.R. No. L-6776 May 21, 1955
. .. (Printed Rec. App. p. 5.)
THE REGISTER OF DEEDS OF RIZAL, petitioner-
appellee,
vs.
UNG SIU SI TEMPLE, respondent-appellant.
Alejo F. Candido for appellant.
Office of the Solicitor General Querube C. Makalintal and
Solicitor Felix V. Makasiar for appellee.
REYES, J.B.L., J.:
The Register of Deeds for the province of Rizal refused to
accept for record a deed of donation executed in due form
on January 22, 1953, by Jesus Dy, a Filipino citizen,
conveying a parcel of residential land, in Caloocan, Rizal,
known as lot No. 2, block 48-D, PSD-4212, G.L.R.O.
Record No. 11267, in favor of the unregistered religious
organization "Ung Siu Si Temple", operating through
three trustees all of Chinese nationality. The donation was
duly accepted by Yu Juan, of Chinese nationality, founder
and deaconess of the Temple, acting in representation
and in behalf of the latter and its trustees.
The refusal of the Registrar was elevated en
Consultato the IVth Branch of the Court of First Instance
of Manila. On March 14, 1953, the Court upheld the action
of the Rizal Register of Deeds, saying:
The question raised by the Register of Deeds in
the above transcribed consulta is whether a deed
of donation of a parcel of land executed in favor
of a religious organization whose founder,
trustees and administrator are Chinese citizens
should be registered or not.
It appearing from the record of the Consulta that
UNG SIU SI TEMPLE is a religious organization
whose deaconess, founder, trustees and
administrator are all Chinese citizens, this Court
is of the opinion and so hold that in view of the
provisions of the sections 1 and 5 of Article XIII of
the Constitution of the Philippines limiting the
acquisition of land in the Philippines to its citizens,
or to corporations or associations at least sixty
per centum of the capital stock of which is owned
by such citizens adopted after the enactment of
said Act No. 271, and the decision of the
Supreme Court in the case of Krivenko vs. the
Register of Deeds of Manila, the deed of donation
in question should not be admitted for admitted
for registration. (Printed Rec. App. pp 17-18).
Not satisfied with the ruling of the Court of First Instance,
counsel for the donee Uy Siu Si Temple has appealed to
this Court, claiming: (1) that the acquisition of the land in
question, for religious purposes, is authorized and
permitted by Act No. 271 of the old Philippine
Commission, providing as follows:
SECTION 1. It shall be lawful for all religious
associations, of whatever sort or denomination,
whether incorporated in the Philippine Islands or
in the name of other country, or not incorporated
at all, to hold land in the Philippine Islands upon
which to build churches, parsonages, or
educational or charitable institutions.
SEC. 2. Such religious institutions, if not
incorporated, shall hold the land in the name of
three Trustees for the use of such associations; .
and (2) that the refusal of the Register of Deeds violates
the freedom of religion clause of our Constitution [Art. III,
Sec. 1(7)].
We are of the opinion that the Court below has correctly
held that in view of the absolute terms of section 5, Title
XIII, of the Constitution, the provisions of Act No. 271 of
the old Philippine Commission must be deemed repealed
since the Constitution was enacted, in so far as
incompatible therewith. In providing that, —
Save in cases of hereditary succession, no
private agricultural land shall be transferred or
assigned except to individuals, corporations or
associations qualified to acquire or hold lands of
the public domain in the Philippines,
the Constitution makes no exception in favor of religious
associations. Neither is there any such saving found in
sections 1 and 2 of Article XIII, restricting the acquisition
of public agricultural lands and other natural resources to
"corporations or associations at least sixty per centum of
the capital of which is owned by such citizens" (of the
Philippines).
The fact that the appellant religious organization has no
capital stock does not suffice to escape the Constitutional
inhibition, since it is admitted that its members are of
foreign nationality. The purpose of the sixty per centum
requirement is obviously to ensure that corporations or
associations allowed to acquire agricultural land or to
exploit natural resources shall be controlled by Filipinos;
and the spirit of the Constitution demands that in the
absence of capital stock, the controlling membership
should be composed of Filipino citizens.
To permit religious associations controlled by non-
Filipinos to acquire agricultural lands would be to drive the
opening wedge to revive alien religious land holdings in
this country. We can not ignore the historical fact that
complaints against land holdings of that kind were among
the factors that sparked the revolution of 1896.
As to the complaint that the disqualification under article
XIII is violative of the freedom of religion guaranteed by
Article III of the Constitution, we are by no means
convinced (nor has it been shown) that land tenure is
indispensable to the free exercise and enjoyment of
religious profession or worship; or that one may not
worship the Deity according to the dictates of his own
conscience unless upon land held in fee simple.
The resolution appealed from is affirmed, with costs
against appellant.

Section 11. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to
corporations or associations organized under the laws of
the Philippines, at least sixty per centum of whose capital
is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for
a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition
that it shall be subject to amendment, alteration, or repeal
by the Congress when the common good so requires. The
State shall encourage equity participation in public utilities
by the general public. The participation of foreign
investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in
its capital, and all the executive and managing officers of
such corporation or association must be citizens of the
Philippines.
THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
WILLIAM H. QUASHA, defendant-appellant.
Jose P. Laurel for appellant and William H. Quasha in his
own behalf.
Office of the Solicitor General Juan R. Liwag and
Assistant Solicitor General Francisco Carreon for
appellee.
REYES, J.:
William H. Quasha, a member of the Philippine bar, was
charged in the Court of First Instance of Manila with the
crime of falsification of a public and commercial document
in that, having been entrusted with the preparation and
registration of the article of incorporation of the Pacific
Airways Corporation, a domestic corporation organized
for the purpose of engaging in business as a common
carrier, he caused it to appear in said article of
incorporation that one Arsenio Baylon, a Filipino citizen,
had subscribed to and was the owner of 60.005 per cent
of the subscribed capital stock of the corporation when in
reality, as the accused well knew, such was not the case,
the truth being that the owner of the portion of the capital
stock subscribed to by Baylon and the money paid
thereon were American citizen whose name did not
appear in the article of incorporation, and that the purpose
for making this false statement was to circumvent the
constitutional mandate that no corporation shall be
authorize to operate as a public utility in the Philippines
unless 60 per cent of its capital stock is owned by
Filipinos.
Found guilty after trial and sentenced to a term of
imprisonment and a fine, the accused has appealed to
this Court.
The essential facts are not in dispute. On November
4,1946, the Pacific Airways Corporation registered its
articles of incorporation with the Securities and
Exchanged Commission. The article were prepared and
the registration was effected by the accused, who was in
fact the organizer of the corporation. The article stated
that the primary purpose of the corporation was to carry
on the business of a common carrier by air, land or water;
that its capital stock was P1,000,000, represented by
9,000 preferred and 100,000 common shares, each
preferred share being of the par value of p100 and entitled
to 1/3 vote and each common share, of the par value of
P1 and entitled to one vote; that the amount capital stock
actually subscribed was P200,000, and the names of the
subscribers were Arsenio Baylon, Eruin E. Shannahan,
Albert W. Onstott, James O'Bannon, Denzel J. Cavin, and
William H. Quasha, the first being a Filipino and the other
five all Americans; that Baylon's subscription was for
1,145 preferred shares, of the total value of P114,500,
and for 6,500 common shares, of the total par value of
P6,500, while the aggregate subscriptions of the
American subscribers were for 200 preferred shares, of
the total par value of P20,000, and 59,000 common
shares, of the total par value of P59,000; and that Baylon
and the American subscribers had already paid 25 per
cent of their respective subscriptions. Ostensibly the
owner of, or subscriber to, 60.005 per cent of the
subscribed capital stock of the corporation, Baylon
nevertheless did not have the controlling vote because of
the difference in voting power between the preferred
shares and the common shares. Still, with the capital
structure as it was, the article of incorporation were
accepted for registration and a certificate of incorporation
was issued by the Securities and Exchange Commission.
There is no question that Baylon actually subscribed to
60.005 per cent of the subscribed capital stock of the
corporation. But it is admitted that the money paid on his
subscription did not belong to him but to the Americans
subscribers to the corporate stock. In explanation, the
accused testified, without contradiction, that in the
process of organization Baylon was made a trustee for the
American incorporators, and that the reason for making
Baylon such trustee was as follows:
Q. According to this article of incorporation Arsenio
Baylon subscribed to 1,135 preferred shares with a total
value of P1,135. Do you know how that came to be?
A. Yes.
The people who were desirous of forming the corporation,
whose names are listed on page 7 of this certified copy
came to my house, Messrs. Shannahan, Onstott,
O'Bannon, Caven, Perry and Anastasakas one evening.
There was considerable difficulty to get them all together
at one time because they were pilots. They had difficulty
in deciding what their respective share holdings would be.
Onstott had invested a certain amount of money in
airplane surplus property and they had obtained a
considerable amount of money on those planes and as I
recall they were desirous of getting a corporation formed
right away. And they wanted to have their respective
shares holdings resolved at a latter date. They stated that
they could get together that they feel that they had no time
to settle their respective share holdings. We discussed
the matter and finally it was decided that the best way to
handle the things was not to put the shares in the name
of anyone of the interested parties and to have someone
act as trustee for their respective shares holdings. So we
looked around for a trustee. And he said "There are a lot
of people whom I trust." He said, "Is there someone
around whom we could get right away?" I said, "There is
Arsenio. He was my boy during the liberation and he
cared for me when i was sick and i said i consider him my
friend." I said. They all knew Arsenio. He is a very kind
man and that was what was done. That is how it came
about.
Defendant is accused under article 172 paragraph 1, in
connection with article 171, paragraph 4, of the Revised
Penal Code, which read:
ART. 171. Falsification by public officer, employee, or
notary or ecclesiastic minister. — The penalty of prision
mayor and a fine not to exceed 5,000 pesos shall be
imposed upon any public officer, employee, or notary
who, taking advantage of his official position, shall falsify
a document by committing any of the following acts:
xxx xxx xxx
4. Making untruthful statements in a narration of facts.
ART. 172. Falsification by private individuals and use of
falsified documents. — The penalty of prision correccional
in its medium and maximum period and a fine of not more
than 5,000 pesos shall be imposed upon:
xxx xxx xxx
1. Any private individual who shall commit any of the
falsifications enumerated in the next preceding article in
any public or official document or letter of exchange or
any other kind of commercial document.
Commenting on the above provision, Justice Albert, in his
well-known work on the Revised Penal Code ( new
edition, pp. 407-408), observes, on the authority of U.S.
vs. Reyes, (1 Phil., 341), that the perversion of truth in the
narration of facts must be made with the wrongful intent
of injuring a third person; and on the authority of U.S. vs.
Lopez (15 Phil., 515), the same author further maintains
that even if such wrongful intent is proven, still the
untruthful statement will not constitute the crime of
falsification if there is no legal obligation on the part of the
narrator to disclose the truth. Wrongful intent to injure a
third person and obligation on the part of the narrator to
disclose the truth are thus essential to a conviction for a
crime of falsification under the above article of the
Revised Penal Code.
Now, as we see it, the falsification imputed in the accused
in the present case consists in not disclosing in the
articles of incorporation that Baylon was a mere trustee (
or dummy as the prosecution chooses to call him) of his
American co-incorporators, thus giving the impression
that Baylon was the owner of the shares subscribed to by
him which, as above stated, amount to 60.005 per cent of
the sub-scribed capital stock. This, in the opinion of the
trial court, is a malicious perversion of the truth made with
the wrongful intent circumventing section 8, Article XIV of
the Constitution, which provides that " no franchise,
certificate, or any other form of authorization for the
operation of a public utility shall be granted except to
citizens of the Philippines or to corporation or other
entities organized under the law of the Philippines, sixty
per centum of the capital of which is owned by citizens of
the Philippines . . . ." Plausible though it may appear at
first glance, this opinion loses validity once it is noted that
it is predicated on the erroneous assumption that the
constitutional provision just quoted was meant to prohibit
the mere formation of a public utility corporation without
60 per cent of its capital being owned by the Filipinos, a
mistaken belief which has induced the lower court to that
the accused was under obligation to disclose the whole
truth about the nationality of the subscribed capital stock
of the corporation by revealing that Baylon was a mere
trustee or dummy of his American co-incorporators, and
that in not making such disclosure defendant's intention
was to circumvent the Constitution to the detriment of the
public interests. Contrary to the lower court's assumption,
the Constitution does not prohibit the mere formation of a
public utility corporation without the required formation of
Filipino capital. What it does prohibit is the granting of a
franchise or other form of authorization for the operation
of a public utility to a corporation already in existence but
without the requisite proportion of Filipino capital. This is
obvious from the context, for the constitutional provision
in question qualifies the terms " franchise", "certificate", or
"any other form of authorization" with the phrase "for the
operation of a public utility," thereby making it clear that
the franchise meant is not the "primary franchise" that
invest a body of men with corporate existence but the
"secondary franchise" or the privilege to operate as a
public utility after the corporation has already come into
being.
If the Constitution does not prohibit the mere formation of
a public utility corporation with the alien capital, then how
can the accused be charged with having wrongfully
intended to circumvent that fundamental law by not
revealing in the articles of incorporation that Baylon was
a mere trustee of his American co-incorporation and that
for that reason the subscribed capital stock of the
corporation was wholly American? For the mere formation
of the corporation such revelation was not essential, and
the Corporation Law does not require it. Defendant was,
therefore, under no obligation to make it. In the absence
of such obligation and of the allege wrongful intent,
defendant cannot be legally convicted of the crime with
which he is charged.
It is urged, however, that the formation of the corporation
with 60 per cent of its subscribed capital stock appearing
in the name of Baylon was an indispensable preparatory
step to the subversion of the constitutional prohibition and Section 11. (1) The ownership and management of mass
the laws implementing the policy expressed therein. This media shall be limited to citizens of the Philippines, or to
view is not correct. For a corporation to be entitled to corporations, cooperatives or associations, wholly-owned
operate a public utility it is not necessary that it be and managed by such citizens.
organized with 60 per cent of its capital owned by Filipinos
from the start. A corporation formed with capital that is
entirely alien may subsequently change the nationality of
its capital through transfer of shares to Filipino citizens. The Congress shall regulate or prohibit monopolies in
conversely, a corporation originally formed with Filipino commercial mass media when the public interest so
capital may subsequently change the national status of
requires. No combinations in restraint of trade or unfair
said capital through transfer of shares to foreigners. What
competition therein shall be allowed.
need is there then for a corporation that intends to operate
a public utility to have, at the time of its formation, 60 per
cent of its capital owned by Filipinos alone? That condition
may anytime be attained thru the necessary transfer of
stocks. The moment for determining whether a (2) The advertising industry is impressed with public
corporation is entitled to operate as a public utility is when interest, and shall be regulated by law for the protection
it applies for a franchise, certificate, or any other form of of consumers and the promotion of the general welfare.
authorization for that purpose. And that can be done after
the corporation has already come into being and not while
it is still being formed. And at that moment, the corporation
must show that it has complied not only with the Only Filipino citizens or corporations or associations at
requirement of the Constitution as to the nationality of its least seventy per centum of the capital of which is owned
capital, but also with the requirements of the Civil Aviation by such citizens shall be allowed to engage in the
Law if it is a common carrier by air, the Revised advertising industry.
Administrative Code if it is a common carrier by water, and
the Public Service Law if it is a common carrier by land or
other kind of public service.

The participation of foreign investors in the governing

body of entities in such industry shall be limited to their
proportionate share in the capital thereof, and all the
Equally untenable is the suggestion that defendant should executive and managing officers of such entities must be
at least be held guilty of an "impossible crime" under citizens of the Philippines.
article 59 of the Revised Penal Code. It not being possible
to suppose that defendant had intended to commit a crime
for the simple reason that the alleged constitutional
prohibition which he is charged for having tried to
circumvent does not exist, conviction under that article is
out of the question.

The foregoing consideration can not but lead to the

conclusion that the defendant can not be held guilty of the
crime charged. The majority of the court, however, are
also of the opinion that, even supposing that the act
imputed to the defendant constituted falsification at the
time it was perpetrated, still with the approval of the Party
Amendment to the Constitution in March, 1947, which
placed Americans on the same footing as Filipino citizens
with respect to the right to operate public utilities in the
Philippines, thus doing away with the prohibition in section
8, Article XIV of the Constitution in so far as American
citizens are concerned, the said act has ceased to be an
offense within the meaning of the law, so that defendant
can no longer be held criminally liable therefor.

In view of the foregoing, the judgment appealed from is

reversed and the defendant William H. Quasha acquitted,
with costs de oficio.
FILIPINAS COMPAÑIA DE SEGUROS, petitioner,
vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation,
Christern Huenefeld, & Co., Inc., after payment of
corresponding premium, obtained from the petitioner
,Filipinas Cia. de Seguros, fire policy No. 29333 in the
sum of P1000,000, covering merchandise contained in a
building located at No. 711 Roman Street, Binondo
Manila. On February 27, 1942, or during the Japanese
military occupation, the building and insured merchandise
were burned. In due time the respondent submitted to the
petitioner its claim under the policy. The salvage goods
were sold at public auction and, after deducting their
value, the total loss suffered by the respondent was fixed
at P92,650. The petitioner refused to pay the claim on the
ground that the policy in favor of the respondent had
ceased to be in force on the date the United States
declared war against Germany, the respondent
Corporation (though organized under and by virtue of the
laws of the Philippines) being controlled by the German
subjects and the petitioner being a company under
American jurisdiction when said policy was issued on
October 1, 1941. The petitioner, however, in pursuance of
the order of the Director of Bureau of Financing, Philippine
Executive Commission, dated April 9, 1943, paid to the
respondent the sum of P92,650 on April 19, 1943.
The present action was filed on August 6, 1946, in the
Court of First Instance of Manila for the purpose of
recovering from the respondent the sum of P92,650
above mentioned. The theory of the petitioner is that the
insured merchandise were burned up after the policy
issued in 1941 in favor of the respondent corporation has
ceased to be effective because of the outbreak of the war
between the United States and Germany on December
10, 1941, and that the payment made by the petitioner to
the respondent corporation during the Japanese military
occupation was under pressure. After trial, the Court of
First Instance of Manila dismissed the action without
pronouncement as to costs. Upon appeal to the Court of
Appeals, the judgment of the Court of First Instance of
Manila was affirmed, with costs. The case is now before
us on appeal by certiorari from the decision of the Court
of Appeals.
The Court of Appeals overruled the contention of the
petitioner that the respondent corporation became an
enemy when the United States declared war against
Germany, relying on English and American cases which
held that a corporation is a citizen of the country or state
by and under the laws of which it was created or
organized. It rejected the theory that nationality of private
corporation is determine by the character or citizenship of
its controlling stockholders.
There is no question that majority of the stockholders of
the respondent corporation were German subjects. This
being so, we have to rule that said respondent became an
enemy corporation upon the outbreak of the war between
the United States and Germany. The English and
American cases relied upon by the Court of Appeals have
lost their force in view of the latest decision of the
Supreme Court of the United States in Clark vs. Uebersee
Finanz Korporation, decided on December 8, 1947, 92
Law. Ed. Advance Opinions, No. 4, pp. 148-153, in which
the controls test has been adopted. In "Enemy
Corporation" by Martin Domke, a paper presented to the
Second International Conference of the Legal Profession
held at the Hague (Netherlands) in August. 1948 the
following enlightening passages appear:
Since World War I, the determination of enemy nationality
of corporations has been discussion in many countries,
belligerent and neutral. A corporation was subject to
enemy legislation when it was controlled by enemies,
namely managed under the influence of individuals or
corporations, themselves considered as enemies. It was
the English courts which first the Daimler case applied this
new concept of "piercing the corporate veil," which was
adopted by the peace of Treaties of 1919 and the Mixed
Arbitral established after the First World War.
The United States of America did not adopt the control
test during the First World War. Courts refused to
recognized the concept whereby American-registered
corporations could be considered as enemies and thus
subject to domestic legislation and administrative
measures regarding enemy property.
World War II revived the problem again. It was known that
German and other enemy interests were cloaked by
domestic corporation structure. It was not only by legal
ownership of shares that a material influence could be
exercised on the management of the corporation but also
by long term loans and other factual situations. For that
reason, legislation on enemy property enacted in various
countries during World War II adopted by statutory
provisions to the control test and determined, to various
degrees, the incidents of control. Court decisions were
rendered on the basis of such newly enacted statutory
provisions in determining enemy character of domestic
corporation.
The United States did not, in the amendments of the
Trading with the Enemy Act during the last war, include
as did other legislations the applications of the control test
and again, as in World War I, courts refused to apply this
concept whereby the enemy character of an American or
neutral-registered corporation is determined by the
enemy nationality of the controlling stockholders.
Measures of blocking foreign funds, the so called freezing
regulations, and other administrative practice in the
treatment of foreign-owned property in the United States
allowed to large degree the determination of enemy
interest in domestic corporations and thus the application
of the control test. Court decisions sanctioned such
administrative practice enacted under the First War
Powers Act of 1941, and more recently, on December 8,
1947, the Supreme Court of the United States definitely
approved of the control theory. In Clark vs. Uebersee
Finanz Korporation, A. G., dealing with a Swiss
corporation allegedly controlled by German interest, the
Court: "The property of all foreign interest was placed
within the reach of the vesting power (of the Alien
Property Custodian) not to appropriate friendly or neutral
assets but to reach enemy interest which masqueraded
under those innocent fronts. . . . The power of seizure and
vesting was extended to all property of any foreign
country or national so that no innocent appearing device
could become a Trojan horse."
It becomes unnecessary, therefore, to dwell at length on
the authorities cited in support of the appealed decision.
However, we may add that, in Haw Pia vs. China Banking
Corporation,* 45 Off Gaz., (Supp. 9) 299, we already held
that China Banking Corporation came within the meaning
of the word "enemy" as used in the Trading with the
Enemy Acts of civilized countries not only because it was
incorporated under the laws of an enemy country but
because it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as
amended,) in section 8, provides that "anyone except a
public enemy may be insured." It stands to reason that an
insurance policy ceases to be allowable as soon as an
insured becomes a public enemy.
Effect of war, generally. — All intercourse between
citizens of belligerent powers which is inconsistent with a
state of war is prohibited by the law of nations. Such
prohibition includes all negotiations, commerce, or trading
with the enemy; all acts which will increase, or tend to
increase, its income or resources; all acts of voluntary
submission to it; or receiving its protection; also all acts
concerning the transmission of money or goods; and all
contracts relating thereto are thereby nullified. It further
prohibits insurance upon trade with or by the enemy, upon
the life or lives of aliens engaged in service with the
enemy; this for the reason that the subjects of one country
cannot be permitted to lend their assistance to protect by
insurance the commerce or property of belligerent, alien
subjects, or to do anything detrimental too their country's
interest. The purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is inconsistent
that one country should destroy its enemy's property and
repay in insurance the value of what has been so
destroyed, or that it should in such manner increase the
resources of the enemy, or render it aid, and the
commencement of war determines, for like reasons, all
trading intercourse with the enemy, which prior thereto
may have been lawful. All individuals therefore, who
compose the belligerent powers, exist, as to each other,
in a state of utter exclusion, and are public enemies. (6
Couch, Cyc. of Ins. Law, pp. 5352-5353.)
In the case of an ordinary fire policy, which grants
insurance only from year, or for some other specified term
it is plain that when the parties become alien enemies, the
contractual tie is broken and the contractual rights of the
parties, so far as not vested. lost. (Vance, the Law on
Insurance, Sec. 44, p. 112.)
The respondent having become an enemy corporation on
December 10, 1941, the insurance policy issued in its
favor on October 1, 1941, by the petitioner (a Philippine
corporation) had ceased to be valid and enforcible, and
since the insured goods were burned after December 10,
1941, and during the war, the respondent was not entitled
to any indemnity under said policy from the petitioner.
However, elementary rules of justice (in the absence of
specific provision in the Insurance Law) require that the
premium paid by the respondent for the period covered by
its policy from December 11, 1941, should be returned by
the petitioner.
The Court of Appeals, in deciding the case, stated that the
main issue hinges on the question of whether the policy
in question became null and void upon the declaration of
war between the United States and Germany on
December 10, 1941, and its judgment in favor of the
respondent corporation was predicated on its conclusion
that the policy did not cease to be in force. The Court of
Appeals necessarily assumed that, even if the payment
by the petitioner to the respondent was involuntary, its
action is not tenable in view of the ruling on the validity of
the policy. As a matter of fact, the Court of Appeals held
that "any intimidation resorted to by the appellee was not
unjust but the exercise of its lawful right to claim for and
received the payment of the insurance policy," and that
the ruling of the Bureau of Financing to the effect that "the
appellee was entitled to payment from the appellant was,
well founded." Factually, there can be no doubt that the
Director of the Bureau of Financing, in ordering the
petitioner to pay the claim of the respondent, merely
obeyed the instruction of the Japanese Military
Administration, as may be seen from the following: "In
view of the findings and conclusion of this office contained
in its decision on Administrative Case dated February 9,
1943 copy of which was sent to your office and the
concurrence therein of the Financial Department of the
Japanese Military Administration, and following the
instruction of said authority, you are hereby ordered to
pay the claim of Messrs. Christern, Huenefeld & Co., Inc.
The payment of said claim, however, should be made by
means of crossed check." (Emphasis supplied.)
It results that the petitioner is entitled to recover what paid
to the respondent under the circumstances on this case.
However, the petitioner will be entitled to recover only the
equivalent, in actual Philippines currency of P92,650 paid
on April 19, 1943, in accordance with the rate fixed in the
Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and
the respondent corporation is ordered to pay to the
petitioner the sum of P77,208.33, Philippine currency,
less the amount of the premium, in Philippine currency,
that should be returned by the petitioner for the unexpired
term of the policy in question, beginning December 11,
1941. Without costs. So ordered.
In determining compliance with the minimum Filipino
equity requirement, there are two acknowledged tests. ...
On the other hand, the Grandfather Rule determines the
actual Filipino ownership and control in a corporation by
tracing both the direct and indirect shareholdings in the
corporation.
Chapter II – 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. (n)
Sec. 110. Corporation sole. – For the purpose of administering
and managing, as trustee, the affairs, property and
temporalities of any religious denomination, sect or church, a
corporation sole may be formed by the chief archbishop,
bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church. (154a)
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. (n)
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. (n)
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. (159a)
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
1. That the religious society or religious order, or diocese,
business as such on the filing with the Securities and Exchange
synod, or district organization is a religious organization of a
Commission of a copy of their commission, certificate of
religious denomination, sect or church;
election, or letters of appointment, duly certified by any notary
public.

2. That at least two-thirds (2/3) of its membership have given

their written consent or have voted to incorporate, at a duly
During any vacancy in the office of chief archbishop, bishop,
convened meeting of the body;
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, 3. That the incorporation of the religious society or religious
sect or church represented by the corporation sole to order, or diocese, synod, or district organization desiring to
administer the temporalities and manage the affairs, estate incorporate is not forbidden by competent authority or by the
and properties of the corporation sole during the vacancy shall constitution, rules, regulations or discipline of the religious
exercise all the powers and authority of the corporation sole denomination, sect, or church of which it forms a part;
during such vacancy. (158a)

4. That the religious society or religious order, or diocese,

Sec. 115. Dissolution. – A corporation sole may be dissolved synod, or district organization desires to incorporate for the
and its affairs settled voluntarily by submitting to the Securities administration of its affairs, properties and estate;
and Exchange Commission a verified declaration of dissolution.

5. The place where the principal office of the corporation is to

The declaration of dissolution shall set forth: be established and located, which place must be within the
Philippines; and

1. The name of the corporation;

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
2. The reason for dissolution and winding up;
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
3. The authorization for the dissolution of the corporation by
less than five (5) nor more than fifteen (15). (160a)
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. (n)

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:
 7. Double taxation may be imposed on corporate
income.
AQUILA LEGIS FRATERNITY
8. Corporations are subject to governmental regulations
Corporation Law Reviewer
supervision and control including submission of reportorial
Page 1 of 87 requirements not otherwise imposed in other business form.

Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

CHAPTER 2: DEFINITION AND ATTRIBUTES

A corporation is 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.

Attributes:

1. Artificial being;

2. Created by operation of law;

3. Right of succession; and

4. Powers, attributes and properties expressly Disti

authorized by law or incident to its existence.

A corporation may claim for moral damages under

AQUILA LEGIS FRATERNITY
Art. 2219 (7) of the Civil Code in cases of libel, slander or any
form of defamation. (Filipinas Broadcasting Network vs. Ago Corporation Law Reviewer
Medical and Educational Center)
Page 2 of 87
Advantages of corporate form of business:
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
1. Capacity to act as a single unit;

2. Limited shareholder‟s liability;

3. Continuity in existence;

4. Feasibility of greater undertaking;

5. Transferability of shares;
CHAPTER 3: CLASSIFICATION OF CORPORATIONS
6. Centralized management; and
Classes of corporations:
7. Standardized method of organization, management
and finance 1. Stock

Disadvantage of corporate form of business: 2. Non-stock

1. To have valid and binding corporate act, formal Requisites to be classified as a stock corporation:
proceedings, such as board meetings are required.
1. That they have a capital stock divided into shares; and
2. The business transactions of a corporation is limited
2. That they are authorized to distribute dividends or
to the State of its incorporation and may not act as such
allotments as surplus profits to its stockholders on the basis of
corporation in other jurisdiction unless it has obtained a
the shares held by them
license or authority from the foreign state.
Non-stock corporations – no part of their income is
3. The shareholders‟ limited liability tends to limit the
distributable as dividends to its members, trustees or officers
credit available to the corporation as a separate legal entity.
subject to the provisions on dissolution. (Sec. 87)
4. By the very nature of shares of stock which are
The plain and ordinary meaning of a business is
personal properties, transferable at will by the owners thereof,
restricted to activities or affairs where profit is the purpose or
transfers of share may result to uniting incompatible and
livelihood is the motive, and the term business when used
conflicting interests.
without qualification, should be construed in its plain and
5. The minority shareholders have practically no say in ordinary meaning, restricted to activities for profit or
the conduct of corporate affairs. livelihood. (CIR vs. Club Filipino, Inc.)

6. In large scale enterprises, stockholders‟ voting
rights may become merely fictitious and theoretical because
of disinterest in management, wide-scale ownership and
inaccessible place of meeting.
The test in determining whether a government
owned or controlled corporation 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-EDC vs.
NLRC)
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Other classes of corporations:
1. Public and Private.
a. Public corporations – those created, formed or
organized for political or governmental purposes with political
powers to be exercised for purposes connected with the public
good in the administration of civil government.
b. Private corporations – those formed for some private
purpose, benefit, aim or end.
2. Ecclesiastical (religious societies or corporation sole)
and Lay (eleemosynary or civil).
a. Ecclesiastical or religious corporations – those
composed exclusively of ecclesiastics organized for spiritual
purposes or for administering properties held for religious
ones. They are further classified as religious societies or
corporation sole.
b. Lay corporations – those established for the purposes
other than religion. They are further classified as
eleemosynary or civil. Eleemosynary corporations are created
for charitable and benevolent purposes. Civil corporations are
organized not for the purpose of public charity but for the
benefit, pecuniary or otherwise, of its members.
3. Aggregate and Sole.
a. Aggregate corporations – those composed of a
number of individuals vested with corporate powers.
b. Corporations sole – those that 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.
4. Close and Open.
a. Close corporations – those whose shares of stock are
held by limited number of persons.
b. Open corporations – those formed to openly accept
outsiders as stockholders or investors.
5. Domestic and Foreign.
a. Domestic corporations – those that are organized or
created under or by virtue of the Philippine laws. Note: issues
of intra-corporate nature are governed by Philippine law.
b. Foreign corporations – 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.
6. Parent or Holding Companies and Subsidiaries and
Affiliates.
a. Holding corporations – corporations that confine
their activities to owning stock in, and supervising
management of other companies.
b. Subsidiary corporations – those which another
corporation owns at least a majority of the shares, and thus
have control.
c. Affiliates – those corporations which are subject to
common control and operated as part of a system.
7. Quasi-public.
a. Quasi-public corporations – private corporations
which have accepted from the State the grant of a franchise or
contract involving the performance of public duties (public
service corporations).
AQUILA LEGIS FRATERNITY
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
8. Quasi corporations.
a. Quasi corporations – public bodies or municipal
societies such as townships, counties, school districts, road or
highway districts which, though not vested with the general
powers of corporations, are organized by statutes or
immemorial usage, as persons or aggregate corporations with
precise duties which may be enforced, and privileges which
may be maintained, by suits of law.
9. De jure corporations.
a. De jure corporations – juridical entities created or
organized in strict or substantial compliance with the statutory
requirements of incorporation and whose right to exist as such
cannot be successfully attacked even by the State in a quo
warranto proceeding.
10. De facto corporations.
a. De facto corporations – those which exist by virtue of
an irregularity or defect in the organization or constitution or
from some other 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.
11. Corporations by estoppel.
a. Corporations 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.
The mere fact that the government happens to be a
majority stockholder does not make it a public corporation.
(National Coal vs. CIR)
CHAPTER 4: FORMATION AND ORGANIZATION
 Stages in the life of a corporation: 8. If a stock corporation, amount of authorized capital
stock, number of shares, par value, original subscribers
1. Creation
9. If a non-stock corporation, amount of capital,
2. Reorganization or quasi-reorganization
contributors
3. Dissolution and winding up
10. Such other matters not inconsistent with law and
Steps in creation: which the incorporator may deem necessary and convenient

1. Promotional stage 11. Treasurer‟s certificate

2. Process of incorporation CORPORATE NAME

3. Organization and commencement of business A corporation cannot use a name which is:

PROMOTIONAL STAGE 1. identical or deceptively or confusingly similar to that

A promoter acting for a proposed corporation has 3
options:
1. He may make a continuing offer on behalf of the
corporation, which, if accepted after incorporation, will
become a contract. In this case, the promoter does not assume
any personal liability, whether or not the corporation will
accept the offer.
2. The promoter may make a contract at the time
binding himself, with the understanding that if the
corporation, once formed, accepts or adopts the contract, he
will be relieved of responsibility.
3. The promoter may bind himself personally and
assume the responsibility of looking to the proposed
corporation, when formed, for reimbursement.
of any existing corporation or to any other name protected by
law; or
2. patently deceptive, confusing or contrary to law.
The law gives a corporation no 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. (Red Line Transportation Co. vs.
Rural Transit Co.)
A word or phrase originally incapable of exclusive
appropriation with reference to an article on the market,
because geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively by one
producer with reference to his article that, in that trade and to
that branch of the purchasing public, the word or phrase has
come to mean that the article was his product. (Doctrine of
secondary meaning, Lyceum of the Philippines, Inc. vs.CA)

A corporation's right to use its corporate and trade

name is a property right, a right in rem, which it may assert and
AQUILA LEGIS FRATERNITY protect against the world in the same manner as it may protect
its tangible property, real or personal, against trespass or
Corporation Law Reviewer conversion. It is regarded, to a certain extent, as a property
Page 5 of 87 right and one which cannot be impaired or defeated by
subsequent appropriation by another corporation in the same
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C field. (Philips Export B.V. vs. CA)
PROCESS OF INCORPORATION To come within the scope of the prohibition of Sec.
18, two requisites must be proven, namely:
Process of incorporation:
1. That the complainant corporation acquired a prior
1. Drafting the articles of incorporation
right over the use of such corporate name; and
2. Preparation and submission of additional and
2. The proposed name is either: (a) identical or (b)
supporting documents
deceptively or confusingly similar to that of any existing
3. Filing with the SEC corporation or to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.
4. Subsequent issuance of certificate of incorporation (Philips Export B.V. vs. CA)
Contents of the articles of incorporation

1. Name

2. Purpose AQUILA LEGIS FRATERNITY

3. Principal office Corporation Law Reviewer
4. Term Page 6 of 87
5. Incorporators Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
6. Number of directors/trustees In determining the existence of confusing similarity in
7. Names, nationalities and residences of corporate names, the test is whether the similarity is such as
directors/trustees to mislead a person using ordinary care and discrimination.
Proof of actual confusion need not be shown. It suffices that
confusion is probably or likely to occur. (Philips Export
B.V. vs. CA)
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. (Philips Export B.V. vs. CA)
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.
PURPOSE CLAUSE
A corporation has only such powers as are expressly
granted to it by law and by its articles of incorporation
including those which are incidental to such conferred powers,
those reasonably necessary to accomplish its purpose and
those which may be incidental to its existence.
Reasons for requiring a statement of 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 risk.
2. So that the board of directors and management may
know within what lines of business they are authorized to act.
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.
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.
General limitations on the purpose clause:
1. The purpose 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.
4. The purpose must be capable of being lawfully
combined.
THE PRINCIPAL OFFICE
The residence of the corporation is the place of its
principal office as may be indicated in its articles of
incorporation and may, therefore, be sued only at that place.
(CRS vs. Antillon)
TERM OF EXISTENCE
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.
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 capital stock of the
corporation.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
General rule: Only natural persons can be
incorporators.
Exception: Cooperatives and corporations primarily
organized to hold equities in rural banks.
Minors are not qualified to become incorporators.
THE DIRECTORS/TRUSTEES
General rule: There must be at least 5 but not more
than 15 directors or trustees in a private corporation.
Exceptions:
1. Educational corporations registered as a non-stock
corporation 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 the stockholders are
considered as members of the board of directors thereby
effectively allowing 20 members in the board; and
3. Corporation sole.
The by-laws may provide for additional qualifications
and disqualifications. However, it may not do away with the
minimum disqualifications laid down by the Code.
Qualifications:
1. Directors must own at least one (1) share of the
capital stock of the corporation. Trustees must be members.
2. A majority of the directors or trustees must be
residents of the Philippines.
Disqualifications:
1. Conviction 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 election or appointment.
2. Other disqualifications under applicable special laws.
 A by-laws may validly provide that no person may be
elected as director unless he owns a specified number of
shares required for the directorate qualification.
It may likewise disqualify a stockholder from being
elected into office if he has a substantial interest in a
competitor corporation to avoid any possible adverse effects
of conflicting interest of a director.
In order to be eligible as a director, what is material is
the legal title to, not beneficial ownership, of the stock as
appearing on the books of the corporation. (Lee vs. CA)
If no election is conducted or no qualified candidate
is elected, the incumbent director shall continue to act as such
in a hold over capacity until the election is held and a qualified
candidate is so elected. (Detective and Protective Bureau vs.
Cloribel)
CAPITALIZATION
Authorized capital – the maximum amount fixed in
the articles to be subscribed and paid-in or secured to be paid
by the subscribers.
Subscribed capital stock – the total number of shares
and its total value for which there are contracts for their
acquisition or subscription.
Paid-up capital stock – the actual amount or value
which has been actually contributed or paid to the corporation
in consideration of the subscriptions made thereon.
Stocks shall not be issued for a consideration less than
the par or issued price thereof.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Consideration for the issuance of stock may be any or
a combination of any two or more of the ff:
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 or services actually rendered to the
corporation;
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained
earnings to stated capital; and
6. Outstanding shares in exchange for stocks in the
event of reclassification or conversion.
Stocks shall not be issued in exchange of promissory
notes or future services.
Shares of stock and their classification
Shares of stock designate the interest or right which
the stockholder has in the management of the corporation,
and in the surplus profits and, in case of distribution, in all
assets remaining after the payment of its debts.
Stock certificate is a document or instrument
evidencing the interest of a stockholder in the corporation.
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.
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.
3. As a management control device.
4. To comply with statutory requirements.
5. To better insure return on investment.
6. For flexibility in price.
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.
Common and preferred shares
Common stock – a stock which entitles its owner to
an equal pro-rata division of profits, if there be any, but
without any preference or advantage in that respect over any
other stockholder or class of stockholders.
Preferred stock – a stock that gives the holder a
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 on preferred stock:
1. Must be issued with a stated par value; and
2. The preferences must be stated in the articles of
incorporation and in the certificate of stock, otherwise, each
share shall be, in all respect, equal to every other share.
The guarantee to preference as to dividends does not
create a relation of debtor and creditor between the
corporation and the holders of such stock. The board has the
discretion to determine whether or not to declare dividends.
Preferred shares are presumed to be non-
participating.
Participating preferred shares – the holders thereof
are still given the right to participate with the common
stockholders in dividends beyond their stated preference.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Cumulative preferred share – 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 absence of express stipulation, preferred shares
are presumed to be non-cumulative.
Non-cumulative preferred shares – 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.
Types of non-cumulative preferred shares:
1. Discretionary dividend type – gives the holder of such
shares the right to have dividends paid thereon in a particular
year depending on the judgment or discretion of the board of
directors.
2. Mandatory if earned type – impose a positive duty on
directors to declare dividends every year when profits are
earned.
3. Earned cumulative or dividend credit – gives the
holder thereof the right to arrears in dividends if there were
profits earned during the previous years but dividends were
not declared.
Unless the right to vote is clearly withheld, a
preferred stockholder has the right to vote.
Preference upon liquidation must be clearly indicated
otherwise they shall be placed on equal footing with other
shares.
Par and no par value shares
Par value shares – those whose value are fixed in the
articles of incorporation.
Par value shares cannot be issued nor sold by the
corporation at less than par.
No par value shares – those whose issued price are
not stated in the certificate of stock but which may be fixed in
the articles of incorporation, or by the board of directors when
so authorized by the said articles or by the by-laws, or in the
absence thereof, by the stockholders themselves.
Limitations of no par value shares:
1. Such shares, once issued, are deemed fully paid and
thus, non assessable;
2. The consideration for its issuance should not be less
than P5.00;
3. The entire consideration for its issuance 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 loan
associations.
Advantages to the issuance of no par value shares:
1. Flexibility in price;
2. Evasion of the danger of liability upon watered stock;
and
3. Disappearance of personal liability on the part of the
holder thereof for unpaid subscription.
Voting and non-voting shares
Voting shares – gives the holder thereof the right to
vote and participate in the management of the corporation
through the exercise of such right, either at the election of the
board of directors, or in any manner requiring the
stockholder‟s approval.
Non-voting shares – do not grant the holder thereof
the right to vote except under the penultimate paragraph of
Sec. 6.
Only preferred and redeemable shares may be denied
the right to vote.
There must always be a class or series of shares which
have complete voting rights.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Non-voting 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 penultimate paragraph of
Sec. 6, 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.
Founders’ shares
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.
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.
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 means. Such shares may again be
disposed of for a reasonable price fixed by the board of
directors.
Treasury shares may again be issued for a price less
than par.
Treasury shares have no voting and dividend rights.
Such rights are only granted to outstanding shares of stock.
(CIR vs. Manning)
CAPITAL REQUIREMENT
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.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
RESTRICTIONS AND PREFERENCES ON TRANSFER OF SHARES
General rule: Corporations may or may not provide
for restrictions and preferences regarding the transfer, sale or
assignment of shares in the articles of incorporation. It is
discretionary.
Exception: Close corporations are required to subject
their shares to specified restrictions as required in Sec. 96.
General rule: Restrictions or preferences must be
contained in the articles of incorporation and in all stock
certificates to be issued by the corporation.
Exception: In close corporations, such restrictions and
preferences must also be embodied in the by-laws.
NO TRANSFER CLAUSE
No transfer of stock or interest which will 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 be recorded in the books of
the corporation and this restriction shall be indicated in all of
the stock certificates to be issued by the corporation.
GROUNDS FOR DISAPPROVAL
Only substantial and not strict compliance is required.
Grounds for disapproval:
1. The articles of incorporation or any amendment
thereto is not substantially in accordance with the form
prescribed;
2. The purpose or purposes of the corporation are
patently unconstitutional, illegal, immoral, or contrary to
government rules and regulations;
3. The Treasurer‟s Affidavit concerning the amount of
capital stock subscribed and/or paid is false;
4. 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,
5. The articles of incorporation of corporations subject
to government supervision are not accompanied by a
favorable recommendation from the appropriate government
agency.
The grounds are not exclusive.
COMMENCEMENT OF CORPORATE EXISTENCE
It is only from the time of the issuance of the
certificate of incorporation that a corporation acquires
juridical personality and legal existence.
Prior to incorporation, a corporation has no juridical
personality to enter into contracts. (Cagayan Fishing
Development vs. Sandiko)
DE FACTO CORPORATION
De facto corporation – 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:
1. There is a valid law under which the corporation could
have been created as a de jure corporation;
2. An attempt, in good faith, to form a corporation
according to the requirements of law (colorable compliance);
3. A user of corporate powers; and
4. Good faith in claiming to be and doing business as a
corporation.
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Rules on collateral and direct attack against corporate
existence:
1. The corporate existence of a de jure corporation
cannot be directly attacked either directly or collaterally, even
by the State.
2. The corporate existence of a de facto corporation can
be directly attacked on a quo warranto proceeding.
3. The corporate existence of a de facto corporation is
not subject to collateral attack by any party.
A municipal corporation created by an
unconstitutional law cannot be cannot exist as a de facto
corporation unless there is some other valid law giving
corporate vitality to the organization. An unconstitutional law
confers no rights. (Municipality of Malabang vs. Benito)
Without having obtained a certificate of
incorporation, a corporation – even its stockholders – may not
claim in good faith to be a corporation. (Hall vs. Piccio)
CORPORATION BY ESTOPPEL
Sec. 21. Corporation by estoppel. - All persons who
assume to act as corporation knowing it be without authority
to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof;
Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not
be allowed to use as a defense its lack of corporate personality.
The doctrine of corporation by estoppel may apply to
the alleged corporation or to a third party transacting with the
former.
The principle of estoppel cannot be invoked in favor
of a person who is a member of the association and therefore
must be presumed to know that it is not a corporation. (Lozano
vs. De Los Santos)
The principle of estoppel applies when persons
assume to form a corporation and exercise corporate functions
and enter into business relations with third persons. Where
there is no third person involved and the 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. (Lozano vs. De Los Santos)
One who has induced another to act upon his willful
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. Such persons
becomes liable for the contracts entered into by such
ostensible corporation. (Albert vs. University Publishing Co.,
Inc.)
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 to be applicable where fraud takes part in the said
transaction. (Salvatierra vs. Garlitos)
Persons who have continuously and for a long period
misrepresented themselves as a corporation as estopped from
denying such personality to defeat claims against it. (Chiang
Kai Shek School vs. CA)
In the absence of fraud, a person who has contracted
or 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 an action
leading out of or involving such contract or dealing, unless the
existence is attacked for causes which have arisen since
making the contract or other dealing relied on as an estoppel.
(Asia Banking Corp. vs. Standard Products Co., Inc.)
The doctrine of estoppel applies to a third party only
when he tries to escape liability on a contract from which he
has benefited. It does not apply when the third party is the one
claiming from the contract. (International Express Travel &
Tours Services, Inc. vs. CA)
The doctrine of estoppel applies to foreign as well as
domestic corporations. Foreign corporations 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. (Georg Grotjahn GMBH & Co. vs. Isnani)
AQUILA LEGIS FRATERNITY
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
If a corporation by estoppel exists and enters into a
contract or transacts business with a third party, the latter has
three 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 who held out the association a corporation; and
3. Against both the ostensible corporation and persons
forming it, jointly and severally.
As regards the liability of the associates of the alleged
corporation, only those who actively participated in holding
out the association as a corporation should be held personally
liable.
ORGANIZATION AND COMMENCEMENT OF BUSINESS
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.
Organization – the election of officers, providing for
the subscription and payment of capital stock, the adoption of
by-laws, and such other steps as are necessary to endow the
legal entity with the capacity to transact the legitimate
business for which it was created.
Failure of the corporation to organize within the
prescribed period would result in its automatic dissolution,
unless its failure to do so is due to causes beyond its control.
Substantial compliance is sufficient.
Subsequent inoperation is merely a ground for
suspension or revocation of corporate franchise. Dissolution is
not automatic.
CHAPTER 5: THE CORPORATE CHARTER AND ITS
AMENDMENTS CORPORATE CHARTER
Corporate charter – an instrument or authority from
the sovereign power, bestowing rights and power.
The corporate charter is a 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; and
3. Between and among the stockholders or members
themselves as far as their relationship with one another is
concerned.
The charter of corporations created under the
Corporation Code consists of the articles of incorporation and
the Corporation Code inclusive of the by-laws adopted
thereunder and all pertinent provisions of any statute
governing them.
The charter of corporations created by special laws
consists of the special law creating the same and any and all
laws, rules and regulations affecting or applicable to them.
Franchise – the right or privilege itself to be and act
as a corporation or to do a certain act.
Kinds of franchises:
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1. Primary franchise – the right or privilege of being a
corporation which the state confers upon the applicant for this
faculty.
2. Secondary franchise – the powers and privileges
vested in, and to be exercised by the corporate body as such.
CORPORATE ENTITY THEORY
The corporation is possessed with a personality
separate and distinct from the individual stockholders or
members.
A corporation is a distinct legal entity to be
considered as separate and apart from the individual
stockholders or members who compose it, and is not affected
by the personal rights, obligations and transactions of its
stockholders or members. Conversely, a corporation has no
interest in the individual property of its stockholders unless
transferred to the corporation, even in case of a one- man
corporation. (Sulo ng Bayan, Inc. vs. Gregoria Araneta, Inc.)
A bona fide corporation should alone be liable for its
corporate acts as duly authorized by its directors and officers.
(Caram vs. CA)
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 the corporation being separate and distinct from the person
composing it. (Rustan Pulp and Paper Mills, Inc. vs. IAC)
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 and possesses the property of the
corporation, since the president, as an individual, and the
corporation are separate entities. (Cruz vs. Dalisay)
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. (Palay Inc. vs. Clave)
In a right of action against the corporation, the
officers may not be held personally liable as long as they act
within the scope of their authority. (Soriano vs. CA)
PIERCING THE VEIL OF CORPORATE FICTION
 Piercing the veil of the corporate fiction is resorted to
only in cases where the corporation is used or being used to
defeat public convenience, justify wrong, protect fraud,
defend crime, confuse legitimate issues, or to circumvent the
law or perpetuate deception, or an alter-ego, adjunct or
business conduit for the sole benefit of a stockholder or a
group of stockholders or another corporation.
Test in determining the applicability of the doctrine of
piercing the veil of corporation fiction:
1. Control, not mere majority or complete stock control,
but complete domination, not only of 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 loss complained of.
(Instrumentality Rule, Concept Builders, Inc. vs. NLRC)
WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
Corporate fiction cannot be disregarded in the
absence of intent to defraud in corporate transactions. (Remo,
JR vs. IAC)
For the separate juridical personality of a corporation
to be disregarder, the wrongdoing must be clearly and
convincingly established. (Del Rosario vs. NLRC)
AQUILA LEGIS FRATERNITY
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Mere corporate ownership of all the stocks of another
corporation will not justify their being treated as single entity.
(PNB vs. Ritratto)
There being not the least indication that the second
corporation is a dummy or serves as a client of the first
corporation, the fiction of separate and distinct corporate
entities cannot be disregarder and brushed aside. (Yu vs. NLRC)
AMENDMENT OF THE CORPORATE CHARTER
Steps to be followed for an effective amendment of
the articles of incorporation:
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 stock or 2/3
of the members in case of non-stock corporation.
3. Submission and filing of the amendments with the
SEC as follows:
a. The original and amender articles together shall
contain all the 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.
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 duly
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.
Time when the amendments shall take effect:
1. Upon approval of the SEC; or
2. From the date of filing with the SEC if not acted upon
with 6 months from the date of filing for a cause not
attributable to the corporation. (Note: not applicable to
special amendments)
Special amendments:
1. Extension or shortening of corporate term (Sec. 37)
2. Increase or decrease of capital stock (Sec. 38)
3. Incurring, creating or increasing bonded
indebtedness (Sec. 38)
PROVISIONS SUBJECT TO AMENDMENT
Matters which are fait accompli are not subject to
change.
A change in the name of the corporation does not
affect the identity of the corporation, nor in any way affect the
rights, privileges, or obligations previously acquired or
incurred by it. (Philippine First Insurance Co. vs. Hartigan)
AMENDMENT OF THE CORPORATE TERM
Procedure to amend the corporate term:
1. Approval by a majority vote of the board or 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 representing at least
2/3 of the outstanding capital stock or 2/3 of the members in
case of non-stock corporations.
4. In case of extension of corporate term, the extension
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 his appraisal rights.
AQUILA LEGIS FRATERNITY Where a corporate contract has been effected with
the approval of the board of directors, a resolution adopted at
Corporation Law Reviewer
a meeting of stockholders refusing to recognize the contract or
Page 16 of 87 repudiating it is without effect. (Ramirez vs. Orientalist Co.)

Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Extension may be made only before the term
provided in the corporate charter expires. (Alhambra Cigar &
Cigarette Mfg. Co., Inc. vs. SEC)
Contracts between a corporation and third persons
must be made by or under the authority of its board of
directors and not of its stockholders. (Barreto vs. La Previsora)
QUALIFICATIONS AND DISQUALIFICATIONS

CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS Qualifications:

POWERS OF THE BOARD
1. Directors must own at least one (1) share of the
Sec. 23. The board of directors and trustees. - Unless capital stock of the corporation. Trustees must be members.
otherwise provided in the Code, the corporate powers of all
2. A majority of the directors or trustees must be
corporations formed under this Code shall be exercised, all
residents of the Philippines.
business conducted and all property of such corporations
controlled and held by the board of directors or trustees.

The authority of the board of directors does not

extend to the fundamental changes in the corporate charter.

The board may delegate the exercise of corporate

powers.

A corporation is bound by the acts of its corporate

officers if they act within the scope of the 5 classifications of
powers of corporate agents:

1. Those expressly conferred or those granted by the

articles of incorporation, the corporate by-laws or by the
official act of the board of directors.

2. Those that are incidental or those acts as are naturally

Disqualifications:
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. AQUILA LEGIS FRATERNITY

4. Those that are apparent or those acts which although Corporation Law Reviewer
not actually granted, the principal knowingly allows or permits
it to be done. Page 17 of 87

5. Powers arising out of customs, usage or emergency. Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

Where a corporation seeks to evade liability on a

contract on the ground of lack of authority on the part of the
person who assumed to act for it, such defense should be
specially pleaded. Failure to make an issue as to such authority
eliminates any questions regarding it. (Ramirez vs. Orientalist
Co.)
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 the
board can create liability, like an individual, by other means
than by a formal expression of its will. (Ramirez vs. Orientalist
Co.)
The power to make corporate contracts resides
primarily in the company's board of directors; but the board
may ratify an unauthorized contract made by an officer of the
corporation. Ratification in this case is held to have occurred
when the board, with knowledge that the contract had been
made, adopted a resolution recognizing the existence of the
contract and directing that steps be taken to enable the
corporation to utilize its benefits. (Ramirez vs. Orientalist Co.)
1. Conviction 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 election or appointment.
2. Other disqualifications under applicable special laws.
In order to be eligible as a director, what is material is
the legal title to, not beneficial ownership, of the stock as
appearing on the books of the corporation. (Lee vs. CA)
If no election is conducted or no qualified candidate
is elected, the incumbent director shall continue to act as such
in a hold-over capacity until the election is held and a qualified
candidate is so elected. (Detective and Protective Bureau vs.
Cloribel)
ELECTION AND VOTING
In stock corporations, the majority of the outstanding
capital stock, in person or by representative authorized to act
by written proxy, must be present at the election of directors.
 In non-stock corporations, a majority of the members
entitled to vote, in person or by proxy, if allowed in its articles
of incorporation or by-laws, must be present in the election.
The election may be adjourned if, for any reason, no
election is held, or if the required quorum is not obtained.
However, it may not be adjourned indefinitely.
The election must be by ballot if requested by any
voting stockholder or member.
Candidates receiving the highest number of votes
shall be declared elected.
In stock corporations, cumulative voting is a matter of
right.
In non-stock corporations, cumulative voting is not
available unless provided for in the articles of incorporation or
by-laws. I.e., a member may cast as many votes as there are
trustees to be elected but may not cast more than one vote for
one candidate.
In stock corporations, the stockholder may:
1. Vote such number of shares for as many persons as
there are directors to be elected;
2. 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;
3. Distribute them on the same principle among as many
candidates as he shall see fit.
No delinquent stock shall be voted.
Officers to be elected
1. President, who shall be a director
2. Treasurer, who may or may not be a director
3. Secretary, who shall be a resident and citizen of the
Philippines
4. 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.
The directors or officers shall hold office for one (1)
year until their successors are elected and qualified.
VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE
OFFICERS
General rule: the quorum requirement for a valid
board meeting is the majority of the number of the directors
or trustees as fixed in the articles of incorporation.
Exception: The articles of incorporation or the by-laws
may provide for a greater majority.
General rule: To have a valid corporate act, the
decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum is required.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Exception: The election of corporate officers requires
the vote of a majority of all the members.
General rule: Individual directors cannot bind the
corporation by their individual acts.
Exceptions:
1. By delegation of authority;
2. Where expressly conferred; or
3. Where the officer or agent is clothed with actual or
apparent authority.
Although 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 is 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) the
acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or without
the scope of his ordinary powers. (Yao Ka Sin Trading vs. CA)
Any 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. (Lopez vs. Fontecha)
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, the authority is implied and that the
corporation is bound. (Pua Casim & Co. vs. Neumark and Co.)
An invalid contract may be validated by the
ratification only of the board of directors; the president has no
authority to ratify such contract. (Yu Chuck vs. Kong Li Po)
Silence coupled with acceptance of benefits
constitutes a binding ratification. (Francisco vs. GSIS)
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 Board of Directors, 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. 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 board of
directors. (Board of liquidators vs. Kalaw)
Lack of repudiation, acquiescence and acceptance of
benefits are equivalent to an implied ratification by the Board
of Directors and binds the corporation even without formal
resolution passed and recorded. (Buenaseda vs. Bowen & Co.,
Inc.)
Express ratification: through formal board action.
Implied ratification:
1. Silence or acquiescence;
2. Acceptance and/or retention of benefits; or
3. By recognition or adoption.
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REMOVAL AND FILLING UP OF VACANCIES
Requirements and procedure:
1. The removal should take place at a general or special
meeting duly called for that purpose;
2. The removal must be a vote of the stockholders
representing at least 2/3 of the outstanding capital stock or 2/3
of the members in case of non-stock corporations;
3. Prior notice of the proposed removal must be made
stating the time and place of meeting either by publication or
by written notice.
The special meeting must be called by the secretary,
on order of the president or on the written demand of the
stockholders representing a majority of the outstanding capital
stock, or 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 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 signing the demand.
General rule: Directors or trustees may be removed
with or without just cause.
Exception: Removal without just cause may not be
used to deprive minority stockholders or members of the right
of representation to which they may be entitled under Sec. 24.
PD 902-A grants the court the power and authority to
remove or oust a director and it can do so, even motu propio
by the appointment of a management committee.
In case of a deadlock in a close corporation, the SEC is
authorized to issue an order cancelling, altering, or enjoining
any resolution or other act of the corporation or its board of
directors or directing or prohibiting any act of the corporation
or the board of directors thereby effectively taking away the
rights of the directors to act as managers of the corporation.
Vacancies to be filled by the stockholders or members
in a regular or special meeting:
1. Vacancy due to removal;
2. Vacancy due to expiration of term;
3. Vacancy due to an increase in the number of board of
directors; and
4. Vacancy due to other causes when the remaining
directors or trustees do not constitute a quorum.
Vacancy due to removal may be filled by an election
at the same meeting without further notice.
Any change in the constitution of the board of
directors or trustees must be reported to the SEC.
The tenure of the director filling up the vacancy shall
only be for the unexpired term of his predecessor in office.
If the successor is not qualified, the predecessor shall
hold office in a hold-over capacity until such successor is duly
elected and qualified. (Detective and Protective Bureau vs.
Cloribel)
COMPENSATION OF DIRECTORS
General rule: Directors shall not receive any
compensation, as such directors, except for reasonable per
diems.
Exceptions:
1. When there is a provision in the by-laws fixing their
compensation;
2. When the stockholders, by a majority vote the
outstanding capital stock grant the same; and
3. If the director renders extra-ordinary or unusual
service.
In no case shall the total yearly compensation of
directors, as such directors, exceed 10% of the net income
before income tax of the corporation during the preceding
year.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
If there is wastage of corporate assets, the courts may
be justified to look into the reasonableness and fairness of the
compensation despite the fact that the grant thereof is
authorized pursuant to the by-laws and by the vote of the
majority of the holders of the outstanding capital stock of the
corporation.
The board may not grant compensation upon itself
without authorization of the by-laws or in contravention of the
by-laws. (Central Cooperative Exchange vs. Tibe, Jr.)
 Members of the board of directors may receive
compensation, in addition to reasonable per diems, when they
render services to the corporation in a capacity other than as
directors or trustees. (Western Institute of Technology, Inc. vs.
Salas)
The fact that the amount paid as compensation to
directors under a by-law provision has increased beyond what
would probably be necessary to secure adequate service from
them is a matter that cannot be corrected by the court. The
remedy is in the hands of the stockholders who have the
power at any lawful meeting to change the rule. (Govt. vs. El
Hogar Filipino)
LIABILITY 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.
Personal liability of a corporate director, trustee or
officer along with the corporation may validly attach, as a rule,
only when:
1. He assents (a) to a patently unlawful act of the
corporation, or (b) for bad faith, 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; or
4. He is made, by specific provision of law, to personally
answer for his corporate action. (Tramat Mercantile, Inc. vs.
CA)
Where a 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. (Sec. 1, BP
22)
In labor cases, 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. (Uichico vs. NLRC)
THREE-FOLD DUTY OF DIRECTORS
Three-fold duty of directors:
1. Obedience
2. Diligence
3. Loyalty
Solidarily liability for all damages suffered by the
corporation, its stockholders or members or other persons
shall be imposed upon directors or trustees:
1. Who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation;
2. Who are guilty of gross negligence or bad faith in
directing the affairs of the corporation; or
3. Who acquire any personal property or pecuniary
interest in conflict with their duty as such directors or trustees.
Business judgment rule – directors are not liable for
losses due to imprudence or honest error of judgment.
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.
Resolutions passed in good faith by the board of
directors are valid and binding, and whether or not it will cause
losses or decrease in profits are not subject to the review of
the court. (Montelibano vs. Bacolod Murcia Milling, Co., Inc.)
AQUILA LEGIS FRATERNITY
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
General rule: A director is not liable for misconduct of
co-directors or other officers.
Exceptions:
1. He connives or participates in it; or
2. He is negligent in not discovering or acting to prevent
it.
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.
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 a business opportunity which in fairness
should belong to the corporation.
Distinction between Secs. 31 & 34:
1. Sec. 31, where a director is 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 by
the stockholders.
2. Sec. 34, where the director acquires for himself 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 owning or representing at least 2/3 of the
outstanding capital stock.
 Directors are liable for fraud committed by
concealment of information as to the state and probable result
of the negotiations for the sale of corporate assets which may
affect the price of the corporation‟s stock. (Strong vs. Repide)
SELF-DEALING DIRECTORS
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 of 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, provided:
1. The contract is 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
2. Such ratification is made at a meeting called for that
purpose;
3. Full disclosure of the adverse interest of the directors
or trustees involved is made; and
4. The contract is fair and reasonable under the
circumstances.
In the absence of express delegation, a contract
entered into by the president, on behalf of the corporation,
may bind the corporation if the board should ratify the same
expressly or impliedly. Furthermore, the president as such may
bind the corporation by a contract in the ordinary course of
AQUILA LEGIS FRATERNITY
Corporation Law Reviewer
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
business, provided the same is reasonable under the
circumstances. These rules only apply where the president or
other officer, purportedly acting for the corporation, is dealing
with a third person, i.e., person outside the corporation. It
does not apply to self-dealing directors or officers. (Prime
White Cement Corp. vs. IAC)
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. (Mead vs. Mc Cullough)
INTERLOCKING DIRECTORS
Sec. 33. Contracts between corporations with
interlocking directors. - Except in cases of fraud, and provided
the contract is fair and reasonable under the circumstances, a
contract between two or more corporations having
interlocking directors shall not be invalidated on that ground
alone: Provided, That if the interest of the interlocking director
in one corporation is substantial and his interest in the other
corporation or corporations is merely nominal, he shall be
subject to the provisions of the preceding section insofar as the
latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the
outstanding capital stock shall be considered substantial for
purposes of interlocking directors.
A director who owns a substantial interest in one
corporation dealing with another where he has a nominal
interest is a regarded as a self-dealing director in so far as the
latter corporation is concerned.
DERIVATIVE SUIT
Suits that stockholders may bring against erring
directors or officers:
1. Individual or personal suit – one brought by the
shareholders for direct injury to his rights, such as denial of his
right to inspect corporate books and records or pre-emptive
right;
2. Representative of class suit - ; and
3. Derivative suit – an action based on injury to the
corporation – to enforce a corporate right
– wherein the corporation is joined as a necessary party, and
recovery is in favor of the corporation.
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, can not
maintain a derivative suit unless such transactions continue
and are injurious to the stockholder, or affect him specifically
in some other way. (Pascual vs. Orozco, et al.)
When the board is under the complete control of the
principal defendants in the case, demand upon such board to
institute action and prosecute the same is not required. The
law does not require litigants to do useless acts. (Everett vs.
Asia Banking Corporation)
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 issue. On what side the corporation
appears is not important. (Republic Bank vs. Cuaderno)
The minority shareholder who is suing for and in
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 vest jurisdiction upon the
court or quasi-judicial body concerned over the subject matter
and nature of the action. (Western Institute of Technology, Inc.
vs. Salas)
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. (SMC vs. Khan)
Where corporate directors are guilty of breach of
trust – not mere error of judgment or abuse of discretion – and
intra-corporate 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
5. Any benefit or damages recovered shall pertain to the
corporation.
EXECUTIVE COMMITTEE
An executive committee may be created when
authorized by the by-laws.
General rule: The executive 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.

Exceptions:

1. Approval of any action for which shareholders'

approval is also required;
AQUILA LEGIS FRATERNITY
2. The filling of vacancies in the board;
Corporation Law Reviewer
3. The amendment or repeal of by-laws or the adoption
Page 23 of 87
of new by-laws;
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
4. The amendment or repeal of any resolution of the
redress of the wrong inflicted directly upon the corporation board which by its express terms is not so amendable or
and indirectly upon the stockholders. (Reyes vs. Tan, et al.) repealable; and

The stockholders in a derivate suit cannot allege or 5. A distribution of cash dividends to the shareholders.
vindicate their own individual interests or prejudice. (Gamboa
CHAPTER 7: CORPORATE POWERS AND AUTHORITY
vs. Victoriano, et al.)
Classification of corporate authority:
In a derivative suit, the injury complained of is
primarily to the corporation, so that the suit for the damages 1. Those expressly granted or authorized by law
claimed should be by the corporation rather than by the inclusive of the corporate charter or articles of incorporation
stockholders. The stockholders may not directly claim those
damages for themselves for that would result in the 2. Those impliedly granted as are essential or
appropriation by, and the distribution among them of part of reasonably necessary to the carrying out of the express powers
the corporate assets before the dissolution of the corporation
3. Those that are incidental to its existence.
and the liquidation of its debts and liabilities. (Evangelista vs.
Santos)

Rules, requirements and procedure so that a

derivative suit may proceed or prosper:
AQUILA LEGIS FRATERNITY
1. The party bringing the action should be a stockholder
as of the time the act or transaction complained of took place, Corporation Law Reviewer
or whose shares have evolved upon him since by operation of Page 24 of 87
law. This rule, however, does not apply if such act or
transaction continues and is injurious to the stockholder or Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
affects him specifically in some other way. The number of
Powers expressly granted
shares is immaterial.
1. Power to sue and be sued (Sec. 36)
2. He has tried to exhaust intra-corporate remedies, i.e.
he has made a demand on the board of directors for the 2. Power of succession (Sec. 36)
appropriate relief but the latter had failed or refused to heed
his plea. Demand, however, is not required if the company is 3. Power to adopt and use a corporate seal (Sec. 36)
under the complete control of the directors who are the very 4. Power to amend its articles of incorporation (Sec. 36)
ones to be sued (or where it becomes obvious that a demand
upon them would have been futile and useless) since the law 5. Power to adopt, amend or repeal by-laws (Sec. 36)
does not require a litigant to perform useless acts.
6. Power to issue or sell stocks/ to admit members (Sec.
3. The stockholder bringing the suit must allege in his 36)
complaint that he is suing on a derivative cause of action on
7. Power to acquire or alienate real or personal property
behalf of the corporation and all other stockholders similarly
(Sec. 36)
situated, otherwise, the case is dismissible.
8. Power to enter into merger or consolidation (Sec. 36)
4. The corporation should be made a party, either as
party-plaintiff or defendant, in order to make the court‟s 9. Power to make reasonable donations (Sec. 36)
judgment binding upon it.
10. Power to establish pension, retirement, and other
plans (Sec. 36)
11. Power to extend or shorten corporate term (Sec. 37) General rule: Amendment of the articles of
incorporation is a matter of right (Note: procedure differs for
12. Power to increase or decrease capital stock (Sec. 38)
special amendments)
13. Power to incur, create or increase bonded
Exception: Corporations created by special law
indebtedness (Sec. 38)
POWER TO ADOPT BY-LAWS
14. Power to deny pre-emptive right (Sec. 39)
A corporation, once formed is required to adopt its
15. Power to sell or dispose corporate assets (Sec. 40)
by-laws, not contrary to law, morals or public policy, within
16. Power to acquire own shares (Sec. 41) one month from receipt of official notice of the issuance of
certificate of incorporation or registration.
17. Power to invest corporate funds in another
corporation or business or for any other purpose (Sec. 42) POWER TO ISSUE/SELL STOCKS OR ADMIT MEMBERS

18. Power to declare dividends (Sec. 43) The power of a corporation to issue or sell stock is an
inherent right except where it sells or issues stocks of other
19. Power to enter into management contract (Sec. 44) corporations (Securities Regulation Code).
POWER TO SUE AND BE SUED POWER TO ACQUIRE/ALIENATE PROPERTY
The residence of the corporation is the place of its Real or personal properties must be acquired, held or
principal office as may be indicated in its articles of conveyed as the transaction of the lawful business of the
incorporation and may, therefore, be sued only at that place. corporation may reasonably and necessarily require.
(CRS vs. Antillon) Furthermore, it shall be subject to the limitations imposed by
law and the Constitution.
Service of summons upon a corporation must be
made upon: A corporation cannot undertake acquisition of
property which would have no purpose and would have no
1. President,
necessary connection with its legitimate business. (Luneta
2. Managing partner, Motors Co. vs. A.D. Santos, Inc.)

3. General manager, A corporation whose business may properly

conducted in a populous center may acquire an appropriate lot
4. Corporate secretary, and construct thereon an edifice with facilities in excess of its
5. treasurer, or own immediate requirements. (Govt. vs. El Hogar)

6. In-house counsel A corporation may register alienable public lands if it

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. (Delta Motor Sales Corp. vs. Mangosing)
Under the new rules, service of summons upon an
agent of the corporation is no longer authorized. (E.B. Villarosa
& Partner Co., LTD. vs. Benito)
POWER OF SUCCESSION
Right of succession – a corporation persists to exist
despite the death, incapacity, civil interdiction or withdrawal
of the stockholders or members thereof.
has been held by it, personally or through its predecessor-in-
interest, openly, continuously and publicly within the
prescribed statutory period of 30 years under the Public Land
Law, as amended, since it is converted into private property by
mere lapse of completion of said period. (Dir. of Lands vs. CA)
POWER TO MAKE REASONABLE DONATIONS
Limitations imposed upon corporate donations:
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 any political party or candidate,
or for purpose of partisan political activity.

POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER

PLANS

AQUILA LEGIS FRATERNITY
Corporation Law Reviewer
Page 25 of 87
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
POWER TO ADOPT AND USE COMMON SEAL
Statutes empowering corporations to make and own
a seal are not mandatory but merely permissive.
POWER TO AMEND ARTICLES OF INCORPORATION
While as a rule an ultra vires act is one committed
outside the object for which a corporation is created as
defined by law of its organization and therefore beyond the
powers conferred upon it by law, there are however 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. (Republic
vs. Acoje Mining Co., Inc.)
POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR
NECESSARY TO CARRY OUT ITS PURPOSES (IMPLIED POWERS)
Classification of implied powers:
1. Acts in the usual course of business 6. In case of extension, the same must be made during
the lifetime of the corporation;
2. Acts to protect debts owing to the corporation
7. Any dissenting stockholder may exercise his appraisal
3. Embarking on a different business
right;

8. Submission of the amended articles with the SEC; and

9. Approval thereof by the SEC.

AQUILA LEGIS FRATERNITY
POWER TO INCREASE/DECREASE CAPITAL; INCUR, CREATE OR
Corporation Law Reviewer INCREASE BONDED INDEBTEDNESS

Page 26 of 87 Requirements and procedure:

Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
4. Acts in part or wholly to protect or aid employees
5. Acts to increase business
A corporation has authority to do what will
legitimately tend to effectuate the express purposes and
objects; that it may ordinarily do all things that are convenient,
suitable or necessary to enable it to fully perform the
undertaking designated in its charter, and for which it is
organized.
There must be a logical and necessary relation of the
act to the corporate purpose. (NPC vs. Vera)
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. (NPC vs. Vera)
1. Approval by the majority vote of the board of
directors or trustees;
2. Ratification by the stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of the members in
case of non-stock corporations;
3. The ratification must be at a meeting duly called for
that purpose;
4. Prior written notice of the proposed action 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. 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 stockholder‟s meeting,
setting forth the matters contained in subsection 1 to 7 of Sec.
38;

Examples:

1. Operation and maintenance of an electric plant for a AQUILA LEGIS FRATERNITY

cement factory. (Teresa Electric Power Co., Inc. vs. PSC)
Corporation Law Reviewer
2. NPC‟s undertaking of stevedoring services for its
Page 27 of 87
power plant. (NPC vs. Vera)
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
3. International School‟s imposition of a development
fee for expansion and maintenance. (Powers vs. Marshall) 6. In case of increase in capital stock, 25% of such
increased capital must be subscribed and that at least 25% of
POWER TO EXTEND/SHORTEN CORPORATE TERM
the amount subscribed must be paid either in cash or property;
Requirements and procedure:
7. In case of decrease in capital stock, the same must not
1. Approval by the majority vote of the board of prejudice the right of the creditors;
directors or trustees;
8. Filing of the certificate of increase and amended
2. Ratification by the stockholders representing at least articles with the SEC; and
2/3 of the outstanding capital stock or 2/3 of the members in
9. Approval thereof by the SEC.
case of non-stock corporations;
3 ways of increasing the capital stock:
3. The ratification must be at a meeting duly called for
that purpose; 1. Increasing the par value of the existing number of
shared without increasing the number of shares;
4. Prior written notice of the proposal to extend or
shorten the corporate term must be made stating the time and 2. Increasing the number of existing shares without
place of meeting addressed to each stockholder or member at increasing the par value thereof; and
his place of residence, either by mail or personal service;
3. Increasing the number of existing shares and at the
5. In case of extension, the same cannot be made ealier same time increasing the par value of the shares.
than five (5) years prior to the original or subsequent expiry
Existence of unissued or unsubscribed share out of
date unless there are justifiable reasons for an earlier
the original capital stock will not prohibit the increase of
extension;
capital stock.
 Reasons for decreasing capital stock: Corporation Law Reviewer

1. To reduce or wipe out existing deficit where no Page 28 of 87

creditors would thereby be affected;
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
2. When capital is more than what is necessary to
The exceptions do not apply to stockholders of a close
procreate the business or reduction of capital surplus; or
corporation.
3. To write down the value of its fixed assets to reflect
The right may be lost by waiver, expressly or impliedly
the present actual value in case where there is a decline in the
by inability or failure to exercise it after having been notified.
value of the fixed assets of the corporation.
The pre-emptive right covers all issues or disposition
A corporation has no power to release an original
of share of any class. It includes new share issued pursuant to
subscriber to its capital stock from the obligation of paying for
an increase in capital stock, unissued shares which form part
his shares, without a valuable consideration for such release;
of the original capital stock and treasury shares.
and as against creditors a reduction of the capital stock can
take place only in the manner and under the conditions POWER TO SELL/DISPOSE ASSETS
prescribed by law. Moreover, strict compliance with the
statutory regulations is necessary. (Philippine Trust Company There is a sale or other disposition of substantially all
vs. Rivera) the corporate property and assets if the corporation would
thereby be rendered incapable of continuing the business or
A reduction of capital stock may not be used as a accomplishing the purpose for which it was incorporated.
subterfuge, a deception as it were, to camouflage the fact that
a corporation has been making profits to obviate a just sharing Conditions for the valid exercise of this right:
to labor. (Madrigal & Co. vs. Zamora)
1. Resolution by the majority vote of the board of
A corporation which has the power to borrow or raise directors or trustees;
money, to contract for labor or services, or otherwise contract
2. Authorization from the stockholders representing at
a debt has the implied power to issue bonds in payment or as
least 2/3 of the outstanding capital stock or 2/3 of the
a security provided it violates no prohibition or restriction in
members in case of non-stock corporations;
its charter or any other statutes.
3. The ratification must be at a meeting duly called for
Corporate bonds must be registered and approved by
that purpose;
the SEC before they are issued.
4. Prior written notice of the proposed action must be
POWER TO DENY PRE-EMPTIVE RIGHTS
made stating the time and place of meeting addressed to each
Pre-emptive right – is a right granted by law to all stockholder or member at his place of residence, either by mail
existing stockholders of a stock corporation to subscribe to all or personal service;
issues or disposition of shares of any class, in proportion to
5. The sale of the assets shall be subject to the
their respective stockholdings, subject only to the limitations
provisions of existing laws on illegal combinations and
imposed under Sec. 39.
monopolies; and
The basis for the grant of this right is the preservation,
6. Any dissenting stockholder shall have the option to
unimpaired and undiluted, of the old stockholders‟ relative
exercise his appraisal right.
and proportionate voting strength and control, that is, the
existing ratio of their proprietary interest and voting power in 7. (Note: In non-stock corporations where there are no
the corporation. members with voting rights, the vote of at least a majority of
the trustees in office will be sufficient authorization for the
All stockholders of a stock corporation shall enjoy pre-
corporation to enter into such transaction.)
emptive right to subscribe to all issues or disposition of shares
of any class, in proportion to their respective shareholdings, Exception to application of the procedure and
unless such right is denied by the articles of incorporation or requirements:
an amendment thereto.
1. The sale, lease, exchange, mortgage, pledge or other
Exceptions: dispose of property and assets is necessary in the usual and
regular course of business of the corporation; or
1. Shares to be issued in compliance with laws requiring
stock offerings or minimum stock ownership by the public; or 2. The sale or other disposition of property and assets is
appropriated for the conduct of the corporation‟s remaining
2. Shares to be issued in good faith with the approval of
business.
the stockholders representing two- thirds (2/3) of the
outstanding capital stock, in exchange for property needed for The sale or other disposition of all or substantially all
corporate purposes or in payment of a previously contracted of the corporate property or assets must be voted for by the
debt. legitimate board and concurred in by the bona fide
stockholders or members. (IDP vs. CA)

General rule: Where a corporation sells or otherwise

transfers all of its assets to another corporation, the latter is
AQUILA LEGIS FRATERNITY not liable for the debts and liabilities of the transferor.
 Exceptions: 2. Ratification by the stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of the members in
1. Where the purchaser expressly or impliedly agrees to
case of non-stock corporations;
assume such debts;
3. The ratification must be at a meeting duly called for
2. Where the transaction amounts to a consolidation or
that purpose;
merger of the corporations;
4. Prior written notice of the proposed investment and
3. Where the purchasing corporation is merely a
the time and place of meeting shall be made, addressed to
continuation of the selling corporation; and
each stockholder or member at his place of residence, either
4. Where the transaction is entered into fraudulently in by mail or personal service; and
order to escape liability for such debts.
5. Any dissenting stockholder shall have the option to
exercise his appraisal right.

The approval of the stockholders or members is not

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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:
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;
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares; and
required where the investment is reasonably necessary to
accomplish its primary purpose.
An unauthorized investment which is not illegal or
void ab initio or not contrary to law, morals, public order or
public policy, is merely voidable and may become binding and
enforceable when ratified by the stockholders. (Gokongwei, Jr.
vs. SEC)
POWER TO DECLARE DIVIDENDS
Dividends – are corporate profits set aside, declared
and ordered by the Board of Directors to be paid to the
stockholders.
Dividends can only be declared out of unrestricted
retained earnings.
Unrestricted retained earnings – undistributed
earnings of a corporation which have not been allocated for
any managerial, contractual or legal purpose and which are
free for distribution to the stockholders as dividends.

4. To redeem redeemable shares.

General rule: the corporation must have unrestricted

retained earnings.

Exceptions:

1. Redemption of redeemable shares; and

2. Stockholder‟s right to compel a close corporation to

purchase his shares when the corporation has sufficient assets
to cover its debts and liabilities.

The acquisition of shares must be made in good faith,

free from fraud, actual or constructive, and that the
corporation is not insolvent or in the process of dissolution and Types of dividends:
that the rights of creditors and other stockholders are in no
way injuriously affected.
AQUILA LEGIS FRATERNITY
POWER TO INVEST FUNDS
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The right refers to investment in the form of money,
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properties or other fixed assets.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Requirements and procedure:

1. Resolution by the majority vote of the board of

1. Cash dividend – those that are payable in lawful
directors or trustees;
money.
2. Property dividend – those that take form of bonds,
notes, evidences of indebtedness or stock in other
corporations.
3. Stock dividends – refer to the corporation‟s shares of
stock.
Rules on dividends due on delinquent stock:
1. Cash dividend – first applied to the unpaid balance on
subscription costs and expenses.
2. Stock dividend – withheld until subscription is fully
paid.
General rule: Stock corporations are prohibited from
retaining surplus profits in excess of 100% of their paid-in
capital stock.
Exceptions:
1. When justified by definite corporate expansion
projects or programs approved by the board of directors; or
2. When the corporation is prohibited under any loan
agreement with any financial institution or creditor, whether
local or foreign, from declaring dividends without its/his
consent, and such consent has not yet been secured; or
3. When it can be clearly shown that such retention is
necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for
probable contingencies.
General rule: The board of directors exercise
exclusive authority in declaring dividends.
Exception: In declaring stock dividends, the approval
of the stockholders representing at least 2/3 of the
outstanding capital stock is required.
The judgment of the board of directors in the matter
of declaring dividends is conclusive except when they act in
bad faith, or for a dishonest purpose or act fraudulently,
oppressively, unreasonably or unjustly or abuse of discretion
can be shown so as to impair the rights of the complaining
stockholders to their just proportion of corporate profits.
The essential test of bad faith is to determine if the
policy of the directors is dictated by their personal interest
rather than the corporate welfare.
The right of the stockholders to be paid dividends vest
as soon as they have been lawfully and finally declared by the
Board of Directors.
No revocation of dividend may be had unless it has
not been officially communicated to the stockholders or is in
the form of stock dividends which is revocable at any time prior
to distribution.
Stock dividends cannot be issued to a person who is
not a stockholder. (Neilson & Co., Inc. vs. Lepanto
Consolidated Mining Co.)
Directors are not liable for declaration of dividend
contrary to law, unless attended with bad faith, gross
negligence or willful and knowing assent. (Ladia)
POWER TO ENTER INTO MANAGEMENT CONTRACTS
Requirements and procedure:
1. Resolution by the board of directors or trustees;
2. Approval by the stockholders representing a majority
of the outstanding capital stock or majority of the members in
case of non-stock corporations;
3. The approval must be at a meeting duly called for that
purpose;
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.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
When approval of the stockholders of the managed
corporation owning at least 2/3 of the outstanding capital
stock or 2/3 of the members in case of non-stock corporations
are required:
1. Where a stockholder or stockholders representing
the same interest of both the managing and the managed
corporations own or control more than 1/3 of the total
outstanding capital stock entitled to vote of the managing
corporation;
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; or
3. Where 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, operating agreements or otherwise.
ULTRA-VIRES ACTS
Ultra-vires acts – are those that can not be executed
or performed by a corporation because they are not within its
express, inherent or implied powers as defined by its charter
or articles of incorporation.
Consequences of ultra-vires acts:
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
either an individual or derivative suit to enjoin a threatened
ultra-vires act or contract.
3. On the immediate parties – (a) if the contract is fully
executed on both sides, the contract is effective; (b) if the
contract is executory on both sides, neither party can maintain
an action for its non-performance; and (c) if the contract is
executory on one side only, and has been fully performed on
the other, the party who has received the benefits is estopped
to set up that the contract is ultra-vires.
Acts which are clearly beneficial to the company or
necessary to promote the interest or welfare of the
corporation, its employees and their families, or in the
legitimate furtherance of its business are within corporate
powers. (Republic vs. Acoje Mining)
Mere ultra-vires acts which are not illegal per se may
become binding and enforceable either by ratification,
estoppel or on equitable grounds unless the public or third
parties are thereby prejudiced. (Privano vs. De la Rama
Steamship)
Corporations authorized to acquire the bonds have
the 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. 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. (Carlos vs.
Midoro Sugar Co.)
Actions which are beyond the powers of the
corporation as embodied in its articles of incorporation and
have absolutely no relation to the avowed purpose of the
corporation are ultra-vires. (Japanese War Notes Claimants
Assoc., Inc. vs. SEC)
Corporate officers 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 shall be personally liable therefor, as
well as for the consequences arising from their acts in
connection therewith. (Crisologo-Jose vs. CA)
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
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
themselves. They are 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
member and directors and officers with relation thereto and
among themselves in their relation to it.
Requirements and procedure for adoption of by-laws:
1. The by laws must not be inconsistent with the Code;
2. If adopted prior to incorporation:
a. Approved and signed by all the incorporators;
b. Submitted together with the articles of incorporation
to the SEC;
3. If adopted subsequent to incorporation:
a. Adopted within one (1) month after receipt of official
notice of the issuance of its certificate of incorporation by the
SEC;
b. 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,
c. Signed by the stockholders or members voting for
them
d. Kept in the principal office of the corporation, subject
to the inspection of the stockholders or members during office
hours.
e. A copy thereof, duly certified to by a majority of the
directors or trustees countersigned by the secretary of the
corporation, must be filed with the SEC which shall be attached
to the original articles of incorporation.
4. Certification of the appropriate government agency
concerned to the effect that such by- laws or amendments are
in accordance with law.
5. Issuance by the Securities and Exchange Commission
of a certification that the by-laws are not inconsistent with this
Code.
Contents of by-laws:
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.
By-laws are subordinate to the articles of
incorporation, the Corporation Code and other statutes which
form part of the corporate charter.
 By-laws become effective only upon the approval of 1. It must not be contrary to law, public policy or morals.
the SEC
2. It must not be inconsistent with the articles of
incorporate.

3. It must be general and uniform in its effect or

applicable to all alike or those similarly situated.

4. It must not impair obligations and contracts or vested

rights.

5. It must be reasonable.

CHAPTER 9: MEETINGS

Meetings – applies to every duly convened assembly

either stockholders, members, directors or trustees, manages,
etc. for any legal purpose, or the transaction of business of a
common interest.
Time of filing: Classes of meetings:

1. General
AQUILA LEGIS FRATERNITY 2. Special
Corporation Law Reviewer STOCKHOLDER’S MEETINGS
Page 33 of 87 Requirements to have a valid stockholder‟s meeting:
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C 1. It must be held on the date fixed in the by-laws or in
accordance with law.

2. Prior notice must be given.

1. Prior to incorporation – must be signed by all the
incorporators, must be filed together with the articles of 3. It must be held at the proper place.
incorporation
4. It must be called by the proper party.
2. After incorporation – approval of at least a majority
of the outstanding capital stock 5. Quorum and voting requirements must be met

Failure to file by-laws may result to suspension or
revocation of corporate franchise after proper notice and
hearing
Failure to file by-laws does not result in automatic
dissolution. (LGVHA vs. CA)
It must be held on the date fixed in the by-laws or in
accordance with law.
Regular meetings shall be held annually on a date
fixed in the by-laws, or if not so fixed, on any date in April of
every year as determined by the board of directors or trustees.

By-laws are internal rules an cannot bind, effect or

prejudice third persons without knowledge. (Fleisher vs. Botica
Nolasco)
AQUILA LEGIS FRATERNITY
Two modes of amending or repealing by laws or
adopting a new one: Corporation Law Reviewer

1. By a majority vote of the directors or trustees and the Page 34 of 87

majority vote of the outstanding capital stock or members, at
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
a regular or special meeting called for that purpose; or
Special meetings of stockholders or members shall be
2. By the board of directors alone when delegated by
held at any time deemed necessary or as provided in the by-
2/3 of the outstanding capital stock or members
laws.
Delegated power to amend, repeal or adopt by-laws
Prior notice must be given.
may be revoked
Regular – 2 weeks prior notice
Incorporation of an invalid by-law provision is not a
misdemeanor. It does not justify the dissolution of the Special – 1 week prior notice
corporation. (Govt. vs. El Hogar)
The by-laws may provide for a different period
The by-laws may disqualify a stockholder from being (shorter or longer)
elected into office if he has a substantial interest in a
competitor corporation to avoid any possible adverse effects Failure to give notice of a meeting would render the
of conflicting interest of a director. (Gokongwei, Jr. vs. SEC) resolution made thereunder voidable at the option of the
stockholder or member who was not notified. (Board of
Elements of a valid by laws: Directors vs. Tan)
 Notice may be waived, expressly or impliedly.
Notice must state the agenda otherwise it may
become voidable.
Notice of meetings shall be in writing, and the time
and place thereof stated therein.
It must be held at the proper place.
General Rule: Stockholders' or members' meetings,
whether regular or special, shall be held in the city or
municipality where the principal office of the corporation is
located, and if practicable in the principal office of the
corporation.
Exceptions to the rule:
1. A non-stock corporation, in its by laws, may provide
for any place within the Philippines.
2. Metro Manila is considered a city or municipality.
It must be called by the proper party.
Persons who may call the meeting:
1. The person or persons authorized under the by-laws;
2. Absent of any provision in the by-laws, the president;
3. Under Sec. 28 (removal of director), by the secretary
on order of the president or on written demand of the
stockholder representing or holding at least a majority of the
outstanding capital stock or majority of the members entitled
to vote in a non-stock corporation, or the stockholder or
member making the demand if there is no secretary or he
refuses to do so; and
4. On order of the proper forum under Sec. 50.
A stockholder may only petition the SEC to issue an
order directing the petitioner to call a meeting when there is
no person authorized to call a meeting. Otherwise, the remedy
is to file a petition for mandamus.
Quorum and voting requirements must be met
A quorum shall consist of the stockholders
representing a majority of the outstanding capital stock.
The by-laws or the Code itself may provide for a
greater quorum.
The basis of determining the presence of a quorum:
1. Stock corporation – total subscription irrespective of
the amount paid by them.
2. Non-stock corporation – total number of registered
voting members.
A quorum once present is not broken by the
subsequent withdrawal of a part or fraction of the
stockholders.
If the voting requirement is met, any resolution
passed in the meeting, even if improperly held or called will be
valid if all the stockholders or members are present or duly
represented.
DIRECTORS’/TRUSTEES’ MEETING
Regular meetings – held monthly, unless the by-laws
provide otherwise
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Special meetings – held at any time upon the call of
the president or as provided in the by-laws
Meetings may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise.
Notice must be sent at least one (1) day prior to the
scheduled meeting, unless otherwise provided by the by-laws.
Notice may be waived, expressly or impliedly.
If the notice requirement is not complied with the
meeting is illegal and will not bind the corporation except
when subsequently ratified. (Lopez vs. Fontecha)
In a close corporation, the act of any one director may
bind the corporation without a meeting.
Presence at a meeting waives want of notice.
Physical presence at the meeting is not required;
teleconferencing and videoconferencing is allowed. (RA 8792)
The president shall preside at the meeting, unless the
by-laws provide otherwise.
A director or trustee cannot attend or vote by proxy
at any board meeting.
STOCKHOLDERS’ RIGHT TO VOTE AND MANNER OF VOTING
General rule: The right to vote is an inherent right and
the stockholder may vote any way he pleases.
Exceptions:
1. Non-voting shares are not entitled to vote except in
those instances provided for in the penultimate paragraph of
Sec. 6
2. Treasury shares
3. Delinquent shares
4. Unregistered transferee of stock
General rule: Stockholders or members may vote
personally or through a representative by way of proxy, voting
trust agreement or by the executor, administrator, receiver of
other legal representative.
Exception: In non-stock corporations, the right to
vote may be limited, broadened or denied in the articles of
incorporation or in the by-laws.
The right to vote is vested with the legal owner of the
shares.
In case of pledged or mortgaged shares, the pledgor
or mortgagor is entitled to vote in absence of a written
agreement (recorded in the corporate books) to the contrary.
(Sec. 55)
 Executors, administrators, receivers, and other legal
representatives duly appointed by the court may attend and
vote in behalf of the stockholders or members without need of
any written proxy. (Sec. 50)
An executor or administrator of a stockholder may
not be elected unless he owns at least 1 share.
General Rule: In case of shares jointly owned, the
consent of all the co-owners shall be necessary.
Exceptions:
1. Written proxy signed by all the co-owners
2. The shares are owned in an "and/or" capacity
PROXY
Proxy – the authority given by the stockholder or
member to another to vote for him at a stockholders‟ or
members‟ meeting. It also refers to the instrument or paper
which is evidence of the authority of the agent or the holder
thereof to vote for and in behalf of the stockholder or member.
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Two types of proxies:
1. General – gives a general discretionary power of
attorney to vote for directors and all ordinary matters that may
properly come before a meeting. It is not an authority,
however, to vote for fundamental changes in the corporate
charter or for other unusual transactions, unless specified.
2. Limited – restricts the authority to vote on specified
matters only and may direct the manner in which the vote will
be cast.
Proxy voting may not be denied except in a non-stock
corporation.
Requirements:
1. In writing
2. Signed by the stockholder or member
3. Filed before the scheduled meeting with the
corporate secretary
By-laws may reasonably regulate the form and
execution of proxies.
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.
A proxy is revocable unless coupled with an interest.
Revocation may be expresses:
1. To the proxy holder
2. To the election committee
3. By a subsequent proxy to another
4. By sale of the shares
VOTING TRUST
A 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 between individual
stockholders and a common trustee, whereby it is provided
that for a term of years, or for a period contingent upon a
certain event, or 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 used. It is a device of binding stockholders to
vote as a unit and thus assuring a desirable stability and
continuity in management in situations where it is needed.
Requirements:
1. It should confer upon the trustee or trustees the right
to vote and other rights pertaining to the shares;
2. It should be for a period not exceeding five (5) years
at any time unless the voting trust is specifically required as a
condition in a loan agreement, in which case, the voting trust
may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan;
3. It must be in writing and notarized, and shall specify
the terms and conditions thereof;
4. A certified copy thereof must be filed with the
corporation and with the Securities and Exchange Commission,
otherwise, said agreement is ineffective and unenforceable;
5. The certificate or certificates of stock covered by the
voting trust agreement shall be canceled and new ones shall
be issued in the name of the trustee or trustees stating that
they are issued pursuant to said agreement. In the books of
the corporation, it shall be noted that the transfer in the name
of the trustee or trustees is made pursuant to said voting trust
agreement;
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
6. The trustee or trustees shall execute and deliver to
the transferors voting trust certificates, which shall be
transferable in the same manner and with the same effect as
certificates of stock.
7. It should not be entered into for the purpose of
circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of
fraud.
Voting trust distinguished from proxy
VOTING TRUST PROXY Conditional subscription – one made upon a
condition precedent, does not make the subscriber a
The beneficial owner of the shares ceases to be a stockholder
stockholder, or render him to pay the amount of his
of record of the corporation Legal title remains with
subscription, until the performance or fulfillment of the
the beneficial owner
condition.
The trustee votes as owner of the shares The proxy holder
Subscription upon special terms – an absolute
votes merely as an agent
subscription, making the subscriber a stockholder, and
The beneficial owner of the shares is disqualified to be a rendering him liable as such, as soon as the subscription is
director The owner of the shares may be elected as a director accepted, the special term being an independent stipulation.
since legal title remains with him

The purpose is to acquire voting control of the corporation

Generally used to secure voting and quorum
requirements or merely for the purpose of representing an AQUILA LEGIS FRATERNITY
absent stockholder
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Irrevocable Revocable unless coupled with an interest
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The trustee can act and vote at any meeting during the
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
duration of the voting trust
In case of doubt, a subscription shall be considered
agreement A proxy holder can generally act as such only
one upon special terms in order to protect the creditors and
at a particular meeting
other subscribers.
The trustee may vote in person or by proxy A proxy holder
General rule: Conditional subscriptions are valid.
must vote in person
Exceptions:
The duration may exceed 5 years The duration may not
exceed 5 years 1. The charter or enabling act prohibits the same; or
Must be notarized and filed with the SEC Need not be 2. The conditions are such as to render their
notarized nor filed with the SEC performance beyond the powers of the corporation or in
violation of law or contrary to public policy.

An application for subscription which is at variance

A corporation is not a party to a voting trust
with the terms evidenced in a general form of subscription
agreement therefore it is not a real party interest in a suit to
must be accepted by the corporation to create a binding
enforce the same. (NIDC vs. Aquino)
contract. (Trillana vs. Quezon College, Inc.)
A voting trust transfers only voting and other rights
A condition facultative as to the debtor renders the
pertaining to the shares subject of the agreement or control
whole obligation void. (Trillana vs. Quezon College, Inc.)
over the stock. It does not include the assets, operation and
management of the corporation. (NIDC vs. Aquino) PRE-INCORPORATION SUBSCRIPTIONS
CHAPTER 10: STOCKS AND STOCKHOLDERS Types of subscriptions as to time of execution:
3 ways in which a person may become a stockholder: 1. Pre-incorporation subscriptions – subscriptions for
shares of stock of a corporation still to be formed; and
1. By a contract of subscription with the corporation;
2. Post-incorporation subscriptions – those made or
2. By the purchase of treasury shares from the
executed after the formation or organization of the
corporation; and
corporation.
3. By purchase or acquisition of shares from existing
General rule: A subscription for shares of stock of a
stockholders (includes purchase from the stock exchange).
corporation still to be formed is irrevocable.
SUBSCRIPTION CONTRACT
Exceptions:
Subscription – the mutual agreement of the
1. Lapse of a period of 6 months from the date of
subscribers to take and pay for the stocks of a corporation.
subscription;
Subscription contract – any contract for the
2. All the subscribers consent to the revocation; or
acquisition of unissued stock in an existing corporation or a
corporation still to be formed, not withstanding the fact that 3. The incorporation of said corporation fails to
the parties refer to it as a purchase or some other contract. materialize within 6 months or within a longer period as may
be stipulated in the contract of subscription.
A subscription contract is not required to be written;
an oral contract for subscription is valid and enforceable. The Exception to the exceptions: No pre-incorporation
statutes of fraud do not apply to a subscription contract subscription may be revoked after the submission of the
because such subscription does not fall under the statutory articles on incorporation to the SEC.
definition of a sale.
 Pre-incorporation subscriptions are mandatory in
view of Secs. 13 and 14 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
total subscription has been paid.
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 ff:
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 or services actually rendered to the
corporation;
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained
earnings to stated capital; and
6. Outstanding shares in exchange for stocks in the
event of reclassification or conversion.
Stocks shall not be issued in exchange of promissory
notes or future services. Their realization is uncertain.
Issue – the making of a share contract or contract of
subscription; transaction by which a person becomes the
owner of shares and by which new share contracts are created.
The issuance of shares is not dependent on the
delivery of a certificate of stock.
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Par or issue price – 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.
Valuation of properties given as a consideration for
issuance of stock:
1. Tangible properties (particularly real properties):
a. Appraisal report of an independent appraiser;
b. Zonal valuation as certified by the BIR; or
c. Market value indicated in the Real Estate Tax
Declaration.
2. Intangible properties (such as patents or copyrights):
a. Initial determination by the incorporators or the
board of directors subject to the approval of the SEC; or
b. Appraisal report of an independent appraiser.
Labor performed or services actually rendered to the
corporation must be capable of valuation and in fact fairly
valued.
Two theories in the valuation of property or services:
1. True value rule – the motives or 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.
2. Good faith rule – 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 the later becomes evident that
the property or services were in fact worth much less than the
value fixed on them initially.
The set-off or satisfaction of a debt due from the
corporation is a lawful and valid consideration for the issuance
of stock.
Amounts transferred from unrestricted retained
earnings to stated capital – refers to the declaration and
distribution of stock dividends where corporate earnings are
capitalized.
Outstanding shares exchanged for stocks in the event
of reclassification or conversion – refers to stocks surrendered
to the corporation in exchange for a new or different type of
shares. (Ex. conversion of founder‟s shares to common
shares.)
The prohibition against the issuance of shares by
corporations except for actual cash or property at its fair
valuation secures absolute equality among stockholders with
respect to their liability upon stock subscriptions. A stipulation
is a stock subscription which obligates the subscriber to pay
nothing for the shares except as dividends may accrue upon
the stock is a discrimination in favor of the particular
subscriber, and hence, illegal. (National Exchange Co., Inc. vs.
Dexter)
A corporation has no power to receive a subscription
upon such terms as will operate as a fraud upon the other
subscribers as stockholders by subjecting the particular
subscribers to lighter burden, or by giving his greater rights and
privileges, or as fraud upon creditors of the corporation by
withdrawing or decreasing capital. Therefore, 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, is illegal and void. (National Exchange Co., Inc. vs. Dexter)
CERTIFICATES OF STOCK AND THEIR TRANSFER
Certificate of stock – the piece of paper or document
which evidences the ownership of shares and a convenient
instrument for the transfer of the title.
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 Requisites for the issuance of a 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 full amount of subscription together with interest
and expenses (in case of delinquent shares) if any is due, has
been paid.
General rule: Holders of subscribed shares not fully
paid are entitled to all the rights of a stockholder.
Exceptions:
1. The shares have been declared delinquent; or
2. The stockholder exercises his appraisal right.
The issuance of a stock certificate is not a condition
sine quanon to consider a subscriber as a stockholder.
Two modes of transferring shares of stock:
1. When the corporation has already issued stock
certificates – only by delivery of the certificate or certificates
of stock indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer.
2. When the corporation has not yet issued certificates
of stock – by a duly notarized deed.
No transfer shall be valid, except as between the
parties, until the transfer is recorded in the books of the
corporation.
Until registration is accomplished, the transfer of
stock, though valid between the parties, cannot be effective as
against the corporation. The corporation looks only though its
books for the purpose of determining who its stockholders are.
Non-registration of a transfer of stock will not,
however, affect the validity thereof at least in so far as the
contracting parties are concerned.
Reasons for the necessity of the registration of
transfers of stock:
1. To enable the corporation to know who its
stockholders are;
2. To enable the transferee to exercise his rights as a
stockholder;
3. To 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. To avoid fictitious and fraudulent transfers; and
5. To protect creditors who have the right to look upon
stockholders, in case of non-payment or watered shares, for
the satisfaction of their claims.
The duty of the corporate secretary to record a valid
transfer of shares of stock is ministerial. Thus, he may be
compelled by mandamus.
General rule: A certificate of stock is not a negotiable
instrument. A bona-fide purchaser of a certificate of stock will
acquire no better title to the shares than his transferor had and
will be subject to all rights, remedies and defenses which the
true and lawful owner may have.
Exception: When the general principles of estoppel
apply. Thus, if the legal owner thereof, by his act or negligence,
is estopped from claiming ownership, (as when he clothes
another with apparent title or authority to dispose of the
same) a purchaser in good faith and without notice will acquire
a better title as against the owner so estopped.
Shares of stock 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.
The duty of the corporate secretary to register a valid
transfer of shares is ministerial. Therefore, mandamus will lie
to compel registration in case the corporation or the corporate
secretary refuses
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registration. (Rural Bank of Salinas vs. CA) However, the
transferee has no such right when his title to said shares has
no prima facie validity of is uncertain. (Tay vs. CA)
The right to transfer shares of stock may not be
unreasonably restricted or prohibited. 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. (Padgett vs. Bobcock & Templeton;
Fleischer vs. Botica Nolasco)
However, 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 30 days
provided that the same is contained in the articles of
incorporation and in all of the stock certificates to be issued by
the corporation. This is considered “reasonable” since it
merely suspends the right to transfer within the period
specified.
A corporation may classify its shares and grant such
“rights, privileges or restrictions” provided that such are made
in the articles of incorporation and subject to reasonable
terms, conditions or period. (Go Soc & Sons vs. IAC)
Other restrictions on the right to transfer shares:
1. It is not valid, except as between the parties, until
recorded in the books of the corporation;
2. Share of stock against which the corporation holds
any unpaid claim shall not be transferable 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 articles of
incorporation, by-laws 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 – refers to absolute and unconditional
conveyance of the title and ownership of a share of stock to
warrant registration in the books of the corporation in order
to bind the latter and other third persons. (Monserrat vs.
Ceron)
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 a necessary requisite to its
validity. (Monserrat vs. Ceron)
Chattel mortgages over shares of stock 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 order to bind third persons. The ownership of
shares in a corporation is property distinct from the certificates
which are merely the evidence of such ownership. The
property in the shares are deemed to be situated in the
province in which the corporation has its principal office or
place of business. (Chua Guan vs. Samahang Magsasaka, Inc.)
All transfers of shares should be entered in the books
of the corporation. Transfers 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 transfer. (Uson vs. Diosomito)
A clause contained in the by-laws of a corporation
which provides that the owner of a share of stock cannot sell
it to another person except to the defendant corporation is
ultra-vires, violative of the property rights of shareholders, and
in restraint of trade. (Fleischer vs. Botica Nolasco Co.)
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Shares of stock being regarded as property, the
owner of such shares may, as a general rule, dispose of them
as they see 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. (Padgett vs. Babcock & Templeton)
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 or the company, or to an insolvent person, or even
though a controlling interest is sold to one purchaser.
Therefore, restrictions consisting in the word “non-
transferable” is illegal. (Padgett vs. Babcock & Templeton)
The suspension of the power to sell shares of stock
which 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 suspension is valid.
(Lambert vs. Fox)
An indorsee of an undelivered certificate of stock has
no power to effectively transfer the shares to other persons or
his nominees. For an effective transfer of shares of stock the
mode and manner of transfer prescribed by law must be
followed. (Embassy Farms, Inc. vs. CA)
Indorsement of the certificate of stock is a mandatory
requirement of law for an effective transfer of a certificate of
stock. (Razon vs. IAC)
The right of a transferee/assignee to have stocks
transferred to his name is an inherent right flowing from his
ownership of the stocks. The corporation‟s obligation to
register is ministerial. (Rural Bank of Salinas vs. CA)
The pledge of shares of stock does not vest ownership
of such shares to the pledgee. The pledgor remains the owner
during the pendency of the pledge and prior to foreclosure and
sale. Therefore, the pledgee has no right to demand the
registration of the pledged shares in his name. 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 is it the imperative duty of the respondent
to perform the act required. (Tay vs. CA)
Without a 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.
(Nava vs. Peers Marketing)
For a valid transfer of stocks, there must be strict
compliance with the mode of transfer prescribed by law.
1. There must be delivery of the stock certificate;
2. The certificate must be endorsed by the owner or his
attorney-in-fact or other persons legally authorized to make
the transfer; and
3. To be valid against third parties, the transfer must be
recorded in the books of the corporation.
An assignment, without endorsement and delivery, while valid
as among the parties, does not necessarily make the transfer
effective. The 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. (Rural Bank of Lipa City, Inc. vs. CA)
 Delivery is not essential where it appears that the
person sought to be held as stockholders are officers of the
corporation, and have custody of the stock books. (Tan vs. SEC)
After a valid transfer of share, the right to have such
registered commences to exist. However, it would not follow
that said right should be exercised immediately or within a
definite period. (Won vs. Wack Wack Golf & Country Club, Inc.)
Certificates of stock are not negotiable instruments.
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. 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. (De Los Santos vs.
Republic)
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
FORGED AND UNAUTHORIZED TRANSFERS
Forged and unauthorized transfer – what is forged or
unauthorized is the transfer of the certificate from the true
and lawful owner to another person.
Unauthorized issuance of certificate of stock – the act
of the corporation in issuing a certificate, either fraudulently
or by mistake.
General rule: In forged or unauthorized transfer of
stock the purchaser acquires no title as against the lawful
owner and will have no right or remedy against the
corporation (non-negotiability of stock certificates).
Exception: If after such forged or unauthorized
transfer, the corporation issues a new certificate and such
certificate passes into the hands of subsequent bona fide
purchaser, the latter may rightfully acquire title thereto since
the corporation will be estopped to deny the validity thereof.
The subsequent purchaser in good faith took the shares by
virtue of the genuiness of the certificates issued by the
corporation or of the representation made by the corporation
that the same is valid and subsisting and that the person
named therein is a stockholder of the corporation. He may
therefore, compel the corporation to recognize him as a
stockholder or claim reimbursement and damages against the
latter.
ISSUANCE OF STOCK CERTIFICATES
Subscriptions to shares of stock are indivisible. Thus,
no certificate of stock shall be issued to a subscriber until the
full amount of his subscription together with interest and
expenses (in case of delinquent shares), if any is due, has been
paid.
Once a subscriber has paid his subscription in full, he
becomes entitled to be issued a stock certificate.
The duty of the corporate officers to issue stock
certificates to those entitled is a ministerial duty enforceable
by mandamus.
A stockholder whose subscription is not fully paid may
not be issued a stock certificate for that portion already paid.
(Fua Cun vs. Summers and China Banking Corporation)
WATERED STOCK
Watered stock – 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.
Directors or officers 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
for the following acts:
1. Consenting to the issuance of watered stocks; or
2. Having knowledge thereof, failing to forthwith
express his objection in writing and file the same with the
corporate secretary.
All creditors, whether prior or subsequent to the
issuance of watered stock may enforce payment of such water.
Ways in which watered stocks may be issued:
1. For a monetary consideration less than its par or
issued value;
2. For a consideration in property, tangible or intangible,
valued in excess of its fair 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.
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Evil effects of stock watering:
1. The corporation is deprived of its capital thereby
hurting its business prospects, financial capability and
responsibility;
2. Stockholders 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
corporate assets for the protection of their interest.
Two theories advanced as the basis for the liability on
water stocks:
1. Trust fund doctrine – treating the capital of the
corporation, 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.
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 shared has been paid or promised to be
paid full.
Effects of issuance of watered stock:
1. As to the corporation – when a corporation is guilty of
ultra-vires 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; the subscriber is liable to pay the full 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 stockholder – 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, solidary
against the responsible directors/officers and the stockholders
concerned.
6. As against transferees of the watered stock – 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.
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.
ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS
When unpaid subscription or any percentage thereof,
together with interest if required, shall be paid:
1. On the date or dates fixed in the contract of
subscription; or
2. On the date or dates that may be specified by the
board of directors pursuant to a “call” declaring any or all
unpaid portion thereof to be so payable.
Two possible remedies available to the corporation to
enforce payment of unpaid subscription:
1. By board action (delinquency sale);
2. By a collection case in court.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Failure or refusal of the corporation, through its
board of directors 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 (trust fund doctrine).
Procedure for the enforcement of payment through
board action:
1. The board of directors, by a formal resolution,
declares the whole or any percentage of unpaid subscriptions
to be due and payable on a specific date. However, if the
contract of subscription provides the date or dates when
payment is due, no “call” declaration of the board is necessary;
2. The stockholders concerned are given notice of the
board resolution by 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;
3. Payment shall be made in the date specified in the call
or on the date 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 stated in the call or as
may be provided in the contract of subscription 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 became delinquent;
8. Notice of the sale, with the copy of the board
resolution should be sent to every delinquent stockholder
either personally or by registered mail;
9. Publication of the notice of sale must be made once a
week for two consecutive weeks in the newspaper of general
circulation in the province or city where the principal officer is
located;
10. 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;
11. Registration or transfer of the shares of stock in the
name of the bidder and corresponding issuance of the stock
certificate covering the shares successfully bidded;
12. If there be any remaining shares, the same shall be
credited in favor of the delinquent stockholder who shall be
entitled to the issuance of a certificate of stock covering such
shares;
13. If there is no bidder at the public auction who offers
to pay the total amount due plus interest, cost and expenses,
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
14. The shares so purchased by the corporation shall be
vested in the latter as treasury shares.
Highest bidder – is such bidder who shall offer to pay
the full amount of the balance on the subscription together
with accrued interest, cost of advertisement and expenses of
sale, for the smallest number of shares or fraction of a share.
Grounds to question the delinquency sale:
1. Irregularity or defect in the notice of sale; or
2. Irregularity or defect in the sale itself.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Two conditions before an action to recover
delinquent stocks irregularly sold may be allowed:
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 six months from the date of the sale.
A “call” is a condition precedent before the right of
action to institute a recovery suit accrues. A demand is
required before a debtor may incur a delay in the performance
of his obligation.
Instances when a “call” is not necessary:
1. The contract of subscription provides for a date or
dates when payment is due; or
2. The corporation has become insolvent.
A subscription for shares of stock does not require an
express promise to pay the amount subscribed, as the law
implies a promise to pay on the part of the subscriber. The
subscriber is as much bound to pay the amount of the share
subscribed by him as he would be to pay any other debt, and
the right of the company to demand payment is no less
incontestable. (Velasco vs. Poizat)
Notwithstanding the fact that the by-laws of the
corporation provides for a method for the collection of the
unpaid portion of stock subscriptions, the corporation may still
make use of the methods provided by the Code. (De Silva vs.
Aboitiz & Co.)
General rule: A valid and binding subscription for
stock of a corporation cannot be cancelled so as to release the
subscriber from liability thereon.
Exception: Consent of all the stockholders is given.
Exceptions to the exception:
1. Bona fide compromise;
2. Set-off of a debt due from the corporation; or
3. Release supported by consideration. (Lingayen Gulf
vs. Baltazar)
The NLRC has no jurisdiction to determine intra-
corporate disputes between the stockholder and the
corporation as in the matter of unpaid subscriptions. (Apocada
vs. NLRC)
Unpaid subscriptions are not due and payable until a
call is made by the corporation for payment. (Apocada vs.
NLRC)
Subscription to the capital of a corporation
constitutes 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
debt. (Lumanlan vs. Cura)
The President of the Philippines is devoid of the
prerogative of suspending the operation of any stature or any
of its items. Thus the President cannot condone the payment
of stock subscriptions in the event that the counterpart fund
to be invested by the government would not be available. (PNB
vs. Bitulok Sawmill, Inc.)
A stockholder is personally liable for the financial
obligations of a corporation to the extent of his unpaid
subscription. (Edward Keller & Co., Ltd. vs. Cob Group
Marketing, Inc.)
The subscription to capital stock of the corporation,
unless otherwise stipulated, is not payable at the moment of
the subscriptions but on a subsequent date which may be fixed
by the corporation. (Garcia vs. Suarez)
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 board of
directors pursuant to a call made by it.
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
General rule: No delinquent stock shall not be entitled
to:
1. Be voted for or to vote; 2. To enter into a voting trust agreement;

2. Representation at any stockholder's meeting; or 3. To receive dividends and to compel their declaration
if warranted;
3. Any of the rights of a stockholder.
4. To transfer shares of stock subject only to reasonable
Exception: Delinquent stocks are entitled to the right
restrictions inclusive of the right of the transferee to compel
to dividends (any cash dividends due on delinquent
the registration of the transfer in the books of the corporation;
stockholders shall first be applied to the unpaid balance on his
subscription plus cost and expenses, while stock dividends 5. To be issued a certificate of stock for fully paid-up
shall be withheld until his unpaid subscription is paid in full). shares;

General rule: Holders of subscribed shares not fully 6. To exercise pre-emptive rights;
paid which are not delinquent shall have all the rights of a
stockholder.

Exception: Shares of stock not fully paid are not

entitled to be issued a certificate of stock. AQUILA LEGIS FRATERNITY
Requirements and procedure for issuance of new Corporation Law Reviewer
certificates of stock in lieu of those lost, stolen or destroyed:
Page 48 of 87
1. The registered owner of a certificate of stock in a
corporation or his legal representative shall file with the Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
corporation an affidavit in triplicate setting forth:
7. To exercise their appraisal right;
a. The circumstances as to how the certificate was lost,
8. To institute and file a derivative suit;
stolen or destroyed;
9. To recover shares of stock unlawfully sold for
b. The number of shares represented by such certificate;
delinquency;
c. The serial number of the certificate; and
10. To inspect the books of the corporation;
d. The name of the corporation which issued the same.
11. To be furnished the most recent financial statements
2. He shall also submit such other information and of the corporation;
evidence which he may deem necessary.
12. To be issued a new stock certificate in lieu of the lost
3. Publication of a notice in a newspaper of general or destroyed one;
circulation published in the place where the corporation has
13. To have the corporation dissolved;
its principal office, once a week for 3 consecutive weeks at the
expense of the registered owner of such certificate of stock. 14. To participate in the distribution of the assets of the
corporation upon dissolution;
4. If no contest has been presented within 1 year from
the date of the last publication, the right to make such contest 15. In the case of a close corporation, to petition the SEC
shall be barred and said corporation shall cancel in its books to arbitrate a deadlock; and
the certificate of stock which has been lost, stolen or destroyed
and issue in lieu thereof new certificate of stock. However, the 16. In the case of a close corporation, to withdraw
registered owner may file a bond or other security, effective therefrom, for any reason, and to compel the purchase of his
for a period of 1 year, for such amount and in such form and shares.
with such sureties as may be satisfactory to the board of Certain obligations and liabilities of stockholders:
directors, in which case a new certificate may be issued even
before the expiration of the one 1 year period. 1. To pay the corporation the balance of his unpaid
subscriptions;
5. If a contest has been presented to said corporation or
if an action is pending in court regarding the ownership of said 2. To pay interest on his unpaid subscription if required
certificate of stock, the issuance of the new certificate of stock by the by-laws or by the contract of subscription;
shall be suspended until the final decision by the court
3. To answer to creditors for the unpaid portion of their
regarding the ownership of said certificate of stock.
subscription;
Except in case of fraud, bad faith, or negligence on the
4. To answer the “water” in their stocks;
part of the corporation and its officers, no action may be
brought against any corporation which shall have issued 5. To be liable, as general partners, for all debts,
certificate of stock in lieu of those lost, stolen or destroyed liabilities and damages of ostensible corporations; and
pursuant to the procedure above-described.
6. In case of a close corporation, to be personally liable
RIGHTS AND LIABILITIES OF STOCKHOLDERS for corporate torts when they actively participate in the
management of the corporation.
Certain basic rights for the protection of stockholders:
CHAPTER 11: CORPORATE BOOKS AND RECORDS
1. Participation in the management of the corporate
affairs by exercising their right to vote and be voted upon Records to be kept and maintained by the
either personally or by proxy; corporation:
1. Records of all business transactions – which include,
among others, journals, ledgers, contracts, vouchers and
receipts, financial statements and other books of accounts,
income tax returns, and voting trust agreement which must be
kept and carefully preserved at its principal office.
2. Minutes of all meetings of stockholders or members
and of the directors or trustees - setting forth in detail the time
and place of holding the meeting, how authorized, the notice
given, whether the meeting was regular or special, if special its
object, those present and absent, and every act done or
ordered done thereat which must likewise be kept at the
principal office of the corporation.
3. Stock and transfer book – showing the names of the
stockholders, the amount padi or unpaid on all stock for which
subscription has been made, a statement of every alienation,
sale or transfer of stock made, the date thereof, and by and to
whom made which must be kept either in the principal office
of the corporation or in the office of its stock transfer agent.
These corporate books and records, inclusive of all
business transactions and minutes of meetings, are subject to
inspection by any director, trustee, stockholder or member of
the corporation at reasonable hours on business days and a
copy of excerpts of said records may be demanded.
General rule: Any officer or agent of the corporation
who refuses to allow the inspection of corporate books and
records, or any director or trustee who through a resolution by
the board votes for such refusal shall be liable for damages and
shall be guilty of an offense which shall be punishable under
Sec. 144.
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Exception. It shall be a defense that the person
demanding inspection
1. Has improperly used any information secured
through any prior examination of the records or minutes of
such corporation or of any other corporation; or
2. Was not acting in good faith or for a legitimate
purpose in making his demand.
Within ten (10) days from receipt of a written request
of any stockholder or member, the corporation shall furnish to
him its most recent financial statement, which shall include a
balance sheet as of the end of the last taxable year and a profit
or loss statement for said taxable year, showing in reasonable
detail its assets and liabilities and the result of its operations.
At the regular meeting of stockholders or members,
the board of directors or trustees shall present to such
stockholders or members a financial report of the operations
of the corporation for the preceding year, which shall include
financial statements, duly signed and certified by an
independent certified public accountant. However, if the paid-
up capital of the corporation is less than P50,000.00, the
financial statements may be certified under oath by the
treasurer or any responsible officer of the corporation.
The basis of the right of the stockholder to inspect the
books and records of the corporation for a proper purpose is
to protect his interest as a stockholder.
General rule: The right of stockholders to examine
corporate books extends to a wholly owned subsidiary which
is completely under the control and management of the parent
company where he is such a stockholder. (Gokongwei vs. SEC)
Exception: The subsidiary and the parent are legally
being operated as separate and distinct entities.
The right to inspect corporate books, although
personal, may be exercised through an agent or representative
since it may be unavailing in many instances. (W.G. Philpotts
vs. Philippine Manufacturing Co.)
The corporation, or its responsible directors and
officers cannot unduly restrict the right of inspection and may
not arbitrarily set a few days of the year within which the
stockholder may make the inspection. (Pardo vs. Hercules
Lumber, Co.)
Directors of a corporation have the unqualified right
to inspect the books and records of the corporation at all
reasonable hours. However, there is no absolute right to
secure certified copies of the minutes of the corporation until
these minutes have been written up and approved by the
directors. (Vegaruth vs. Isabela Sugar Co., Inc.)
It is a required condition for the inspection of
corporate books that the one requesting it must not have been
guilty of using improperly any information secured through a
prior examination and that the person asking for such
examination must be acting in good faith and for a legitimate
purpose in making his demand. (Gonzales vs. PNB)
Remedies of a stockholder who is denied inspection
of corporate books:
1. Mandamus;
2. Damages either against the corporate or the
responsible officer; or
3. Criminal complaint based on Sec. 144 of the Code.
CHAPTER 12: MERGER AND CONSOLIDATION
Merger – a union effected by absorbing one or more
existing corporations by another which survives and continues
the combined business; the uniting of two or more
corporations by the transfer of property to one of them which
continues in existence, the other or others being dissolved and
merged therein.
Consolidation – the uniting or amalgamation of two
or more existing corporations to form a new corporation and
the termination of existence of the old ones.
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Requirements and procedure for merger or
consolidation:
1. The board of directors or trustees of each constituent
corporation shall approve a plan of merger or consolidation
setting forth the following:
a. The names of the constituent corporations;
b. The terms of the merger or consolidation and the
mode of carrying the same into effect;
c. A statement of changes, if any, in the articles of
incorporation; and
d. Other provisions deemed necessary and desirable.
2. Approval of the plan by the stockholders representing
2/3 of the outstanding capital stock or 2/3 of the members in
a non-stock corporations of each constituent corporation at
separate corporate meetings called for the purpose;
3. Prior notice of such meeting, with a copy or summary
of the plan of merger or consolidation shall be given to all
stockholders or members at least 2 weeks prior to the
scheduled meeting, either personally or by registered mail
stating the purpose thereof;
4. Execution of the articles of merger or consolidation by
each constituent corporation to be signed by the president or
vice-president and certified by the corporate secretary or
assistant secretary setting forth the following:
a. The plan of the merger or consolidation;
b. As to stock corporations, the number of shares
outstanding, or in the case of non-stock corporations, the
number of members; and
c. As to each corporation, the number of shares or
members voting for and against such plan, respectively.
5. Submission of the articles of merger or consolidation
in quadruplicate to the SEC subject to the requirement of that
if it involves corporations under the direct supervision of any
other government agency or governed by special laws the
favorable recommendation of the 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 proper notice and
thereafter, the SEC shall proceed as provided in the Code.
Any amendment to the plan of merger or
consolidation must be approved by majority vote of the
respective boards of directors or trustees of all the constituent
corporations and ratified by the affirmative vote of
stockholders representing at least 2/3 of the outstanding
capital stock or of 2/3 of the members of each of the
constituent corporations.
Mergers and consolidations may not be entered into
for the purpose of circumventing the law against monopolies
and illegal combinations in restraint of trade or for purposes of
fraud.
Effects of merger or consolidation:
1. There will only be a single corporation. In case of
merger, the surviving corporation, or in case of consolidation,
the consolidated corporation;
2. Termination of the corporate existence of the
constituent corporations, except that of the surviving or the
consolidated corporation;
3. The surviving or the consolidated corporation will
possess all the rights, privileges, immunities and powers and
shall be subject to all the duties and liabilities of a corporation
organized under the Code;
4. The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and franchises of
the constituent corporations; and all property and all
receivables due on whatever account, including subscriptions
to shares and other choses in action, and all and every other
interest of, or belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in such
surviving or consolidated corporation without further act or
deed; and
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5. The surviving or consolidated corporation shall be
responsible and liable for all the liabilities and obligations of
each of the constituent corporations; and any pending claim,
action or proceeding brought by or against any of such
constituent corporations may be prosecuted by or against the
surviving or consolidated corporation. The rights of creditors
or liens upon the property of any of such constituent
corporations shall not be impaired by such merger or
consolidation.
Merger or consolidation does not become effective
upon the mere agreement of the constituent corporations. It
shall be effective only upon the issuance of a certificate of
merger. (Associated Bank vs. CA)
CHAPTER 13: APPRAISAL RIGHT
Appraisal right – the method of paying a shareholder
for the taking of his property; the statutory means whereby a
stockholder can avoid the conversion of his property into
another property not of his own choosing. The purpose of the
right is to protect the property rights of dissenting
stockholders from actions by the majority shareholders which
alters the nature and character of their investment. 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.
Instances when a stockholder may have the right to
dissent and demand payment of the fair value of his shares:
1. In case any amendment to the articles of
incorporation has the effect of:
a. Changing or restricting the rights of any stockholder
or class of shares;
b. Authorizing preferences in any respect superior to
those of outstanding shares of any class; or
c. Extending or shortening the term of corporate
existence.
2. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of the
corporate property and assets as provided in the Code; and
3. In case of merger or consolidation.
Other instances provided for in the Code:
1. Investment of corporate funds in another corporation
or business or for any other purpose;
2. In a close corporation, a stockholder has the right to
compel the corporation for any reason to purchase his shares
at their fair value which shall not be less than the par or issued
value when the corporation has sufficient assets to cover it
debts and liabilities, exclusive of capital stock.
Requirements and procedure for the exercise of the
appraisal right:
1. The stockholder must have voted against the
proposed corporate action in any of the instances allowed by
law for the exercise of the appraisal right;
2. A written demand for payment must be made by the
dissenting stockholder within 30 days after the date on which
the vote was taken. Failure to make the demand within the
said period shall be deemed a waiver of the appraisal right;
3. Surrender of the certificate of stock by the dissenting
stockholder for notation in the corporate books and payment
by the corporation of the fair market value of said shares as of
the day prior to the date on which the vote was taken,
excluding any appreciation or depreciation in anticipation of
such corporate action. If the stockholder and the corporation
cannot agree on the fair market value thereof, the same shall
be determined by appraisers;
4. The corporation must have unrestricted retained
earnings in it books to cover the payment of the fair value of
the shares of the dissenting stockholder;
5. Upon payment of the shares by the corporation, the
dissenting stockholder shall transfer his shares to the
corporation.
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Effects of demand for payment of the fair value of a
stockholder‟s shares:
1. From the time of demand for payment – all rights
accruing to such shares, including voting and dividend rights,
are suspended, except the right to receive payment.
2. After either the right ceases or the purchase of the
said shares by the corporation – all rights accruing to such
shares are restored and all dividend distributions which would
have accrued on the shares shall be paid to the holder thereof.
If the dissenting stockholder is not paid the value of
his shares within 30 days after the award, his voting and
dividend rights shall immediately be restored.
No demand for payment may be withdrawn unless
the corporation consents thereto.
Instances when the right to payment ceases:
1. The stockholder withdraws his demand for payment
with the consent of the corporation;
2. The proposed corporate action is abandoned or
rescinded by the corporation;
3. The proposed corporate action is disapproved by the
SEC where such approval is necessary;
4. The SEC determines that such stockholder is not
entitled to the appraisal right;
5. The stockholder fails within 10 days after demanding
payment for his shares to submit the certificates of stock
representing his shares to the corporation for notation and the
corporation, at its option, terminates the right.
6. The shares represented by the certificates bearing
such notation are transferred and the certificates
subsequently canceled.
General rule: The costs and expenses of appraisal
shall be borne by the corporation.
Exception: The fair value ascertained by the
appraisers is approximately the same as the price which the
corporation offered to pay the stockholder.
General rule: In an action to recover the fair value of
stocks, all costs and expenses shall be assessed against the
corporation.
Exception: The refusal of the stockholder to receive
payment is unjustified.
A dissenting stockholder is required within 10 days
after demanding payment for his shares to submit the stock
certificates representing his shares to the corporation for
notation. His failure to do so shall, at the option of the
corporation, terminate his rights.
The dissenting stockholder is not prohibited from
selling, transferring or assigning his shares. If such be the case,
once the certificates are subsequently canceled, the rights of
the transferor as a dissenting stockholder shall cease and the
transferee shall have all the rights of a regular stockholder; and
all dividend distributions which would have accrued on such
shares shall be paid to the transferee.
A director who exercises his appraisal right remain to
be a director until his shares are no longer registered in his
name.
A stockholder whose subscription is not fully paid is
still entitled to exercise his appraisal right.
CHAPTER 14: NON-STOCK CORPORATIONS
Non-stock corporation - one where no part of its
income is distributable as dividends to its members, trustees,
or officers, subject to the provisions of the Code on dissolution.
 Even if a corporation has capital stock divided into
shares it is considered as non-stock so long as it does not
distribute dividends to its members and officers. (CIR vs. Club
Filipino de Cebu)
Any profit which a non-stock corporation may obtain
as an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes
for which the corporation was organized.
The fact that a non-profit corporation earns a profit,
gain or income for the corporation or members does not make
it a profit-making corporation where such profit or income is
used for the purpose
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set forth in the articles of incorporation and is not distributable
to its incorporators, members or officers, since mere
intangible or pecuniary benefits of the members does not
change the nature of the corporation.
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 indicated in the
articles of incorporation. If the business activity is authorized
in the said articles, necessary, incidental or essential thereto,
the same may be undertaken by the corporation, otherwise,
not, as it would be an ultra-vires act.
Purposes: Charitable, religious, educational,
professional, cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry, agricultural
and like chambers, or any combination thereof (non-
exclusive).
The provisions governing stock corporation, when
pertinent, shall be applicable to non-stock corporations.
MEMBERSHIP AND VOTING RIGHTS
General rule: Each member, regardless of class, shall
be entitled to one vote (no cumulative voting).
Exception: The right to vote is limited, broadened or
denied in the articles of incorporation or the by- laws.
General rule: A member may vote by proxy.
Exception: Proxy voting is denied in the articles of
incorporation or the by-laws.
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 SEC.
General rule: Membership in a non-stock corporation
and all rights arising therefrom are personal and non-
transferable.
Exception: The articles of incorporation or the by-laws
provide otherwise.
Membership in non-stock corporations may be
acquired by complying with the provisions of its rules
prescribed in the by-laws. In absence of restrictions, a non-
stock corporation may act arbitrarily and exclude any persons
it may see fit, and the courts have no power to interfere. It is
free to fix qualifications for membership and to provide for
termination of membership.
General rule: The board of directors of a non-stock
corporation shall have the authority to admit members.
Exception: The by-laws provide otherwise.
Membership shall be terminated in the manner and
for the causes provided in the articles of incorporation or the
by-laws.
General rule: Termination of membership shall have
the effect of extinguishing all rights of a member in the
corporation or in its property.
Exception: The articles of incorporation or the by-laws
provide otherwise.
In terminating membership, strict compliance with
the manner and procedure laid down in the by- laws must be
observed, otherwise it may render the expulsion ineffective
and invalid. (Carmoan vs, PED)
In absence of any provision in the articles of
incorporation or by-laws relative to the manner and causes of
termination, the power is nonetheless inherent in the
following situations:
1. When an offense is committed which, although it has
no immediate relation to a member‟s duty as such, it is so
infamous as to render him unfit for society of honest men, and
which is indictable at common law;
2. When the offense is a violation of his duty as a
member of the corporation; and
3. When the offense is of a mixed nature, being both
against his duty as a member of the corporation, and also
indictable at common law.
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As to whether or not a member should be expelled or
maintained is the established right of the corporation to
determine and the courts are without authority to strip a
member of his membership without cause.
Courts cannot strip a member of a non-stock
corporation of his membership therein without cause.
Otherwise, that would be an unwarranted and undue
interference with the well established right of a corporation to
determine its membership. (Chinese YMCA vs. Ching)
TRUSTEES AND OFFICERS
 Non-stock or special corporations may designate 1. The by-laws of the corporation provide otherwise;
their governing boards by any name through their articles of and
incorporation or their by-laws.
2. Metro Manila is considered a city or municipality.
General rule: The number of trustees in a non-stock
corporation may exceed 15.

Exception: The articles of incorporation or the by-laws

provide otherwise.
General rule: The term of office of the board of
trustees may be staggered. They 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.
Exception: The articles of incorporation or the by-laws
provide otherwise.
Qualifications of trustees:
1. He is a member of the corporation;
2. Majority thereof must be residents of the Philippines;
and
3. Other qualifications as may be provided for in the by-
laws.
General rule: officers of a non-stock corporation may
be directly elected by the members.
Exception: The articles of incorporation or the by-laws
provide otherwise.
Trustees elected to fill vacancies occurring before the
expiration of a particular term hold office only for the
unexpired period.
General rule: The courts will not interfere on matters
involving the internal affairs of an unincorporated association
such as elections, the manner by which it was conducted and
the results thereof. (Lions Club International vs. CA)
Exceptions:
1. There is fraud, oppression or bad faith;
2. The action complained of is capricious, arbitrary or
unjustly discriminatory;
3. Property and civil rights are invaded;
4. The proceedings are violative of the laws of society,
or the law of the land, as by depriving a person of due process
of law;
5. There is lack of jurisdiction on the part of the tribunal
conducting the proceedings;
6. The organization exceeds its powers;
7. The proceedings are illegal; or
8. An incorporated association or its members avail of
the remedy of instituting an intra- corporate dispute case.
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Requirements for meetings held outside the location
of the principal office as provided for by the by-laws:
1. Proper notice is sent to all members indicating the
date, time and place of the meeting; and
2. The place of meeting must be within the Philippines.
General rule: All proceedings and business
transactions at a meeting improperly held or called are invalid.
Exception: All of the members are present or duly
represented at the meeting.
DISTRIBUTION OF ASSETS UPON DISSOLUTION
Rules of distribution:
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;
4. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or the by-laws, to the
extent that the articles of incorporation or the by-laws,
determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and
5. In any other case, assets may be distributed to such
persons, societies, organizations or corporations, whether or
not organized for profit, as may be specified in a plan of
distribution.

General rule: Regular or special meetings of members Procedure and requirements for a plan of distribution
of a non-stock corporation shall be held in the city or of assets:
municipality where the principal office is located, and if
1. Majority vote of the board of trustees adopting a plan
practicable in the principal office of the corporation.
of distribution;
Exceptions:
2. Approval of such plan by at least 2/3 of the members
having voting rights present or represented by proxy at a
regular or special meeting for that purpose; and
3. Prior 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 the
Code for the giving of notice of meetings to members.
CHAPTER 15: CLOSE CORPORATIONS
Close corporation - one whose articles
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 20;
2. All the issued stock of all classes shall be subject to
one or more specified restrictions on transfer permitted by
Title XV of the Code; and
3. The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class.
Absent any of the three requisites, a corporation
cannot be considered a close corporation and would thus be
governed by the general provisions on ordinary corporations.
A corporation does not become a close corporation
just because a husband and wife owns 99.86% of the capital
stock. (San Juan Structural Steel vs. CA)
and the determination of whether or not it should be vested
with public interest is within its domain.
The provisions of Title XV of the Code shall primarily
govern close corporations. However, the provisions of other
Titles of the Code apply suppletorily.
A close corporation may partake the nature of a
partnership in that the stockholders thereof take an active role
in the management of the corporate affairs either as directors,
officers or even perhaps as partners in management which is
akin to the partnership form of business.
of
The articles of incorporation of a close corporation
may provide:
1. For a classification of shares or rights and the
qualifications for owning or holding the same and restrictions
on their transfers as may be stated therein;
2. For a classification of directors into one or more
classes, each of whom may be voted for and elected solely by
a particular class of stock;
3. For a greater quorum or voting requirements in
meetings of stockholders or directors;
4. That the business of the corporation shall be
managed by the stockholders of the corporation rather than
by a board of directors. So long as this provision continues in
effect:
a. No meeting of stockholders need be called to elect
directors;

b. Unless the context clearly requires otherwise, the

stockholders of the corporation shall be deemed to be
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to all liabilities of directors.
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5. That all officers or employees or that specified
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C officers or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
A corporation shall not be deemed a close
corporation when at least 2/3 of its voting stock or voting In order to bind purchasers in good faith, restrictions
on the right to transfer shares must appear in:
rights is owned or controlled by another corporation which is
not a close corporation. 1. The articles of incorporation;
General rule: Any corporation may be incorporated as 2. The by-laws; and
a close corporation.
3. The certificate of stock.
Exceptions:
Restrictions on the right to transfer shares shall not
1. Mining or oil companies; be more onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the
2. Stock exchanges;
transferring stockholder within reasonable terms, conditions
3. Banks; or period. If upon the expiration of said period, the existing
stockholders or the corporation fails to exercise the option to
4. Insurance companies; purchase, the transferring stockholder may sell his shares to
5. Public utilities; any third person.

6. Educational institutions; and

7. Corporations declared to be vested with public

interest.

Sec. 140 authorizes the NEDA to recommend to the

legislature the setting of maximum limits to family or group
ownership of stock in corporation vested with public interest,

Effe
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General rule: A close corporation may refuse to
register the transfer of stock in the name of the transferee who
has or is conclusively presumed to have notice that:
1. He is not eligible to be a holder of stock of the
corporation;
2. Transfer of stock to him causes 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
3. The transfer of stock is in violation of a restriction on
transfer of stock.
Exceptions:
1. The transfer of stock has been consented to by all the
stockholders; or
2. The close corporation has amended its articles of
incorporation.
Options granted to the transferee:
1. Rescind the transfer; or
2. Recover under any applicable warranty, express or
implied.
The term "transfer" is not limited to a transfer for
value.
Agreements by and among stockholders executed
before the formation and organization of a close corporation,
signed by all stockholders, shall survive the incorporation of
such corporation and shall continue to be valid and binding
between and among such stockholders, if such be their intent,
to the extent that such agreements are not inconsistent with
the articles of incorporation, irrespective of where the
provisions of such agreements are contained, except those
required by this Title to be embodied in said articles of
incorporation.
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.
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.
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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.
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.
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:
General rule: Any action by the directors of a close
corporation without a meeting is invalid.
Exceptions:
1. Written consent is signed by all the directors;
2. All the stockholders have actual or implied knowledge
of the action and make no prompt objection thereto in writing;
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.)
Exception to the exceptions: The by-laws provide
otherwise.
General rule: 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.
Exception: The articles of incorporation provide
otherwise.
Any amendment to the articles of incorporation
which seeks to:
1. Delete or remove any provision required by Title XV
of the Code to be contained in the articles of incorporation, or
2. Reduce a quorum or voting requirement stated in said
articles of incorporation,
must be approved by the affirmative vote of at least 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.
Deadlock - 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.
2. A provisional director is not a receiver of the
corporation and does not have the title and powers of a
custodian or receiver.
3. 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 SEC or by all
the stockholders.
4. His compensation shall be determined by agreement
between him and the corporation subject to approval of the
SEC, which may fix his compensation in the absence of
agreement or in the event of disagreement between the
provisional director and the corporation.
Any stockholder of a close corporation may, for any
reason, compel the said corporation to purchase his shares at
their fair value, which shall not be less than their par or issued
value, when the corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of capital stock.
Any stockholder of a close corporation may, by
written petition to the SEC, compel the dissolution of such
corporation whenever:
1. Any of acts of the directors, officers or those in
control of the corporation is illegal, or fraudulent, or dishonest,
or oppressive or unfairly prejudicial to the corporation or any
stockholder; or

2. Corporate assets are being misapplied or wasted.

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Corporation Law Reviewer

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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

In case of a deadlock and upon written petition by any

stockholder, the SEC has the power to arbitrate the dispute
and the authority to:

1. Cancel or alter any provision contained in the articles

of incorporation, by-laws, or any stockholder's agreement;

2. Cancel, alter or enjoin any resolution or act of the

corporation or its board of directors, stockholders, or officers;

3. Direct or prohibit any act of the corporation or its Clos

board of directors, stockholders, officers, or other persons
party to the action;
AQUILA LEGIS FRATERNITY
4. Require the purchase at their fair value of shares of
any stockholder, either by the corporation regardless of the Corporation Law Reviewer
availability of unrestricted retained earnings in its books, or by
the other stockholders; Page 60 of 87

5. Appoint a provisional director; Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

6. Dissolve the corporation; or

7. Grant such other relief as the circumstances may

warrant.

Provisional director:

1. 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 AQUILA LEGIS FRATERNITY
further qualifications, if any, may be determined by the SEC.
Corporation Law Reviewer
Page 61 of 87 Exception: Educational institutions established by
religious groups and mission boards.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
General rule: No educational institution shall be
In a close corporation, a corporate action taken at a
established exclusively for aliens and no group of aliens shall
board meeting without proper call or notice is deemed ratified
comprise more than 1/3 of the enrollment in any school.
by the absent director unless the latter promptly files his
written objection with the secretary of the corporation after Exception: The rule shall not apply to schools
having knowledge of the meeting. (Manuel Dulay Enterprises established for foreign diplomatic personnel and their
vs. CA) dependents and, unless otherwise provided by law, for other
foreign temporary residents.
Stockholders who actively engage in the management
or operation of the business and affairs of a close corporation RELIGIOUS CORPORATIONS
shall be personally liable for corporate torts unless the
Religious corporation – one composed entirely of
corporation has obtained reasonably adequate liability
spiritual persons which is created for the furtherance of
insurance. Essentially a tort consists in the violation of a right
religion or perpetuating the rights of the church or for the
given or the omission of a duty imposed by law. Article 283 of
administration of church or religious work or property.
the Labor Code mandates the employer to grant separation
pay to employees in case of closure or cessation of operations Classes of religious corporations:
of establishment or undertaking not due to serious business
losses or financial reverses. CFTI failed to comply with this law- 1. Corporations sole; and
imposed duty or obligation. Consequently, its stockholder who
2. Religious societies.
was actively engaged in the management or operation of the
business should be held personally liable. (Naguiat vs. NLRC) Religious corporations are governed by the
appropriate chapter of the Code and the general provisions on
CHAPTER 16: SPECIAL CORPORATIONS EDUCATIONAL
non-stock corporations.
CORPORATIONS

Educational corporations – those which provide

facilities for teaching or instruction.

Educational corporations are governed primarily by

special laws and secondarily by the Code.

Educational institutions are required to incorporate

within 90 days after their recognition as such. However, failure
to comply will not immune the educational institution from
suit as a corporation.

A favorable recommendation of the Secretary of

Education, Culture and Sports is required before the SEC
accepts or approves the articles of incorporation or by-laws of
any educational institution.
Corporation Sole
Trustees of non-stock educational corporations shall
not be less than 5 nor more than fifteen 15, in multiples of 5.

Unless otherwise provided in the articles of AQUILA LEGIS FRATERNITY

incorporation on the by-laws, the board of trustees of
incorporated schools, colleges, or other institutions of learning
shall, as soon as organized, so classify themselves that the
term of office of 1/5 of their number shall expire every year.
Trustees thereafter elected to fill vacancies, occurring before
the expiration of a particular term, shall hold office only for the
unexpired period. Trustees elected thereafter to fill vacancies
caused by expiration of term shall hold office for 5 years. A
majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees
shall be defined in the by- laws.
For institutions organized as stock corporations, the
number and term of directors shall be governed by the
provisions on stock corporations.
General rule: Educational institutions shall be owned
solely by citizens of the Philippines or corporations or
associations at least 60% of the capital of which is owned by
such citizens. The control and administration of educational
institutions shall be vested in citizens of the Philippines.
Corporation Law Reviewer
Page 62 of 87
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Corporation sole – consists of one person only and his
successor 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.
Purpose – Administration and management, as
trustee, of the affairs, properties and temporalities of any
religious denomination, sect or church.
Who – Chief archbishop, bishop, priest, minister,
rabbi or other presiding elder of such religious denomination,
sect or church.
Requirements and procedure of incorporation:
1. The chief archbishop, bishop, priest, minister, rabbi or
other presiding elder of such religious denomination, sect or
church must file the articles of incorporation with the SEC
which must contain the following:
a. 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;
b. 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;
c. 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;
d. 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
e. The place where the principal office of the
corporation sole is to be established and located, which place
must be within the Philippines.
2. The articles of incorporation may include any other
provision not contrary to law for the regulation of the affairs
of the corporation.
3. The articles of incorporation must be:
Verified by affidavit or affirmation of the chief archbishop,
bishop, priest, minister, rabbi or presiding elder, as the case
may be;
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; and
Duly certified to be correct by any notary public.
4. From and after the filing of the aforementioned
documents with the SEC, such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall become a corporation
sole.
All temporalities, estate and properties of the
religious denomination, sect or church administered or
managed by the corporation sole shall be held in trust for the
use, purpose, behalf and sole benefit of the religious
denomination, sect or church, including hospitals, schools,
colleges, orphan asylums, parsonages and cemeteries thereof.
A provision relative to its term of existence is not
required since a corporation sole is supposed to exist in
perpetuity.
General rule: A corporation acquires juridical
personality only upon the issuance of a certificate of
incorporation by the SEC.
Exception: A corporation sole becomes endowed with
corporate personality after filing of the verified articles of
incorporation together with other required documents.
AQUILA LEGIS FRATERNITY
Corporation Law Reviewer
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
A 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.
General rule: A court order is required before a
corporation sole may sell or mortgage real property held by it.
Before such an order is granted, a verified petition must be
made by the chief archbishop, bishop, priest, minister, rabbi or
presiding elder acting as corporation sole and it must be shown
that notice of the application has been given as directed by the
court and that it is to the interest of the corporation that the
petition be granted. However, such application may be
opposed by any member of the religious denomination, sect or
church represented by the corporation sole.
Exception: Court intervention is not necessary when
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.
Registration of real property in the name of the
corporation sole does not vest ownership unto the head
thereof.
The constitutional requirement that 60% of the
capital of a corporation must be owned by Filipino citizens
before it may register land in its own name does not apply to
a corporation sole. A corporation sole has no nationality and
the framers of the constitution did not have in mind the
corporation sole when it provided for such requirement.
(Roman Catholic Apostolic Adm. of Davao, Inc. vs. LRC)
Whether or not a corporation sole, or any private
corporation for that matter, can acquire alienable land of the
public domain depends upon the character of the land at the
time of the institution of the registration proceeding. If it still
forms part of the public domain, no. If it is private, yes.
(Republic vs. INC)
Under the Public Land Act, alienable public land may
be subject to registration by a possessor if he, personally or
through his predecessor-in-interest, had openly, continuously,
exclusively and notoriously possessed the same for 30 years.
The 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. CA)
In case of 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 successors in office shall become the corporation
sole and shall be permitted to transact business as such only
upon the filing with the SEC of a copy of their commission,
certificate of election, or letters of appointment, duly certified
by a notary public.
Requirements for the voluntary dissolution of
corporations sole:
1. Filing with the SEC of a verified declaration of
dissolution which must set forth the following:
a. The name of the corporation;
b. The reason for dissolution and winding up;
c. The authorization for the dissolution of the
corporation by the particular religious denomination, sect or
church; and
d. The names and addresses of the persons who are to
supervise the winding up of the affairs of the corporation.
2. Approval of the SEC.
Religious Societies
Religious society – a body of person associated
together for the purpose of maintaining religious worship.
Purpose – the administration of its temporalities or
for the management of its affairs, properties and estate
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Corporation Law Reviewer
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
Who – any religious society or religious order, or any
diocese, synod, or district organization of any religious
denomination, sect or church.
Requirements and procedure for incorporation:
1. Filing of the articles of incorporation with the SEC;
2. The articles of incorporation must set forth the
following:
a. That the religious society or religious order, or
diocese, synod, or district organization is a religious
organization of a religious denomination, sect or church;
b. That at least 2/3 of its membership have given their
written consent or have voted to incorporate, at a duly
convened meeting of the body;
c. 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;
d. 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;
e. The place where the principal office of the
corporation is to be established and located, which place must
be within the Philippines; and
f. 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 5 nor more than 15.
3. The articles of incorporation must be 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.
4. Issuance of the SEC of the certificate of incorporation.
The articles of incorporation of a religious society
need not indicate a term since it is supposed to exist in
perpetuity.
CHAPTER 17: DISSOLUTION
Dissolution – the extinguishment of the corporate
franchise and the termination of corporate existence.
General rule: When a corporation is dissolved, it
ceases to be a juridical entity and can no longer pursue the
business for which it is incorporated.
Exception: The corporation will continue as a body
corporate for another period of 3 years from the time it is
dissolved for the purpose of winding up its affairs and the
liquidation of its assets.
Three modes of dissolution:
1. By expiration of the corporate term;
2. By voluntary surrender of its primary franchise
(voluntary dissolution); or
3. By the revocation of its corporate franchise
(involuntary dissolution).
EXPIRATION OF CORPORATE TERM
General rule: A corporation registered under the
Corporation Code is required to indicate its term of existence
in the articles of incorporation.
Exceptions:
1. Corporations sole; and
2. Religious societies.
AQUILA LEGIS FRATERNITY
Corporation Law Reviewer
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
A corporation ceases to exist and is automatically
dissolved upon the expiration of the term indicated in its
articles of incorporation without the need of formal
proceeding. There is no need to for the institution of a
proceeding for quo warranto to determine the time and date
of the dissolution of a corporation because the period of
corporate existence is provided in the articles of incorporation.
(PNB vs. CFI)
SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION)
Three modes of voluntary dissolution:
1. Voluntary dissolution where no creditors are
affected;
2. Voluntary dissolution where creditors are affected;
and
3. Shortening of corporate term.
Voluntary dissolution where no creditors are affected
Formal and procedural requirements for voluntary
dissolution where no creditors are affected:
1. Majority vote of the board of directors or trustees;
2. Sending of notice to each stockholder or member
either by registered mail or personal delivery at least 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 stockholders or members);
3. Publication of the notice of time, place and subject of
the meeting for 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; and
6. Issuance of a certificate of dissolution by the SEC.
The requirements and formalities provided by law for
the dissolution of corporations are mandatory such that failure
to comply therewith will have no effect on the legal existence
of the corporation. A corporation being a creation of law may
only terminate its existence in the manner prescribed by law.
A mere resolution by the stockholders or the board of
directors of a corporation to dissolve the same does not affect
the dissolution of a corporation. (Daguhoy Enterprises vs.
Ponce)
Voluntary dissolution where creditors are affected
Formal and procedural requirements for voluntary
dissolution where creditors are affected:
1. Affirmative vote of the stockholder 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 the dissolution shall be filled with the SEC
signed by the 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 30 days nor more than 60 days after entry of
the order;
4. Before such date, a copy of the order must be
published once a week for 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 3 consecutive weeks in
3 public places in such city or municipality;
AQUILA LEGIS FRATERNITY
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
6. Upon 5 days notice, given after the date on which the
right to file objects has expired, the SEC shall hear the petition
and try any issue made by the objections filed; and
7. Judgment dissolving the corporation and directing
disposition of its assets as justice requires and the
appointment of a receiver (if necessary in the court‟s
discretion) to collect such assets and pay the debts of the
corporation.
The appointment of a receiver is only permissive and
not mandatory. The law is intended to let the stockholders
have control of the assets of the corporation upon dissolution
and winding up of its affairs.
Dissolution by shortening the corporate term
Procedure to shorten the corporate term:
1. Approval by a majority vote of the board or 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 representing at least
2/3 of the outstanding capital stock or 2/3 of the members in
case of non-stock corporations.
4. Submission of the amended articles of incorporation
to the SEC.
5. Approval of the SEC.
In case of a corporation sole, an authorization for the
dissolution by the particular religious denomination, sect or
church is necessary.
A vote must cast at a duly constituted meeting.
Written assent is insufficient.
It is only upon the approval of the SEC that the
corporation is deemed dissolved.
INVOLUNTARY DISSOLUTION
 Requirements for involuntary dissolution by the SEC:
1. Filing of a verified complaint; and
2. Proper notice and hearing on the grounds provided
by laws, rules and regulations.
Notwithstanding the fact that RA 8799 transferred
the jurisdiction of the SEC under Sec. 5 of PD 902-A to the
Special Commercial Courts, the same law granted the SEC
concurrent jurisdiction over revocation proceedings. Sec. 5 (m)
of RA 8799 provides that the SEC shall have the power to
suspend or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations,
partnerships or associations, upon any ground provided by
law.
Grounds for involuntary dissolution under Sec. 6, PD
902-A:
1. Fraud in procuring the certificate of registration;
2. Serious misrepresentation as to what the corporation
can do or is doing to the great prejudice of or damage to the
general public;
3. Refusal to comply or defiance of any lawful order of
the Commission restraining commission of acts which would
amount to a grave violation of its franchise;
4. Continuous inoperation for a period of at least 5
years;
5. Failure to file by-laws within the required period; and
6. Failure to file required reports in appropriate forms as
determined by the Commission within the prescribed period.
Other grounds provided for the in Corporation Code:
1. Violation of any provision of the Code (Sec. 144);
2. In case of deadlock in a close corporation (Sec. 105);
3. In a close corporation, any acts of directors, officers
or those in control of the corporation which is illegal or
fraudulent or dishonest or oppressive or unfairly prejudicial to
the
AQUILA LEGIS FRATERNITY
Corporation Law Reviewer
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
corporation or any stockholder or whenever corporate assets
are being misapplied or wasted (Sec. 105).
Other grounds can be found in special laws, e.g. the
Securities Regulation Code and the General Banking Act.
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. But 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 franchise were granted and
thus defeat the purpose of the grant, then dissolution will be
granted. (Government vs. Philippine Sugar Estates Co.)
The court has a discretion with respect to the
infliction of capital punishment upon corporations and there
are certain misdemeanors and misusers of franchises which
should not be recognized as requiring their dissolution.
(Government vs. El Hogar)
That the corporation is guilty of willful and repeated
violation of the law and that its continuance inflicts substantial
injury to the public warrants its dissolution. (Republic vs.
Security Credit)
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. The several acts of misuse and misapplication of the
funds and/or assets of the corporation were committed more
particularly by the corporation‟s president, for the
commission of which they may be held personally liable.
(Republic vs. Bisaya Land Transportation Co., Inc.)
Under the present state of law, any stockholder or
member of a corporation can institute a dissolution
proceeding against his own corporation before the proper
forum.
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
corporation, partnership or association and the State insofar
as it concerns their individual franchise or right to exist as such
entity. (PD 902-A)
The SEC has concurrent jurisdiction to suspend,
revoke, after proper notice and hearing, the franchise or
certificate of registration of corporations, partnership or
associations upon any of the grounds provided by law. (Sec.
5(m) RA 8799)
The existence of a de jure corporation may be
determined in a private suit for its dissolution between
stockholders, without intervention of the State. (Hall vs. Piccio)
In a close corporation, a petition for the dissolution of
the corporation may be instituted by any shareholder on the
ground of mere dishonesty.
EFFECTS OF DISSOLUTION
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 by the subsequent dissolution of said
corporation.
Dissolution terminates a corporation‟s primary
franchise and generally prevents it from further exercising
other or secondary franchises which have been conferred to it.
Dissolution terminates the corporation‟s power to
enter into contracts or to continue the business as a going
concern. (Hall vs. Piccio)
 General rule: In a lease to a corporation, the rights
and obligations thereunder are not extinguished by the
corporation‟s dissolution since leases affect property rights
and survives the death of 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.
Exception: The lease, by its terms, terminates when
the corporation ceases to exist.
Contracts for personal services are deemed
terminated by the dissolution of the corporation. There is an
implied condition that the contract shall terminate in such
event. (Gelano vs. CA)
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.
General rule: No corporation shall distribute any of its
assets or property except upon lawful dissolution and after
payment of all its debts and liabilities.
Exceptions:
1. By decrease of capital stock; or

2. As otherwise allowed the Code.

Three methods of liquidation:

AQUILA LEGIS FRATERNITY
1. By the corporation itself though the Board of
Corporation Law Reviewer
Directors.
Page 68 of 87
2. By a Trustee appointed by the corporation.
Darren L. Salipsip 98B & Ronald Patrick Rubin 06C
3. By appointment of a receiver.
A dissolved corporation has no juridical personality; it
Mere appointment of a receiver without anything
ceases to exist as a corporation and cannot apply for a new
more does not imply the dissolution of a corporation.
certificate or a secondary franchise. (Buenaflor vs. Camarines
Sur Industry Corp.) Pending actions by or against a corporation are
abated upon expiration of the period allowed by law for the
The 3-year period allowed by the law is only for the
liquidation of its affairs; but trustees to whom the corporate
purpose of liquidation or winding up of corporate affairs. No
assets have been conveyed may sue or be sued as such in all
act can be done for the purpose of continuing the business for
matters connected with the liquidation. The effect of
which it was established. Neither can it enforce a contract
conveyance is to make the trustees the legal owners of the
executed prior to its dissolution. (Cebu Port Labor Union vs.
property conveyed, subject to the beneficial interest therein of
State Marine Co.)
creditors and stockholders. (National Abaca Other Fibers Co.
The termination of the life of a juridical entity does vs. Pore)
not, by itself, imply the diminution or extinction of rights
If the corporation carries out the liquidation of its
demandable against such juridical entity. Debts due to or
assets through its own officers and continues and defends the
against the corporation will not be extinguished. Otherwise, it
actions brought by or against it, its existence shall terminate at
will amount to an impairment of contracts or a denial of due
the end of three years from the time of dissolution; but if a
process. (Gonzales vs. Sugar Regulatory Administration)
receiver or assignee is appointed, as has been done in the
LIQUIDATION AND WINDING UP present case, with or without a transfer of its properties within
three years, the legal interest passes to the assignee, the
Liquidation and winding up – the collection of all
beneficial interest remaining in the members, stockholders,
corporate assets, the payments of all its debts and settlement
creditors and other interested persons; and said assignee may
of its obligations and the ultimate distribution of the corporate
bring an action, prosecute that which has already been
assets, if any of it remains, to all stockholders in accordance
commenced for the benefit of the corporation, or defend the
with their proportionate stockholdings in the corporation or in
latter against any other action already
accordance with their respective contracts of subscription (e.g.
preferred stocks).

A dissolved corporation continues as a body

corporate for a period of 3 years from the time of dissolution
AQUILA LEGIS FRATERNITY
for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to Corporation Law Reviewer
dispose of and convey its property and to distribute its assets,
but not for the purpose of continuing the business for which it Page 69 of 87
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At any time during said three (3) years, the
instituted or which may be instituted even outside of the
corporation is authorized and empowered to convey all of its
period of three years fixed for the offices of the corporation.
property to trustees for the benefit of stockholders, members,
(Sumera vs. Valencia)
creditors, and other persons in interest. From and after any
such conveyance by the corporation of its property in trust for (Board of Liquidators vs. Kalaw)
the benefit of its stockholders, members, creditors and others
 The counsel who prosecuted and defended the
interest of the corporation and who appeared in behalf of the
corporation may be considered a trustee of the corporation at
least with respect to the matter in litigation only. The word
“trustee” must be understood in its general concept. (Gelano
vs. CA)
A claim established against the corporation may be
prosecuted against the liquidator of such corporation even
after the three years from its dissolution. (Republic vs.
Marsman Development Company)
Upon dissolution of the corporation its assets are held
for the benefit of its stockholder after payment of its debts and
will be so distributed to the said stockholder in accordance
with their proportionate interest in the corporation or their
contracts of subscription.
Holders of preferred shares may be granted certain
rights or privileges upon dissolution.
General rule: The board of directors of a dissolved
corporation is not permitted to undertake any activity outside
of the usual liquidation of the corporation.
Exception: The stockholders of a dissolved
corporation may convey 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 a new. (Chung
Ka Bio vs. IAC)
If the three 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 its behalf, may make proper
representations with the SEC for working out a final settlement
of the corporate concern. (Clemente vs. CA)
Note: The above decision is an aberrant ruling. Once
the three year period for liquidation and winding up has
elapsed without any trustee or receiver being appointed, the
assets of the corporation will be escheated in favor of the
Government thus barring the claims of stockholders and
creditors.
CHAPTER 18: FOREIGN CORPORATIONS
Foreign corporation – 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).
The phrase “whose laws allow Filipino citizens and
corporations to do business in its own country or state” is a
mere condition precedent to the grand of a license of a foreign
corporation to do business in the Philippines.
General rule: The “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.
Exception: In times of war, the “control test” would
apply in determining the corporate nationality, i.e., the
citizenship of the controlling stockholders determines the
nationality of the corporation.
General rule: A corporation can have no legal
existence outside the boundaries of the sovereign by which it
is created.
Exception: By virtue of state comity, a corporation
created by laws of one state is usually allowed to transact
business in other states and to sue in the courts of the forum,
subject to restrictions and certain requirements imposed
therein.
Requisites for a foreign corporation to transact
business in the Philippines:
1. A license or permit to do so; and
2. A certificate of authority from the appropriate
government agency.
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Procedure for application of a license:
1. Submission to the SEC of its articles of incorporation
and by-laws, certified in accordance with law, and their
translation to an official language of the Philippines, if
necessary.
2. The application shall be under oath and, unless
already stated in its articles of incorporation, shall specifically
set forth the following:
a. The date and term of incorporation;
b. The principal office of the corporation in the country
or state of incorporation;
c. The resident agent;
d. The place in the Philippines where the corporation
intends to operate;
e. The purpose or purposes of the corporation;
f. The directors and officers of the corporation;
g. Its authorized capital stock;
h. Its outstanding capital stock;
i. The amount actually paid in; and
j. Such additional information as may be necessary or
appropriate in order to enable the SEC to determine whether
such corporation is entitled to a license to transact business in
the Philippines, and to determine and assess the fees payable.
3. 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.
4. 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.
5. 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.
Foreign corporations already issued a license to
transact business in the Philippines prior to the effectivity of
the Code continue to have such authority under the terms and
conditions of its license, subject to the provisions of the Code
and other special laws.
Upon compliance with the provisions of Sec. 125,
other special laws and the rules and regulations implementing
them, the SEC shall thereafter issue the license.
Upon issuance of the license, such foreign
corporation may commence to transact business in the
Philippines and continue to do so for as long as it retains its
authority to act as a corporation under the laws of the country
or state of its incorporation, unless such license is sooner
surrendered, revoked, suspended or annulled in accordance
with this Code or other special laws.
Within 60 days after the issuance of the license, a
foreign corporation, except those engaged in foreign banking
or insurance, shall deposit with the SEC, for the benefit of
creditors, securities consisting of bonds or other evidence of
indebtedness of the Philippine government or its political
subdivisions or instrumentalities, or of government owned or
controlled corporations and entities, shares of stock in
“registered enterprises,” shares of stock in domestic insurance
companies and
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banks, or any combination thereof, with an actual market
value of P100,000.00. Additional securities may be required by
the SEC if the actual market value of the securities on deposit
has decreased by at least 10%.
The objective of the law requiring the license is not to
prevent the foreign corporation from performing isolated or
single acts, but to prevent it from acquiring a domicile for the
purpose of pursuing its business without taking steps to render
it amendable to suit in the local courts. (Marshall-Wells Co. vs.
H. W. Elser & Co.)
MODES OF ENTRY OF FOREIGN CORPORATIONS
Modes of entry of foreign corporations:
1. Branch office;
2. Representative or liaison office;
3. Local subsidiary;
4. Regional or area headquarters;
5. Regional operating headquarters;
6. Regional warehouse; or
7. Joint venture.
RESIDENT AGENT
The appointment of a resident agent is a condition
precedent to the issuance of a license to transact business in
the Philippines by a foreign corporation.
The following may be appointed as a resident agent:
1. An individual residing in the Philippines, of good
moral character and of sound financial standing; or
2. A domestic corporation lawfully transacting business
in the Philippines (includes partnerships such as law firms and
accounting firms).
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.
Modes of service of summons upon a foreign
corporation:
1. Service upon the resident agent – service upon the
resident agent is mandatory if the foreign corporation is
license to do business in the Philippines;
2. Service upon the SEC – if the licensed foreign
corporation has ceased to transact business in the Philippines
or has no resident agent in the Philippines; or
3. Service upon any of its officers or agents within the
Philippines.
DOING BUSINESS WITHOUT A LICENSE
General rule: 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
Exception: Such corporation may be sued or
proceeded against before Philippine courts or administrative
tribunals on any valid cause of action recognized under
Philippine laws.
A foreign corporation cannot transact business in the
Philippines without the requisite license. If it does so, the
responsible officers may be subjected to the penal provisions
of Sec. 144.
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General rules regarding whether or not a foreign
corporation may sue or be sued in the Philippines:
1. As to whether or not it can sue.
a. A foreign corporation transacting or doing business in
the Philippines with a license can sue before Philippine Courts.
b. Subject to certain exceptions, a foreign corporation
doing business in the country without a license can not sue in
Philippine Courts.
c. If it is not transacting business in the Philippines, even
without a license, it can sue before the Philippine Courts.
2. As to whether it can be sued or not.
a. A foreign corporation transacting business in the
Philippines with the requisite license can be sued in the
Philippines.
b. A foreign corporation transacting business in the
Philippines without a license can be sued in Philippine courts.
c. If it is doing business in the Philippines, it cannot be
sued in Philippine courts for lack of jurisdiction.
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)
General rule: A foreign corporation must have the
requisite license to sue before the Philippine courts.
Exceptions:
1. The act or transaction involved is an “isolated
transaction;”
2. The foreign 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;
3. The purpose of the suit is to protect its trademark,
tradename, corporate name, reputation or goodwill;
4. The suit is based on a violation of the Revised Penal
Code;
5. The foreign corporation is merely defending a suit
filed against it;
6. The party is estopped to challenge the personality of
the corporation by entering into a contract with it.
Exception to an exception: 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.
The true test regarding “doing” or “engaging in” or
“transacting” business is 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 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. (Mentholatum Co., Inc. vs. Mangaliman)
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 is from acquiring domicile for the purpose of business
without taking the steps necessary to render it amenable to
suit in the local courts. The law simply means that no foreign
corporation shall be permitted “to transact business in the
Philippine Islands” 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. (Marshall-Wells Co. vs.
Henry W. Elser & Co.)
A foreign corporation not engaged in business in the
Philippines may not be denied the right to file an action in
Philippine courts for isolated transactions. (Bulakhidas vs.
Navarro)
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If A foreign corporation not engaged in business in the
Philippines has the right to sue on an isolated transaction,
more so may it sue based on a mistake. (Swedish East Asia Co.,
Ltd. vs. Manila Port Service)
There was only one agreement between petitioners
and the respondent. 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. 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. (Atnam
Consolidated, Inc. vs. CA)
Under the rules of the BOI, the phrase „doing
business‟ has been exemplified with illustrations, among
them being as follows:
1. Soliciting orders, purchase (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 contract, regardless of whether the contracts are
actually reduced to writing, shall constitute doing business
even in the enterprise has no office or fixed place of 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 own account, and not in the
name or for the account of the pricipal.
3. Opening offices, whether called „liaison‟ offices,
agencies or branches, unless provided otherwise.
4. 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. (Facilities
Management Corp. vs. De La Rosa)
A single act may bring the corporation within the
purview of the statute where it is an act of the ordinary
business of the corporation. In such a case, the single act of
transaction is not merely incidental or casual, but is of such
character as distinctly to indicate a purpose on the part of the
operations for the conduct of a part of the corporation‟s
ordinary business. (Far East Int‟l Import vs. Nankai)
ITEC‟s arrangement with its various business contacts
in the country indicate its 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 engage in
business in the country. 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. (Communication Materials and Design, Inc. vs.
CA)
A foreign corporation doing business in the
Philippines may sue in Philippine courts although no
authorized to do business here against a Philippine citizen or
entity who had contracted with and benefited by said
corporation. To put it 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. An
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.
(Communication Materials and Design, Inc. vs. CA)
The right of a corporation to use its corporate and
trade name is a property right, a right in rem, which it 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. Since it is the
trade and not the make that is to be protected, a trademark
acknowledges no territorial boundaries or 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. (Western Equipment and Supply Co. vs. Reyes)
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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 the
Trademark Law 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. (General
Garments Corporation vs. Director of Patents)
Article 8 of the Paris Convention to which the
Philippines became a party provides that 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 the trademark. (Puma vs. IAC)
A foreign corporation not doing business not doing
business in the Philippines needs no license to sue before
Philippine courts for infringement of trademark and unfair
competition. (Le Chemise Lacoste vs. Fernandez)
In a suit involving the violation of the Revised Penal
Code the complainant foreign corporation‟s capacity to sue is
not significant. (Le Chemise Lacoste vs. Fernandez)
CAPACITY TO SUE
General rule: A foreign corporation must affirmatively
plead its capacity to sue in order that it may proceed and
effectively institute a case in Philippine courts.
Exceptions:
1. The action involves a complaint for violation of the
Revised Penal Code.
2. The foreign corporation is not suing or maintaining a
suit but is merely defending itself from one filed against it.
The qualifying circumstance of whether or not a
foreign corporation has engaged in business in the Philippines
is an essential part of the element of a foreign corporation‟s
capacity to sue and must be affirmatively pleaded. (Atlantic
Mutual Insurance Co. vs. Cebu Stevedoring Co., Inc.)
If the dismissal of the case, based on 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 defense of the
defendant. Technical rules should not be accorded undue
importance to frustrate and defeat a plainly valid claim.
(Olympia Business Machines Co. vs. Razon, Inc.)
Since 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), its failure to aver its legal capacity
to institute the present petition is not fatal. (Time, Inc. vs.
Reyes)
LAWS GOVERNING FOREIGN CORPORATIONS
 General rule: 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.
Exceptions:
1. Laws which provide for the creation, formation,
organization or dissolution of corporations; or
2. Laws which fix the relations, liabilities,
responsibilities, or duties of stockholders, members or officers
of a corporation to each other or to the corporation.
Intra-corporate or internal matters not affecting
creditors or the public in general are governed not by
Philippine laws but the law under which the foreign
corporation was formed or organized.
Special laws may provide or grant certain restrictions,
limitations, privileges or incentives to a foreign corporation not
otherwise applicable or granted to domestic corporations (e.g.
import duties and tax incentives under the Omnibus
Investments Code).
A foreign corporation authorized to transact business
in the Philippines which amends its articles of incorporation or
by-laws must file a copy of such amended articles of
incorporation or by-laws with
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the SEC or the appropriate government agency within 60 days
from the effectivity of such amendment.
Instances when a foreign corporation authorized to
transact business in the Philippines must obtain an amended
license:
1. The foreign corporation changes its corporate name;
or
2. The foreign corporation desires to pursue other or
additional purposes in the Philippines.
Requirements in a merger or consolidation of a
foreign corporation licensed in the Philippines: With a
domestic corporation:
Such must be permitted under Philippines laws and by the law
of its incorporation; and
The requirements on merger or consolidation provided by the
Code must be followed.
With a foreign corporation:
Such must be permitted by the law of its incorporation;
A duly authenticated articles of merger or consolidation must
be filed with the SEC or the appropriate government agency
within 60 days from the effectivity of the merger or
consolidation; and
If the absorbed corporation is the foreign corporation doing
business in the Philippines, a petition for withdrawal of its
license must also be filed.
Requirements and procedure for the withdrawal of
foreign corporations:
1. Filing of a petition for withdrawal of license;
2. All claims which have accrued in the Philippines have
been paid, compromised or settled;
3. 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;
4. Publication of the petition for withdrawal once a
week for 3 consecutive weeks in a newspaper of general
circulation in the Philippines; and
5. Issuance of the certificate of withdrawal by the SEC.
Grounds for the revocation or suspension of license:
1. Failure to file its annual report or pay any fees as
required by the Code;
2. Failure to appoint and maintain a resident agent in
the Philippines;
3. Failure, after change of its resident agent or of his
address, to submit to the SEC a statement of such change;
4. Failure to submit to the SEC 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 the Code;
5. Misrepresentation of any material matter in any
application, report, affidavit or other document submitted;
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.
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Other grounds for revocation of license under special
laws:
1. General Banking Act – imminent danger of insolvency;
2. Insurance Code – unsound condition, failure to
comply with the provisions of law or regulation obligatory
upon it, a condition or method of business hazardous to the
public or its policy holders, impairment of its security deposit,
or deficiency in the margin of solvency.
3. Omnibus Investments Code – willful violation of the
provisions of existing laws and implementing guidelines or
violation of the terms and conditions of its license.
In case the revocation is warranted the SEC shall:
1. Issue a certificate of revocation;
2. Furnish a copy thereof to the appropriate
government agency; and
3. Mail a notice of such revocation accompanied by a
copy of the certificate of revocation to the corporation at its
registered office in the Philippines.
CHAPTER 18: MISCELLANEOUS PROVISIONS
Outstanding capital stock – the total shares of stock
issued under binding subscription agreements to subscribers
or stockholders, whether or not fully or partially paid, except
treasury shares.
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.
The NEDA 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
Congress, whenever deemed necessary, a report of its
findings, including recommendations for their prevention or
correction.
Maximum limits may be set by Congress 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 Congress corporations, business or
industries to be declared vested with a public interest and in
formulating proposals for limitations on stock ownership, the
NEDA 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.
Every corporation, domestic or foreign, lawfully doing
business in the Philippines shall submit to the SEC 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 SEC may
require. Such report shall be submitted within such period as
may be prescribed by the SEC.
All interrogatories propounded by the SEC 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.
The SEC 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.
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)
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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.
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.
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.
PD 902-A, AS AMENDED
The SEC‟s quasi-judicial functions under Sec. 5 of PD
902-A, as amended were transferred to the Special
Commercial Courts by RA 8799.
 General rule: The Special Commercial Courts shall
have exclusively and originally jurisdiction over cases falling
under Sec. 5 of PD 902-A.
Exception: The SEC shall retain jurisdiction over cases
involving suspension of payments and corporate rehabilitation
filed on or before June 30, 2000.
Distribution of Special Commercial Courts:
1. Two in Makati City;
2. Two in Quezon City;
3. One in each in other cities in Metro Manila; and
4. One per region.
DEVICES OR SCHEMES AMOUNTING TO FRAUD AND
MISREPRESENTATION (Sec. 5 [a])
General rule: The Special Commercial Courts shall
have original and exclusive jurisdiction to hear and decide
cases involving devices or schemes employed by or any acts of
the board of directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which
may be detrimental to the interest of the public and/or of the
stockholder, partners, members of associations or
organizations registered with the SEC.
Exception: The complaint is based on the violation of
the Revised Penal Code (Ex. Syndicated Estafa)
Even if the action is for recovery of sums of money
paid or given to the corporation through devices and schemes
amounting to fraud or misrepresentation detrimental to the
investing public, the same must be filed, heard and tried by the
Special Commercial Courts.
Examples of acts amount to fraud or
misrepresentation within the original and exclusive jurisdiction
of the Special Commercial Courts:
1. Fraud committed by a corporation in failing to pay
individual money market placements. (Orosa, Jr. vs. CA)
2. Corporations act of duping persons into investing
money when such corporations authority to issue commercial
papers has already expired. (Mangalad vs. Premier
Corporation)
3. Corporate officer‟s act of diverting corporate funds
and assets for his personal use. (Alleje vs. CA)
4. Pyramiding schemes.
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The allegation of fraud must be stated with
particularity to place the case with the jurisdiction of the
Special Commercial Courts.
INTRA-CORPORATE CONTROVERSIES (Sec. 5 [b])
Intra-corporate controversies include those of
corporations, partnerships and associations.
Elements of intra-corporate controversies:
1. An intra-corporate relationship:
a. Between and among the stockholders, members,
associates of a corporation, partnership or association;
b. Between them and the corporation, partnership or
association; or
c. Between the corporation, partnership or association
and the State.
2. The controversy must arise out of said relationship.
The dispute among the parties must be intrinsically
connected with the regulation of the corporation. If the nature
of the controversy involves matters that are purely civil in
character necessarily the case does not involve an intra-
corporate controversy. (Speed Distributing Corp. vs. CA)
The fact that shares of stock were issued to be used
as part payment for lease rentals does not convert it into a
intra-corporate controversy. (DMRC Enterprises vs. Este del
Sol Mountain Reserve, Inc.)
Recovery of the control and management of a
corporation in the guise of a complaint for rescission of a
memorandum of agreement which vested such control and
management is an intra-corporate controversy. (DPB vs.
Ilustre, Jr.)
If all of the requirements for a valid transfer have
been complied the dispute is intra-corporate and is within the
jurisdiction of the Special Commercial Court. (Abejo vs. de la
Cruz; Rural Bank of Salinas, Inc. vs. CA)
If the petitioner does not have a “prima facie” title to
the share sought to be recorded in his name the dispute is not
intra-corporate and the ordinary or regular court can assume
jurisdiction over the case. (Rivera vs. Florendo; Tay vs. CA)
A dispute regarding the automatic rescission clause of
a Memorandum of Agreement regarding the sale of shares of
a group of stockholders to another group of stockholders is
intra-corporate. (Saavedra vs. SEC)
Where the conflict involves the enforcement of rights
and obligations under the Corporation Code or the inter and
intra-corporate affairs of the corporation, jurisdiction would
fall with the Special Commercial Courts. But if it requires a
mere determination of the contractual rights of the parties
under an ordinary agreement, the ordinary/regular courts can
acquire jurisdiction thereto.
The factor which decides whether the action is within
the jurisdiction of the Special Commercial Courts is that the
controversy arose out of an intra-corporate relation between
and among the parties. (SEC vs. CA)
The filing of the civil/intra-corporate case before the
SEC does not preclude the simultaneous and concomitant filing
of a criminal action before the regular courts; such that, a
fraudulent act may give rise to liability for violation of the rules
and regulations of the SEC cognizable by the SEC itself, as well
as criminal liability for violation of the Revised Penal Code
cognizable by the regular courts, both charges to be filed and
proceeded independently, and may be simultaneously, with
the other. (Fabia vs. CA)
CONTROVERSIES IN THE APPOINTMENT, ELECTION AND
REMOVAL OF DIRECTORS AND OFFICERS (Sec. 5 [c])
The Special Commercial Courts have original and
exclusive jurisdiction to hear and decide cases involving
controversies in the election or appointment of directors,
trustees, officers or managers of corporations, partnerships or
associations.
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General rule: A corporate officer‟s election,
appointment or termination by the board of directors is always
a corporate act, and the fact that the officer asks for
backwages does not alter the picture. The original and
exclusive jurisdiction rests with the Special Commercial Courts.
Exception: The main cause of action is for the
recovery of unpaid wages and separation pay. (Midland
Construction Co., Inc. vs. Movilla)
The main aspect to be considered is whether the
corporate officer asserts his rights as such officer or questions
his removal or ouster. If so, the case would fall within the ambit
of the jurisdiction of the Special Commercial Courts and not
the NLRC.
RECEIVERSHIP AND SUSPENSION (Sec. 5 [d] and 6[c, d])
Petitions for suspension of payments of corporations,
partnerships or associations, and appointment of receivership,
management committee, board or body are lodged within the
jurisdiction of the Special Commercial Courts.
A corporation, partnership or association, whether or
not insolvent, can file a petition for suspension of payments
provided it is placed under a rehabilitation receiver or
management committee or rehabilitation receiver.
Three types of suspension of payments:
1. Simple suspension of payments – mere deferment of
payment of debts and it refers to a petition which is filed by a
corporation which possesses sufficient assets to cover its
liabilities but foresees the possibility of meeting them when
they respectively fall due owing to temporary liquidity
problems.
2. Suspension of payments with the appointment of a
receiver with or without a rehabilitation plan. The
rehabilitation plan is a plan under which the corporation will
reschedule the payment of its debts and liabilities. Either the
petitioner corporation will propose the plan or ask for the
appointment of a receiver who will study and make the plan.
3. Suspension of payments where the corporation has
no sufficient assets to cover its debts and liabilities with or
without the appointment of a management committee with or
without a rehabilitation plan.
EFFECTS OF SUSPENSION OF PAYMENTS
The proper court may issue an order suspending
payments of claims due from a distress corporation.
Upon the appointment of a management committee,
rehabilitation receiver, board or body all actions for claims
against the corporation, partnership or association under
management or receivership pending before any court,
tribunal, board or body shall be suspended accordingly.
The reason for suspension of payments for claims
against a distressed corporation is to enable the management
committee to effectively exercise its powers free from judicial
or extrajudicial interference that might unduly hinder or
prevent the „rescue‟ of the debtor company. (PAL vs. Sps.
Sadic and Kurangking)
The suspension of all actions for claims against a
corporation embraces all phases of the suit, be it before the
trial court or any tribunal or before this Court. No other action
may be taken, including the rendition of judgment during the
state of suspension. It must be stressed that what are
automatically stayed or suspended are the proceedings of a
suit and not just the payment of claims during the execution
stage after the case had become final and executory. Once the
process of rehabilitation, however, is completed, this Court
will proceed to complete the proceedings on the suspended
actions. Furthermore, the actions that are suspended cover all
claims against the corporation whether for damages founded
on a breach of contract of carriage, labor cases, collection suits
or any other claims of a pecuniary nature. No exception in
favor of labor claims is mentioned in the law. (PAL vs. Zamora)
Claims – refers to debts or demands of pecuniary
nature; the assertion of right to have money paid.
Suspended proceedings include extra judicial
foreclosures. You cannot even consolidate. All proceedings at
whatever stage are suspended.
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Even if the suspension order is issued after a
creditor‟s action in court has already become final but pending
execution, the execution of the decision is likewise suspended.
(Filinvest vs. Ejercito)
Note the words “against the corporation.”
If a corporation secures a loan, and one of its key
officers uses his private properties to guarantee the loan,
corporation files for suspension, the bank want to foreclose on
the prop, may the bank foreclose? Yes. It is not an action for ac
claim against the corporation. Union bank case.
Properties of an individual stockholder, director or
officer, as surety of corporate liabilities, are not, and will not
be covered by the suspension of payments order issued by the
court pursuant to PD 902-A.
 Same with regard to criminal proceedings, personal
to corporate officer concerned.
Despite the appointment of a receiver for a
corporation under PD 902-A, an action against a corporation
seeking the nullification of corporate documents cannot be
suspended by reason thereof, since the civil action does not
present a monetary claim against the corporation. (Finasia
Investment and Finance Corporation vs. CA)
The SEC does not have jurisdiction to entertain
petitions for suspension of payments filed by parties other
than corporations, partnerships or associations. (Union Bank
vs. CA)
Equality is Equity – during suspension the assets are
held in trust for the equal benefit of all creditors to preclude
one from obtaining an advantage or preference over another
by the expediency of an attachment, execution or otherwise.
The creditors should stand on equal footing. Not anyone of
them should be given any preference by paying one of them
ahead of the others. (Alemars Sibal and Son, Inc. vs. Elibenas)
The issue of whether or not preferred creditors of
distressed corporations stand on equal footing with all other
creditors gains relevance and materiality only upon the
appointment of a management committee, rehabilitation
receiver, board or body. Suspension of claims against the
corporation under rehabilitation is counted or figured up only
upon the appointment of a management committee or a
rehabilitation receiver. (RCBC vs. IAC)
VERY IMPORTANT!!!
1. All claims against corporations, partnerships or
associations that are pending before any court, tribunal or
board, without distinction as to whether or not a creditor is
secured or unsecured, shall be suspended effective upon the
appointment of a management committee, rehabilitation
receiver, board or body in accordance with the provisions of
PD 902-A.
2. Secured creditors retain their preference over
unsecured creditors, but enforcement of such preferences is
equally suspended upon the appointment of a management
committee, rehabilitation receiver, board or body. In the event
that the assets of the corporation, partnership or association
are finally liquidated, however, secured or preferred credits
under the applicable provisions of the Civil Code will definitely
have preference over unsecured ones.
If the rehabilitation of the corporation is not feasible,
the court muto propio or the management committee may
petition the lifting and the preferences will be there again.
APPOINTMENT OF MANAGEMENT COMMITTEE, BOARD OR
BODY (Sec. 6 [d])
Special Commercial Courts may create or appoint a
management committee, board or body upon petition or muto
propio to undertake the management of corporations,
partnerships or association not supervised or regulated by
other government agencies in appropriate cases where there
is imminent danger of dissipation, loss or wastage or
destruction of assets or other properties or paralyzation of
business operations of such corporation or entities which may
be prejudicial to the interest of minority stockholders, parties-
litigant or the general public.
It may also create or appoint a management
committee, board or body to undertake the management of
corporations, partnerships or other associations supervised or
regulated by other government agencies such as banks and
insurance companies, upon the request of the government
agency concerned.
Requisites before a management committee, board
or body may be appointed or created:
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1. Dissipation, loss, wastage or destruction of assets or
other properties; and
2. Paralyzation of its business operations which may be
prejudicial to the interest of the minority stockholders, parties-
litigants or the general public. (Sy Chim vs. Sy Siy Ho & Sons,
Inc.)
Danger – a general term, including peril, jeopardy,
hazard and risk; refers to exposure or liability to injury.
Imminent – something which is threatening to
happen at once, something close at hand, something to
happen upon the instant, close although not yet happening,
and on the verge of happening.
In the absence of a strong showing of an imminent
danger of dissipation, loss, wastage or destruction of assets or
other properties of a corporation and paralysis of its business
operations, the mere apprehension of future misconduct
based upon prior mismanagement will not authorize the
appointment of a management committee/receiver. (Sy Chim
vs. Sy Siy Ho & Sons, Inc.)
Mere disagreement among stockholder as to the
fairness of the corporation would not in itself suffice as a
ground for the appointment of a management committee.
However, where the dissention among the stockholders is
such that the corporation cannot successfully carry on its
corporate functions, the appointment of a management
committee becomes imperative. (Jacinto vs. First Women‟s
Credit Corporation)
A management committee shall have the power to
take custody of and control all assets and properties owned
and possessed by the entity under management. It shall take
the place of the management and board of directors of the
entity under management, assume their rights and
responsibilities, and preserve the entity‟s assets and
properties in its possession.
The rehabilitation receiver shall not take over the
management and control of the debtor but shall closely
oversee and monitor the operations of the debtor during the
pendency of the proceedings. He shall be primarily tasked to
study the best way to rehabilitate the debtor and to ensure
that the value of the debtor‟s property is reasonably
maintained pending the determination of whether or not the
debtor should be rehabilitated, as well as implement the
rehabilitation plan after its approval.
Venue of actions in intra-corporate controversies –
Special Commercial Court which has jurisdiction over the
principal office of the corporation, partnership or association.
Nature of proceedings is in rem. Jurisdiction acquired
upon publication of the proceeding.
Creditors have the personality (at least 25% of the
total outstanding liablitities) may file, ex. Bayantel.
Their compensation is subject to agreement of the
parties.
Actuations of the board, body, committee subject
to….
Service of pleadings . Sec. 6 rule 1. may be by fax or
email. When authorized by the court.
Service of summons. Sec. 5 rule 2. made upon any of
the statutory or corporate officers or their respective
secretaries. vs. Eb Villarosa case. (Rule of Court)
SECURITIES REGULATION CODE (SRC)
Full disclosure rule – as long as there is full and
complete disclosure relative to the issue of securities the
investing public should determine for themselves whether or
not to invest.
Doctrine of primary jurisdiction – courts will not
determine a controversy involving a question within the
jurisdiction of the administrative tribunal, where the question
demands the exercise of sound administrative discretion
requiring the specialized knowledge and expertise of said
administrative tribunal to determine technical and intricate
matters of fact.
A criminal charge for violation of the SRC is a
specialized dispute. Hence, it must first be referred to an
administrative agency of special competence, i.e., the SEC…
The SRC is a special law. Its enforcement is particularly vested
in the SEC. Hence, all complaints for any violation of the Code
and its implementing rules and regulations should be filed with
the SEC. Where the complaint is criminal in nature, the SEC
shall indorse the complaint to the DOJ for preliminary
investigation and prosecution as provided in Section 53.1.
(Baviera vs. Paglinawan)
Securities
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Securities – are shares, participation or interests in a
corporation or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract, instrument,
whether written or electronic in character. It includes:
1. Shares of stock, bonds, debentures, notes, evidences
of indebtedness, asset-backed securities;
2. Investment contracts, certificates of interest or
participation in a profit sharing agreement, certificates of
deposit for a future subscription;
3. Fractional undivided interests in oil, gas or other
mineral rights;
4. Derivatives like option and warrants;
5. Certificates of assignments, certificates of
participation, trust certificates, voting trust certificates or
similar instruments;
6. Proprietary or non proprietary membership
certificates incorporations; and
7. Other instruments as may in the future be
determined by the Commission.
The definition of securities is extra-ordinarily broad. It
is a catch all phrase meant to include all novel devices which
are of the same nature. Investment contracts and golf club
shares are included in the definition of securities.
General rule: Securities cannot be sold or offered for
sale or distribution to more than 19 persons without a
Registration Statement duly filed and approved by the SEC.
Once the securities are sold or offered to more than 19
persons, it becomes a public offering requiring prior
registration with the SEC. Violation thereof renders the person
administratively, civilly and criminally liable.
Exception: The securities involved are covered by Sec.
9 (exempt securities) and Sec. 10 (exempt transactions).
Persons engaging in the business of buying or selling
securities in the Philippines as a broker or dealer, or acting as
a salesman for such entities must be registered and authorized
as such by the SEC.
Investment contract – a contract or scheme whereby
a person invests his money in a common venture premised on
a reasonable expectation of profits to be derived from the
entrepreneurial or managerial efforts of others.
Issuance of certificates of participation in a multi-level
marketing scheme, solely on the management of others
without goods or services is an investment contract and thus a
security. (Justee vs. SEC)
Pyramiding schemes partakes of a nature of an
investing contract which cannot be sold to more than 19
persons without prior approval of the SEC.
 When an investor is relatively uninformed and turns
over his money to others, essentially depending upon their
representations and their honesty and skill in managing it, the
transaction generally is considered as an investment contract.
The touchstone is the presence of an investment in a common
venture premised on a reasonable expectation of profits to be
derived from the entrepreneurial or managerial efforts of
others. (People vs. Petralba)
Exempt Securities
Exempt Securities (Sec. 9):
1. Any security issued or guaranteed by the Government
of the Philippines, or by any political subdivision or agency
thereof, or by any person controlled or supervised by, and
acting as an instrumentality of said Government.
2. Any security issued or guaranteed by the government
of any country with which the Philippines maintains diplomatic
relations, or by any state, province or political subdivision
thereof on the basis of reciprocity: Provided, That the
Commission may require compliance with the form and
content of disclosures the Commission may prescribe.
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3. Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory body.
4. Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and regulation of the
Office of the Insurance Commission, HLURB, or BIR.
5. Any security issued by a bank except its own shares of
stock.
Exempt Transactions
Exempt Transactions (Sec. 10):
1. Any judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in insolvency or
bankruptcy.
2. By or for the account of a pledge holder, or
mortgagee or any other similar lien holder selling or offering
for sale or delivery in the ordinary course of business and not
for the purpose of avoiding the provisions the SRC, to liquidate
a bona fide debt, a security pledged in good faith as security
for such debt.
3. An isolated transaction in which any security is sold,
offered for sale, subscription or delivery by the owner thereof,
or by his representative for the owner‟s account, such sale or
offer for sale, subscription or delivery not being made in the
course of repeated and successive transactions of a like
character by such owner, or on his account by such
representative and such owner or representative not being the
underwriter of such security.
4. The distribution by a corporation, actively engaged in
the business authorized by its articles of incorporation, of
securities to its stockholders or other security holders as a
stock dividend or other distribution out of surplus.
5. The sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.
6. The issuance of bonds or notes secured by mortgage
upon real estate or tangible personal property, where the
entire mortgage together with all the bonds or notes secured
thereby are sold to a single purchaser at a single sale.
7. The issue and delivery of any security in exchange for
any other security of the same issuer pursuant to a right of
conversion entitling the holder of the security surrendered in
exchange to make such conversion: Provided, That the security
so surrendered has been registered under the SRC or was,
when sold, exempt from the provisions of the SRC, and that
the security issued and delivered in exchange, if sold at the
conversion price, would at the time of such conversion fall
within the class of securities entitled to registration under the
SRC. Upon such conversion the par value of the security
surrendered in such exchange shall be deemed the price at
which the securities issued and delivered in such exchange are
sold.
8. Broker‟s transactions, executed upon customer‟s
orders, on any registered Exchange or other trading market.
9. Subscriptions for shares of the capital stock of a
corporation prior to the incorporation thereof or in pursuance
of an increase in its authorized capital stock under the
Corporation Code, when no expense is incurred, or no
commission, compensation or remuneration is paid or given in
connection with the sale or disposition of such securities, and
only when the purpose for soliciting, giving or taking of such
subscriptions is to comply with the requirements of such law
as to the percentage of the capital stock of a corporation which
should be subscribed before it can be registered and duly
incorporated, or its authorized capital increased.
10. The exchange of securities by the issuer with its
existing security holders exclusively, where no commission or
other remuneration is paid or given directly or indirectly for
soliciting such exchange.
11. The sale of securities by an issuer to fewer than 20
persons in the Philippines during any twelve-month period.
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12. The sale of securities to any number of the following
qualified buyers:
a. Bank;
b. Registered investment house;
c. Insurance company;
d. Pension fund or retirement plan maintained by the
Government of the Philippines or any political subdivision
thereof or managed by a bank or other persons authorized by
the Bangko Sentral to engage in trust functions;
e. Investment company; or
f. Such other person as the Commission may by rule
determine as qualified buyers, on the basis of such factors as
financial sophistication, net worth, knowledge, and experience
in financial and business matters, or amount of assets under
management.
Tender Offer
Tender Offers – a publicly announced intention by the
purchaser to acquire a certain block of equities of a company
through open market purchases or private negotiations.
A tender offer is required of any person or group of
persons acting in concert who intend to acquire:
1. At least 15% of any class of any equity security of a
listed corporation or of any class of any equity security of a
corporation with assets of at least P50M and having 200 or
more stockholders with at least 100 shares each; or
2. At least 30% of such equity over a period of 12
months.
Proxies
Proxies must be issued and proxy solicitation must be
made in accordance with rules and regulations to be issued by
the Commission.
Requisites for proxies:
1. In writing;
2. Signed by the stockholder or his duly authorized
representative; and
3. Filed before the scheduled meeting with the
corporate secretary.
General rule: A proxy shall be valid only for the
meeting for which it is intended.
Exception: It is otherwise provided in the proxy.
No proxy shall be valid and effective for a period
longer than 5 years at one time.
No broker or dealer shall give any proxy, consent or
authorization, in respect of any security carried for the account
of a customer, to a person other than the customer, without
the express written authorization of such customer.
A broker or dealer who holds or acquires the proxy for
at least 10% or such percentage as the Commission may
prescribe of the outstanding share of the issuer, shall submit a
report identifying the beneficial owner within 10 days after
such acquisition, for its own account or customer, to the issuer
of the security, to the Exchange where the security is traded
and to the Commission.
Independent Director
Any corporation with a class of equity securities listed
for trading on an Exchange or with assets in excess of P50M
and having 200 or more holders, at least of 200 of which are
holding at least 100 shares of a class of its equity securities or
which has sold a class of equity securities to the public
pursuant to an effective registration statement shall have at
least 2 independent directors or such independent directors
shall constitute at least 20% of the members of such board,
whichever is the lesser.
Independent director – a person other than an officer
or employee of the corporation, its parent or subsidiaries, or
any other individual having a relationship with the
corporation, which would interfere with the exercise of
independent judgment in carrying out the responsibilities of a
director.
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The SEC may exempt corporations from the required
independent directors as it did in the rehabilitation of Victorias
Milling Co. Inc..
Insider Trading
Insider:
1. The issuer;
2. A director or officer (or person performing similar
functions) of, or a person controlling the issuer;
3. A person whose relationship or former relationship to
the issuer gives or gave him access to material information
about the issuer or the security that is not generally available
to the public;
4. A government employee, or director, or officer of an
exchange, clearing agency and/or self-regulatory organization
who has access to material information about an issuer or a
security that is not generally available to the public; or
5. A person who learns such information by a
communication from any of the foregoing insiders.
General rule: An insider may not sell or buy a security
of the issuer while in possession of material information with
respect to the issuer or the security that is not generally
available to the public.
Exceptions:
1. The insider proves that the information was not
gained from such relationship; or
2. The insider disclosed the information to a party
reasonably believed by the insider to possess the information.
Material non-public information – has not been
generally disclosed to the public and:
1. would likely affect the market price of the security
after being disseminated to the public and the lapse of a
reasonable time for the market to absorb the information; or
2. would be considered by a reasonable person
important under the circumstances in determining his course
of action whether to buy, sell or hold a security.
 An insider may not communicate material non-public
information to any person who will likely buy or sell a security
of the issuer while in possession of such information.
Trading by persons who have material non-public
information about a tender offer is prohibited.
Registration of Brokers, Dealers, Salesmen and Associated
Persons
Persons engaging in the business of buying or selling
securities in the Philippines as a broker or dealer, or acting as
a salesman for such entities must be registered and authorized
as such by the SEC.
Broker – a person engaged in the business of buying
and selling securities for the account of others.
Dealer – any person who buys and sells securities for
his/her own account in the ordinary course of business.
Salesman - a natural person, employed as such or as
an agent, by a dealer, issuer or broker to buy and sell
securities.
A stockbrokerage firm can have no other business
than that.
Purchase of shares should be coursed through a
broker. However a private transaction can be made.
Fraudulent Transactions and Other Market Manipulations
Fraudulent and manipulative devices:
1. Wash sale – any transaction in a security which
involves no change in the beneficial ownership thereof.
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2. Matched order – an order or orders for the purchase
or sale of security with the knowledge that a simultaneous
order or orders of substantially the same size, time and price
for the sale or purchase of such security has, or will be entered
by or for the same or different parties.
3. Marking the close – place of purchase or sale order,
at or near the close of the trading period.
4. Painting the tape – the activity is made during normal
trading hours. It involves buying activity among nominee
accounts at increasingly higher or lower prices or causing
fictitious reports to appear on the “ticker tape.”
5. Squeezing the float – the part or portion of the
issue/security which is outstanding but intentionally held by
dealers or other persons with a view of reselling them later for
profit.
6. Hype and dump – the act employed by a person or
group of persons of purchasing the outstanding capital stock
of a dormant public shell company for a nominal amount and
merge it with their privately held company. They would then
gain control of the majority of the stocks of the merged entity.
The shares of the Shell Company are often reverse-split four to
one or more to reduce the number of shares. Stock certificates
are often re-issued in the name of the merged entity to
relatives and associates who act as nominees of the person or
group of persons employing the device. They would then look
for a broker- dealer who would be willing to make a market
relative to the stocks of the newly merged company; then hire
a promoter who would “hype” the virtues of the company, its
products and stocks. The broker-dealer then generates volume
and advance bid price. When the market reaches a high price,
they would “dump” their shareholdings and bail out.
7. Boiler room operations – involves an intensive selling
campaign through numerous salesmen by telephone or
through direct mail offerings for securities of either a certain
type or from a specific issuer. Investors are induced to
purchase through hard-sell techniques based on unfounded
predictions and mailing of misleading market letters.
8. Circulating or dissemination information that the
price of any security listed in the Exchange will or is like to rise
or fall (illegal)
9. Making false or misleading statements with respect
to any material fact, which he knew or had reasonable ground
to believe was so false or misleading for the purpose of
inducing the purchase or sale of any security (illegal).
10. Pegging or fixing or stabilizing the price of security
effected either alone or with others through any series of
transactions for the purchase or sale thereof (illegal)
11. Short sale – sale of securities which the vendor does
not own (illegal unless done in accordance with the rules and
regulations of the SEC) (T3 rule).
12. Insider trading – the act of an insider of buying or
selling securities of the issuer while in possession of material
information with respect thereto that is not generally available
to the public (illegal unless exempted).
Wash sale and matched order is illegal when used as
a means to create a false or misleading appearance of active
trading in the security concerned.
Marking the close, painting the tape, squeezing the
float, hype and dump, and boiler room operations are illegal
when they are effected to:
1. Raise the price or induce the purchase of a security or
of a controlling, controlled or commonly controlled company
by others;
2. Depress their price to induce the sale of a security,
whether of the same or of a different class, of the same issuer
or of a controlling, controlled company, or common controlled
company of others; and
3. Creates active trading to induce such purchase or sale
through said devices or schemes.
Other fraudulent transactions:
1. Employing any device, scheme, or artifice to defraud;
AQUILA LEGIS FRATERNITY
Corporation Law Reviewer
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Darren L. Salipsip 98B & Ronald Patrick Rubin 06C

2. Obtaining money or property by means of any untrue

statement of a material fact of any omission to state a material
fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not
misleading; or

3. Engaging in any act, transaction, practice or course of

business which operates or would operate as a fraud or deceit
upon any person.

Fraud – akin to bad faith which implies a conscious

and intentional design to do a wrongful act for a dishonest
purpose or moral obliquity.

Settlement Offer

At any time, during an investigation or proceeding

under this Code, parties being investigated and/or charged
may propose in writing an offer of settlement with the
Commission.

Upon receipt of such offer of settlement, the

Commission may consider the offer based on timing, the
nature of the investigation or proceeding, and the public
interest.

The Commission may only agree to a settlement offer

based on its findings that such settlement is in the public
interest. Any agreement to settle shall have no legal effect
until publicly disclosed. Such decision may be made without a
determination of guilt on the part of the person making the
offer.

Limitation of Actions

SEC. 62. Limitation of Actions. - 62.1. No action shall

be maintained to enforce any liability created under Section 56
or 57 of this Code unless brought within two (2) years after the
discovery of the untrue statement or the omission, or, if the
action is to enforce a liability created under Subsection 57.1(a),
unless brought within two (2) years after the violation upon
which it is based. In no event shall any such action be brought
to enforce a liability created under Section 56 or Subsection
57.1

(a) more than five (5) years after the security was bona fide
offered to the public, or under Subsection 57.1 (b) more than
five (5) years after the sale.

62.2. No action shall be maintained to enforce any

liability created under any other provision of this Code unless
brought within two (2) years after the discovery of the facts
constituting the cause of action and within five (5) years after
such cause of action accrued.

Fasle registration statement - liable civily - sec. 56

Ceiling as to amount of damages - triple of the amount

involved

limitation of actions - not later than 5 years after the cause of

action accrues