THE CORPORATION CODE OF THE PHILIPPINES

CHAPTER 1: INTRODUCTION

KINDS OF BUSINESS ORGANIZATION

CHAPTER 2: DEFINITION AND ATTRIBUTES
1. SOLE PROPRIETORSHIP – one conducted for profit by a lone or single
individual who owns all assets, personally owes and answers all the A. DEFINITION
liabilities or suffers all the losses and enjoys all the profits to the exclusion
of others.
Sec. 2. Corporation Defined – A corporation is an artificial being created by
operation of law, having the right of succession and the powers, attributes and
ADVANTAGES DISADVANTAGES properties expressly authorized by law or incident to its existence.

Eliminates the bureaucratic process Unlimited personal liability of the

common in corporations where the proprietor
board of directors must sit as a body B. ATTRIBUTES (CARP)
to have a valid transaction. The
proprietor makes his own decisions 1. CREATED BY OPERATION OF LAW (Creature of Law) – the formal
and can act without delay. requirement of the State’s consent through compliance with the
requirements imposed by law is necessary for its creation such that the
mere agreement of the persons composing it or intending to organize it
Proprietor owns all the profits without Capital is limited by the proprietor’s does not warrant the grant of its independent existence as a juridical
having to share the same personal resources entity;

2. ARTIFICIAL BEING – it has a juridical personality, separate and distinct

from the persons composing it.
2. PARTNERSHIP – a contract where two or more persons bind themselves
to contribute money, property or industry to a common fund with the 3. RIGHT OF SUCCESSION – unlike in a partnership, the death, incapacity
intention of dividing the profits among themselves (Art. 1767, Civil Code). or civil interdiction of one or more of its stockholder does not result in its
dissolution;
3. JOINT VENTURE – a one-time grouping of two or more persons, natural
or juridical, in a specified undertaking. 4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY
AUTHORIZED BY LAW – it can exercise only such powers and can hold
PARTNERSHIP JOINT VENTURE only such properties as are granted to it by the enabling statutes unlike
natural persons who can do anything as they please.

Has a personality separate and Does not acquire a separate and LBC EXPRESS, INC. VS. COURT OF APPEALS (236 SCRA 602 [Sept. 21,
distinct from the partners distinct personality from the 1994]) – Private respondent Carloto, incumbent President-Manager of private
venturers respondent Rural Bank of Labason, alleged that he was instructed to go to
Manila to follow up on the Bank’s plan of payment of rediscounting obligations
Has for its object a general business Object is an undertaking of a with Central Bank’s main office, where he purchased a round trip ticket and
of particular kind, although there may particular or single transaction phone his sister to send him P1,000 for his pocket money which LBC failed to
be partnership for a single transaction deliver and eventually Carloto was not able to submit the rediscounting
documents and the Bank was made to pay the Central Bank P32,000 s penalty
interest and alleged that he suffered embarrassment and humiliation.
Corporations, generally are not Corporations may enter joint ventures Respondent Rural Bank was later on joined as one of the plaintiff and prayed
allowed to enter into partnerships* for the reimbursement of P32,000. Carloto and the Bank were awarded moral
and exemplary damages of P10,000 and P5,000, respectively.

*A corporation is generally not allowed to enter into partnerships because (1)
the identity of the corporation is lost or merged with that of another; and (2)
the discretion of the officials is placed in other hands other than those
permitted by the law in its creation.
EXCEPTION to the rule is when the following conditions are met:
a. The articles of incorporation expressly authorized the corporation to enter
into contracts of partnership;
b. The agreement or articles of partnership must provide that all the partners
will manage the partnership; and
c. The articles of partnership must stipulate that all the partners are and shall
be jointly and severally liable for all obligations of the partnership
4. CORPORATION – an artificial being created by operation of law, having
the right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence (Sec. 1,
Corporation Code [CC])
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ISSUE: WON Rural Bank of Labason, Inc. being an artificial person should be
awarded moral damages?
HELD: No. Moral damages are granted in recompense for physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, oral shock, social humiliation and social injury. A corporation, being
an artificial person and having existence only in legal contemplation, has no
feelings, no emotions, no senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering can be experienced only by one
having a nervous system and it flows from real ills, sorrows and grieves of life
– all of which cannot be suffered by respondent bank as an artificial person.
BEDROCK RULE: Under Article 2219 of the Civil Code, for cases of libel,
slander and other forms of defamation, a corporation is entitled to moral
damages.
C. ADVANTAGES OF THE CORPORATE FORM OF BUSINESS
1. CAPACITY TO ACT AS A SINGLE UNIT – any number of persons may
unite in a single enterprise without using their names, without difficulty
or inconvenience, and with the valuable right to contract, to sue and be
 sued, and to hold or convey property, in the corporate name;
Right of succession, it continues to Based on mutual rust and the death,
2. LIMITED SHAREHOLDER’S LIABILITY – the limit of his liability since
exist despite the death, withdrawal, incapacity, insolvency, civil interdiction
stockholders are not personally liable for the debts of the corporation;
incapacity or civil interdiction of the or mere withdrawal of one of the
3. CONTINUITY OF EXISTENCE – rights and obligations of a corporation
stockholders or members. (Sec. 3) parties would result in its dissolution
are not affected by the death, incapacity or replacement of the individual
(Art. 1830, par. 6 & 7)
members;
4. FEASIBILITY OF GREATER UNDERTAKING – it enables the
Transferability of shares – without the A partner cannot transfer his rights or
individuals to cooperate in order to furnish the large amounts of capital
consent of the other stockholders. interests in the partnership so as to
necessary to finance large scale enterprises;
(Sec. 63) make the transferee a partner without
5. TRANSFERABILITY OF SHARES – unless reasonably restricted, shares
the consent of the other partners (Art.
of stocks, being personal properties, can be transferred by the owner
1830, par. 6 & 7)
without the consent of the other stockholders;
6. CENTRALIZED MANAGEMENT – the vesting of powers of management
and appointing officers and agents in board of directors gives to a Limited liability – only to the extent of All partners, including industrial ones
corporation the benefit of a centralized administration which is a practical their subscription or their promised (except a limited partner) are liable
business necessity in any large organization; and contribution. pro rata with all their property and
7. STANDARDIZED METHOD OF ORGANIZATION, MANAGEMENT after all the partnership property has
AND FINANCE – which are provided under a well-drawn general been exhausted, for all partnership
corporation law. The corporation statutes enter into the charter contract liability (Art. 1813)
and these are constantly being interpreted by courts. An established
system of management and protection of shareholders and creditors’ The term of corporate existence is May exist for an indefinite period
rights has thus been and are being evolved. limited only to fifty years and unless subject only to the causes of
extended by amendment, it shall be dissolution provided for by the law of
D. DISADVANTAGES considered non-existent except for the its creation (Art. 1824)
1. To have a valid and binding corporate act, formal proceedings, such as purpose of liquidation.
board meetings are required;
2. The business transactions of a corporation is limited to the State of its Cannot be dissolved by mere Partners may dissolve their
incorporation and may not act as such corporation in other jurisdiction agreement of the stockholders. The partnership at will or at any time they
unless it has obtained a license or authority from the foreign state; consent of the State is necessary for it deem it fit (Art. 1830, par. 1(b) and
3. The shareholders’ limited liability tends to limit the credit available to the to cease as a body corporate. par. 2)
corporation as a separate legal entity;
4. Transferability of shares may result to uniting incompatible and conflicting
interests;
5. The minority shareholders have practically no say in the conduct of F. GOVERNMENT POWERS IN RELATION TO CORPORATIONS
corporate affairs;
6. In large scale enterprises, stockholders’ voting rights may become merely The Corporation Code places all corporations registered under its provision to
fictitious and theoretical because of disinterest in management, wide- be under the control and supervision of the Securities and Exchange
scale ownership and inaccessible place of meeting; Commission (Sec. 19 and 144). Its powers and functions are clearly spelled out
7. “Double taxation” may be imposed on corporate income; and in PD 902-A, as amended by RA No. 8799, otherwise known as the Securities
8. Corporations are subject to governmental regulations, supervision and Regulation Code.
control including submission of reportorial requirements not otherwise
imposed in other business form.
CHAPTER 3: CLASSIFICATION OF CORPORATION
E. CORPORATION VS. PARTNERSHIP
A. CLASSES OF CORPORATIONS UNDER THE CORPORATION CODE

CORPORATION PARTNERSHIP
Sec. 3. Classes of corporations. - Corporations formed or organized under
this Code may be stock or non-stock corporations. Corporations which have
Created by operation of law (Sec. 2&4, Created by mere agreement of the capital stock divided into shares and are authorized to distribute to the holders
Corp Code) parties (Art. 1767, Civil Code) of such shares dividends or allotments of the surplus profits on the basis of the
shares held are stock corporations. All other corporations are non-stock
There must be at least 5 Maybe formed by two or more natural corporations.
incorporations (Sec. 10), except persons (Art. 1767)
corporation sole which is incorporated
by one single individual (Sec. 110)

REQUISITES TO BE CLASSIFIED STOCK CORPORATIONS:

Can exercise only such powers and Can do anything by agreement of the 1. They have a capital stock dividend into shares; and
functions expressly granted to it by law parties provided only that it is not 2. That they are authorized to distribute dividends or allotments as surplus
and those that are necessary or contrary to law, morals, good customs profits to its stockholders on the basis of the shares held by each of
incidental to its existence (Sec. 2, 45) or public order. (Art. 1306) them.

SIGNIFICANT DISTINCTION: Although a non-stock corporation exists for

Unless validly delegated expressly or
impliedly, a corporation must transact
its business through the board of
directors (Sec. 23)
In the absence of an agreement to the
contrary, any one of the parties in the
partnership form of business may
validly bind the partnership (Art. 1308,
par. 1)
purposes other than for profit, it does not follow that they cannot make
profits as an incident to their operations. But a significant distinction is that
profits obtained by a non-stock corporation cannot be distributed as
dividends but are used merely for the furtherance of their purpose or
purposes.

COLLECTOR OF INTERNAL REVENUE VS. CLUB FILIPINO, INC. DE

CEBU (5 SCRA 312; May 31, 1968) – Herein respondent Club operates a
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clubhouse, a bowling alley, a golf course and a bar restaurant where it sells
wines, liquors, soft-drinks, meals and short orders to its members and their
guests. The bar and restaurant was a necessary incident to the operation of
the Club and its golf course is operated mainly with funds derived from
membership fees and dues. Whatever profits it had were used to defray its
overhead expenses and to improve its golf course. In 1951, as a result of
capital surplus arising from the revaluation of its real properties, the Club
declared stock dividends. In 1952, the BIR assessed percentage taxes on the
gross receipt of the Club’s bar and restaurant pursuant to Sec. 182 of the Tax
Code: “unless otherwise provided, every person engaging in a business on
which the percentage tax is imposed shall pay in full a fixed annual tax of P10
for each calendar year or a fraction thereof” and under Sec. 191: “keepers of
restaurant, refreshment parlors and other eating places shall pay a tax of 3%
of their gross receipts”
ISSUE: WON the Club is liable for the assessment?
HELD: No. It has been held that the liability for fixed and percentage taxes
does not ipso facto attach by mere reason of the operation of a bar and
restaurant. For the liability to attach, the operator thereof must be engaged in
the business as a bar keeper and restauranteur. Business, in the ordinary
sense, is restricted to activities or affairs where profit is the purpose or
livelihood is the motive, and the term business when used without qualification,
should be construed in its plain and ordinary meaning; restricted to activities
for profit or livelihood.
The fact that the Club derived profits from the operation of its bar and
restaurant does not necessarily convert it into a profit making enterprise. The
bar and restaurant are necessary adjunct of the Club to foster its purpose and
the profits derived therefrom are necessarily incidental to the primary object
of developing and cultivating sports for the healthful recreation and
entertainment of the stockholders and members. That a club makes profit does
not make it a profit-making club.
ISSUE2: Is the Club a stock corporation?
HELD: No. The fact that the capital of the Club is divided into shares does not
detract from the finding of the trial court that it is not engaged in the business
of operator of bar and restaurant. What is determinative of whether or not the
Club is engaged in such business is its object or purpose as stated in its articles
and by-laws.
Moreover, for a stock corporation to exists, two requisites must be
complied with: (1) a capital stock divided into shares; and (2) an
authority to distribute to the holders of such shares, dividends or
allotments of surplus profits on the basis of the shares held. In the
case at bar, nowhere it its AOI or by-laws could be found an authority for the
distribution of its dividends or surplus profits. Strictly speaking, it cannot
therefore, be considered as stock corporation, within the contemplation of the
Corporation Code.
B. CORPORATIONS CREATED BY SPECIAL LAW OR CHARTER
Sec. 4. Corporations created by special laws or charters. - Corporations one that is created, formed or organized for political or governmental purposes
created by special laws or charters shall be governed primarily by the provisions with political powers to be exercised for purposes connected with the public
of the special law or charter creating them or applicable to them, supplemented good in the administration of the civil government.
by the provisions of this Code, insofar as they are applicable.
Among these corporations created by special law are the Philippine National
Oil Company, the National Development Company, the Philippine Export and
Foreign Loan Guarantee Corporation and the GSIS. All these are government
owned or controlled, operating under a special law or charter such that
registration with the SEC is not required for them to acquire legal and juridical
personality. They owe their own existence as such not by virtue of their
compliance with the requirements of registration under the Corporation Code
but by virtue of the law specially creating them.
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They are primarily governed by the special law creating them. But unless
otherwise provided by such law, they are not immune from suits, it is thus
settled that when the government engages in a particular business through the
instrumentality of a corporation, it divests itself pro hoc vice of its sovereign
character so as to subject itself to the rules governing private corporations
(PNB vs. Pabolar 82 SCRA 595)
Officers and employees of GOCCs created by special laws are governed by the
law of their creation, usually the Civil Service Law. Their subsidiaries,
organized under the provisions of the Corporation Code are governed by the
Labor Code. The test in determining whether they are governed by the Civil
Service Law is the manner of their creation.
PNOC-EDC VS. NLRC (201 SCRA 487; Sept. 11, 1991) – Danilo Mercado, an
employee of herein petitioner was dismissed on the ground of dishonesty and
violation of company rules and regulations. He filed an illegal dismissal
complaint before herein respondent NLRC who ruled on his favour, despite the
motion to dismiss of petitioner that the Civil Service Commission has
jurisdiction over the case.
ISSUE: WON NLRC has jurisdiction over the case?
HELD: Yes. Employees of GOCCs, whether created by special law or formed
as subsidiaries under the Corporation Law are governed by the Civil Service
Law and not the Labor Code, under the 1973 Constitution has been supplanted
by the present Constitution.
Thus, under the present state of the law, the test in determining whether
a GOCC is subject to the Civil Service Law is the manner of its
creation, such that government corporations created by special
charter are subject to its provisions while those incorporated under
the General Corporation Law are not within its coverage.
PNOC has its special charter, but its subsidiary, PNOC-EDC, having been
incorporated under the General Corporation Law was held to be a GOCC whose
employees are subject to the provisions of the Labor Code.
C. OTHER CLASSES OF CORPORATIONS
1. PUBLIC AND PRIVATE CORPORATIONS
PUBLIC CORPORATION: those formed or organized for the government of
a portion of the State or any of its political subdivisions and which have for
their purpose the general good and welfare.
It is to be observed, however, that the mere fact that the undertaking in which
a corporation is engaged in is one which the State itself might enter into as
part of its public work does not make it a public one. Nor is the fact that the
State has granted property or special privileges to a corporation render it
public. Likewise, the fact that some or all of the stocks in the corporation are
held by the government does not make it a public corporation.
The TRUE TEST to determine the nature of a corporation is found in the
relation of the body to the State. Strictly speaking, a public corporation is
The GOCCs are regarded as private corporations despite common
misconceptions.
NATIONAL COAL COMPANY VS. COLLECTOR OF INTERNAL REVENUE
(146 Phil. 583) – Herein plaintiff brought an action for the purpose of
recovering a sum of money allegedly paid by it under protest to the herein
defendant, a specific tax on some tons of coal. It claimed exemption from taxes
under Sec. 1469 of the Administrative Code which provides that “on all coal
and coke shall be collected per metric ton, fifty centavos”. Of the 30,000 shares
issued by the corporation, the Philippine government is the owner of 29,809 or
substantially all of the shares of the company.
ISSUE: WON the plaintiff corporation is a public corporation?

HELD: No. The plaintiff is a private corporation. The mere fact that the
government happens to be a majority stockholder does not make it a
public corporation. As a private corporation, it has no greater rights, powers
and privileges than any other corporation which might be organized for the
same purpose under the Corporation Law, and certainly, it was not the
intention of the Legislature to give it a preference or right or privilege over
other legitimate private corporation in the mining of coal.
PRIVATE CORPORATIONS: those formed for some private purpose, benefit,
aim or end. They are created for the immediate benefit and advantage of the
individuals or members composing it and their franchise may be considered as
privileges conferred by the State to be exercised and enjoyed by them in the
form of the corporation.
2. ECCLESIASTICAL AND LAY CORPORATIONS
ECCLESIASTICAL OR RELIGIOUS CORPORATIONS: are composed
exclusively of ecclesiastics organized for spiritual purposes or for administering
properties held for religious ones. They are organized to secure public worship
or perpetuating the right of a particular religion.
LAY CORPORATIONS: are those organized for purposes other than religion.
They may further be classified as:
a. ELEEMOSYNARY: created for charitable and benevolent purposes such as
those organized for the purpose of maintaining hospitals and houses for the
sick, aged or poor.
b. CIVIL: organized not for the purpose of public charity but for the benefit,
pecuniary or otherwise, of its members.
3. AGGREGATE AND SOLE CORPORATIONS
AGGREGATE CORPORATIONS: are those composed of a number of
individuals vested with corporate powers.
CORPORATION SOLE: those consist of one person or individual only and
who are made as bodies corporate and politic in order to give them some legal
capacity and advantage which, as natural persons, they cannot have. Under
the Code, a corporation sole may be formed by the chief archbishop, bishop,
priest, minister, rabbi, or other presiding elder or religious denominations, sects
or churches.
4. CLOSE AND OPEN CORPORATION
CLOSE CORPORATIONS: are those whose shares of stock are held by a
limited number of persons like the family or other closely-knit group. There are
no public investors and the shareholders are active in the conduct of the
corporate affairs; recognized under Sec. 96 of the Corporation Code.
OPEN CORPORATIONS: are those formed to openly accept outsiders as
stockholders or investors. They are authorized and empowered to list in the
stock exchange and to offer their shares to the public such that stock
ownership can widely be dispersed.
5. DOMESTIC AND FOREIGN CORPORATIONS
DOMESTIC CORPORATIONS: are those organized or created under or by
virtue of the Philippine laws, either by legislative act or under the provisions of
the General Corporation Law.
FOREIGN CORPORATIONS: are those formed, organized or existing under
any laws other than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country or state (Sec. 123,
Corporation Code).
The second part of the definition is, however, somehow misplaced since any
corporation for that matter, which is not registered under Philippine laws is a
foreign corporation. Such second part was inserted only for the purpose of
qualifying a foreign corporation to secure a license and to do business in the
Philippines.
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6. PARENT OR HOLDING COMPANIES AND SUBSIDIARIES AND
AFFILIATES
PARENT OR HOLDING COMPANY: a corporation who controls another
corporation, or several other corporations known as its subsidiaries. Holding
companies have been defined as corporations that confine their activities to
owning stock in, and supervising management of other companies. A holding
company usually owns a controlling interest (more than 50% of the voting
stock) in the companies whose stocks it holds. As may be differentiated from
investment companies which are active in the sale or purchase of shares of
stock or securities, parent or holding companies have a passive portfolio and
hold the securities merely for purposes of control and management.
SUBSIDIARY CORPORATIONS: those which another corporation owns at
least a majority of the shares, and thus have control.
A subsidiary has an independent and separate juridical personality, distinct
from that of its parent company, hence any claim or suit against the latter does
not bind the former or vice versa.
AFFILIATES: are those corporations which are subject to common control
and operated as part of a system. They are sometimes called “sister
companies” since the stockholdings of a corporation is not substantial enough
to control the former. Example: 15% of ABCD Company is held by A Corp, 18%
by B Corp, and another 15% by C Corp. – A, B and C are affiliates.
7. QUASI-PUBLIC CORPORATIONS
These are private corporations which have accepted from the state the grant
of a franchise or contract involving the performance of public duties. The term
is sometimes applied to corporations which are not strictly public in the sense
of being organized for governmental purposes, but whose operations
contribute to the convenience or welfare of the general public, such as
telegraph and telephone companies, water and electric companies. More
appropriately, they are known as public service corporations.
8. DE JURE, DE FACTO AND CORPORATION BY ESTOPPEL
DE JURE CORPORATIONS: are juridical entities created or organized in strict
or substantial compliance with statutory requirements of incorporation and
whose rights to exist as such cannot be successfully attacked even by the State
in a quo warranto proceeding. They are, in effect, incorporated by strict
adherence to the provisions of the law of their creation.
DE FACTO CORPORATIONS: are those which exist by the virtue of an
irregularity or defect in the organization or constitution or from some omission
to comply with the conditions precedent by which corporations de jure are
created, but there was colorable compliance with the requirements of the law
under which they might be lawfully incorporated for the purposes and powers
assumed, and user of the rights claimed to be conferred by law. Its existence
can only be attacked by a direct action of quo warranto proceedings.
CORPORATION BY ESTOPPEL: those which are so defectively formed as
not to be either de jure or de facto corporations but which are considered as
corporations in relation only to those who cannot deny their corporate
existence due to their agreement, admission or conduct.
CHAPTER 4: FORMATION AND ORGANIZATIONS OF CORPORATIONS
1. PROMOTIONAL STAGE
This is undertaken by the organizers or promoters who bring together
persons interested in the business venture. They enter into contract either in
their own names or in the name of the proposed corporation.
LIABILITY OF PROMOTERS:
GENERAL RULE: a promoter, although he may assume to act for and on behalf
of a projected corporation and not for himself, will be held personally liable on
contracts made by him for the benefit of a corporation he intends to organize.
The personal liability continues even after the formation of the corporation
unless there is novation or other agreement to release him from liability. As
such, the promoter may do either of the following options: Sec. 15. Forms of Articles of Incorporation . - Unless otherwise prescribed
by special law, articles of incorporation of all domestic corporations shall
a. He may make a continuing offer on behalf of the corporation, which, if comply substantially with the following form:
accepted after incorporation, will become a contract. In this case, the promoter
does not assume any personal liability, whether or not the corporation will a. PREFATORY PARAGRAPH
accept the offer;
b. He may make a contract at the time binding himself, with the xxx
understanding that if the corporation, once formed, accepts or adopts the “KNOW ALL MEN BY THESE PRESENTS:
contract, he will be relieved of responsibility; or The undersigned incorporators, all of legal age and a majority of
c. He may bind himself personally and assume responsibility of looking to the whom are residents of the Philippines, have this day voluntarily
proposed corporation, when formed, for reimbursement. agreed to form a (stock) (non-stock) corporation under the laws of
the Republic of the Philippines”
2. PROCESS OF INCORPORATION xxx

Includes the drafting of the Articles of Incorporation, preparation and
submission of additional and supporting documents, filing with the SEC, and
the subsequent issuance of the Certificate of Incorporation.
CONTENTS OF THE ARTICLES OF INCORPORATION
It must specify the nature of the corporation being organized in order to
prevent difficulties of administration and supervision. Thus, the corporation
should indicate whether it is a stock or a non-stock corporation, a close
corporation, corporation sole or a religious corporation.

Sec. 14. Contents of the articles of incorporation. - All corporations b. CORPORATE NAME
organized under this code shall file with the Securities and Exchange
xxx
Commission articles of incorporation in any of the official languages duly signed
AND WE HEREBY CERTIFY:
and acknowledged by all of the incorporators, containing substantially the FIRST: That the name of said corporation shall be
following matters, except as otherwise prescribed by this Code or by special ".............................................., INC. or CORPORATION";
law: xxx

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

1. The name of the corporation; that it can act and perform all legal acts. Each corporation should therefore,
2. The specific purpose or purposes for which the corporation is being have a name by which it is to sue and be sued and do all legal acts.
incorporated. Where a corporation has more than one stated purpose, the
articles of incorporation shall state which is the primary purpose and which A corporation, once formed, cannot use any other name, unless it has been
is/are the secondary purpose or purposes: Provided, That a non-stock amended in accordance with law as this would result in confusion and may
corporation may not include a purpose which would change or contradict its open the door to fraud and evasion as well as difficulties of administration and
nature as such; supervision.
3. The place where the principal office of the corporation is to be located, which
must be within the Philippines; Thus, the organizers must make sure that the name they intend to use as a
4. The term for which the corporation is to exist; corporate name is not similar or confusingly similar to any other name
5. The names, nationalities and residences of the incorporators; already registered and protected by law since the SEC would refuse registration
6. The number of directors or trustees, which shall not be less than five (5) nor if such be the case.
more than fifteen (15);
7. The names, nationalities and residences of persons who shall act as directors
or trustees until the first regular directors or trustees are duly elected and Sec. 18. Corporate name. - No corporate name may be allowed by the
qualified in accordance with this Code; Securities and Exchange Commission if the proposed name is identical or
8. If it be a stock corporation, the amount of its authorized capital stock in lawful deceptively or confusingly similar to that of any existing corporation or to any
money of the Philippines, the number of shares into which it is divided, and in other name already protected by law or is patently deceptive, confusing or
case the share are par value shares, the par value of each, the names, contrary to existing laws. When a change in the corporate name is approved,
nationalities and residences of the original subscribers, and the amount
the Commission shall issue an amended certificate of incorporation under the
subscribed and paid by each on his subscription, and if some or all of the shares
are without par value, such fact must be stated; amended name.
9. If it be a non-stock corporation, the amount of its capital, the names,
nationalities and residences of the contributors and the amount contributed by
each; and
10. Such other matters as are not inconsistent with law and which the The SEC, in implementing the above provision on corporate name, thus
incorporators may deem necessary and convenient. requires that a “Verification Slip” from the Records Division of the
Commission be submitted showing that the proposed name is legally
The Securities and Exchange Commission shall not accept the articles of permissible. If the corporate name is available for use, the SEC will allow the
incorporation of any stock corporation unless accompanied by a sworn incorporators to “reserve” it for a nominal fee for a specific period until the AOI
statement of the Treasurer elected by the subscribers showing that at least is filed with the SEC.
twenty-five (25%) percent of the authorized capital stock of the corporation has
been subscribed, and at least twenty-five (25%) of the total subscription has SEC Memorandum Circular No. 14-2000 dated October 24, 2000, provides:
been fully paid to him in actual cash and/or in property the fair valuation of
In implementing Section 18 of the Corporation Code of the Philippines (BP 68),
which is equal to at least twenty-five (25%) percent of the said subscription,
the following revised guidelines in the approval of corporate and partnership
such paid-up capital being not less than five thousand (P5,000.00) pesos.
names are hereby adopted for the information and guidelines of all concerned:

1. The corporation name shall contain the word "Corporation" or

its abbreviation "Corp." or "Incorporated", or "Inc.".

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 The partnership name shall contain the word "Company" or "Co.". For
limited partnership, the word "Limited" or "Ltd." shall be included. In case
of professional partnership, the word "Company" need not be used.
2. Terms descriptive of a business in the name shall be indicative of the
primary purpose. If there are two (2) descriptive terms, the first shall refer
to the primary purpose and the second shall refer to one of the secondary
purposes.
3. The name shall not be identical, misleading or confusingly
similar to one already registered by another corporation or
partnership with the Commission or a sole proprietorship registered with
the Department of Trade and Industry.
If the proposed name is similar to the name of a registered firm,
the proposed name must contain at least one distinctive word
different from the name of the company already registered. (The
Book of Sir Ladia, 2007 Edition, provides that there must be two other
words different and distinct from the name of the company already
registered or protected by law).
4. Business or tradename of any firm which is different from its corporate or
partnership name shall be indicated in the articles of incorporation or
partnership of said firm.
5. Tradename or trademark duly registered with the Intellectual Property
Office cannot be used as part of a corporate or partnership name without
the consent of the owner of such tradename of trademark.
6. If the name or surname of a person is used as part of a corporate
or partnership name, the consent of said person or his heirs must
be submitted except of that person is a stockholder, member,
partner of a declared national hero. If such person cannot be
identified or non-existent, an explanation for the use of such
name shall be required.
7. The meaning of initials in the name shall be disclosed in writing
by the registrant.
8. Name containing a term descriptive of a business different from the
business of a registered company whose name also bears similar term(s)
used by the former may be allowed.
9. The name should not be patently deceptive, confusing or
contrary to existing laws.
10. The name which contains a word identical to a word in a
registered name shall not be allowed if such word is coined or
already appropriated by a registered firm, regardless of the
number of the different words in the proposed name, unless
there is consent from the registered firm of this firm is one of the
stockholders of partners of the entity to be registered.
11. The name of an internationally known foreign corporation or one
similar to it may not be used by a domestic corporation without
the consent of the former.
12. The term "Philippines" when used as part of the name of a
subsidiary corporation of a foreign corporation shall be in
parenthesis: i.e. "(Philippines)" or "(Phil.)".
13. The following words shall not be used as part of a corporate or
partnership names:
a. As provided by special laws:
1. "Finance", "Financing" or "Finance and Investment" by
corporations or partnerships not engaged in the financing
business (R.A. 5980, as amended)
2. "Engineer", "Engineering" or "Architects" as part of the
corporate name (R. A. 546 and R.A. 1582)
3. "Bank", "Banking", "Banker", Building and Loan Association",
Trust Corporation", "Trust Company" or words of similar import
by corporations or associations not engaged in banking
business. (R.A. 337, as amended)
4. "United Nations" in full or abbreviated form cannot be part of a
corporate or partnership name (R.A. 226)
5. "Bonded" for corporations or partnerships with unlicensed
warehouse (R.A. 245)
b. As a matter of policy:
1. "Investment(s)" by corporations or partnership not organized
as investment house company or holding company.
2. "National" by all stock corporations and partnership.
1 http://www.disini.ph/res_sec__mc142000.html
6 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
3. "Asean", "Calabarzon" and "Philippines 2000".
14. The name of a dissolved firm shall not be allowed to be used by other
firms within three (3) years after the approval of the dissolution of the
corporation by the Commission, unless allowed by the last stockholders
representing at least majority of the outstanding capital stock of the
dissolved firm.
15. Registrant corporations or partnership shall submit a letter undertaking to
change their corporate or partnership name in case another person or
firm has acquired a prior right to the use of the said firm name or the
same is deceptively or confusingly similar to one already registered unless
this undertaking is already included as one of the provisions of the articles
of incorporation or partnership of the registrant.1
RED LINE TRANSPORTATION CO. VS. RURAL TRANSIT CO. (60 Phil.
549; Sept. 6, 1934) – A certificate of public convenience was issued in the
name of Rural Transit Co. by the Public Service Commission despite opposition
of herein petitioner-appellant Red Line Transportation Co.. It appears that “Red
Line Transit Co.” is being used as a trade name of Bahrach Motors Co.
ISSUE: Who is the real party in interest, Rural Transit Co. which appears in
the face of the application? Or Bahrach Motors, Inc. using the name of the
former as a trade name?
HELD: Bahrach Motors, Inc.. There is no law that empowers PSC or any court
in this jurisdiction to authorize one corporation to assume the name of another
corporation as a trade name. Both Rural Transit and Bahrach are Philippine
corporations and the very law of their creation and continued existence
requires each to adopt and certify a distinctive name.
The incorporators constitute a body politic and corporate under the name state
in the certificate (Sec. 11, Act. No. 1459). A corporation has the power of
succession in its corporate name (Sec. 13). The name of a corporation is
therefore essential to its existence. It cannot change its name except in the
manner provided by law. By that name alone it is authorized to transact
business.
The law gives a corporation on express or implied authority to assume another
name that is unappropriated; still less that of another corporation, which is
expressly set apart from it and protected by law. If any corporation should
assume at pleasure as an unregistered trade name, the name of another
corporation, this practice would result in confusion of administration and
supervision. The policy of the law as expressed in our corporation statute and
the Code of Commerce is clearly against such a practice.
UNIVERSAL MILLS CORP. VS. UNIVERSAL TEXTILE MILLS INC. (78
SCRA 62; July 28, 1977) – In 1953, Universal Textile Mills, Inc. (UTMI) was
organized. In 1954, Universal Hosiery Mills Corporation (UHMC) was also
organized. Both are actually distinct corporations but they engage in the same
business (fabrics). In 1963, UHMC petitioned to change its name to Universal
Mills Corporation (UMC). The Securities and Exchange Commission (SEC)
granted the petition.
Subsequently, a warehouse owned by UMC was gutted by fire. News about the
fire spread and investors of UTMI thought that it was UTMI’s warehouse that
was destroyed. UTMI had to make clarifications that it was UMC’s warehouse
that got burned. Eventually, UTMI petitioned that UMC should be enjoined from
using its name because of the confusion it brought. The SEC granted UTMI’s
petition. UMC however assailed the order of the SEC as it averred that their
tradename is not deceptive; that UTMI’s tradename is qualified by the word
“Textile”, hence, there can be no confusion,
ISSUE: WON the SEC is correct?
HELD: Yes. There is definitely confusion as it was evident from the facts where
the investors of UTMI mistakenly believed that it was UTMI’s warehouse that
was destroyed. Although the corporate names are not really identical, they are
indisputably so similar that it can cause, as it already did, confusion. The SEC
did not act in abuse of its discretion when it ordered UMC to drop its name
because there was factual evidence presented as to the confusion. Further,
when UMC filed its petition for change of corporate name, it made an
undertaking that it shall change its name in the event that there is another
person, firm or entity who has obtained a prior right to the use of such name
or one similar to it. That promise is still binding upon the corporation and its
responsible officers
LYCEUM OF THE PHILIPPINES VS. COURT OF APPEALS (219 SCRA 610;
March 5, 1993) - Lyceum of the Philippines Inc. previously obtained from the
SEC a favourable decision on the exclusive use of “Lyceum” against Lyceum of
Baguio, Inc.. such decision assailed by the latter before the SC which was
denied for lack of merit.
Armed with the Resolution of the Supreme Court, the Lyceum of the Philippines
then wrote all the educational institutions it could find using the word "Lyceum"
as part of their corporate name, and advised them to discontinue such use of
"Lyceum." Unheeded, Lyceum of the Philippines instituted before the SEC an
action to enforce what Lyceum of the Philippines claims as its proprietary right
to the word "Lyceum." The SEC rendered a decision sustaining petitioner's
claim to an exclusive right to use the word "Lyceum." The hearing officer relied
upon the SEC ruling in the Lyceum of Baguio, Inc. case.
On appeal, however, by Lyceum Of Aparri, Lyceum Of Cabagan, Lyceum Of
Camalaniugan, Inc., Lyceum Of Lallo, Inc., Lyceum Of Tuao, Inc., Buhi Lyceum,
Central Lyceum Of Catanduanes, Lyceum Of Southern Philippines, Lyceum Of
Eastern Mindanao, Inc. and Western Pangasinan Lyceum, Inc.,, which are also
educational institutions, to the SEC En Banc, the decision of the hearing officer
was reversed and set aside. The SEC En Banc did not consider the word
"Lyceum" to have become so identified with Lyceum of the Philippines as to
render use thereof by other institutions as productive of confusion about the
identity of the schools concerned in the mind of the general public. Unlike its
hearing officer, the SEC En Banc held that the attaching of geographical names
to the word "Lyceum" served sufficiently to distinguish the schools from one
another, especially in view of the fact that the campuses of Lyceum of the
Philippines and those of the other Lyceums were physically quite remote from
each other.
On appeal, the CA affirmed the decision of the CA en banc, and denied
reconsideration.
ISSUE: WON private respondents can be directed to delete the word “lyceum”
from their corporate names?
HELD: No. The policy underlying the prohibition in Section 18 against the
registration of a corporate name which is "identical or deceptively or
confusingly similar" to that of any existing corporation or which is "patently
deceptive" or "patently confusing" or "contrary to existing laws," is the
avoidance of fraud upon the public which would have occasion to deal
with the entity concerned, the evasion of legal obligations and duties,
and the reduction of difficulties of administration and supervision
over corporations.
Herein, the Court does not consider that the corporate names of the academic
institutions are "identical with, or deceptively or confusingly similar" to that of
Lyceum of the Philippines Inc. True enough, the corporate names of the other
schools (defendant institutions) entities all carry the word "Lyceum" but
confusion and deception are effectively precluded by the appending of
geographic names to the word "Lyceum." Thus, the "Lyceum of Aparri" cannot
be mistaken by the general public for the Lyceum of the Philippines, or that
the "Lyceum of Camalaniugan" would be confused with the Lyceum of the
Philippines. Further, etymologically, the word "Lyceum" is the Latin word for
the Greek lykeion which in turn referred to a locality on the river Ilissius in
ancient Athens "comprising an enclosure dedicated to Apollo and adorned with
fountains and buildings erected by Pisistratus, Pericles and Lycurgus
frequented by the youth for exercise and by the philosopher Aristotle and his
followers for teaching."
In time, the word "Lyceum" became associated with schools and other
institutions providing public lectures and concerts and public discussions. Thus
today, the word "Lyceum" generally refers to a school or an institution of
learning. Since "Lyceum" or "Liceo" denotes a school or institution of learning,
7 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
it is not unnatural to use this word to designate an entity which is organized
and operating as an educational institution. To determine whether a given
corporate name is "identical" or "confusingly or deceptively similar" with
another entity's corporate name, it is not enough to ascertain the presence of
"Lyceum" or "Liceo" in both names. One must evaluate corporate names in
their entirety and when the name of Lyceum of the Philippines is juxtaposed
with the names of private respondents, they are not reasonably regarded as
"identical" or "confusingly or deceptively similar" with each other.
ISSUE2: WON the word “Lyceum” has acquired a secondary meaning
although originally generic?
HELD: No. The Court of Appeals recognized this issue and answered it in the
negative: "Under the doctrine of secondary meaning, a word or phrase
originally incapable of exclusive appropriation with reference to an
article in the market, because geographical or otherwise descriptive
might nevertheless have been used so long and so exclusively by one
producer with reference to this article that, in that trade and to that
group of the purchasing public, the word or phrase has come to mean
that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56).
This circumstance has been referred to as the distinctiveness into
which the name or phrase has evolved through the substantial and
exclusive use of the same for a considerable period of time. . . . No
evidence was ever presented in the hearing before the Commission which
sufficiently proved that the word 'Lyceum' has indeed acquired secondary
meaning in favor of the appellant. If there was any of this kind, the same tend
to prove only that the appellant had been using the disputed word for a long
period of time.
The number alone of the private respondents in the present case suggests
strongly that the Lyceum of the Philippines' use of the word "Lyceum" has not
been attended with the exclusivity essential for applicability of the doctrine of
secondary meaning. It may be noted also that at least one of the private
respondents, i.e., the Western Pangasinan Lyceum, Inc., used the term
"Lyceum" 17 years before Lyceum of the Philippines registered its own
corporate name with the SEC and began using the word "Lyceum." It follows
that if any institution had acquired an exclusive right to the word "Lyceum,"
that institution would have been the Western Pangasinan Lyceum, Inc. rather
than Lyceum of the Philippines. Hence, Lyceum of the Philippines is not entitled
to a legally enforceable exclusive right to use the word "Lyceum" in its
corporate name and that other institutions may use "Lyceum" as part of their
corporate names.
PHILIPS EXPORT B.V. et. al. VS. COURT OF APPEALS (206 SCRA 457;
Feb. 21, 1992) – Petitioner is the registered owner of the trademark PHILIPS
and PHILIPS SHIELD EMBLEM issued by the Philippine Patent Office. Philips
Electric Lamp Inc. and Philips Industrial Development Inc., also petitioners, are
the authorized users of such trademark.
Petitioner filed a case with SEC praying for a writ of injunction to prohibit herein
respondent Standard Philips Corporation from using the word “PHILIPS” in its
corporate name, which was denied. On appeal, the CA affirmed the SEC.
ISSUE: WON Standard Philips should be directed to delete the word PHILIPS
from its corporate name?
HELD: Yes. As early as Western Equipment and Supply Co. v. Reyes, 51 Phil.
115 (1927), the Court declared that a corporation's right to use its
corporate and trade name is a property right, a right in rem, which it
may assert and protect against the world in the same manner as it
may protect its tangible property, real or personal, against trespass
or conversion. It is regarded, to a certain extent, as a property right
and one which cannot be impaired or defeated by subsequent
appropriation by another corporation in the same field (Red Line
Transportation Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549).
A name is peculiarly important as necessary to the very existence of
a corporation (American Steel Foundries vs. Robertson, 269 US 372, 70 L ed
317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First National
Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its name is one of
its attributes, an element of its existence, and essential to its identity (6
Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations is that each
corporation must have a name by which it is to sue and be sued and
do all legal acts. The name of a corporation in this respect designates
the corporation in the same manner as the name of an individual
designates the person (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26
SW 538; Newport Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right
to use its corporate name is as much a part of the corporate franchise
as any other privilege granted (Federal Secur. Co. vs. Federal Secur. Corp.,
129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial
Association, 18 RI 165, 26 A 36).
A corporation acquires its name by choice and need not select a name identical
with or similar to one already appropriated by a senior corporation while an
individual's name is thrust upon him (See Standard Oil Co. of New Mexico, Inc.
v. Standard Oil Co. of California, 56 F 2d 973, 977). A corporation can no
more use a corporate name in violation of the rights of others than
an individual can use his name legally acquired so as to mislead the
public and injure another (Armington vs. Palmer, 21 RI 109. 42 A 308).
The statutory prohibition (under Sec. 18 of the Corporation Code) cannot be
any clearer. To come within its scope, 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) deceptively 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.
The right to the exclusive use of a corporate name with freedom from
infringement by similarity is determined by priority of adoption. In
this regard, there is no doubt with respect to Petitioners' prior adoption of' the
name ''PHILIPS" as part of its corporate name. Petitioners Philips Electrical and
Philips Industrial were incorporated on 29 August 1956 and 25 May 1956,
respectively, while Respondent Standard Philips was issued a Certificate of
Registration on 12 April 1982, twenty-six (26) years later. Petitioner PEBV has
also used the trademark "PHILIPS" on electrical lamps of all types and their
accessories since 30 September 1922.
The second requisite no less exists in this case. 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. In so doing, the Court must look to the record as
well as the names themselves. While the corporate names of Petitioners and
Private Respondent are not identical, a reading of Petitioner's corporate names,
to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude that
"PHILIPS" is, indeed, the dominant word in that all the companies affiliated or
associated with the principal corporation, PEBV, are known in the Philippines
and abroad as the PHILIPS Group of Companies.
Respondents argue that there were no evidence presented that there was
actual confusion. It is settled, however, that proof of actual confusion need
not be shown. It suffices that confusion is probably or likely to occur
(6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases).
Moreover, Given Private Respondent's underlined primary purpose in its AOI,
nothing could prevent it from dealing in the same line of business of electrical
devices, products or supplies which fall under its primary purposes. Besides,
there is showing that Private Respondent not only manufactured and sold
ballasts for fluorescent lamps with their corporate name printed thereon but
also advertised the same as, among others, Standard Philips (TSN, before the
SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As
aptly pointed out by Petitioners, [p]rivate respondent's choice of "PHILIPS" as
part of its corporate name [STANDARD PHILIPS CORPORATION] . . . tends to
show said respondent's intention to ride on the popularity and established
goodwill of said petitioner's business throughout the world" (Rollo, p. 137). The
subsequent appropriator of the name or one confusingly similar thereto usually
seeks an unfair advantage, a free ride of another's goodwill (American Gold
8 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC 269,
191 F 2d 488).
In allowing Private Respondent the continued use of its corporate name, the
SEC maintains that the corporate names of Petitioners PHILIPS ELECTRICAL
LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least
two words different from that of the corporate name of respondent STANDARD
PHILIPS CORPORATION, which words will readily identify Private Respondent
from Petitioners and vice-versa.
True, under the Guidelines in the Approval of Corporate and Partnership Names
formulated by the SEC, the proposed name "should not be similar to one
already used by another corporation or partnership. If the proposed name
contains a word already used as part of the firm name or style of a registered
company; the proposed name must contain two other words different
from the company already registered" (Emphasis ours). It is then pointed
out that Petitioners Philips Electrical and Philips Industrial have two words
different from that of Private Respondent's name.
What is lost sight of, however, is that PHILIPS is a trademark or trade name
which was registered as far back as 1922. Petitioners, therefore, have the
exclusive right to its use which must be free from any infringement by
similarity. A corporation has an exclusive right to the use of its name,
which may be protected by injunction upon a principle similar to that
upon which persons are protected in the use of trademarks and
tradenames (18 C.J.S. 574). Such principle proceeds upon the theory that it
is a fraud on the corporation which has acquired a right to that name and
perhaps carried on its business thereunder, that another should attempt to use
the same name, or the same name with a slight variation in such a way as to
induce persons to deal with it in the belief that they are dealing with the
corporation which has given a reputation to the name (6 Fletcher [Perm Ed],
pp. 39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210 F
510). Notably, too, Private Respondent's name actually contains only a single
word, that is, "STANDARD", different from that of Petitioners inasmuch as the
inclusion of the term "Corporation" or "Corp." merely serves the Purpose of
distinguishing the corporation from partnerships and other business
organizations.
The fact that there are other companies engaged in other lines of business
using the word "PHILIPS" as part of their corporate names is no defense and
does not warrant the use by Private Respondent of such word which constitutes
an essential feature of Petitioners' corporate name previously adopted and
registered and-having acquired the status of a well-known mark in the
Philippines and internationally as well (Bureau of Patents Decision No. 88-35
[TM], June 17, 1988, SEC Records).
c. PURPOSE CLAUSE
xxx
SECOND: That the purpose or purposes for which such corporation is
incorporated are: (If there is more than one purpose, indicate
primary and secondary purposes);
xxx
The statement of the objects or purpose or powers in the charter results
practically in defining the scope of authority of the corporate enterprise or
undertaking. This statement both congers and also limits the actual authority
of the corporate representatives.
The reasons for requiring a statement of the purposes or objects:
1. In order that the stockholder who contemplates on an investment in a
business enterprise shall know within what lines of business his money is to be
put at risks;
2. So that the board of directors and management my now within what
lines of business they are authorized to act; and
3. So that anyone who deals with the company may ascertain whether a
contract or transaction into which he contemplates entering is one within the
general authority of the management.
SECONDARY PURPOSE: Although the Corporation Code does not restrict nor
limit the number of purpose or purposes which a corporation may have, Sec.
14 thereof, requires that if it has more than one purpose, the primary purpose
as well as the secondary ones must be indicated therein.
PROHIBITION: The following are prohibited by special laws for having any
other purpose not peculiar to them:
1. Educational, religious, and other non-stock corporations cannot include any
other purpose which would change or contradict its nature or to engage in any
enterprise to make profits for is members;
2. Insurance companies cannot engage in commercial banking at the same
time, and vice-versa; and
3. Stock brokers can have no other line of business not peculiar to them.
RESTRICTIONS AND/OR ADDITIONAL REQUIREMENTS:
1. As a general rule, the purpose or purposes must be lawful. Hence, the SEC
is duty bound to determine the legality of the corporate purpose/s before it
issues the certificate of registration;
2. A corporation may not be formed for the purpose of practicing a profession
like law, medicine or accountancy, either directly or indirectly. These are
reserved exclusively for professional partnerships;
3. The retail trade, where the corporate capital is less than $2.5M, or its peso
equivalent are reserved exclusively for Filipinos, or for corporations or
partnerships wholly owned by such citizen.
4. As a general rule, corporations with foreign equity are not allowed to engage
in restaurant business but corporations with such foreign equity can purse such
undertaking if it is incidental or in connection with hotel or inn-keeping
business.
5. Management consultants, advisers and/or specialists, must submit the
personal information sheet of the incorporators and directors in order that the
SEC may be able to find out or determine whether or not the applicant
corporation is qualified to act as such.
6. As a matter of policy, financing companies are required by the SEC to submit
certain additional documents together with their applications for registration to
verify compliance with RA 8556.
7. For bonded warehousing companies, an undertaking to comply with the
General Bonded Warehousing Act must be submitted along with the AOI.
8. In case the applicant proposes to engage in the business of hospital and/or
clinic, the purpose clause must contain the following proviso: “Provided that
purely medical or surgical services in connection therewith shall be performed
by duly qualified physician and surgeon who may or may not be freely and
individually contracted by the parties.”
9. In the case of Customs Brokerage business, the applicant must submit the
license of at least two customs broker connected with the applicant
corporation;
10. Transfer Agents, Broker and Clearing Houses must submit the certificate of
admission to the profession of the CPA of any officer of the corporation;
11. Carriage of mails cannot be a purpose of a corporation unless a special
franchise has been granted to it.
12. If the corporate purpose or objective includes any purpose under the
supervision of another government agency, prior clearance and/or
approval of the concerned government agencies or instrumentalities
will be required pursuant to the last paragraph of Sec. 17 of the Code.
GENERAL LIMITATIONS:
1. The purpose or purposes must be lawful;
2. The purpose must be specific or stated concisely although in broad or
general terms;
3. If there is more than one purpose, the primary as well as the secondary
ones must be specified; and
4. The purposes must be capable of being lawfully combined.
d. PRINCIPAL OFFICE
xxx
THIRD: That the principal office of the corporation is located in the
City/Municipality of............................................, Province
of................................................., Philippines
xxx
It must be located within the Philippines. The AOI must not only specify the
province, but also the City or Municipality where it is located. In this regard, it
is to be observed that the principal office may be in one place but the business
operations are actually conducted in other areas. The law does not, of course,
9 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
require a statement of the place of corporate operations and, therefore, may
be dispensed with.
The principal office serves as the residence of the corporation, and is thus
important in: (1) venue of actions; (2) registration of chattel mortgage of
shares; (3) validity of meetings of stockholders or members in so far as venue
thereof is concerned.
CLAVECILLA RADIO SYSTEM VS. ANTILLON (19 SCRA 379; Feb. 18,
1967) – The New Cagayan Grocery filed a complaint against CRS for some
irregularities in the transmission of a message which changed the context and
purport causing damages. The complaint was filed in the City Court of Cagayan
de Oro.
ISSUE: WON the action will prosper?
HELD: No. The action was based on tort and not upon a written contract and
as such, under the Rules of Court, it should be filed in the municipality where
the defendant or any of the defendants resides or may be served with
summons.
Settled is the principle in corporation law that the residence of a
corporation is the place where the principal office is established. Since
it is not disputed that CRS has its principal office in Manila, it follows that the
suit against it may properly be filed in the City of Manila.
The fact that CRS maintains branch office in some parts of the country does
not mean that it can be sued in any of these places. To allow such would create
confusion and work untold inconveniences to the corporation.
e. TERM OF EXISTENCE
xxx
FOURTH: That the term for which said corporation is to exist
is............... years from and after the date of issuance of the
certificate of incorporation;
xxx
Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding
fifty (50) years from the date of incorporation unless sooner dissolved or unless
said period is extended. The corporate term as originally stated in the articles
of incorporation may be extended for periods not exceeding fifty (50) years in
any single instance by an amendment of the articles of incorporation, in
accordance with this Code; Provided, That no extension can be made earlier
than five (5) years prior to the original or subsequent expiry date(s) unless there
are justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission
The corporate term is necessary in determining at what point in time the
corporation will cease to exist or have lost its juridical personality. Once it
ceases to exist, its legal personality also expires and could not thereafter, act
in its own name for the purpose of prosecuting it business.
EXTENSION: can be made not earlier than 5 years prior to the expiry date
unless there are justifiable reasons.
f. INCORPORATORS
xxx
FIFTH: That the names, nationalities and residences of the
incorporators of the corporation are as follows:
NAME NATIONALITY RESIDENCE
..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
 xxx
Sec. 5. Corporators and incorporators, stockholders and members. -
Corporators are those who compose a corporation, whether as stockholders or
as members. Incorporators are those stockholders or members mentioned in
the articles of incorporation as originally forming and composing the corporation
and who are signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders.
The by-laws of a corporation may provide for additional qualifications and
Corporators in a non-stock corporation are called members.
disqualifications of its members of the board of directors or trustees. However,
it may not do away with the minimum disqualifications laid down by the Code.
The minimum qualifications of directors and trustees in a domestic corporation
are provided under the 2nd par. Of Sec. 23:
CORPORATORS apply to all who compose the corporation at any given time
and need not be among those who executed the AOI at the start of its
formation or organization.
INCORPORATORS are those mentioned in the AOI as originally forming the
corporation and who are signatories in the AOI.
An incorporator may be considered as a corporator as long as he continues to
be a stockholder or a member, but not all corporators are incorporators.
Sec. 10. Number and qualifications of incorporators. - Any number of
natural persons not less than five (5) but not more than fifteen (15), all of legal
age and a majority of whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes. Each of the incorporators of a
stock corporation must own or be a subscriber to at least one (1) share of the QUALIFICATIONS OF DIRECTORS/TRUSTEES:
capital stock of the corporation.
QUALIFICATIONS OF INCORPORATORS:
1. Must be natural persons. It implies that a corporation or a partnership cannot
become incorporators. EXCEPTION: (1) cooperatives; (2) corporations
primarily organized to hold equities in rural banks and may rightfully become
incorporators thereof. It must be noted likewise that the law does not preclude
firms and other entities from becoming stockholders or subscribers to the
shares of a stock corporation. Thus, while they cannot qualify as incorporators,
they can become corporators or stockholders.
2. Of Legal Age. Minors cannot be incorporators. They may, however, become
stockholders provided they are legally represented by parents, guardians or
administrators.
3. Must own at least 1 share.
4. Majority must be residents of the Philippines. The law does not provide for
citizenship requirements. EXCEPT: in certain areas of activity or industry
wherein ownership of shares of stock are reserved wholly or partially to Filipino
citizens. Hence, all incorporators may be foreigners provided majority of them
are residents. Note that the requirement is residence and not citizenship.
g. DIRECTORS/TRUSTEES
xxx
SIXTH: That the number of directors or trustees of the corporation
shall be............; and the names, nationalities and residences of the
first directors or trustees of the corporation are as follows:
NAME NATIONALITY RESIDENCE
..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
xxx
10 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
DIRECTORS compose the governing board in stock corporations. TRUSTEES
refer to non-stock corporations.
There must be at least 5 but not more than 15 directors in a private
corporation. EXCEPTIONS:
1. Educational corporations registered as non-stock corporations whose
number of trustees, though not less than 5 and not more than 15 should be
divisible by 5.
2. In close corporations where all stockholders are considered as members of
the board of directors (Sec. 97) thereby effectively allowing 20 members in the
board.
Sec. 23. The board of directors or trustees
xxx
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.
1. Must own at least 1 share in their own names or a member (in the case of
trustees);
2. Majority must be resident of the Philippines. Even aliens may be elected as
directors, provided that the majority of such directors are residents of the
Philippines. EXCEPT: in activities exclusively reserved to Filipino citizens like
the management of educational institutions and those governed by the Retail
Trade Law.
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.
DISQUALIFICATIONS:
1. Imprisonment for a period exceeding 6 years;
2. Violation of the Corporation Code within 5 years prior to the date of election
or appointment;
3. Such other disqualifications that may be provided in the by-laws.
JOHN GOKONGWEI, JR., Petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, SAN MIGUEL
CORPORATION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL,
ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, EMIGDIO TANJUATCO and EDUARDO VISAYA, Respondents
(GR No. L-52129; April 21, 1980)
FACTS: Petitioner, stockholder of San Miguel Corp. filed a petition with the
SEC for the declaration of nullity of the by-laws etc. against the majority
members of the BOD and San Miguel. The amended by-laws provided for the
disqualification of competitors from nomination and election in the Board of
Directors of SMC. This was denied by the SEC.

ISSUE: Is the disqualification valid?
HELD: Yes. The Court held that a corporation has authority prescribed, by law,
the qualifications of directors. It has the inherent power to adopt by-laws for
its internal government, and to regulate the conduct and prescribe the rights
and duties of its members towards itself and among themselves in reference
to the management of its affairs. A corporation, under the Corporation
law, may prescribe in its by-laws the qualifications, duties and
compensation of directors, officers, and employees. Any person who
buys stock in a corporation does so with the knowledge that its affairs are
dominated by a majority of the stockholders and he impliedly contracts that
the will of the majority shall govern in all matters within the limits of the acts
of incorporation and lawfully enacted by-laws and not forbidden by law. Any
corporation may amend its by-laws by the owners of the majority of the
subscribed stock. It cannot thus be said that petitioners has the vested right,
as a stock holder, to be elected director, in the face of the fact that the law at
the time such stockholder's right was acquired contained the prescription that
the corporate charter and the by-laws shall be subject to amendment,
alteration and modification. A Director stands in a fiduciary relation to
the corporation and its shareholders, which is characterized as a trust
relationship. An amendment to the corporate by-laws which renders
a stockholder ineligible to be director, if he be also director in a
corporation whose business is in competition with that of the other
corporation, has been sustained as valid. This is based upon the principle
that where the director is employed in the service of a rival company, he cannot
serve both, but must betray one or the other. The amendment in this case
serves to advance the benefit of the corporation and is good. Corporate officers
are also not permitted to use their position of trust and confidence to further
their private needs, and the act done in furtherance of private needs is deemed
to be for the benefit of the corporation. This is called the doctrine of corporate
opportunity.
h. CAPITALIZATION
xxx
SEVENTH: That the authorized capital stock of the corporation
is................................................ (P......................) PESOS in lawful
money of the Philippines, divided into.............. shares with the par
value of.................................. (P.......................) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is.......................... shares
without par value. (In case some shares have par value and some
are without par value): That the capital stock of said corporation
consists of....................... shares of which...................... shares are of
the par value of............................. (P.....................) PESOS each, and
of which............................... shares are without par value.
EIGHTH: That at least twenty five (25%) per cent of the authorized
capital stock above stated has been subscribed as follows:
Name of Subscriber Nationality No of Shares Amount
Subscribed
........................ .............. ................ ...........................
........................ .............. ................ ...........................
........................ .............. ................ ...........................
........................ .............. ................ ...........................
........................ .............. ................ ...........................
NINTH: That the above-named subscribers have paid at least
twenty-five (25%) percent of the total subscription as follows:
Name of Subscriber Amount Subscribed Total Paid-Up
.............................. .............................. ....................
.............................. .............................. ....................
.............................. .............................. ....................
.............................. .............................. ....................
.............................. .............................. ....................
(Modify Nos. 8 and 9 if shares are with no par value. In case the
corporation is non-stock, Nos. 7, 8 and 9 of the above articles may
11 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
be modified accordingly, and it is sufficient if the articles state the
amount of capital or money contributed or donated by specified
persons, stating the names, nationalities and residences of the
contributors or donors and the respective amount given by each.)
xxx
The Corporation Code requires the AOI to state the authorized capital stock,
the number of shares and/or kind of shares into which the authorized capital
is divided, the par value of each share, if there by any, the names, nationalities
and residences of the original subscribers, and the amount subscribed and paid
by each. At least 25% of the subscribed capital must be paid and in no case
may the paid-up capital be less than P5,000.
AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articles
to be subscribed and paid-in or secured to be paid by the subscribers. It may
also refer to the maximum number of shares that a corporation can issue.
SUBSCRIBED CAPITAL STOCK is the total number of shares and its total
value for which there are contracts for their acquisition or subscription. It is in
effect, the stockholder’s equity account showing that part of the authorized
capital stock which has been paid or promised to be paid, or that portion of
the authorized capital stock which has been subscribed by the subscribers or
stockholders.
PAID UP CAPITAL STOCK or paid-in capital is the actual amount or value
which has been actually contributed or paid to the corporation in consideration
of the subscriptions made thereon. It may be in the form of cash, property or
in the form of services actually rendered to the corporation as provided under
Sec. 62 of the Corporation Code:
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the
following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation equal
to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
Where the consideration is other than actual cash, or consists of intangible
property such as patents of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors, subject to approval
by the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future
service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred upon
it by the articles of incorporation or the by-laws, or in the absence thereof, by
the stockholders representing at least a majority of the outstanding capital stock
at a meeting duly called for the purpose.
SHARES OF STOCKS AND THEIR CLASSIFICATIONS
SHARES OF STOCK designate the units into which the proprietary interest in
a corporation is divided. They represent the proportionate integers or units,
the sum of which constitutes the capital stock of the corporation. It is likewise
the interest or right which the owner, called the stockholders or shareholder,
has in the management of the corporation, and in the surplus profits and in
case of distribution, in all of its assets remaining after the payment of its debts.
CERTIFICATE OF STOCK is a document or instrument evidencing the
interest of a stockholder in the corporation.
PURPOSE OF CLASSIFICATION:
1. To specify and define the rights and privileges of the stockholders;
2. For regulation and control of the issuance of sale of corporate securities for
the protection of purchasers and stockholders.
12 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Sec. 6. Classification of shares. - The shares of stock of stock corporations
may be divided into classes or series of shares, or both, any of which classes or
series of shares may have such rights, privileges or restrictions as may be stated
in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code: Provided, further, That there
shall always be a class or series of shares which have complete voting rights.
Any or all of the shares or series of shares may have a par value or have no par
value as may be provided for in the articles of incorporation: Provided, however,
That banks, trust companies, insurance companies, public utilities, and building
and loan associations shall not be permitted to issue no-par value shares of
stock.
Preferred shares of stock issued by any corporation may be given preference in
the distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code:
Provided, That preferred shares of stock may be issued only with a stated par
value. The board of directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as capital
and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled
to vote on the following matters:
1. Amendment of the articles of incorporation;
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 this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary
to approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights.
3. As a management control device.
4. To comply with statutory requirements particularly those which provide for
certain limitations on foreign ownership.
5. To better insure return on investment which can be affected through the
issuance of redeemable shares or preferred shares, i.e., granting the holders
thereof, preference as to dividends and/or distribution of assets in case of
liquidation; and
6. For flexibility in price, particularly, no par shares may be issued or sold from
time to time at different prices depending on the net worth of the company
since they do not purport to represent an actual or fixed value.
COMMON STOCKS are the most commonly issued shares of stock of a
corporation. Although no clear cut definition can be found, it has been
described as one which entitles it owner to an equal or pro-rata division of
profits, if there are any, but without any preference or advantage in that
respect over any other stockholder or class of stockholders.
A common share usually carries with it the right to vote, and frequently, the
exclusively right to do so. However, where the AOI is silent, all issued and
outstanding shares shall be considered to have the right to vote and be voted
for.
PREFERRED STOCK is a stock that gives the holder preference over the
holder of common stocks with respect to the payment of dividends and/or with
respect to distribution of capital upon liquidation. LIMITATIONS imposed by
the Code in the issuance of preferred stocks: (1) They can be issued only with
a stated par value; and (2) The preference must be stated in the AOI and in
the certificate of stock otherwise each share shall be, in all respect, equal to
every other share.
a. PREFERENCE AS TO DIVIDENDS
They have the privilege of being paid dividends first before any other
stockholders are paid theirs. The guaranty is not absolute so as to create a
relation of debtor and creditor between the corporation and the holders of such
stock. The amount of preference is stated in the contract of subscription and
is usually a fixed percentage or by specified amount indicated therein.
Participating and Non-Participating Preferred Shares
If the preferred shares are participating, they are entitled to participate in
dividends with the common shareholders beyond their stated preference. Non-
participating preferred shares on the other hand are entitled to its fixed priority
or preference only.
Cumulative and Non-cumulative Preference Shares
Cumulative preferred shares are those that entitle the owner thereof to
payment not only of current dividends but also back dividends not previously
paid whether or not, during the past years, dividends were declared or paid.
In light of the provision of the Code stating that all shares are equal in all
respects unless otherwise stated in the AOI, a preferred share to be considered
cumulative, the same must be provided for and specified in the certificate.
Non-cumulative preferred shares are those which grant the holders of such
shares only to the payment of current dividends but not back dividends, when
and if dividends are paid, to the extent agreed upon before any other
stockholders are paid the same. This type may be divided into three groups:
1. Discretionary dividend type – depends on the judgment or discretion of the
board of directors. Unless there is grave abuse of discretion as to result in
oppression, fraud or unfair discrimination, the dividend right of stockholders of
a particular year cannot be made up in subsequent years;
2. Mandatory if earned – impose a positive duty on directors to declare
dividends every year when profits are earned. In effect, directors cannot
withhold dividends if there are profits.
3. Earned cumulative or dividend credit type – gives the holder the right to
arrears in dividends if there were profits earned during the previous years. In
effect, their right to receive dividends is merely postponed on a later date. The
moment dividends are declared, back dividends earned in previous years but
not declared as such must first be paid to this type of preferred shareholders
before the common shareholders receive theirs.
DIFFERENCE WITH CUMULATIVE PREFERRED: Cumulative preferred are
entitled to dividends whether or not there are profits. Earned cumulative or
13 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
dividend credit type is entitled only to arrears if there are profits in those years.
b. Voting Right of Preferred Shares
Preferred shares, along with redeemable shares, are usually denied voting
rights as they are allowed to be denied of such as provided in Sec. 6, but this
right must clearly be withheld. However, even if deprived, preferred
shareholders have the right to vote in matters enumerated in the penultimate
paragraph of Sec. 6.
c. Preference Upon Liquidation
Such preference must also be stated in the contract, accordingly giving them
the preference to the distribution of corporate assets upon liquidation or
termination of corporate existence. If the preferred shares are cumulative, they
have the right to any arrears in arrears in priority to any distribution of assets
to the common stockholders.
PAR AND NON-PAR VALUE SHARES
Par Value Shares are those whose values are fixed in the AOI. Its par value is
the minimum subscription or original issue price of the shares and indicates
the amount which the original subscribers are supposed to contribute to the
capital, which, however, may not reflect the true value of the shares because
the same may fluctuate depending on the liability and networth of the
enterprise.
Watered Stocks are those issued at less than par value where the stockholders
will remain liable for the difference between what he paid and the actual par
value thereof (Sec. 65).
No Par Value Shares are those whose issued price are not stated in the
certificate of stock but may be fixed in the AOI, or by the BOD when so
authorized the articles or the by-laws, or in the absence thereof, the
stockholders themselves. They do not purport to represent ay stated
proportionate interest in the capital measured by value, but only an aliquot
part of the whole number of shares of the corporation issuing it.
The Code allows the issuance of no par value shares, subject to the following
limitations provided in Sec. 6:
1. Such shares once issued, are deemed fully paid and thus, non-assessable;
2. The consideration for its issuance should not be less than P5;
3. The entire consideration constitutes capital, hence, not available for dividend
declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance companies,
public utilities and building and loans associations.
Advantages of no-par value shares:
1. Flexibility in price – no par shares may be issued from time to time at
different prices with the exception only that it shall not be issued at less than
P5;
2. The issuance thereof practically results to the evasion of the danger of
liability upon watered stock in case of overvaluation of the consideration paid
for it;
3. There is a disappearance of personal liability on the part of the holder for
unpaid subscription since they are already deemed fully paid and non-
assessable.
VOTING AND NON-VOTING SHARES
Voting shares as the name suggests, gives the holder thereof the right to vote
and participate in the management of the corporation, through the election of
the BOD, or in any matter requiring stockholders’ approval.
However, voting shares may practically be denied the right to vote where there
exist founders’ shares.
Non-voting shares do not grant the holder thereof, a voice in the election of
directors and some other matter requiring stockholders’ vote.
Only preferred and redeemable shares may be denied the right to vote. But,
even if denied such right, they may still vote on the following matters:

1. Amendment of the articles of incorporation;
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 this Code; and
8. Dissolution of the corporation
FOUNDERS’ SHARES are shares issued to the founders of the corporation
which are granted certain right and privileges such as the exclusive right to
vote and be voted for in the election of directors.
Sec. 7. Founders' shares. - Founders' shares classified as such in the articles
of incorporation may be given certain rights and privileges not enjoyed by the
owners of other stocks, provided that where the exclusive right to vote and be
voted for in the election of directors is granted, it must be for a limited period
not to exceed five (5) years subject to the approval of the Securities and
Exchange Commission. The five-year period shall commence from the date of
the aforesaid approval by the Securities and Exchange Commission.
The period of 5 years is non-extendable because it may result in the almost
perpetual disqualification of other stockholders to elect or be elected as
members of the BOD resulting to the lack of proper representation thereat.
REDEEMABLE SHARES are those subject to redemption as may be provided
in the subscription contract, which are usually attached to preferred shares and
other debt securities like bonds.
Sec. 8. Redeemable shares. - Redeemable shares may be issued by the
corporation when expressly so provided in the articles of incorporation. They
may be purchased or taken up by the corporation upon the expiration of a fixed
period, regardless of the existence of unrestricted retained earnings in the
books of the corporation, and upon such other terms and conditions as may be
stated in the articles of incorporation, which terms and conditions must also be
stated in the certificate of stock representing said shares
These types of shares grants the corporation the right to repurchase the shares
at its option or at the option of the holder based on the face or issued value
plus specified premium, such redemption may be optional or mandatory at a
fixed or future date.
Such repurchase may also be made regardless if there are unrestricted retained
earnings. (see Power to Acquire Own Shares)
TREASURY SHARES
Sec. 9. Treasury shares. - Treasury shares are 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 From the above provisions, it can be said that there is no minimum capital
means. Such shares may again be disposed of for a reasonable price fixed by requirement in order that a corporation may be duly incorporated except in
the board of directors. special cases and provided that at least P5,000 should be paid-in, which
effectively would make the P5,000 the minimum capital requirement.
Treasury shares, as provided in Sec. 9, are reacquired but not retired. They
14 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
may be issued for a price, even less than par, and the purchaser will not be
liable to the creditors of the corporation for the difference of the purchase price
and its par value. They may also be declared as dividends since they are
properties of the corporation.
Such shares do not have the right to share in dividends nor the right to vote.
COMMISSIONER OF INTERNAL REVENUE VS. MANNING (66 SCRA 14;
Aug. 6, 1975) – Julius Reese owned 24,700 of the 25,000 authorized capital
stock of Manta Trading and Supply Co., the rest are owned by herein
respondents. Upon Reese’ death, his shares was held in trust by the law firm
Ross, Carrascoso and Janda for the private respondent, who were to continue
management of the corporation. These shares considered by the respondents
as treasury shares, prior to full payment, were declared as stock dividends.
Such declaration was assessed by the BIR as distribution of assets subject to
income tax.
ISSUE: WON the subject shares are treasury shares?
HELD: No. Treasury shares are stocks issued and fully paid for and
reacquired by the corporation either by purchase, donation,
forfeiture or other means and do not have the status of outstanding
shares. They may be re-issued or sold again and while held by the
company participates neither in dividends, because dividends cannot
be declared by the corporation to itself, nor in meeting of the
corporation as voting stock for otherwise equal distribution of voting
powers among stockholders will be effectively lost and the directors
will be able to perpetuate their control of the corporation, though it
still represent a paid for interest in the property of the corporation.
These features of a treasury stock are lacking in the questioned shares.
In this case, and under the terms of the trust agreement, the shares of stock
of Reese participated in dividends which the trustee received and the said
shares were voted upon by the trustee in all corporate meetings. They were
not, therefore, treasury shares. The 24,700 shares were outstanding shares of
Reese’s estate until they were fully paid. Such being the case, their declaration
as treasury stock dividend was a complete nullity.
CAPITAL REQUIREMENTS
Sec. 12. Minimum capital stock required of stock corporations. - Stock
corporations incorporated under this Code shall not be required to have any
minimum authorized capital stock except as otherwise specifically provided for
by special law, and subject to the provisions of the following section
Sec. 13. Amount of capital stock to be subscribed and paid for the
purposes of incorporation. - At least twenty-five percent (25%) of the
authorized capital stock as stated in the articles of incorporation must be
subscribed at the time of incorporation, and at least twenty-five (25%) per cent
of the total subscription must be paid upon subscription, the balance to be
payable on a date or dates fixed in the contract of subscription without need of
call, or in the absence of a fixed date or dates, upon call for payment by the
board of directors: Provided, however, That in no case shall the paid-up capital
be less than five Thousand (P5,000.00) pesos
The 25% minimum paid-in capital can be paid by any shareholder, meaning
that it is not particularly required that each subscriber pay 25% of their
subscription.
 TREASURER'S AFFIDAVIT
There are instances where the SEC, by virtue of an existing law, rules and
regulations or policies, requires the payment of more than the amount provided REPUBLIC OF THE PHILIPPINES )
in the Code, such as Financing Companies where the required minimum paid- CITY/MUNICIPALITY OF ) S.S.
up capital be P10,000,000 (within Metro Manila), P5,000,000 (other cities), and PROVINCE OF )
P2,000,000 (municipalities).
I,..................................., being duly sworn, depose and say:
i. RESTRICTIONS AND PREFERENCES That I have been elected by the subscribers of the corporation as
Treasurer thereof, to act as such until my successor has been duly
Corporations are not required to provide for certain restrictions and elected and qualified in accordance with the by-laws of the
preferences regarding the transfer, sale or assignment of shares in the AOI corporation, and that as such Treasurer, I hereby certify under oath
except in close corporations which would subject their shares to specific that at least 25% of the authorized capital stock of the corporation
restrictions as required in Sec. 96 of the Code. They are not, however, has been subscribed and at least 25% of the total subscription has
restrained or prohibited from doing so been paid, and received by me, in cash or property, in the amount of
not less than P5,000.00, in accordance with the Corporation Code.
If the corporation desires to grant such options, restrictions and/or .......................................
preferences, the same must be indicated in the AOI AND in all of the stock
certificates. Failure to provide the same in the AOI would not bind the (Signature of Treasurer)
purchasers in good faith despite the fact that the said restriction and/or xxx
preference is indicated in the by-laws of the corporation.
n. NOTARIAL ACKNOWLEDGMENT
In a close corporation, however, such restrictions and preferences must not xxx
only appear in the articles of incorporation and in the stock certificates BUT SUBSCRIBED AND SWORN to before me, a Notary Public, for and in
ALSO be embodied in the by-laws of that close corporation otherwise it may the City/Municipality of................................. Province
not bind purchasers in good faith. of........................................., this............ day of........................,
19.......; by........................................... with Res. Cert.
j. THE TREASURER No..................... issued at................ on....................., 19.........
xxx
TENTH: That...................................... has been elected by the NOTARY PUBLIC
subscribers as Treasurer of the Corporation to act as such until his
successor is duly elected and qualified in accordance with the by- My commission expires on.........................., 19.......
laws, and that as such Treasurer, he has been authorized to receive
for and in the name and for the benefit of the corporation, all
subscription (or fees) or contributions or donations paid or given by Doc. No...............;
the subscribers or members. Page No...............;
xxx Book No..............;
Series of 19.....
k. NO TRANSFER CLAUSE xxx
xxx
ELEVENTH: (Corporations which will engage in any business or GROUNDS FOR DISAPPROVAL
activity reserved for Filipino citizens shall provide the following):

"No transfer of stock or interest which shall reduce the ownership of

Filipino citizens to less than the required percentage of the capital
stock as provided by existing laws shall be allowed or permitted to
recorded in the proper books of the corporation and this restriction
shall be indicated in all stock certificates issued by the corporation."
xxx

This indicates the treasurer who has been elected as such until his successor
has been elected and qualified and who is authorized to receive for and in
the name of the corporation all subscriptions, contributions or donations paid
or given by the subscribers or members.

l. THE EXECUTION CLAUSE

xxx
IN WITNESS WHEREOF, we have hereunto signed these Articles of
Incorporation, this..............day of....................., 19.......... in the
City/Municipality of......................................., Province
of................................................, Republic of the Philippines.

(Names and signatures of the incorporators)

xxx

The signatures are important as the AOI serves as a contract between the
signatories thereof, by and among themselves, with the corporation, and the
latter with the State.

m. TREASURER’S AFFIDAVIT
xxx

15 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes

Sec. 17. Grounds when articles of incorporation or amendment may
be rejected or disapproved. - The Securities and Exchange Commission may
reject the articles of incorporation or disapprove any amendment thereto if the
same is not in compliance with the requirements of this Code: Provided, That
the Commission shall give the incorporators a reasonable time within which to
correct or modify the objectionable portions of the articles or amendment. The
following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock
subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by citizens
of the Philippines has not been complied with as required by existing laws or
the Constitution.
No articles of incorporation or amendment to articles of incorporation of banks,
banking and quasi-banking institutions, building and loan associations, trust
companies and other financial intermediaries, insurance companies, public
utilities, educational institutions, and other corporations governed by special
laws shall be accepted or approved by the Commission unless accompanied by
a favorable recommendation of the appropriate government agency to the
effect that such articles or amendment is in accordance with law.
After filing of the AOI, the SEC will examine and process them to determine
compliance with the requirements enumerated in Sec. 14 and if the form
prescribed under Sec. 15 is complied with. Only substantial and not strict
compliance is required.
The above grounds are not exclusive. There may be other reasons for rejection
or disapproval such as the corporate name is not legally permissible or that the
minimum capital requirement is not sufficient.
3. COMMENCEMENT OF CORPORATE EXISTENCE
Corporate existence is reckoned from the time of the issuance of its
CERTIFICATE OF INCORPORATION or registration. It is only from this time
that it acquires juridical personality and legal existence, EXCEPT:
a. Corporations by Estoppel;
b. Those created by special laws;
c. Those organized as Cooperatives covered by Bureau of Cooperatives and
Home Owners’ Associations covered by Home Insurance Guaranty Corporation.
d. Corporation Sole – which is reckoned from the filing of verified articles. (Sec.
112)
Sec. 19. Commencement of corporate existence. - A private corporation
formed or organized under this Code commences to have corporate existence d. Good faith in claiming to be and doing business as a corporation.
and juridical personality and is deemed incorporated from the date the
Securities and Exchange Commission issues a certificate of incorporation under
its official seal; and thereupon the incorporators, stockholders/members and
their successors shall constitute a body politic and corporate under the name
stated in the articles of incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is sooner dissolved in
accordance with law.
CAGAYAN FISHING DEVELOPMENT CO. VS. SANDIKO (65 Phil. 233; Dec.
23, 1937) – On May 31, 1930, Manuel Tabora executed a Deed of Sale where
16 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
he sold four parcels of land in favor of herein petitioner Cagayan Fishing
Development Co., said to be under the process of incorporation. Plaintiff
company filed its AOI with the Bureau of Commerce and Industry on Oct. 22,
1930. A year later, before the issuance of the certificate of incorporation, the
BD of the company adopted a resolution to sell the four parcels of land to
Teodoro Sandiko for P42,000.
ISSUE: WON the subsequent sale to Sandiko is valid?
HELD: No. A duly organized corporation has the power to purchase and hold
real property as the purpose for which such corporation was formed may
permit and for this purpose may enter into such contract as may be necessary.
But before a corporation may be said to be lawfully organized many
thing have to be done. Among which, the law requires the filing of
the AOI.
It cannot be denied that the plaintiff was not incorporated when it entered into
the contract of sale. It was not even a de facto corporation at that time. Not
being in legal existence then, it did not possess juridical personality to enter
into the contract.
Corporations are creatures of the law, and can only come into existence in the
manner prescribed by the law. That a corporation should have a full and
complete organization and existence as an entity before it can enter into a
contract or transact any business, would seem to be self-evident. A
corporation, until organized, has no being, franchises or faculties. Nor do those
engaged in bringing it into being have any power to bind it by contract, unless
so authorized by the charter, there is no corporation, nor does it possess
franchise or faculties for it to exercise, until it acquires complete existence.
If the company could not and did not acquire the four parcels of and here
involved, it follows that it did not have the resultant right to dispose the same
to the defendant.
D. DEFECTIVELY FORMED CORPORATIONS
A corporation de jure is one created in strict or substantial compliance to the
governing corporation statutes and whose right to exist and act as such could
not be attacked in a either collaterally or through a direct proceeding for that
purpose even by the State.
1. DE FACTO CORPORATIONS
A de facto corporation is one that is so defectively created as not to be a de
jure corporation but nevertheless exists, for all practical purposes, as a
corporate body, by virtue of its bona fide attempt to incorporate under existing
statutory authority, coupled with the exercise of corporate powers.
REQUISITES:
a. There is a valid statute under which the corporation could have been
created as a de jure corporation (or according to some, an apparently
valid statute);
b. An attempt, in good faith, to form a corporation according to the
requirements of law which goes far enough to amount to a “colourable
compliance” with the law;
c. A user of corporate powers, the transaction of business in some way as if
it were a corporation;
Sec. 20. De facto corporations. - The due incorporation of any corporation
claiming in good faith to be a corporation under this Code, and its right to
exercise corporate powers, shall not be inquired into collaterally in any private
suit to which such corporation may be a party. Such inquiry may be made by
the Solicitor General in a quo warranto proceeding
ATTACK: From the above provision, the only purpose of determining whether
it is a de facto or de jure corporation is the applicability of the rules on collateral
and direct attack. Such that a de jure is impregnable to either, while a de facto
corporation’s existence can only be questioned in a direct proceeding by the
State through a quo warranto. A de facto corporation’s corporate existence
however cannot be attacked collaterally.
THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER
MACAORAO BALINDONG, petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN
MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG
ANDOY, MACALABA INDAR LAO. Respondents
GR No. L-28113; March 28, 1969)
2. CORPORATION BY ESTOPPEL
A corporation may exist on the ground of estoppel by virtue of the agreement,
admission or conduct of the parties such that they will not be permitted to deny
the fact of the existence of the corporation. It is neither a de jure nor de facto
because of serious defects in its incorporation or organization, unlike the de
facto doctrine, it does not involve a theory that the irregular corporation has
acquired a corporate status generally. It applies to the consequences of some
particular transactions or acts done in the corporate name by associates
assuming to be a corporation.

FACTS: The Municipality of Balabagan was created from the barrios and sitios
Sec. 21. Corporation by estoppel. - All persons who assume to act as a
of the Municipality of Malabang by virtue of EO No 386 issued by President
Garcia by virtue of Sec. 68 of the Revised Administrative Code. Following the corporation knowing it to be without authority to do so shall be liable as general
decision of the Court in Pelaez vs. Auditor General, which declared Sec. 68 partners for all debts, liabilities and damages incurred or arising as a result
unconstitutional and that the President had no power to create a municipality, thereof: Provided, however, That when any such ostensible corporation is sued
herein petitioners sought to nullify EO 386 and to restrain the respondents, on any transaction entered by it as a corporation or on any tort committed by
who are officers of Balabagan, to vacate said their office and desist from it as such, it shall not be allowed to use as a defense its lack of corporate
performing their functions. personality.
Respondents argue that it is at least a de facto corporation and the ruling in
Pelaez is not applicable to it, having been organized under color of a statute
On who assumes an obligation to an ostensible corporation as such, cannot
before it was declared unconstitutional, its officers having been either elected
resist performance thereof on the ground that there was in fact no corporation.
or appointed, and the municipality itself having discharged corporate functions
for the past five years. That as a de facto corporation, its existence cannot be
collaterally attacked.

ISSUE: WON the Municipality of Balabagan is a de facto corporation?

From the above provision, it is clear that the doctrine of estoppel may apply to
the alleged corporation or to a third party transacting with the former.
HELD: No. In cases where a de facto municipal corporation was recognized as
such despite the fact that the statute creating it was later invalidated, the
As to the Corporation – the members who purported to be a corporate body
decision could be fairly made to rest on the consideration that there was
cannot deny their purported existence as a corporation in an action against
some other valid law giving validity to the organization. Hence, in the
them on the contract, where the third persons were induced to deal with the
case at bar, the mere fact that Balabagan was organized at the time when the
supposed corporation. They cannot avoid liability on the ground of lack of
statute had not been invalidated cannot conceivably make it a de facto
personality to be sued.
corporation, as independently of the Administrative Code provision in question,
there is no other valid statute to give color of authority for its creation.
As to third persons – they are estopped from denying the existence of the
alleged corporation in a suit to enforce a contract. However, the association of
An unconstitutional act is not a law; it confers no rights; it imposes no duties;
persons must have purported or acted, and were treated by the third persons,
it affords no protection; it creates no office; it is, in legal contemplation, as
as corporations. The doctrine also applies when the third person tries to escape
inoperative as though it had never been passed.
liability on a contract from which he has benefited on the irrelevant ground of
defective incorporation.
HALL VS. PICCIO (86 Phil 603 June 29, 1950) – Petitioner, together with
private respondents signed and acknowledged the AOI of Far East Lumber and
LOZANO VS. DE LOS SANTOS (274 SCRA 452; June 19, 1977) – Petitioner
Commercial Co., Inc., after the execution of which the corporation proceeded
Reynaldo Lozano and respondent Antonio Anda agreed to consolidate their
to do business by adopting its by-laws and election of its officers.
respective Jeepney Associations, to which they are presidents. They conducted
Subsequently, pending action on the AOI, the respondents filed with the CFI
an election for one set of officers of the consolidated association, where
alleging the corporation to be an unregistered partnership and praying for its
petitioner was the winner. Respondent, however, refused to abide by the
dissolution, which was granted.
agreement which prompted petitioner to institute an action for damages in the
trial court which was denied for being intra-corporate, and was held to be
Herein petitioner claims that the corporation is a de facto corporation, that its
within the jurisdiction of the SEC.
dissolution may be ordered only in a quo warranto proceedings instituted by
the State.
ISSUE: WON there is corporation by estoppel placing the case within SEC
jurisdiction?
ISSUE: WON it is a de facto corporation?
HELD: None. The unified association was still a proposal and had not been
HELD: No. First, not having obtained a certificate of incorporation, the
approved by the SEC, neither had its officers and members submitted their
company, even its stockholders, may not probably claim “in good faith” to be
AOI. Their respective associations are distinct and separate entities, petitioner
a corporation.
and private respondent does not have an intra-corporate relation much less do
they have an intra-corporate dispute. The SEC has no jurisdiction over the
Such claim is compatible with the existence of errors and irregularities, but not
complaint.
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
The doctrine of corporation by estoppel advance by private respondent cannot
this Act” (Sec. 19) could not be made in good faith.
override jurisdictional requirements. Jurisdiction is fixed by law and is not
subject to the agreement of the parties.
Second, this is not a suit where the corporation is a party. This is a litigation
between a stockholder of the alleged corporation, for the purpose of obtaining
Corporation by estoppel is founded on principle of equity and is designated to
its dissolution. Even the existence of a de jure corporation may be terminated
prevent injustice and unfairness. It applies when persons assume to form a
in a private suit for its dissolution between stockholders, without the
corporation and exercise corporate functions and enter into business relations
intervention of the State.
with third persons. Where there is no third person involved and the
17 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
conflict arises only among those assuming to form a corporation, who
therefore know that it has not been registered, there is no
corporation by estoppel.
ALBERT VS. UNIVERSITY PUBLISHING CO., INC. (13 SCRA 84; Jan. 30,
1965) – Jose Aruego, president of defendant University Publishing Co, Inc.
entered into a contract with plaintiff for the publishing of the latter’s revised
commentaries on the Revised Penal Code, which the defendant failed to pay
the second instalment due. The CFI of Manila rendered judgment in favor of
plaintiff, such judgment reduced by the Supreme Court to P15,000.
The CFI issued a writ of execution against Aruego, as the real defendant,
stating the discovery that there is no such entity as University Publishing Co.,
Inc.
ISSUE: WON the writ of execution may be effected upon Aruego?
HELD: Yes. On account of non-registration, University cannot be considered a
corporation, not even a corporation de facto. It has therefore, no personality
separate from Aruego it cannot be sued independently.
The doctrine of corporation by estoppel is inapplicable. Aruego represented a
non-existent entity and induced not only the plaintiff but even the court of
belief of such representation. He signed the contract as “President” of
University and obviously misled plaintiff in to believing that University is a
“corporation duly organized and existing under the laws of the Philippines”.
One who has induced another to act upon his wilful
misrepresentation that a corporation was duly organized and
existing under the law, cannot, thereafter, set up against his victim
the principle of corporation by estoppel.
SALVATIERRA VS. GARLITOS, ET AL. (103 Phil. 757; May 23, 1958) –
Petitioner Manuel T. Vda de Salvatierra, owner of a parcel of land, entered into
a contract of lease with Philippine Fibers Processing Co., Inc., allegedly a
corporation. For failure to comply with the obligations under the lease,
petitioner filed a complaint in the CFI where the company was declared in
default and decision was rendered in favor of petitioner. Defendant Refuerzo
filed a motion claiming that he should not be made personally liable in the
decision which was granted by the Court. Hence, this petition.
ISSUE: WON Refuerzon can be made personally liable?
HELD: Yes. While as a general rule, a person who has contracted or dealt
with an association in such a way as to recognize its existence as a corporate
body is estopped from denying the same in an action arising out of such
transaction or dealing, yet this doctrine may not be held applicable where
fraud takes part in the said transaction. In the instant case, on plaintiff’s
charge that she was unaware of the fact that the company had no juridical
personality, defendant Refuerzo gave no confirmation or denial and the
circumstances surrounding the execution of the contract led to the inescapable
conclusion that plaintiff Salvatierra was really made to believe that such
corporation was duly organized in accordance with law.
The rule on the separate personality of a corporation is understood to refer
merely to registered corporations and cannot be made applicable to the liability
of members of an unincorporated association. The reason behind this doctrine
is obvious – since an organization which before the law is non-existent
has no personality and would be incompetent to act on its behalf;
thus, those who act or purport to act as its representatives or agent
do so without authority and at their own risk. And, as is it elementary
principle of law that a person who acts as an agent without authority or
without principal is himself regarded as the principal, a person acting
or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts
performed as such agents.
In acting on behalf of a corporation which he knew to be unregistered, the
president of the unregistered corporation Refuerzo, assumed the risk of
reaping the con the consequential damages of resultant right, if any, arising
out of such transaction.
18 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
CHANG KAI SHEK SCHOOL VS. CA (172 SCRA 389; April 18, 1989) – Private
respondent Faustina Oh has been teaching in the herein petitioner School since
1932 for a continuous period of 33 years until that day that she was told that
she had no assignment for the next semester. She filed a suit before the CFI
against the school and later on amended her complaint to include certain
officials. The CFI of Sorsogon dismissed the complaint. On appeal, the CA
reversed the decision and held herein petitioner school liable but absolved the
other defendants.
ISSUE: WON the School can be held liable?
HELD: Yes. Even though the school failed to incorporate as mandated by law,
it cannot now invoke such non-compliance with the law to immunize it from
the private respondent’s complaint. There should also be no question that
having contracted with the private respondent every year for 32 years and thus
represented itself possessed of juridical personality to defeat her claim against
it. According to Art. 1431 of the Civil Code: “through estoppel an admission or
representation is rendered conclusive upon the person making it and it cannot
be denied as against the person relying on it”.
As the school itself may be sued in its own name, there is no need to apply
Rule 3, Sec. 15 ,under which the persons joined in an association without any
juridical personality may be sued with such an association. Besides, it has been
shown that the individual members of the board of trustees are not liable,
having been appointed only after the private respondent’s dismissal.
ASIA BANKING CORP., plaintiff-appelle VS. STANDARD PRODUCTS CO.,
INC., defendant-appellant (46 Phil. 144; Sept. 11, 1924) – This action was
brought to recover the balance due of a promissory note executed by herein
appellant. The court rendered judgment in favor of the plaintiff.
At the trial of the case the plaintiff failed to prove affirmatively the corporate
existence of the parties and the appellant insists that under these
circumstances the court erred in finding that the parties were corporations with
juridical personality and assigns same as reversible error.
ISSUE: WON parties herein are corporations with juridical personality?
HELD: Yes. There is no merit whatever in the appellant's contention. The
general rule is that in the absence of fraud a person who has contracted
or otherwise dealt with an association in such a way as to recognize
and in effect admit its legal existence as a corporate body is thereby
estopped to deny its corporate existence in any action leading out of
or involving such contract or dealing, unless its existence is attacked
for cause which have arisen since making the contract or other
dealing relied on as an estoppel and this applies to foreign as well as
to domestic corporations. (14 C. J., 227; Chinese Chamber of Commerce
vs. Pua Te Ching, 14 Phil., 222.)
The defendant having recognized the corporate existence of the plaintiff by
making a promissory note in its favor and making partial payments on the same
is therefore estopped to deny said plaintiff's corporate existence. It is, of
course, also estopped from denying its own corporate existence. Under these
circumstances it was unnecessary for the plaintiff to present other evidence of
the corporate existence of either of the parties. It may be noted that there is
no evidence showing circumstances taking the case out of the rules stated.
INTERNATIONAL EXPRESS TRAVEL & TOURS SERVICES, INC. VS. CA
(343 SCRA 674; Oct. 19, 2000) – Petitioner International Express Travel &
Tours Services, Inc. entered into an agreement with the Philippine Football
Federation through its president Henry Kahn, herein private respondent, where
the former supplied tickets for the trips of the athletes to the Southeast Asian
Games and other various trips. The Federation failed to pay a balance of
P265,894.33 which led petitioner to file a civil case in the RTC of Manila which
decided in its favor and holding Henry Kahn personally liable. On appeal, the
CA reversed the decision of the RTC absolving Kahn from personal liability
holding that the Federation had a separate and distinct personality.
ISSUE: WON Henry Kahn can be made personally liable?
HELD: Yes. While we agree with the appellate court that associations may be
accorded corporate status, such does not automatically take place by the mere
passage of RA 3135 otherwise known as the Revised Charter of the Philippine
Amateur Athletic Federation and PD 604. 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. Nowhere can it be
found in RA 3135 and PD 604 any provision creating the Philippine Football
Federation. These laws merely recognized the existence of national sports
associations and provided for the manner by which these entities may acquire
juridical personality.
The recognition of Philippine Amateur Athletic Federation required under RA
3135 and the Department of Youth and Sports Development under 604,
extended to the PFF was not substantiated by Kahn. Accordingly, the PFF is
not a national sports association within the purview of the aforementioned laws
and does not have corporate existence of its own.
This being said, it follows that private respondent Kahn should be held liable
for the unpaid obligations of the unincorporated PFF. It is a settled principle 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
obligations and becomes personally liable for contracts entered into or for other
acts performed as such agents.
We cannot subscribe to the position taken by the appellate court that even
assuming that the PFF was defectively incorporated, the petitioner cannot deny
the corporate existence of the PFF because it had contracted and dealt with
the PFF in such a manner as to recognize and in effect admits 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.
GEORG GROTJAHN GMBH & CO. VS. ISNANI (235 SCRA 216; Aug. 10,
1994) – Petitioner is a German company who was granted a license to establish
a regional or area headquarters in the Philippines. Private respondent Romana
Lanchinebre was a sales representative of petitioner who made advances
totalling P35,000 which were left unpaid. Petitioner filed a complaint for the
collection of a sum of money which was dismissed by the judge holding, among
others, that the license of petitioner does not include the license to do business
in the Philippines.
ISSUE: WON petitioner has capacity to sue?
HELD: Yes. Private respondent is estopped from assailing the personality of
petitioner. “The rule is that the party is estopped to challenge the personality
of a corporation after having acknowledged the same by entering into a
contract with it. And the doctrine of estoppel to deny corporate existence
applies to foreign as well as domestic corporation; one who has dealt with a
corporation of foreign origin as a corporate entity is estopped to deny its
corporate existence and capacity. The principle will be applied to prevent a
person contracting with a foreign corporation from later taking advantage of
its non-compliance with the statutes chiefly in case where such person has
received the benefits of the contract” (Merill Lynch Futures, Inc. vs. CA).
In the case of Merill Lynch Futures, the SC held that a foreign corporation doing
business in the Philippines may sue in Philippine courts although not authorized
to do business here against the Philippine citizen who had contracted with and
been benefited by said corporation. Citing and applying the doctrine laid down
in Asia Banking Corp. vs. Standard Products Co., Inc.
IN SUMMARY: it appears that if a corporation by estoppel exist and enters
into a contract and transact business with a third party, the latter has three
possible remedies:
1. He may file a suit against the ostensible corporation to recover from the
corporate properties;
2. He may file the case directly against the associates personally liable who
held out the association as a corporation; and
19 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
3. Against both the ostensible corporation and persons forming it, jointly and
severally. The last two remedies may not, however, be availed of if the
third party by his conduct is estopped from denying the existence of the
association as a corporation and as such, recovery should be limited only
against the corporate assets.
INDIVIDUAL LIABILITY of associates should not be overlooked. If the
doctrine of corporation by estoppel cannot be applied in their favor because
the third party dealing with it has not, in any manner, deemed to have chosen
to deal with it as a corporation or in short not, estopped to deny corporate
existence, the associates can be held liable either as partners or principals.
WHO SHOULD BEAR THE LOSS: The better view is that those who actively
participated in holding out the association as a corporation should be held
personally liable by virtue of the express provision of Sec. 21 which provides
that “all persons 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” therefrom.
4. ORGANIZATION AND COMMENCEMENT OF BUSINESS
a. CORPORATE ORGANIZATION
Sec. 22. Effects on non-use of corporate charter and continuous
inoperation of a corporation.- If a corporation does not formally organize
and commence the transaction of its business or the construction of its works
within two (2) years from the date of its incorporation, its corporate powers
cease and the corporation shall be deemed dissolved. However, if a corporation
has commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5) years, the same shall
be a ground for the suspension or revocation of its corporate franchise or
certificate of incorporation.
This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to continuously
operate is due to causes beyond the control of the corporation as may be
determined by the Securities and Exchange Commission.
Once the certificate of incorporation has been issued, the corporation MUST
formally organize and commence its business.
NON-USE OF CORPORATE CHARTER: Apparent from the above provision
is that the failure of the corporation to organize within 2 years would
result in it automatic dissolution, unless, of course, its failure to do so is
due to causes beyond its control.
FORMAL ORGANIZATION: refers to the process of structuring the
corporation to enable it to effectively pursue the purpose for which it was
organized. It includes:
a. Organizational meeting of the stockholders to elect the BOD;
b. Adoption of by-laws, if not simultaneously filed with the AOI, and its
subsequent filing with the SEC which must be within 1 month from the
issuance of the certificate of incorporation;
c. Organizational meeting of the BOD to elect the corporate officers,
adoption of corporate seal, accepting pre-incorporation subscriptions,
establishing the principal office and such other steps necessary to transact
the legitimate business for which the corporation was formed.
Strict compliance is not required. Substantial compliance therewith is sufficient.
Thus, it has been held in the case of Perez vs. Balmaceda that a corporation is
deemed to have formally organized if it had a governing board which direct its
affairs, as well as a treasurer and a clerk, and that through these
instrumentalities, it actually functioned and engaged in the business for which
it was organized. It cannot be held to have forfeited its charter simply because
it has not been shown that is also had a president and a secretary.

b. COMMENCEMENT OF BUSINESS/TRANSACTION
This means that the corporation has actually functioned and engaged in
business for which it was organized which must be done within two years
from the issuance of the certificate of incorporation lest it is deemed
dissolved. This may take the form of entering into contracts which tend to
pursue its business undertaking or other acts related thereto.
If a corporation has commenced its business but subsequently becomes
inoperative continuously for a period of at least 5 years, the same
shall be merely a ground for suspension or revocation of its corporate
franchise or certificate of registration.
CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS
A. CORPORATE CHARTER
CORPORATE CHARTER signifies an instrument or authority from the
sovereign power, bestowing rights or power, and is often used convertibly with
the term “act of incorporation”, where the corporation was formed under a
special act of the legislature, and with the “articles of incorporation”, when the
corporation was formed under a general law.
THREE-FOLD CONTRACT:
1. Between the corporation and the state insofar as it concerns its primary
franchise to be and act as a corporation’
2. Between the corporation and the stockholders or members insofar as it
governs their respective rights and obligations;
3. Between and among the stockholders or members themselves as far as
their relationship with one another is concerned.
FRANCHISE: appropriately applies to the right or privilege itself to be and act
as a corporation or to do a certain act while charter applies to the instrument
by which the state vests such right or privilege. Franchise may either be: (1)
Primary – nothing more than the right or privilege of being a corporation; or
(2) Secondary – the powers and privileges vested in, and to be exercised by
the corporate body as such. Example: Employment Agencies, primary franchise
is the certificate of incorporation from the SEC, the secondary franchise is the
license issued by the POEA.
B. CORPORATE ENTITY THEORY
As a legal entity, the corporation is possessed with a juridical personality
separate and distinct from the individual stockholders or members and is not
affected by the personal rights, obligations or transactions of the latter. The
properties it possesses belongs to it exclusively as a separate juridical entity
such that the personal creditors of its stockholders or members cannot attach
corporate properties to satisfy their claims.
On the other hand, the corporation is not likewise liable for the debts,
obligations or liabilities of its stockholders. Neither may it properties be made
answerable to satisfy the claim of creditors against its stockholders or member
even if the stockholder concerned is its president.
SULO NG BAYAN, INC., plaintiff-appellant VS. GREGORIO ARANETA,
INC. ET AL., defendant-appelle (72 SCRA 347; Aug. 17, 1976) – Plaintiff-
appellant Sulo ng Bayan, Inc. instituted a reinvindicatory action for the
recovery of 28,000 square meters of land for and in behalf of its members,
who were themselves and their predecessors-in-interest pioneered in the
clearing of the land and cultivated the same since the Spanish Regime and
have been in continuous possession of the same. The action was dismissed on
the ground that there is no cause of action. On appeal, the CA certified the
case to the SC for the legal issues involved.
ISSUED: WON Sulo ng Bayan, Inc. may institute the action for recovery of
property of it individual members?
HELD: No. 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
20 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
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 a 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 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”.
Absent any showing of interest, therefore, a corporation, like plaintiff-appellant
herein, has no personality to bring an action for and in behalf of its stockholders
or members for the purpose of recovering property which belongs to said
stockholders or members in their personal capacities.
It is fundamental that there cannot be a cause of action without an antecedent
primary legal right conferred by law upon a person. Evidently, there can be no
wrong without a corresponding right, and no breach of duty by one person
without a corresponding right belonging to some other person.
FERMIN CARAM, JR. AND ROSA DE CARAM VS. CA AND ALBERTO V.
ARELLANO (151 SCRA 372; June 30, 1987) – Herein petitioners were ordered
jointly and severally to pay the plaintiff P50,000 for the preparation of the
project study and his technical services that led to the organization of the
defendant corporation. The petitioners questioned the order stating that they
are mere subsequent investors in the corporation that was later created, that
they should not be held solidarily liable with the Filipinas Orient Airways, a
separate juridical entity, and with co-defendants who were the ones who
requested the said services from the private respondent.
ISSUE: WON petitioners can be held personally liable for such expenses?
HELD: No. Petitioners were not involved in the initial stages of the organization
of the airline, which were being directed by Baretto, respondent, as the main
promoter. It was he who was putting all the pieces together, so to speak. The
petitioners were merely among the financiers whose interest was to be invited
and who were in fact persuaded, on the strength of the project study, to invest
in the proposed airline.
Significantly, there was no showing that the Filipinas Orient Airways was a
fictitious corporation and did not have a separate juridical personality, to justify
making the petitioner, as principal stockholder thereof, responsible for its
obligations. As a bona fide corporation, the Filipinas Orient Airways should
alone be liable for its corporate acts as duly authorized by its directors and
officers.
The most that can be said is that they benefited from the services, but that
surely is no justification to hold them personally liable therefor. Otherwise, all
other stockholders of the corporation, including those who came in later, and
regardless of the amount of their stockholdings would be equally and
personally liable also with the petitioners for the claims of the private
respondents.
Petitioners are not liable under the challenged decision.
RUSTAN PULP AND PAPER MILLS, INC. VS. IAC (214 SCRA 665; Oct. 19,
1992) – Petitioner Rustan entered into a contract of sale with respondent Lluch
which was later on stopped by Rustan through a letter. Lluch sent a letter to
clarify whether the letter sent by Rustan was for the stoppage of delivery or
termination of the contract of sale. Unanswered, respondent Lluch resumed
deliveries and later on filed a complaint for contractual breach which was
dismissed. On appeal, the CA modified the decision of the trial court directing
petitioner including Tantoco, president and general manager, and Vergara,
resident manager, to pay private respondents.
ISSUE: WON individual petitioners may be held liable?
HELD: No. The president and manager of a corporation, who entered
into and signed a contract in his official capacity, cannot be made
liable thereunder in his individual capacity in the absence of
stipulation to that effect due to the personality of a corporation being
separate and distinct from the person composing it. And because of this
precept, Vergara’s supposed non-participation in the contract of sale although
he signed the letter terminating it is completely immaterial.
CRUZ VS. DALISAY (152 SCRA 482; July 31, 1987) – Adelio Cruz charged
Quiterio Dalisay, Senior Deputy Sheriff of Manila, with malfeasance in office,
corrupt practices and serious irregularities when the respondent sheriff
attached and/or levied the money belonging to complainant Cruz when he was
not himself the judgment debtor in the final judgment of NLRC sought to be
enforced but rather the company known as Qualitrans Limousine Service, Inc.,
a duly registered corporation.
ISSUE: WON the charge against the respondent should be upheld for
attaching personal property of the corporate president?
HELD: Yes. The respondent’s action in enforcing judgment against complaint
who is not the judgment debtor in the case calls for disciplinary action.
Considering the ministerial duty in enforcing writs of execution, what is
incumbent upon him is to ensure that only that portion of a decision ordered
or decreed in the dispositive part should be the subject of execution. No more,
no less. That the title of the case specifically names complaint as one of the
respondent is of no moment as execution must conform to that directed in the
dispositive portion and not in the title of the case. The tenor of the NLRC
judgment and the implementing writ are clear enough. It directed Qualitrans
to reinstate the discharged employee and pay the full backwages. Respondent,
however, chose to “pierce the veil of corporate entity” usurping a power
belonging to the court and assumed improvidently that since the complainant
is the owner/president, they are one and the same. It is well-settled doctrine,
both in law and in equity that as a legal entity, a corporation has a
personality distinct and separate from its individual stockholders or
members. The mere fact that one is president of a corporation does
not render the property he owns or possesses the property of the
corporation, since the president, as individual, and the corporation
are separate entities.
PALAY INC. VS. CLAVE (124 SCRA 638; Sept. 21, 1983) – Petitioner Palay,
Inc. through its president Albert Onstott, executed in favor of respondent
Naario Dumpit a Contract to Sell a parcel of land which provided for automatic
rescission upon default in payment of any monthly amortization without need
of notice and forfeiture of all instalments paid. Respondent failed to pay some
instalments and later offered to update all his overdue account but was
informed that the contract has already been rescinded.
Respondent filed with the NHA a complaint questioning the validity of the
rescission which decided in its favor holding Palay, Inc. and Alberto Onstott, in
his capacity as president, jointly and severally liable.
ISSUE: WON the corporate president is liable to refund the amount state in
the NHA ruling?
HELD: No. As a general rule, a corporation may not be made to answer for
acts or liabilities of its stockholders or those of the legal entities to which it may
be connected and vice versa. However, the veil of corporate fiction may be
pierced when it is used as a shield to further an end subversive of justice; or
for purposes that could not have been intended by the law that created it; or
to defeat public convenience, justify wrong, protect fraud, or defend crime; or
to perpetuate fraud or confuse legitimate issues; or to circumvent the law or
perpetuate deception; or as an alter ego, adjunct or business conduit for the
sole benefit of the stockholders.
We find no badges of fraud on petitioners’ part. They had literally relied, albeit
mistakenly, on its contract with private respondent when it rescinded the
contract to sell extrajudicially and had sold it to another person.
No sufficient proof exists on record that said petitioner used the corporation to
defraud private respondent. He cannot, therefore, be made personally liable
just because he “appears to be the controlling stockholder”. Mere ownership
by a single stockholder or by another corporation of all or nearly all
of the capital stock of a corporation is not, of itself, sufficient ground
for disregarding the separate corporate personality.
PAULINO SORIANO, NENITA C. ESPERANZA and JANDRO
21 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
MACADANGDANG, petitioners,
vs.
HON. COURT OF APPEALS (Former Sixth Division) and GERVACIO CU,
respondents
(GR No. L-49834; June 22, 1989)
FACTS: Petitioners were held solidarily liable by the appellate court in their
personally capacity to the private respondent for non-payment of tobacco
under an agreement between them embodied in a receipt which states as
follows:
GREETINGS:
WE, the President, Manager, Treasurer and Director Representative of
Bacarra (I.N.) Facoma, Inc., do hereby execute this document:
That we received from Mr. Gervacio Cu, a truck load of Virginia tobacco
consisting of ONE HUNDRED SIXTY (160) bales of fifty (50) kilos each bale
(sic) the said Virginia tobacco consists of different grades or class from E to
A (sic) the said tobaccos are to be shipped to the redrying plants through
the Bacarra Facoma under Guia number 236.
Conditions of the deal between Mr. Cu and the Association. Upon payment
of the said tobacco by the Philippine Virginia Tobacco Administration then
Mr. Cu, will collect the corresponding payments as graded by the redrying
plant as further stipulated that the check representing the payment shall
only be cashed in the presence of Mr. Cu, or his authorized representative.
(Sic)
This instrument is executed for the protection, guidance and information of
the parties concerned.
Done this 10th day of August 1964 at Bacarra, Ilocos Norte.
(Sgd.) Paulino Soriano
PAULINO SORIANO
President
(Sgd.) Nenita C. Esperanza
NENITA C. ESPERANZA
Sec. Treasurer
by:
(Sgd.) Erlinda V. Acosta BIENVENIDO
E. ACOSTA Director, Official
Representative
(Sgd.) A. Macadangdang
A.G. MACADANGDANG
Manager
ISSUE: WON petitioners are liable?
HELD: No. We cannot accept the conclusion that the official designations of
petitioners were written on the document merely as meaningless and hollow
decorations or as mere descripto personae without any relevance to the liability
of the corporation these officers obviously represented. Indeed, taking in
conjunction with the other obtaining circumstances, the receipt discloses the
capacity by which the petitioners entered into the “deal” with private
respondent.
The subject receipt itself states that the conditions contained therein were
between the private respondent and the “Association”. The lower court held
that the “Association” referred only to the signatories. We disagree. It is quite
plain and we are convinced that the “Association is none other than the Bacarra
(I.N.) Facoma, Inc. which is a farmer’s cooperative marketing association. Not
only that , we cannot find any cogent reason why the petitioners used the word
“Association” when they could have more easily and conveniently placed “the
undersigned” or words to the same effect in its stead.
In light of the foregoing, it is clear that the liability of the petitioners under the
document subject of the instant case is not personal but corporate, and
G. therefore attached to the Bacarra (I.N.) Facoma, Inc. which being a
corporation, has a personality distinct and separate from that of the petitioners
who are only its officers. It is the general rule that the protective mantle
of a corporation’s separate and distinct personality could only be
pierced and liability attached directly to its officers and/or member-
stockholders, when the same is used for fraudulent, unfair or illegal
purpose.
C. PIERCING THE VEIL OF CORPORATE FICTION
The notion of corporate legal entity is not, at all ties respected. This is because
the applicability of the corporate entity theory is confined to legitimate
transactions and is subject to equitable limitations to prevent its being used as
a cloak or cover for fraud or illegality, or to work injustice.
While no hard and fast rule exists as to when the corporate fiction may pierced
or disregarded, it is a fundamental principle in Corporation law that a
corporation is an entity separate and distinct from its stockholders or member
and from other corporations to which it may be connected. But when the notion
of legal entity is used to defeat public convenience, Justify wrong, Protect
fraud, Defend crime, the law will regard the corporation as a mere association
of persons, or in the case of two corporations, merge them into one, the one
being merely regarded as part or instrumentality of the other. The same is true
where a corporation is a mere dummy and serves no business purpose and is
intended only as a blind, or an alter-ego or business conduit for the sole benefit
of the stockholders.
In cases where the doctrine of piercing the veil of corporate fiction, liability will
attach directly to the officers and stockholders, at least, in so far as that
particular act is concerned.
PALACIO VS. FELY TRANSPORTATION COMPANY (5 SCRA 1011; Aug.
31, 1962) – Alfredo Carillo, a driver of herein respondent corporation, ran over
the child of herein petitioner Mario Palacio, and was found guilty of the criminal
case filed against him. Isabelo Calingasan, the employer, was held subsidiarily
liable and not the defendant corporation. Plaintiffs now contend that the
defendant corporation should be made subsidiarily liable for damages in the
criminal case because the sale to it of the jeep in question, after the conviction
of Carillo was merely an attempt on the part of Calingasan, its president and
general manager, to evade his subsidiary civil liability.
ISSUE: WON the corporation can be held liable for the subsidiary civil liability
of Isabelo Calingasan?
HELD: Yes. It is evident that Calingasan’s main purpose in forming the
corporation was to evade his subsidiary civil liability resulting from the
conviction of his driver. This conclusion is borne out by the fact that the
incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his
son, Dr. Calingasan, and his two daughters. We believe that this one case
where the defendant corporation should not be heard to say that it has
a personality separate and distinct from its members when to allow
it to do so would be to sanction the use of the fiction of corporate
entity as a shield to further an end of subversive of justice.
Furthermore, the failure of the defendant corporation to prove that it has other
property other than the jeep strengthens the conviction that its formation was
for the purpose above indicated.
MARVEL BUILDING CORPORATION, et al. VS. DAVID (94 Phil. 376; Feb.
24, 1954) – Plaintiffs, as stockholders of Marvel Building Corporation sought to
enjoin the defendant Collector of Internal Revenue from selling at a public
auction properties which were said to be registered in the name of said
corporation. Said properties were seized and distrained by defendant to collect
war profits taxes against Maria Castro who the former claims to be the sole
owner of the said corporation. Maria Castro owns P250,000 of the P1,025,000
capital of the corporation, of the rest of the incorporators were her half-
brothers, half-sister and a brother-in-law.
ISSUE: WON Maria Castro is the sole owner of the Corporation?
HELD: Yes. Circumstantial pieces of evidence presented were: (1)
Endorsement in blank of the certificates of stock issued in the name of the
incorporators and the possession thereof by Maria Castro; (2) The other
22 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
incorporators did not have incomes in such amount, during the time of the
organization of the corporation or immediately thereto, as to enable them to
pay in full their supposed subscriptions; and (3) It should have been the
supposed subscribers who should have come to court to assert that they
actually paid for their subscriptions and are not mere dummies.
The circumstantial evidence is not only convincing, it is conclusive. In addition
to the above, the fact that the stockholders or directors never appeared to
have ever met to discuss the business of the corporation and the fact that
Maria Castro advanced big sums of money to the corporation without any
previous arrangements or account, and the fact that the books of accounts
were kept as if they belonged to Maria Castro alone – these facts are of patent
and potent significance.
In our opinion, the facts and circumstances duly set forth, all of which have
been proved to our satisfaction, prove conclusively and beyond reasonable
doubt that Maria Castro is the sole and exclusive owner of all the shares of
stock of the corporation and that the other partners are her dummies.
YUTIVO & SONS CO. VS. CTA (1 SCRA 160; Jan. 28, 1961) – Herein
petitioner Yutivo purchased its cars and trucks from General Motors Overseas
Corporation (GM), the latter paying the sales tax once on original sales, Yutivo
no longer paid sales tax on its sales to the public. Later no, GM withdrew from
the Philippines and appointed Yutivo as importer. Yutivo in turn exclusively sold
to Southern Motors, Inc. (SM), a corporation where the incorporators are sons
of the founders of Yutivo. Under this arrangement, Yutivo paid the sales tax
on original sale, while SM did not subject to sales tax its sales to the public.
The Collector of Internal Revenue assessed Yutivo for deficiency sales taxes
which the CTA affirmed.
ISSUE: WON Yutivo is liable for the deficiency taxes?
HELD: No. It is elementary rule and fundamental principle of corporation law
that a corporation is an entity separate and distinct from its stockholders and
from other corporations to which it may be connected. However, when the
notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud or defend crime, the law will regard the corporation as an
association of persons, or in case of two corporations merge them into one.
Another rule is that, when the corporation is a mere alter-ego or business
conduit of a person, it may disregarded.
The sales tax liability of Yutivo did not arise until it became the importer and
simply continued its practice of selling to SM. The decision, therefore, of the
Tax Court that SM was organized purposely as a tax evasion device runs
counter to the fact that there was no tax to evade.
We are, however, inclined to agree with the court below that SM was actually
owned and controlled by petitioner as to make it a mere subsidiary or branch
of the latter created for the purpose of selling the vehicles at retail and
maintaining stores for spare parts as well as service repair shops. It is not
disputed that the petitioner, which is engaged principally in hardware supplies
and equipment, is completely controlled by the Yutivo, Young and Yu family.
The founders of the corporation are closely related to each other either by
blood or affinity and most of its stockholders are members of the Yu (Yutivo or
Young) family.
According to the AOI, the amount of P62,500 was actually advanced by Yutivo.
The additional subscriptions to SM were paid by Yutivo. The shareholders in
SM are mere nominal stockholders holding the share for and in behalf of Yutivo,
so even conceding that the original subscribers were bona fide stockholders,
Yutivo was at all tie in control of the stock of SM and that the latter was a mere
subsidiary of the former.
SM is under the management control of Yutivo by virtue of the management
contract entered into between the two parties. In fact, the controlling majority
of the BOD of Yutivo is also the controlling majority of the Board of SM. At the
same time, the principal officers of both corporations are identical. In addition,
both corporations have a common comptroller. There is therefore no doubt
that by virtue of such control, the business, financial and management policies
of both corporations would be directed towards common ends. Likewise, cash
or funds of SM, including those of its branches which are directly remitted to
Yutivo, and subject to withdrawal only by Yutivo, SM’s being under Yutivo’s
control, the former’s operations and existence became dependent upon the
latter.
SM, being but a mere instrumentality or adjunct of Yutivo, the CTA correctly
disregarded the technical defense of separate corporate entity to arrive at the
true tax liability of Yutivo.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
NORTON and HARRISON COMPANY, respondent.
(GR No. L-17618; 11 SCRA 714; Aug 31, 1964)
FACTS: Herein respondent entered into an agreement with Jackbilt where the
former was made the sole and exclusive distributor of concrete blocks
manufactured by Jackbilt and accordingly every order of a customer of Norton
was transmitted to Jackbilt which delivered the merchandise directly to the
customer. Payment of the goods, however, is made to Norton, which in turn
pays Jackbilt the amount charged the customer less a certain amount, as its
compensation or profit.
During the existence of the agreement, Norton acquired by purchase all the
outstanding stocks of Jackbilt. Due to this, the Commissioner of Internal
Revenue, assess respondent Norton for deficiency taxes making the basis of
sales tax the sales of Norton to the public, which is the higher price compare
to the sale of Jackbilt to Norton. The CTA decided in favor of Norton.
ISSE: WON the two corporations may be merged into a single corporation?
HELD: Yes. It has been settled that the ownership of all the stocks of a
corporation by another corporation does not necessarily breed an
identity of corporate interest between the two companies and be
considered as a sufficient ground for disregarding distinct
personalities. However, in the case at bar, we find sufficient grounds to
support the theory that the separate identities of the two companies should be
disregarded.
(a) Norton owned all the outstanding stocks of Jackbilt;
(b) Norton constituted Jackbilt’s directors;
(c) Norton financed the operations of Jackbilt;
(d) Norton treats Jackbilt’s employees as its own;
(e) Compensation given to board members of Jackbilt indicate that Jackbilt is
merely a department of Norton;
(f) The offices of Norton and Jackbilt are located in the same compound;
(g) Payments were effected by Norton of accounts for Jackbilt and vice versa;
(h) Payments were also made to Norton of accounts due or payable to Jackbilt
and vice versa.
The circumstances presented by the facts of the case, yields to the conclusion
that Jackbilt is merely an adjunct, business conduit or alter-ego of Norton and
that the fiction of corporate entities, separate and distinct from each other
should be disregarded.
LA CAMPANA COFFEE FACTORY, INC. VS. KAISAHAN NG MGA
MANGGAGAWA SA LA CAMPANA (KKM) (93 Phil. 160; May 25, 1953) –
Tan Tong, one of herein petitioners, is engaged in the buying and selling of
guagua under the trade name La Campana Guagua Packing. Later on, Tong
and his family organized a family corporation known as La Campana Coffee
Factory Co, Inc. with its principal office located at the same place as that of La
Campana Guagua Packing.
Tan Tong’s employees later on formed a union (herein respondent) through
which they demanded (from both companies) higher salaries and more
privileges. As the demand was not granted and an attempt at a settlement
through mediation had given no result, the Department of Labor certified the
dispute to the Court of Industrial Relations (CIR). Petitioners filled a motion to
dismiss which was denied. Hence, this present petition for certiorari.
ISSUE: WON the corporate entity of La Campana Coffee Factory, Inc. may be
disregarded?
23 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
HELD: Yes. La Campana Guagua Packing and La Campana Coffee Factory, Inc.
are operating under on single management, that is, as one business though
with two trade names. True, the coffee factory is a corporation and, by legal
fiction, an entity existing separate and apart from the person composing it,
that Tan Tong and his family. But it is settled that this fiction of law, which
has been introduced as a matter of convenience and to subserve the
ends of justice cannot be invoked as to further and end subversive of
that purpose.
In the present case, Tan Tong appears to be the owner of the guagua factory.
And the factory, though an incorporated business, is in reality owned
exclusively by Tan Tong and his family. As found by the CIR, one payroll,
except after July 17, the day the case was certified to the CIR, when the person
who was discharging the office of cashier for both branches of the business
began preparing separate payrolls for the two. And above all, it should not be
overlooked that, as also found by the industrial court, the laborers of the
guagua factory and the coffee factory were interchangeable. In view of all
these, the attempt to make the two factories appear as two separate
businesses, when in reality they are but one, is but a device to defeat the ends
of the law and should not be permitted to prevail.
EMILIO CANO ENTERPRISES, INC. VS. COURT OF INDUSTRIAL
RELATIONS (CIR) (13 SCRA 290; Feb. 26, 1965) – In a complaint for unfair
labor practice, the Court of Industrial Relations rendered a decision in favor of
Honorata Cruz, ordering Emilio and Rodolfo Cano, officials of herein petitioner
corporation, to reinstate Cruz. An order of execution was issued directed
against the properties of herein petitioner. Hence, this petition.
ISSUE: WON execution may be had on the properties of the corporation?
HELD: Yes. We should not lose sight of the fact that Emilio Cano Enterprises,
Inc. is a closed family corporation where the incorporators and directors belong
to one single family. Here is an instance where the corporation and its members
are considered as one. And to hold such entity liable for the acts of its
members is not to ignore the legal fiction but merely to give meaning
to the principle that such fiction cannot be invoked if its purpose is to
use it as a shield to further an end subversive of justice. And so it has
been held that while a corporation is a legal entity existing separate
and apart from the person composing it, that concept cannot be
extended to a point beyond it reason and policy, and when invoked
in support of an end subversive of this policy it should be disregarded
by the courts.
Emilio and Rodlfo Cano were indicted in the case, not in their personal capacity,
but as president and manager of the corporation. Having been sued officially,
their connection with the case must be deemed to be impressed with the
representation of the corporation. In fact, the court’s order is for them to
reinstate Honorata Cruz to her former position in the corporation and
incidentally pay her the wages she had been deprived of during her separation.
Verily, the order against them is in effect against the corporation. No benefit
can be attained if this case were to be remanded to the court a quo merely in
response to a technical substitution of parties.
TELEPHONE ENGINEERING SERVICE CO. VS. WCC (104 SCRA 354; May
13, 1981) – The late Pacifico Gatus was an employee of Utilities Management
Corporation (UMACOR), a sister company of herein Petitioner TESCO. He was
later on detailed with Petitioner Company and returned back to UMACOR. But
he contracted illness and later on died of “liver cirrhosis with malignant
degeneration”.
His wife, respondent Leonila Gatus filed a Notice and Claim for Compensation
with the Workmen’s Compensation Commission (WCC) alleging Pacifico to be
an employee of TESCO. An employer’s report was submitted to WCC where
UMACOR was indicated as the employer of the deceased and stated that it
would not contravert the claim and admitted that Pacifico contracted illness “in
regular occupation”.
The sheriff levied on and attached the property of TESCO and scheduled the
sale of the same at public auction. Thus, the present petition for certiorari with
preliminary injunction.

ISSUE: WON the award may be rendered against TESCO?
HELD: Yes. We note that it is only in this Petition that petitioner denied, for
the first time, the employer-employee relationship. In fact, in the letters it
submitted to the Acting Referee and to the Commission, petitioner represented
and defended itself as the employer of the deceased. Petitioner even admitted
that TESCO and UMACOR are sister companies operating under one single
management and housed in the same building. Although respect for the
corporate personality as such, is the general rule, there are
exceptions. In appropriate cases, the veil of corporate fiction may be
pierced as when the same is made as a shield to confuse the
legitimate issues.
While indeed, jurisdiction cannot be conferred by acts or omission of the
parties. TESCO’s denial at this stage that it is the employer of the deceased is
obviously an afterthought, a devise to defeat the law and evade its obligations.
This denial also constitutes a change of theory on appeal which is not allowed
in this jurisdiction.
CLARAPOLS VS. COMMISSIONER OF INTERNAL REVENUE (July 31,
1975; 65 SCRA 613) – A decision rendered against herein petitioner was
rendered on a complaint filed by herein private respondents Allied Workers’
Association, Demetrio Garlitos and 10 respondent workers who petitioner
dismissed from Clarapols Steel and Nail Plant.
ISSUE: WON the veil of corporate fiction should be pierced?
HELD: Yes. It very clear that the latter corporation was a continuation and
successor of the first entity, and its emergence was skilfully timed to avoid
financial liability that already attached to its predecessor, Clarapols Steel and
Nail Plant. (1) Both predecessor and successor were owned and controlled by
the petitioner Eduardo Clarapols; and (2) there was no break in the succession
and continuity in the same business. This avoiding-the-liability scheme is very
patent, considering that (3) 90% of the subscribed shares of stock of the
second corporation was owned by Clarapols himself, and (4) all assets of the
dissolved Clarapols Steel and Nail Plant were turned over to the emerging
Clarapols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should be pierced
as it was deliberately and maliciously designed to evade its financial obligations
to its employees.
NATIONAL FEDERATION OF LABOR UNION (NAFLU) VS. OPLE (143
SCRA 124; July 22, 1986) – NAFLU requested for conciliation before the Bureau
of Labor Relations for certain money claims and refusal of the company to
conclude collective agreement and run-away shop undertaken by
management. In the course of the negotiation, management unilaterally
declared a temporary shutdown. But it was discovered that the actual partial
shutdown begun a month before and that the machines of Lawman were
transferred to a different location and the name of the company was changed
to Libra Garments, upon discovery of this, the name was further changed to
DOLPHIN garments. For failure of the company to resume operations in
January 1983 (as promised) a complaint for unfair labor practice was filed.
ISSUE: WON the corporate fiction of LIBRA (now DOLPHIN) garments should
be pierced?
HELD: Yes. It is very obvious from the above findings that the second
corporation seeks the protective shield of a corporate fiction to achieve illegal
purpose. As enunciated in Clarapols vs. CIR, its view in the present case should,
therefore be pierced as it was deliberately and maliciously designed to evade
its financial obligations to it employees. It is an established principle that when
the veil of corporate fictions is made as a shield to perpetrate a fraud or to
confuse legitimate issues (here, the relation of employer-employee), the same
should be pierced.
After finding that Lawman Industrial Corporation had transferred business
operations to Libra Garments, which later changed to Dolphin Garments, the
public respondent cannot deny reinstatement to the petitioners simply because
24 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Lawman has ceased its operation.
As Libra Garments is but an alter-ego of the old employer, Lawman Industrial,
the former must bear the consequences of the latter’s unfair act by reinstating
petitioners to their former positions without loss of seniority rights.
AC RANSOM LABOR UNION-CCLU VS. NLRC (150 SCRA 498 May 29,
1987) – A decision was rendered by the CIR and affirmed by this Court against
AC Ransom for unfair labor practice. Writ of execution were issued successively
against Ransom to no avail. The Union filed an ex-parte motion for a Writ of
Execution and Garnishment against the officers/agents of AC Ransom
personally and on their estates, as the case may be, which the Labor Arbiter
granted. On appeal, the NLRC reversed the Labor Arbiter relieving the officers
of personal liability.
ISSUE: WON the officers may be liable?
HELD: Yes. The NLRC, on appeal, could not have modified the CIR decision as
affirmed by this Court, by relieving AC Ransom’s officers and agent of liability
which were held to be jointly and severally liable to the 22 employees for unfair
labor practice.
This finding does not ignore the legal fiction that a corporation has a personality
separate and distinct from its stockholders and members for, as this Court had
held “where the incorporators belong to a single family, the corporation and its
members can be considered as one in order to avoid it being used as an
instrument to commit injustice,” or to further an end subversive of justice. In
the case of Clarapols vs. CIR involving almost similar facts as in this case, it
was also held that the shield of corporate fiction should be pierced when it is
deliberately and maliciously designed to evade financial obligations to
employees.
Aggravating AC Ransom’s clear evasion of payment of its financial obligations
is the organization of a “run-away” corporation, ROSARIO Industrial
Corporation, in 1969 at the time the unfair labor practice case was proceeding
before the CIR by the same person who were the officers and stockholders of
AC Ransom, engaged in the same line of business, producing the same line of
product, occupying the same compound, using the same machineries,
buildings, factories, bodega and sales and accounts departments used by AC
Ransom, and which is still in existence. Both corporations were closed
corporations owned and managed by members of the same family. Its
organization proved to be a convenient instrument to avoid payment of
backwages and the reinstatement of 22 workers. This is another instance
where the fiction of separate and distinct corporate entities should be
disregarded.
CONCEPT BUILDERS, INC. VS. NLRC (257 SCRA 149; May 29, 1996) –
Private respondents were employees of petitioner Concept Builders, Inc., who
were served termination letters stating that the project for which they were
hired was already completed and that their contracts have already expired.
Finding that the project was not actually completed yet, and that petitioner
employed a subcontractor whose employees performed the duties of private
respondents, the latter filed a complaint for illegal dismissal with the Labor
Arbiter who held that the dismissal was illegal.
A writ of execution was issued but was partially satisfied only. The sheriff
sought levy upon the properties in the head office of Concept Builders, Inc. but
was not allowed to do so on the ground that it was occupied by Hydro Pipes
Philippines, Inc. and not concept builders. Unable to remove the personal
properties he found thereat, the Sheriff asked for a “break-open” order which
was denied by the Labor Arbiter after a third party claim was filed by Hydro,
which was reversed by the NLRC on appeal.
ISSUE: WON the break-open order should be issued?
HELD: Yes. The conditions under which the juridical entity may be disregarded
vary according to the particular facts and circumstances of each case. No hard
and fast rule can be accurately laid down, but certainly there are some
probative factors of identity that will justify the application of the doctrine
of piercing the veil of corporate veil, to wit:
1. Stock ownership by one or common ownership of both corporations;
2. Identity of directors and officers;
3. The manner of keeping corporate books and records;
4. Methods of conducting the business.
The SEC en banc explained the “instrumentality rule” which the courts have
applied in disregarding separate juridical personality of corporations as follows:
“Where on 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 of the “instrumentality” may be disregarded.
The control necessary to invoke the rule is not majority or even complete stock
control but such domination of finances, policies, and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of
its own and is a business conduit of its principal. It must be kept in mind that
the control must be shown to have been exercised at the time the acts
complained of took place. Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for which the complaint is made”
The test in determining the applicability of piercing the veil of
corporate fictions is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only in finances but of policy and business practice 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;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal
duty or dishonest and unjust act in contravention of plaintiff’s legal rights;
and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust los complained of.
The absence of one of the elements prevents piercing the corporate veil. In
applying the “instrumentality” or “alter-ego” doctrine, the courts are concerned
with reality and not form, with how the corporation operated and the individual
defendant’s relationship to that operation. Thus, the question of whether a
corporation is mere alter-ego, a mere sheet of paper corporation, a sham
or a subterfuge is purely one of fact.
In this case, while petitioner claimed that it ceased on operations on April 29,
1986, it filed an information sheet with the SEC on May 15, 1987 stating that
its office address is at 355 Maysan Road, Valenzuela Metro Manila. On the other
hand, third-party claimant Hydro, on the same day, filed an information sheet
with the same address, both information sheets filed by the same Virgilio O.
Casino. Both companies have the same president, the same BOD, the same
corporate officers and substantially the same subscribers.
Clearly, petitioner ceased its business operations in order to evade the payment
to private respondents of back wages and to bar their reinstatement to their
former position. Hydro is obviously a business conduit of petitioner corporation
and its emergence was skilfully orchestrated to avoid the financial liability
attached to petitioner corporation.
MC CONNEL VS. CA (1 SCRA 722; March 1, 1961) – Petitioners, original
incorporators of Park Rite Co., Inc. was ordered to pay the unsatisfied balance
of a judgment rendered in favor of lot owners whose property they used in the
operations of their parking business without the owners’ consent.
ISSUE: WON the incorporators may be held liable for obligations of the
corporation?
HELD: Yes. The Court has already answered the question in the affirmative
wherever the circumstances have shown that the corporate entity is being used
as an alter-ego or business conduit for the sole benefit of the stockholders, or
else to defeat public convenience, justify wrong, protect fraud, or defend crime.
The evidence shows that Cirilio Paredes and Ursula Tolentino (present
stockholders) and M. McConnel, WP Cochrane and Ricardo Rodriguez (previous
stockholders) completely dominated and controlled the corporation and that
the functions of the corporation were solely for their benefit, as shown that the
other shareholders were merely qualifying shares. This is strengthened by the
fact that the office of Cirilio Paredes and that of Park Rite Co., Inc. were located
25 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
in the same building, in the same floor, and in the same room. This is further
shown by the fact that the funds of the corporation were kept by Cirilio Paredes
in his own name. The corporation itself had no visible assets, as correctly found
by the trial court, except perhaps the toll house, the wire fence around the lot
and the signs thereon It was for this reason that the judgment against it could
not be fully satisfied.
While the mere ownership of all or nearly all of the capital stock of a
corporation does not necessarily mean that it is a mere business
conduit of the stockholder, that conclusion is amply unjustified
where it is shown, as in this case before us, that the operations of the
corporation were so merged with the stockholders as to be practically
indistinguishable from them. To hold the latter liable for the corporation’s
obligations is not to ignore the corporation’s separate entity, but merely to
apply the established principle that such entity cannot be invoked or used for
purposes that could not have been intended by the law that created the
separate personality.
TAN BOON BEE & CO., INC., petitioner,
vs.
THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE OF
BRANCH XVIII of the Court of First Instance of Manila, GRAPHIC PUBLISHING,
INC., and PHILIPPINE AMERICAN CAN DRUG COMPANY, respondents
(GR No. L-41337; 163 SCRA 205; June 30, 1988)
FACTS: For failure of private respondent Graphic Publishing Inc. to pay paper
products purchased from petitioner (doing business under the name and style
Anchor Supply, Inc.), petitioner filed a complaint in the CFI of Manila. A writ of
Execution was issued levying a printing machine which private respondent
Philippine American Drug Company claimed as its own. PADCO filed a third
party claim and asked the court to nullify the auction sale already conducted,
which herein respondent judge granted.
ISSUE: WON the respondent judge should be upheld?
HELD: No. It is true that a corporation, upon coming into being, is invested by
law with a personality separate and distinct from that of the persons composing
it as well as from any other legal entity to which it may be related. As a matter
of fact, the doctrine that a corporation is a legal entity distinct and separate
from the members and stockholders who compose it is recognized and
respected in all cases which are within reason and the law. However, this
separate and distinct personality is merely a fiction created by law
for convenience and to promote justice. Accordingly, this separate
personality of the corporation may be disregarded, or the veil of
corporate fiction pierced, in cases where it is used as a cloak or cover
for fraud or illegality, or to work an injustice, or where necessary to
achieve equity or when necessary for the protection of creditors.
Corporations are composed of natural persons and the legal fiction of
a separate corporate personality is not a shield for the commission of
injustice and inequity. Likewise, this is true when the corporation is
merely an adjunct, business conduit or alter-ego of another
corporation. In such case, the fiction of separate and distinct
corporate entities should be disregarded.
In the instant case, petitioner’s evidence established that PADCO never
engaged in the printing business; that the BOD and the officers of PADCO and
Graphic are the same; and that PADCO holds 50% share of stock of Graphic.
The printing machine in question was in the premises of Graphic, long before
PADCO even acquired its alleged title from Capitol Publishing.
Considering the above, respondent judge should have pierced PADCO’s veil of
corporate identity.
CEASE VS. CA (93 SCRA 483; Oct. 18, 1979) – Forrest L. Cease is the common
predecessor-in-interest of the parties. He and other American citizens
organized the Tiaong Milling and Plantation Company and in the course of its
corporate existence all other incorporators were bought out by Cease and his
children. The corporation’s charter expired but there were no records as to its
liquidation. Upon Cease’s death, Ernesto, Teresita, Cecilia (3 of the 5 children)
and Bonifacia Terante re-incorporated under FL Cease Plantation Company, to
the objection of Benjamin and Florence who wanted actual division of Forrest
Cease’s shares. The latter two filed a civil case asking to declare the corporation
identical to FL Cease and that its properties be divided among Fl Cease’s
children as his intestate heirs which was granted by the trial court.
ISSUE: WON the assets of the corporation are also the properties of Forrest
L. Cease?
HELD: Yes. In sustaining respondent’s theory of “merger of Forrest Cease and
the Tiaong Milling as one personality”, or that “the company is only the
business conduit and alter-ego of the deceased FL Cease and the registered
properties of Tiaong Milling are actually properties of FL Cease and should be
divided equally among his children”, the trial court did aptly apply the familiar
exception to the general rule by disregarding the legal fiction of distinct and
separate corporate personality and regarding the corporation and the individual
members one and the same. In shredding the fictitious corporate veil, the trial
judge narrated the undisputed factual premise:
“While the records show that originally, the incorporators were aliens, friends
or third-parties in relation of one to another, in the course of its existence, it
developed into a close family corporation. The BOD and stockholders belong
to one family the head of which FL Cease always retained the majority and
hence, the control and management of its affairs. In fact, during the
reconstruction of its records before the SEC, only 9 nominal shares out of 300
appear in the name of his 3 eldest children then and another person close to
them (Ternate). It is likewise noteworthy to observe that as his children
increase or perhaps become of age, he continued distributing his shares among
them adding Florence, Teresa and Marion until at the time of his death, only
190 were left to his name. Definitely, only the members of his family benefited
from the corporation.
The accounts of the corporation and therefore its operation, as well as that of
the family appears to be indistinguishable and apparently joined together. As
admitted by the defendants, the corporation “never” had any account with any
banking institution or if any account was carried in a bank on its behalf, it was
in the name of FL Cease. In brief, the operation of the Corporation is merged
with those of the majority stockholders, the latter using the former as his
instrumentality and for the exclusive benefit of all his family. From the
foregoing indication, therefore, there is truth in plaintiffs’ allegation that the
corporation is only a business conduit of his father and an extension of his
personality, they are once and the same thing. Thus, the assets of the
corporation are also the estate of FL Cease, the father of the parties herein
who are al legitimate children of full blood”
Were we to sustain petitioners, the legal fiction of separate corporate
personality shall have been used to delay and ultimately deprive and defraud
the respondents of their successional right to the estate of their deceased
father.
D. WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
1. Absent any of the following circumstances, the courts will not be justified
in disregarding the corporate entity;
a. The corporation is used or being used to defeat public convenience;
b. Justify wrong;
c. Protect fraud;
d. Defend crime;
e. Confuse legitimate issues;
f. Circumvent the law;
g. Perpetuate deception; or
h. An alter-ego, adjunct or business conduit for the sole benefit of a
stockholder or a group of stockholders or another corporation.
2. The wrong doing must be clearly and convincingly established. It
cannot be justified by speculation and can never be presumed.
3. The petitioner must seek to impose a claim against the stockholders or
officers directly liable, otherwise piercing the veil of corporate fiction
would not be available nor justified.
CRUZ VS. DALISAY (supra) – It is well-settled doctrine, both in law and in
equity that as a legal entity, a corporation has a personality distinct
26 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
and separate from its individual stockholders or members. The mere
fact that one is president of a corporation does not render the
property he owns or possesses the property of the corporation, since
the president, as individual, and the corporation are separate entities
REMO, JR. VS. INTERMEDIATE APPELLATE COURT (175 SCRA 405; April
18, 1989) – Petitioner Feliciano Coprada, as president of Akron, purchased 13
trucks from private respondent (EB Marcha Transport Co., Inc.) for and in
consideration of P525,000 as evidenced by a deed of absolute sale. In a side
agreement, the parties agreed on a down payment of P50,000 and the balance
to be paid within 60 days. They further agreed that until the balance is paid,
the down payment shall accrue as rentals for the 13 trucks; and in case of
failure to pay the balance shall constitute a chattel mortgage lien; and the
parties may allow 30 day extension; and private respondent may ask for the
revocation of the contract and re-conveyance of the said trucks. The obligation
is further secured by a promissory note executed by Coprada, where it is stated
that the balance shall be paid from the proceeds of a loan from DBP which was
never applied for. A complaint was later on filed by private respondent for the
recovery of the P525, 000 or the return of the 13 trucks against Akron and its
officers and directors including herein petitioner which was granted by the CFI
of Rizal. Petitioner denied any participation the transaction and alleging that
Akron has distinct corporate personality. He was, however, declared in default
for failure to attend pre-trial.
ISSUE: WON Petitioner Remo, Jr. is jointly and severally liable?
HELD: No. The facts of the case show that there is no cogent basis to pierce
the corporate veil of Akron and hold petitioner personally liable for its obligation
to private respondent. While it is true that he is a member of the board at the
time the resolution to purchase the trucks were adopted, it does not appear
that said resolution was intended to defraud anyone. It was Coprada who
negotiated with respondent and the one who signed the promissory note. The
word “We” in the said promissory note must refer to the corporation and
Coprada and not of its stockholders and directors. Petitioner did not sign such
note so he cannot be personally bound thereby. Thus, if there was any fraud
or misrepresentation that was foisted on private respondent in that there was
forthcoming loan from the DBP when in fact there as none, it is Coprada who
should account for the same and not the petitioner.
DEL ROSARIO VS. NLRC (182 SCRA 777; July 24, 1990) - Pursuant to a
complaint for money claims which was ultimately decided by the NLRC against
PHILSA Construction and Trading Co. (recruiter) and Arieb Enterprises
(employer), a writ of execution was issued by the POEA which was returned
unsatisfied as PHILSA was no longer operating and was financially incapable
of satisfying the judgment.
At the motion of private respondent, an alias writ was issued against the
properties of Mr. Francisco del Rosario and if insufficient, against the cash
and/or surety bond of the Bonding Company concerned.
Petitioner appealed to the NLRC which was denied together with his MR.
ISSUE: WON the writ of execution must be upheld?
HELD: No. Under the law, a corporation is bestowed juridical personality,
separate and distinct from its stockholders. But when the juridical personality
of the corporation is used to defeat public convenience, Justify wrong, protect
fraud or defend crime, the corporation shall be considered as a mere
association of persons, and its responsible officers and/or
stockholders shall be held individually liable. For the same reasons, a
corporation shall be liable for the obligation of a stockholder or a corporation
and its successor-in-interest shall be considered as one and the liability of the
former shall attach to the latter.
But for the separate juridical personality of a corporation to be disregarded,
the wrongdoing must be clearly and convincingly established. It cannot be
presumed. In this regard, we find the NLRC decision wanting.
1. PHILSA allowed its license to expire so as to evade payment of private
respondent’s claim – not supported by facts. The license expired in 1985, it
was delisted in 1986, there was no judgment yet in favour of PR. An intent
to evade payment of his claims cannot therefore be implied from the
expiration of PHILSA’s license and its delisting.
2. Organization of PHILSA International Placemen and Services Corp. and its
registration with POEA implies fraud – it was organized and registered in 1981,
several years before private respondent filed his complaint with the POEA in
1985. The creation of the second corporation could not therefore have
been in anticipation of PR’s money claims and the consequent
adverse judgment against PHILSA.
3. Substantial identity of the incorporators of the two corporations – does not
necessarily imply fraud.
*Distinguished from other cases*
LA CAMPANA – the two companies were substantially owned by the same
person. They had one office, one management, and a single payroll for both
businesses. The laborers were also interchangeable.
CLARAPOLS – Both corporations were substantially owned and controlled by
the same person and there was no break or cessation in operations. Moreover,
all the assets of the old were transferred to the new corporation.
AC RANSOM – The distinguishing mark of fraud were clearly apparent in AC
Ransom, when such corporation ceased operation after the decision of the CIR
and new one replacing it which was owned by the same family, engaging in
the same business and operating in the same compound. In the present case,
not only has there been failure to establish fraud, but it has also not
been shown that petitioner is the corporation officer responsible for
PR’s predicament. It must be emphasized that the claims were actually
directed against the employer, PHILSA became liable only because of its
undertaking to be jointly and severally bound with the foreign employer, as
required by POEA rules.
INDOPHIL TEXTILE MILL WORKERS UNION VS. CALICA (205 SCRA
697; Feb. 3, 1992) - On April 1987, petitioner and Indophil Textile Mills, Inc.
executed a CBA effective from April 1, 1987 to March 31, 1990. On November
3, 1987, Indophil ACRYLIC MANUFACTURING CORP was formed and registered
with the SEC and in 1988 became operation and hired workers according to its
own criteria and standards.
In 1989, the workers of ACRYLIC unionized and a CBA was executed. In 1990,
petitioner union claimed that the plant facilities build and set up by ACRYLIC
should be considered an extension or expansion of the facilities of TEXTILE
MILLS, to make ACRYLIC part of the TEXTILE MILLS bargaining unit. Public
respondent voluntary arbitrator Calica declared that the CBA of petitioner DOES
NOT extend to employees of ACRYLIC.
ISSUE: WON the veil of corporate entity should be pierced?
HELD: No. Under the doctrine of piercing the veil of corporate entity, when
valid grounds therefore exist, the legal fiction that a corporation is an entity
with a juridical personality separate and distinct from its members or
stockholders may be disregarded. In such cases, the corporation will be
considered as a mere association of persons. The members or
stockholders of a corporation will be considered as the corporation,
that is, liability will attach directly to the officers and stockholders.
In the case at bar, petitioner alleges that the creation of the ACRYLIC is a
devise to evade the application of the CBA between petitioner and TEXTILE
MILL. While we do not discount the possibility of the similarities of the
businesses of the two corporations, neither are we inclined to apply the
doctrine invoked by petitioner.
1. The fact that the business of Indophil Textile Mills and Indphil Acrylic
Manufacturing are related;
2. That some of the employees of PR are the same persons manning and
providing for auxilliary services to the units of ACRILYC, and that;
3. The physical plants, offices and facilities are situated in the same compound.
It is our considered opinion that these facts are not sufficient to
justify piercing the corporate veil of ACRILYC.
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UMALI VS. CA – “the legal corporate entity is disregarded only if it’s sought
to hold the officers and stockholders directly liable for a corporate debt or
obligation”. In the instant case, petitioner does not seek to impose a
claim against the members of ACRILYC.
PNB VS. RITRATTO GROUP, INC. ET. AL. (362 SCRA 216; July 31, 2001) -
PNB International Finance Ltd. (IFL), a wholly-owned subsidiary of PNB,
organized and doing business in HK, extended a letter of credit in favor of
respondent RITRATTO in the amount of US$300K , later increased to 1.14M,
to 1.29M, to 1.425M and decreased to 1,421,316.18, secured by a real estate
mortgage constituted in 4 parcels of land in Makati City.
As of April 1998, the outstanding obligation of respondents stood at
US$1,497,274.70. Pursuant to the terms of the mortgages, IFL, through its
attorney-in-fact PNB, notified respondents of the foreclosure of all the real
estate mortgages and that the properties would be sold at a public auction.
Respondents filed a complaint for injunction for which a TRO was issued and
later on a writ of preliminary injunction, which petitioner assailed with the CA
through petition for certiorari.
The CA dismissed the petition.
ISSUE: WON the corporate entity of IFL may be disregarded?
HELD: No. Respondents, therefore, do not have any cause of action against
it. The trial court erred in disregarding the corporate entity by saying that IFL
is a wholly owned subsidiary of PNB and that it is a mere alter-ego or business
conduit of the latter.
The mere fact that a corporation owns all of the stocks of another
corporation, taken alone is not sufficient to justify their being treated
as one entity. If used to perform legitimate functions, a subsidiary’s
separate existence may be respected, and the liability of the parent
corporation as well as the subsidiary will be confined to those arising
in their respective businesses.
KOPPEL PHIL VS. YATCO – this Court disregarded the separate existence of
the parent and subsidiary on the ground that the latter was formed merely for
the purpose of evading the payment of higher taxes. In the case at bar,
respondents failed to show any cogent reason why the separate
entities of PNB and IFL should be disregarded.
While there exists no definite test of general application in determining when
a subsidiary may be treated as a mere instrumentality of the parent corporation
some factors have been identified that will justify the application of the
treatment of the doctrine of piercing the corporate veil:
1. As a general rule, the stock ownership alone by one corporation of the stock
of another does not thereby render the dominant corporation liable for the
torts of the subsidiary unless the separate corporate existence of the
subsidiary is a mere sham, or unless the control of the subsidiary is
such that it is by an instrumentality or adjunct of the dominant
corporation (Garrett vs. Southern Railway Co.; Tennessee SC);
2. The doctrine of piercing the corporate veil is an equitable doctrine developed
to address situations where the separate corporate personality of a corporation
is abused or used for wrongful purpose. The doctrine applies when the
corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime, or when it is used as a shield to confuse legitimate
issues or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation;
3. The test in determining the doctrine of piercing the veil of corporation fiction:
a. Control, not mere majority of complete control, but complete
domination, not only of finances, but of policy and business practices
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 to perpetuate the violation of a statutory or other positive
legal duty, or dishonest and unjust act in contravention to
plaintiff’s legal rights; and
c. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.
The absence of any one of these elements prevents “piercing the corporate
veil”. In applying the “instrumentality” or “alter-ego” doctrine, the courts are
concerned with reality and not form, with how the corporation
operated and the individual defendant’s relationship to the
operation. (Concept Builders, Inc. vs. NLRC)
Aside from the fact that IFL is a wholly owned subsidiary, there is no showing
of the indicative factors that the it is a mere instrumentality of PNB. Neither is
there a demonstration that any of the evils sought to be prevented by
the doctrine of piercing the corporate veil based on the alter-ego or
instrumentality doctrine finds application in the case at bar.
The injunction suit was directed against PNB, as agent of IFL and not as parent.
A suit against an agent, cannot, without compelling reasons be considered a
suit against the principal, for he is not the real party in interest provided under
the Rules of Court.
YU VS. NLRC, FERNANDO DURAN, EDUARDO PALIWAN, ROQUE
ESTOCE AND RODRIGO SANTOS (245 SCRA 134) - Private respondents
were employees of Tanduay Distillery, Inc. (TDI). On March 29, 1988, 22
employees of TDI, including PRs, received a memorandum from TDI,
terminating their services for reasons of retrenchment, because First Pacific
Metro Corporation is buying TDI’s assets, which purchase did not push through.
On June 1, 1988, after employees had ceased as such, Twin Ace Holdings, Inc.
took over the business and assumed the name Tanduay Distillers (Tanduay).
Labor Arbiter, on a case originally filed in April 26, decided in favor of PRs
holding the retrenchment illegal, which was affirmed by the NLRC. Petitioners
filed an opposition against the motion for execution (which was directed
towards them and TDI) contending that Tanduay is a separate entity distinct
from TDI, and respondents James Yu and Wilson Young, which was dismissed
by the NLRC.
ISSUE1: WON the order of execution is void?
HELD: Yes. The decision dated May 24, 1989, was already final and executory
and cannot be amended or corrected except for clerical errors or mistakes. An
examination of the said decision does not in any manner obligate Tanduay or
even petitioners Yu and Young to reinstate PRs. Only TDI was held liable up to
the time of change of ownership. The order of execution in effect amended the
decision. It is beyond the power and competence of Labor Arbiter Cueto to
amend a final decision. The writ of execution must not go beyond the scope of
judgment.
ISSUE2: WON NLRC committed grave abuse of discretion in holding petitioner
Yu and Young liable?
HELD: It cannot be said that TDI and Tanduay are one and the same, as
seems to be the impression of respondents when they impleaded petitioners
as party-respondents in their complaint.
Such a stance is not supported by the facts. The name of the company for
whom the petitioners are working is Twin Ace Holdings Corporation.
As stated by the SolGen, Twin Ace is part of the Allied Banking Group although
it conducts the rum business under the name of Tanduay Distillers. The use of
a similar sounding or almost identical name is an obvious device to capitalize
on the goodwill which Tanduay Rhum has built over the years. Twin Ace or
Tanduay Distillers and TDI are distinct and separate corporations.
28 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
There is nothing to suggest that the owners of TDI, have any common
relationship as to identify it with Allied Banking Group which runs
Tanduay Distillery.
The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin
Ace was only a subsequent interested buyer. PRs have not presented any
proof as to communality of ownership and management to support
their contention that the two companies are one firm or closely
related.
The complaint was filed against TDI. Only later when the manufacture
and sale of Tanduay products was taken over by Twin Ace or Tanduay
Distillers were James Yu and Wilson Young impleaded. The corporation
itself was never made a party to the case.
The buyer (Twin Ace) did not buy TDI as a corporation, only most of its assets,
equipment and machinery. Thus, Tanduay Distillers or Twin-Ace did not
take over the corporate personality of TDI although they
manufacture the same product at the same plant with the same
equipment and machinery. Obviously, the trade name “Tanduay” went with
the sale because the new firm does business as Tanduay Distillers and its main
product of rum is sold as Tanduay Rum. There is no showing, however,
that TDI itself was absorbed by Twin Ace or that it ceased to exist as
a separate corporation. In point of fact, TDI is now herein a party
respondent represented by its own counsel.
The fiction of separate and distinct corporate entities cannot, in the instant
case, be disregarded and brushed aside, there being not the lease
indication that the second corporation was a dummy or services as a
client of the first corporate entity.
AMENDMENT OF THE CORPORATE CHARTER
Sec. 36. Corporate powers and capacity. - Every corporation incorporated
under this Code has the power and capacity:
xxx
4. To amend its articles of incorporation in accordance with the provisions of
this Code;
Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise
prescribed by this Code or by special law, and for legitimate purposes, any
provision or matter stated in the articles of incorporation may be amended by
a majority vote of the board of directors or trustees and the vote or written
assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of this Code, or the vote or
written assent of at least two-thirds (2/3) of the members if it be a non-stock
corporation.
The original and amended articles together shall contain all provisions required
by law to be set out in the articles of incorporation. Such articles, as amended
shall be indicated by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary and a majority of
the directors or trustees stating the fact that said amendment or amendments
have been duly approved by the required vote of the stockholders or members,
shall be submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and
Exchange Commission or from the date of filing with the said Commission if not
acted upon within six (6) months from the date of filing for a cause not
attributable to the corporation
The steps to be followed for an effective amendment of the articles of
incorporation would thus be:
1. Resolution by at least a majority of the board of directors or trustees;
2. Vote OR WRITTEN ASSENT of the stockholders representing at least
2/3 of the outstanding capital stocks or members in case of a non-stock
corporation. (Note: non-voting shares are considered in determining the
voting and quorum requirement in case of amendments of the articles of
incorporation as provided in Sec. 6);
3. Submission and filing of the amendments with the SEC as follows:
a. The original and amended articles together shall contain all the
provision required by law to be set out in the articles of
incorporation. Such articles, as amended, shall be indicated by
underscoring the change or changes made;
b. A copy thereof, duly certified under oath by the corporate secretary
and a majority of the directors or trustees stating the fact that such
amendments have been approved by the required vote of the
stockholders or members;
c. Favorable recommendation of the appropriate government agency
concerned in the case where the corporation is under its supervision
such as banking and insurance companies, etc.

When to take effect? (1) Upon approval by the SEC; or (2) From the date of
filing if not acted upon within 6 months for a cause not attributed to the
corporation (does not apply to increasing or decreasing the capital stock or
shortening the corporate term, which shall require the approval of the SEC
[Sec. 38 and 120])

SPECIAL AMENDMENTS

Sec. 37.Power to extend or shorten corporate term. - A private

corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of directors or
trustees and ratified at a meeting by the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of
the members in case of non-stock corporations. Written notice of the proposed
action and of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That in case of extension of corporate
term, any dissenting stockholder may exercise his appraisal right under the
conditions provided in this code.

29 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 Sec. 38. Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness. - No corporation shall increase or decrease
its capital stock or incur, create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and, at a stockholder's
meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital
stock shall favor the increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness. Written notice of the
proposed increase or diminution of the capital stock or of the incurring, creating,
or increasing of any bonded indebtedness and of the time and place of the
stockholder's meeting at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of residence as
shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors of the

corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities and
residences of the persons subscribing, the amount of capital stock or number
of no-par stock subscribed by each, and the amount paid by each on his
subscription in cash or property, or the amount of capital stock or number of
shares of no-par stock allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or

increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission and the issuance by
the Commission of its certificate of filing, the capital stock shall stand increased
or decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare: Provided, That
the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at the time
of the filing of the certificate, showing that at least twenty-five (25%) percent
of such increased capital stock has been subscribed and that at least twenty-
five (25%) percent of the amount subscribed has been paid either in actual
cash to the corporation or that there has been transferred to the corporation
property the valuation of which is equal to twenty-five (25%) percent of the
subscription: Provided, further, That no decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice the rights of corporate
creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase

the same, with the approval by a majority vote of the board of trustees and of
at least two-thirds (2/3) of the members in a meeting duly called for the
purpose.

Bonds issued by a corporation shall be registered with the Securities and

Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof.

30 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes

SEC. 37&38 vs. SEC. 16:
1. In the former a meeting of the stockholders would be REQUIRED, unlike in
Sec. 16, where the “written assent” would suffice.
2. Former requires the approval of the SEC.
vs.
MARIA CARMEN HARTIGAN, CGH and O. ENGKEE, defendants-appellees
(GR No. L-26370; 74 SCRA 252; July 31, 1970)
FACTS: Plaintiff changed its name from “The Yek Tong Lin Fire and Marine
Insurance Co., Ltd” (Yek Tong).

NOTE: When the amendment of the corporate charter involves shortening the
life of the corporation with the effect of dissolution, Sec. 120 would apply,
requiring approval by the SEC.
GROUNDS FOR DISAPPROVAL OF AMENDMENT
The complaint alleges that under its old name, PFIC signed as co-maker
together with Hartigan, a promissory note for P5,000 in favor of China Banking
Corporation (Chinabank). Plaintiff agreed to act as such upon application of the
defendant, who together with Antonio Chua and Chang Ka Fu, signed an
indemnity agreement in favor of the plaintiff.

Defendants admitted the execution of the indemnity agreement but argued

Sec. 17. Grounds when articles of incorporation or amendment may
be rejected or disapproved. - The Securities and Exchange Commission may
reject the articles of incorporation or disapprove any amendment thereto if the
same is not in compliance with the requirements of this Code: Provided, That
the Commission shall give the incorporators a reasonable time within which to
correct or modify the objectionable portions of the articles or amendment. The
following are grounds for such rejection or disapproval:
that it was made in favor of Yek Tong and not PFIC. They claim that there was
no privity of contract between plaintiff and defendants and consequently, the
plaintiff has no cause of action against them considering that the plaintiff does
not allege that PFIC and Yek Tong are one and the same or that the plaintiff
has acquired the rights of the latter.
CFI of Manila dismissed the complaint.

ISSUE: WON the trial court correctly dismissed the case?

1. That the articles of incorporation or any amendment thereto is not
HELD: No. Sec. 18 (Now Sec. 16) of the Corporation Law (Act No. 1459)
substantially in accordance with the form prescribed herein;
explicitly permits the articles of incorporation to be amended. The law does not
only authorize corporations to amend their charter; it also lays down the
2. That the purpose or purposes of the corporation are patently
procedure for such amendment; and, what is more relevant to the present
unconstitutional, illegal, immoral, or contrary to government rules and
discussion, it contains provisos restricting the power to amend when it comes
regulations;
to the term of their existence and the increase or decrease of the capital stock.
There is no prohibition therein against the change of name. The inference is
3. That the Treasurer's Affidavit concerning the amount of capital stock
clear that such a change is allowed, for if the legislature had intended to enjoin
subscribed and/or paid if false;
corporations from changing names, it would have expressly stated so in this
section or in any other provision of the law.
4. That the percentage of ownership of the capital stock to be owned by citizens
of the Philippines has not been complied with as required by existing laws or
No doubt, the name of the corporation is peculiarly important as
the Constitution.
necessary to the very existence of a corporation. The general rule as
to corporation is that each corporation shall have a name by which it
No articles of incorporation or amendment to articles of incorporation of banks,
is to sue and be sued and do all legal acts. The name of the corporation
banking and quasi-banking institutions, building and loan associations, trust
in this respect designates the corporation in the same manner as the name of
companies and other financial intermediaries, insurance companies, public
an individual designates the person. Since an individual has the right to
utilities, educational institutions, and other corporations governed by special
change his name under certain conditions, there is no compelling
laws shall be accepted or approved by the Commission unless accompanied by
reason why a corporation may not enjoy the same right. The
a favorable recommendation of the appropriate government agency to the
sentimental considerations which individuals attach to their names are not
effect that such articles or amendment is in accordance with law.
present in corporations and partnerships. Of course, as in the case of an
individual, such change may not be made exclusively by the
corporation’s own act. It has to follow the procedure prescribed by
law for the purpose, and this is what is important and indispensably
prescribed – strict adherence to such procedure.

PROVISIONS NOT SUBJECT TO AMENDMENT (fait accompli):
1. Names of the incorporations and the incorporating directors or trustees;
2. Name of the treasurer originally or first elected by the subscribers or
members to act as such;
3. Number of shares and the amount originally subscribed and paid out of
the original authorized capital stock of the corporation; and
4. Date and place of execution of the articles of incorporation and the
signatories and acknowledgment thereof.
CHANGE IN CORPORATE NAME
Change in corporate name is included in the general power to amend and
maybe effected with compliance to Sec. 16.
Any change in the corporate identity or name does not affect the rights and
obligations of the corporation. A mere change in the name of the
corporation does not affect the identity of a corporation nor in any
manner affect the rights, privileges and obligations previously
acquired or incurred by it.
PHILIPPINE FIRST INSURANCE CO., plaintiff-appellant
RED LINE TRANSPORT VS. RURAL TRANSIT CO. – what was held as
contrary to public policy is the USE by one corporation of the name of another
corporation as its trade name. We are certain no one will disagree that such
an act can only result in confusion and open the door to frauds and evasions
and difficulties of administration and supervision. Surely, the Red Line case
was not one of change of name.
The change of name of a corporation DOES NOT result in its dissolution. There
is unanimity in authorities: “An authorized change in the name of a corporation
has no more effect upon its identity as a corporation than change of
name of natural person has upon his identity. It does not affect the
rights of the corporation or lessen or add to its obligations. After a
corporation has effected a change in its name it should sue and be
sued in its new name” (13 Am. Jur. 276-277)
A mere change in the name of a corporation, either by the legislature or by the
corporators or stockholders under legislative authority, does not, generally
speaking, affect the identity of the corporation, nor in any way affect
the rights, privileges, or obligations previously acquired or incurred
by it. Indeed, it has been said that a change of name by a corporation has no
more effect upon the identity of the corporation than a change of name by a

31 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
natural person has upon the identity of such person. The corporation, upon
such change in its name, is in no sense a new corporation, nor the
successor of the original one, but remains and continues to be the
original corporation. It is the same corporation with a different name,
and its character is in no respect changed. ... (6 Fletcher, Cyclopedia of
the Law of Private Corporations, 224-225, citing cases).
REPUBLIC PLANTERS BANK VS. CA (216 SCRA 738; Dec. 31, 1992) – A
change in the corporate name does not make a new corporation, and whether
effected by special act or under a general law, has no effect on the identity of
the corporation, or on its property rights or liabilities. The corporation
continues, as before, responsible in its new name for all debts or other liabilities
which it had previously contracted or incurred.
AMENDMENT OF THE CORPORATION TERM
For purposes of amending the corporate term, the following procedure is to be
observed (Sec. 37):
1. Approval by a majority vote of the board of directors or trustees;
2. Written notice of the proposed action and the time and place of meeting
shall be served to each stockholder or member either by mail or by
personal service;
3. Ratification by the stockholders or members representing at least 2/3;
4. In case of extension of corporate term, it should be for periods not
exceeding 50 years in any single instance, and provided that no extension
can be made earlier than 5 years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an earlier extension
as may be determined by the SEC.
5. In cases of extension of corporate term, a dissenting stockholder may
exercise appraisal rights under the conditions prescribes by Sec. 81
and 82 of the Code.
ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC.,
petitioner,
vs.
SECURITIES & EXCHANGE COMMISSION, respondent
(G.R. No. L-23606 July 29, 1968)
FACTS: ACCMC was incorporated on Jan. 15, 1912 for a period of 50 years
which expired on Jan. 15, 1962.
On July 15, 1963, during the period within which it is to liquidate, the board of
directors resolved to amend its articles of incorporation extending its corporate
life for another 50 years which was approved by the stockholders but denied
by the SEC.
ISSUE: WON the extension of corporate term should be allowed?
HELD: No. The privilege of extension is purely statutory. All the statutory
conditions precedent must be complied with in order that the
extension may be effectuated. And, generally, these conditions must be
complied with, and the steps necessary to effectuate an extension must be
taken, during the life of the corporation, and before the expiration of
the term of existence as originally fixed by its charter or the general law,
since, as a rule, the corporation is ipso facto dissolved as soon as the
time expires. So where the extension is by amendment of the articles of
incorporation, the amendment must be adopted before that time.
The logic of this position is well-expressed in a four square case decided by the
CA of Kentucky:
“But section 561 (section 2147) provides that, when any corporation expires
by the terms of its articles of incorporation, it may be thereafter continued
to act for the purpose of closing up its business, but for no other purpose.
The corporate life of the Home Building Association expired on May 3, 1905.
After that date, by the mandate of the statute, it could continue to act for
the purpose of closing up its business, but for no other purpose. The
proposed amendment was not made until January 16, 1908, or nearly three
years after the corporation expired by the terms of the articles of
incorporation. When the corporate life of the corporation was ended, there
32 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
was nothing to extend. Here it was proposed nearly three years after the
corporate life of the association had expired to revivify the dead body, and
to make that relate back some two years and eight months. In other words,
the association for two years and eight months had only existed for the
purpose of winding up its business, and, after this length of time, it was
proposed to revivify it and make it a live corporation for the two years and
eight months daring which it had not been such.
The law gives a certain length of time for the filing of records in this court,
and provides that the time may be extended by the court, but under this
provision it has uniformly been held that when the time was expired, there
is nothing to extend, and that the appeal must be dismissed... So, when the
articles of a corporation have expired, it is too late to adopt an amendment
extending the life of a corporation; for, the corporation having expired, this
is in effect to create a new corporation ..."
OTHER MATTERS SUBJECT TO AMENDMENT:
1. Purpose clause – by changing, altering or including other purpose or
purposes;
2. Principal Office;
3. Number of Directors;
4. Shares of stock and their classification;
5. Restrictions as well as preference;
CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
A. POWERS OF THE BOARD
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.
The Board of Directors (or trustees or other designation allowed under Sec.
138) is the supreme authority in matter of management of the regular and
ordinary business affairs of the corporation.
However, this authority does not extend to the fundamental changes in the
corporate charter such as amendments or substantial changes thereof, which
belong to the stockholders as a whole. The equitable principle therefore is
that the stockholders may have all the profits but shall turn over the
management of the enterprise to the Board of Directors.
CLASSIFICATION OF POWERS OF CORPORATE AGENTS/OFFICERS
Unless the law so provides, corporate powers may be delegated to
individual directors or other officers or agents. Whether or not the acts
of the individual director, officer or agent would bind the corporation depend
on the nature of the agency created or the powers conferred upon such person
by the statute, the corporate charter, the by-laws, the corporate action of the
board or stockholders, or whether it is necessary or incidental to one’s office.
The general rule is that a corporation is bound by the acts of its
corporate officers who act within the scope of the 5 classification of
powers of corporate agents, which are:
1. Those expressly conferred or those granted by the articles of
incorporation, corporate by-laws or by the official act of the board of
directors;
2. Those that are incidental or those acts as are naturally and ordinarily
done which are reasonable and necessary to carry out the corporate
purpose or purposes;
3. Those that are inherent or acts that go with the office;
4. Those that are apparent or those acts which although not actually
granted, the principal knowingly allows or permits it to be done; and
5. Powers arising out of customs, usage or emergency.
J. F. RAMIREZ, plaintiff-appellee,
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-
appellants
(G.R. No. 11897 September 24, 1918)
FACTS: The Board of Directors were apprised of the fact the plaintiff JF
Ramirez, who is based in Paris and represented by his son Jose Ramirez, had
control of agencies for two different marks of films, “Éclair Films” and “Milano
Films”.
Negotiations began between Jose Ramirez and the board of directors of
Orientalist Co. where Ramon Fernandez, one of the members of the board and
TOC’s treasurer was chiefly active.
Near the end of July 1913, Jose Ramirez offered to supply from Paris the
aforesaid films to TOC through Fernandez. Accordingly, Fernandez had an
informal conference with the BOD except one, and with approval of those
whom he had communicated, accepted the offer through letters signed by
Fernandez in his capacity as treasurer.
Upon arrival of the said films, it turned out that TOC was without funds, so the
first drafts, taken in the name of TOC were received and paid by its president,
Hernandez, through his own funds and such films were treated by him as his
own property; and in fact, they never came into the possession of TOC and
were rented by Hernandez to TOC as they are exhibited in the Oriental Theater.
Other films arrived together with their drafts, taken in the name of TOC through
its president, which were not paid and gave rise to the present action. TOC
was declared the principal debtor and Ramon Fernandez, the guarantor.
ISSUE: WON the corporation could be held liable for the contract?
HELD: Yes. The public is not supposed nor required to know the transactions
which happen around the table where the corporate board of directors or the
stockholders are from time to time convoked. In dealing with
corporations, the public at large is bound to rely to a large extent
upon outward appearances. If a man is acting for a corporation with the
external indicia of authority, any person not having notice of want of authority
may usually rely upon those appearances; and if it be found that the directors
had permitted the agent to exercise that authority and thereby held him out
as a person competent to bind the corporation, or had acquiesced in a contract
and retained the benefit supposed to have been conferred by it, the corporation
will be bound, notwithstanding the actual authority may ever have been
granted.
The failure of the defendant corporation to make an issue in its answer with
regard to the authority of Ramon Fernandez to bind it, and particularly to deny
specifically under oath the genuineness and due execution of the contracts
sued upon have the effect of eliminating the question of his authority from the
case.
It is declared under Sec. 28 (now 23) that corporate powers shall be
exercised, and all corporate business conducted by the board of
directors, and this principle is recognized in the by-laws of the
corporation in question which contain a provision declaring that the
power to make contracts shall be vested in the board of directors.
33 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
It is true that it is also true in the by-laws, that the president shall have the
power and it shall be his duty, to sigh contract; but this has reference rather
to the formality of reducing to proper form the contract which are
authorized by the board and is not intended to confer an independent power
to make contract binding on the corporation.
The fact that the power to make corporate contracts is thus vested in the board
of directors does not signify that a formal vote of the board must always be
taken before contractual liability can be fixed upon a corporation; for a board
can create liability, like an individual, by other means than by a
formal expression of its will.
Participation of the stockholders. The letter accepting the offer was dispatched
in a meeting of the board called by Ramon Fernandez, where 4 members,
including the president were present. The minutes add that terms of this offer
were approved; but at the suggestion of Fernandez it was decided to call a
special meeting of the stockholders to consider the matter and definite action
was postponed. From the meeting of the stockholders, it can be inferred that
this body was then cognizant that the offer had already been accepted. It is
not, however, necessary to find the judgment of the stockholder proceedings,
even if the assumption is that they did not approve of the contract.
Both upon the principle and authority it is clear that the action of the
stockholders, whatever its character, must be ignored. The theory of a
corporation is that the stockholders may have all the profits but shall
turn over the complete management of the enterprise to their
representatives and agents, called directors. Accordingly, there is little
for the stockholders to do beyond electing directors, making by-laws, and
exercising certain other special powers defined by law. In conformity with this
idea, it is settled that contract between a corporation and third person
must be made by the director and not by the stockholders. The
corporation, in such matters, is represented by the former and not by the latter.
It results that where a meeting of the stockholders is called for the purpose
of passing on the propriety of making a corporate contract, its resolutions are
at most advisory and not in any wise binding on the board.
BARRETO VS. LA PREVISORY FILIPINA (57 Phil. 649; Dec. 8, 1932) –
Petitioners, directors of respondent up to March 1929, sought to recover 1%
(to each plaintiff) of the profits of the company for the year 1929, under and
in accordance with an amendment to the by-laws which was made at the
general meeting of the stockholders on Feb. 1929, to which the lower court
rendered in their favor.
ISSUE: WON the amendment has a binding effect as to grant plaintiffs’ claim?
HELD: No. Sec. 20 of the Corporation Law limits the authority of a corporation
to adopt by-laws which are not consistent with the provisions of the law. The
appellees contend that the articled in question is merely a provision of the
compensation of directors which is not only consistent with but expressly
authorized by Sec. 21 of the Corporation Law.
We cannot agree with this contention. The authority conferred upon
corporations in that section refers only to providing compensation for the future
services of directors, officers, and employees thereof after the adoption of the
by-law or other provisions in relation thereto, and cannot in any sense be held
to authorize the giving, as in this case, of continuous compensation to
particular directors after their employment has terminated for part services
rendered gratuitously by them to the corporation. To permit the transaction
involved in this case would be to create an obligation unknown to law, and to
countenance a misapplication of the funds of the defendant building and loan
association to the prejudice of the substantial rights of its shareholders.
Irrespective of the above, the conclusion is the same. The article which the
appellees rely upon is merely a by-law provision adopted by the stockholders
of the defendant corporation, without any action having been taken in relation
thereto by its board of directors. The law is settled that contracts between
a corporation and third person must be made by or under the
authority of its board of directors and not by its stockholders. Hence,
the action of the stockholders in such matters is only advisory and not in any
wise binding on the corporation. There could not be a contract without
mutual consent, and it appears that the plaintiffs did not consent to
the provisions of the by-law in question, but, on the contrary, they
objected to and voted against it in the stockholders’ meeting in which
it was adopted.
QUALIFICATIONS AND DISQUALIFICATIONS (see discussion under
DIRECTORS/TRUSTEES in chapter 4)
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP.,
PABLO GONZALES, JR. and THOMAS GONZALES, respondents.
(GR No. 93695; 205 SCRA 752; Feb. 4, 1992)
FACTS: A complaint for a sum of money was filed by International Corporate
Bank, Inc. against the private respondents who, in turn, filed a third-party
complaint against Alfa Integrated Textile Mills, Inc.
The trial court ordered the issuance of alias summons upon Alfa through DBP,
who is said to be the transferee of Alfa’s management by virtue of a voting
trust agreement.
DBP declined to receive the summons saying it is not authorized, Alfa having a
personality separate and distinct. The trial court in turn ordered private
respondents to take the appropriate steps to serve the summons to Alfa which
they made through the officers and later on, was later on declared to be proper
service of summons.
After the second motion for reconsideration, the trial court reversed itself,
saying that the service of summons upon the petitioners were not proper, them
not being officers of the corporation anymore. On appeal, the CA reversed the
trial court.
ISSUE: WON the petitioners can still be authorized to receive the summons
despite the voting trust agreement with DBP?
HELD: No. Sec. 59 of the Code expressly recognizes VTAs and gives a more
definitive meaning. By its very nature, a VTA results in the separation of the
voting right of a stockholder from his other rights such as the right to receive
dividends, the right to inspect the books of the corporation, the right to sell
certain interests in the assets of the corporation and other rights to which a
stockholder may be entitled until the liquidation of the corporation. However,
in order to distinguish a VTA from proxies and other voting pool and
agreements, it must pass three criteria or tests, namely: (1) the voting rights
of the stock are separated from other attributes or ownership; (2) that the
voting right granted are intended to be irrevocable for a definite period of time;
and (3) that the principal purpose of the grant of voting rights is to acquire
voting control of the corporation.
The execution of VTA, therefore, may create a dichotomy between
the equitable and beneficial ownership of the corporate shares of
stockholder, on the one hand and the legal title thereto, on the other
hand.
By virtue of the VTA, the petitioners are no longer directors. Under the old and
new Corporation Code, the most immediate effect of a VTA on the status of a
stockholder who is a party to its execution is that he becomes only an equitable
or beneficial owner, from being the legal titleholder or owner of the shares
subject of the VTA.
Under the old code, the eligibility of a director, strictly speaking, cannot be
adversely affected by a VTA inasmuch as he remains the owner (although
beneficial or equitable only) of the shares subject of the VTA pursuant to which
a transfer of the stockholder’s shares in favor of the trustee is required. No
disqualification arises by virtue of the phrase “in his own right” provided under
the Old Code, which has been omitted.
Hence, this omission requires that in order to be eligible as director, what is
material is the legal title to, not beneficial ownership, of the stock as appearing
on the books of the corporation.
34 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
The petitioners ceased to be the owners of at least one share standing in their
names on the books of Alfa as required under Sec. 23 of the new Code. They
also ceased to have anything to do with the management of the enterprise.
The petitioners ceased to be directors.
Considering the VTA, DBP as trustee, became the stockholder of record with
respect to the said shares of stocks.
DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26 SCRA 256;
Nov. 29, 1968) – A complaint was filed by herein petitioner-plaintiff Detective
and Protective Bureau against defendant-respondent Fausto Alberto, alleging
that defendant illegally seized and took control of all the assets as well as the
books, records, vouchers and receipt of the corporation from the accountant-
cashier, concealed them illegally and refused to allow any member of the
corporation to see and examine the same. That on a meeting, the stockholders
removed defendant as managing director and elected Jose dela Rosa.
Alberto, on the other hand, stated that Jose dela Rosa could not be elected
managing director because he did not own any stock in the corporation.
ISSUE: WON dela Rosa may be elected managing director?
HELD: No. There is no record showing that Jose dela Rosa owned a share of
stock in the corporation. If he did not own any share of stock, certainly he
could not be a director pursuant to Sec. 30 of the Corporation Law and
consequently he cannot be a managing director by virtue of the by-laws of the
corporation that the manager shall be elected by the BOD among its members.
Accordingly, Faustino Alberto could not be compelled to vacate his office and
cede the same to dela Rosa because the by-laws provide that the Directors
shall serve until the election and qualification of their duly qualified successor.
ELECTION AND VOTING
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.
NOTE:
1. Majority of the outstanding capital stock, whether in person or by written
proxy must be present at the election of the directors; or majority of
members entitled to vote, in the case of a non-stock corporation. If the
required quorum is not obtaining, the meeting may be adjourned;
2. On the request of any voting stockholder or member, the election may be
held by ballot otherwise viva-voce would suffice.
3. The candidates receiving the highest number of votes shall be elected.
CUMULATIVE VOTING:
1. Cumulative voting gives the stockholder entitled to vote the right to give
a 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 among the candidates as he may see fit.
2. This is granted by law to each stockholder with voting rights. However, in
non-stock corporations, cumulative voting is generally not allowed,
UNLESS allowed by the AOI or by-laws.
3. Under this method, if there are 10 directors to be elected, a holder of
1,000 shares will have 10,000 votes which he may cast in favor of one
candidate or may apportion to any number of candidate he may wish;
4. PURPOSE: to allow the minority to have a rightful representation in the
board of directors.
Sec. 25. Corporate officers, quorum. - Immediately after their election, the
directors of a corporation must formally organize by the election of a president,
who shall be a director, a treasurer who may or may not be a director, a
secretary who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two (2) or more positions
may be held concurrently by the same person, except that no one shall act as
president and secretary or as president and treasurer at the same time.
NOTE:
1. Except in a close corporation where the corporate officers may be elected
directly by the stockholders, the Code requires the BOD to elect the said
officers;
2. The officers that may be elected are the:
a. President – who must be a director;
b. Treasurer – who may or may not be a director;
c. Secretary – who should be a resident and citizen of the Philippines;
d. Such other officers as may be provided for in the by-laws.
3. Any two or more positions may be held concurrently by the same person,
except:
a. The president and the secretary;
b. The president and the treasurer.
B. VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE
OFFICERS
Sec. 25. Corporate officers, quorum
xxx
The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation. Unless the articles
of incorporation or the by-laws provide for a greater majority, a majority of the
number of directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business, and every
decision of at least a majority of the directors or trustees present at a meeting
at which there is a quorum shall be valid as a corporate act, except for the
election of officers which shall require the vote of a majority of all the members
of the board.
QUORUM: requirement for a valid board meeting is the majority of the
number of the board fixed in the AOI, and a decision of at least a majority of
the directors/trustees present in a meeting at which there is a quorum shall be
35 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
a valid corporate act, except:
1. Election of officers, which shall require the majority of all the members of
the board; and
2. Unless the AOI or the by-laws provide for a greater quorum/voting
requirement.
Every action of the board without a meeting and without the required voting
and quorum requirement will not bind the corporation unless subsequently
ratified, expressly or impliedly.
Individual directors, however, can rightfully be considered as agents of the
corporation. And although they cannot bind the corporation by their individual
acts, this is subject to certain EXCEPTIONS: (1) by delegation of authority; (2)
when expressly conferred; or (3) where the officer or agent is clothed with
actual or apparent authority.
YAO KA SIN TRADING VS. CA (209 SCRA 763; June 15, 1992) – Constacio
B. Malagna, President and Chairman of the Board of private respondent Prime
White Cement Corporation (PWCC), sent a letter-offer (Exhibit A) to Mr. Yao
for the delivery of cement, which was accepted by the latter by delivering a
check for P243,000.
ISSUE: WON the letter-offer sent by Malagna binds the corporation?
HELD: No. A corporation can act only through its officers and agents, all acts
within the powers of said corporation may be performed by agents of his
selection and except in so far as limitations or restrictions may be imposed by
special charter, by-law or statutory provisions, the same general provision of
law which govern the relation of agency for natural person govern the officer
or agent of a corporation, of whatever status or rank, in respect to his power
to act for the corporation; and the agents once appointed, or members acting
in their stead, are subject to the same rules, liabilities and incapacities as are
agents of individuals and private persons.
Moreover, a corporate officer or agent may represent and bind the corporation
in transactions with third person to the extent that authority has been
conferred upon him, and this includes powers which have been (1)
intentionally conferred, and (2) also such powers as, in the usual course of
business, are incidental thereto, or may be implied therefrom, (3) powers
added by custom and usage, as usually pertaining to the particular officer or
agent, and (4) such apparent powers as the corporation has caused persons
dealing with the officer or agent to believe that it has conferred.
While Mr. Maglana was an officer, the by-laws do not in any way confer upon
the president the authority to enter into contracts for the corporation
independently of the BOD. That power is expressly lodged in the latter.
Nevertheless, to expedite or facilitate the execution of the contract, only the
President shall sign the contact for the corporation. No greater power can be
implied from such express, but limited delegated authority. Neither can it be
logically claimed that any power greater than that expressly conferred is
inherent in Mr. Maglana’s position as president and chairman of the
corporation.
Although there is authority "that if the president is given general control and
supervision over the affairs of the corporation, it will be presumed that he has
authority to make contract and do acts within the course of its ordinary
business," We find such inapplicable in this case. We note that the private
corporation has a general manager who, under its By-Laws has, inter alia,
the following powers: "(a) to have the active and direct management of the
business and operation of the corporation, conducting the same accordingly to
the order, directives or resolutions of the Board of Directors or of the
president." It goes without saying then that Mr. Maglana did not have a direct
and active and in the management of the business and operations of the
corporation.
Petitioner's last refuge then is his alternative proposition, namely, that private
respondent had clothed Mr. Maglana with the apparent power to act for it and
had caused persons dealing with it to believe that he was conferred with such
power. The rule is of course settled that "[a]lthough an officer or agent
acts without, or in excess of, his actual authority if he acts within the
scope of an apparent authority with which the corporation has
clothed him by holding him out or permitting him to appear as having
such authority, the corporation is bound thereby in favor of a person
who deals with him in good faith in reliance on such apparent
authority, as where an officer is allowed to exercise a particular
authority with respect to the business, or a particular branch of it,
continuously and publicly, for a considerable time." Also, "if a private
corporation intentionally or negligently clothes its officers or agents
with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority in real, as to innocent
third persons dealing in good faith with such officers or agents." This
"apparent authority may result from (1) the general manner, by which the
corporation holds out an officer or agent as having power to act or, in other
words, the apparent authority with which it clothes him to act in general or (2)
acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, whether within or without the scope of his ordinary powers.
It was incumbent upon the petitioner to prove that indeed the private
respondent had clothed Mr. Maglana with the apparent power to execute
Exhibit "A" or any similar contract. This could have been easily done by
evidence of similar acts executed either in its favor or in favor of
other parties. Petitioner miserably failed to do that. Upon the other hand,
private respondent's evidence overwhelmingly shows that no contract can be
signed by the president without first being approved by the Board of Directors;
such approval may only be given after the contract passes through, at least,
the comptroller, who is the NIDC representative, and the legal counsel.
LOPEZ REALTY, INC. VS. FOTENCHA (147 SCRA 183; Aug. 11, 1995) –
Petitioner corporation approved two resolutions providing for the gratuity pay
of its employees. Except for Asuncion Lopez-Gonzales, who was then abroad,
the remaining member of the board convened a special meeting and passed a
resolution adopting the above-mentioned resolutions. Private respondents
requested for the full payment of the gratuity pay which was granted.
At that time, however, petitioner Asuncion was still abroad, and allegedly sent
a cablegram objecting to certain matters taken up by the board in her absence.
Notwithstanding a corporate squabble between Asuncion and Arturo Lopez, the
first two installments of the gratuity pay of private respondents were paid.
Also, petitioner corporation had prepared the cash vouchers and checks for the
third installment. For some reason, said voucher was cancelled by petitioner
Asuncion.
A complaint was filed before the labor arbiter who decided in favor of private
respondents.
ISSUE: WON the gratuity pay should be paid?
HELD: Yes. The general rules is that a corporation, through its board of
directors, should act in the manner and within the formalities, if any,
prescribed by its charter or by the general law. Thus, the directors must
act as a body in a meeting called pursuant to the law or the corporation’s by-
laws, otherwise, any action taken therein may be questioned by any objecting
director or shareholder.
Be that as it may, jurisprudence tells us that an action of the board of
directors during a meeting, which was illegal for lack of notice, may
be ratified either (1) expressly, by the action of the directors in
subsequent legal meeting, or (2) impliedly, by the corporations’
subsequent conduct.
Ratification by directors may be by an express resolution or vote to that effect,
or it may be implied from adoption of the act, acceptance or acquiescence.
Moreover, the unauthorized acts of an officer of a corporation may be ratified
by the corporation by conduct implying approval and adoption of the act in
question. Such ratification may be expressed or may be inferred from silence
and inaction.
In the case at bench, it was established that petitioner corporation did not
issue any resolution revoking nor nullifying the board resolution granting
gratuity pay to private respondents. Instead, they paid the gratuity pay,
36 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
particularly, the first two installments thereof.
Despite lack of notice to Asuncion, we can glean from the records that she was
aware of the corporation’s obligations under the said resolution. More
importantly she acquiesced thereto by affixing her signature on two cash
vouchers. The conduct of petitioners had estopped them from assailing the
validity of the said board resolutions.
PUA CASIM & CO. VS. NEUMARK AND CO. (46 Phil. 242; Oct. 2, 1924) –
W. Neumark, president of defendant corporation borrowed P15000 from
plaintiff which was delivered by means of a check in favor of defendant and
deposited in BPI and the amount of it credited to the corporation’s current
account.
ISSUE: WON the corporation is responsible for the money borrowed by its
president?
HELD: Yes. W. Neumark is the principal stockholder, president and general
business manager of the defendant corporation. On behalf of the corporation,
he solicited a loan and was given a check, which was endorsed by him in his
capacity as president and deposited to the corporation’s account. It may be
true that a large part of the amount so deposited was diverted by Neumark to
his own use, but that does not alter that the money was borrowed for the
corporation and was placed in its possession.
It is conceded that Neumark was not expressly authorized by the board of
directors to borrow the money in question and the general rule is that a
business manager or other officer of a corporation, has no implied power to
borrow money on its behalf. But much depends upon the circumstances of
each particular case and the rule state is subject to important exceptions. Thus,
where a general business manager of a corporation is clothed with
apparent authority to borrow money and the amount borrowed does
not exceed the ordinary requirements of the business, it has often
been held that the authority is implied and that the corporation is
bound.
YU CHUCK VS. KONG LI PO (46 Phil. 608; Dec. 3, 1924) – CC Chen or TC
Chen, General Manager of defendant corporation Kong Li Po, entered into an
agreement with the plaintiffs by which the latter bound themselves to do the
necessary printing for the newspaper. Later on, the new general manager, Tan
Tian Hong, discharged plaintiffs with no special reasons. Aggrieved, plaintiffs
sought to recover full payment of the remaining term of the contract, which
was originally for 3 years, as stated therein.
ISSUE: WON Chen had the power to bind the corporation under a contract of
that character?
HELD: No. The general rule is that the power to bind a corporation by contract
lies with its board of directors or trustees, but this power may either be
expressly or impliedly be delegated to other officers or agents of the
corporation, and it is well settled that except where the authority of
employing servants and agents is expressly vested in the BOD/T, an
officer or agent who has general control and management of the
corporation’s business, or a specific part thereof, may bind the
corporation as are usual and necessary in the conduct of such
business. But the contracts of employment must be reasonable.
Chen, as general manager of Kong Li Po, had implied authority to bind the
defendant corporation by a reasonable and usual contract of employment with
the plaintiffs, but we do not think that contract here in question can be so
considered. Not only is the term of employment usually long, but the conditions
are otherwise so onerous to the defendant that the possibility of the
corporation being thrown into insolvency thereby is expressly contemplated in
the same contract. This fact, in itself was, in our opinion, sufficient to put the
plaintiffs upon inquiry as to the extent of the business manager’s authority;
they had not the right to presume that he or any other single officer or
employee of that corporation had implied authority to enter into a contract of
employment which might bring about its ruin.
TRINIDAD J. FRANCISCO VS. GSIS (7 SCRA 557; March 30, 1963) –
Trinidad Francisco, in consideration of loan extended by GSIS, mortgaged her
property in QC. For being in arrears in her installments, GSIS extrajudicially
foreclosed the mortgage.
Plaintiff’s father, Atty. Vicente Francisco sent a letter to Rodolfo Andal, general
manager of GSIS, offering to redeem the property which was replied to by
Andal through a telegram saying “GSIS BOARD APPROVED YOUR REQUEST RE
REDEMTPION OF FORECLOSED PROPERTY OF YOUR DAUGHTER”
Later, inasmuch as, according to the defendant GSIS, the remittances made
by Atty. Francisco were allegedly not sufficient to pay off her daughter’s
arrears, the one year redemption period has expired, said defendant
consolidated title to the property in its name.
ISSUE: WON the telegram sent by the Andal binds the corporation?
HELD: Yes. The terms of the offer were clear and over the signature of Andnal,
plaintiff was informed that the proposal has been accepted. There was nothing
in the telegram that hinted at any anomaly, or gave grounds to suspect its
veracity, and the plaintiff, therefore, cannot be blamed for relying upon it.
There is no denying that the telegram was within Andal’s apparent authority,
but eh defense is that he did not sign it, but that it was sent by the board
secretary in his name and without his knowledge. Assuming this to be true,
how was appellee to know it? Corporate transactions would speedily
come to a standstill were every person dealing with a corporation
were held duty-bound to disbelieve every act of its responsible
officers, no matter how regular they should appear on their face.
Indeed, it is well-settled that If a private corporation intentionally or
negligently clothes its officers or agents with apparent power to
perform acts for it, the corporation will be estopped to deny that such
apparent authority is real, as to innocent third persons dealing in
good faith with such officers or agents.
Hence, even if it were the board secretary who sent the telegram, the
corporation could not evade the binding effect produced by the telegram.
The error in the wording cannot be taken seriously. All the while GSIS pocketed
the various remittances, and kept silent as to the true facts as it now alleges.
This silence, taken together with the unconditional acceptance of three other
subsequent remittances from plaintiff constitutes in itself a binding ratification
of the original agreement.
THE BOARD OF LIQUIDATORS VS. KALAW (20 SCRA 987; Aug. 10, 1965)
– National Coconut Corporation (NACOCO) embarked on copra trading
activities led by its General Manager Maximo Kalaw and the other defendants
as members of the board. Due to natural calamities, the business of copra
became unprofitable. Kalaw made a full disclosure of the situation and apprised
the board of the impending losses on the contracts already entered into, but
no action was taken. But later on, the contracts were unanimously approved
by the Board.
The buyers threated damage suits, but some were settled. Louis Dreyfus & Co.
Ltd. Actually sued but was also culminated in an out-of-court settlement.
NACOCO now seeks to recover the sum paid to Louis from general manager
and board chairman Kalaw and the other members who approved the
contracts. It charges Kalaw with negligence and bad faith and/or breach of
trust for having approved the contracts, which was dismissed by the trial court.
ISSUE: WON the contracts executed by Kalaw bind the corporation?
HELD: Yes. A rule that has gained acceptance through the years is that a
corporate officer “entrusted” with the general management and
control of its business, has implied authority to make any contract or
do any other act which is necessary or appropriate to the conduct of
the ordinary business of the corporation. As such officer, he may,
without any special authority from the BOD perform all acts of an
ordinary nature, which by usage or necessity are incident to his
office, and may bind the corporation by contracts in matters arising
in the usual course of business.
37 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Long before the disputed contracts came into being, Kalaw contracted by
himself alone as general manager – for forward sales of copra (which is a
necessity in the business) which were profitable. So pleased was NACOCO;s
BOD that it voted to grant Kalaw special bonus in recognition of the signal
achievement rendered by him.
These previous contacts, it should be stressed, were signed by Kalaw without
prior authority from the board. Said contracts were known all along to the
board members. Nothing was said by them. The aforesaid contracts stand to
prove one thing. Obviously, NACOCO’s board met difficulties attendant to
forward sales by leaving the adoption of means to end, to the sound discretion
of NACOCO’s general manager Maximo Kalaw.
Where similar acts have been approved by the directors as a matter
of general practice, custom, and policy, the general manager may
bind the company without formal authorization of the BOD. In varying
language, existence of such authority is established, by proof of the course of
business, the usages and practices of the company and by the knowledge
which the BOD has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation.
In the case at bar, the practice of the corporation has been to allow its general
manager to negotiate and execute contracts in its copra trading activities for
and in NACOCO’s behalf without prior board approval. If the by-laws were to
be literally followed, the board should give its stamp of prior approval on all
corporate contracts. But the Board itself, by its acts and through acquiescence,
practically laid aside the by-law requirement of prior approval.
BUENASEDA VS. BOWEN & CO., INC. (110 Phil. 464; Dec. 29, 1969) – As
a consequence of P200,000 worth of ECA allocated to the Bowen & Co., Inc.,
it required a letter of credit in the amount of P100,000 with the PNB. As the
corporation did not have at the time the necessary funds to put up the required
cash marginal deposit of P60,000, its president Geoffrey Bowen, obligating the
corporation and himself in his personal capacity, offered to pay Francisco
Buenaseda 37 ½% of the profits to be realized from the sale of the ECA
procurement materials, should he be able to obtain and produce the amount
necessary to cover the cash marginal deposit – which Buenaseda was able to
do.
The corporation refused to pay, Buenaseda filed an action in the CFI to recover
the same.
ISSUE: WON the agreement was binding?
HELD: Yes. It is not here pretended that the BOD of the defendant corporation
had no knowledge of the agreement between Bowen and plaintiff. Indeed, at
the time the said Agreement was made, the BOD of the corporation was
composed of Bowen himself, his wife, Buenaseda and two others, with Bowen
and his wife controlling the majority of the stocks of the corporation. The Board
did not repudiate the agreement but on the contrary, acquiesced in and took
advantage of the benefits afforded by said agreement. Such acts are equivalent
to an implied ratification of the agreement by the BOD and bound the
corporation even without formal resolution passed and recorded.
It is agreed by the respondents, defendants below, that the profits of the
corporation form part of its assets and payment of a certain percentage of the
profits requires a declaration of dividends and/or resolution of the BOD. The
agreement is untenable. Although the plaintiff is a stockholder of the
corporation he does not, however, claim a share of the profits as such
stockholder, but under the agreement between him and the president of the
corporation which has been impliedly ratified by the BOD.
IN SUMMARY: An unauthorized act, or the act of a single director, officer or
agent of a corporation may be ratified either expressly or impliedly.
1. Express ratification is made through a formal board action;
2. Implied ratification can either be (a) silence or acquiescence; (b)
acceptance and/or retention of benefits, or (c) by recognition or adoption.
C. REMOVAL AND FILLING UP OF VACANCIES
 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.
NOTE:
1. By-laws may provide for causes or grounds for removal of a director;
2. A director representing the minority may not be removed except for those
causes;
3. A director NOT representing the minority may be removed even without
a cause.
REQUIREMENTS FOR A VALID REMOVAL:
1. The removal should take place at a general or special meeting duly call
for that purpose;
2. The removal must be by the vote of the stockholders holding or
representing 2/3 of the outstanding capital stock or the members entitled
to vote in cases of non-stock corporations; and
3. There must be a previous notice to the stockholders or members of the
intention to propose such removal at the meeting either by publication or
on written notice to the stockholders or members.
JURISDICTION OF THE COURT: The law, as it stands now, grants the
proper court, the power and authority to hear and decide cases “involving
controversies in the election or appointment of directors, trustees, officers, or
managers of such corporation, partnership or association.”
DEADLOCK: In the case of deadlock in a close corporation, the SEC is also
authorized to issue an Order as it deems appropriate “canceling, altering or
enjoining any resolution or other act of the corporation or its board of directors
or “directing or prohibiting” any act the corporation or the other board of
directors thereby effectively taking away the rights of the directors to act as
manager of the corporation.
VACANCY:
1. If a vacancy occurs by virtue of REMOVAL, Sec. 28 authorizes the filling
of the vacancy by the election of a replacement at the same meeting;
2. If it occurs NOT by removal, Sec. 29 applies.
38 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
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 for that purpose. A director or trustee so
elected to fill a vacancy shall be elected only or the unexpired term of his
predecessor in office.
A directorship or trusteeship to be filled by reason of an increase in the number
of directors or trustees shall be filled only by an election at a regular or at a
special meeting of stockholders or members duly called for the purpose, or in
the same meeting authorizing the increase of directors or trustees if so stated
in the notice of the meeting.
If the VACANCY is resulting from other than (1) by expiration of term; or (2)
by removal, the BOARD OF DIRECTORS, if still constituting a quorum, may fill
the vacancy.
VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA,
AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO SUNICO, VICTOR
SALTA, FRANCISCO ORTIGAS III, ERIC ROXAS, in their capacities as members
of the Board of Directors of Valle Verde Country Club, Inc., and JOSE RAMIREZ,
Petitioners
Vs.
Victor Africa, Respondent
(GR No. 151969; Sept. 4, 2009)
▪ FACTS: February 27, 1996: Ernesto Villaluna, Jaime C. Dinglasan
(Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor
Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray
Gamboa were elected as BOD during the Annual Stockholders’ Meeting
of petitioner Valle Verde Country Club, Inc. (VVCC). From 1997-2001, the
requisite quorum could not be obtained so they continued to act as
directors in a hold-over capacity.
▪
▪ On September 1, 1998, Dinglasan resigned, BOD still constituting a
quorum elected Eric Roxas (Roxas) followed by Macalintal.
▪
▪ On March 6, 2001, Jose Ramirez (Ramirez) was elected by the remaining
BOD. Respondent Africa (Africa), a member of VVCC, questioned the
election of Roxas and Ramirez as members of the VVCC Board with the
Securities and Exchange Commission (SEC) and the Regional Trial Court
(RTC) as contrary to Sec. 23 and 29 of the Corporation Code.
The RTC decided in favor of Africa.
ISSUE: WON the appointment of Roxas and Ramirez made by the remaining
members of the Board, still constituting a quorum, were valid?
HELD: No. The resolution of this legal issue is significantly hinged on the
determination of what constitutes a director’s term of office.
The holdover period is not part of the term of office of a member of
the board of directors. The word “term” has acquired a definite meaning in
jurisprudence. In several cases, we have defined “term” as the time during
which the officer may claim to hold the office as of right, and fixes the
interval after which the several incumbents shall succeed one another. The
term of office is not affected by the holdover. The term is fixed by statute
and it does not change simply because the office may have become vacant,
nor because the incumbent holds over in office beyond the end of the term
due to the fact that a successor has not been elected and has failed to qualify.
Term is distinguished from tenure in that an officer’s “tenure” represents
the term during which the incumbent actually holds office. The tenure
may be shorter (or, in case of holdover, longer) than the term for reasons
within or beyond the power of the incumbent.
Based on the above discussion, when Section 23 of the Corporation Code
declares that “the board of directors…shall hold office for one (1) year until
their successors are elected and qualified,” we construe the provision to mean
that the term of the members of the board of directors shall be only
for one year; their term expires one year after election to the office. The
holdover period – that time from the lapse of one year from a member’s
election to the Board and until his successor’s election and qualification – is
not part of the director’s original term of office, nor is it a new term; the
holdover period, however, constitutes part of his tenure. Corollary, when an
incumbent member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has expired,
and the incumbent is holding the succeeding term.
After the lapse of one year from his election as member of the VVCC Board in
1996, Makalintal’s term of office is deemed to have already expired. That he
continued to serve in the VVCC Board in a holdover capacity cannot be
considered as extending his term. This holdover period is not to be considered
as part of his term, which, as declared, had already expired.
With the expiration of Makalintal’s term of office, a vacancy resulted which, by
the terms of Section 29 of the Corporation Code, must be filled by the
stockholders of VVCC in a regular or special meeting called for the purpose.
To assume – as VVCC does – that the vacancy is caused by Makalintal’s
resignation in 1998, not by the expiration of his term in 1997, is both illogical
and unreasonable. His resignation as a holdover director did not change the
nature of the vacancy; the vacancy due to the expiration of Makalintal’s term
had been created long before his resignation.
The powers of the corporation’s board of directors emanate from its
stockholders
This theory of delegated power of the board of directors similarly explains why,
under Section 29 of the Corporation Code, in cases where the vacancy in the
corporation’s board of directors is caused not by the expiration of a member’s
term, the successor “so elected to fill in a vacancy shall be elected only for
the unexpired term of the his predecessor in office.” The law has authorized
the remaining members of the board to fill in a vacancy only in specified
instances, so as not to retard or impair the corporation’s operations; yet, in
recognition of the stockholders’ right to elect the members of the board, it
limited the period during which the successor shall serve only to the “unexpired
term of his predecessor in office.”
It also bears noting that the vacancy referred to in Section 29 contemplates a
vacancy occurring within the director’s term of office. When a vacancy
is created by the expiration of a term, logically, there is no more unexpired
term to speak of. Hence, Section 29 declares that it shall be the corporation’s
stockholders who shall possess the authority to fill in a vacancy caused by the
expiration of a member’s term.
CHANGE IN CONSTITUTION OF THE BOARD: must be reported by the
BOD to the SEC:
Sec. 26. Report of election of directors, trustees and officers. - Within
thirty (30) days after the election of the directors, trustees and officers of the
corporation, the secretary, or any other officer of the corporation, shall submit
to the Securities and Exchange Commission, the names, nationalities and
residences of the directors, trustees, and officers elected. Should a director,
trustee or officer die, resign or in any manner cease to hold office, his heirs in
case of his death, the secretary, or any other officer of the corporation, or the
director, trustee or officer himself, shall immediately report such fact to the
Securities and Exchange Commission
PURPOSE: to give public information, under sanction of oath responsible
39 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
officers, of the nature of the business, financial condition and operational status
of the company together with information on its key officers or managers so
that hose dealing with it and those who intend to do business with it may know
or have the means of knowing facts concerning the corporation’s financial
resources and business responsibility”
D. COMPENSATION OF DIRECTORS
Sec. 30. Compensation of directors. - In the absence of any provision in
the by-laws fixing their compensation, the directors shall not receive any
compensation, as such directors, except for reasonable per diems: Provided,
however, That any such compensation other than per diems may be granted to
directors by the vote of the stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders' meeting. In no
case shall the total yearly compensation of directors, as such directors, exceed
ten (10%) percent of the net income before income tax of the corporation
during the preceding year.
GENERALLY: Directors are not entitled to receive any compensation,
EXCEPT:
1. Reasonable per diems;
2. As provided in the by-laws or upon a majority vote of the stockholders;
and
3. If they are performing functions other than that of a director.
(3) above: Sec. 30 is clear on the point when it provides “as such directors”.
Therefore, special and extraordinary service rendered, outside of the regular
duties, may form the basis for a claim of special compensation, such as when
a director acts as a general counsel.
REASON: the office of a director is usually filled up by those chiefly interested
in the welfare of the institution by virtue of their interest in stock or other
advantages and such interests are presumed to be the motive for executing
duties of the office without compensation.
MAY THE COURTS LOOK INTO THE REASONABLENESS OF
COMPENSATION? The courts will not generally undertake to review the
fairness of official salaries, at the suit of a stockholder unless wrongdoing and
oppression or possible abuse of fiduciary position are shown.
When the recipient does not stand in the dual relation of the (1) one
compensated and (2) a participant in fixing his own compensation, it is
considered outside the proper judicial function to go into business policy
question of the fairness or reasonableness of compensation as fixed by the
board. Otherwise, it will call for a scrutiny of the reasonableness or fairness of
the compensation. Likewise, even if consented to by the majority of
stockholders, the courts may still look into such reasonableness if: (1) it would
amount to giving away corporate funds in the guise of compensation as against
the interest of the dissenting minority; or (2) in fraud of creditors, either
amounting to wastage of assets.
CENTRAL COOPERATIVE EXCHANGE (CCE) VS. TIBE, JR. (33 SCRA 593;
June 30, 1970) – This is a complaint filed by herein petitioner CCE for the
refund of certain amounts received by respondent when he served as member
of the board of directors of CCE, which were said to be per diems and
transportation expenses, representation expenses and commutable
discretionary funds.
ISSUE: WON the BOD had the power to appropriate funds for the expenses
claimed by respondent?
HELD: No. The by-laws expressly reserved unto the stockholders the power
to determine the compensation of the members of the BOD, and the
stockholders did restrict such compensation to (1) actual transportation
expenses plus (2) per diems of P30 and (3) actual expenses while waiting.
Even without the express prohibition, the directors are not entitled to
compensation for “The law is well-settled that directors of corporations
presumptively serve without compensation and in the absence of an
express agreement or a resolution thereto, no claim can be asserted
therefor. Thus it has been held that there can be no recovery of
compensation, unless expressly provided for, when director serves as
president or vice-president, as secretary or treasurer or cashier, as
member of an executive committee, as chairman of a building
committee, or similar offices.
Thus, the directors, in assigning themselves additional duties, such as the
visitation of FACOMAS, acted within their power, but, by voting for themselves
compensation for such additional duties, they acted in excess of their authority,
as express in the by-laws.
WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS,
DIMAS ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F. VILLASIS,
petitioner,
vs.
RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-
TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS & HON. JUDGE
PORFIRIO PARIAN, respondents
(GR No. 113032; 278 SCRA 216; Aug. 21, 1997)
FACTS: In a special board meeting, a resolution was passed providing for
compensation of officers. A few years later, petitioners Homero Villasis, Prestod
Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-complaint for
falsification of public documents (for submission of an income reflecting the
resolution as passed on 1985, when in fact it was passed in 1986) and estafa
(for the disbursement of funds by effecting payment to the aforesaid salaries)
against herein respondents who were members of the Board of Trustees who
were also officers of the corporation. The trial court acquitted respondents in
both charges without civil liability. The motion for reconsideration on the civil
aspect being denied, petitioners filed this petition.
ISSUE: WON the resolution granting compensation to OFFICERS of the
corporation is valid?
HELD: Yes. The proscription under Sec. 30, is against granting compensation
to directors/trustees of a corporation is not a sweeping rule. Worthy of note is
the clear phraseology of Sec 30 which states “… [T]he directors shall not
receive any compensation, as such directors, …” The phrase as such
directors is not without significance for it delimits the scope of the
prohibition to compensation given to them for services performed
purely in their capacity as directors or trustees. The unambiguous
implication is that members of the board may receive compensation, in addition
to reasonable per diems, when they render services to the corporation in a
capacity other than as directors/trustees. In the case at bench, the
Resolution granted monthly compensation to private respondents not in their
capacity as members of the board, but rather as officers of the corporation,
more particularly as Chairman, Vice-Chairman, Treasurer and Secretary of
WIT.
Clearly Sec. 30 is not violated. Consequently, the last sentence limiting the
compensation to 10% of the net income before income tax does not likewise
find application in this case since the compensation is being given to private
respondents in their capacity as officers of WIT and not as board members.
GOVERNMENT VS. EL HOGAR FILIPINO (50 Phil. 399; July 14, 1927) –
The members of the board of El Hogar Filipino receives 5% of the net profit as
shown in the balance sheet and is distributed in proportion to their attendance
to meetings of the board. A complaint was filed against the, and the sixth cause
of action alleged that the directors, instead of serving without pay, or receiving
nominal pay or a fixed salary - as the complainant supposes would be proper
– have been receiving large compensation in varying amounts.
ISSUE: WON the courts may declare the by-law provision null and void?
HELD: No. The Corporation Law does not undertake to prescribe the
rate of compensation for the directors of corporations. The power to fix
the compensation they shall receive, if any, is left to the corporation, to be
determined in its by-laws (Act No. 1459, sec. 21). Pursuant to this authority
the compensation for the directors of El Hogar Filipino has been fixed in section
40 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
92 of its by-laws, as already stated. The justice and propriety of this
provision was a proper matter for the shareholders when the by-laws
were framed; and the circumstance that, with the growth of the
corporation, the amount paid as compensation to the directors has
increased beyond what would probably be necessary to secure
adequate service from them is matter that cannot be corrected in this
action; nor can it properly be made a basis for depriving the respondent of its
franchise, or even for enjoining it from compliance with the provisions of its
own by-laws. If a mistake has been made, or the rule adopted in the by-laws
has been found to work harmful results, the remedy is in the hands of the
stockholders who have the power at any lawful meeting to change the rule.
The remedy, if any, seems to lie rather in publicity and competition, rather
than in a court proceeding. The sixth cause of action is in our opinion without
merit.
E. LIBABILITY OF CORPORATE OFFICERS
The general rule is that unless the law specifically provides a corporate officer
or agent is not civilly or criminally liable for acts done by him as such officer or
agent, or when absent bad faith or malice.
TRAMAT MERCANTILE, INC. VS. CA (238 SCRA 14; Nov. 7, 1994) – Melchor
dela Cuesta, doing business under the name Farmers Machineries, sold a
tractor to Tramat Mercantile, Inc. In payment, David Ong, Tramat’s president
and manager issued a check for P33,500. Tramat sold the tractor, together
with an attached lawn mower fabricated by it, to NAWASA. David Ong put a
stop payment on the check when NAWASA refused to pay on the account that
aside from the defects on the lawn mower, the engine (sold by dela Costa)
was a reconditioned unit.
De la Costa filed an action for recovery of money which was granted by the
court.
ISSUE: WON Ong should be held jointly and severally liable?
HELD: No. It was an error to hold David Ong jointly and severally liable with
TRAMAT to de la Cuesta under the questioned transaction. Ong had there so
acted, not in his personal capacity, but as an officer of a corporation, TRAMAT,
with a distinct and separate personality. As such, it should only be the
corporation, not the person acting for and on its behalf that properly could be
made liable thereon.
Personal liability of a corporate director, trustee or officer along
(although not necessarily) with the corporation may so validly attach,
as a rule, only when —
1. He assents (a) to a patently unlawful act of the corporation, or
(b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict
of interest, resulting in damages to the corporation, its stockholders or other
persons;
2. He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written
objection thereto;
3. He agrees to hold himself personally and solidarily liable with the
corporation;
4. He is made, by a specific provision of law, to personally answer for his
corporate action.
In the case at bench, there is no indication that petitioner David Ong could be
held personally accountable under any of the abovementioned cases.
RICARDO A. LLAMADO, petitioner,
vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents
(GR No. 99032; 270 SCRA 423; March 26, 1997)
FACTS: Private complainant Leon Gaw delivered to the accused Ricardo
Llamado and Jacinto Pascual the amount of P180,000 which is to be repaid in
6 months with 12% interest. As security, the accused issued and signed a
postdated check which was later on stopped and dishonored for being drawn
against insufficient funds. Gaw filed a complaint for violation of BP Blg. 22.
Pascual remained at large and the trial on the merits against Llamado was
conducted. The trial court convicted Llamado.
ISSUE: WON petitioner, treasurer of Pan Asia Finance Corporation could be
held civilly and criminally liable?
HELD: Yes. Petitioner denies knowledge of the issuance of the check without
sufficient funds and involvement in the transaction with private complainant.
However, knowledge involves a state of mind difficult to establish. Thus, the
statute itself creates a prima facie presumption, i.e., that the drawer had
knowledge of the insufficiency of his funds in or credit with the bank at the
time of the issuance and on the check's presentment for payment. Petitioner
failed to rebut the presumption by paying the amount of the check within five
(5) banking days from notice of the dishonor. His claim that he signed the
check in blank which allegedly is common business practice is hardly a defense.
If as he claims, he signed the check in blank, he made himself prone to being
charged with violation of BP 22. It became incumbent upon him to prove his
defenses. As Treasurer of the corporation who signed the check in his capacity
as an officer of the corporation, lack of involvement in the negotiation for the
transaction is not a defense.
Petitioner's argument that he should not be held personally liable for the
amount of the check because it was a check of the Pan Asia Finance
Corporation and he signed the same in his capacity as Treasurer of the
corporation, is also untenable. The third paragraph of Section 1 of BP Blg. 22
states:
“Where the check is drawn by a corporation, company or entity, the
person or persons who actually signed the check in behalf of such
drawer shall be liable under this Act”
ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F. BASILIO, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION, LUZVIMINDA SANTOS,
SHIRLEY PORRAS, CARMEN ELIZARDE, ET. AL., respondents
(GR No. 121434; 273 SCRA 35; June 2, 1997)
FACTS: Private respondents were employees of Crispa, Inc. who were
dismissed due to alleged retrenchment. They filed an illegal dismissal complaint
with the NLRC against Crispa, Inc., Valeriano Floro (major stockholder,
incorporation and director of Crispa) and petitioners, who were high ranking
officials and directors of Crispa. The Labor Arbiter dismissed the complaint but
ordered petitioners, Floro and Crispa to pay separation pay.
ISSUE: WON petitioners can be held liable?
HELD: Yes. A corporation is a juridical entity with legal personality separate
and distinct from those acting for and in its behalf and, in general, from the
people comprising it. The general rule is that obligations incurred by the
corporation, acting through its directors, officers and employees, are its sole
liabilities. There are times, however, when solidary liabilities may be incurred
but only when exceptional circumstances warrant such as in the following
cases:
“1. When directors and trustees or, in appropriate cases, the
officers of a corporation: (a) vote for or assent to patently
unlawful acts of the corporation; (b) act in bad faith or with
gross negligence in directing the corporate affairs; (c) are
guilty of conflict of interest to the prejudice of the corporation,
its stockholders or members, and other persons;
2. When a director or officer has consented to the issuance of
watered stocks or who, having knowledge thereof, did not
forthwith file with the corporate secretary his written objection
thereto;
3. When a director, trustee or officer has contractually agreed or
41 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
stipulated to hold himself personally and solidarily liable with
the corporation; or
4. When a director, trustee or officer is made, by specific
provision of law, personally liable for his corporate action.”2
In labor cases, particularly, corporate directors and officers are
solidarily liable with the corporation for the termination of
employment of corporate employees done with malice or in bad faith.
In this case, it is undisputed that petitioners have a direct hand in the illegal
dismissal of respondent employees. They were the ones, who as high-ranking
officers and directors of Crispa, Inc., signed the Board Resolution retrenching
the private respondents on the feigned ground of serious business losses that
had no basis apart from an unsigned and unaudited Profit and Loss Statement
which, to repeat, had no evidentiary value whatsoever. This is indicative of
bad faith on the part of petitioners for which they can be held jointly and
severally liable with Crispa, Inc. for all the money claims of the illegally
terminated respondent employees in this case.
F. THREE-FOLD DUTY OF DIRECTORS
Directors owe a three-fold duty to the corporation: (1) Obedience; (2) Diligence
and (3) 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.
OBEDIENCE: as stated in the first part of Sec. 31 refers to the act of voting
or assenting, either willfully or knowingly, to patently unlawful acts thereby
making the responsible director liable for damages resulting therefrom;
DILIGENCE: Under the second part of Sec. 31, the directors are required to
manage the corporate affairs with reasonable care and prudence. This is
because the liability of a corporation is not limited to willful breach of trust or
excess of power, but extends also to negligence. Their liability rests upon the
common law rule which renders liable every agent who violates his authority
or neglects his duty to the damage of his principal.
The degree of diligence is relative. The more fair and satisfactory rule is that
degree of care and diligence which an ordinary prudent director could
reasonably be expected to exercise in a like position under similar
circumstances.
BUSINESS JUDGMENT RULE: Although directors are commonly said to be
responsible both for reasonable care and also prudence, the formula is
continually repeated that they are not liable for losses due to imprudence or
honest error of judgment. The business judgment rule in effect states that
questions of policy and management are left solely to the honest decision of
the board of directors and the courts are without authority to substitute its
judgment as against the former. The directors are business managers and as
long as they act in good faith, its actuations are not subject to judicial review.
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
(GR No. L-15092; 5 SCRA 36; May 18, 1962)
FACTS: Appellants have been sugar planter adhered to defendant-appellees
sugar central mill under identical milling contracts with a 55% share of the
resulting product. There was a proposal to increase the planter’s share to 60%
which was adopted by defendant in an Amended Milling Contract and
consequently a Board Resolution.
In 1953, the appellants initiated the present action, contending that three
Negros sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a
total annual production exceeding one-third of the production of all the sugar
central mills in the province, had already granted increased participation (of
62.5%) to their planters, and that under paragraph 9 of the resolution of
August 20, 1936, heretofore quoted, the appellee had become obligated to
grant similar concessions to the plaintiffs (appellants herein). The appellee
Bacolod-Murcia Milling Co., Inc., resisted the claim, and defended by urging
that the stipulations contained in the resolution were made without
consideration; that the resolution in question was, therefore, null and void ab
initio, being in effect a donation that was ultra vires and beyond the powers of
the corporate directors to adopt. The trial court decided in favor of defendant,
thus the present appeal.
ISSUE: WON the resolutions passed by the bard are valid and binding?
HELD: Yes. There can be no doubt that the directors of the appellee company
had authority to modify the proposed terms of the Amended Milling Contract
for the purpose of making its terms more acceptable to the other contracting
parties.
As the resolution in question was passed in good faith by the board
of directors, it is valid and binding, and whether or not it will cause
losses or decrease the profits of the central, the court has no
authority to review them.
“They hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be controlled
in the reasonable exercise and performance of such duty. Whether the
business of a corporation should be operated at a loss during depression, or
close down at a smaller loss, is a purely business and economic problem to
be determined by the directors of the corporation and not by the court. It is
a well-known rule of law that questions of policy or of management are left
solely to the honest decision of officers and directors of a corporation, and
the court is without authority to substitute its judgment of the board of
directors; the board is the business manager of the corporation, and so long
as it acts in good faith its orders are not reviewable by the courts. (Fletcher
on Corporations, Vol. 2, p. 390).”
And it appearing undisputed in this appeal that sugar centrals of La Carlota,
Hawaiian Philippines, San Carlos and Binalbagan (which produce over one-third
of the entire annual sugar production in Occidental Negros) have granted
progressively increasing participations to their adhered planter at an average
rate of
62.333% for the 1951-52 crop year;
64.2% for 1952-53;
64.3% for 1953-54;
64.5% for 1954-55; and
63.5% for 1955-56,
the appellee Bacolod-Murcia Milling Company is, under the terms of its
Resolution of August 20, 1936, duty bound to grant similar increases to
plaintiffs-appellants herein.
LIABILITY OF DIRECTORS FOR ACTS OF THEIR CO-DIRECTORS:
Generally: a director is not liable for the acts of their co-directors, unless: (1)
42 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
He connives or participates; or (2) He is negligent in not discovering or acting
to prevent it. Thus, absent of actual knowledge of the wrongful activities, on
the part of the co-directors, the same cannot be imputed to the other director
unless in the exercise of reasonable care attending his responsibilities, he
should have been aware of suspicious circumstances demanding correlative
action.
LOYALTY: refers to the proscription imposed on directors on acquiring any
personal or pecuniary interest in conflict with their duty as director. Their
relationship is regarded as “fiduciary relation”. As fiduciaries, they are obliged
to act with utmost candor and fair dealing for the interest of the corporation
and without selfish motives.
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.
Apparent from Sec. 31 and 34, the duty of loyalty is violated in the following
instances:
1. When a director or trustee “acquires any personal or pecuniary interest in
conflict with (his) duty as such director or trustee”;
2. When he “attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect to 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”; and
3. When he, “by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining
profit to the prejudice of such corporation”.
FORBIDDEN PROFITS: Forbidden in the sense that directors and officers are
fiduciary representatives of the corporation and as such they are not allowed
to obtain any personal profit, commission, bonus or gain for their official
actions. This may also refer to those arising from transactions of directors with
third persons which may involve misappropriation of corporate opportunities
and disloyal diverting of business. Directors and officers are corporate insiders
and cannot, therefore, utilize their strategic position for their own preferment
or use their powers and opportunities for their personal advantage to the
exclusion of the interest which they represent.
CORPORATE OPPORTUNITY DOCTRINE: it places a director of a
corporation in the position of a fiduciary and prohibits him from seizing a
business opportunity and/or developing it at the expense and with the facilities
of the corporation. He cannot appropriate to himself opportunity which in
fairness should belong to the corporation.
RATIFICATION:
1. The second paragraph of Sec. 31 which makes a director liable to account
for profits if he attempts to acquire or acquires any interest adverse to
the corporation in respect to any matter reposed in him in confidence as
to which equity imposes a disability upon him to deal in his own behalf is
not subject to ratification.
2. Whereas, in Sec. 34, if a director acquires a business opportunity which
should belong to the corporation, he is bound to account for such profits
unless his act is ratified by the stockholders owing or representing at least
2/3 of the outstanding capital stock.
Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to sell
his property with a fair market value of P100M for P90M.
a. If it was offered first to A, and A made a profit of P10M, this would fall
under Sec. 34 and may be subject to ratification; A merely acquired a
business opportunity owing to the corporation.
b. If it was offered to REALTY CORP., and A, later on offered to buy it for
 P95 and sold it making a profit of P5M, it would fall under Sec. 31 and not
subject to ratification, A should return the profits to REALTY CORP. It
was a matter reposed in him in confidence.
STRONG VS. REPIDE (41 Phil. 947; May 3, 1909) – the Governor of the
Philippine Islands, on behalf of the government, made an offer of purchase for
the total sum of $6,,043,219.47 in gold for all the friar lands, though owned by
different owners.
While this state of things existed, and before the final offer had been made by
the Governor, the defendant, although still holding out for a higher price for
the lands, took steps to purchase the 800 shares of stock in his own company
from Mrs. Strong, which he knew were in the possession of F. Stuart Jones, as
her agent. The defendant employed Krauffman and the latter employed Mr.
Sloan, a broker, to purchase the stock for him. Mr. Sloan, the husband, did not
know who wanted to buy the shares nor did Jones when he was spoken to.
Jones would not have sold at the price he did had he known it was the
defendant who was purchasing, because, as he said, it would show increased
value, as the defendant would not be likely to purchase ore stock unless the
price was going up.
ISSUE: WON it was the duty of the defendant to disclose to the agent of the
plaintiff the facts bearing upon or which might affect the value of the stock?
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 necessary to constitute a quorum for such
meeting;
2. That the vote of such director or trustee was not necessary for the approval
of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the
board of directors.
Where any of the first two conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director or trustee, such contract may
be ratified by the vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of at least two-thirds (2/3) of the members
in a meeting called for the purpose: Provided, That full disclosure of the adverse
interest of the directors or trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the circumstances.

HELD: Yes. A director upon whose action the value of the shares depends
cannot avail of his knowledge of what his own action will be to acquire shares
from those whom he intentionally keeps in ignorance of his expected action
and the resulting value of the shares.
Generally: A contract entered into by a director with his own corporation is
voidable at the latter’s option, except when all the conditions laid down in Sec.
Even though a director may not be under the obligation of a fiduciary nature
32 are met. On the other hand, where any of the first two conditions is absent,
to disclose to a shareholder his knowledge affecting the value of the shares,
the contract becomes voidable subject to the ratification of the stockholders
that duty may exist in special cases, and did exist upon the facts in this case.
representing 2/3 of the outstanding capital stock – the requirements of which
are: (1) there must be a meeting called for that purpose; (2) full disclosure of
In this case, the facts clearly indicate that a director of a corporation owning
the adverse interest of the director; and (3) the contract is fair and reasonable
friar lands in the Philippine Islands, and who controlled the action of the
under the circumstances.
corporation, had so concealed his exclusive knowledge of the impending sale
to the government from a shareholder from whom he purchased, through an
If the self-dealing director owns all or substantially all of the shares of stock,
agent, shares in the corporation, that the concealment was in violation of his
thereby making ratification easily possible, the last sentence of Sec. 32 should
duty as a director to disclose such knowledge, and amounted to deceit
be made to apply by determining reasonableness of the transaction to which
sufficient to avoid the sale; and, under such circumstances, it was immaterial
there is no yardstick. Every case stands upon its own bottom, and the ultimate
whether the shareholder's agent did or did not have power to sell the stock.
question is whether the contract was honest and beneficial which is always a
question of fact.
In addition to his ownership of almost three-fourths of the shares of the stock
of the company, the defendant was one of the five directors of the company,
PRIME WHITE CEMENT CORPORATION, petitioner,
and was elected by the board the agent and administrator general of such
vs.
company, "with exclusive intervention in the management" of its general
IAC and ALEJANDRO TE, respondents
business.
(GR No. L-68555; 220 SCRA 103; March 19, 1993)
Concealing his identity when procuring the purchase of stock, by his agent,
FACTS: Respondent Alejandro Te, a director of petitioner corporation, was
was in itself stock evidence of fraud on the part of the defendant. The
awarded a dealership agreement whereby Te would be the exclusive dealer
concealment was not a mere inadvertent omission but was a studied and
and/or distributor of the corporation in the entire Mindanao. As a consequence,
intentional omission, to be characterized as part of the deceitful machination
Te entered into different contracts for selling white cement. Laer on, defendant
to obtain the purchase without giving information whatever as to the state and
corporation decided to impose certain conditions upon the dealership
probable result of the negotiations, to the vendor of the stock, and to, in that
agreement.
way, obtain the same at a lower price.
Several demands to comply with the agreement were made by Te to the
G. SELF-DEALING DIRECTORS
corporation but were refused and Te was constrained to cancel the contracts
he entered into.
The self-dealing director is one who deals or transacts business with his own
corporation.
Defendant corporation entered into an exclusive dealership agreement with
Napoleon Co for the marketing of white cement in Mindanao. Hence, this suit.

ISSUE: WON the dealership agreement entered into by Te with his own
corporation is valid and binding?

HELD: No. In the instant case respondent Te was not an ordinary stockholder;
he was a member of the Board of Directors and Auditor of the corporation as
well. He was what is often referred to as a "self-dealing" director.

A director of a corporation holds a position of trust and as such, he owes a

duty of loyalty to his corporation. In case his interests conflict with those of the
43 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
corporation, he cannot sacrifice the latter to his own advantage and benefit.
As corporate managers, directors are committed to seek the maximum amount
of profits for the corporation. This trust relationship "is not a matter of statutory
or technical law. It springs from the fact that directors have the control and
guidance of corporate affairs and property and hence of the property interests
of the stockholders.
Granting arguendo that the "dealership agreement" involved here would be
valid and enforceable if entered into with a person other than a director or
officer of the corporation, the fact that the other party to the contract was a
Director and Auditor of the petitioner corporation changes the whole situation.
First of all, We believe that the contract was neither fair nor reasonable. The
"dealership agreement" entered into in July, 1969, was to sell and supply to
respondent Te 20,000 bags of white cement per month, for five years starting
September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a
businessman himself and must have known, or at least must be presumed to
know, that at that time, prices of commodities in general, and white cement in
particular, were not stable and were expected to rise. At the time of the
contract, petitioner corporation had not even commenced the manufacture of
white cement, the reason why delivery was not to begin until 14 months later.
He must have known that within that period of six years, there would be a
considerable rise in the price of white cement. In fact, respondent Te's own
Memorandum shows that in September, 1970, the price per bag was P14.50,
and by the middle of 1975, it was already P37.50 per bag. Despite this, no
provision was made in the "dealership agreement" to allow for an increase in
price mutually acceptable to the parties. Instead, the price was pegged at
P9.70 per bag for the whole five years of the contract. Fairness on his part as
a director of the corporation from whom he was to buy the cement, would
require such a provision. In fact, this unfairness in the contract is also a basis
which renders a contract entered into by the President, without authority from
the Board of Directors, void or voidable, although it may have been in the
ordinary course of business. We believe that the fixed price of P9.70 per bag
for a period of five years was not fair and reasonable. Respondent Te, himself,
when he subsequently entered into contracts to resell the cement to his "new
dealers" Henry Wee and Gaudencio Galang stipulated as follows:
The price of white cement shall be mutually determined by us but in no
case shall the same be less than P14.00 per bag (94 lbs)
As director, especially since he was the other party in interest, respondent Te's
bounden duty was to act in such manner as not to unduly prejudice the
corporation. In the light of the circumstances of this case, it is to Us quite clear
that he was guilty of disloyalty to the corporation; he was attempting in effect,
to enrich himself at the expense of the corporation. There is no showing that
the stockholders ratified the "dealership agreement" or that they were fully
aware of its provisions. The contract was therefore not valid and this Court
cannot allow him to reap the fruits of his disloyalty.
CHARLES W. MEAD, plaintiff-appellant,
vs.
E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING AND
CONSTRUCTION COMPANY, defendant-appellants
(GR No. 6217; 21 Phil. 95; Dec. 26, 1911)
FACTS: Herein plaintiff-appellant Mead with defendant McCullough formed the
Philippine Engineering and Construction Company, the incorporators being the
only stockholders and directors of the company. When Mead left for China, the
other directors entered into an agreement where all the rights in a “wrecking
contract” with the naval authorities were sold to defendant. The defendant, in
turn, sold these rights with R.W. Brown, HDC jones, John Macleod and TH
Twentyman, and retaining one sixth interest, formed Manila Salvage
Association.
ISSUE: WON officers or directors of the corporation may purchase the
corporate property?
HELD: Yes. While a corporation remains solvent, we can see no reason why a
director or officer, by the authority of a majority of the stockholders or board
of managers, may not deal with the corporation, loan it money or buy property
from it, in like manner as a stranger. So long as a purely private corporation
remains solvent, its directors are agents or trustees for the stockholders. They
owe no duties or obligations to others. But the moment such a corporation
44 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
becomes insolvent, its directors are trustees of all the creditors, whether they
are members of the corporation or not, and must manage its property and
assets with strict regard to their interest; and if they are themselves creditors
while the insolvent corporation is under their management, they will not be
permitted to secure to themselves by purchasing the corporate property or
otherwise any personal advantage over the other creditors. Nevertheless, a
director or officer may in good faith and for an adequate consideration
purchase from a majority of the directors or stockholders the property even of
an insolvent corporation, and a sale thus made to him is valid and binding upon
the minority. (Beach et al. vs. Miller, supra; Twin-Lick Oil Company vs. Marbury,
supra; Drury vs. Cross, 7 Wall., 299; Curran vs. State of Arkansas, 15 How.,
304; Richards vs. New Hamphshire Insurance Company, 43 N. H., 263;
Morawetz on Corporations (first edition), sec. 579; Haywood vs. Lincoln
Lumber Company et al., 64 Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott
vs. Shaw Carriage Company, 21 Fed. Rep., 577.)
In the case of the Twin-Lick Oil Company vs. Marbury, he court said:
That a director of a joint-stock corporation occupies one of those fiduciary
relations where his dealings with the subject-matter of his trust or agency,
and with the beneficiary or party whose interest is confided to his care, is
viewed with jealousy by the courts, and may be set aside on slight
grounds, is a doctrine founded on the soundest morality, and which has
received the clearest recognition in this court and others. (Koehler vs.
Iron., 2 Black, 715; Drury vs. Cross, 7 Wall., 299; R.R. Co. vs. Magnay,
25 Beav., 586; Cumberland Co vs. Sherman, 30 Barb., 553; Hoffman S.
Coal Co. vs. Cumberland Co., 16 Md., 456.) The general doctrine,
however, in regard to contracts of this class, is, not that they are
absolutely void, but that they are voidable at the election of the party
whose interest has been so represented by the party claiming under it.
We say, this is the general rule; for there may be cases where such
contracts would be void ab initio; as when an agent to sell buys of himself,
and by his power of attorney conveys to himself that which he was
authorized to sell. But even here, acts which amount to a ratification by
the principal may validate the sale
The sale or transfer of the corporate property in the case at bar was made by
three directors who were at the same time a majority of stockholders. If a
majority of the stockholders have a clear and a better right to sell the corporate
property than a majority of the directors, then it can be said that a majority of
the stockholders made this sale or transfer to the defendant McCullough.
What were the circumstances under which said sale was made? The
corporation had been going from bad to worse. The work of trying to raise the
sunken Spanish fleet had been for several months abandoned. The corporation
under the management of the plaintiff had entirely failed in this undertaking.
It had broken its contract with the naval authorities and the $10,000 Mexican
currency deposited had been confiscated. It had no money. It was considerably
in debt. It was a losing concern and a financial failure. To continue its operation
meant more losses. Success was impossible. The corporation was civilly dead
and had passed into the limbo of utter insolvency. The majority of the
stockholders or directors sold the assets of this corporation, thereby relieving
themselves and the plaintiff of all responsibility. This was only the wise and
sensible thing for them to do. They acted in perfectly good faith and for the
best interests of all the stockholders. "It would be a harsh rule that would
permit one stockholder, or any minority of stockholders to hold a majority to
their investment where a continuation of the business would be at a loss and
where there was no prospect or hope that the enterprise would be profitable."
We therefore conclude that the sale or transfer made by the quorum of the
board of directors — a majority of the stockholders — is valid and binding upon
the majority-the plaintiff.
H. INTERLOCKING DIRECTORS
An interlocking director is a director in one corporation who deals or transacts
with another corporation of which he is also a director. In such case, there may
effectively be a dual agency, a divided allegiance where allegiance in one
corporation may subordinated to the other.
The prevailing view is that these contracts entered into where there is an
interlocking director is not voidable merely by reason of conflicting duties or
interest as to corporations represented, even when a majority or all of the
directors are common to both corporations. It is recognized that such will be
upheld if there is no bad faith or unfairness or collusion.
Sec. 33. Contracts between corporations with interlocking directors.
– (1) Except in cases of fraud, and provided (2) the contract is fair and
reasonable under the circumstances, a contract between two or more
corporations having interlocking directors shall not be invalidated on that
ground alone: Provided, That if the interest of the interlocking director in one
corporation is substantial and his interest in the other corporation or
corporations is merely nominal, he shall be subject to the provisions of the corporation was denied until within a comparatively short time, but his right is
preceding section insofar as the latter corporation or corporations are
concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital not proved that the corporation itself was under the control of the guilty
stock shall be considered substantial for purposes of interlocking directors.
NOTE:
1. The contract between corporations with interlocking director is valid
absent fraud and provided it is reasonable under the circumstances;
2. If the interest of the interlocking director in one corporation exceeds
20% and in the other merely nominal, the contract becomes voidable at
the latter corporation’s option. In effect, the director would be treated as firmly established the law for England and America, that where corporate
a self-dealing director under Sec. 32;
3. If the interest in both companies is either both substantial or both
nominal, Sec. 33 will apply.
I. DERIVATIVE SUIT
In case of a wrongful or fraudulent act of a director, officer or agent,
stockholders have the following options:
1. Individual or Personal Action – for direct injury to his rights, such as denial So it is clear that the plaintiff, by reason of the fact that he is a stockholder in
of his right to inspect corporate books and records or pre-emptive rights;
2. Representative or Class Suit – in which one or more members of a class
sue for themselves as a class or for all to whom the right was denied,
either as an individual action or a derivative suit; and a
3. Derivative Suit – an action based on injury to the corporation – to enforce
a corporate right – wherein the corporation itself is joined as a necessary
party, and recovery is in favor of and for the corporation. It is a suit
granted to any stockholder to institute a case to remedy a wrong done
directly to the corporation and indirectly to stockholders.
CANDIDO PASCUAL, plaintiff-appellant,
vs.
EUGENIO DEL SAZ OROZCO, ET AL, defendants-appellees
(GR No. L-5174; 19 Phil. 83; March 17, 1911)
FACTS: During 1903-1907, the defendant-appellees, without the knowledge
and acquiescence of the stockholders deducted their compensation from gross
income instead of from the net profits of the bank, the same with their
predecessors for the years 1899-1902.
Plaintiff-appellant brings this action in his own right as a stockholder of the
bank, for the benefit of the bank and all the stockholders, in behalf of the
corporation, which, even though, nominally a defendant, is to all intents and
purposes the real plaintiff in this case as shown in the prayer of the complaint. years 1989 to the first half of 1903.)
example of one person or entity owning all the stock and still having no greater
or essentially different title than if he owned but one single share. Since,
therefore, the stockholder has no title; it is evident that what he does have,
with respect to the corporation and his fellow stockholder, are certain rights
sui generis. These rights are generally enumerated as being, first, to have a
certificate or other evidence of his status as stockholder issued to him; second,
to vote at meetings of the corporation; third, to receive his proportionate share
of the profits of the corporation; and lastly, to participate proportionately in
the distribution of the corporate assets upon the dissolution or winding up.
(Purdy's Beach on Private Corporations, sec. 554.)
The right of individual stockholders to maintain suits for and on behalf of the
now no longer doubted. Accordingly, in 1843, in the leading case of Foss vs.
Harbottle, a stockholder brought suit in the name of himself and other
defrauded stockholders, and for the benefit of the corporation, against the
directors, for a breach of their duty to the corporation. This case was decided
against the complaining stockholder, on the ground that the complainant had
parties, and had not proved that it was unable to institute suit. The court,
however, broadly intimated that a case might arise when a suit instituted by
defrauded stockholders would be entertained by the court and redress given.
Acting upon this suggestion, and impelled by the utter inadequacy of suits
instituted by the corporation, defrauded stockholders continued to institute
these suits and to urge the courts of equity to grant relief. These efforts were
unsuccessful in clearly establishing the right of stockholders herein until the
cases of Atwol against Merriwether, in England, 1867, and of Dodge vs.
Woolsey, in this country, in 1855. These two great and leading cases have
directors have committed a breach of trust either by their frauds,
ultra vires acts, or negligence, and the corporation is unable or
unwilling to institute suit to remedy the wrong, a single stockholder
may institute that suit, suing on behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a
redress of the wrong done directly to the corporation and indirectly
to the stockholders.
the bank (corporation) has a right to maintain a suit for and on behalf of the
bank, but the extent of such a right must depend upon when, how, and for
what purpose he acquired the shares which he now owns. In the determination
of these questions we cannot see how, if it be true that the bank is a quasi-
public institution, it can affect in any way the final result.
It is alleged that the plaintiff became a stockholder on the 13th of November,
1903; that the defendants, as members of the board of directors and board of
government, respectively, during each and all the years 1903, 1904, 1905,
1906, and 1907, did fraudulently, and to the great prejudice of the bank and
its stockholders, appropriate to their own use from the profits of the bank sums
of money amounting approximately to P20,000 per annum.
It is self-evident that the plaintiff in the case at bar was not, before he acquired
in September, 1903, the shares which he now owns, injured or affected in any
manner by the transactions set forth in the second cause of action. His vendor
could have complained of these transactions, but he did not choose to do so.
The discretion whether to sue to set them aside, or to acquiesce in and agree
to them, is, in our opinion, incapable of transfer. If the plaintiff himself had
been injured by the acts of defendants' predecessors that is another matter.
He ought to take things as he found them when he voluntarily acquired his ten
shares. If he was defrauded in the purchase of these shares he should sue his
vendor. (Thus, he may sue for the second half of 1903 to 1907 but not for the

ISSUE: WON plaintiff has capacity to sue?
HELD: Yes. In suits of this character the corporation itself and not the plaintiff
stockholder is the real party in interest. The rights of the individual stockholder
are merged into that of the corporation. It is a universally recognized doctrine
that a stockholder in a corporation has no title legal or equitable to the
corporate property; that both of these are in the corporation itself for the
benefit of all the stockholders. Text writers illustrate this rule by the familiar
So it seems to be settled by the Supreme Court of the United States, as a
matter of substantive law, that a stockholder in a corporation who was not
such at the time of the transactions complained of, or whose shares had not
devolved upon him since by operation of law, cannot maintain suits of this
character, unless such transactions continue and are injurious to the
stockholder, or affect him especially and specifically in some other way.
HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W.

45 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
ROBINSON, plaintiffs-appellants,
vs.
THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC
BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D. MACINTOSH,
defendants-appellees.
(GR No. L-25241; 49 Phil. 512; Nov. 3, 1926)
FACTS: Plaintiffs, stockholders (together with Barclay) of Teal and Company
(Company), entered into a Memorandum of Agreement and Voting Trust
Agreement with defendant Asia Banking Corporation (Bank) with the
understanding that it was intended for the protection of all parties thereto from
outside creditors, but that they were not intended to be enforced according to
the letter thereof, and that they did not contain the true agreement between
the Bank and the Company which was to finance the company without
interference from the above-named creditors.
That shortly after, Mullen caused the removal of the plaintiffs as directors of
the Company and their replacement. The defendants thereafter gave pledges
and mortgages from the Company to the Bank and entered into contracts as
directed by the Bank, and permitted the Bank to foreclose the same and to sell
the property of the Company itself and permitted the Bank to institute suits
against the Company, in which the Company was not represented by anyone
having its interest at heart and in which reason the Bank occupied both plaintiff
and defendant and tricked and deluded the courts into giving judgment in
which the rights of the real parties were concealed and unknown to the courts.
Thereafter, defendants incorporated Philippine Motors Corporation where all
the assets and goodwill of the Company were transferred by the Bank.
ISSUE: WON the plaintiffs have the legal capacity to bring an action?
HELD: Yes. Invoking the well-known rule that shareholders cannot ordinarily
sue in equity to redress wrongs done to the corporation, but that the action
must be brought by the Board of Directors, the appellees argue — and the
court below held — that the corporation Teal and Company is a necessary party
plaintiff and that the plaintiff stockholders, not having made any demand on
the Board to bring the action, are not the proper parties plaintiff. But, like most
rules, the rule in question has its exceptions. It is alleged in the complaint and,
consequently, admitted through the demurrer that the corporation Teal and
Company is under the complete control of the principal defendants in
the case, and, in these circumstances, it is obvious that a demand
upon the Board of Directors to institute an action and prosecute the
same effectively would have been useless, and the law does not
require litigants to perform useless acts. (Exchange bank of Wewoka vs.
Bailey, 29 Okla., 246; Fleming and Hewins vs. Black Warrior Copper Co., 15
Ariz., 1; Wickersham vs. Crittenden, 106 Cal., 329; Glenn vs. Kittaning Brewing
Co., 259 Pa., 510; Hawes vs. Contra Costa Water Company, 104 U. S., 450.)
The conclusion of the court below that the plaintiffs, not being stockholders in
the Philippine Motors Corporation, had no legal right to proceed against that
corporation in the manner suggested in the complaint evidently rest upon a
misconception of the character of the action. In this proceeding it was
necessary for the plaintiffs to set forth in full the history of the various
transactions which eventually led to the alleged loss of their property and, in
making a full disclosure, references to the Philippine Motors Corporation appear
to have been inevitable. It is to be noted that the plaintiffs seek no judgment
against the corporation itself at this stage of the proceedings.
In our opinion the plaintiffs state a good cause of action for equitable relief
and their complaint is not in any respect fatally defective. The judgment of the
court below is therefore reversed, the defendants demurrer is overruled, and
it is ordered that the return of the record to the Court within ten days from the
return of the record to the Court of First Instance. So ordered
REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc.,
plaintiff-appellant,
vs.
MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN,
THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY
BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees
(GR No. L-22399; 19 SCRA 671; March 30, 1967)
46 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
FACTS: Damaso Perez, a stockholder of Republic Bank, instituted a derivative
suit against defendant Pablo Roman, then President of the Bank, for granting
certain loans to fictitious and non-existing persons and to their close friends,
relatives and/or employees, who were in reality their dummies on the basis of
fictitious or inflated appraised value of real estate properties, in connivance
with other officials.
The complaint alleged that Miguel Cuaderno, then Central Bank Governor,
acting upon the complaint, and the Monetary Board ordered an investigation
and found violations of the General Banking Act, but no information was filed
until his retirement; that to neutralize the impending action against him, Pablo
Roman engaged Miguel Cuaderno as technical consultant and selected
Bienvenido Dizon as Chairman of the Board of the Bank; that such appointment
was done in bad faith and without intention to protect the interest of the Bank
but were only prompted to protect Pablo Roman.
The complaint, therefore, prayed for a writ of preliminary injunction against eh
Monetary Board in confirming such appointments, but was dismissed by the
lower court.
ISSUE: WON the court below erred in dismissing the complaint?
HELD: Yes. The defendants mainly controvert the right of plaintiff to question
the appointment and selection of defendants Cuaderno and Dizon, which they
contend to be the result of corporate acts with which plaintiff, as stockholder,
cannot interfere. Normally, this is correct, but Philippine jurisprudence is settled
that an individual stockholder is permitted to institute a derivative or
representative suit on behalf of the corporation wherein he holds
stock in order to protect or vindicate corporate rights, whenever (1)
the officials of the corporation refuse to sue, or (2) are the ones to be
sued or (3) hold the control of the corporation. In such actions, the
suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest (Pascual vs. Del Saz Orozco, 19
Phil. 82, 85; Everett vs. Asia Banking Corp., 45 Phil. 518; Angeles vs. Santos,
64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's action
here is precisely in conformity, with these principles. He is neither alleging
nor vindicating his own individual interest or prejudice, but the
interest of the Republic Bank and the damage caused to it. The action
he has brought is a derivative one, expressly manifested to be for and
in behalf of the Republic Bank, because it was futile to demand action
by the corporation, since its Directors were nominees and creatures
of defendant Pablo Roman (Complaint, p. 6). The frauds charged by
plaintiff are frauds against the Bank that redounded to its prejudice.
The complaint expressly pleads that the appointment of Cuaderno as technical
consultant, and of Bienvenido Dizon to head the Board of Directors of the
Republic Bank, were made only to shield Pablo Roman from criminal
prosecution and not to further the interests of the Bank, and avers that both
men are Roman's alter egos. There is no denying that the facts thus pleaded
in the complaint constitute a cause of action for the bank: if the questioned
appointments were made solely to protect Roman from criminal prosecution,
by a Board composed by Roman's creatures and nominees, then the moneys
disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or
diversion of corporate funds, since the Republic Bank would have no interest
in shielding Roman, and the directors in approving the appointments would be
committing a breach of trust; the Bank, therefore, could sue to nullify the
appointments, enjoin disbursement of its funds to pay them, and recover those
paid out for the purpose, as prayed for in the complaint in this case (Angeles
vs. Santos, supra.).
Defendants urge that the action is improper because the plaintiff was not
authorized by the corporation to bring suit in its behalf. Any such authority
could not be expected as the suit is aimed to nullify the action taken by the
manager and the board of directors of the Republic Bank; and any demand for
intra-corporate remedy would be futile, as expressly pleaded in the complaint.
These circumstances permit a stockholder to bring a derivative suit
(Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has
chosen to make common cause with plaintiff Perez is irrelevant, since
the smallness of plaintiff's holdings is no ground for denying him
relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in
the proceedings for the absence of other stockholders to be of any significance,
no issues having even been joined.
ISSUE2: WON the Corporation should be a plaintiff or defendant?
HELD2: The English practice is to make the corporation a party plaintiff, while
in the United States, the usage leans in favor of its being joined as party
defendant (see Editorial Note, 51 LRA [NS] 123). Objections can be raised
against either method. (1) Absence of corporate authority would seem
to militate against making the corporation a party plaintiff, while (2)
joining it as defendant places the entity in the awkward position of
resisting an action instituted for its benefit. What is important is that
the corporation' should be made a party, in order to make the Court's
judgment binding upon it, and thus bar future relitigation of the
issues. On what side the corporation appears loses importance when
it is considered that it lay within the power of the trial court to direct
the making of such amendments of the pleadings, by adding or
dropping parties, as may be required in the interest of justice (Revised
Rule 3, sec. 11). Misjoinder of parties is not a ground to dismiss an
action. (Ibid.)
ISSUE3: WON the action of the plaintiff amounts to a quo warranto
proceeding?
HELD: No. Plaintiff Perez is not claiming title to Dizon's position as head of the
Republic Bank's board of directors. The suit is aimed at preventing the waste
or diversion of corporate funds in paying officers appointed solely to protect
Pablo Roman from criminal prosecution, and not to carry on the corporation's
bank business. Whether the complaint's allegations to such effect are true or
not must be determined after due hearing.
WESTERN INSTITUTE OF TECHNOLOGY, INC., vs. SALAS (supra, under
Compensation of Directors) – Petitioners assert that the motion for
reconsideration of the civil aspect of the RTC decision acquitting respondents
is a derivative suit brought by them as minority stockholders of WIT for and
on behalf of the corporation
ISSUE: WON the appeal may be considered as a derivative action?
HELD: No. A derivative suit is an action brought by minority
shareholders in the name of the corporation to redress wrongs
committed against it, 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. Here, however,
the case is not a derivative suit but is merely an appeal on the civil aspect of
Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and
falsification of public document. Among the basic requirements for a
derivative suit to prosper is that the minority shareholder who is
suing for and on behalf of the corporation must allege in his
complaint before the proper forum that he is suing on a derivative
cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join. This is necessary to
vest jurisdiction upon the tribunal in line with the rule that it is the allegations
in the complaint that vests jurisdiction upon the court or quasi-judicial body
concerned over the subject matter and nature of the action. This was not
complied with by the petitioners either in their complaint before the court a
quo nor in the instant petition which, in part, merely states that "this is a
petition for review on certiorari on pure questions of law to set aside a portion
of the RTC decision in Criminal Cases Nos. 37097 and 37098" since the trial
court's judgment of acquittal failed to impose any civil liability against the
private respondents. By no amount of equity considerations, if at all deserved,
can a mere appeal on the civil aspect of a criminal case be treated as a
derivative suit.
Granting, for purposes of discussion, that this is a derivative suit as insisted by
petitioners, which it is not, the same is outrightly dismissible for having been
wrongfully filed in the regular court devoid of any jurisdiction to entertain the
complaint. The ease should have been filed with the Securities and Exchange
Commission (SEC) which exercises original and exclusive jurisdiction over
derivative suits, they being intra-corporate disputes, per Section 5 (b) of P.D.
No. 902-A.
47 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES,
petitioners,
vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO
ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO,
RALPH KAHN and RAMON DEL ROSARIO, JR., respondents.
(GR No. 85339; 176 SCRA 447; Aug. 11, 1989)
FACTS: Eduardo de los Angeles was a director appointed by PCGG who
sequestered the shares of Andres Soriano III claiming it to belong to Eduardo
Conjuangco, a close associate and dummy of then President Marcos. De los
Angeles initiated a derivative suit against herein respondents, in behalf of SMC,
for the revocation of a Board Resolution adopted to assume the loans incurred
by Neptunia Corporation, a foreign company, said to be a wholly-owned
subsidiary of SMC. The action was dismissed by the SEC on the grounds that
De los Angeles does not have adequate shares to represent the interest of the
stockholders and that his assumed role as a PCGG appointed director is
inconsistent with his assumed role as a representative of minority stockholders.
ISSUE: WON De Los Angeles can institute a derivative suit?
HELD: Yes. The theory that de los Angeles has no personality to bring suit in
behalf of the corporation — because his stockholding is minuscule, and there
is a "conflict of interest" between him and the PCGG — cannot be sustained.
It is claimed that since de los Angeles 20 shares (owned by him since 1977)
represent only. 00001644% of the total number of outstanding shares (1
21,645,860), he cannot be deemed to fairly and adequately represent the
interests of the minority stockholders. The implicit argument — that a
stockholder, to be considered as qualified to bring a derivative suit, must hold
a substantial or significant block of stock — finds no support whatever in the
law. The requisites for a derivative suit are as follows:
a) the party bringing suit should be a shareholder as of the time of the act
or transaction complained of, the number of his shares not being
material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a
demand on the board of directors for the appropriate relief but the latter has
failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation, the
wrongdoing or harm having been, or being caused to the corporation and not
to the particular stockholder bringing the suit.
The bona fide ownership by a stockholder of stock in his own right
suffices to invest him with standing to bring a derivative action for
the benefit of the corporation. The number of his shares is immaterial
since he is not suing in his own behalf, or for the protection or
vindication of his own particular right, or the redress of a wrong
committed against him, individually, but in behalf and for the benefit
of the corporation.
Neither can the "conflict-of-interest" theory be upheld. From the conceded
premise that de los Angeles now sits in the SMC Board of Directors by the grace
of the PCGG, it does not follow that he is legally obliged to vote as the PCGG
would have him do, that he cannot legitimately take a position inconsistent
with that of the PCGG, or that, not having been elected by the minority
stockholders, his vote would necessarily never consider the latter's interests.
The proposition is not only logically indefensible, non sequitur, but also
constitutes an erroneous conception of a director's role and function, it being
plainly a director's duty to vote according to his own independent judgment
and his own conscience as to what is in the best interests of the company.
Moreover, it is undisputed that apart from the qualifying shares given to him
by the PCGG, he owns 20 shares in his own right, as regards which he cannot
from any aspect be deemed to be "beholden" to the PCGG, his ownership of
these shares being precisely what he invokes as the source of his authority to
bring the derivative suit.
ELTON W. CHASE, as minority Stockholder and on behalf of other
Stockholders similarly situated and for the benefit of AMERICAN MACHINERY
AND PARTS MANUFACTURING, INC., plaintiff-appellant,
vs.
DR. VICTOR BUENCAMINO, SR., VICTOR BUENCAMINO, JR., JULIO B.
FRANCIA and DOLORES A. BUENCAMINO, respondents.
(GR No. L-20395; 136 SCRA 365; May 13, 1985)
FACTS: Herein plaintiff-appellant Elton Chase, entered into an agreement with
Dr. Buencamino and William Cranker (already business partners) for the
establishment of a factory in Manila called American Machinery Engineering
Parts, Inc. (Amparts), where chase was to transfer his tractor plant, ship his
machineries from his former plant in America to Manila, install said machineries
at Amparts plant and he is to be the production manager of Amparts.
For some time the three maintained harmonious relations until Chase tendered
his resignation which was accepted by Buencamino and Cranker. Chase initially
filed a case in California against Cranker for the recovery of the purchase price
of his plant, but this died a natural death. Eventually, he filed a case before
the CFI alleging various acts of frauds allegedly committed by the other two.
ISSUE: WON Chase has capacity to institute a derivative suit?
HELD: Yes. The evidence of defendants proves very clearly that right from the
start, Chase was by them recognized as a stockholder and initial incorporator
with 600 paid up shares representing a 1/3 interest in Amparts, and that would
be enough for Chase to have the correct personality to institute this derivative
suit; the second place, it also appears apparently undenied that Chase did not
win in California so that he did not recover the $150,000.00 that he had prayed
for there against Overseas, which if he had would really in the mind of the
Court have put him in estoppel to intervene in any manner as incorporator or
stockholder of Amparts; and in the third place and most important it should
not be forgotten that Chase has filed the present case not for his personal
benefit, but for the benefit of Amparts, so that to the Court the argument of
estoppel as against him would appear to be out of place; the estoppel to be
valid as a defense must be an estoppel against Amparts itself; the long and
short of it is that the Court is impelled and constrained to discard all the other
defenses set up by Dr. Buencamino on the principal complaint; the result of all
these would be to sustain so far, the position of Chase that Dr. Buencamino
must account for the P570,000.00 used to pay the second series of payment
on the subscription, the P330,000.00 used in paying the last series on the
subscription, plus another sum of P245,000.00 entered as loan on his favor
and against Amparts, for the sum of P434,000.00 earned in the blackmarketing
of the excess of $140,000.00 dollars on the forwarding costs and promotional
expenses, for the sum of P391,200.00 earned in the blackmarketing of the
excess of $117,000.00 in the transaction with Bertoni and Cotti, and all these
would reach a total of P1,970,200.00; and as the appropriation of the profits
for himself was a quasi-delict, the liability therefore assuming that it had been
done with the cooperation of Cranker would have to be solidary, 2194 New
Civil Code.
CATALINA R. REYES, petitioner,
vs.
HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of Manila,
Branch XIII and FRANCISCA R. JUSTINIANI, respondents.
(GR No. L-16982; 3 SCRA 198; Sept. 30, 1961)
FACTS: Several purchases were made by Roxas-Kalaw Textile Mills in New
York for raw materials but were found out to consist of already finished product
for which reason the Central Bank of the Philippines stopped all dollar
allocations for raw materials for the corporation which necessarily led to the
paralysis of the operations. It was alleged that the supplier of the said finished
goods was United Commercial Company of New York in which Dalamal,
appointed by the BOD of the Textile Mills as co-manager, had interests and
that the letter of credit for said goods were guaranteed by the Indian
Commercial Company and Indian Traders in which Dalamal likewise has
interests. It was further alleged that the sale of the finished products was the
business of Indian Commercial Company of Manila who cannot obtain dollar
allocations for importations of finished goods.
An action for the appointment of a receiver was filed before the trial court after
the BOD refused to proceed against Dalamal, which was granted.
48 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
ISSUE: WON Justiniani may be allowed to institute the case for receivership
and damages?
HELD: Yes. It is not denied by petitioner that the allocation of dollars to the
corporation for the importation of raw materials was suspended. In the eyes
of the court below, as well as in our own, the importation of textiles instead of
raw materials, as well as the failure of the Board of Directors to take action
against those directly responsible for the misuse of dollar allocations constitute
fraud, or consent thereto on the part of the directors. Therefore, a breach of
trust was committed which justified the derivative suit by a minority
stockholder on behalf of the corporation.
“It is well settled in this jurisdiction that where corporate directors are
guilty of a breach of trust — not of mere error of judgment or abuse
of discretion — and intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholders. An illustration of a suit of this kind is
found in the case of Pascual vs. Del Saz Orozco (19 Phil. 82), decided by this
Court as early as 1911. In that case, the Banco Español-Filipino suffered heavy
losses due to fraudulent connivance between a depositor and an employee of
the bank, which losses, it was contended, could have been avoided if the
president and directors had been more vigilant in the administration of the
affairs of the bank. The stockholders constituting the minority brought a suit
in behalf of the bank against the directors to recover damages, and this over
the objection of the majority of the stockholders and the directors. This court
held that the suit could properly be maintained.” (64 Phil., Angeles vs. Santos
[G.R. No. L-43413, prom. August 31, 1937] p. 697).
The claim that respondent Justiniani did not take steps to remedy the illegal
importation for a period of two years is also without merit. During that period
of time respondent had the right to assume and expect that the directors would
remedy the anomalous situation of the corporation brought about by their own
wrong doing. Only after such period of time had elapsed could respondent
conclude that the directors were remiss in their duty to protect the corporation
property and business.
We are led to agree with the judge below that the appointment of a receiver
was not only expedient but also necessary to restore the faith and confidence
of the Central Bank authorities in the administration of the affairs of the
corporation, thus ultimately leading to a restoration of the dollar allocation so
essential to the operation of the textile mills.
RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA,
EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES DE LA RAMA-
BORROMEO, petitioners,
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First
Instance of Negros Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN
LOPUE, JR., LEONITO LOPUE, and LUISA U. DACLES respondents.
(GR No. -40620; 90 SCRA 40; May 6, 1979)
FACTS: A writ of preliminary injunction was filed by herein respondents as
purchasers of 1,328 shares of stock of Inocente De La Rama, inc. after herein
petitioners surreptitiously met and authorized the sale of 823 shares to forestall
the petitioner’s takeover from the previous president and vice-president (sellers
of the 1,328 shares), in violation of their pre-emptive right. The trial court ruled
in favor of respondents. Later on, private respondents entered into a
compromise agreement with the recipients for the transfer of the 823 shares,
against which the petitioners filed a motion to dismiss which was denied.
ISSUE: WON a derivative suit is the more proper action that should have been
filed by respondents?
HELD: No. The petitioners contend that the proper remedy of the plaintiffs
would be to institute a derivative suit against the petitioners in the name of
the corporation in order to secure a binding relief after exhausting all the
possible remedies available within the corporation.
An individual stockholder is permitted to institute a derivative suit on behalf of
the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to sue, or are
the ones to be sued or hold the control of the corporation. In such actions, the
suing stockholder is regarded as a nominal party, with the corporation as the
real party in interest. In the case at bar, however, the plaintiffs are
alleging and vindicating their own individual interests or prejudice,
and not that of the corporation. At any rate, it is yet too early in the
proceedings since the issues have not been joined. Besides, misjoinder of
parties is not a ground to dismiss an action.
JUAN D. EVANGELISTA, et. al., plaintiff-appellant VS. RAFAEL SANTOS,
defendant-appelle (86 Phil. 387; May 19, 1950) – Juan D. Evangelista, et. al.
are minority stockholders of the Vitali Lumber Company, Inc., while Rafael
Santos holds more than 50% of the stocks of said corporation and also is and
always has been the president, manager, and treasurer thereof. Santos, in
such triple capacity, through fault, neglect, and abandonment allowed its
lumber concession to lapse and its properties and assets, among them
machineries, buildings, warehouses, trucks, etc., to disappear, thus causing
the complete ruin of the corporation and total depreciation of its stocks.
Evangelista, et. al. therefore prays for judgment requiring Santos: (1) to render
an account of his administration of the corporate affairs and assets: (2) to pay
plaintiffs the value of their respective participation in said assets on the basis
of the value of the stocks held by each of them; and (3) to pay the costs of
suit. Evangelista, et. al. also ask for such other remedy as may be and
equitable. The trial court dismissed the action on the ground of improper venue
and lack of cause of action.
ISSUE: WON plaintiffs have a right to bring the action for their benefit?
HELD: No. The complaint shows that the action is for damages resulting from
mismanagement of the affairs and assets of the corporation by its principal
officer, it being alleged that defendant's maladministration has brought about
the ruin of the corporation and the consequent loss of value of its stocks. The
injury complained of is thus primarily to that of the corporation, so that the suit
for the damages claimed should be by the corporation rather than by the
stockholders (3 Fletcher, Cyclopedia of Corporation pp. 977-980). The
stockholders may not directly claim those damages for themselves
for that would result in the appropriation by, and the distribution
among them of part of the corporate assets before the dissolution of
the corporation and the liquidation of its debts and liabilities,
something which cannot be legally done in view of section 16 of the
Corporation Law.
But while it is to the corporation that the action should pertain in cases of this
nature, however, if the officers of the corporation, who are the ones called
upon to protect their rights, refuse to sue, or where a demand upon them to
file the necessary suit would be futile because they are the very ones to be
sued or because they hold the controlling interest in the corporation, then in
that case any one of the stockholders is allowed to bring suit (3 Fletcher's
Cyclopedia of Corporations, pp. 977-980). But in that case it is the corporation
itself and not the plaintiff stockholder that is the real property in interest, so
that such damages as may be recovered shall pertain to the corporation
(Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In other words, it is a derivative
suit brought by a stockholder as the nominal party plaintiff for the benefit of
the corporation, which is the real property in interest (13 Fletcher, Cyclopedia
of Corporations, p. 295).
In the present case, the plaintiff stockholders have brought the action not for
the benefit of the corporation but for their own benefit, since they ask that the
defendant make good the losses occasioned by his mismanagement and pay
to them the value of their respective participation in the corporate assets on
the basis of their respective holdings. Clearly, this cannot be done until all
corporate debts, if there be any, are paid and the existence of the corporation
terminated by the limitation of its charter or by lawful dissolution in view of the
provisions of section 16 of the Corporation Law.
It results that plaintiff's complaint shows no cause of action in their favor so
that the lower court did not err in dismissing the complaint on that ground.
49 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
While plaintiffs ask for remedy to which they are not entitled unless the
requirement of section 16 of the Corporation Law be first complied with, we
note that the action stated in their complaint is susceptible of being converted
into a derivative suit for the benefit of the corporation by a mere change in the
prayer. Such amendment, however, is not possible now, since the complaint
has been filed in the wrong court, so that the same last to be dismissed.
The order appealed from is therefore affirmed, but without prejudice to the
filing of the proper action in which the venue shall be laid in the proper
province. Appellant's shall pay costs. So ordered
IN SUMMARY:
1. That the party bringing the suit should be a stockholder as of the
time the act or transaction complained of took place, or whose shares
have evolved upon him since by operation of law. This rule, however,
does not apply if such act or transaction continues and is injurious to the
stockholder or affect him specifically in some other way.
The number of his shares is immaterial since he is not suing in his
own behalf or for the protection or vindication of his own right, or the
redress of a wrong done against him, individually, but in behalf and for
the benefit of the corporation.
2. He has tried to exhaust intra-corporate remedies, he has made a
demand on the board of directors for the appropriate relief but the latter
had failed or refused to heed his plea. Demand, however, is not
required if the company is under the complete control of the
directors who are the very ones to be sued (or where it becomes
obvious that a demand upon them would have been futile and useless)
since the law does not require a litigant to perform useless acts;
3. The stockholder bringing the suit must allege in his complaint that he
is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated,
otherwise, the case is dismissible. This is because the cause of action
actually devolves on the corporation and not to a particular stockholder.
4. The corporation should be made a party, either as party-plaintiff or
defendant, in order to make the court’s judgment binding upon it, and
thus, bar future litigation of the same issues. On what side the corporation
appears loses importance when it is considered that it lay within the power
of the court to direct the making of amendment of the pleading, by adding
or dropping parties, as may be required in the interest of justice.
Misjoinder of parties is not a ground to dismiss action; and,
5. Any benefit or damages recovered shall pertain to the
corporation. This is so because in all instances, derivative suit is
instituted for and in behalf of the corporation and not for the protection
or vindication of a right or rights of a particular stockholder, otherwise,
the aggrieved stockholder should institute, instead, an individual or
personal suit to vindicate his personal or individual right. Or, for that
matter, representative or class suit for all other stockholders whose rights
are similarly situated, injured or violated, personally or individually.
J. EXECUTIVE COMMITTEE
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
CHAPTER 7: CORPORATE POWERS AND AUTHORITY
 Sec. 36. Corporate powers and capacity. - Every corporation incorporated
under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
Sec. 11. Service upon domestic private juridical entity. When the
defendant is a corporation, partnership or association organized under the laws
of the Philippines with a juridical personality, service may be made on the
president, managing partner, general manager, corporate secretary, treasurer,
or in-house counsel.

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of Service of summons upon persons other than those named under than those
this Code; named in the above provision is without force and effect.

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend DELTA MOTOR SALES CORPORATION, petitioner,
or repeal the same in accordance with this Code; vs.
HON. JUDGE IGNACIO MANGOSING, Branch XXIV, Court of First Instance
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell of Manila, THE CITY SHERIFF OF MANILA, and JOSE LUIS PAMINTUAN,
stocks to subscribers and to sell treasury stocks in accordance with the respondents
provisions of this Code; and to admit members to the corporation if it be a non- (GR No. L-41667; April 30, 1976)
stock corporation;
FACTS: Herein respondent Pamintuan initiated an action against petitioner
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, Delta Motors for the alleged defective Toyota car sold to him and for failure to
mortgage and otherwise deal with such real and personal property, including fulfill the warranty obligation by not repairing the car.
securities and bonds of other corporations, as the transaction of the lawful
business of the corporation may reasonably and necessarily require, subject to The summons were served on Dionisia Miranda, employee of the petitioner.
the limitations prescribed by law and the Constitution; Delta Motors failed to answer the complaint and was declared in default and
evidence was presented and a decision was rendered against herein petitioner.
8. To enter into merger or consolidation with other corporations as provided in
this Code; Petitioner filed a motion to lift the order of default and to set aside the
judgment and for new trial, which was denied.
9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That ISSUE: WON there was proper service of summons?
no corporation, domestic or foreign, shall give donations in aid of any political
party or candidate or for purposes of partisan political activity; HELD: No. Rule 14 of the Revised Rules of Court provides:

10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry
out its purpose or purposes as stated in the articles of incorporation.
The statement of the objects, purposes or powers in the AOI results practically
in defining the scope of the authorized corporate enterprise or undertaking.
This statement both confers and also limits the actual authority of the
corporation.
Along with the powers indicated in the AOI, a corporation can also exercise
powers that may be granted by law, particularly those provided under Sec. 36
and 44 of the Corporation Code and those which may be necessary or incidental
to tis existence.
In short, corporate authority may be classified as:
1. Express powers – those expressly granted by law inclusive of the
corporate charter or AOI;
2. Implied Powers – those impliedly granted as are essential or reasonably
necessary to the carrying out of the express powers; and
3. Incidental Powers – those incidental to its existence.
A. POWER TO SUE AND BE SUED
A corporation may sue and be sued in its corporate name just like any other
person.
SEC. 13. Service upon private domestic corporation or partnership. — If
defendant is a corporation organized under the laws of the Philippines or a
partnership duly registered, service may be made on the president,
manager, secretary, cashier, agent, or any of its directors.
For the purpose of receiving service of summons and being bound by
it, a corporation is identified with its agent or officer who under the
rule is designated to accept service of process. "The corporate power
to receive and act on such service, so far as to make it known to the
corporation, is thus vested in such officer or agent." (Lafayette
Insurance Co. vs. French, 15 L. Ed. 451, 453).
A strict compliance with the mode of service is necessary to confer jurisdiction
of the court over a corporation. The officer upon whom service is made be one
who is named in the statute; otherwise the service is insufficient. So, where
the statute required that in the case of a domestic corporation summons should
be served on "the president or head of the corporation secretary treasurer,
cashier or managing agent thereof", service of summons on the secretary's
wife did not confer jurisdiction over the corporation in the foreclosure
proceeding against it. Hence, the decree of foreclosure and the deficiency
judgment were void and should be vacated. (Reader vs. District Court, 94
Pacific 2nd 858).
The purpose is to render it reasonably certain that the corporation
will receive prompt and proper notice in an action against it or to
insure that the summons be served on a representative so integrated
with the corporation that such person will know what to do with the
legal papers served on him. In other words, "to bring home to the
corporation notice of the filing of the action". (35A C.J.S. 288 citing
Jenkins vs. Lykes Bros. S.S. Co., 48 F. Supp. 848; MacCarthy vs. Langston D.C.
Fla., 23 F.R.D. 249).

VENUE: the action filed against it must be instituted at the place of principal In the instant case the Manila court did not acquire jurisdiction over Delta Motor
office of the corporation. because it was not properly served with summons. The service of summons on
Dionisia G. Miranda, who is not among the persons mentioned in section 13 of
SERVICE OF SUMMONS: Sec. 11, Rule 14 of the Rules of Court provide: Rule 14, was insufficient. It did not bind the Delta Motor. Courts acquire
50 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
jurisdiction over the person of a party defendant and of the subject-matter of
the action by vertue of the service of summons in the manner required by law.
Where there is no service of summons or a voluntary general appearance by
the defendant, the court acquires no jurisdiction to pronounce a judgment in
the cause. (Syllabi Salmon and Pacific Commercial Co. vs. Tan Cueco, 36 Phil.
556).
Consequently, the order of default, the judgment by default and the execution
in Civil Case No. 97373 are void and should be set aside.
E. B. VILLAROSA & PARTNER CO., LTD., petitioner,
vs.
HON. HERMINIO I. BENITO, in his capacity as Presiding Judge, RTC, Branch
132, Makati City and IMPERIAL DEVELOPMENT CORPORATION, respondent.
(GR No. 136426; Aug. 6, 1999)
FACTS: Petitioner is a limited partnership with principal office address at
Davao City and with branch offices at Parañaque, Metro Manila and Lapasan,
Cagayan de Oro City.
Petitioner and private respondent executed a Deed of Sale with Development
Agreement wherein the former agreed to develop certain parcels of land
located at Cagayan de Oro belonging to the latter into a housing subdivision
for the construction of low cost housing units. They further agreed that in case
of litigation regarding any dispute arising therefrom, the venue shall be in the
proper courts of Makati.
Private respondent, as plaintiff, filed a Complaint for Breach of Contract and
Damages against petitioner, as defendant, before the RTC Makati for failure of
the latter to comply with its contractual obligation in that, other than a few
unfinished low cost houses, there were no substantial developments therein.
Summons, together with the complaint, were served upon the defendant,
through its Branch Manager at the stated address at Cagayan de Oro City but
the Sheriff's Return of Service stated that the summons was duly served "upon
defendant E.B. Villarosa & Partner Co., Ltd. thru its Branch Manager Engr. at
their new office Villa Gonzalo, Nazareth, Cagayan de Oro City, and evidenced
by the signature on the face of the original copy of the summons.
Defendant filed a motion to dismiss on the ground of improper service of
summons which was denied.
ISSUE: WON the court acquired jurisdiction?
HELD: No. Earlier cases have uphold service of summons upon a construction
project manager; a corporation's assistant manager; ordinary clerk of a
corporation; private secretary of corporate executives; retained counsel;
officials who had charge or control of the operations of the corporation, like
the assistant general manager; or the corporation's Chief Finance and
Administrative Officer. In these cases, these persons were considered as
"agent" within the contemplation of the old rule. Notably, under the new Rules,
service of summons upon an agent of the corporation is no longer authorized.
The designation of persons or officers who are authorized to accept summons
for a domestic corporation or partnership is now limited and more clearly
specified in Section 11, Rule 14 of the 1997 Rules of Civil Procedure. The rule
now states "general manager" instead of only "manager"; "corporate
secretary" instead of "secretary"; and "treasurer" instead of "cashier." The
phrase "agent, or any of its directors" is conspicuously deleted in the new rule.
The particular revision under Section 11 of Rule 14 was explained by retired
Supreme Court Justice Florenz Regalado, thus:
. . . the then Sec. 13 of this Rule allowed service upon a defendant
corporation to "be made on the president, manager, secretary,
cashier, agent or any of its directors." The aforesaid terms were
obviously ambiguous and susceptible of broad and sometimes
illogical interpretations, especially the word "agent" of the
corporation. The Filoil case, involving the litigation lawyer of the
corporation who precisely appeared to challenge the validity of
service of summons but whose very appearance for that purpose
51 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
was seized upon to validate the defective service, is an
illustration of the need for this revised section with limited scope
and specific terminology. Thus the absurd result in the Filoil case
necessitated the amendment permitting service only on the in-
house counsel of the corporation who is in effect an employee of
the corporation, as distinguished from an independent
practitioner. (emphasis supplied).
Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court
Revision Committee, stated that "(T)he rule must be strictly observed. Service
must be made to one named in (the) statute . . .
It should be noted that even prior to the effectivity of the 1997 Rules of Civil
Procedure, strict compliance with the rules has been enjoined. In the case of
Delta Motor Sales Corporation vs. Mangosing, the Court held:
A strict compliance with the mode of service is necessary to
confer jurisdiction of the court over a corporation. The officer
upon whom service is made must be one who is named in the
statute; otherwise the service is insufficient. . . .
The purpose is to render it reasonably certain that the corporation will
receive prompt and proper notice in an action against it or to insure that
the summons be served on a representative so integrated with the
corporation that such person will know what to do with the legal papers
served on him. In other words, "to bring home to the corporation notice
of the filing of the action." . . . .
The liberal construction rule cannot be invoked and utilized as a
substitute for the plain legal requirements as to the manner in
which summons should be served on a domestic corporation. . .
. . (emphasis supplied).
Accordingly, we rule that the service of summons upon the branch manager of
petitioner at its branch office at Cagayan de Oro, instead of upon the general
manager at its principal office at Davao City is improper. Consequently, the
trial court did not acquire jurisdiction over the person of the petitioner.
B. POWER OF SUCCESSION
This right basically means that the corporation persists to exist despite death,
incapacity, civil interdiction, or withdrawal of the stockholders or members
thereof.
C. POWER TO ADOPT AND USE A COMMON SEAL
This right has been expressly granted by law. However, it is not mandatory but
merely permissive. This is because the corporate seal performs no further or
greater function than to impart prima facie evidence of the due execution by
the corporation of a written document or obligation.
D. POWER TO AMEND ITS ARTICLES OF INCORPORATION
The procedures for the exercise of this right are provided under Sec. 16, Sec.
37 and 38 as discussed earlier under CHAPTER 5: CORPORATE CHARTER AND
ITS AMENDMENTS.
As far as corporations created by special law are concerned, amendment may
NOT be considered as a matter of right. The law creating it may or may not
authorize or empower the corporation to make any changes in its AOI or
charter. However, whether empowered or not, Congress may amend or repeal
a corporate charter by virtue of its inherent authority to amend or repeal laws
under the Constitution.
E. POWER TO ADOPT BY-LAWS
The Corporation Code actually REQUIRES a corporation to adopt by-laws, not
contrary to law, morals, or public policy, within 1 month from receipt of official
notice of the issuance of the certificate of incorporation or registration (Sec.
46).
Amendment of the by-laws are allowed subject to the procedure and
requirement provided under Sec. 48.
F. POWER TO ISSUE OR SELL STOCKS AND TO ADMIT MEMBERS
The power of a corporation to issue or sell its stocks is an inherent right of any
stock corporation except only as it may be regulated by law or by the AOI.
Admission, as well as termination of members is a prerogative granted by law
to non-stock corporations and the manner, requirements or procedures for
such admission or termination may be contained in the AOI or by-laws.
G. POWER TO ACQUIRE OR ALIENATE REAL OR PERSONAL
PROPERTY
When a corporation is expressly empowered by law to acquire or alienate real
and/or personal properties, the limitations imposed by Sec. 36 are as follows:
Sec. 36. Xxx
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property, including
securities and bonds of other corporations, (1) as the transaction of the
lawful business of the corporation may reasonably and necessarily
require, (2) subject to the limitations prescribed by law and the
Constitution.
The first limitation practically sets the limit of the corporate authority to
acquire, own, hold or alienate property. As it has been said the purpose clause
in the AOI grants as well as limits the powers which a corporation may exercise.
Verily, WON the acquisition of such property is within the corporate powers or
authority may reasonably be determined from the purpose or purposes
indicated in the AOI.
LUNETA MOTOR COMPANY, petitioner, vs. A.D. SANTOS, INC., ET AL.,
respondents (Gr No. 17716; July 31, 1962) – Nicolas Concepcion executed a
chattel mortgage covering a certificate of public convenience granted to him
to operate taxicab service of 27 units in Manila, in favor of petitioner, to secure
a loan evidenced by a promissory note guaranteed by Concepcion and one
Placid Esteban.
Concepcion mortgaged the same certificate to cover a second loan with
Rehabilitation Finance.
Petitioner filed an action to foreclose the mortgage. While it was pending, RF
also foreclosed the second chattel mortgage where the certificate was sold at
a public auction in favor of AD Santos who applied for the approval of the sale
which was granted by the Public Service Commission.
Later on, the CFI rendered a judgment in favor of petitioner, where the
certificate was sold at a public auction in favor of the petitioner who
immediately filed for approval with the Commission. AD Santos Inc., recipient
of the certificate from AD Santos, opposed the application for approval.
ISSUE: WON Petitioner may acquire the certificate of public convenience?
HELD: No. Petitioner claims in this regard that its corporate purposes are to
carry on a general mercantile and commercial business, etc., and that it is
authorized in its articles of incorporation to operate and otherwise deal in and
concerning automobiles and automobile accessories' business in all its
multifarious ramification (petitioner's brief p. 7) and to operate, etc., and
otherwise dispose of vessels and boats, etc., and to own and operate
steamship and sailing ships and other floating craft and deal in the same and
engage in the Philippine Islands and elsewhere in the transportation of
persons, merchandise and chattels by water; all this incidental to the
transportation of automobiles (id. pp. 7-8 and Exhibit B).
52 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
We find nothing in the legal provision and the provisions of petitioner's articles
of incorporation relied upon that could justify petitioner's contention in this
case. To the contrary, they are precisely the best evidence that it has no
authority at all to engage in the business of land transportation and operate a
taxicab service. That it may operate and otherwise deal in automobiles and
automobile accessories; that it may engage in the transportation of persons by
water does not mean that it may engage in the business of land transportation
— an entirely different line of business. If it could not thus engage in the line
of business, it follows that it may not acquire a certificate of public convenience
to operate a taxicab service, such as the one in question, because such
acquisition would be without purpose and would have no necessary connection
with petitioner's legitimate business.
GOVERNMENT VS. EL HOGAR FILIPINO (supra) – the directors of El Hogar
Filipino erected a modern reinforced concrete office building at the site of its
old building. The acquisition of the lot and the construction of the new office
building thereon is not the subject of the second cause of action for being ultra
vires on the part of the corporation.
ISSUE: WON the erection of the building was reasonable?
HELD: Yes. With this contention we are unable to agree. Under the
Corporation Law, every corporation has the power to purchase, hold and lease
such real property as the transaction of the lawful business of the corporation
may reasonably and necessarily require. When this property was acquired in
1916, the business of El Hogar Filipino had developed to such an extent, and
its prospects for the future were such as to justify its directors in acquiring a
lot in the financial district of the City of Manila and in constructing thereon a
suitable building as the site of its offices; and it cannot be fairly said that the
area of the lot — 1,413 square meters — was in excess of its reasonable
requirements. The law expressly declares that corporations may acquire such
real estate as is reasonably necessary to enable them to carry out the purposes
for which they were created; and we are of the opinion that the owning of a
business lot upon which to construct and maintain its offices is reasonably
necessary to a building and loan association such as the respondent was at the
time this property was acquired. A different ruling on this point would compel
important enterprises to conduct their business exclusively in leased offices —
a result which could serve no useful end but would retard industrial growth
and be inimical to the best interests of society.
We are furthermore of the opinion that, inasmuch as the lot referred to was
lawfully acquired by the respondent, it is entitled to the full beneficial use
thereof. No legitimate principle can discovered which would deny to one owner
the right to enjoy his (or its) property to the same extent that is conceded to
any other owner; and an intention to discriminate between owners in this
respect is not lightly to be imputed to the Legislature. The point here involved
has been the subject of consideration in many decisions of American courts
under statutes even more restrictive than that which prevails in this
jurisdiction; and the conclusion has uniformly been that a corporations whose
business may properly be conducted in a populous center may acquire an
appropriate lot and construct thereon an edifice with facilities in excess of its
own immediate requirements
It would seem to be unnecessary to extend the opinion by lengthy citations
upon the point under consideration, but Brown vs. Schleier (118 Fed., 981),
may be cited as being in harmony with the foregoing authorities. In dealing
with the powers of a national bank the court, in this case, said:
When an occasion arises for an investment in real property for either of
the purposes specified in the statute the national bank act permits
banking associations to act as any prudent person would act in making
an investment in real estate, and to exercise the same measure of
judgment and discretion. The act ought not to be construed in such a way
as to compel a national bank, when it acquires real property for a
legitimate purpose, to deal with it otherwise than a prudent land owner
would ordinarily deal with such property.
At any rate the weight of judicial opinion is so overwhelmingly in favor of
sustaining the validity of the acts alleged in the second cause of action to have
been done by the respondent in excess of its powers that we refrain from
commenting at any length upon said cases. The ground stated in the second
cause of action is in our opinion without merit.
THE DIRECTOR OF LANDS, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and IGLESIA NI CRISTO,
respondents
(GR No. L56613; March 14, 1988)
FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite for
registration of a parcel of land which it claimed to have acquired by virtue of a
Deed of Absolute Sale from Aquelina de la Cruz, alleging that the applicant and
its predecessors-in-interest have been in actual, continuous, public, peaceful
and adverse possession and occupation of the said land for more than 30 years,
which was opposed by the Government as represented by the Director of
Lands. The CFI and the CA ruled in favor of INC.
ISSUE: WON the corporation may acquire the land in question?
HELD Yes. As observed at the outset, had this case been resolved immediately
after it was submitted for decision, the result may have been quite adverse to
private respondent. For the rule then prevailing under the case of Manila
Electric Company v. Castro-Bartolome et al., 114 SCRA 799, reiterated in
Republic v. Villanueva, 114 SCRA 875 as well as the other subsequent cases
involving private respondent adverted to above', is that a juridical person,
private respondent in particular, is disqualified under the 1973 Constitution
from applying for registration in its name alienable public land, as such land
ceases to be public land "only upon the issuance of title to any Filipino citizen
claiming it under section 48[b]" of Commonwealth Act No. 141, as amended.
These are precisely the cases cited by petitioner in support of its theory of
disqualification.
Since then, however, this Court had occasion to re-examine the rulings in these
cases vis-a-vis the earlier cases of Carino v. Insular Government, 41 Phil. 935,
Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among others.
Thus, in the recent case of Director of Lands v. Intermediate Appellate Court,
146 SCRA 509, We categorically stated that the majority ruling in Meralco is
"no longer deemed to be binding precedent", and that "[T]he correct rule, ...
is that alienable public land held by a possessor, personally or through his
predecessors-in-interest, openly, continuously and exclusively for the
prescribed statutory period [30 years under the Public Land Act, as amended]
is converted to private property by mere lapse or completion of said period,
ipso jure." We further reiterated therein the timehonored principle of non-
impairment of vested rights.
The crucial factor to be determined therefore is the length of time private
respondent and its predecessors-in-interest had been in possession of the land
in question prior to the institution of the instant registration proceedings. The
land under consideration was acquired by private respondent from Aquelina de
la Cruz in 1947, who, in turn, acquired by same by purchase from the Ramos
brothers and sisters, namely: Eusebia, Eulalia, Mercedes, Santos and Agapito,
in 1936. Under section 48[b] of Commonwealth Act No. 141, as amended,
"those who by themselves or through their predecessors-in-interest have been
in open, continuous, exclusive and notorious possession and occupation of
agricultural lands of the public domain, under a bona fide claim of acquisition
or ownership, for at least thirty years immediately preceding the filing of the
application for confirmation of title except when prevented by war or force
majeure" may apply to the Court of First Instance of the province where the
land is located for confirmation of their claims, and the issuance of a certificate
of title therefor, under the Land Registration Act. Said paragraph [b] further
provides that "these shall be conclusively presumed to have performed all the
conditions essential to a Government grant and shall be entitled to a certificate
of title under the provisions of this chapter." Taking the year 1936 as the
reckoning point, there being no showing as to when the Ramoses first took
possession and occupation of the land in question, the 30-year period of open,
continuous, exclusive and notorious possession and occupation required by law
was completed in 1966.
The completion by private respondent of this statutory 30-year period has dual
significance in the light of Section 48[b] of Commonwealth Act No. 141, as
53 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
amended and prevailing jurisprudence: [1] at this point, the land in question
ceased by operation of law to be part of the public domain; and [2] private
respondent could have its title thereto confirmed through the appropriate
proceedings as under the Constitution then in force, private corporations or
associations were not prohibited from acquiring public lands, but merely
prohibited from acquiring, holding or leasing such type of land in excess of
1,024 hectares.
If in 1966, the land in question was converted ipso jure into private land, it
remained so in 1974 when the registration proceedings were commenced. This
being the case, the prohibition under the 1973 Constitution would have no
application. Otherwise construed, if in 1966, private respondent could have its
title to the land confirmed, then it had acquired a vested right thereto, which
the 1973 Constitution can neither impair nor defeat.
H. POWER TO ENTER INTO MERGER OR CONSOLIDATION
This is an express power granted by the law under the Code, particularly Title
IX thereof.
I. POWER TO MAKE REASONABLE DONATIONS
Ordinarily, a pure gift of funds or property by a corporation not created for
charitable purpose is not authorized and would constitute a violation of the
rights of its stockholders unless it is empowered by statute. There are
circumstances, however, under which a donation by a corporation may be to
it benefit as a means of increasing its business or promoting patronage.
Thus, Sec. 36 (9) expressly authorizes a corporation to make donations,
subject to the following limitations:
1. The donation must be reasonable;
2. It must be for public welfare, or for hospital, charitable, scientific, cultural
or similar purpose; and
3. It shall not be in aid of political party or candidate, or for purposes of
partisan political activity.
J. POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER
PLANS
It is now generally recognized in almost all jurisdiction to empower a
corporation to establish pension plans, pension trust, profit sharing plans, stock
bonus or stock option plans and other incentive plans to directors, officers and
employees. In fact, the power may include any act to promote convenience,
welfare and benefit of the employees or officers.
REPUBLIC VS. ACOJE MINING COMPANY INC. (7 SCRA 361; Feb. 28,
1963) - A post office branch was opened in herein respondent’s mining camp
at Sta. Cruz Zambales, at its request, where Hilario M. Sanchez, an employee
of such company, was the postmaster. Prior to the opening the company, at
the request of the Bureau of Posts, adopted a resolution that the former would
assume full responsibility for all cash received by the postmaster. On May 11,
1954, the postmaster went on a three day leave but never returned. As a result,
an action was brought by the government to recover P13,867.24, the amount
of shortage in the accounts of the postmaster, from the company.
ISSUE: WON the subject resolution is within the powers of the company to
adopt?
HELD: Yes. The opening of the post office branch was undertaken because of
a request submitted by respondent company to promote the convenience and
benefit of its employees. The idea did not come from the government and the
Director of Posts was prevailed upon to agree to the request only after studying
the necessity for its establishment and after imposing upon the company
certain requirements intended to safeguard and protect the interest of the
government. Accordingly, the company cannot now be heard to complain of its
liability upon the technical plea that the resolution is ultra vires. The least that
can be said is that it cannot now go back on its plighted word on the ground
of estoppel.
The resolution covers a subject which concerns the benefit, convenience and
welfare of the company’s employees and their families. There are certain
corporate acts that may be performed outside of the scope of the powers
expressly conferred if they are necessary to promote the interest or welfare of
the corporation. Thus, it has been held that “although not expressly authorized
to do so a corporation may become a surety where the particular transaction
is reasonably necessary or proper to the conduct of its business”, and here it
is undisputed that the establishment of the local post office is a vital
improvement in the living condition of its employees and laborers who came
to settle in it mining camp which is far removed from the postal facilities or
means of communication accorded to people living in a city or municipality.
IMPLIED POWERS
Sec. 36. Xxx
11. To exercise such other powers as may be essential or necessary to carry it may be fairly considered within the corporation’s charter powers
out its purpose or purposes as stated in the articles of incorporation
It is a question, in each case, of the logical relation of the act to the
corporate purpose expressed in the charter. For if the act is one which
is lawful in itself and not otherwise prohibited, and is done for the
purpose of serving corporate ends, and reasonably contributes to the
promotion of those ends in a substantial and not in a remote and
fanciful sense, it may be fairly considered within the corporation’s
charter powers (Montelibano vs. Bacolod-Murcia Milling Co., Inc. as cited in
NPC vs. VERA)
I. POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR
NECESSARY TO CARRY OUT ITS PURPOSES
TERESA ELECTRIC AND POWER CO., INC. VS. P.S.C (21 SCRA 198; Sept.
25, 1967) – Respondent Filipinas Cement Corporation filed an application with
herein respondent PSC for a certificate of public convenience to install,
maintain and operate an electric plant in Teresa, Rizal for the purpose of
supplying electric power and light to its cement factory and its employees living
within its compound. Herein petitioner, operating an electric plant in Teresa
Rizal filed an opposition claiming that Filipinas is not authorized to operate the
proposed electric plant under its articles of incorporation. PSC decided in favor
of Filipinas.
ISSUE: WON under its articles of incorporation, Filipinas is authorized to
operate and maintain an electric plant?
HELD: Yes. Paragraph 7 of the AOI of Filipinas provides for authority to secure
from any governmental, state, municipality, or provincial, city or other
authority, and to utilize and dispose of in any lawful manner, rights, powers,
privileges, franchises and concessions – obviously necessary or at least related
to the operation of its cement factory. Moreover, said AOI also provide that the
corporation may generally perform any and all acts connected with the
business of manufacturing portland cement or arising therefrom or incidental
thereto.
It cannot be denied that the operation of an electric light, heat and power plant
is necessarily connected with the business of manufacturing cement. If in the
modern world where we live today electricity is virtually a necessity for our
daily needs, it is more so in the case of industries like the manufacture of
cement.
NPC VS. VERA (170 SCRA 721; Feb. 27, 1989)
FACTS: Private Respondent Sea Lion International Port Terminal Services Inc.
filed a complaint for prohibition and mandamus with damages against
petitioner NPC and Philippine Ports Authority after NPC did not renew its
Contract for Stevedoring Services for coal-handling of NPC’s plant and in taking
over its stevedoring services.
ISSUE: WON NPC may embark in stevedoring and arrastre services?
HELD: Yes. The NPC was created and empowered not only to construct,
54 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
operate and maintain power plants, reservois, transmission lines and other
works, but also:
…to exercise such powers and do such things as may be reasonably necessary
to carry out the business and purposes for which it was organized, or which,
from time to time, may be declared by the Board to be necessary, useful,
incidental or auxiliary to accomplish said purpose… (Sec. 3[1] of RA 6395, as
amended)
To determine whether or not the NPC act falls within the purview of the above
provision, the Court must decide whether or not a logical and necessary
relation exists between the act questioned and the corporate purpose
expressed in the NPC charter. For if the act is one which is lawful in
itself and not otherwise prohibited, and is done for the purpose of
serving corporate ends, and reasonably contributes to the promotion
of those ends in a substantial and not in a remote and fanciful sense,
(Montelibano vs. Bacolod-Murcia Milling Co., Inc.)
In the instant case, it is an undisputed fact that the pier owned by NPC,
receives various shipment of coal which is used exclusively to fuel the Batangas
Coal-Fired Thermal Power Plant of the NPC for the generation of electric power.
The stevedoring services which involve the unloading of the coal shipments
into the NPC pier for its eventual conveyance to the power plant are incidental
and indispensable to the operation of the plant. The Court holds that NPC is
empowered under its Charter to undertake such services, it being reasonably
necessary to the operation and maintenance of the power plant.
POWERS VS. MARSHALL (161 SCRA 176; May 9, 1988)
FACTS: 14 plaintiffs, all associate members of the International School, Inc.
brought an action for injunction against 10 members of the Board of Trustees,
after a letter of Donal Marshall, president of the board, was sent stating that
the school would be collecting a “development fee” of P2,625 per enrollee for
the purpose of constructing new buildings and remodel existing ones to
accommodate the increasing enrollment in the school which would need P35M.
The CFI of Manila dismissed the complaint.
ISSUE: WON the imposition of the development fee is within the powers of
the school?
HELD: Yes. Section 2(b) of PD No. 732 granting certain rights to the sch0ol,
expressly authorized the Board of Trustees “upon consultation with the
Secretary of Education and Culture” to determine the amount of fees and
assessments which may be reasonably imposed upon its students, to maintain
or conform to the school’s standard of education. Such consultation complied
with and the Secretary expressed his conformity with the reasonableness of
the assessment. The lower court observed that:
Xxx the expansion of the school facilities, which is to be done by improving old
buildings and/or constructing new ones, is an ordinary business transaction
well within the competence of the Board of Trustees to act upon. Xxx Being
directly related to the purpose of elevating and maintaining the school’s
standard of instruction, which is ordained in fact by PD 732, the expansion
cannot result in any radical or fundamental change in the kind of activity being
conducted by the school that might require the consent of the members
composing it.
J. POWER TO EXTEND OR SHORTEN CORPORATE TERM
This has been discussed in Chapter 5: CORPORATE CHARTER AND ITS
AMENDMENTS.
 Sec. 37. Power to extend or shorten corporate term. - A private
corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of directors or
trustees and ratified at a meeting by the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of
the members in case of non-stock corporations. Written notice of the proposed
action and of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That in case of extension of corporate
term, any dissenting stockholder may exercise his appraisal right under the
conditions provided in this code.

From the above-provision and jurisprudence, the requirements and procedure

for extending or shortening the corporate term are as follows:
1. Approval by the majority vote of the BOD/T;
2. Ratification by the stockholders representing at least 2/3 of the
outstanding capital stock (including non-voting shares) or 2/3 of the
members in case of non-stock corporations;
3. The ratification must be made at a meeting duly called for that purpose;
4. Prior written notice of the proposal to extend or shorten the corporate
term must be made stating the time and place of meeting addressed to
each stockholder or member at his place of residence, either by mail or
personal service;
5. In case of extension, the same cannot be made earlier than 5 years prior
to the original or subsequent expiry date unless there are justifiable
reasons for an earlier extension;
6. In case of extension, the same must be made during the lifetime of the
corporation;
7. Any dissenting stockholder may exercise his appraisal right;
8. Submission of the amended articles with the SEC; and
9. Approval thereof by the SEC (as required under Sec. 37 for extension, and
Sec. 120 for shortening the term with the effect of dissolution)

READ: Alhambra Cigar and Cigarette Manufacturing, Inc. vs. SEC

K. POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR,

CREATE OR INCREASE BONDED INDEBTEDNESS

55 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 Sec. 38. Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness. - No corporation shall increase or decrease
its capital stock or incur, create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and, at a stockholder's
meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital
stock shall favor the increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness. Written notice of the
proposed increase or diminution of the capital stock or of the incurring, creating,
or increasing of any bonded indebtedness and of the time and place of the
stockholder's meeting at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of residence as
shown on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.

A certificate in duplicate must be signed by a majority of the directors of the

corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities and
residences of the persons subscribing, the amount of capital stock or number
of no-par stock subscribed by each, and the amount paid by each on his
subscription in cash or property, or the amount of capital stock or number of
shares of no-par stock allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating

or increasing of any bonded indebtedness shall require prior approval
of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission and the issuance by
the Commission of its certificate of filing, the capital stock shall stand increased
or decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare: Provided, That
the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at the time
of the filing of the certificate, showing that at least twenty-five (25%) percent
of such increased capital stock has been subscribed and that at least twenty-
five (25%) percent of the amount subscribed has been paid either in actual
cash to the corporation or that there has been transferred to the corporation
property the valuation of which is equal to twenty-five (25%) percent of the
subscription: Provided, further, That no decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice the rights of corporate
creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase

the same, with the approval by a majority vote of the board of trustees and of
at least two-thirds (2/3) of the members in a meeting duly called for the
purpose.

Bonds issued by a corporation shall be registered with the Securities and

Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof.

56 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes

The following requirements or procedure should be complied with:
1. Approval by the majority vote of the BOD/T;
2. Ratification by the stockholders representing at least 2/3 of the
outstanding capital stock (including non-voting shares) or 2/3 of the
members in case of non-stock corporations at a meeting duly called for
that purpose;
3. Prior written notice of the proposal to extend or shorten the corporate
term must be made stating the time and place of meeting addressed to
each stockholder or member at his place of residence, either by mail or
personal service;
4. A certificate in duplicate must be signed by a majority of the directors of
the corporation, countersigned by the chairman and the secretary of the
stockholders meeting, setting forth the matters contained in subsection 1
to 7 of Sec. 38;
5. In case of increase in capital stock, 25% of such increased capital must
be subscribed and that at least 25% of the amount subscribed must be
paid either in cash or property;
6. In case of decrease of capital stock, the same must not prejudice the right
of the creditors;
7. Filing of the certificate of increase and amended AOI with the SEC; and
8. Approval thereof by the SEC.
METHODS OF INCREASING CAPITAL STOCK:
1. Increase the par value of the existing number of shares without increasing
the number of shares;
2. Increase the number of existing shares without increasing the par value
thereof;
3. Increasing the number of shares and at the same time increasing the par
value of the shares
REASONS/PURPOSE FOR THE INCREASE:
1. Expansion;
2. Payment of Debt Obligations;
3. To acquire additional assets such as providing cars to employees to
distribute the goods;
*Nothing in law prohibits increase of capital stock
REASONS FOR DECREASE:
1. To reduce or wipe out existing deficit where no creditors would thereby
by affected;
2. When the capital is more than what is necessary to procreate the business
or reduction of capital surplus;
3. To write down the value of its fixed assets to reflect their present actual
value in case where there is a decline in the value of the fixed assets of
the corporation.
TRUST FUND DOCTRINE: The subscriptions to capital stock of the
corporation constitute a fund which the creditors have a right to look up for
the satisfaction of their claims. Accordingly, if the decrease would affect the
rights of creditors, the same would not be approved by the SEC.
PHILIPPINE TRUST COMPANY VS. RIVERA (44 Phil. 469; Jan. 29, 1923)
- Shortly after its incorporation, the stockholders of Cooperativa Naval Filipina,
adopted a resolution to the effect that the capital should be reduced by 50%
and the subscribers be released from the obligation to pay their unpaid
balance.
In the course of time, the company became insolvent and went into the hands
of Philippine Trust Company (Philtrust), as assignee in bankruptcy, and by it
this action was instituted to recover ½ of the stock subscription of herein
defendant who subscribed to 450 of the 1,000 authorized capital stock.
It does not appear that the formalities under the Corporation Code for the
reduction of capital stock were observed and in particular it does not appear
that any certificate was at any time filed in the Bureau of Commerce and
Industry, showing such reduction.
57 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Respondent judge ruled in favor of Philtrust and directed respondent to pay ½
of the subscription price of his shares.
ISSUE: WON the reduction is valid and proper?
HELD: No. A corporation has no power to release an original subscriber to its
capital stock from the obligation of paying for his shares, without a valuable
consideration for such release; and as against creditors a reduction of the
capital stock can take place only in the manner and under the conditions
prescribed by the statute or the charter or the AOI. Moreover, strict compliance
with the statutory regulations is necessary. In the case before us, the resolution
releasing the shareholders from their obligation to pay 50% of their respective
subscriptions was an attempted withdrawals of so much capital from the fund
upon which the company’s creditors were entitled ultimately to rely and, having
been effected without compliance with the statutory requirements, was wholly
ineffectual.
MADRIGAL & COMPANY VS. ZAMORA (151 SCRA 355; June 30, 1987) -
The Madrigal Central Office Employees Union sought for the renewal of its CBA,
proposing a P200 wage increase and an allowance of P100 a month. Petitioner
company requested for the deferment of its negotiation.
Meanwhile, the company effected two reductions of its capital stock by issuing
marketable securities owned by petitioner in exchange for shareholders’
shares.
After the petitioner’s failure to sit down with the respondent union, the latter
commenced a case with the NLRC for unfair labor practice. In due time,
petitioner filed its position paper, alleging operating losses.
The Labor Arbiter rendered a decision in favor of respondent Union.
ISSUE: WON the decrease in capital stock is valid and binding?
HELD: No. What clearly emerges from the recorded facts is that the petitioner,
awash with profits from its business operations but confronted with the
demand of the union for wage increase, decided to evade its responsibility
towards the employees by a devised capital reduction. While the reduction in
capital stock created an apparent need for retrenchment, it was, by all
indications, just a mask for the purge of union members, who, by then, had
agitated for wage increases. In the face of the petitioner company’s piling
profits, the unionists had the right to demand for such salary adjustments.
That the petitioner made quite handsome profits is clear from the records.
This court is convinced that the petitioner’s capital reduction efforts were, to
begin with, a subterfuge, a deception as it were, to camouflage the fact that it
had been making profits, and consequently, to justify the mass layoff in it
employee ranks, especially the union members. They were nothing but a
premature and plain distribution of corporate assets to obviate a just sharing
to labor of the vast profits obtained by its joint efforts with capital through the
years. Surely, we can neither countenance nor condone this. It is an unfair
labor practice.
L. POWER TO DENY PRE-EMPTIVE RIGHT
PRE-EMPTIVE RIGHT is a right granted by law to all existing stockholders of
a stock corporation to subscribe to all issues or disposition of shares of any
class, in proportion to their respective holdings, subject only to the limitation
imposed under Sec. 39, which provides:

Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to subscribe to all issues or disposition
of shares of any class, in proportion to their respective shareholdings, unless
such right is denied by the articles of incorporation or an amendment thereto:
Provided, That such pre-emptive right shall not extend to shares to be issued
in compliance with laws requiring stock offerings or minimum stock ownership
by the public; or to shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate purposes or in payment of a
previously contracted debt.
BASIS OF RIGHT: The grant of this right is for the preservation, unimpaired
and undiluted, of the old stockholders’ relative and proportionate voting
strength and control, that is, the existing ratio of their property interest and
voting power in the corporation.
EXCEPTIONS (Under Sec. 39):
1. When shares to be issued is in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or
2. Shares to be issued in good faith with the approval of the stockholders
representing 2/3 of the outstanding capital stock either:
a. In exchange for property needed for corporate purpose; or
b. In payment of a previously contracted debt.
The exceptions will not apply to stockholders of close corporation whose pre-
emptive right, is broader if not absolute. See Sec. 102.
The right may likewise be lost by waiver, express or implied or inability or
failure to exercise it having been notified of the proposed disposition of shares.
BENITO VS. SEC (123 SCRA 722; July 25, 1983) -Respondent Jamiatul
Philippines – Al Islamia, Inc. was incorporated with P2,000,000 authorized
capital stock divided into 20,000 shares, of which 460 belong to herein
petitioner. In a stockholders meeting, an increase of the authorized capital
stock to P1,000,000 was approved, where the previously unissued shares were
all issued.
Petitioner Datu Tagoranao Benito filed a petition with herein respondent SEC
alleging that the additional issue of previously unissued shares was made in
violation of his pre-emptive right and that the increase of capital stock was
illegal considering that the stockholders on record were not notified, and that
such issuance be cancelled.
SEC Ruling: Benito is not entitled to pre-emptive right with respect to the
original unsubscribed shares, but can exercise such right with regards the
increase capitalization.
ISSUE: WON the above ruling is correct?
HELD: Yes. The issuance of the unsubscribed portion of the capital stock or
P110,980 is valid even if assuming that it was made without notice to the
stockholders as claimed by petitioner. The power to issue shares of stocks in
a corporation is lodged in the board of directors and no stockholders’ meeting
is necessary to consider it because such issuance does not need approval of
stockholders.
The general rule is that pre-emptive right is recognized only with respect to
new issue of shares, and not with respect to additional issues of originally
authorized shares. This is on theory that when a corporation, at its inception
offers its first shares, it is presumed to have offered all of those which it is
authorized to issue. An original subscriber is deemed to have taken his shares
knowing that they form a definite proportionate part of the whole number of
authorized shares. When the shares left unsubscribed are reoffered, he cannot
therefore claim a dilution of interest.
With respect to the claim that the increase in the authorized capital stock was
58 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
without consent, expressed or implied, of the stockholder, it was the finding of
the Commission that a meeting was called for the purpose. The petitioner had
not sufficiently overcome the evidence of respondent that such meeting was
in fact held. What petitioner successfully proved, however, was the fact that
he was not notified of said meeting and that he never attended the same as
he was out of the country at the time, attending the Mecca pilgrimage. Another
thing that petitioner was able to disprove was the allegation that all
stockholders who did not subscribe to the increase have waived their pre-
emptive right. As far as petitioner is concerned, he had not waived his pre-
emptive right to subscribe as he could not have done so for the reason that he
was not present at the meeting and had not executed a waiver, thereof. Not
having waived such right and for reasons of equity, he may still be allowed to
subscribe to the increased capital stock proportionate to his present
shareholdings.
M. POWER TO SELL OR DISPOSE OF ASSETS
Sec. 40. Sale or other disposition of assets. - Subject to the provisions of
existing laws on illegal combinations and monopolies, a corporation may, by a
majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as its board of directors
or trustees may deem expedient, when authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, or in case of non-stock corporation, by the vote of at least to two-thirds
(2/3) of the members, in a stockholder's or member's meeting duly called for
the purpose. Written notice of the proposed action and of the time and place of
the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder may exercise his appraisal right under
the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all
the corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board
of directors or trustees may, nevertheless, in its discretion, abandon such sale,
lease, exchange, mortgage, pledge or other disposition of property and assets,
subject to the rights of third parties under any contract relating thereto, without
further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation,
without the authorization by the stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise dispose of any of its property and
assets if the same is (1) necessary in the usual and regular course of
business of said corporation or (2) if the proceeds of the sale or other
disposition of such property and assets be appropriated for the
conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the
vote of at least a majority of the trustees in office will be sufficient authorization
for the corporation to enter into any transaction authorized by this section.
The conditions for the valid exercise of this power are thus as follows:
1. Resolution by a majority of the BOD/T;
2. Authorization from the stockholders representing at least 2/3 of the
 outstanding capital stock or 2/3 of the members;
3. The ratification of the stockholders or member must be made at a meeting
duly called for that purpose;
4. Prior written notice of the proposed action and of the time and place of
meeting must be made addressed to all stockholders of record, either by
mail or personal service;
5. The sale of the assets shall be subject to the provisions of existing laws
on illegal combinations and monopolies; and
6. Any dissenting stockholder shall have the option to exercise his appraisal
right.
The above requirements will not apply:
1. In case the sale is NOT covering all or substantially all of the assets of a
corporation as to render it incapable of continuing the business or
accomplishing the purpose for which it was incorporated; or if the
proceeds are to be used to continue the conduct of the remaining
business of the company;
2. If the sale is in the usual and regular course of business of the company.
ISLAMIC DIRECTORATE OF THE PHILIPPINES VS. CA (272 SCRA 454;
May 4, 1997) – The Islamic Directorate of the Philippines received two parcels
of land from the Libyan government for the purpose of putting up a Mosque,
Madrasah (arabic school) and other religious infrastructures. In 1972, Martial
Law was declared, most of the members of the Board of Trustees, together
with petitioner Sen. Mamintal Tamano, fled to the middle-east to escape
political prosecution.
Thereafter, two Muslim groups sprung claiming to be the legitimate IDP. One
headed by Engr. Farouk Caprizo, not having been properly elected as new
members of the Board of Trustees caused to be sold, through a resolution of
IDP, the two lots to respondent Iglesia Ni Cristo.
The 1971 Board of Trustees now filed a petition to declare the sale null and
void.
ISSUE: WON the sale is valid?
HELD: No. The Caprizo Group is a fake board of trustees. IDP never gave its
consent through a legitimate Board of Trustees. Therefore, this is not a case
of vitiated consent, but one where consent on the part of one of the contracting
parties is totally wanting. Ineluctably, the subject sale is void and produces no
effect whatsoever.
The Caprizo group-INC sale is further deemed null and void ab initio because
of the Caprizo Group’s failure to comply with Sec. 40 of the Corporation Code
pertaining to
the disposition of all or substantially all assets of the corporation.
The Tandang Sora property, it appears from the records, constitutes the only
property of the IDP. Hence, its sale to a third-party is a sale or disposition of
all the corporate property and assets of IDP falling squarely within the
contemplation of Sec. 40. For the sale to be valid, the majority vote of the
legitimate Board of Trustees, concurred in by vote of at least 2/3 of the bona
fide members of the corporation should have been obtained. These twin
requirements were not met as the Caprizo Groups which voted to sell the
property was a fake Board and those whose names and signatures were affixed
by the Caprizo Group together with the sham Board Resolution authorizing
negotiation for the sale were, from all indications, not bona fide members of
the IDP as they were made to appear to be.
EDWARD J. NELL CO. VS. PACIFIC FARMS, INC. (15 SCRA 415; Nov. 29,
1965) - The appellant secured in a civil case against Insular Famrs, Inc. a
judgment for the balance of the price of a pump sold by the former to the
latter. A writ of execution was issued but was returned unsatisfied, saying that
Insular Farms had no leviable property. Soon after appellant filed with the same
Municipal Court the present action against Pacific Farms claiming it to be an
alter ego of Insular Farms, which the court denied. On appeal, the CFI and CA
also denied the petition.
ISSUE: WON Pacific Farms should answer for the liability of Insular Farms?
59 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
HELD: No. It appears on record that the appellee purchase 1,000 shares of
stock of Insular Farms, and thereupon sold said shares of stock to certain
individuals, who forthwith reorganized said corporation and that the board of
directors thereof, as reorganized, then caused its assets, including its leasehold
right over a public land in Pangasinan to be sold to herein appellee. These facts
do not prove that the appellee is an alter ego of Insular Farms, or is liable for
its debts.
Generally where on corporation sells or otherwise transfers all of its assets to
another corporation, the latter is not liable for the debts and liabilities of the
transferor, except: (1) where the purchaser expressly or impliedly agrees to
assumes such debts; (2) where the transaction amounts to a consolidation or
merger of the corporations; (3) where the purchasing corporation is merely a
continuation of the selling corporation; and (4) where the transaction is
entered into fraudulently in order to escape liability for such debts.
In the case at bar, there is neither proof nor allegation of the foregoing
exceptions. In fact, these sales took place not only over 6 months before the
rendition of the judgment sought to be collected in the present action, but also,
appellee purchase the shares of stock of Insular Farms as the highest bidder
at an auction sale held at the instance of a bank to which said shares had been
pledged as security for the obligation of Insular Farms in favor of said bank.
N. POWER TO ACQUIRE OWN SHARES
Sec. 41. Power to acquire own shares. - A stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate purpose
or purposes, including but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to cover the shares
to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code.
The limitation that the corporation must at all times have “unrestricted retained
earnings” is a condition for the exercise of this power, EXCEPT:
1. Redemption of redeemable shares under Sec. 8;
2. Exercise of stockholders right to compel a close corporation to purchase
his shares for any reason under Sec. 105 when the corporation has
sufficient assets in its book to cover its debts and liabilities exclusive of
capital stock;
3. In case of deadlocks under Sec. 104.
Once purchased, the shares are considered as treasury shares and while they
remain so, they have no voting rights and dividend rights. The corporation may
(1) re-issue them even below par; (2) issue them as stock dividends; (3) retire
or cancel them and thereby remove from issue effectively reducing the number
of shares issued stated in the AOI.
STEINBERG VS. VELASCO (52 Phil 953; March 12, 1929) - the Board of
Directors of Trading Company approved and authorized the purchases of the
capital stock of the company from its various stockholder, herein respondents,
at par value amounting to P3,300. Petitioner assails the recovery of the amount
paid to such stockholders and the P3,000 dividends declared which were
claimed to be made to the injury and in fraud of its creditors. The complaint
was dismissed.
ISSUE: WON recovery can be made?
HELD: Yes. The Board of Directors acted on the assumption that it had
accounts receivable of the face value of P19,126.02 but there was no
stipulation as to the value of such accounts and P12,512.47 of which had but
little, if any value. The purchase of the stocks and the dividend declaration
further decreased the assets of the corporation. The profits amounted only to
P3,314.72. In other words, that the corporation did not then have actual bona
fide surplus from which the dividends could be paid, and that the payment of
them in full at the time would “affect the financial condition of the corporation”.
It is indeed peculiar that the action of the board in the assailed acts was all
done at the same meeting of the board of directors, and it appears that the
stockholders, whose shares were purchased, were former directors and
resigned before the board approved the purchase and declaration of dividends.
In other words, the directors were permitted to resign so that they could sell
their stock to the corporation. In this situation and upon this state of facts, it
is very apparent that the directors did not act in good faith or that they were
grossly ignorant of their duties.
Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets
of the corporation to purchase its own stock, and that it will not declare
dividends to stockholders when the corporation is insolvent.
The amount involved in this case is not large, but the legal principles are
important and we have given them consideration which they deserve.
O. POWER TO INVEST FUNDS
Sec. 42. Power to invest corporate funds in another corporation or
business or for any other purpose. - Subject to the provisions of this Code,
a private corporation may invest its funds in any other corporation or business
or for any purpose other than the primary purpose for which it was organized
when approved by a majority of the board of directors or trustees and ratified
by the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3) of the members in the case of non-
stock corporations, at a stockholder's or member's meeting duly called for the
purpose. Written notice of the proposed investment and the time and place of
the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder shall have appraisal right as provided
in this Code: Provided, however, That where the investment by the corporation
is reasonably necessary to accomplish its primary purpose as stated in the
articles of incorporation, the approval of the stockholders or members shall not We agree with Professor Guevarra. We therefore agree with the finding of the
be necessary.
“MAY INVEST FUNDS” has been held by the SEC to mean an investment in
the form of money, stock, bonds and other liquid assets and does not include
real properties or other fixed assets, otherwise the law would have phrased
Sec. 42 to include “assets” rather than “to invest funds”.
SECONDARY PURPOSE: the law uses the phrase “for any purpose other than
the primary purpose” signifying that even if the business or undertaking is
allowed or authorized in the secondary purpose or purposes of the corporation,
the provision of Sec. 42 would apply.
REQUIREMENTS FOR A VALID INVESTMENT OF CORPORATE FUNDS:
1. Resolution by a majority of the BOD/T;
2. Ratification by the stockholders representing 2/3 of the outstanding
capital stock (or 2/3 of members);
3. The ratification must be made at a meeting duly called for that purpose;
4. Prior written notice of the proposed investment and the time and place of
the meeting shall be made, addressed to each stockholder or member by
mail or by personal service; and
5. Any dissenting stockholder shall have the option to exercise his appraisal
right.
RATIFICATION: as a requirement, applies only to investments that are
beyond the corporation’s primary purpose, or outside the express or implied
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powers of the investing corporation. Thus, if the investment is reasonably
necessary to accomplish its primary purpose, the approval of the stockholders
or members is not required.
DELA RAMA VS. MA-AO SUGAR CENTRAL CO., INC. (27 SCRA 247; Feb.
28, 1969) - Defendant Ma-ao Sugar Central Co, Inc., engaged in the
manufacture of sugar, invested P655,000 in shares of stock of Philippine Fiber
Processing Co., Inc., which is engaged in the manufacture of sugar bags. The
sale, though not previously authorized, was ratified by the 2/3 vote of the
stockholders. Claiming the business of defendant is not related to that of
Philippine Fiber, such sale was attacked but the trial court decided on its
legality.
ISSUE: WON the investment by Ma-ao Sugar constitutes a violation of Sec.
17-1/2 of the Corporation Law?
HELD: Yes. In his work entitled “The Philippine Corporation Law”, Professor
Sulpicio S. Guevarra of the UP College of Law, reconciled par. (9) and (10) of
Sec. 13, as follows:
“j. Power to acquire or dispose of shares or securities. – A private
corporation, in order to accomplish it purpose as stated in its articles of
incorporation, and imposed by the Corporation Law, has the power to
acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and
other evidences of indebtedness of any domestic or foreign corporation.
Such an act, if done in pursuance of the corporate purpose, does
not need the approval of the stockholders; but when the purchase
of shares of another corporation is done solely for investment and
not to accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary”
“40. Power to invest corporate funds. – A private corporation has the power
to invest its corporate funds in any other corporation or business, or for any
other purpose other than the main purpose for which it was organized,
provided that its board of directors has been authorized in a resolution by
the affirmative vote of stockholders holding shares in the corporation
entitling them to exercise at least two-thirds of the voting power on such a
proposal at a stockholders’ meeting called for that purpose. When the
investment is necessary to accomplish its purpose or purposes as stated in
its articles of incorporation, the approval of the stockholders is not
necessary”
lower court that the investment in question does not fall under the purview of
Sec. 17 ½ of the Corporation Law.
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE
M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO,
WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL
CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA,
respondents.
(GR No. L-45911; April 11, 1979)
FACTS: Petitioner John Gokongwei alleged that the respondent corporation
has been investing corporate funds in other corporations or business outside
of its primary purpose in violation of Sec. 17 ½ of the Corporation Law.
Respondents sent notices of the annual stockholders’ meeting including in the
agenda thereof the re-affirmation of the authorization of the BOD by the
stockholders at the meeting to invest corporate funds in other companies or
businesses or for purposes other than the main purpose. An injunction was
prayed for by petitioner, but the date of hearing originally set was cancelled.
No action was taken up to the date of the filing of the instant petition.
ISSUE: WON respondent SEC committed grave abuse of discretion in allowing
the above agenda to be taken up in the stockholders’ meeting?
HELD: No. Section 17-1/2 of the Corporation Law allows a corporation to
"invest its funds in any other corporation or business or for any purpose other
than the main purpose for which it was organized" provided that its Board of
Sec. 43. Power to declare dividends. - The board of directors of a stock
Directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting corporation may declare dividends out of the unrestricted retained earnings
power. If the investment is made in pursuance of the corporate which shall be payable in cash, in property, or in stock to all stockholders on
purpose, it does not need the approval of the stockholders. It is only the basis of outstanding stock held by them: Provided, That any cash dividends
when the purchase of shares is done solely for investment and not to due on delinquent stock shall first be applied to the unpaid balance on the
accomplish the purpose of its incorporation that the vote of approval subscription plus costs and expenses, while stock dividends shall be withheld
of the stockholders holding shares entitling them to exercise at least from the delinquent stockholder until his unpaid subscription is fully paid:
two-thirds of the voting power is necessary.
Provided, further, That no stock dividend shall be issued without the approval
As stated by respondent corporation, the purchase of beer manufacturing of stockholders representing not less than two-thirds (2/3) of the outstanding
facilities by SMC was an investment in the same business stated as its main capital stock at a regular or special meeting duly called for the purpose. (16a)
purpose in its Articles of Incorporation, which is to manufacture and market
beer. It appears that the original investment was made in 1947-1948, when
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong Stock corporations are prohibited from retaining surplus profits in excess of one
(Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of hundred (100%) percent of their paid-in capital stock, except: (1) when justified
San Miguel beer thereat. Restructuring of the investment was made in 1970- by definite corporate expansion projects or programs approved by the board of
1971 thru the organization of SMI in Bermuda as a tax free reorganization. directors; or (2) when the corporation is prohibited under any loan agreement
with any financial institution or creditor, whether local or foreign, from declaring
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central dividends without its/his consent, and such consent has not yet been secured;
Co., Inc., supra, appears relevant. In said case, one of the issues was the or (3) when it can be clearly shown that such retention is necessary under
legality of an investment made by Manao Sugar Central Co., Inc., without prior special circumstances obtaining in the corporation, such as when there is need
resolution approved by the affirmative vote of 2/3 of the stockholders' voting for special reserve for probable contingencies.
power, in the Philippine Fiber Processing Co., Inc., a company engaged in the
manufacture of sugar bags. The lower court said that "there is more logic
in the stand that if the investment is made in a corporation whose
business is important to the investing corporation and would aid it in
its purpose, to require authority of the stockholders would be to
unduly curtail the power of the Board of Directors.”
UNRESTRICTED RETAINED EARNINGS: the undistributed earnings of the
corporation which have not been allocated for any managerial, contractual or
Assuming arguendo that the Board of Directors of SMC had no authority to
legal purposes and which are free for distribution to the stockholders as
make the assailed investment, there is no question that a corporation, like an
dividends.
individual, may ratify and thereby render binding upon it the originally
unauthorized acts of its officers or other agents. This is true because the
TYPES OF DIVIDENDS:
questioned investment is neither contrary to law, morals, public order or public
1. Cash dividends – payable in lawful money or currency;
policy. It is a corporate transaction or contract which is within the corporate
2. Property dividends - those paid in the form property (e.g., bonds, notes,
powers, but which is defective from a supported failure to observe in its
shares in another corporation);
execution the. requirement of the law that the investment must be authorized
3. Stock dividends – corporation’s own shares of stock out of the remaining
by the affirmative vote of the stockholders holding two-thirds of the voting
unissued shares which would require the approval of the stockholders
power. This requirement is for the benefit of the stockholders. The stockholders
representing 2/3 of the outstanding capital stock at a regular or special
for whose benefit the requirement was enacted may, therefore, ratify the
meeting duly called for that purpose. This is to be valued at par value or
investment and its ratification by said stockholders obliterates any defect which
issue price.
it may have had at the outset. "Mere ultra vires acts", said this Court in
Pirovano, "or those which are not illegal and void ab initio, but are
Cash and property dividends have the effect of reducing corporate assets to
not merely within the scope of the articles of incorporation, are
the extent of the dividends declared. In stock dividends, it would generally not
merely voidable and may become binding and enforceable when
increase the proportionate interest of the stockholders of the corporation
ratified by the stockholders.
although it will have the effect of increasing the subscribed and paid-up capital
(exception is when the stock dividend declaration would result in fractional
Besides, the investment was for the purchase of beer manufacturing and
shares like when 1 share is declared as dividend for every 9 shares held)
marketing facilities which is apparently relevant to the corporate purpose. The
mere fact that respondent corporation submitted the assailed investment to
OVERISSUANCE OF SHARES: happens when a corporation issues shares
the stockholders for ratification at the annual meeting of May 10, 1977 cannot
beyond its authorized capital stock, even in the form of stock dividends.
be construed as an admission that respondent corporation had committed an
ultra vires act, considering the common practice of corporations of periodically
DELINQUENCY: is a requirement for the application of the second part of the
submitting for the gratification of their stockholders the acts of their directors,
first paragraph of Sec. 43. Such that, cash dividends declared are first applied
officers and managers.
on the unpaid balance on the subscription plus costs and expenses and stock
dividends are withheld until the subscription is fully paid.
P. POWER TO DECLARE DIVIDENDS
WHO CAN DECLARE DIVIDENDS? The BOD. They cannot be compelled to
DIVIDENDS are corporate profits set aside, declared and ordered by the BOD
declare dividends, except: (1) When the unrestricted retained earnings is in
to be paid to the stockholders. It is a fruit of investment, the recurrent return,
excess of 100% of the paid-up capital; and (2) In the case of Mandatory If
analogous to interest and rent upon other forms of invested capital.
Earned Preference Shares.

The judgment of the BOD is conclusive, EXCEPT: (1) when they act in bad
faith; (2) for a dishonest purpose; (3) they act fraudulently, oppressively,
unreasonably or unjustly; or (4) abuse of discretion can be shown as to impair
the rights of the complaining shareholders. The TEST of bad faith is to
determine if the policy of the directors is dictated by their personal interest
rather than the corporate welfare.

WHEN DIVIDENDS RIGHTS VEST: It has been succinctly said that the right
61 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
of the stockholders to be paid dividends vest as soon as they have been lawfully
and finally declared by the BOD. It is not revocable unless: (1) it has not been
officially communicated to the stockholders; or (2) it is in the form of stock
dividends which is revocable any time prior to distribution because this does
not result in the distribution of assets but merely the division of existing shares
of a stockholder into smaller units or integers.
TRANSFER OF SHARES: The dividends already declared belong to the owner
at the time of declaration. Usually, however, the dividends are payable to
stockholders of record on a specific future date and as far as the corporation
is concerned, the registered owner is the one entitled to dividends. As against
his transferor, however, the transferee has presumably the right to such
dividends and is oftentimes taken into account in entering effecting the transfer
of shares.
NIELSON & COMPANY, INC., plaintiff-appellant,
vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee
(GR No. L-21601; Dec. 28, 1968)
FACTS: This is a motion for reconsideration filed by respondent Lepanto
contending that the order of the SC to pay Nielson 10% of the stock dividends,
declared by Lepanto during the extension of the contract, as compensation for
services under a management contract is in violation of the Corporation Law
and that it could not be the intention of the parties that the services of Nielson
should be paid in stock dividends.
ISSUE: WON Nielson & Co. is entitled to receive stock dividends?
HELD: No. The considerations for which shares of stock may be issued are:
(1) cash; (2) property; and (3) undistributed profits. Shares of stock are given
the special name "stock dividends" only if they are issued in lieu of
undistributed profits. If shares of stocks are issued in exchange of cash or
property then those shares do not fall under the category of "stock dividends".
A corporation may legally issue shares of stock in consideration of services
rendered to it by a person not a stockholder, or in payment of its indebtedness.
A share of stock issued to pay for services rendered is equivalent to a stock
issued in exchange of property, because services is equivalent to property.
Likewise a share of stock issued in payment of indebtedness is equivalent to
issuing a stock in exchange for cash. But a share of stock thus issued should
be part of the original capital stock of the corporation upon its organization, or
part of the stocks issued when the increase of the capitalization of a corporation
is properly authorized. In other words, it is the shares of stock that are
originally issued by the corporation and forming part of the capital that can be
exchanged for cash or services rendered, or property; that is, if the corporation
has original shares of stock unsold or unsubscribed, either coming from the
original capitalization or from the increased capitalization. Those shares of
stock may be issued to a person who is not a stockholder, or to a person
already a stockholder in exchange for services rendered or for cash or property.
But a share of stock coming from stock dividends declared cannot be issued to
one who is not a stockholder of a corporation.
A "stock dividend" is any dividend payable in shares of stock of the
corporation declaring or authorizing such dividend. It is, what the term
itself implies, a distribution of the shares of stock of the corporation among the
stockholders as dividends. A stock dividend of a corporation is a dividend paid
in shares of stock instead of cash, and is properly payable only out of surplus
profits. So, a stock dividend is actually two things: (1) a dividend, and
(2) the enforced use of the dividend money to purchase additional
shares of stock at par. When a corporation issues stock dividends, it
shows that the corporation's accumulated profits have been
capitalized instead of distributed to the stockholders or retained as
surplus available for distribution, in money or kind, should
opportunity offer. Far from being a realization of profits for the stockholder,
it tends rather to postpone said realization, in that the fund represented by the
new stock has been transferred from surplus to assets and no longer available
for actual distribution. Thus, it is apparent that stock dividends are
issued only to stockholders. This is so because only stockholders are
entitled to dividends. They are the only ones who have a right to a proportional
share in that part of the surplus which is declared as dividends. A stock dividend
really adds nothing to the interest of the stockholder; the proportional interest
62 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
of each stockholder remains the same. If a stockholder is deprived of his
stock dividends - and this happens if the shares of stock forming part
of the stock dividends are issued to a non-stockholder — then the
proportion of the stockholder's interest changes radically. Stock
dividends are civil fruits of the original investment, and to the owners
of the shares belong the civil fruits.
The term "dividend" both in the technical sense and its ordinary acceptation,
is that part or portion of the profits of the enterprise which the corporation, by
its governing agents, sets apart for ratable division among the holders of the
capital stock. It means the fund actually set aside, and declared by the directors
of the corporation as dividends and duly ordered by the director, or by the
stockholders at a corporate meeting, to be divided or distributed among the
stockholders according to their respective interests.
It is Our considered view, therefore, that under Section 16 of the Corporation
Law stock dividends cannot be issued to a person who is not a stockholder in
payment of services rendered. And so, in the case at bar Nielson can not be
paid in shares of stock which form part of the stock dividends of Lepanto for
services it rendered under the management contract. We sustain the
contention of Lepanto that the understanding between Lepanto and Nielson
was simply to make the cash value of the stock dividends declared as the basis
for determining the amount of compensation that should be paid to Nielson, in
the proportion of 10% of the cash value of the stock dividends declared. And
this conclusion of Ours finds support in the record.
Q. POWER TO ENTER INTO MANAGEMENT CONTRACT
Sec. 44. Power to enter into management contract. - No corporation shall
conclude a management contract with another corporation unless such contract
shall have been approved by the board of directors and by stockholders owning
at least the majority of the outstanding capital stock, or by at least a majority
of the members in the case of a non-stock corporation, of both the managing
and the managed corporation, at a meeting duly called for the purpose:
Provided, That (1) where a stockholder or stockholders representing the same
interest of both the managing and the managed corporations own or control
more than one-third (1/3) of the total outstanding capital stock entitled to vote
of the managing corporation; or (2) where a majority of the members of the
board of directors of the managing corporation also constitute a majority of the
members of the board of directors of the managed corporation, then the
management contract must be approved by the stockholders of the managed
corporation owning at least two-thirds (2/3) of the total outstanding capital
stock entitled to vote, or by at least two-thirds (2/3) of the members in the case
of a non-stock corporation. No management contract shall be entered into for
a period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to manage or operate all or substantially all
of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise: Provided, however, That
such service contracts or operating agreements which relate to the exploration,
development, exploitation or utilization of natural resources may be entered
into for such periods as may be provided by the pertinent laws or regulations.
This provision was inserted to assure not only technical competence but
continuity in management policy in running corporate affairs which can be
achieved through a management contract.
REQUIREMENTS OF A VALID MANAGEMENT CONTRACT:
1. Resolution of the BOD;
2. Approval by the stockholders representing a majority of the outstanding
 capital stock or majority of the members of both the managing and the
managed corporation;
3. The approval of the stockholders or members must be made at the
meeting called for that purpose; and
4. The contract shall not be for a period longer than 5 years for any one
term, except those which relate to exploration, development or utilization
of natural resources which may be entered into for such periods as may
be provided by pertinent laws and regulations;
5. 2/3 of the stockholders or members would be required, where:
a. The stockholders representing the same interest of both the
managing and the managed corporation own or control more than
1/3 of the total outstanding capital stock of the managing
corporation;
b. A majority of the members of the BOD of the managing corporation
also constitute a majority of the directors of the managed
corporation;
c. The contract would constitute the management or operation of all or
substantially all of the business of another corporation, whether such
contracts are called service contracts. If it will not constitute the
management of all or substantially all of the business of another
corporation, the first paragraph of Sec. 44 will apply and not that of
the second, that is, only the vote of the majority is required.
R. ULTRA VIRES ACTS
Sec. 45. Ultra vires acts of corporations. - No corporation under this Code
shall possess or exercise any corporate powers except those conferred by this
Code or by its articles of incorporation and except such as are necessary or
incidental to the exercise of the powers so conferred.
ULTRA VIRES ACTS are those which cannot be executed or performed by a
corporation because they are not within its express, inherent, or implied
powers as defined by its charter or AOI. Accordingly, it may be subject to a
collateral attack questioning the authority of the corporation to engage in such
particular endeavor.
CONSEQUENCES:
1. On the Corporation itself: The proper forum may suspend or revoke, after
proper notice and hearing, the franchise or certificate of registration of
the corporation for serious misrepresentation as to what the corporation
can do or is doing to the great damage or prejudice of the general public.
2. On the rights of the Stockholders: A stockholder may bring either an
individual or derivative suit to enjoin a threatened ultra-vires act or
contract. If already performed, a derivative suit against the directors may
be filed, but their liability will depend on whether they acted in good faith
and with reasonable diligence in entering into the contract.
3. On the immediate parties:
a. If the contract is fully executed in both sides, the contract is effective
and the courts will not interfere to deprive either party of what has
been acquired under it;
b. If the contract is executory on both sides, as a rule, neither party
can maintain an action for its non-performance; and
c. Where the contract is executory on one side only, and has been fully
performed on the other, the courts differ as to whether an action will
lie on the contract against the party who has received benefits of
performance under it. Majority of the courts, however, hold that the
party who has received benefits from the performance is “estopped”
to set up that the contract is ultra vires to defeat an action on the
contract.
READ AGAIN: Government vs. EL Hogar and Republic vs. Acoje Mining (both
in this chapter)
PRIVANO, ET AL. VS. DE LA RAMA STEAMSHIP CO. (96 Phil. 335; Dec.
29, 1954) - The Board of directors of defendant company adopted a resolution
wherein the proceeds of the insurance taken on the life of its previous President
and General Manager Enrico Privano be set aside and used to purchase 4,000
shares to be given to Privano’s heirs, which was approved by the stockholders
63 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
in a meeting duly called for the purpose.
The donation of the shares was later on modified to transfer all the proceeds
directly to the heirs which would become a loan of the company with 5%
interest per annum and payable after the settlement of its bonded
indebtedness, and still later, modified to be payable “whenever the company
is in a position to meet said obligation”.
On an opinion by the SEC, sought by the President of the corporation, Sergio
Osmena, Jr., it was opined by the SEC that the donation was void for being
ultra vires. The Board planned to adopt a different resolution to effect the
donation but failed to act on it. The heirs, through Mrs. Estefania R. Privano,
acting as guardian, demanded the settlement of the obligation.
ISSUE: WON the donation was an ultra vires act?
HELD: No. After a careful perusal of the AOI, we find that the corporation was
given broad and almost unlimited powers to carry out the purposes for which
it was organized among them, (1) “to invest and deal with the money of the
company not immediately required, in such manner as from time to time may
be determined” and (2) “to aid in any manner any person association, or
corporation or in the affairs of the property of which this corporation has lawful
interest”. The donation in question undoubtedly comes within the scope of this
broad power for it is a fact appearing in the evidence that the insurance
proceeds were not immediately required when they were given away.
We don’t see much distinction between the acts of generosity of the
benevolence extended to some employees of the corporation, and
even to some in whom the corporation was merely interested
because of certain moral or political consideration, and the donations
which the corporation has seen fit to give the children of the late
Enrico Privano from the point of view of the power of the corporation as
expressed in the AOI. And if the former had been sanctioned and had been
valid and intra-vires, we see no plausible reasons why the latter should now be
deemed ultra-vires. It may perhaps be argued that the donation given to the
children of the late Enrico Privano is so large and disproportionate that it can
hardly be considered a pension or gratuity that can be placed on par with the
instances above-mentioned, but this argument overlooks one consideration:
the gratuity here given was not merely motivated by pure liberality or act of
generosity, but by a deep sense of recognition of the valuable services
rendered by the late Enrico Privano which had immensely contributed to the
growth of the corporation to the extent that from its humble capitalization it
blossomed into a multi-million corporation that it is today.
Granting that it was ultra-vires, it may be said that the same cannot
be invalidated, or declared legally ineffective for that reason alone, it
appearing that the donation represents not only the act of the BOD
but of the stockholders themselves as shown by the fact the same
has been expressly ratified in a resolution duly approved by the
latter. By this ratification, the infirmity of the corporate act, if any has
been obliterated thereby making the act perfectly valid and
enforceable. This is specially so if the donation is not merely executory but
executed and consummated and no creditors are prejudiced, or if there are
creditors affected, the latter has expressly given their conformity.
ISSUE2: What is the difference between an illegal act and that which is ultra-
vires?
HELD: The former contemplates the doing of an act which is contrary to law,
morals, or public order or contravene some rules of public policy or public duty,
and are, like similar transactions between the individuals, void. They cannot
serve as basis of a court action, nor acquire validity by performance, ratification
or estoppel. Mere ultra-vires acts, on the other hand, or those which
are not illegal and void ab initio, but are merely beyond the scope of
the AOI, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
Since it is not contended that the donation under consideration is illegal, or
contrary to any of the express provisions of the AOI, nor prejudicial to the
creditors of the defendant corporation, we cannot but logically conclude that
said donation, even if ultra vires in the supposition we have adverted
to, is not void, and if voidable its infirmity has been cured by
ratification and subsequent acts of the defendant corporation. The
corporation is now prevented or estopped from contesting the validity of the
donation.
IRINEO CARLOS, plaintiff-appellant VS. MINDORO SUGAR CO., ET AL.,
defendant-appellees (57 Phil. 343; Oct. 26, 1932) - Mindoro Sugar Company
(MSC) transferred all of its property to Philippine Trust Company (PTC) in
consideration of the bonds it had issued to the value of P3,000,000, each bond
being $1,000, which par value, with interest at 8% per annum, PTC guaranteed
to the holders.
PTC paid Ramon Diaz upon presentation of the coupons, the stipulated interest
from the date of maturity until July 1, 1928, when its stopped payments,
alleging that it did not deem itself bound to pay such interest or to redeem the
obligation because the guarantee given for the bonds was illegal and void.
The CFI of Manila absolved the defendants from the complaint except MSC
which was sentenced to pay the value of the bond.
ISSUE: WON PTC’s act was ultra-vires?
HELD: No. Firstly, PTC although secondarily engaged in banking, was primarily
organized as a trust corporation with full power to acquire personal property
such as the bonds in question according to both sec. 13 (par. 5) of the
Corporation Law and its duly registered by-laws and AOI; Secondly, that being
thus authorized to acquire the bonds, it was given implied power to guarantee
them in order to place them upon the market under better, more advantageous
conditions, and thereby secure the profit derived from their sale.
“It is not, however, ultra vires for a corporation to enter into
contracts of guaranty where it does so in the legitimate furtherance
of its purposes and business. And it is well settled that where a corporation
acquires commercial papers or bonds in the legitimate transaction of its
business it may sell them, and in furtherance of such a sale, it may in order to
make them more readily marketable, indorse or guarantee their payment.”
Even if PTC did not acquire the bonds in question, but only guaranteed them,
it would at any rate, be valid and the said corporation is bound to pay the
appellant their value with the accrued interest in view of the fact that they
become due on account of the lapse of 60 days, without the accrued interest
due having been paid; and the reason is that it is estopped from denying the
validity of its guarantee.
The doctrine of ultra vires as a defense, is by some courts regarded as an
ungracious and odious one, to be sustained only where the most persuasive
consideration of public policy are involved, and there are numerous decisions
and dicta to the effect that the plea should not as a general rule prevail whether
interposed for or against the corporation, where it will not advance justice but
on the contrary will accomplish a legal wrong.
When a contract is not on its face necessarily beyond the scope of the power
of the corporation by which it was made, it will, in the absence of proof to the
contrary, be presumed to be valid. Corporations are presumed to contract
within their powers. The doctrine of ultra vires, when invoked for or against a
corporation, should not be allowed to prevail where it would defeat the ends
of justice or work a legal wrong.
JAPANESE WAR NOTES CLAIMANTS ASSOC., INC. VS. SEC (101 Phil
540; May 23, 1957) - The SEC issued an order requiring petitioner herein and
its President Alfredo Abcede to show cause why it should not be proceeded
against for making misrepresentations to the public about the need of
registering and depositing war notes, with a view of probable redemption as
contemplated in Senate Bill No. 163 and in Senate Concurrent Resolution No.
14, for otherwise they would be valueless.
Petitioner contended that the statement was made in good faith as President
Magsaysay would soon make representations to the US to have the war notes
redeemed.
Respondent SEC found that according to its AOI, the petitioner has the privilege
64 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
to work for the redemption of the war notes of its members alone, but that it
cannot offer its services to the public for a valuable consideration, because
there is nothing definite and tangible about the redemption of the war notes
and its success is speculative that any authority given to offer services can
easily degenerate into a racket; that under its AOI the petitioner is a civic and
non-stock corporation and upon should not engage in business for profit; that
it has received war notes for deposit, upon payment of fees, without authority
in its articles to do so; that it had previously been rendered to desist from
collecting from those registering the war notes, but notwithstanding this
prohibition it has done so in the guise of service fees. Hence the Commission
ordered to stop receiving war notes, receiving same for deposit and charging
fees therefore.
ISSUE: WON the SEC erred in issuing the questioned order?
HELD: No. The articles authorize collection of fees from members; but they
do not authorize the corporation to engage in the business of registering and
accepting war notes for deposit and collecting fees from such services. This
was the ruling of the Commission and this we find to be correct.
Neither do we find any merit in the third contention that the association has
authority to accept and collect fees for reparation claims for civilian casualties
and other injuries. This is beyond any of the powers of the association as
embodied in its articles and has absolutely no relation to the avowed purpose
of the association to work for the redemption of war notes.
ERNESTINA CRISOLOGO-JOSE VS. CA (GR No. 80599; Sept. 15, 1989) -
The Vice-president of Mover Enterprises, Inc. issued a check drawn against
Traders Royal Bank, payable to petitioner Ernestina Crisologo-Jose, for the
accommodation of his client. Petitioner-payee was charged with the knowledge
that the check was issued at the instance and for the personal account of the
President who merely prevailed upon respondent vice-president to act as co-
signatory in accordance with the arrangement of the corporation with its
depository bank. While it was the corporation's check which was issued to
petitioner for the amount involved, petitioner actually had no transaction
directly with said corporation.
ISSUE: WON private respondent, one of the signatories of the check issued
under the account of Mover Enterprises, Inc., is an accommodation party under
NIL and a debtor of petitioner to the extent of the amount of said check?
HELD: Yes. The liability of an accommodation party to a holder for value,
although such holder does not include nor apply to corporations which are
accommodation parties. This is because the issue or indorsement of
negotiable paper by a corporation without consideration and for the
accommodation of another is ultra vires. One who has taken the
instrument with knowledge of the accommodation nature thereof cannot
recover against a corporation where it is only an accommodation party. By way
of exception, an officer or agent of a corporation shall have the power to
execute or indorse a negotiable paper in the name of the corporation for the
accommodation of a third person only if specifically authorized to do so.
Corollarily, corporate officers, such as the president and vice-president, have
no power to execute for mere accommodation a negotiable instrument of the
corporation for their individual debts or transactions arising from or in relation
to matters in which the corporation has no legitimate concern. Since such
accommodation paper cannot thus be enforced against the corporation,
especially since it is not involved in any aspect of the corporate business or
operations, the signatories thereof (president and vice-president) shall be
personally liable therefor, as well as the consequences arising from their acts
in connection therewith.
CHAPTER 8: BY-LAWS
BY-LAWS are rules and ordinances made by a corporation for its own
government; to regulate the conduct and define the duties of the stockholders
or members towards the corporation and among themselves. They are the
rules and regulations or private laws enacted by the corporation to regulate,
govern and control its own actions, affairs and concerns and tis stockholder or
members and directors and officers with relation thereto and among
themselves in their relation to it.

Sec. 46. Adoption of by-laws. - Every corporation formed under this Code
must, within one (1) month after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and Exchange Commission, adopt
a code of by-laws for its government not inconsistent with this Code.
For the adoption of by-laws by the corporation the affirmative vote of the
stockholders representing at least a majority of the outstanding capital stock,
or of at least a majority of the members in case of non-stock corporations, shall
be necessary. The by-laws shall be signed by the stockholders or members
voting for them and shall be kept in the principal office of the corporation,
subject to the inspection of the stockholders or members during office hours. A
copy thereof, duly certified to by a majority of the directors or trustees
countersigned by the secretary of the corporation, shall be filed with the
Securities and Exchange Commission which shall be attached to the original
articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be
adopted and filed prior to incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and submitted to the Securities
and Exchange Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities
and Exchange Commission of a certification that the by-laws are not
inconsistent with this Code.
Sec. 47. Contents of by-laws. - Subject to the provisions of the Constitution,
this Code, other special laws, and the articles of incorporation, a private
corporation may provide in its by-laws for:
1. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special meetings
of the stockholders or members;
3. The required quorum in meetings of stockholders or members and the
manner of voting therein;
4. The form for proxies of stockholders and members and the manner of
voting them;
5. The qualifications, duties and compensation of directors or trustees,
officers and employees;
6. The time for holding the annual election of directors of trustees and the
mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all
officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock
certificates; and
10. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs.

The Securities and Exchange Commission shall not accept for filing the by-laws AMENDMENT:
or any amendment thereto of any bank, banking institution, building and loan
association, trust company, insurance company, public utility, educational
institution or other special corporations governed by special laws, unless
accompanied by a certificate of the appropriate government agency to the effect
that such by-laws or amendments are in accordance with law.
EFFECTIVITY: After approval of the SEC.
BY-LAWS PRIOR TO INCORPORATION: it must be signed by all the
incorporators without the need of the affirmative vote of the majority of the
outstanding capital stock or the members provided it is submitted together
with the AOI.
AFTER INCPORPORATION: Must be submitted one month after the
issuance of the certificate of incorporation and must be approved by a majority
of the outstanding capital stock or members and signed by such stockholders
or members voting for them. Failure to file within 1 month may result to
suspension or revocation of corporate franchise.
Sec. 48. Amendments to by-laws. - The board of directors or trustees, by
a majority vote thereof, and the owners of at least a majority of the outstanding
capital stock, or at least a majority of the members of a non-stock corporation,
at a regular or special meeting duly called for the purpose, may amend or repeal
any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors or trustees the power to
amend or repeal any by-laws or adopt new by-laws: Provided, That any power
delegated to the board of directors or trustees to amend or repeal any by-laws
or adopt new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a majority
of the members in non-stock corporations, shall so vote at a regular or special
meeting.
Whenever any amendment or new by-laws are adopted, such amendment or
new by-laws shall be attached to the original by-laws in the office of the
corporation, and a copy thereof, duly certified under oath by the corporate
secretary and a majority of the directors or trustees, shall be filed with the
Securities and Exchange Commission the same to be attached to the original
articles of incorporation and original by-laws.

THIRD PERSONS: are generally not bound, affected or prejudiced the by- The amended or new by-laws shall only be effective upon the issuance by the
laws, it being merely internal rules of the corporation, EXCEPT: if they have Securities and Exchange Commission of a certification that the same are not
knowledge of its existence and contents. inconsistent with this Code.

CONTENTS:

TWO MODES OF AMENDMENT:

1. By a majority vote of the directors or trustees and the majority vote of
the outstanding capital stock or members, at a regular or special meeting
called for that purpose; or
2. By the board of directors alone when delegated by stockholders owning
2/3 of the outstanding capital stock or 2/3 of the members. This power,
however, is considered revoked, when so voted by a majority of the
outstanding capital stock or members in a regular or special meeting.

65 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION,
INC., petitioner,
vs.
HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY
CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO,
respondents.
(GR No. 117188; Aug. 7, 1997)
FACTS: Petitioner Association was organized on Feb. 8, 1983, but for some
reason failed to file its corporate by-laws. Victorio Soliven, himslef the owner
and developer of the subdivision was the first president of the Association.
Later on, asking on the status of petitioner, Soliven discovered that the said
association was already dissolved (according to the head of the legal
department of HIGC), and accordingly caused the registration of HIGC as the
association covering Phases West I, East I and East II of the subdivision.
ISSUE: WON the Association can be considered dissolved for non-adoption of
by-laws?
HELD: Yes. As correctly postulated by the petitioner, interpretation of this
provision of Sec. 46 begins with the determination of the meaning and import
of the word "must" in this section. Ordinarily, the word "must" connotes an
imperative act or operates to impose a duty which may be enforced. It is
synonymous with "ought" which connotes compulsion or mandatoriness.
However, the word "must" in a statute, like "shall," is not always imperative.
It may be consistent with an exercise of discretion. In this jurisdiction, the
tendency has been to interpret "shall" as the context or a reasonable
construction of the statute in which it is used demands or requires. This is
equally true as regards the word "must." Thus, if the languages of a statute
considered as a whole and with due regard to its nature and object reveals
that the legislature intended to use the words "shall" and "must" to be
directory, they should be given that meaning.
In this respect, the following portions of the deliberations of the Batasang
Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are we made to
understand here, Mr. Speaker, that by-laws must immediately be filed
within one month after the issuance? In other words, would this be
mandatory or directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the
effect of the failure of the corporation to file these by-laws within one
month?
MR. MENDOZA. There is a provision in the latter part of the Code which
identifies and describes the consequences of violations of any provision
of this Code. One such consequences is the dissolution of the corporation
for its inability, or perhaps, incurring certain penalties.
MR. FUENTEBELLA. But it will not automatically amount to a dissolution
of the corporation by merely failing to file the by-laws within one month.
Supposing the corporation was late, say, five days, what would be the
mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in the automatic or
ipso facto dissolution of the corporation. Perhaps, as in the case, as you
suggested, in the case of El Hogar Filipino where a quo warranto action
is brought, one takes into account the gravity of the violation committed.
If the by-laws were late — the filing of the by-laws were late by, perhaps,
a day or two, I would suppose that might be a tolerable delay, but if they
are delayed over a period of months — as is happening now — because
of the absence of a clear requirement that by-laws must be completed
within a specified period of time, the corporation must suffer certain
consequences.
This exchange of views demonstrates clearly that automatic corporate
dissolution for failure to file the by-laws on time was never the intention of the
66 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
legislature. Moreover, even without resorting to the records of deliberations of
the Batasang Pambansa, the law itself provides the answer to the issue
propounded by petitioner.
Taken as a whole and under the principle that the best interpreter of a statute
is the statute itself (optima statuli interpretatix est ipsum statutum), Section
46 aforequoted reveals the legislative intent to attach a directory, and not
mandatory, meaning for the word "must" in the first sentence thereof. Note
should be taken of the second paragraph of the law which allows the
filing of the by-laws even prior to incorporation. This provision in the
same section of the Code rules out mandatory compliance with the
requirement of filing the by-laws "within one (1) month after receipt
of official notice of the issuance of its certificate of incorporation by
the Securities and Exchange Commission." It necessarily follows that
failure to file the by-laws within that period does not imply the
"demise" of the corporation. 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. There
are in fact cases where by-laws are unnecessary to corporate existence or to
the valid exercise of corporate powers, thus:
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 nonaction which will not render void any acts of
the corporation which would otherwise be valid. (Emphasis supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are the rule of its life,
and that until by-laws have been adopted the corporation may not be able
to act for the purposes of its creation, and that the first and most
important duty of the members is to adopt them. This would seem to
follow as a matter of principle from the office and functions of by-laws.
Viewed in this light, the adoption of by-laws is a matter of
practical, if not one of legal, necessity. Moreover, the peculiar
circumstances attending the formation of a corporation may impose the
obligation to adopt certain by-laws, as in the case of a close corporation
organized for specific purposes. And the statute or general laws from
which the corporation derives its corporate existence may expressly
require it to make and adopt by-laws and specify to some extent what
they shall contain and the manner of their adoption. The mere fact,
however, of the existence of power in the corporation to adopt
by-laws does not ordinarily and of necessity make the exercise
of such power essential to its corporate life, or to the validity of
any of its acts.
Although the Corporation Code requires the filing of by-laws, it does not
expressly provide for the consequences of the non-filing of the same within the
period provided for in Section 46. However, such omission has been rectified
by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction
of the SEC of which state:
Sec. 6. In order to effectively exercise such jurisdiction, the Commission
shall possess the following powers:
xxx xxx xxx
(1) To suspend, or revoke, after proper notice and hearing, the franchise
or certificate of registration of corporations, partnerships or associations,
upon any of the grounds provided by law, including the following:
xxx xxx xxx
Failure to file by-laws within the required period.
Even under the foregoing express grant of power and authority, there
can be no automatic corporate dissolution simply because the
incorporators failed to abide by the required filing of by-laws
embodied in Section 46 of the Corporation Code. There is no outright
"demise" of corporate existence. Proper notice and hearing are
cardinal components of due process in any democratic institution,
agency or society. In other words, the incorporators must be given
the chance to explain their neglect or omission and remedy the same.
That the failure to file by-laws is not provided for by the Corporation Code but
in another law is of no moment. P.D. No. 902-A, which took effect immediately
after its promulgation on March 11, 1976, is very much apposite to the Code.
Accordingly, the provisions abovequoted supply the law governing the situation
in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are
statutes in pari materia. Interpretare et concordare legibus est optimus
interpretandi. Every statute must be so construed and harmonized with other
statutes as to form a uniform system of jurisprudence.
As the "rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its
stockholders or members and directors and officers with relation thereto and
among themselves in their relation to it," by-laws are indispensable to
corporations in this jurisdiction. These may not be essential to corporate birth
but certainly, these are required by law for an orderly governance and
management of corporations. Nonetheless, failure to file them within the period
required by law by no means tolls the automatic dissolution of a corporation.
In this regard, private respondents are correct in relying on the
pronouncements of this Court in Chung Ka Bio v. Intermediate Appellate Court,
as follows:
“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.”
HENRY FLEISCHER, plaintiff-appellee,
vs.
BOTICA NOLASCO CO., INC., defendant-appellant.
(GR No. L-23241; March 14 ,1925)
FACTS: Manuel Gonzales, the original owner of 5 shares of stock in question
of Defendant Company, assigned and transferred to herein plaintiff Fleischer.
Two days after, Dr. Miciano, secretary-treasurer of the company, offered to
buy from Fleischer the said shares in behalf of the corporation, contending that
Art. 12 of the by-laws grants the company preferential right to buy Gonzales’
shares. Plaintiff refused and requested Dr. Miciano to register said shares in
his name, and the latter refused to do so.
ISSUE: WON Fleischer is bound by the provisions of the corporation’s by-laws?
HELD: No. Section 13, paragraph 7 (of Act 1459), empowers a corporation to
make by-laws, not inconsistent with any existing law, for the transferring of its
stock. It follows from said provision, that a by-law adopted by a corporation
relating to transfer of stock should be in harmony with the law on the subject
of transfer of stock. The law on this subject is found in section 35 of Act No.
1459. Said section specifically provides that the shares of stock "are personal
property and may be transferred by delivery of the certificate indorsed by the
owner, etc." Said section 35 defines the nature, character and transferability
of shares of stock. Under said section they are personal property and may be
transferred as therein provided. Said section contemplates no restriction as to
whom they may be transferred or sold. It does not suggest that any
discrimination may be created by the corporation in favor or against a certain
purchaser. The holder of shares, as owner of personal property, is at
liberty, under said section, to dispose of them in favor of whomsoever
he pleases, without any other limitation in this respect, than the
general provisions of law. Therefore, a stock corporation in adopting a by-
law governing transfer of shares of stock should take into consideration the
67 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
specific provisions of section 35 of Act No. 1459, and said by-law should be
made to harmonize with said provisions. It should not be inconsistent
therewith.
As a general rule, the by-laws of a corporation are valid if they are reasonable
and calculated to carry into effect the objects of the corporation, and are not
contradictory to the general policy of the laws of the land. (Supreme
Commandery of the Knights of the Golden Rule vs. Ainsworth, 71 Ala., 436; 46
Am. Rep., 332.)
On the other hand, it is equally well settled that by-laws of a corporation must
be reasonable and for a corporate purpose, and always within the charter
limits. They must always be strictly subordinate to the constitution and the
general laws of the land. They must not infringe the policy of the state, nor be
hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested
rights or impair the obligation of a contract, take away or abridge the
substantial rights of stockholder or member, affect rights of property or create
obligations unknown to the law. (People's Home Savings Bank vs. Superior
Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79
Am. St. Rep., 769.)
The validity of the by-law of a corporation is purely a question of law. (South
Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)
“The power to enact by-laws restraining the sale and transfer of stock must
be found in the governing statute or the charter. Restrictions upon the traffic
in stock must have their source in legislative enactment, as the corporation
itself cannot create such impediments. By-laws are intended merely for the
protection of the corporation, and prescribe regulation and not restriction;
they are always subject to the charter of the corporation. The corporation,
in the absence of such a power, cannot ordinarily inquire into or
pass upon the legality of the transaction by which its stock passes
from one person to another, nor can it question the consideration
upon which a sale is based. A by-law cannot take away or abridge
the substantial rights of stockholder. Under a statute authorizing by-
laws for the transfer of stock, a corporation can do no more than prescribe
a general mode of transfer on the corporate books and cannot justify an
unreasonable restriction upon the right of sale. (4 Thompson on
Corporations, sec. 4137, p. 674.
The jus disponendi, being an incident of the ownership of property, the
general rule (subject to exceptions hereafter pointed out and discussed) is
that every owner of corporate shares has the same uncontrollable right to
alien them which attaches to the ownership of any other species of property.
A shareholder is under no obligation to refrain from selling his shares at the
sacrifice of his personal interest, in order to secure the welfare of the
corporation, or to enable another shareholder to make gains and profits. (10
Cyc., p. 577.)
It follows from the foregoing that a corporation has no power to prevent or to
restrain transfers of its shares, unless such power is expressly conferred in its
charter or governing statute. This conclusion follows from the further
consideration that by-laws or other regulations restraining such
transfers, unless derived from authority expressly granted by the
legislature, would be regarded as impositions in restraint of trade.
(10 Cyc., p. 578.)
The foregoing authorities go farther than the stand we are taking on this
question. They hold that the power of a corporation to enact by-laws
restraining the sale and transfer of shares, should not only be in
harmony with the law or charter of the corporation, but such power
should be expressly granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer of shares is
found in section 35 of Act No. 1459, quoted above, as follows: "No transfer,
however, shall be valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as to show the names
of the parties to the transaction, the date of the transfer, the number of the
certificate, and the number of shares transferred." This restriction is necessary
in order that the officers of the corporation may know who are the
stockholders, which is essential in conducting elections of officers, in calling
meeting of stockholders, and for other purposes. but any restriction of the
nature of that imposed in the by-law now in question, is ultra vires, violative
of the property rights of shareholders, and in restraint of trade
And moreover, the by-laws now in question cannot have any effect on the
appellee. He had no knowledge of such by-law when the shares were assigned
to him. He obtained them in good faith and for a valuable consideration. He
was not a privy to the contract created by said by-law between the shareholder
Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to
defeat his rights as a purchaser.
GOVERNMENT VS. EL HOGAR (supra) - Fourth cause of action. — It appears
that among the by-laws of the association there is an article (No. 10) which
reads as follows:
“The board of directors of the association, by the vote of an absolute
majority of its members, is empowered to cancel shares and to return to the
owner thereof the balance resulting from the liquidation thereof whenever,
by reason of their conduct, or for any other motive, the continuation as
members of the owners of such shares is not desirable.”
ISSUE: WON the above provision is valid?
HELD: No. This by-law is of course a patent nullity, since it is in direct
conflict with the latter part of section 187 of the Corporation Law,
which expressly declares that the board of directors shall not have
the power to force the surrender and withdrawal of unmatured stock
except in case of liquidation of the corporation or of forfeiture of the
stock for delinquency. It is agreed that this provision of the by-laws has
never been enforced, and in fact no attempt has ever been made by the board
of directors to make use of the power therein conferred. In November, 1923,
the Acting Insular Treasurer addressed a letter to El Hogar Filipino, calling
attention to article 10 of its by-laws and expressing the view that said article
was invalid. It was therefore suggested that the article in question should be
eliminated from the by-laws. At the next meeting of the board of directors the
matter was called to their attention and it was resolved to recommend to the
shareholders that in their next annual meeting the article in question be
abrogated. It appears, however, that no annual meeting of the shareholders
called since that date has been attended by a sufficient number of shareholders
to constitute a quorum, with the result that the provision referred to has not
been eliminated from the by-laws, and it still stands among the by-laws of the
association, notwithstanding its patent conflict with the law.
It is supposed, in the fourth cause of action, that the existence of this article
among the by-laws of the association is a misdemeanor on the part of the
respondent which justifies its dissolution. In this view we are unable to concur.
The obnoxious by-law, as it stands, is a mere nullity, and could not be enforced
even if the directors were to attempt to do so. There is no provision of law
making it a misdemeanor to incorporate an invalid provision in the by-laws of
a corporation; and if there were such, the hazards incident to corporate effort
would certainly be largely increased. There is no merit in this cause of action.
ISSUE2: Owing to the failure of a quorum at most of the general meetings
since the respondent has been in existence, it has been the practice of the
directors to fill vacancies in the directorate by choosing suitable persons from
among the stockholders. This custom finds its sanction in article 71 of the by-
laws, which reads as follows:
“ART. 71. The directors shall elect from among the shareholders members to
fill the vacancies that may occur in the board of directors until the election at
the general meeting”
WON Art. 71 is valid?
HELD: Yes. We are unable to see the slightest merit in the charge. No fault
can be imputed to the corporation on account of the failure of the shareholders
to attend the annual meetings; and their non-attendance at such meetings is
doubtless to be interpreted in part as expressing their satisfaction of the way
in which things have been conducted. Upon failure of a quorum at any annual
meeting the directorate naturally holds over and continues to function until
another directorate is chosen and qualified. Unless the law or the charter
68 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
of a corporation expressly provides that an office shall become
vacant at the expiration of the term of office for which the officer was
elected, the general rule is to allow the officer to holdover until his
successor is duly qualified. Mere failure of a corporation to elect
officers does not terminate the terms of existing officers nor dissolve
the corporation (Quitman Oil Company vs. Peacock, 14 Ga. App., 550;
Jenkins vs. Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81
Conn., 466; Hatch vs. Lucky Bill Mining Company, 71 Pac., 865; Youree vs.
Home Town Matual Ins. Company, 180 Missouri, 153; Cassell vs. Lexington, H.
and P. Turnpike Road Co., 10 Ky. L. R., 486). The doctrine above stated finds
expressions in article 66 of the by-laws of the respondent which declares in so
many words that directors shall hold office "for the term of one year on until
their successors shall have been elected and taken possession of their offices."
It result that the practice of the directorate of filling vacancies by the action of
the directors themselves is valid. Nor can any exception be taken to then
personality of the individuals chosen by the directors to fill vacancies in the
body. Certainly it is no fair criticism to say that they have chosen competent
businessmen of financial responsibility instead of electing poor persons to so
responsible a position. The possession of means does not disqualify a man for
filling positions of responsibility in corporate affairs.
READ AGAIN: BARRETO VS. LA PREVISORA FILIPINA (CHAPTER 6)
GOKONGWEI VS. SEC (supra) - As additional causes of action, it was alleged
that corporations have no inherent power to disqualify a stockholder from
being elected as a director and, therefore, the questioned act is ultra vires and
void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing
other corporations, entered into contracts (specifically a management contract)
with respondent corporation, which was allowed because the questioned
amendment gave the Board itself the prerogative of determining whether they
or other persons are engaged in competitive or antagonistic business; that the
portion of the amended bylaws which states that in determining whether or
not a person is engaged in competitive business, the Board may consider such
factors as business and family relationship, is unreasonable and oppressive
and, therefore, void; and that the portion of the amended by-laws which
requires that "all nominations for election of directors ... shall be submitted in
writing to the Board of Directors at least five (5) working days before the date
of the Annual Meeting" is likewise unreasonable and oppressive.
ISSUE: WON the amended by-laws of SMC disqualifying a competitor from
nomination or election to the BOD are valid and reasonable?
HELD: Yes. The validity or reasonableness of a by-law of a corporation in
purely a question of law. Whether the by-law is in conflict with the law of the
land, or with the charter of the corporation, or is in a legal sense unreasonable
and therefore unlawful is a question of law. This rule is subject, however, to
the limitation that where the reasonableness of a by-law is a mere matter of
judgment, and one upon which reasonable minds must necessarily differ, a
court would not be warranted in substituting its judgment instead of the
judgment of those who are authorized to make by-laws and who have
exercised their authority.
It is a settled state law in the United States, according to Fletcher, that
corporations have the power to make by-laws declaring a person employed in
the service of a rival company to be ineligible for the corporation's Board of
Directors. ... (A)n amendment which renders ineligible, or if elected, subjects
to removal, a director if he be also a director in a corporation whose business
is in competition with or is antagonistic to the other corporation is valid." This
is based upon the principle that where the director is so employed in the
service of a rival company, he cannot serve both, but must betray one
or the other. Such an amendment "advances the benefit of the
corporation and is good." An exception exists in New Jersey, where the
Supreme Court held that the Corporation Law in New Jersey prescribed the
only qualification, and therefore the corporation was not empowered to add
additional qualifications. This is the exact opposite of the situation in the
Philippines because as stated heretofore, section 21 of the Corporation Law
expressly provides that a corporation may make by-laws for the qualifications
of directors. Thus, it has been held that an officer of a corporation cannot
engage in a business in direct competition with that of the corporation where
he is a director by utilizing information he has received as such officer, under
"the established law that a director or officer of a corporation may not enter
into a competing enterprise which cripples or injures the business of the
corporation of which he is an officer or director.
It is also well established that corporate officers "are not permitted to use their
position of trust and confidence to further their private interests." In a case
where directors of a corporation cancelled a contract of the corporation for
exclusive sale of a foreign firm's products, and after establishing a rival
business, the directors entered into a new contract themselves with the foreign
firm for exclusive sale of its products, the court held that equity would regard
the new contract as an offshoot of the old contract and, therefore, for the
benefit of the corporation, as a "faultless fiduciary may not reap the fruits of
his misconduct to the exclusion of his principal.
The doctrine of "corporate opportunity" is precisely a recognition by the courts
that the fiduciary standards could not be upheld where the fiduciary was acting
for two entities with competing interests. This doctrine rests fundamentally on
the unfairness, in particular circumstances, of an officer or director taking
advantage of an opportunity for his own personal profit when the interest of
the corporation justly calls for protection.
It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information, such
as: (a) marketing strategies and pricing structure; (b) budget for expansion
and diversification; (c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director
of San Miguel Corporation, who is also the officer or owner of a competing
corporation, from taking advantage of the information which he acquires as
director to promote his individual or corporate interests to the prejudice of San
Miguel Corporation and its stockholders, that the questioned amendment of
the by-laws was made. Certainly, where two corporations are competitive in a
substantial sense, it would seem improbable, if not impossible, for the director,
if he were to discharge effectively his duty, to satisfy his loyalty to both
corporations and place the performance of his corporation duties above his
personal concerns.
Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require
that he disclose this information to a competitive arrival. These dangers are
enhanced considerably where the common director such as the petitioner is a
controlling stockholder of two of the competing corporations. It would seem
manifest that in such situations, the director has an economic incentive to
appropriate for the benefit of his own corporation the corporate plans and
policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing
strategies and pricing policies of San Miguel Corporation would subject the
latter to a competitive disadvantage and unjustly enrich the competitor, for
advance knowledge by the competitor of the strategies for the development of
existing or new markets of existing or new products could enable said
competitor to utilize such knowledge to his advantage.
Neither are We persuaded by the claim that the by-law was Intended to
prevent the candidacy of petitioner for election to the Board. If the by-law were
to be applied in the case of one stockholder but waived in the case of another,
then it could be reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms, applies to all
stockholders. The equal protection clause of the Constitution requires only that
the by-law operate equally upon all persons of a class. Besides, before
petitioner can be declared ineligible to run for director, there must be hearing
and evidence must be submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and management, therefore,
support the view that a by-law which disqualifies a competition from election
to the Board of Directors of another corporation is valid and reasonable.
ISSUE2: WON the Corporation has the power to prescribe qualifications?
HELD2: Yes. Private respondents contend that the disputed amended by laws
were adopted by the Board of Directors of San Miguel Corporation a-, a
69 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
measure of self-defense to protect the corporation from the clear and present
danger that the election of a business competitor to the Board may cause upon
the corporation and the other stockholders inseparable prejudice. Submitted
for resolution, therefore, is the issue — whether or not respondent San Miguel
Corporation could, as a measure of self- protection, disqualify a competitor
from nomination and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent
power to adopt by-laws 'for its internal government, and to regulate the
conduct and prescribe the rights and duties of its members towards itself and
among themselves in reference to the management of its affairs. At common
law, the rule was "that the power to make and adopt by-laws was inherent in
every corporation as one of its necessary and inseparable legal incidents. And
it is settled throughout the United States that in the absence of positive
legislative provisions limiting it, every private corporation has this inherent
power as one of its necessary and inseparable legal incidents, independent of
any specific enabling provision in its charter or in general law, such power of
self-government being essential to enable the corporation to accomplish the
purposes of its creation.
In this jurisdiction, under section 21 of the Corporation Law, a corporation may
prescribe in its by-laws "the qualifications, duties and compensation of
directors, officers and employees ... " This must necessarily refer to a
qualification in addition to that specified by section 30 of the Corporation Law,
which provides that "every director must own in his right at least one share of
the capital stock of the stock corporation of which he is a director ... " In
Government v. El Hogar, the Court sustained the validity of a provision in the
corporate by-law requiring that persons elected to the Board of Directors must
be holders of shares of the paid up value of P5,000.00, which shall be held as
security for their action, on the ground that section 21 of the Corporation Law
expressly gives the power to the corporation to provide in its by-laws for the
qualifications of directors and is "highly prudent and in conformity with good
practice
ISSUE3: WON stockholders have the vested right to be elected a director?
HELD: No. Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the stockholders and
that he impliedly contracts that the will of the majority shall govern in all
matters within the limits of the act of incorporation and lawfully enacted by-
laws and not forbidden by law." To this extent, therefore, the stockholder may
be considered to have "parted with his personal right or privilege to regulate
the disposition of his property which he has invested in the capital stock of the
corporation, and surrendered it to the will of the majority of his fellow
incorporators. ... It cannot therefore be justly said that the contract, express
or implied, between the corporation and the stockholders is infringed ... by any
act of the former which is authorized by a majority ... ."
Under section 22 of the same law, the owners of the majority of the subscribed
capital stock may amend or repeal any by-law or adopt new by-laws. It cannot
be said, therefore, that petitioner has a vested right to be elected director, in
the face of the fact that the law at the time such right as stockholder was
acquired contained the prescription that the corporate charter and the by-law
shall be subject to amendment, alteration and modification.
It being settled that the corporation has the power to provide for the
qualifications of its directors, it has also been settled that the disqualification
of a competitor from being elected to the Board of Directors is a reasonable
exercise of corporate authority.
CHAPTER 9: MEETINGS
Meetings applies to every duly convened assembly either of stockholders,
members, directors or trustees, managers, etc. for any legal purpose or the
transaction of business of common interest.
Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders,
or members may be regular or special.
 WORKERS SAVINGS AND LOAN ASSOCIATION, INC., ET AL.,
A. STOCKHOLDERS’ MEETING petitioners,
vs.
HON. BIENVENIDO A. TAN, ETC., ET AL., respondents.
Sec. 50. Regular and special meetings of stockholders or members. -
(GR No. L-12282; March 31, 1959)
Regular meetings of stockholders or members shall be held annually on a date
fixed in the by-laws, or if not so fixed, on any date in April of every year as FACTS: A meeting electing the BOD of herein petitioner was declared null and
determined by the board of directors or trustees: Provided, That written notice void by the Court in a suit filed by John Castillo, et. al.
of regular meetings shall be sent to all stockholders or members of record at
least two (2) weeks prior to the meeting, unless a different period is required In compliance with the order, another election was scheduled on March 28 at
by the by-laws. 5:30. On March 27, the plaintiff filed an ex-parte motion alleging that the
meeting is composed of the same people that had conducted and supervised
the previously nullified meeting; that the election to be conducted did not
comply with the 5 day notice requirement required by the by-laws and the
Special meetings of stockholders or members shall be held at any time deemed
constitution of the association, since the notice was posted and sent out only
necessary or as provided in the by-laws: Provided, however, That at least one
on March 26 and the election was to be held on March 28.
(1) week written notice shall be sent to all stockholders or members, unless
otherwise provided in the by-laws.
ISSUE: WON the notice requirement is complied with?
Notice of any meeting may be waived, expressly or impliedly, by any stockholder
HELD: No. Section 3, article III, of the constitution and by-laws the association
or member.
provides:
Whenever, for any cause, there is no person authorized to call a meeting, the
“Notice of the time and place of holding of any annual meeting, or any
Securities and Exchange Commission, upon petition of a stockholder or member
special meeting, the members, shall be given either by posting the same in
on a showing of good cause therefor, may issue an order to the petitioning
a postage prepaid envelope, addressed to each member on the record at
stockholder or member directing him to call a meeting of the corporation by
the address left by such member with the Secretary of the Association, or at
giving proper notice required by this Code or by the by-laws. The petitioning
his known post-office address or by delivering the same person at least (5)
stockholder or member shall preside thereat until at least a majority of the
days before the date set for such meeting. . . . In lieu of addressing or
stockholders or members present have been chosen one of their number as
serving personal notices to the members, notice of the members, notice of
presiding officer.
a regular annual meeting or of a special meeting of the members may be
given by posting copies of said notice at the different departments and
plants of the San Miguel Brewery Inc., not less than five (5) days prior to
the date of the meeting. (Annex K.)”
The stockholders have no power to act as or for the corporation except at a
corporate meeting called and conducted according to law. This rule arises from Notice of a special meeting of the members should be given at least five days
the need to protect the stockholder by providing them with notice of meeting before the date of the meeting. Therefore, the five days previous notice
and giving them opportunity to attend the meeting, discuss the issues and vote required would not be complied with.
(an exception would be an ordinary amendment where “written asset” is
acceptable).
3. It Must Be Held at the Proper Place
DATE OF REGULAR MEETING: The date so fixed in the by-laws, if not fixed,
on any date of April of very year as the BOD/T may determine. April, because
Sec. 51. Place and time of meetings of stockholders or members. -
this is the time the Audited Financial Statements are already available.
Stockholders' or members' meetings, whether regular or special, shall be held
DATE OF SPECIAL MEETING: At any time deemed necessary or as provided in the city or municipality where the principal office of the corporation is located,
for in the by-laws. and if practicable in the principal office of the corporation: Provided, That Metro
Manila shall, for purposes of this section, be considered a city or municipality.
REQUIREMENTS FOR A VALID STOCKHOLDERS’ MEETING:
1. It Must Be Held On The Date Fixed In The By-Laws Or In
Accordance With The Law. Notice of meetings shall be in writing, and the time and place thereof stated
therein.
The date required, as previously discussed, admits of an exception, as
when the annual meeting cannot be held on the appointed time for some All proceedings had and any business transacted at any meeting of the
valid and meritorious reasons. stockholders or members, if within the powers or authority of the corporation,
shall be valid even if the meeting be improperly held or called, provided all the
2. Prior Notice Must Be Given stockholders or members of the corporation are present or duly represented at
the meeting.
Sec 50 and 51 requires that written notice of regular meeting shall be sent
at least 2 weeks prior to the meeting, whereas, 1 week prior notice is
required for special meetings.

EXCEPTIONS: (a) If the by-laws provide for a different period for sending
Meeting must, at all times, be held in the city or municipality where the principal
out notice for regular or special meetings (failure to comply would render
office is located, or if practicable at the principal office of the corporation. For
the resolutions adopted at the option of the stockholder who was not
this purpose, Metro Manila is considered as one city or municipality.
notified); (b) Waiver, either express or implied.
While there is no law allowing a STOCK corporation to hold a meeting outside
The Notice must contain the agenda or business matter/s that may be
the city or municipality where the principal office is located, NON-STOCK
taken up before the meeting otherwise it may become voidable at the
corporations are allowed to provide a provision in its by-laws any place of
instance of any objecting stockholder or member.
members’ meeting provided there is proper notice (Sec. 93)
THE BOARD OF DIRECTORS AND ELECTION COMMITTEE OF THE SMB
4. It Must Be Called by the Proper Party
70 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 d. A stockholder as empowered by the proper forum pursuant to Sec. 50
DOMINGO PONCE AND BUHAY L. PONCE, petitioners,
vs. 5. Quorum and Voting Requirement Must Be Met
DEMETRIO B. ENCARNACION, Judge of the Court of First Instance of
Manila, Branch I, and POTENCIANO GAPOL, respondents
Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code
(GR No. L-5883; Nov. 28, 1953)
or in the by-laws, a quorum shall consist of the stockholders representing a
FACTS: It was agreed by the stockholders of Daguhoy Enterprises at a majority of the outstanding capital stock or a majority of the members in the
stockholder’s meeting that the said corporation shall be voluntarily dissolved, case of non-stock corporations.
and was placed under the receivership of Gapol, the largest stockholder. A
petition for voluntary dissolution was drafted and signed by Ponce, which was
to be filed with the appropriate authorities. It was found out that instead of
filing the petition, Gapol filed a complaint in the CFI for the accounting of the
A by-law provision may provide for a higher quorum requirement than that
funds and assets of the corporation, and to reimburse it the amounts expended
prescribed in the Code, but not less. Otherwise, the by-law provision providing
for the purchase of a parcel of land, a loan extended to the wife of Ponce, and
for a lesser quorum requirement have no force and effect since a by-law
an amount spent by Ponce in a trip to the US. Gapol contends that such
provision is subordinate to the statute and could not defeat the requirements
amount, taken from the corporation, was misapplied, misappropriated and
of the law. The same goes for a by-law provision providing for a voting
misspent by Ponce to his own use and benefit, thus he prayed for the removal
requirement less than that provided in the Code.
of Ponce as a member of the board of directors. Such removal was rejected by
the court, but Gapol’s petition for the calling of a stockholders’ meeting, was
If the voting requirement is met, any resolution passed in the meeting, even if
granted. At said meeting, a new set of board of directors was elected. Ponce
improperly held or called will be valid if ALL the stockholders or members are
filed a petition in the lower court seeking to set aside its order, but the same
present or duly represented thereat, as provided under the last paragraph of
was denied. Thus, they filed for an appeal to the SC.
Sec. 51:
ISSUE: WON the Court may issue such order directing a stockholder to call a
All proceedings had and any business transacted at any meeting of the
meeting of the stockholders of a corporation?
stockholders or members, if within the powers or authority of the corporation,
shall be valid even if the meeting be improperly held or called, provided all the
HELD: Yes. The corporation law provides that “whenever, from any cause,
stockholders or members of the corporation are present or duly represented at
there is no person authorized to call a meeting, or when the officer authorized
the meeting.
to do so refuses, fails or neglects to call a meeting, any judge of a CFI on the
showing of a good cause therefore, may issue an order to any stockholder or
B. DIRECTORS’/TRUSTEES’ MEETING
member of a corporation, directing him to call a meeting of the corporation by
giving the proper notice required”. Thus, on the showing of good cause
therefore, the court may authorize a stockholder to call a meeting Sec. 53. Regular and special meetings of directors or trustees. - Regular
and to preside thereat until the majority stockholders representing a meetings of the board of directors or trustees of every corporation shall be held
majority of the stock present and permitted to be voted shall have monthly, unless the by-laws provide otherwise.
chosen one among them to preside. This showing of good cause
exists when the court is apprised of the fact that the by-laws of the
corporation require the calling of a general meeting of the
Special meetings of the board of directors or trustees may be held at any time
stockholders to elect the board of directors but the call of the meeting
upon the call of the president or as provided in the by-laws.
has not been done. There is no need to issue a notice of hearing, nor is there
any necessity to hold a hearing, upon the board of directors. The court here
Meetings of directors or trustees of corporations may be held anywhere in or
found good cause in calling the meeting for the election of a new board,
outside of the Philippines, unless the by-laws provide otherwise. Notice of
because the chairman of the board of directors who is so authorized to call
regular or special meetings stating the date, time and place of the meeting must
such meeting, failed, neglected or refused to perform his duty. Having the
be sent to every director or trustee at least one (1) day prior to the scheduled
authority to grant such relief, the lower court did not exceed its jurisdiction nor
meeting, unless otherwise provided by the by-laws. A director or trustee may
did it abuse its discretion in granting it.
waive this requirement, either expressly or impliedly.
NOTE: In a case decided by the SEC, it rules that under the present state of
law, the Ponce case will apply ONLY “where there is no person authorized to
call the meeting:, thus an ex-parte proceeding may be allowed as obviously
there is no person to summon and no person whose right to due process will
REGULAR MEETINGS: those held monthly or as the by-laws may provide;
be violated. However, where there is an officer authorized to call the meeting
SPECIAL MEETINGS: those that are held at any time upon call of the
and that officer refuses, fails or neglects to call a meeting then the Ponce case
President or the person authorized to do so as may be provided in the by-laws.
WILL NOT APPLY. This is so, because the phrase “or when the officer
authorized to do so refuses, or fails, or neglects to call a meeting” has been
PLACE: Unlike the meeting of stockholders, the meetings of directors/trustees
deliberately omitted in Sec. 50 of the Corporation Code.
may be held anywhere, within or even outside the Philippines, except when
the by-laws provide otherwise.
Likewise, in the same ruling of the SEC, the Ponce case likened the questioned
order to a writ of preliminary injunction which may be issued ex parte, the said
NOTICE REQUIREMENT: is necessary for the purpose of determining the
PI can no longer be issued without notice and hearing under Sec. 5 of Rule 58
legality of and binding effect of the resolution/s passed, EXCEPT:
of the Rules of Court. Mandamus is the proper remedy.
1. When subsequently ratified;
2. In close corporations where a director may bid the corporation even
IN SUMMARY: The following are authorized to call a meeting:
without a meeting;
a. The person or persons authorized under the by-laws;
3. When the right to a notice is waived.
b. Absent any provision in the by-laws, it may be called by the President;
c. By the secretary on order of the president or on written demand of the
The SEC has ruled that a special meeting conducted in the absence of some of
stockholders representing at least a majority of the outstanding capital
the directors and without any notice to them is illegal and the action at such
stock or majority of the members entitled to vote, or the stockholder or
meeting although by a majority of the directors is invalid, unless ratified.
member making the demand if there is no secretary or he refuses to do
so, under Sec. 28; and
However, if all the directors are present, their presence at the meeting waives
71 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
the want of notice.
PRESIDING OFFICER: Unless the by-laws otherwise provide, the president.
Sec. 54. Who shall preside at meetings. - The president shall preside at all
meetings of the directors or trustee as well as of the stockholders or members, vote for him at a stockholders’ or members’ meeting. The term is also used to
unless the by-laws provide otherwise.
D. PROXY AND OTHER REPRESENTATIVE VOTING
PROXY: is a species of absentee voting by mail by a one way ballot for the
slate or proposals suggested by the management or even perhaps, the solicitor
thereof. It is the authority given by the stockholder or member to another to
refer to the instrument or paper which is evidence of the authority of an agent
or the holder thereof to vote for and in behalf of the stockholder or member.

QUORUM: Unless the AOI or by-laws provide for a greater majority, a majority
of the members of the BOD/T as fixed in the AOI will constitute a quorum for
the transaction of corporate business and the decision of the majority of those
present shall be valid as a corporate act. EXCEPT: election of corporate officers
as provided under Sec. 25 which required the vote of a majority of all the
members of the board.
Sec. 58. Proxies. - Stockholders and members may vote in person or by proxy
in all meetings of stockholders or members. Proxies shall be in writing, signed
by the stockholder or member and filed before the scheduled meeting with the
corporate secretary. Unless otherwise provided in the proxy, it shall be valid
only for the meeting for which it is intended. No proxy shall be valid and
effective for a period longer than five (5) years at any one time.

PROXY VOTING: is not allowed for a director or trustee, since he was

supposedly elected because of his expertise in management or his business
acumen such that he is expected to personally attend and vote on matters
brought before the meeting. PROXY VOTING: is a right granted by law to all stockholders entitled to vote
in stock corporations and cannot, therefore, be denied. EXCEPT: In a non-stock
C. STOCKHOLDERS’ RIGHT TO VOTE AND MANNER OF VOTING corporation with by-laws providing for a prohibition on the use of proxies (Sec.
89).
Being a property right, a stockholder can vote his share the way he pleases
except in the following: REQUIREMENTS: In the absence of a by-law provision regulating the form
1. Non-voting shares are not entitled to vote except in those instances and execution of proxy, Sec. 58 requires:
provided in the penultimate paragraph of Sec. 6 of the Code; 1. The proxy must be in writing;
2. Treasury shares have no voting rights while they remain in the treasury 2. It is signed by the stockholder or member or his duly authorized
(Sec. 57); representative; and
3. Shares of stock declared delinquent are not entitled to vote at any 3. It is filed on or before the schedule meeting with the corporate secretary.
meeting; and
4. Unregistered transferee of shares of stock. It is to be noted, however, that publicly listed companies are required to
observe and comply with SEC Memorandum Circular No. 5 -1996.
PROXY VOTING: is allowed or through a voting trust agreement, or by the
executor, administrator, receiver or other legal representative appointed by the TYPES OF PROXIES:
court. 1. General – gives a general discretionary power of attorney to vote for
directors and all ordinary matters that my properly come before a
PLEDGED OR MORTGAGED SHARES: the pledgor or mortgagor is entitled meeting. It is not an authority, however, to vote for fundamental changes
to vote in the absence of an agreement to the contrary: in the corporate charter or for other unusual transactions, unless so
specified;
2. Special – restricts the authority to vote on specified matters only and may
Sec. 55. Right to vote of pledgors, mortgagors, and administrators. - direct the manner in which the vote will be cast.
In case of pledged or mortgaged shares in stock corporations, the pledgor or
mortgagor shall have the right to attend and vote at meetings of stockholders, DURATION: May be fixed by the proxy’s own terms but it cannot exceed 5
unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor years and for not more than 5 years for each renewal. Otherwise, it expires
such right in writing which is recorded on the appropriate corporate books. after the meeting for which it was given.

VOTING TRUST: is one created by an agreement between a group of

stockholders of a corporation and a trustee, or a group of identical agreements
Executors, administrators, receivers, and other legal representatives duly
between individual stockholders and a common trustee, whereby it is provided
appointed by the court may attend and vote in behalf of the stockholders or
that for a term of years, or for a period contingent upon a certain event, or
members without need of any written proxy.
until the agreement is terminated, control over the stock owned by such
stockholders, shall be lodged in the trustee, either with or without reservation
to the owners or persons designated by them the power to direct how such
control shall be issued.
SHARES OWNED BY TWO OR MORE PERSONS JOINTLY:

Sec. 56. Voting in case of joint ownership of stock. - In case of shares of

stock owned jointly by two or more persons, in order to vote the same, the
consent of all the co-owners shall be necessary, unless there is a written proxy,
signed by all the co-owners, authorizing one or some of them or any other
person to vote such share or shares: Provided, That when the shares are owned
in an "and/or" capacity by the holders thereof, any one of the joint owners can
vote said shares or appoint a proxy therefor.

72 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 Sec. 59. Voting trusts. - One or more stockholders of a stock corporation Purpose is to acquire voting control of Generally used to secure voting an
may create a voting trust for the purpose of conferring upon a trustee or the corporation quorum requirements or merely for
trustees the right to vote and other rights pertaining to the shares for a period the purpose of representing an absent
stockholder
not exceeding five (5) years at any time: Provided, That in the case of a voting
trust specifically required as a condition in a loan agreement, said voting trust
Irrevocable Revocable anytime unless coupled
may be for a period exceeding five (5) years but shall automatically expire upon with an interest
full payment of the loan. A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions thereof. A certified copy The trustee can act and vote at any Proxy can generally act as such only at
of such agreement shall be filed with the corporation and with the Securities meeting during the duration of the a particular meeting
and Exchange Commission; otherwise, said agreement is ineffective and VTA
unenforceable. The certificate or certificates of stock covered by the voting trust
Trustee may vote in person or by Proxy holder must vote in person
agreement shall be cancelled and new ones shall be issued in the name of the
proxy
trustee or trustees stating that they are issued pursuant to said agreement. In
the books of the corporation, it shall be noted that the transfer in the name of Duration may exceed five years Proxy is of a shorter duration and may
the trustee or trustees is made pursuant to said voting trust agreement. not exceed 5 years

VTA to be valid and effective, must be Unless required by the by-laws,

The trustee or trustees shall execute and deliver to the transferors voting trust notarized and filed with the SEC proxies need not be notarized nor is it
certificates, which shall be transferable in the same manner and with the same required to be filed with the SEC.
effect as certificates of stock.

The voting trust agreement filed with the corporation shall be subject to
READ AGAIN: LEE VS. CA
examination by any stockholder of the corporation in the same manner as any
other corporate book or record: Provided, That both the transferor and the
NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION,
trustee or trustees may exercise the right of inspection of all corporate books
EUSEBIO VILLATUYA MARIO Y. CONSING and ROBERTO S. BENEDICTO,
and records in accordance with the provisions of this Code.
petitioners,
vs.
Any other stockholder may transfer his shares to the same trustee or trustees
HON. BENJAMIN AQUINO, in his official capacity as Presiding Judge of
upon the terms and conditions stated in the voting trust agreement, and
Branch VIII of the Court of First Instance of Rizal, BATJAK INC., GRACIANO A.
thereupon shall be bound by all the provisions of said agreement.
GARCIA and MARCELINO CALINAWAN JR., respondents.
(G.R. No. L-34192 June 30, 1988)
No voting trust agreement shall be entered into for the purpose of
circumventing the law against monopolies and illegal combinations in restraint
PHILIPPINE NATIONAL BANK, petitioner,
of trade or used for purposes of fraud.
vs.
HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge of the Court
Unless expressly renewed, all rights granted in a voting trust agreement shall
of First Instance of Rizal, Branch VIII and BATJAK INCORPORATED,
automatically expire at the end of the agreed period, and the voting trust
respondents
certificates as well as the certificates of stock in the name of the trustee or
(G.R. No. L-34213 June 30, 1988)
trustees shall thereby be deemed cancelled and new certificates of stock shall
be reissued in the name of the transferors.
FACTS: On Oct. 26, 1965, private respondent Batjak, Inc. entered into a
Voting Trust Agreement with petitioner NIDC, in order to assist the former with
The voting trustee or trustees may vote by proxy unless the agreement provides
its financial obligations. The VTA was for a period of 5 years constituting 60%
otherwise.
of the outstanding paid-up and subscribed shares of Batjak. 5 years therafter,
or on Aug. 31, 1970, Batjak represented by majority stockholders, through
Atty. Amado Duran, legal counsel, wrote to NIDC inquiring if the atter was still
interest in negotiating the renewal of the VTA, but there was no reply even
with the second letter sent on Sept. 22, 1970.

On Sept. 23, 1970, legal counsel of Batjak wrote another letter asking for a
complete accounting of the assets, properties, management and operation of
VOTING TRUSTS DISTINGUISHED FROM PROXY Batjak, preparatory to their turn-over and transfer to the stockholders of
Batjak.
VOTING TRUST PROXY
NIDC replied that it had no intention to comply with such demand. Batjak filed
an action for mandamus with preliminary injunction which was granted.
The beneficial owner of the shares Legal title to the shares remain with
ISSUE: WON Batjak has the personality to enforce the voting trust agreement
ceased to be stockholder of record of the beneficial owner executed by its stockholders and whether it may compel the trustee to turn
the corporation since the shares are
over the assets of the corporation?
transferred to the trustee
HELD: No. In support of the third ground of their motion to dismiss, PNB and
Trustee votes as owner of the shares Proxy votes merely as an agent NIDC contend that Batjak's complaint for mandamus is based on its claim or
right to recovery of possession of the three (3) oil mills, on the ground of an
alleged breach of fiduciary relationship. Noteworthy is the fact that, in the
The beneficial owner is disqualified to The owner of the shares may be Voting Trust Agreement, the parties thereto were NIDC and certain
be a director elected as such since legal title thereof stockholders of Batjak. Batjak itself was not a signatory thereto. Under Sec. 2,
remains with him Rule 3 of the Rules of Court, every action must be prosecuted and defended in
the name of the real party in interest. Applying the rule in the present case,

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the action should have been filed by the stockholders of Batjak, who executed
the Voting Trust Agreement with NIDC, and not by Batjak itself which is not a
party to said agreement, and therefore, not the real party in interest in the suit
to enforce the same.
In addition, PNB claims that Batjak has no cause of action and prays that the
petition for mandamus be dismissed. A careful reading of the Voting Trust
Agreement shows that PNB was really not a party thereto. Hence, mandamus
will not lie against PNB.
Batjak has no clear right to be entitled to the writ prayed for. What
Batjak seeks to recover is title to, or possession of, real property (the
three (3) oil mills which really made up the assets of Batjak) but
which the records show already belong to NIDC. It is not disputed that
the mortgages on the three (3) oil mills were foreclosed by PNB and NIDC and
acquired by them as the highest bidder in the appropriate foreclosure sales.
Ownership thereto was subsequently consolidated by PNB and NIDC, after
Batjak failed to exercise its right of redemption. The three (3) oil mills are now
titled in the name of NIDC. From the foregoing, it is evident that Batjak had no
clear right to be entitled to the writ prayed for. In Lamb vs. Philippines (22 Phil.
456) citing the case of Gonzales V. Salazar vs. The Board of Pharmacy, 20 Phil.
367, the Court said that the writ of mandamus will not issue to give to the
applicant anything to which he is not entitled by law.
Batjak premises its right to the possession of the three (3) off mills on the
Voting Trust Agreement, claiming that under said agreement, NIDC was
constituted as trustee of the assets, management and operations of Batjak,
that due to the expiration of the Voting Trust Agreement, on 26 October 1970,
NIDC should tum over the assets of the three (3) oil mills to Batjak From the
foregoing provisions, it is clear that what was assigned to NIDC was the power
to vote the shares of stock of the stockholders of Batjak, representing 60% of
Batjak's outstanding shares, and who are the signatories to the agreement.
The power entrusted to NIDC also included the authority to execute any
agreement or document that may be necessary to express the consent or
assent to any matter, by the stockholders. Nowhere in the said provisions or
in any other part of the Voting Trust Agreement is mention made of any
transfer or assignment to NIDC of Batjak's assets, operations, and
management. NIDC was constituted as trustee only of the voting rights of 60%
of the paid-up and outstanding shares of stock in Batjak. This is confirmed by
paragraph No. 9 of the Voting Trust Agreement, thus:
9. TERMINATION — Upon termination of this Agreement as heretofore
provided, the certificates delivered to the TRUSTEE by virtue hereof shall
be returned and delivered to the undersigned stockholders as the absolute
owners thereof, upon surrender of their respective voting trust
certificates, and the duties of the TRUSTEE shall cease and terminate.-
Under the aforecited provision, what was to be returned by NIDC as trustee to
Batjak's stockholders, upon the termination of the agreement, are the
certificates of shares of stock belonging to Batjak's stockholders, not the
properties or assets of Batjak itself which were never delivered, in the first
place to NIDC, under the terms of said Voting Trust Agreement.
In any event, a voting trust transfers only voting or other rights pertaining to
the shares subject of the agreement or control over the stock. The law on the
matter is Section 59, Paragraph 1 of the Corporation Code (BP 68) which
provides:
Sec. 59. Voting Trusts — One or more stockholders of a stock corporation
may create a voting trust for the purpose of conferring upon a trustee or
trusties the right to vote and other rights pertaining to the shares for a
period not exceeding five (5) years at any one time: ...
The acquisition by PNB-NIDC of the properties in question was not made or
effected under the capacity of a trustee but as a foreclosing creditor for the
purpose of recovering on a just and valid obligation of Batjak.
CHAPTER 10: STOCKS AND STOCKHOLDERS
A person may become a stockholder in a corporation in either of three ways:
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1. By a contract of subscription with the corporation;
2. By purchase of treasury shares from the corporation; and
3. By purchase or acquisition of shares from existing stockholders.
A. SUBSCRIPTION CONTRACT
A “subscription”, properly speaking, is the mutual agreement of the subscribers
to take and pay for the stocks of the corporation. A “subscription contract”, on
the other hand is specifically defined in Sec. 60:
Sec. 60. Subscription contract. - Any contract for the acquisition of unissued
stock in an existing corporation or a corporation still to be formed shall be
deemed a subscription within the meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or some other contract.
SUBSCRIPTION VS. PURCHASE: In the latter, the buyer becomes a
shareholder only upon full payment of the price. UNISSUED shares cannot be
the subject of a “purchase”.
“We may add that the law in force in this jurisdiction makes no distinction, in
respect to the liability of the subscriber, between shares subscribed before
incorporation is effected and shares subscribed thereafter. All like are bound
to pay full value in cash or its equivalent, and any attempt to discriminate in
favor of one subscriber by relieving him of this liability wholly or in part is
forbidden. In what is here said we have reference of course primarily to
subscriptions to shares that have not been previously issued. It is conceivable
that the power of the corporation to make terms with the purchaser would be
greater where the shares which are the subject of the transaction have been
acquired by the corporation in course of commerce, after they have already
been once issued. But the shares with which are here concerned are not of this
sort.” (National Exchange Co., Inc. vs. Dexter)
EXAMPLE: If X corporation had P1M authorized capital divided into 1M shares
with a par value of P1. 500,000 has already been subscribed:
1. Z “purchased” 100,000 of the UNISSUED shares paying 50% down
payment and the balance payable after 6 months, with a condition that
he will not be considered a shareholder until full payment. – He is still
liable for the balance because this will be considered a subscription no
matter how the parties refer to it and accordingly, Z is liable as a
shareholder therein.
2. Z was declared a delinquent shareholder and X Co. was declared as the
winning bidder by paying P100,000 and acquired the delinquent shares.
Later on, 20,000 of the shares were sold to Y – here, the shares being
from treasury and not from unissued shares, may be the proper subject
of a “purchase” and thus, a condition that Y would not became a
shareholder until full payment may be valid.
FORM: A subscription contract need not be in writing such that an oral contract
of subscription is valid and enforceable under the Statute of Frauds. Thus, it
was ruled by the SC that such an agreement does not seem to fall within the
definition of a sale under our substantive law, and is therefore believed that an
oral subscription agreement as distinguished from sale of stock is valid and
enforceable.
CONDITION: Subscriptions may be made upon a condition precedent or upon
special terms (condition subsequent). A conditional subscription, or one
made upon a condition precedent, does not make the subscriber a stockholder,
or render him to pay the amount of his subscription, until performance of the
condition. A subscription upon special terms, on the other hand, is an
absolute subscription, making the subscriber a stockholder, and rendering him
liable as such, as soon as the subscription is accepted, the special term being
an independent stipulation.
In case of doubt in the intention of the parties, a subscription should be
considered as an absolute subscription upon special terms, rather than
conditional. The policy of giving protection to creditors and other subscribers
has led to the adoption of this rule of construction favoring the immediate
liability of the subscriber.

Conditional Subscriptions are valid provided: (1) there is nothing in the charter
or enabling act prohibiting the same; and (2) provided the conditions are not
such as to render their performance beyond the powers of the corporation or
in violation of law or contrary to public policy.
NAZARIO TRILLANA, administrator-appellee,
vs.
QUEZON COLLEGE, INC., claimant-appellant
(GR No. L-5003; June 27, 1953)
FACTS: Damasa Crisostomo sent the following letter to the Board of Trustees
of the Quezon College:
June 1, 1948
The BOARD OF TRUSTEES
Quezon College
Manila
Gentlemen:
Please enter my subscription to dalawang daan (200) shares of your
capital stock with a par value of P100 each. Enclosed you will find
(Babayaran kong lahat pagkatapos na ako ay makapag-pahuli ng
isda) pesos as my initial payment and the balance payable in
accordance with law and the rules and regulations of the Quezon
College. I hereby agree to shoulder the expenses connected with
said shares of stock. I further submit myself to all lawful demands,
decisions or directives of the Board of Trustees of the Quezon
College and all its duly constituted officers or authorities (ang nasa
itaas ay binasa at ipinaliwanag sa akin sa wikang tagalog na aking
nalalaman).
Very respectfully,
(Sgd.) DAMASA CRISOSTOMO
Signature of subscriber
Nilagdaan sa aming harapan:
JOSE CRISOSTOMO
EDUARDO CRISOSTOMO
On Oct. 26, 1948, Crisostomo died. As no payment on the subscriptions appear
to have been made, herein appellant filed a claim in her testate proceedings
for P20,000 which was opposed by the administrator, and dismissed by the
CFI.
ISSUE: WON the subscription is valid and enfroceable?
HELD: No. It appears that the application sent by Damasa Crisostomo to the
Quezon College, Inc. was written on a general form indicating that an applicant
will enclose an amount as initial payment and will pay the balance in
accordance with law and the regulations of the College. On the other hand, in
the letter actually sent by Damasa Crisostomo, the latter (who requested that
her subscription for 200 shares be entered) not only did not enclose any initial
payment but stated that "babayaran kong lahat pagkatapos na ako ay
makapagpahuli ng isda." There is nothing in the record to show that the
Quezon College, Inc. accepted the term of payment suggested by Damasa
Crisostomo, or that if there was any acceptance the same came to her
knowledge during her lifetime. As the application of Damasa Crisostomo is
obviously at variance with the terms evidenced in the form letter issued by the
Quezon College, Inc., there was absolute necessity on the part of the College
to express its agreement to Damasa's offer in order to bind the latter.
Conversely, said acceptance was essential, because it would be unfair to
immediately obligate the Quezon College, Inc. under Damasa's promise to pay
the price of the subscription after she had caused fish to be caught. In other
words, the relation between Damasa Crisostomo and the Quezon
College, Inc. had only thus reached the preliminary stage whereby
the latter offered its stock for subscription on the terms stated in the
form letter, and Damasa applied for subscription fixing her own plan
of payment, — a relation, in the absence as in the present case of
75 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
acceptance by the Quezon College, Inc. of the counter offer of
Damasa Crisostomo, that had not ripened into an enforceable
contract.
Indeed, the need for express acceptance on the part of the Quezon College,
Inc. becomes the more imperative, in view of the proposal of Damasa
Crisostomo to pay the value of the subscription after she has harvested fish, a
condition obviously dependent upon her sole will and, therefore, facultative in
nature, rendering the obligation void, under article 1115 of the old Civil Code
which provides as follows: "If the fulfillment of the condition should depend
upon the exclusive will of the debtor, the conditional obligation shall be void.
If it should depend upon chance, or upon the will of a third person, the
obligation shall produce all its effects in accordance with the provisions of this
code." It cannot be argued that the condition solely is void, because it would
have served to create the obligation to pay, unlike a case, exemplified by
Osmeña vs. Rama (14 Phil., 99), wherein only the potestative condition was
held void because it referred merely to the fulfillment of an already existing
indebtedness.
In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879), this Court
already held that "a condition, facultative as to the debtor, is obnoxious to the
first sentence contained in article 1115 and renders the whole obligation void."
B. PRE-INCORPORATION SUBSCRIPTION
Pre-incorporation subscriptions make reference to subscriptions for shares of
stock of a corporation still to be formed while post-incorporation subscriptions
are those made or executed after the formation or organization of the
corporation.
Sec. 61. Pre-incorporation subscription. - A subscription for shares of
stock of a corporation still to be formed shall be irrevocable for a period of at
least six (6) months from the date of subscription, unless all of the other
subscribers consent to the revocation, or unless the incorporation of said
corporation fails to materialize within said period or within a longer period as
may be stipulated in the contract of subscription: Provided, That no pre-
incorporation subscription may be revoked after the submission of the articles
of incorporation to the Securities and Exchange Commission.
IMMEDIATE BINDING EFFECT: This new provision gives an immediate
binding effect on pre-incorporation subscriptions as against the subscribers of
the capital stock of a corporation still to be formed. Pre-incorporation
subscriptions are, in fact, mandatory as may be culled from the provisions of
Sec. 13 and 14 of the Code which mandates that a corporation may be
registered as such only if at least 25% of its authorized capital stock has been
subscribed and that at least 25% of the subscribed capital has been paid.
IRREVOCABLE: Pre-incorporation subscriptions are irrevocable:
1. For a period of at least 6 months from the date of subscription unless (a)
all the subscribers consent to the revocation; or (b) the incorporation fails
to materialize within said period or within a longer period as may
stipulated in the contract of subscription; and
2. After submission of the AOI to the SEC.
C. STOCK ISSUANCE
Stock issuance is generally the initial and primary source of corporate capital.
Other sources may include corporate borrowings, loans and advances from
creditors or stockholders. Corporate earnings may also be a source of corporate
funds if it is reinvested or ploughed back to the company.

Sec. 62. Consideration for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the
following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation equal
to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
Where the consideration is other than actual cash, or consists of intangible are not certain.
property such as patents of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors, subject to approval THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee,
by the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future (GR No. L-27872; Feb. 25, 1928)
service.
The same considerations provided for in this section, insofar as they may be subscription to the corporate stock of C. S. Salmon & Co. in the following form:
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred upon
it by the articles of incorporation or the by-laws, or in the absence thereof, by
the stockholders representing at least a majority of the outstanding capital stock
at a meeting duly called for the purpose.
“ISSUE”: is generally employed to indicate the making of a share contract or
contract of subscription, that is, transaction by which a person becomes the
owner of shares and by which new share contracts are created. It is often
associated with the execution and delivery of a share certificate but the
issuance of the shares is not dependent on the delivery of a certificate of stock.
“PAR” or “ISSUED PRICE”: while it may not reflect the true value of the
shares which constantly fluctuates, merely indicates the amount which the
original subscribers are supposed to contribute to the corporate capital as the
basis of the privilege of profit sharing with limited liability.
PROPERTY: If shares are issued in exchange for property, the value of such
should at least be equal to the par or issued value of the stocks. Such value,
may be determined with reference to
a. REAL PROPERTY - (1) independent appraiser’s appraisal report; (2) BIR
Zonal Valuation; or (3) Market Value indicated in the Real Estate Tax
Declaration.
b. INTANGIBLE PROPERTY – as determined by the incorporators or the BOD
subject to the approval of the SEC.
TRUE VALUE RULE: the motives and intent of those making the valuation are
disregarded and the sole and decisive factor or question is whether or not the
property or services are in fact worth the value placed on them.
GOOD FAITH RULE: is based on the proposition that the value of the property
or services is a matter about which there can be an honest difference of
opinion. Therefore, if the parties have acted in good faith without fraud or
intentional over-valuation, the transaction cannot be overturned even if it later
becomes evident that the property or services were in fact worth much less
than the value fixed on them initially.
Most jurisdiction follow the GOOD FAITH rule.
STOCK DIVIDENDS: Sec. 62(5) which states that “amounts transferred from
76 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
unrestricted retained earnings to stated capital” refer to stock dividends where
corporate earnings are capitalized rather than being distributed as cash
dividend. It merely converts income into capital, the consideration being the
retained earnings itself which would have accrued to the stockholders in
proportion to their respective stockholdings.
NO CONSIDERATION: stocks may not be issued without consideration for
the following reasons: (1) it is discriminatory against other stockholders; and
(2) it prejudices the rights of creditors under the Trust Fund Doctrine.
RECLASSIFICATION: Sec. 62(6) which provides that “outstanding shares
exchanged for stocks in the event of reclassification or conversion” speaks of
shares of stock surrendered to the corporation in exchange for new or different
type of shares. Example: Found Shares which, after 5 years, may be converted
to common stocks.
PROHIBITED CONSIDERATIONS: Shares of stock may not be issued in
exchange for (1) promissory notes; or (2) future services – as their realization
vs.
I. B. DEXTER, defendant-appellant
FACTS: On August 10, 1919, the defendant, I. B. Dexter, signed a written
I hereby subscribe for three hundred (300) shares of the capital stock of C.
S. Salmon and Company, payable from the first dividends declared on any
and all shares of said company owned by me at the time dividends are
declared, until the full amount of this subscription has been paid
Upon subscription, defendant Dexter paid P15,000 from the dividends declared
by the company and supplemented by money supplied personally by the
subscriber. No other payment was made.
ISSUE: WON the subscription to be paid out of the dividends declared on the
shares has the effect of relieving the subscriber from personal liability in an
action to recover the value of the shares?
HELD: No. Under the American regime corporate franchises in the Philippine
Islands are granted subject to the provisions of section 74 of the Organic Act
of July 1, 1902, which, in the part here material, is substantially reproduced in
section 28 of the Autonomy Act of August 29, 1916. In the Organic Act it is
among other things, declared: "That all franchises, privileges, or concessions
granted under this Act shall forbid the issue of stock or bonds except in
exchange for actual cash or for property at a fair valuation equal to the par
value of the stock or bonds so issued; . . . ." (Act of Congress of July 1, 1902,
sec. 74.)
Pursuant to this provision we find that the Philippine Commission inserted in
the Corporation Law, enacted March 1, 1906, the following provision: ". . . no
corporation shall issue stock or bonds except in exchange for actual
cash paid to the corporation or for property actually received by it at
a fair valuation equal to the par value of the stock or bonds so
issued." (Act No. 1459, sec. 16 as amended by Act No. 2792, sec. 2.)
The prohibition against the issuance of shares by corporations except for actual
cash to the par value of the stock to its full equivalent in property is thus
enshrined in both the organic and statutory law of the Philippine Islands; and
it would seem that our lawmakers could scarcely have chosen language more
directly suited to secure absolute equality stockholders with respect to their
liability upon stock subscriptions. Now, if it is unlawful to issue stock otherwise
than as stated it is self-evident that a stipulation such as that now under
consideration, in a stock subscription, is illegal, for this stipulation
obligates the subscriber to pay nothing for the shares except as
dividends may accrue upon the stock. In the contingency that
dividends are not paid, there is no liability at all. This is a
discrimination in favor of the particular subscriber, and hence the
stipulation is unlawful.

The general doctrine of corporation law is in conformity with this conclusion,
as may be seen from the following proposition taken from the standard
encyclopedia treatise, Corpus Juris:
Nor has a corporation the power to receive a subscription upon
such terms as will operate as a fraud upon the other subscribers or
stockholders by subjecting the particular subcriber to lighter
burdens, or by giving him greater rights and privileges, or as a
fraud upon creditors of the corporation by withdrawing or
decreasing the capital. It is well settled therefore, as a general rule, that
an agreement between a corporation and a particular subscriber, by which
the subscription is not to be payable, or is to be payable in part only, whether
it is for the purpose of pretending that the stock is really greater than it is,
or for the purpose of preventing the predominance of certain stockholders,
or for any other purpose, is illegal and void as in fraud of other stockholders
or creditors, or both, and cannot be either enforced by the subscriber or
interposed as a defense in an action on the subscription. (14 C. J., p. 570.)
The rule thus stated is supported by a long line of decisions from numerous
courts, with little or no diversity of opinion. As stated in the headnote to the
opinion of the Supreme Court of United States in the case of Putnan vs. New
Albany, etc. Railroad Co. as reported in 21 Law. ed., 361, the rule is that
"Conditions attached to subscriptions, which, if valid, lessen the
capital of the company, are a fraud upon the grantor of the franchise,
and upon those who may become creditors of the corporation, and
upon unconditional stockholders."
In the appellant's brief attention is called to the third headnote to Bank vs.
Cook (125 Iowa, 111), where it is stated that a collateral agreement with a
subscriber to stock that his subscription shall not be collectible except from
dividends on the stock, is valid as between the parties and a complete defense
to a suit on notes given for the amount of the subscription. A careful perusal
of the decision will show that the rule thus broadly stated in the headnote is
not justified by anything in the reported decision; for what the court really held
was that the making of such promise by the agent of the corporation who sold
the stock is admissible in evidence in support of the defense of fraud and failure
of consideration. Moreover, even if the decision had been to the effect
supposed, the rule announced in the headnote, could have no weight in a
jurisdiction like this where there is a statutory provision prohibiting such
agreements.
D. CERTIFICATE OF STOCK AND THEIR TRANSFER
Share of Stock: may rightfully be described as a profit sharing contract, a
series of units of interest and participation in a corporation in consideration of
a proportionate right to participate in dividend and other distributions. They
are personal properties and the owners thereof have the unbridled right to
transfer the same to anyone they please subject only to reasonable charter
provisions.
Certificate of Stock: is the piece of paper or document which evidences the
ownership of shares and a convenient instrument in the transfer of the title.
77 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Sec. 63. Certificate of stock and transfer of shares. - The capital stock of
stock corporations shall be divided into shares for which certificates signed by
the president or vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or certificates endorsed by
the owner or his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties,
until the transfer is recorded in the books of the corporation showing the names
of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall
be transferable in the books of the corporation.
REQUISITES FOR THE ISSUANCE OF CERTIFICATE OF STOCK:
1. It must be signed by the president or vice-president and countersigned
by the secretary or assistant secretary;
2. It must be sealed with the corporate seal, and
3. The entire value thereof (together with the interest or expenses, if any)
should have been paid.
RIGHTS OF SUBSCRIBERS: While it appears, that a subscriber to shares of
stock cannot be entitled to the issuance of a certificate of stock until the full
amount of his subscription together with interest and expenses (in case of
delinquent shares) if any is due, has been paid, a subscriber, even if not yet
fully paid, is entitled to exercise all the rights of a stockholder and the
corresponding liability that attach thereunder:
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully
paid which are not delinquent shall have all the rights of a stockholder.
In essence, the issuance of a certificate of stock is not a condition sine qua non
to consider a subscriber a stockholder. To all intents and purposes, a subscriber
is a shareholder upon subscription and entitled to the all the rights as such,
except:
1. For the issuance of a certificate of stock;
2. If his shares are declared delinquent; or
3. When he exercises appraisal right under Sec. 83.
NEGOTIABILITY: A certificate of stock is not regarded as “negotiable” in the
sense same sense as a bill or a not, even if its endorsed in blank. Thus, while
it may be transferred by endorsement coupled with delivery thereof, it is
nonetheless non-negotiable in that the transferee takes it without prejudice to
all the rights and defenses which the true and lawful owner may have except
in so far as the principles governing estoppel may apply.
NON-REGISTRATION: of shares disposed of by the holder will not affect the
validity of the transfer at least in so far as the contracting parties are
concerned. As regards, the corporation, the transferee will not be recognized
as such stockholder and could not exercise the rights until the transfer has
been duly recorded in the stock and transfer book. As such, “he cannot vote
or be vote for, and he will not be entitled to dividends. The corporation may
be protected when it pays dividends to the registered owner despite a previous
transfer of which it had no knowledge. The purpose of registration therefore is
two-fold: (1) to enable the transferee to exercise all the rights of stockholder,
and (2) to inform the corporation of any change in share ownership so that it
can ascertain the person entitled to the rights and subject to the liabilities of a
corporation” (De Erquiga vs. CA)
REGISTRATION: is necessary to:
1. Enable the corporation to know who its stockholders are;
2. Enable the transferee to exercise his rights as a stockholder;
3. Afford the corporation an opportunity to object or refuse registration of
the transfer in cases allowed by law (as when it has unpaid claims on the
shares transferred);
4. Avoid fictitious and fraudulent transfers; and
5. Protect creditors who have the right to look upon stockholders, in case of
non-payment or watered shares, for the satisfaction of their claims.
MANDAMUS: If the corporate secretary refuses to registered or record the
transfer, mandamus will lie to compel the registration. This is because such
duty is ministerial. HOWEVER, he cannot be compelled to do so when the
transferee’s title to said shares has no prima facie validity or is uncertain.
TWO MODES OF TRANSFERRING STOCKS:
1. Endorsement and delivery of certificate of stock;
2. Notarized deed.
The SEC has, however, ruled that when a corporation has already issued stock
certificates, any transfer of the shares can only be effectively made by
endorsement and delivery of the stock certificate. A deed of transfer, sale or
assignment alone would not suffice (as affirmed by the SC in Rural Bank of
Lipa City, Inc. vs. CA) for to rule otherwise would open the door to fraudulent
or fictitious transfer which the SEC seeks to avoid. In effect, while a formal
contract of sale in a notarized document is equivalent to actual delivery of the
certificate itself, this mode of transfer is available only if no certificate of stock
has been issued.
RIGHT TO TRANSFER SHARES OF STOCK: may not be unreasonably
restricted prohibited. Thus, in Padgett vs. Bobcock & Templeton and Fleischer
vs. Botica Nolasco, the SC held that every owner of corporate shares has the
same uncontrollable right to alienate them and is under no obligation from
selling them at his sacrifice and for the welfare and benefit of the corporation
and other stockholders. But while unreasonable restrictions may not be
allowed, the right to transfer may be “regulated” to give the corporation
protection against colorable or fraudulent transfer or to enable it to know who
its stockholders are. Also, as a matter of policy, the SEC allows the grant of
“preferential rights” to existing stockholders and/or the corporation, giving
them the first option to purchase the shares of a selling stockholder within a
reasonable period not exceeding thirty days provided that the same is
contained in the AOI and in all the stock certificates to be issued. This is
considered “reasonable” since it merely suspends the right to transfer within
the period specified.
OTHER RESTRICTIONS:
1. It is not valid, except as between the parties, until recorded in the books
of the corporation;
2. Shares of stock against which the corporation holds any unpaid claim shall
not be transferrable in the books of the corporation. Unpaid claims, refer
to claims arising from unpaid subscription and not to any indebtedness
which a stockholder may owe the corporation such as monthly dues;
3. Restrictions required to be indicated in the AOI, bylaws and stock
certificates of a close corporation;
4. Restrictions imposed by special law, such as the Public Service Act
requiring the approval of the government agency concerned if it will vest
unto the transferee 40% of the capital of the public service company;
5. Sale to aliens in violation of maximum ownership of shares under the
Nationalization Laws; and
6. Those covered by reasonable agreement of the parties.
TRANSFER: as used in the Corporation Code, refers to absolute and
unconditional transfer to warrant registration in the books of the corporation
in order to bind the latter and other third persons.
ENRIQUE MONSERRAT, plaintiff-appellee,
vs.
CARLOS G. CERON, ET AL., defendants.
ERMA, INC., and, THE SHERIFF OF MANILA, respondents
(G.R. No. 37078; September 27, 1933)
FACTS: Enrique Monserrat, president and manager of the Manila Yellow
78 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Taxicab Co., Inc. (MYTC), assigned to Carlos G. Ceron the usufruct of his 1,200
shares in consideration of the interest shown and the financial aid extended
him (Monserrat) in the organization of the corporation. This assignment
allowed Ceron to derive the right to enjoy the profits (during his lifetim) that
may be derived from the shares but prohibited him from acts of absolute
ownership, such acts and the right to vote, reserved to Monserrat and his heirs.
Such assignment was recorded in the books of the corporation and the
corresponding shares certificate was issued to Ceron.
Later on, Ceron mortgaged the shares to herein defendant Eduardo Matute,
the latter without knowledge of the existence of the assignment. Due to non-
payment, Matute foreclosed the mortgage and the shares were sold at a public
auction.
Monserrat claims ownership over the shares and the lower court rendered
judgment in his favor, holding that the mortgage on the shares was null and
void, but the mortgage on the usufruct is valid.
ISSUE: WON it is necessary to enter upon the books of the corporation a
mortgage constituted on shares of stock in order that such mortgage may be
valid and may have force and effect as against third persons?
HELD: No. Section 35 of the Corporation Law provides the following:
SEC. 35. The capital stock of stock corporations shall be divided into shares
for which certificates signed by the president or the vice-president, counter
signed by the secretary or clerk and sealed with the seal of the corporation,
shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate
indorsed by the owner or his attorney in fact or other person legally
authorized to make the transfer. No transfer, however, shall be valid, except
as between the parties, until the transfer is entered and noted upon the
books of the corporation so as to show the names of the parties to the
transaction, the date of the transfer the number of the certificate, and the
number of shares transferred.
No share of stock against which the corporation hold, any unpaid claim shall
be transferable on the books of the corporation.
The legal provision just quoted does not require any entry except of transfers
of shares of stock in order that such transfers may be valid as against third
persons. Now, what did the Legislature mean in using the word "transfer"?
Inasmuch as it does not appear from the text of the Corporation Law that an
attempt was made to give a special signification to the word "transfer", we
shall construe it according to its accepted meaning in ordinary parlance.
The word "transferencia" (transfer) is defined by the "Diccionario de la
Academia de la Lengua Castellana" as "accion y efecto de transferir" (the act
and effect of transferring); and the verb "transferir", as "ceder o renunciar en
otro el derecho o dominio que se tiene sobre una cosa, haciendole dueno de
ella" (to assign or waive the right in, or absolute ownership of, a thing in favor
of another, making him the owner thereof).
In the Law Dictionary of "Words and Phrases", third series, volume 7, p. 589,
the word "transfer" is defined as follows:
"Transfer" means any act by which property of one person is vested in
another, and "transfer of shares", as used in Uniform Stock Transfer Act
(Comp. St. Supp., 690), implies any means whereby one may be divested of
and another acquire ownership of stock. (Wallach vs. Stein [N.J.], 136 A.,
209, 210.)"
In view of the definitions cited above, the question arises as to whether or not
a mortgage constituted on certain shares of stock in accordance with Act No.
1508, as amended by Act No. 2496, is a transfer of such shares in the
abovementioned sense.
Section 3 of the aforesaid Act No. 1508, as amended by Act No. 2496, defines
the phrase "hipoteca mobiliaria" (chattel mortgage) as follows:
 SEC. 3. A chattel mortgage is a conditional sale of personal property as
security for the payment of a debt, or the performance of some other
obligation specified therein, the condition being that the sale shall be
avoided upon the seller paying to the purchaser a sum of money or doing
some other act named. If the condition is performed according to its terms
the mortgage and sale immediately become void, and the mortgage is
hereby divested of his title.
According to the legal provision just quoted, although a chattel mortgage,
accompanied by delivery of the mortgaged thing, transfers the title and
ownership thereof to the mortgage creditor, such transfer is not absolute but
constitutes a mere security for the payment of the mortgage debt, the transfer
in question becoming null and void from the time the mortgage debtor complies
with his obligation to pay his debt.
In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127 Pac., 14, 17; 34
Okl., 662; 46 L. R. A. [N.S.], 455), cited in Words and Phrases, second series,
vol. 4, p. 978, the following appears:
A "transfer" is the act by which owner of a thing delivers it to another with
the intent of passing the rights which he has in it to the latter, and a chattel
mortgage is not within the meaning of such term.
Therefore, the chattel mortgage is not the transfer referred to in
section 35 of Act No. 1459 commonly known as the Corporation law,
which transfer should be entered and noted upon the books of a
corporation in order to be valid, and which, as has already been said,
means the absolute and unconditional conveyance of the title and
ownership of a share of stock.
If, in accordance with said section 35 of the Corporation Law, only the
transfer or absolute conveyance of the ownership of the title to a
share need be entered and noted upon the books of the corporation
in order that such transfer may be valid, therefore, inasmuch as a
chattel mortgage of the aforesaid title is not a complete and absolute
alienation of the dominion and ownership thereof, its entry and
notation upon the books of the corporation is not necessary requisite
to its validity.
It is obvious, therefore, that the defendant entity Erma, Inc., as a conditional
purchaser of the shares of stock in question given as security for the payment
of his credit, acquired in good faith Carlos G. Ceron's right and title to the 600
common shares of stock evidenced by certificate No. 7 of the MYTC, and as
such conditional purchaser in good faith, it is entitled to the protection of the
law.
In view of the foregoing considerations, we are of the opinion and so hold that,
inasmuch as section 35 of the Corporation Law does not require the
notation upon the books of a corporation of transactions relating to
its shares, except the transfer of possession and ownership thereof,
as a necessary requisite to the validity of such transfer, the notation
upon the aforesaid books of the corporation, of a chattel mortgage
constituted on the shares of stock in question is not necessary to its
validity.
GONZALO CHUA GUAN, plaintiff-appellant,
vs.
SAMAHANG MAGSASAKA, INC., and SIMPLICIO OCAMPO, ADRIANO G.
SOTTO, and EMILIO VERGARA, as president, secretary and treasurer
respectively of the same, defendants-appellees
(G.R. No. L-42091; November 2, 1935)
FACTS: To secure the payment of a debt, Gonzalo H. Co Toco mortgage his
shares to Chua Chiu, such assignment recorded in the Office of the Register of
Deeds and the books of the corporation. For non-payment, the mortgage was
foreclosed and the shares were sold at a public auction with plaintiff Chua Guan
as the highest bidder.
The Company refused to cancel the certificates of stock and issue new ones to
herein plaintiff alleging that prior to the date of plaintiff’s demand, nine
79 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
attachments had been issued and served and noted on the books of the
corporation. Thus, a prayer for a writ of mandamus.
The validity of the assignments and the mortgage is not in question.
ISSUE: WON the registration of the mortgage in the registry of chattel
mortgage in the office of the register of deeds give constructive notice to the
said attaching creditors and thus gave preference to the mortgage over the
other debts?
HELD: No. In passing, let it be noted that the registration of the said chattel
mortgage in the office of the corporation was not necessary and had no legal
effect. (Monserrat vs. Ceron, 58 Phil., 469.) The long mooted question as to
whether or not shares of a corporation could be hypothecated by placing a
chattel mortgage on the certificate representing such shares we now regard as
settled by the case of Monserrat vs. Ceron, supra. But that case did not deal
with any question relating to the registration of such a mortgage or the effect
of such registration. Nothing appears in the record of that case even tending
to show that the chattel mortgage there involved was ever registered anywhere
except in the office of the corporation, and there was no question involved
there as to the right of priority among conflicting claims of creditors of the
owner of the shares
Section 4 of Act No. 1508 provides two ways for executing a valid chattel
mortgage which shall be effective against third persons. First, the possession
of the property mortgage must be delivered to and retained by the mortgagee;
and, second, without such delivery the mortgage must be recorded in the
proper office or offices of the register or registers of deeds. If a chattel
mortgage of shares of stock of a corporation may validly be made without the
delivery of possession of the property to the mortgagee and the mere
registration of the mortgage is sufficient to constructive notice to third parties,
we are confronted with the question as to the proper place of registration of
such a mortgage. Section 4 provides that in such a case the mortgage resides
at the time of making the same or, if he is a non-resident, in the province in
which the property is situated; and it also provides that if the property is
situated in a different province from that in which the mortgagor resides the
mortgage shall be recorded both in the province of the mortgagor's residence
and in the province where the property is situated.
If with respect to a chattel mortgage of shares of stock of a corporation,
registration in the province of the owner's domicile should be sufficient, those
who lend on such security would be confronted with the practical difficulty of
being compelled not only to search the records of every province in which the
mortgagor might have been domiciled but also every province in which a
chattel mortgage by any former owner of such shares might be registered. We
cannot think that it was the intention of the legislature to put this almost
prohibitive impediment upon the hypothecation of shares of stock in view of
the great volume of business that is done on the faith of the pledge of shares
of stock as collateral.
It is a common but not accurate generalization that the situs of shares of stock
is at the domicile of the owner. The term situs is not one of fixed of invariable
meaning or usage. Nor should we lose sight of the difference between the situs
of the shares and the situs of the certificates of shares. The situs of shares of
stock for some purposes may be at the domicile of the owner and for others
at the domicile of the corporation; and even elsewhere. (Cf. Vidal vs. South
American Securities Co., 276 Fed., 855; Black Eagle Min. Co. vs. Conroy, 94
Okla., 199; 221 Pac,, 425 Norrie vs. Kansas City Southern Ry. Co., 7 Fed. [2d].
158.) It is a general rule that for purposes of execution, attachment
and garnishment, it is not the domicile of the owner of a certificate
but the domicile of the corporation which is decisive. (Fletcher,
Cyclopedia of the Law of Private Corporations, vol. 11, paragraph 5106. Cf.
sections 430 and 450, Code of Civil Procedure.)
By analogy with the foregoing and considering the ownership of shares in a
corporation as property distinct from the certificates which are merely the
evidence of such ownership, it seems to us a reasonable construction of section
4 of Act No. 1508 to hold that the property in the shares may be deemed
to be situated in the province in which the corporation has its
principal office or place of business. If this province is also the
province of the owner's domicile, a single registration sufficient. If
not, the chattel mortgage should be registered both at the owner's
domicile and in the province where the corporation has its principal
office or place of business. In this sense the property mortgaged is
not the certificate but the participation and share of the owner in the
assets of the corporation.
In view of the premises, the attaching creditors are entitled to priority over the
defectively registered mortgage of the appellant and the judgment appealed
from must be affirmed without special pronouncement as to costs in this
instance.
TORIBIA USON, plaintiff-appellee,
vs.
VICENTE DIOSOMITO, ET AL., defendants.
VICENTE DIOSOMITO, EMETERIO BARCELON, H.P.L. JOLLYE and NORTH
ELECTRIC COMPANY, INC., appellants.
(G.R. No. L-42135; June 17, 1935)
FACTS: In a civil action filed by herein plaintiff-appellee Uson, an attachment
was levied on Jan. 18, 1932 upon the property of defendant Vicente
Diosmomito including the question 75 shares of North Electric Company, Inc..
On March 20, 1933, the said shares were sold at a public auction to satisfy the
claim of Uson.
In the present action, appellant HPL Jollye claims ownership of said shares.
Apparently, these shares were sold by Diosomito to Emetertio Barcelon on Feb.
3, 1931 but the certificates were cancelled and a new one issued only on Sep.
16, 1932. Later on, the same shares were sold to Jollye and registered in the
books on Feb. 13, 1933.
ISSUE: WON a bona fide transfer of the shares of a corporation, not registered
or noted on the books of the corporation, is valid as against a subsequent
lawful attachment of said shares, regardless of whether the attaching creditor
had actual notice of said transfer or not?
HELD: Section 35 of the Corporation Law is as follows:
SEC. 35. The capital stock of stock corporations shall be divided into shares
for which certificates signed by the president or the vice-president,
countersigned by the secretary or clerk and sealed with the by-laws. Shares
of stock so issued are personal property and may be transferred by delivery
of the certificate indorsed by the owner or his attorney in fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is entered and noted upon
the books of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate, and the
number of shares transferred
We prefer to adopt the line followed by the Supreme Courts of Massachusetts
and of Wisconsin. (See Clews vs. Friedman, 182 Mass., 555; 66 N.E. 201, and
In re Murphy, 51 Wis., 519; 8 N.W., 419.) In this case the court had under
consideration a statute identical with our own section 35, supra, and the court
said:
We think the true meaning of the language is, and the obvious intention of
the legislature in using it was, that all transfers of shares should be entered,
as here required, on the books of the corporation. And it is equally clear to
us that all transfers of shares not so entered are invalid as to
attaching or execution creditors of the assignors, as well as to the
corporation and to subsequent purchasers in good faith, and
indeed, as to all persons interested, except the parties to such
transfers. All transfers not so entered on the books of the
corporation are absolutely void; not because they are without
notice or fraudulent in law or fact, but because they are made so
void by statute.
To us the language of the legislature is plain to the effect that the right of
the owner of the shares of stock of a Philippine corporation to
transfer the same by delivery of the certificate, whether it be
regarded as statutory on common law right, is limited and restricted
by the express provision that "no transfer, however, shall be valid,
80 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
except as between the parties, until the transfer is entered and noted
upon the books of the corporation." Therefore, the transfer of the 75
shares in the North Electric Company, Inc., made by the defendant
Diosomito to the defendant Barcelon was not valid as to the plaintiff-
appellee, Toribia Uson, on January 18, 1932, the date on which she
obtained her attachment lien on said shares of stock which still stood
in the name of Diosomito on the books of the corporation.
CYRUS PADGETT, plaintiff-appellee,
vs.
BABCOCK & TEMPLETON, INC., and W. R. BABCOCK, defendants-
appellants
(G.R. No. L-38684; December 21, 1933)
FACTS: The appellee was an employee of the appellant corporation and
rendered services as such from January 1, 1923, to April 15, 1929. During that
period he bought 35 shares thereof at P100 a share at the suggestion of the
president of said corporation. He was also the recipient of 9 shares by way of
bonus during Christmas seasons. In this way the said appellee became the
owner of 44 shares for which the 12 certificates, Exhibits F to F-11, were issued
in his favor. The word "nontransferable" appears on each and every one of
these certificates. Before severing his connections with the said corporation,
the appellee proposed to the president that the said corporation buy his 44
shares at par value plus the interest thereon, or that he be authorized to sell
them to other persons. The corporation bought similar shares belonging to
other employees, at par value. Sometime later, the said president offered to
buy the appellee's shares first at P85 each and then at P80. The appellee did
not agree thereto.
ISSUE: WON the restriction imposed on the right to transfer the shares is
valid?
HELD: No. The opinion seems to be unanimous that a restriction imposed
upon a certificate of shares, similar to the ones under consideration,
is null and void on the ground that it constitutes and unreasonable
limitation of the right of ownership and is in restraint of trade.
Shares of corporate stock being regarded as property, the owner of such
shares may, as a general rule, dispose of them as he sees fit, unless the
corporation has been dissolved, or unless the right to do so is properly
restricted, or the owner's privilege of disposing of his shares has been
hampered by his own action. (14 C. J., sec. 1033, pp. 663, 664.)
Any restriction on a stockholder's right to dispose of his shares must be
construed strictly; and any attempt to restrain a transfer of shares is
regarded as being in restraint of trade, in the absence of a valid lien upon
its shares, and except to the extent that valid restrictive regulations and
agreements exist and are applicable. Subject only to such restrictions, a
stockholder cannot be controlled in or restrained from exercising his right to
transfer by the corporation or its officers or by other stockholders, even
though the sale is to a competitor of the company, or to an insolvent person,
or even though a controlling interest is sold to one purchaser. (Ibid., sec.
1035, pp. 665, 666.)
In the case of Fleischer vs. Botica Nolasco Co. (47 Phil., 583), we have
discussed the validity of a clause in the by-laws of the defendant corporation,
which provided that, under the same conditions, the owner of a share of stock
could not sell it to another person except to the defendant corporation. In
deciding the legality and validity of said restriction, we held:
The only restraint imposed by the Corporation Law upon transfer
of shares is found in section 35 of Act No. 1459. This restriction is
necessary in order that the officers of the corporation may know
who are the stockholders, which is essential in conducting
elections of officers, in calling meetings of stockholders, and for
other purposes. But any restriction of the nature of that imposed
in the by-law now in question, is ultra vires, violative of the
property rights of shareholders, and in restraint of trade. (Id., p.
592.)
It is obvious, therefore, that the restriction consisting in the word
"nontransferable", appearing on the 12 certificates, Exhibits F to F-11, is illegal
and should be eliminated.
ISSUE2: WON the corporation may be compelled to buy the shares of a selling
stockholder?
HELD: No. There is no existing law nor authority in support of the plaintiff's
claim to the effect that the defendants are obliged to buy his shares of stock
value at par value, plus the interest demanded thereon. In this respect, we
hold that there has been no such contract, either express or implied, between
the plaintiff and the defendants. In the absence of a similar contractual
obligation and of a legal provision applicable thereto, it is logical to conclude
that it would be unjust and unreasonable to compel the said defendants to
comply with a non-existent or imaginary obligation. Whereupon, we are
likewise compelled to conclude that the judgment originally rendered to that
effect is untenable and should be set aside
LEON J. LAMBERT, plaintiff-appellant,
vs.
T. J. FOX, defendant-appellee
(G.R. No. L-7991; January 29, 1914)
FACTS: Defendant and plaintiff, became two of the largest shareholders of
John R. Edgar & Co., Inc. was incorporated. They were former creditors who
agreed to aid the financially distressed predecessor John R. Edgar & Co.. They
entered into an agreement a few days after incorporation as follows:
Whereas the undersigned are, respectively, owners of large amounts of
stock in John R. Edgar and Co, Inc; and,
Whereas it is recognized that the success of said corporation depends, now
and for at least one year next following, in the larger stockholders retaining
their respective interests in the business of said corporation:
Therefore, the undersigned mutually and reciprocally agree not to sell,
transfer, or otherwise dispose of any part of their present holdings of stock
in said John R. Edgar & Co. Inc., till after one year from the date hereof.
Either party violating this agreement shall pay to the other the sum of one
thousand (P1,000) pesos as liquidated damages, unless previous consent in
writing to such sale, transfer, or other disposition be obtained.
Notwithstanding this contract the defendant Fox on October 19, 1911, sold his
stock in the said corporation to E. C. McCullough of the firm of E. C. McCullough
& Co. of Manila, a strong competitor of the said John R. Edgar & Co., Inc.
A complaint was filed and the trial court decided in favor of defendant.
ISSUE: WON the stipulation in the contract is valid?
HELD: Yes. It is urged by the appellee in this case that the stipulation in the
contract suspending the power to sell the stock referred to therein is an illegal
stipulation, is in restraint of trade and, therefore, offends public policy. We do
not so regard it. The suspension of the power to sell has a beneficial
purpose, results in the protection of the corporation as well as of the
individual parties to the contract, and is reasonable as to the length
of time of the suspension. We do not here undertake to discuss the
limitations to the power to suspend the right of alienation of stock, limiting
ourselves to the statement that the suspension in this particular case is legal
and valid.
EMBASSY FARMS, INC., petitioner,
vs.
HON. COURT OF APPEALS (INTERMEDIATE APPELLATE COURT), HON.
ZENAIDA S. BALTAZAR, Judge of the Regional Trial Court, Branch CLVIII,
(158), Pasig, Metro Manila, VOLTAIRE B. CRUZ, Deputy Sheriff, Branch CLVIII,
Regional Trial Court, Pasig, Metro Manila and EDUARDO B. EVANGELISTA,
respondents
(G.R. No. 80682 August 13, 1990)
FACTS: Alexander G. Asuncion and Eduardo B. Evangelista entered into a
Memorandum of Agreement (MOA) with the following obligations:
81 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 EVANGELISTA:
1. To transfer to Asuncion 19 parcels of agricultural land registered in
his name, together with the stocks, equipment and facilities of
Embassy Farms, Inc. wherein 90% of the shares of stock is owned
by Evangelista;
2. To cede, transfer and convey “in a manner absolute and irrevocable
any and all of his shares of stocks” in Embassy Farms, Inc. to
Asuncion or his nominees “until the total of said shares of stock so
transferred shall constitute 90% of the paid-in equity of said
corporation” within a reasonable time from signing the document.
 ASUNCION:
1. To pay Evangelista P8,630,999;
2. To organize and register a new corporation with an authorized
capital stock of P10M which upon registration will take over all the
rights and liabilities of Asuncion.
Effective control and management of the piggery at Embassy Farms, Inc. was
transferred by Evangelista to Asuncion pursuant to clause 8 of the MOA. In
accordance with clause 15, Evangelista served as President and Chief Executive
of Embassy Farms.
Evangelista also endorsed in blank all his shares of stock including that of his
wife and three nominees with minor holdings but retained possession of said
shares and opted to deliver to Asuncion only upon full compliance of the latter
of his obligations under the MOA.
For failure to comply with his obligations, Evangelista intimated the institution
of the appropriate legal action. But Asuncion eventually filed for the rescission
of the MOA.
ISSUE: WON Evangelista has a better right to the shares and control of the
corporate affairs?
HELD: Yes. From the pleadings submitted by the parties it is clear that
although Evangelista has indorsed in blank the shares outstanding in his name
he has not delivered the certificate of stocks to Asuncion because the latter
has not fully complied with his obligations under the MOA. There being no
delivery of the indorsed shares of stock Asuncion cannot therefore
effectively transfer to other person or his nominees the undelivered
shares of stock. For an effective transfer of shares of stock the mode and
manner of transfer as prescribed by law must be followed (Navea v. Peers
Marketing Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa
Bilang 68, otherwise known as the Corporation Code of the Philippines, shares
of stock may be transferred by delivery to the transferree of the
certificate properly indorsed. Title may be vested in the transferree
by the delivery of the duly indorsed certificate of stock (18 C.J.S. 928,
cited in Rivera v. Florendo, 144 SCRA 643). However, no transfer shall be valid,
except as between the parties until the transfer is properly recorded in the
books of the corporation (Sec. 63, Corporation Code of the Philippines).
In the case at bar the indorsed certificate of stock was not actually delivered
to Asuncion so that Evangelista is still the controlling stockholder of Embassy
Farms despite the execution of the memorandum of agreement and the turn-
over of control and management of the Embassy Farms to Asuncion on August
2, 1984.
When Asuncion filed on April 10, 1986 an action for the rescission of contracts
with damages, the Pasig Court merely restored and established the status quo
prior to the execution of the MOA by the issuance of a restraining order on July
10, 1987 and the writ of preliminary injunction on July 30, 1987. It would be
unjust and unfair to allow Asuncion and his nominees to control and manage
the Embassy Farms despite the fact that Asuncion, who is the source of their
supposed shares of stock in the corporation, is not asking for the delivery of
the indorsed certificate of stock but for the rescission of the MOA. Rescission
would result in mutual restitution (Magdalena Estate v. Myrick, 71 Phil. 344) so
it is but proper to allow Evangelista to manage the farm. Compared to Asuncion
or his nominees Evangelista would be more interested in the preservation of
the assets, equipment and facilities of Embassy Farms during the pendency of
the main case.
ENRIQUE RAZON, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and VICENTE B. CHUIDIAN, in his
capacity as Administrator of the Estate of the Deceased JUAN T. CHUIDIAN,
respondents.
(G.R. No. 74306 March 16, 1992)
VICENTE B. CHUIDIAN, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, ENRIQUE RAZ0N, and E. RAZON,
INC., respondents
(G.R. No. 74315 March 16, 1992)
FACTS: E. Razon, Inc. was organized by petitioner Enrique Razon in 1962.
However, it began operations only in 1966 since the other incorporators
withdrew from the said corporation. The petitioner then distributed the stocks
previously placed in the names of the withdrawing nominal incorporators to
some friends, among them the late Juan T. Chuidian to whom he gave 1,500
shares.
The shares of stocks were registered in the name of Chuidian only as nominal
stockholder and with the agreement that the said shares of stock were owned
and held by the petitioner but Chuidian was given the option to buy the same
Chuidian delivered to petitioner the stock certificate in 1966, and since then
petitioner had in his possession such certificate, until the time, he delivered it
for deposit with PBCom under the parties’ joint custody pursuant to their
agreement embodied in the trial court’s order.
ISSUE: WON petitioner Razon is the rightful owner of the shares?
HELD: No. In the case of Embassy Farms, Inc. v. Court of Appeals (188 SCRA
492 [1990]) we ruled:
. . . For an effective, transfer of shares of stock the mode and manner of
transfer as prescribed by law must be followed (Navea v. Peers Marketing
Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa Bilang,
68 otherwise known as the Corporation Code of the Philippines, shares of
stock may be transferred by delivery to the transferee of the certificate
properly indorsed. Title may be vested in the transferee by the delivery of
the duly indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v.
Florendo, 144 SCRA 643). However, no transfer shall be valid, except as
between the parties until the transfer is properly recorded in the books of
the corporation (Sec. 63, Corporation Code of the Philippines; Section 35 of
the Corporation Law)
In the instant case, there is no dispute that the questioned 1,500 shares of
stock of E. Razon, Inc. are in the name of the late Juan Chuidian in the books
of the corporation. Moreover, the records show that during his lifetime Chuidian
was elected member of the Board of Directors of the corporation which clearly
shows that he was a stockholder of the corporation. (See Section 30,
Corporation Code) From the point of view of the corporation, therefore,
Chuidian was the owner of the 1,500 shares of stock. In such a case, the
petitioner who claims ownership over the questioned shares of stock must
show that the same were transferred to him by proving that all the
requirements for the effective transfer of shares of stock in accordance with
the corporation's by laws, if any, were followed (See Nava v. Peers Marketing
Corporation, 74 SCRA 65 [1976]) or in accordance with the provisions of law.
The petitioner failed in both instances. The petitioner did not present any by-
laws which could show that the 1,500 shares of stock were effectively
transferred to him. In the absence of the corporation's by-laws or rules
governing effective transfer of shares of stock, the provisions of the
Corporation Law are made applicable to the instant case.
The law is clear that in order for a transfer of stock certificate to be
effective, the certificate must be properly indorsed and that title to
such certificate of stock is vested in the transferee by the delivery of
the duly indorsed certificate of stock. (Section 35, Corporation Code)
Since the certificate of stock covering the questioned 1,500 shares of stock
registered in the name of the late Juan Chuidian was never indorsed to the
petitioner, the inevitable conclusion is that the questioned shares of stock
82 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
belong to Chuidian. The petitioner's asseveration that he did not require an
indorsement of the certificate of stock in view of his intimate friendship with
the late Juan Chuidian cannot overcome the failure to follow the procedure
required by law or the proper conduct of business even among friends. To
reiterate, indorsement of the certificate of stock is a mandatory requirement of
law for an effective transfer of a certificate of stock.
Moreover, the preponderance of evidence supports the appellate court's factual
findings that the shares of stock were given to Juan T. Chuidian for value. Juan
T. Chuidian was the legal counsel who handled the legal affairs of the
corporation. We give credence to the testimony of the private respondent that
the shares of stock were given to Juan T. Chuidian in payment of his legal
services to the corporation. Petitioner Razon failed to overcome this testimony.
RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS and
FRANCISCO TRIAS, petitioners,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, MELANIA
A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES, FRANCISCO M.
GUERRERO, JR., and FRANCISCO GUERRERO , SR., respondents
(G.R. No. 96674 June 26, 1992)
FACTS: On June 10, 1979, Clemente G. Guerrero, President of the Rural Bank
of Salinas, Inc., executed a Special Power of Attorney in favor of his wife,
private respondent Melania Guerrero, giving and granting the latter full power
and authority to sell or otherwise dispose of and/or mortgage 473 shares of
stock of the Bank registered in his name (represented by the Bank's stock
certificates nos. 26, 49 and 65), to execute the proper documents therefor,
and to receive and sign receipts for the dispositions.
Pursuant to said SPA, private respondent Melania Guerrero, as Attorney-in-
Fact, executed the following assignments of shares of stocks: Luz Andico (457
shares); Wilhelmina Rosales (10 shares); Francisco Guerrero, Jr. (5 shares);
and Francisco Guerrero, Sr. (1 share). The last share was transferred 2 months
before the death of Clemente.
Subsequently, Melania Guerrero presented the Deeds of Assignments and
requested for the cancellation of the certificates of stock and new ones to be
issued in the name of transferees. However, petitioner Bank refused.
Melania Guerrero filed for an action for mandamus with the SEC. Maripol
Guerrero, a legally adopted daughter of Melania and Clemente filed for
intervention claiming that two weeks before filing the action for mandamus, a
petition for the administration of the estate of Celemente has been filed and
that the deeds of assignment were fictitious and antedated. SEC denied the
motion for intervention.
Maripol filed a complaint before the CFI for the annulment of the Deeds of
Assignment.
Later on, the SEC rendered a decision granting the action for mandamus which
was affirmed by the SEC en banc and still later, by the CA.
ISSUE: WON the mandamus was properly granted for the registration of the
transfer of the 473 shares in question?
HELD: Yes. Respondent SEC correctly ruled in favor of the registering of the
shares of stock in question in private respondent's names. Such ruling finds
support under Section 63 of the Corporation Code, to wit:
Sec. 63. . . . Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed by the
owner or his attorney-in-fact or other person legally authorized to make
the transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the corporation . . .
In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court interpreted
Sec. 63 in his wise:
 Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation Code])
contemplates no restriction as to whom the stocks may be
transferred. It does not suggest that any discrimination may be
created by the corporation in favor of, or against a certain
purchaser. The owner of shares, as owner of personal property,
is at liberty, under said section to dispose them in favor of
whomever he pleases, without limitation in this respect, than the
general provisions of law. . . .
The only limitation imposed by Section 63 of the Corporation Code
is when the corporation holds any unpaid claim against the shares
intended to be transferred, which is absent here.
A corporation, either by its board, its by-laws, or the act of its officers, cannot
create restrictions in stock transfers, because:
. . . Restrictions in the traffic of stock must have their source in legislative
enactment, as the corporation itself cannot create such impediment. By-
laws are intended merely for the protection of the corporation, and
prescribe regulation, not restriction; they are always subject to the charter
of the corporation. The corporation, in the absence of such power, cannot
ordinarily inquire into or pass upon the legality of the transactions by
which its stock passes from one person to another, nor can it question
the consideration upon which a sale is based. . . . (Tomson on Corporation
Sec. 4137, cited in Fleisher vs. Nolasco, Supra).
The right of a transferee/assignee to have stocks transferred to his name is an
inherent right flowing from his ownership of the stocks. Thus:
Whenever a corporation refuses to transfer and register stock in
cases like the present, mandamus will lie to compel the officers
of the corporation to transfer said stock in the books of the
corporation" (26, Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; Fleisher vs.
Botica Nolasco, 47 Phil. 583, 594).
The corporation's obligation to register is ministerial.
In transferring stock, the secretary of a corporation acts in purely
ministerial capacity, and does not try to decide the question of ownership.
(Fletcher, Sec. 5528, page 434).
The duty of the corporation to transfer is a ministerial one and if
it refuses to make such transaction without good cause, it may
be compelled to do so by mandamus. (See. 5518, 12 Fletcher 394)
For the petitioner Rural Bank of Salinas to refuse registration of the transferred
shares in its stock and transfer book, which duty is ministerial on its part, is to
render nugatory and ineffectual the spirit and intent of Section 63 of the
Corporation Code. Thus, respondent Court of Appeals did not err in upholding
the Decision of respondent SEC affirming the Decision of its Hearing Officer
directing the registration of the 473 shares in the stock and transfer book in
the names of private respondents. At all events, the registration is without
prejudice to the proceedings in court to determine the validity of the Deeds of
Assignment of the shares of stock in question.
LIM TAY, petitioner,
vs.
COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE ESTATE
OF ALFONSO LIM, respondents
(G.R. No. 126891; August 5, 1998)
FACTS: To secure their separate loans, respondent Sy Guiok and Alfonso Lim,
each executed a contract of pledge covering their respective 300 shares in
favor of petitioner Lim Tay where they indorsed in blank and delivered their
shares of stock to Tay.
For non-payment, Lim Tay filed a Petition for Mandamus in the SEC against Go
Fay & Compny, Inc. to cancel the old certificates and issue a new one in his
name, which was granted by the SEC but reversed by the CA.
ISSUE: WON the rulings in the Abejo case and the Rural Bank of Salinas case
will apply?
83 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
HELD: No. Petitioner's reliance on the doctrines set forth in Abejo v. De la Cruz
and Rural Bank of Salinas, Inc. v. Court of Appeals is misplaced.
ABEJO: the Abejo spouses sold to Telectronic Systems, Inc. shares of stock
in Pocket Bell Philippines, Inc. Subsequent to such contract of sale, the
corporate secretary, Norberto Braga, refused to record the transfer of the
shares in the corporate books and instead asked for the annulment of the sale,
claiming that he and his wife had a pre-emptive right over some of the shares,
and that his wife's shares were sold without consideration or consent.
At the time the Bragas questioned the validity of the sale, the contract had
already been perfected, thereby demonstrating that Telectronic Systems, Inc.
was already the prima facie owner of the shares and, consequently, a
stockholder of Pocket Bell Philippines, Inc. Even if the sale were to be annulled
later on, Telectronic Systems, Inc. had, in the meantime, title over the shares
from the time the sale was perfected until the time such sale was annulled.
The effects of an annulment operate prospectively and do not, as a rule,
retroact to the time the sale was made. Therefore, at the time the Bragas
questioned the validity of the tranfers made by the Abejos, Telectronic
Systems, Inc. was already a prima facie shareholder of the corporation, thus
making the dispute between the Bragas and the Abejos "intra-corporate" in
nature. Hence, the Court held that "the issue is not on ownership of shares but
rather the non-performance by the corporate secretary of the ministerial duty
of recording transfers of shares of stock of the corporation of which he is
secretary."
Unlike Abejo, however, petitioner's ownership over the shares in this
case was not yet perfected when the Complaint was filed. The
contract of pledge certainly does not make him the owner of the
shares pledged. Further, whether prescription effectively transferred
ownership of the shares, whether there was a novation of the contracts of
pledge, and whether laches had set in were difficult legal issues, which were
unpleaded and unresolved when herein petitioner asked the corporate
secretary of Go Fay to effect the transfer, in his favor, of the shares pledged
to him.
In Rural Bank of Salinas: Melenia Guerrero executed deeds of assignment
for the shares in favor of the respondents in that case. When the corporate
secretary refused to register the transfer, an action for mandamus was
instituted. Subsequently, a motion for intervention was filed, seeking the
annulment of the deeds of assignment on the grounds that the same were
fictitious and antedated, and that they were in fact donations because the
considerations therefor were below the book value of the shares.
Like the Abejo spouses, the respondents in Rural Bank of Salinas were already
prima facie shareholders when the deeds of assignment were questioned. If
the said deeds were to be annulled later on, respondents would still be
considered shareholders of the corporation from the time of the assignment
until the annulment of such contracts.
ISSUE2: WON petitioner is entitled to the relief of mandamus as against the
company?
HELD: No. Petitioner prays for the issuance of a writ of mandamus, directing
the corporate secretary of respondent corporation to have the shares
transferred to his name in the corporate books, to issue new certificates of
stock and to deliver the corresponding dividends to him.
In order that a writ of mandamus may issue, it is essential that the
person petitioning for the same has a clear legal right to the thing
demanded and that it is the imperative duty of the respondent to
perform the act required. It neither confers powers nor imposes
duties and is never issued in doubtful cases. It is simply a command
to exercise a power already possessed and to perform a duty already
imposed.
In the present case, petitioner has failed to establish a clear legal right.
Petitioner's contention that he is the owner of the said shares is completely
without merit. Quite the contrary and as already shown, he does not have any
ownership rights at all. At the time petitioner instituted his suit at the SEC, his
ownership claim had no prima facie leg to stand on. At best, his contention
was disputable and uncertain Mandamus will not issue to establish a legal right,
but only to enforce one that is already clearly established.
ISSUE3: WON by Guiok and Lim’s failure to pay, the ownership of the shares
automatically passed to Lim Tay?
HELD: No. On appeal, petitioner claimed that ownership over the shares had
passed to him, not via the contracts of pledge, but by virtue of prescription
and by respondents' subsequent acts which amounted to a novation of the
contracts of pledge. We do not agree.
At the outset, it must be underscored that petitioner did not acquire ownership
of the shares by virtue of the contracts of pledge. Article 2112 of the Civil Code
states:
“The creditor to whom the credit has not been satisfied in due time, may
proceed before a Notary Public to the sale of the thing pledged. This sale
shall be made at a public auction, and with notification to the debtor and
the owner of the thing pledged in a proper case, stating the amount for
which the public sale is to be held. If at the first auction the thing is not sold,
a second one with the same formalities shall be held; and if at the second
auction there is no sale either, the creditor may appropriate the thing
pledged. In this case he shall be obliged to give an acquittance for his entire
claim.”
Furthermore, the contracts of pledge contained a common proviso, which we
quote again for the sake of clarity:
“3. In the event of the failure of the PLEDGOR to pay the amount within a
period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without notice
to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his
option; and "the PLEDGEE is hereby authorized and empowered at his option
to transfer the said shares of stock on the books of the corporation to his
own name, and to hold the certificate issued in lieu thereof under the terms
of this pledge, and to sell the said shares to issue to him and to apply the
proceeds of the sale to the payment of the said sum and interest, in the
manner hereinabove provided;”
There is no showing that petitioner made any attempt to foreclose or
sell the shares through public or private auction, as stipulated in the
contracts of pledge and as required by Article 2112 of the Civil Code.
Therefore, ownership of the shares could not have passed to him. The
pledgor remains the owner during the pendency of the pledge and prior to
foreclosure and sale, as explicitly provided by Article 2103 of the same Code:
“Unless the thing pledged is expropriated, the debtor continues to be the
owner thereof.”
RICARDO A. NAVA, petitioner-appellant.
vs.
PEERS MARKETING CORPORATION, RENATO R. CUSI and AMPARO CUSI,
respondents-appellees
(G.R. No. L-28120; November 25, 1976)
FACTS: Teofilo Po was an incorporator who subscribed to 80 shares and paid
25% of the subscription. No certificate of stock was issued to him.
Later on, Po sold to herein petitioner Nava 20 of the 80 shares at par value of
P100, or P2,000. Nava requested herein private respondents, officers of Peers
Marketing Corporation, to register him as owner of the shares, but they
refused, Po being delinquent in the payment of the balance due his
subscription.
Po filed an action for mandamus in the CFI of Negros but it was dismissed.
Po claims that the trial court erred in applying the ruling in Fua Cun vs.
Summers and China Banking Corporation wherein it was ruled that the
payment of one-half of the subscription does not entitle the subscriber to a
84 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
certificate for one-half of the number of shares subscribed.
ISSUE: WON Peers Marketing Corporation may be compelled by mandamus
to enter in its stock and transfer book the sale made by Po to Nava of the 20
shares forming part of Po’s subscription of 80 shares, it being admitted that
the corporation has an unpaid claim of P6,000 as the balance on said
subscription?
HELD: No. We hold that the transfer made by Po to Nava is not the "alienation,
sale, or transfer of stock" that is supposed to be recorded in the stock and
transfer book, as contemplated in section 52 of the Corporation Law.
As a rule, the shares which may be alienated are those which are
covered by certificates of stock, as shown in the following provisions of
the Corporation Law and as intimated in Hager vs. Bryan, 19 Phil. 138
(overruling the decision in Hager vs. Bryan, 21 Phil. 523. See 19 Phil. 616,
notes, and Hodges vs. Lezama, 14 SCRA 1030).
SEC. 35. The capital stock of stock corporations shall be divided into shares
for which certificates signed by the president or the vice-president,
countersigned by the secretary or clerk and sealed with the seal of the
corporation, shall be issued in accordance with the by-laws. Shares of stock
so issued are personal property and may be transferred by delivery of the
certificate indorsed by the owner or his attorney in fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the, parties, until the transfer is entered and noted upon
the books of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate, and the
number of shares transferred.
No share of stock against which the corporation holds any unpaid claim shall
be transferable on the books of the corporation.
SEC. 36. (re voting trust agreement) ...
The certificates of stock so transferred shall be surrendered and cancelled,
and new certificates therefor issued to such person or persons, or
corporation, as such trustee or trustees, in which new certificates it shall
appear that they are issued pursuant to said agreement.
xxx xxx xxx
As prescribed in section 35, shares of stock may be transferred by delivery to
the transferee of the certificate properly indorsed. "Title may be vested in the
transferee by delivery of the certificate with a written assignment or
indorsement thereof" (18 C.J.S. 928). There should be compliance with the
mode of transfer prescribed by law (18 C.J.S. 930).
The usual practice is for the stockholder to sign the form on the back of the
stock certificate. The certificate may thereafter be transferred from one person
to another. If the holder of the certificate desires to assume the legal rights of
a shareholder to enable him to vote at corporate elections and to receive
dividends, he fills up the blanks in the form by inserting his own name as
transferee. Then he delivers the certificate to the secretary of the corporation
so that the transfer may be entered in the corporation's books. The certificate
is then surrendered and a new one issued to the transferee. (Hager vs. Bryan,
19 Phil. 138, 143-4).
That procedure cannot be followed in the instant case because, as already
noted, the twenty shares in question are not covered by any certificate of stock
in Po's name. Moreover, the corporation has a claim on the said shares
for the unpaid balance of Po's subscription. A stock subscription is a
subsisting liability from the time the subscription is made. The
subscriber is as much bound to pay his subscription as he would be
to pay any other debt. The right of the corporation to demand
payment is no less incontestable. (Velasco vs. Poizat, 37 Phil. 802;
Lumanlan vs. Cura, 59 Phil. 746).
A corporation cannot release an original subscriber from paying for
his shares without a valuable consideration (Philippine National Bank vs.
Bitulok Sawmill, Inc., L-24177-85, June 29, 1968, 23 SCRA 1366) or without
the unanimous consent of the stockholders (Lingayen Gulf Electric Power
Co., Inc. vs. Baltazar, 93 Phil 404).
Under the facts of this case, there is no clear legal duty on the part of the
officers of the corporation to register the twenty shares in Nava's name, Hence,
there is no cause of action for mandamus
As already stressed, in this case no stock certificate was issued to Po. Without
stock certificate, which is the evidence of ownership of corporate
stock, the assignment of corporate shares is effective only between
the parties to the transaction (Davis vs. Wachter, 140 So. 361).
The delivery of the stock certificate, which represents the shares to be
alienated , is essential for the protection of both the corporation and its
stockholders (Smallwood vs. Moretti, 128 So. 2d 628).
THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS,
BERNARDO BAUTISTA, JAIME CUSTODIO, OCTAVIO KATIGBAK, FRANCISCO
CUSTODIO, and JUANITA BAUTISTA OF THE RURAL BANK OF LIPA CITY, INC.,
petitioners,
vs.
HONORABLE COURT OF APPEALS, HONORABLE COMMISSION EN BANC,
SECURITIES AND EXCHANGE COMMISSION, HONORABLE ENRIQUE L.
FLORES, JR., in his capacity as Hearing Officer, REYNALDO VILLANUEVA, SR,
AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES GONZALES,
AURORA LACERNA, CELSO LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN
and ELENA USI, respondents
(G.R. No. 124535; September 28, 2001)
FACTS: Private respondent Reynaldo Villanueva Sr., a stockholder of Rural
Bank of Lipa City, Inc. executed a Deed of Assignment wherein he assigned his
shares, as well as those of eight stockholders under his control with a total of
10,457 shares, in favor of stockholders of the Bank represented by its BOD. At
the same time, He and his wife executed an agreement wherein he
acknowledge their indebtedness of P4M and stipulated that the said debt will
be paid out of the proceeds of the sale of their real property described in the
agreement.
The Villanueva spouses failed to settle their obligation on the due date, and
the BOD sent a demand letter for the surrender of the said shares and for the
delivery of sufficient collateral to cover the balance of the debt, which the
Villanueva spouses ignored. Their shares were converted into Treasury shares.
The Villanueva spouses questioned the legality of the such conversion and filed
with the SEC a petition for annulment of the stockholders’ meeting and election
of directors and officers because they were not notified of such meeting.
The SEC hearing officer dismissed the application for issuance of a preliminary
injunction, but was granted on reconsideration. The decision was affirmed by
the SEC en banc and later by the CA.
ISSUE: WON the transfer of the shares is ineffective for non-indorsement and
non-delivery of the certificate of stocks?
HELD: Yes. The Corporation Code specifically provides:
SECTION 63. Certificate of stock and transfer of shares. — The capital stock
of stock corporations shall be divided into shares for which certificates signed
by the president or vice president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the corporation shall be
issued in accordance with the by-laws. Shares of stocks so issued are
personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of
the corporation so as to show the names of the parties to the transaction,
the date of the transfer, the number of the certificate or certificates and the
number of shares transferred.
85 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
No shares of stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation. (Emphasis ours)
Petitioners argue that by virtue of the Deed of Assignment, private respondents
had relinquished to them any and all rights they may have had as stockholders
of the Bank. While it may be true that there was an assignment of private
respondents' shares to the petitioners, said assignment was not sufficient
to effect the transfer of shares since there was no endorsement of
the certificates of stock by the owners, their attorneys-in-fact or any
other person legally authorized to make the transfer. Moreover,
petitioners admit that the assignment of shares was not coupled with delivery,
the absence of which is a fatal defect. The rule is that the delivery of the
stock certificate duly endorsed by the owner is the operative act of
transfer of shares from the lawful owner to the transferee. Thus, title
may be vested in the transferee only by delivery of the duly indorsed
certificate of stock.
We have uniformly held that for a valid transfer of stocks, there must be strict
compliance with the mode of transfer prescribed by law. The requirements
are: (a) There must be delivery of the stock certificate: (b) The
certificate must be endorsed by the owner or his attorney-in-fact or
other persons legally authorized to make the transfer; and (c) To be
valid against third parties, the transfer must be recorded in the books
of the corporation. As it is, compliance with any of these requisites has not
been clearly and sufficiently shown.
It may be argued that despite non-compliance with the requisite endorsement
and delivery, the assignment was valid between the parties, meaning the
private respondents as assignors and the petitioners as assignees. While the
assignment may be valid and binding on the petitioners and private
respondents, it does not necessarily make the transfer effective. Consequently,
the petitioners, as mere assignees, cannot enjoy the status of a
stockholder, cannot vote nor be voted for, and will not be entitled to
dividends, insofar as the assigned shares are concerned.
Parenthetically, the private respondents cannot, as yet, be deprived of their
rights as stockholders, until and unless the issue of ownership and transfer of
the shares in question is resolved with finality.
There being no showing that any of the requisites mandated by law was
complied with, the SEC Hearing Officer did not abuse his discretion in granting
the issuance of the preliminary injunction prayed for by petitioners in SEC Case
No. 02-94-4683 (herein private respondents). Accordingly, the order of the SEC
en banc affirming the ruling of the SEC Hearing Officer, and the Court of
Appeals decision upholding the SEC en banc order, are valid and in accordance
with law and jurisprudence, thus warranting the denial of the instant petition
for review.
ALFONSO S. TAN, Petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, VISAYAN EDUCATIONAL
SUPPLY CORP., TAN SU CHING, ALFREDO B. UY, ANGEL S. TAN and PATRICIA
AGUILAR, Respondents
(G.R. No. 95696; March 3, 1992)
FACTS: With the withdrawal of two of the original incorporators, petitioner
Alfonso Tan assigned 50 of his 400 shares (covered by Stock Certificate No. 2)
to his brother Angel S. Tan, private respondent.
Petitioner’s stock certificate was cancelled by the corporate secretary, Patricia
Aguilar, by virtue of Resolution No. 1981(b), while petitioner was still the
president and member of the board.
With the cancellation of Certificate of stock No. 2 and the subsequent issuance
of Stock Certificate No. 6 in the name of Angel S. Tan and for the remaining
350 shares, Stock Certificate No. 8 was issued in the name of petitioner Alfonso
S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29), alleging that:
9. That in view of his having taken 33 1/3 interest, I was personally
requested by Mr. Tan Su Ching to request Mr. Alfonso Tan to make proper
endorsement in the cancelled Certificate of Stock No. 2 and Certificate No.
8, but he did not endorse, instead he kept the cancelled (1981) Certificate
 of Stock No. 2 and returned only to me Certificate of Stock No. 8, which I
delivered to Tan Su Ching.
10. That the cancellation of his stock (Stock No. 2) was known by him in
1981; that it was Stock No. 8 that was delivered in March 1983 for his
endorsement and cancellation.
Petitioner filed with the SEC a case questioning the cancellation of the aforesaid
Stock Nos. 2 and 8.
ISSUE: WON the cancellation and transfer of stock certificate no. 2 was valid?
HELD: Yes. Petitioner claims that "(T)he cancellation and transfer of
petitioner's shares and Certificate of Stock No. 2 (Exh. A) as well as the
issuance and cancellation of Certificate of Stock No. 8 (Exh. M) was patently
and palpably unlawful, null and void, invalid and fraudulent." (Rollo, p. 9) And,
that Section 63 of the Corporation Code of the Philippines is "mandatory in
nature", meaning that without the actual delivery and endorsement of the
certificate in question, there can be no transfer, or that such transfer is null
and void.
Contrary to the understanding of the petitioner with respect to the use of the
word "may", in the case of Shauf v. Court of Appeals, (191 SCRA 713, 27
November 1990), this Court held, that "Remedial law statues are to be
construed liberally." The term 'may' as used in adjective rules, is only
permissive and not mandatory.
This Court held in Chua v. Samahang Magsasaka, that "the word "may"
indicates that the transfer may be effected in a manner different from that
provided for in the law." (62 Phil. 472)
Moreover, it is safe to infer from the facts deduced in the instant case that,
there was already delivery of the unendorsed Stock Certificate No. 2, which is
essential to the issuance of Stock Certificate Nos. 6 and 8 to angel S. Tan and
petitioner Alfonso S. Tan, respectively. What led to the problem was the return
of the cancelled certificate (No. 2) to Alfonso S. Tan for his endorsement and
his deliberate non-endorsement.
For all intents and purposes, however, since this was already cancelled
which cancellation was also reported to the respondent Commission,
there was no necessity for the same certificate to be endorsed by the
petitioner. All the acts required for the transferee to exercise its
rights over the acquired stocks were attendant and even the
corporation was protected from other parties, considering that said
transfer was earlier recorded or registered in the corporate stock and
transfer book.
Following the doctrine enunciated in the case of Tuazon v. La Provisora Filipina,
where this Court held, that:
But delivery is not essential where it appears that the persons
sought to be held as stockholders are officers of the corporation,
and have the custody of the stock book . . . (67 Phi. 36).
Furthermore, there is a necessity to delineate the function of the stock itself
from the actual delivery or endorsement of the certificate of stock itself as is
the question in the instant case. A certificate of stock is not necessary to render
one a stockholder in corporation.
Nevertheless, a certificate of stock is 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 is not essential to the existence
of a share in stock or the nation of the relation of shareholder to the
corporation. (13 Am. Jur. 2d, 769)
Under the instant case, the fact of the matter is, the new holder, Angel S. Tan
has already exercised his rights and prerogatives as stockholder and was even
86 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
elected as member of the board of directors in the respondent corporation with
the full knowledge and acquiescence of petitioner. Due to the transfer of fifty
(50) shares, Angel S. Tan was clothed with rights and responsibilities in the
board of the respondent corporation when he was elected as officer thereof.
Besides, in Philippine jurisprudence, a certificate of stock is not a
negotiable instrument. "Although it is sometime regarded as quasi-
negotiable, in the sense that it may be transferred by endorsement,
coupled with delivery, it is well-settled that it is non-negotiable,
because the holder thereof takes it without prejudice to such rights
or defenses as the registered owner/s or transferror's creditor may
have under the law, except insofar as such rights or defenses are
subject to the limitations imposed by the principles governing
estoppel." (De los Santos vs. McGrath, 96 Phil. 577)
To follow the argument put up by petitioner which was upheld by the Cebu
SEC Extension Office Hearing Officer, Felix Chan, that the cancellation of Stock
Certificate Nos. 2 and 8 was null and void for lack of delivery of the cancelled
"mother" Certificate No. 2 whose endorsement was deliberately withheld by
petitioner, is to prescribe certain restrictions on the transfer of stock in violation
of the corporation law itself as the only law governing transfer of stocks. While
Section 47(s) grants a stock corporation the authority to determine in the by-
laws "the manner of issuing certificates" of shares of stock, however, the
power to regulate is not the power to prohibit, or to impose
unreasonable restrictions of the right of stockholders to transfer their
shares. (Emphasis supplied)
In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law which prohibits
a transfer of stock without the consent or approval of all the stockholders or of
the president or board of directors is illegal as constituting undue limitation on
the right of ownership and in restraint of trade. (47 Phil. 583)
LEE E. WON alias RAMON LEE, plaintiff-appellant,
vs.
WACK WACK GOLF and COUNTRY CLUB, INC., defendant-appellee
(G.R. No. L-10122; August 30, 1958)
FACTS: The defendant corporation issued membership certificate no. 201 to
Iwao Teruyama which on April 1944, was assigned to MT Reyes and on the
same year assigned to herein plaintiff-appellant. On April 26, 1955, the plaintiff
filed an action against the defendant alleging that shortly after its rehabilitation
after the war, plaintiff asked that the assignment be registered in the books of
the defendant and that the latter refused and still refuses to do so unlawfully.
Defendant filed a motion to dismiss on the ground that 11 years have elapsed
from the time of the assignment up to the time of the filing of the complaint,
beyond the 5 year period provided under Art. 1149 of the Civil Code. The trial
court dismissed the action and denied reconsideration.
ISSUE: WON plaintiff was bound to present and register the certificate
assigned to him within any definite or fixed period?
HELD: No. The defendant has not made herein any pretense to that effect;
but it contends that from the moment the certificate was assigned to the
plaintiff, the latter's right to have the assignment registered commenced to
exist. This contention is correct, but it would not follow that said right
should be exercised immediately or within a definite period. The
existence of a right is one thing, and the duration of said right is
another.
On the other hand, it is stated in the appealed order of dismissal that the
plaintiff sought to register the assignment on April 13, 1955; whereas in
plaintiff's brief it is alleged that it was only in February, 1955, when the
defendant refused to recognize the plaintiff. If, as already observed, there is
no fixed period for registering an assignment, how can the complaint be
considered as already barred by the Statute of Limitations when it was filed on
April 26, 1955, or barely a few days (according to the lower court) and two
months (according to the plaintiff), after the demand for registration and its
denial by the defendant. Plaintiff's right was violated only sometime in 1955,
and it could not accordingly have asserted any cause of action against the
defendant before that.
The defendant seems to believe that the plaintiff was compelled immediately
to register his assignment. Any such compulsion is obviously for the benefit of
the plaintiff, because it is only after registration that the transfer would be
binding against the defendant. But we are not here concerned with a situation
where the plaintiff claims anything against the defendant allegedly accruing
under the outstanding certificate in question between the date of the
assignment to the plaintiff and the date of the latter’s demand for registration
and issuance of a new certificate.
APOLINARIO G. DE LOS SANTOS and ISABELO ASTRAQUILLO, plaintiffs-
appellees,
vs.
J. HOWARD MCGRATH ATTORNEY GENERAL OF THE UNITED STATES,
SUCCESSOR TO THE PHILIPPINE ALIEN PROPERTY ADMINISTRATION OF THE
UNITED STATES, defendant-appellant.
REPUBLIC OF THE PHILIPPINES, intervenor-appellant
(G.R. No. L-4818; February 28, 1955)
FACTS: Plaintiff delos Santos alleges that he purchased 55,000 shares of
Lepanto Consolidated Mining Co., Inc. from Juan Campos, and later 200,000
shares from Carl Hess and much later 800,000 still from Hess (for the account
and benefit of Astraquillo). Both of the supposed vendors, now deceased.
By virtue of vesting order P-12, title to the 1,600,000 shares in dispute was,
however, vested in the Alien Property Custodian of the US. In due course, the
Vested Property Claims Committee of the Philippine Alien Property
Administration made a “determination” allowing said claims, which were
considered and hear jointly. But upon personal review of the Philippine Alien
Property Administrator, the “determination” was reversed and decreed that
“title to the shares in question shall remain in the name of the Philippine Alien
Property Administrator”.
Consequently, plaintiffs instituted the present action to establish title to the
aforementioned shares of stock.
Defendant Attorney General of the US contends that the shares were bought
by Vicente Madrigal, in trust and for the benefit, of the Mistsui Bussan, abranch
office of a Japanese company; and that Madrigal endorsed in blank and
delivered the shares to Mistsui for safe keeping; that Mitsui never sold or
otherwise disposed of the said shares; and that the stock certificates must have
been stolen or looted during the emergency from the liberation.
ISSUE: WON plaintiffs are the rightful owners of the shares?
HELD: No. Even, however, if Juan Campos and Carl Hess had sold the shares
of stock in question, as testified to by De los Santos, the result, insofar as
plaintiffs are concerned, would be the same. It is not disputed that said shares
of stock were registered, in the records of the Lepanto, in the name of Vicente
Madrigal. Neither is it denied that the latter was, as regards said shares of
stock, a mere trustee for the benefit of the Mitsuis. The record shows — and
there is no evidence to the contrary — that Madrigal had never disposed of
said shares of stock in any manner whatsoever, except by turning over the
corresponding stock certificates, late in 1941, to the Mitsuis, the beneficial and
true owners thereof. It has, moreover, been established, by the uncontradicted
testimony of Kitajima and Miwa, the managers of the Mitsuis in the Philippines,
from 1941 to 1945, that the Mitsuis had neither sold, conveyed, or alienated
said shares of stock, nor delivered the aforementioned stock certificates, to
anybody during said period. Section 35 of the Corporation Law reads:
The capital stock corporations shall be divided into shares for which
certificates signed by the president or the vice-president, countersigned by
the secretary or clerk and sealed with the seal of the corporation, shall be
issued in accordance with the by-laws. Shares of stock so issued are personal
property and may be transferred by delivery of the certificate endorsed by
the owner or his attorney in fact or other person legally authorized to make
the transfer. No transfer, however, shall be valid, except as between
the parties, until the transfer is entered and noted upon the books
of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate, and the
number of shares transferred.
87 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Pursuant to this provision, a share of stock may be transferred by
endorsement of the corresponding stock certificate, coupled with its
delivery. However, the transfer shall "not be valid, except as between
the parties," until it is "entered and noted upon the books of the
corporation." no such entry in the name of the plaintiffs herein having been
made, it follows that the transfer allegedly effected by Juan Campos and Carl
Hess in their favor is "not valid, except as between" themselves. It does not
bind either Madrigal or the Mitsuis, who are not parties to said alleged
transaction. What is more, the same is "not valid," or, in the words of the
Supreme Court of Wisconsin (Re Murphy, 51 Wisc. 519, 8 N. W. 419) — which
were quoted approval in Uson vs. Diosomito (61 Phil., 535) — "absolutely void"
and, hence, as good as non-existent, insofar as Madrigal and the Mitsuis are
concerned. For this reason, although a stock certificate is sometimes
regarded as quasi-negotiable, in the sense that it may be transferred
by endorsement, coupled with delivery, it is well settled that the
instrument is non-negotiable, because the holder thereof takes it
without prejudice to such rights or defenses as the registered owner
or creditor may have under the law, except insofar as such rights or
defenses are subject to the limitations imposed by the principles
governing estoppel.
Certificates of stock are not negotiable instruments (post, Par. 102),
consequently, a transferee under a forged assignment acquires no title
which can be asserted against the true owner, unless his own negligence
has been such as to create an estoppel against him (Clarke on Corporations,
Sec. Ed. p. 415). If the owner of the certificate has endorsed it in blank, and
it is stolen from him, no title is acquired by an innocent purchaser for value
(East Birmingham Land Co. vs. Dennis, 85 Ala. 565, 2 L.R.A. 836; Sherwood
vs. mining co., 50 Calif. 412).
In the case at bar, neither madrigal nor the Mitsuis had alienated shares of
stock in question. It is not even claimed that either had, through negligence,
given — occasion for an improper or irregular disposition of the corresponding
stock certificates.
E. FORGED AND UNAUTHORIZED TRANSFERS
FORGED AND UNAUTHORIZED TRANSFERS VS. UNAUTHORIZED
ISSUANCE OF STOCK CERTIFICATE: In the former, what is forged or
unauthorized is the transfer of the certificate from the true and lawful owner
to another person. While the latter refers to the act of the corporation in issuing
the certificate, either fraudulently or by mistake.
In forged or unauthorized transfer:
1. The purchaser or purchasers, no matter how innocent they may have
been, will acquire no title as against the lawful owner by virtue of the
doctrine of non-negotiability of certificates of stock;
2. The purchaser will have no right or remedy against the corporation
because he took the shares not by virtue of a misrepresentation made by
the corporation but on the faith of a forged endorsement or unauthorized
transfer;
3. The corporation incurs no liability to the person in whose favor the
certificate is endorsed or issued.
4. If the old certificate is cancelled and new one is issued by the corporation,
the holder thereof may be required to return the same for its cancellation;
5. However, if new certificates are issued and passes into the hands of a
subsequent bona fide purchaser, the latter may rightfully acquire title
thereto since the corporation will be estopped to deny the validity thereof;
6. The subsequent purchaser in good faith took the shares, not by virtue of
a forged or unauthorized transfer but on reliance to the genuineness of
the certificate issued by the corporation or by virtue of the representation
made by the corporation that the same is valid and therefore, compel the
corporation to recognize him as a stockholder or claim reimbursement and
damages against the latter.
Example: A owns 100 shares of X Co., B stole the stock certificate and forged
A’s signature:
a. If B indorsed and sold it to C:
1. C will not acquire title to the shares whether he is innocent or not;
2. C cannot compel the corporation to register him as stockholder;
3. X Co. does not incur any liability in favor of C
b. If X Co. cancelled the certificate and issued a new one to C:
1. If A later on finds out that his certificate was stolen, C may still be
required to return the new certificate;
2. If C sold it to D, an innocent purchaser, D may rightfully acquire
thereto since X Co. is estopped to deny the validity of the certificate;
3. If A later on finds out that his certificate was stole, X Co. may be
compelled to recognize both A and D as stockholders.*
damages, such issuance being ministerial.
FUA CUN (alias Tua Cun), plaintiff-appellee,
vs.
RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the City of Manila,
and the CHINA BANKING CORPORATION, defendants-appellants
(G.R. No. L-19441; March 27, 1923)

*This is so because the A cannot be deprived of his rights as owner by virtue
of a forged transfer, and B, because of X Co.’s representation that the person
named therein is the owner of shares in the corporation.
c. If (b3) above would result in over-issuance of shares
1. Only A, the rightful owner may be recognized and A will have a right
to compel X Co. to issue him a new certificate;
2. D will be entitled to damages from the X Co.;
3. X Co. will have a right of action against the who made false
representation and in whose favor a new certificate is issued.**
**In this sense, if D sues X Co., the latter will have no valid defense, but he
may institute a third party complaint against C. If C is an innocent purchaser,
X Co., may file a fourth party complaint against B.
FACTS: Chua Soco subscribed to 500 shares of defendant Bank paying 50%
of the subscription price and a corresponding receipt being issued therefor.
Such shares were mortgaged to plaintiff Fua Cun to secure a loan evidenced
by a promissory note, together with the receipt, which was endorsed and
delivered to plaintiff mortgagee. Plaintiff informed the manager of the Bank
about the transaction but was told to await action by the BOD.
In the meantime, Chua Soco became indebted to the bank, and in the action
for recovery of money, his 500 shares were attached.
Fua Cun thereupon instituted the present action maintaining that the payment
of 50% of the subscription entitled Chua Soco to 250 shares and prayed that
his lien on the shares by virtue of the chattel mortgage be declared to have
priority over the claim of defendant Bank.

ISSUANCE OF STOCK CERTIFICATION The trial court rendered judgment in favor of plaintiff.

Subscriptions to shares of stock are indivisible such that a subscriber to such ISSUE: (1) WON Chua Soco became entitled to 250 shares or the
shares will not be entitled to the issuance of a stock certificate until he has paid proportionate share to his partial payment? (2) WON plaintiff had a superior
the full amount of his subscription. claim over that of the Bank?

HELD: (1) No. (2) Yes. Though the court below erred in holding that Chua
Sec. 64. Issuance of stock certificates. - No certificate of stock shall be
Soco, by paying one-half of the subscription price of five hundred shares, in
issued to a subscriber until the full amount of his subscription together with effect became the owner of two hundred and fifty shares, the judgment
interest and expenses (in case of delinquent shares), if any is due, has been appealed from is in the main correct.
paid.
The claim of the defendant Banking Corporation upon which it brought the
action in which the writ of attachment was issued, was for the non-payment of
drafts accepted by Chua Soco and had no direct connection with the shares of
stock in question. At common law a corporation has no lien upon the shares of
INDIVISIBILITY: As the law stands now, subscription to shares of stock are stockholders for any indebtedness to the corporation (Jones on Liens, 3d ed.,
deemed indivisible and no certificate of stock can be issued unless and until sec. 375) and our attention has not been called to any statute creating such
the full amount of his subscription including interest and expenses, if any is lien here. On the contrary, section 120 of the Corporation Act provides that "no
paid. bank organized under this Act shall make any loan or discount on the security
of the shares of its own capital stock, nor be the purchaser or holder of any
The ruling, therefore, in Baltazar vs. Lingayen Gulf Electronic Power Co where such shares, unless such security or purchase shall be necessary to prevent
a subscriber may opt to apply his partial payment to a corresponding number loss upon a debt previously contracted in good faith, and stock so purchased
of shares, will not hold true. Thus, even if under the old law, where a or acquired shall, within six months from the time of its purchase, be sold or
corporation may, under a by-law provision or by custom, practice or tradition, disposed of at public or private sale, or, in default thereof, a receiver may be
issue stock certificates covering the number of shares that might have been appointed to close up the business of the bank in accordance with law."
correspondingly paid, this authority or practice is valid only two years after the
effectivity of the Corporation Code and after which corporations, registered There can be no doubt that an equity in shares of stock may be assigned and
under the said law should comply with the mandatory requirement of Sec. 64. that the assignment is valid as between the parties and as to persons to whom
The Corporation Code thus provides: notice is brought home. Such an assignment exists here, though it was made
for the purpose of securing a debt. The endorsement to the plaintiff of the
Sec. 148. Applicability to existing corporations. - All corporations lawfully receipt above mentioned reads:
existing and doing business in the Philippines on the date of the effectivity of
this Code and heretofore authorized, licensed or registered by the Securities For value received, I assign all my rights in these shares in favor of Mr.
Tua Cun.
and Exchange Commission, shall be deemed to have been authorized, licensed
or registered under the provisions of this Code, subject to the terms and Manila, P. I., May 18, 1921.
conditions of its license, and shall be governed by the provisions hereof: (Sgd.) CHUA SOCO
Provided, That if any such corporation is affected by the new requirements of
this Code, said corporation shall, unless otherwise herein provided, be given a This endorsement was accompanied by the delivery of the receipt to the
period of not more than two (2) years from the effectivity of this Code within plaintiff and further strengthened by the execution of the chattel mortgage,
which mortgage, at least, operated as a conditional equitable assignment.
which to comply with the same.
As against the rights of the plaintiff the defendant bank had, as we have seen,
no lien unless by virtue of the attachment. But the attachment was levied after
the bank had received notice of the assignment of Chua Soco's interests to the
MANDAMUS: Once a subscriber has paid his subscription in full, he becomes plaintiff and was therefore subject to the rights of the latter. It follows that as
entitled to be issued a stock certificate and in the event that the corporation against these rights the defendant bank holds no lien whatever.
refuses to do so, the stockholder may institute a case for mandamus with

88 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
As we have already stated, the court erred in holding the plaintiff as the owner
of two hundred and fifty shares of stock; "the plaintiff's rights consist in an
equity in five hundred shares and upon payment of the unpaid portion of the
subscription price he becomes entitled to the issuance of certificate for said
five hundred shares in his favor."
The judgment appealed from is modified accordingly, and in all other respects
it is affirmed, with the costs against the appellants Banking Corporation. So
ordered.
F. WATERED STOCKS
DEFINITION: Watered stocks may be defined as one which is issued by the
corporation as fully paid-up shares, when in fact the whole amount of the value
thereof has not been paid. If the shares have thus been issued by the
corporation as fully paid, when in fact it has intentionally and knowingly
received or agreed to receive nothing at all for them, or less than their par
value, either in money, property or services, the shares are said to be
“watered” or “fictitiously paid-up” to the extent to which they have not been
issued or are not to be paid for”
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.
RIGHT OF CORPORATION AND CREDITORS: The law does not make any
distinction as to the right of the corporation and its creditors to enforce
payment of the water in the stocks issued, thus, it applies to all creditors
whether prior or subsequent to the issuance of the watered stock.
SOLIDARY LIABILITY: All consenting directors and officers are solidarily
liable for the “water” in the stock.
NON-CONSENTING DIRECTORS: may be absolved of liability by their
written dissent. Otherwise, if they did not issue such written dissent or are
passive, they may be held liable for not objecting thereto.
ISSUANCE OF WATERED STOCKS: may be effected in the following ways:
1. For a monetary consideration less than its par or issue value;
2. For a consideration in property, tangible or intangible, valued in excess of
its market value;
3. Gratuitously or under an agreement that nothing shall be paid at all; or
4. In the guise of stock dividends when there are no surplus profits of the
corporation.
ILLUSTRATION: X Co. has P10M Authorized Capital Stock divided into: (1)
5M shares at P1.00 par value; and (2) 1M no par value shares with issued value
at P5.00. A acquired 1M of the par value shares for P.80 and 100,000 no par
value shares at P4.00:
1. WATERED STOCK: There is stock watering for both shares. Sec. 65 speaks
of issuance of shares at “less than its par or issued value”;
2. LIABILITY FOR PAR VALUE SHARES: The directors who consented to the
issuance or were passive about it, without written dissent, are solidarily
liable with A for the difference of P.20;
3. LIABILITY FOR NO PAR VALUE SHARES: A cannot be held liable because
the no par value shares are “deemed fully paid and non-assessable” (Sec.
6). Accordingly, only the directors or officers consenting to the issuance
are liable.
ILLUSTRATION2: X Co. has P100M Authorized Capital Stock divided into
100M shares at P1.00 par value, there is a provision in the by-laws denying the
pre-emptive right of the shareholders. The Board of Directors subscribed to 1M
89 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
of the unissued shares at P2.00 each when the fair market value of the shares
was P12.00.
1. WATERED STOCK: No stock watering, since the shares were subscribed
for more than the par value, notwithstanding if it less than the fair market
value;
2. If 3 days later, the members of the Board sold those purchased shares at
P12.00 per share, making a profit of P10.00 per share, they cannot be
held liable for stock watering but they can be question on their duty of
loyalty. Since the whole P12.00 per share could’ve gone to the coffers of
the corporation instead of them reaping the profits for themselves.
EFFECTS OF ISSUANCE OF WATERED STOCKS:
1. The corporation is deprived of its capital thereby hurting its business
prospects, financial capability and responsibility;
2. Stockholder who paid their subscriptions in full, or promised to pay the
same, are injured and prejudiced by the reduction of their proportionate
interest in the corporation; and
3. Present and future creditors are deprived of the corporate assets for the
protections of their interest.
BASIS OF LIABILITY:
1. “Trust Fund Doctrine” – the capital stock of the corporation is treated as
inclusive of the unpaid portion of subscriptions to said capital, as a “trust
fund” which the creditors have a right to look up to for the satisfaction of
their claims. Stockholders, therefore, are mandated to pay the full value
of their shares.
2. “Fraud or Misrepresentation Theory” – liability is based on the false
representation made by the corporation and the stockholder concerned
to the creditors that the true par value or issued price of the shares has
been paid or promised to be paid in full.
CONSEQUENCES OF ISSUANCE OF WATERED STOCKS (FLETCHER):
1. As to the corporation – when a corporation is guilty of ultra-vires or illegal
acts which constitute an injury to or fraud upon the public, or which will
tend to injure or defraud the public, the State may institute a quo-
warranto proceeding to forfeit its charter for the misuse or abuse of its
franchise;
2. As between the corporation and the subscriber – the subscription is void.
Such being the case, the subscriber is liable to pay the full or par or issued
value thereof, to render it valid and effective;
3. As to the consenting stockholders – they are estopped from raising any
objection thereto;
4. As to dissenting stockholders – in view of the dilution of their
proportionate interest in the corporation, they may compel the payment
of the “water” in the stock solidarily against the responsible and
consenting directors and officers inclusive of the holder of the watered
stock;
5. As to creditors – they may enforce payment of the difference in the price,
or the water in the stock, solidarily against the responsible
directors/officers and the stockholders concerned; and
6. As against the transferees of the watered stocks – his right is the same
as that of his transferor. If, however, a certificate of stock has been issued
and duly indorsed to a bona fide purchaser, without knowledge, actual or
constructive, the latter cannot be held liable, at least as against the
corporation, since he took the shares on reliance of the misrepresentation
made by the corporation that the stock certificate is valid and subsisting.
This is because a corporation is prohibited from issuing certificates of
stock until the full value of the subscriptions have been paid and could
not, therefore, deny the validity of the stock certificate it issued as against
a purchaser in good faith. Thus, Ballantine states that whether there is
any liability on the part of the transferee of watered stock is made to
depend upon whether he acquired the same without notice, either as
purchaser or donee. If he had knowledge thereof, he is subject to the
same liability as his transferor.
LIABILITY FOR INTEREST: Aside from the value of their subscription,
subscribers may likewise be required to pay interest on all unpaid subscriptions
if so imposed in the contract or in the corporate by-laws at such rate as may
be indicated thereat or the legal rate if so not fixed. Unless so required or
provided, however, the subscribers to shares of stock, not fully paid, are not
liable to pay interest on their unpaid subscriptions.

Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay
to the corporation interest on all unpaid subscriptions from the date of
subscription, if so required by, and at the rate of interest fixed in the by-laws.
If no rate of interest is fixed in the by-laws, such rate shall be deemed to be
the legal rate.
G. ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS
TIME OF PAYMENT: Unpaid subscription or any percentage thereof, together
with interest if required by the by-laws or the contract of subscription, shall be
paid either:
1. On the date or dates fixed in the contract or subscription;
2. On the date or dates that may be specified by the BOD pursuant to a
“call” declaring any or all unpaid portion thereof to be so payable.
REMEDIES TO ENFORCE PAYMENT ON UNPAID SUBSCRIPTION:
1. By board action in accordance with the procedure laid down in Sec. 67 to
69 of the Code; and
2. By a collection case in court as provided for in section 70.
CREDITOR/RECEIVER: Failure or refusal of the BOD to enforce or collect
payment of unpaid subscription will not prevent the creditors or the receiver of
the corporation to institute a court action to collect the unpaid portion thereof.
This is because the capital of the corporation is the basis of the credit of and
financial responsibility of the corporation. Persons dealing with a corporation
and extending credit to it have a right to insist that the unpaid subscription
shall be paid in when this becomes necessary for the satisfaction of their
claims. This is otherwise known as the Trust Fund Doctrine which states that
subscriptions to the capital of a corporation constitute a fund to which creditors
have the right to look up to for the satisfaction of their claims.
Sec. 67. Payment of balance of subscription. - Subject to the provisions
of the contract of subscription, the board of directors of any stock corporation
may at any time declare due and payable to the corporation unpaid
subscriptions to the capital stock and may collect the same or such percentage
thereof, in either case with accrued interest, if any, as it may deem necessary. PROCEDURE:
Payment of any unpaid subscription or any percentage thereof, together with
the interest accrued, if any, shall be made on the date specified in the contract
of subscription or on the date stated in the call made by the board. Failure to 2. The stockholders concerned are given notice of the board resolution by
pay on such date shall render the entire balance due and payable and shall
make the stockholder liable for interest at the legal rate on such balance, unless
a different rate of interest is provided in the by-laws, computed from such date
until full payment. If within thirty (30) days from the said date no payment is
made, all stocks covered by said subscription shall thereupon become 3. Payment shall be made on the date specified in the call or on the date
delinquent and shall be subject to sale as hereinafter provided, unless the board
of directors orders otherwise.
90 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Sec. 68. Delinquency sale. - The board of directors may, by resolution, order
the sale of delinquent stock and shall specifically state the amount due on each
subscription plus all accrued interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor more than sixty (60) days from
the date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally or by registered mail. The same shall
furthermore be published once a week for two (2) consecutive weeks in a
newspaper of general circulation in the province or city where the principal
office of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the date
specified for the sale of the delinquent stock, the balance due on his
subscription, plus accrued interest, costs of advertisement and expenses of sale,
or unless the board of directors otherwise orders, said delinquent stock shall be
sold at public auction to such bidder who shall offer to pay the full amount of
the balance on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of shares or
fraction of a share. The stock so purchased shall be transferred to such
purchaser in the books of the corporation and a certificate for such stock shall
be issued in his favor. The remaining shares, if any, shall be credited in favor
of the delinquent stockholder who shall likewise be entitled to the issuance of a
certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full amount
of the balance on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of shares or
fraction of a share, the corporation may, subject to the provisions of this
Code*, bid for the same, and the total amount due shall be credited as paid in
full in the books of the corporation. Title to all the shares of stock covered by
the subscription shall be vested in the corporation as treasury shares and may
be disposed of by said corporation in accordance with the provisions of this
Code.
1. The BOD, by a formal Resolution, declares the whole or any percentage
unpaid subscriptions to be due and payable on a specified date. However,
if the contract of subscription provides the date or dates when payment
is due, no ”call” or declaration by the board is necessary;
the corporation either personally or by registered mail. Publication of the
notice of call is not required unless the by-laws provide otherwise. Notice
is not likewise necessary if the contract of the subscription stipulates a
specific date when any unpaid portion is due and payable;
provided for in the contract of subscription;
4. Failure to pay on the date required in the call or as specified in the
contract of subscription will render the entire balance due and payable
and making the stockholder liable for the interest;
5. If within 30 days from the date, no payment is made, all the stock covered
by the subscription shall become delinquent and shall be subject to a
delinquency sale;
6. The board, by resolution, orders the sale of the delinquent stock stating
the amount due and the date, time and place of the sale;
7. The sale shall be made not less than 30 days nor more than 60 days from
the date the stocks become delinquent;
8. Publication of the notice of sale must be made once a week for 2
consecutive weeks in the newspaper of general circulation in the province
or city where the principal office is located;
9. Sale at public auction, if no payment is made by the delinquent
stockholder, in favor of the bidder who offered to pay the full amount of
the balance in the subscription, inclusive of interest, cost of advertisement
and expenses for the smallest number of shares;
10. Registration or transfer of the shares of stock in the name of the bidder
 and corresponding issuance of the stock certificate covering the shares
Sec. 70. Court action to recover unpaid subscription. - Nothing in this
successfully bidded;
11. If there be any remaining shares, the same shall be credited in favor of Code shall prevent the corporation from collecting by action in a court of proper
the delinquent stockholder who shall be entitled to the issuance of a jurisdiction the amount due on any unpaid subscription, with accrued interest,
certificate of stock covering such shares; costs and expenses.
12. If there is no bidder at the public auction, the corporation may, subject
to the provisions of the Code, bid for the same and the total amount due
shall be credited or paid in full in the corporate books; and
13. The shares so purchased by the corporation shall be vested in the latter
CALL: Consistent with Art. 1169 of the Civil Code, a “call” is a condition
as treasury shares.
precedent before the right of action to institute a recovery suit accrues. This is
because a demand is required before a debtor may incur a delay in the
HIGHEST BIDDER: in the case of sale of delinquent stock, and as indicated
performance of his obligation. As earlier said however, a call is not necessary
in number 10 above, is such bidder who shall offer to pay the full amount of
if the contract of subscription provides for a date or dates when payment is
the balance on the subscription together with accrued interest, cost of
due, or when the corporation has become insolvent.
advertisement and expenses of sale, for the smallest number of shares or
fraction of a share. It should be properly termed “Lowest” Bidder because the
MIGUEL VELASCO, assignee of The Philippine Chemical Product Co.
bidders are offering to pay the same amount, and their bids are based on the
(Ltd.), plaintiff-appellant,
number of shares they are willing to receive, the lowest of which is the winning
vs.
bid.
JEAN M. POIZAT, defendant-appellee
(G.R. No. L-11528; March 15, 1918)
Ex. A subscribed to 100 shares of stock for P100.00 each and paid only 50%
and later on declared to be delinquent. For the full amount of P5,000 (unpaid
FACTS: Defendant Jean M. Poizat subscribed to 20 shares of stock of The
balance) and the interests, costs, and expenses, the following bidders are
Philippine Chemical Product Co., of which 5 were paid. In an action instituted
willing to accept - X: 70 shares; Y: 80 shares; Z: 90 shares. In this case, X
by Miguel Velasco as assignee of the company, he seeks to recover the balance
would be the highest bidder. The remaining 30 shares would be credited to A.
of the subscription. The CFI rendered a judgment dismissing the complaint.
Hence, this appeal.
*NO BIDDER: If there was no bidder, the company has to have unrestricted
retained earnings in order to acquire the shares as thus provided under Sec.
ISSUE: WON defendant is liable for the balance?
41 of the Corporation Code (Power to Acquire Own Shares). Accordingly, if the
company has no unrestricted retained earnings, it cannot acquire the said
HELD: Yes. We think that Poizat is liable upon this subscription. A stock
shares by virtue of a delinquency sale, however, it may institute an action for
subscription is a contract between the corporation on one side, and the
the recovery of the subscription price under Sec. 70.
subscriber on the other, and courts will enforce it for or against either. It is a
rule, accepted by the Supreme Court of the United States, that a subscription
MAY A DIRECTOR DECLARED TO BE DELINQUENT ON HIS
for shares of stock does not require an express promise to pay the
SUBSCRIPTION BE ALLOWED TO CARRY OUT HIS FUNCTIONS AS
amount subscribed, as the law implies a promise to pay on the part
SUCH DIRECTOR? Yes. He is still a shareholder entitled to all the rights as
of the subscriber. (7 Ruling Case Law, sec. 191.) Section 36 of the
such, and pending the sale, the shares still stand in his name. Even after the
Corporation Law clearly recognizes that a stock subscription is subsisting
sale, he may still be credited to some of the shares and he only needs 1 to
liability from the time the subscription is made, since it requires the subscriber
qualify as a director.
to pay interest quarterly from that date unless he is relieved from such liability
by the by-laws of the corporation. The subscriber is as much bound to pay
QUESTIONING A SALE ON IRREGULARITY OR DEFECT IN THE NOTICE
the amount of the share subscribed by him as he would be to pay any
OR IN THE SALE ITSELF:
other debt, and the right of the company to demand payment is no
less incontestable.
Sec. 69. When sale may be questioned. - No action to recover delinquent
stock sold can be sustained upon the ground of irregularity or defect in the The provisions of the Corporation Law (Act No. 1459) has given recognition of
notice of sale, or in the sale itself of the delinquent stock, unless the party two remedies for the enforcement of stock subscriptions. The first and most
seeking to maintain such action first pays or tenders to the party holding the special remedy given by the statute consists in permitting the
corporation to put up the unpaid stock for sale and dispose of it for
stock the sum for which the same was sold, with interest from the date of sale
the account of the delinquent subscriber. In this case the provisions of
at the legal rate; and no such action shall be maintained unless it is commenced section 38 to 48, inclusive of the Corporation Law are applicable and must be
by the filing of a complaint within six (6) months from the date of sale followed. The other remedy is by action in court, concerning which we
find in section 49 the following provision:

TWO CONDITIONS:
1. The party seeking to maintain such action first pays or tenders to the
party holding the stock the sum for which the same was sold, with interest
from the date of the sale at the legal rate; and
2. The action shall be commenced by the filing of a complaint within 6
months from the date of sale.
ACTION BY THE CORPORATION:
Notwithstanding the provisions of Sec. 67 to 69, the corporation may enforce
payment of unpaid subscriptions by court action.
“Nothing in this Act shall prevent the directors from collecting, by action
in any court of proper jurisdiction, the amount due on any unpaid
subscription, together with accrued interest and costs and expenses
incurred.”
ARNALDO F. DE SILVA, plaintiff-appellant,
vs.
ABOITIZ & COMPANY, INC., defendant-appellee
(G.R. No. L-19893; March 31, 1923)
FACTS: Plaintiff de Silva subscribed to 650 shares of defendant company and
paid 200 of such subscription leaving a balance of P225,000. On April 22, 1922,
he was informed by the corporate secretary that he has been declared
delinquent by the BOD and that he should pay the unpaid subscription
otherwise such shares shall be sold at a public auction.

De Silva filed a complaint in the CFI of Cebu, contending among others that
the resolution adopted was violative of Art. 46 of the by-laws stating that all
91 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
shares subscribed and were not paid at the time of the incorporation shall be
paid out of the 70% of the profit obtained until such shares are paid in full. De
Silva contends that such article provides for the operative method of payment
of the shares, and by declaring the unpaid subscription to have become due
and payable on May 31st and in publishing the notice declaring his shares to be
delinquent, the company has exceeded its executive authority.
ISSUE: WON the BOD may declare the unpaid shares delinquent or collect or
enforce payment of the same despite the provision of the by-laws?
HELD: Yes. It is discretionary on the part of the board of directors to do
whatever is provided in the said article relative to the application of a part of
the 70 percent of the profit distributable in equal parts on the payment of the
shares subscribed to and not fully paid.
If the board of directors does not wish to make, or does not make, use of said
authority it has two other remedies for accomplishing the same purpose. As
was said by this court in the case of Velasco vs. Poizat (37 Phil., 802):
“The first and most special remedy given by the statute consists in permitting
the corporation to put the unpaid stock for sale and dispose of it for the
account of the delinquent subscriber. In this case the provisions of sections
38 to 48, inclusive, of the Corporation Law are applicable and must be
followed. The other remedy is by action in court.”
Admitting that the provision of article 46 of the said by-laws maybe regarded
as a contract between the defendant corporation and its stockholders , yet as
it is only to the board of directors of the corporation that said articles gives the
authority or right to apply on the payment of unpaid subscriptions such amount
of the 70 percent of the profit distributable among the shareholders in equal
parts as may be deemed fit, it cannot be maintained that the said article has
prescribe an operative method for the payment of said subscription
continuously until their full amortization.
In the instant case, the defendant corporation, through its board of directors,
made use of its discretionary power, taking advantage of the first of the two
remedies provided by the aforesaid law. On the other hand, the plaintiff has
no right whatsoever under the provision of the above cited article 46 of the
said by-laws to prevent the board of directors from following, for that purpose,
any other method than that mentioned in the said article, for the very reason
that the same does not give the stockholders any right in connection with the
determination of the question whether or not there should be deducted from
the 70 percent of the profit distributable among the stockholders such amount
as may be deemed fit for the payment of subscriptions due and unpaid.
Therefore, it is evident that the defendant corporation has not violated, nor
disregarded any right of the plaintiff recognized by the said by-laws, nor
exceeded its authority in the discharge of its executive functions, nor abused
its discretion when it performed the acts mentioned in the complaint as
grounds thereof, and, consequently, the facts therein alleged do not constitute
a cause of action.
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellant,
vs.
IRINEO BALTAZAR, defendant-appellee.
(G.R. No. L-4824; June 30, 1953)
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellee,
vs.
IRINEO BALTAZAR, defendant and appellant
(G.R. No. L-6244; June 30, 1953)
FACTS: Herein defendant Irineo Baltazar subscribed to 600 shares, at
P100.000 par value per share, of the plaintiff corporation paying P15,000 and
making further payments leaving a balance of P18,500.
On July 23, 1946, the stockholders, including herein defendant, approved
Resolution No. 17 agreeing: (1) to “call” of the balance of the unpaid
subscription to be paid: 50% within 60 days beginning Aug. 1, 1946; the
remaining 50% 60 days beginning October 1, 1946; (2) that all unpaid unpaid
subscriptions after the due dates of both calls to be subject to 12% interest
per annum; (3) that after the expiration of a grace period of 60 days, all unpaid
92 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
subscribed shares would revert to the corporation.
A demand was made against defendant, but was ignored. Hence this action.
ISSUE: WON Baltazar is liable to pay the unpaid portion of his subscription
HELD: No. We agree with the lower court that the law requires that notice
of any call for the payment of unpaid subscription should be made
not only personally but also by publication. This is clear from the
provisions of section 40 of the Corporation Law, Act No. 1459, as amended.
It will be noted that section 40 is mandatory as regards publication, using the
word "must". As correctly stated by the trial court, the reason for the
mandatory provision is not only to assure notice to all subscribers, but also to
assure equality and uniformity in the assessment on stockholders. (14 C.J.
639).
We find the citation of authorities made by the plaintiff and appellant
inapplicable. In the case of Velasco vs. Poizat (37 Phil. 805), the corporation
involved was insolvent, in which case all unpaid stock subscriptions become
payable on demand and are immediately recoverable in an action instituted by
the assignee. Said the court in that case:
“. . . . it is now quite well settled that when the corporation becomes
insolvent, with proceedings instituted by creditors to wind up and
distribute its assets, no call or assessment is necessary before the
institution of suits to collect unpaid balance on subscription.”
But when the corporation is a solvent concern, the rule is:
“It is again insisted that plaintiffs cannot recover because the suit was
not proceeded by a call or assessment against the defendant as a
subscriber, and that until this is done no right of action accrues. In a
suit by a solvent going corporation to collect a subscription, and in certain suits
provided by statute this would be true;. . . . . (Id.)”
ISSUE 2: WON the Baltazar is correct in claiming that Resolution No. 17 of
1946 of the BOD released him from the obligation to pay for his unpaid
subscription?
HELD: No. There must be unanimous consent of the stockholders of the
corporation. We quote some authorities:
Subject to certain exceptions, considered in subdivision (3) of this section, the
general rule is that a valid and binding subscription for stock of a
corporation cannot be cancelled so as to release the subscriber from
liability thereon without the consent of all the stockholders or
subscribers. Furthermore, a subscription cannot be cancelled by the
company, even under a secret or collateral agreement for
cancellation made with the subscriber at the time of the subscription,
as against persons who subsequently subscribed or purchased
without notice of such agreement. (18 C.J.S. 874).
“(3) Exceptions.
In particular circumstances, as where it is given pursuant to a bona fide
compromise, or to set off a debt due from the corporation, a release,
supported by consideration, will be effectual as against dissenting stockholders
and subsequent and existing creditors. A release which might originally have
been held invalid may be sustained after a considerable lapse of time. (18
C.J.S. 874).”
In the present case, the release claimed by defendant and appellant does not
fall under the exception above referred to, because it was not given pursuant
to a bona fide compromise, or to set off a debt due from the corporation, and
there was no consideration for it.
In conclusion we hold that under the Corporation Law, notice of call for
payment for unpaid subscribed stock must be published, except
when the corporation is insolvent, in which case, payment is
immediately demandable. We also rule that release from such
payment must be made by all the stockholders.
ERNESTO M. APODACA, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, JOSE M. MIRASOL and
INTRANS PHILS., INC., respondents
(G.R. No. 80039; April 18, 1989)
FACTS: Petitioner, an employee of respondent company, subscribed to 1,500
shares at P100 per share. He paid an initial payment P37,500. On Sept. 1,
1975, he was appointed President and General Manager of the company but
on Jan. 2, 1986, he resigned.
He filed a complaint with the NLRC claiming unpaid wages, cost of living
allowance, the balance of his gasoline and representation expenses and his
bonus compensation for 1986. Respondent admitted that petitioner was
entitled to P17,060.07 but the same was already set-off against his unpaid
subscription. Petitioner questioned such set-off claiming that no call or notice
was made.
The Labor Arbiter decided in favor of petitioner. On appeal, such decision was
reversed by the NLRC.
ISSUE: WON the set-off was properly made?
HELD: No. Firstly, the NLRC has no jurisdiction to determine such intra-
corporate dispute between the stockholder and the corporation as in the matter
of unpaid subscriptions. This controversy is within the exclusive jurisdiction of
the Securities and Exchange Commission.
Secondly, assuming arguendo that the NLRC may exercise jurisdiction over the
said subject matter under the circumstances of this case, the unpaid
subscriptions are not due and payable until a call is made by the
corporation for payment. Private respondents have not presented a
resolution of the board of directors of respondent corporation calling for the
payment of the unpaid subscriptions. It does not even appear that a notice of
such call has been sent to petitioner by the respondent corporation.
What the records show is that the respondent corporation deducted the
amount due to petitioner from the amount receivable from him for the unpaid
subscriptions. No doubt such set-off was without lawful basis, if not premature.
As there was no notice or call for the payment of unpaid subscriptions, the
same is not yet due and payable.
BONIFACIO LUMANLAN, plaintiff-appellee,
vs.
JACINTO R. CURA, ET AL., defendants.
DIZON & CO., INC., ETC., appellant.
(G.R. No. L-39861; March 21, 1934)
FACTS: Lumanlan subscribed to 300 shares of stock of appellant company at
a par value of P50.
Layag was appointed the receiver of said company, at the instance of its
creditors Julio Valenzuela, Pedro Santos and Francisco Escoto, to collect the
unpaid subscriptions, there appearing that the company had no assets except
the credits against those who had subscribed for shares of stock.
The CFI rendered a decision in favor of Julio Valenzuela and held Lumanlan
liable for the unpaid subscription and loans and advances together with
interests.
Pending appeal, the parties entered into an agreement where Lumanlan would
dismiss the appeal and the corporation would collect only 50% of the amount
subscribed by him for stock, provided that in case the 50% was inufficient to
pay Valenzuela he should pay an additional amount not to exceed the judgment
against him in that case. Lumanlan paid Valenzuela the sum of P11,840
including interest.
Disregarding the agreement, appellant company asked for and order of
93 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
execution of the CFI decision which was granted and the provincial sheriff
levied upon two parcels of land of Lumanlan.
ISSUE: WON Lumanlan is still liable to the corporation?
HELD: Yes. In the promissory note given by the corporation to Valenzuela the
former obligated itself to pay Valenzuela the sum of P8,000 with interest at 12
per cent per annum and, upon failure to pay said sum and interest when due,
25 per cent of the principal as expenses of collection and judicial costs in case
of litigation.
By virtue of these facts Lumanlan is entitled to a credit against the judgment
in case No. 37492 for P11,840 and an additional sum of P2,000, which is 25
per cent on the principal debt, as he had to file this suit to collect, or receive
credit for the sum which he had paid Valenzuela for and in place of the
corporation, or a total of P13,840. This leaves a balance due Dizon & co., Inc.,
of P1,269 on that judgment with interest thereon at 6 per cent per annum from
August 30, 1930.
It appears from the record that during the trial of the case now under
consideration, the Bank of the Philippine Islands appeared in this case as
assignee in the "Involuntary Insolvency of Dizon & Co., Inc. That bank was
appointed assignee in case No. 43065 of the Court of First Instance of the City
of Manila on November 28, 1932. It is therefore evident that there are still
other creditors of Dizon & Co., Inc. This being the case that corporation has a
right to collect all unpaid stock subscriptions and any other amounts which may
be due it.
It is established doctrine that subscriptions to the capital of a
corporation constitute a fund to which the creditors have a right to
look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts.
(Philippine Trust Co. vs. Rivera, 44 Phil., 469, 470.)
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC., SIERRA MADRE
LUMBER CO., INC., NASIPIT LUMBER CO., INC., WOODWORKS, INC.,
GONZALO PUYAT, TOMAS B. MORATO, FINDLAY MILLAR LUMBER CO., INC.,
ET AL., INSULAR LUMBER CO., ANAKAN LUMBER CO., AND CANTILAN LUMBER
CO., INC., defendants-appellees.
(G.R. Nos. L-24177-85; June 29, 1968)
FACTS: In various suits decided jointly, PNB as creditor, and therefore the real
party in interest, was allowed by the lower court to substitute the receiver of
the Philippine Lumber Distributing Agency in these respective actions for the
recovery from the defendant lumber producers the balance of their stock
subscriptions.
The defendant lumber producers were convinced by the late President Manuel
Roxas to form a cooperative and ensure the stable supply of lumber in the
country and to eliminate alien middlemen. To induce them, the president
promised and agreed to invest P9.00 for every P1.00 that the members would
invest therein.
There was no appropriation made by congress for the P9.00 investment. The
President then instructed Hon. Emilio Abello, then Executive Secretary and
chairman of the BOD of PNB to grant an overdraft of P250,000 (later increased
to P350,000) which was approved by the BOD of PNB with interest at 6%.
The Philippines did not invest the P9.00 for every peso coming from defendant
lumber producers. The loan extended by PNB was not paid. Hence, these suits
which the trial court dismissed.
ISSUE: WON the lumber producers are liable for the full value of their
subscriptions?
HELD: Yes. In Philippine Trust Co. v. Rivera, citing the leading case of Velasco
v. Poizat, this Court held: "It is established doctrine that subscriptions to the
capital of a corporation constitute a fund to which creditors have a right to look
for satisfaction of their claims and that the assignee in insolvency can maintain
an action upon any unpaid stock subscription in order to realize assets for the
payment of its debt.... A corporation has no power to release an original
subscriber to its capital stock from the obligation of paying for his shares,
without a valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner and under the
conditions prescribed by the statute or the charter or the articles of
incorporation. Moreover, strict compliance with the statutory regulations is
necessary...." The Poizat doctrine found acceptance in later cases. One of the
latest cases, Lingayen Gulf Electric Power v. Baltazar, Speaks to this effect: "In
the case of Velasco v. Poizat, the corporation involved was insolvent, in which
case all unpaid stock subscriptions become payable on demand and are
immediately recoverable in an action instituted by the assignee."
It would be unwarranted to ascribe to the late President Roxas the view that
the payment of the stock subscriptions, as thus required by law, could be
condoned in the event that the counterpart fund to be invested by the
Government would not be available. Even if such were the case, however, and
such a promise were in fact made, to further the laudable purpose to which
the proposed corporation would be devoted and the possibility that the lumber
producers would lose money in the process, still the plain and specific
wording of the applicable legal provision as interpreted by this Court
must be controlling. It is a well-settled principle that with all the vast
powers lodged in the Executive, he is still devoid of the prerogative
of suspending the operation of any statute or any of its terms.
EDWARD A. KELLER & CO., LTD., petitioner-appellant,
vs.
COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE CASTRO,
JOHNNY DE LA FUENTE, SERGIO C. ORDOÑEZ, TRINIDAD C. ORDOÑEZ,
MAGNO C. ORDOÑEZ, ADORACION C. ORDOÑEZ, TOMAS C. LORENZO, JR.,
LUIZ M. AGUILA-ADAO, MOISES P. ADAO, ASUNCION MANAHAN and
INTERMEDIATE APPELLATE COURT, respondents-appellees.
(G.R. No. L-68097; January 16, 1986)
FACTS: Petitioner-appellant appointed defendant COB Group Marketing, Inc.
as exclusive distributor of its household products in Panay and Negros. Under
its sales agreement, Keller sold on credit its products to COB Group Marketing.
The BOD of COB Group Marketing were apprised by Jose E. Bax that the firm
owed Keller about P179,000.
Keller sued COB Marketing and its stockholders.
ISSUE: WON Keller can collect the unpaid subscriptions of the stockholders?
HELD: Yes. It is settled that a stockholder is personally liable for the
financial obligations of a corporation to the extent of his unpaid
subscription (Vda. de Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs 1311-
2).
GERARDO GARCIA, plaintiff-appellee,
vs.
ANGEL SUAREZ, defendant-appellant
(G.R. No. L-45493; April 21, 1939)
FACTS: Appellant Suarez subscribed to 16 shares of Compania Hispano-
Filipina, Inc. and paid the value of 4 shares, at P100 par value each, or P400.
Plaintiff-appellee Garcia was appointed by the court as receiver of the
company, to collect the unpaid subscription, among others. On June 18, 1931,
Garcia brought an action to recover from Suarez and other shareholders the
balance of their subscriptions, but the complaint was dismissed for lack of
prosecution.
On Oct. 10, 1935, a similar action was instituted which was granted by the CFI
holding defendant liable for the balance of his unpaid subscription and interest.
On appeal, the defendant raises the issue of prescription.
ISSUE: WON defendant Suarez is liable?
94 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
HELD: Yes. The premise of the argument is wrong because it confuses two
distinct obligations: the obligation to pay interest and that to pay the amount
of the subscription. The said section 37 of the Corporation Law provides when
the obligation to pay interest arises and when payment should be made, but it
is absolutely silent as to when the subscription to a stock should be paid. Of
course, the obligation to pay arises from the date of the subscription,
but the coming into being of an obligation should not be confused
with the time when it becomes demandable. In a loan for example, the
obligation to pay arises from the time the loan is taken; but the maturity of
that obligation, the date when the debtor can be compelled to pay, is not the
date itself of the loan, because this would be absurd. The date when payment
can be demanded is necessarily distinct from and subsequent to that the
obligation is contracted.
By the same token, the subscription to the capital stock of the
corporation, unless otherwise stipulation, is not payable at the
moment of the subscription but on a subsequent date which may be
fixed by the corporation. Hence, section 38 of the Corporation Law,
amended by Act No. 3518, provides that:
“The board of directors or trustees of any stock corporation formed,
organized, or existing under this Act may at any time declare due and
payable to the corporation unpaid subscriptions to the capital stock . . . .”
The board of directors of the Compañia Hispano-Filipino, Inc., not having
declared due and payable the stock subscribed by the appellant, the
prescriptive period of the action for the collection thereof only commenced to
run from June 18, 1931 when the plaintiff, in his capacity as receiver and in
the exercise of the power conferred upon him by the said section 38 of the
Corporation Law, demanded of the appellant to pay the balance of his
subscription. The present action having been filed on October 10, 1935, the
defense of prescription is entirely without basis.
DELINQUENT: Shares of stock become delinquent when no payment is made
on the balance of all or any portion of the subscription on the date or dates
fixed in the contract of subscription without need of call, or on the date
specified by the BOD pursuant to a call made by it in accordance with the
provisions of Sec. 67.
EFFECT OF DELINQUENCY: The stockholder thereof immediately loses the
right to vote and be voted upon or represented in any stockholders meeting as
well as all the rights pertaining to a stockholder except the right to receive
dividends in accordance with the Code.
Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be
entitled to vote or to representation at any stockholder's meeting, nor shall the
holder thereof be entitled to any of the rights of a stockholder except the right
to dividends in accordance with the provisions of this Code, until and unless he
pays the amount due on his subscription with accrued interest, and the costs
and expenses of advertisement, if any.
RIGHT TO RECEIVE DIVIDENDS: Sec. 43 provides that “any cash dividend
due on delinquent stockholders shall first be applied to the unpaid balance on
his subscription plus cost and expenses, while stock dividends shall be withheld
until his unpaid subscription is paid in full”
RIGHTS OF UNPAID SHARES: If the shares are not delinquent, however,
subscribers to the capital stock of a corporation though not fully paid, are
entitled to all the rights of a stockholder (Sec. 72) EXCEPT the issuance of
certificate of stocks (Sec. 64). They can vote and be voted upon and entitled
to receive all dividends due their shares.
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully
paid which are not delinquent shall have all the rights of a stockholder.
 will be issued 1 year from the date of the last publication;
2. Nevertheless, the stockholder may file a bond or other security to have
NON-STOCK CORPORATIONS: The rules on delinquent shareholders the shares issued before the 1 year prescribed.
applies to non-stock corporations, such as when members are delinquent in 3. If a contest has been present to the corporation or an action is pending
paying membership dues. in court, the issuance of the new certificate shall be suspended until final
decision.
RIGHT TO SECURE THE ISSUANCE OF A NEW STOCK CERTIFICATE:
H. RIGHTS AND LIABILITIES OF STOCKHOLDERS
Sec. 73. Lost or destroyed certificates. - The following procedure shall be
RIGHTS OF A STOCKHOLDER:
followed for the issuance by a corporation of new certificates of stock in lieu of 1. Participation in the management of the corporate affairs by
those which have been lost, stolen or destroyed: exercising their right to vote and be voted upon either personally or by
proxy as provided for under Sec. 50 and 58 of the Code;
2. To enter into a voting trust agreement subject to the procedure,
1. The registered owner of a certificate of stock in a corporation or his legal requirements and limitations imposed under Sec. 50;
representative shall file with the corporation (A) an affidavit in triplicate 3. To receive dividends and to compel their declaration if warranted under
setting forth, if possible, (1) the circumstances as to how the certificate was Sec. 43;
lost, stolen or destroyed, (2) the number of shares represented by such 4. To transfer shares of stock subject only to reasonable restrictions such
certificate, (3) the serial number of the certificate and (4) the name of as the options and preferences as may be allowed by law inclusive of the
the corporation which issued the same. He shall also submit such (B) other right of the transferee to compel the registration of the transfer in the
information and evidence which he may deem necessary; books of the corporation as provided for in Sec. 63;
5. To be issued a certificate of stock for fully paid-up shares in
2. After verifying the affidavit and other information and evidence with the accordance with Sec. 64;
books of the corporation, said corporation shall publish a notice in a 6. To exercise pre-emptive rights as provided for in Sec. 39;
newspaper of general circulation published in the place where the corporation 7. To exercise their appraisal right in accordance with the provision of
has its principal office, once a week for three (3) consecutive weeks at the Sec. 81 and in those instance allowed by law such as Sec. 42 and 105;
expense of the registered owner of the certificate of stock which has been lost, 8. To institute and file a derivative suit;
stolen or destroyed. The notice shall state (1) the name of said corporation, 9. To recover shares of stock unlawfully sold for delinquency as may
(2) the name of the registered owner and (3) the serial number of said be allowed under Sec. 69;
certificate, and (4) the number of shares represented by such certificate, and 10. To inspect the books of the corporation subject only to the limitations
that after the expiration of one (1) year from the date of the last publication, if imposed by Sec. 75;
no contest has been presented to said corporation regarding said certificate of 11. To be furnished by the most recent financial statement of the
stock, the right to make such contest shall be barred and said corporation shall corporation as by Sec. 75;
cancel in its books the certificate of stock which has been lost, stolen or 12. To be issued a new stock certificate in lieu of the lost or destroyed
destroyed and issue in lieu thereof new certificate of stock, unless the one subject to the procedure laid down in Sec. 73;
registered owner files a bond or other security in lieu thereof as may be 13. To have the corporation dissolved under Sec. 118 to 121, and Sec.
required, effective for a period of one (1) year, for such amount and in such 105 in a close corporation;
form and with such sureties as may be satisfactory to the board of directors, in 14. To participate in the distribution of assets of the corporation upon
which case a new certificate may be issued even before the expiration of the dissolution under Sec. 122;
one (1) year period provided herein: Provided, That if a contest has been 15. In the case of a close corporation, to petition the SEC to arbitrate in
presented to said corporation or if an action is pending in court regarding the the event of a deadlock as allowed under Sec. 104; and
ownership of said certificate of stock which has been lost, stolen or destroyed, 16. Also in the case of a close corporation, to withdraw therefrom, for any
the issuance of the new certificate of stock in lieu thereof shall be suspended reason, and compel the corporation to purchase his shares as
until the final decision by the court regarding the ownership of said certificate provided for in Sec. 105.
of stock which has been lost, stolen or destroyed.
OBLIGATIONS AND LIABILITIES:
Except in case of fraud, bad faith, or negligence on the part of the corporation 1. To pay the corporation the balance of his unpaid subscriptions
and its officers, no action may be brought against any corporation which shall subject to the provision of Sec. 67-70;
have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant 2. To pay interest on his unpaid subscription, if required by the by-
to the procedure above-described. laws or by the contract of subscription in accordance with Sec. 66;
3. To answer to the creditor for the unpaid portion of his
subscription under the Trust Fund Doctrine;
4. To answer the “water” in his stocks as provided for in Sec. 65;
5. To be liable, as general partners, for all debts, liabilities and damages
of determinable corporation as envisioned under Sec. 21 (corporation by
estoppel); and
RATIONALE: 6. To be personally liable for torts, in the event that a stockholder in a
1. To avoid duplication of certificates of stock; close corporation actively participates in the management of corporate
2. To avoid fictitious and fraudulent transfers; and affairs.
3. To protect the corporation against damage from whatever source arising
from the issuance of the duplicate certificate inluding liability to the holder CHAPTER 11: CORPORATE BOOKS AND RECORDS
of the original certificate or to innocent holders of certificate based on the
duplicate. A. BOOKS AND RECORDS TO BE KEPT

Thus, the BOD has the authority to decide the amount and the kind of surety
bond that may be required for the issuance of a certificate of stock, in liey of
the lost or destroyed one, if the same is to be issued prior to the expiration of
the 1 year period provided by Sec. 73.

ISSUANCE OF NEW CERTIFICATES:

1. After the above procedures have been complied with, the new certificate

95 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 preserved at its principal office;
Sec. 74. Books to be kept; stock transfer agent. - Every corporation shall
2. Minutes of all meetings of stockholders or members and of the
keep and carefully preserve at its principal office a record of all business directors or trustees setting forth in detail (1) the date, time and place of
transactions and minutes of all meetings of stockholders or members, or of the meeting, (2) how authorized, (3) the notice given, (4) whether the same
board of directors or trustees, in which shall be set forth in detail the time and be regular or special, and if special, the purpose thereof shall be specified,
place of holding the meeting, how authorized, the notice given, whether the (5) those present and absent, and (6) every act done or ordered done
meeting was regular or special, if special its object, those present and absent, thereat - which must likewise be kept at the principal office of the said
and every act done or ordered done at the meeting. Upon the demand of any corporation; and
3. Stock and Transfer Book showing the (1) names of the stockholders,
director, trustee, stockholder or member, the time when any director, trustee,
(2) the amount paid or unpaid on all stocks for which the subscription has
stockholder or member entered or left the meeting must be noted in the been made, (3) a statement of every alienation, sale or transfer of stock
minutes; and on a similar demand, the yeas and nays must be taken on any made, if any (4) the date thereof, and (5) by whom and to whom - which
motion or proposition, and a record thereof carefully made. The protest of any must also be kept at the principal office of the corporation or in the office
director, trustee, stockholder or member on any action or proposed action must of its stock transfer agent.
be recorded in full on his demand.
STOCK AND TRANSFER AGENT: is the person who records every movement
of the shares by the minute or by the hour.
The records of all business transactions of the corporation and the minutes of
NON-STOCK CORPORATIONS: can also have a stock and transfer agent for
any meetings shall be open to inspection by any director, trustee, stockholder
purposes of the club share-membership.
or member of the corporation at reasonable hours on business days and he may
demand, writing, for a copy of excerpts from said records or minutes, at his
INSPECTION & COPIES: These books are subject to inspection by any of
expense.
the directors, trustees, stockholders or members of the corporation at
reasonable hours on business days and a copy of excerpts of said records may
Any officer or agent of the corporation who shall refuse to allow any director,
be demanded. In fact, in so far as Financial Statements are concerned, the
trustees, stockholder or member of the corporation to examine and copy
Code provides:
excerpts from its records or minutes, in accordance with the provisions of this
Code, shall be liable to such director, trustee, stockholder or member for
damages, and in addition, shall be guilty of an offense which shall be punishable Sec. 75. Right to financial statements. - Within ten (10) days from receipt
under Section 144 of this Code: Provided, That if such refusal is made pursuant of a written request of any stockholder or member, the corporation shall furnish
to a resolution or order of the board of directors or trustees, the liability under to him its most recent financial statement, which shall include a balance sheet
this section for such action shall be imposed upon the directors or trustees who
as of the end of the last taxable year and a profit or loss statement for said
voted for such refusal: and Provided, further, That it shall be a defense to any
action under this section that the person demanding to examine and copy taxable year, showing in reasonable detail its assets and liabilities and the result
excerpts from the corporation's records and minutes has improperly used any of its operations.
information secured through any prior examination of the records or minutes of
such corporation or of any other corporation, or was not acting in good faith or
for a legitimate purpose in making his demand. 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
Stock corporations must also keep a book to be known as the "stock and operations of the corporation for the preceding year, which shall include
transfer book", in which must be kept a record of all stocks in the names of the financial statements, duly signed and certified by an independent certified public
stockholders alphabetically arranged; the installments paid and unpaid on all accountant.
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 However, if the paid-up capital of the corporation is less than P50,000.00, the
date thereof, and by and to whom made; and such other entries as the by-laws financial statements may be certified under oath by the treasurer or any
may prescribe. The stock and transfer book shall be kept in the principal office responsible officer of the corporation.
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.
BASIS OF RIGHT: is to protect his interest as a stockholder. Thus, it has been
No stock transfer agent or one engaged principally in the business of registering said that: “The right of the shareholders to ascertain how the affairs of his
transfers of stocks in behalf of a stock corporation shall be allowed to operate company are being conducted by its directors and officers is founded by his
in the Philippines unless he secures a license from the Securities and Exchange beneficial interest through ownership of shares and the necessity of self-
Commission and pays a fee as may be fixed by the Commission, which shall be protection. Managers of some corporations deliberately keep the shareholders
renewable annually: Provided, That a stock corporation is not precluded from in ignorance or under misapprehension as to the true condition of its affairs.
performing or making transfer of its own stocks, in which case all the rules and Business prudence demands that the investor keep a watchful eye on the
regulations imposed on stock transfer agents, except the payment of a license management and the condition of the business. Those in charge of the
fee herein provided, shall be applicable. company may be guilty of gross incompetence or dishonesty for years and
escape liability if the shareholders cannot inspect the records and obtain
information.”

BOOKS OF SUBSIDIARY: The right of the stockholder to examine corporate

THE FOLLOWING SHALL BE KEPT AND MAINTAINED BY THE
CORPORATION:
1. Records of all business transactions which include, among others,
(1) journals, (2) ledger, (3) contracts, (4) vouchers and receipts, (5)
financial statements and other books of accounts, (6) income tax returns,
and (7) voting trust agreements - which must be kept and carefully
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. But if the two entities are legally being operated as separate and
distinct entities, there is no such right of inspection on the part of the
stockholder of the parent company.
INSPECTION BY AGENT: while the right is founded on stock ownership, thus
personal in nature, it may be made by the stockholder’s agent or representative
since it may be unavailing in many instances.

96 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
INSPECTION BY DIRECTOR/TRUSTEE: As compared to a stockholder or
member, the right of a director or trustee to inspect and examine corporate
books and records is considered absolute and unqualified and without regard
to motive. This is because a director supervises, directs and manages
corporate business and it is necessary that he be equipped with all
the information and data with regard to the affairs of the company in
order that he may manage and direct its operations intelligently and
according to this best judgment in the interest of all the stockholders he
represents. Thus, while stockholders and mmebers are entitled to inspect and
examine the books and records as provided in Sec. 74 and 75 they may not
gain access to highly sensitive and confidential information. In the case of
directors, “it is not denied” that they have such access. This would include,
among others, (a) marketing strategies and pricing structure; (b)
budget for expansion and diversification; (c) research and
development; and (d) sources of funding, availability of personnel,
proposals for mergers or tie-ups with other firms.
REMEDIES OF STOCKHOLDERS UNJUSTIFIABLY REFUSED THE RIGHT
TO INSPECT THE CORPORATE BOOKS: (MDC)
1. Mandamus. In such event, the corporate secretary shall be included as
a party respondent since he is customarily charged with the custody of all
documents or records of the corporation and against whom personal
order of the court would be made;
2. Damages either against the corporation or the responsible officer who
refused the inspection; or
3. Criminal complaint for violation of his right to inspect and copy excerpts
of all business transactions and minutes of meetings. The officer or agent
who refused the examination or copying thereof, shall be guilty and liable
of an offense punishable under Sec. 144 of the Code. Sec. 144 imposes a
penalty of a fine of not less than P1,000 but not more than P10,000 or an
imprisonment for not less than 30 days but not more than 5 years, or
both, at the discretion of the court. If the refusal is pursuant to a
resolution or order of the board, the liability shall be imposed upon the
directors/trustees who voted for such refusal.
DEFENSE OF CORPRATE OFFICERS: (INL)
1. That the person demanding has improperly used any information
secured through any prior examination of the records or minutes of such
corporation or any other corporation;
2. That he was not acting in good faith or for a legitimate purpose in
making his demand; or
3. The right is limited or restricted by special law or the law of its
creation.
W. G. PHILPOTTS, petitioner,
vs.
PHILIPPINE MANUFACTURING COMPANY and F. N. BERRY, respondents.
(G.R. No. L-15568; November 8, 1919)
FACTS: Petitioner seeks to obtain a writ of mandamus to compel the
respondents to permit him, in person or by some authorized agent or attorney,
to inspect and examine the records of the business by Philippine Manufacturing
Company, of which he is a stockholder.
Respondents interposed a demurrer.
ISSUE: WON the right the law concedes to a stockholder may be exercised by
a proper agent or attorney?
HELD: Yes. The right of inspection given to a stockholder can be
exercised either by himself or by any proper representative or
attorney in fact, and either with or without the attendance of the
stockholder. This is in conformity with the general rule that what a man may
do in person he may do through another; and we find nothing in the statute
that would justify us in qualifying the right in the manner suggested by the
respondents.
This conclusion is supported by the undoubted weight of authority in the United
States, where it is generally held that the provisions of law conceding the right
of inspection to stockholders of corporations are to be liberally construed and
that said right may be exercised through any other properly authorized person.
97 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
As was said in Foster vs. White (86 Ala., 467), "The right may be regarded
as personal, in the sense that only a stockholder may enjoy it; but the
inspection and examination may be made by another. Otherwise it
would be unavailing in many instances." An observation to the same effect is
contained in Martin vs. Bienville Oil Works Co. (28 La., 204), where it is said:
"The possession of the right in question would be futile if the possessor of it,
through lack of knowledge necessary to exercise it, were debarred the right of
procuring in his behalf the services of one who could exercise it." In Deadreck
vs. Wilson (8 Baxt. [Tenn.], 108), the court said: "That stockholders have
the right to inspect the books of the corporation, taking minutes from
the same, at all reasonable times, and may be aided in this by experts
and counsel, so as to make the inspection valuable to them, is a
principle too well settled to need discussion." Authorities on this point could be
accumulated in great abundance, but as they may be found cited in any legal
encyclopedia or treaties devoted to the subject of corporations, it is
unnecessary here to refer to other cases announcing the same rule.
The demurrer is overruled; and it is ordered that the writ of mandamus shall
issue as prayed, unless within 5 days from notification hereof the respondents
answer to the merits.
ANTONIO PARDO, petitioner,
vs.
THE HERCULES LUMBER CO., INC., and IGNACIO FERRER,
respondents
(G.R. No. L-22442; August 1, 1924)
FACTS: Petitioner Antonio Pardo seeks to obtain a writ of mandamus to
compel respondent company to permit petitioner and his duly authorized agent
and representative to examine the records and business transactions of said
company.
Respondents raised the defense that under Art. 10 of the by-laws, it is declared
that “every shareholder may examine the books of the company and other
documents pertaining to the same upon the days which the board of directors’
shall annually fix”. And thus was set from 15th to 25th of March by virtue of a
board resolution.
ISSUE: WON the BOD may choose specific performance and particular dates
when the right of inspection may be exercised?
HELD: No. The general right given by the statute may not be lawfully
abridged to the extent attempted in this resolution. It may be admitted
that the officials in charge of a corporation may deny inspection when
sought at unusual hours or under other improper conditions; but neither the
executive officers nor the board of directors have the power to
deprive a stockholder of the right altogether. A by-law unduly restricting
the right of inspection is undoubtedly invalid. Authorities to this effect are too
numerous and direct to require extended comment. (14 C.J., 859; 7 R.C.L.,
325; 4 Thompson on Corporations, 2nd ed., sec. 4517; Harkness vs. Guthrie,
27 Utah, 248; 107 Am., St. Rep., 664. 681.)
The demurrer is, therefore, sustained; and the writ of mandamus will issue as
prayed, with the costs against the respondent.
EUGENIO VERAGUTH, Director and Stockholder of the Isabela Sugar
Company, Inc., petitioner,
vs.
ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting President, and
AGUSTIN B. MONTILLA, Secretary of the same corporation, respondents.
(G.R. No. L-37064; October 4, 1932)
FACTS: Petitioner Eugenio Veraguth seeks to obtain a final and absolute writ
of mandamus to be issued to each and all of the respondents to, among others,
place at his disposal at reasonable hours the minutes, documents and books
of Isabela Sugar Company, Inc. (which he is a director and stockholder) for his
inspection and to issue immediately, upon payment of the fees, certified copies
of any documentation in connection with said minutes, documents and the
books of the aforesaid corporation.
Director Veraguth telegraphed the secretary of the company, asking the latter
to forward in the shortest possible time a certified copy of the resolution of the
board of directors concerning the payment of attorney's fees in the case
against the Isabela Sugar Company and others. To this the secretary made
answer by letter stating that, since the minutes of the meeting in question had
not been signed by the directors present, a certified copy could not be
furnished and that as to other proceedings of the stockholders a request should
be made to the president of the Isabela Sugar Company, Inc. It further appears
that the board of directors adopted a resolution providing for inspection of the
books and the taking of copies "by authority of the President of the corporation
previously obtained in each case."
ISSUE: WON the corporate secretary is justified in refusing to furnish copies
of the minutes of the meeting of the BOD?
HELD: Yes. The Corporation Law, section 51, provides that:
“All business corporations shall keep and carefully preserve a record of all
business transactions, and a minute of all meetings of directors, members,
or stockholders, in which shall be set forth in detail the time and place of
holding the meeting was regular or special, if special its object, those present
and absent, and every act done or ordered done at the meeting. . . .
The record of all business transactions of the corporation and the minutes
of any meeting shall be open to the inspection of any director, member, or
stockholder of the corporation at reasonable hours.”
The above puts in statutory form the general principles of Corporation Law.
Directors of a corporation have the unqualified right to inspect the books and
records of the corporation at all reasonable times. Pretexts may not be put
forward by officers of corporations to keep a director or shareholder from
inspecting the books and minutes of the corporation, and the right of inspection
is not to be denied on the ground that the director or shareholder is on
unfriendly terms with the officers of the corporation whose records are sought
to be inspected. A director or stockholder cannot of course make copies,
abstracts, and memoranda of documents, books, and papers as an incident to
the right of inspection, but cannot, without an order of a court, be permitted
to take books from the office of the corporation. We do not conceive,
however, that a director or stockholder has any absolute right to
secure certified copies of the minutes of the corporation until these
minutes have been written up and approved by the directors. (See
Fisher's Philippine Law of Stock Corporations, sec. 153, and Fletcher Cyclopedia
Corporations, vol. 4, Chap. 45.)
Combining the facts and the law, we do not think that anything improper
occurred when the secretary declined to furnish certified copies of minutes
which had not been approved by the board of directors, and that while so much
of the last resolution of the board of directors as provides for prior approval of
the president of the corporation before the books of the corporation can be
inspected puts an illegal obstacle in the way of a stockholder or director, that
resolution, so far as we are aware, has not been enforced to the detriment of
anyone. In addition, it should be said that this is a family dispute, the petitioner
and the individual respondents belonging to the same family; that a test case
between the petitioner and the respondents has not been begun in the Court
of First Instance of Occidental Negros involving hundreds of thousands of
pesos, and that the appellate court should not intrude its views to give an
advantage to either party. We rule that the petitioner has not made out a case
for relief by mandamus.
GOKONGWEI VS. SEC (supra, CHAPTER 7 and 8) – ISSUE: WON petitioner
may be properly denied examination of the books and records of San Miguel
International, Inc., a fully owned subsidiary of SMC?
HELD: No. Pursuant to the second paragraph of section 51 of the Corporation
Law, "(t)he record of all business transactions of the corporation and minutes
of any meeting shall be open to the inspection of any director, member or
stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is
based upon their ownership of the assets and property of the corporation. It
is, therefore, an incident of ownership of the corporate property, whether this
ownership or interest be termed an equitable ownership, a beneficial
98 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
ownership, or a ownership. This right is predicated upon the necessity of self-
protection. It is generally held by majority of the courts that where the right is
granted by statute to the stockholder, it is given to him as such and must be
exercised by him with respect to his interest as a stockholder and for some
purpose germane thereto or in the interest of the corporation. In other
words, the inspection has to be germane to the petitioner's interest
as a stockholder, and has to be proper and lawful in character and
not inimical to the interest of the corporation. In Grey v. Insular Lumber,
this Court held that "the right to examine the books of the corporation
must be exercised in good faith, for specific and honest purpose, and
not to gratify curiosity, or for specific and honest purpose, and not to
gratify curiosity, or for speculative or vexatious purposes. The weight
of judicial opinion appears to be, that on application for mandamus to enforce
the right, it is proper for the court to inquire into and consider the stockholder's
good faith and his purpose and motives in seeking inspection. Thus, it was held
that "the right given by statute is not absolute and may be refused
when the information is not sought in good faith or is used to the
detriment of the corporation." But the "impropriety of purpose such as will
defeat enforcement must be set up the corporation defensively if the Court is
to take cognizance of it as a qualification. In other words, the specific provisions
take from the stockholder the burden of showing propriety of purpose and
place upon the corporation the burden of showing impropriety of purpose or
motive. It appears to be the general rule that stockholders are entitled to full
information as to the management of the corporation and the manner of
expenditure of its funds, and to inspection to obtain such information,
especially where it appears that the company is being mismanaged or that it
is being managed for the personal benefit of officers or directors or certain of
the stockholders to the exclusion of others."
While the right of a stockholder to examine the books and records of
a corporation for a lawful purpose is a matter of law, the right of such
stockholder to examine the books and records of a wholly-owned
subsidiary of the corporation in which he is a stockholder is a
different thing.
Some state courts recognize the right under certain conditions, while others do
not. Thus, it has been held that where a corporation owns approximately no
property except the shares of stock of subsidiary corporations which are merely
agents or instrumentalities of the holding company, the legal fiction of distinct
corporate entities may be disregarded and the books, papers and documents
of all the corporations may be required to be produced for examination, and
that a writ of mandamus, may be granted, as the records of the subsidiary
were, to all incontents and purposes, the records of the parent even though
subsidiary was not named as a party. Mandamus was likewise held proper to
inspect both the subsidiary's and the parent corporation's books upon proof of
sufficient control or dominion by the parent showing the relation of principal or
agent or something similar thereto.
On the other hand, mandamus at the suit of a stockholder was refused where
the subsidiary corporation is a separate and distinct corporation domiciled and
with its books and records in another jurisdiction, and is not legally subject to
the control of the parent company, although it owned a vast majority of the
stock of the subsidiary. Likewise, inspection of the books of an allied
corporation by stockholder of the parent company which owns all the stock of
the subsidiary has been refused on the ground that the stockholder was not
within the class of "persons having an interest."
In the Nash case, The Supreme Court of New York held that the contractual
right of former stockholders to inspect books and records of the corporation
included the right to inspect corporation's subsidiaries' books and records
which were in corporation's possession and control in its office in New York."
In the Bailey case, stockholders of a corporation were held entitled to inspect
the records of a controlled subsidiary corporation which used the same offices
and had identical officers and directors.
In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would
be more in accord with equity, good faith and fair dealing to construe the
statutory right of petitioner as stockholder to inspect the books and
records of the corporation as extending to books and records of such
wholly-owned subsidiary which are in respondent corporation's
possession and control.
The Court voted unanimously to grant the petition insofar as it prays that
petitioner be allowed to examine the books and records of San Miguel
International, Inc., as specified by him.
RAMON A. GONZALES, petitioner,
vs.
THE PHILIPPINE NATIONAL BANK, respondent.
(G.R. No. L-33320; May 30, 1983)
FACTS: Petitioner Ramon A. Gonzales instituted in the CFI of Manila a special
civil action for mandamus against the herein respondent PNB praying that the
latter be ordered to allow him to look into the books and records of PNB to
satisfy himself as to the truth of the published report that (1) the respondent
has guaranteed the obligation of South Negros Development Corporation in
the purchase of a US$ 23M sugar-mill to be financed by Japanese suppliers
and financiers; that the respondent; (2) the respondent is financing the
construction of the P21M Cebu-Mactan Bridge to be constructed by VC Ponce,
Inc.; and (3) the construction of Passi Sugar Mill at Iloilo by the Homion
Philippines, Inc.; as well as (4) to inquire into the validity of said transactions.
The CFI dismissed the special civil action.
Assailing the conclusions of the lower court, the petitioner has assigned the
single error to the lower court of having ruled that his alleged improper motive
in asking for an examination of the books and records of the respondent bank
disqualifies him to exercise the right of a stockholder to such inspection under
Section 51 of Act No. 1459, as amended. Said provision reads in part as follows:
Sec. 51. ... The record of all business transactions of the corporation and
the minutes of any meeting shall be open to the inspection of any director,
member or stockholder of the corporation at reasonable hours.
Petitioner maintains that the above-quoted provision does not justify the
qualification made by the lower court that the inspection of corporate records
may be denied on the ground that it is intended for an improper motive or
purpose, the law having granted such right to a stockholder in clear and
unconditional terms. He further argues that, assuming that a proper motive or
purpose for the desired examination is necessary for its exercise, there is
nothing improper in his purpose for asking for the examination and inspection
herein involved.
ISSUE: WON Petitioner is correct in saying that he has an unqualified right to
inspect the books as provided under Sec. 51 of the Corporation Law?
HELD: No. Petitioner may no longer insist on his interpretation of Section 51
of Act No. 1459, as amended, regarding the right of a stockholder to inspect
and examine the books and records of a corporation. The former Corporation
Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg.
68, otherwise known as the "Corporation Code of the Philippines."
The right of inspection granted to a stockholder under Section 51 of Act No.
1459 has been retained, but with some modifications. The second and third
paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the following:
“The records of all business transactions of the corporation and the minutes
of any meeting shall be open to inspection by any director, trustee,
stockholder or member of the corporation at reasonable hours on business
days and he may demand, in writing, for a copy of excerpts from said records
or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any director,
trustee, stockholder or member of the corporation to examine and copy
excerpts from its records or minutes, in accordance with the provisions of
this Code, shall be liable to such director, trustee, stockholder or member
for damages, and in addition, shall be guilty of an offense which shall be
punishable under Section 144 of this Code: Provided, That if such refusal is
made pursuant to a resolution or order of the board of directors or trustees,
99 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
the liability under this section for such action shall be imposed upon the
directors or trustees who voted for such refusal; and Provided, further, That
it shall be a defense to any action under this section that the person
demanding to examine and copy excerpts from the corporation's records
and minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in
making his demand.”
As may be noted from the above-quoted provisions, among the changes
introduced in the new Code with respect to the right of inspection granted
to a stockholder are the following (1) the records must be kept at the
principal office of the corporation; (2) the inspection must be made
on business days; (3) the stockholder may demand a copy of the
excerpts of the records or minutes; (4) and the refusal to allow such
inspection shall subject the erring officer or agent of the corporation
to civil and criminal liabilities.
However, while seemingly enlarging the right of inspection, the new Code has
prescribed limitations to the same. It is now expressly required as a
condition for such examination that (1) the one requesting it must
not have been guilty of using improperly any information through a
prior examination, and (2) that the person asking for such
examination must be "acting in good faith and for a legitimate
purpose in making his demand."
The unqualified provision on the right of inspection previously contained in
Section 51, Act No. 1459, as amended, no longer holds true under the
provisions of the present law. The argument of the petitioner that the right
granted to him under Section 51 of the former Corporation Law should not be
dependent on the propriety of his motive or purpose in asking for the inspection
of the books of the respondent bank loses whatever validity it might have had
before the amendment of the law. If there is any doubt in the correctness of
the ruling of the trial court that the right of inspection granted under Section
51 of the old Corporation Law must be dependent on a showing of proper
motive on the part of the stockholder demanding the same, it is now dissipated
by the clear language of the pertinent provision contained in Section 74 of
Batas Pambansa Blg. 68.
ISSUE2: WON petitioner is in good faith in the exercise of his right to inspect
the books of PNB?
HELD: No. Although the petitioner has claimed that he has justifiable motives
in seeking the inspection of the books of the respondent bank, he has not set
forth the reasons and the purposes for which he desires such inspection, except
to satisfy himself as to the truth of published reports regarding certain
transactions entered into by the respondent bank and to inquire into their
validity. The circumstances under which he acquired one share of stock in the
respondent bank purposely to exercise the right of inspection do not argue in
favor of his good faith and proper motivation. Admittedly he sought to be a
stockholder in order to pry into transactions entered into by the respondent
bank even before he became a stockholder. His obvious purpose was to arm
himself with materials which he can use against the respondent bank for acts
done by the latter when the petitioner was a total stranger to the same. He
could have been impelled by a laudable sense of civic consciousness, but it
could not be said that his purpose is germane to his interest as a stockholder.
ISSUE3: WON the right of a stockholder to inspect the books provided under
Sec. 74 of the Corporation Code is applicable to PNB?
HELD: No. We also find merit in the contention of the respondent bank that
the inspection sought to be exercised by the petitioner would be violative of
the provisions of its charter. (Republic Act No. 1300, as amended.) Sections
15, 16 and 30 of the said charter provide respectively as follows:
Sec. 15. Inspection by Department of Supervision and Examination of the
Central Bank. — The National Bank shall be subject to inspection by
the Department of Supervision and Examination of the Central
Bank'
 Sec. 16. Confidential information. —The Superintendent of Banks and the
Auditor General, or other officers designated by law to inspect or investigate
the condition of the National Bank, shall not reveal to any person other
than the President of the Philippines, the Secretary of Finance, and
the Board of Directors the details of the inspection or investigation,
nor shall they give any information relative to the funds in its
custody, its current accounts or deposits belonging to private
individuals, corporations, or any other entity, except by order of a
Court of competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act.— Any director,
officer, employee, or agent of the Bank, who violates or permits the violation
of any of the provisions of this Act, or any person aiding or abetting the
violations of any of the provisions of this Act, shall be punished by a fine not
to exceed ten thousand pesos or by imprisonment of not more than five
years, or both such fine and imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a charter
of its own, it is not governed, as a rule, by the Corporation Code of the
Philippines. Section 4 of the said Code provides:
Sec. 77. Stockholder's or member's approval. - Upon approval by majority
vote of each of the board of directors or trustees of the constituent corporations
of the plan of merger or consolidation, the same shall be submitted for approval
by the stockholders or members of each of such corporations at separate
corporate meetings duly called for the purpose. Notice of such meetings shall
be given to all stockholders or members of the respective corporations, at least
two (2) weeks prior to the date of the meeting, either personally or by registered
mail. Said notice shall state the purpose of the meeting and shall include a copy
or a summary of the plan of merger or consolidation. The affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock of each corporation in the case of stock corporations or at least two-thirds
(2/3) of the members in the case of non-stock corporations shall be necessary
for the approval of such plan. Any dissenting stockholder in stock corporations
may exercise his appraisal right in accordance with the Code: Provided, That if
after the approval by the stockholders of such plan, the board of directors
decides to abandon the plan, the appraisal right shall be extinguished.

SEC. 4. Corporations created by special laws or charters. — Corporations Any amendment to the plan of merger or consolidation may be made, provided
created by special laws or charters shall be governed primarily by the such amendment is approved by majority vote of the respective boards of
provisions of the special law or charter creating them or applicable to them. directors or trustees of all the constituent corporations and ratified by the
supplemented by the provisions of this Code, insofar as they are applicable. affirmative vote of stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds (2/3) of the members of each of the
The provision of Section 74 of Batas Pambansa Blg. 68 of the new constituent corporations. Such plan, together with any amendment, shall be
Corporation Code with respect to the right of a stockholder to considered as the agreement of merger or consolidation.
demand an inspection or examination of the books of the corporation
may not be reconciled with the abovequoted provisions of the charter
of the respondent bank. It is not correct to claim, therefore, that the
right of inspection under Section 74 of the new Corporation Code may
apply in a supplementary capacity to the charter of the respondent
bank.

Sec. 78. Articles of merger or consolidation. - After the approval by the

CHAPTER 12: MERGER AND CONSOLIDATION
Sec. 36, par. 8 of the Corporation Code of the Philippines expressly empowers
a corporation to merge or consolidate with another corporation subject to the
requirements and procedure prescribed in TITLE IX.
stockholders or members as required by the preceding section, articles of
merger or articles of consolidation shall be executed by each of the constituent
corporations, to be signed by the president or vice-president and certified by
the secretary or assistant secretary of each corporation setting forth:

Sec. 76. Plan or merger of consolidation. - Two or more corporations may

1. The plan of the merger or the plan of consolidation;
merge into a single corporation which shall be one of the constituent
corporations or may consolidate into a new single corporation which shall be 2. As to stock corporations, the number of shares outstanding, or in the case of
the consolidated corporation. non-stock corporations, the number of members; and

3. As to each corporation, the number of shares or members voting for and

The board of directors or trustees of each corporation, party to the merger or against such plan, respectively.
consolidation, shall approve a plan of merger or consolidation setting forth
the following: (NTSO)

1. The names of the corporations proposing to merge or consolidate,

hereinafter referred to as the constituent corporations;

2. The terms of the merger or consolidation and the mode of carrying the same
into effect;

3. A statement of the changes, if any, in the articles of incorporation of the

surviving corporation in case of merger; and, with respect to the consolidated
corporation in case of consolidation, all the statements required to be set forth
in the articles of incorporation for corporations organized under this Code; and

4. Such other provisions with respect to the proposed merger or consolidation

as are deemed necessary or desirable.

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Sec. 79. Effectivity of merger or consolidation. - The articles of merger or
of consolidation, signed and certified as herein above required, shall be
submitted to the Securities and Exchange Commission in quadruplicate for its
approval: Provided, That in the case of merger or consolidation of banks or
banking institutions, building and loan associations, trust companies, insurance
companies, public utilities, educational institutions and other special
corporations governed by special laws, the favorable recommendation of the
appropriate government agency shall first be obtained. If the Commission is
satisfied that the merger or consolidation of the corporations concerned is not
inconsistent with the provisions of this Code and existing laws, it shall issue a
certificate of merger or of consolidation, at which time the merger or
consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission has reason to
believe that the proposed merger or consolidation is contrary to or inconsistent
with the provisions of this Code or existing laws, it shall set a hearing to give
the corporations concerned the opportunity to be heard. Written notice of the
date, time and place of hearing shall be given to each constituent corporation
at least two (2) weeks before said hearing. The Commission shall thereafter
proceed as provided in this Code.
thereby avoiding liquidation or bankruptcy. But in some cases, a reorganization
is effected notwithstanding the fact that the corporation is solvent.
ILLEGAL COMBINATIONS: While a merger or consolidation is a right,
granted by law, to corporations registered under the Code, Act 3518 proscribes
illegal combination. It provides, under Sec. 20 thereof that “no corporation
engaged in commerce may acquire, directly or indirectly, the whole or any part
of the stock or other share capital of another corporation or corporations
engaged in commerce, where the effect of such acquisitions may be to
substantially lessen competition between the corporation or corporations
whose stock is so acquired and the corporation making the acquisition, or
between any of them, or to restrain such commerce in any section community,
or ten to create a monopoly of any line of commerce.” Corollary to this is Art.
186 of the Revised Penal Code which imposes a penalty of imprisonment and/or
fine on any person who enters into a contract or conspiracy to create
monopolies and combinations in restraint of trade.
MERGER: is a union effected by absorbing one or more existing corporations
by another which survives and continues the combined business. It is the
uniting of two or more corporations by the transfer of property to one of them
which continue in existence, the other or the others being dissolved and
merged therein.
Example: It was agreed that B Company will take over and acquire all the
business, assets, properties, rights and liabilities of C Corporation and by virtue
of which B will absorb C which is to be dissolved.

CONSOLIDATION: is the uniting or amalgamation of two or more existing

Sec. 80. Effects of merger or consolidation. - The merger or consolidation corporations to form a new corporation. It signifies a union as necessarily
shall have the following effects: results in the creation of a new corporation and the termination of existence
of old ones. The united concern resulting from such union is called consolidated
corporation.
1. The constituent corporations shall become a single corporation which, in case Thus, in the example given, if B and C agreed to form a new corporation, A
of merger, shall be the surviving corporation designated in the plan of merger; Company, which will absorb both business, and all of B’s and C’s assets,
and, in case of consolidation, shall be the consolidated corporation designated properties, rights and liabilities are transferred to A which will continue their
in the plan of consolidation; combined business while B and C will be dissolved, a consolidation takes place.
2. The separate existence of the constituent corporations shall cease, except In effect, in a consolidation, the constituent corporations are all dissolved, while
that of the surviving or the consolidated corporation; in a merger, the absorbing or surviving corporation is not, only the absorbed.
3. The surviving or the consolidated corporation shall possess all the rights, REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR
privileges, immunities and powers and shall be subject to all the duties and CONSOLIDATION:
liabilities of a corporation organized under this Code; 1. The BOD/T of each constituent corporations shall approve a plan or
merger or consolidation setting for the matters required in Sec. 76;
4. The surviving or the consolidated corporation shall thereupon and thereafter 2. Approval of the plan by the stockholders representing 2/3 outstanding
possess all the rights, privileges, immunities and franchises of each of the
capital stock or 2/3 of the member in non-stock corporations of each of
constituent corporations; and all property, real or personal, and all receivables such corporations at separate corporate meetings called for the purpose;
due on whatever account, including subscriptions to shares and other choses in 3. Prior notice of such meeting, with a copy or summary of the plan of
action, and all and every other interest of, or belonging to, or due to each merger or consolidation shall be given to all stockholders or members at
constituent corporation, shall be deemed transferred to and vested in such least 2 weeks prior to the scheduled meeting, either personally or by
surviving or consolidated corporation without further act or deed; and registered mail stating the purpose thereof;
4. Execution of the articles of merger or consolidation by each constituent
5. The surviving or consolidated corporation shall be responsible and liable for corporations to be signed by the president or vice-president and certified
all the liabilities and obligations of each of the constituent corporations in the by the corporate secretary or assistant secretary setting forth the matters
same manner as if such surviving or consolidated corporation had itself incurred required in Sec. 78;
such liabilities or obligations; and any pending claim, action or proceeding 5. Submission of the articles of merger or consolidation in quadruplicate to
brought by or against any of such constituent corporations may be prosecuted the SEC subject to the requirement of Sec. 79 that if it involve
by or against the surviving or consolidated corporation. The rights of creditors corporations under direct supervision of any other government agency or
or liens upon the property of any of such constituent corporations shall not be
governed by special laws the favorable recommendation of the
impaired by such merger or consolidation. government agency concerned shall first be secured; and
6. Issuance of the certificate of merger or consolidation by the SEC at which
time the merger or consolidation shall be effective. If the plan, however,
is believed to be contrary to law, the SEC shall set a hearing to give the
corporations concerned an opportunity to be heard upon notice and
thereafter, the Commission shall proceed as provided in the Code.
REASON FOR REORGANIZATION: The reasons inducing a reorganization
are not in every case the same, but for the most part, they are to be found in EFFECTS OF MERGER OR CONSOLIDATION:
the weak financial or insolvent condition of the particular corporations. The aim 1. There will only be a single corporation. In case of merger, the surviving
of corporate reorganization or combination is generally to put the company corporation or the consolidate corporation in case of consolidation;
upon a sound financial basis and to enable it to take care of its obligations 2. The termination of corporate existence of the constituent corporations,

101 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 except that of the surviving corporation or the consolidated corporation;
3. The surviving corporation 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 consolidated corporation shall possess all the rights,
privileges, immunities and franchises of the constituent corporations, and
all property and all receivables due, including subscriptions to shares and
other choses in action, and every other interest of, or belonging to or due
to the constituent corporations shall be deemed transferred to and vested
in such surviving or consolidated corporation without further act or deed;
and
5. The rights of creditors or any lien on the property of the constituent
corporations shall not be impaired by the merger or consolidation.
LIQUIDATION: There would be no need to liquidate or wind-up the affairs of
the corporation because (1) there are no assets to distribute; (2) no debts and
liabilities to pay – since all these are transferred to the surviving or consolidated
corporation.
ASSOCIATED BANK, petitioner,
vs.
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.
(G.R. No. 123793; June 29, 1998)
FACTS: Associated Banking Corporation and Citizens Bank and Trust Company
merged to form Associated Citizens Bank which subsequently changed its
corporate name to Associate Bank.
The defendant Lorenzo Sarmiento Jr. executed a promissory note in favor of
Associated Bank for P2.5M of which P2.25M remains unpaid. Despite repeated
demands, the defendant failed to pay the sum due.
Defendant denied all pertinent allegations in the complaint and alleged as
affirmative and/or special defense that Associated Bank is not the real party in
interest because the promissory note was executed in favor of Citizens Bank
and Trust Company.
Defendant was declared in default for not appearing in the Pre-Trial Conference
and the plaintiff was allowed to present evidence ex-parte, the Motion to Life
Order of Default and or Reconsideration of the Order being dismissed. The trial
court ruled in favor of Associated Bank. On appeal, the CA reversed the trial
court.
ISSUE: WON Associated Bank, the surviving corporation, may enforce the
promissory note made by Sarmiento in favor of CBTC, the absorbed company
after the effectivity of the merger?
HELD: Yes. Ordinarily, in the merger of two or more existing
corporations, one of the combining corporations survives and
continues the combined business, while the rest are dissolved and all
their rights, properties and liabilities are acquired by the surviving
corporation. Although there is a dissolution of the absorbed
corporations, there is no winding up of their affairs or liquidation of
their assets, because the surviving corporation automatically
acquires all their rights, privileges and powers, as well as their
liabilities.
The merger, however, does not become effective upon the mere
agreement of the constituent corporations. The procedure to be followed
is prescribed under the Corporation Code. Section 79 of said Code requires the
approval by the Securities and Exchange Commission (SEC) of the articles of
merger which, in turn, must have been duly approved by a majority of the
respective stockholders of the constituent corporations. The same provision
further states that the merger shall be effective only upon the issuance
by the SEC of a certificate of merger. The effectivity date of the
merger is crucial for determining when the merged or absorbed
corporation ceases to exist; and when its rights, privileges,
properties as well as liabilities pass on to the surviving corporation.
102 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Consistent with the aforementioned Section 79, the September 16, 1975
Agreement of Merger, which Associated Banking Corporation (ABC) and
Citizens Bank and Trust Company (CBTC) entered into, provided that its
effectivity "shall, for all intents and purposes, be the date when the necessary
papers to carry out this [m]erger shall have been approved by the Securities
and Exchange Commission." As to the transfer of the properties of CBTC to
ABC, the agreement provides:
“10. Upon effective date of the Merger, all rights, privileges, powers,
immunities, franchises, assets and property of [CBTC], whether real,
personal or mixed, and including [CBTC's] goodwill and tradename, and all
debts due to [CBTC] on whatever act, and all other things in action belonging
to [CBTC] as of the effective date of the [m]erger shall be vested in [ABC],
the SURVIVING BANK, without need of further act or deed”
The records do not show when the SEC approved the merger. Private
respondent's theory is that it took effect on the date of the execution of the
agreement itself, which was September 16, 1975. Private respondent contends
that, since he issued the promissory note to CBTC on September 7, 1977 —
two years after the merger agreement had been executed — CBTC could not
have conveyed or transferred to petitioner its interest in the said note, which
was not yet in existence at the time of the merger. Therefore, petitioner, the
surviving bank, has no right to enforce the promissory note on private
respondent; such right properly pertains only to CBTC.
Assuming that the effectivity date of the merger was the date of its execution,
we still cannot agree that petitioner no longer has any interest in the
promissory note. A closer perusal of the merger agreement leads to a different
conclusion. The provision quoted earlier has this other clause:
Upon the effective date of the [m]erger, all references to [CBTC] in any
deed, documents, or other papers of whatever kind or nature and wherever
found shall be deemed for all intents and purposes, references to [ABC], the
SURVIVING BANK, as if such references were direct references to [ABC]. . .
.
Thus, the fact that the promissory note was executed after the
effectivity date of the merger does not militate against petitioner.
The agreement itself clearly provides that all contracts — irrespective
of the date of execution — entered into in the name of CBTC shall be
understood as pertaining to the surviving bank, herein petitioner.
Since, in contrast to the earlier aforequoted provision, the latter clause no
longer specifically refers only to contracts existing at the time of the merger,
no distinction should be made. The clause must have been deliberately
included in the agreement in order to protect the interests of the combining
banks; specifically, to avoid giving the merger agreement a farcical
interpretation aimed at evading fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC as the payee, the
reference to CBTC in the note shall be construed, under the very provisions of
the merger agreement, as a reference to petitioner bank, "as if such reference
[was a] direct reference to" the latter "for all intents and purposes."
No other construction can be given to the unequivocal stipulation. Being clear,
plain and free of ambiguity, the provision must be given its literal
meaning and applied without a convoluted interpretation. Verba lelegis non est
recedendum.
In light of the foregoing, the Court holds that petitioner has a valid cause of
action against private respondent. Clearly, the failure of private respondent to
honor his obligation under the promissory note constitutes a violation of
petitioner's right to collect the proceeds of the loan it extended to the former.
BANK OF THE PHILIPPINE ISLANDS, Petitioner,
vs.
BPI EMPLOYEES UNION-DAVAO CHAPTER-FEDERATION OF UNIONS
IN BPI UNIBANK, Respondent
(G.R. No. 164301; August 10, 2010)
FACTS: On March 23, 2000, the Bangko Sentral ng Pilipinas approved the
Articles of Merger executed on January 20, 2000 by and between BPI, herein
petitioner, and FEBTC. This Article and Plan of Merger was approved by the
Securities and Exchange Commission on April 7, 2000.
Pursuant to the Article and Plan of Merger, all the assets and liabilities of FEBTC
were transferred to and absorbed by BPI as the surviving corporation. FEBTC
employees, including those in its different branches across the country, were
hired by petitioner as its own employees, with their status and tenure
recognized and salaries and benefits maintained.
BPI has an existing Union Shop Clause agreement with the BPI Employees
Union-Davao Chapter-Federation of Unions in BPI Unibank (BPI Union)
whereby it is a pre-condition that new employees must join the union before
they can be regularized otherwise they will not have a continued employment.
By reason of the failure of the FEBTC employees to join the union, BPI Union
recommended to BPI their dismissal. BPI refused. The issue went to voluntary
arbitration where BPI won but the Court of Appeals reversed the Voluntary
Arbitrator. Hence, this petition.
ISSUE: WON employees of a dissolved corporation in a merger are considered
absorbed by the surviving corporation?
HELD: No. Absorbed FEBTC Employees are neither assets nor
liabilities. In legal parlance, however, human beings are never embraced in
the term "assets and liabilities." Moreover, BPI’s absorption of former FEBTC
employees was neither by operation of law nor by legal consequence of
contract. There was no government regulation or law that compelled
the merger of the two banks or the absorption of the employees of
the dissolved corporation by the surviving corporation. Had there
been such law or regulation, the absorption of employees of the non-
surviving entities of the merger would have been mandatory on the
surviving corporation. In the present case, the merger was voluntarily
entered into by both banks presumably for some mutually acceptable
consideration. In fact, the Corporation Code does not also mandate the
absorption of the employees of the non-surviving corporation by the
surviving corporation in the case of a merger. Section 80 of the
Corporation Code provides.
This Court believes that it is contrary to public policy to declare the former
FEBTC employees as forming part of the assets or liabilities of FEBTC that were
transferred and absorbed by BPI in the Articles of Merger. Assets and liabilities,
in this instance, should be deemed to refer only to property rights and
obligations of FEBTC and do not include the employment contracts of its
personnel. A corporation cannot unilaterally transfer its employees to another
employer like chattel. Certainly, if BPI as an employer had the right to choose
who to retain among FEBTC’s employees, FEBTC employees had the
concomitant right to choose not to be absorbed by BPI. Even though FEBTC
employees had no choice or control over the merger of their employer with
BPI, they had a choice whether or not they would allow themselves to be
absorbed by BPI. Certainly nothing prevented the FEBTC’s employees from
resigning or retiring and seeking employment elsewhere instead of going along
with the proposed absorption.
Employment is a personal consensual contract and absorption by BPI of a
former FEBTC employee without the consent of the employee is in violation of
an individual’s freedom to contract. It would have been a different matter if
there was an express provision in the articles of merger that as a condition for
the merger, BPI was being required to assume all the employment contracts
of all existing FEBTC employees with the conformity of the employees. In the
absence of such a provision in the articles of merger, then BPI clearly had the
business management decision as to whether or not employ FEBTC’s
employees. FEBTC employees likewise retained the prerogative to allow
themselves to be absorbed or not; otherwise, that would be tantamount to
involuntary servitude.
There appears to be no dispute that with respect to FEBTC employees that BPI
chose not to employ or FEBTC employees who chose to retire or be separated
from employment instead of "being absorbed," BPI’s assumed liability to
these employees pursuant to the merger is FEBTC’s liability to them in terms
of separation pay, retirement pay or other benefits that may be due them
depending on the circumstances.
103 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Although not binding on this Court, American jurisprudence on the
consequences of voluntary mergers on the right to employment and seniority
rights is persuasive and illuminating. We quote the following pertinent
discussion from the American Law Reports:
Several cases have involved the situation where as a result of mergers,
consolidations, or shutdowns, one group of employees, who had accumulated
seniority at one plant or for one employer, finds that their jobs have been
discontinued except to the extent that they are offered employment at the
place or by the employer where the work is to be carried on in the future. Such
cases have involved the question whether such transferring employees should
be entitled to carry with them their accumulated seniority or whether they are
to be compelled to start over at the bottom of the seniority list in the "new"
job. It has been recognized in some cases that the accumulated seniority does
not survive and cannot be transferred to the "new" job.
In Carver v Brien (1942) 315 Ill App 643, 43 NE2d 597, the court saying that,
absent some specific contract provision otherwise, seniority rights were
ordinarily limited to the employment in which they were earned, and
concluding that the contract for which specific performance was sought was
not such a completed and binding agreement as would support such equitable
relief, since the railroad, whose concurrence in the arrangements made was
essential to their effectuation, was not a party to the agreement.
Indeed, from the tenor of local and foreign authorities, in voluntary mergers,
absorption of the dissolved corporation’s employees or the
recognition of the absorbed employees’ service with their previous
employer may be demanded from the surviving corporation if
required by provision of law or contract. The dissent of Justice Arturo D.
Brion tries to make a distinction as to the terms and conditions of employment
of the absorbed employees in the case of a corporate merger or consolidation
which will, in effect, take away from corporate management the prerogative to
make purely business decisions on the hiring of employees or will give it an
excuse not to apply the CBA in force to the prejudice of its own employees and
their recognized collective bargaining agent. In this regard, we disagree with
Justice Brion.
Justice Brion takes the position that because the surviving corporation
continues the personality of the dissolved corporation and acquires all the
latter’s rights and obligations, it is duty-bound to absorb the dissolved
corporation’s employees, even in the absence of a stipulation in the plan of
merger. He proposes that this interpretation would provide the necessary
protection to labor as it spares workers from being "left in legal limbo."
However, there are instances where an employer can validly discontinue or
terminate the employment of an employee without violating his right to security
of tenure. Among others, in case of redundancy, for example, superfluous
employees may be terminated and such termination would be authorized under
Article 283 of the Labor Code.
The lack of a provision in the plan of merger regarding the transfer of
employment contracts to the surviving corporation could have very well been
deliberated on the part of the parties to the merger, in order to grant the
surviving corporation the freedom to choose who among the dissolved
corporation’s employees to retain, in accordance with the surviving
corporation’s business needs. If terminations, for instance due to redundancy
or labor-saving devices or to prevent losses, are done in good faith, they would
be valid. The surviving corporation too is duty-bound to protect the rights of
its own employees who may be affected by the merger in terms of seniority
and other conditions of their employment due to the merger. Thus, we are not
convinced that in the absence of a stipulation in the merger plan the surviving
corporation was compelled, or may be judicially compelled, to absorb all
employees under the same terms and conditions obtaining in the dissolved
corporation as the surviving corporation should also take into consideration the
state of its business and its obligations to its own employees, and to their
certified collective bargaining agent or labor union.
Even assuming we accept Justice Brion’s theory that in a merger situation the
surviving corporation should be compelled to absorb the dissolved
corporation’s employees as a legal consequence of the merger and as a social
justice consideration, it bears to emphasize his dissent also recognizes that the
employee may choose to end his employment at any time by voluntarily
resigning. For the employee to be "absorbed" by BPI, it requires the employees’
implied or express consent. It is because of this human element in employment
contracts and the personal, consensual nature thereof that we cannot agree
that, in a merger situation, employment contracts are automatically
transferable from one entity to another in the same manner that a contract
pertaining to purely proprietary rights – such as a promissory note or a deed
of sale of property – is perfectly and automatically transferable to the surviving
corporation.
That BPI is the same entity as FEBTC after the merger is but a legal fiction
intended as a tool to adjudicate rights and obligations between and among the
merged corporations and the persons that deal with them. Although in a
merger it is as if there is no change in the personality of the employer, there
is in reality a change in the situation of the employee. Once an FEBTC employee
is absorbed, there are presumably changes in his condition of employment
even if his previous tenure and salary rate is recognized by BPI. It is reasonable
to assume that BPI would have different rules and regulations and company
practices than FEBTC and it is incumbent upon the former FEBTC employees
to obey these new rules and adapt to their new environment. Not the least of
the changes in employment condition that the absorbed FEBTC employees
must face is the fact that prior to the merger they were employees of an
unorganized establishment and after the merger they became employees of a
unionized company that had an existing collective bargaining agreement with
the certified union. This presupposes that the union who is party to the
collective bargaining agreement is the certified union that has, in the
appropriate certification election, been shown to represent a majority of the
members of the bargaining unit.
Sec. 81. Instances of appraisal right.- Any stockholder of a corporation
shall have the right to dissent and demand payment of the fair value of his
shares in the following instances:
3. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or
of authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of corporate
existence;
4. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets
as provided in the Code; and
3. In case of merger or consolidation.
ENUMERATION NOT EXCLUSIVE: it may also cover:
1. Investment of funds in another corporation or business or for any other
purpose other than its primary purpose as provided in Sec. 42;
2. Likewise, in a close corporation, a stockholder has the unbridled 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 its debts and liabilities, exclusive
of capital stock (Sec. 105).

Likewise, with respect to FEBTC employees that BPI chose to employ and who
also chose to be absorbed, then due to BPI’s blanket assumption of liabilities
and obligations under the articles of merger, BPI was bound to respect the
years of service of these FEBTC employees and to pay the same, or
commensurate salaries and other benefits that these employees previously
enjoyed with FEBTC.
As the Union likewise pointed out in its pleadings, there were benefits under
the CBA that the former FEBTC employees did not enjoy with their
previous employer. As BPI employees, they will enjoy all these CBA benefits
upon their "absorption." Thus, although in a sense BPI is continuing FEBTC’s
employment of these absorbed employees, BPI’s employment of these
absorbed employees was not under exactly the same terms and conditions as
stated in the latter’s employment contracts with FEBTC. This further
strengthens the view that BPI and the former FEBTC employees voluntarily
contracted with each other for their employment in the surviving corporation.
NOT ALL AMENDMENTS: the right may only be exercised in cases of
amendment which “has the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence”.
Accordingly, if the amendment is to increase or decrease the number of
directors, or change the corporate name, or change of principal office, the
appraisal right is not available.
STOCKHOLDER WITH UNPAID SUBSCRIPTION: He MAY exercise the
appraisal right, since the subscriber is entitled to all the rights of a stockholder
under Sec. 72 and although Sec. 82 provides for the submission of certificate
of stock, Sec. 86 provides that the notation to such certificate of stock is
OPTIONAL at the instance of the corporation.
C. REQUIREMENTS AND PROCEDURE

CHAPTER 13: APPRAISAL RIGHT

A. DEFINITION

Appraisal Right is the method of paying a shareholder for the taking of his
property. It is a statutory means whereby a stockholder can avoid the
conversion of this property into another property not of his own choosing and
is given to a shareholder as compensation for the abrogation of the common-
law rule that a single stockholder could block a certain corporate act such as
merger.

PURPOSE: is to protect the property rights of dissenting stockholders from

actions by the majority shareholders which alters the nature and character of
their investment. In effect, it is a right granted to dissenting stockholders on
certain corporate or business decisions to demand payment of the fair market
value of their shares.

B. WHEN EXERCISED

104 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 Sec. 82. How right is exercised. – The appraisal right may be exercised by
any stockholder who shall have voted against the proposed corporate action,
by making a written demand on the corporation within thirty (30) days after the
date on which the vote was taken for payment of the fair value of his shares:
Provided, That failure to make the demand within such period shall be deemed
a waiver of the appraisal right. If the proposed corporate action is implemented
or affected, the corporation shall pay to such stockholder, upon surrender of
the certificate or certificates of stock representing his shares, the fair value
thereof as of the day prior to the date on which the vote was taken, excluding
any appreciation or depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was
approved by the stockholders, the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall be determined and
appraised by three (3) disinterested persons, one of whom shall be named by
the stockholder, another by the corporation, and the third by the two thus
chosen. The findings of the majority of the appraisers shall be final, and their
award shall be paid by the corporation within thirty (30) days after such award
is made: Provided, That no payment shall be made to any dissenting
stockholder unless the corporation has unrestricted retained earnings in its
books to cover such payment: and Provided, further, That upon payment by
the corporation of the agreed or awarded price, the stockholder shall forthwith
transfer his shares to the corporation.
REQUIREMENTS AND PROCEDURE FOR THE VALID EXERCISE OF
THIS RIGHT ARE:
1. The stockholder must have voted against the proposed corporate action
in any of the instances allowed by law for the exercise of the right of
appraisal;
2. The written demand for payment must be made by the dissenting
stockholder within 30 days after the date on which the vote was taken.
Failure to make the demand within the said period shall be deemed a
waiver on the part of the stockholder concerned to exercise his appraisal
right;
3. Surrender of the certificate of stock by the dissenting stockholder for
notation in the corporate books and the payment of the corporation of
the fair market value of the said shares as of the day prior to the date on
which the vote was taken. If the stockholder and the corporation cannot
agree on the fair market value thereof, the same shall be determined in
accordance with the provisions of par.2 of Sec. 82;
4. The fair value of the shares of the dissenting stockholder must be paid by
the corporation only if it has “unrestricted retained earnings” in its books
to cover such payment. If the corporation has no unrestricted retained
earnings, the dissenting stockholder may not, therefore, be able to
effectively exercise his appraisal right, EXCEPT in the case of a close
corporation under Sec. 105;
5. Upon payment of the shares by the corporation, the dissenting
stockholder shall transfer his shares to the corporation.
D. EFFECT OF EXERCISE OF APPRAISAL RIGHT
Sec. 83. Effect of demand and termination of right. - From the time of
demand for payment of the fair value of a stockholder's shares until either the
abandonment of the corporate action involved or the purchase of the said
shares by the corporation, all rights accruing to such shares, including voting
and dividend rights, shall be suspended in accordance with the provisions of a. The price offered by the corporation is lower than the fair value of the
this Code, except the right of such stockholder to receive payment of the fair
value thereof: Provided, That if the dissenting stockholder is not paid the value b. Where an action is filed by the dissenting stockholder to recover such fair
of his shares within 30 days after the award, his voting and dividend rights shall
immediately be restored.
105 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
SUSPENSION OF STOCKHOLDER RIGHTS: Upon completion of the steps
provided in Sec. 82, the stockholder concerned is regarded as having made an
election to withdraw from the corporate enterprise and take the value of his
stock. Such a procedure suspends (for a maximum period of 30 days) certain
ownership rights associated with stockholder status, such as the right to
receive dividends or distribution and the right to vote which cannot be restored
without compliance with the governing statutory conditions.
DIRECTOR EXERCISING APPRAISAL RIGHT: may still continue to
function as such, prior to payment, unless there is a contrary provision in the
by-laws.
E. WHEN RIGHT TO PAYMENT CEASES
Sec. 84. When right to payment ceases. - No demand for payment under
this Title may be withdrawn unless the corporation consents thereto. If,
however, such demand for payment is withdrawn with the consent of the
corporation, or if the proposed corporate action is abandoned or rescinded by
the corporation or disapproved by the Securities and Exchange Commission
where such approval is necessary, or if the Securities and Exchange Commission
determines that such stockholder is not entitled to the appraisal right, then the
right of said stockholder to be paid the fair value of his shares shall cease, his
status as a stockholder shall thereupon be restored, and all dividend
distributions which would have accrued on his shares shall be paid to him.
INSTANCES WHEN THE RIGHT OF A DISSENTING STOCKHOLDER TO
BE PAID THE FAIR VALUE OF HIS SHARES CEASES:
1. When he withdraws his demand for payment and the corporation
consents thereto;
2. When the proposed action is abandoned or rescinded by the corporation;
3. When the proposed action is disapproved by the SEC where such approval
is necessary;
4. When the SEC determines that he is not entitled to exercise his appraisal
right;
5. When he fails to submit the stock certificate within ten (10) days from
demand to the corporation for notation that such shares are dissenting
shares; and,
6. If the shares are transferred and the certificate subsequently cancelled.
F. COST OF APPRAISAL
If the corporation and the dissenting stockholder do not agree, an appraisal to
be made by three disinterested person may be made.
Sec. 85. Who bears costs of appraisal. - The costs and expenses of
appraisal shall be borne by the corporation, unless the fair value ascertained by
the appraisers is approximately the same as the price which the corporation
may have offered to pay the stockholder, in which case they shall be borne by
the latter. In the case of an action to recover such fair value, all costs and
expenses shall be assessed against the corporation, unless the refusal of the
stockholder to receive payment was unjustified.
THE CORPORATION BEARS THE COST IF:
shares of the dissenting stockholder as determined by the appraisers;
value and the refusal of the stockholder to receive payment is found by
the court to be justified.
DISSENTING STOCKHOLDER WILL BE LIABLE FOR THE COST AND
EXPENSES OF APPRAISAL WHEN:
a. When the price offered by the corporation is approximately the same as earns a profit, gain or income for the corporation or members does not make
the fair value ascertained by the appraisers; it a profit-making corporation where such profit or income is used for the
b. Where the action filed by the dissenting stockholder and his refusal to purpose set forth in the AOI and is not distributable to its incorporators,
accept payment is found by the court to be unjustified. members or officers, since mere intangible or pecuniary benefits to the
members do not change the nature of the corporation.
G. NOTATION
The determination of whether or not a non-stock corporation can engage in
profit-making business or activity depends largely on the purpose or purposes
Sec. 86. Notation on certificates; rights of transferee. - Within ten (10)
indicated in the AOI. If the business activity is authorized in the said articles,
days after demanding payment for his shares, a dissenting stockholder shall necessary, incidental or essential thereto, the same may be undertaken by the
submit the certificates of stock representing his shares to the corporation for corporation, otherwise, not, as it would be an ultra-vires act under Sec. 45
notation thereon that such shares are dissenting shares. His failure to do so
shall, at the option of the corporation, terminate his rights under this Title. If B. PURPOSE
shares represented by the certificates bearing such notation are transferred,
and the certificates consequently cancelled, the rights of the transferor as a Sec. 88. Purposes. - Non-stock corporations may be formed or organized for
dissenting stockholder under this Title shall cease and the transferee shall have charitable, religious, educational, professional, cultural, fraternal, literary,
all the rights of a regular stockholder; and all dividend distributions which would scientific, social, civic service, or similar purposes, like trade, industry,
have accrued on such shares shall be paid to the transferee. agricultural and like chambers, or any combination thereof, subject to the
special provisions of this Title governing particular classes of non-stock
corporations.

PURPOSE: to give notice and guide to the corporation to determine the

respective rights of stockholder.
SALE: The law does not prohibit the dissenting stockholder to sell, transfer or
assign his shares. If such be the case, the right of the dissenting stockholder
to be paid the fair value of his shares shall cease and the transferee will acquire
all the rights of a regular stockholder inclusive of all dividends which would
have accrued on such shares.
Non-stock corporations may be organized or formed for any purpose or
purposes allowed or indicated in the above provision. The enumeration,
however, is not exclusive as the law itself recognizes similar or allied purpose
or purposes for which non-stock corporations may be organized. Recreational,
sports club, athletic or allied activities of similar import, for instance, may
likewise be lawful purpose of a non-stock corporation.

C. MEMBERSHIP AND VOTING RIGHTS

CHAPTER 14: NON-STOCK CORPORATIONS (TITLE XI)
Sec. 89. Right to vote. - The right of the members of any class or classes to
A. DEFINITION
vote may be limited, broadened or denied to the extent specified in the articles
of incorporation or the by-laws. Unless so limited, broadened or denied, each
Sec. 87. Definition. - For the purposes of this Code, a non-stock corporation member, regardless of class, shall be entitled to one vote.
is one where no part of its income is distributable as dividends to its members,
trustees, or officers, subject to the provisions of this Code on dissolution:
Provided, That any profit which a non-stock corporation may obtain as an Unless otherwise provided in the articles of incorporation or the by-laws, a
incident to its operations shall, whenever necessary or proper, be used for the member may vote by proxy in accordance with the provisions of this Code.
furtherance of the purpose or purposes for which the corporation was
organized, subject to the provisions of this Title. Voting by mail or other similar means by members of non-stock corporations
may be authorized by the by-laws of non-stock corporations with the approval
of, and under such conditions which may be prescribed by, the Securities and
Exchange Commission.
The provisions governing stock corporation, when pertinent, shall be applicable
to non-stock corporations, except as may be covered by specific provisions of
this Title.
CUMULATIVE VOTING: GENERAL RULE: Cumulative voting is not allowed,
accordingly, even if the members may cast as many votes are there are
trustees to be elected, he may not cast more than one vote for one candidate,
CAPITAL STOCK: the old notion is that a non-stock corporation is one which
UNLESS: allowed in the AOI or the by-laws.
has no capital stock divided into shares – this may no longer hold true under
the definition provided by Sec. 87. Thus, even if it may have capital stock
CLASSIFICATION: The by-laws or the AOI may provide for classification as
divided into shares, proprietary or otherwise, a corporation is considered “non-
to members with voting or non-voting rights, since it is provided that “the right
stock” so long as it does not distribute dividends to its members and officers.
of the members of any class or classes to vote may be limited, broadened or
We have, for instance, Club shares issued t the members, the totality of which
denied”.
may rightfully represent “capital” of the corporation but whose income (if there
be any) is not distributed by way of dividends during its corporate existence.
PROXY VOTING: Generally, allowed unless disallowed by the AOI or the by-
The corporation, in such a case, is legally “non-stock”.
laws.
PROFITS: A non-stock corporation is generally not allowed to engage in any
VOTING OTHER THAN IN PERSON: may also be allowed by the AOI or by-
business undertaking or activity for profit as it would run counter to its very
laws. Contrary to a stock corporation, a stockholder has to vote in the meeting
nature as a non-profit entity. However, as may be allowed and specified in its
called for the purpose except in case of a general amendment where “written
AOI or incidental to the objects and purposes indicated therein, it may engage
assent” is allowed.
in certain money-making ventures or economic activities provided that any
profits derived therefrom shall be used for the furtherance of the purposes for
which the corporation was organized or to defray the operating expenses of
the entity. It has thus been said that the fact that a non-profit corporation
106 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 Sec. 90. Non-transferability of membership. - Membership in a non-stock
CHINESE YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE
corporation and all rights arising therefrom are personal and non-transferable, PHILIPPINE ISLANDS, WILLIAM GOLANGCO, in his capacity as Director and
unless the articles of incorporation or the by-laws otherwise provide. President of the said Association, and JUANITO K. TAN, in his capacity as
Recording Secretary of the said Association, petitioners,
vs.
VICTOR CHING and THE COURT OF APPEALS, respondents
(G.R. No. L-36929; June 18, 1976)
Sec. 91. Termination of membership. - Membership shall be terminated in
the manner and for the causes provided in the articles of incorporation or the FACTS: Respondent Ching, a member of the BOD of petitioner Chinese YMCA,
by-laws. Termination of membership shall have the effect of extinguishing all filed an action in the CFI, alleging that on the Membership Campaign of the
Chinese YMCA held from Sept. 27, 1965, only 175 applicants were submitted,
rights of a member in the corporation or in its property, unless otherwise
canvassed and accepted on the last day of the membership campaign, which
provided in the articles of incorporation or the by-laws. was Nov. 26, 1965, NOT more than 240, as reported in the Nov. 28, 1965 issue
of the Chinese Commercial News.

The trial court rendered a decision in favor of herein respondent declaring that
only 174 applications constitute the present active membership of the
MEMBERSHIP: non-stock corporations have the right to adopt rules
association.
prescribing the mode and manner in which membership thereat can be
obtained or maintained. This includes the right to limit membership. In other
ISSUE: WON the trial court is justified in stripping members of their
words, membership in non-stock corporations may be acquired by complying
membership in a non-stock corporation?
with the provisions of its rules prescribed in the by-laws. This is in consonance
with the express power granted by law under Sec. 36, par. 6 of the Code,
HELD: No. The documentary evidence itself as cited by the trial court,
authorizing them to admit members thereof and that authority carries with it
consisting of the applications and the receipts for payment of the membership
the power to prescribe rules on membership.
fees show that they were filed and paid not later than the November 26, 1965
deadline, and this was further supported by the bank statement of the
It has thus been stated that in the absence of charter or statutory restrictions,
petitioner YMCA deposit account with the China Banking Corporation and the
non-stock corporations may determine who shall be admitted to membership
checks paid by certain members to the YMCA which show that the application
and how they shall be admitted. It may exclude any person whom it deems
fees corresponding to the questioned 74 applications (that raised the total to
unfit for membership. Indeed, in the absence of restrictions, it may act
249 from 175) were already paid to petitioner YMCA as the time of the said
arbitrarily and exclude any persons it may see fit, and the courts have no power
deadline. (Exhibits 4, 6, 6-A, 6-B and 6-C). No evidence could be cited by the
to interfere. In other words, it is free to fix qualifications for membership and
trial court to rebut this well nigh conclusive documentary evidence other than
to provide for termination of membership.
respondent's unsupported suspicion which the trial court adopted in a negative
manner with its statement that it is "not improbable" that "some of those
AUTHORITY TO ADMIT MEMBERS: the provisions in the by-laws, if any,
applications filed after said deadline". If there were indeed any applications
shall govern. Absent any provision to the contrary, it must necessarily be
filed after the deadline, they certainly should have been positively pin-pointed
lodged with the BOT since it is the body that exercises all corporate powers as
and specifically annulled.
enunciated in Sec. 23 of the Code.
What is worse, 175 membership applications were undisputedly filed within the
SPECIAL CASES: the law itself may provide certain limitations or even
deadline (including the 75 withdrawn by respondent) and yet the 100
perhaps proscription on transfer of membership. Thus, RA 4726, otherwise
remaining unquestioned memberships were nullified by the questioned
known as the Condominium Act requires that membership therein shall not be
decision without the individuals concerned ever having been impleaded or
transferred separately from the condominium unit of which it is appurtenant
heard (except the individual petitioners president and secretary).
and that when a member ceases to own a unit, he shall automatically cease to
be a member.
The appealed decision thus contravened the established principle that the
courts cannot strip a member of a non-stock non-profit corporation
TERMINATION OF MEMBERSHIP: Membership may be terminated in the
of his membership therein without cause. Otherwise, that would be
manner and for causes provided in the AOI or by-laws and when a member is
an unwarranted and undue interference with the well-established
so terminated it shall extinguish all his rights in the corporation or in its property
right of a corporation to determine its membership, as announced by
unless otherwise provided in the said articles or by-laws.
Fletcher, as follows:
The power or authority to terminate members in non-stock corporations is said
Compliance with provisions of charter, constitution or by-laws. —In order
to be inherent but strict compliance with the manner and procedure laid down
that membership may be acquired in a non-stock corporation and valid by-
in the by-laws must be observed, otherwise it may render the expulsion
laws must be complied with, except in so far as they may be and are waived.
ineffective and invalid.
*** But provisions in the by-laws as to formal steps to be taken to acquire
membership may be waived by the corporation, or it may be estopped to
In the absence of any provision in the AOI or by-laws relative to the manner
assert that they have not been taken. [12A Fletcher Cyclopedia
and causes of termination or expulsion of member, the decided weight of
Corporations, Perm. ed., pp. 583-585; emphasis supplied.]
authority is to the effect that the power is inherent and may be exercised in
certain situations, namely:
Finally, the appealed decision did not give due importance to the undisputed
1. When an offense is committed which, although it has no immediate
fact therein stated that "at the board meeting of the association held on
relation to a member’s duty as such, it is so infamous as to render him
December 7, 1965, a list of 174 applications for membership, old and new, was
unfit for society of honest men, and which is indictable at common law;
submitted to the board and approved by the latter, over the objection of the
2. When the offense is a violation of his duty as member of the corporation;
petitioner [therein private respondent] who was present at said meeting." Such
and
action of the petitioner association's board of directors approving the 174
3. When the offense is of a mixed nature, being both against his duty as a
membership applications of old and new members constituting its active
member of the corporation, and also indictable at common law.
membership as duly processed and screened by the authorized committee just
be deemed a waiver on its part of any technicality or requirement of form,
As to whether or not a member should be expelled or maintained is the
since otherwise the association would be practically paralyzed and deprived of
established right of the corporation to determine and the courts are without
authority to strip a member of his membership without cause.
107 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
the substantial revenues from the membership dues of P17,400.00 (at P100.00
per application).
WHEREFORE the respondent court's decision is hereby set aside and in lieu
thereof judgment is rendered dismissing private respondent's petition in the
Court of First Instance of Manila and dissolving the preliminary injunction, with
costs against private respondent.
CEBU COUNTRY CLUB, INC., SABINO R. DAPAT, RUBEN D. ALMENDRAS,
JULIUS Z. NERI, DOUGLAS L. LUYM, CESAR T. LIBI, RAMONTITO* E. GARCIA
and JOSE B. SALA, petitioners,
vs.
RICARDO F. ELIZAGAQUE, respondent
(G.R. No. 160273 ; January 18, 2008)
FACTS: Cebu Country Club, Inc. (CCCI), petitioner, is a domestic corporation
operating as a non-profit and non-stock private membership club, having its
principal place of business in Banilad, Cebu City. Petitioners herein are
members of its Board of Directors.
Sometime in 1987, San Miguel Corporation, a special company proprietary
member of CCCI, designated respondent Ricardo F. Elizagaque, its Senior Vice
President and Operations Manager for the Visayas and Mindanao, as a special
non-proprietary member. The designation was thereafter approved by the
CCCI’s Board of Directors.
In 1996, respondent filed with CCCI an application for proprietary membership.
The application was indorsed by CCCI’s two (2) proprietary members, namely:
Edmundo T. Misa and Silvano Ludo.
As the price of a proprietary share was around the P5 million range, Benito
Unchuan, then president of CCCI, offered to sell respondent a share for only
P3.5 million. Respondent, however, purchased the share of a certain Dr. Butalid
for only P3 million. Consequently, on September 6, 1996, CCCI issued
Proprietary Ownership Certificate No. 1446 to respondent.
During the meetings dated April 4, 1997 and May 30, 1997 of the CCCI Board
of Directors, action on respondent’s application for proprietary membership
was deferred. In another Board meeting held on July 30, 1997, respondent’s
application was voted upon. Subsequently, or on August 1, 1997, respondent
received a letter from Julius Z. Neri, CCCI’s corporate secretary, informing him
that the Board disapproved his application for proprietary membership.
On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote CCCI a
letter of reconsideration. As CCCI did not answer, respondent, on October 7,
1997, wrote another letter of reconsideration. Still, CCCI kept silent. On
November 5, 1997, respondent again sent CCCI a letter inquiring whether any
member of the Board objected to his application. Again, CCCI did not reply.
Consequently, on December 23, 1998, respondent filed with the Regional Trial
Court (RTC), Branch 71, Pasig City a complaint for damages against petitioners,
docketed as Civil Case No. 67190.
After trial, the RTC rendered its Decision dated February 14, 2001 in favor of
respondent.
On appeal by petitioners, the Court of Appeals, in its Decision dated January
31, 2003, affirmed the trial court’s Decision and denied the Motion for
Reconsideration subsequently filed.
Hence, the present petition.
ISSUE: WON in disapproving respondent’s application for proprietary
membership with CCCI, petitioners are liable to respondent for damages?
HELD: Yes. Petitioners contend, inter alia, that the Court of Appeals erred in
awarding exorbitant damages to respondent despite the lack of evidence that
they acted in bad faith in disapproving the latter’s application; and in
disregarding their defense of damnum absque injuria.
108 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
For his part, respondent maintains that the petition lacks merit, hence, should
be denied.
CCCI’s Articles of Incorporation provide in part:
SEVENTH: That this is a non-stock corporation and membership therein as
well as the right of participation in its assets shall be limited to qualified
persons who are duly accredited owners of Proprietary Ownership
Certificates issued by the corporation in accordance with its By-Laws.
Corollary, Section 3, Article 1 of CCCI’s Amended By-Laws provides:
SECTION 3. HOW MEMBERS ARE ELECTED – The procedure for the
admission of new members of the Club shall be as follows:
(a) Any proprietary member, seconded by another voting proprietary
member, shall submit to the Secretary a written proposal for the admission
of a candidate to the "Eligible-for-Membership List";
(b) Such proposal shall be posted by the Secretary for a period of thirty (30)
days on the Club bulletin board during which time any member may
interpose objections to the admission of the applicant by communicating the
same to the Board of Directors;
(c) After the expiration of the aforesaid thirty (30) days, if no objections
have been filed or if there are, the Board considers the objections
unmeritorious, the candidate shall be qualified for inclusion in the "Eligible-
for-Membership List";
(d) Once included in the "Eligible-for-Membership List" and after the
candidate shall have acquired in his name a valid POC duly recorded in the
books of the corporation as his own, he shall become a Proprietary Member,
upon a non-refundable admission fee of P1,000.00, provided that admission
fees will only be collected once from any person.
On March 1, 1978, Section 3(c) was amended to read as follows:
(c) After the expiration of the aforesaid thirty (30) days, the Board may, by
unanimous vote of all directors present at a regular or special
meeting, approve the inclusion of the candidate in the "Eligible-for-
Membership List".
As shown by the records, the Board adopted a secret balloting known as the
"black ball system" of voting wherein each member will drop a ball in the ballot
box. A white ball represents conformity to the admission of an applicant, while
a black ball means disapproval. Pursuant to Section 3(c), as amended, cited
above, a unanimous vote of the directors is required. When respondent’s
application for proprietary membership was voted upon during the Board
meeting on July 30, 1997, the ballot box contained one (1) black ball. Thus,
for lack of unanimity, his application was disapproved.
Obviously, the CCCI Board of Directors, under its Articles of Incorporation, has
the right to approve or disapprove an application for proprietary membership.
But such right should not be exercised arbitrarily. Articles 19 and 21 of the Civil
Code on the Chapter on Human Relations provide restrictions.
In GF Equity, Inc. v. Valenzona, we expounded Article 19 and correlated it with
Article 21, thus:
“This article, known to contain what is commonly referred to as the principle
of abuse of rights, sets certain standards which must be observed not only
in the exercise of one's rights but also in the performance of one's duties.
These standards are the following: to act with justice; to give everyone his
due; and to observe honesty and good faith. The law, therefore, recognizes
a primordial limitation on all rights; that in their exercise, the norms of
human conduct set forth in Article 19 must be observed. A right, though
by itself legal because recognized or granted by law as such, may
nevertheless become the source of some illegality. When a right is
exercised in a manner which does not conform with the norms
enshrined in Article 19 and results in damage to another, a legal
wrong is thereby committed for which the wrongdoer must be held
responsible. But while Article 19 lays down a rule of conduct for the
government of human relations and for the maintenance of social order, it
does not provide a remedy for its violation. Generally, an action for damages
under either Article 20 or Article 21 would be proper. (Emphasis in the
original)”

In rejecting respondent’s application for proprietary membership, we find that
petitioners violated the rules governing human relations, the basic principles
to be observed for the rightful relationship between human beings and for the
stability of social order. The trial court and the Court of Appeals aptly held that
petitioners committed fraud and evident bad faith in disapproving respondent’s
applications. This is contrary to morals, good custom or public policy. Hence,
petitioners are liable for damages pursuant to Article 19 in relation to Article
21 of the same Code.
It bears stressing that the amendment to Section 3(c) of CCCI’s Amended By-
Laws requiring the unanimous vote of the directors present at a special or
regular meeting was not printed on the application form respondent filled and
submitted to CCCI. What was printed thereon was the original provision of
Section 3(c) which was silent on the required number of votes needed for
admission of an applicant as a proprietary member.
Petitioners explained that the amendment was not printed on the application
form due to economic reasons. We find this excuse flimsy and unconvincing.
Such amendment, aside from being extremely significant, was introduced way
back in 1978 or almost twenty (20) years before respondent filed his
application. We cannot fathom why such a prestigious and exclusive golf
country club, like the CCCI, whose members are all affluent, did not have
enough money to cause the printing of an updated application form.
It is thus clear that respondent was left groping in the dark
wondering why his application was disapproved. He was not even
informed that a unanimous vote of the Board members was required.
When he sent a letter for reconsideration and an inquiry whether
there was an objection to his application, petitioners apparently
ignored him. Certainly, respondent did not deserve this kind of
treatment. Having been designated by San Miguel Corporation as a special
non-proprietary member of CCCI, he should have been treated by petitioners
with courtesy and civility. At the very least, they should have informed him why
his application was disapproved.
The exercise of a right, though legal by itself, must nonetheless be in
accordance with the proper norm. When the right is exercised arbitrarily,
unjustly or excessively and results in damage to another, a legal wrong is
committed for which the wrongdoer must be held responsible. It bears
reiterating that the trial court and the Court of Appeals held that petitioners’
disapproval of respondent’s application is characterized by bad faith.
As to petitioners’ reliance on the principle of damnum absque injuria or damage
without injury, suffice it to state that the same is misplaced. In Amonoy v.
Gutierrez, we held that this principle does not apply when there is an abuse
of a person’s right, as in this case.
As to the appellate court’s award to respondent of moral damages, we find the
same in order. Under Article 2219 of the New Civil Code, moral damages may
be recovered, among others, in acts and actions referred to in Article 21. We
believe respondent’s testimony that he suffered mental anguish, social
humiliation and wounded feelings as a result of the arbitrary denial of his
application.
ISSUE2: WON the liability is solidary considering that only one voted for
disapproval?
HELD: Yes. Section 31 of the Corporation Code provides:
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.
(Emphasis ours)
WHEREFORE, we DENY the petition. The challenged Decision and Resolution
of the Court of Appeals in CA-G.R. CV No. 71506 are AFFIRMED with
109 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
modification in the sense that (a) the award of moral damages is reduced from
P2,000,000.00 to P50,000.00; (b) the award of exemplary damages is reduced
from P1,000,000.00 to P25,000.00; and (c) the award of attorney’s fees and
litigation expenses is reduced from P500,000.00 and P50,000.00 to P50,000.00
and P25,000.00, respectively.
D. TRUSTEES AND OFFICERS
The word “trustees” as used in Sec. 92 makes reference to the governing board
or body in a non-stock corporation.
Sec. 92. Election and term of trustees. - Unless otherwise provided in the
articles of incorporation or the by-laws, the board of trustees of non-stock
corporations, which may be more than fifteen (15) in number as may be fixed
in their articles of incorporation or by-laws, shall, as soon as organized, so
classify themselves that the term of office of one-third (1/3) of their number
shall expire every year; and subsequent elections of trustees comprising one-
third (1/3) of the board of trustees shall be held annually and trustees so elected
shall have a term of three (3) years. Trustees thereafter elected to fill vacancies
occurring before the expiration of a particular term shall hold office only for the
unexpired period.
No person shall be elected as trustee unless he is a member of the corporation.
Unless otherwise provided in the articles of incorporation or the by-laws, officers
of a non-stock corporation may be directly elected by the members.
QUALIFICATIONS OF TRUSTEES:
1. He is a member of the association;
2. Majority thereof must be residents of the Philippines; and
3. Other qualifications as may be provided for in the by-laws.
DISQUALIFICATIONS and REMOVAL: Sec. 27 as to disqualifications, and
Sec. 29 and 30 as to removal also apply to Trustees.
NUMBER OF TRUSTEES: may exceed 15 as may be fixed in the AOI or by-
laws, contrary to a stock corporation whose BOD must not exceed 15 members.
TERM: Sec. 92 allows the AOI or by-laws to provide a desired term of office
and may vary depending on the needs of a specific corporation. By analogy of
the provisions of Sec. 7, however, a term in excess of 5 years is not allowed
as it would unduly deprive other members to take active part in corporate
management.
STAGGERED TERM: The term of office may also be staggered unless the AOI
or by-laws otherwise provide. If such be the case, the board shall classify
themselves in order that 1/3 of their number shall expire every year and
subsequent elections of trustees comprising 1/3 shall be held annually. The
trustees so elected to fill up any vacancy occurring before the expiration of a
particular term shall hold office only for the unexpired portion of his
predecessor.
GOVERNING BOARDS: While the Code speaks of the BOT as the governing
board or body in a non-stock corporation the same law allows a non-stock
corporation or any other special corporation to designate their governing board
by any other name other than BOD/T. The Rotary Club for instance, designates
it as Board of Governors while the Evangelica Independence Metodista En Las
Islas Filipinas calls it as the Consistory of Elders.
ELECTION BY MEMBERS OF OFFICERS: One of the significant features of
a non-stock corporation is that it allows the AOI or by-laws to provide that the
officers thereof shall be directly elected by the members. Unlike in a stock
corporation where corporate officers are elected by the BOD.

Section 138. Designation of governing boards. - The provisions of specific
provisions of this Code to the contrary notwithstanding, non-stock or special
corporations may, through their articles of incorporation or their by-
laws, designate their governing boards by any name other than as
board of trustees.
LIONS CLUBS INTERNATIONAL and JAMES L. SO, petitioners,
vs.
HON. AUGUSTO M. AMORES, Presiding Judge of the Court of First Instance
of Manila, Branch XXIV, COURT OF APPEALS and VICENTE JOSEFA,
respondents.
(G.R. No. L-61259; April 26, 1983)
FACTS: Vicente Josefa and James L. So entered into an agreement whereby
So would withdraw his candidacy for the post of Governor of District 301-A of
herein petitioner Lions Club International. Such withdrawal was accepted by
Governor Huang, however news items were published conveying the idea that
So had not withdrawn from the gubernatorial race.
Josefa filed a complaint before the CFI for quo warranto, injunction or at least
a temporary restraining order alleging irregularities in the election; that
although at the old site of the election, Josefa won, the Lions Club Internation
unlawfully recognized So as the winner.
and the results thereof, is strictly the internal affair that concerns only the Lions
association and/or its members, and We find from the records that the same
was resolved within the organization of Lions Clubs International in accordance
with the Constitution and By-Laws which are not immoral, unreasonable,
contrary to public policy, or in contravention of the laws of the land
At the meeting of the International Board of Directors held on June 27, 1982,
the election of petitioner James L. So to serve as District Governor of District
301-Al for the fiscal year 1982-83 was approved and said petitioner was duly
informed thereof by Richard G. Rice, Manager, District Operations Department,
Lions Clubs International in his letter dated July 8, 1982 and marked Annex "K"
to the petition, p. 79, Records. Petitioner attended and completed the District
Governors' Executive Seminar as District Governor of 301-Al (see Annex "L", P.
80, Records). On June 29, 1982, petitioner So was proclaimed, sworn to and
installed to office as District Governor of District 301-Al by the President of
Lions International at the close of the 65th Lions Clubs International
Convention held in Atlanta, Georgia, U.S.A
The findings upon the evidence submitted and examined at the hearing of the
election protest before the Committee personally attended by both petitioner
So and respondent Josefa may not be disturbed by the courts. The decision of
the Association's tribunal, the International Board of Directors, is controlling
since respondent Josefa alleges no invasion of this property or civil rights and
neither is it claimed that the government of the Association is not fairly and
honestly administered in conformity with its laws and the law of the land.
E. PLACE OF MEETINGS

The trial court issued the TRO which was later on lifted and on appeal, the CA
issued a new TRO.
ISSUE: WON the dispute between petitioners and Josefa is a justiciable issue
cognizable by the courts?
HELD: No. We adopt the general rule that "... the courts will not interfere
with the internal affairs of an unincorporated association so as to
settle disputes between the members, or questions of policy,
discipline, or internal government, so long as the government of the
society is fairly and honestly administered in conformity with its laws
and the law of the land, and no property or civil rights are invaded.
Under such circumstances, the decision of the governing body or established
private tribunal of the association is binding and conclusive and not subject to
review or collateral attack in the courts. " (7 C.J.S. pp. 38- 39).
Sec. 93. Place of meetings. - The by-laws may provide that the members of
a non-stock corporation may hold their regular or special meetings at any place
even outside the place where the principal office of the corporation is located:
Provided, That proper notice is sent to all members indicating the date, time
and place of the meeting: and Provided, further, That the place of meeting shall
be within the Philippines.
PLACE OF MEETING: another distinctive feature of a non-stock corporation
is that membership meeting may be held anywhere in the Philippines whereas
in a stock corporation, the stockholders’ meeting is mandated to be held or
conducted within the city or municipality where the principal office is located,
and as far as practicable, within the principal office of the corporation.

The general rule of non-interference in the internal affairs of associations is, F. DISTRIBUTION OF ASSETS UPON DISSOLUTION
however, subject to exceptions, but the power of review is extremely limited.
Accordingly, the courts have and will exercise power to interfere in the Corporations, stock and non-stock, may be dissolved in accordance and
internal affairs of an association where (1) law and justice so require, pursuant to the provisions of Sections 118 to 121 of the Corporation Code and
and (2) the proceedings of the association are subject to judicial the pertinent provisions of P.D. 902-A, as amended. If such be the case, the
review where there is fraud, oppression, or bad faith, or (3) where assets of the corporation are to be distributed in accordance with law and
the action complained of is capricious, arbitrary, or unjustly established jurisprudence.
discriminatory. Also, the courts will usually entertain jurisdiction to grant
relief (4) in case property or civil rights are invaded, although it has also
been held that the involvement of property rights does not necessarily
authorize judicial intervention, in the absence of arbitrariness, fraud or
collusion. Moreover, the courts will intervene (5) where the proceedings in
question are violative of the laws of the society, or the law of the
land, as by depriving a person of due process of law. Similarly, judicial
intervention is warranted (6) where there is a lack of jurisdiction on the
part of the tribunal conducting the proceedings, where the
organization exceeds its powers, or where the proceedings are
otherwise illegal. (7 C.J.S., pp. 39-41).

In accordance with the general rules as to judicial interference cited above, the
decision of an unincorporated association on the question of an election to
office is a matter peculiarly and exclusively to be determined by the association,
and, in the absence of fraud, is final and binding on the courts. (7 C.J.S., p.
44).

The instant controversy between petitioner So and respondent Josefa falls

squarely within the ambit of the rule of judicial non-intervention or non-
interference. The elections in dispute, the manner by which it was conducted
110 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 Sec. 94. Rules of distribution. - In case dissolution of a non-stock
corporation in accordance with the provisions of this Code, its assets shall be
applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and
discharged, or adequate provision shall be made therefore;
2. Assets held by the corporation upon a condition requiring return, transfer or
conveyance, and which condition occurs by reason of the dissolution, shall be
returned, transferred or conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to limitations permitting
their use only for charitable, religious, benevolent, educational or similar
purposes, but not held upon a condition requiring return, transfer or conveyance
by reason of the dissolution, shall be transferred or conveyed to one or more
corporations, societies or organizations engaged in activities in the Philippines
substantially similar to those of the dissolving corporation according to a plan
of distribution adopted pursuant to this Chapter;
4. Assets other than those mentioned in the preceding paragraphs, if any, shall
be distributed in accordance with the provisions of the articles of incorporation
or the by-laws, to the extent that the articles of incorporation or the by-laws,
determine the distributive rights of members, or any class or classes of
members, or provide for distribution; and
Sec. 96. Definition and applicability of Title. - A close corporation, within
the meaning of this Code, is one whose articles of incorporation provide that:
(1) All the corporation's issued stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a specified number of persons, not
exceeding twenty (20); (2) all the issued stock of all classes shall be subject to
one or more specified restrictions on transfer permitted by this Title; and (3)
The corporation shall not list in any stock exchange or make any public offering
of any of its stock of any class. Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or controlled by another corporation which
is not a close corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or
oil companies, stock exchanges, banks, insurance companies, public utilities,
educational institutions and corporations declared to be vested with public
interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided,
That the provisions of other Titles of this Code shall apply suppletorily except
insofar as this Title otherwise provides.

5. In any other case, assets may be distributed to such persons, societies,

organizations or corporations, whether or not organized for profit, as may be The ultimate effect of the special provisions of the law on close corporations is
specified in a plan of distribution adopted pursuant to this Chapter. to furnish another form of business organization – a “de facto corporation with
a corporate shell”. It is referred to sometimes as a hybrid of both the corporate
and partnership forms, an “incorporated partnership” or “corporation de jure
but a de facto partnership”.

This is because a close corporation may partake the nature of a partnership in

that the stockholders thereof take an active role in the management of the
Sec. 95. Plan of distribution of assets. - A plan providing for the distribution corporate affairs either as directors, officers or even perhaps as partners in
management which is akin to the partnership form of business. This, in fact, is
of assets, not inconsistent with the provisions of this Title, may be adopted by
the main distinction between a close corporation and the ordinary stock
a non-stock corporation in the process of dissolution in the following manner: corporation where, in the latter, the stockholders have hardly a voice in
management except perhaps to elect the directors.

The board of trustees shall, by majority vote, adopt a resolution recommending
a plan of distribution and directing the submission thereof to a vote at a regular
or special meeting of members having voting rights. Written notice setting forth
the proposed plan of distribution or a summary thereof and the date, time and
place of such meeting shall be given to each member entitled to vote, within
the time and in the manner provided in this Code for the giving of notice of
meetings to members. Such plan of distribution shall be adopted upon approval
of at least two-thirds (2/3) of the members having voting rights present or
represented by proxy at such meeting.
Culled from the law is that non-stock corporations may provide in the AOI or
by-laws, for the distribution of its assets among its members subject to the
provisions of Sec. 94 and 95. That is, the exception relative to assets which it
holds upon some trust. In which event, the claims of the state, beneficiaries,
rightful owners or donors will have to be considered. Thus, assets not subject
to the provisions of number 2-4 of Sec. 94 may be distributed in accordance
with a plan of distribution thereof in accordance with the rule established in
Sec. 95 of the Code.
CHAPTER 15: CLOSE CORPORATION
A. DEFINITION
Despite this, the stockholders who are active in management still enjoy limited
liability to the extent of their subscription in so far as corporate obligations are
concerned. It will be noted, however, that under no. 5 of Sec. 100 of the Code,
they are made personally liable for corporate torts unless they have obtained
a reasonably adequate insurance liability.
CLOSE CORPORAIONS: must contain the three provisions required to be
indicated in the AOI as provided by Sec. 96. Absent any of the provisions
required by the said section, the corporation, will not, for all legal intents and
purposes, be considered as a close corporation and would thus not be
governed by TITLE XII of the Code, but by the general provisions governing
ordinary corporation. “A corporation does not become a close corporation just
because man and his wife owns 99.86% if the capital stock” (San Juan
Structural Steel vs. CA). The qualifying conditions requreid by law must be
complied with.
2/3 OWNED BY ANOTHER CORPORATION: Even if another corporation
owns or controls 2/3 of the “voting” stocks of a close corporation, the latter
may still be considered as such close corporation if the corporation owning or
controlling the shares is also a close corporation.
BUSINESS WITH PUBLIC INTEREST: may not be formed as close
corporation under the second paragraph of Sec. 95. Sec. 140 of the Code lays
down a similar policy authorizing NEDA to recommend to the legislature the
setting of maximum limits to family or group ownership of stock in corporations
vested with public interest, and the determination of whether or not it should
be vested with public interest within its domain.

B. PERMISSIVE PROVISIONS

111 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 to what is “reasonably adequate liability insurance” would vary depending on
Sec. 97. Articles of incorporation. - The articles of incorporation of a close
the facts and circumstances of the case.
corporation may provide:
In order that the provision allowing a close corporation to do away with a BOD
may be effective, the same must contain the continuing provisions required in
1. For a classification of shares or rights and the qualifications for owning or par. 2 of Sec. 97:
holding the same and restrictions on their transfers as may be stated therein, 1. No meeting of stockholders need be called to elect directors;
subject to the provisions of the following section; 2. Unless the context clearly requires otherwise, the stockholders of the
2. For a classification of directors into one or more classes, each of whom may corporation shall be deemed to be directors for the purpose of applying the
be voted for and elected solely by a particular class of stock; and provisions of this Code; and
3. For a greater quorum or voting requirements in meetings of stockholders or 3. The stockholders of the corporation shall be subject to all liabilities of
directors than those provided in this Code. directors.

The articles of incorporation of a close corporation may provide that the ELECTION OF OFFICERS: Sec. 97 likewise allows the AOI of a close
business of the corporation shall be managed by the stockholders of the corporation to provide that all officers or employees shall be elected or
corporation rather than by a board of directors. So long as this provision appointed by the stockholders instead of the BOD.
continues in effect:
C. EFFECT OF BREACH OF QUALIFYING CONDITIONS
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying the Sec. 98. Validity of restrictions on transfer of shares. - Restrictions on
provisions of this Code; and the right to transfer shares must appear in the articles of incorporation and in
3. The stockholders of the corporation shall be subject to all liabilities of the by-laws as well as in the certificate of stock; otherwise, the same shall not
directors. be binding on any purchaser thereof in good faith. Said restrictions shall not be
more onerous than granting the existing stockholders or the corporation the
The articles of incorporation may likewise provide that all officers or employees option to purchase the shares of the transferring stockholder with such
or that specified officers or employees shall be elected or appointed by the
reasonable terms, conditions or period stated therein. If upon the expiration of
stockholders, instead of by the board of directors.
said period, the existing stockholders or the corporation fails to exercise the
option to purchase, the transferring stockholder may sell his shares to any third
person.
CLASSIFICATION OF SHARES: Under no. 1 above, the close corporation
may classify its shares into different classes to be held of record only by
specified persons. Example: Classes A, B and C. Class A is to be held only by
the incorporators; Class B by their relatives within the third civil degree of The restriction must be indicated not only in the AOI and the stock certificates
consanguinity or affinity; Class C by their close business associates. but also in the by-laws. The restrictions, however, shall not be more onerous
than granting existing stockholders or the corporation the option to purchase
CLASSIFICATION OF DIRECTORS: Under no. 2 above, a close corporation the shares of the selling or transferring stockholder within reasonable terms,
may provide for a classification of directors into one or more class, each of conditions and period. If, after the expiration of the period, the existing
whom may be voted for and elected solely by a particular class of stock. stockholders or the corporation fails to exercise the option, the stockholder
Example: 1,000 Class A shares; 500 Class B shares; and 200 Class C shares. concerned may transfer his shares to any third person subject to the provisions,
The AOI may provide that each class shall have a representation in the BOD however, of Sec. 99:
regardless of the number of shares within each class. So, if the close
corporation has 5 directors, then the AOI may allocate 3 directors for Class A
shares, 1 for B and 1 for C. Within each class, cumulative voting may also be
exercised by the stockholders of such class to elect their representative in the
board. But to the extent that each class can elect its own directors regardless
of the number of shares in such class, cumulative voting may, in effect be
restricted. This is so because if there is no provision for a classification of
directors, then Class A stockholders, by cumulating their votes (5x1000) will
have 5,000 votes and can elect 3 directors with 1,666 votes each. Class B
shares, having 2,500 votes can vote 2 members and Class C shares having only
1,000 votes cannot be guaranteed to any seat in the board.

QUORUM AND VOTING REQUIREMENT: a close corporation may provide

for a greater quorum or voting requirement under no. 3 above. Although the
AOI or by-laws of other stock corporations may provide for greater quorum
and voting requirements in directors’ meeting as provided in Sec. 25 of the
Code, those for stockholder’ meeting, unlike in a close corporation, may not be
altered or increased. This provisions in effect, increases the veto power of the
minority stockholders.

DIRECT MANAGEMENT BY STOCKHOLDERS: the AOI of the close

corporation may provide that the corporation shall be managed by the
stockholders rather than by the BOD. If such be the case, the stockholders are
deemed directors and are subject to all the rights and liabilities of a director.
However, their liability would be more extensive in that they are personally
lilable for torts unless, again, the corporation has obtained reasonably
adequate liability insurance. As distinguished from the ordinary stock
corporation, directors hereof are liable for corporate torts only if they have
been negligent or acted fraudulently in the performance of their functions. As

112 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 Sec. 99. Effects of issuance or transfer of stock in breach of qualifying Sec. 100. Agreements by stockholders. –
conditions. –

1. Agreements by and among stockholders executed before the formation and

1. If stock of a close corporation is issued or transferred to any person who is
not entitled under any provision of the articles of incorporation to be a holder
of record of its stock, and if the certificate for such stock conspicuously shows
the qualifications of the persons entitled to be holders of record thereof, such
person is conclusively presumed to have notice of the fact of his
ineligibility to be a stockholder.
2. If the articles of incorporation of a close corporation states the number of
persons, not exceeding twenty (20), who are entitled to be holders of record of
its stock, and if the certificate for such stock conspicuously states such number,
and if the issuance or transfer of stock to any person would cause the stock to
be held by more than such number of persons, the person to whom such stock
is issued or transferred is conclusively presumed to have notice of this
fact.
3. If a stock certificate of any close corporation conspicuously shows a
restriction on transfer of stock of the corporation, the transferee of the stock is
conclusively presumed to have notice of the fact that he has acquired
stock in violation of the restriction, if such acquisition violates the
restriction.
4. Whenever any person to whom stock of a close corporation has been issued
or transferred has, or is conclusively presumed under this section to have, notice
either (a) that he is a person not eligible to be a holder of stock of the
corporation, or (b) that transfer of stock to him would cause the stock of the
corporation to be held by more than the number of persons permitted by its
articles of incorporation to hold stock of the corporation, or (c) that the transfer
of stock is in violation of a restriction on transfer of stock, the corporation
may, at its option, refuse to register the transfer of stock in the name
of the transferee.
5. The provisions of subsection (4) shall not applicable if the transfer of stock,
though contrary to subsections (1), (2) of (3), has been consented to by all
the stockholders of the close corporation, or if the close corporation
has amended its articles of incorporation in accordance with this Title.
organization of a close corporation, signed by all stockholders, shall survive the
incorporation of such corporation and shall continue to be valid and binding
between and among such stockholders, if such be their intent, to the extent
that such agreements are not inconsistent with the articles of
incorporation, irrespective of where the provisions of such agreements are
contained, except those required by this Title to be embodied in said articles
of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by
the parties thereto, may provide that in exercising any voting rights, the
shares held by them shall be voted as therein provided, or as they may agree,
or as determined in accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating
to any phase of the corporate affairs, shall be invalidated as between the
parties on the ground that its effect is to make them partners among
themselves.
4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to the
conduct of the business and affairs of the corporation as to restrict or
interfere with the discretion or powers of the board of directors:
Provided, That such agreement shall impose on the stockholders who are
parties thereto the liabilities for managerial acts imposed by this Code on
directors.
5. To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close corporation,
the stockholders shall be held to strict fiduciary duties to each other and among
themselves. Said stockholders shall be personally liable for corporate
torts unless the corporation has obtained reasonably adequate
liability insurance.

6. The term "transfer", as used in this section, is not limited to a transfer for
value. PRE-INCORPORATION AGREEMENTS: under par.1 do not ordinarily
survive the corporation in ordinary stock corporations unless it has been ratified
7. The provisions of this section shall not impair any right which the transferee or adopted by the corporation after incorporation. Only in such case may the
may have to rescind the transfer or to recover under any applicable warranty, corporation be bound by said agreement. In a close corporation, these pre-
express or implied. incorporation agreements survive and continue to be valid and binding, if such
be the intent of the stockholders, provided that the agreement is not
inconsistent with the AOI

VOTING AGREEMENTS or rights or the manner of exercising voting rights

under par. 2 may be the subject of agreement of stockholders, such as to vote
for a specific person or group or to maintain a certain stockholder as their
SALE OF SHARES: Apparently, a selling stockholder may not be able to
president or chairman.
transfer his shares if to do so would violate the qualifying conditions indicated
in the AOI unless of course, all the stockholder consents to the transfer or the
CONDUCT OF CORPORATE AFFAIRS under par. 3 and 4, may be the
AOI is amended (no. 5 above).
subject of an agreement, in writing, and will be effective and binding despite
the fact that it may make them partners among themselves. Agreements may
STOCKHOLDER: concerned is not, however, left without any recourse as he
also be entered into by and between the stockholders of a close corporation
may compel the close corporation to purchase his shares at their fair value for
which relates to the management of the corporate affairs which would not
any reason subject only to the condition laid down in Sec. 105.
otherwise be valid and binding in other corporations. This is because
stockholders’ agreement in the latter cannot limit or restrict the discretion and
TRANSFEREE: may rescind the transaction or to recover from the transferor
powers of the BOD to manage the corporate affairs.
under any applicable warranty, express or implied.
E. WHEN BOARD MEETINGS NOT NECESSARY:
D. STOCKHOLDERS’ AGREEMENT
As a rule, directors in ordinary stock corporations must act as a body at a duly
constituted meeting to have a valid corporate transaction. In a close
corporation, directors may validly act even without a meeting subject only to
the conditions laid down in the Code under Sec. 101:

113 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 Sec. 101. When board meeting is unnecessary or improperly held. -
Unless the by-laws provide otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all
the directors; or
2. All the stockholders have actual or implied knowledge of the action and make
no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or
implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question
and none of them makes prompt objection thereto in writing.
If a director's meeting is held without proper call or notice, an action taken
therein within the corporate powers is deemed ratified by a director who failed
to attend, unless he promptly files his written objection with the secretary of
the corporation after having knowledge thereof.
F. PRE-EMPTIVE RIGHTS
Sec. 102. Pre-emptive right in close corporations. - The pre-emptive right
of stockholders in close corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for money, property or
personal services, or in payment of corporate debts, unless the articles of
incorporation provide otherwise.
G. AMENDMENTS TO ARTICLES OF INCORPORATION
Sec. 103. Amendment of articles of incorporation. - Any amendment to
the articles of incorporation which seeks to delete or remove any provision
required by this Title to be contained in the articles of incorporation or to reduce
a quorum or voting requirement stated in said articles of incorporation shall not
be valid or effective unless approved by the affirmative vote of at least two-
thirds (2/3) of the outstanding capital stock, whether with or without voting
rights, or of such greater proportion of shares as may be specifically provided
in the articles of incorporation for amending, deleting or removing any of the
aforesaid provisions, at a meeting duly called for the purpose.
H. DEADLOCKS
114 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the articles
of incorporation or by-laws or agreement of stockholders of a close corporation,
if the directors or stockholders are so divided respecting the management of
the corporation's business and affairs that the votes required for any corporate
action cannot be obtained, with the consequence that the business and affairs
of the corporation can no longer be conducted to the advantage of the
stockholders generally, the Securities and Exchange Commission, upon written
petition by any stockholder, shall have the power to arbitrate the dispute. In
the exercise of such power, the Commission shall have authority to make such
order as it deems appropriate, including an order: (1) canceling or altering any
provision contained in the articles of incorporation, by-laws, or any stockholder's
agreement; (2) canceling, altering or enjoining any resolution or act of the
corporation or its board of directors, stockholders, or officers; (3) directing or
prohibiting any act of the corporation or its board of directors, stockholders,
officers, or other persons party to the action; (4) requiring the purchase at their
fair value of shares of any stockholder, either by the corporation regardless of
the availability of unrestricted retained earnings in its books, or by the other
stockholders; (5) appointing a provisional director; (6) dissolving the
corporation; or (7) granting such other relief as the circumstances may warrant.
A provisional director shall be an impartial person who is neither a stockholder
nor a creditor of the corporation or of any subsidiary or affiliate of the
corporation, and whose further qualifications, if any, may be determined by the
Commission. A provisional director is not a receiver of the corporation and does
not have the title and powers of a custodian or receiver. A provisional director
shall have all the rights and powers of a duly elected director of the corporation,
including the right to notice of and to vote at meetings of directors, until such
time as he shall be removed by order of the Commission or by all the
stockholders. His compensation shall be determined by agreement between him
and the corporation subject to approval of the Commission, which may fix his
compensation in the absence of agreement or in the event of disagreement
between the provisional director and the corporation.
The provision above-quoted gives the SEC a very wide discretion in respect to
management of a close corporation in the event of a deadlock. It may:
1. Cancel or alter any provision in the AOI, by-laws or any stockholders’
agreement;
2. Cancel, alter or enjoin any resolution or other act of the corporation or its
BOD, stockholders or officers;
3. Prohibit any act of the corporation or its BOD, stockholders or officers or
other persons party to the action;
4. Requiring the purchase of the par value of the shares of any stockholders,
either by the corporation regardless of availability of unrestricted retained
earnings, or by the other shareholders;
5. Appointment of a provisional director; - the second paragraph of Sec. 104
will govern. The provisional director may break the deadlock by casting
the deciding vote.
6. Dissolving the corporation; or
7. Other relief as the circumstances may warrant.
I. WITHDRAWAL OF STOCKHOLDERS/DISSOLUTION
If a stockholder wishes to withdraw therefrom, he may do so “for any reason”
and compel the corporation to purchase his shares at their fair value provided
only that the corporation has sufficient assets in its books to cover its debts
and liabilities exclusive of capital stock. This can be done by a stockholder in
ordinary stock corporation only upon the exercise of his appraisal right in those
instances allowed under Sec. 81 of the Code.
Likewise a corporation may be dissolved on petitioner of only one stockholder
on the grounds indicated in Sec. 105 which include even mere dishonesty. It
provides:
It may provide for greater quorum and Although the articles of incorporation
voting requirements in meetings of or by-laws may provide for greater
Sec. 105. Withdrawal of stockholder or dissolution of corporation. - In stockholders and directors quorum and voting requirements in
addition and without prejudice to other rights and remedies available to a directors’ meeting under section 25,
stockholder under this Title, any stockholder of a close corporation may, for any those for stockholders’ meeting cannot
generally be altered
reason, compel the said corporation to purchase his shares at their fair value,
which shall not be less than their par or issued value, when the corporation has
sufficient assets in its books to cover its debts and liabilities exclusive of capital
Restriction on transfer of shares Valid and binding if indicated in the
stock: Provided, That any stockholder of a close corporation may, by written should be indicated in the articles of articles of incorporation and stock
petition to the Securities and Exchange Commission, compel the dissolution of incorporation, by-laws and stock certificates
such corporation whenever any of acts of the directors, officers or those in certificates
control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any stockholder, or whenever corporate Pre-emptive rights of stockholders is Pre-emptive rights may be denied as
assets are being misapplied or wasted. broader as it include all issues without provided for in section 39
exception

A stockholder may withdraw and Unless he sells his shares, a

compel the corporation to purchase his stockholder cannot get back his
shares for any reason with the investment nor compel the corporation
J. CLOSE CORPORATION VS. ORDINARY STOCK CORPORATION
limitation only that the corporation has to buy his shares except in the
sufficient assets to cover its liabilities exercise of his appraisal right
CLOSE CORPORATION ORDINARY STOCK exclusive of capital stock
CORPORATION
The proper forum may interfere in the Courts cannot interfere I the business
The number of stockholders cannot No limitation as to number of management of a close corporation in judgment of the directors/stockholders
exceed 20 shareholder case of deadlocks under Section 104, “BUSINESS JUDGMENT RULE”
even of the directors/stockholders are
To the extent that all stockholders can Maximum number of directors is 15 acting in good faith
be deemed directors, the number of
directors can effectively be more than
15 Any stockholder may petition the SEC Dissolution may be had only on the
for corporate dissolution on grounds grounds provided by the provisions of
Shares of stock are subject to specified Generally no restriction on transfer of among others, provides for in section the Code on dissolution and P.D. 902-
restrictions shares 105. A, as amended

Shares of stock are prohibited from No prohibition

being listed in the stock exchange or
offered for sale to the public MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND
NEPOMUCENO REDOVAN, petitioners,
Stockholders may take an active part Management is lodged in the Board of vs.
in corporate management by vesting Directors THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN, MANUEL
management to them rather than a A. TORRES, JR., MARIA THERESA V. VELOSO AND CASTRENSE C. VELOSO,
Board of Director respondents.
(G.R. No. 91889; August 27, 1993)
Those active in management are Directors are liable for torts only if they
personally liable for corporate torts have acted negligently or fraudulently FACTS: Manuel Dulay, president of petitioner Manuel Dulay Enterprises, Inc.,
unless the corporation has obtained an through Board Resolution No. 18 sold the subject property, known as the Dulay
adequate liability insurance Apartment, to private respondent Maria Theresa Veloso where a Memorandum
to the Deed of Absolute Sale was executed giving Manuel Dulay within 2 years
Directors can validly act even without Directors must, as a rule, act as a body to repurchase the property.
a meeting at a duly constituted meeting
Respondent Veloso mortgaged said property to secure a loan from private
Agreements between stockholders Not valid and binding since respondent Manuel Torres. For non-payment of the said loan, Torres foreclosed
regarding the operations of the stockholders’ agreement cannot limit the mortgage and was declared the highest bidder in the public auction.
business can validly be made the discretion of the Board to manage
corporate affairs For Dulay’s and Veloso’s failure to redeem said property, Torres applied for
consolidation of title, to which petitioner Virgilio Dulay, vice president of the
corporation intervened alleging that Manuel Dulay was never authorized by the
To the extent that directors may be Ordinarily, no such classification and
classified into one or more classes and no restrictions on cumulative voting corporation to sell the property. Instead of impleading Virgilio Dulay, Torres
withdrew his petition and moved for its dismissal which was granted.
to be voted solely by a particular class
of stock, cumulative voting may, in
Later on, Torres and Edgardo Pabalan, real estate administrator of Torres, filed
effect, be restricted
an action against petitioners (Redovan as tenant of Dulay Apartment) for the
recovery of possession, sum of money and damages with preliminary
The articles of incorporation may Officers are elected by the Board of
injunction.
provide that all officers shall be elected Directors
or appointed by the stockholders
Private respondents and Torres later on filed an action against spouses
Florentino Manalastas, a tenant of Dulay Apartment with petitioner corporation
for ejectment.

115 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
The MTC decided in favor of respondents which was affirmed by the RTC and
later by the CA.
ISSUE: WON the sale of the subject property between private respondents
spouses Veloso and Manuel Dulay has no binding effect on petitioner
corporation as Board Resolution No. 18 which authorized the sale of the subject
property was resolved without the approval of all the members of the board of
directors and said Board Resolution was prepared by a person not designated
by the corporation to be its secretary?
HELD: No. Section 101 of the Corporation Code of the Philippines provides:
Sec. 101. When board meeting is unnecessary or improperly held. Unless
the by-laws provide otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by
all the directors, or
2. All the stockholders have actual or implied knowledge of the action and
make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or
implied acquiese of all the stockholders, or
4. All the directors have express or implied knowledge of the action in
question and none of them makes prompt objection thereto in writing.
If a directors' meeting is held without call or notice, an action taken therein
within the corporate powers is deemed ratified by a director who failed to
attend, unless he promptly files his written objection with the secretary of
the corporation after having knowledge thereof.
In the instant case, petitioner corporation is classified as a close corporation
and consequently a board resolution authorizing the sale or mortgage
of the subject property is not necessary to bind the corporation for
the action of its president. At any rate, corporate action taken at a board
meeting without proper call or notice in a close corporation is deemed ratified
by the absent director unless the latter promptly files his written objection with
the secretary of the corporation after having knowledge of the meeting which,
in his case, petitioner Virgilio Dulay failed to do.
Petitioners' claim that the sale of the subject property by its president, Manuel
Dulay, to private respondents spouses Veloso is null and void as the alleged
Board Resolution No. 18 was passed without the knowledge and consent of
the other members of the board of directors cannot be sustained. As correctly
pointed out by the respondent Court of Appeals:
Appellant Virgilio E. Dulay's protestations of complete innocence to the effect
that he never participated nor was even aware of any meeting or resolution
authorizing the mortgage or sale of the subject premises (see par. 8,
affidavit of Virgilio E. Dulay, dated May 31, 1984, p. 14, Exh. "21") is difficult
to believe. On the contrary, he is very much privy to the transactions
involved. To begin with, he is a incorporator and one of the board of
directors designated at the time of the organization of Manuel R. Dulay
Enterprise, Inc. In ordinary parlance, the said entity is loosely referred to as
a "family corporation". The nomenclature, if imprecise, however, fairly
reflects the cohesiveness of a group and the parochial instincts of the
individual members of such an aggrupation of which Manuel R. Dulay
Enterprises, Inc. is typical: four-fifths of its incorporators being close
relatives namely, three (3) children and their father whose name identifies
their corporation (Articles of Incorporation of Manuel R. Dulay Enterprises,
Inc. Exh. "31-A").
Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an
affidavit that he was a signatory witness to the execution of the post-dated
Deed of Absolute Sale of the subject property in favor of private respondent
Torres indicates that he was aware of the transaction executed between his
father and private respondents and had, therefore, adequate knowledge about
the sale of the subject property to private respondents.
Consequently, petitioner corporation is liable for the act of Manuel Dulay and
the sale of the subject property to private respondents by Manuel Dulay is valid
and binding. As stated by the trial court:
116 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
. . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses
Maria Theresa V. Veloso and Castrense C. Veloso, was a corporate act of the
former and not a personal transaction of Manuel R. Dulay. This is so because
Manuel R. Dulay was not only president and treasurer but also the general
manager of the corporation. The corporation was a closed family corporation
and the only non-relative in the board of directors was Atty. Plaridel C. Jose
who appeared on paper as the secretary. There is no denying the fact,
however, that Maria Socorro R. Dulay at times acted as secretary. . . ., the
Court can not lose sight of the fact that the Manuel R. Dulay Enterprises,
Inc. is a closed family corporation where the incorporators and directors
belong to one single family. It cannot be concealed that Manuel R. Dulay as
president, treasurer and general manager almost had absolute control over
the business and affairs of the corporation.
SERGIO F. NAGUIAT, doing business under the name and style SERGIO F.
NAGUIAT ENT., INC., & CLARK FIELD TAXI, INC., petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION (THIRD DIVISION),
NATIONAL ORGANIZATION OF WORKINGMEN and its members, LEONARDO
T. GALANG, et al., respondents.
(G.R. No. 116123; March 13, 1997)
FACTS: Private respondents were employed as taxi drivers of Clark Field Taxi,
Inc. which held a concessionaire’s contract with Army Air Force Exchange
Services (AAFES) for the operation of taxi services within the Clark Air Base.
Due to the phase-out of the US Military Bases in the Philippines, which Clark
Air Base was not spared, the AAFES was dissolved and the services of individual
respondents were officially terminated.
The AAFES Taxi Drivers’ Association (drivers union) and CFTI agreed on a
separation pay of P500 per year of service to which private respondents did
not agree.
Private respondents filed a complaint against Sergio Naguiat, president of CFTI,
doing business under the name and style of Sergio F. Naguiat Enterprises, Inc.,
AAFES and the drivers’ union for separation pay which was granted by the
Labor Arbiter at P1,200 per year of service for humanitarian considerations.
On appeal, the NLRC granted separation pay to private respondents.
ISSUE: WON Sergio F. Naguiat Enterprises, Inc., may be held solidarily liable
with CFTI?
HELD: No. From the evidence proffered by both parties, there is no substantial
basis to hold that Naguiat Enterprises is an indirect employer of individual
respondents much less a labor only contractor. On the contrary, petitioners
submitted documents such as the drivers' applications for employment with
CFTI, and social security remittances and payroll of Naguiat Enterprises
showing that none of the individual respondents were its employees. Moreover,
in the contract between CFTI and AAFES, the former, as concessionaire, agreed
to purchase from AAFES for a certain amount within a specified period a fleet
of vehicles to be "ke(pt) on the road" by CFTI, pursuant to their
concessionaire's contract. This indicates that CFTI became the owner of the
taxicabs which became the principal investment and asset of the company.
Private respondents failed to substantiate their claim that Naguiat Enterprises
managed, supervised and controlled their employment. It appears that they
were confused on the personalities of Sergio F. Naguiat as an individual who
was the president of CFTI, and Sergio F. Naguiat Enterprises, Inc., as a
separate corporate entity with a separate business. They presumed that Sergio
F. Naguiat, who was at the same time a stockholder and director of Sergio F.
Naguiat Enterprises, Inc., was managing and controlling the taxi business on
behalf of the latter. A closer scrutiny and analysis of the records, however,
evince the truth of the matter: that Sergio F. Naguiat, in supervising the taxi
drivers and determining their employment terms, was rather carrying out his
responsibilities as president of CFTI. Hence, Naguiat Enterprises as a separate
corporation does not appear to be involved at all in the taxi business.
And, although the witness insisted that Naguiat Enterprises was his employer,
he could not deny that he received his salary from the office of CFTI inside the
base.
Another driver-claimant admitted, upon the prodding of counsel for the
corporations, that Naguiat Enterprises was in the trading business while CFTI
was in taxi services.
In addition, the Constitution of CFTI-AAFES Taxi Drivers Association which,
admittedly, was the union of individual respondents while still working at Clark
Air Base, states that members thereof are the employees of CFTI and "(f)or
collective bargaining purposes, the definite employer is the Clark Field Taxi
Inc."
ISSUE2: WON Sergio F. Naguiat and his son Antolin Naguiat, officers of CFTI
may be solidarily liable with CFTI?
HELD: Only Sergio F. Naguiat. Sergio F. Naguiat, in his capacity as president
of CFTI, cannot be exonerated from joint and several liability in the payment
of separation pay to individual respondents.
Sergio F. Naguiat, admittedly, was the president of CFTI who actively managed
the business. Thus, applying the ruling in A.C. Ransom, he falls within the
meaning of an "employer" as contemplated by the Labor Code, who may be
held jointly and severally liable for the obligations of the corporation to its
dismissed employees.
Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises
were "close family corporations" owned by the Naguiat family. Section 100,
paragraph 5, (under Title XII on Close Corporations) of the Corporation Code,
states:
(5) To the extent that the stockholders are actively engage(d) in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to each
other and among themselves. Said stockholders shall be personally liable
for corporate torts unless the corporation has obtained reasonably
adequate liability insurance. (emphasis supplied)
Nothing in the records show whether CFTI obtained "reasonably adequate
liability insurance;" thus, what remains is to determine whether there was
corporate tort.
Our jurisprudence is wanting as to the definite scope of "corporate tort."
Essentially, "tort" consists in the violation of a right given or the omission of a
duty imposed by law. Simply stated, tort is a breach of a legal duty. Article 283
of the Labor Code mandates the employer to grant separation pay to
employees in case of closure or cessation of operations of establishment or
undertaking not due to serious business losses or financial reverses, which is
the condition obtaining at bar. CFTI failed to comply with this law-imposed
duty or obligation. Consequently, its stockholder who was actively engaged in
the management or operation of the business should be held personally liable.
As pointed out earlier, the fifth paragraph of Section 100 of the Corporation
Code specifically imposes personal liability upon the stockholder actively
managing or operating the business and affairs of the close corporation.
The Court here finds no application to the rule that a corporate officer cannot
be held solidarily liable with a corporation in the absence of evidence that he
had acted in bad faith or with malice. In the present case, Sergio Naguiat is
held solidarily liable for corporate tort because he had actively engaged in the
management and operation of CFTI, a close corporation.
Antolin T. Naguiat was the vice president of the CFTI. Although he carried the
title of "general manager" as well, it had not been shown that he had acted in
such capacity. Furthermore, no evidence on the extent of his participation in
the management or operation of the business was proferred. In this light, he
cannot be held solidarily liable for the obligations of CFTI and Sergio Naguiat
to the private respondents.
CHAPTER 16: SPECIAL CORPORATIONS (TITLE XIII)
117 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
A. CHAPTER I – EDUCATIONAL INSTITUTIONS
Sec. 106. Incorporation. - Educational corporations shall be governed by
special laws and by the general provisions of this Code.
EDUCATIONAL INSTITUTIONS are those that provide facilities for teaching
or instruction. It includes both public and private schools or colleges and
universities and are subject to the provisions of special laws and by the general
provisions of the Code.
PUBLIC SCHOOLS or those created by the government are, however, subject
to the law of their creation. UP for instance has its own special charter and
would thus be governed by the special law creating it. Insofar as they may be
applicable however, the provisions of any special law or the Corporation Code
supplement the law of their creation.
PRIVATE SCHOOLS OR COLLEGES include any private institutions for
teaching, managed by private individuals or corporations which offer courses
of kindergarten, primary, intermediary or secondary instructions or superior
courses in vocational, technical, professional or special schools by which
diploma or certificates are to be granted or titles and degrees conferred (Sec.
2, Act No. 2076, as amended by CA 180).
These instructions of learning once recognized by the government as such are
mandated by law to be incorporated within 90 days under the provisions of the
Corporation Code and must, perforce, comply with the requirements and
procedure laid down thereunder. (Sec. 5, supra)
Their failure to do so will not immune the educational institution from suit as a
corporation (Chang Kai Shek School vs. CA; April 18, 1989, supra)
The SEC, however, shall not act on the incorporation of any educational
corporation, unless the provision of Sec. 107 is complied with:
Sec. 107. Pre-requisites to incorporation. - Except upon favorable
recommendation of the Ministry of Education and Culture, the Securities and
Exchange Commission shall not accept or approve the articles of incorporation
and by-laws of any educational institution
BOARD OF DIRECTORS/TRUSTEES: or the governing board by any name
of an educational institution is similar in number as to any other corporation
except that in case it is non-stock, the number must be in multiples of five (5).
As compared to stock corporation, their number may be within the vicinity of
five (5) to fifteen (15).
TERM OF OFFICE: Members of the Board may hold office for five years but
they shall be staggered so that 1/5 of their number shall expire every year.
Sec. 108 provides:
 Sec. 108. Board of trustees. - Trustees of educational institutions organized
C. CORPORATION SOLE
as non-stock corporations shall not be less than five (5) nor more than fifteen
(15): Provided, however, That the number of trustees shall be in multiples of CORPORATION SOLE: consists of one person only and his successor in some
five (5). particular station, who are incorporated by law in order to give them some
legal capacities and advantages, particularly that of perpetuity, which in their
natural persons they could not have had.
Unless otherwise provided in the articles of incorporation or the by-laws, the
board of trustees of incorporated schools, colleges, or other institutions of PURPOSE OF INCORPORATION AND PERSONS WHO MAY
learning shall, as soon as organized, so classify themselves that the term of INCORPORATE:
office of one-fifth (1/5) of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a particular Sec. 110. Corporation sole. - For the purpose of administering and
term, shall hold office only for the unexpired period. Trustees elected thereafter
managing, as trustee, the affairs, property and temporalities of any religious
to fill vacancies caused by expiration of term shall hold office for five (5) years.
A majority of the trustees shall constitute a quorum for the transaction of denomination, sect or church, a corporation sole may be formed by the chief
business. The powers and authority of trustees shall be defined in the by-laws. archbishop, bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church.
For institutions organized as stock corporations, the number and term of
directors shall be governed by the provisions on stock corporations.

CONTENTS OF THE ARTICLES OF INCORPORATION:

CONSTITUTIONAL PROVISION ON FILIPINO OWNERSHIP: par. 2,
Sec. 4 of Article XIV (Education, Science and Technology, Arts, Culture and
Sports)
Educational institutions, other than those established by religious groups and
mission boards, shall be owned solely by citizens of the Philippines or
corporations or associations at least sixty per centum of the capital of which is
owned by such citizens. The Congress may, however, require increased Filipino
equity participation in all educational institutions. The control and administration
of educational institutions shall be vested in citizens of the Philippines.
No educational institution shall be established exclusively for aliens and no
group of aliens shall comprise more than one-third of the enrollment in any
school. The provisions of this sub section shall not apply to schools established
for foreign diplomatic personnel and their dependents and, unless otherwise
provided by law, for other foreign temporary residents.
Culled from this is that while foreigners may own a maximum of 40% of the
capital stock of an educational corporation, not one of them may sit as a
member of the governing board thereof. Neither may they act as an officer
with the power of control and administration of the institution. In effect their
ownership of any capital would be limited to “non-controlling” interest.
Sec. 111. Articles of incorporation. - In order to become a corporation sole,
the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any
religious denomination, sect or church must file with the Securities and
Exchange Commission articles of incorporation setting forth the following:
1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding
elder of his religious denomination, sect or church and that he desires to
become a corporation sole;
2. That the rules, regulations and discipline of his religious denomination, sect
or church are not inconsistent with his becoming a corporation sole and do not
forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding
elder, he is charged with the administration of the temporalities and the
management of the affairs, estate and properties of his religious denomination,
sect or church within his territorial jurisdiction, describing such territorial
jurisdiction;
4. The manner in which any vacancy occurring in the office of chief archbishop,
bishop, priest, minister, rabbi of presiding elder is required to be filled,
according to the rules, regulations or discipline of the religious denomination,
sect or church to which he belongs; and
5. The place where the principal office of the corporation sole is to be
established and located, which place must be within the Philippines.
The articles of incorporation may include any other provision not contrary to
law for the regulation of the affairs of the corporation.

B. CHAPTER II - RELIGIOUS CORPORATIONS

REGLIGIOUS CORPORATIONS are those composed entirely of spiritual

persons, which are created for the furtherance of religion or perpetuating the PROCEDURE FOR THE ORGANIZATION:
rights of the church or for the administration of church or religious work or
property.

CLASSES OF RELIGIOUS CORPORATIONS:

Sec. 109. Classes of religious corporations. - Religious corporations may

be incorporated by one or more persons. Such corporations may be classified
into corporations sole and religious societies.

Religious corporations shall be governed by this Chapter and by the general

provisions on non-stock corporations insofar as they may be applicable.

118 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes

Sec. 112. Submission of the articles of incorporation. - The articles of
incorporation must be verified, before filing, by affidavit or affirmation of the
chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case
may be, and accompanied by a copy of the commission, certificate of election
or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi
or presiding elder, duly certified to be correct by any notary public.
From and after the filing with the Securities and Exchange Commission of the
said articles of incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the preceding paragraph, such
chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become
a corporation sole and all temporalities, estate and properties of the religious
denomination, sect or church theretofore administered or managed by him as
such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be
held in trust by him as a corporation sole, for the use, purpose, behalf and sole
benefit of his religious denomination, sect or church, including hospitals,
schools, colleges, orphan asylums, parsonages and cemeteries thereof.
TERM OF EXISTENCE: As can be gleaned from the law, the AOI of a
corporation sole does not require a provision for its term of existence. For
obvious reasons, since a corporation sole is supposed to exist in perpetuity. It
may, however, be dissolved in accordance with Sec. 115 of the Code.
BEGINNING OF CORPORATE EXISTENCE: is upon filing of the verified AOI
with the SEC and the documents required under Sec. 112. This serves as an
exception to the rule that a corporation acquires juridical personality only upon
the issuance of a certificate of incorporation by the said government agency.
POWER TO ALIENATE PROPERTIES, LIMITATION: The extent of the its
power to mortgage or sell real properties is, however, subject to certain
restriction, that is, a proper court order must first be secured for that purpose,
which is not otherwise imposed in any other corporation. Intervention of the
court may dispensed with only if the rules, regulations and discipline of the
religious denomination, sect or church concerned provide or regulate the
manner or method of holding or alienating properties. Sec. 113 provides:
Sec. 113. Acquisition and alienation of property. - Any corporation sole
may purchase and hold real estate and personal property for its church,
charitable, benevolent or educational purposes, and may receive bequests or
gifts for such purposes. Such corporation may sell or mortgage real property
held by it by obtaining an order for that purpose from the Court of First Instance
of the province where the property is situated upon proof made to the
satisfaction of the court that notice of the application for leave to sell or
mortgage has been given by publication or otherwise in such manner and for
such time as said court may have directed, and that it is to the interest of the
corporation that leave to sell or mortgage should be granted. The application
for leave to sell or mortgage must be made by petition, duly verified, by the
chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as
corporation sole, and may be opposed by any member of the religious
denomination, sect or church represented by the corporation sole: Provided,
That in cases where the rules, regulations and discipline of the religious
denomination, sect or church, religious society or order concerned represented
by such corporation sole regulate the method of acquiring, holding, selling and
mortgaging real estate and personal property, such rules, regulations and
discipline shall control, and the intervention of the courts shall not be necessary.
OWNERSHIP OF PROPERTY: does not vest unto the head upon registration
of real property in the name of the corporation sole, such devolving upon the
119 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
church or congregation acquiring it.
CONSITUTIONAL LIMITATION, RE: 60% FILIPINO OWNED: does not
apply to corporation sole with regards ownership of real property in its own
name. It has thus been held that the Roman Catholic Church of the Philippines,
a corporation sole, has no nationality and that the framers of the Constitution
did not have in mind the religious corporation sole when they provided that
60% of the capital of the corporation acquiring it must be owned by Filipino
citizens.
CHARACTER OF THE LAND: at the time of institution of registration
proceedings must first be determined before a corporation sole, or any private
corporation for that matter, can acquire the land must first be determined. If
it does not form part of public domain, the constitutional prohibition against its
acquisition by private corporation will not apply. Thus, it has likewise been
earlier held that under the Public Land Act, alienable public land may be subject
to registration by a possessor if he, personally or through his predecessors-in-
interest, had openly continuously and exclusively possessed the same for 30
years as the same is converted into private property by mere lapse or
completion of the said period.
THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO,
INC., petitioner,
s.
THE LAND REGISTRATION COMMISSION and THE REGISTER OF
DEEDS OF DAVAO CITY, respondents
(G.R. No. L-8451; December 20, 1957)
FACTS: Mateo Rodis executed a Deed of Sale in favor of the Roman Catholic
Apostolic Administrator of Davao, Inc., with Mgr. Clovit Thibault, a Canadian
citizen, as actual incumbent. When the deed of sale was presented to the
Register of Deeds of Davao for registration, the latter required the corporation
to submit an affidavit declaring that 60% of the members thereof were Filipino
citizens.
Entertaining some doubts as to the registrability of the deed of sale, the
Register of Deeds referred the matter to the Land Registration Commission
which held that by virtue of the provisions of Sec. 1 and 5 of Art. XIII of the
Philippine Constitution, the vendee was not qualified to acquire private lands
in the Philippines in the absence of proof that at least 60% of the capital,
property, or assets of the Roman Catholic Apostolic Administrator of Davao,
Inc. was actually owned or controlled by Filipino citizens.
ISSUE: WON the corporation sole may register the property transferred?
HELD: Yes. In solving the problem thus submitted to our consideration, We
can say the following: A corporation sole is a special form of corporation
usually associated with the clergy. Conceived and introduced into the
common law by sheer necessity, this legal creation which was referred to as
"that unhappy freak of English law" was designed to facilitate the exercise of
the functions of ownership carried on by the clerics for and on behalf of the
church which was regarded as the property owner (See I Couvier's Law
Dictionary, p. 682-683).
A corporation sole consists of one person only, and his successors
(who will always be one at a time), in some particular station, who
are incorporated by law in order to give them some legal capacities
and advantages, particularly that of perpetuity, which in their natural
persons they could not have had. In this sense, the king is a sole
corporation; so is a bishop, or dens, distinct from their several chapters (Reid
vs. Barry, 93 Fla. 849, 112 So. 846).
That leaves no room for doubt that the bishops or archbishops, as the
case may be, as corporation's sole are merely administrators of the
church properties that come to their possession, in which they hold
in trust for the church. It can also be said that while it is true that church
properties could be administered by a natural persons, problems regarding
succession to said properties can not be avoided to rise upon his death.
Through this legal fiction, however, church properties acquired by the
incumbent of a corporation sole pass, by operation of law, upon his death not
his personal heirs but to his successor in office. It could be seen, therefore,
that a corporation sole is created not only to administer the temporalities of
the church or religious society where he belongs but also to hold and transmit
the same to his successor in said office. If the ownership or title to the
properties do not pass to the administrators, who are the owners of church
properties?.
Bouscaren and Elis, S.J., authorities on cannon law, on their treatise comment:
In matters regarding property belonging to the Universal Church and to the
Apostolic See, the Supreme Pontiff exercises his office of supreme
administrator through the Roman Curia; in matters regarding other church
property, through the administrators of the individual moral persons in the
Church according to that norms, laid down in the Code of Cannon Law. This
does not mean, however, that the Roman Pontiff is the owner of all the
church property; but merely that he is the supreme guardian (Bouscaren
and Ellis, Cannon Law, A Text and Commentary, p. 764).
We must therefore, declare that although a branch of the Universal Roman
Catholic Apostolic Church, every Roman Catholic Church in different countries,
if it exercises its mission and is lawfully incorporated in accordance with the
laws of the country where it is located, is considered an entity or person with
all the rights and privileges granted to such artificial being under the laws of
that country, separate and distinct from the personality of the Roman Pontiff
or the Holy See, without prejudice to its religious relations with the latter which
are governed by the Canon Law or their rules and regulations.
The Corporation Law also contains the following provisions:
SECTION 159. Any corporation sole may purchase and hold real estate and
personal; property for its church, charitable, benevolent, or educational
purposes, and may receive bequests or gifts of such purposes. Such
corporation may mortgage or sell real property held by it upon obtaining an
order for that purpose from the Court of First Instance of the province in
which the property is situated; but before making the order proof must be
made to the satisfaction of the Court that notice of the application for leave
to mortgage or sell has been given by publication or otherwise in such
manner and for such time as said Court or the Judge thereof may have
directed, and that it is to the interest of the corporation that leave to
mortgage or sell must be made by petition, duly verified by the bishop, chief
priest, or presiding elder acting as corporation sole, and may be opposed by
any member of the religious denomination, society or church represented
by the corporation sole: Provided, however, That in cases where the rules,
regulations, and discipline of the religious denomination, society or church
concerned represented by such corporation sole regulate the methods of
acquiring, holding, selling and mortgaging real estate and personal property,
such rules, regulations, and discipline shall control and the intervention of
the Courts shall not be necessary.
It can, therefore, be noticed that the power of a corporation sole to purchase
real property, like the power exercised in the case at bar, it is not restricted
although the power to sell or mortgage sometimes is, depending upon the
rules, regulations, and discipline of the church concerned represented by said
corporation sole. If corporations sole can purchase and sell real estate for its
church, charitable, benevolent, or educational purposes, can they register said
real properties? As provided by law, lands held in trust for specific purposes
me be subject of registration (section 69, Act 496), and the capacity of a
corporation sole, like petitioner herein, to register lands belonging to it is
acknowledged, and title thereto may be issued in its name (Bishop of Nueva
Segovia vs. Insular Government, 26 Phil. 300-1913). Indeed it is absurd that
while the corporations sole that might be in need of acquiring lands for the
erection of temples where the faithful can pray, or schools and cemeteries
which they are expressly authorized by law to acquire in connection with the
propagation of the Roman Catholic Apostolic faith or in furtherance of their
freedom of religion they could not register said properties in their name. As
professor Javier J. Nepomuceno very well says "Man in his search for the
immortal and imponderable, has, even before the dawn of recorded history,
erected temples to the Unknown God, and there is no doubt that he will
continue to do so for all time to come, as long as he continues 'imploring the
aid of Divine Providence'" (Nepomuceno's Corporation Sole, VI Ateneo Law
Journal, No. 1, p. 41, September, 1956). Under the circumstances of this case,
We might safely state that even before the establishment of the Philippine
120 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Commonwealth and of the Republic of the Philippines every corporation sole
then organized and registered had by express provision of law the necessary
power and qualification to purchase in its name private lands located in the
territory in which it exercised its functions or ministry and for which it was
created, independently of the nationality of its incumbent unique and single
member and head, the bishop of the dioceses. It can be also maintained
without fear of being gainsaid that the Roman Catholic Apostolic Church
in the Philippines has no nationality and that the framers of the
Constitution, as will be hereunder explained, did not have in mind the
religious corporations sole when they provided that 60 per centum of
the capital thereof be owned by Filipino citizens.
THE DIRECTOR OF LANDS vs. CA (supra, POWER TO ACQUIRE PROPERTY)
FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite for
registration of a parcel of land which it claimed to have acquired by virtue of a
Deed of Absolute Sale from Aquelina de la Cruz, alleging that the applicant and
its predecessors-in-interest have been in actual, continuous, public, peaceful
and adverse possession and occupation of the said land for more than 30 years,
which was opposed by the Government as represented by the Director of
Lands. The CFI and the CA ruled in favor of INC.
ISSUE: WON the registration of the land should be upheld?
HELD: As observed at the outset, had this case been resolved immediately
after it was submitted for decision, the result may have been quite adverse to
private respondent. For the rule then prevailing under the case of Manila
Electric Company v. Castro-Bartolome et al., 114 SCRA 799, reiterated in
Republic v. Villanueva, 114 SCRA 875 as well as the other subsequent cases
involving private respondent adverted to above', is that a juridical person,
private respondent in particular, is disqualified under the 1973 Constitution
from applying for registration in its name alienable public land, as such land
ceases to be public land "only upon the issuance of title to any Filipino citizen
claiming it under section 48[b]" of Commonwealth Act No. 141, as amended.
These are precisely the cases cited by petitioner in support of its theory of
disqualification.
Since then, however, this Court had occasion to re-examine the rulings in these
cases vis-a-vis the earlier cases of Carino v. Insular Government, 41 Phil. 935,
Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among others.
Thus, in the recent case of Director of Lands v. Intermediate Appellate Court,
146 SCRA 509, We categorically stated that the majority ruling in Meralco is
"no longer deemed to be binding precedent", and that "[T]he correct rule, ...
is that alienable public land held by a possessor, personally or
through his predecessors-in-interest, openly, continuously and
exclusively for the prescribed statutory period [30 years under the
Public Land Act, as amended] is converted to private property by
mere lapse or completion of said period, ipso jure." We further
reiterated therein the timehonored principle of non-impairment of vested
rights.
The crucial factor to be determined therefore is the length of time private
respondent and its predecessors-in-interest had been in possession of the land
in question prior to the institution of the instant registration proceedings. The
land under consideration was acquired by private respondent from Aquelina de
la Cruz in 1947, who, in turn, acquired by same by purchase from the Ramos
brothers and sisters, namely: Eusebia, Eulalia, Mercedes, Santos and Agapito,
in 1936. Under section 48[b] of Commonwealth Act No. 141, as amended,
"those who by themselves or through their predecessors-in-interest have been
in open, continuous, exclusive and notorious possession and occupation of
agricultural lands of the public domain, under a bona fide claim of acquisition
or ownership, for at least thirty years immediately preceding the filing of the
application for confirmation of title except when prevented by war or force
majeure" may apply to the Court of First Instance of the province where the
land is located for confirmation of their claims, and the issuance of a certificate
of title therefor, under the Land Registration Act. Said paragraph [b] further
provides that "these shall be conclusively presumed to have performed all the
conditions essential to a Government grant and shall be entitled to a certificate
of title under the provisions of this chapter." Taking the year 1936 as the
reckoning point, there being no showing as to when the Ramoses first took
possession and occupation of the land in question, the 30-year period of open,
continuous, exclusive and notorious possession and occupation required by law
was completed in 1966.
The completion by private respondent of this statutory 30-year period has dual
significance in the light of Section 48[b] of Commonwealth Act No. 141, as
amended and prevailing jurisprudence: [1] at this point, the land in question
ceased by operation of law to be part of the public domain; and [2] private
respondent could have its title thereto confirmed through the appropriate
proceedings as under the Constitution then in force, private corporations or
associations were not prohibited from acquiring public lands, but merely
prohibited from acquiring, holding or leasing such type of land in excess of
1,024 hectares.
If in 1966, the land in question was converted ipso jure into private land, it
remained so in 1974 when the registration proceedings were commenced. This
being the case, the prohibition under the 1973 Constitution would have no
application. Otherwise construed, if in 1966, private respondent could have its
title to the land confirmed, then it had acquired a vested right thereto, which
the 1973 Constitution can neither impair nor defeat.
REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, ROMAN CATHOLIC BISHOP OF
LUCENA, represented by Msgr. Jose T. Sanchez, and REGIONAL TRIAL
COURT, BRANCH LIII, LUCENA CITY, respondents
(G.R. No. 75042; November 29, 1988)
FACTS: The ROMAN CATHOLIC BISHOP of Lucena, represented by Msgr. Jose
T. Sanchez, filed an application for confirmation of title to 4 parcels of land
which were said to have been obtained either by purchase or donation dating
as far back as 1928, which was granted by the CFI.
Against this decision, the Solicitor General filed a Motion for reconsideration on
the following grounds:
1. Article XIV, Section 11 of the New Constitution(1973) disqualifies a private
corporation from acquiring alienable lands for the public domain;
2. In the case at bar the application was filed after the effectivity on the New
Constitution on January 17, 1973;
which was denied by the lower court for lack of merit.
Still insisting of the alleged unconstitutionality of the registration (a point
which, incidentally, the appellant never raised in the lower court prior to its
Motion for Reconsideration), the Republic elevated this appeal, and the IAC
affirmed the lower court’s decision.
ISSUE: WON private respondent, corporation sole, is entitled to confirmation
of its title to the 4 parcels of land?
HELD: The parties herein do not dispute that since the acquisition of the four
(4) lots by the applicant, it has been in continuous possession and enjoyment
thereof, and such possession, together with its predecessors-in-interest,
covering a period of more than 52 years (at least from the date of survey in
1928) with respect to lots 1 and 2, about 62 years with respect to lot 3, all of
plan PSU-65686; and more than 39 years with respect to the fourth parcel
described in plan PSU-11 2592 (at least from the date of the survey in 1940)
have been open, public, continuous, peaceful, adverse against the whole world,
and in the concept of owner.
Petitioner argues that considering such constitutional prohibition, private
respondent is disqualified to own and register its title to the lots in question.
Further, it argues that since the application for registration was filed only on
February 2, 1979, long after the 1973 Constitution took effect on January 17,
1973, the application for registration and confirmation of title is ineffectual
because at the time it was filed, private corporation had been declared
ineligible to acquire alienable lands of the public domain pursuant to Art. XIV,
Sec. 11 of the said constitution. (Rollo, p. 41)
121 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
The questioned posed before this Court has been settled in the case of
DIRECTOR OF LANDS vs. Intermediate Appellate Court (146 SCRA 509 [1986])
which reversed the ruling first enunciated in the 1982 case of Manila Electric
Co. vs. CASTRO BARTOLOME, (114 SCRA 789 [1982]) imposing the
constitutional ban on public land acquisition by private corporations which
ruling was declared emphatically as res judicata on January 7, 1986 in Director
of Lands vs. Hermanos y Hermanas de Sta. Cruz de Mayo, Inc., (141 SCRA 21
[1986]). In said case, (Director of Lands v. IAC, supra), this Court stated that
a determination of the character of the lands at the time of institution
of the registration proceedings must be made. If they were then still part
of the public domain, it must be answered in the negative.
If, on the other hand, they were already private lands, the constitutional
prohibition against their acquisition by private corporation or association
obviously does not apply. In affirming the Decision of the Intermediate
Appellate Court in said case, this Court adopted the vigorous dissent of the
then Justice, later Chief Justice Claudio Teehankee, tracing the line of cases
beginning with CARINO, in 1909, thru SUSI, in 1925, down to HERICO, in 1980,
which developed, affirmed and reaffirmed the doctrine that open, exclusive
and undisputed possession of alienable public land for the period prescribed by
law creates the legal fiction whereby the land, upon completion of the requisite
period ipso jure and without the need of judicial or other sanction, ceases to
be public land and becomes' private property. (DIRECTOR OF LANDS vs. IAC,
supra, p. 518).
It must be emphasized that the Court is not here saying that a corporation sole
should be treated like an ordinary private corporation.
In Roman Catholic Apostolic Administration of Davao, Inc. vs. Land Registration
Commission, et al. (L-8451, December 20,1957,102 Phil. 596). We articulated:
In solving the problem thus submitted to our consideration, We can say the
following: A corporation sole is a special form of corporation usually
associated with the clergy. Conceived and introduced into the common law
by sheer necessity, this legal creation which was referred to as "that
unhappy freak of English Law" was designed to facilitate the exercise of the
functions of ownership carried on by the clerics for and on behalf of the
church which was regarded as the property owner (See 1 Bouvier's Law
Dictionary, p. 682-683).
A corporation sole consists of one person only, and his successors (who will
always be one at a time), in some particular station, who are incorporated
by law in order to give them some legal capacities and advantages,
particulary that of perpetuity, which in their natural persons they could not
have had.
There is no doubt that a corporation sole by the nature of its Incorporation is
vested with the right to purchase and hold real estate and personal property.
It need not therefore be treated as an ordinary private corporation because
whether or not it be so treated as such, the Constitutional provision involved
will, nevertheless, be not applicable.
In the light of the facts obtaining in this case and the ruling of this Court in
Director of Lands vs. IAC, (supra, 513), the lands subject of this petition were
already private property at the time the application for confirmation of title was
filed in 1979. There is therefore no cogent reason to disturb the findings of the
appellate court.
VACANCY: in the office of the “head” of the corporation, the person
authorized by the rules, regulations or discipline of the denomination shall
exercise all the powers and authority of the corporation sole during such
vacancy and until such vacancy has been filled-up. The manner in which the
vacancy is to be filled in clearly spelled out in Sec. 114 of the Code:
 Sec. 114. Filling of vacancies. - The successors in office of any chief
archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation
sole shall become the corporation sole on their accession to office and shall be
permitted to transact business as such on the filing with the Securities and
Exchange Commission of a copy of their commission, certificate of election, or
letters of appointment, duly certified by any notary public.
During any vacancy in the office of chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious denomination, sect or church
incorporated as a corporation sole, the person or persons authorized and
empowered by the rules, regulations or discipline of the religious denomination,
sect or church represented by the corporation sole to administer the
temporalities and manage the affairs, estate and properties of the corporation
sole during the vacancy shall exercise all the powers and authority of the
corporation sole during such vacancy.
Under the above-provision, it is required that the successor, in order to be
permitted to transact business as a corporation sole, must file with the SEC a
copy of his commission, certificate of election, or letter of appointment, duly
certified by a notary public.
DISSOLUTION:
Sec. 115. Dissolution. - A corporation sole may be dissolved and its affairs
settled voluntarily by submitting to the Securities and Exchange Commission a
verified declaration of dissolution.
The declaration of dissolution shall set forth: (NRAN)
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular
religious denomination, sect or church;
4. The names and addresses of the persons who are to supervise the winding
up of the affairs of the corporation.
Upon approval of such declaration of dissolution by the Securities and Exchange
Commission, the corporation shall cease to carry on its operations except for
the purpose of winding up its affairs.
DISSOLUTION BY JUDICIAL DECREE: is generally not allowed because of
the doctrine of separation of the Church and the State. However, the State
may exercise its police power if the corporation is being carried out and is being
used for illegal purposes.
D. RELIGIOUS SOCIETIES
Under common law, a religious society is a body of persons associated together
for the purpose of maintaining religious worship. The religious society and the
church are distinct bodies, independent of each other, though they may exist
with each other.
Under Philippine Law, a religious society, order, diocese, synod or district
organization of any religious denomination, sect or church may incorporate for
the administration of its temporalities or for the management of its affairs,
properties and estate in accordance with the Code:
122 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Sec. 116. Religious societies. - Any religious society or religious order, or
any diocese, synod, or district organization of any religious denomination, sect
or church, unless forbidden by the constitution, rules, regulations, or discipline
of the religious denomination, sect or church of which it is a part, or by
competent authority, may, upon written consent and/or by an affirmative vote
at a meeting called for the purpose of at least two-thirds (2/3) of its
membership, incorporate for the administration of its temporalities or for the
management of its affairs, properties and estate by filing with the Securities
and Exchange Commission, articles of incorporation verified by the affidavit of
the presiding elder, secretary, or clerk or other member of such religious society
or religious order, or diocese, synod, or district organization of the religious
denomination, sect or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect or
church;
2. That at least two-thirds (2/3) of its membership have given their written
consent or have voted to incorporate, at a duly convened meeting of the body;
3. That the incorporation of the religious society or religious order, or diocese,
synod, or district organization desiring to incorporate is not forbidden by
competent authority or by the constitution, rules, regulations or discipline of the
religious denomination, sect, or church of which it forms a part;
4. That the religious society or religious order, or diocese, synod, or district
organization desires to incorporate for the administration of its affairs,
properties and estate;
5. The place where the principal office of the corporation is to be established
and located, which place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees elected by the
religious society or religious order, or the diocese, synod, or district organization
to serve for the first year or such other period as may be prescribed by the laws
of the religious society or religious order, or of the diocese, synod, or district
organization, the board of trustees to be not less than five (5) nor more than
fifteen (15).
Apparent from the foregoing, is that a religious society is not mandated by law
to register as a corporation but may do so to acquire juridical personality and
for the purpose of administration of its temporalities and properties and even
to acquire properties of its own. Thus, it has been held that an unincorporated
religious association cannot acquire private agricultural lands in the Philippines
(Register of Deeds vs. Ung Sui Temple)
TERM OF EXITENCE: Like the corporation sole, the AOI of a religious society
need not contain a term of its existence as it is supposed to exist in perpetuity.
BEGINNING OF CORPORATE EXISTENCE: is upon issuance of the
certificate of registration by the SEC. Absent any specific provision of the law,
it must be deemed to fall within the general rule under Sec. 19.
CHAPTER XVII: DISSOLUTION (TITLE XIV)
A. DISSOLUTION is the extinguishment of the corporate franchise and the
termination of corporate existence.
When a corporation is dissolved, it ceases to be a juridical entity and can no
longer pursue the business for which it was incorporated. It will nevertheless
continue as a body corporate for another period of three years from the time
it is dissolved but only for the purpose of winding up its affairs and the
liquidation of its assets.
B. METHODS OF DISSOLUTION
THREE WAYS OF DISSOLUTION:
1. Expiration of its corporate term;
2. Voluntary surrender of its primary franchise (voluntary dissolution); and
3. The revocation of its corporate franchise (involuntary dissolution)
Sec. 117, however, mentions only two methods:
Sec. 117. Methods of dissolution. - A corporation formed or organized
under the provisions of this Code may be dissolved voluntarily or involuntarily. a corporate life of only twenty-five (25) years which ended an January 19,
This is rightfully so, because the expiration of corporate term can be considered
voluntary dissolution t being the intention of the stockholders that it shall exist
only for such period.
C. EXPIRATION OF CORPORATE TERM
A corporation registered under the Corporation Code, with the exception of
religious ones, is required to indicate its term of existence in the AOI. It ceases
to exist and is deemed automatically dissolved upon the expiration of the term
indicated thereat without the need of any formal proceedings.
EXTENSION: It is to be observed, however, that the original term of existence
indicated in the AOI is subject to extension in accordance with the provisions
of Sec. 11 and 37 of the Code. If such be the case, the corporation continues
to be possessed with juridical personality and may carry out its business for
the period of time granted by virtue of such extension.
The extension should nonetheless be made before the expiration of the original
term, but not earlier than 5 years prior to such expiration, otherwise the
corporation is dissolved, ipso facto.
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF FIRST INSTANCE OF RIZAL, PASIG — BRANCH XXI,
PRESIDED BY JUDGE GREGORIO G. PINEDA, CHUNG SIONG PEK @
BONIFACIO CHUNG SIONG PEK AND VICTORIA CHING GENG TY @ VICTORIA
CHENG GENG TY, and THE REGISTER OF DEEDS OF RIZAL, PASIG, METRO
MANILA AND/OR HIS DEPUTIES AND AGENTS, respondents
(G.R. No. 63201; May 27, 1992)
FACTS: Philippine Blooming Mills, Inc. (PBM), a corporation with corporate
existence of 25 years, entered into a lease contract with private respondents,
whereby the latter shall lease the parcels of land owned by them to PBM for a
period of 20 years, extendible to another 20 years, provided that PBM extend
its corporate existence in accordance with law.
PBM introduced improvements on the land which were annotated with the
Register of Deeds.
Later on, PBM executed a deed of assignment in favor of PNB over its leasehold
rights and later on a real estate mortgage covering all the improvements to
secure a loan.
PBM filed a petition for registration of improvements in the titles of real
property of private respondents which was opposed by private respondents on
the ground that PBM failed to renew the contract of lease and apply for
extension of its corporate existence.
The CFI issued an order directing the cancellation of the inscriptions on
respondents’ certificates of title.
ISSUE: WON the cancellation of entries on respondents’ title is valid and
proper?
123 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
HELD: Yes. The contract of lease expressly provides that the term of the lease
shall be twenty years from the execution of the contract but can be extended
for another period of twenty years at the option of the lessee should the
corporate term be extended in accordance with law. Clearly, the option of the
lessee to extend the lease for another period of twenty years can be exercised
only if the lessee as corporation renews or extends its corporate term of
existence in accordance with the Corporation Code which is the applicable law.
Contracts are to be interpreted according to their literal meaning and should
not be interpreted beyond their obvious intendment. Thus, in the instant case,
the initial term of the contract of lease which commenced on March 1, 1954
ended on March 1, 1974. PBM as lessee continued to occupy the leased
premises beyond that date with the acquiescence and consent of the
respondents as lessor. Records show however, that PBM as a corporation had
1977. It should be noted however that PBM allowed its corporate term to expire
without complying with the requirements provided by law for the extension of
its corporate term of existence.
Section 11 of Corporation Code provides that a corporation shall exist for a
period not exceeding fifty (50) years from the date of incorporation unless
sooner dissolved or unless said period is extended. Upon the expiration of the
period fixed in the articles of incorporation in the absence of compliance with
the legal requisites for the extension of the period, the corporation ceases to
exist and is dissolved ipso facto (16 Fletcher 671 cited by Aguedo F. Agbayani,
Commercial Laws of the Philippines, Vol. 3, 1988 Edition p. 617). When the
period of corporate life expires, the corporation ceases to be a body corporate
for the purpose of continuing the business for which it was organized. But it
shall nevertheless be continued as a body corporate for three years after the
time when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it gradually to settle and close its
affairs, to dispose of and convey its property and to divide its assets (Sec. 122,
Corporation Code). There is no need for the institution of a proceeding
for quo warranto to determine the time or date of the dissolution of
a corporation because the period of corporate existence is provided
in the articles of incorporation. When such period expires and
without any extension having been made pursuant to law, the
corporation is dissolved automatically insofar as the continuation of
its business is concerned. The quo warranto proceeding under Rule 66 of
the Rules of Court, as amended, may be instituted by the Solicitor General only
for the involuntary dissolution of a corporation on the following grounds: a)
when the corporation has offended against a provision of an Act for its creation
or renewal; b) when it has forfeited its privileges and franchises by non-user;
c) when it has committed or omitted an act which amounts to a surrender of
its corporate rights, privileges or franchises; d) when it has mis-used a right,
privilege or franchise conferred upon it by law, or when it has exercised a right,
privilege or franchise in contravention of law. Hence, there is no need for the
SEC to make an involuntary dissolution of a corporation whose corporate term
had ended because its articles of incorporation had in effect expired by its own
limitation.
Considering the foregoing in relation to the contract of lease between the
parties herein, when PBM's corporate life ended on January 19, 1977 and its
3-year period for winding up and liquidation expired on January 19, 1980, the
option of extending the lease was likewise terminated on January 19, 1977
because PBM failed to renew or extend its corporate life in accordance with
law. From then on, the respondents can exercise their right to terminate the
lease pursuant to the stipulations in the contract.
The rights of the lessor and the lessee over the improvements which the latter
constructed on the leased premises is governed by Article 1678 of the Civil
Code.
The provision gives the lessee the right to remove the improvements if the
lessor chooses not to pay one-half of the value thereof. However, in the case
at bar, the law will not apply because the parties herein have stipulated in the
contract their own terms and conditions concerning the improvements, to wit,
that the lessee, namely PBM, bound itself to remove the improvements before
the termination of the lease. Petitioner PNB, as assignee of PBM succeeded to
the obligation of the latter under the contract of lease. It could not possess
rights more than what PBM had as lessee under the contract. Hence, petitioner
was duty bound to remove the improvements before the expiration of the
period of lease as what we have already discussed in the preceding paragraphs.
Its failure to do so when the lease was terminated was tantamount to a waiver
of its rights and interests over the improvements on the leased premises.
D. SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION)
MODES OF VOLUNTARY DISSOUTION:
1. Voluntary Dissolution where no creditors are affected (Sec. 118);
2. Voluntary Dissolution where creditors are affected (Sec. 119);
3. Shortening of corporate term (Sec. 120).
1. VOLLUNTARY DISSOUTION WHERE NO CREDITORS ARE
AFFECTED:
Sec. 118. Voluntary dissolution where no creditors are affected. - If
dissolution of a corporation does not prejudice the rights of any creditor having
a claim against it, the dissolution may be effected by majority vote of the board
of directors or trustees, and by a resolution duly adopted by the affirmative vote
of the stockholders owning at least two-thirds (2/3) of the outstanding capital
stock or of at least two-thirds (2/3) of the members of a meeting to be held
upon call of the directors or trustees after publication of the notice of time,
place and object of the meeting for three (3) consecutive weeks in a newspaper
published in the place where the principal office of said corporation is located;
and if no newspaper is published in such place, then in a newspaper of general
circulation in the Philippines, after sending such notice to each stockholder or
member either by registered mail or by personal delivery at least thirty (30)
days prior to said meeting. A copy of the resolution authorizing the dissolution
shall be certified by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation. The Securities and Exchange
Commission shall thereupon issue the certificate of dissolution.
FORMAL AND PROCEDURAL REQUIREMENTS:
1. Majority vote of the board of directors or trustees;
2. Sending of notice of each stockholders or member either by registered
mail or personal delivery at least thirty (30) days prior to the meeting
(scheduled by the board for the purpose of submitting the board action
to dissolve the corporation for approval of the stockholder or members.);
3. Publication of the notice of time, place and subject of the meeting for
three (3) consecutive weeks in a newspaper published in the place where
the principal office of said corporation is located or in a newspaper of
general circulation in the Philippines;
4. Resolution adopted by the affirmative vote of the stockholders owning at
least 2/3 of the outstanding capital stock or 2/3 of the members at the
meeting duly called for the purpose;
5. A copy of the resolution authorizing the dissolution must be certified by a
majority of the board of directors or trustees and countersigned by the
corporate secretary;
6. Issuance of a certificate of dissolution by the SEC.
FAILURE TO COMPLY: with the above requirements will have no effect on
the legal existence of the corporation. Elsewise stated, a corporation benig a
creation of the law by the grant of its existence by the State, may only be
dissolved in the manner prescribed by the law of its creation. Since it is the
State that grants its right to exist, it is only through the State which can allow
th termination of existence. Unless dissolved pursuant thereto, a corporation
does not cease to have a juridical personality.
A mere resolution by the stockholders or the BOD of a corporation to dissolve
the same does not affect the dissolution but that some other steps,
administrative or judicial is necessary (Daguhoy Enterprises vs. Ponce)
2. VOLUNTARY DISSOLUTION WHERE CREDITORS ARE AFFECTED
124 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Sec. 119. Voluntary dissolution where creditors are affected. - Where
the dissolution of a corporation may prejudice the rights of any creditor, the
petition for dissolution shall be filed with the Securities and Exchange
Commission. The petition shall be signed by a majority of its board of directors
or trustees or other officers having the management of its affairs, verified by
its president or secretary or one of its directors or trustees, and shall set forth
all claims and demands against it, and that its dissolution was resolved upon by
the affirmative vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or by at least two-thirds (2/3) of the members
at a meeting of its stockholders or members called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an
order reciting the purpose of the petition, fix a date on or before which
objections thereto may be filed by any person, which date shall not be less than
thirty (30) days nor more than sixty (60) days after the entry of the order.
Before such date, a copy of the order shall be published at least once a week
for three (3) consecutive weeks in a newspaper of general circulation published
in the municipality or city where the principal office of the corporation is
situated, or if there be no such newspaper, then in a newspaper of general
circulation in the Philippines, and a similar copy shall be posted for three (3)
consecutive weeks in three (3) public places in such municipality or city.
Upon five (5) day's notice, given after the date on which the right to file
objections as fixed in the order has expired, the Commission shall proceed to
hear the petition and try any issue made by the objections filed; and if no such
objection is sufficient, and the material allegations of the petition are true, it
shall render judgment dissolving the corporation and directing such disposition
of its assets as justice requires, and may appoint a receiver to collect such
assets and pay the debts of the corporation.
FORMAL AND PROCEDURAL REQUIREMENTS:
1. Affirmative vote of the stockholders representing at least 2/3 of the
outstanding capital stock or at least 2/3 of the members at a meeting duly
called for that purpose;
2. Petition for dissolution shall be filed with the SEC (the proper forum)
signed by a majority of its board of directors or trustees or other officers
having the management of its affairs, verified by the president or
secretary or one of its directors or trustees, setting forth all claims and
demands against it.
3. Issuance of an order by the SEC reciting the purpose of the petition
and fixing the date on or before which objections thereto may be filed by
any person, which date shall not be less than thirty days nor more than
sixty days after entry of the order.
4. Before such date, a copy of the order must be published once a week
for three (3) consecutive weeks in a newspaper of general circulation
published in the city or municipality where the principal office is situated
or in a newspaper of general circulation in the Philippines.
5. Posting of the same order for three (3) consecutive weeks in three (3)
public places in such city or municipality.
6. Upon five (5) days’ notice, given after the date on which the right to file
objections has expired, the SEC shall hear the petition and try any issue
made by the objections filed.
7. Judgment dissolving the corporation and directing of its assets as justice
requires and the appointment of a receiver (if necessary in its discretion)
to collect such assets and pay the debts of the corporation
APPOINTMENT OF A RECEIVER: While the foregoing are mandatory
requirements, the appointment of a receiver is only permissive. As can be
gleaned from the second paragraph of Sec. 119, it uses the phrase “and may
appoint a receiver”, showing the clear intent of the aw that the same is merely
discretionary on the part of the proper forum. Such language, held by the High
Court, “tends to recognize that in cases of voluntary dissolution, there is no
occasion for the appointment of a receiver except under special circumstances
and upon proper showing” (China Bank vs. Michellin) introduced by the Securities Regulations Code (SRC) of 2000, or RA 8799,
which transferred the jurisdiction of the SEC under Sec. 5 of PD 902-A to the
3. DISSOLUTION BY SHORTENING CORPORATE TERM regional trial courts as designated by the SC (Sec. 5.2, RA 8799). The
jurisdiction of the courts and the SEC over revocation proceedings seems to be
Sec. 120 was inserted to incorporate the long standing practice of dissolving a concurrent under the present set up since Sec. 5 of RA 8799, particularly par.
corporation by amendment of the AOI by shortening the corporate existence. (m) thereof, provides that the SEC has the power to “suspend, or revoke, after
proper notice and hearing the franchise and certificate of registration of
A corporation may exist for 50 years, but there is no law which prevents the corporations, partnership or associations, upon any ground provided by law”.
shareholders thereof to shorten that period and effect a dissolution of the This, despite the transfer of its jurisdiction under the SRC.
corporation.
GROUNDS FOR INVOLUNTARY DISSOLUTION: as provided under Sec. 6
PERPETUAL SUCCESSION: In fact, a corporation may be given the capacity of PD 902-A: (FSRCFF)
of “perpetual succession” like the corporation sole and the religious society. It
does not mean, however, that it shall continue to exist forever. It merely means 1. Fraud in procuring its certificate of registration;
that it has the capacity of continuous existence during a particular period or 2. Serious misrepresentation as to what the corporation can do or is
until dissolved in accordance with law. doing to the great prejudice of or damage to the general public;
3. Refusal to comply or defiance of any lawful order of the
It may thus amend its AOI and provide a term of existence or shorten it which Commission restraining commission of acts which would amount to a
may have the effect of a dissolution. Thus, while Sec. 115 of the Code provides grave violation of its franchise;
for the process and procedure for the dissolution of a corporation sole, there 4. Continuous inoperation for a period of at least five (5) years;
is nothing in the law itself which would prohibit it from amending its AOI. It is 5. Failure to file by-laws within the required period;
believed, however, that authorization for the dissolution by the particular 6. Failure to file required reports in appropriate forms as determined by
religious denomination, sect or church, as required in sub-paragraph 3 of Sec. the Commission within the prescribed period.
115 would still be necessary in the case of amending the AOI to affect
dissolution. OTHER GROUNDS PROVIDED FOR IN THE CORPORATION CODE:
1. Violation of any provision of the Code under section 144;
2. In case of deadlock in a close corporation as provided for in section 105;
Sec. 120. Dissolution by shortening corporate term. - A voluntary
3. In a close corporation, any acts of directors, officers or those in control of
dissolution may be effected by amending the articles of incorporation to shorten the corporation which is illegal or fraudulent or dishonest or oppressive
the corporate term pursuant to the provisions of this Code. A copy of the or unfairly prejudicial to the corporation or any stockholder or whenever
amended articles of incorporation shall be submitted to the Securities and corporate assets are being misapplied or wasted under section 105.
Exchange Commission in accordance with this Code. Upon approval of the
amended articles of incorporation of the expiration of the shortened term, as INVOLUNTARY DISSOLUTION: is a harsh remedy akin to a capital
the case may be, the corporation shall be deemed dissolved without any further punishment. Thus, it has been laid to rest in the case of Government vs.
Philippine Sugar Estate that courts proceed with extreme caution which have
proceedings, subject to the provisions of this Code on liquidation.
for their object the forfeiture of corporate franchise, and forfeiture will not be
allowed, except under express limitation, or for plain abuse of power by which
the corporation fails to fulfil the design and purpose of its organization. But
when the abuse or violation constitutes or threatens a substantial injury to the
public or such as to amount to a violation of the fundamental conditions of its
SPECIAL AMENDMENT: Shortening of the corporate term with the effect of
charter, or its conduct is characterized by “obduracy or pertinacity in contempt
dissolution is a special type of amendment covered and governed by the special
of law”, dissolution will be granted.
provisions of Sec. 37 of the Code. Thus, while the general provision on
amendment under Sec. 16 allows “written assent” in determining the voting
Likewise, it has been held that the relief of dissolution will be awarded only
requirement for ordinary amendments, sec. 37 mandates that the vote must
where no other adequate remedy is available and it will not be allowed where
be cast at a duly constituted meeting.
the rights of the stockholders can be, or are, protected in some other way.
Likewise, sec. 16 provides that amendment of the AOI is deemed approved if
THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellant,
not acted upon by the SEC within 6 months from the date of filing for a cause
vs.
not attributable to the corporation. This is not applicable in case of shortening
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO. (LTD.)
the corporate term which will have the effect of dissolution in Sec. 120, which
defendant-appellant
requires the approval of the SEC.
(G.R. No. L-11789; April 2, 1918)
E. INVOLUNTARY DISSOLUTION
FACTS: Defendant corporation by its charter is authorized among others:

Sec. 121. Involuntary dissolution. - A corporation may be dissolved by the
Securities and Exchange Commission upon filing of a verified complaint and
after proper notice and hearing on the grounds provided by existing laws, rules
and regulations.
Culled from the above provision is that this is a dissolution is by judicial decree.
JURISDICTION OVER DISSOLUTION CASES: In a ruling laid down by the
SC, actions, for quo warranto against corporations or against persons who
usurps an office in a corporation fall under the jurisdiction of the SEC (Unilongo,
et. al. vs. CA; GR No. 123910; April 5, 1999).
j) To buy shares of the Compañia de Navegacion, Ferrocarriles, Diques, y
Almacenes de Depositos, and, in this manner or otherwise, to engage in any
mercantile or industrial enterprise.
(k) With no other restrictions than those provided by law, place funds of the
corporation in hypothecary or pignorative loans, in public securities of the
United States, in stocks or shares issued by firms, corporations, or
companies that are legally organized and operated, and in rural and urban
property. It may also contract and guarantee all kinds of obligations, in
conformity with existing laws
These powers are necessarily limited by Sec. 75 of of the Act of Congress of
July 1, 1902, and by the section 13 Act of 1459, the latter being a reproduction
of the former, which is as follows:

This, however, is no longer exclusive and absolute in view of the amendments

125 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 That no corporation shall be authorized to conduct the business of buying
and selling real estate or be permitted to hold or own real estate except such
as may be reasonably necessary to enable it to carry out the purposes for
which it is created, . . . . Corporations, however, may loan funds upon real
estate, security, and purchase real estate when necessary for the collection
of loans, but they shall dispose of real estate so obtained within five years
after receiving the title . . .
The defendant corporation entered into a contract with The Tayabas Land
Company (TLC) where PSEC invested P400,000 in the TLC and that “All lands
bought or which may be bought with the credit, which The Philippine Sugar
brings to The Tayabas Land Company and which lie within and without the
railway line from Pagbilao to Lopez, shall be held as security for such credit, at
their respective cost price, until their alienation, except the part thereof which
pertains to D. Mariano Lim in The Tayabas Land Company” and that if TLC is
to sell the land and its improvements at a price lower than P0.50 per square
meter TLC is to obtain the consent of PSEC first.
An action for quo warranto was brought by the Attorney General for and in
behalf of the Government of the Philippine Islands for the purpose of having
the charter of the defendant corporation PSEC declared forfeited for engaging
in the “buying and selling of real estate” along the right of way of Manila
Railroad Company with the view of reselling the same to Manila Railroad for a
profit; that it had continuously offended against the laws of the Philippine
Islands and had misused its corporate authority, franchise and privileges and
had assumed privileges and franchises not granted.
ISSUE: WON defendant corporation should be dissolved?
HELD: No. Section 212 of Act No. 190 provides a judgment which may be
rendered in said case:
When in any such action, it is found and adjudged that the corporation has,
by any act done or omitted surrendered, or forfeited its corporate rights,
privileges, and franchise, or has not used the same during the term of five
years, judgment shall be entered that it be ousted and excluded therefrom
and that it be dissolved; but when it is found and adjudged that a
corporation has offended in any matter or manner which does not
by law work as a surrender or forfeiture, or has misused a franchise
or exercised a power not conferred by law, but not of such a
character as to work a surrender or forfeiture of its franchise,
judgment shall be rendered that it be ousted from the continuance
of such offense or the exercise of such power.
It will be seen that said section (212) gives the court a wide discretion in its
judgment in depriving corporations of their franchise. High, in his work on
Extraordinary Legal Remedies, says at page 606:
It is to be observed in the outset that the courts proceed with extreme
caution in the proceeding which have for their object the forfeiture
of corporate franchises, and a forfeiture will not be allowed, except
under express limitation, or for a plain abuse of power by which
the corporation fails to fulfill the design and purpose of its
organization.
In the case of State of Minnesota vs. Minnesota Thresher Manufacturing Co.
(3 L.R.A. 510) the court said (p. 518):
The scope of the remedy furnished by its (quo warranto) is to forfeit the
franchises of a corporation for misuser or nonuser. It is therefore necessary
in order to secure a judicial forfeiture of respondent's charter to show a
misuser of its franchises justifying such a forfeiture. And as already remarked
the object being to protect the public, and not to redress private grievances,
the misuser must be such as to work or threaten a substantial injury to the
public, or such as to amount to a violation of the fundamental condition of
the contract by which the franchise was granted and thus defeat the purpose
of the grant; and ordinarily the wrong or evil must be one remediable in no
other form of judicial proceeding.
Courts always proceed with great caution in declaring a forfeiture of
franchises, and require the prosecutor seeking the forfeiture to bring the
126 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
case clearly within the rules of law entitling him to exact so severe a penalty.
(People vs. North River Sugar Refining Co., 9 L.R.A., 33, 39; State vs.
Portland Natural Gas Co., 153, Ind., 483.)
While it is true that the courts are given a wide discretion in ordering the
dissolution of corporations for violations of its franchises, etc., yet nevertheless,
when such abuses and violations constitute or threaten a substantial
injury to the public or such as to amount to a violation of the
fundamental conditions of the contract (charter) by which the
franchises were granted and thus defeat the purpose of the grant,
then the power of the courts should be exercised for the protection
of the people.
Under the law the people of the Philippine Islands have guaranteed the
payment of the interest upon cost of the construction of the railroad which
occupied or occupies at least some of the lands purchased by the defendant.
Every additional dollar of increase in the price of the land purchased by the
railroad company added that much to the costs of construction and thereby
increased the burden imposed upon the people. The very and sole purpose of
the intervention of the defendants in the purchase of the land from the original
owners was for the purpose of selling the same to the Railroad Company at
profit — at an increased price, thereby directly increasing the burden of the
people by way of additional taxation. The purpose of the intervention of the
defendant in the transactions in question, was to enrich itself at the expense
of the taxpayers of the Philippine Islands, who had, by a franchise granted,
permitted the defendant to exist and do business as a corporation. The
defendant was not willing to allow the Railroad Company to purchase the land
of the original owners. Its intervention with The Tayabas Land Company was
to obtain an increase in the price of the land in a resale of the same to the
railroad company. The conduct of the defendant in the premises merits the
severest condemnation of the law.
The judgment of the lower court should be modified. It is hereby ordered and
decreed that the franchise heretofore granted to the defendant by which it was
permitted to exist and do business as a corporation in the Philippine Islands,
be withdrawn and annulled and that it be disallowed to do and to continue
doing business in the Philippine Islands, unless it shall within a period of
six months after final decision, liquidate, dissolve and separate
absolutely in every respect and in all of its relations, complained of in
the petition, with The Tayabas Land Company, without any findings
to costs.
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the
Attorney-General), plaintiff,
vs.
EL HOGAR FILIPINO, defendant
(G.R. No. L-26649; July 13, 1927)
FACTS: The Attorney General of the Government of the Philippine Islands
instituted the present quo warranto for the purpose of depriving defendant
corporation of its franchise upon 17 distinct causes of action, the first of which
is:
Plaintiff “alleged illegal holding by the respondent of the title to real property
for a period in excess of five years after the property had been bought in by
the respondent at one of its own foreclosure sales. The provision of law
relevant to the matter is found in section 75 of Act of Congress of July 1, 1902
(repeated in subsection 5 of section 13 of the Corporation Law.) In both of
these provisions it is in substance declared that while corporations may loan
funds upon real estate security and purchase real estate when necessary for
the collection of loans, they shall dispose of real estate so obtained within five
years after receiving the title”
ISSUE: WON the corporation should be dissolved on the first cause of action?
HELD: No. It is evident that the strict letter of the law was violated by the
respondent; but it is equally obvious that its conduct has not been
characterized by obduracy or pertinacity in contempt of the law. Moreover,
several facts connected with the incident tend to mitigate the offense.
It has been held by this court that a purchaser of land registered under the
Torrens system cannot acquire the status of an innocent purchaser for value
unless his vendor is able to place in his hands an owner's duplicate showing
the title of such land to be in the vendor (Director of Lands vs. Addison, 49,
Phil., 19; Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to May
7, 1921, El Hogar Filipino was not really in a position to pass an indefeasible
title to any purchaser. In this connection it will be noted that section 75 of the
Act of Congress of July 1, 1902, and the similar provision in section 13 of the
Corporation Law, allow the corporation "five years after receiving the title,"
within which to dispose of the property. A fair interpretation of these provisions
would seem to indicate that the date of the receiving of the title in this
case was the date when the respondent received the owner's
certificate, or May 7, 1921, for it was only after that date that the
respondent had an unequivocal and unquestionable power to pass a
complete title. The failure of the respondent to receive the certificate
sooner was not due in any wise to its fault, but to unexplained delay
on the part of the register of deeds. For this delay the respondent
cannot be held accountable.
The question then arises whether the failure of the respondent to get rid of the
San Clemente property within five years after it first acquired the deed thereto,
even supposing the five-year period to be properly counted from that date, is
such a violation of law as should work a forfeiture of its franchise and require
a judgment to be entered for its dissolution in this action of quo warranto.
Upon this point we do not hesitate to say that in our opinion the corporation
has not been shown to have offended against the law in a manner that should
entail a forfeiture of its charter. Certainly no court with any discretion to use in
the matter would visit upon the respondent and its thousands of shareholders
the extreme penalty of the law as a consequence of the delinquency here
shown to have been committed.
The law applicable to the case is in our opinion found in section 212 of the
Code of Civil Procedure, as applied by this court in Government of the Philippine
Islands vs. Philippine Sugar Estates Development Co. (38 Phil., 15). This
section (212), in prescribing the judgment to be rendered against a corporation
in an action of quo warranto, among other things says:
. . . When it is found and adjudged that a corporation has offended in any
matter or manner which does not by law work as a surrender or forfeiture,
or has misused a franchise or exercised a power not conferred by law, but
not of such a character as to work a surrender or forfeiture of its franchise,
judgment shall be rendered that it be outset from the continuance of such
offense or the exercise of such power.
This provision clearly shows that the court has a discretion with
respect to the infliction of capital punishment upon corporation and
that there are certain misdemeanors and misuses of franchises which
should not be recognized as requiring their dissolution.
Government of the Philippine Islands vs. Philippine Sugar Estates
Development Co.: (38 Phil., 15): In the PSEC, case, it was found that the
offending corporation had been largely (though indirectly) engaged in the
buying and holding or real property for speculative purposes in contravention
of its charter and contrary to the express provisions of law. Moreover, in that
case the offending corporation was found to be still interested in the properties
so purchased for speculative at the time the action was brought.
Nevertheless, instead of making an absolute and unconditional order
for the dissolution of the corporation, the judgment of ouster was
made conditional upon the failure of the corporation to discontinue
its unlawful conduct within six months after final decision. In the case
before us the respondent appears to have rid itself of the San Clemente
property many months prior to the institution of this action. It is evident from
this that the dissolution of the respondent would not be an appropriate remedy
in this case. We do not of course undertake to say that a corporation might
not be dissolved for offenses of this nature perpetrated in the past, especially
if its conduct had exhibited a willful obduracy and contempt of law.
Third cause of action. — Under the third cause of action the
respondent is charged with engaging in activities foreign to the
purposes for which the corporation was created and not reasonable
127 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
necessary to its legitimate ends. The specifications under this cause
of action relate to three different sorts of activities. The first consist
of the administration of the offices in the El Hogar building not used
by the respondent itself and the renting of such offices to the public.
The second specification under the third cause of action has reference to the
administration and management of properties belonging to delinquent
shareholders of the association
The third specification under this cause of action relates to certain activities
which are described in the following paragraphs contained in the agreed
statements of facts:
El Hogar Filipino has undertaken the management of some parcels of
improved real estate situated in Manila not under mortgage to it, but owned
by shareholders, and has held itself out by advertisement as prepared to do
so
For the services so rendered in the management of such properties El Hogar
Filipino receives compensation in the form of commissions upon the gross
receipts from such properties at rates varying from two and one-half per
centum to five per centum of the sums so collected, according to the location
of the property and the effort involved in its management.
The administration of property in the manner described is more befitting to the
business of a real estate agent or trust company than to the business of a
building and loan association.
ISSUE2: WON the defendant should be dissolved on the above-ground?
HELD: No. It is a general rule of law that corporations possess only such
express powers. The management and administration of the property of the
shareholders of the corporation is not expressly authorized by law, and we are
unable to see that, upon any fair construction of the law, these activities are
necessary to the exercise of any of the granted powers. The corporation, upon
the point now under the criticism, has clearly extended itself beyond the
legitimate range of its powers. But it does not result that the dissolution
of the corporation is in order, and it will merely be enjoined from
further activities of this sort.
Fourth cause of action. — It appears that among the by-laws of the
association there is an article (No. 10) which reads as follows:
The board of directors of the association, by the vote of an absolute
majority of its members, is empowered to cancel shares and to
return to the owner thereof the balance resulting from the
liquidation thereof whenever, by reason of their conduct, or for any
other motive, the continuation as members of the owners of such
shares is not desirable.
ISSUE3: WON if the above by-law is invalid, the corporation may be dissolved?
HELD: No. This by-law is of course a patent nullity, since it is in direct conflict
with the latter part of section 187 of the Corporation Law, which expressly
declares that the board of directors shall not have the power to force the
surrender and withdrawal of unmatured stock except in case of liquidation of
the corporation or of forfeiture of the stock for delinquency. It is agreed that
this provision of the by-laws has never been enforced, and in fact no attempt
has ever been made by the board of directors to make use of the power therein
conferred.
It is supposed, in the fourth cause of action, that the existence of this
article among the by-laws of the association is a misdemeanor on the
part of the respondent which justifies its dissolution. In this view we
are unable to concur. The obnoxious by-law, as it stands, is a mere nullity, and
could not be enforced even if the directors were to attempt to do so. There is
no provision of law making it a misdemeanor to incorporate an invalid provision
in the by-laws of a corporation; and if there were such, the hazards incident to
corporate effort would certainly be largely increased. There is no merit in this
cause of action.

REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T.
RESUELLO, PABLO TANJUTCO, ARTURO SORIANO, RUBEN BELTRAN,
BIENVENIDO V. ZAPA, PILAR G. RESUELLO, RICARDO D. BALATBAT,
JOSE SEBASTIAN and VITO TANJUTCO JR., respondents.
(G.R. No. L-20583; January 23, 1967)
FACTS: The AOI of defendant corporation were registered with the SEC on
March 27, 1961. Based on the opinion of legal counsel of the Central Bank of
the Philippines, that the defendant corporation is a banking institution, the
Monetary Board promulgated Resolution No. 1095, declaring that the
corporation is performing banking operations without having first complied with
the provisions of Sec. 2 and 6 of RA No. 337. Despite such resolution, the
company still continued with its operations and was able to establish 74
branches all over the Philippines and induced the public to open 59,643 savings
deposit accounts.
The Solicitor General initiated this quo warranto proceeding to dissolve said
company.
ISSUE: WON the company should be dissolved?
HELD: Yes. Although, admittedly, defendant corporation has not secured the
requisite authority to engage in banking, defendants deny that its transactions
partake of the nature of banking operations. It is conceded, however, that, in
consequence of a propaganda campaign therefor, a total of 59,463 savings
account deposits have been made by the public with the corporation and its
74 branches, with an aggregate deposit of P1,689,136.74, which has been lent
out to such persons as the corporation deemed suitable therefor. It is clear
that these transactions partake of the nature of banking, as the term is used
in Section 2 of the General Banking Act.
Accordingly, defendant corporation has violated the law by engaging in
banking without securing the administrative authority required in Republic
Act No. 337.
That the illegal transactions thus undertaken by defendant corporation warrant
its dissolution is apparent from the fact that the foregoing misuser of the
corporate funds and franchise affects the essence of its business, that
it is willful and has been repeated 59,463 times, and that its
continuance inflicts injury upon the public, owing to the number of
persons affected thereby.
Wherefore, the writ prayed for should be, as it is hereby granted and defendant
corporation is, accordingly, ordered dissolved.
REPUBLIC OF THE PHILIPPINES, petitioner-appellee,
vs.
BISAYA LAND TRANSPORTATION CO., INC., MIGUEL CUENCO, MANUEL
CUENCO, LOURDES CUENCO, JOSE P. VELEZ, JESUS P. VELEZ and FEDERICO
A. REYES (Original Respondents); and ANTONIO V. CUENCO, CARMEN
CUENCO, DIOSCORO B. LAZARO and MANUEL V. CUENCO, JR. (New Directors
of respondent corporation), respondent-appellees.
MIGUEL CUENCO, respondent-crossclaimant-appellant.
(G.R. No. L-31490; January 6, 1978)
FACTS: The Solicitor General initiated this quo warranto proceedings against
respondent corporation on the following nine causes of action:
1. To conceal its illegal transaction, respondent corporation falsely
reconstituted its articles of incorporation in July 1948 by adding new cattle
ranch, agriculture, and general merchandise;
2. On May 25, 1948, respondent corporation through its Board of Directors,
adopted a resolution authorizing it to acquire 1,024 hectares of public
land in Zamboanga and 10,000 hectares of timber concession in Mindanao
in violation of Section 6, Act No. 143);
3. In May, 1949, respondent office constituting themselves as Board of
Directors of respondent corporation, passed a resolution authorizing the
128 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
corporation to lease a pasture land of 2,000 hectares of cattle ranch on a
public land in Bayawan, Negros Occidental;
4. From August 1946 to the end of 1952, respondent corporation operated
a general merchandise store, a business which is neither for, nor
incidental to, the accomplishment of its principal business for which it was
organized, i.e., the operation of land and water transportation;
5. Respondent corporation snowed Mariano Cuenco and Manuel Cuenco to
act as president in 1945 to 1948 and 1953 to 1954, respectively, when at
that time, neither of them owned a single stock;
6. In violation of its charter and articles of incorporation, as well as
applicable statutes concerning its operation, it engaged in mining by
organizing the Jose P. Velez Coal Mines, and allowing said corporation to
use the facilities and assets of respondent corporation;
7. It imported and sold at black market prices to third persons truck spare
Parts, the of which were appropriated by respondent directors;
8. It paid its laborers and employees wages below the minimum wage law
to the great prejudice of its labor force, and in violation of the laws of the
state, manipulating its books and records so as to make it appear that its
laborers and employees were and have been paid their salaries and wages
in accordance with the minimum wage law;
9. It deliberately failed to maintain accurate and faithful stock and transfer
books since 1945 up to the filing of the petition, enabling it to defraud the
state, mislead the general public, its creditors, investors and its
stockholders by not accurately and faithfully making
a. an adequate, accurate and complete record of dividend distribution, and
b. an adequate, accurate and complete record of transfers of its stocks
Later on, the Solicitor General filed a motion for the dismissal of the complaint
which was granted by the lower court.
ISSUE: WON the lower court is correct in not dissolving the corporation?
HELD: Yes. After a very careful and deliberate consideration of the evidence
adduced by petitioner, the lower court came to the conclusion that the same
did not really warrant a quo warranto by the State that could truly justify to
decapitate corporate life, and that the corporate acts or missions complained
of had not resulted in substantial injury to the public, nor were they wilful and
clearly obdurate. The court found that the several acts of misuse and
misapplication of the funds and/or assets of the Bisaya Land Transportation
Co., Inc. were committed new particularly by the respondent Dr. Manuel
Cuenco with the cooperation of Jose P. Velez, for the commission of which they
may be personally held liable. There appears to be no reason for us to disregard
the findings of the trial court, which, applying well settled doctrines, ought to
be given due weight and credit (De la Rama vs. Ma-ao Sugar Central, L-17504
& L-17506, Feb. 28, 1969). Besides, the court a quo found that the
controversy between the parties was more personal than anything
else and did not at all affect public interest.
The Solicitor General himself asserts that the only purpose of his ration for the
of this quo warranto is to take the State out of an unnecessary court litigation,
so that the dismissal of the case would result in the disposition solely of the
quo warranto by and between petitioner Republic of the Philippines and the
respondents named therein. Other interested parties who might feel aggrieved,
therefore, would not be without their remedies since they can still maintain
whatever claims they may have against each other. It has been held that
relief by dissolution will be awarded only where no other adequate
remedy is available, and is not available where the rights of the
stockholders can be, or are, protected in some other way (16 Fletcher
Cyc. Corporations, 1942 Ed., pp. 812-813, citing "Thwing vs. McDonald", 134
Minn. 148,156 N.W. 780,158 N.W. 820, 159 N.W. 564, Ann. Cas. 1918 E 420;
Mitchell vs. Bank of St. Paul, 7 Minn. 252, cited in De la Rama vs. Ma-ao Sugar
Central, supra).
ACCORDINGLY, without prejudice to the rights of the private parties herein to
take proper steps to enforce whatever causes of action they may have against
each other, the order of the lower court embodied in its "Resolution" dated
April 3, 1968, granting the Solicitor General's motion to dismiss the quo
warranto proceedings is hereby upheld.
FINANCING CORPORATION OF THE PHILIPPINES and J. AMADO
ARANETA, petitioners,
vs.
HON. JOSE TEODORO, Judge of the Court of First Instance of Negros
Occidental, Branch II, and ENCARNACION LIZARES VDA. DE
PANLILIO, respondents
(G.R. No. L-4900; August 31, 1953)
FACTS: In civil case No. 1924 of the Court of First Instance of Negros
Occidental, Asuncion Lopez Vda. de Lizares, Encarnacion Lizares Vda. de
Panlilio and Efigenia Vda. de Paredes, in their own behalf and in behalf of the
other minority stockholders of the Financing Corporation of the Philippines,
filed a complaint against the said corporation and J. Amado Araneta, its
president and general manager, claiming among other things alleged gross
mismanagement and fraudulent conduct of the corporate affairs of the
defendant corporation by J. Amado Araneta, and asking that the corporation
be dissolved; that J. Amado Araneta be declared personally accountable for
the amounts of the unauthorized and fraudulent disbursements and disposition
of assets made by him, and that he be required to account for said assets, and
that pending trial and disposition of the case on its merits a receiver be
appointed to take possession of the books, records and assets of the defendant
corporation preparatory to its dissolution and liquidation and distribution of the
assets. Over the strong objection of the defendants, the trial court granted the
petition for the appointment of a receiver and designated Mr. Alfredo Yulo as
such receiver with a bond of P50,000.
ISSUE: The main contention of the petitioners in opposing the appointment
of a receiver in this case is that said appointment is merely an auxiliary remedy;
that the principal remedy sought by the respondents in the action in Negros
Occidental was the dissolution of the Financing Corporation of the Philippines;
that according to the law a suit for the dissolution of a corporation can be
brought and maintained only by the State through its legal counsel, and that
respondents, much less the minority stockholders of said corporation, have no
right or personality to maintain the action for dissolution, and that inasmuch
as said action cannot be maintained legally by the respondents, then the
auxiliary remedy for the appointment of a receiver has no basis.
HELD: True it is that the general rule is that the minority stockholders of a
corporation cannot sue and demand its dissolution. However, there are cases
that hold that even minority stockholders may ask for dissolution, this, under
the theory that such minority members, if unable to obtain redress and
protection of their rights within the corporation, must not and should not be
left without redress and remedy. This was what probably prompted this Court
to state in the case of Hall, et al. vs. Judge Piccio,* G.R. No. L-2598 (47 Off.
Gaz. No. 12 Supp., p. 200) that even the existence of a de jure corporation
may be terminated in a private suit for its dissolution by the stockholders
without the intervention of the State.
We repeat that although as a rule, minority stockholders of a corporation
may not ask for its dissolution in a private suit, and that such action
should be brought by the Government through its legal officer in a
quo warranto case, at their instance and request, there might be
exceptional cases wherein the intervention of the State, for one
reason or another, cannot be obtained, as when the State is not
interested because the complaint is strictly a matter between the
stockholders and does not involve, in the opinion of the legal officer
of the Government, any of the acts or omissions warranting quo
warranto proceedings, in which minority stockholders are entitled to have
such dissolution. When such action or private suit is brought by them, the trial
court had jurisdiction and may or may not grant the prayer, depending upon
the facts and circumstances attending it. The trial court's decision is of course
subject to review by the appellate tribunal. Having such jurisdiction, the
appointment of a receiver pendente lite is left to the sound discretion of the
trial court. As was said in the case of Angeles vs. Santos (64 Phil., 697), the
action having been properly brought and the trial court having entertained the
same, it was within the power of said court upon proper showing to appoint a
receiver pendente lite for the corporation; that although the appointment of a
receiver upon application of the minority stockholders is a power to be
exercised with great caution, nevertheless, it should be exercised necessary in
order not to entirely ignore and disregard the rights of said minority
stockholders, especially when said minority stockholders are unable to obtain
129 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
redress and protection of their rights within the corporation itself.
PRESENT STATE OF LAW: any stockholder or member of a corporation can
institute a dissolution proceeding against his own corporation before the proper
forum. This is clear from the provisions of PD 902-A, as amended, when it
provides that the SEC, now the Special Commercial Courts, shall hear and
decide cases involving “intra-corporate dispute or partnership relations
between and among stockholders, members or associates; between any or all
of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such
corporations, partnerships or association and the State insofar as it concerns
their individual franchise or right to exist as such entity” (Sec. 5(b) as further
amended by Sec. 5.2 of RA 8799). Of note, however, is that under Sec. 5(m)
of RA 8799, the SEC appears to have concurrent jurisdiction to “suspend or
revoke, after proper notice and hearing, the franchise or certificate of
registration of corporations, partnerships or associations upon any of the
grounds provided by law.
It has thus been held as early as 1950 that “even the existence of a de jure
corporation may be determined in a private suit for its dissolution between
stockholders, without the intervention of the state” (Hall vs. Piccio). Likewise,
in a close corporation, a petition for the dissolution of the corporation may be
instituted by any one individual shareholder on the ground, even by mere
dishonesty.
F. EFFECTS OF DISSOLUTION
Dissolution terminates its power to enter into contracts or to continue the
business as a going concern.
The SC held that a corporation, whose corporate life expired, cannot lawfully
pursue the business for which it was organized. It cannot apply for a new
certificate or a secondary franchise for it is incapable of receiving a grant
(Buenaflor vs. Camarines Sur Industry Corp). Neither can it enforce a contract
executed prior to its dissolution for the purpose of continuing the business of
its organization (Cebu Ports vs. State Marine).
Debts due to or by a corporation are not extinguished. It has thus been held
that the termination of the life of a juridical entity does not, by itself, imply the
diminution or extinction of rights demandable against such juridical entity
(Gonzales vs. Sugar Regulatory Adm.)
Sec. 145. Amendment or repeal. - No right or remedy in favor of or against
any corporation, its stockholders, members, directors, 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.
PROPERTY RIGHTS: Thus, a lease to a corporation may, by its terms,
terminate where the corporation cease to exist. But unless the lease so
provides, the rights and obligations thereunder are not extinguished by the
corporation’s dissolution since leases affect property rights and survives the
death of the parties. The stockholders succeed to the rights and liabilities of
the dissolved corporation in an unexpired leasehold state which may be
enforced by or against the receiver or liquidating trustee.
CONTRACTS FOR PERSONAL SERVICE: This rule, however, may not hold
true in cases of contracts for personal services which are deemed terminated
by the dissolution of the corporation. In such cases, there is found an “implied
condition” that the contract shall terminate in such event.
PERIOD OF LIQUIDATION: Despite its dissolution, a corporation
nonetheless, continues to be a body corporate for a period of 3 years for
purposes of liquidation and winding up its affairs (Sec. 122). Upon expiration
of the 3 year period to wind up its affairs, the juridical personality of the
corporation ceases for all intent and purposes, and as a general rule, it can no
longer sue and be sued (see Gelano vs. CA).
JAIME T. BUENAFLOR, petitioner,
vs.
CAMARINES SUR INDUSTRY CORPORATION, respondent
(G.R. Nos. L-14991-94; May 30, 1960)
FACTS: In Aug. and Sept. 1957, Jaime Buenaflor filed applications before the
Public Service Commission for the construction of a 5-ton ice plant and to
establish a cold storage and refrigeration service of about 6,000 cubic feet
capacity in Sabang, respectively. After being served a copy of the application
of petitioner, respondent corporation also filed the same applications on Oct.
1957.
Counsel for Buenaflor presented a motion to dismiss on the ground that the
corporate life of respondent already expired in Nov. 1953. Respondent
Corporation then registered on Oct. 1957, a new AOI and transferred all assets
of the old corporation together with existing certificate of public convenience
to the new corporation.
The PSC provisionally approved the transfer of the assets, as well as the
certificate of public convenience to the new corporation.
On Nov. 1957, the new corporation answered the motion to dismiss by alleging
its recent incorporation.
ISSUE: WON Buenaflor’s application should be approved?
HELD: Yes. It is admitted — and the Commission found – that the needs of
Sabang Barrio will be conveniently served with the establishment of a 5-ton ice
plant. But it elected to deny Buenaflor's application, even as it awarded the
privilege to the new Camarines Corporation on the ground that it (the old
corporation) had been serving ice in Sabang up to the time of Buenaflor's
application, and was, consequently, the pioneer operator there.
The fact, however, is that since 1953, the old Corporation had been illegally
plying its business of selling ice in Sabang because, under the Corporation Law,
Sec. 77, after November 1953, it could not lawfully continue the business for
which it had been established (operate ice plant, sell ice, etc). After November
1953, it could only continue to exist for three years for the purpose of
prosecuting and defending suits by or against it, and of enabling it gradually
to settle and close its affairs, to dispose and convey its property and to divide
its capital stock. It could not, without violating the law, continue to sell ice. And
yet, the Commission awarded the certificate on the basis of such serve and
distribution of ice — applying the "prior operator" rule. In other words, the new
Camarines Corporation is rewarded, precisely because the old corporation, its
predecessor, had violated the law during that period (1953-1957). We cannot,
and should not countenance such anomalous result.
On the other hand, when the old Camarines Corporation docketed its
application October 1, 1957, it had no juridical personality, it had ceased
to exist as a corporation and could not sue nor apply for certificate,
for it was incapable of receiving a grant. It was not even a
corporation de facto. And then, there is no application subscribed by the
new Camarines Corporation. Far from being mere technicality, these point
support a conclusion which appears to be just and equitable, not only for the
reasons already indicated, but also to compensate Buenaflor's diligence and
courage in exposing the irregular practice of a "ghost" corporation foisting its
services upon the unsuspecting public of Sabang and neighboring territory —
enjoying a franchise without paying, perhaps, the corporate income tax and
other burdens attached to corporate existence.
Remembering the Camarines Corporation's automatic cessation in November
1956 (three years after November 1953) we must decline to regard the new
Camarines Corporation (formed October 30, 1957) as a continuation of the old.
At most, it is the transferee of the properties of the old corporation (or more
properly, the assets of the stockholders) plus the certificate of public
convenience to operate the ice plant in Naga and Magarao. And yet, as stated,
the new corporation has not filed any application for certificate of public
convenience in Sabang, and has not published such application
130 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Wherefore, revoking the appealed decision in so far as it awarded the
certificate to said Corporation, we hereby approve Buenaflor's application for
five tons, instead of one ton, subject to the usual conditions imposed by the
Public Service Commission on ice plant establishments.
CEBU PORT LABOR UNION, represented by this President ALEJO
CABABAJAY, petitioner,
vs.
STATES MARINE CORPORATION, NICASIO PANSACALA,
ANDRESTURA, ALFONSO VILLAJAS, and PERPETUO REGIS,
respondents
(G.R. No. L-9350; May 20, 1957)
FACTS: On Sept. 12, 1953, petitioner filed a petition for “recognition of
stevedoring services and injunction” against respondents claiming that it was
awarded a contract for the exclusive right of loading and unloading of the
cargoes of the vessel MV Bisayas formerly owned by Elizalde & CO., though at
the time of the filing of the petition it was owned and operated by the States
Marine Corporaiton.
Respondent corporation filed a motion to dismiss on the ground that it has no
legal capacity to sue or be sued, it having been dissolved on Oct. 17, 1952 and
therefore has no personality to enter or refuse to enter into any contract, much
less of threatening the petitioner as alleged in the petition.
Petitioner relied on Sec. 77 to include said corporation as party respondent
despite the fact that counsel for the other respondents called already the
attention of the Court that the State Marine Corporation was non-existing and
suggested that proper substitution or amendment of the petition be made.
ISSUE: WON State Marine Corp can be made a party respondent?
HELD: Section 77 of the Corporation Law reads as follows:
SEC. 77. Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued
as a body corporate for three years after the time when it would have been
so dissolved, for the purpose of prosecuting and defending suits by or
against it and of enabling it gradually to settle and close its affairs, to dispose
of and convey its property and to divide its capital stock, but not for the
purpose of continuing the business for which it was established.
Even a cursory reading of the above-quoted provision would convey the idea
clearly manifested in the limitation "but not for the purpose of continuing the
business for which it was established", that the 3-year period allowed by the
law is only for the purpose of winding up its affairs. Petitioner-appellee prayed
that it be declared to have the right to stevedoring work in question "thereby
respecting the contract entered into by petitioner and the Elizalde & Co. and
subsequently enforced and continued by the respondent States Marine
Corporation". It appearing that the said States Marine Corporation was
already dissolved at the time said petition was filed, and the vessel
subject of the agreement having changed hands, it cannot be
compelled now to respect such agreement specially considering the
fact that it cannot even be made a party to this suit (See. 1, Rule 3, of
the Rules of Court.
SPOUSES RAMON A. GONZALES and LILIA Y. GONZALES, petitioners,
vs.
SUGAR REGULATORY ADMINISTRATION, respondent
(G.R. No. 84606; June 28, 1989)
FACTS: Petitioner spouses file a complaint seeking cancellation of a mortgage
and recovery of a sum of money for the overpayment they made, on a loan
secured from RP Bank, by virtue of an alleged deduction made by Philippine
Sugar Commission (Philsucom) of the proceeds of sugar exports.
Petitioners filed an amended complaint which assailed the constitutionality of
EO No. 18 abolishing Philsucom which in effect destroyed petitioners’ right to
recover from PSC. They assert that the transfer from Philsucom to SRA are
unconstitutional and ineffective.
On Aug. 2, 1988, the trial court granted the motion to dismiss insofar as SRA
is concerned while denying that same motion insofar as RP Bank and Philsucom
were concerned.
ISSUE: WON SRA could be made a party-respondent liable to the claim of the
petitioners?
HELD: Yes. The termination of the life of a juridical entity does not by itself
imply the diminution or extinction of rights demandable against such juridical
entity.
Executive Order No. 18, promulgated on 28 May 1986, abolished the
Philsucom, created the SRA and authorized the transfer of assets from
Philsucom to SRA. Section 13 of Executive Order No. 18 reads in part:
Assets and records that, as determined by the Sugar Regulatory
Administration, are required in its operation are hereby transferred to the
Sugar Regulatory Administration.
Although the Philsucom is hereby abolished, it shall nevertheless continue
as a juridical entity for three years after the time when it would have been
so abolished, for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to dispose of and
convey its property and to distribute its assets, but not for the purpose of
continuing the functions for which it was established, under the supervision
of the Sugar Regulatory Administration.
We believe, that Section 13 of Executive Order No. 18 is not to be interpreted
as authorizing respondent SRA to disable Philsucom from paying Philsucom's
demandable obligations by simply taking over Philsucom's assets and
immunizing them from legitimate claims against Philsucom. The right of those
who have previously contracted with, or otherwise acquired lawful claims
against, Philsucom, to have the assets of Philsucom applied to the satisfaction
of those claims, is a substantive right and not merely a procedural remedy.
Section 13 cannot be read as permitting the SRA to destroy that substantive
right. We think that such an interpretation would result in Section 13 of
Executive Order No. 18 colliding with the non-impairment of contracts clause
of the Constitution insofar as contractual claims are concerned, and with the
due process clause insofar as the non-contractual claims are concerned. To
avoid such a result, we believe and so hold that should the assets of
Philsucom remaining in Philsucom at the time of its abolition not be
adequate to pay for all lawful claims against Philsucom, respondent
SRA must be held liable for such claims against Philsucom to the
extent of the fair value of assets actually taken over by the SRA from
Philsucom, if any. To this extent, claimants against Philsucom do
have a right to follow Philsucom's assets in the hands of SRA or any
other agency for that matter.
We conclude that dismissal of petitioners' complaint against respondent SRA
was clearly premature. Petitioners have a cause of action against SRA to the
extent that they are able to prove lawful claims against Philsucom, which claims
Philsucom is or may be unable to satisfy, and to the extent respondent SRA
did, or does, in fact take over all or some of the assets of Philsucom. At the
very least, the motion to dismiss was not shown to rest upon indubitable
grounds and should, therefore, have been denied not only in respect of
Philsucom but also in respect of respondent SRA.
G. LIQUIDATION AND WINDING UP
During the course of liquidation and winding up, the assets will be collected
and realized, the rights and claims of creditors will be settled or provided for
and a distribution of the remaining assets to the shareholders who are entitled
thereto.
Therefore, liquidation or winding up of corporate affairs therefore means the
collection of all corporate assets, the payments of all its debts and settlement
of its obligations and the ultimate distribution of corporate assets, if any of it
remains, to all stockholders in accordance with their proportionate
131 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
stockholdings in the corporation or in accordance with their respective
contracts of subscription.
After dissolution, a body corporate continues to exist for 3 years for the
purpose of liquidation and winding up of its affairs:
Sec. 122. Corporate liquidation. - Every corporation whose charter expires
by its own limitation or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and after
any such conveyance by the corporation of its property in trust for the benefit
of its stockholders, members, creditors and others in interest, all interest which
the corporation had in the property terminates, the legal interest vests in the
trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found shall be
escheated to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities.
LIQUIDATION MAY BE UNDERTAKEN IN EITHER OF THREE WAYS:
1. By the corporation itself through the BOD
a. This is the usual method or procedure of liquidating a corporation (China
Banking Corp vs. Michelin) and although there is no law authorizing it,
neither is there anything that prohibits the BOD from undertaking the
same
b. If this method is resorted to, the board will only have a period of 3 years
to finish its task of liquidation
c. Claims for or against the corporate entity not filed within the period will
become unenforceable as there exist no corporate entity against which
they can be enforced.
d. Actions pending for or against the corporation when the 3 year period
expires are abated, since after the period, the corporation ceases for all
intents and purposes and is no longer capable of suing or being sued
(National Abaca & Other Fibers Co. vs. Pore)
2. By a trustee appointed by the corporation
a. The corporation may opt to convey all corporate assets to a trustees who
will take charge of liquidation
b. If this method is used, the three year period limitation imposed by section
122 will not apply provided the designation of the trustee is made within
that period.
c. Thus, during the period of liquidation, but before the completion thereof,
a dissolved corporation is still liable for all its debts and liabilities in an
action filed against it through its trustee even if the case is filed beyond
the 3 year period of liquidation.
3. By appointment of a receiver
a. A receiver may be appointed by the proper forum on petition or motu
proprio upon the dissolution of the corporation (Sec. 119)
b. The appointment of a receiver is, however, permissive rather than
 mandatory and the law tends to recognize that in cases of voluntary
dissolution there is no occasion for the appointment of a receiver except
under special circumstances and upon proper showing (China Banking vs.
Michelin)
c. If a receiver is appointed, the 3 year period fixed by law within which to
complete the task of liquidation will not likewise apply because the
dissolved corporation is substituted by the receiver who may sue or be
sued even after that period (Sumera vs. Valencia).
d. Thus, it has been held that when a corporation is dissolved and the
liquidation of assets is placed in the hands of a receiver or assignee, the
3 year period is not applicable and the assignee may institute all actions
leading to the liquidation of the corporation even after the expiration of 3
years.
e. Note however, that a receiver may be appointed by the court even while
the corporation is a going concern and does not always imply dissolution
of a corporation.
NATIONAL ABACA AND OTHER FIBERS CORPORATION, plaintiff-
appellant,
vs.
APOLONIA PORE, defendant-appellee
(G.R. No. L-16779; August 16, 1961)
FACTS: On Nov. 3, 1953, plaintiff filed a complaint before the Municipal Court
of Tacloban, Leyte, against defendant for the recovery of advances the latter
failed to account for, amounting to P1,213.34. The court rendered a decision
holding that defendant is liable for P272.49.
Said court denying reconsideration, plaintiff appealed before the CFI to which
a motion to dismiss was filed by defendant on the ground that EO No. 372
abolished plaintiff and thus it no longer had capacity to sue.
Plaintiff objected there to on the ground that the said EO granted plaintiff to
continue in existence for 3 years from Nov. 30, 1950, the effectivity date of the
EO, for the purpose of prosecuting and defending suits by or against it and of
enabling the Board of Liquidators to gradually settle the its affairs and that
the case was filed on Nov. 14, 1953, or before the expiration of the 3 year
period.
ISSUE: WON the action commenced within the 3 year period may be
continued after the expiration of the said period?
HELD: No. The rule appears to be well settled that, in the absence of
statutory provision to the contrary, pending actions by or against a
corporation are abated upon expiration of the period allowed by law
for the liquidation of its affairs.
It is generally held, that where a statute continues the existence of a
corporation for a certain period after its dissolution for the purpose of
prosecuting and defending suits, etc., the corporation becomes defunct
upon the expiration of such period, at least in the absence of a provision to
the contrary, so that no action can afterwards be brought by or against it,
and must be dismissed. Actions pending by or against the corporation when
the period allowed by the statute expires, ordinarily abate.
. . . This time limit does not apply unless the circumstances are such
as to bring the corporation within the provision of the statute.
However, the wording of the statutes, in some jurisdictions authorize suits
after the expiration of the time limit, where the statute provides that for the
purpose of any suit brought by or against the corporation shall continue
beyond such period for a further named period after final judgment.
(Fletcher's Cyclopedia on Corporations, Vol. 16, pp. 892-893.).
Our Corporation Law contains no provision authorizing a corporation, after
three (3) years from the expiration of its lifetime, to continue in its corporate
name actions instituted by it within said period of three (3) years. In fact,
section 77 of said law provides that the corporation shall "be continued as a
body corporate for three (3) years after the time when it would have been . .
. dissolved, for the purpose of prosecuting and defending suits by or against it
. . .", so that, thereafter, it shall no longer enjoy corporate existence for such
purpose. For this reason, section 78 of the same law authorizes the
132 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
corporation, "at any time during said three years . . . to convey all of its
property to trustees for the benefit of members, stockholders, creditors and
other interested", evidently for the purpose, among others, of enabling said
trustees to prosecute and defend suits by or against the corporation begun
before the expiration of said period. Hence, commenting on said sections,
Judge Fisher, in his work entitled Philippines Law on Stock Corporations (1929
ed.), has the following to say:
It is to be noted that the time during which the corporation, through its own
officers, may conduct the liquidation of its assets and sue and be sued as a
corporation is limited to three years from the time the period of dissolution
commences; but that there is no time limit within the trustees must
complete a liquidation placed in their hands. It is provided only
(Corp. Law, Sec. 78) that the conveyance to the trustees must be
made within the three-year period. It may be found impossible to
complete the work of liquidation within the three-year period or to reduce
disputed claims to judgment. The authorities are to the effect that suits by
or against a corporation abate when it ceased to be an entity capable of
suing or being sued (7 R.C.L. Corps., Par. 750); but trustees to whom the
corporate assets have been conveyed pursuant to the authority of section
78 may sue and be sued as such in all matters connected with the
liquidation. By the terms of the statute the effect of the conveyance is
to make the trustees the legal owners of the property conveyed,
subject to the beneficial interest therein of creditors and
stockholders. (pp. 389-390; see also Sumera v. Valencia [67 Phil. 721,
726-727).
Obviously, the complete loss of plaintiff's corporate existence after the
expiration of the period of three (3) years for the settlement of its affairs is
what impelled the President to create a Board of Liquidators, to continue the
management of such matters as may then be pending. The first question must,
therefore, be answered in the negative.
Wherefore, actions commenced within the 3 year period of liquidation may be
continued by the trustee despite the expiration of the said period.
TIBURCIO SUMERA, as receiver of the corporation "Devota de
Nuestra Señora de la Correa", plaintiff-appellant,
vs.
EUGENIO VALENCIA, defendant-appellee
(G.R. No. 45485; May 3, 1939)
FACTS: Devota de Nuestra Senora de la Correa filed for a voluntary dissolution
which was approved by the CFI of Bulacan on Feb. 14, 1928 appointing
Damaso Nicolas as assignee to take charge of liquidation. Nicolas was
substituted by herein appellant Sumera who filed a motion with the court
asking defendant Valencia to deliver to him the P400.00 funds of the
corporation which was denied, reserving, however to said assignee the right to
bring the proper action. Accordingly, on June 5, 1936, Sumera filed the present
complaint for recovery of money.
The defendant interposed the defense that the right against him had already
prescribed which was found by the lower court to be tenable, the case not
being filed within the 3 year period prescribed under Sec. 77 of Act No. 1459.
ISSUE: WON the 3 year period prescribed by the Corporation Law is applicable
if the liquidation is placed on the hands of a receiver or assignee?
HELD: No. Passing now to discuss the question raised by plaintiff and appellant
in his sole assignment of alleged error, section 77 of Act No. 1459 provides
that "Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued
as a body corporate for three years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it
and of enabling it gradually to settle and close its affairs to dispose of and
convey its property and to divide its capital stock, but not for the purpose of
continuing the business for which it was established." And section 77 of the
same Act provides, "At any time during said three years said corporation is
authorized and empowered to convey all of its property to trustees for the
benefit of members, stockholders, creditors, and others interested. From and
after any such conveyance by the corporation of its property in trust for the
benefit of its members, stockholders, creditors, and others in interest, all
interest which the corporation had in the property terminates, the legal interest
vests in the trustees, and the beneficial interest in the members, stockholders,
creditors, or other persons in interest.
Fletcher, in volume 8, page 9226, of his Encyclopedia of Private Corporations,
says:
6537. Effect of expiration of statutory extension of life. — In general. — The
qualified existence after dissolution, as provided for by statute, terminates
at the expiration of the time fixed, or, no time is fixed, at the expiration of
a reasonable time. Where the extreme limit to which the statute has
extended the life of a corporation after its dissolution has expired, it has no
offices which can bind it by agreement, but only has statutory trustees. After
the expiration of such time, it is generally held not only that the corporation
cannot sue or be sued but that actions pending at such time are abated. But
a statute authorizing the continuance of a corporation for three years to
wind up its affairs, does not preclude an action to wind up brought after the
three years.
In the light of the legal provisions and authorities cited, interpretative of said
laws, if the corporation carries out the liquidation of its assets through
its own officers and continues and defends the actions brought by or
against it, its existence shall terminate at the end of three years from
the time of dissolution; but if a receiver or assignee is appointed, as
has been done in the present case, with or without a transfer of its
properties within three years, the legal interest passes to the
assignee, the beneficial interest remaining in the members,
stockholders, creditors and other interested persons; and said
assignee may bring an action, prosecute that which has already been
commenced for the benefit of the corporation, or defend the latter
against any other action already instituted or which may be instituted
even outside of the period of three years fixed for the offices of the
corporation.
For the foregoing considerations, we are of the opinion and so hold that when
a corporation is dissolved and the liquidation of its assets is placed in
the hands of a receiver or assignee, the period of three years
prescribed by section 77 of Act No. 1459 known as the Corporation
Law is not applicable, and the assignee may institute all actions
leading to the liquidation of the assets of the corporation even after
the expiration of three years.
Wherefore, the order appealed from is reversed and it is ordered that the case
be remanded to the court of origin to the end that it may decide the same on
the merits, with costs against the appellee.
THE BOARD OF LIQUIDATORS representing THE GOVERNMENT OF THE
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW, JUAN BOCAR, ESTATE OF THE DECEASED
CASIMIRO GARCIA, and LEONOR MOLL, defendants-appellees
(G.R. No. L-18805; August 14, 1967)
FACTS: A suit was filed by the Board of Liquidators for the recovery of a sum
of money from National Coconut Corporation’s (NACOCO) general manager
and board chairman Maximo Kalaw and other defendants as directors.
The defendants pose that since the three year period has elapsed since its
abolition by virtue of EO 372, the Board of Liquidators may not now continue
with, and prosecute, the present case to its conclusion.
ISSUE: WON the Board of Liquidators has personality to proceed as party-
plaintiff in this case?
HELD: Yes. The executive order abolishing NACOCO and creating the Board
of Liquidators should be examined in context. The proviso in Section 1 of
Executive Order 372, whereby the corporate existence of NACOCO was
continued for a period of three years from the effectivity of the order for "the
133 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
purpose of prosecuting and defending suits by or against it and of enabling the
Board of Liquidators gradually to settle and close its affairs, to dispose of and
convey its property in the manner hereinafter provided", is to be read not as
an isolated provision but in conjunction with the whole. So reading, it will be
readily observed that no time limit has been tacked to the existence of
the Board of Liquidators and its function of closing the affairs of the
various government owned corporations, including NACOCO.
By Section 2 of the executive order, while the boards of directors of the various
corporations were abolished, their powers and functions and duties under
existing laws were to be assumed and exercised by the Board of Liquidators.
The President thought it best to do away with the boards of directors of the
defunct corporations; at the same time, however, the President had chosen to
see to it that the Board of Liquidators step into the vacuum. And nowhere in
the executive order was there any mention of the lifespan of the Board of
Liquidators. A glance at the other provisions of the executive order buttresses
our conclusions.
Not that our views on the power of the Board of Liquidators to proceed to the
final determination of the present case is without jurisprudential support. The
first judicial test before this Court is National Abaca and Other Fibers
Corporation vs. Pore, L-16779, August 16, 1961. In that case, the corporation,
already dissolved, commenced suit within the three-year extended period for
liquidation. That suit was for recovery of money advanced to defendant for the
purchase of hemp in behalf of the corporation. She failed to account for that
money. We there said that "the rule appears to be well settled that, in the
absence of statutory provision to the contrary, pending actions by or
against a corporation are abated upon expiration of the period
allowed by law for the liquidation of its affairs." We there said that "[o]ur
Corporation Law contains no provision authorizing a corporation, after three
(3) years from the expiration of its lifetime, to continue in its corporate name
actions instituted by it within said period of three (3) years." However, these
precepts notwithstanding, we, in effect, held in that case that the
Board of Liquidators escapes from the operation thereof for the
reason that "[o]bviously, the complete loss of plaintiff's corporate
existence after the expiration of the period of three (3) years for the
settlement of its affairs is what impelled the President to create a
Board of Liquidators, to continue the management of such matters as
may then be pending.
CARLOS GELANO and GUILLERMINA MENDOZA DE GELANO,
petitioners,
vs.
THE HONORABLE COURT OF APPEALS and INSULAR SAWMILL, INC.,
respondents
(G.R. No. L-39050; February 24, 1981)
FACTS: Private respondent Insular Sawmill, Inc. lease the paraphernal
property of petitioner-wife Guillermina Mendoza de Gelano. It was while private
respondent was leasing the property that its officers and directors had come
to know petitioner-husband Carlos Gelano who received from the corporation
cash advances on account of rent to be paid by the corporation to the land.
Despite repeated demands by the private respondent refused to pay the cash
advances. Petitioner-wife refused to pay on the ground that the cash advances
was for the personal account of her husband asked for by, and given to him,
without the knowledge and consent and did not benefit the family.
On May 29, 1959, the corporation, through its lawyer, filed a complaint for
collection against petitioners.
Meanwhile, the corporation amended its AOI to shorten its term of existence
up to Dec. 31, 1960 only which was approved by the SEC but the trial court
was not notified of such amendment.
On Nov. 20, 1964, almost 4 years after the dissolution, the trial court rendered
a decision in favor of private respondent.
ISSUE: WON a corporation whose corporate life had ceased by the expiration
of its term of existence, could still continue prosecuting and defending suits
after its dissolution and beyond the period of 3 years to wind up its affairs,
without having undertaken any step to transfer its assets to a trustee or
assignee?
HELD: Yes. In American corporate law, upon which our Corporation Law was
patterned, it is well settled that, unless the statutes otherwise provide, all
pending suits and actions by and against a corporation are abated by a
dissolution of the corporation. Section 77 of the Corporation Law provides that
the corporation shall "be continued as a body corporate for three (3) years
after the time when it would have been ... dissolved, for the purpose of
prosecuting and defending suits By or against it ...," so that, thereafter, it shall
no longer enjoy corporate existence for such purpose. For this reason, Section
78 of the same law authorizes the corporation, "at any time during said three
years ... to convey all of its property to trustees for the benefit of members,
Stockholders, creditors and other interested," evidently for the purpose, among
others, of enabling said trustees to prosecute and defend suits by or against
the corporation begun before the expiration of said period
When Insular Sawmill, Inc. was dissolved on December 31, 1960, under
Section 77 of the Corporation Law, it still has the right until December 31, 1963
to prosecute in its name the present case. After the expiration of said period,
the corporation ceased to exist for all purposes and it can no longer sue or be
sued.
However, a corporation that has a pending action and which cannot be
terminated within the three-year period after its dissolution is authorized under
Section 78 to convey all its property to trustees to enable it to prosecute and
defend suits by or against the corporation beyond the Three-year period.
Although private respondent did not appoint any trustee, yet the
counsel who prosecuted and defended the interest of the corporation
in the instant case and who in fact appeared in behalf of the
corporation may be considered a trustee of the corporation at least
with respect to the matter in litigation only. Said counsel had been
handling the case when the same was pending before the trial court
until it was appealed before the Court of Appeals and finally to this
Court. We therefore hold that there was a substantial compliance
with Section 78 of the Corporation Law and as such, private
respondent Insular Sawmill, Inc. could still continue prosecuting the
present case even beyond the period of three (3) years from the time
of its dissolution.
The word "trustee" as sued in the corporation statute must be
understood in its general concept which could include the counsel to
whom was entrusted in the instant case, the prosecution of the suit
filed by the corporation. The purpose in the transfer of the assets of the
corporation to a trustee upon its dissolution is more for the protection of its
creditor and stockholders. Debtors like the petitioners herein may not take
advantage of the failure of the corporation to transfer its assets to a trustee,
assuming it has any to transfer which petitioner has failed to show, in the first
place. To sustain petitioners' contention would be to allow them to enrich
themselves at the expense of another, which all enlightened legal systems
condemn.
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
MARSMAN DEVELOPMENT COMPANY and/or F.H. BURGESS, in his
capacity as Liquidator of the Marsman Development Company,
defendants-appellants.
(G.R. No. L-18956; April 27, 1972)
FACTS: Sometime before Oct. 15, 1953, an investigation was conducted on
the business operation and activities of defendant corporation leading to the
discovery of deficiency taxes on logs produced from its concession.
The Collector of Internal Revenue demanded payment for forest charges and
25% surcharge. After further investigation, another assessment was sent to
the defendant by the BIR demanding a total sum of P45, 541.66 representing
deficiency taxes, forest charges, surcharges and penalties. Later on, another
assessment was sent to defendant corporation for discharging lumber without
permit.
134 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Defendant contend that the present action was barred by Sec. 77 of the
Corporation Law which allows corporate existence to continue after dissolution
only for a period of 3 years. That the company was extra-judicially dissolved
on April 23, 1954, the orginal complaint was filed only on Sept. 8, 1958 and
the amended complaint on Aug. 26, 1956.
The trial court ruled in favor of the government holding that the amended
complaint was precisely to include FH Burgess, liquidator of the company, as
party defendant.
ISSUE: WON the case should prosper?
HELD: Yes. It is to be recalled that the assessments against appellant
corporation for deficiency taxes due for its operations since 1947 were made
by the Bureau of Internal Revenue on October 15, 1953, September 13, 1954
and November 8, 1954, such that the first was before its dissolution and the
last two not later than six months after such dissolution. Thus, in whatever
way the matter may be viewed, the Government became the creditor of the
corporation before the completion of its dissolution by the liquidation of its
assets. Appellant F.H. Burgess, whom it chose as liquidator, became
in law the trustee of all its assets for the benefit of all persons
enumerated in Section 78, including its creditors, among whom is the
Government, for the taxes herein involved. To assume otherwise
would render the extra-judicial dissolution illegal and void, since,
according to Section 62 of the Corporation Law, such kind of
dissolution is permitted only when it "does not affect the rights of
any creditor having a claim against the corporation." It is immaterial
that the present action was filed after the expiration of three years after April
23, 1954, for at the very least, and assuming that judicial enforcement of taxes
may not be initiated after said three years despite the fact that the actual
liquidation has not been terminated and the one in charge thereof is still
holding the assets of the corporation, obviously for the benefit of all the
creditors thereof, the assessment aforementioned, made within the three
years, definitely established the Government as a creditor of the corporation
for whom the liquidator is supposed to hold assets of the corporation. And
since the suit at bar is only for the collection of taxes finally assessed against
the corporation within the three years invoked by appellants, their assignment
of error cannot be sustained.
Judgment of the trial court is affirmed.
STOCKHOLDERS UPON DISSOLUTION: Upon dissolution of a corporation,
it is considered in equity, even in the absence of a statute that its assets are
held for the benefit of its stockholders after payment of its debts and will be
so distributed to the said stockholders in accordance with their proportionate
interest in the corporation or their contracts of subscription.
PREFERRED SHAREHOLDERS: It must herein be remembered that holders
of preferred shares may be granted certain rights or privileges upon dissolution
of the corporation. The preference may be in the form of receiving a certain
part or portion of corporate assets upon dissolution. And, depending on their
contracts of subscription, they may or may not be entitled to share any of the
assets remaining, after they may have received their respective preference in
accordance therewith.
INCORPORATION OF A NEW CORPORATION: During the 3 year period
granted to a corporation to liquidate or wind up its affairs, the BOD is not
normally permitted to undertake any activity outside of the usual liquidation of
the corporation. There is, however, nothing to prevent the stockholders from
conveying their respective shareholdings toward the creation of a new
corporation to continue the business of the old. This is because winding up is
the sole activity of a dissolved corporation that does not intend to incorporate
a new. If it does, however, it is not unlawful for the old BOD to incorporate
and transfer the assets of a dissolved corporation to the new corporation
intended to be created as long as the stockholders have given their consent
(Chung Ka Bio vs. IAC)
LAPSE OF THE THREE YEAR PERIOD: If the 3 year period of liquidation
has elapsed and no effort to finally settle or close the corporate affairs was
undertaken, those having pecuniary interest in the corporate assets, including
not only the stockholders but likewise the creditors, acting for and in behalf,
may make proper representations with the SEC for working out a final
settlement of the corporate concern (Clemente vs. CA).
RECEPIENT UNKNOWN OR CANNOT BE FOUND: Any asset distributable
to any creditor or stockholders or member who is unknown or cannot be found
shall be escheated to the city or municipality where such assets are located
(Sec. 122).
CHUNG KA BIO, WELLINGTON CHUNG, CHUNG SIONG PEK, VICTORIANO
CHUNG, and MANUEL CHUNG TONG OH, petitioners,
vs.
INTERMEDIATE APPELLATE COURT (2nd Special Cases Division),
SECURITIES and EXCHANGE COMMISSION EN BANC, HON. ANTONIO R.
MANABAT, HON. JAMES K. ABUGAN, HON. ANTERO F.L. VILLAFLOR, JR., HON.
SIXTO T.J. DE GUZMAN, JR., ALFREDO CHING, CHING TAN, CHIONG TIONG
TAY, CHUNG KIAT HUA, CHENG LU KUN, EMILIO TAÑEDO, ROBERTO G.
CENON and PHILIPPINE BLOOMING MILLS COMPANY, INC., respondents
(G.R. No. 71837; July 26, 1988)
FACTS: Chung Ka Bio and other petitioners are stockholders of the old
Philippine Blooming Mills Company, Inc. (PBM) which has been reincorporated
on July 14, 1977 after the old was dissolved on Jan. 19 1977. The assets and
liabilities of the old PBM was transferred by the BOD to the new PBM.
Ching Ka Bio and other petitioners filed with the SEC a petition for liquidation
of both the old and new PBM (for non-usage of its charter and failure to operate
within 2 years).
ISSUE: WON the BOD was justified to convey all the assets of the old PBM to
the new corporation without the express consent of its stockholders?
HELD: Yes. As the contention is based on the negative averment that no
stockholders' meeting was held and the 2/3 consent vote was not obtained,
there is no need for affirmative proof. Even so, there is the presumption of
regularity which must operate in favor of the private respondents, who insist
that the proper authorization as required by the Corporation Law was duly
obtained at a meeting called for the purpose. (That authorization was
embodied in a unanimous resolution dated March 19, 1977, which was
reproduced verbatim in the deed of assignment.) Otherwise, the new PBM
would not have been issued a certificate of incorporation, which should also be
presumed to have been done regularly. It must also be noted that under
Section 28-1/2, "any stockholder who did not vote to authorize the action of
the board of directors may, within forty days after the date upon which such
action was authorized, object thereto in writing and demand payment for his
shares." The record does not show, nor have the petitioners alleged or proven,
that they filed a written objection and demanded payment of their shares
during the reglementary forty-day period. This circumstance should bolster the
private respondents' claim that the authorization was unanimous.
While we agree that the board of directors is not normally permitted
to undertake any activity outside of the usual liquidation of the
business of the dissolved corporation, there is nothing to prevent the
stockholders from conveying their respective shareholdings toward
the creation of a new corporation to continue the business of the old.
Winding up is the sole activity of a dissolved corporation that does
not intend to incorporate anew. If it does, however, it is not unlawful
for the old board of directors to negotiate and transfer the assets of
the dissolved corporation to the new corporation intended to be
created as long as the stockholders have given their consent. This
was not prohibited by the Corporation Act. In fact, it was expressly
allowed by Section 28-1/2.
What the Court finds especially intriguing in this case is the fact that although
the deed of assignment was executed in 1977, it was only in 1981 that it
occurred to the petitioners to question its validity. All of four years had elapsed
before the petitioners filed their action for liquidation of both the old and the
new corporations, and during this period, the new PBM was in full operation,
openly and quite visibly conducting the same business undertaken earlier by
the old dissolved PBM. The petitioners and the private respondents are not
strangers but relatives and close business associates. The PBM office is in the
135 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
heart of Metro Manila. The new corporation, like the old, employs as many as
2,000 persons, the same personnel who worked for the old PBM. Additionally,
one of the petitioners, Chung Siong Pek was one of the directors who executed
the deed of assignment in favor of the old PBM and it was he also who received
the deeded assets on behalf and as treasurer of the new PBM. Surely, these
circumstances must operate to bar the petitioners now from questioning the
deed of assignment after this long period of inaction in the protection of the
rights they are now belatedly asserting. Laches has operated against them.
LUIS C. CLEMENTE, LEONOR CLEMENTE DE ELEPAÑO, HEIRS OF ARCADIO
C. OCHOA, represented by FE O. OCHOA-BAYBAY, CONCEPCION, MARIANO,
ARTEMIO, VICENTE, ANGELITA, ROBERTO, HERNANDO AND LOURDES, all
surnamed ELEPAÑO, petitioners,
vs.
THE HON. COURT OF APPEALS, ELVIRA PANDINCO-CASTRO AND VICTOR
CASTRO, respondents.
(G.R. No. 82407; March 27, 1995)
FACTS: Petitioners herein initiated an action to be declared owners of the
property in question and to received rentals and other fruits as consequence
of such ownership.
The trial court rendered a decision in favor of respondents holding, among
others, that since there is no liquidation, it is the corporation, not the
stockholders, which can assert, if at all, any title to the corporate assets.
ISSUE: WON petitioners can be held, given their submissions, to have
succeeded in establishing for themselves a firm title to the property in
question?
HELD: No. Like the courts below, we find petitioners' evidence to be direly
wanting; all that appear to be certain are that the "Sociedad Popular
Calambeña," believed to be a "sociedad anonima" and for a while engaged in
the operation and management of a cockpit, has existed sometime in the past;
that it has acquired the parcel of land here involved; and that the plaintiffs'
predecessors, Mariano Elepaño and Pablo Clemente, had been original
stockholders of the sociedad. Except in showing that they are the successors-
in-interest of Elepaño and Clemente, petitioners have been unable to come up
with any evidence to substantiate their claim of ownership of the corporate
asset.
If, indeed, the sociedad has long become defunct, it should behoove
petitioners, or anyone else who may have any interest in the corporation, to
take appropriate measures before a proper forum for a peremptory settlement
of its affairs. We might invite attention to the various modes provided by the
Corporation Code (see Sees. 117-122) for dissolving, liquidating or winding up,
and terminating the life of the corporation. Among the causes for such
dissolution are when the corporate term has expired or when, upon a verified
complaint and after notice and hearing, the Securities and Exchange
Commission orders the dissolution of a corporation.
The corporation continues to be a body corporate for three (3) years after its
dissolution for purposes of prosecuting and defending suits by and against it
and for enabling it to settle and close its affairs, culminating in the disposition
and distribution of its remaining assets. It may, during the three-year term,
appoint a trustee or a receiver who may act beyond that period. The
termination of the life of a juridical entity does not by itself cause the
extinction or diminution of the rights and liabilities of such entity (see
Gonzales vs. Sugar Regulatory Administration, 174 SCRA 377) nor those of
its owners and creditors. If the three-year extended life has expired without
a trustee or receiver having been expressly designated by the corporation
within that period, the board of directors (or trustees) itself, following the
rationale of the Supreme Court's decision in Gelano vs. Court of Appeals (103
SCRA 90) may be permitted to so continue as "trustees" by legal implication to
complete the corporate liquidation. Still in the absence of a board of
directors or trustees, those having any pecuniary interest in the
assets, including not only the shareholders but likewise the creditors
of the corporation, acting for and in its behalf, might make proper
representations with the Securities and Exchange commission, which
has primary and sufficiently broad jurisdiction in matters of this
nature, for working out a final settlement of the corporate concerns.
WHEREFORE, the decision appealed from is AFFIRMED. A certificate of authority from the Board of Investments is no longer required
under RA 7042. Said certificate of authority is only necessary for the purpose
ISSUE AS TO CLEMENTE CASE: The SC should have applied Sec. 122, such of availing the incentives granted and allowed under the Omnibus Investments
that, in the absence of a known stockholder, member of the BOD or creditor, Code.
the properties should have been escheated in favor of the local government.
Following the rule laid down in Clemente will open the door to fraud in a way The manner in which a foreign corporation may obtain a license to do business
that any person claiming interest as heir of the corporation may still go to the in the Philippines is laid down in Sec. 125:
SEC to make proper representations with the SEC for working out a final
settlement. Moreover, the corporation being non-existent for all intents and
purposes, after the expiration of the three year period provided by law, could
not have legally transferred such property to any person. The Gonzales case is
misapplied, because SRA was a successor of Philsucom, while in the Gelano
case, there was a lawyer who prosecuted the case who was deemed as trustee.
In the Clemente case, there was no such successor nor a lawyer who can be
deemed a trustee.

CHAPTER 18: FOREIGN CORPORATIONS

A. DEFINITION: As to the Philippines, any corporation, which owe its

existence to the laws of another state, government or country is a “foreign
corporation”. Elsewise stated, a foreign corporation is one created or
organized under the laws of any state or government other than those of
the forum.

Sec. 123. Definition and rights of foreign corporations. - For the

purposes of this Code, a foreign corporation is one formed, organized or existing
under any laws other than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country or state. It shall have
the right to transact business in the Philippines after it shall have obtained a
license to transact business in this country in accordance with this Code and a
certificate of authority from the appropriate government agency.

“AND WHOSE LAWS ALLOW FILIPINO CITIZENS AND

CORPORATIONS TO DO BUSINESS IN ITS OWN COUNTRY OR STATE”:
is not an accurate inclusion in the definition as any corporation registered or
organized under the laws of another state is necessarily a foreign corporation
WON the state of its corporation allow Filipino citizens or corporations to do
business in that forum.

The said phrase was inserted by framers of the law only as a condition
precedent to the grant of a license to do business in the Philippines.

INCORPORATION TEST: is applied in determining whether a corporation is

domestic or foreign. If it is incorporated in another state, it is a foreign
corporation, while if it is registered under Philippine laws, it is deemed a Filipino
or domestic corporation irrespective of the nationality of its stockholders.

Thus, a corporation registered under the Foreign Investments Act of 1991 (RA
No. 7074) or the Trade Liberalization Law of 2000 (RA No. 8762) with 100%
foreign equity is considered a Filipino or domestic corporation and not foreign.

CONTROL TEST: In times of war and for purposes of security of the state,
however, the “control test” would apply in determining the corporate
nationality, i.e., the citizenship of the controlling stockholders determines the
nationality of the corporation.

CORPORATE PERSONALITY BEYOND BORDERS:

B. APPLICATION FOR LICENSE

Under Sec. 123, a foreign corporation cannot transact business in the

Philippines unless it has obtained a license or permit to do so in accordance
with the laws of the country and a certificate of authority from the appropriate
government agency such as the Banko Sentral ng Pilipinas for banking
institutions or the Office of the Insurance Commission for insurance companies,
etc.
136 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
 Sec. 125. Application for a license. - A foreign corporation applying for a
Foreign corporations already issued a license to transact business in the
license to transact business in the Philippines shall submit to the Securities and Philippine prior to the effectivity of the Code continues to have such authority
Exchange Commission a copy of its articles of incorporation and by-laws, under the terms and conditions of the license. Sec. 124 provides:
certified in accordance with law, and their translation to an official language of
the Philippines, if necessary. The application shall be under oath and, unless Sec. 124. Application to existing foreign corporations. - Every foreign
already stated in its articles of incorporation, shall specifically set forth the corporation which on the date of the effectivity of this Code is authorized to do
following: business in the Philippines under a license therefore issued to it, shall continue
to have such authority under the terms and condition of its license, subject to
the provisions of this Code and other special laws.
1. The date and term of incorporation;

2. The address, including the street number, of the principal office of the
corporation in the country or state of incorporation;
Upon compliance with the provision of Sec. 125, other special laws and the
3. The name and address of its resident agent authorized to accept summons
rules and regulations implementing them, the SEC shall thereafter issue the
and process in all legal proceedings and, pending the establishment of a local
license.
office, all notices affecting the corporation;
Within 60 days after the issuance of the license, a foreign corporation, except
4. The place in the Philippines where the corporation intends to operate;
those engaged in foreign banking or insurance, shall deposit with the SEC, for
the benefit of creditors, securities consisting of (1) bonds or other evidence of
5. The specific purpose or purposes which the corporation intends to pursue in
indebtedness of the Philippine government or its political subdivision, or of a
the transaction of its business in the Philippines: Provided, That said purpose or
GOCC, (2) shares of stock in “registered enterprises” as this term is defined
purposes are those specifically stated in the certificate of authority issued by
under RA 5186, (3) shares of stock in domestic corporations registered in the
the appropriate government agency;
stock exchange and (4) shares of stock in domestic insurance companies and
banks or any combination thereof with an actual market value of P100,000.00.
6. The names and addresses of the present directors and officers of the
corporation;
Additional securities may be required by the SEC if the market value of the
securities n deposit has decreased by at least 10%. Sec. 126 provides:
7. A statement of its authorized capital stock and the aggregate number of
shares which the corporation has authority to issue, itemized by classes, par
value of shares, shares without par value, and series, if any;

8. A statement of its outstanding capital stock and the aggregate number of

shares which the corporation has issued, itemized by classes, par value of
shares, shares without par value, and series, if any;

9. A statement of the amount actually paid in; and

10. Such additional information as may be necessary or appropriate in order to

enable the Securities and Exchange Commission to determine whether such
corporation is entitled to a license to transact business in the Philippines, and
to determine and assess the fees payable.

Attached to the application for license shall be a duly executed certificate under
oath by the authorized official or officials of the jurisdiction of its incorporation,
attesting to the fact that the laws of the country or state of the applicant allow
Filipino citizens and corporations to do business therein, and that the applicant
is an existing corporation in good standing. If such certificate is in a foreign
language, a translation thereof in English under oath of the translator shall be
attached thereto.

The application for a license to transact business in the Philippines shall likewise
be accompanied by a statement under oath of the president or any other person
authorized by the corporation, showing to the satisfaction of the Securities and
Exchange Commission and other governmental agency in the proper cases that
the applicant is solvent and in sound financial condition, and setting forth the
assets and liabilities of the corporation as of the date not exceeding one (1)
year immediately prior to the filing of the application.
Foreign banking, financial and insurance corporations shall, in addition to the
above requirements, comply with the provisions of existing laws applicable to
them. In the case of all other foreign corporations, no application for license to
transact business in the Philippines shall be accepted by the Securities and
Exchange Commission without previous authority from the appropriate
government agency, whenever required by law.

137 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes

Sec. 126. Issuance of a license. - If the Securities and Exchange Commission
is satisfied that the applicant has complied with all the requirements of this
Code and other special laws, rules and regulations, the Commission shall issue
a license to the applicant to transact business in the Philippines for the purpose 3.
or purposes specified in such license. Upon issuance of the license, such foreign
corporation may commence to transact business in the Philippines and continue
to do so for as long as it retains its authority to act as a corporation under the
laws of the country or state of its incorporation, unless such license is sooner
surrendered, revoked, suspended or annulled in accordance with this Code or
other special laws.
country and is fully subsidized by the head office. It undertakes activities
such as but not limited to information dissemination and promotion of the
company’s products;
Local Subsidiary – A foreign corporation may form or organize a
separate corporation under the Foreign Investment Act (RA 7042) by
making at least a majority of the investments therein. The corporation
thus formed becomes known as a local subsidiary of the investing foreign
corporation which becomes a legally independent unit governed by the
laws of the Philippines. Ballantine calls it “domestication” in the sense that
the foreign corporation is granted the right to obtain a charter or organize
itself into a domestic corporation under the general laws of the other
state;

Within sixty (60) days after the issuance of the license to transact business in 4.
the Philippines, the license, except foreign banking or insurance corporation,
shall deposit with the Securities and Exchange Commission for the benefit of
present and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange Commission, consisting of bonds or
other evidence of indebtedness of the Government of the Philippines, its political
subdivisions and instrumentalities, or of government-owned or controlled
corporations and entities, shares of stock in "registered enterprises" as this term
is defined in Republic Act No. 5186, shares of stock in domestic corporations
registered in the stock exchange, or shares of stock in domestic insurance
companies and banks, or any combination of these kinds of securities, with an 5.
actual market value of at least one hundred thousand (P100,000.) pesos;
Provided, however, That within six (6) months after each fiscal year of the
licensee, the Securities and Exchange Commission shall require the licensee to
deposit additional securities equivalent in actual market value to two (2%)
percent of the amount by which the licensee's gross income for that fiscal year
exceeds five million (P5,000,000.00) pesos. The Securities and Exchange
Commission shall also require deposit of additional securities if the actual
market value of the securities on deposit has decreased by at least ten (10%)
percent of their actual market value at the time they were deposited. The
Securities and Exchange Commission may at its discretion release part of the
additional securities deposited with it if the gross income of the licensee has
decreased, or if the actual market value of the total securities on deposit has
increased, by more than ten (10%) percent of the actual market value of the
securities at the time they were deposited. The Securities and Exchange
Commission may, from time to time, allow the licensee to substitute other
securities for those already on deposit as long as the licensee is solvent. Such
licensee shall be entitled to collect the interest or dividends on the securities
deposited. In the event the licensee ceases to do business in the Philippines,
the securities deposited as aforesaid shall be returned, upon the licensee's 6.
application therefor and upon proof to the satisfaction of the Securities and
Exchange Commission that the licensee has no liability to Philippine residents,
including the Government of the Republic of the Philippines.
Regional or Area Headquarters – is an office whose purpose is to act
as an administrative branch of a multinational company engaged in
international trade which principally serves as a supervision,
communications and coordinating center for its subsidiaries, branches or
affiliates in the Asia-Pacific Region and other foreign markets and which
does not earn or derive income in the Philippines (Sec. 2(2), RA 8756). It
cannot in any manner, participate in the management of any subsidiary
or branch office in the Philippines nor shall it market goods and services
in behalf of its mother company, branches or affiliates.
Regional Operating Headquarters – is a foreign business entity which
is allowed to derive income in the Philippines by performing qualifying
services exclusively to its affiliates, subsidiaries or branches in the
Philippines, in the Asia-Pacific Region and in other foreign markets (Sec.
2(3), RA 8756).
Qualifying services, under RA 8756, include among others: general
administration and planning, business planning and coordination,
sourcing or procurement of raw materials and components, corporate
finance advisory services, marketing control and sales promotion, training
and personnel management, logistic service, research and development
services and the like.
The Regional or Area Headquarters and Regional Operating Headquarters
are granted certain tax incentives such as exemption from all kinds of
local taxes, fees or charges imposed by local government units except
real property tax on land improvements; tax and duty-free importation of
training materials and equipment; and importation of motor vehicles.
Regional Warehouse – one whose activities are limited to serving as
supply depot of Regional or Area Headquarters or Regional Operating
Headquarters in the Philippines, after securing a license therefor from the
Philippine Economic Zone Authority (PEZA) or the concerned ecozone
authorities. The regional warehouse shall only be used for the storage,
deposit and safekeeping of its spare parts, components, marking, labelling
and cutting or altering to customer’s specifications but shall not directly
engage in trade nor solicit business, promote any sale nor enter into
contracts for the sale or disposition of goods in the Philippines, except
those for delivery to an authorized distributor in the country.

OBJECTIVE OF LICENSE: is not to prevent the foreign corporation from
performing isolated or single act, but to prevent it from acquiring a domicile
for the purpose of pursuing its business without taking steps to render it
amenable to suit in the local courts. If the foreign corporation transacts
business in the Philippines without the requisite license, its officers may be
subjected to the penal provisions of Sec. 144 of the Code.
C. MODE OF ENTRY OF FOREIGN CORPORATIONS
1. Branch Office – of a foreign corporation is one which carries out the
business activities of the foreign corporation itself and derives income
from the Philippines (Sec. 1, C, IRR of RA No. 7042). As such, the juridical
entity involved is one and the same;
2. Representative or Liason Office – one which deals directly with the
clients of the parent company but does not derive income from the host
7. Joint Venture – is a one-time grouping of two or more persons, natural
or juridical, for carrying out a specified undertaking. Under Sec. 1, L of
RA 7042, it is combination of property, money, efforts, skill or knowledge
to carry out a single business enterprise for profit, which is duly registered
with the SEC as a corporation or partnership. No license to do business is
required on the part of the foreign corporation entering into such kind of
a business venture since mere investment does no constitute doing
business as per the Implementing Rules and Regulations of RA 7042
unless, of course, the foreign corporation actively participates in the
management thereof.
D. RESIDENT AGENT
As a condition precedent to the grant of license to do or transact business in
the Philippines, the foreign corporation is required to designate its resident
agent on whom summons and other legal processes my be served in all actions
or legal proceedings against such corporation. Sec. 128 provides:

138 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes

Sec. 128. Resident agent; service of process. - The Securities and
Exchange Commission shall require as a condition precedent to the issuance of
the license to transact business in the Philippines by any foreign corporation
that such corporation file with the Securities and Exchange Commission a
written power of attorney designating some person who must be a resident of
the Philippines, on whom any summons and other legal processes may be
served in all actions or other legal proceedings against such corporation, and
consenting that service upon such resident agent shall be admitted and held as
valid as if served upon the duly authorized officers of the foreign corporation at
its home office. Any such foreign corporation shall likewise execute and file with
the Securities and Exchange Commission an agreement or stipulation, executed
by the proper authorities of said corporation, in form and substance as follows:
"The (name of foreign corporation) does hereby stipulate and agree, in
consideration of its being granted by the Securities and Exchange Commission
a license to transact business in the Philippines, that if at any time said
corporation shall cease to transact business in the Philippines, or shall be
without any resident agent in the Philippines on whom any summons or other
legal processes may be served, then in any action or proceeding arising out of
any business or transaction which occurred in the Philippines, service of any
summons or other legal process may be made upon the Securities and
Exchange Commission and that such service shall have the same force and
effect as if made upon the duly-authorized officers of the corporation at its
home office." RESPONSIBLE OFFICERS: of a foreign corporation doing business in the
Philippines without the requisite license may be subject to the penal sanctions
Whenever such service of summons or other process shall be made upon the provided for in Sec. 144 of the Code which may either be imprisonment or fine.
Securities and Exchange Commission, the Commission shall, within ten (10)
days thereafter, transmit by mail a copy of such summons or other legal process
to the corporation at its home or principal office. The sending of such copy by
the Commission shall be necessary part of and shall complete such service. All
expenses incurred by the Commission for such service shall be paid in advance
by the party at whose instance the service is made.
In case of a change of address of the resident agent, it shall be his or its duty 1. A foreign corporation transacting or doing business in the Philippines with
to immediately notify in writing the Securities and Exchange Commission of the
new address.
As to who may be appointed as resident agent, the Corporation Code provides:
Sec. 127. Who may be a resident agent. - A resident agent may be either
an individual residing in the Philippines or a domestic corporation lawfully
transacting business in the Philippines: Provided, That in the case of an
individual, he must be of good moral character and of sound financial standing.
Culled from the provisions of Sec. 128 is that the necessity of the appointment
of a resident agent is only for the purpose of receiving summons and other
legal processes in any legal action or proceeding against the foreign
corporation. And, when a foreign corporation has designated a person to
receive summons in judicial proceedings affecting the corporation that
designation is exclusive and service of summons is without force and effect
unless made on him (Poizat vs. Mogan). Thus, while the law allows service
upon the SEC (Sec. 128), or any of its officers or agents within the Philippines
(Sec. 13, Rule 14, Rules of Civil Procedure), the latter two modes may become
effective only if the foreign corporation failed or neglected to designate such a
person or an agent. In a decision, therefore, rendered by the SC in the case of
General Corporation of the Philippines vs. Union Insurance Soc. Of Canton Ltd
(87 Phil 313), it was held that “where such foreign corporation actually doing
139 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
business here has not applied for a license to do and has not designated an
agent to receive summons, then service of summons on it will be made
pursuant to the provisions of the Rules of Court”. If such foreign corporation
has a license to do business, then summons to it will be served on the agent
designated by it for the purpose, or otherwise in accordance with the
Corporation Law.
E. DOING BUSINESS WITHOUT LICENSE AND ITS EFFECT
A foreign corporation must secure the necessary license before it can transact
or do business in the Philippines. This is the clear import of Sec. 123 when it
states that it shall have the right to transact business in the Philippines after it
shall have obtained a license. Without such a license, the law provides for
certain consequences:
Sec. 133. Doing business without a license. - No foreign corporation
transacting business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine
laws.
CAPACITY TO SUE and BE SUED: The corporation may not likewise sue or
intervene in any action, suit or proceeding in any court or administrative agency
of the Philippines while it may be sued or proceeded against before such court
or agency on any valid cause of action recognized under the law.
WHETHER OR NOT IT CAN SUE:
a license can sue before Philippine Courts;
2. Subject to certain exceptions, a foreign corporation doing business in the
country without a license cannot sue in Philippine Courts; and
3. If it is not transacting business in the Philippines, even without a license,
it can sue before the Philippine Courts.
“It is not the lack of required license but doing business without a
license which bars a foreign corporation from access to our courts”
(Universal Shipping vs. IAC)
EXCEPTIONS:
1. Foreign corporations can sue before the Philippine Courts if the act or
transaction involved is an “isolated transaction” or the corporation is
not seeking to enforce any legal or contractual rights arising from, or
growing out of, any business which it has transacted in the Philippines
(Western Equipment Supply vs. Reyes)
2. Neither is a license required before a foreign corporation may sue before
the forum if the purpose of the suit is to protect its trademark, trade
name, corporate name, reputation or goodwill; (Western Equipment
Supply vs. Reyes)
3. Or where it is based on a violation of the Revised Penal Code (Le
Chemise Lacoste, SA vs. Fernandez);
4. Or merely defending a suit filed against it (Time, Inc. vs. Reyes)
5. Or where a party is estopped to challenge the personality of the
corporation by entering into a contract with it (Communications Materials
and Design, Inc. vs. CA and ITEC)
WHETHER OR NOT IT CAN BE SUED:
1. A foreign corporation transacting business in the Philippines with the
requisite license can be sued in Philippine Courts;
2. A foreign corporation transacting business in the Philippines without a
license can be sued in Philippine Courts;
3. If it is not doing business in the Philippines, it cannot be sued in Philippine
Courts for lack of jurisdiction.
“DOING BUSINESS”: As to what constitutes “doing business” or “transacting
business” which would bar a foreign corporation from access to our courts, no
general rule or governing principle can be laid down. Indeed, such case must
be judged in the light of its peculiar environmental circumstance. However, the
TRUE TEST seems to be whether the foreign corporation is continuing the
body or substance of the business or enterprise for which it was organized or
whether it has substantially retired from it and turned it over to another. The
term implies a continuity of commercial dealings and arrangements and
contemplates, to the extent, the performance of acts or works or the exercise
of some functions normally incident to and in progressive prosecution of, the
purpose and objects of its organization (Metholatum, Inc. vs. Mangaliman)
PRESENT STATE OF LAW AS TO “DOING BUSINESS”: under the Foreign
Investment Act (Sec. 3, d), “doing business” would include:
1. Soliciting orders, service contracts;
2. Opening offices, whether called “liason offices” or branches;
3. Appointing representatives or distributor domiciled in the Philippines or
who in any calendar year stay in the country for a period or periods
totalling 180 days or more;
4. Participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines;
5. Any other act that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or
works, or the exercise of functions normally incident to and in progressive
prosecution of commercial gain or of the purpose and object of the
business organization.
Provided, however, that the phrase “doing business” shall not be deemed to
include mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or exercise of rights as such
investor, nor having a nominee director or officer to represent its interest in
such corporation; nor appointing a representative or distributor domiciled in
the Philippines which transacts business in its own name and for its own
account.
ISOLATED TRANSACTION: even if it is pursuant of the usual business does
not constitute doing business the doing of which would not bar a foreign
corporation from access to Philippine Courts (Facilities Mgt. vs. Dela Osa)
THE MENTHOLATUM CO., INC., ET AL., petitioners,
vs.
ANACLETO MANGALIMAN, ET AL., respondents
(G.R. No. L-47701; June 27, 1941)
FACTS: A complaint was filed by herein petitioner, a foreign corporation having
Philippine-American Drug Co. as its sole distributor, for infringement of
trademark for its product “Mentholatum” and unfair competition alleging that
herein respondents Anacleto and Florencio Mangaliman prepared a
medicament and salve named “Mentholiman” which they sold to the public
packed in the same size, color and shape as its product Metholatum.
ISSUE: WON petitioner corporation is transacting business in the Philippines?
HELD: No. No general rule or governing principle can be laid down as
to what constitutes "doing" or "engaging in" or "transacting"
business. Indeed, each case must be judged in the light of its peculiar
environmental circumstances. The true test, however, seems to be
whether the foreign corporation is continuing the body or substance
of the business or enterprise for which it was organized or whether
it has substantially retired from it and turned it over to another.
(Traction Cos. v. Collectors of Int. Revenue [C. C. A. Ohio], 223 F. 984, 987.)
The term implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise
of some of the functions normally incident to, and in progressive prosecution
of, the purpose and object of its organization. (Griffin v. Implement Dealers'
Mut. Fire Ins. Co., 241 N. W. 75, 77; Pauline Oil & Gas Co. v. Mutual Tank Line
Co., 246 P. 851, 852, 118 Okl. 111; Automotive Material Co. v. American
Standard Metal Products Corp., 158 N. E. 698, 703, 327 III. 367.)
140 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
In its decision of June 29, 1940, the Court of Appeals concluded that "it is
undeniable that the Mentholatum Co., through its agent, the Philippine-
American Drug Co., Inc., has been doing business in the Philippines by selling
its products here since the year 1929, at least." This is assailed by petitioners
as a pure conclusion of law. This finding is predicated upon the testimony of
Mr. Roy Springer of the Philippine-American Drug Co., Inc., and the pleadings
filed by petitioners. The complaint filed in the Court of First Instance of Manila
on October 1, 1935, clearly stated that the Philippine-American Drug Co., Inc.,
is the exclusive distributing agent in the Philippine Islands of the Mentholatum
Co., Inc., in the sale and distribution of its product known as the
“Mentholatum." The object of the pleadings being to draw the lines of battle
between litigants and to indicate fairly the nature of the claims or defenses of
both parties, a party cannot subsequently take a position contradictory to, or
inconsistent with, his pleadings, as the facts therein admitted are to be taken
as true for the purpose of the action. It follows that whatever transactions the
Philippine-American Drug Co., Inc., had executed in view of the law, the
Mentholatum Co., Inc., did it itself. And, the Mentholatum Co., Inc., being a
foreign corporation doing business in the Philippines without the license
required by section 68 of the Corporation Law, it may not prosecute this action
for violation of trade mark and unfair competition.
The writ prayed for should be, as it hereby is, denied, with costs against the
petitioners.
ISOLATED TRANSACTION
MARSHALL-WELLS COMPANY, plaintiff-appellant,
vs.
HENRY W. ELSER & CO., INC., defendant-appellee
(G.R. No. 22015; September 1, 1924)
FACTS: Plaintiff sued defendant for the unpaid balance of a bill of goods
amounting to P2,660.74, for which the plaintiff holds accepted drafts.
Defendant demurred on the ground that plaintiff had no capacity to sue which
the trial court granted. And in as much as the plaintiff could not allege
compliance with the statute, the order was allowed to become final and no
appeal was perfected.
ISSUE: WON obtaining a license is required before a foreign corporation can
maintain any kind of action in the courts of the Philippine Islands?
HELD: No. The object of the statute was to subject the foreign
corporation doing business in the Philippines to the jurisdiction of its
courts. The object of the statute was not to prevent the foreign
corporation from performing single acts, but to prevent it from
acquiring a domicile for the purpose of business without taking the
steps necessary to render it amenable to suit in the local courts. The
implication of the law is that it was never the purpose of the Legislature to
exclude a foreign corporation which happens to obtain an isolated order for
business from the Philippines, from securing redress in the Philippine courts,
and thus, in effect, to permit persons to avoid their contracts made with such
foreign corporations. The effect of the statute preventing foreign corporations
from doing business and from bringing actions in the local courts, except on
compliance with elaborate requirements, must not be unduly extended or
improperly applied. It should not be construed to extend beyond the plain
meaning of its terms, considered in connection with its object, and in
connection with the spirit of the entire law.
The law simply means that no foreign corporation shall be permitted
"to transact business in the Philippine Islands," as this phrase is
known in corporation law, unless it shall have the license required by
law, and, until it complies with the law, shall not be permitted to
maintain any suit in the local courts. A contrary holding would bring the
law to the verge of unconstitutionality, a result which should be and can be
easily avoided.
The order appealed from shall be set aside and the record shall be returned to
the court of origin for further proceedings. Without special finding as to costs
in this instance, it is so ordered.

HATHIBHAI BULAKHIDAS, petitioner,
vs.
THE HONORABLE PEDRO L. NAVARRO, as Presiding Judge of the
Court of First Instance of Rizal, Seventh Judicial District, Pasig, Metro
Manila, Branch 11 and DIAMOND SHIPPING CORPORATION,
respondent.
(G.R. No. L-49695; April 7, 1986)
FACTS: Petitioner, a foreign partnership, filed a complaint for damages against
respondent Diamond Shipping Corporation having failed to deliver the goods
shipped to it by petitioner to their proper destination.
Said complaint alleged that the plaintiff is “not doing business in the
Philippines” and that it is “suing under an isolated transaction”.
Defendant filed a motion to dismiss on the ground that plaintiff has no capacity
to sue which was granted.
ISSUE: WON a corporation not engaged in business in the Philippines can
institute an action before our courts?
HELD: Yes. This issue is already well-settled in this jurisdiction. In Aetna
Casualty and Surety Co. vs. Pacific Star Lines, 80 SCRA 635, is a case similar
to the present one in that the action is also one for recovery of damages
sustained by cargo shipped on defendants' vessels. Defendants set up the
defense that plaintiff is a foreign corporation not duly licensed to do business
in the Philippines and, therefore, without capacity to sue and be sued. In
overruling said defense, this Court said:
It is settled that if a foreign corporation is not engaged in business
in the Philippines, it may not be denied the right to file an action in
Philippine courts for isolated transactions.
The object of Sections 68 and 69 of the Corporation law was not to prevent
the foreign corporation from performing single acts, but to prevent it from
acquiring a domicile for the purpose of business without taking the steps
necessary to render it amenable to suit in the local courts. It was never the
purpose of the Legislature to exclude a foreign corporation which happens
to obtain an isolated order for business from the Philippines, from securing
redress in the Philippine courts.
And in Eastboard Navigation, Ltd. et al vs. Juan Ysmael & Co., Inc., this Court
held that:
(d) While plaintiff is a foreign corporation without license to
transact business in the Philippines, it does not follow that it has
no capacity to bring the present action. Such license is not
necessary because it is not engaged in business in the Philippines.
In fact, the transaction herein involved is the first business undertaken by
plaintiff in the Philippines, although on a previous occasion plaintiff's vessel
was chartered by the National Rice and Corn Corporation to carry rice cargo
from abroad to the Philippines. These two isolated transactions do not
constitute engaging in business in the Philippines within the purview of
Sections 68 and 69 of the Corporation Law so as to bar plaintiff from seeking
redress in our courts. (Marshall Wells Co. vs. Henry W. Elser & Co. 49 Phil.,
70; Pacific Vegetable Oil Corporation vs. Angle O. Singson, G.R. No. L-7917,
April 29, 1955.)
Again, in Facilities Management Corporation vs. De la Osa 89 SCRA 131, 139,
following Aetna Casualty & Surety Co. vs. Pacific Star Line, supra, held a foreign
corporation not engaged in business in the Philippines is not barred from
seeking redress from the courts of the Philippines.
WHEREFORE, the order of respondent Court dismissing the petitioner's
complaint is hereby set aside and the case remanded for further proceedings,
with costs against private respondent.
THE SWEDISH EAST ASIA CO., LTD., petitioner,
141 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
vs.
MANILA PORT SERVICE AND/OR MANILA RAILROAD COMPANY,
respondents
(G.R. No. L-26332; October 26, 1968)
FACTS: MS SUDAN, owned and operated by petitioner, a swedish company
without license in the Philippines, discharged cargo to herein respondent. By
mistake, cargo destined for Hongkong consisting of 16 bundles of “lifts and
mild steel tees window sections” covering which the petitioner had issued a bill
of lading to a Hongkong consignee, were also landed at Manila. The erroneous
discharge was obviously engendered by the fact that the same ship on the
same day discharged 40 similar bundles destined for consignee in the
Philippines.
Petitioner, through a complaint filed in the CFI of Manila, sought for the
recovery of the value of the missing goods which it paid to the Hongkong
consignee, which was granted by the lower court.
On appeal, the CA reversed the trial court’s decision.
ISSUE: WON petitioner should be barred from access to our courts?
HELD: No. The respondents challenge the petitioner's capacity to sue, it being
admittedly a foreign corporation without license to engage in business in the
Philippines, citing section 69 of the Corporation Law. It must be stated
however that this section is not applicable to a foreign corporation
performing single acts or "isolated transactions." There is nothing in the
record to show that the petitioner has been in the Philippines engaged in
continuing business or enterprise for which it was organized, when the sixteen
bundles were erroneously discharged in Manila, for it to be considered as
transacting business in the Philippines. The fact is that the bundles, the
value of which is sought to be recovered, were landed not as a result
of a business transaction, "isolated" or otherwise, but due to a
mistaken belief that they were part of the shipment of forty similar
bundles consigned to persons or entities in the Philippines. There is no
justification, therefore, for invoking the provisions of section 69 of the
Corporation Law.
ACCORDINGLY, the judgment of the Court of Appeals is reversed, and another
judgment is hereby rendered ordering the respondents, jointly and severally,
to pay the petitioner the sum of P2,349.62 with interest thereon at the rate of
6% per annum from March 13, 1961, the date of the filing of the complaint,
until the amount shall have been fully paid, and the sum of P600 as attorney's
fees. Costs against the respondents.
ANTAM CONSOLIDATED, INC., TAMBUNTING TRADING
CORPORATION and AURORA CONSOLIDATED SECURITIES and
INVESTMENT CORPORATION, petitioners,
vs.
THE COURT OF APPEALS, THE HONORABLE MAXIMIANO C.
ASUNCION (Court of First Instance of Laguna, Branch II [Sta. Cruz])
and STOKELY VAN CAMP, INC., respondents
(G.R. No. L-61523; July 31, 1986)
FACTS: Respondent Stokely Van Camp, Inc., a corporation organized and
existing under the laws of the state of Indiana, filed a complaint against
Banahaw Milling Corporation, Antam Consolidated, Inc., Tambunting Trading
Corporation, Aurora Consolidated Securities and Investment Corporation and
United Coconut Oil Mills, Inc. (Unicom) for collection of sum of money.
One of respondent’s subdivision “Capital City Product Company” (Capital City)
entered into a contracts where Coconut Oil Manufacturing (Phil), Inc. (Comphil)
were to sell to the former 500 long tons of crude coconut oil at US$0.30/lb,
which it failed to comply with and Capital City was forced to buy its coconut oil
needs from the open market at a higher price resulting in a loss of US$103,600.
A 2nd contract was entered into to settle Capital City’s loss, Comphil was
supposed to repurchase the coconut oil earlier purchased from the open market
at a price of US$ 0.3925/lb, but the latter failed to pay.
To compensate for the loss, Comphil entered into a 3rd contract agreeing to
sell the same quantity of coconut oil at a price of US$0.3425/lb which was
below the market price. That by the discounted amount, Comphil would have
compensated for the loss Capital City sustained. But still, Comphil failed to
deliver.
Petitioners filed a motion to dismiss the complaint on the ground that
respondent had no personality to maintain a suit which was denied. The
subsequent petition for certiorari was dismissed by the appellate court.
ISSUE: WON respondent is doing business in the Philippines?
HELD: No. In the case of Top-Weld Manufacturing, Inc. v. ECED, S.A. (138
SCRA 118,127-128), we stated:
There is no general rule or governing principle laid down as to what
constitutes ‘doing' or 'engaging in' or 'transacting business in the
Philippines. Each case must be judged in the Light of its peculiar
circumstance (Mentholatum Co. v. Mangaliman, 72 Phil.524). Thus, a
foreign corporation with a settling agent in the Philippines which issues
twelve marine policies covering different shipments to the Philippines
(General Corporation of the Philippines v. Union Insurance Society of
Canton, Ltd., 87 Phil. 313) and a foreign corporation which had been
collecting premiums on outstanding policies (Manufacturing Life Insurance
Co., v. Meer, 89 Phil. 351) were regarded as doing business here. The acts
of these corporations should be distinguished from a single or isolated
business transaction or occasional, incidental and casual transactions which
do not come within the meaning of the law. Where a single act or transaction
, however, is not merely incidental or casual but indicates the foreign
corporation's intention to do other business in the Philippines, said single act
or transaction constitutes 'doing' or 'engaging in' or 'transacting' business in
the Philippines. (Far East International Import and Export Corporation v.
Nankai Kogyo, Co., 6 SCRA 725).
In the Mentholatum Co. v. Mangaliman case earlier cited, this Court held:
xxx xxx xxx
...The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the business or
enterprise for which it warning-organized or whether it has
substantially was retired from it and turned it over to another.
(Traction Cos. v. Collectors of Int. Revenue [CCA., Ohio], 223 F. 984, 987.)
The term implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or workers or the
exercise of some of the functions normally incident to, and in progressive
prosecution of, the purpose and object of its organization. (Griffin v.
Implement Dealers' Mut. Fire Ins. Co., 241 N.W. 75, 77, Pauline Oil & Gas
Co. v. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl. 111; Automotive
Material Co. v. American Standard Metal Products Corp., 158 N.E. 698, 703,
327 111. 367.) '
In the case at bar, the transactions entered into by the respondent
with the petitioners are not a series of commercial dealings which
signify an intent on the part of the respondent to do business in the
Philippines but constitute an isolated one which does not fall under
the category of "doing business." The records show that the only reason
why the respondent entered into the second and third transactions with the
petitioners was because it wanted to recover the loss it sustained from the
failure of the petitioners to deliver the crude coconut oil under the first
transaction and in order to give the latter a chance to make good on their
obligation. Instead of making an outright demand on the petitioners, the
respondent opted to try to push through with the transaction to recover the
amount of US$103,600.00 it lost. This explains why in the second transaction,
the petitioners were supposed to buy back the crude coconut oil they should
have delivered to the respondent in an amount which will earn the latter a
profit of US$103,600.00. When this failed the third transaction was entered
into by the parties whereby the petitioners were supposed to sell crude coconut
oil to the respondent at a discounted rate, the total amount of such discount
being US$103,600.00. Unfortunately, the petitioners failed to deliver again,
prompting the respondent to file the suit below.
142 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
From these facts alone, it can be deduced that in reality, there was only one
agreement between the petitioners and the respondent and that was the
delivery by the former of 500 long tons of crude coconut oil to the latter, who
in turn, must pay the corresponding price for the same. The three seemingly
different transactions were entered into by the parties only in an effort to fulfill
the basic agreement and in no way indicate an intent on the part of the
respondent to engage in a continuity of transactions with petitioners which will
categorize it as a foreign corporation doing business in the Philippines. Thus,
the trial court, and the appellate court did not err in denying the petitioners'
motion to dismiss not only because the ground thereof does not appear to be
indubitable but because the respondent, being a foreign corporation not doing
business in the Philippines, does not need to obtain a license to do business in
order to have the capacity to sue
We agree with the respondent that it is a common ploy of defaulting local
companies which are sued by unlicensed foreign companies not engaged in
business in the Philippines to invoke lack of capacity to sue. The respondent
cites decisions from 1907 to 1957 recognizing and rejecting the improper use
of this procedural tactic. (Damfschieffs Rhedered Union v. Cia Trans-atlantica,
8 Phil. 766 11907]; Marshall-Wells Co. v. Henry W. Elser & Co., 49 Phil. 70
[1924]; Western Equipment Co. v. Reyes, 51 Phil. 115 [1927]; Central Republic
Bank v. Bustamante, 71 Phil. 359 [1941]; Pacific Vegetable Oil Co. v. Singson,
96 Phil.-986 [1955]; Eastboard Navigation, Ltd. v. Juan Ysmael and Co., Inc.,
102 Phil. 1 [1957]). The doctrine of lack of capacity to sue based on failure to
first acquire a local license is based on considerations of sound public policy. It
intended to favor domestic corporations who enter was never into solitary
transactions with unwary foreign firms and then repudiate their obligations
simply because the latter are not licensed to do business in this country. The
petitioners in this case are engaged in the exportation of coconut oil, an export
item so vital in our country's economy. They filed this petition on the ground
that Stokely is an unlicensed foreign corporation without a bare allegation or
showing that their defenses in the collection case are valid and meritorious.
We cannot fault the two courts below for acting as they did.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is DISMISSED for
lack of merit. The Temporary Restraining Order dated February 2, 1983 is
hereby DISSOLVED. Costs against the petitioners.
HAVING A REPRESENTATIVE IN THE PHILIPPINES
FACILITIES MANAGEMENT CORPORATION, J. S. DREYER, and J. V.
CATUIRA, petitioners,
vs.
LEONARDO DE LA OSA AND THE HONORABLE COURT OF INDUSTRIAL
RELATIONS, respondents
(G.R. No. L-38649; March 26, 1979)
FACTS: Respondent Leonardo dela Osa filed a petition for reinstatement with
recovery of his overtime compensation, swing shift and graveyard shift
differentials.
Petitioner corporation filed a letter-answer interposing special defenses:
1. Facilities Management Corporation and JS Deyer are domiciled in Wake
Islands and is beyond the territorial jurisdiction of the Philippine
Government; and
2. JV Catuira, though an employee of respondent corporation and stationed
in Manila does not have power and authority of legal representation; and
3. The employment of respondent is with approval of the Department of
Labor of the Philippines.
Subsequently, a motion to dismiss was filed which was denied.
ISSUE: WON petitioner, FMC, has been doing business in the Philippines to
vest the Philippine court with jurisdiction?
HELD: Yes. From the facts of record, the petitioner may be considered as
doing business in the Philippines within the scope of Section 14, Rule 14 of the
Rules of the Court which provide:
SEC 14. Service upon private foreign corporations. If the defendant is a foreign
corporation or a non-resident joint stock company or association: doing
business in the Philippines, service may be made on its resident agent
designated in accordance with law for that purpose or, if there be no such
agent, on the government official designated by law to that effect, or on any
of its officers or agents within the Philippines.
Indeed, the petitioner, in compliance with Act 2486 as implemented by
Department of Labor Order No. IV dated May 20, 1968 had to appoint Jaime
V. Catuira, 1322 A. Mabini, Ermita, Manila as agent for FMC with authority to
execute Employment Contracts and receive, in behalf of that corporation, legal
services from and be bound by processes of the Philippine Courts of Justice,
for as long as he remains an employee of FMC (Annex 'I', rollo, p. 56). It is a
fact that when the summons for the petitioner was served on Jaime V. Catuira
he was still in the employ of the FMC.
In his motion to dismiss Annex B', p. 19, Rollo), petitioner admits that Mr.
Catuira represented it in this country 'for the purpose of making arrangements
for the approval by the Department of Labor of the employment of Filipinos
who are recruited by the Company as its own employees for assignment
abroad.' In effect, Mr. Catuira was an officer representing petitioner in the
Philippines.
Under the rules and regulations promulgated by the Board of Investments
which took effect Feb. 3, 1969, implementing Rep. Act No. 5455,
which took effect Sept. 30, 1968, the phrase 'doing business' has
been exemption with illustrations, among them being as follows:
xxx xxx xxx
(f) the performance within the Philippines of any act or combination of acts
enumerated in section l(l) of the Act shall constitute 'doing business' therein.
in particular, 'doing business includes:
(1) Soliciting orders, purchases (sales) or service contracts. Concrete and
specific solicitations by a foreign firm, not acting independently of the foreign
firm amounting to negotiation or fixing of the terms and conditions of sales
or service contracts, regardless of whether the contracts are actually
reduced to writing, shall constitute doing business even if the enterprise has
no office or fixed place of business in the Philippines. xxx
(2) Appointing a representative or distributor who is domiciled in
the Philippines, unless said representative or distributor has an
independent status, i.e., it transacts business in its name and for
its own account, and not in the name or for the account of the
principal.
xxx xxx xxx
(4) Opening offices, whether called 'liaison'offices, agencies or branches,
unless proved otherwise.
xxx xxx xxx
(10) Any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally incident to, or in
the progressive prosecution of, commercial gain or of the purpose and
objective of the business organization
Indeed, if a foreign corporation, not engaged in business in the Philippines, is
not banned from seeking redress from courts in the Philippines, a fortiori, that
same corporation cannot claim exemption from being sued in Philippine courts
for acts done against a person or persons in the Philippines.
WHEREFORE, THE PETITION IS HEREBY DENIED WITH COSTS AGAINST THE
PETITIONERS
SINGLE ACT WITH INTENTION TO CONTINUE DOING BUSINESS
FAR EAST INTERNATIONAL IMPORT and EXPORT CORPORATION,
plaintiff-appellee,
vs.
143 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
NANKAI KOGYO CO. LTD., ET AL., defendants,
NANKAI KOGYO CO., LTD., defendant-appellant
(G.R. No. L-13525; November 30, 1962)
FACTS: Plaintiff Far East entered into a contract with herein appellant Nankai
for the sale of steel scrap. Only 1,058.6 metric tons were delivered upon the
expiration of the export license of Far East.
Far East later on wrote to Everett Steamship Corporation, requesting the
issuance of a complete set of the Bill of Lading for the shipment, in order that
payment thereof be effected against the letter of credit opened by Nankai.
For failure of Nankai and the shipping agent to comply, Far East filed a
complaint for specific performance.
Nankai filed a motion to dismiss, on the ground of lack of jurisdiction over its
person and the subject matter, which was denied.
ISSUE: WON the trial court acquired jurisdiction over the subject matter and
over the person of the defendant-appellant through the proper service of
summons?
HELD: Yes. Defendant contends that Philippine Courts have no jurisdiction to
take cognizance of the case because the Nankai is not doing business in the
islands; and that while it has entered into the transaction in question, same,
however, does not constitute "doing business", so as to make it amenable to
summons and subject it to the Court's jurisdiction. It bolstered this claim by a
provision in the contract which provides that "In case of disputes, Board of
Arbitration may be formed in Japan. Decision of the Board of Arbitration shall
be final and binding on both BUYER and SELLER".
The rule pertinent to the questions in issue provides —
SEC. 14. Service upon private foreign corporations. — If the defendant is a
foreign corporation, or a non-resident joint stock company or association,
doing business in the Philippines, service may be made on its resident agent
designated in accordance with law for that purpose, or, if there be no such
agent, on the government official designated by law to that effect, or on any
officer or agent within the Philipines. (Rule 7).
The above rule indicates three modes of effecting service of summons
upon a private, foreign corporation, viz: (1) by serving upon the agent
designated in accordance with law to accept service of summons; (2)
if there is no resident agent, by service on the government cial
designated by law to that effect; and (3) by serving on any officer or
agent of said corporation with Philippines. The plaintiff complied with the
third stated above, for it has been shown that Mr. Ishida, who personally signed
the contract for the purchase of the scrap in question in behalf of the Nankai
Kogyo, the Trade Manager of said Company, Mr. Tominaga the Chief of the
Petroleum Section of the same company and Mr. Yoshida was the man-in-
charge of the Import Section of the company's Tokyo Branch. All these three,
including the first two who were served with Summons, were officers of the
defendant company.
Not only did appellant allege non-jurisdictional grounds in its pleadings to have
the complaint dismissed, but it also went into trial on the merits and presented
evidence destined to resist appellee's claim. Verily, there could not be a better
situation of acquired jurisdiction based on consent. Consequently, the provision
of the contract wherein it was agreed that disputes should be submitted to a
Board of Arbitration which may be formed in Japan (in the supposition that it
can apply to the matter in dispute - payment of the scrap), seems to have been
waived with appellant's voluntary submission. Apart from the fact that the
clause employs the word "may".
From the proven facts obtaining in this particular case, the appellant's defense
of lack of jurisdiction appears unavailing. The case of Pacific Micronesian Line,
Inc. v. Baens del Rosario, et al., G.R. No. L-7154, October 23, 1954, relied
upon in the Motion to Dismiss and other pleadings presented by defendant-
appellant, stand on a different footing. Therein, We made the following
pronouncements:
 . . . . And the only act it did here was to secure the services of Luceno
Pelingon to act as cook and chief steward in one of its vessels authorizing
to that effect the Luzon Stevedoring Co., Inc., a domestic corporation, and
the contract of employment was entered into on July 18, 1951. It further
appears that petitioner has never sent its ships to the Philippines nor has it
transported nor even solicited the transportation passengers and cargoes to
and from the Philippines. In words, petitioner engaged the services of
Pelingon not as part of the operation of its business but merely to employ
him as member of the crew in one of its ships. That act apparently is an
isolated one, incidental, or casual, and "not of a character to indicate a
purpose to engage in business" within the meaning of the rule. (Emphasis
ours.)
ISSUE2: WON the single act done in this case can be considered as doing
business in the Philippines?
HELD: Yes. In the instant case, the testimony of Atty. Pablo Ocampo that
appellant was doing business in the Philippines corroborated by no less than
Nabuo Yoshida, one of appellant's officers, that he was sent to the Philippines
by his company to look into the operation of mines, thereby revealing the
defendant's desire to continue engaging in business here, after
receiving the shipment of the iron under consideration, making the Philippines
a base thereof.
The rule stated in the preceding section that the doing of a single act
doesnot constitute business within the meaning of statutes prescribing the
conditions to be complied with the foreign corporations must be qualified to
this extent, that a single act may bring the corporation. In such a case,
the single act of transaction is not merly incidental or casual, but is of such
character as distinctly to indicate a purpose on the part of the foreign
corporation to do other business in the state, and to make the state a basis
of operations for the conduct of a part of corporation's ordinary business.
(17 Fletchers Cyc. of Corporations, sec. 8470, pp. 572-573, and authorities
cited therein.) (Emphasis ours.)
WHEREFORE, the judgment appealed from is hereby affirmed, with costs
against defendant-appellant Nankai Kogyo.
ESTOPPED TO QUESTION PERSONALITY TO SUE
COMMUNICATION MATERIALS AND DESIGN, INC., ASPAC MULTI-
TRADE, INC., (formerly ASPAC-ITEC PHILIPPINES, INC.) and
FRANCISCO S. AGUIRRE, petitioners,
vs.
THE COURT OF APPEALS, ITEC INTERNATIONAL, INC., and ITEC,
INC., respondents
(G.R. No. 102223; August 22, 1996)
FACTS: Respondent ITEC entered into a contract with petitioner ASPAC
referred to as “Representative Agreement” where ASPEC was assigned as
ITEC’s “exclusive representative” in the Philippines for the sale of ITEC’s
products.
By virtue of said contract, ASPAC sold electronic products exported by ITEC, to
their sole customer PLDT. ASPAC and PLDT executed a document entitled
“PLDT-ASPAC/ITEC PROTOCOL” which defined the project detais for the supply
of ITEC’s Interface Equipment in connection with the 5th Expansion Program of
PLDT.
ITEC later on terminated its representative agreement with ASPAC and fied a
complaint alleging that the latter and another corporation Digital Base
Communications, Inc. (DIGITAL), the president of which is Francisco Aguirre
who is also the president of ASPAC, used knowledge and information of ITEC’s
product specifications to develop their own line of equipment and product
support, which are similar, if not identical to ITEC’s own and offering them to
ITEC’s customers.
Defendants filed a motion to dismiss on the ground that ITEC had no legal
capacity to sue as it is a foreign corporation doing business in the Philippines
without the required license, which was denied. On appeal, the CA affirmed
the decision of the trial court.
144 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
ISSUE: WON private respondents ITEC is an unlicensed corporation doing
business in the Philippines, and WON it is barred from invoking the injunctive
authority of the courts?
HELD: Yes and No (by estoppel). Generally, a "foreign corporation" has
no legal existence within the state in which it is foreign. This
proceeds from the principle that juridical existence of a corporation
is confined within the territory of the state under whose laws it was
incorporated and organized, and it has no legal status beyond such
territory. Such foreign corporation may be excluded by any other state from
doing business within its limits, or conditions may be imposed on the exercise
of such privileges. Before a foreign corporation can transact business in this
country, it must first obtain a license to transact business in the Philippines,
and a certificate from the appropriate government agency. If it transacts
business in the Philippines without such a license, it shall not be
permitted to maintain or intervene in any action, suit, or proceeding
in any court or administrative agency of the Philippines, but it may
be sued on any valid cause of action recognized under Philippine
laws.
In a long line of decisions, this Court has not altogether prohibited foreign
corporation not licensed to do business in the Philippines from suing or
maintaining an action in Philippine Courts. What it seeks to prevent is a foreign
corporation doing business in the Philippines without a license from gaining
access to Philippine Courts.
The purpose of the law in requiring that foreign corporations doing business
in the Philippines be licensed to do so and that they appoint an agent for service
of process is to subject the foreign corporation doing business in the
Philippines to the jurisdiction of its courts. The object is not to prevent
the foreign corporation from performing single acts, but to prevent it from
acquiring a domicile for the purpose of business without taking steps necessary
to render it amenable to suit in the local courts. The implication of the law is
that it was never the purpose of the legislature to exclude a foreign corporation
which happens to obtain an isolated order for business from the Philippines,
and thus, in effect, to permit persons to avoid their contracts made with such
foreign corporations.
There is no exact rule or governing principle as to what constitutes "doing" or
"engaging" or "transacting" business. Indeed, such case must be judged in the
light of its peculiar circumstances, upon its peculiar facts and upon the
language of the statute applicable. The true test, however, seems to be
whether the foreign corporation is continuing the body or substance of the
business or enterprise for which it was organized.
Article 44 of the Omnibus Investments Code of 1987 defines the
phrase to include:
“soliciting orders, purchases, service contracts, opening offices,
whether called "liaison" offices or branches; appointing
representatives or distributors who are domiciled in the Philippines
or who in any calendar year stay in the Philippines for a period or
periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any
domestic business firm, entity or corporation in the Philippines,
and any other act or acts that imply a continuity or commercial
dealings or arrangements and contemplate to that extent the
performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business
organization.”
Thus, a foreign corporation with a settling agent in the Philippines which issued
twelve marine policies covering different shipments to the Philippines and a
foreign corporation which had been collecting premiums on outstanding
policies were regarded as doing business here.
The same rule was observed relating to a foreign corporation with an "exclusive
distributing agent" in the Philippines, and which has been selling its products
here since 1929, and a foreign corporation engaged in the business of
manufacturing and selling computers worldwide, and had installed at least 26
different products in several corporations in the Philippines, and allowed its
registered logo and trademark to be used and made it known that there exists
a designated distributor in the Philippines.
In Georg Grotjahn GMBH and Co. vs. Isnani, it was held that the
uninterrupted performance by a foreign corporation of acts pursuant
to its primary purposes and functions as a regional area headquarters
for its home office, qualifies such corporation as one doing business
in the country.
These foregoing instances should be distinguished from a single or
isolated transaction or occasional, incidental, or casual transactions,
which do not come within the meaning of the law, for in such case,
the foreign corporation is deemed not engaged in business in the
Philippines.
Where a single act or transaction, however, is not merely incidental or casual
but indicates the foreign corporation's intention to do other business in the
Philippines, said single act or transaction constitutes "doing" or "engaging in"
or "transacting" business in the Philippines.
In determining whether a corporation does business in the Philippines or not,
aside from their activities within the forum, reference may be made to the
contractual agreements entered into by it with other entities in the country.
Thus, in the Top-Weld case (supra), the foreign corporation's LICENSE AND
TECHNICAL AGREEMENT and DISTRIBUTOR AGREEMENT with their local
contacts were made the basis of their being regarded by this Tribunal as
corporations doing business in the country. Likewise, in Merill Lynch Futures,
Inc. vs. Court of Appeals, etc., the FUTURES CONTRACT entered into by the
petitioner foreign corporation weighed heavily in the court's ruling.
With the above-stated precedents in mind, we are persuaded to conclude that
private respondent had been "engaged in" or "doing business" in the
Philippines for some time now. This is the inevitable result after a scrutiny of
the different contracts and agreements entered into by ITEC with its various
business contacts in the country, particularly ASPAC and Telephone Equipment
Sales and Services, Inc. (TESSI, for brevity). The latter is a local electronics
firm engaged by ITEC to be its local technical representative, and to create a
service center for ITEC products sold locally. Its arrangements, with these
entities indicate convincingly ITEC's purpose to bring about the situation
among its customers and the general public that they are dealing directly with
ITEC, and that ITEC is actively engaging in business in the country.
In its Master Service Agreement with TESSI, private respondent required its
local technical representative to provide the employees of the technical and
service center with ITEC identification cards and business cards, and to
correspond only on ITEC, Inc., letterhead. TESSI personnel are instructed to
answer the telephone with "ITEC Technical Assistance Center.", such telephone
being listed in the telephone book under the heading of ITEC Technical
Assistance Center, and all calls being recorded and forwarded to ITEC on a
weekly basis.
What is more, TESSI was obliged to provide ITEC with a monthly report
detailing the failure and repair of ITEC products, and to requisition monthly the
materials and components needed to replace stock consumed in the warranty
repairs of the prior month.
A perusal of the agreements between petitioner ASPAC and the respondents
shows that there are provisions which are highly restrictive in nature, such as
to reduce petitioner ASPAC to a mere extension or instrument of the private
respondent.
The "No Competing Product" provision of the Representative Agreement
between ITEC and ASPAC provides: "The Representative shall not represent or
offer for sale within the Territory any product which competes with an existing
ITEC product or any product which ITEC has under active development."
Likewise pertinent is the following provision: "When acting under this
Agreement, REPRESENTATIVE is authorized to solicit sales within the Territory
on ITEC's behalf but is authorized to bind ITEC only in its capacity as
145 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Representative and no other, and then only to specific customers and on terms
and conditions expressly authorized by ITEC in writing."
When ITEC entered into the disputed contracts with ASPAC and
TESSI, they were carrying out the purposes for which it was created,
i.e., to market electronics and communications products. The terms
and conditions of the contracts as well as ITEC's conduct indicate that they
established within our country a continuous business, and not merely one of a
temporary character.
Notwithstanding such finding that ITEC is doing business in the country,
petitioner is nonetheless estopped from raising this fact to bar ITEC from
instituting this injunction case against it.
A foreign corporation doing business in the Philippines may sue in Philippine
Courts although not authorized to do business here against a Philippine citizen
or entity who had contracted with and benefited by said corporation. To put
it in another way, a party is estopped to challenge the personality of
a corporation after having acknowledged the same by entering into
a contract with it. And the doctrine of estoppel to deny corporate existence
applies to a foreign as well as to domestic corporations. One who has dealt
with a corporation of foreign origin as a corporate entity is estopped to deny
its corporate existence and capacity: The principle will be applied to prevent a
person contracting with a foreign corporation from later taking advantage of
its noncompliance with the statutes chiefly in cases where such person has
received the benefits of the contract.
The rule is deeply rooted in the time-honored axiom of Commodum ex injuria
sua non habere debet — no person ought to derive any advantage of his own
wrong. This is as it should be for as mandated by law, "every person must in
the exercise of his rights and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good faith."
Concededly, corporations act through agents, like directors and officers.
Corporate dealings must be characterized by utmost good faith and fairness.
Corporations cannot just feign ignorance of the legal rules as in most cases,
they are manned by sophisticated officers with tried management skills and
legal experts with practiced eye on legal problems. Each party to a corporate
transaction is expected to act with utmost candor and fairness and, thereby
allow a reasonable proportion between benefits and expected burdens. This is
a norm which should be observed where one or the other is a foreign entity
venturing in a global market.
As observed by this Court in TOP-WELD (supra), viz:
The parties are charged with knowledge of the existing law at the time they
enter into a contract and at the time it is to become operative. (Twiehaus v.
Rosner, 245 SW 2d 107; Hall v. Bucher, 227 SW 2d 98). Moreover, a person is
presumed to be more knowledgeable about his own state law than his alien or
foreign contemporary. In this case, the record shows that, at least, petitioner
had actual knowledge of the applicability of R.A. No. 5455 at the time the
contract was executed and at all times thereafter. This conclusion is compelled
by the fact that the same statute is now being propounded by the petitioner to
bolster its claim. We, therefore sustain the appellate court's view that "it was
incumbent upon TOP-WELD to know whether or not IRTI and ECED were
properly authorized to engage in business in the Philippines when they entered
into the licensing and distributorship agreements." The very purpose of the law
was circumvented and evaded when the petitioner entered into said
agreements despite the prohibition of R.A. No. 5455. The parties in this case
being equally guilty of violating R.A. No. 5455, they are in pari delicto, in which
case it follows as a consequence that petitioner is not entitled to the relief
prayed for in this case.
The doctrine of lack of capacity to sue based on the failure to acquire
a local license is based on considerations of sound public policy. The
license requirement was imposed to subject the foreign corporation doing
business in the Philippines to the jurisdiction of its courts. It was never
intended to favor domestic corporations who enter into solitary
transactions with unwary foreign firms and then repudiate their
obligations simply because the latter are not licensed to do business
in this country.

In Antam Consolidated Inc. vs. Court of Appeals, et al. we expressed our
chagrin over this commonly used scheme of defaulting local companies which
are being sued by unlicensed foreign companies not engaged in business in
the Philippines to invoke the lack of capacity to sue of such foreign companies.
Obviously, the same ploy is resorted to by ASPAC to prevent the injunctive
action filed by ITEC to enjoin petitioner from using knowledge possibly acquired
in violation of fiduciary arrangements between the parties.
By entering into the "Representative Agreement" with ITEC, Petitioner is
charged with knowledge that ITEC was not licensed to engage in business
activities in the country, and is thus estopped from raising in defense such
incapacity of ITEC, having chosen to ignore or even presumptively take
advantage of the same.
In Top-Weld, we ruled that a foreign corporation may be exempted from the
license requirement in order to institute an action in our courts if its
representative in the country maintained an independent status during the
existence of the disputed contract. Petitioner is deemed to have acceded to
such independent character when it entered into the Representative
Agreement with ITEC, particularly, provision 6.2 (supra).
IN VIEW OF THE FOREGOING PREMISES, the instant Petition is hereby
DISMISSED. The decision of the Court of Appeals dated June 7, 1991,
upholding the RTC Order dated February 22, 1991, denying the petitioners'
Motion to Dismiss, and ordering the issuance of the Writ of Preliminary
Injunction, is hereby affirmed in toto.
TRADEMARK INFRINGEMENT
WESTERN EQUIPMENT AND SUPPLY COMPANY, WESTERN ELECTRIC
COMPANY, INC., W. Z. SMITH and FELIX C. REYES, plaintiffs-appellees,
vs.
FIDEL A. REYES, as Director of the Bureau of Commerce and Industry,
HENRY HERMAN, PETER O'BRIEN, MANUEL B. DIAZ, FELIPE MAPOY
and ARTEMIO ZAMORA, defendants-appellants.
(G.R. No. L-27897 December 2, 1927)
FACTS: The present case was filed and tried on the following facts:
1. Petitioner Western Equipment and Supply Company, through its duly
authorized agent, the plaintiff, Felix Reyes, applied to the defendant
Director of Bureau of Commerce and Industry (BCI) for the issuance of a
license to engage in business in the Philippine Islands which was granted
on Aug. 23, 1926.
2. On the other hand, Western Electric Company, Inc, also organized and
existing under the laws of Nevada, was not issued such license but it was
alleged that it has never engaged in business herein.
3. That a Philippine corporation known as Electric Supply Company, Inc.,
where defendant Henry Herman was president, has been importing the
manufactures of plaintiff Western Electric Company, Inc.
4. That defendant Henry Herman signed and filed AOI with the defendant
Fidel Reyes, as Director of BCI, with the intention to organize a domestic
corporation to be known as “Western Electric Company, Inc.” for the
purpose, among others things, of manufacturing, buying, selling and
dealing generally in electrical and telephone apparatus and supplies” in
violation of a trademark over “Western Electric” existing in Washington,
DC.
The lower court decided in favor of plaintiffs.
ISSUE: WON plaintiff corporation can maintain an action to restraint residents
and inhabitants of the Philippines from organizing a corporation, when said
inhabitants have knowledge of the existence of such foreign corporation?
HELD: Yes. In the case of Marshall-Wells Co. vs. Henry W. Elser & Co. (46
Phil., 70, 76), this court held:
146 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
The noncompliance of a foreign corporation with the statute may be pleaded
as an affirmative defense. Thereafter, it must appear from the evidence,
first, that the plaintiff is a foreign corporation, second, that it is doing
business in the Philippines, and third, that it has not obtained the proper
license as provided by the statute.
If it had been stipulated that the plaintiff, Western Electric Company, Inc., had
been doing business in the Philippine Islands without first obtaining a license,
another and a very different question would be presented. That company is
not here seeking to enforce any legal or contract rights arising from, or growing
out of, any business which it has transacted in the Philippine Islands. The sole
purpose of the action:
"Is to protect its reputation, its corporate name, its goodwill,
whenever that reputation, corporate name or goodwill have,
through the natural development of its trade, established
themselves." And it contends that its rights to the use of its corporate and
trade name:
Is a property right, a right in rem, which may assert and protect against all the
world, in any of the courts of the world — even in jurisdictions where it does
not transact business — just the same as it may protect its tangible property,
real or personal, against trespass, or conversion. Citing sec. 10, Nims on Unfair
Competition and Trade-Marks and cases cited; secs. 21-22, Hopkins on Trade-
Marks, Trade Names and Unfair Competition and cases cited." That point is
sustained by the authorities, and is well stated in Hanover Star Milling Co. vs.
Allen and Wheeler Co. (208 Fed., 513), in which they syllabus says:
Since it is the trade and not the mark that is to be protected, a
trade-mark acknowledges no territorial boundaries of
municipalities or states or nations, but extends to every market
where the trader's goods have become known and identified by the
use of the mark
It is very apparent that the purpose and intent of Herman and his associates
in seeking to incorporate under the name of Western Electric Company, Inc.,
was to unfairly and unjustly compete in the Philippine Islands with the Western
Electric Company, Inc., in articles which are manufactured by, and bear the
name of, that company, all of which is prohibited by Act No. 666, and was
made known to the defendant Reyes by the letter known in the record to the
defendant Reyes by the letter known in the record as Exhibit A.
The plaintiff, Western Electric Company, Inc., has been in existence as a
corporation for over fifty years, during which time it has established a
reputation all over the world including the Philippine Islands, for the kind and
quality of its manufactured articles, and it is very apparent that the whole
purpose and intent of Herman and his associates in seeking to incorporate
another corporation under the identical name of Western Electric Company,
Inc., and for the same identical purpose as that of the plaintiff, is to trespass
upon and profit by its good name and business reputation. The very fact that
Herman and his associates have sought the use of that particular name for that
identical purpose is conclusive evidence of the fraudulent intent with which it
is done.
The judgment of the lower court is affirmed, with costs
GENERAL GARMENTS CORPORATION, petitioner,
vs.
THE DIRECTOR OF PATENTS and PURITAN SPORTSWEAR
CORPORATION, respondents
(G.R. No. L-24295; September 30, 1971)
FACTS: Respondent Puritan Sportswear Corporation, a corporation organized
and exiting under the laws of the state of Pensylvania, USA filed a petition with
the Philippine Patent Office for the cancellation of the petitioner’s trademark
“Puritan”, alleging ownership and prior use in the Philippines of the said
trademark for assorted men’s wear, such as sweaters, shirts, jackets,
undershirts and briefs, which has not been abandoned. It further alleged that
the registration thereof by petitioner had been obtained fraudulently and in
violation of Sec. 17(c) of RA 166, in relation to Sec. 4(d) thereof.
Petitioner filed a motion to dismiss on several grounds which may be
synthesized to respondent’s lack of capacity to maintain suit in the Philippines
which was denied.
ISSUE: WON Respondent Puritan Sportswear can maintain the suit?
HELD: Yes. That respondent is a juridical person should be beyond serious
dispute. The fact that it may not transact business in the Philippines unless it
has obtained a license for that purpose, nor maintain a suit in Philippine courts
for the recovery of any debt, claim or demand without such license (Secs. 68
and 69, Corporation Law) does not make respondent any less a juridical
person. Indeed an exception to the license requirement has been recognized
in this jurisdiction, namely, where a foreign corporation sues on an isolated
transaction. As first enunciated in Marshall-Wells Co. v. Elser & Co. "the object
of the statute (Secs. 68 and 69, Corporation Law) was not to prevent the
foreign corporation from performing single acts, but to prevent it from
acquiring a domicile for the purpose of business without taking the steps
necessary to render it amenable to suit in the local courts ... the implication of
the law (being) that it was never the purpose of the legislature to exclude a
foreign corporation which happens to obtain an isolated order for business
from the Philippines, from securing redress in the Philippine Courts. ..." The
principle has since then been applied in a number of other cases.
A more or less analogous question arose in Western Equipment & Supply Co.
v. Reyes, 51 Phil. 115. The syllabus of the report, which is a correct statement
of the doctrine laid down in the decision, reads as follows:
A foreign corporation which has never done ... business in the Philippine
Islands and which is unlicensed and unregistered to do business here, but
is widely and favorably known in the Islands through the use therein of its
products bearing its corporate and trade name has a legal right to maintain
an action in the Islands.
Parenthetically, it may be stated that the ruling in the Mentholatum case was
subsequently derogated when Congress, purposely to "counteract the effects"
of said case, enacted Republic Act No. 638, inserting Section 21-A in the
Trademark Law, which allows a foreign corporation or juristic person
to bring an action in Philippine courts for infringement of a mark or
trade-name, for unfair competition, or false designation of origin and
false description, "whether or not it has been licensed to do business
in the Philippines under Act Numbered Fourteen hundred and fifty-
nine, as amended, otherwise known as the Corporation Law, at the
time it brings complaint."
Petitioner argues that Section 21-A militates against respondent's capacity to
maintain a suit for cancellation, since it requires, before a foreign corporation
may bring an action, that its trademark or tradename has been registered
under the Trademark Law. The argument misses the essential point in the said
provision, which is that the foreign corporation is allowed there under to sue
"whether or not it has been licensed to do business in the Philippines" pursuant
to the Corporation Law (precisely to counteract the effects of the decision in
the Mentholatum case).
In any event, respondent in the present case is not suing for infringement or
unfair competition under Section 21-A, but for cancellation under Section 17,
on one of the grounds enumerated in Section 4. The first kind of action, it
maybe stated, is cognizable by the Courts of First Instance (Sec. 27); the
second partakes of an administrative proceeding before the Patent Office (Sec.
18, in relation to Sec. 8). And while a suit under Section 21-A requires that the
mark or tradename alleged to have been infringed has been "registered or
assigned" to the suing foreign corporation, a suit for cancellation of the
registration of a mark or tradename under Section 17 has no such requirement.
For such mark or tradename should not have been registered in the first place
(and consequently may be cancelled if so registered) if it "consists of or
comprises a mark or tradename which so resembles a mark or tradename ...
previously used in the Philippines by another and not abandoned, as to be
likely, when applied to or used in connection with goods, business or services
of the applicant, to cause confusion or mistake or to deceive purchasers;
..."(Sec. 4d).
147 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
WHEREFORE, the petition is dismissed, and the resolution of the Director of
Patents dated August 6, 1964 is affirmed, with costs.
PUMA SPORTSCHUHFABRIKEN RUDOLF DASSLER, K.G., petitioner
vs.
THE INTERMEDIATE APPELLATE COURT and MIL-ORO
MANUFACTURING CORPORATION, respondents
(G.R. No. 75067; February 26, 1988)
FACTS: Petitioner, a corporation organized and existing under the laws of the
Federal Republic of Germany filed a complaint of patent or trademark
infringement against herein respondent before the RTC of Makati.
Private respondent filed a motion to dismiss on the ground that petitioner had
no capacity to sue which was denied. On appeal, the CA reversed the trial
court.
ISSUE: WON petitioner had capacity to sue?
HELD: Yes. Petitioner maintains that it has substantially complied with the
requirements of Section 21-A of Republic Act R.A. No. 166, as amended.
According to the petitioner, its complaint specifically alleged that it is not doing
business in the Philippines and is suing under the said Repulbic Act; that
Section 21-A thereof provides that "the country of which the said corporation
or juristic person is a citizen, or in which it is domiciled, by treaty, convention
or law, grants a similar privilege to corporate or juristic persons of the
Philippines" but does not mandatorily require that such reciprocity between the
Federal Republic of Germany and the Philippines be pleaded; that such
reciprocity arrangement is embodied in and supplied by the Union Convention
for the Protection of Industrial Property Paris Convention) to which both the
Philippines and Federal Republic of Germany are signatories and that since the
Paris 'Convention is a treaty which, pursuant to our Constitution, forms part of
the law of the land, our courts are bound to take judicial notice of such treaty,
and, consequently, this fact need not be averred in the complaint.
We agree.
In the leading case of La Chemise Lacoste, S.A .v. Fernandez, (129 SCRA 373),
we ruled:
But even assuming the truth of the private respondents allegation that the
petitioner failed to allege material facto in its petition relative to capacity to
sue, the petitioner may still maintain the present suit against respondent
Hernandes. As early as 1927, this Court was, and it still is, of the view that
a foreign corporation not doing business in the Philippines needs
no license to sue before Philippine courts for infringement of
trademark and unfair competition. Thus, in Western Equipment and
Supply Co. v. Reyes (51 Phil. 11 5), this Court held that a foreign corporation
which has never done any business in the Philippines and which is unlicensed
and unregistered to do business here, but is widely and favorably known in
the Philippines through the use therein of its products bearing its corporate
and tradename, has a legal right to maintain an action in the Philippines to
restrain the residents and inhabitants thereof from organizing a corporation
therein bearing the same name as the foreign corporation, when it appears
that they have personal knowledge of the existence of such a foreign
corporation, and it is apparent that the purpose of the proposed domestic
corporation is to deal and trade in the same goods as those of the foreign
corporation.
Quoting the Paris Convention and the case of Vanity Fair Mills, Inc. v. T. Eaton,
Co. (234 F. 2d 633), this Court further said:
By the same token, the petitioner should be given the same treatment in the
Philippines as we make available to our own citizens. We are obligated to
assure to nationals of 'countries of the Union' an effective protection against
unfair competition in the same way that they are obligated to similarly
protect Filipino citizens and firms.
In the case of of Cerverse Rubber Corporation V. Universal Rubber Products,
Inc. (174 SCRA 165), we likewise re-aafirmed our adherence to the Paris
Convention:

The ruling in the aforecited case is in consonance with the Convention of
Converse Rubber Corporation v. Universal Rubber Products, Inc. (I 47 SCRA
165), we likewise re-affirmed our adherence to the Paris Convention: the
Union of Paris for the Protection of Industrial Property to which the
Philippines became a party on September 27, 1965. Article 8 thereof
provides that 'a trade name [corporation name] shall be protected in all the
countries of the Union without the obligation of filing or registration, whether
or not it forms part of the trademark.'
The mandate of the aforementioned Convention finds implementation in
Section 37 of RA No. 166, otherwise known as the trademark Law:
Rights of Foreign Registrants. — Persons who are nationals of, domiciled in,
or have a bona fide or effective business or commercial establishment in any
foreign country, which is a party to an international convention or treaty
relating to marks or tradenames on the represssion of unfair competition to
which the Philippines may be party, shall be entitled to the benefits and
subject to the provisions of this Act ...
Tradenames of persons described in the first paragraph of this section shall
be protected without the obligation of filing or registration whether or not
they form part of marks.
We, therefore, hold that the petitioner had the legal capacity to file the action
below.
SUING FOR VIOLATION OF THE PENAL CODE AND AGENT DOING
BUSINESS UNDER ITS OWN NAME
LA CHEMISE LACOSTE, S. A., petitioner,
vs.
HON. OSCAR C. FERNANDEZ, Presiding Judge of Branch XLIX,
Regional Trial Court, National Capital Judicial Region, Manila and
GOBINDRAM HEMANDAS, respondents.
(G.R. No. L-63796-97; May 2, 1984)
GOBINDRAM HEMANDAS SUJANANI, petitioner,
vs.
HON. ROBERTO V. ONGPIN, in his capacity as Minister of Trade and
Industry, and HON. CESAR SAN DIEGO, in his capacity as Director of
Patents, respondents
(G.R. No. L-65659 May 2l, 1984)
FACTS: Petitioner, a corporation organized and existing under the laws of
France and not doing business in the Philippines, filed with the NBI a letter-
complaint alleging therein the acts of unfair competition being committed by
respondent Hemandas and requesting their assistance in his apprehension and
prosecution, after Hermandas acquired a patent for the use of “CHEMISE
LACOSTE & DEVICE”.
NBI filed with the respondent court for two search warrant which was issued
and for which a motion to quash was filed by Hermandas alleging that his
trademark is different from that of petitioner, which was granted by respondent
court.
ISSUE: WON petitioner, having a representative, is doing business in the
Philippines?
HELD: No. Respondent states that not only is the petitioner not doing business
in the Philippines but it also is not licensed to do business in the Philippines.
He also cites the case of Leviton Industries v. Salvador (114 SCRA 420) to
support his contention The Leviton case, however, involved a complaint for
unfair competition under Section 21-A of Republic Act No. 166 which provides:
Sec. 21 — A. Any foreign corporation or juristic person to which a mark or
tradename has been registered or assigned under this Act may bring an
action hereunder for infringement, for unfair competition, or false
designation of origin and false description, whether or not it has been
licensed to do business in the Philippines under Act numbered Fourteen
Hundred and Fifty-Nine, as amended, otherwise known as the Corporation
148 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Law, at the time it brings the complaint; Provided, That the country of which
the said foreign corporation or juristic person is a citizen, or in which it is
domiciled, by treaty, convention or law, grants a similar privilege to
corporate or juristic persons of the Philippines.
We held that it was not enough for Leviton, a foreign corporation organized
and existing under the laws of the State of New York, United States of America,
to merely allege that it is a foreign corporation. It averred in Paragraph 2 of its
complaint that its action was being filed under the provisions of Section 21-A
of Republic Act No. 166, as amended. Compliance with the requirements
imposed by the above-cited provision was necessary because Section 21-A of
Republic Act No. 166 having explicitly laid down certain conditions in a specific
proviso, the same must be expressly averred before a successful prosecution
may ensue. It is therefore, necessary for the foreign corporation to comply
with these requirements or aver why it should be exempted from them, if such
was the case. The foreign corporation may have the right to sue before
Philippine courts, but our rules on pleadings require that the qualifying
circumstances necessary for the assertion of such right should first be
affirmatively pleaded.
In contradistinction, the present case involves a complaint for violation
of Article 189 of the Revised Penal Code. The Leviton case is not
applicable.
Asserting a distinctly different position from the Leviton argument, Hemandas
argued in his brief that the petitioner was doing business in the Philippines but
was not licensed to do so. To support this argument, he states that the
applicable ruling is the case of Mentholatum Co., Inc. v. Mangaliman: (72 Phil.
524) where Mentholatum Co. Inc., a foreign corporation and Philippine-
American Drug Co., the former's exclusive distributing agent in the Philippines
filed a complaint for infringement of trademark and unfair competition against
the Mangalimans.
The argument has no merit. The Mentholatum case is distinct from and
inapplicable to the case at bar. Philippine American Drug Co., Inc., was
admittedly selling products of its principal Mentholatum Co., Inc., in the latter's
name or for the latter's account. Thus, this Court held that "whatever
transactions the Philippine-American Drug Co., Inc. had executed in view of
the law, the Mentholatum Co., Inc., did it itself. And, the Mentholatum Co.,
Inc., being a foreign doing business in the Philippines without the license
required by Section 68 of the Corporation Law, it may not prosecute this action
for violation of trademark and unfair competition."
In the present case, however, the petitioner is a foreign corporation not doing
business in the Philippines. The marketing of its products in the Philippines is
done through an exclusive distributor, Rustan Commercial Corporation. The
latter is an independent entity which buys and then markets not only products
of the petitioner but also many other products bearing equally well-known and
established trademarks and tradenames. In other words, Rustan is not a mere
agent or conduit of the petitioner.
The rules and regulations promulgated by the Board of Investments pursuant
to its rule-making power under Presidential Decree No. 1789, otherwise known
as the Omnibus Investment Code, support a finding that the petitioner is not
doing business in the Philippines. Rule I, Sec. 1 (g) of said rules and
regulations defines "doing business" as one" which includes, inter alia:
(1) ... A foreign firm which does business through middlemen acting
on their own names, such as indentors, commercial brokers or
commission merchants, shall not be deemed doing business in the
Philippines. But such indentors, commercial brokers or commission
merchants shall be the ones deemed to be doing business in the Philippines.
(2) Appointing a representative or distributor who is domiciled in
the Philippines, unless said representative or distributor has an
independent status, i.e., it transacts business in its name and for its
account, and not in the name or for the account of a principal. Thus, where
a foreign firm is represented by a person or local company which does not
act in its name but in the name of the foreign firm the latter is doing business
in the Philippines.
xxx xxx xxx

Applying the above provisions to the facts of this case, we find and conclude
that the petitioner is not doing business in the Philippines. Rustan is
actually a middleman acting and transacting business in its own name and or
its own account and not in the name or for the account of the petitioner.
ISSUE2: WON the criminal case can be maintained even if the foreign
corporation is doing business without a license?
HELD: Yes. But even assuming the truth of the private respondent's allegation
that the petitioner failed to allege material facts in its petition relative to
capacity to sue, the petitioner may still maintain the present suit against
respondent Hemandas. As early as 1927, this Court was, and it still is,
of the view that a foreign corporation not doing business in the
Philippines needs no license to sue before Philippine courts for
infringement of trademark and unfair competition.
Our recognizing the capacity of the petitioner to sue is not by any means novel
or precedent setting. Our jurisprudence is replete with cases illustrating
instances when foreign corporations not doing business in the Philippines may
nonetheless sue in our courts. In East Board Navigation Ltd, v. Ysmael and Co.,
Inc. (102 Phil. 1), we recognized a right of foreign corporation to sue on
isolated transactions. In General Garments Corp. v. Director of Patents (41
SCRA 50), we sustained the right of Puritan Sportswear Corp., a foreign
corporation not licensed to do and not doing business in the Philippines, to file
a petition for cancellation of a trademark before the Patent Office.
More important is the nature of the case which led to this petition. What
preceded this petition for certiorari was a letter complaint filed before the NBI
charging Hemandas with a criminal offense, i.e., violation of Article 189 of the
Revised Penal Code. If prosecution follows after the completion of the
preliminary investigation being conducted by the Special Prosecutor the
information shall be in the name of the People of the Philippines and
no longer the petitioner which is only an aggrieved party since a
criminal offense is essentially an act against the State. It is the latter
which is principally the injured party although there is a private right violated.
Petitioner's capacity to sue would become, therefore, of not much
significance in the main case. We cannot snow a possible violator of our
criminal statutes to escape prosecution upon a far-fetched contention that the
aggrieved party or victim of a crime has no standing to sue.
ISSUE3: WON petitioner has a right to maintain a suit for infringement of
trademarks?
HELD: Yes. We are moreover recognizing our duties and the rights of foreign
states under the Paris Convention for the Protection of Industrial Property to
which the Philippines and France are parties. We are simply interpreting and
enforcing a solemn international commitment of the Philippines embodied in a
multilateral treaty to which we are a party and which we entered into because
it is in our national interest to do so.
The Paris Convention provides in part that:
ARTICLE 2
(2) Nationals of each of the countries of the Union shall as regards the
protection of industrial property, enjoy in all the other countries of the Union
the advantages that their respective laws now grant, or may hereafter grant,
to nationals, without prejudice to the rights specially provided by the present
Convention. Consequently, they shall have the same protection as the latter,
and the same legal remedy against any infringement of their rights, provided
they observe the conditions and formalities imposed upon nationals.
xxx xxx xxx
ARTICLE 6
(1) The countries of the Union undertake, either administratively if their
legislation so permits, or at the request of an interested party, to refuse or
to cancel the registration and to prohibit the use of a trademark which
constitutes a reproduction, imitation or translation, liable to create
confusion, of a mark considered by the competent authority of the country
of registration or use to be well-known in that country as being already the
149 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
mark of a person entitled to the benefits of the present Convention and used
for Identical or similar goods. These provisions shall also apply when the
essential part of the mark constitutes a reproduction of any such well-known
mark or an imitation liable to create confusion therewith.
xxx xxx xxx
ARTICLE 8
A trade name shall be protected in all the countries of the Union without the
obligation of filing or registration, whether or not it forms part of a
trademark.
xxx xxx xxx
ARTICLE 10bis
(1) The countries of the Union are bound to assure to persons entitled to
the benefits of the Union effective protection against unfair competition
A treaty or convention is not a mere moral obligation to be enforced
or not at the whims of an incumbent head of a Ministry. It creates a
legally binding obligation on the parties founded on the generally
accepted principle of international law of pacta sunt servanda which
has been adopted as part of the law of our land. (Constitution, Art.
II, Sec. 3).
We have carefully gone over the records of all the cases filed in this Court and
find more than enough evidence to sustain a finding that the petitioner is the
owner of the trademarks "LACOSTE", "CHEMISE LACOSTE", the crocodile or
alligator device, and the composite mark of LACOSTE and the representation
of the crocodile or alligator. Any pretensions of the private respondent that he
is the owner are absolutely without basis. Any further ventilation of the issue
of ownership before the Patent Office will be a superfluity and a dilatory tactic.
The records show that the goodwill and reputation of the petitioner's products
bearing the trademark LACOSTE date back even before 1964 when LACOSTE
clothing apparels were first marketed in the Philippines. To allow Hemandas to
continue using the trademark Lacoste for the simple reason that he was the
first registrant in the Supplemental Register of a trademark used in
international commerce and not belonging to him is to render nugatory the
very essence of the law on trademarks and tradenames.
WHEREFORE, the petition in G.R. NOS. 63797-97 is hereby GRANTED. The
order dated April 22, 1983 of the respondent regional trial court is REVERSED
and SET ASIDE.
F. CAPACITY TO SUE
GENERAL RULE: A corporation’s capacity to sue must be affirmatively
pleaded in order that it may proceed and effectively institute a case in
Philippine courts. Thus, in the case for instance of a complaint for unfair labor
competition under Sec. 21-A of RA No. 166, it was held that it is necessary for
the foreign corporation to comply with the provision thereof or aver why it
should be exempted from them, if such be the case. The foreign corporation
may have the right to sue before our courts but our rules on pleadings require
that the qualifying circumstances necessary for the assertion of such right
should first be affirmatively pleaded (Leviton Industries vs Salvador).
EXCEPTIONS:
EFFECT OF NON-PLEADING: If the dismissal of the case is based on the
failure of the foreign corporation to aver its capacity to sue, would not,
however, bar the institution of the same action, dismissal should not be
allowed, especially so if it would be an idle, circuitous ceremony considering
the absence of any meritorious substantial defense of the defendant. Technical
rules should not be accorded undue importance to frustrate and defeat a plainly
valid claim (Olympia Business Machines vs. E. Razon, Inc.)
COMPLAINT BASED ON VIOLATION OF RPC OR THE CORPORATION
IS MERELY DEFENDING ITSELF: averment of capacity to sue is not likewise
necessary as laid down in the case of Chemise Lacoste vs. Fernandez, or when
the foreign corporation is not suing or maintaining a suit but is merely
defending itself from one filed against it (Times, Inc. vs. Reyes).
ATLANTIC MUTUAL INSURANCE COMPANY and CONTINENTAL
INSURANCE COMPANY, plaintiffs and appellants,
vs.
CEBU STEVEDORING CO., INC., defendant and appellee
(G.R. No. L-18961; August 31, 1966)
FACTS: Plaintiff-appellants, organized and existing under the laws of the US,
sued herein defendant-appellee, as subrogee to the shipper and consignee,
alleging that the latter undertook to carry a shipment of copra for delivery to
P&G Company at Cebu City but upon discharge, a portion of the copra was
found damaged.
Defendant moved to dismiss on the ground that the complaints on the ground
of failure to allege compliance with Sec. 69 of the Corporation Law which was
granted after failure of the plaintiff to comply with the amendment of the
complaint.
ISSUE: WON plaintiff-appellants have the right to sue as to the defects n the
pleadings and procedures?
HELD: No. It should be noted that insofar as the allegations in the complaint
have a bearing on appellants' capacity to sue, all that is averred is that they
are both foreign corporations existing under the laws of the United States. This
averment conjures two alternative possibilities: either they are engaged in
business in the Philippines or they are not so engaged. If the first, they must
have been duly licensed in order to maintain this suit; if the second, if the
transaction sued upon is singular and isolated, no such license is required. In
either case, the qualifying circumstance is an essential part of the element of
plaintiffs' capacity to sue and must be affirmatively pleaded.
To be sure, under the Rules of Court (Section 11, Rule 15) in force prior to the
promulgation of the Revised Rules on January 1, 1964, it was not necessary to
aver the capacity of a party to sue except to the extent required to show
jurisdiction of the court. In our opinion, however, such rule does not apply in
all situations and under all circumstances. The theory behind a similar rule in
the United States is "that capacity ... of a party for purpose of suit is not in
dispute in the great bulk of cases, and that pleading and proof can be simplified
by a rule that an averment of such matter is not necessary, except to show
jurisdiction."1 But where as in the present case, the law denies to a foreign
corporation the right to maintain suit unless it has previously complied with a
certain requirement, then such compliance, or the fact that the suing
corporation is exempt therefrom, becomes a necessary averment in the
complaint. These are matters peculiarly within the knowledge of appellants
alone, and it would be unfair to impose upon appellee the burden of asserting
and proving the contrary. It is enough that foreign corporations are allowed by
law to seek redress in our courts under certain conditions: the interpretation
of the law should not go so far as to include, in effect, an inference that those
conditions have been met from the mere fact that the party suing is a foreign
corporation.
It was indeed in the light of these and other consideration that this Court has
seen fit to amend the former rule by requiring in the Revised Rules (Section 4,
Rule 8) that "facts showing the capacity of a party to sue or be sued or the
authority of a party to sue or be sued in a representative capacity or the legal
existence of an organized association of persons that is made a party, must be
averred."
The orders appealed from are affirmed, with costs against plaintiffs-appellants
OLYMPIA BUSINESS MACHINES CO. (PHIL.) INC. and CALIFORNIA
INSURANCE CO., LTD., petitioners,
vs.
E. RAZON, INC., TOYO LINE, LTD., and SEA BRIDGE CONTAINER
SHIPPING LINES, INC., respondents.
(G.R. No. 75631; October 28, 1987)
FACTS: Olympia Office Machines, Ltd., a foreign corporation with offices at
Hongkong, shipped 300 portable typewriters to its sister company in Manila,
Olympia Business Machines Company (Phil.), Inc., such shipment insured with
California Insurance Co., Ltd. another foreign corporation.
150 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
The typewriters were discharged at North Harbor, Manila into the custody of
the carrier’s agent which in turn turned it over to E. Razon, Inc. While in the
latter’s possession, part of the shipment was stolen. California Insurance was
subrogated to the claim for loss after paying Olympia (Phil).
Both Olympia (Phil.) and California thereafter brought a suit against E. Razon,
Inc., the carrier and the container company, which had earlier refused to make
good the loss of the goods.
For E.Razon’s failure to appear at the pre-trial and after ex-parte reception of
evidence, the trial court decided for California. On Razon’s motion, the order
was set aside and Razon amended his answer that California is a foreign
corporation doing business in the Philippines without a license to do so and
that it cannot maintain suit in this jurisdiction. But once again, Razon failed to
appear at the pre-trial, as a result, the trial court revived the decision.
On appeal, the IAC reversed the decision holding, among others, that California
failed to allege in the complaint its capacity to sue.
ISSUE: WON the failure of California to aver its capacity to sue is fatal?
HELD: The slightest reflection will however immediately make — Tear that
between the factual settings of the Atlantic Mutual case and the case at bar,
there are distinctions of no little significance. In the former, Atlantic Mutual
Insurance Co. and Continental Insurance Co., two (2) American firms, brought
suit as subrogees of the shipper and/or consignee of the goods ensured
without joining the latter. In the case at hand, the action was instituted by
both the subrogee, California Insurance Co., Ltd., and the subrogor,
a domestic corporation, Olympia (Philippines) about whose capacity
to sue no dispute exists. In Atlantic Mutual, the plaintiffs' lack of
capacity to sue was raised by the defendant at the earliest
opportunity, through a motion to dismiss filed within the
reglementary period to answer in accordance with Rule 16 of the
Rules of Court. In the case at bar, the defendant was twice declared
in default, and the defense of lack of capacity to sue, was not raised
until after 'the first declaration of default had been lifted. Moreover,
there Is a pronouncement by the Court of Appeals in the instant case, that the
defendant had no meritorious defenses save that of lack of capacity to sue on
the part of the plaintiff.
These circumstances proscribe the application to the controversy at bar of the
doctrine in Atlantic Mutual. The defendant's conduct in this case strongly
indicates the absence of any valid defense on its part against the
plaintiffs' claims: the defendant failed to appear for pre-trial despite notice,
not once, but twice and was in consequence twice declared in default. The lack
of any meritorious defense on its part was in fact confirmed by the declaration
of the Court of Appeals, which it has not challenged, that three (3) errors
attributed by it to the Trial Court were "unmeritorious except the second," i.
e., plaintiff's lack of capacity to sue. Even assuming incapacity on the part of
California, no such incapacity may be attributed to its co-plaintiff, Olympia
Business Machines Co. (Phil.), Inc. And if strictly necessary, the latter could
quite easily execute a cancellation of the deed of subrogation or of re-
assignment of the right of action from California back to Olympia. Moreover,
the dismissal of the case at this stage, would not bar the institution by
California of the same action, this time alleging in its complaint that it was
suing on a single, isolated transaction. But this would be an Idle, circuitous
ceremony in the light of the unchallenged declaration by the Court of Appeals
of the absence of any meritorious substantial defense on the part of defendant
Razon. This would be to accord undue importance and significance to technical
rules, to allow an inflexible, unreasoning adherence to such technical rules to
frustrate and defeat a plainly valid claim.
WHEREFORE, the judgment of the Intermediate Appellate Court subject of the
appeal is reverse and that of the Trial Court, dated February 1, 1980 reinstated
and affirmed, with costs against the respondents.
TIME, INC., petitioner,
vs.
HON. ANDRES REYES, as Judge of the Court of First Instance of Rizal,
ELISEO S. ZARI, as Deputy Clerk of Court, Branch VI, Court of First
Instance of Rizal, ANTONIO J. VILLEGAS and JUAN PONCE ENRILE,
respondents.
(G.R. No. L-28882; May 31, 1971)
FACTS: Herein respondents Antonio Villegas and Juan Ponce Enrile sought to
recover from herein petitioner damages upon an alleged libel arising from a
publication of Time (Asia Edition) magazine, in its issue entitled “Corruption in
Asia”.
Petitioner filed a motion to dismiss on lack of jurisdiction and improper venue
which was deferred until after the trial of the case.
ISSUE: WON the petition for certiorari and prohibition will prosper?
HELD: The dismissal of the present petition is asked on the ground that the
petitioner foreign corporation failed to allege its capacity to sue in the courts
of the Philippines. Respondents rely on section 69 of the Corporation law, which
provides:
SEC. 69. No foreign corporation or corporations formed, organized, or
existing under any laws other than those of the Philippines shall be permitted
to ... maintain by itself or assignee any suit for the recovery of any debt,
claim, or demand whatever, unless it shall have the license prescribed in the
section immediately preceding. ..." ...;
They also invoke the ruling in Marshall-Wells Co. vs. Elser & Co., Inc. 7 that no
foreign corporation may be permitted to maintain any suit in the local courts
unless it shall have the license required by the law, and the ruling in Atlantic
Mutual Ins. Co., Inc. vs. Cebu Stevedoring Co., Inc. 8 that "where ... the law
denies to a foreign corporation the right to maintain suit unless it has previously
complied with a certain requirement, then such compliance or the fact that the
suing corporation is exempt therefrom, becomes a necessary averment in the
complaint." We fail to see how these doctrines can be a propos in the
case at bar, since the petitioner is not "maintaining any suit" but is
merely defending one against itself; it did not file any complaint but
only a corollary defensive petition to prohibit the lower court from
further proceeding with a suit that it had no jurisdiction to entertain.
Petitioner's failure to aver its legal capacity to institute the present petition is
not fatal, for ...
A foreign corporation may, by writ of prohibition, seek relief against the
wrongful assumption of jurisdiction. And a foreign corporation seeking
a writ of prohibition against further maintenance of a suit, on the
ground of want of jurisdiction in which jurisdiction is not bound by
the ruling of the court in which the suit was brought, on a motion to
quash service of summons, that it has jurisdiction.
WHEREFORE, the writs applied for are granted: the respondent Court of First
Instance of Rizal is declared without jurisdiction to take cognizance of its Civil
Case No. 10403; and its orders issued in connection therewith are hereby
annulled and set aside,. Respondent court is further commanded to desist from
further proceedings in Civil case No. 10403 aforesaid. Costs against private
respondents, Antonio J. Villegas and Juan Ponce Enrile.
G. LAWS GOVERNING FOREIGN CORPORATIONS
Sec. 129. Law applicable. - Any foreign corporation lawfully doing business
in the Philippines shall be bound by all laws, rules and regulations applicable to
domestic corporations of the same class, except such only as provide for the
creation, formation, organization or dissolution of corporations or those which
fix the relations, liabilities, responsibilities, or duties of stockholders, members,
or officers of corporations to each other or to the corporation.
M. E. GREY, plaintiff-appellant,
vs.
INSULAR LUMBER COMPANY, defendant-appelle
151 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
(G.R. No. L-45144; April 3, 1939)
FACTS: Herein defendant-appellee Insular Lumber Company is a corporation
existing and organized under the laws of the State of New York licensed to
engage business in the Philippines.
The plaintiff-appellant Grey, holder of 57 shares (which is less than 3% of the
outstanding capital stock of defendant corporation), was denied access to the
books and records of the company because, as alleged, the laws of New York
provide that only a stockholder who own at least 3% of the outstanding capital
stock of a corporation may make a written request to the treasurer or other
fiscal officer for a statement of its affairs; that plaintiff neither has the 3%
requirement nor made the written request.
Plaintiff raises the Corporation Law which does not provide such requirements
and gives any stockholder the right to examine the books of the corporation.
Such law, being the law upon which the defendant corporation was issued a
license to do business in the Philippines.
ISSUE: WON appellant, as a stockholder, is entitled to inspect and examine
the books and records of transactions of appellee?
HELD: Under ection 77 Stock Corporation Law of New York. Under this law,
plaintiff has the right to be furnished by the treasurer or other fiscal officer of
the corporation with statement of its affairs embracing a particular account of
all its assets and liabilities. In the third place, inasmuch as plaintiff, either at
the hearing or in his motion for new trial, did not ask to have the stipulation of
facts altered or changed, he cannot now, for the first time on appeal, raise the
question that aside from the right conferred upon him by section 77 of the
Stock Corporation Law of New York, he also entitled under the common law to
examine and inspect the books and records of the defendant corporation. In
the fourth place, neither can this right under the common law be granted the
defendant in the present case, since the same can only be granted at the
discretion of the court, under certain conditions, to wit:
(a) That the stockholder of a corporation in New York has the right to inspect
its books and records if it can be shown that he seeks information for an
honest purpose (14 C. J., 853), or to protect his interest as stockholder. (In
re Steinway, 159 N. Y., 250; 53 N. E., 1103; 45 L. R. A., 461 [aff. 31 App.
Div., 70; 52 N. Y. S., 343]).
(b) That said right to examine and inspect the books of the corporation must
be exercised in good faith, for a specific and honest purpose, and not to
gratify curiosity, or for speculative or vexatious purposes. (14 C. J., 854,
855.)
The appellant has made no effort to prove or even allege that the information
he desired to obtain through the examination and inspection of defendant's
books was necessary to protect his interests as stockholder of the corporation,
or that it was for a specific and honest purpose, and not to gratify curiosity,
nor for speculative or vexatious purposes.
In view of the foregoing, we affirm the judgment of the lower court, with costs
against the appellant.
H. AMENDMENTS TO THE ARTICLES OF INCORPROATION
 Sec. 130. Amendments to articles of incorporation or by-laws of
foreign corporations. - Whenever the articles of incorporation or by-laws of
a foreign corporation authorized to transact business in the Philippines are
amended, such foreign corporation shall, within sixty (60) days after the
amendment becomes effective, file with the Securities and Exchange
Commission, and in the proper cases with the appropriate government agency,
a duly authenticated copy of the articles of incorporation or by-laws, as
amended, indicating clearly in capital letters or by underscoring the change or
changes made, duly certified by the authorized official or officials of the country
or state of incorporation. The filing thereof shall not of itself enlarge or alter the
purpose or purposes for which such corporation is authorized to transact
business in the Philippines.
I. AMENDMENT OF LICENSE
Sec. 131. Amended license. - A foreign corporation authorized to transact
business in the Philippines shall obtain an amended license in the event it
changes its corporate name, or desires to pursue in the Philippines other or
additional purposes, by submitting an application therefor to the Securities and
Exchange Commission, favorably endorsed by the appropriate government
agency in the proper cases.
J. MERGER/CONSOLIDATION
Sec. 132. Merger or consolidation involving a foreign corporation
licensed in the Philippines. - One or more foreign corporations authorized
to transact business in the Philippines may merge or consolidate with any
domestic corporation or corporations if such is permitted under Philippine laws
and by the law of its incorporation: Provided, That the requirements on merger
or consolidation as provided in this Code are followed.
Whenever a foreign corporation authorized to transact business in the
Philippines shall be a party to a merger or consolidation in its home country or
state as permitted by the law of its incorporation, such foreign corporation shall,
within sixty (60) days after such merger or consolidation becomes effective, file
with the Securities and Exchange Commission, and in proper cases with the
appropriate government agency, a copy of the articles of merger or
consolidation duly authenticated by the proper official or officials of the country
or state under the laws of which merger or consolidation was effected: Provided,
however, That if the absorbed corporation is the foreign corporation doing
business in the Philippines, the latter shall at the same time file a petition for
withdrawal of it license in accordance with this Title.
L.
K. REVOCATION OF LICENSE
152 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Sec. 134. Revocation of license. - Without prejudice to other grounds
provided by special laws, the license of a foreign corporation to transact
business in the Philippines may be revoked or suspended by the Securities and
Exchange Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as required
by this Title;
3. Failure, after change of its resident agent or of his address, to submit to the
Securities and Exchange Commission a statement of such change as required
by this Title;
4. Failure to submit to the Securities and Exchange Commission an
authenticated copy of any amendment to its articles of incorporation or by-laws
or of any articles of merger or consolidation within the time prescribed by this
Title;
5. A misrepresentation of any material matter in any application, report, affidavit
or other document submitted by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine Government or any of its agencies or political
subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes
for which such corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf
of any foreign corporation or entity not duly licensed to do business in the
Philippines; or
9. Any other ground as would render it unfit to transact business in the
Philippines.
Sec. 135. Issuance of certificate of revocation. - Upon the revocation of
any such license to transact business in the Philippines, the Securities and
Exchange Commission shall issue a corresponding certificate of revocation,
furnishing a copy thereof to the appropriate government agency in the proper
cases.
The Securities and Exchange Commission shall also mail to the corporation at
its registered office in the Philippines a notice of such revocation accompanied
by a copy of the certificate of revocation.
WITHDRAWAL OF FOREIGN CORPORATIONS
 Sec. 136. Withdrawal of foreign corporations. - Subject to existing laws
and regulations, a foreign corporation licensed to transact business in the
Philippines may be allowed to withdraw from the Philippines by filing a petition
for withdrawal of license. No certificate of withdrawal shall be issued by the
Securities and Exchange Commission unless all the following requirements are
met;
1. All claims which have accrued in the Philippines have been paid, compromised
or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions have been
paid; and
3. The petition for withdrawal of license has been published once a week for
three (3) consecutive weeks in a newspaper of general circulation in the
Philippines.
CHAPTER 19: MISCELLANEOUS PROVISIONS (TITLE XVI)
Sec. 137. Outstanding capital stock defined. - The term "outstanding
capital stock", as used in this Code, means the total shares of stock issued under
binding subscription agreements to subscribers or stockholders, whether or not
fully or partially paid, except treasury shares.
Sec. 138. Designation of governing boards. - The provisions of specific
provisions of this Code to the contrary notwithstanding, non-stock or special
corporations may, through their articles of incorporation or their by-laws,
designate their governing boards by any name other than as board of trustees.
Sec. 139. Incorporation and other fees. - The Securities and Exchange
Commission is hereby authorized to collect and receive fees as authorized by
law or by rules and regulations promulgated by the Commission.
153 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes
Sec. 140. Stock ownership in certain corporations. - Pursuant to the
duties specified by Article XIV of the Constitution, the National Economic and
Development Authority shall, from time to time, make a determination of
whether the corporate vehicle has been used by any corporation or by business
or industry to frustrate the provisions thereof or of applicable laws, and shall
submit to the Batasang Pambansa, whenever deemed necessary, a report of its
findings, including recommendations for their prevention or correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in
corporations declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to individuals or groups of individuals
related to each other by consanguinity or affinity or by close business interests,
or whenever it is necessary to achieve national objectives, prevent illegal
monopolies or combinations in restraint or trade, or to implement national
economic policies declared in laws, rules and regulations designed to promote
the general welfare and foster economic development.
In recommending to the Batasang Pambansa corporations, business or
industries to be declared vested with a public interest and in formulating
proposals for limitations on stock ownership, the National Economic and
Development Authority shall consider the type and nature of the industry, the
size of the enterprise, the economies of scale, the geographic location, the
extent of Filipino ownership, the labor intensity of the activity, the export
potential, as well as other factors which are germane to the realization and
promotion of business and industry.
Sec. 141. Annual report or corporations. - Every corporation, domestic or
foreign, lawfully doing business in the Philippines shall submit to the Securities
and Exchange Commission an annual report of its operations, together with a
financial statement of its assets and liabilities, certified by any independent
certified public accountant in appropriate cases, covering the preceding fiscal
year and such other requirements as the Securities and Exchange Commission
may require. Such report shall be submitted within such period as may be
prescribed by the Securities and Exchange Commission.
Sec. 142. Confidential nature of examination results. - All interrogatories
propounded by the Securities and Exchange Commission and the answers
thereto, as well as the results of any examination made by the Commission or
by any other official authorized by law to make an examination of the
operations, books and records of any corporation, shall be kept strictly
confidential, except insofar as the law may require the same to be made public
or where such interrogatories, answers or results are necessary to be presented
as evidence before any court.
Sec. 143. Rule-making power of the Securities and Exchange
Commission. - The Securities and Exchange Commission shall have the power
and authority to implement the provisions of this Code, and to promulgate rules
and regulations reasonably necessary to enable it to perform its duties
hereunder, particularly in the prevention of fraud and abuses on the part of the
controlling stockholders, members, directors, trustees or officers.
 Sec. 144. Violations of the Code. - Violations of any of the provisions of this
Code or its amendments not otherwise specifically penalized therein shall be
punished by a fine of not less than one thousand (P1,000.00) pesos but not
more than ten thousand (P10,000.00) pesos or by imprisonment for not less
than thirty (30) days but not more than five (5) years, or both, in the discretion
of the court. If the violation is committed by a corporation, the same may, after
notice and hearing, be dissolved in appropriate proceedings before the
Securities and Exchange Commission: Provided, That such dissolution shall not
preclude the institution of appropriate action against the director, trustee or
officer of the corporation responsible for said violation: Provided, further, That
nothing in this section shall be construed to repeal the other causes for
dissolution of a corporation provided in this Code.

Sec. 145. Amendment or repeal. - No right or remedy in favor of or against

any corporation, its stockholders, members, directors, 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.

Sec. 146. Repealing clause. - Except as expressly provided by this Code, all
laws or parts thereof inconsistent with any provision of this Code shall be
deemed repealed.

Sec. 147. Separability of provisions. - Should any provision of this Code or

any part thereof be declared invalid or unconstitutional, the other provisions, so
far as they are separable, shall remain in force.

Sec. 148. Applicability to existing corporations. - All corporations lawfully

existing and doing business in the Philippines on the date of the effectivity of
this Code and heretofore authorized, licensed or registered by the Securities
and Exchange Commission, shall be deemed to have been authorized, licensed
or registered under the provisions of this Code, subject to the terms and
conditions of its license, and shall be governed by the provisions hereof:
Provided, That if any such corporation is affected by the new requirements of
this Code, said corporation shall, unless otherwise herein provided, be given a
period of not more than two (2) years from the effectivity of this Code within
which to comply with the same.

Sec. 149. Effectivity. - This Code shall take effect immediately upon its
approval.

154 THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) | wlcnotes