  The right to patent belongs to the
industrially applicable. inventor, his heirs or assigns.
 When two or more persons have jointly
made an invention, right shall belong
NON-PATENTABLE INVENTIONS to them jointly.
1. Discoveries, scientific theories
and mathematical methods  First to file Rule
2. Schemes, rules and methods of - If two or more persons have made
performing mental acts, playing invention separately and
games, or doing business and independently of each other, right
programs for computer shall belong to applicant who has
3. Methods for treatment of the human earliest filing date or earliest
body or animal body by surgery or priority date.
therapy and diagnostic methods
  Other applications in foreign
jurisdiction –Application filed by
any person who has previously
Smith Kline Beckman Corp vs. CA (2003)
applied for same invention in
another country which by treaty, In division applications, the
convention or law affords similar applicant to divide –that is to limit
privileges to Filipino citizens, the claims to whichever invention he may
shall be considered as filed as of elect, whereas those inventions not
date of filing the foreign elected may be made the subject of
separate applications. If any of the
application, provided that:
requisite contents of the application is
(a) Local application expressly not submitted within the period set,
claims priority application shall be considered
(b) Filed within 12 months from withdrawn.
date earliest foreign
application was filed
(c) Certified copy of foreign
RIGHTS AFTER PBLICATION OF APPLICATION
application together with
 Applicant shall have all rights
English translations filed
of a patentee against any person
within 6months from date of
who, without his authorization,
Philippine filing.
exercised any of the rights
conferred, as if a patent had been
granted for that invention.
PATENTS PURSUANT TO COMMISSION
The person who commissions the work
 Action may not be filed until
shall own the patent, unless the
after grant of patent on
contract otherwise provides.
published application and within
4years from commission of acts
In case an employee made invention in
complained of.
course of his employment contract,
patent shall belong to:
a. EMPLOYEE, if inventive activity
GRANT OF LETTER OF PATENT
is not part of his regular duties
 Patent shall take effect on date of
even if employee uses time,
publication of grant of patent in IPO
facilities and materials of
Gazette.
employer.
b. EMPLOYER, if invention results
Issuance of letters patent creates a
from performance of his regularly
presumption which yields only to clear
assigned duties unless there is
and cogent evidence that patentee was
an agreement to the contrary.
the original and first inventor. Burden
of proving want of novelty is on him who
avers it and burden is a heavy one which
UNITY OF INVENTION
is met only by clear and satisfactory
Application shall relate to one
proof which overcomes every reasonable
invention only or to a group of
doubt. (Manzano vs. CA, 1997)
inventions forming a single general
inventive concept.
REMEDIES OF PERSON WITH PATENT
If several independent inventions are
 Application by persons not having
claimed in one invention, Director may
right to patent
require that application be restricted
 If a person other than the
to a single invention.
applicant is declared by final
court order or decision as having
A later application filed for an
the patent right, such person
invention divided out shall be
may, within 3months after the
considered as having been filed on the
decision becomes final:
same day as the first application,
(a) Prosecute application as
provided: it must be filed within
his own in place of
4months after the requirement to divide
applicant
becomes final or within such additional
(b) File new patent
time, not exceeding 4months as may be
application in respect of
granted.
same invention
(c) Request that application e
refused
(d) Seek cancellation of
patent, if already been
issued.
 Remedies of True and Actual Inventor Remedies:
 When true and actual inventor is 1. Secure an injunction for the
deprived of patent without his protection of his rights
consent or through fraud, and so
declared by final court order, 2. Civil action for damages plus
the court shall order for (a) his attorney’s fees and other
substitution as patentee, or (b) litigation expenses
at the option of true inventor,  The court may award damages in
cancel patent and award actual a sum above the amount found as
and other damages in his favor as actual damages sustained but not
warranted. exceeding three times the amount
 Actions shall be filed within one of actual damages.
year from date of publication.  No damages can be recovered for
acts of infringement committed
more than 4years before
RIGHTS CONFERRED BY PATENT institution of infringement
Patent shall confer on its owner the action.
following exclusive rights:  Damages cannot be recovered for
(a) Where patent covers product infringement committed before
 To restrain, prohibit and infringer had known or had
prevent any unauthorized person reasonable grounds to know of
or entity from making, using, patent.
offering for sale, selling or  It is presumed that
importing that product. infringer had knowledge if
on patented product or
(b) Where patent is process container or package or on
 To restrain, prevent or prohibit advertising are placed
any unauthorized person or “Philippine Patent” with
entity from using process, and number of patent.
from manufacturing, dealing in,
using, selling or offering for 3. Criminal action for repetition of
sale or importing any product infringement
obtained directly or indirectly  If infringement is repeated by
from such process. infringer or by anyone in
connivance with him after
(c) To assign, or transfer by finality of judgment against
succession, conclude licensing infringer, offenders shall
contracts on, the patent without prejudice to
 Assignment must be in writing, institution of civil action for
notarized and recorded with IPO, damages, be criminally liable.
otherwise void as against any  Such criminal action shall
subsequent purchaser or prescribe in 3years from date of
mortgagee without notice, commission of crime.
unless recorded in IPO within
3months from date of instrument,  Contributory Infringers – anyone
or prior to subsequent purchase actively inducing infringement or
or mortgage. provides infringer with component of
patented invention and not suitable
for substantial non-infringing use,
PRIOR USER shall be liable as contributory
 Any prior user, who in good faith was infringer and shall be solidarily
using the invention or has undertaken liable with the infringer.
serious preparations to use the
invention in his enterprise or
business, before filing date or
priority date of application on which
a patent is granted shall have the
right to continue use thereof.
PATENT INFRINGEMENT
 It constitutes making, using,
offering for sale, selling, or
importing patented products or
obtained directly or indirectly from
patented process, or use of patented
process without authorization of
patentee.
V. TRADEMARKS and SERVICE MARKS
 MARK is any visible sign capable
of distinguishing goods
(trademark) or services (service
mark) of an enterprise and shall
include a stamped or marked
container of goods.
 COLLECTIVE MARK is any visible
sign capable of distinguishing the
origin or any other common
characteristic, including the
quality of goods or services of
different enterprises which use
the sign under the control of the
registered owner of the collective
mark.
 TRADENAME is the name
designation identifying
distinguishing an enterprise.
 TRADEMARK is a distinctive word,
name symbol or emblem, sign,
device or any combination thereof,
adopted and used by a manufacturer
or merchant on his goods to
identify and distinguish them from
those manufacture, sold or dealt
by others. Inarguably, a trademark
deserves protection. (Dermaline vs.
Myra Pharmaceuticals, Inc. , 2010)
PURPOSE OF TRADEMARK
a. Indicate origin or ownership of
articles to which they are
attached
b. Guarantee that those articles
come up to certain standard of
quality
c. Advertise articles they symbolize
HOW MARKS ARE ACQUIRED
 Rights in the mark shall be acquired
through registration made in
accordance with the legal provisions.
 Any person who shall procure
registration of mark by a false or
fraudulent declaration or
representation, or by any false means
shall be liable in civil action by
any person injured thereby for any
damages sustained as a consequence
thereof.
 Once registered, not only the mark’s
validity but also the registrant’s
ownership of the mark is prima facie
presumed. (Ong vs. People, 2011)
FIRST TO FILE RULE
IPC espouses the first to file rule and
removed the previous requirement of
proof of actual use prior to the filing
of an application for registration of a
mark, proof of prior and continuous use
is necessary to establish ownership of a
mark. In fact, prior and continuous use
of a mark may even overcome the
presumptive ownership of the registrant
and be held as the owner of the mark.
NON-REGISTRABLE MARKS
A mark cannot be registered if it:
(a) Consists of:
 Immoral or scandalous matter
 Matter which may disparage or
falsely suggest a connection with
persons, living or dead,
institutions, beliefs or national
symbols
 Flag, coat of arms, or other
insignia of the Philippines, or
or of its political subdivisions or
or of any foreign nation or of any
simulation thereof
 Name, portrait or signature
identifying a particular living
individual except by his written
consent or of a deceased
Philippine president during the
life of his widow except by
written consent of widow.
 Shapes that may be necessitated
by technical factors, by nature
of goods themselves or factors
that affect their intrinsic value
 Color alone, unless defined by a
given form.
(b) Consists exclusively of signs or of
indication that:
 Generic for the goods or services
that they seek to identify
 Have become customary or usual to
designate goods or services in
everyday language or in bona fide
and established trade practice
 May serve in trade to designate
the kind , quality, quantity
intended purpose, value, time or
production of goods or rendering
of services
(c) Is identical with registered mark
belonging to different proprietor or
make with an earlier filing or
priority date, in respect of:
 Same goods
 Closely related goods or services
 If it nearly resembles such a mark
as to be likely to deceive or
cause confusion
(d) Is identical with or confusingly
similar to or constitutes a
translation of a mark which is
considered:
 By Philippine competent
authority, whether or not it is
 registered here, as being already
the mark of a person and used for
identical or similar goods or
services
 Well-known and which is
registered in the Philippines
with respect to goods or services
which are not similar to those
with respect to which
registration is applied for.
(e) Is likely to mislead public,
particularly as to nature, quality,
characteristics or geographical
origin of goods or services
(f) Is contrary to public order
morality
Dermaline, Inc. vs. Myra
Pharmaceuticals, Inc (2010)
When one applies for the
registration of a trademark or label
which is almost the same or that very
closely resembles one already used and
registered by another, the application
should be rejected and dismissed
outright, even without any opposition
on the part of the owner and user of
a previously registered label or
trademark.
DOCTRINE OF SECONDARY MEANING
A generic or descriptive mark may
later acquire the characteristic of
distinctiveness and can later be
registered if it acquires a meaning
which is different from its ordinary
connotation.
 For this to happen, there must be
exclusive and continuous use for
the period of at least 5years.
RIGHTS CONFERRED (Sec.147, IPC)
1. Right to the exclusive use of the
mark for one’s own goods or
services
2. Right to prevent others from the
use of the same mark for identical
goods or services in the course of
trade
3. Right to the exclusive use of one’s
already registered mark even for
goods or services into which one’s
venture expands, if used by others
for dissimilar products is likely
to damage the business interests of
the first venture.
DURATION: 10years subject
indefinite renewal for periods
10years each.
TRADEMARK INFRINGEMENT
Prosource Int’l vs.
Horphag Research Management (2009)
The elements of trademark
infringement are as follows:
a) Trademark infringed is registered
in IPO, however in case of
infringement of trade name, the
same need not be registered
b) Trademark or trade name is
reproduced, counterfeited, copied
or colorably imitated by the
infringer
c) Infringing mark or trade name is
or used in connection with the sale,
offering for sale or advertising
of any goods, business or
services; or is applied to
labels, signs, receptacles or
advertisements intended to be
used upon or in connection with
such goods, business or services
d) Use or application of the
infringing mark or trade name is
likely to cause confusion or
mistake or to deceive purchasers
or others as to the goods or
services themselves or as to the
origin of such goods or services
of the identity of such business
e) It is without the consent of the
trademark or trade name owner or
the assignee thereof.
Superior Commercial Enterprises vs.
Kunnan Enterprises (2010)
To establish trademark infringement,
the following elements must be proven:
1) Validity of plaintiff’s mark
2) Plaintiff’s ownership of the mark
3) Use of the mark or its colorable
imitation by the alleged
infringer results in likelihood
of confusion.
CONFUSION
 Confusion of goods
-when an otherwise prudent
purchaser is induced to purchase
one product in the belief that he
is purchasing another, in which
case defendant’s goods are then
bought as the plaintiff’s and its
poor quality reflects badly on the
plaintiff’s reputation.
 Confusion of business
-where the goods of the parties are
different but the defendant’s
product can be reasonably, though
to mistakenly, be assumed to originate
of from the plaintiff, thus deceiving
the public into believing that
 there is some connection between
the plaintiff and defendant which
in fact does not exist.
Batistis vs. People (2009)
Where the accused exerted the
effort to make the counterfeit products
look genuine to deceive the unwary
public into regarding the product as
genuine, he thereby committed acts
constituting infringement of trademark
as set out in Sec.155 of IPC.
LIKELIHOOD OF CONFUSION
Coffee Partners, Inc. vs. San
Francisco Coffee (2010)
It is the likelihood of confusion
that is the gravamen of
infringement, but there is no
absolute standard for likelihood of
confusion. Only the particular
circumstances of each case can
determine its existence. Thus, in
infringement cases, precedents must
be evaluated in the light of each
particular case.
The likelihood of confusion is
higher in cases where the business
of one corporation is the same or
substantially the same as that of
another corporation.
 DOMINANCY TEST
 Focuses on the similarity of the
prevalent features of the
competing trademarks which might
cause confusion or deception and
thus infringement.
 If the competing mark contains the
main or dominant features of
another and confusion is likely to
result, infringement takes place.
Dermaline, Inc. vs.
Myra Pharmaceuticals, Inc. (2010)
While there are no set rules
that can be deduced as to what
constitutes a dominant feature with
respect to trademarks applied for
registration, usually what are
taken into account are signs,
color, design, peculiar share or
name, or some special easily
remembered earmarks of the brand
that readily attracts and catches
the attention of the ordinary
consumer.
The test of dominancy is now
explicitly incorporated into law in
Section 155.1 of IPC.
 HOLISTIC TEST
 Requires that the entirety of the
marks in question can be considered
in resolving confusing similarity.
 The discerning eye of the observer
must focus not only on the
predominant words but also on the
other features appearing in both
labels in order that he may draw his
conclusion whether one is confusingly
similar to the other. (Great White
Shark Ent. Vs. Cavalde, 2012)
AURAL EFFECTS or IDEM SONANS RULE
 The aural effects of words and letters
contained in the marks should be
considered in determining the issue of
confusingly similar marks. (Societes Des
Produits Nestle, S.A. vs. Dy, 2010)
RELATED GOODS
 Non-competing goods may be those which,
though they are not in actual
competition, are so related to each other
that it can be reasonably be assumed that
they originate from one manufacturer, in
which case, confusion of business can
arise out of the use of similar marks.
Societes Des Produits Nestle, S.A. vs.
Dy, 2010
The following factors shall be used
in determining whether the goods are
related:
(a) Classification of the goods
(b) Nature of the goods
(c) Descriptive properties, physical
attributes or essential
characteristics of the goods,
with reference to their form,
composition, texture or quality,
and
(d) Style of distribution and
marketing of the goods,
including how the goods are
displayed and sold.
Mighty Corp. vs. E&J Gallo Winery
(2004)
It has been held that where the
products are different, the prior owner’s
chance of success is a function of many
variables, such as:
(a) Strength of his mark
(b) Degree of similarity between the
two marks
(c) Reciprocal of defendant’s good
faith in adopting its own mark
(d) Quality of defendant’s product
(e) Proximity of the products
(f) Likelihood that the prior owner
will bridge the gap
(g) Actual confusion
(h) Sophistication of the buyers
  In case of internationally “well- INTER PARTES CASES
known” marks, it is expressly These are contested cases filed before
provided under the IPC that other the Intellectual Property Office.
persons or entities cannot use the
internationally well-known mark Inter
Period
even for unrelated goods. (246 Partes Ground/s Venue
Corp., vs. Daway, 2003) to file
Case

Opposition Within
to 30 days Registration
UNFAIR COMPETITION application
after will damage IPO
 This involves employing deception or for
publicat the oppositor
any other means contrary to good registration
(Sec.134) ion
faith by which a person passes off
his goods or business or services for Within 5
those of one who has already years
established goodwill thereto. Cancellation Mark is
from
(Sec168.2, IPL) (Sec.151 confusingly IPO
[a]) date of
similar
registra
TEST: Whether the acts of the defendant tion
have the intent of deceiving or are  Mark
calculated to deceive the ordinary becomes
conditions of the particular trade to generic
or
which the controversy relates.
descript-
(Superior ;?”Commercial Enterprises vs. tive
Kunnan Enterprises, 2010)
 Abandonment
–failure
Essential Elements of unfair competition to use it
with respect to goods: for an
(a) Confusing similarity in the Cancellation uninterru
At any
general appearance of the goods (Sec.151[b] pted IPO
and [c]) time
(b) Fraud or intent to deceive the period of
public and defraud a competitor. 3years

 Mark is
UNFAIR being
TRADEMARK
COMPETITION used to
Passing off of misrepresent
one’s goods as the
source of
Infringement is those of another
goods or
unauthorized use and giving one’s services
of a trademark goods the
appearance of
 An administrative complaint for
that of another.
violation of laws involving
Not necessary to It is necessary intellectual property rights can be
establish to establish filed with the IPO where the total
fraudulent intent fraudulent intent damages claimed are not less than
Prior P200,000.00 (Subsec.10.2, IPL)
Registration is
registration of
necessary for the
the trademark is
filing of an
not necessary in
action for
unfair
infringement
competition
Broader as it
includes cases
covered not only
Limited in
by IPC but also
coverage
by Article 27 of
the New Civil
Code
VI. COPYRIGHT
 Right over literary and artistic
works which are original
intellectual creations in the
literary and artistic domain
protected from the moment of
creation.
 PRINCIPLE OF AUTOMATIC PROTECTION
 Right over copyrights are
conferred from the moment of
creation. (Sec.172.1) The work is
deemed created if something
original is expressed in a fixed
manner.
Even with respect to works which are
required to be registered and with
copies to be deposited with National
Library. Failure to comply with said
requirements does not deprive the
copyright owner of the right to sue for
infringement as it merely limits the
remedies available to him and subjects
him to the corresponding sanction.
(Columbia Pictures vs. CA, 1996)
ELEMENTS OF COPYRIGHTABILITY
1. Originality – Must have been created
by the author’s own skill, labor,
and judgment without directly
copying or evasively imitating the
work of another. (Ching Kian Chuan vs.
CA, 2001)
 Elements of Originality
(a) It is independently created
by the author
(b) It possesses some minimal
degree of creativity
2. Expression – Must be embodied in a
medium sufficiently permanent or
stable to permit it to be perceived,
reproduced or communicated for a
period more than the transitory
duration.
Ching vs. Salinas (2005)
It bears stressing that the focus of
copyright is the usefulness of the
artistic design and not its
marketability. The central inquiry is
whether the article is a work of art.
Works of applied art include all
original pictorials, graphics, and
sculptural works that are intended to be
or have been embodied in useful articles
regardless of factors such as mass
production, commercial exploitation, and
the potential availability of design
patent protection.
OWNERSHIP OF COPYRIGHT
1. One creator
 Creator, his heirs or assigns
owns the copyright.
2. Joint creation
GR: co-authors shall be the
original owners of the copyright
and in the absence of agreement,
their rights shall be governed
by the rules on co-ownership.
EXCEPT: Work of joint authorship
consists of parts that can be
used separately and the author
of each part is identified, the
author of each part shall be the
original owner of the copyright
in the part that he has created.
3. Commissioned work
 The person commissioning owns
the work; ownership of the
copyright remains with the
creator unless there is a
written stipulation to the
contrary.
4. Audio-visual work
GR: Producer, the author of the
scenario, the composer of the
music, the film director, and the
author of the work so adapted –
audiovisual work.
EXCEPTION: The producers shall
exercise the copyright to an extent
required for the exhibition of the
work in any manner.
5. Pseudonyms and anonymous works
GR: Publishers – deemed
representatives of the author in
case of anonymous and
pseudonymous works.
EXCEPTION: When the contrary
appears or where the pseudonym or
adopted name leaves no doubt as
to the author’s identity; or
author discloses his identity
6. Employee’s work during course of
employment
(a) The employee, if not a part of
his regular duties even if the
employee uses the time,
facilities and materials of
the employer.(Sec. 178.3, IPC)
(b) The employer, if the work is
the result of the performance
of his regularly‐assigned
duties, unless there is an
agreement, express or implied,
to the contrary.
DURATION OF COPYRIGHT NON-COPYRIGHTABLE WORKS
TYPE OF WORK DURATION 1) Idea, procedure, system, method or
Lifetime of the operation, concept, principle,
creator and for discovery or mere data as such
Single creation
50 years after 2) News of the day and other items of
his death press information
Lifetime of the 3) Any official text of a legislative,
last surviving administrative or legal nature, as
Joint Creation co‐creator and
well as any official translation
for 50 years
after his death. thereof
50 years after 4) Pleadings
the date of their 5) Decisions of courts and tribunals –
first this refers to original decisions and
publication; not to annotated decisions such as the
SCRA or SCAD as these already fall
EXCEPT: under the classification of
 where before derivative works, hence copyrightable
the expiration 6) Any work of the Government of the
of said period, Philippines
Anonymous or the author’s  GR: Conditions imposed prior the
pseudonymous work identity is approval of the government agency
revealed or is or office wherein the work is
no longer in
created shall be necessary for
doubt, the 1st
two mentioned exploitation of such work for
rules shall profit. Such agency or office,
apply; may, among other things, impose as
 if unpublished, condition the payment of
50 years from royalties.
their making.  EXCEPTION: No prior approval or
conditions shall be required for
Work of an the use of any purpose of statutes,
applied art rules and regulations, and
of an artistic speeches, lectures, sermons,
creation addresses, and dissertations,
with utilitarian pronounced, read, or rendered in
functions 25 years from the courts of justice, before
or incorporated time
administration agencies, in
in a of the making.
deliberative assemblies and in
useful article
whether meetings of public character.
made by hand or (Section 176, IPC)
produced on an 7) TV programs, format of TV programs
industrial scale (Joaquin v. Drilon, Jan.28,1999)
8) Systems of bookkeeping; and
9) Statutes
Audio‐visual
works PRESUMPTION OF AUTHORSHIP
including those  The natural person whose name is
produced by 50 years from indicated on a work in the usual
process date of manner as the author shall, in the
analogous to publication and,
absence of proof to the contrary,
photography or if unpublished,
presumed to be the author of the
any from the date of
process for making. work. This is applicable even if the
making name is a pseudonym, where the
audio‐visual pseudonym leaves no doubt as to
recordings identity of the author. (Sec. 219.1, IPC)

Lifetime of the  The person or body corporate, whose

author and 50 name appears on the audio‐visual work
Newspaper Article
years after. in the usual manner shall, in the
(Sec.213, IPC) absence of proof to the contrary, be
presumed to be the maker of said
work. (Sec. 219.2, IPC)
RIGHTS OF AUTHORS disposition by the author.
(a) Economic Rights
 These shall consist of the  The following works are not covered:
exclusive rights to carry out, 1. Prints
authorize or prevent the 2. Etchings
following acts: 3. Engravings
1. Reproduction of the work or 4. Works of applied art
substantial portion thereof 5. Similar works wherein the
2. Carry‐out derivative work author primarily derives gain
(dramatization, translation, from the proceeds of
adaptation, abridgement, reproductions.(Sec. 201, IPC)
arrangement or other
transformation of the work)
3. First distribution of the FAIR USE
original and each copy of the  Fair use of a copyrighted work for
work by sale or other forms criticism, comment, news reporting,
of transfer of ownership teaching including multiple copies
4. Rental right –rental of the for classroom use, scholarship,
original or a copy of an research and similar purposes is not
audio-visual or an infringement of copyright.
cinematographic work
5. Public display of the  Factors to consider:
original or a copy of the work (a) Purpose and the character of the
6. Public performance of the use
work (b) Nature of the copyrighted work
7. Other communications to the (c) Amount and substantiality of the
public portions used
(d) Effect of the use upon the
(b) Moral Rights potential market of the
For reasons of professionalism and copyrighted work.
propriety, the author has the
right:
Note: The fact that a work is unpublished
1. To require that the
shall not by itself bar a finding of fair
authorship of the works be
use if such finding is made upon
attributed to him
consideration of all the above factors.
(attribution right)
2. To make any alterations of
his work prior to, or to
MUST CARRY RULE
withhold it from publication
3. Right to preserve integrity ABS‐CBN Broadcasting Corporation vs.
of work, object to any Philippine Multimedia System (2009)
distortion, mutilation or
other modification which Must‐carry rule is another
would be prejudicial to his limitation on copyright. It obligates
honor or reputation; and operators to carry the signals of
4. To restrain the use of his local channels within their
respective systems. This is to give
name with respect to any work
the people wider access to more
not of his own creation or in
sources of news, information,
a distorted version of his education, sports event and
work. (Sec.193, IPC) entertainment programs other than
those provided for by mass media and
afforded television programs to
DROIT DE SUITE attain a well-informed, well‐versed
(Right to proceeds in subsequent and culturally refined citizenry and
transfers or follow up rights) enhance their socio‐economic growth.
 This is an inalienable right of the
author or his heirs to receive to
the extent of 5% of the gross
proceeds of the sale or lease of a
work of painting or sculpture or of
the original manuscript of a writer
or composer, subsequent to its first
INFRINGEMENT exposing for sale or hire
o How made? When there is piracy or the article
substantial reproduction. If so much b) Distributing the article
is taken that the value of the for the purpose of trade or
original work is substantially for any other purpose to an
diminished or the labors of the extent that will prejudice
original author are substantially and the rights of the copyright
to an injurious extent appropriated owner
by another. (Habana vs. Robles, 1999) c) Trade exhibit of the article
in public.
REMEDIES FOR INFRINGEMENT
1. Injunction to prevent infringement AFFIDAVIT EVIDENCE
- includes the prevention of entry  An affidavit made before the notary
into commerce of imported good public in actions for infringement,
immediately after customs reciting the facts required to be
clearance of such goods stated under the IPC. (Sec. 216.1)
2. Pay for:
a) Actual damages, legal costs Note: As a prima facie proof, the
and other expenses incurred affidavit shifts the burden of proof to
due to infringement the defendant, to prove the ownership of
b) Profits the infringer may the copyrighted work.
have made due to such
infringement PLAGIARISM
c) Moral and exemplary damages,  It is the practice of claiming or
which the court may deem implying original authorship of (or
proper, wise and equitable incorporating material from) someone
and the destruction of else’s written or creative work, in
infringing copies of the work whole or in part, into one’s own
even in the event of without adequate acknowledgment.
acquittal in a criminal case
3. Impounding during pendency of COPYRIGHT
PLAGIARISM
action of sales invoices and other INFRINGEMENT
sales documents, all articles and The unauthorized
use of copyrighted
their packaging alleged to infringe material in a
a copyright and implements for manner that The use of
making them violates one of the another’s
4. Destruction without any copyright owner’s information,
compensation all infringing copies exclusive rights, language,
such as the right or writing, when
or devices as well as all plates, to reproduce or done without proper
molds or other means for making perform the acknowledgment of
such infringing copies as the court copyrighted work, the original source
may order or to make
5. Seizure and impounding of any derivative works
that build upon it.
article which may serve as evidence Copyright
in the court proceedings. infringement is a
6. Criminal case very broad term
o Any person shall be guilty of a that describes a
crime when he: variety of acts.
Plagiarism is
 Infringes on any copyright It may be specific as
secured by IPC duplication of a it refers only to
 Aides or abets such work, rewriting a using someone
infringing piece, performing a else’s work
written work or without proper
doing anything that acknowledgement.
o The crime includes any person
is normally
who, at the time when copyright considered to be
subsists in a work, has in his the exclusive right
possession an article which he of the copyright
knows, or ought to know, to be an holder.
There is no Public documents
infringing copy of the work for
copyright can be plagiarized
the purpose of: infringement on so long as it is
a) Selling, letting for hire or public documents. not acknowledged.
by way of trade offering or