Nationality of Corporation

Place of Incoporation Test – A corporation is a national of a country under whose laws it has been organized and registered pursuant to Section 123 of the
Corporation Code

Place of Business Test – applied to determine whether a state has jurisdiction over the existence and legal character of a corporation. The corporation is subject
to the jurisdiction of the place where its principal office or center of management is located.

Control Test – nationality of a corporation is determined by the nationality of the majority of the stockholders on whom equity control is vested, on the theory
that they would be able to elect the majority of the Board of Directors. This also applies to:

1. Exploitation of Natural Resources

a. Section 2, Article XII, 1987 Constitution– “All lands of the public domain, waters minerals, coal, petroleum, and other mineral oils, all forces of
potential and other natural resources are owned by the State…The State may directly undertake such activities, or it may enter into co-production,
joint venture, or production sharing agreements with Filipino citizens, or corporations or association at least 60 per centum of whose capital is
owned by such citizens.”
b. A foreign corporation would not be qualified to exploit our natural resources. Exploitation of natural resources must be in the control of Filipinos.
c. Control test would only pertain to domestic corporations.
2. Owning of Operating Public Utilities
a. Section 11, Article XII, 1987 Constitution – “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 association organized under the laws of the Philippines at least 60 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 50 years…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.”
b. The abovementioned provision includes the place of incorporation test and requires that only domestic corporations with at least 60% of the
capital stock owned by Filipinos may own and operate public utilities in the Philippines.
3. Mass Media
a. Section 11, Article XVI of the 1987 Constitution – Ownership of mass media shall be limited to citizens of the Philippine, or to corporations,
cooperatives or association, wholly-owned and managed by such citizens.
b. Mass media includes radio, television, and printed media and does not include commercial telecommunications, which are considered as public
utilities, nor the advertising industry. It shall mean the gathering, transmission of news, information, messages, signals, and forms of written, oral
and all visual communication and shall embrace the print medium, radio, television, films, movies, advertising in all its phases, and their business
managerial.
c. The provision does not expressly include the place of incorporation test, the same shall be deemed included under the same principle governing
exploitation of natural resources. It requires not only 100% ownership of capital stock but also 100% Filipino management of the entity.
4. Advertising Industry
a. Section 11, Article XVI, 1987 Constitution - The advertising industry is impressed with public interest, and shall be regulated by law for the
protection of consumers and the promotion of the general welfare.
 b. Only Filipino citizens or corporations or association at least 70% of the capital of which is owned by such citizens shall be allowed to engage in the
advertising industry. Participation of foreign investors shall be limited to their proportionate share in the capital thereof, and all the executive and
managing officers of such entities must be citizens of the Philippines.
5. War-time test
a. In times of war, the nationality of a private corporation is determined by the character or citizenship of its controlling stockholders.
6. Investment Test and the Grandfather Rule
a. The Grandfather Rule is the method by which the percentage of Filipino equity is computed in fully or partly nationalized areas of activities provided
for under the Constitution and other nationalization laws, in cases where corporate shareholders are present in the situation, by attributing the
nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder.

Corporations Disqualified from owning Lands of the Public Domain

 Section 3, Article XII, 1987 Constitution – “Alienable lands of the public domain shall be limited to agricultural lands. Private corporations or associations
may not hold such alienable lands of the public domain except by lease, for a period of not exceeding 25 years, renewable for not more than 25 years, and
not to exceed 1000 hectares in area. Citizens of the Philippines may lease not more than 500 hectares, or acquire not more than 12 hectares thereof by
purchase, homestead, or grant.”

Classification of Corporations

1. In relation to the State

a. Public and Private corporations
i. Public Corporation – those created for political purposes connected with the public good in the administration of the civil government,
i.e., municipal corporations like barangay, municipality, city , province.
1. 2-fold character of Municipal Corporations:
a. Public or governmental character – it acts as agent of the state and exercises by delegation a part of the sovereignty of
the State.
b. Private or Proprietary character – it acts as a private or business corporation and stands for the community in the
administration of its local affairs wholly beyond the spheres of public purposes.
ii. Private Corporation
1. Private corporations are divided into:
a. Stock corporation – corporation with capital stock divided into shares. They are authorized to distribute to the holders of
such shares dividends or allotments of the surplus profit on the basis of the shares held.
b. Non-stock corporation – all other private corporations.
2. Purposes:
a. Business corporation – profit-seeking corporations
 b. Religious corporations
c. Eleemosynary corporations – those organized for charitable, scientific, or vocational corporations
3. Types of Private Corporations:
a. Those organized under the Corporation Code for private ends
b. Those organized under the Corporation Code as GOCCs to achieve certain purposes of the government
c. Those GOCCs organized with their own charter
iii. Distinctions
1. The distinction is based on the corporation’s creations.
a. General Rule: Public corporations are created by its charter whereas a private corporation is created under a general
incorporation law (Corporation Code).
b. Some private corporations are granted special charters by the Legislature (GOCCs) but they cannot be considered as public
corporations.
b. Quasi-Public Corporations – a cross between private corporations and public corporations, i.e., school districts, water districts.
c. Applicability of Civil Service Law
2. As to Place of Incorporation
a. Domestic Corporations – one incorporated under the laws of the Philippines.
b. Foreign Corporations – may be licensed by SEC to do business in Philippines only under the principle of reciprocity, after securing a certificate of
authority from the Board of Investments (Exec Order 226 or the Omnibus Investment Code) and after complying with the conditions for the
issuance of the license on application forms, structural organizations, and capitalization.
i. Purposes of placing condition over F.C. :
1. To place them on an equality with domestic corporations
2. To subject them to inspection so that their condition may be known
3. To protect the residents of the state doing business with them by subjecting them to the courts of the state
3. As to Legal Status
a. De Jure corporations – a corporation has de jure existence if there is a full or substantial compliance with the requirement of an existing law
permitting organization of such corporation as by proper articles of incorporation duly executed and filed.
b. Corporation De Facto – A corporation has de facto existence where there is a bona fide attempt to incorporate, colorable compliance with the
statute and user of corporate powers.
c. Corporation by Estoppel – A corporation which is not a corporation de jure or de facto but is precluded from denying its corporate existence.
d. Corporation by Prescription – A corporation with acknowledged juridical personality as it is an institution, i.e., Roman Catholic church
4. As to Existence of Shares of Stocks
a. Stock Corporation – corporations which have a capital stock divided into shares and are authorized to distribute to the holders dividends
i. Requisites:
1. Capital stock divided into shares
2. Authority to distribute
 b. Non-stock Corporation – one where no part of its income is distributable as dividends to its members, trustees or officers, subject to the provision
on dissolution, provided that any profit incident to its operations shall be used for the furtherance of the purpose or purposes for which the
corporation was organized.
5. As to relationship of management and control
a. Holding company – one that controls another as a subsidiary or affiliate by the power to elect its management. It is one which hold stocks in other
companies for purposes of control rather than for mere investment.
b. Affiliate company – a company which is subject to common control of a mother or holding company and operated as part of a system.
c. Parent and Subsidiary Companies – when a corporation has a controlling financial interest in one or more corporation
i. Parent Company – the one having control
ii. Subsidiary – affiliate controlled by such person, directly or indirectly, through one or more intermediaries

Corporate Juridical Personality

Basis: Section 2 of Corporation Code – “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.”

Definition: A Corporation is an artificial being invested by law with a personality separate and distinct from its officers and stockholders and from other corporations
to which it may be connected.

Legal consequences:

1. Such corporations may not be liable for the obligations of the persons composing it or of its officers.
2. Neither can its stockholders be held liable for the obligations of such corporation.
3. Officers are not personally liable for their acts as such officers unless it is shows that they have exceeded their authority.
4. Property of the corporation is not the property of its stockholders or members.
5. Nor can the property of the controlling stockholders or officers be treated as part of the corporate estate.
6. Suit against a corporation cannot be considered as a suit against the stockholders and vice versa.
7. A mother or holding corporation has no proprietary interest in the property, rights and interest of the subsidiary or affiliate corporation.
8. It may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statues, or to confuse legitimate issues, except:
a. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock.
b. Having the same address
c. Presence of interlocking incorporators
d. Presence of interlocking directors
Application of the Piercing Doctrine

Definition: The doctrine can be applied when the legal notion of legal entity is used to:

1. Defeat public convenience

2. Justify wrong
3. Protect fraud
4. Defend crime

Nature and Consequences:

1. Piercing applies only when corporate personality is used as enabling tool

a. Corporation used as a cloak or cover for fraud or illegality, to work injustice
2. Piercing applies to benefit either those within or outside the intracorporate relations
3. Piercing application is to prevent fraud or wrong and not available for other purposes
a. Victim Standing – Piercing Doctrine cannot be employed to be able to complete its claims against another corporation
4. Piercing Application must be shown to be necessary and with factual basis
a. The wrongdoing must be clearly and convincingly established and that it cannot be presumed.
5. Piercing application is essentially a Judicial Prerogative
a. It is not a function of the sheriff but can be a function of quasi-judicial agencies.
6. Piercing application only has res adjudicata effect
a. It binds only the parties to the case only to the matters actually resolved therein
b. A corporation’s legal personality has been pierced in a case, such corporation still possessed such separate juridical personality in any other case
7. Probative factors and three-tiered test for determining applicability of piercing doctrine
a. Probative factors to be considered when corporate mask may be lifted and corporate veil be pierced:
i. Stock ownership by one or common ownership of both corporations
ii. Identity of directors and officers
iii. Manner of keeping corporate books and records
iv. Methods of conducting the business
b. Test to determine applicability/ Requisites:
i. Control, not merely majority of 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 has at the time to separate mind, will or existing
of its own
ii. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of statutory or other positive
legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights
iii. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of

Classifications of the Piercing Cases:

1. Fraud cases - When the corporate entity is used to commit fraud or to justify a wrong, or to defend a crime
 a. Its distinction lies on the element of malice or evil motive
b. Examples:
i. Sale of a parent corporation to a subsidiary corporation to evade tax or gain tax advantage
ii. A stockholder with absolute control over the corporation, entered into a contract with another corporation through fraud and
representations
c. Requisites:
i. Fraud or evil motive in the affected transaction and the mere proof of control of the corporation by itself would not authorize piercing
ii. Corporate entity used in the perpetration of the fraud or in the justification of wrong, or to escape personal liability
iii. Main action should seek for the enforcement of pecuniary claims pertaining to the corporation against officers or stockholder, vice versa
2. Alter-ego cases – When the corporate entity is used as a mere alter ego, business conduit or instrumentality of a person or another entity
a. Also called instrumentality rule
b. Example: persons trying to hide behind corporate personality to evade liabilities (taxes)
c. Four policy bases:
i. Officers intends to do no evil, the use of the corporation as an alter ego is in direct violation of the central principle of CC of treating the
corporation as a separate juridical entity from its members and stockholders
ii. By not respecting the separate juridical personality of the corporation, others who deal with the corporation are not also expected to be
bound by the separate juridical personality of the corporation and may treat the interest of both the controlling stockholder or officer
and the corporation as the same
iii. Piercing in alter ego may prevail even when no monetary claims are sought.
iv. When the underlying business enterprise does not really change and only the medium by which that business enterprise is changed,
then there would be occasion to pierce the veil of corporate fiction to allow creditors to recover.
3. Defeat public convenience cases – when the corporate entity is used to defeat public convenience
a. i.e. when a corporation is used as a means to evade one’s obligation
4. Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity
a. Dumping ground – applied when no evil had been sought to be achieved but corporate personality cannot be respected to achieve justice

Piercing Doctrine and the Due Process Clause

 It has been rightly argued that to enforce a writ of execution to satisfy a judgment rendered against the corporation on the separate assets of the
stockholders or officers would be in violation of the due process clause in cases where such stockholders or officers were not even summoned as parties
to the case brought against the corporation.

Corporation in Sequestration Issues

 Corporations which could have been used as the instruments for acquisition or as being depositaries of products of ill-gotten wealth need not be impleaded
as separate parties to cases filed with the Sandiganbayan and would still be proper subject of sequestration.
Corporate Contract Law

Merging Principles of Corporate Law and Contract Law

 Unenforceable Contract Premise

o For a contract to be valid and binding, these three must concur:
 Consent
 Lack of consent – void (i.e., corporation with no juridical person)
 Vice in consent – voidable
 Contracts from defectively formed non-existent corporation – unenforceable
 Object
 Cause
o Contract – meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some
service.
o When a contract

Pre-Incorporation Stages

1. Who is a Promoter?
a. A person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives
consideration therefor.
2. What are Promoter’s Contracts?
a. Contracts entered into in behalf of a corporation which is in the process of organization and incorporation and such fact is acknowledged as an
essential ingredient in the process of perfection.
b. Also known as pre-incorporation contracts
c. Governed by the law on Agency
3. Application of Agency Principles
4. Pre-incorporation subscription agreements
a. Section 60 of CC: “Any contract for the acquisition of unissued stock in an existing corporation, or a corporation still to be formed shall be deemed
a subscription agreement.”
b. Section 61 of CC: subscription of shares of stocks of a corporation still to be formed shall be irrevocable for a period of at least 6 months from the
date of subscription unless all other subscribers consent to the revocation/ no pre-incorporation subscription may be revoked after the submission
of the articles of incorporation with the SEC.
c. Offer Theory – construes subscription agreement as only a continuing offer to a proposed corporation which offer does not ripen into a contract
until accepted by the corporation when organized. It allows subscriber to withdraw before the corporation comes into existence and accepts the
offer.
 d. Contract Theory – a subscription agreement among several persons to take shares in a proposed corporation becomes a binding contract and
irrevocable from the time of subscription, unless cancelled by all the parties before acceptance by the corporation.
5. Other Promoter’s Contract
a. Post-Incorporation Ratification as the Basis to Hold the Corporation Liable
i. Without ratification by a corporation after full incorporation, a contract entered into in behalf of a corporation yet to be organized is void
against the corporation.
b. Promoter Personally liable in the event the corporation is not duly incorporated

Defectively Formed and Non-existent corporations

1. De facto corporation doctrine - the alleged inexistence of the juridical personality of a corporation cannot be raised collaterally and can only be pursued
in a direct suit filed that seeks to question such juridical personality
a. Rationale: to prevent any party from raising the defect of authority as a means to avoid fulfillment of a contract or a transaction entered into in
good faith; to protect the sanctity of dealing by the public with persons or entities whose authority emanates from the State
b. Scope:
Contract between Action initiated by Against Liable or not
Enterprise + Outsider Outsider corporation Enterprise is LIABLE
Enterprise + Outsider Corporation Outsider Outsider is LIABLE
Enterprise + Outsider Outsider Individuals from corporation NOT LIABLE – remedy is against
enterprise only
Enterprise + Outsider Individuals from corporation Outsider NOT LIABLE – recovery must be
by the enterprise
c. Requisites:
i. Existence of a valid law under which the corporation may be incorporated
ii. An attempt in good faith to incorporate or existence of a colorable compliance with provisions or incorporation
iii. Assumption by the enterprise of corporate power
2. Corporation by estoppel doctrine – seeks to enforce a contract where clearly the element of consent is lacking because one of the parties thereto, a
purported corporation does not in fact exist at the time of perfection
a. Rationale: meant to hold contractual parties to their representations or expectations at the time the contract was perfected; does not allow parties
to draw on a basic defect (lack of the element of consent); to promote the public’s underlying faith in contracts entered into with corporate entities
b. Requisites:
i. One who assumes an obligation to an ostensible corporation cannot resist performance thereof on the ground that there was in fact no
corporation.
3. Outside the two doctrines – In pari delicto
Articles of Incorporation and By-Laws

1. Articles of Incorporation
a. Basic contract document:
i. Between state and corporation
ii. Between stockholders and state
iii. Between corporation and its stockholders
b. Doctrines in Contract Law
i. Principle of Mutuality – amendments can only be made by one party only after the consent of the other parties
ii. Doctrine of obligatory force – agreements in the articles of incorporation have the force of law
2. By-laws
a. Meant to be an intramural document to govern the relationship between and among the members of a corporate family.
b. It prescribes regulation
c. It shall not contravene the law.
d. Articles of Incorporation prevails over by-law provisions
e. By-laws does not bind parties outside of the corporate family

Ultra Vires Doctrine – corporate capacity to enter into contracts and transaction I

 Involves either of these two principles:

o Corporations are creatures of the State, thus, they are creatures of limited power – any contract outside of its powers is ultra vires and void
o Every corporation can act through its Board of Directors and agents authorized by such board – any contract not through the Board is not binding
on the corporation
 Types of ultra vires cases
o Those entered into or beyond the powers of the corporation as provided for in the law or its articles of incorporation
o Those entered into or done on behalf of the corporation by persons who have no corporate authority
o Acts or contracts which are per se illegal as being contrary to law
ARTICLES OF INCORPORATION

Approved Articles of Incorporation constituting the Corporate Charter

 The best proof of the purpose of the corporation is its articles of incorporation and by-laws
 If a corporation’s purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation has
purposes other than those stated.

Registration of Articles of Incorporation

 Articles of Incorporation do not become binding as the charter of the corporation unless they have been filed and registered with, and certified by, the
SEC.
 In case of special types of corporation (such as banks, public utilities, insurance companies), they will not be certified by SEC unless such articles are
accompanied by a favorable recommendation from the appropriate agencies supervising such special types of corporations, to the effect that the articles
are in accordance with the specific laws applicable.
 Examination and Approval/Disapproval by SEC
o If the articles of incorporation are not in conformity with law, SEC shall give the incorporators reasonable time within which to correct or modify
the objectionable portions.
o PD 902-A: BOI, NEDA and other appropriate government agencies shall be consulted first. If the corporation will not be consistent with the declared
national policies, SEC may deny the application.
 Special Rules for Banking
o Sec 14 of Banking Law: SEC shall not register the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a
certificate of authority issued by the Monetary Board, under its seal.
o Requirements of Monetary Board:
 All requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have
been complied with.
 Public interest and economic conditions justify the authorization
 Amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers
and administrators, reasonably assure the safety of deposits and the public interest
o Sec 81 – SEC shall not register the articles unless accompanied by the certificate of authority issued by BSP.
 Grounds for disapproval of the Articles of Incorporation (Sec 17 of Corpo Code)
o Articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed by law
o The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations
o The treasurer’s affidavit concerning the amount of capital stock subscribed and/or paid is false
o 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

Contents of the Articles of Incorporation (Sec 14)

  All corporations organized shall file with the SEC their articles of incorporation together with the following matters:
o Name of the corporation
o Purpose clauses, and should distinguish the primary purpose from the secondary purposes, should the corporation have more than one purpose
 Non-stock corporations shall not include a purpose which would change or contradict its nature
o place of principal office within the Philippines
o term of existence
o names, nationalities and residences of the persons who shall act as directors or trustees until the first regular directors or trustees are duly elected
and qualified
o if stock corporation, amount of authorized capital stock, number of shares, par value or no par value shares, original subscribers, amounts
subscribed and paid by each
 Treasurer’s Affidavit
o SEC shall not accept the article unless accompanied by a sworn statement by the Treasurer that:
 At least 25% of the capital stock authorized is subscribed, and
 At least 25% of such have been fully paid in cash or property
 Fair valuation of which is equal to at least 25% of the said subscription
 Paid-up capital shall be no less than P5,000
 Other requirements:
o Certificate of deposit
o Letter of authority to examine bank deposit
o Written undertaking to change corporate name (in case there is another person, firm or entity using said name or similar to it)

Corporate Name

 The name of the corporation is essential to its existence

o The incorporators constitute a body politic and corporate under the name stated in the certificate
o A corporation has the power of succession by its corporate name
o Authorization to transact business
o Power to sue and be sued
o Perform all other legal acts
 It cannot change its name unless in the manner provided by the statute
 The law does not allow a corporation to adopt a name identical, deceptively or confusingly similar to any other name already protected by law (Sec 18)
o When amendment as to the name is granted, an amended certificate of incorporation shall be given by SEC
 Guidelines:
o Shall contain the words:
 Corporation or Corp.
 Incorporated or Inc.
o Terms descriptive of a business in the name shall be indicative of the primary purpose
  If there are two descriptive terms:
 first shall refer to the primary purpose
 second shall refer to one of the secondary purposes
o name shall not be identical, misleading or confusingly similar to one already registered by another corporation or partnership (SEC) or a sole
proprietorship (DTI)
 if proposed name is similar
 name must contain at least one distinctive word different from other corporations
 requisites:
 complainant corporation acquired a prior right over the use of such corporate name
 proposed name is either:
o identical
o deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law
o patently deceptive, confusing or contrary to existing laws
o business name or trade name which is different from its corporate or partnership shall be indicated in the articles of incorporation or partnership
of said firm
o trade name or trademark duly registered with IPO cannot be used as part of corporation name without consent of owner of such trade name or
trademark
o if name or surname of a person is used, consent of said person or his heirs must be submitted except:
 when the person is a stockholder, member, partner or declared national hero
 if person cannot be identified or non-existent, explanation for the use of such name shall be required
o meaning of initials in the name shall be disclosed in writing by the registrant
o name containing a term descriptive of a business different from the business of a registered company whose name also bears similar terms used
by the former may be allowed
o name should not be patently deceptive, confusing or contrary to existing laws
o name which contains a word identical to a word in a registered name shall not be allowed if such word is coined or already appropriated by a
registered firm unless:
 there is consent from the registered firm or
 this firm is one of the stockholders or partners of the entity to be registered
o name of an internationally known corporation or one similar may not be used without the consent
o Philippines when used shall be in parenthesis
o Following words shall not be used
 Special laws:
 RA 5980: finance, financing, finance and investment – for those not engaged in the financing business
 RA 546: engineer, engineering, architects
 RA 337: bank, banking, banker, building and loan association, savings and loan association, trust company – for those not engaged
in banking business
  RA 266: United Nations
 RA 245: bonded – for corporations with unlicensed warehouse
 Matter of policy:
 Investments – for corporations not organized as investment house, investment company or a holding company
 National – for all stock corporations and partnership
 ASEAN, CALABARZON, PHILIPPINES 2000
o Name of a dissolved firm shall not be allowed to be used by other firms within 3 years after approval of dissolution unless:
 Allowed by last stockholders representing at least majority of the outstanding capital stock of the dissolved firm
o Registrant corporations or partnership shall submit a letter undertaking to changer their corporate name in case:
 Another person or firm has acquired prior right to use the name
 The same is deceptively or confusingly similar to one already registered unless:
o This undertaking is already included as one of the provisions of the articles of incorporation of the registrant
 Change of corporate name:
o Change of name does not result in dissolution
o A change in the name does not make a new corporation, whether effected by a special act or under a general law. It has no effect on the identity
of the corporation, or on its property, rights, or liabilities.
o Amendment in the corporate name in the articles of incorporation no longer requires another amendment to the old corporate names appearing
in the bylaws of the corporation
 SEC Jurisdiction over issues involving corporation names
o PD 902-A transferred jurisdiction of the SEC over corporate cases (Sec 5)
o SEC still has quasi-judicial powers to hear and decide a controversy between two persons who has a better right to use of a particular corporate
name.
o SEC has absolute jurisdiction, supervision and control over all corporation.
 Purpose Clause
o Purposes
 It confers and limits the powers by which a corporation may exercise.
 Necessary to determine which particular agency shall have jurisdiction over the operations of the corporation.
 To know the main path of business of the corporation
 So they can file suits if the corporation deviates from the primary purpose
o Reasons for indication purpose:
 Prospective investors shall know the kind of business the corporation deals with
 Management shall know the limits of its actions
 A third party can know whether his dealings with the corporation are within corporate functions and powers
o Investment of Non-Primary Purpose Activities
 Sec 42: A corporation may invest its funds in any other corporation or businesses or for any purposes other than the primary purpose for
which it was organized, provided:
  It was approved by majority of the Board of Directors or Trustees and
 Ratified at least 2/3 of the outstanding capital stock or
 At least 2/3 of the members in case of non-stock corporation
 Requirements:
o Written notice of the proposed investment
o Time and place of meeting addressed to each stockholder or member
 If investment is for purpose necessary to accomplish primary purposed, no need for approval of stockholders.
o Rules on interpretation of purpose clauses
 Construction of charters are same as those which govern statutes, contracts and other written instruments.
 When the charter of a corporation confers certain enumerated powers on the corporation, it is to be construed as including incidental
powers reasonably necessary to the proper exercise of the enumerated powers and as excluding all other non-enumerated powers.
 The general language of the charter following a recitation of specific power is construed and confined within the limitation of the specific
power expressly provided for.

Principal Place of business - must be indicated in the articles of incorporation; residence of a corporation is the place where its principal office is located.

o SEC Memorandum Circular #3: Articles of Incorporation shall include:

 Specific address of principal office
 Street number, street name, barangay, city or municipality
 Specific residence address of each incorporator, stockholder, director, trustee or partner
 Metro Manila shall no longer be allowed as address of principal office.
o Residence of Corporation
 Sec 51 of Civil Code: when the law creating or recognizing them, or any other provision does not fix the domicile of juridical persons, the
same shall be understood to be the place where their legal representation is established or where they exercise their principal functions.
 The residence or domicile of a corporation is fixed by law creating or recognizing it.
 Sec 14(3) or Corpo code: place where the principal office of corporation is to be located is one of the required contents of the articles of
incorporation
 Residence in specific cases:
 Corporate Residence for Intra-Corporate disputes
o Sec 1 Rule 1 of Interim rules of procedure for intra-corporate controversies: when place of business is metro manila, action
must be filed in the city or municipality where the head office is actually located
 Corporate Residence for Corporate recovery cases
o Sec 2 rule 3 of SC Rules of procedure for corporate rehabilitation: petitions for rehabilitation shall be filed in RTC which
has jurisdiction over the principal office of the debtor as specified in articles of incorporation
o Where principal office is registered in SEC as in Metro Manila, action must be filed in the RTC of the city or municipality
where the head office is located
 Service of Summons of a Corporation
  Service must be made to an AGENT or a representative so integrated with the corporation sued as to make it a priori supposable
that he will realize his responsibilities and know what he should do with any legal papers served on him. (old law, no longer applies)
 Sec 11 Rule 14 ROC: service may be made on the president, managing partner, general manager, corporate secretary, treasurer
or in-house counsel

Corporate Term

 Commencement of Corporate Existence

o Sec 19 of Corpo Code: private corporation commences to have corporate existence and juridical personality is deemed incorporated from the date
the SEC issues a certificate of incorporation under it official seal
 Extension of Corporate Term:
o Sec 11 of Corpo Code: corporation shall exist for a period not exceeding 50 years from the date of incorporation unless sooner dissolved or unless
said period is extended
 It may be extended for a period not exceeding 50 years
 No extension can be made earlier than 5 year before the original or subsequent expirty date.
 Corporation may virtually have a perpetual lifespan renewable for 50 years. (Contractual nature of corporations

Incorporating Stockholder or Members

 Sec 10 of Corpo Code: not less than 5 but not more than 15 natural persons may form a private corporations
o Of legal age
o Majority are residents of Philippines
 If only 2 are residents of Philippines, and there are at least 5 incorporators, the corporation shall become a de facto corporation
 The law does not preclude corporations and partnerships from becoming incorporating stockholders or members as long as they are not incorporators.

Capital Structure at Registration

 Article of Incorporation (AOI) must state the amount of its authorized capital stock and the number of shares into which it is divided
 Sec 12 or Corpo Code: stock corporations are not required to have minimum capital stock. Paid up capital cannot be lower than P5000.

Subscription and Paid-up Requirements

 Sec 13 of Corpo code provides that:

o at least 25% of the authorized capital stock must be subscribed at the time of the incorporation
 Capital stock – amount fixed in the AOI procured to be subscribed and paid in.
 Outstanding capital stock – total shares of stock issued to subscribers or stockholders, whether fully or partially padi
 Subscribed capital stock – portion of capital stock subscribed, whether or not fully paid
o at least 25 of the total subscription must be paid
 Subscription – mutual agreement of the corporation and subscriber to take and pay for the stock of a corporation
 Issuance of Par Value Shares of Stocks
 o Par Value Share – one in the certificate of stock of which appears an amount in pesos as the nominal value of shares
 if no par value shares will be issues, such fact must be stated in the AOI. This cannot be less than P5
 Considerations in which no-par value shares may be issued may be fixed by:
 AOI
 Board of directors when authorized by AOI or by the bylaws
 Stockholders representing at least a majority of the outstanding capital stock
 Corporations which cannot issue no-par value shares:
 Banks
 Public utilities
 Insurance companies
 Building and loan associations

Amendment to the Revisions of the AOI

 Sec 16 of Corpo Code: unless otherwise provided by law, any provision or matter in AOI may be amended by:
o A majority vote of the Board of Directors or Trustees and
o Vote or written consent of stockholders representing at least 2/3 of the outstanding capital stock or
o Written assent of at least 2/3 of the members if it be a non-stock corporation
 Amendment shall take effect upon approval by SEC
o If SEC fails to act on the application, within 6 months from the date of filing
 Matters in AOI that are beyond amendment
o Certain portions which cannot be altered:
 Names of the incorporators
 Names of the incorporating directors/ trustees
 Names of the original subscribers to the capital stock of the corporation and their subscribed and paid-up capital
 The treasurer-in-trust elected by the original subscribers
 Members who contributed to the initial capital of a non-stock corporation
 Witnesses and the acknowledgement thereof
BYLAWS

Legal Basis of Power to Adopt a Set of By-laws

 Every corporation has the inherent power to adopt by-laws

o To regulate the conduct
o prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs

Contractual Significance of By-laws

 The provisions of by-laws are meant to govern merely the internal affairs of the corporation and the relationship between and among the members of a
corporate family
 Intended merely for the protection of the corporation, and prescribe regulation, not restriction.
 By-laws are always subject to the charter of the corporation.
 They should not prejudice third persons who deal in good faith with the corporation, unless:
o They have knowledge of the same
 That strangers are not bound to know the by-laws of a corporation which are merely provisions for the government of a corporation
 Fleischer vs Botica Nolasco: by-laws must be consistent with all laws.
 By-laws have the effect of law inside the corporation

Requisites of valid by-laws

 Requisites:
o By-law provisions cannot contravene the law
 Sec 36 of Corpo Code: one of the powers of a corporation is to adopt by-laws not contrary to law, morals, and public policy
 By-laws provisions cannot prevail over legal provisions and the lawful orders and processes
o By-law provisions cannot contravene the Charter
 Sec 47 of Corpo Code: specified provisions of the by-laws are subject to the provisions of the Constitution, the Corporation Code, other
special laws, and the articles of incorporation.
 General Rule: by-laws must always be within the charter limits.
 Charter prevails over by-laws
o By-law must be reasonable and non-discriminatory
 Sole purpose of by-law: regulate intra-corporate relationships. If the by-laws contravene this objective, it is deemed unreasonable and
void.
 By-law provisions must not disturb vested rights or impair substantial rights of stockholders or member, affect rights of property or create
obligations unknown to the law.

Procedure for Adoption of By-laws

  Sec 46 of Corpo Code: every corporation must, within one month after receipt of official notice of the issuance of its certificate of incorporation by SEC,
adopt a code of by-laws for its government not inconsistent with the Code.
o Clearly directory obligation, not mandatory
o Failure to file by-laws does not imply demise of the corporation
 PD 902-A: However, it is a ground for SEC to seek forfeiture of the franchise of the corporation
 Such corporation may be considered a de facto corporation
 By-laws may be adopted:
o Before incorporation: by-laws shall be approved and signed by all the incorporators and submitted to SEC together with AOI
o After incorporation: affirmative vote of stockholders representing at least majority of the outstanding capital stock
 Non-stock: majority of the members of such corporation is necessary
 By-laws shall be
o Signed by stockholders or members voting for them
o Shall be kept in the principal office of the corporation
o Subject to inspection of the stockholders or members during office hours
o A copy thereof, duly certified by majority of the directors or trustees and countersigned by the secretary of the corporation, shall be filed with the
SEC
 This shall be attached to the AOI
o It shall only be effective only upon issuance of the SEC of a certification that the by-laws are not inconsistent with the Corporation Code
 Rule on the by-laws of banks
o General Banking Law of 2000: SEC shall not register the by-laws of any bank unless accompanied by a certificate of authority from the BSP

Basic Contents of By-laws

 Matters usually found in by-laws

o Time, place and manner of calling and conducting regular and special meetings of directors or trustees; places for meetings of directors or trustees
may be outside of the Philippines if it so provided in the by-laws
o Time and manner of calling and conducting regular and special meetings of the stockholders or members
o Required quorum in meetings of stockholders and the manner of voting
o Form for proxies of stockholders and members and manner of voting
o Qualifications, duties and compensation of directors, trustees, officers and employees
o Time for holding annual election of directors or trustees, mode and manner of giving notice thereto
o Manner of election or appointment and the term of office of all officers except directors or trustees
o Penalties for violation of by-laws
o Manner of issuing stock certificates
o Such other matters necessary for the proper means of corporate business and affairs
 Matters that may be included in the by-laws
o Designation of time when voting rights may be exercised by stockholders of record
 o Providing for additional officers for the corporation
o Provisions for the compensation of the directors
o Creation of an executive committee
o Date of the annual meeting or provisions of special meetings of the stockholders or members of the corporation
o Quorum on meetings of stockholders or members of the corporation
o Providing for the presiding officer at meetings of the directors or trustees, as well as of the stockholders or members
o Procedure for issuance of certificates of shares of stock
o Providing for interest on unpaid subscriptions
o Entries to be made in the stock and transfer book
o Providing for meetings of the members in a non-stock corporation outside of the principal office of the corporation
 Matters that may be found in both the articles of incorporation and the by-laws
o Providing for cumulative voting in non-stock corporations
o Providing for a higher quorum requirement for a valid board meeting
o Limiting, broadening or denial of the right to vote, including voting by proxy, for members in non-stock corporations
o Transferability of membership in a non-stock corporation
o Termination of membership in non-stock corporations
o Manner of election and term of office of trustees and officers in non-stock corporation
o Manner of distribution of assets in non-stock corporations upon dissolution
o Providing for staggered board in educational institutions
 In close corporations, rights of transfer shares must appear both in AOI and BL
 Matters that cannot be provided for in the by-laws
o Classification of shares of stocks and preferences granted to preferred shares
o Provisions on founder’s shares
o Providing for redeemable shares
o Provisions on the purposes of the corporation
o Providing for the corporate term of existence
o Capitalization of stock corporations
o Corporate name
o Denial of pre-emptive rights

Amendments to and revisions of the by-laws

 Sec 47 of Corpo Code: BOD or trustees, by a majority vote thereof, and the owners of at least majority of the outstanding capital stock, or at least a majority
of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new
by-laws.
o The owner of 2/3 of the outstanding capital stock or 2/3 of the members in a non-stock corporation may delegate to BOD or trustees the power
to amend or repeal any by-law or adopt new by-laws
 May be revoked when the same majority shall vote for the revocation of the power to amend, etc
 When any amendment or new by-laws are adopted:
o Amended or new by-law shall be attached to the original by-laws in the office of the corporation
o Copy, under oath by the secretary and majority of directors and trustees, shall be filed with the SEC
 The same to be attached to original AOI and original by-laws
o Shall only be effective upon issuance by Sec of certification that the same is not inconsistent with the Corporation Code
CORPORATE POWERS AND AUTHORITY

Underlying theory on Corporate Powers

 Sec 2 of Corpo Code: corporation has powers authorized by law or incident to its existence
o Basis: theory of concession, corporation is a mere create and within the control of the State
 Sec 45 of Corpo Code: no corporation shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation
except when such are necessary or incidental to the exercise of the powers so conferred.
 Ultra Vires Doctrine: 3 powers of corporations are:
o Express
o Implied
o Incidental powers

Corporate powers and capacity

 Express powers
o Art 46 of CC: Juridical persons may:
 Acquire and possess property of all kinds
 Incur obligations
 Bring civil and criminal actions
 All in conformity with the laws and regulations of their organization
o Sec 36 of Corpo Code: express powers of the corporation
 To sue and be sued in its corporate name
 Lies within the discretion of the BOD
o Exception: derivative suit – power to sue even without the approval of BODT
 Agents may have power if granted by AOI or by-laws
 Certificate on forum shopping: a board resolution is required. If not, it is subject to dismissal
 Power of succession by its corporate name for the period of time stated in the AOI and certificate of incorporation (COI)
 Adopt and use a corporate seal
 Contracts without seal is still valid
 Amend its AOI
 Adopt by-laws and amend or repeal the same
 Stock corporations: issue or sell stocks to subscribers and to sell treasury stocks
 Non-stock: admit members to the corporations
 Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property
 Includes securities and bonds
 Power to sell and purchase
o Vested in the corporation through its BODT
 o Agent may be authorized to negotiate but it is the approval of the BODT that shall finalize the transaction
o Officers and agents may transact for corporation when authorized by:
 Board resolution or
 Its by-laws
o Lack of written authority would make the sale void
 No ratification can save the contract
 Power to borrow
o Decision to borrow money falls within the discretion of the BODT
 Exception: sec 38 of corpo code
o Agents needs special power of attorney to borrow in behalf of corporation
 Enter into merger or consolidation with other corporations
 To make reasonable donations, including:
 For public welfare
 Hospital
 Charitable
 Cultural
 Scientific
 Civic
 Similar purposes
o No donation to aid political party or candidate.
o No donation for any political activity
 Establish pension, retirement and other plans for the benefits of its directors, trustees, officers and employees
 Incidental powers
o Sec 2 of corpo code: powers, attributes and properties expressly authorized by law or incident to its existence
o It necessarily arise from its being a juridical person engaged in business.
 Power to sue and be sued, to grant and receive, in the corporate name
 Power to purchase, hold and convey real and personal property for such purposes as are within the objects of its creation
 Power to have a corporate seal
 Power to adopt and amend by-laws for its government
 Power to disenfranchise or remove members (in proper cases)
 Implied or necessary powers
o Sec 6 (11): power and capacity to exercise such other powers as may be essential or necessary to carry out its purpose as stated in AOI
o These are necessary consequence of the grant or exercise of the express powers of the corporation or the pursuit of its purposes provided in its
AOI
o Examples:
  Discretionary authority to enter into contracts or transaction which may be deemed reasonably necessary or incidental to its business
purposes
 Invest at the best returns available its investible funds
 Lease out idle real property

Ultra vires acts of the first type

 Test to determine if act or contract is ultra vires

o If act is one which is lawful in itself, and not prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the
promotion of those ends, it may fairly be considered within charter powers.
o Test is whether the act in question is in direct and immediate furtherance of the corporation’s business.
 Supervening policies in ultra vires issues
o Realm of contract law
 If contracts could be set aside by mere showing that they do not fall within the language of the purpose clauses of the AOI, then public
dealing with corporations would be wary of entering into contracts with corporate entities
o Realm of corporate law
 Moving away from holding corporate acts and contracts as ultra vires because of the philosophy underlying the business judgment rule
 Business judgment rule – courts will not sit in judgement to substitute their business judgment for that of the directors
 Doctrine of estoppel or ratification
o Two kinds of ultra vires acts:
 Those illegal per se – prohibited by law > VOID
 One that is not illegal – subjected to test to determine whether it is intra vires or ultra vires > VOIDABLE
 Examples: act within the scope of AOI but not enforceable > can be ratified by stockholders
 A corporation cannot be heard to complain that it is not liable for ultra vires action not illegal because of estoppel by
representation
 Illegal acts
o Mere creature of the state does not have any legal capability to violate the mandatory or prohibitory dictates of the States.
o A contract within corporate powers but done against provisions of law is VOID.

Various powers

 Power to extend or shorten corporate term

 Sec 37 of corpo code: private corporation may extend or shorten its term of existence when:
o Approved by the majority vote of the BODT and
o Ratified at a meeting by the stockholders representing at least 2/3 of the outstanding capital stock or
 At least 2/3 of the members (non-stock corporation)
 Nature of Power
o Power to extend not inherent power of corporations
  Constitutes integral clause of AOI
 State shall grant juridical personality and can only grant it for a period provided in AOI
o Power to shorten
 Inherent right of corporation
 State would have to approve eventually the shortening of corporate life, State really compels enterprise to go on.
 Appraisal rights issue
o Sec 37 of corpo code: only in case of extension of corporate term that a dissenting stockholder may exercise his appraisal right to have his
share bought back at fair value by the corporations
o Sec 81 of corpo code: appraisal right available to dissenting stockholder even when it covers the shortening of the term of corporate existence
o Extension is actually a novation of corporate contract with shareholder.
 Power to temporary cease corporate operations
o Temporary cessation of business should be decided by:
 BODT and
 Stockholders (2/3 vote of outstanding capital stock)
 Power to increase or decrease capital stock
o Sec 38 of corpo code: no increase or decrease in capital stock unless:
 Majority vote of BODT and
 Ratification by stockholder, 2/3 of outstanding capital stock
 During stockholder’s meeting duly called for such purpose
 Written notice of proposed increase or diminution of capital stock must be addressed to each stockholders at his place of residence
 Approval of SEC
 Sworn statement of treasurer of corporation showing at least:
o 25% of increased capital stock has been subscribed and
o 25% of the amount subscribed has been paid

o Certificate in duplicate:
 Requirements of law on increasing or decreasing capital stock complied with
 Amount of increase or diminution of capital stock
 If increase:
 Amount of capital stock or number of shares of no-par stock subscribed
 Names, nationalities, residences of persons subscribing
 Amount of capital stock or number of shares of no-par stock subscribed by each
 Amount paid by each or amount of capital stock or number of no-par stock allotted to each stockholder
 Actual indebtedness of the corporation on the day of meeting
 Amount of stock represented at the meeting
 Vote authorizing the increase or diminution of the capital stock
o Nature or power
  Not an inherent power
 Touches on items required by AOI
 Capital stock of corporation is governed by common law doctrines
o Compliance with sec 38 and 16 of corpo code
o Appraisal right issues
 No appraisal right is granted in increase of decrease of capital stock:
 Increase does not prevent stockholder from selling his shares
 To grant appraisal right in case of increase defeats the purpose of raising funds for the operation and survival of corporation
 Sec 38 of corpo code does not include appraisal right
o Effectivity: increase does not constitute part of capital stock until approval by SEC
o Special rules on listed shares on stock exchange: no offer or right to acquire or issue stock dividends to stockholders after increase of capital
stock
 Power to incur, create, or increase bonded indebtedness
o Sec 38 of corpo code: inherent power of corporation to borrow money or to incur indebtedness
 BODT decision to borrow does not need ratification of stockholders
o Sec 40 of corpo code: encumbrance of all or substantially all of the assets of corporation requires stockholders’ ratification
o Nature of Bond
 Bond – security representing denominated units of indebtedness issues by a corporation to raise money or capital obliging the issuer
to pay the maturity value at the end of a specified period
 Covers only mortgage on real property or personal property
o Requirements:
 Majority vote of BODT
 Stockholders’ meeting duly called for the purpose
 2/3 of outstanding capital stock in favor of incurring, creating, increasing any bonded indebtedness
 Non-stock: 2/3 of members
o Particular Requirement of SEC:
 Minimum net worth of P25 million at time of filing of application
 In operation for 3 years
 Fulfillment of financial ratios mandate by SEC
o Nature of Power: INHERENT
 Power to Sell, dispose, lease, or encumber assets
o Sec 40 of corpo code requirements:
 Majority vote of BODT
 Authorized by the vote of stockholders (2/3 of outstanding capital stock)
 Written notice for place and time of meeting addressed to each stockholder or member
o Nature of power: State leaves it to the discretion of the corporation if they will sell, lease among others all of its properties
o Nature of transactions covered: Transactions not covered by ratificatory vote requirement
 o Sale or Disposition of All Corporate Assets or Property:
 Sec 40 of corpo code applies
 Approval of stockholders and members are required
 Quantitative test: no remaining business is to be conducted
o Sale or Disposition of substantially all of assets or property
 Sec 40 of corpo code applies
 Qualitative test to determine if there was substantial sale or disposition of all properties
 If corporation is incapable of continuing the business or
 Incapable of accomplishing the purpose for which it was incorporated
o This formula does not apply when sale is of all property
o Lease or encumbrance of all or substantially all of the assets
 Lease: Sec 40 or corpo code applies
 Ratification of stockholders needed
 Encumbrance: sec 40 does not apply
 Ratification needed because:
o Disruption of business because of encumbrance
o Will fall the same category of incurring or creating bonded indebtedness
o Bulk sales law: requirement of sworn statement listing of corporate creditors and amount and nature of claims
o Consequences of contracts entered into without requisite stockholders’ approval > VOID
o Legal effect on assignee even when contracts entered into with the requisite stockholders’ or members’ approval – assignee liable to obligation
from business enterprise
o Appraisal right
 Dissenting stockholder may exercise his appraisal right in case of sale of all or substantially all of the corporate assets and properties
 Power to Purchase own Shares
o Sec 41 of corpo code: stock corporation has power to buy its own shares for legitimate corporate purposes, provided that it has unrestricted
retained earnings in its books
 Eliminate fractional shares arising out of stock dividends
 Collect or compromise an indebtedness to the corporation
 Pay dissenting or withdrawing stockholders
o Redeemable Shares
 Sec 8 of Corpo Code: same may be acquired by corporation without existence of unrestricted retained earnings
 Redeemable shares can only be provided when they are so classified and they are indicated in the AOI
 Power to Invest Corporate Funds in another Corporate Business
o Sec 42 of Corpo Code: a corporation may invest in another corporation for any purposes other than the corporation’s primary purpose
provided:
 Majority vote of BODT
 Ratification by 2/3 majority of outstanding capital stock
  2/3 members is non-stock
o Funds refers to any corporate property
o If for primary purpose indicated in AOI, no approval of stockholders or members is needed
o Investments outside of secondary purposes: requires ratificatory vote of stockholders and members to be valid
o Consequences of non-obtaining of ratificatory vote: VOID
 Power to declare dividends
o Sec 43 of Corpo Code: BODT of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in
cash, property or in stock to all stockholders on the basis of outstanding capital stock held by them
 Approval of 2/3 of the outstanding stocks
 Meeting duly called for the purpose
 Report to SEC within 15 days from date of declaration
o Retention of surplus profits
 No retention of surplus profits under sec 43 except:
 Justified by definite corporate expansion projects or programs approved by BODT
 Corporation is prohibited under any loan agreement from declaring dividends without its consent
 Retention is necessary under special circumstances obtaining in the corporation
o Special reserve for probable contingencies
 Power to enter into management contract
o Sec 44 of Corpo Code: no corporation shall conclude a management contract with another corporation unless:
 Approved by BODT and
 By stockholders owning at least majority of the outstanding stock
 Majority of members in non-stock
o No management contract shall be entered into a period longer than 5 years for any one term
o Coverage: every contract where a corporation undertakes to manage or operate all or substantially all of the business of another corporation
exception those involved in nationalized industries
o Special Ratification Rule:
 Stockholder representing interest of both corporations more then 1/3 of total outstanding capital stock of the managing corporation
 Majority of BODT of managing corporation also constitute majority of members of BODT of managed corporation
 Then, the 2/3 ratification rule shall apply
 Power to make donation
 Power to Grant Pension, retirement and other gratuities
o Sec 36 of Corpo Code
 Power to Enter into Partnership
o General rule: without express authority by law or charter, no partnership should be entered into
DIRECTORS, TRUSTEES, AND OFFICERS

Underlying Contractual Theory on Exercise of Corporate Powers

 Section 23 – unless otherwise provided in the Corporation Code, all corporate powers shall be exercised by, and all corporate business shall be conducted
through, the Board of Directors of the corporation
o Source of power of BOD is primary and directly-vested by law, not from stockholders or members
o Power of Centralized management
 Hornilla vs Salunat: Board of Directors:
o Excercises all powers provided for under the Corporation Code
o Conducts all businesses of the corporation
o Controls and holds all properties of the corporation
 Rationale for Centralized Management
o A corporation is a mere fiction of law and needs human intervention to allow the judicial person to conduct its business affairs and to enter into
contracts and transactions
o It needs the BOD and officers and agents to transact it businesses.
 Primary Objective of the Board
o Maximization of Profits
o Enhancing the value of the corporation
 Publicly held companied: promote corporate governance
 Stakeholder Theory
 Ultra vires acts of the second type
o Emanates from the enforcement of the doctrine of centralized management
o Policy basis of the ultra vires doctrine of the second type
 Art 1910 of CC: acts done outside the scope of the authority of agents shall be unenforceable and can be ratified
 These agents are estopped from denying their acts as well
 Corporation may only acts through its BOD when authorized either by:
 By laws
 Board resolution
 Consequence: persons who deal with corporate agents within circumstances showing that the agents are acting in excess of corporate
authority may not hold the corporation liable.
 Ultra vires doctrine of the second type cannot prevail over public policy
 Doctrines counterveiling doctrines of ultra vires of the second type
 Doctrine of estoppel
 Ratification
 Doctrine of apparent authority
o Doctrine of estoppel or ratification
  Precludes a corporation from denying the validity of the transaction entered into by its officer with a third party who in good faith, relied
on the authority of the former as manager to act on behalf of the corporation
 Sign of ratification:
 acceptance of the benefits arising from the contract binding upon the corporation
 subsequent compromise agreement on behalf of the corporation
 Ratification
 The principal voluntarily adopts, confirms and gives sanction to some unauthorized act of its agent on its behalf.
 Voluntary choice, knowingly made, which amounts to a ratification of what was theretofore unauthorized and becomes the
authorized act of the party so making the ratification
o Doctrine of Apparent Authority
 Formula: If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of apparent authority, it hold
him out to the public as possessing the power to do those acts, thus, the corporation will, as against anyone who has in good faith dealt
with it through such agent, be estopped from denying the agent’s authority.
 It comes into play on the basis of the principle of estoppel
 Private Corporation intentionally or negligently clothes its offices or agents with apparent power to perform acts for it. Therefore, the
corporation shall be estopped to deny such apparent authority.
 Existence of apparent authority may be ascertained through:
 General manner in which the corporation hold out an officer or agent as having the power to act or the apparent authority to act
with which it clothes him
 Acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope
of his ordinary powers
o Timely and Proper Repudiation of Lack of Officer’s Authority
 If a corporation desires to set up the defense that the contract was executed by one not authorized as its agent, it must plead such fact.
 Ramirez doctrine: if a corporation desires to set up the defense that the contract was executed by one not authorized as its agent, it must
plead and prove such fact; so that the burden is initially on the shoulders of the corporation
 Yao Ka Sin doctrine: once a corporation has discharged its obligation under the Ramirez doctrine, that acting officer was not in fact
authorized, then the burden of proof now shifts to the contracting party to show that indeed by previous acts and actuations the acting
officer had been clothed by the corporation with apparent authority for the public to have taken such authority at face value.
o Self-dealings of directors and officers as exception to doctrine of apparent authority
 Self-dealing constitute a strong exception to the doctrine of apparent authority.
 Corporate power shall be exercised by the BOD, except as provided by law
 BOD may delegate power to any of the officers
 In absence of express delegation, a contract may still bind the corporation if the board should ratify the same expressly or
impliedly
o Implied: silence or acquiescence
o Acts showing approval or adoption of the contract
o Acceptance and retention of the benefits flowing therefrom
  In absence of ratification, corporation is still bound provided that the same is reasonable under the circumstances
o Victim Standing for the Doctrine to Apply
 Agency law is applied: doctrine of apparent authority cannot apply to benefit a party who deals with the corporation aware of the
corporate representative’s lack of authority
 Acts and contracts of the agent as are within the apparent scope of the authority conferred on him, although no actual authority
to do such acts or to make such contracts has been conferred, bind the principal.
 Liability of the principal is limited only to third persons who have been led reasonably to believe by the contract of the principal
that such actual authority exists, although none was given.
 Apparent authority is determined by the acts of the principal and not by the agent.
o Doctrine of De Facto Corporate Officers
 May be applied insofar as third parties dealing with the corporations.
 Corporate officer as a de facto officer – he acts as such under color of an election or appointment, but fails being a de jure officer by some
irregularity or failure to qualify as required by law
 Dealing of directors de facto with third persons are sustained as rightful and valid on ground of continuous acquiescence by the corporation
 Source of the Power of the Board
o Theory of Original Power
 Source of power of BOD comes directly from the law
 BOD is originally and directly granted corporate power as the embodiment of the corporation.
 BOD are vested the legal or naked title to the properties and business enterprise of the corporation
 There is a fiduciary relationship established between the BOD as the trustee and the stockholders as the beneficiaries
o Theory of Delegated Power
 Power of BOD is derived as delegated authority, delegated to them by the stockholders or member of the corporation
 Corporate power should belong to the stockholders or member who form the corporation and who contribute to the corporate assets
o Peculiar Agency Role of the BOD
 BOD is the main agency by which all corporate powers and authority are exercised, and strictly speaking any other officer appointed to
represent the corporation is a mere appointee or sub-agent of the BOD
o BOD’s power and fiduciary obligations spring more from a Trust Relationship
 Corporate medium is based on the medium of business trust
 Trustor conveys naked or legal title to the trustee for the benefit of another called the beneficiary who thereby is deemed to hold beneficial
or equitable ownership of the property covered by the trust arrangement
 Corpus: corporate assets and business enterprise
 Collective Trustees: BOD
o Powers of control, ownership and management over the corpus
o Chosen based on their qualification
o They are not mere stooges of the corporation or mere agents
 Beneficiary: stockholders
 Relationship of BOD to stockholders is one of trust, rather than of agency
 Business Judgement Rule
o Corporate power is primarily lodged with the BOD
o A resolution or transaction pursued within the corporate powers and business operations of the corporation, and passed in good faith by the BOD,
is valid and binding, and generally the courts have no authority to review the same or substitute their own judgment, even when it can be proven
that the exercise of such power may cause losses to the corporation or decrease its profits.
o Laissez faire doctrine influenced the development of business judgment rule
o Theoretical Basis of the Business Judgment Rule
 Such office charged with the duty to act for the corporation to their best judgment, and in so doing they cannot be controlled in the
reasonable exercise and performance of such duty
 2 branches of BJR:
 Resolutions approved, contracts and transactions entered into by BOD within the powers of the corporation cannot be reversed
by the courts, not even on the behest of the stockholders
 Directors and officers acting within such business judgment cannot be held personally liable for the consequences of such acts
 Exceptions:
o When director willfully and knowingly vote for unlawful acts
o When he is grossly negligent or in bad faith in directing the affairs of the corporation
o When he acquires any personal or pecuniary interest in conflict with his duty as such director
 Requirement that the board must act as a body
o Sec 25 of Corpo Code
 Majority of the number of directors or trustees as fixed by the articles of incorporation shall constitute a quorum for the transaction of
the corporate business, and
 Every decision of at least a majority of the directors or trustees at a meeting at which there is a quorum shall be valid as a corporate act
 Requirements:
 Directors or trustees cannot act individually to bind the corporation
o Acts or contracts of a corporation must be made either by BOD or by a corporate agent duly authorized by the BOD
 Ratification by the BOD does not need formal meeting
o An action of BOD during a meeting, which was illegal for lack of notice, may be ratified either:
 Expressly – action of directors in subsequent legal meeting
 Impliedly – corporation’s subsequent course of conduct
o When corporations act through its officers, certain things are presumed and by virtue of business and commercial
customs, the officer is presumed to have power, and that he acts with the BOD’s authority
 Directors or Trustees cannot bind the BOD in a Stockholders’ or Members’ meeting
 Directors and Trustees cannot attend or act by Proxy or Alternate
o BODs cannot validly act by proxy
o They must attend meetings of the Board and act in person and as a body
o He cannot delegate his powers or assign his duties
 Executive Committee
o Sec 35 of Corpo Code: the by-laws of the corporation may create an executive committee
 Composed of not less than 3 members of the BOD
 To be appointed by the Board
 Purpose: they may act on such specific matters within the competence of the BOD except
 Approval of any action for which shareholders’ approval is required
 Filling of vacancies in BOD
 Amendment or repeal of by-laws or the adoption of new by-laws
 Amendment or repeal of any resolution of the BOD which in its terms are not amendable or repealable
 Distribution of cash dividends to the shareholders
 Ultimate power remains with BOD
 Cannot be created with powers greater than those sanctioned by law
 Qualifications and disqualifications of Directors and Trustees
o Directors
 Must own at least 1 share of the capital stock of the corporation of which he is a director
 Majority of the directors or trustees must be residents of the Philippines
 What the law requires is that one has legal title to the share.
o Sec 23 of Corpo Code: share of director shall stand in his name on the books of the corporation
 Ownership of shares does not give one vested right to be elected to BOD
o Corporate Stockholders
 Such entities cannot be qualified to be elected to BOD
o Disqualification
 Director must not have been convicted of an offense punishable by imprisonment exceeding 6 years
 Or has committed any violation of the Corporation Code within 5 years prior to his election
 No appointive or elective public official shall serve as officer of any private bank.
o Bylaws of corporation can provide other qualifications and disqualifications in addition to those provided in the Corporation Code
 Institutions of Independent Directors
o Defining the role of ID
 Securities Regulation Code: All public companies shall have at least 2 independent directors
 Such IDs shall constitute at least 20% of members of such BOD
 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
 Disqualification under Sec 38.1
o Not a director or officer
o Not a substantial shareholder (more than 10%)
o Not a relative of director
 o Not acting as a nominee or representative of any director or substantial shareholder
o Has not been employed in any executive capacity by that public company or any of its substantial shareholders within last
5 years
o Not retained as professional adviser by that public company within the last 5 years
o Not retained as professional adviser either personally or through his firm
o Not engaged/ does not engage in any transaction with the corporation or with any of its related companies or substantial
shareholders
 Issues:
o Diluting sense of responsibility to the corporation and various stockholders
o Quasi-public role of the independent director
o Wrongly presumes that only independent directors can exercise independent judgment
o Promotes a culture of confrontation
o Independent directors may come in practically ignorant of the industry
 Election of the Board of Directors or Trustees
o Sec 4 of Corpo Code
 Owners of majority of outstanding capital stock or members entitled to vote must be present
 Election must be by ballot if requested by any stockholder
o Cumulative Voting
 At all elections, a stockholder may:
 Vote such member of shares for as many persons as there are directors to be elected or
 He may distribute them on the same principle among as many candidates as he shall see fit
 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
 Classic / Cole Formula
 S1 = (s xd1/ d+1) +1
o S1 number of shares owned by some shareholders of group of shareholders
o S total number of shares voting at the meeting
o D1 number of directors bloc 1 desires to elect
o D total number of directors to be elected at the meeting
 Glasser iterative procedure
 Integer dxs1/d1 is greater than integer dxs1/d+1-d1
o D’Hondt Remainders Table
 Look at pic
o Electioin of the BOT
 Sec 92 of Corpo Code: non stock corporations
 Which may be more than 15
  Classify themselves that the term of office of 1/3 of their number shall expire every year
 Subsequent election of trustees shall be held annually
 Trustees elected shall have a term of three years
 Those elected to fill vacancies before expiration of another’s term shall hold office only for unexpired period
 Sec 24 of Corpo Code:
 Member of non-stock corporations may case as many votes as there are trustees to be elected but may not case more than one
vote for one candidate
 Default rule: straight voting
 Alien membership in BOD
 Anti-Dummy Law penalizes intervention of aliens in management, operation, administration or control of a nationalized enterprise
or activity
 General Banking Law: non-Filipino citizens may become members of BOD of a bank to the extent of the foreign participation in
the equity of said bank
 Vacancy in Board
 Sec 29 of Corpo Code: any vacancy occurring in the BODT other than by removal by the stockholders or members or by expiration
of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum
o Otherwise, said vacancies must be filled by stockholders in a regular or special meeting called for that purpose.
o Increase in number of directors or trustees: filled only by an election at a regular or at a special meeting of stockholders
or members duly called for that purpose, or in the same meeting authorizing the increase of directors or trustees if so
stated in the notice of the meeting.
o If there is no quorum, it may be filled by stockholders or members in a regular or special meeting called for that purpose
 Report on Election of Directors, Trustees and Officers
 Sec 26 of Corpo Code: within 30 days after election of directors, trustees, officers of corporation, the secretary or any other officer
of the corporation shall submit to the SEC the:
o Names
o Nationalities
o Residences of directors, trustees or officers elected
 Sec 26 of Corpo Code: when director, trustee or officer die, resign or in any manner cease to hold office
o His heirs
o Secretary
o Any other officer
o Director
o Trustee
o Or officer himself shall immediately report such fact to the SEC
 Sec 26 is mandatory and jurisdictional.
 SEC requires filing of General Information Sheet
 Term of Office; Hold over principle
o Term of office of members of BODT shall be one year until their successors are elected and qualified
o Hold-over situations:
 When no successor is cleared due to valid and justifiable reasons
 Incumbent holds over and continues to function until another officer is chosen and qualified
 It does not disqualify an incumbent officer from seeking another term in office
o Non-permanency of Board Seat
 It is unlawful to grant any person a permanent seat in BODT.
 Tenure: term during which the incumbent actually holds office
 Term: shall always be for one year
 Removal and Discipline of Directors and Trustees
o Removal
 Sec 28 of Corpo Code: any director or trustee of a corporation may be removed from office by:
 a vote of the stockholders holding or representing 2/3 of the outstanding capital stock
 non-stock: vote of 2/3 of members entitled to vote
 it shall take place at a regular meeting or at a special meeting called for the purpose of removal of directors or trustees
 must be called by
o the secretary on order of the President or
o on written demand of stockholders representing or holding at least majority of the outstanding capital stock.
o Non-stock: written demand of majority of members by any stockholder or member of corporation signing the demand
 Time and place of meeting must be given by publication or by written notice
 General Rule: removal by majority vote of 2/3 of outstanding capital stock
 If removal is for cause: 2/3 vote is minimum requirement to remove
 If without cause: 2/3 vote is enough to remove
o Exception: when director is elected by minority through cumulative voting, he may not be removed without cause even if
there is 2/3 vote.
o Board has no power to discipline or remove one of their own
 Sec 28 of Corpo Code: power to remove is vested in the stockholders, such power cannot be exercised by BODT
 BODT also does not have power to discipline a member of the BODT
 BODT should bring an action on behalf of the corporation to recover damages
 If Director commits criminal offense, it is duty of BODT to file criminal case against culprit
o What constitutes cause as basis for removal?
 “for cause” goes into the three duties of director or officer:
 Loyalty
 Obedience
 Diligence
  Once these three are violated, they will constitute sufficient cause for removal
 Meeting of Directors or Trustees:
o Kinds of Meeting
 Regular
 Held monthly, unless otherwise provided in bylaws
 Special
 Held by BODT at any time upon call of president of provided in the bylaws
 May be held anytime, anywhere, unless otherwise provided in the bylaws
 The president shall always preside
 Quorum = presence of majority of directors as fixed in AOI
 Required vote for resolution: majority of quorum
o Requisites of Valid Board Meeting
 Meeting of directors or trustees duly assembled as a Board, at a place, time, and manner provided in bylaws
 Presence of required quorum
 Decision of majority of quorum, or a majority of entire Board
 Abstention during vote is counted in favor of the issue that won majority vote
o Mode of attendance of Board members
 Director or trustee cannot be represented by a proxy in a meeting
 SEC Memorandum Circular No 15 – guidelines for conduct of teleconferencing and videoconferencing
 Trustee may be allowed to vote through the internet
 Trustee must hear and see the actual proceedings
o Attendance by Stockholders at Board Meetings
 Corpo Code does not confer to stockholders any right to attend board meetings
 Stockholders may attend upon the discretion of BODT
o Minutes of Board Meeting
 Signing of MOM is not required
 It is the signature of the Corporate Secretary that gives the MOM probative value
 Resolution versus MOM
 Resolution: formal action by BOD or other corporate body authorizing a particular act, transaction or appointment
 MOM: brief statement not only of what transpired in a meeting but also at a meeting of an Executive Committee
 Compensation of Directors and Officers
o Sec 30 of Corpo Code: in absence of bylaws provision fixing compensation, directors shall not receive any compensation, except for reasonable
per diem (attendance in meeting)
o In no case income shall exceed 10% of net income before income tax
o Per diem formula: compensation is tied up with a certain percentage of net income
 Corporate Officers
o Theory on the Power of BODT to delegate authority to corporate officers
 General rules: power to bind corporation by contract lies with its BODT, may be express or implied, and may be delegated to other officers
or agents
o Two levels of Discussion on Corporate Officers Issues
 1st level: power of BODT to hire and terminate officers in the exercise of its business judgment
 2nd level: distinction of corporate officers from non-officers to determine who are bound by the common law duties of obedience, diligence
and loyalty
o Election or Appointment and Removal of Corporate Officers
 Theory on the Power of the BODT to Appoint and Terminate Corporate Officers
 Directors may appoint officers and agents and as incident to this power of appointment, they may discharge those appointed.
 Two disciples diverging in corporate officership issues
 Corporate officers are coterminous with that of the BODT
 However, labor law provides that corporate officers are also looked upon as employees who shall be protected by the Labor Law
and the Constitution
 Appointment or Election of Corporate Officers:
 Sec 25 of Corpo Code: directors must formally organize who shall be
o Director
o Treasurer
o Who may or who may not be director
o Secretary – must be resident and citizen of Philippines
o Such other officers
 Stock corporation: appointment power is within the power of BODT
 Close corporation: directly granted to stockholders
 Non-stock corporation: officers are elected by members
 Removal of corporate officers
 Sec 5 © of PD 902-A: SEC has jurisdiction over election or appointments of directors, trustees, officers or managers of such
corporation
o 2 controversies:
 Officers-employees issues: Who are deemed to be officers within the jurisdiction of RTC vis a vis jurisdiction of
NLRC
 What is the extent by which the power of regular courts can adjudicate (backwages, remuneration) which are
inherently labor law issues
 Corporate officers: officers who are given that character either by Corporation Law or the Corporation’s
bylaws
 RTC assumes SEC’s jurisdiction now.
 o If not within the corporation law or by laws, such person is a mere employee and not corporate
officer, NLRC shall assume jurisdiction.
o If such position is provided in the bylaws or the corporation law, then issues arising shall be under
the jurisdiction of RTC (then SEC)
 Statutory Corporate Officers
o President
 Position brings with it implied powers and apparent authority upon which the dealing public can rely upon
 Implied powers only covers acts, contracts, transactions which are deemed to be within his competence as the highest executive of the
company
 Position does not make him solidarily liable for the torts committed by employees
o Corporate Secretary
 There is minimum legal expectations
 Custodian of corporate records
 Register valid transfer of stocks in books
 GOCCs: CS is a primarily confidential position
 Should be Filipino citizen and resident
 Safekeeping/ preservation of MOM and other official records
 Be loyal to mission and objective of corporation
 Works fairly and objectively with Board, Management and stockholders
 Have appropriate administrative and interpersonal skills
 Be aware of laws, rules, regulations
 Have working knowledge of operations of corporation
 Inform BODT agenda of meeting and to give accurate information
 Attend all BODT meeting
 Ensure BODT procedures are followed
 Perform duties and responsibilities as provided in SEC Revised Guidelines on Corporate Governance
o Compliance Officer
 Appointed in public / publicly-held companies
 Monitor compliance by corporation with Revised Guidelines on Corporate Governance
 Appear before SEC when summoned
 Issue certification every January 30th of the year on the extent of corporation’s compliance with RCCG
o Corporate Treasurer
 Purpose: to receive and keep funds of corporation, and to disburse them in accordance with authority given to him by BODT
o Independent Auditor
 External Auditor: not an officer of corporation; only a contractor of service
 Purpose: determine and investigate financial statements submitted
 Duties and Liabilities of Directors, Trustees, Officers
o Common Law Duties of Directors, Trustees and Corporate Officers
 Fiduciary relationship between the three
 Three-fold duties:
 Obedience
 Diligence
 Loyalty
 Violation of three gives rise to liability
o General Rule on Duties and Liabilities of DTCo
 General rule: members of BODT and Corporate Officers who act in good faith and within lawful scope are not liable for their acts
 Formula:
 He assents:
o Unlawful acts
o Bad faith or gross negligence
o Conflict of interest
 He consents to issuance of watered stocks
 He agrees to hold himself personally and solidarily liable
 He is made, by provisions of law, personally to answer for his corporate actions
o Duty of Obedience
 Officers shall direct the affairs of the corporation only in accordance with purposed for which it was organized
 Officers are bound to follow law and the bylaws of corporation
o Duty of Diligence
 Each members shall act in good faith
o Duty of Loyalty
 Each must not have conflict of interest
o Dealings of DTCo with their Corporation
 Sec 32 of Corpo Code: contract of corporation with its DTCos is voidable unless:
 Presence of director or trustee was not necessary to constitute a quorum in BM in approving such contract
 Vote of such DT not necessary for approval of such contract
 Contract is fair and reasonable
 Previously authorized by BODT
o Contracts between Corporations with Interlocking Directors
 Sec 33 of Corpo Code: except in cases of fraud, contract between two corporations which is fair and reasonable shall not be invalidated
just because of having interlocking directors
 If interest of interlocking directors is merely nominal, he shall be subject to ratificatory vote
o Divergent Strains in Labor Law on the General Rule of Liability of Corporate Officers
  Doctrine of Liability of Corporate Officers
 Liability of officer to dismissed employee is based on whether such officer acted with evident malice and bad faith
 Doctrine of Vicarious Liability
 Makes a person liable not only for one’s negligent act but also for negligent act of person under one’s custody or responsibility
 Fiduciary Duty to Creditors – no express duty of DT to corporate creditors unless there is:
o Corporate fraud or tort
 Basis of liability is fraud, bad faith, gross negligence or tort by corporate officer
o Trust fund doctrine
 It would be a violation of rights of creditors of corporation to allow the return to stockholders the return of their capital or to declared
dividends outside unrestricted earnings
o Watered Stocks
 Sec 65 of Corpo Code: any DTCo consenting to issuance of stocks for a consideration less than its par or issued value for any consideration
in any form other than case is a violation
o Stakeholders’ theory under corporate governance principle
 Public companies – director assumes responsibilities to different constituencies or stakeholders who have the right to expect that the
institution in being run in a prudent and sound manner
 Banking institution – BSP: bank assumes responsibilities to different constituencies or stakeholders and that they have right to expect that
the institution is being run in a prudent and sound manner
Stockholders and Members

 Policy Approaches on rights of stockholders and members

o Nature of the rights of stockholders
 Default rules – all stockholders have equal rights expressed in last paragraph of sec 6 which provides: each share shall be equal in all
respects to every other share
 When preferences or restrictions are made to apply to a class of shareholders, then such preferences on restrictions shall exist and be
valid only when expressly provided in the AOI and stated in the certificate of stock
 Section 6 of Corpo Code also contains BOARD ENABLING CLAUSE
 Although the default rule is that shareholders have equal rights, when authorized by AOI, the BODT may fix the terms and
conditions of preferred shares of stock or any series thereof, or to classify its shares for the purpose of insuring compliance with
constitutional or legal requirements
o Provided that such terms and conditions shall be effective upon filing of certificate thereof with SEC.
 Cojuangco vs roxas (page 416) – rights of stockholders:
 Right to vote
 Right to receive dividends
 Right to receive distributions upon liquidation of corporation
 Right to inspect the books of the corporation
o These rights need not be expressly provided in the AOI
 Free-transferable units of ownership
 Membership in non-stock corporations are personal in character and are non-transferrable to heirs.
 Section 60 of Corpo Code: Death of a registered stockholder does not automatically make the heirs stockholders unless:
 Stocks must be distributed first to the heirs in the estate proceedings
 The transfer of stock must be recorded in the books of corporation
 Heirs do not succeed to the rights of the deceased stockholder
o Nature of the rights of the members
 Section 90 of Corpo Code: membership in NSC are non-transferrable
 Unless provided in the AOI or BL
 Section 89 of Corpo code: right of members of any class or classes to vote may be limited, broadened or denied to the extent specified in
the AOI or BL.
 Right to bore by proxy may also be denied by AOI or BL
 The Pre-emptive right
o Section 39 of Corpo Code: all stockholders of a stock corporation shall enjoy pre-emptive rights to subscribe to all issues or disposition of shares
of any class, in proportion to their respective shareholdings.
 Definition: common law right granted to the stockholders to be granted the first option to any opening of the corporations unissued capital
stock, or to any increase of its authorized capital stock
o Subscription Deposits not within pre-emptive rights coverage
  In determining the proportionate right of the stockholders to subscribe to a proposed increase of the authorized capital stock, subscription
deposits are excluded.
 Deposits for additional subscriptions – payments received for future issuance of stock which may or may not materialize.
o Exceptions to pre-emptive rights (Section 39 of Corpo Code)
 When such right is denied by AOI or amendment thereto
 Stockholders have no pre-emptive rights to the issuance of shares from the capital stock of corpo:
 Issued in compliance with laws requiring stock offerings of minimum stock ownership by public
 Issued in good faith with the approval of stockholders representing 2/3 of the outstanding capital stock, in exchange for property
needed for corporate purposes
 Issued in good faith with the approval of stockholders representing 2/3 of the OCS in payment of previously contracted debt
o Right of First Refusal
 Unlike PER, if ROFR is not provided by law or by AOI, it does not exist at all.
 It is a creature of contract law
o Extent of Preemptive Rights
 Section 39 of Corpo Code: the preemptive right of stockholders is recognized to exist to all issues or disposition of shares of any class.
 Disposition includes treasury shares
 Right of first refusal and other restrictions on transfer of shares
o Types of restrictions on shares
 Right of first refusal
 Most common restriction
 Definition: Stockholder who wish to sell or assign shares must first offer the shares to the corporation or to other existing
stockholders of the corporation under terms and considerations which are reasonable and that only when the corporation or the
other stockholders do not or fail to exercise their option, is the offering stockholder at liberty to dispose of his shares to third
parties
 Right of first option
 Definition: right to buy the shares at a fixed price, and would be valid if the terms and considerations are reasonable
 Right of prior consent
 Definition: Any stockholder who may wish to sell, assign or dispose of his shares in the corporation may do so only when he obtains
the consent of the BOD or other stockholders of the corporation.
 Void stipulation
 Buy-back agreement
 Definition: exists when shares are given or assigned to officers or employees under the condition that should they resign or be
terminated from employment, the corporation shall be granted the right to buy-back the shares.
 Valid
 Absolute prohibition to transfer shares
 Void since it violates sec 63 of corpo code
o Jurisprudential rules on rights of first refusal
 Contractual stipulation
 Lambert vs fox (page 423): an agreement entered into between two majority stockholders of a corporation whereby they mutually
agrees not to sell, transfer, or otherwise dispose of any part of their shareholdings till after one year from the date of the
agreement is VALID.
 Restrictions in the by-laws
 Fleischer v Botica Nolasco
 Sec 63 of the Corpo Code
 Restrictions in the Charter
 PCGG vs SEC: waiver of right of first refusal is an act of ownership and belongs only to stockholders of corporations
 SEC allows restriction in AOI if the same is necessary and convenient to the attainment of the objective for which the company
was incorporated
 Test: if it is sufficiently reasonable as to justify the overriding of the general policy against restraint on alienation of personal
property.
 SEC: reasonable period is 30 to 60 days.
 Restriction must be indicated in the stock certificates
 Quasi-negotiable character of COS
 Party entitled to exercise rights on sequestered shares
 Conjuangco vs Roxas: to vote on sequestered shares would be an exercise of ownership. PCGG cannot do such thing.
 Right of first refusal and nationalization issues
 Jg summit holding vs ca (page 427): right of first refusal over shares pertains to the shareholders, whereas, the capacity to own
land pertains to corporations (separate juridical entities)
o Underlying doctrine in restrictions on transfers of shares
 Villa Rey Transit vs Ferrer: when one buys the business of another as a going concern, he usually wishes to keep it going; he wishes to get
the location, the building, the stock in trade, and the customers.
 Rural bank of Salinas vs ca: transfer of shares is an inherent right of a stockholder
 Lambert vs fox: twin test of reasonable restraint:
 Has a beneficial purpose, results in the protection of the corporation as well as of the individual parties to the contract
 Reasonable as to the length of time of the suspension
 Shares of stocks are personal property and with it is the power to dispose
 SEC parameters:
 Not onerous than granting the existing stockholders or the corporation the option to purchase the shares
 Not valid/ unenforceable: if sale is prohibit without consent of stockholders
 Reasonable period: 30 to 60 days
 After period, he is free to sell his shares of stock to anyone
o Non-competition clause
  May be properly be provided as a condition for the principle of self-preservation
 Right to Vote
o Tan vs Sycip: right to vote is inherent and incidental to the ownership of corporate stocks and such is a property right
o Varying the right to vote
 Section 6 of corpo code: no share may be deprived of voting rights except those classified and issued as preferred or redeemable shares.
 Non-voting shares may vote on following matter:
 Amendment of AOI
 Adoption and amendment of BL
 Sale, lease exchange, etc of all or substantially all of corporate property
 Incurring, creating, or increasing bonded indebtedness
 Increase or decrease of capital stock
 Merger or consolidation of the corporation with another corporation or other corporations
 Investment of corporate funds in another corporation or business
 Dissolution of the corporation
 Outstanding capital stock
 Definition: total shares of stock issues to subscribers or stockholders w/n fully or partially paid, except treasury shares
 Voting rights of members
 Section 89 of corpo code: right of a member of any class to vote may be limited, voted, or denied to the extent specified in the
AOI or BL.
 NSC: w/n dead members are entitled to right through their executor or administrator depends on the AOI or BL
 Voting by mail in NSC may be authorized by BL of NSC or those prescribed by SEC
 General Rule: cumulative voting may be provided in the NSC
o In the absence of any voting rule, straight voting system
o Party entitled to vote
 Price vs Martin (page 434): until challenged in a proper proceeding, a stockholder of record has a right to participate and vote in any
meeting of the stockholders of the corporation and in the absence of fraud, the action of the stockholders at the meeting cannot be
collaterally attacked on account of such participation
 Right to vote on sequestered shares:
 Cojuangco vs roxas
 Trans middle east vs SB: owner of shares of corporation, even if shares are sequestered, exercises the right and the privilege of
voting on them; PCGG merely conservator
 Republic vs cocofed: SC allowed PCGG the right to exercise the voting right on sequestered shares
o Voting on joint ownership
 Sec 56 of corpo code: consent of all co-owners are needed for jointly-owned shares to vote.
 Proxies are allowed as long as they have written authorization and signed by all co-owners
  Certificate of stock indicates conjunctive AND/OR between names of co-owners, either of the co-owners may exercise the right to
vote.
o Voting rights of pledgers, mortgagors, and administrators
 Sec 55 of corpo code:
 Pledgers and mortgagors: they have the right to attend and vote at meetings of stockholders.
o Except: when they have given the pledgees or mortgagees such rights
 Executors, administrators, receivers and others legal representatives c
o Should be duly appoint by court
o Have right to vote and attend in behalf of those they represent
o Even without written proxy form
 Tan vs sycip: until a settlement and division of estate is effected, the stocks of decedents are held by the administrator or executor.
Therefore, the determination of whether or not dead members are entitled to exercise their voting rights depends on AOI and BL.
 Restrictions on shareholders to pledge or mortgage shares should be UNLAWFUL
 Should be with consent of BOD : void restriction
o Treasury Shares
 Sec 57 of corpo code: Treasury shares shall have no voting right as long as such shares remain in the treasury
 Purpose: to prohibit directors to prolong their stay in office against the wishes of majority of the stock
 Tan vs sycip: the right to vote is inherent in and incidental to the ownership of corporate stocks…only stocks actually issued and
outstanding may be voted
o Election of directors and trustees
 Sec 24 of corpo code: owners of majority of the outstanding capital stock or members in NSC must be present in election of directors and
trustees
o Amendment of AOI
 Sec 16 of corpo code: aoi may be amended by majority vote of BODT and vote or written assent by stockholders representing at least 2/3
of OCS
o Investment in Non-primary purpose business
 Sec 42 of corpo code: investment must be approved by majority of BODT and ratified by the stockholders or members
 If in line with the primary purpose, no approval of stockholders is needed
o Mergers and consolidation
 Sec 77 of corpo code: approval of BODT + ratification of 2/3 of OCS needed or members
o Increase and decrease of capital stock / incurring or creating bonded indebtedness
 Sec 38 of corpo code: approval of BODT + ratification of 2/3 of OCS or members
o Adoption, amendment and repeal of by-laws
 Sec 48 of corpo code: approval of BODT + ratification of 2/3 of OCS or members
o Declaration of stock dividends
 Sec 43 of corpo code: no stock dividends shall be issued without approval of stockholder representing 2/3 of OCS
o Management contracts:
  Sec 44 of corpo code: approval of BODT and ratification of 2/3 of stockholders
 Only managed corporation shall vote if:
o Where stockholders representing the same interest of both managing and the managed corporations owns or control
more than ¼ of total OCS entitled to vote of the managing corporations
o Majority of members of BODT of managing corporation also constitute a majority members of BODT of manage
corporation
 No longer than 5 years
o Fixing consideration on no-par value shares
 Sec 62 of corpo code: issued price of no-par value shares may be fixed:
 By AOI
 BL
 By shareholders at a meeting representing majority of OCS
 Agreements Affecting Voting Rights
o Proxies
 Sec 58 of corpo code: stockholders and members may vote in person or by proxy
 In case of proxy, written authorization is needed, signed by stockholder or member, and filed with corporate secretary
 Right to issue a proxy may be regulated by bylaws but not denied, since it is an aspect of ownership
 Sec 89 of corpo code: non stock corporations – member may vote by proxy
 Can only be denied by provisions by AOI or BL
 Nature
 Proxy is a special form of agency
 Governed by law on agency
 Fiducial relation
 May be revoked, even if they have revocable terms
 Requisites of a valid proxy
 Must be in writing
 Signed by stockholder or member of record
 Filed before the corporate secretary before the scheduled meeting
o If bylaws do not prescribe form for proxy, imposition of particular form is void
o If bylaws silent on time and submission of proxies, corporation cannot fix the deadline
 Period of effectivity of proxy: valid only for the meeting it was intended
 If there is a stipulation for a longer period of effectivity, no proxy shall be valid and effective for a period longer than 5 years at
any one time
 Who may be appointed: no limitation
 Proxy rules for publicly listed companies
 Sec memo circular no 5:
 o Must be in writing and signed
o Not longer than 5 years
o No broker or dealer shall give any proxy, consent or authorization
o Transfer and stock book shall be closed 20 days before scheduled date of stockholders meeting – unless otherwise
provided in AOI or BL
o List of stockholders shall be submitted to sec 15 days before meeting
o Proxy need not be notarized
 Procedural matters relating to proxies
 Gsis vs ca: rules:
o Proxy solicitation involves securing and submission of proxies while proxy validation involves validation of such secured
and submitted proxies
o Sec’s power on validity of proxies has been withdrawn to the RTC commercial courts
o SEC still has investigatory and regulatory power
o Voting trusts agreements
 Nature- complete surrender by shareholder of voting rights to a trustee, as well as committing groups of shareholders to continuation of
fixed business policies
 A stockholder part with the naked title (including vote) and retains beneficial ownership of stock
 Requisites:
 In writing and authorized
 Specify the terms and conditions thereof
 Certified copy thereof filed with corporation and SEC
 If under condition of a loan agreement
 It should not exceed 5 years
 Extinguished upon payment of loan
 Difference with proxy
 Trustee may receive dividends, proxies can’t
 Trustees requirements of notary and submission to sec vs proxies requirement of sign and authority from shareholder
 Voting trusts not limited to one meeting vs proxy limitation to only one meeting unless otherwise specified
 Trustees can exercise appraisal right; proxies can’t
 Proxies can’t inspect corporate books, trustees can
 Pre-determination of voting trusts agreement
 VTA can be set aside when rights of transferring stockholders are trampled by the trustee
 No voting trust can be used for purposes of fraud
 Voting trust agreement as part of loan agreement
o Pooling agreement and other stockholders’ agreement
 Definition: contractual agreements by which two or more stockholders agree that their shares be voted as a unit.
  Hierarchy of enforceability
 1. Voting trust agreement because it is based on law on trust
 2. Proxy because it is based on law on agency and can be terminated at will by principal
 3. Pooling agreement based on contract law
o Stockholders’ or members’ meeting
 Calls and types of meeting
 Sec 49 of corpo code: meetings of directors, trustees, stockholder or member may be regular or special
 Sec 50:
o Regular meeting:
 Held annually on a fixed date in bylaw, if not fixed, on every date in april
 Written notices shall be sent 2 weeks prior to meeting
o Special meeting
 Shall be held anytime deemed necessary or as provided by the bylaw
 Written notice at least 1 week
 place and time
 sec 51: municipality or city where principal office of corporation is located (place of stockholders’ meeting)
 shall be mandatory
 who can call a stockholders’ or members’ meeting
 person who is authorized by the bylaws
 in absence of such provision, it may be called by a director or trustee of an officer entrusted with management of corporation
 quorum
 sec 52: shall consist of stockholders representing majority of the OCS or majority of members in NSC
 minutes of meeting
 sec 74: corporation shall keep and preserve the MOMs in its principal office.
 it shall be signed by secretary of the meeting, if not, it has no probative value
o right to inspect/examine corporate records
 purpose: to protect interest of shareholders
 specified records subject to inspection
 sec 74: all records shall be kept and preserved in the principal office.
 right to financial statements
 10 days upon written request of stockholder or member, the corporation shall furnish to him most recent financial statement
 Annual report: corporations shall submit to SEC an annual reports of its operations, financial statements certified by an
independent CPA, and other requirements SEC may require
 Summary of corporate obligations to report
 Books and records required to be prepared and maintained;
o Books recording all business transactions of corporations
 o Minute book of meeting of SH or M
o MBM for meetings of BODT
o Stock and transfer book
o Annual financial statements
o Annual report to SEC
o Report of election of BODT and officers within 30 days after such election
 Manner of availing right to inspect
 Sec 75: all records of meetings and business transactions shall be open to inspection of any BODT, ShM
o reasonable hours on business days
o He may demand in writing for copy of excerpts of records or minutes
o Demand is made in good faith or for legitimate purpose
 Who may exercise right to inspect
 Only ShM, BODT of record can inspect
 It can be in person or by representative
 Nature and scope of right to inspect
 With respect to interest of his interests as a stockholder and for some purpose germane to the interest of the corporation
 General rule: right to inspect
o Exception: corporation may deny the right to inspect providing proof that the purpose of the stockholder is improper.
However, it cannot be denied because of unfriendly terms with officers of the corporations
 Summary of doctrinal rulings on right to inspect
 Purposes of inspection
 To ascertain whether there is mismanagement
 To ascertain financial condition of corporation
 To ascertain the value of shares of stocks for sale or investment
 To obtain a mailing list of shareholders to solicit proxies or influence voting
o Improper purposes:
 Obtain business secrets
 To secure business prospects
 To find technical defects
 To embarrass company business
 Remedies if denied: if refusal is caused by BODT resolution, it is the BODT who shall be liable
 Mandamus
 Damages
 Criminal suit
 Procedural rules on suits – interim rules on procedure governing intra-corporate controversies
o Within 2 days from filing, decide whether to dismiss or order issuance of summons to be served within 2 days.
 o Defendant has 10 days to file an answer
o Within 15 days from receipt of last pleading, decision shall be rendered
 Defenses
 Right to inspect covers controlled subsidiaries
 Appraisal rights
o Nature of appraisal right
 Right of stockholder to demand payment of the fair value of his shares after dissenting from a proposed corporate action involving a
fundamental change in the corporate setting
o Who is entitled
 A prejudiced stockholder:
 One who dissented in the meeting where the proposal or amendment was approved
 Stockholder must have voted against such transaction
 Not mere silence nor abstention
o Instances
 Amendment to AOI restricting rights of stockholders or class of shares
 Sec 37: shortening or extending the term of corporate existence
 Sale, lease, exchange or other disposition of all or substantially all corporate property or assets
 Investment outside of primary purpose
 Merger or consolidation
o How exercised:
 Vote against corporate action
 Written demand with 30 days after vote was taken for payment of fair value of shares
o Effects of demand of payment: if not paid within 30 days, his voting and dividend right shall be restored.
o Notation on certificates; right of transferee
 10 days after demand of payment for shares, dissenting stockholder shall submit certificate of stock representing his shares to the
corporation for notation that such shares are dissenting shares
o How payment of fair value affected
 If proposed corporate action is implemented, the corporation shall pay SH, upon surrender of certificate of stock, the fair value thereof
 If within 60 days from such action was approved, and dissenting SH and corporation cannot agree on fair value, it shall be appraised by 3
disinterested persons.
 one named by SH, corporation, and one by the two thus chosen
 final after 30 days award is made
o existence of unrestricted retained earnings
 no payment to dissenting SH unless corporation has Unrestricted retained earnings
o when right to payment ceases:
 if demand is with consent of corporation
 if proposed action is abandoned
  if proposed action is disapproved by SEC
 If SEC determines dissenting SH is not entitled to appraisal right
o Party who bears cost of appraisal
 Borne by corporation
 If fair value ascertained is the same as those of corporation, the SH have to bear the cost
o Denial of appraisal right
 When waived without dissenting SH’s consent, it is against public policy
 When individual is already a stockholder, and not constrained to waive, then it is not void.
o Statutory attitude towards right of appraisal
o Emerging significance of existence of appraisal rights
 Availability of appraisal rights shall be considered by the courts (harassment or nuisance suit)
 Derivative suit
o A common law right of ShM
o Definition: suit by a shareholder to enforce a corporate cause of action
o Derivative suits: exception to business judgment rule
o Requisites:
 Jurisprudential
 Party bringing suit should be a shareholder
 Party has exhausted intra-corporate remedies
 Cause of action devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to
the particular SH bringing the suit
 Interim Rules
 Plaintiff a stockholder or member
 Plaintiff exerted all efforts to exhaust all remedies under AOI or BL
 Relief sought pertain to the corporation
 No appraisal rights are available for the act or acts complained of
 Suit is not a nuisance or harassment suit
 Proper party
 SH or M
 Exhaustion of intra-corporate remedy
 Must be alleged specifically
 Laches by inaction of directors does not attach when corporation is immobilized by the commencing suit against it directors
 Grounds for derivative suit
 Express allegation that suit filed is derivative in nature
 Nature of reliefs prayed for: action brought for the benefit of the corporation
o Wastage and diversion of corporate funds
  Wastage if there is hiring of officers to shield chairman from criminal prosecution
 Violation of laws
 Enforcement of pre-emptive right
 Appointment of receiver: management Power of board transferred temporarily to receiver
 Venue: SEC before, now transferred to RTC
 Nuisance suits: derivative suit is not a nuisance suit
 Availability of appraisal rights: important factor to determine if suit is derivative or harassment suit
 Corporation counsel cannot defend members of BODT
 Withdrawal of Stockholder or demand for dissolution in close corporation
o Any SH in Close corporation, may compel the said corporation to purchase his shares at fair value
o Any SH in Close corporation may compel by written petition to SEC the dissolution of corporation whenever the acts of BODT or officers are
 Illegal
 Fraudulent
 Dishonest
 Oppressive
 Unfairly prejudicial to corporation or SHH
 Corporate assets misapplied or wasted
 Right to proportionate share of remaining asset upon dissolution
o Sec 122: no corporation shall distribute assets or property except:
 Lawful distribution
 After payments of debts and liabilities
SHARES OF STOCKS

 Nature of shares of stocks

o Shares of stocks do not represent proprietary rights of stockholders to the assets or properties of the corporation.
o Shares of stocks whether issued or unissued do not represent assets or property to the corporation which eventually issues them.
o Shares of stocks do not constitute debts or liabilities of the corporation, and they are not reported as components of liabilities in the corporation’s
financial statement.
o It falls within the special category of intangible personal properties under the generic name equity.
o Modes of dealings with shares of stocks
 Transaction of shares of stocks in two levels:
 Distinguishing between initial issuance of shares of stock, epitomized by the subscription agreement from subsequent dealings
with issued shares of stock
o Initial issuance:
 Constitutes commercial transaction between the issuing corporation and subscribing stockholder (subscription
agreement) – governed by contract law
 When it comes to subsequent dealings: distinguishing between acts of sale, transfer or assignment (contracts of disposition) from
acts of attachment, levy and encumbrance (contracts of encumbrance)
o Contracts of disposition: Involves contract of sale over shares disposed of, and such a contract is between the original
stockholder as the seller, and the buyer of the shares
o Contracts of encumbrance: constitute only security arrangements where the shares are offered as mere collateral to
support some other principal contract. These are involuntary acts of disposition
o Modes of tradition applicable to shares of stock
 SOS are essentially intangible personal properties are not capable of actual or physical delivery. Transfer can only be effected by
constructive delivery. The types of constructive delivery in dealings of SOS are:
 Execution of public document – Deed of Sale of shares of stocks; deed of assignment of shares of stock
 Transfer or negotiation of the titles, certificates or other evidence – endorsement and delivery of stock certificates
 Use and enjoyment by buyer of rights and privileges pertaining to the incorporeal, with the knowledge and consent of the selling
shareholder
o Rights of corporation with respect to SOS
 To call for payment of the unpaid subscription on the date specified in the subscription contract or on date stated made by the BOD
 To impose interest on the unpaid subscription from the date of subscription and at the rate of interest fixed in the by-laws
 To refuse to issue to the subscriber the certificate of stocks where the subscription has not been fully paid
 To refuse to recognize and register the sale or assignment of any share where the subscription has not been fully paid
 To refuse to recognize a sale or assignment of shares of stocks which have not been duly registered in the stock and transfer book
o Corporation has no power to:
 Demand repurchase of its SOS unless the shares are classified as redeemable shares in the AOI
  Refuse to pay SH dividends declared on the shares which have not been declared delinquent to apply them to the payment of the unpaid
subscription
 Bid delinquent shares, and thereby obtain for itself profit, for a value greater than the balance due on the unpaid subscription, plus accrued
interest, cost of advertisement and expenses of sale
 Original dealings with SOS
o Subscription agreement: root to stockholder standing
 Sec 72 of corpo code: holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a SH.
 Characteristics of Subscription agreements: there can be subscription and issuance only with reference to unissued shares in:
o The original issuance from authorized capital stock at the time of incorporation
o The opening of the portion of the original ACS previously unissued
o Increase of ACS achieved through amendment of AOI and registration with SEC
 Sec 60 of corpo code: any contract for acquisition of unissued stock in an existing corporation or a corporation still to be formed
shall be deemed a subscription agreement
o Corporate law governs subscription agreements
o Law on sales governs purchase agreement on unissued shares
o Law on sales also governs disposition of issued shares of stocks
 Distinctions between subscription contract and purchase agreement (old rules, no longer applicable)
Subscription contract Purchase agreement over unissued shares of stocks
Subscriber becomes SH even if he has not paid his subscription Promise to issue shares and promise to pay the price are considered to
create dependent and concurrent duties and payment is a condition to
the right to a certificate for shares and the status of a shareholder
Unpaid subscription is a debt of the subscriber Purchaser is not a debtor; the measure of liability (in default) is in
damages for the difference between contract price and the market value
of shares
Insolvency of corporation makes unpaid subscription Bankruptcy or insolvency of corporation will terminate its claim against
immediately due and demandable the purchaser
Corporate law provisions re calls for unpaid subscriptions and Rule does not apply
assessment of stock applies
Corporation has no legal capacity to release an original Rule does not apply.
subscriber to its capital stock from the obligation to pay for his
shares.
 Pre-Incorporation Subscription Agreements
 Effect of subscriptions before incorporation
o Offer theory: offers to proposed corporation do not ripen into contracts until accepted by corporation when organized
 They can withdraw their subscriptions before corporation comes into existence and accepts the offer.
o Contract theory: subscription agreement becomes a binding contract and is irrevocable from time of subscription unless
cancelled by all parties before acceptance by corporation.
  Section 61 of corpo code: subscriptions shall be irrevocable for a period of at least 6 months from the date of subscription except:
o When all of other subscribers consent to the revocation or
o Unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be
stipulated in the contract of subscription
o Although corporation is still non-existent, it is still bound under the pre-incorporation agreement.
o Trust fund doctrine: corporate assets are held as a trust fund for the benefit of the SH and creditors and the corporate
officers have the fiduciary duty to deal with them properly.
 When shares deemed subscribed:
 A subscription agreement also has the same characteristics of a sale of shares of stocks: namely – nominate, bilateral, onerous,
consensual, and cumulative
 Delivery of sales is required to make the subscriber the owner of the shares. – contract of sales
 In contrast to sec 72 of corpo code: holders of subscribed shares not fully paid which are not delinquent shall have all the rights
of a stockholder.
o The full payment of subscription value of the shares are not important ingredients for the transfer of ownership over the
subscribed shares.
o Entire shareholdings of SH even when not fully paid belongs to the SH with legal authority to sell or mortgage them validly.
 Sec 63 of Corpo Code: registration in stock and transfer book is controlling factor as well
 Subscription agreement exists upon meeting of minds. (consent) Covered shares have been issued upon the time of giving of
consent.
 Subscription agreement under the Statute of Frauds
 Nowhere in Corpo Code that it is required for a subscription agreement be in writing to be valid.
 Statute of fraud: if not in writing, it is UNENFORCEABLE
 Subscription Agreement ARE NOT COVERED BY STATUTE OF FRAUDS.
 Consideration for issuance of shares
o Sec 62 of corpo code: SOS shall not be issued for a consideration less than the par or issued price thereof
o Kinds of considerations:
 Actual cash paid to the corporation
 Property, tangible or intangible
 Labor performed for or services actually rendered to the corporation
 Previously incurred indebtedness by corporation
 Amounts transferred from unrestricted retained earnings to stated capital
 Outstanding shares exchanged for stocks in the event of reclassification or conversion
 If consideration is other than cash or consists of intangible property, valuation is determined by BODT or incorporators, subject to
SEC’s approval
o Sec 65 of corpo code: any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued
value or for a consideration in any form other cash, valued in excess of its fair value, or who having knowledge thereof, does not forthwith express
 his objection 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.
 Cash and promissory notes for subscription
 Sec 62 of corpo code: shares of stocks shall not be issued in exchanged for promissory notes or future services.
 It is not required that there be actual payment of cash consideration in order to make the subscription agreement valid and
binding. It is binding upon the meeting of the minds of parties.
 Note receivables are payments for subscription of shares of stocks. It is an addition to the assets of the corporation.
 Subscription receivables are not assets of the corporation.
 Property Consideration
 Property in exchange for stock must be for the carrying out of the purposes of its incorporation and necessary or proper for it to
own in carrying on its business.
 It cannot lawfully issue stock for property which its charter does not authorize it to acquire, or for property acquired for an
unauthorized purpose.
 SEC: property may be accepted subject to the following conditions:
o Actually received by corporation
o Necessary or convenient for corporation’s use and lawful purpose
o At a fair valuation equal to the par value of the stock issued to be approved by SEC
 Debts and service as consideration
 A corporation is allowed to receive as payment for stocks labor performed for or service actually rendered to the corporation
provided the transaction is in good faith and no fraud is perpetrated upon SHs.
 An agreement to issue stock for services to be rendered in future is void under Sec 62 of corpo code.
 Set off of corporation’s indebtedness
 Previously incurred debts would be converted to capital and it is likely that having been established, they represent the true value
to the corporation.
 Unrestricted retained earnings or existing capital as consideration
 Sec 62 of corpo code: considerations constituting amounts transferred from unrestricted retained earnings to stated capital and
outstanding shares exchanged for stocks in the event of reclassification or conversion are merely booking entries.
 Consequence of unlawful consideration
 Sec 62 of corpo code: SOSs shall not be issued in exchange for promissory notes or future services. This is not in consonance with
the trust fund doctrine.
o Watered stocks
 Sec 65 of corpo code: makes directors and officers liable for watered stocks.
 They are solidarily liable with SH
 Liable to corporation and its creditors for the difference of fair value received at time of issuance of stock and the par or issued
value of the same time.
 Stock watering is prohibited because it cause injuries to:
  The corporation: deprivation of needed capital
 Existing and future SHs: dilution of proportional interests in corporation and who pay full value of their shares
 Present and future creditors: deprivation of assets or capital required by law
 Persons who deal with company or purchased it securities: SW is accompanied with misleading corporate accounts and financial
statements.
 Three theories for holding SHs and officers liable for watered stocks:
 Subscription contract theory: subscription contract is the source and measure of the duty of a subscriber to pay for his shares
 Fraud theory: holds shareholders liable for watered stocks on the basis of tort or misrepresentation. Wrong done to creditor is
fraud or deceit in falsely representing that the par value has been paid or agreed to be paid in full.
 Trust fund doctrine: all corporate creditors would have legal basis to recover against SHs and guilty officers
o Prevailing view in Philippine jurisdiction
o Release from subscription obligations
 General rule: corporation can release a subscriber from his subscription in whole or in part only with express of implied consent of all of
the other SHs and only when there is no prejudice to corporate creditors.
o Payment of Balance of Subscription
 Sec 66 of corpo code: subscribers for stock shall pay to the corporation the interest of all unpaid subscriptions from the date of subscription
and at the rate of interest fixed in, the bylaws. If no rate of interest fixed in bylaws, such rate shall be deemed to be the legal rate.
 Sec 67 of corpo code: BOD may at any time declare due and payable the unpaid subscriptions to the capital stock and may collect the
same or such percentage thereof as it may deem necessary.
 Payment of unpaid subscriptions shall be made on the date specified in the contract of subscription or on the date stated in the call made
by the BOD. Failure to pay on such date shall render entire balance due and payable and shall make the SH liable for interest at the legal
rate on such balance, unless a different rate is provided in BL.
 If within 30 days no payment is made, all stock covered by said subscription becomes delinquent and shall be subject to sale.
o Call on unpaid subscriptions
 Nature of the call
 Call
o Resolution of BOD for payment of unpaid subscriptions
o Notification of such resolution made on SH
o Time when subscriptions become payable.
 When call is not necessary
 2 instances:
o When subscription, under terms of the subscription contract, is payable not upon call but immediately or on a specified
day or when it is payable in installment at specified times
o If corporation becomes insolvent, which makes the liability on the paid subscription due and demandable regardless of
any stipulation to the contrary in the subscription agreement
o Delinquency sale
  Sec 68 of corpo code: BOD may order sale of delinquent stocks and shall specifically state the amount due on each subscription, plus all
accrued interest, and the date, time, and place of the sale which shall not be less than 30 days nor more than 60 days from the date the
stocks become delinquent.
 Notice of sale shall be sent to every delinquent SH either personally or registered mail. Notice shall be published once a week for 2
consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located.
 Sec 67 of corpo code: unpaid subscriptions shall be made on the date specified in the contract of subscription or on the date stated in the
call made by the BOD. If within 30 days from the said date no payment is made, all stocks covered by said subscription shall thereupon be
made delinquent.
 SEC: prior call or board resolution to demand payment is not necessary if a date of payment is specified in the subscription contract;
neither is there a need of a formal declaration of the board for an unpaid subscription to become delinquent in the event of failure to pay
within 30 day period from the date specified in the subscription contract
 Highest bidder: 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 sale. Remaining share shall
remain to the delinquent SH
 Questioning the delinquency sale:
o Sec 69 of Corpo code: no action to recover delinquent stock can be sustained upon ground of irregularity or defect in the
notice of sale, or in the sale itself of the delinquent stock, unless the party holding the stock the sum for which the same
was sold, with interest from the date of sale at the legal rate, and no such action shall be maintained unless it is
commenced by the filing of a complaint within 6 months from the date of sale.
 Other remedies:
o Sec 70 of corpo code: nothing in corpo code prevents corporation from collecting by action in a court the amount due on
any unpaid subscription with accrued interest, costs, and expenses.
 Effects of delinquency:
o Sec 71 of corpo code: no delinquent stock shall be voted for or be entitled to vote or to representation at any SH’s meeting,
nor shall the holder thereof be entitled to any rights of a SH except the right to dividends until and unless he pays the
amount due on his subscription.
o Delinquency is achieved in two ways:
 Failure to pay subscription on date provided in the call
 Failure to pay subscription on date specified in subscription agreement
o Effects on SH once SOS becomes delinquent:
 It disqualifies SH to be voted for or be entitled to vote or to representation at any SH’s meeting
 It disqualifies SH from exercising any right as a SH, except right to receive dividends, until he pays full amounts
with accrued interest and costs and expenses of advertisement.
 Prescription rule on subscription agreement: action shall not prescribe since period begins to run from time payment becomes
demandable. (Garcia vs suarez)
 Certificate of stock
o Nature of certificate of stock
  COS is an instrument that is issued formally by the corporation with intention that the same constitute the best evidence of the issuance
of shares of stocks that are fully paid and no longer assessable.
 Sec 64 of corpo code: no COS shall be issued until full amount has been paid.
 Promotion of free transferability of units of ownership
 Intra-corporate level: relationship bet corporation and subscriber
 Extra-corporate level: covers the nature and effect of issuance or non-issuance of SOS to parties who are not within the intra-
corporate relationship (i.e., buyer of shares issued from registered SH & those who take shares as security from principal
obligations of registered SH)
 Certificate of stock is merely evidence of SOS covered
 Issuance of COS is not necessary to confer upon the stockholder full ownership over the shares and the standing to exercise all
rights that pertain to him being a SH
 Sec 72 of Corpo code: holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a
stockholderSec 63 of corpo code: transfer shall not be valid until transfer is recorded in books of corporation. Valid only as between
the parties.
 COS are merely quasi-negotiable in character: it may be transferred by endorsement coupled with delivery but not negotiable because
holder takes it without prejudice to rights and defenses as registered owners or transferor’s creditors may have under the law
 Probative value of a COS: probative value of COS issues by corporation fully covered paid shares. (presumption that it was legally issued)
o When COS deemed issues:
 Sec 63 of corpo code: COS must be signed by the president or VP, countersigned by secretary or asst. secretary, and sealed with the seal
of the corporation
o On original dealing with SOS
 Right to issuance of COS
 Sec 63 of corpo code: capital of stock corporation shall be divided into shares for which certificates signed by president or VP,
countersigned by sec etc…. and be issued in accordance with BL. SOS are personal properties and may be transferred by delivery
of COS or certificates indorsed by owner of attorney-in-fact
 Sec 64 of corpo code: no COS shall be issued until full amount has been paid.
 Sec 43 of corpo code: unpaid subscription can be voted upon in corporate meetings
 Every SH has right to have a proper COS issued to him by corporation by demand.
 in absence of BL provisions, payments can be made:
o full payment for corresponding number of shares
o payment pro rata to each and all the entire number of shares subscribed
 remedies available when corporation refuses to issues COS
 file a suit for specific performance
 file an alternative relief by way of damages where specific performance cannot be granted
 file a petition for mandamus to compel issuance of COS
 rescind the contract of subscription and sue to recover what has been paid.
  On subsequent dealing with SOS
 No inherent right to be issued COS to one who merely bought shares from a registered SH
o New buyer must present evidence of his rightful purchase SOS and compel the corporation to cancel covering COS and
issue new one under his name
 Negotiation of COS
o Normal mode of dealing with COS is by process of endorsement and delivery.
o Purposes of endorsement and delivery:
 For sale or assignment of shares
 Pursuant to a trust or nominee arrangement
 By way of pledge or encumbrance of shares
o Requirement for valid transfer of stocks:
 COS must be endorsed by owner or his attorney-in-fact or other authorized persons
 There must be delivery of stock certificates
 Transfer must be recorded in the books of the corporation
 Forges and illegal transfers of COS
 Since COS are only quasi-negotiable, they do not afford the same protection to a holder in good faith and for value who receives
them in the course of their being negotiated, and that the ownership of true owner would be preferred.
 Loss or destroyed certificates:
 Sec 73 of corpo code: procedures:
o Registered owner shall file an affidavit in triplicate setting
 How lost, destroyed of stolen
 Number of shares
 Serial numbers of COS
o Other info or evidence necessary
o After verifying affidavit, corporation shall publish a notice in newspaper of general circulation once a week for three
consecutive weeks
o After 1 year for date of publication and no contest, right to make such contest shall be barred.
o If contest has been presented or a pending action, said COS’ issuance shall be suspended until final decision by court
 Special rules on Registered or listed shares
o Rule on uncertificated shares
 Sec 63 of SRC: a corporation whose shares of stocks are registered pursuant to the code or listed on a stock may:
 Issue shares to or record transfer of some or all of its shares into the name of said shareholders, investors, or securities
intermediary in the form of uncertificated securities (requires approval of BODT and ratification of SHs)
 Use of uncertificated securities shall be without prejudice to the rights of securities intermediary subsequently to require the
corporation to issue a certificate in respect of any shares in its name
 Issue all of the shares of a particular class in the form of uncertificated securities and subject to a condition that investor may not
require the corporation to issue a certificate in respect of any shares recorded in their name (if so provided in AOI or BL)
 o Binding effect on shares transaction
 Sec 43.3 of SRC: transfers of securities, including uncertificated securities, may be validly made and consummated in any of the following
matters:
 By appropriate book-entries in the securities account maintained by securities intermediaries
 In the stock and transfer book held by the corporation or the stock transfer agent and such bookkeeping entries shall be binding
on the parties to the transfer
 Transfer of uncertificated shares shall only be valid as far as the corporation in concerned, when a transfer is recorded in the books of the
corporation so as to show the names of the parties to the transfer and the number of shares transferred
o Evidentiary value of records of the clearing agency
 Official records and book entries of a clearing agency shall constitute the best evidence of such transaction between clearing agency and
its participants and members
o Pledging a security or interest therein
 Art 2093 and 2095 of civil code: a pledge of security, including uncertificated security, shall be considered delivered to creditor if a
securities intermediary indicates by book-entry that such security has been credited to a specially designated pledge account in favor of
the pledgee
o Issuer’s responsibility for wrongful transfer to registered clearing agency
 Registration to another shall be final and conclusive unless clearing agency had notice of an adverse claim before the registration was
made.
o Power of SEC to issue rules covering shares
 Sec 47 of SRC: powers of SEC to issue rules on ownership issues pertaining to securities:
 Validate the transfer of securities by book-entries rather than delivery of physical certificates
 Establish when a person acquires a security or an interest therein and when delivery of security to a purchaser occurs
 Establish which records best constitute the best evidence of a person’s interest in a security and the effect of any errors in
electronic records of ownership
 Codify rights of investors who choose to hold their securities indirectly through a registered clearing agency and/or other securities
intermediaries
 Codify the duties of securities intermediaries who hold securities on behalf of investor
 Give first priority to any claims of a registered clearing agency against a participant arising from a failure by the participant to meet
its obligations
 Stock and transfer book
o Sec 74 of corpo code: stock corporation must keep a stock and transfer book which must keep a record of:
 All stocks in the names of the stockholders alphabetically arranged
 Installment paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment
 A statement of every alienation, sale or transfer of stock made
 Such other entries as the BLs may prescribe
o Registration with SEC
  SEC Rules requires that set-up and register their stocks and transfer book with SEC within 30 days from receipt of certificate of
incorporation
o Where kept: principal office of corporation or in office of its stock transfer agent
o Who may be transfer agent: Such person must have a license from SEC and pays a fee fixed by SEC.
o Who may make proper entries: entries by those other than the president and chairman, secretary, shall not be given any valid effect
o Registration in stock and transfer book
 Sec 63 of corpo code: dispositions, purchases of shares stock would not be valid to the corporation and the world unless the transaction
is registered in the stock and transfer book.
o BIR certification to effect transfer of shares:
 Sec 97 of NIRC: corporate secretary is not authorized to effect transfer of shares to any new owner in the books of a corporation, unless
accompanied by certification from CIR that taxes have been paid.
o Probative value of stock and transfer book:
 They are merely private records and rules applicable to documentary evidence governs
o Stock and transfer book vs general information sheet
 GIS alone does not conclusively prove that they are SH. Corporate books is still controlling.
o Period within which to enforce registration rights
 Action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer
 Subsequent dealing with shares of stocks
o Trust relations on SOS
 Trust relationship may be created involving SOS.
 Sec 10 of corpo code: incorporator must be a subscriber to at least 1 shares of capital stock
 Sec 23 of corpo code: every director must own at least 1 share of the capital stock of the corporation.
 Sec 59 of corpo code: voting trust arrangements covering SOS and provides for the solemnities
o Voluntary contracts of disposition: transfer, sale and assignment of shares
 Free-transferability of SOS
 SOS are personal properties and it is an inherent right to transfer the same
 When shares are not fully paid:
 Sec 63 of corpo code: no SOS against which the corporation holds any unpaid claim shall be transferrable in the books of the
corporation. A corporation may therefore refuse to acknowledge and register a sale or assignment of shares which are not fully
paid, and may continue to hold the original subscriber liable on the payment of the subscription.
 Sale of portion of not fully-paid shares
o SEC: SH who has not paid full amount cannot transfer part of his subscriptions.
 Sale of entire not fully paid shares
o Entire subscription may be transferred to a single transferee.
o Requirement: secure consent of corporation (rules on novation governs)
 When shares are fully paid and covered by COS
 Sec 63 of corpo code: SOS so issued with covering COS are personal property and may be transferred by delivery of COS
  No transfer is valid, except as between the parties, until transfer is recorded in the books of the corporation showing the names
of the parties to the transaction
 Non-exclusivity of Sec 63 on modes of registration
 Sec 63 governs only sale or assignment of SOS covered by COS
 Filing of deeds of assignment with SEC
 SEC instituted a system for filing of Deeds of Assignment covering SOS
o Entered in and kept by corporate and legal department of SEC affixing official seal
 Remedy if registration of transfer is refused
 one who has established his purchase of SOS should be entitled to registration of his ownership
 before transferee may ask for issuance of stock certificates, he must first cause the registration of the transfer and enjoy the status
of a SH. Corporate secretary may not be compelled to register transfers of shares merely on indorsement of stock certificates.
 Prescription on cause of action
 Prescription period would only begin upon demand for registration is made and not at time of assignment of certificate
 Claims for damages
 In case of refusal of publicly-listed corporation to issue cOS, claims for damages pertaining to value that the shares could have sold
at the stock market is considered speculative damage and cannot be recovered
o Involuntary dealings with SOS
 Pledge, mortgage and other encumbrances
 Sec 55 of corpo code: regulates manner of voting on pledged or mortgaged shares
 SEC restrictions on right of SH to encumber shares:
o Restriction must appear in AOI, BLs and COS
o Shall not be more onerous than granting the existing SHs the option to purchase shares of transferring SH
o Within reasonable terms, conditions or period stated therein.
 When shares not covered by certificates
 Chattel mortgages on SOS are valid as between the parties and could be enforced as against third parties
with notice. There is difficulty as to how to pin down the notice of chattel mortgage over third parties
 Sec 72 of corpo code: holders of subscribed shares not fully paid which are not delinquent shall have all
rights of a SH
 When shares covered by stock certificate
 Provisions do not require entry except of transfers of shares of stock in order that such transfer may be
valid as against third persons.
 When it comes to mortgages and other encumbrances covering SOSs which are not complete and absolute
alienation of dominion and ownership thereof, its entry and notation upon books of corporation is not
necessary requisite to its validity.
 Mortgage contracts versus attachments and levies
  Rule 57 sec 7 of ROC: SOS or interest in stock shall be attached by leaving with the president or managing agent a copy of writ and
notice stating that the stock or interest of party against whom the attachment is issued is attached in pursuance to such writ.
 Attaching of levying creditors versus other creditors
 Placing priority in stock and transfer book as determining factor seems to be the good rule-of-thumb since the only objective basis
by which third parties who deal with SOS of a judgment debtor would be to verify the stock and transfer book to determine
whether he is still the rightful owner.
 Voluntary buyer/assignee versus attaching creditor
 Attachment of SOS are not included in term transfer in Sec 63 of Corporation Code, since only absolute transfer of shares of stocks
are required to be recorded in the corporation’s stock and transfer book in order to have the force and effect as against third
persons, since an attachment does not constitute an absolute conveyance of property by is primarily used as a means to seize the
debtor’s property in order to secure the debt or claim of the creditor in the event the judgment is rendered.
 Summary of current doctrinal rulings on SOSs
o A mortgage or pledge of shares would constitute a valid mortgage even without registration with register of deeds but subject to prior attachment
or levy or shares
o Outside of physical transfer or delivery of COS, chattel mortgage over SOS would be valid on third parties if mortgage was registered with register
of deeds or registers of deeds.
o A writ of attachment/execution against SOS of judgment debtor would be valid and binding on shares and against third parties the moment there
is a proper service of writ to proper officer (rule 57)
o In any of the three cases above, pledge, mortgage, attachment or levy of SOS would be valid and binding against the whole upon their constitution
or completion of process
o As between two contending judgment creditors, the first to have the writ served upon proper officer of corporation would be preferred
o As between contending pledgee/mortgagee and attaching creditor, if registration requirement happened first in point of time prior to service of
writ to proper corporate officer, pledge or mortgage shall be preferred. If service of write to officer before registration of pledge or mortgage, the
attaching creditor would be preferred.
o As between pledge/mortgage duly constituted and buyer or assignee of shares, if pledge or mortgage was registered ahead of registration of sale
or assignment in stock and transfer book, the pledge or mortgage would be preferred.
o As between attaching/levying creditor where there has been proper service of writ to proper corporate officer and buyer or assignee of shares, if
write was properly served upon corporate office ahead of registration of sale or assignment in stock and transfer book, attachment or levy would
be preferred.
Sec 72

Sec 60

Sec 63

Sec 62

65

66

67

68

69

70

71

72
CORPORATE CAPITAL STRUCTURE

 Contrasting equity investments from corporate debts

o Investments – an expenditure to acquire property or other assets in order to produce revenue.
o To invest – to purchase securities of a more or less permanent nature, or to place money or property in business ventures or real estate, or so that
it may produce a revenue or income
Equity investment Debt placement
One who makes E.I. in a corporation expects that his returns shall be
tied up with the success or loss of the operations of the corporation
Generally non-withdrawable for so long as the corporation has not Person who extends a loan or debt to a corporation only looks at the
been dissolved financial condition and operations of the corporation as a means of
gauging the ability of the corporation to pay-back the loan at the
specified period.
He participates in all income earned by the venture Creditor can only demand the stipulated fixed return of his investment
They can only receive a return of their investment only from the Corporate venture must in case of insolvency, devote and prefer all
remaining assets of the venture after payment of all liabilities to corporate assets towards payment of its creditors
creditors
 Power to issue shares
o Stock corporations have the express power to issue or sell stocks.
o Such power is lodged in the BOD and no stockholders’ meeting is required to consider it.
 Limitations on power to issue shares
o SOSs cannot be issued for a consideration less than the par value or issued price thereof.
 Exception: TREASURY SHARES
 Capital Stock
o Sec 137 of Corpo Code: Outstanding Capital Stock - total shares of stock issued to subscribers or stockholders whether or not fully or partially paid
o Authorized capital stock – amount fixed in the AOI that may be subscribed and paid by stockholders of corporation
 Paid-in Capital – subscribed shares out of ACS paid in which forms part of the legal capital of the corporation which cannot be returned
to the stockholders unless otherwise allowed by law
 Subscription receivables – portion which is to be paid on the subscriptions
o Overissuance of shares beyond the ACS: both increase in capital stock and certificate of stocks issued shall be VOID.
o Meaning of book value of shares: the amount that would be paid on each share to retiring stockholders or in the case the company is liquidated.
 Classification of shares
o Policies
 1st: Sec 6 of corpo code: it recognizes the freedom and power of a corporation to classify shares
 However, no share may be deprived of voting rights except those classified and issued as preferred or redeemable shares
 2 : presumption of equality of rights and features of shares when nothing is expressly provided to the contrary
nd
  3rd: voting rights for all types of shares on matters it considers as fundamental measures
 If AOI provides for non-voting shares, such shareholders shall be entitled to vote on the following matters:
o Amendment of AOI
o Adoption of BL
o Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of corporate property
o Incurring, creating, or increasing bonded indebtedness
o Increase or decrease of capital stock
o Investment of corporate funds in another corporation or business
o Merger of consolidation of the corporation with another corporation or other corporation
o Dissolution of the corporation
o Common shares – represents the greatest proportion of the corporation’s capital structure; a common stock to represent the residual ownership
interest in the corporation
o Preferred shares – stock which entitles the holder thereof to certain preferences over the holders of common stock designed to induce persons
to subscribe for shares of a corporation
 Entitlement to preferences: preference to preferred shares must be construed in accordance with corporate law doctrines and cannot be
absolute
 Cumulative and non-cumulative preferred shares
 Cumulative P.S. – entitle the holders thereof to payment not only of current dividends but also of back dividends not previously
paid, when and if dividends are declared to the extent agreed upon before holders of common shares are paid
 Non-cumulative – entitle the holders merely the payment of current dividends that are paid from unrestricted retained earnings
and lose whatever agreed rate of return in any year where there are no unrestricted retained earnings.
 Participating and non-participating preferred shares
 Participating – entitles the SH to participate with the holders of common shares in the retained earnings after the amount of
stipulated dividend has been paid to the preferred shares
 Non-participating – entitles SH to only to the stipulated preferred dividends and no more.
o Redeemable shares
 Sec 8 of corpo code: redeemable shares may be issued by the corporation when expressly so provided in the AOI
 They may be purchased or taken up by the corporation upon the expiration of a fixed period regardless of existence of unrestricted
retained earnings
 Redemption – repurchase, reacquisition of stock by corporation which issued the stock in exchange for property, whether or not the
acquired stock is cancelled, retired or held in the treasury.
 SEC: redeemable shares are SOS issued by corporation which the corporation can purchase or take up from their holders as expressly
provided in AOI and certificate of stocks representing said shares
 Taxability
o Not subject to tax: those redeemed shares coming from those issued upon establishment of corporation or from initial
capital investment
 o Taxable: if redemption is from previously declared stock dividends, the proceeds of the redemption constitute additional
wealth
o Founders’ shares: sec 7 of corpo code: classified as such in AOI which may be given certain rights and privileges not enjoyed by owners of other
stocks, provided that 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
5 years from date of approval of SEC
 What constitutes founders’ shares:
 Issued basically to founders or initial organizers of corporation
o Nomenclature (designated)
o Certain exclusive rights granted to such shares
 Indication from interim batasang pambansa proceedings
 Effect when exclusivity period expires: the exclusive right shall be transferred to the common SHs as if there had been no founders’ rights.
o No par value shares: Sec 6 of corpo code – SOSs issued without par value shall be deemed fully paid and non-assessable and the holder of such
share shall not be liable to the corporation or to its creditors in respect thereto
o Treasury shares: Sec 9 of corpo code – treasury shares are SOS 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
 Rule on treasury shares for banks: no bank shall purchase or acquire shares of its own capital stock or accept its own shares as a security
for a loan, except when authorized by the monetary board
o Escrow shares – those held by third persons to be released only upon the performance of a condition or the happening of a certain event contained
in the agreement
o Hybrid securities
 Equity securities – represents ownership interest in corporation and include both common and preferred stock
 Debt securities – do not represent ownership interest in corporation but create a debtor-creditor relationship between the corporation
and the bondholder
o Trust fund doctrine: a corporate theory developed in US which seeks to protect interest of corporate creditors and is deemed to have implanted
in our jurisdiction with the adoption of the corporation law
 History: wood v drummer
 Capital stock, especially its unpaid subscription is a trust fund for the benefit of the general creditors of the corporation
 Application in Philippine setting:
 Where there has been a distribution or an attempt to distribute corporate properties, or a return of the capital or portion thereof
to stockholders without providing payments of creditors
 Where it had released the subscribers to the capital stock from their subscription without valuable consideration
 Where it has transferred the corporate property in fraud of its creditors
 Where the corporation is insolvent
 Fraud theory: the actionable wrong is the fraud or misrepresentation by directors, officers or stockholder in falsely representing that the
capital stock has been fully paid or covered by binding subscription contracts
 Coverage of trust fund theory:
  Capital impairment rule – fixed capital must be preserved for protecting the claims of creditors so that dividend distributions to
SHs should be limited to profits earned or accumulated by the corporation
 Profit rule
 Concept of capital stock – the protective reach of the trust fund doctrine in a corporation not in a state of insolvency would only
be up to the extent of the capital stock of the corporation.
 Advances in payment of future subscription: funds received by corporation to cover subscription payments on increase in ACS
prior to approval thereof of the SEC would not be covered within the ambits of the Trust fund doctrine
 Observation: trust fund doctrine engrafted and strengthened in our jurisdiction
 Dividends – sec 43 of corpo code
o Concept of surplus profits and retained earnings
 Sec 43 of corpo code: dividends can only be declared out of unrestricted retained earnings
o Treatment of paid-in surplus: when par value shares are issued by a corporation and a premium is paid by the subscriber over the par, a paid-in
surplus results and recorded as such in the books of the corporation
 Philippine jurisdiction does not allow paid-in surplus to be declared as dividends either as cash or property in view of the provision of
section 43 of corpo code
 Consideration received for no-par value shares
 Sec 6 of corpo code: the entire consideration received by corporation for a no-par value shares shall be treated as capital and shall
not be available for distribution as dividends
o Discretion of board to declare dividends
 General rule: within the business judgment of BOD of a stock corporation
 Retention of excess profits: sec 43 of corpo code – stock corporations are prohibited from retaining surplus profits in excess of 100% of
their paid-in capital stock except:
 When justified by definite corporation expansion projects approved by BOD
 When corporation is prohibited under any loan agreement
 When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation
(reservation for probable contingencies)
 SEC rules governing the distribution of excess profits
 Penalty: 1/10 of 1% of the excess amount over the paid-in capital but shall not be less than 10k nor more than 200k
o Concept of dividends – portion of profits of a corporation set aside, declared and ordered by the directors to be paid ratably to the SHs on demand
or at fixed time
 Dividends vs profits: profits cover a larger meaning then dividends and includes benefits of any kinds, the excess of value over cost,
acquisition beyond expenditures, gain or advance
 Stock dividends vs cash dividend: the latter may be declared by BOD under a formal resolution and does not requires ratification of SHs
but stock dividends requires ratification of not less than 2/3 of OCS
 Property dividends:
  Within 30 days from declaration of property dividends, a notice must be sent by corporation showing the nature of property
declared as dividends, their individual book values and market values
 Properly should no longer be used in the operation of the business
 Issuance shall not result to an inequitable distribution of property to SHs
 Prevailing market value of property shall be considered
 No dividends in form of lands shall be issued to a foreign individual or entity not qualified to hold land
 No distribution without approval of SEC
o Liabilities for illegally received dividends: SHs who received can be held liable to refund them to the corporation; if directors acted in good faith,
they are not liable
o Dividends declaration for DOCCs
 GOCCs shall declare and remit at least 50% of their annual net earnings to the national government
 Exempted: those which administer real or personal properties such as GSIS, HDMF, ECC, OWWA
o Liquidating dividends: a corporation cannot make a valid contract to pay dividends other than from retained earning s or profits and an agreement
to pay such dividends out of capital is unlawful and void
 Acquisition by corporation of its own shares: sec 41 of corpo code
o Sec 41: corporation may acquire its own shares for legitimate corporate purpose
 Eliminate fractional shares
 Collect or compromise an indebtedness to the corporation arising out of unpaid subscription
 Pay dissenting or withdrawing stockholders
 Quasi-reorganization and other special rules on shares of stocks
o Methods:
 Use of reappraisal surplus of a corporation’s assets to wipe out its deficit or negative retained earnings
 By reduction of corporation’s capital stock through amendment of AOI
o Use of Reappraisal value of assets
 Only companies which are financially in distress may be allowed to undergo quasi-reorganization
 Company must have substantial increment in the market value of its fixed assets as appraised by a reputable licensed appraiser which is
adequate to absorb its accumulated past losses
 Appraisal increment shall be limited to real properties
 Appraisal increment of fixed assets undergoing repair shall not be included
 Company shall present a project study on its future operations to support its quasi-reorganization
 Remaining appraisal surplus set up in books will not be used to wipe out future losses without approval of SEC
 Retained earnings shall be restricted to the extent of the deficit wiped out and not recovered by accumulated depreciation
 After approval of SEC, company shall disclose the mechanics, purpose and effect of such quasi-reorganization on the financial condition
of the company
o Reduction of capital stock: sec 38 of corpo code: allows reduction of capital stocks but shall insure protection of corporate creditors
o Debt-to-equity conversions: corporation may convert existing liabilities into equity accounts with the consent of the corporate creditors.
 Special treatments relating to shares
o Warrants – type of security which entitles the holder the right to subscribe to the unissued capital stock of a corporation or to purchase issued
shares in the future evidenced by a warrant certificate
 Types of issuers of warrants:
 duly registered domestic corporations which issues of proposes to issue subscription warrants
 Person or group of persons who issues or proposes to issue covered warrants
 Types of warrants
 Subscription warrants – entitles holders the right to subscribe to a pre-determined number of shares out of unissued capital stock
of the issuer
 Covered warrant – entitles holder thereof the right to purchase from issuer a pre-determined number of existing issued shared
 Types of warrant certificates
 Detachable warrant – may be sold, transferred or assigned by a warrantholder
 Non-detachable warrant – cannot be sold, transferred or assigned by the warrantholder
 Warrantholder shall exercise right within period not less than 1 year and not more than 5 years from date of issue of warrants
o Stock options – privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a specified period
and under the terms and conditions of the grant, exercisable by the grantee at any time within the period granted
o Stock splits – each of issued and outstanding shares is broken up into a greater number of shares, each representing a proportionately smaller
interest in the corporation
o Stock consolidation – new shares are issued in replacement of old shares with a higher par or issued value without affecting the total value of the
issued shares
o Stock reclassification and exchange
Reclassification Exchange
Does not always bring any substantial alteration in the subscriber’s Effects a shifting of a balance of stock features
proportional interest
CORPORATE ACQUISITIONS, MERGERS AND CONSOLIDATIONS

 Acquisition, sales, and transfer are contractual transactions governed by contract law and law on sales
o Three levels:
 Assets only (exception 1 &2)
 Business-enterprise level
 Equity level
o General rules: where a corporation sells or transfers its assets to another corporation, the purchaser does not becomes liable for the liabilities
except:
 Where the purchaser expressly or impliedly agrees to assume such debts
 Where purchaser acted in collusion with the transferring corporation to fraud of its creditors
 Where the purchasing corporation merely continues the business of the transferring corporation
 Where the transaction amounts to a consolidation or merger of the corporation
o Comparing with contract law
 Principle of relativity
 Exceptions:
 1st: one who is not a party becomes a guarantor and voluntarily binds himself to the creditor
 2nd: creditors are protected in cases contracts intended to defraud them
o Rescissible contracts – those undertaken in fraud of creditors
o Those who acquire in bad faith the things alienated in fraud of creditors shall indemnify the latter for damages suffered
by them
 3 : transferees by succession may be liable (though not accepted principle in corpo law)
rd

 4th: succession rules for mergers and consolidation

o Rules on liability succession in the three levels of corporate acquisitions and transfers
 Assets-only transfer – transferee shall not be liable for the liabilities of transferor except when there is express or implied assumption of
debts or undertaken in fraud of creditor
 business enterprise transfer – transferee shall be liable for all liabilities
 equity transfer – transferee shall not be liable except when there is express of implied assumption of debts
 Assets-only transfer
o Essence and motivation: Purchaser is interested in raw assets and properties of business and not in the juridical entity of the corporate owner of
assets
o Rationale for non-assumption of liabilities: there is no contractual privity existing between transferee and transferor’s creditors
o Coverage of bulk sales law: if bulk sale would affect transferee that if sale has not complied with requirements of law, sale is fraudulent and void
o Special rules on corporate dissolution: when another corporation takes over assets of another corporation which is dissolved, the succeeding
corporation is liable for the claims against the dissolved corporation
 Business enterprise transfers
 o Nature: interest is to obtain the earning capability of the venture but not interested in obtaining the juridical entity that owns the business
enterprise
o Corporate law recognition of BET: there are no provisions in Corpo code that recognize the BET (separate juridical entity)
o Statement of doctrine and rationale: transferee is liable for liabilities of his transferor arising from business enterprise to protect creditors
o Application: related to piercing of veil doctrine
o Free and harmless clause: stipulation that transferee shall not be liable for any debts arising from business which were contracted or accrued prior
to the time of transfer (valid stipulation)
 Equity transfers
o Constitutes the entirety of business enterprise as it is owned and operated by the corporation
o Rationale: transferee is not liable for the liabilities of transferor except when there is express and implied assumption of debts (doctrine of separate
juridical personality)
o Application of doctrine
 Mergers and consolidations
o Power to merge or consolidate: not inherent power and must be granted by law
o Comparison of merger and consolidation
Consolidation Merger
Union of two or more existing corporations to form a new one called a Union where one or more existing corporation are absorbed by
consolidate corporation another corporation which survives and continues the combined
business
o Procedures in merger or consolidation
 Sec 76 of corpo code: empowers BODT to merge or consolidate and to approve a plan of merger or consolidation
 Name of corporations
 Terms of merger or consolidation and mode of carrying the same into effect
 A statement of changes in AOI
 Such other provision with respect to merger
 SHs’ or members’ approval: 2/3 of OCS or members
 Right of appraisal of dissenting SH
 Amendment of plan or merger or consolidation: approved by majority of BODT and ratification of 2/3 OCS or members
 Articles of merger or consolidation:
 Plan of merger or consolidation
 In Stock corporations: number of shares outstanding, in NSC, number of members
 Number of shares or members voting for or against
 Requirements on submission of financial statements: Long form audit for surviving corporation is required is it is insolvent.
 List of creditors of absorbed and surviving corporation
 Consent of creditors of insolvent corporation
 List of SHs of constituent corporation
 Affidavit of publication
  Company data maintenance form
 Approval by SEC: submitted in quadruplicate for approval
 For banks, trust companies etc, they need recommendation from appropriate government agency
o Effects of merger or consolidation:
 sec 80 of corpo code:
 Constituent corporation becomes a single corporation
o Merger: surviving corporation
o Consolidation: consolidated corporation
 Separate existence of constituent corporation shall cease
 Surviving or consolidate corporation shall possess all rights, privileges, immunities and franchise of each of the constituent
corporations
 All property and receivables shall be transferred to surviving or consolidated corporation
 Surviving or consolidated corporation shall be responsible for liabilities and obligations of each of constituent corporations
 Any claim, action, or proceeding pending may be prosecuted by or against surviving or consolidated corporation
 Neither rights of creditors nor lien upon property shall be impaired by such merger or consolidation
 Salient advantages:
 To achieve continuous flow of juridical personalities and business enterprises
 Allows corporate planners to achieve certain ends not available to other forms of transfer or acquisition
 Transfers of assets or business enterprise are subject to taxable gains tax : no gain or loss shall be recognized in pursuance of a
plan or merger
 Contrary ruling for BOI incentives:
o De facto mergers or consolidations – recognized in Philippines
 De facto merger under corpo code: it can be pursued by one corporation acquiring all or substantially all of properties of another
corporation in exchange of SOS of the acquiring corporation
 Statutory provisions: Sec 42 of corpo code: investment of funds for non-primary purpose (2/3 ratification rule)
 Spin-offs: a department, division, or portions of corporate business enterprise is sold-off or assigned into a new corporation that will arise by the process
which may constitute it into a subsidiary of the original corporation
 Effects of transfer of employees
o Assets only transfers: transferee is not bound to retain the employees of the transferor since the former does not really step into the shoes of the
latter
o Business enterprise transfers: transferee should be bound to retain the services of the employees of the business that it has acquired.
 Employees have no equity claims on business enterprise: In labor claims, the transferee is not obligated to absorb the employment of the
existing employees in the acquired business enterprise
 Piercing doctrine application: if transfer is done with fraud or when it authorizes the application of the piercing doctrine to treat both
transferor and transferee as one.
 Need for a clear break in operations
o Equity transfers: employees remain with the corporate employer in exactly the same manner as before the equity transfer, and purchaser does
not assume personal liability to the employees.
o merger and consolidation: contractual rights of employees and existing collective bargaining agreement would have to be absorbed by surviving
or consolidated corporation
o spin-offs: employees spun-off to another corporation must constitute a new bargaining unit.
CORPORATE REHABILITATION, INSOLVENCY AND LIQUIDATION

 introduction
o Historical background
 1981 – organization, powers and jurisdiction of SEC were enhanced and streamlined (PD 902-A)
 Amendment included the power to pursue the management or rehabilitation of private corporations through the appointment of a
management committee or a rehabilitation receiver
 Extended its powers to quasi-judicial powers
 2000 – jurisdiction over corporate suspension of payments and rehabilitation proceedings were transferred from SEC to RTC special
commercial courts
 2008 – SC approved the amendments referring to interim rules on corporate rehabilitation which also included:
 Creditor-initiated rehabilitation
 Pre-negotiated rehabilitation
 Recognition of foreign proceedings
o Introduction to the FRIA of 2010
 Enacted on July 18, 2010
 FRIA – Financial Rehabilitation and Insolvency Act of 2010
 It provides for the following proceedings:
 Suspension of payments for individual debtors
 Rehabilitation proceedings for juridical debtors
o Court-supervised
o Pre-negotiated
o Out-of-court/ informal restructuring, loan work or rehabilitation plan for juridical entities
 Liquidation of insolvent juridical debtors
 Insolvency proceedings of individual debtors
o Two schools of thought on the state of pure corporate suspension of payment proceedings
 1st: petition filed on behalf of corporate debtor seeking merely a suspension of payments – RTC has jurisdiction – special commercial courts
 2nd: no suspension of payment filed by corporate debtor if outside the main proceedings for corporate rehabilitation – SEC has jurisdiction
o Designation of courts and promulgation of rules of procedures by supreme court: revisions by SC on old SC rules of procedure anticipated
 General provision governing all proceedings under FRIA
o FRIA proceedings in rem, summary and non-adversarial
 Coverage:
 All proceedings in rem in character; and
 Proceedings shall be conducted in summary (conducted without the legal formalities) and non-adversarial (working together not
as adversaries to reach best resolution)
 In rem nature of proceedings
  MWSS vs Daway: jurisdiction over those affected by proceedings is considered acquired upon publication of notice of
commencement of proceedings in newspaper of general circulation.
 Proceedings summary and non-adversarial in nature: rehabilitation cases must be resolved expeditiously for the benefit of all parties
concerned and the economy in general.
 Prohibited pleadings:
 MOD
 MBOP
 Petition for relief
 Motion for extension
 Motion for postponement
 3rd party complaint
 Intervention
 Motion to hear affirmative defenses
 Any pleading or motion which is similar to or of like affect as any of the foregoing
 Verification of motions and pleadings
 Any pleading, claim, motion etc, shall be supported by verified statements that the affiant has read the same and that the factual
allegations therein are true and correct of his personal knowledge or based on authentic records
 Orders and rulings immediately executory
 Any order under these rules are immediately executory
 A petition for review shall not stay the execution of the order unless restrained or enjoined by appellate court
 Penalties:
 Who are liable: director, officer or other employee of a debtor
 How do they become liable
o If having notice of commencement:
 Shall hide or conceal or cause to be destroyed or hidden any property belonging to debtor
 Hide, destroy, mutilate or falsify or cause to be hidden, destroyed, altered, mutilated etc any book, deed,
document, or writing relating thereto
 Make any payment of sale, assignment, transfer, or conveyance of any property of debtor with intent to defraud
creditors
o If he shall, having knowledge belief of any person having proved a false or fictitious claim against debtor
 Fails to disclose the same to the liquidator or receiver within 1 month
 Attempt to account for any of the debtors property by fictitious losses or expense
o If he shall knowingly violate a prohibition or knowingly fail to undertake an obligation established by this Act
o Coverage of FRIA
 Application to pending insolvency, suspension of payments and rehabilitation cases
  All petitions filed under FRIA shall take effect after it was filed; all other proceedings in insolvency, suspension of payment and
rehabilitation shall be pending
 Application to pending contracts: all contracts of debtor regardless of date of perfection shall be covered by FRIA
 Exclusion from the coverage of FRIA
 Banks and quasi-banks – those subject to conservatorship, receivership, liquidation proceedings
 Insurance companies – those subject of insolvency proceedings
 Pre-need companies (provides for performance of future services of the payment of future monetary considerations at the time
of actual needs)
 National and local government agencies or units
 Other government financial institutions other than banks and GOCCs unless otherwise specified by their charters
o Substantive and procedural consolidation rules under FRIA
 General rule: assets and liabilities of a debtor may not be commingled or aggregated with those of another
 Exceptions:
 There was commingling in fact of assets and liabilities of the debtor and the related enterprise prior to the commencement of
proceedings
 Debtor and related enterprise have common creditors
 Related enterprise voluntarily accedes to join the debtor
 Consolidation of assets and liabilities is beneficial to all concerned and promoted objectives of rehabilitation
o Specific rules applicable to all FRIA proceedings
 Decision of creditors made in accordance to corpo code
 Creditors representatives may be designated by creditors by filing notice with Court and serving a copy on receiver or liquidator
 Directors and officers of a debtor shall be liable for double the value of property sold, embezzled or disposed or the amount of transaction,
if they commit the following acts:
 Dispose or caused to be disposed property of debtor in fraud of creditors or disadvantageous to debtor or creditor
 Conceal or authorize or approve concealment from creditors, or embezzles or misappropriates any property of debtor
 Authorization to exchange debt for equity
 Ownership must be subject to ownership limits
 Any equity investment or interest shall be disposed by bank within period of 5 years or as may be prescribed by the Monetary
Board
 Corporate Rehabilitation
o Jurisprudential definition and significance of corporate rehabilitation
 Corporate rehabilitation – process to try to conserve and administer the corporation’s assets in the hope that it may eventually be able to
return from financial stress to solvency
o Important issues pre-FRIA period
  Old SC rules of procedure: rehabilitation is the restoration of debtor to a position of successful operation and solvency, it is shown that its
continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the
plan, more if the corporation continues as a going concern than if is immediately liquidated.
 Rationale:
o Issue of being rehabilitable
o Properly addressing constitutional prohibition against impairment of contractual obligations without due process, and the
taking of property without just compensation
 Jurisdictional requirement of debtor being rehabilitable:
o Both the petition and the proposed rehabilitation plan must allege and show that petitioner debtor must be of such a
condition that if demonstrably rehabilitable or can be restored to sound financial standing
 Petition dismissed outright if enterprise rehabilitation is not viable
o Constitutional protection to property rights
 There must be clear showing that the need to rehabilitate the company should not be at the expense of destroying
the proprietary rights of the creditors
 If rehabilitable but not able to pay claims of creditors, then it should be dismissed as well as it is
detrimental to the rights of the creditors
o Definition, scope, and coverage of rehabilitation under FRIA
 FRIA definition: restoration of debtor to a condition of successful operation and solvency, if it is shown that its
continuance of operation is economically feasible and its creditors can recover by way of the present value of
payments projected in the plan, more if the debtor continues as a going concern that if it is immediately liquidated.
 Bridging the gap under the Pre-FRIA set-up
o Old SC rules of procedure and interim rules govern the procedural basis of rehabilitation proceedings, substantive law
basis for such is PD 902-A
o Now: FRIA governs not only the substantive law but also the specific rules on areas of contention by rehabilitation court
 Types of rehabilitation proceedings under FRIA
o Court supervised
o Pre-negotiated
o Out-of court/ informal restructuring agreements or rehabilitation plans
o Proceedings ancillary to other insolvency or rehabilitation proceedings covering:
 Banks and other financial institution under rehabilitation receveriship
 Cross-border insolvency proceedings
 Court-supervised rehabilitation
o 2 types:
 Voluntary proceedings (debtor-initiated proceedings)
 Involuntary proceedings (creditor-initiated proceedings)
o Initiation of proceedings
 Voluntary proceedings – by filing a petition for rehabilitation with the proper court that complies with the following requirements
 Petition approved by majority of BODT and ratified by 2/3 of the outstanding capital stock or 2/3 of members
 Petition shall be verified includes:
o Identification of debtor, principal activities and its addresses
o Statement of fact and cause of debtor’s insolvency or inability to pay it obligations
o Specific relief sought under FRIA
o Grounds upon which petition is based
o Other info that may be required under FRIA
o Schedule of debtor’s debts and liabilities including a list of creditors with their addresses, amounts of claims and
collaterals, or securities
o An inventory of all its assets including receivables and claims against 3rd parties
o A rehabilitation plan
o Name of at least 3 nominees to the position of rehabilitation receiver
o Other documents required
 Compliance with corporate requirements
o First duty of court is sufficiency of form and substance of the petition filed.
 Joint filing by a group of companies
o Under FRIA, group of companies can jointly file a petition for rehabilitation provided that:
 When one or more of its members foresee the impossibility of meeting debts when they fall due
 Financial distress would likely adversely affect the financial condition and operations of the other members of the
group or the participation of the other members of the group.
o Group of debtors:
 Corporations financially related to one another as parent corporations, affiliates and subsidiaries
 Partnerships owned more than 50% by same person
 Single proprietorships owned by same person
o Parent company: corporation which has control over another corporation either directly or indirectly through one or more
intermediaries
o Subsidiary corporation: corporation more than 50% of the voting stock of which is owned or controlled directly or
indirectly through one or more intermediaries by another corporation
o Affiliate corporation: corporation directly or indirectly, through one or more intermediaries, is controlled or is under the
common control of another corporation
o Control: power of a parent corporation to direct or govern the financial and operating policies of an enterprise so as to
obtain benefits from its activities
 Exists when parents owns directly or indirectly, through subsidiaries or affiliates, more than ½ of the voting power
of an enterprise unless it can clearly demonstrate that such ownership does not constitute control.
 ½ or less of voting power of an enterprise, there is power:
 Over more than ½ of voting rights by virtue of an agreement with investors
 To direct or govern the financial and operating policies of the enterprise under a statute or an agreement
  To appoint or remove majority of members of the BODT or equivalent governing body
 To cast the majority votes at meeting of BODT or equivalent governing bodies
 Inclusion of corporate officers and other parties as co-petitioners
o Old Rules: SEC has jurisdiction over corporation and their assets and not the officers, employees
o SEC only had limited jurisdiction to cover only corporations, partnerships and associations; it had no power to assume
legal jurisdiction over individuals, such as officers of petitioner corporate debtors
o Under FRIA: there is still prohibition but it does not bar creditors or third parties to file actions against directors and officers
acting in their personal capacities
o Involuntary proceedings
 Action on petition
 When petition sufficient: Court shall, within 5 working days from filing of petition, issue a commencement order if found to be
sufficient in form and substance
 When petition in insufficient: Court shall give petitioners reasonable period of time to amend or supplement petition or to submit
documents as necessary
o 5 day period shall be reckoned from date of filing of the amended or supplemental petitions or submission of additional
documents
 Commencement of proceedings and issuance of a commencement order
 Identify debtor, principal business or activity and principal place of business
 Summarize grounds for initiating proceedings
 State relief sought under FRIA
 State legal effects of commencement order
 Declare the debtor is under rehabilitation
 Direct publication of commencement order in a newspaper of general circulation once a week for at least 2 consecutive weeks
 If petitioner is debtor direct the service by personal delivery of a copy of petition to each creditor holding at least 10% of total
liabilities of the debtor
 Appoint a rehabilitation receiver who may or may not from among the nominees of petitioners and who shall exercise such powers
and duties defined
 Summarize requirements and deadlines for creditors to establish their claims against the debtor and direct all creditors to their
claims with the court at least 5 days before the initial hearing
 Direct BIR to file and serve the debtor its comments on or opposition to the petitions
 Prohibit debtor’s suppliers of goods or services from withholding the supply of goods and services in the ordinary course of
business for as long as the debtor makes payments for the services or goods supplied after issuance of commencement order
 Authorize payment of administrative expenses as they become due
 Set the case for initial hearing (not more than 40 days from date of filing of petition)
 Make available copies of petition and rehabilitation plan
 Indicate location at which documents regarding the debtor and the proceedings under FRIA may be reviewed and copied
  State that any creditor or debtor who is not a petitioner may submit the name or nominate any other qualified person to the
position of rehabilitation receiver at least 5 days before initial hearing
 Include the stay or suspension order
o Effects of the commencement order
 Stay or suspension order
 Suspend all actions or proceedings for the enforcement of claims against debtor
 Suspend all actions to enforce any judgment, attachment, or other provisional remedies against debtor
 Prohibit debtor from selling, encumbering, transferring or disposing any of its properties except in the ordinary course of business
 Prohibit debtor from making any payments of its liabilities outstanding as of the commencement date except as may be provided
therein
o Ordinary course of business – transactions in pursuit of individual debtor’s or debtor’s business operations prior to
rehabilitation or insolvency proceedings and on ordinary business terms
o Equality in equity rule – treats all creditor equally bound by the suspensive effect of the stay order
 Other effects
 Vest the rehabilitation court with all powers and functions provided for in FRIA
 Prohibit or otherwise serve as the legal basis rendering null and void the results of any extrajudicial activity
 Serve as legal basis for rendering null and void any setoff after commencement date of any debt owed to the debtor by any of the
debtor’s creditors
 Renders it null and void the perfection of any lien against the debtor’s property after the commencement date
 Consolidate the resolution of all legal proceedings by and against the debtor to the court (except when debtor was the one
initiating the suit in other court)
 Effects of commencement order on LGUS and GFIs
 Waiver of taxes and fees
 Application of stay or suspension order to GFIs shall apply notwithstanding provisions in their charters or other laws to the contrary
 Exception to the stay or suspension order
 To cases already pending appeal in SC as commencement date
 To cases pending or filed at a specialized court or quasi-judicial agency which is capable of resolving the claim more quickly, fairly
and efficiently than court
 To enforcement of claims against sureties and other persons solidarily liable with the debtor and 3 rd party or accommodation
mortgagors as well as issuers of letters of credit
 To any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and securities
entrusted to the latter in the ordinary course of latter’s business
 To the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin
agreement for the settlement of securities transactions
 The clearing and settlement of financial transactions through the facilities of a clearing agency or similar entities duly authorized,
registered and/or recognized by BSP, SEC and other regulatory agency
  Any criminal action against individual debtor or owner, partner, director or officer of a debtor shall not be affected by any
proceeding commenced under FRIA
 Effectivity and duration of commencement order
 Effective for the duration of the rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be
successfully rehabilitated.
o requirements in determining substantial likelihood:
 Proposed rehabilitation plan submitted in compliance with FRIA
 Sufficient monitoring by rehabilitation receivers of debtor’s business for protection of creditors
 Debtor has met with its creditors to the extent reasonably possible in attempts to reach consensus on the
proposed Rehab Plan
 The Rehab receiver submits a report stating that the underlying assumptions and the goals stated in the
petitioner’s rehab plan are realistic, reasonable or there is a substantial likelihood to a successful rehab because:
 There are sufficient assets to rehabilitate debtor
 There is sufficient cash flow to maintain operations of debtor
 Debtor’s SH, directors, officers have been acting in good faith with due diligence
 Petition is not a sham filing intended only to delay the enforcement of the rights of the creditor’s or of
any group of creditors
 Debtor would likely be able to pursue a viable Rehab plan
 The petition, rehab plan and attachments do not contain any material false or misleading statement
 If petitioner is debtor, it has met with its creditors representing at least ¾ of its total obligations to the extent
reasonably possible and made a good faith effort to reach a consensus on the proposed rehab plan. If creditor,
petitioner should have met with debtor and made a good faith effort to reach a consensus on proposed rehab
plan
 Debtor has not committed acts of misrepresentation or fraud to its creditors
o Pre-FRIA issue on duration of automatic stay
 Old rules: stay order effective from date of issuance until approval of rehab plan or dismissal of petition
 Old rules: dismissed if no rehab plan is approved by court upon lapse of 180 days from date of initial hearing (may
be extended by not more than 18 months from date of filing)
o Suspensive effects ought not to impair property rights of creditors
 Cram down powers of rehab court does not apply to future operations or implementations of standing contracts
of corporate debtor with various parties without the consent of the latter
o Rationale of automatic stay and stay order
 To enable management committee or rehabilitation receiver to effectively exercise its/his powers free from any
judicial or extrajudicial interference that might unduly hinder or prevent the rescue of the debtor company
 To prevent creditor from obtaining an advantage or preference over another and to protect and preserve the
rights of party litigants as well as the interests of investing public or creditor.
o Claims covered by stay order under FRIA
  Pre-FRIA ruling on covered claims
 Refers only to debts or demands of a pecuniary nature
 Under FRIA
 All claims or demands of whatever nature or character against the debtor or its property whether the
money or otherwise, liquidated or unliquidated, etc, but not limited to:
o All claims of government
o Claims against directors or officers of the debtor arising from acts done in the discharge of their
functions falling within the scope of their authority
 Issues pertaining to guarantors and sureties and claims against corporate officers
 The use of phrase meant to ensure that the controlling principle is “not solidarily liable with debtor” when
it refers to guarantors and sureties
 When a co-debtor is merely jointly liable to the obligation of the corporate debtor as the principal obligor,
then such co-debtor would be entitled to the benefit of excussion (guarantor cannot be compelled to pay
the creditor unless the latter has exhausted all the property of the debtor and has resorted to all the legal
remedies against the debtor)
o Secured creditors covered stay order
 Secured creditors exempt in insolvency proceedings from the suspensive effect of order issued by the court vs no
exemption provisions in secured creditors in corporate rehabilitation proceedings
o Administrative expenses
 Sec 16 or FRIA: issuance of commencement order shall authorize payment of administrative expenses as they
become due
 Costs associated with the general administration of an organization and include such items as utilities, rents,
salaries, postages, furniture and housekeeping charges
 Administrative expenses refer to:
 Incurred or arising from filing of petition
 Arising from the conduct of proceedings under FRIA
 Incurred in ordinary course of business of the debtor after the commencement date
 For payment of new obligations obtained after the commencement date to finance the rehabilitation of
debtor
 Incurred for fees of rehab receiver or liquidator and professionals engaged by them
 Those authorized or mandated by FRIA or SC
o Supplier’s credit
 There must be an existing supply agreement between corporate debtor and supplier and the terms of stay order
merely seeks to enforce the terms of an existing contract
o New loans and other credit accommodations
  Old rules: stay order shall contain provision directing payment of new loans or other forms of credit obtained for
rehab of debtor with court approval
 FRIA: allows rehab court and receiver more leeway being able to achieve a rehab program that would meet
concerns of new lenders of investors who may be willing to put in new money
o Suspensive effect on employee’s claims
 Stay order includes employee’s claims that had accrued prior to issuance of commencement order.
o Stay order does not cover criminal cases for bouncing checks
 Claim under BP 22 is not covered by the stay order
o Legal effect of violation of terms of stay order
 All agreements, disposition, transfer of property may be declared void by the court upon motion or motu propio.
o Action at the initial hearing
 Determine creditors who have made timely and proper filing of their notice of claim
 Hear and determine any objection to the qualifications of the appointment of the rehabilitation receiver and
appoint a new one if necessary
 Direct the creditors to comment on the petitions and the rehab plan and submit such to the court and the rehab
receiver of a period not more than 20 days
 Direct the rehab receiver to evaluate the financial condition of the debtor and to prepare and submit to the court
within 40 days from initial hearing the report
o Effect of failure to file notice of claim: shall not be entitled to participate in the rehab proceedings but shall be entitled to
receive distributions arising therefrom (if he belatedly filed notice of claim)
o Report of rehab receiver – not more than 40 days
 If debtor is insolvent and if so, the causes thereof and any unlawful or irregular acts committed
 Underlying assumptions, financial goals and procedures to accomplish such goals are realistic, feasible and
reasonable
 There is substantial likelihood for debtor to successfully be rehabilitated
 If petition should be dismissed
 Debtor should be dissolved and/or liquidated
o Giving due course to or dismissal or petition or conversion of proceedings – within 10 days from receipt or rehab report
 Give due course if
 Debtor is insolvent and
 There is substantial likelihood for debtor to be successfully rehabilitated
 Dismiss petition if
 Debtor is not insolvent
 Petition is a sham filing intended to delay
 Petition, rehab plan and attachments contain materially false or misleading statements
 Debtor committed acts of misrepresentations or fraud to its creditors
 Convert proceedings into one for liquidation of the debtor if
 o Debtor is insolvent
o There is no likelihood for debtor to be successfully rehabilitated
 If Petition given due course:
 Court shall direct rehab receiver to review, revise and/or recommend actions on rehab plan within period
not more than 90 days
o Rehabilitation receiver, management committee and creditors’ committee
 Historical significance of appointment of the rehab receiver or the management committee
 Under PD 902-A – appointment of management committee of rehab receiver laid at the heart of the effectivity of any corporate
rehab proceedings. This is the triggering point for the automatic stay, stay order or suspension of all claims against corporate
debtor. (equality in equity)
 Management stays-in-place – management continues to operate the company even under rehab proceedings
 Serious situation test – receivers may be appointed whenever necessary to preserve the rights of parties-litigants and the interest
of the investing public and sector; this is inherent in rehab proceedings
 RCBC: Suspensive effect of prohibition against foreclosure attaches as soon as petition for rehab is filed.
 RCBC ruling challenged by barotac sugar mills ruling – suspensive effect only after appointment of rehab receiver or management
committee. As a result, RCBC was reversed in a MR, and affirmed with the Barotac ruling
 FRIA provides clearly when the commencement order and stay order becomes effective
 Rehab proceedings shall commence upon issuance of the commencement order, which shall include a stay or suspension order
 Rehab receiver
o Any qualified natural or juridical person may serve as a rehab receiver
o If juridical entity, it must designate a natural person who possesses the qualifications and none of the disqualifications as
its representative. (they are solidarily liable)
 Qualifications
o A Filipino citizen, or a resident of the Philippines in 6 months immediately preceding his nomination
o Of good moral character and with acknowledged integrity, impartiality and independence
o Has a requisite knowledge of insolvency and other relevant commercial laws, rules and procedures as well as the relevant
training or experience that may be necessary to enable him to properly discharge the duties and obligations of a rehab
receiver
o Has no conflict of interest
 Such conflict of interest may be waived expressly or impliedly by a party who may be prejudiced thereby.
 Initial appointment of the rehab receiver
o Court may appoint not among nominees of petitioner.
o If debtor is a securities market participant, nominees from appropriate securities and investor protection fund shall be
prioritized
o If a qualified person or entity is nominated by more than 50% of secured creditors and general unsecured creditors, and
satisfactory evidence is submitted, court shall appoint creditor’s nominee as rehab receiver
 Powers, duties, and responsibilities of the rehab receiver
o Verify the accuracy of the actual allegations in the petition and its annexes
o Verify and correct the inventory of all assets of debtor and their valuation
o Verify and correct the schedule of debts and liabilities of debtor
o Evaluate validity, genuineness, and true amount of the claims against the debtor
o Take possession, custody, and control and to preserve value of all the property of the debtor
o Sue and recover amounts owed to and all properties pertaining to the debtor
o Have access to all information necessary
o Sue and recover all property or money of the debtor paid, transferred or disbursed in fraud of creditor
o Monitor the operations and the business of the debtor and to ensure no payments or transfers of property are made other
than in the ordinary course of business
o Engage the services of or to employ persons or entities to assist him in the discharge of his function
o Determine manner by which the debtor may be best rehabilitated, review/revise and or recommend action on rehab plan
and submit the same or a new one to court
o Implement rehab plan approved by court
o Assume and exercise the powers of management of debtor
o Exercise such other powers conferred to him
o Submit status report on rehab proceedings
 Rehab receiver shall not replace or take over the management
 Removal of the rehab receiver
o Rehab receiver may be removed at any time by the court either motu propio or upon motion of any creditor (holding more
than 50% of the total obligations of the debtor) on the following grounds:
 Incompetence, gross negligence, failure to perform or failure to exercise proper degree of care in performance of
his duties and powers
 Lack of competency
 Illegal acts or conduct
 Lack of qualification or presence of disqualification
 Conflict of interest arising after appointment
 Lack of independence that is detrimental to the SHs
 Compensation and terms of service
o During and after hearing: Entitled to reasonable fees and expenses from debtor according to terms approved by court
o Before such hearing: reasonable compensation based on quantum meruit
o All costs considered administrative expenses
 Oath and bond of rehab receiver
o Prior to entering upon to his powers, RR shall take an oath and file a bond (amount fixed by court)
 Vacancy
o Court shall direct debtor and creditors to submit names of nominees
 o Court may appoint nominees and any other qualified for the position
 Displacement of existing management by the RR or MC
o Court may appoint RR to assume powers of management of debtor under following circumstances:
 Danger of dissipation, loss, wastage or destruction of debtor’s assets and other properties
 Paralyzation of business operation of debtor
 Gross mismanagement of debtor or fraud or other wrongful conduct or gross or willful violation by existing
management of debtor etc
o In case a rehab receiver assumes power of management, court may:
 Require rehab receiver to post and additional bond
 Authorize him to engage the services or to employ persons or entities to assist him in the discharge of his
managerial functions
 Authorize commensurate increase in his compensation
 Management committee
o Roles
 Takes place of management and governing body of debtor and assume their rights and responsibilities
 They are not representative of SHs
o Principles in appointment of management committee
 Sec 6 of PD 902-a must be considered
 All circumstances and facts of the case
 Officer and tribunal has fairly weighed and appraised evidence submitted
 Minority SH to obtain interim management committee must show that:
 Corporate property is in danger of being diverted from purpose for which it has been organized
 There is a serious case where majority are violating the rights of minority or putting their interest in
imminent danger
o Summons may be validly served to management committee
o Qualifications of members of MC
 Set forth in procedural rules promulgated by SC
 Provisions common to RR and MC
o Employment of professionals: both may employ professionals to assist in the performance of their duties
o Conflict of interest
 There is conflict of interest one is so situated as to be materially influenced in the exercise of his judgment for or
against any party to the proceedings.
 He is a creditor, owner, partner or SH of debtor
 Engaged in LOB which competed with debtor
 Within 5 years from filing of petition, he was a director, officer, partner, owner employee of debtor or any
of creditor, or auditor or accountant of debtor
  Within 2 years, was an underwriter of the outstanding securities of debtor
 Related by consanguinity or affinity within 4th civil degree to creditor, owner of a sale-proprietorship
debtor, partners of a partnership-debotr or to any SH, director, officer, employee, or underwriter of a
corporation-debtor
 Has direct or indirect material interest in the debtor or creditors
o Immunity: both shall not be subject to any action, claim, demand in connection with acts done or omitted to be done by
them in good faith in connection with their exercise of powers and functions.
o Creditors’ committee
 Creditors may form a committee among themselves composed of representatives from each class of creditors:
 Secured creditors
 Unsecured creditors
 Trade creditors and suppliers
 Employees of debtor
 Election of creditors’ reps shall be attended by RR
 Role: assist the RR in communicating with creditors and shall be primary liaison between RR and creditors
o Determination of claims
 Registry of claims
 Within 20 days from assumption into office, RR shall establish preliminary registry of claims.
 The registry shall be available for public inspection and provide publication notice to the debtor, creditors and SHs on when or
where they may inspect it
 Opposition or challenge of claims
 Within 30 days from expiration of period, debtor, creditors, SHs and other interested parties may submit a challenge to claims to
the court, serving a certified copy on the RR and creditor holding the challenged claims
 Upon expiration of period, RR shall submit to court the registry of claims which shall include the undisputed claims that have not
been subject to challenge
 Appeal: decision of RR may be appealed to court
o Governance and management of corporate debtor
 Management
 Default is management-in-place
 All disbursements, payments or sale, disposal, assignment, transfer or encumbrance of property shall be subject to approval of RR
or the court
 Use or disposition of assets
 No funds/property of debtor shall be used or disposed except in ordinary course of business or necessary to finance the
administrative expenses of rehab proceedings
 Sale of assets
  Court may authorize sale of unencumbered property of debtor outside of ordinary course of business upon showing that property
is perishable, costly to maintain, susceptible to devaluation or otherwise in jeopardy
 Sale or disposal of encumbered property of debtor and assets of 3rd parties held by debtor
 Court may authorize sale, transfer, conveyance or disposal of encumbered property of debtor if with the consent of affected
owners of property or secured creditors, or after notice and hearing in case of encumbered property of debtor
o Sale or transfer, etc shall be necessary for continued operation of debtor’s business
o Debtor has made arrangement to provide a substitute lien or ownership right that provides an equal level of security for
counter-party’s claim or right
 Assets of debtor held by 3rd parties
 3rd persons shall not transfer, convey or otherwise dispose of the same to persons other than the debtor, unless upon approval of
RR. RR shall also:
o Demand surrender or transfer of possession of control of such property to RR
o Allow 3rd parties to retain possession or control
o Undertake other disposition of said property upon notice and hearing and approval of the court
 Rescission or nullity of sale, payment, transfer or conveyance of assets
 Rehab court may rescind or declare null and void any sale, etc. by the debtor or its agents which are not in the ordinary course of
business of debtor.
 Unencumbered property may be sold, etc. upon order of court after notice and hearing:
o If such are in interest of administering the debtor and facilitating the preparation and implementation of rehab plan
o In order to provide a substitute lien, mortgage, pledge of property
o Payment made to
 Administrative expenses
 Victim of quasi-delicts
 Repurchase of property of debtor that is auctioned off in a judicial or extrajudicial sale under FRIA
 Reclaim of property of debtor held pursuant to a possessory lien
 Assets subject to rapid obsolescence, depreciation and diminution of value
 Court shall after notice and hearing order the debtor or RR to take reasonable steps necessary to prevent the depreciation.
 If depreciation cannot be avoided and such depreciation is jeopardizing the security or property interest of secured creditor or
owner, the court shall
o Allow encumbered property to be foreclosed upon by the secured creditor according to the relevant agreement between
debtor and secured creditor
 Proceeds of sale will be distributed in accordance with order prescribed under rules of concurrence and
preference of credits
o Upon motion of or with consent of affected secured creditors or interest owner, order the conveyance of lien against or
ownership interest in substitute property of the debtor to the secured creditor
 Provided that creditors do not object of if property is not available
 o Order the conveyance to secured creditor or holder of an ownership interest of a lien on the residual funds from the sale
of encumbered property during the proceedings
o Allow sale or disposition of property
 Provided that such sale or disposition will maximize the value of property for the benefit of the secured creditor
and the debtor, and the proceeds of the sale will be distributed in accordance with the order prescribed under
the rules of concurrence and preference of creditors
 Post-commencement interest
 Rate and term of interest on secured and unsecured claims shall be determined in the approved rehab plan
 Treatment of contracts
 All valid and subsisting contracts of debtor with creditors and other 3rd parties shall continue in force subject to the following rules:
o Within 90 days from commencement of proceedings, the debtor shall notify counter-party of whether it is confirming the
particular contract
o Contracts not confirmed within the required deadline shall be considered terminated. All others claims shall be considered
pre-commencement claims against debtors
o Contractual obligation of debtor arising during these period and afterwards for confirmed contracts shall be considered
administrative expenses
o Avoidance proceedings
 Rescission or nullity of certain pre-commencement transaction
 All prior transactions by debtor may be rescinded or declared null and void in it was done in fraud of creditors or undue preference
of creditors
o Provides unreasonable inadequate consideration to debtor and is executed within 90 days prior to commencement date
o Involves accelerated payment of a claim to a creditor within 90 days to commencement date
o Provides security or additional security within 90…
o Creditor received or obtained benefit executed at time debtor was insolvent
o Intended to defeat, delay or hinder the ability of the creditor to collect claims
 Actions for rescission or nullity
 Action for rescission pursuant to an order
o RR or any creditor may initiate action to rescind or declare null and void any transaction under following rules:
 If RR does not consent to the action, creditor may seek leave of court to commence action
 If LOC is granted, RR shall assign and transfer to creditors all rights, etc
 Any benefit derived from proceeding belongs exclusively to creditor, if there is surplus, it belongs to the estate
 When initiated by RR
o Benefit belongs to the estate if RR signifies his readiness to institute proceeding
o Treatment of secured creditors
 No diminution of secured creditor rights
 No order shall diminish or impair the security or lien of a secured creditor, or the value of his lien or security except that his right
to enforce said security or lien may be suspended during the term of stay order
  Court may allow secured creditor to enforce his security or lien or foreclose property if said property is not necessary for the rehab
of debtor
 Secured creditor shall be admitted to the rehab proceedings if there is balance in his claim
 Lack of adequate protection
 Court may terminate continuance of suspension of payment upon showing that:
o Creditor does not have adequate protection over property securing its claim
 Debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the property insured
 Debtor fails or refuses to take commercially reasonable steps to maintain the property
 Property has depreciated to an extent that the creditor is under secured
o Value of the claim secured by a lien on property which is not necessary for rehab of debtor exceeds the fair value of the
said property
 Upon showing of lack of protection, court shall order debtor or RR to:
o Make arrangements to provide for the insurance or maintenance of property
o Make payments or otherwise provide additional or replacement security
o Administration of proceedings
 Rehab plan: plan by which the financial well-being and viability of an insolvent debtor can be restored using various means including but
not limited to debt forgiveness, debt rescheduling, reorganization, or quasi-reorganization, dacion en pago, debt-equity conversion and
sale of business.
 Content of rehab plan
 Underlying assumptions, financial goals, and procedures proposed to accomplished such goals
 Compare the amounts expected to be received by the creditors under the Rehab plan with those that they will receive if liquidation
ensues
 Contain information sufficient to give various classes of creditors a reasonable basis for determining whether supporting the plan
is in their financial interest
 Establish classes of voting creditor
 Establish subclasses of voting creditors, if approved by court
 Indicate how insolvent debtor will be rehabilitated
 Specify treatment of each class or subclass
 Provide for equal treatment of all claims within the same class or subclass
 Ensure payments made under plan follow the priority established under the provision of civil code
 Maintain security interest of secured creditors and preserve the liquidation value of the security
 Disclose all payment to creditors for pre-commencement debts made during the proceedings
 Describe disputed claims
 Identify debtor’s role in implementation of plan
 State rehab covenants of debtor, the breach is considered a material breach of plan
 Identify those responsible for future management of debtor and supervision and implementation of plan
  Address the treatment of claims
 Require debtor and counter-parties arising after the confirmation of rehab plan
 Require the debtor and counter-parties to adhere to terms of all contracts
 Arrange payment of all outstanding administrative expenses as a condition to the Plan’s approval
 Arrange for payment of all outstanding taxes and assessments
 Include certified copy of certificate of tax clearance or evidence of a compromise settlement with BIR
 Include valid and binding resolution of a meeting of the debtor’s SHs to increase shares by required amount in cases where the
Plan contemplates additional issuance of shares
 State compensation and status of RR
 Contain provision for conciliation and mediation as a prerequisite to court assistance or intervention in the event of any
disagreement in the interpretation and implementation of the rehab plan
 Consultation with debtor and creditors: if court gives due course to the petition, RR shall confer with debtor and creditors and consider
their views and proposals etc
 Creditor approval of rehab plan:
 Notice to creditors to examine the plan: RR shall notify creditors and SHs that plan is ready. Within 20 days from notification, RR
shall convene creditors for voting on the approval of the rehab plan
 Manner of rejection or approval of plan
o Plan deemed rejected if not approved by all classes of creditors
o Plan deemed approved by a class of creditor, if members of the said class holding more than 50% of the claims vote in
favor of the rehab plan
o Votes of creditors proportionate to the amount of respective claim based on registry of claims
 Courts cram-down power
o Court may still confirm the rehab plan notwithstanding creditor’s rejection if:
 Rehab plan complies with FRIA requirements
 RR recommends confirmation of Rehab Plan
 SHs, owners, partners of juridical debtor lose at least their controlling interest as a result of Rehab Plan
 Rehab Plan would provide objecting class of creditors with compensation of greater value than one they will
received if debtor was liquidated
o Cram-down principle- constitutes a species of exercise of state’s police power to protect the greater public interest
 Submission of rehabilitation plan to court
 If Rehab plan is approved by the creditors, it shall be submitted by RR to the court
 Within 5 days, court shall notify creditors that the rehab plan has been submitted for confirmation, and that they may obtain
copies and file objection thereto.
 Filing of objections to rehab plan
 Creditors may file objections 20 days from receipt of notice from the court of the rehab plan which shall be limited to:
o Creditor’s support induced by fraud
 o Documents or date are false and misleading
o Rehab plan is not supported by voting creditors
 Hearing on the objections
 Court shall set time and date for hearing of objections
 If court finds merit, RR shall be ordered to cure defect
 If court finds debtor acted in bad faith, and not feasible to cure defect, court shall convert proceedings into one for the liquidation
of the debtor
 Confirmation of rehab plan
 No objections – court issues order confirming the rehab plan
 Even if there are unresolved disputes, court may confirm rehab plan if rehab plan has adequate provisions for paying such claims
 Effects of confirmation of rehab plan
 Rehab plan shall be binding upon debtor and all persons who may be affected by it
 Debtor shall comply with the provisions of rehab plan
 Payments shall be made in accordance to rehab plan
 Contracts and arrangements between creditor and debtor continue to apply to the extent it does not conflict with provisions of
rehab plan
 Any compromises shall be binding on creditors regardless of whether or not plan is successfully implemented
 Claims arising after approval of rehab plan are not subject to suspension order
 Treatment of amounts of indebtedness or obligations forgiven or reduced – NOT SUBJECT TO TAX
 Period of confirmation of rehab plan – 1 year from date filing of petition, if no confirmation made, such proceeding is converted into
liquidation upon motion or motu propio.
 Accounting discharge of RR
 RR shall provide final report and accounting to court after confirmation of rehab plan
 RR shall be discharged after approval of Rehab plan unless it requires more functions to RR after approval
 Funds of rehab of GOCCs: funds released only upon appropriation of congress and supported by funds certified by national treasurer
o Termination of proceedings
 Termination of proceeding – upon motion of SH or RR
 Dismissal of the petition of court
 Debtor fails to submit RR
 Under Rehab plan, there is no substantial likelihood debtor can be rehabilitated
 Rehab plan is approved by debtor fails to perform its obligations
 Commission of fraud in securing approval of Rehab Plan
 Other analogous circumstances
 In case of breach – upon motion of affected party, such party may:
 Issue an order directing breach be cured or else proceeding shall be converted to liquidation
 Issue order converting proceedings as liquidation
  Allow debtor or RR to submit amendment
 Issue order to remedy the breach consistent with present regulation
 Enforce applicable provisions of Rehab plan through writ of execution
 effects of terminations
 discharge of RR subject to his submission of a final accounting
 lifting of stay order or other court orders
o appeal from RTC decision
 old rule on appellate remedies: period of appeal is 30 days; petition for rehabilitation is a special proceeding and can be appealed only
through petition for review and not certiorari
 current rule on appellate remedies: it is still a special proceeding appealable by petition for review under Rule 43 of ROC
 Pre-negotiated Rehabilitation
o Petition by debtor
 Vote necessary – approval of pre-negotiated rehab plan by:
 Creditors holding at least 2/3 of total liabilities of debtor
 Including secured creditors holding more than 50% of total secured claims of debtor
 Unsecured creditors holding more than 50% of total unsecured claims of debtor
 Contents of petition
 Schedule of debtor’s debt and liabilities
 Inventory of debtor’s assets
 Pre-negotiated rehab plan plus 3 qualified nominees for RR
 Summary of disputed claims against debtor and report on provisioning of funds to account for appropriate payments
o Issuance of order – within 5 days and after determination that petition is sufficient in form and substance
 Identity of debtor, principal business of activities and place of business
 Declare debtor is under rehab
 Summarize grounds for filing the petition
 Direct publication of order in newspaper of general circulation once for at least 2 weeks, first publication made within 7 days from time of
issuance
 Direct service by personal delivery of a copy of the petition on each creditor
 State that copies of petition and rehab plan are available for examination and copying by any interested party
 State that creditors and other interested parties may file their objections or comments thereto for a period not later than 20 days from
second publication of order
 Appoint a RR
 Include a suspension or stay order
o Approval of plan – within 10 days from second publication of order, court shall approve plan
o Objection to the petition or Rehab plan – not later than 8 days from date of second publication
 Allegations are materially false and misleading
  Majority of any class of creditors do not support rehab plan
 Rehab plan fails to account for a claim against the debtor and not categorically declared as a contested claim
 Support of creditors was induced by fraud
o Hearing on the objections
 Court shall set date for hearing no earlier than 20 days and not later than 30 days from date of second publication
 If with merit – court directs debtor to cure the defect
 If debtor or creditor supporting rehab plan is in bad faith – conversion of proceedings to liquidation
 If objection has no substantial merit or was cured, such finding is deemed as an approval of rehab plan
o Period for approval of rehab plan – 120 days from filing petition to approve rehab plan, if court fails to act, rehab plan is deemed approved
o Effect of approval – same as mentioned in chapter II (initiated by creditor)
 Out of court or informal restructuring agreements/ rehab plan
o Out-of-court or informal restructuring agreements and rehab plans
o Minimum requirements for informal restructuring agreements and rehab plans:
 Debtor must agree to out-of-court or informal restructuring agreement or rehab plan
 Approved by creditors representing at least 67% of secured obligations of the debtor
 Approved by creditors representing at least 75% of unsecured obligations of debtor
 Approved by creditors holding at least 85% of total liabilities, secured and unsecured, of the debtor
o Standstill period – may be agreed upon parties provided that:
 Agreement is approved by creditors representing more than 50% of total liabilities of debtor
 Notice thereof is publishing in a newspaper of general circulation in Philippines once a week for 2 consecutive weeks
 Standstill period does not exceed 120 days from date of effectivity
o Cram-down effect – same as chapter II (creditor initiated) – rehab plan shall take effect upon lapse of 15 days from date of last publication of
notice
o Amendment or modification – must be made in accordance to terms of agreement and due notice to all creditors
o Effect of court action or other proceedings – court action relating to or against the rehab plan shall not stay its implementation unless there is a
TRO obtained
o Court assistance – insolvent debtor or creditor may seek court assistance in implementation of rehab plan
 Insolvency proceedings for juridical debtor
o Voluntary insolvency proceedings (voluntary liquidation)
 Initial petition for VL – debtor may apply petition for liquidation which contains:
 Schedule of debtor’s debts and liabilities including a list of creditors with their addresses amounts or claims and collaterals,
securities
 Inventory of assets including receivables and claims against 3rd parties
 Names of at least nominees to position of liquidator
 Conversion of rehab proceedings to insolvency proceedings – debtor may also initiate liquidation proceedings while rehab proceedings
has been initiated as well
 Issuance of liquidation order – if petition is sufficient in form and substance
 o Involuntary insolvency proceedings (involuntary liquidation)
 Initial creditor-initiated liquidation
 3 or more creditors whose aggregate claim is at least either:
o P1M or
o At least 25% of subscribed capital stock, whichever is higher
 Requisites:
o No genuine issue of fact or law on the claims of petitioners and that the due and demandable payments thereon have not
been made for at least 180 days or that the debtor failed generally to meet its liabilities as they fall due
o No substantial likelihood that debtor may be rehabilitated
 Conversion of rehab proceedings to insolvency proceedings
o At time of pendency or after rehab court pre-negotiated proceedings, 3 or more creditors whose claims are at least 1M
or 25% of subscribed capital files a motion in same court where rehab proceedings are pending’
 Issuance of order: if sufficient in form and substance, order shall contain:
o Order of publication of petition or motion in newspaper of general circulation once a week for two consecutive weeks
o Directing debtor and all creditors who are not petitioners to file comment on petition or motion within 15 days from the
last date of publication
 Issuance of liquidation order: if meritorious, court issues liquidation order
o Conversion of rehab proceedings to liquidation proceedings
 Pre-FRIA controversies on conversion of rehab proceedings to insolvency proceedings
 If debtor is no longer rehabilitable, proceedings shall proceed to dissolve and liquidate the company
 However, there is a school of thought that liquidation and dissolution of corporations are under the jurisdiction of SEC
 Involuntary corporate liquidation with RTC
 Jurisprudence dictates that RTC still has jurisdiction over cases of liquidation or dissolution if it was originally a rehab or suspension
of payment case
 Clarificatory rule under FRIA regime
o Powers of SEC on corporate dissolution and liquidation – it is clear that when a corporation is not insolvent and the original administrative and
quasi-judicial powers of SEC over dissolution and liquidation of every corporation remains in tact
 Liquidation in insolvency of juridical debtors
o Coverage of term debtor
 Liquidation of banks, financial institutions, insurance companies and pre-need companies are determined by relevant legislation and FRIA
as supplement
o Liquidation of corporation
 Liquidation order
 Declare debtor insolvent
 Order liquidation and declare dissolution of juridical debtor
 Order sheriff to take possession and control of all property of the debtor
  Order publication of petition or motion in newspaper of general circulation once a week for 2 consecutive weeks
 Direct payments of any claims and conveyance of any property due the debtor to the liquidator
 Prohibit payments by debtor and transfer of any property by debtor
 Direct all creditors to file their claims with liquidator within period set by rules of procedure
 Authorize payment of administrative expenses as they become due
 State that debtor and creditors who are not petitioners may submit names of other nominees to the position of liquidator
 Set case for hearing for election and appointment of liquidator, which shall not be less than 30 days nor more than 45 days from
date of last publication
 Effects of liquidation order
 Juridical debtor shall be deemed dissolved and corporate existence is terminated
 Legal title to and control to all of assets vested in liquidator
 All contracts of debtor deemed terminated and or breached
 No separate action for collection of an unsecured claim shall be allowed
 No foreclosure proceedings shall be allowed for a period of 180 days
 Rights of secured creditors
 Waive his right under the security or lien, prove his claim in liquidation proceedings and share in the distribution of assets of
debtor
 Maintain his rights under the security or lien
o Value of property may be fixed agreed by creditor and liquidator
 When value of property is less than the claim, liquidator may convey property to secured creditor and creditor
may be admitted to liquidation proceedings
 If value exceeds claim secured, liquidator may convey property to creditor and waive debtor’s right to redemption
upon receiving the excess from creditor
o Liquidator may sell property and satisfy the secured creditor’s entire claim from proceeds of sale
o Secure creditor may enforce lien or foreclose on the property
 Standing foreign corporate creditors – FRIA does not exclude foreign creditors
o Liquidator
 Election of liquidator
 Only creditors who have filed their claims are allowed to vote. A secured creditor will not be allowed to vote, unless:
o He waives his security or lien
o Has value of the property subject of his security or lien fixed by agreement with liquidator and is admitted for the balance
of his claim
 Nominee receiving highest number of votes shall be appointed as liquidator
 Court-appointed liquidator
 On the date of election of liquidator, creditors do not attend
 When creditors attended but fails or refuse to elect liquidator
  After being elected, liquidator fails to qualify
 A vacancy occurs for whatsoever reason
 Oath and bond of liquidator – liquidator takes an oath and files a bond fixed by court
 Qualification of liquidator – same as RR
 Removal of liquidator – upon motion or motu propio at any time by court
 Powers, duties, responsibilities of liquidator
 Sue and recover assets, debts and claims, belonging to or due to the debtor
 Take possession of all the property of debtor
 Sell any property of debtor
 Redeem all mortgages and pledges and satisfy any judgment
 Settle all accounts between debtor and creditor
 Recover property or its value, fraudulently conveyed by debtor
 Recommend creation of creditor’s committee
 Engage professionals to assist him in the discharge of his duties
 Compensation of liquidator – reasonable compensation not exceeding amount prescribed by SC
 Reporting requirements – liquidator shall make and keep records of all moneys received and all disbursements made by him as liquidator
 Discharge of liquidator – after final accounting submitted to court with proof of notice to all creditors and the court finds the report in
order.
 Determination of claims
 Registry of claims
o Within 20 days form assuming functions, liquidator shall prepare preliminary registry of claims of secured and unsecured
creditors
 Secured creditors who waived their security or lien shall be considered as unsecured creditors
 Registry shall be open for public inspection
 right of setoff – setoff is allowed if debtor and creditor are mutually creditor and debtor of each other
 opposition or challenge to claims
o within 30 days from expiration of period of filing of claims, creditors may submit challenge to claim to the court
 submission of disputes to court – liquidator shall resolve disputed claims and submit his findings to the court.
 Avoidance proceedings
 Rescission or nullity of certain transactions
o Actions for rescission or nullity
 Liquidator or creditor may initiate action to rescind or declare null and void any transaction
 If leave of court is granted, liquidator shall assign all right to creditor
 Any benefit derived from proceedings shall belong exclusively to the creditor and if there is surplus, it belongs to
the estate
  If liquidator signifies his readiness to institute proceedings for the creditor, benefit derived shall belong to the
estate
 Liquidation plan
 Liquidation plan – within 3 months from assumption of function, liquidator shall submit liquidation plan to court.
 Exempt property set apart
o It is the duty of the court to set apart property which are exempted by law but such petition shall be heard and proved
that:
 Notice of hearing has been given by Clerk by posting it at least in 3 public places in province or city or at least 10
days prior to the time of hearing
 Notice shall set forth name of insolvent debtor and time and place of hearing
 Decree must show that such proof was made to the satisfaction of the court
 Sale of assets in liquidation – only at public auctions and only unencumbered assets
o Private sale may be allowed with approval of court if:
 Goods are perishable in nature or quickly deteriorates or disproportionally expensive to keep or maintain
 Private sale is for best interest of debtor and creditor
 Manner of implementing liquidation plan – as approved by court and payments shall be made to creditors only in accordance to
liquidation plan
 Concurrence and preference of credits – as enumerated in article 2244 of civil code
o Proper funeral expenses for the debtor, or children under his or her parental authority who have no property of their own, when
approved by the court;
o Credits for services rendered the insolvent by employees, laborers, or household helpers for one year preceding the
commencement of the proceedings in insolvency;
o Expenses during the last illness of the debtor or of his or her spouse and children under his or her parental authority, if they have
no property of their own;
o Compensation due the laborers or their dependents under laws providing for indemnity for damages in cases of labor accident, or
illness resulting from the nature of the employment;
o Credits and advancements made to the debtor for support of himself or herself, and family, during the last year preceding the
insolvency;
o Support during the insolvency proceedings, and for three months thereafter;
o Fines and civil indemnification arising from a criminal offense;
o Legal expenses, and expenses incurred in the administration of the insolvent's estate for the common interest of the creditors,
when properly authorized and approved by the court;
o Taxes and assessments due the national government, other than those mentioned in Articles 2241, No. 1, and 2242, No. 1;
o Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1, and 2242, No. 1;
o Taxes and assessments due any city or municipality, other than those indicated in Articles 2241, No. 1, and 2242, No. 1;
o Damages for death or personal injuries caused by a quasi-delict;
o Gifts due to public and private institutions of charity or beneficence;
 o Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they have been the subject
of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of
the judgments, respectively. (1924a)
 Order of removing debtor from list of registered entities at SEC – only upon determination that liquidation has been made, court
orders SEC to remove debtor from registry of legal entities
 Termination of proceedings – upon removal from list of registry of legal entities, court shall issue order terminating the
proceedings
 Liquidation of a securities market participant
 Shall also apply to securities market participants but are deemed to have absolute priority over other claims
 Recognition of foreign proceedings
o FRIA provisions on cross-border insolvency proceedings
 Adoption of UNCITRAL model law on cross-border insolvency – United Nations Center for International Trade and Development
 FRIA provisions on recognition of foreign proceedings:
 Initiation of proceedings – submission of petition by representative of foreign entity
 Provision of relief – court may issue order:
o Suspending action to enforce claims against entity or to foreclose property
o Requiring the surrender of property of foreign entity to foreign representative
o Providing other necessary relief
 Factors in granting relief
o Protection of creditors in Phil
o Just treatment of all creditors
o Whether other jurisdictions have given recognition to foreign proceeding
o Extent that foreign proceeding recognizes rights of creditors and other interested parties
o Extent that foreign proceedings has recognized and shown deference to proceedings
o Old SC rules on recognition of foreign proceedings
 Scope of application –
 Where assistance is sought in Philippine court by foreign court
 Where assistance is sought in a foreign state in connection with domestic proceedings
 Where foreign proceedings and domestic proceedings are concurrently taking place
 Petition for recognition of foreign proceedings
 Foreign representative may file a petition in RTC where debtor resides accompanied by:
o Copy of decision commencing foreign proceedings and appointment of foreign representative
o Certificate from foreign court affirming existence of foreign proceeding and of appointment of foreign representative
o In absence the above referred evidence, any other evidence acceptable to the court
 Grounds to recognize foreign proceedings
 Proceedings is a foreign proceeding
 Person or body applying for recognition is a foreign representative
  Petition meets requirements
o Shall be decided within 30 days from filing thereof
 Notification to the court
 Any substantial change in status of foreign proceedings or status of foreign representative’s appointment
 Any other foreign proceedings
 Provisional relief that may be granted
 Staying execution against debtor’s assets
 Entrusting administration or realization of assets located in Philippines to foreign representative
 Staying the commencement of continuation of individual actions or proceedings
 Staying execution of debtor’s assets to the extent it has not been stayed
 Granting additional relief necessary
 Effects of recognition of foreign proceedings
 Commencement or continuation of individual actions or proceedings is stayed
 Execution against debtor’s assets is stayed
 Right to transfer, encumber or dispose of assets of debtor is suspended
 Relief that may be granted after recognition of foreign proceedings
 Staying of commencement of continuation of individual actions or proceedings
 Staying execution of debtor’s assets
 Suspending rights to transfer, encumber, dispose assets of debtor
 Providing for examination of witnesses
 Entrusting administration or realization of debtor’s assets located in Philippines to foreign representative
 Extending relief under sec 7
 Granting additional relief
 Protection of creditors and other interested persons – protective clauses:
 Granting or denying relief must be satisfied that the interest of creditors and other interested persons are adequately protected
 Court may subject provisional relief granted to conditions it considers appropriate
 Court may modify or terminate relief
 Intervention by foreign representative in Philippine proceeding – only upon recognition
 Cooperation and direct communication with foreign court and foreign representative
 Appointment of person or body to act at discretion of court
 Communication of information by any means considered appropriate by court
 Coordination of administration and supervision of the debtor’s assets and affairs
 Approval and implementation by courts of agreements concerning the coordination of proceedings
 Coordination of concurrent proceedings regarding same debtor
 Suspension of proceedings against debtor
 Limiting relief to assets
  Implementation of rehab and reorganization plan for debtor
 Commencement of local proceedings after recognition of foreign proceedings – only if debtor is doing business in the Philippines
 Concurrent local and foreign proceedings – court shall seek cooperation and coordination and any relief granted to foreign proceedings
must be made consistent with relief in local proceedings.
CORPORATE DISSOLUTIONS AND LIQUIDATIONS

 No vested rights to corporate fiction

o Gonzales vs Sugar Regulatory Administration: no person who asserts a claim against a juridical entity can claim any constitutional right to the
perpetual existence of such entity
o Dissolution of a juridical entity does not by itself imply the diminution or extinction of rights demandable against the entity.
o When assets of dissolved entity are taken over by another entity, the successor entity must be held liable for the obligations of the dissolved entity
pertaining to the assets so assumed.
 Nature of dissolution
o Dissolution signifies the extinguishment of a corporation’s franchise and termination of its corporate existence for business purpose.
o Dissolution legally affects more the nature and capacity of the juridical person of the corporate being.
o De facto vs de jure
 De jure dissolution:
 one adjudged and determined by administrative or judicial sentence or
 brought about by an act of the sovereign power or
 which results from the expiration of the charter period of corporate life
 de facto resolution:
 one which takes place in substance and in fact when the corporation by reason of insolvency, cessation of business, or suspension
of all its operations goes into liquidation, still retaining its primary franchise to be a corporation.
 Dissolution only of the “business franchise” leaving intact the juridical entity
 Methods of dissolution
o Involuntary
o Voluntary
 Where no creditors are affected by dissolution, by an administrative application for dissolution filed with SEC
 Where creditors are affected by dissolution, by a formal petition for dissolution with SEC with due notice and hearing to be duly conducted
 Shortening of corporate term by amendment of the AOI
 Allowing expiration of corporate term provided in AOI
 Voluntary dissolution where no creditors are affected
o The tenets of trust fund doctrine should not be adversely affected.
o Sec 118 of corpo code: in case dissolution does not prejudice creditors, dissolution may be effected by complying with the following requirements:
 Majority vote of the BODT adopting a resolution for dissolution
 Sending notices to SHs or members of time and place and object of meeting calling for approval of dissolution at least 30 days prior to said
meeting
 By registered mail
 By special delivery
 Publication of such notice of meeting for 3 consecutive weeks
 In newspaper published in place where principal office of corporation is located
  If none, in newspaper of general circulation in Philippines
 Ratification of board resolution for dissolution
 2/3 of OCS
 2/3 of members
 Filing with SEC a copy of resolution for dissolution
 certified by majority of BODT and
 countersigned by corporate secretary
 issuance by SEC of certificate of dissolution
 voluntary dissolution where creditors affected
o if creditors are affected, there is a need to file a formal petition for dissolution with SEC
o nature of proceedings: quasi-judicial, and shall ensure rights of creditors are protected
o dissolution shall be effected upon compliance with the following requirements:
 petition for dissolution filed with SEC
 signed by majority of BODT
 signed by other officers having managements of its affairs
 verified by President or Secretary or one of its directors/trustees
 shall set forth:
o all claims and demand against corporation
o dissolution was resolved by affirmative vote
 at least 2/3 of OCS
 at least 2/3 of members
 if petition is sufficient in form and substance:
 SEC sets date on or which objections may be filed by any person
o Shall not be less than 30 days not more than 60 days from entry of order
 Before such date, copy shall be posted and published
 Copy shall be posted in 3 public places in such municipality or city where the principal office of corporation is situated
 Copy shall be published for 3 consecutive weeks
o In newspaper of general circulation published in municipality of city of principal office of the corporation
o In there be no such newspaper, in newspaper of general circulation in Philippines
 Upon 5 days-notice after date on which right to object fixed by Court has expired, SEC shall proceed to hear petition and try issues made
by objections filed
 If no objection is sufficient and material allegation of petitions are true, SEC shall render judgment dissolving corporation
 SEC directs disposition of assets as justice requires
 SEC appoints receiver to collect such assets and pay the debts of corporation
 Dissolution by shortening corporate term
o Requirement for shortening corporate term:
  Notice of dissolution by shortening corporate term published in newspaper of general circulation for 3 weeks
 Filing list of corporate creditors, with their consent to shortening corporate term
 Submission of following to SEC:
 Undertaking by oath by majority SHs or principal officers that they shall personally answer for any outstanding obligations of the
corporations
 Latest audited financial statements of the corporation
o Not earlier than date of SH’s or members’ meeting approving amendment to AOI
 BIR clearance on tax liabilities
o Corporation deemed dissolved upon approval of amendment of OAI.
 If corporate term expires before approval by SEC, corporation is not automatically dissolved by only upon approval of amendment.
 Dissolution by expiration of corporate term
o When corporation is dissolved by expiration of term, there is no need for further action on part of corporation or the State
o Sec 11 of corpo code: corporate term may be extended by amendment of AOI but cannot be made earlier than 5 years prior to the original or
subsequent expiry date
 Obtaining tax clearance
o Sec 52 of NIRC, corporation shall within 30 days after adoption of resolution for dissolution or liquidation or for reorganization, file the necessary
return with BIR, setting forth terms of resolution or plan
 Prior to issuance of SEC of certificate or dissolution or reorganization, such corporation must secure a certificate of tax clearance from BIR
o BPI vs CA: it is required for corporation to submit tax return upon its dissolution.
o SEC shall furnish copy to CIR of any order of involuntary dissolution or suspension of primary franchise of certificate of registration of a corporation
o SEC shall issue final order of dissolution only after certificate of tax clearance has been submitted.
 Involuntary dissolution
o Grounds for ID
 If corporation does not formally organize and commence transaction within 2 years from date or incorporation
 If corporation was organized and commenced but becomes continuously inoperative for a period of 5 years
 Failure to adopt and file BLs
 Where is has offended against a provision of a law for its creation or renewal
 When it has committed or omitted an act which amounts to surrender of its corporate rights, privileges or franchises
 When it has misused a right, privilege, or franchise conferred upon it by law, or when it exercised a RPF in contravention of law (ultra vires)
 Continuance of business would not be feasible or profitable for the best interest of SHs, parties-litigants, creditors, general public
 When corporation is guilty of fraud in procuring certificate of registration
 When it is guilty of serious misrepresentation as to what corporation can do or is doing to the great prejudice of or damage to general
public
 Refusal of corporation to comply with or defiance to any lawful order of SEC
 Failure to file required reports in appropriate forms
o When corporation deemed organized
 To organize refers to election of officers, subscription and payment of capital stock, adoption of BLs etc
  SEC rules on suspension/revocation provides that corporation is formally organized if it accomplished the following:
 Adoption of BLs and filing and approval thereof by SEC
 Election of BODT and officers
 Establishment of principal office
 Providing for subscription and payment of capital stock and other steps necessary to endow legal entity
o When corporation deemed to have commended business
 Only when it has performed preparatory acts geared towards fulfillment of purposes
 Entering into contracts or negotiations for lease or sale of properties to be used as business or factory site
 Making plans for and the construction of factory
 Taking steps to expedite construction of company’s working equipment
o Procedure for ID
 Old Rules of Court: Solicitor General or public prosecutor, when directed by the President of the Philippines, or when complaint or
otherwise he had good reason to believe that any case specified under law existed to pursue quo warranto (ayan, civpro yan, di na tayo
tinantanan ni duano) against corporation for violation of its franchise, must commence the action
 Under PD 902-A
 SEC possesses the following powers:
o To create and appoint a management committee, board or body upon petition or motu propio to undertake the
management of corporations, partnerships or other associations not supervised by other government agencies in
appropriate cases
o To create or appoint management committees, board or body to undertake the management of the corporations,
partnerships, or other associations supervised or regulated by other government agencies
 Powers of the management committee or rehabilitation receiver
o Take custody, control over all existing assets
o To report and be responsible to SEC until corporation is dissolved by order or SEC
o To overrule or revoke action of previous management of previous BODT
o It shall not be subject to any action, claim or demand in connection with his function if acts are done in good faith
o Particular SEC Rules on Suspension/ revocation of certificate of registration
 Sec 22 of corpo code:
 Corporations who have failed to formally organize and commence the transaction of their business or construction of their works
within 2 years from date of incorporation
 Corporation which have been inoperative for a continuous period of at least 5 years
 Corporations which have failed to file BLs
 Corporations which failed to file/register for a period of 5 years their financial statement, general information sheet, or stock and
transfer book or membership book
 In all of foregoing instances, SEC shall mail show cause order within 30days why certificate of registration shall not be suspended or
revoked
  2nd show cause order shall be published in newspaper of general circulation, directing corporation to respond to respond to the first order
to appear before SEC
 If they will not comply, SEC shall suspend the corporation. Only 90 days is provided for MR. After lapse of 90 days and no MR has been
filed, order of revocation shall be issued.
 Right of minority SHs to demand dissolution
o Minority SHs do not have a common law right, much less a statutory right, to demand dissolution of corporation – SHs fully aware that affairs of
corporation is subject to control of majority SHs
o Financing corp vs Teodoro: even minority SHs may ask for dissolution for alleged gross mismanagement and fraudulent conduct of corporate
affairs
 Jurisprudential attitude towards involuntary dissolution
o RP vs Bisaya Land Transpo: SolGen may discontinue litigation (quo warranto) if with approval of Court
o Gov’t vs El Hogar: holding of real property foreclosed shall not be ground for forfeiture of franchise, especially when corporation acted in good
faith
o Gov’t vs Phil sugar estates: Court did not right away resort to forfeiture of franchise but first directed ousting of corporation from the unlawful act
o RP vs Security Credit and Acceptance Corp: Court directed forfeiture since damage to public was imminent
 Nature of liquidation
o Liquidation is the settlement of affairs of a corporation consisting of:
 Adjusting debts and claims
 Collecting all that is due the corporation
 Settlement and adjustment of claims against it
 Payment of its just debts
o Liquidation in corpo law: winding up or settling with creditor and debtors
 Assets are distributed to those entitled
 Reducing assets to cash
 Discharging liabilities
 Dividing surplus or loss
o Liquidation is a proceeding in rem
 Methods of liquidation
o 3 methods:
 Liquidation through BODT
 Liquidation through trustee
 Liquidation through receiver
o Liquidation through BODT
 Sec 77 and 78 of corpo code intended to let SHs have control of assets of corporation upon dissolution
o Liquidation through a trustee
 Sec 122 of corpo code
  At any time during 3 years of liquidation, corporation is authorized to convey all its properties to trustees for benefit of SHs,
members, creditors and others persons in interest.
 There is no time limit. 3 year period will not apply provided designation of trustee is made within said period
o Liquidation through receiver
 A receivership is created by means of judicial or quasi-judicial appointment of the receiver
 3 year period does not apply because corporation is substituted by receiver who may sue or be sued
 Disposition of pending claims against a dissolved corporation
o General rule on abatement
 Absence of statutory provision to the contrary, pending action are abated upon expiration of 3 year period allowed by law
o Procedure against officers/ SHs possessing corporate assets
 Tan Tiong Bio vs Commissioner: creditors can pursue claims against corporate assets even after the 3 year period of liquidation
 Effects of dissolution and liquidation on corporate contracts:
o No authority to enter into new business – all transactions after dissolution shall be void (does not include transaction pertaining to liquidation
o Summary on dissolution and liquidation proceedings – other effects:
 Termination of life of juridical entity does not cause extinction of right and liabilities of such entity nor those of its owners and creditors
 Corporation continues to be a body corporate for 3 years after dissolution for purposes of prosecuting and defending suits enabling it to
close its affairs
 Corporation may appoint trustee within 3 year period
 3 years period expires without trustee or receiver, BODT or trusteed themselves may continue as trustees
 If BODT or trustees has no interest in assets, SHs and creditors may act for and in its behalf, make proper representation in SEC
 Reincorporation
o Applicable legal provision
 Sec 121 of corpo code: corporation dissolved upon filing with SEC of verified complained and after proper notice and hearing
 Legal effect: corporation shall be continued as a corporate body for 3 years for purpose of liquidation
 Sec 40 of corpo code also applicable: ratification of SHs in sale, lease, exchange, mortgage of all or substantially all of its properties
o Extension of corporate life during period of dissolution
 Sec 122 of corpo code: it would be illegal for corporation, when it has reached stage of dissolution, to seek to extend life even with
amendment of AOI – that would constitute new business
o Distinction between extension of corporate life, revival, and reincorporation
 Extension of a charter: to revive a charter which has expired.
 Renewal of a charter: amounting to grant of a new charter so as to subject corporation to the laws in effect at time of renewal
 Reincorporation: consists in taking out of a new charter by corporation in order to correct errors or defects in the original incorporation.
There is no new company but shall be the same as before the incorporation
o Process of reincorporating
 Reincorporating is not prohibited
 Rights of opposing creditors: it is mandated that all assets of dissolved corporation must be applied first towards payment of existing
creditors of dissolved corporation
 Rights of dissenting SHs: right cannot be denied a SH by majority of SHs voting to reincorporate the corporation
CLOSE CORPORATION

 Introduction
o Old corporation law applied more to publicly-held corporations than to close corporations
 General concept of corporation code on nature of corporation
o A close reading of corpo code will give impression that close corporations are treated more as exceptional cases while publicly-held corporations
are the general rule. Bias against close corporations remains
o Provisions of corpo code more applicable to publicly-held corporations. Relatively few provisions governs close corporations:
 Sec 96-105
 Sec 96: provisions of other titles of the Code shall apply suppletorily to close corporations except as insofar as this title otherwise provides.
 Concept of close corporation
o Close corporations are:
 those in which the majority of persons to whom the powers have been granted, on the happening of vacancies among them, have the
right to appoint others to fill such vacancies, without allowing to the SHs in general any vote or choice in selection of new officers
 where business policy and activities are entirely dominated for practical purposes by the majority stock ownership of a family whose stock
is not traded in any market and is very infrequently sold.
 NIRC definition: any corporation at least 50% in value of OCS or at least 50% of total combined voting power of all classes of stock entitled
to vote is owned directly or indirectly by or for not more than 5 persons, natural or juridical.
 CCs were subjected to 10% corporate development tax on their taxable income
 Sec 96 definition/ requisites: close corporation is defined as one whose AOI provide that:
 All of the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than specified
number of persons, not exceeding 20
 All issued stocks of all classes shall be subject to one or more specified restrictions on transfer permitted by Title XII of corpo code
 Corporation shall not list in any stock exchange or make any public offering of any of its stock of any class
o A corporation shall not be deemed not a close corporation when at least 2/3 of its voting stock is owned or controlled by
another corporation which is not a close corporation
 Problems with statutory definition
 3 problems:
o A significant portion of what otherwise would be generally accepted as close corporations would not be covered by Title
XII (because of limiting definition to the three requisites)
o Those corporations possessing all requisites in actual practice would not be covered if AOI is silent on the matter
o Even when AOI provides for all 3 requisites, such corporations would cease to be governed by Title XII if actual conditions
show any one of the requisites have been violated (i.e. they would be governed by provisions pertaining to publicly held
corporations)
 Objective test vs actual disposition of SOS test
o Objective test: what is provided in AOI
o Actual disposition of SOS test: actual use of shares of stocks/ actual practice
  De facto close corporations
 De facto CC: legal disposition of majority of close corporation which do not comply with the objective test
 Likely Jurisprudential solutions
 Jurisprudence upholds objective test in determining nature of corporations, regardless of actual practice
 Remedy in case of non-compliance with the requisites provided in AOI:
o Not automatic declassification of corporation but
o Administrative enforcement to ensure measures be taken by corporation or its offices to comply with requisites under
pain of penalty as provided in Sec 144 of corpo code:
 Not less than 1K but not more than 10K or
 Imprisonment not more less than 30 days but not more than 5 years
 Or both
 Revolving doctrines in jurisprudences re CC:
o Compliance with formalities of Sec 96 of corpo code would bring about bringing of covered corporate entity within
application of Title XII
o When formalities are not present, there is a need to prove during trial that the existing corporate structure, management
and operation of corporation do bring it into the fold what is a close or family corporation to be able to invoke any statutory
provisions and doctrines pertaining to CC
o Outside of formalities, the essence of CC is not simply concentration or control of equity in one family or close group but
rather a convergence into a small group of individuals
o CC that complies with Sec 96 of corpo code is treated in accordance with provisions of Title XII and would not be considered
as a situation where there is piercing of veil of corporate fiction; whereas corporation found to be a CC outside of
formalities would be governed by Title XII but under premise of piercing the veil of corporate fiction.
o Need for a close corporation
 CC not simply a corporation but essentially the progemy of a marriage of commercial convenience between the essence of a partnership
and that of a corporation. It may be considered as an “incorporated partnership”
 Delectus personae: business should be left at liberty to adopt a business set-up which they feel is the best medium for the pursuit of their
commercial affairs, so long as it is not contrary to law, morals etc
 Role of CC in Gala vs Ellice agro-industrial corp: running a family business or managing family property has formed backbone of Philippine
commerce and industry. A family corporation should serve as a reward for years of hard work.
o Title XII on CC
 Classifications of SOSs and restriction of transfer
 Sec 97 of corpo code: AOI may provide for classification of SOS or rights and the qualification for owning or holding the same and
restrictions on their transfers
 Sec 98 of corpo code: restrictions on the right of transfers must appear in AOI, in BLs, and in certificate of stocks and shall not be
more onerous than granting the existing SHs the option to purchase the shares of transferring SH with such reasonable terms,
conditions or period stated therein
 SEC ruled that this provision of AOI is void and unreasonable
 o SH may mortgage, pledge, encumber all or part of SOS in corporations:
 Provided that other parties shall give their written consent
 Provided further that the written notice to the other parties shall be sufficient if mortgagee or pledge is a banking
or financial institution
 Sec 6 of corpo code: even close corporations may have shares divided into classes or series of shares
 Restriction to transfer of SOS in CC is limited to the right of first refusal.
o Existing SHs has power to maintain delectus personae and prevent outsider from interfering with affairs of corporations
 Right to impose any restraint must be conferred upon the corporation by the AOI. It cannot be done only by a BL without statutory
or charter authority
 Right of first refusal should be available even to de facto close corporation provided that the same is delineated in AOI and
indicated in certificate of stocks and is reasonable
 Classification of directors
 Sec 97 of corpo code: AOI may provide classification of directors into one or more classes, each of which may be voted for and
elected solely by particular class of stock
 Power to classify director seems to be denied by Sec 24 of corpo code
 Director classification provision in a close corporation allows group to parcel out among themselves various management aspects
in the corporate enterprises. The provision indicates an inherent closeness between equity and management, especially when the
scheme of profit distribution is bases not only on the equity holding, but also ties to management perfomances, in the form of
salaries, per diems, and expensive account privileges
 Provisions for greater quorum or voting requirements
 Sec 97 of corpo code: close corporation may provide in its AOI for greater quorum or voting requirements in meeting of SHs or
directors than those provided in this code
 Formal recognition by corpo code for clarified control devices that pertain to close corporations:
o Sec 7 of corpo code allows classification and restriction of SOS including deprivation of voting rights
o Sec 24 reiterates exercise by minority SH of power of cumulative voting
o Sec 44 recognizes power of corporation to enter into management contracts and provided for procedure in exercise of
such power
o Sec 58 lays down requirements for proxies
o Sec 59 provides for requirements of voting trusts
 SHs as corporate managers
 Sec 97 of corpo code: AOI of CC may provide that business shall be managed by SHs of the corporation rather than by BODT.
o No meeting of SHs need be called to elect directors
o SHs deemed to be directors
o SHs subject to all liabilities of directors
 Sec 97 of corpo code: AOI may provide that all officers or employees shall be elected by SHs instead of BODT
  In de facto CC, even if an actual merger of Stock ownership and corporate management in the same group, if acts are not those
of BODT, act would be invalid because of restrictions of Sec 23 and 27 of corpo code
 Agreements among SHs
 Sec 100 of corpo code: agreements among SHs to be valid:
o Agreements executed before formation and organization of CC, signed by all SHs, shall survive the incorporation of such
corporation and is valid and binding.
o Agreement if in writing and signed by parties may provide that in exercising any voting right, the shares held shall be voted
as therein provided, or as they may agree, or as determined in accordance with procedure agreed upon by them
o No provision in any written agreements signed by SHs relating to any phase of corporate affairs, shall be invalidated as
between parties on the ground that its effect is to make them partners among themselves
o A written agreement shall not be invalidated on ground that it be so related to the conduct of the business and affairs of
the corporation as to restrict or interfere with discretion of BODT (managerial acts)
 Agreements between SHs in CC must be in writing to be valid and binding (statute of fraud in corpo law)
o Art 1306 of Civil code: contracting parties may establish stipulations, clauses, etc they may deem convenient as long as it
is not contrary to law, etc
 Agreements between SHs in ordinary corporations that relates to conduct of business affairs as to restrict or interfere with powers
of BODT would be invalid because of Sec 23 and 24 of corpo code
 Board meeting unnecessary
 Sec 101 of corpo code: actions of BODT in CC valid even if:
o Before or after action is taken, written consent is signed by all directors
o All SHs have actual or implied knowledge of action and make no prompt objection in writing
o Directors are accustomed to take informal action with express or implied acquiescence of all SHs
o All directors have express of implied knowledge of action and none of them makes prompt objections in writing
 In ordinary corporations: sec 25 of corpo code mandates that decision of BODT must be made by at least majority of directors
present at meeting at which there is a quorum. Ordinary corporations may be held liable under Sec 101 of corpo code:
o RP vs acoje mining: corporation bound to transaction when it has received benefits therefrom even if resolution of BODT
approving it is beyond powers of BODT
o Ramirez vs orientalist co: corporation knowingly permits officers to act within scope of apparent authority, corporation
shall be estopped from denying authority of officer even in absence of formal vote of BODT
o Acuna vs Batac: subsequent ratification of BODT cleanses the same of all defects and such ratification may be in form of
silence, acquiescence, or acts showing approval or by acceptance of BODT of benefits
 Pre-emptive rights
 Sec 102 of corpo code: preemptive rights in CC shall extend to all stock to be issued, including re-issuance of treasury shares
 pre-emptive right not applicable:
o when shares issued in compliance with laws requiring stock offering or minimum stock ownership by public
o when shares issued in good faith with approval of stockholders representing 2/3 of OCS in exchange for property needed
for corporate purposes or in payment of debt
 deadlocks and dissolution
 operative provisions
o sec 104 of corpo code: notwithstanding any provision in AOI or BL or any agreement, SEC shall have power upon written
petition by any SH to arbitrate the dispute when there is a deadlock situation. SEC may make orders:
 cancelling or altering provision of AOI
 cancelling, altering, or enjoining resolution or acts of corporation or BODT, SHs or officers
 directing or prohibiting act of corporation or its BODT, SHs, officers or other persons party to the action
 requiring purchase of fair value of shares of any SH
 appointing provisional director
 dissolving corporation
 granting other reliefs as circumstances may warrant
 essence/ definition of a deadlock situation in sec 104 of corpo code
o if directors/ SHs are divided and votes required for corporate action cannot be obtained
o with the consequence that business and affairs can no longer be conducted to the advantage of SHs generally
 appointment of provisional director
o sec 104 of corpo code: provisional director shall be an impartial person
 neither a SH nor a creditor or the corporation of any subsidiary or affiliate corporation
 further qualifications determined by SEC
o PD shall have rights and powers of a duly elected director of a corporation until removed by order of SEC or all of SHs
o His compensation is determined by agreement between him and the corporation subject to approval of SEC
 SEC power to buy-back shares and right to withdraw of a SH
o Sec 104 of corpo code: in deadlock situation, SEC may purchase at fair value, shares of any SH
 This does not require existence of unrestricted retained earnings
o Sec 105 of corpo code: SHs may also purchase his share at fair value not less than par or issued value when the corporation
has sufficient assets to cover debts and liabilities exclusive of capital sotck
Buy back power of corporation in CC Power of SH to repurchase share
Sec 104 Sec 105
Exercised only in deadlock situation May be for any reason
Can be directed against the corporation or any SH Available only against corporation
Available even without unrestricted retained earnings Limited only in situation when corporation has sufficient
assets to cover debts and exclusive of capital stock
 Compelling dissolution of CC
o Sec 104 of corpo code: SEC has power to dissolve CC
o Sec 105 of corpo code: SH in CC may file petition in SEC to compel dissolution of CC whenever
 Acts of directors, officers, those in control is illegal, fraudulent, dishonest or oppressive or unfairly prejudicial to
corporation or any SH; or
 Corporate assets are misplaced or wasted
  Power of SEC under Sec 6 of PD 902-A
o Issue preliminary or permanent injunction
o Issue writs of attachments
o Appoint one or more receivers of property
o Create or appoint management committed, board of body
 Power of SEC to suspend or revoke certificate of registrations:
o Fraud in procuring COR
o Serious misrepresentation as to what the corporation can do to the prejudice or damage of general public
o Refusal comply with lawful order of SEC
 Rational for deadlock or dissolution provisions for CC
o Deadlock provisions: meant to cover situations where original management and renumeration intent of parties no longer
functions properly, brought about by events likely not anticipated at time of incorporation
 Missed opportunity in ong yong vs tiu
 Repurchase of SOSs
o Sec 3 of SEC Rules governing redeemable and treasury shares: In CC, any SH may compel corporation to purchase his shares provided that
corporation has sufficient assets to cover debts
 Piercing the veil of corporate fiction
o Separate personality may be disregarded whenever notion of corporate entity is used to defeat public convenience, justify a wrong, protect fraud
or defend crime; or when SHs or officers use corporate fiction as mere conduit or alter ego
 Conclusion: Corpo code has not made formal recognition and provisions for de facto close corporations.
NON-STOCK CORPORATIONS, FOUNDATIONS, AND COOPERATIVES

 Essence of non-stock corporations

o Eleemosynary purpose and non-distribution of profits
 NSC (sec 87 of corpo code) – one where no part of its income is distributable as dividends to its members, trustees, or officers and that
any profit it may obtain as an incident to its operation shall be used for the furtherance of the purpose for which the corporation was
organized
 Sec 88 of corpo code – NSC may be formed or organized for the following purposes
 Charitable
 Religious
 Educational
 Professional
 Cultural
 Recreational
 Fraternal
 Literary
 Scientific
 Social
 Civic service
 Similar purposes like trade, industry, agriculture and like chambers
 Definition of NSC in corpo code in counter-intuitive to nomenclature used for such entities
 1st: non-existence of capital stock is not determinative on whether entity is NSC
 2nd: non-incurring of profits is not determinative as well for classification of entity as NSC
 Requisites of NSC
 Primary purpose is eleemosynary in nature
 There is prohibition in AOI and BLs that no part of income or any form of dividend is distributable to members, trustees, officers
of corporation
 Distribution of net assets and profits upon dissolution – no distribution during existence of corporation but assets can be distributed only
during dissolution after payment of all liabilities
 Theory on NSCs
o Concept of Contractual Failure – inability of buyer of services to assure himself that he is getting what he intends to be contracting for; denotes
high monitoring and enforcement of costs
o Non-profit enterprise theory – whenever general goals cannot be reduced or agreed upon to, it is obviously difficult to monitor and assess
performance of those who undertake to provide services aimed at achieving the general goals
 Members of NSC
o Membership is purely personal
  Sec 90 of corpo code: membership in NSC and all rights arising therefrom, are personal and non-transferrable, unless AOI otherwise
provides
 Proprietary membership: some provides membership couple with issuance of shares of stocks. In some cases, the purchase of certificates
represents a form of investment in anticipation of value of the share in the future and its disposition of profits
o Juridical entities as members of NSC: JE may become members of NSCs provided that a provision for the classification of members shall include
duly designates or authorized representatives of juridical persons as members of corporations for purpose of qualifying them as incorporators
o Nature of members’ voting right: Sec 89 of corpo code: members may be denied entirely of their voting rights in their AOI or BLs
o Proxy rules for members
 Unless otherwise provided in AOI or BLs, member may vote by proxy
 Memorandum circular no 05-01 (2001) – if BLs have specific provisions on proxies, then said BLs are controlling
o Effect on delinquency in membership on voting rights
 Sec 89 of corpo code: suspension of a delinquent member’s right to vote depends on whether or not such member is disenfranchised
under AOI or BLs. In absence of such provision, member shall still be entitled to one vote.
o Manner of voting
 Sec 89 of corpo code: voting by mail or other similar means by members of NSC may be authorized by the BLs with the approval of, and
under such conditions which may be prescribed by SEC
 Merger and consolidations: sec 77 of corpo code provides for procedures in merger and consolidation and it should prevail over sec 89 of
corpo code being a specific provision (sec 77 a general provision)
o Place of meeting: BLs of NSC may provide place for regular or special meetings outside place where principal office of corporation is located
provided that it is within the Philippines and notice is sent to all members
o Quorum in members’ meeting
 SC: based on number of Outstanding voting stocks
 NSC: actual and living members with voting rights
o Assessment of membership dues: NSC may assess membership dues even when nothing has been provided for in the AOI or BLs.
 General rule is that manner in assessing members must be in accordance with provisions of BLs.
 In absence of such provision, NSC may only collect reasonable membership dues and only for purposes of accomplishing purposes or
objectives for which the corporation was organized
o Collection of membership dues:
 Subscription vs membership dues
 Subscription: full payment entitles member to issuance of certificate of membership or certificate of stock
 Membership dues: for maintenance of member to be in good standing and entitles him to use facilities of the corporation and
exercise rights pertaining to membership in the NSC
 General rule: matters may both be provided in AOI or BLs
 In absence of provision, Sec 68 and 69 of corpo code may be applied but not in case of delinquency in membership dues
 Trustees and officers
o Rights and manner of voting for trustees
 Default rule: straight voting (one vote for one candidate) unless otherwise provided for in the AOI or BLs of the corporation
  Cumulative voting can apply to NSC if provided in AOI or BLs
o Number and election of trustees: no person shall be elected as trustee unless he is a member of the corporation
 Trustees may be more than 15
 Term of 1/3 of their number shall expire every year.
 Term of three years
o Juridical persons as members of BOT
 Juridical persons may become members of BOT provided that such provision in AOI or BLs allowing this and its classification of members
shall include duly designated or authorized representatives of juridical persons as member of the corporation
o Meeting of the BOT
 Sec 93 of the corpo code is not applicable to meeting of BOT.
 Sec 53 of corpo code is applicable where any meeting of BOT may be held outside Philippines unless provided by BLs otherwise
 Rule on video-conferencing or tele-conferencing is also applicable to NSCs
o Election of officers: BOT appoints officers of NSC but Sec 92 of corpo code provides that members may direcly elect officers (unless otherwise
provided in AOI or BLs)
o Non-applicability of nationalization laws
 Foreigner may be a member or an officer of NSC.
 Prohibition of foreign citizens becoming officers does not apply to NSC which do not fall within the coverage of nationalized industry or
area of business
 Specific rules applicable to NSC
o Applicability of stock corporation provisions of the code: Sec 87 of corpo code: provisions governing SCs shall be applicable to NSC except as may
be covered by specific provisions of the code pertaining to NSCs
o For profit purpose in AOI: NSCs cannot include a purpose in AOI which would change or contradict its nature as such: Selling of raffle tickets and
other profit-seeking activities: allowed only if it is necessary or essential to carry out the eleemosynary purpose for which it was organized
o Power to adopt rules and regulations: NSC may adopt rules and regulations provided they are not contrary to the provisions of the BLs, AOI, and
corpo code (internal rules and regulations need not be approved by SEC)
o Non-applicability of rules on subscriptions and pre-emptive rights: Pre-emptive rights are not applicable to NSC even when they involve proprietary
membership
o Rule on increases in capital contributions: no need for formal application with SEC to reflect increase in contributed capital of a NSC. It is sufficient
that it be reflected in financial statements
 Continuance of activities after dissolution: NSC not prohibited from continuing its operations after dissolution. What is prohibited is continuing as a
corporation but they may undertake the purposes for which it was organized (status of an association but not of a corporation)
 Distribution of assets of NSC (sec 94 of corpo code)
o All liabilities and obligations
o Assets held with condition to return, transfer or conveyance by reason of dissolution
o Assets received and held subject to limitations permitting their use only for charitable etc, but not held upon a condition requiring return, transfer
or conveyance by reason of dissolution
o Assets other than those mentioned to be distributed in accordance with AOI or BLs
 o Assets may be distributed to such persons, societies, organizations or corporations whether or not organized for profit as established n adopted
plan of distribution
 Distribution plan – adopted upon approval of at least 2/3 of the members having voting rights
 Conversion of NSC to SC
o SC to NSC – by amendment of AOI
o NSC to SC – cannot be converted by process of amendment of AOI
 NSC must be dissolved first and members may organize a SC
 Foundation
o Foundations not a special category under Corpo code: foundations are NSCs governed by Tile XI of corpo code.
o Tax exemption status: sec 30 of NIRC exempts following corporations from corporation income tax:
 NSC or associations organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes or for rehabilitation
of veterans
 Business leagues, chamber of commerce or board of trade
 Civic league or organization
 Non-stock and non-profit institutions
o Tax deductibility of charitable contributions
 Sec 34 of NIRC allows deductions from taxable gross income to domestic corporations or associations organized and operated exclusively
for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans,
or to social welfare institutions
 Requisites:
 Individual taxpayer: 10% of his taxable net income is derived from business
 Corporate taxpayers: 5% of taxable net income is derived from business
 Contributions and gifts to foundations and NGOs may be deductible in full from taxpayer’s taxable gross income.
 Requirements for NGOs/ foundations
o Non-profit domestic corporation, formed under Philippine laws
o Operated exclusively for scientific, research, educational, character-building and youth and sports development etc
o Not later than 15th day of the third month after the close of the corporation’s taxable year in which contributions are
received, makes utilization directly for the active conduct of the activities constituting the purposes
o Level of administration expenses conform with rules and regulations prescribed by secretary of finance (in no case shall it
exceed 30% of the total expense
o Assets in event of dissolution to be distributed to non-profit domestic corporation organized for similar purposes shall be
distributed by the court to another corporation which best accomplish the general purpose for which the dissolved
organization was organized
 Registration as qualified donee-institutions
o BIR-NEDA Reg. No 1-81: foundation must file with government and tax exempt corporation division of the BIR a sworn
statement showing the character or the organizations.
 o Revenue Reg. No 13-98: Philippines council for NGO certification is accredited to determine if foundation or NGO are
qualified as donee-institution
 Process: submission of following documents:
 AOI and BLs
 SEC certificate of registration
 Affidavit of modus operandi showing:
o Character of organization
o Purpose for which it was organized
o List of project/activities for past 2 years or list of proposed projects/ activities
o Source of income and utilization thereof
o Other facts relating to operations
 Duly accredited financial statements for the pas t2 years
 Brochure
 Annual report or list of accomplishment for last 2 years
 Organizational chart or table of organization
 Copy of SEC registration with AOI and BLs with words non-stock, non-profit
o EO 671 removed PCNC’s accrediting functions and directed appropriate departments or agencies to determine
qualification of non-stock, non-profit corporations, NGOs, foundations
 DSWD
 DOST
 PSC
 NCC
 CHED
 Requirements on donors to foundations: >1K, notice should be given to BIR Commissioner within 30 days after receipt of certificate
of donations
o BIR reportorial requirements: foundation should file not later than 15th day of the 4th month after the close of its taxable
year, an annual information return
 Recent SEC rules governing foundations
o SEC memo no. 1: foundation applying for registration with SEC shall submit the following documents:
 Notarized certification of bank deposit of the amount of not less than 1M
 Statement of willingness to allow SEC to conduct audit
o It is required that the word foundation shall be included in the corporate name
o More burden in the GIS:
 Source and amounts of funds
 Program/activity planned, on-going and accomplished:
 Complete names, addresses and contact number of project OIC
  Complete names, addresses and contact number of project office
 Application of funds
o Penalty for non-compliance: payment of amount no less than 10K. if failure is for 2 consecutive years, it is ground, after
hearing and notice, for revocation of registration of foundation.
 In summary: ‘
 Condominium corporations
o Basis for membership: buyer may not, on basis of sale contract, insist on being registered as the owner of the unit and member of the condominium
corporation
 Evidence of membership is by a title issued upon full payment of unit
 Assignment of voting rights of delinquent members
 Delinquent members allowed to vote under the BLs: their voting rights cannot be assigned to the BOD
 Binding effect of master deed: it binds all members in a condominium corporation, since it is annotated on the condominium certificate
of title of each of the units: “master deed is a contract with all the condominium members who are all co-owners of the common areas
and facilities of the condominium.
 Validity of house rules: power to adopt rules based on two grounds:
 Condominium act which clearly provides that the master deed may expressly empower the management body to enforce all
provisions in the master deed and declaration of restrictions
 Provisions of BLs which authorize BOD of condominium corporation to promulgate rules and regulations on the use and enjoyment
of the common areas
 Liability for assessment dues: Sec 9 of condominium act – master deed may authorize condominium corporation to collect reasonable
assessments to meet authorized expenditures. Expenditures must be based to maintain the common areas and facilities whether a
member uses them frequently or never at all.
o Cutting off of utility services:
 sec 36 of the corpo code – gives power to condominium corporation to amend BLs and master deed to authorize management to
disconnect utility services for condominium units whose owners/members fail to timely remit dues, assessments, and other special
assessment due them
 no express provisions in BLs: SEC stated that since BOD is the governing body of the corporation, then they have power to determine
whether or not such enforcement can properly be regarded as an act of management of corporate affairs.
o Rules on uniformity of leasing-out of units: no valid resolution or house rule limiting and providing for uniformity in the leasing out of the units by
the unit owners.
o Bingo and other fund-raising activities: it fund raising is not within the authorized purposes of the condominium corporation under its AOI, then it
has no authority to undertake such activities. AOI would have to be amended.
o Liability for business tax:
 Within purpose: not liable
 Business under the clothing of a condominium corporation: prohibited
o Venue for actions:
 HLURB: complaint for specific performance with damages by a condominium unit buyer against developer or owner
  RTC: issues of ownership, possession, interest in dispute within private parties
 Educational Corporations
o Incorporation
 Sec 106 of corpo code: educational corporations shall be governed by special laws and general provisions of corpo code
 Sec 107 of corpo code: SEC shall not accept or approve AOI and BLs of any educational institution except upon favorable recommendation
of CHED
 Sec 4(2), Article XIV of 1987 Constitution: educational institutions (except those established by religious groups and mission boards) shall
be owned solely by citizen of Philippines or corporations or association at least 60% of capital of which is owned by such citizens
 No educational institution shall be established exclusively for aliens and no group of aliens shall comprise more than 1/3 of
enrollment in any school
o Exception: schools for foreign diplomatic personnel and their dependents
o Stock and Non-stock educational institutions
 Education act of 1982: educational institutions can only be organized as a non-stock, non-profit corporation
 Amendment: Allowed incorporation of private schools as stock or non-stock educational corporation
 Minimum paid up capital for stock educational institution: P5K for those offering elementary, secondary, tertiary, and post-
graduate courses
 Stock educational corporations are ineligible for any form of government subsidy
 Conversion of NSES to SC
 NSNP educational foundations cannot be converted into a stock corporation by amendment of AOI
o Proper procedure is to dissolve first and thereafter register it as a new stock corporation
 BOT
 NSC: not less than 5 nor more than 15.
o Number of trustees shall be in multiples of 5 and may hold office for a term of 5b years
 Stock educational corporation: between 5 and 15 members and term of 1 year
 Benefits and privileges of educational institutions
 Revenues, assets of NSNPEI used directly, actually, exclusively for educational purposes shall be exempted from taxes and duties
 Religious corporations
o May be incorporated by one or more persons and it shall be governed by general provisions on NSC
o They may exist in perpetuity
o Status of the Roman catholic church in Philippine jurisdiction
 RC has the personality of a corporation which existed for almost a thousand year (corporation by prescription)
o Historical jurisprudence on treatment of Catholic Churches and other religious properties
 Such properties are not public properties nor could they be subject to private property in a sense that anybody could be an owner thereof.
 Corporation sole vs religious societies
 Corporation sole- incorporated by one person
 Religious societies – more than one person
o Classes of, and governing rules for religious corporations
 Corporation sole
 formed by only one qualified individual who must be the:
o Chief archbishop
o Bishop
o Priest
o Minister
o Rabbi
o Other presiding elder of such religious denomination, sect or church.
 Primary purpose: administration and management, as trustee, of the affairs, property and temporalities of any religious
denomination, sect or church
 AOI
o Sec 111 of corpo code: the chief archbishop, etc must file with SEC AOI setting forth the following:
 That eh is chief archbishop, etc and that he desires to becomes a corporation sole
 Rules, regulations and discipline of his religious denomination are not inconsistent with his becoming a
corporation sole and do not forbid it.
 As chief archbishop etc, he is in charged with administration of temporalities and the management of the affairs,
estate and properties of his religious denomination
 Manner by which any vacancy occurring in the office of chief archbishop etc, is required to be filled according to
the rules, regulations or disciplines of the religious denomination
 Place where principal office of the corporation sole is to be established and located, which place must be within
Philippines
 Submission of AOI
o AOI must be verified before filing by affidavit or affirmation of the chief archbishop etc, and be accompanied by a copy of
the commission or certificate of election or letter of appointment of such person duly certified to be correct by any notary
public
o Legal existence begins from and after filing with SEC of the said AOI
 Amendment of AOI
o No specific mechanism for amending the AOI. It is the same with ordinary corporation
 Nationality of corporation sole: corporation sole is deemed to have no nationality
o As a juridical person, it is a creature of Philippine laws
 Acquisition, mortgage and alienation of property
o Corporation sole may purchase, hold real estate and personal property for its church, charitable, benevolent or
educational purposes and may receive bequests or gifts for such purposes.
o They need to obtain an order for that purpose from the RTC where property is situated by filing a petition duly verified by
chief archbishop, etc and may be opposed by any member of the religious denomination
 Acquisition of land in particular
 o Corporation sole is not disqualified under the constitutional provision providing that only Filipino citizens or corporations
of which at least 60% of the capital stock are qualified to hold land in the Philippines (was later on overturned)
o When a corporation sole is headed by a foreigner, it may acquire land when records are submitted showing that members
of the Church or religious denominations represented by it constitute at least 60% Filipinos.
 Filling up vacancies
o Successor can assume office upon filing with SEC of copy of their commission, certificate of election, or letter of
appointment duly notarized
o During vacancy, person authorized and empowered by rules of such denomination shall administer the temporalities and
manage the affairs, estate and properties of the corporation sole
 Dissolution
o Verified declaration of dissolution which shall set forth:
 Name of the corporation
 Reason for dissolution and winding up
 Authorization for dissolution
 Names and addresses of persons who are to supervise the winding up of affairs of the corporation
 Religious societies
 Sec 16 of corpo code: any religious society, order, diocese, organization may incorporate for the administration of its temporalities
or for management of its affairs, properties, and estate upon written consent and affirmative vote of 2/3 of its membership by
filing with SEC its AOI verified by affidavit of presiding elder, secretary or clerk or other member setting forth:
o That such religious society is a religious organization of some religious denomination
o 2/3 of membership have given their written consent to incorporate
o Incorporation of religious society is not forbidden by competent authority or by the constitution of the rule, regulations
or discipline of the religious denomination
o Religious society desire to incorporate for administration of its affairs, properties and esatate
o Place where principal office of corporation is within the Philippines
o Names, nationalities, and residences of trustees elected by religious society to serve for first year or such other period as
may be prescribed of the BOT, to be not less than 5 nor more than 15
 Membership discipline: Corpo code leaves matter of ecclesiastical discipline to religious group
 Secession of religious members: when members chose to separate to the governing religious society, they can claim no rights to
the property of the religious corporation
 Term of existence of religious corporations: they may exist in perpetuity
 Cooperatives
o Rationale for cooperative system: cooperatives are practical vehicle for promoting self-reliance and harnessing people towards the attainment of
economic development and social justice
 Cooperative principles
 Essential characteristics of cooperatives:
o Association of persons
 o Common bond of interest
o Voluntary association
o Lawful common social or economic end
o Capital contributions
o Fair share of risks and benefits
o Adherence to cooperative values
o Registration with appropriate government body
 Definition of cooperatives – duly registered association of persons with common bond of interest who have voluntarily joined togather to
achieve a lawful common social or economic end, making equitable contribution to capital required and accepting fair share of the risks
and benefits of the undertaking in accordance with universally accepted cooperative principles
 Main objective of cooperative system: provide goods and service to its members and enable them to attain increased income and savings,
investments, productivity, and purchasing power and promote among them equitable distribution of net surplus through maximum
utilization of economies of scale, cost-sharing and risk-sharing without.
 Organization and member of cooperatives: members can include persons either natural or juridical adhering to principles of cooperative
 Democratic set-up in cooperatives:
 Equal voting rights on one-member-one-vote principle
 No member shall be permitted to vote by proxy unless otherwise provided in the BLs
 Secondary, tertiary cooperative: voting rights shall be limited to only 5 votes.
 Quorum: 25% of members entitled to vote
 Capital and disposition of net surplus: net surplus arising out of operations of cooperative belongs to its members and shall be equally
distributed
 BOD: composed of not less than 5 nor more than 15 for a term of 2 years (no director shall serve for more than 3 consecutive terms
 General assembly: composed of members who are entitled to vote under AOI and BLs
 Exclusive powers:
o Determine and approve amendments to AOI and BLs
o Elect, appoint members of BOD and to remove them for just cause
o Approve developmental plans of cooperative
o Other matter requiring 2/3 vote of all members of general assemble
 Other features: term of 50 years with right to extend by amendment. Juridical existence starts upon issuance of certificate of registration
by cooperative development authority.
FOREIGN CORPORATIONS

 Nature of corporate creature

o Foreign corporation (FC) is one that owes its existence to the laws of another state and it has no legal existence within the state in which it is
foreign
o Doctrine of state comity: a corporation created by the laws of one state is usually allowed to transact business in other states and to sue in the
courts of the forum
o Filing of action by a FC before Philippine courts would mean that by voluntary appearance, the local courts have actually obtained jurisdiction over
the person of the foreign corporation.
 Definition of FC
o Sec 123 of corpo code: 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
o Legal implications of reciprocity rule
 Unless our own nationals are granted business access to foreign state, then the corporate entities of such foreign state would likewise not
be granted legal access within Philippine territory
 Doctrine of state consent: will of the State is the binding force of international law, but they also put emphasis on the way consent is
expressed by the State; the will of the State is expressed in domestic law through legislation, and in the case of international law through
consent through international rules
 Requirement to obtain license to do business in Philippines: verified application with SEC setting forth required data, including certified copies of AOI and
BLs as well as certification of reciprocity
o Designation of resident agent
 Names and address of foreign corporation’s resident agent authorized to accept summons and process in all legal proceedings and pending
the establishment of a local office, all notices affecting the corporation
 In case of change of address of agent, it shall be his duty to notify SEC in writing.
o Agreement on service of summons with SEC
 FC shall file with SEC an agreement or stipulation that if at any time corporation cease to transact business in Philippines or shall be without
any resident agent in the Philippines on whom any summons or other legal processes may be served, then in any action or proceeding
arising out of any business or transaction which occurred in the Philippines, service of summons or other legal processes may be made
upon SEC.
 SEC shall transmit within 10 days by mail a copy of such summons and other legal processes to the corporation at its home or principal
office.
 All expenses incurred by SEC shall be paid in advance by the party at whose instance the service is made (FC)
o Oath on reciprocity compliance: duly executed certificate under oath by the authorized official of the jurisdiction of incorporation, attesting to the
fact that laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein.
o Deposit of Securities
  60 days from issuance of license to do business, such FC shall deposit with the SEC, the benefit of its present and current creditors,
Philippine securities in the actual market value of at least P100K, subject to further deposit of additional securities every 6 months after
each fiscal year equivalent in actual market value to 2% of the amount by the FC’s gross income for the fiscal year exceeds P5M.
 SEC may require securities in event that deposit has decreased by at least 10% of the actual market value at the time they were deposited.
o Effects of being issued license
 It may commence to transact its 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
 Strict rules are necessary since FCs doing business in the Philippines, is bound by all laws, rules and regulations applicable to domestic
corporations of the same class.
 Licensed FC deemed domesticated:
 Once a FC has obtained a license to do business, it is deemed domesticated and should be subject to no harsher rules that are
required of DCs.
 Unlike natural persons, FCs are required to appoint a resident agent for service of process.
 Consequences of not obtaining license to do business
o On standing sue and be sued
 Sec 133 of corpo code: FC doing business in the Philippines without first obtaining license to do business:
 Shall not be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the
Philippines
 But may be sues or proceeded against before the Philippine courts or administrative tribunals on any valid cause of action
recognized under Philippine laws.
 Sec 134 of corpo code: FC transacting business in Philippines as agent or acting for and in behalf of another foreign corporation or entity
not duly licensed to do business in Philippines (ground for revocation of such license)
o On validity of contracts entered into
 Contracts entered into by FCs doing business in Philippines without the requisite license remain valid and enforceable. The requirement
of registration affects only the remedy and the lack of capacity at the time of the execution of the contracts was cured by subsequent
registration.
o Conflicting SC rulings
 In pari delicto ruling:
 Although FCs did not obtain necessary certificate or license to do business as required under RA 5455, it did not exempt them
from BOI requirements since to accept this view would open the way for an interpretation that by doing business in country
without first securing required written certificate from BOI, a FC may violate or disregard safeguards which the law seeks to
establish
 Contract of transaction between a local or FC would qualify the latter to be doing business in Philippines without obtaining
requisite license would not be actionable at all before Philippine court or administrative bodies. If the foreign corporation brings
an action on said contract or transaction, it will be dismissed under Sec 133 of corpo code as a consequence of not obtaining
license.
 If local counterparts brings an action on contract, it would be dismissed on grounds of in pari delicto ruling.
  Doctrine of estoppel: If local investor knew that the FC had no license to do business in the Philippines, then they are estopped from using
the lack of license to avoid their obligation.
 Revoking pari-delicto ruling in favor of estoppel doctrine
 A corporation is estopped from challenging the personality of the corporation after having acknowledged the same by entering
into a contract with it.
 Estoppel doctrine seems to be the prevailing rule
 Eriks ruling as the recommended formula:
 A judgment denying a foreign corporation relief from our courts for failure to obtain requisite license to do business should not
be construed as an attempt to foreclose the ultimate right to collect on an obligation.
 Eriks doctrine would compel every FC doing business in the Philippines without a license to first go to the process of obtaining a
license and then file proper suits before the local courts
 Jurisprudential tests of doing business
o Need to distinguish from isolated transactions: The determination of whether a FC is doing business in the Philippines must be based on facts of
each case.
o Twin characterization tests for doing business:
 Nature of act or transaction – WON the FC is continuing in Philippines the body or substance of business or enterprise for which it was
organized
 Existence of continuing intent: WON there is an intent on part of FC to undertake a continuity of commercial dealing and arrangements in
Philippines as to distinguish it from an isolated transaction
o Essence of intent to pursue continuity of transactions: it is not really the fact that there is only a single act done that is material for determining
whether a corporation is engaged in business in the Philippines since other circumstances must be considered. Where a single act or transaction
of a foreign corporation is not merely incidental or casual but is of such character as distinctly to indicate a purpose on the part of the FC to do
other business in the state, such act will be considered as continuing business.
 Extension of credit as essential indication of intent: what really constitutes doing business is not number or quantity of transactions but
the intention to continue as a body of its business in the country
o Contract test – 3rd branch of what constitutes doing business
 As long as perfection and consummation of series of transactions are done outside of Philippine territory, the same would not constitute
doing business in the Philippines, even if products should be manufactured or processed in the Philippines by locals.
 Implementing rules seeking to overcome contract test
 Rules and regulations of FIA attempted to override contract test doctrine.
 Evolving role of contract test:
 General rule: FC will not be regarded as doing business in the host state simply because it enters into contracts with residents of
the host state where such contracts are consummated outside the host state.
 Concept of doing business under FIA of 1991
o Statutory definition of doing business
 A corporation organized under the laws of the Philippines of which at least 60% of capital stock outstanding and entitled to vote is owned
and held by citizens of Phlippines
  When a corporation and its non-Filipino SHs owns stocks at least 60% of capital stock outstanding and entitled to vote of both corporations
must be owned and held by citizens of the Philippines and at least 60% of the members of BOD of both corporations must be citizens of
the Philippines in order that the corporation shall be considered a Philippine national.
 Doing business includes the following enumeration:
 Soliciting orders, service contracts, opening offices, whether called liaison offices or branches
 Appointing representatives or distributors domiciles in the Philippines or who in any calendar year stay in the country for a period
or periods totaling 180 days or more
 Participating in management, supervision or control of any domestic business, firm, entity or corporation in the Philippines
 Any other 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 and in progressive prosecution of commercial gain,
or the purpose of object of the business organization
 FIA makes clear that following acts does not constitute doing business:
 Mere investment as a SH by a foreign entity in a DC
 Having a nominee director of officer to represent its interests
 Appointing representative or distributor domiciled in Philippines
 DTI IRR also excludes these acts as doing business:
 Publication of general advertisement
 Maintaining stock of good in Philippines
 Consignment by foreign entity of equipment with a local company
 Collecting information in Philippines
 Performing services auxiliary to an existing isolated contract of sale
o Rulings on indentors and brokers
 FCs are exempted from obtaining a license when it transacts through a middlemen, acting their own names
o Law on regional or area headquarters
 FCs registered under PD 218 as a regional or area headquarter are deemed to be doing business in the country (Omnibus Code of 1987)
 No license is required since area or regional headquarters are established only to supervise, coordinate, and communicate with their own
affiliates, subsidiaries, or branches in the Asia-Pacific region and are not allowed to do business in Philippines like the branch or
representative offices of FCs licensed to do business
 Regional operating headquarters are allowed to derive income in Philippines by performing qualifying services to its affiliates, subsidiaries
and branches in the Philippines, in Asia-Pacific and in other foreign markets
 Special rules pertaining to actions on corporate names, trade names and trademarks
o Pre-statutory jurisprudence: the right to use corporate name and trade name of a FC is a property right, a right in rem which it may assert and
protect in any of the courts of the world even in countries where it does not acknowledge any territorial boundaries but extends to every mark
where the trader’s goods have become known and identified by the use of the mark.
 o Under Trademark Law: Section 21-A of TL – FC, whether licensed or not, may bring an action before Philippine courts for infringement, unfair
competition, false designation of origin and false description, if the country of which the foreign corporation is a citizen, or in which it is domiciled
by treaty, convention, or law grants a similar privilege to corporation or juridical persons of the Philippines
o Under Intellectual Property Code: Sec 160 of IPC – any foreign national or juridical person who meets the requirements of Section 3 of this act and
does not engage in businesses in the Philippines may bring a civil or administrative action hereunder for opposition, cancellation, infringement,
unfair competition, or false designation of origin and false description, whether or not it is licensed to do business in the Philippines under existing
laws.
 FCs as petitioners/ plaintiffs
o The disqualification under sec 69 of corpo code was considered as a matter of defense with burden of proof on the part of the party raising it.
o Isolated transaction rule: FC not doing business in the Philippines is not barred from seeking redress in the Philippine courts when it sues on
isolated transactions
o The fact that a FC is not doing business in the Philippines must be disclosed if it desires to sue in the Philippines courts under the isolated transaction
rule
o Even if the challenge to a FCs capacity to sue is raised in the preliminary stage through a motion to dismiss, the demand for a clear factual finding
to justify the dismissal cannot be dispensed with. Rule 16.2 of Rules on Civil Procedure allows not only the hearing on the motion to dismiss but
also for the parties to submit evidence on the questions of facts involved.
 FCs as respondent/ defendants
o When a FC engages in business in the Philippines, it has presence in the country and therefore it may be sued before local courts or administrative
tribunals, WON it has obtained proper license to do so.
o Sec 133 of corpo code: when a FC engages in business in the Philippines without license, it may be sued
o When a FC merely enters into an isolated transaction, it is not deemed present within the Philippine territory
o Our laws would have no binding effect on FCs which do not have presence in the Philippines.
o Service of summons under ROC hinged upon doing business in the Philippines
 Rule 14.12 of Rules on Summary Procedure: service upon foreign private juridical entities only on premise that it has transacted business
in the Philippines.
 If foreign private entity is not registered in the Philippines or has no resident agent, ROC allow service of summons to be served with leave
of court, be effected out of the Philippines through any of the following means:
 By personal service coursed through the appropriate court in the foreign country with assistance of DFA
 Publication once in newspaper of general circulation in country where defendant may be found and by serving a copy of summons
and the the court order by registered mail at last known address of defendant
 By facsimile or any recognized electronic means that could generate proof of service
 By such other means as the court may in its discretion direct
o Nexus of doing business in the Philippines
 When defendant is a non-resident and refuses to appear voluntarily, the court cannot acquire jurisdiction over his person even if the
summons be served by publication for he is beyond the reach of juridical process.
 In order for proper service of summons be effected against a FC, such FC must be one which is doing business in the Philipipnes
  Valid service of summons premised upon doing business: As long as a foreign private corporation does or engages in business in this
jurisdiction, it should and will be amenable to process and the jurisdiction of the local court, this is for the protection of the citizens
 Service of summons on counsel: when FC entered into contracts through its counsel, a suit in local courts against such FC would justify the
service of summons upon such counsel even when counsel has not been expressly authorized by the FC to receive summons because
courts will not sanction a doctrine that a corporation can deny the power of an agent when an advantage is to be obtained by such denial
and share in the fruits of the contract when it is to its interest to consider such contract binding.
 Designation of local agents conclusive on service of summons: where FC has specifically designated a person to receive summons, that
designation is exclusive and service of summons is without force and effect unless made on him
 Allegations on doing business merely preliminary: doing business must first be established in order that summons can be made and
jurisdiction acquired, does not require that evidence must first be adduced to prove doing business before summons can be served upon
the FC. Fact of doing business must be established first by appropriate allegations in the complaints
o Consent to local jurisdiction: consent may also authorize local courts and administrative agencies to exercise jurisdiction over foreign corporations
even when they are not doing business in the Philippines.
o Facilities management strain: if a FC not engaged in business in Philippines is not barred from seeking redress from courts in the Philippines, the
same corporation cannot claim exemption from being sued in the Philippine courts for acts done against persons in the Philippines.
 Suppletory application of the contract test: service of summons requires that a FC be one which is doing business in the Philippines. Fact
must first be established in order that summons can be made and jurisdiction acquired.
 Signetic clarification: a FC although not engaged in the Philippines, may still look up to our courts for relief; reciprocally, such corporation
may likewise be sued in the Philippine courts for acts done against a person or person in the Philippines
 Latest word on the matter: service of summons upon its agent can be made in order that court could assume jurisdiction over FC.
(exemptions of FC from liabilities particularly arising from acts done against a person or persons in Philippines)
o Contractual stipulations on venue: when a contract between a local and a foreign corporation stipulates venue to be within courts of Philippines,
SC has recognized the same to be consent to being sued in Philippines even when the foreign corporation does not engage in business in the
Philippines
 Domicile and residence of FCs
o Domicile of FC belongs to state where it was incorporated and such domicile as a corporation may have is single in its essence and a corporation
can have only one domicile which is the state of its creation
o Residence of corporation: where it exercises its corporate functions or the place where its business is done.
 Laws applicable to FCs
o Any FCs doing business in Philippines shall be bound by all laws, rules and regulations applicable to DCs of same class save and except for such
only those that provide for the creations, formation, organization, dissolution of corporations
 Amendment of AOI
o Amendment in AOI or BLs of FC are amendment, such FC shall file within 60 days with SEC a duly authenticated copy of AOI or BLs indicating in
capital letters or by underscoring the change or changes made, duly certified by authorized officials of country or state of incorporation
 Merger or consolidation
o One or more FC doing business in Philippines may merge or consolidate with DCs or corporations permitted by law.
o Requirement on merger and consolidation in corpo code have to be complies with
 o When FC shall be a party to merger or consolidation in its home country or state, such FC shall within 60 days after merger or consolidation
becomes effective, file with SEC a copy of articles of merger or consolidation duly authenticated by proper officials country or state where merger
or consolidation was effected.
 Revocation of license to do business:
o Failure of FC to:
 File annual report or pay fees required
 Appoint, maintain resident agent or failure, after change of resident agent or his address, to submit to SEC statement of such change
 Submit to SEC statement a statement of change of resident agent or his address
 Submit to SEC an authenticated copy of any amendment to Articles of merger or consolidation
 Pay any and all taxes, impost, assessments or penalties to the Philippines government or any of its agencies
o Misrepresentation of any material matter in any application, report, affidavit, or other documents submitted
o Transacting business in the Philippines
 Outside of purposes for which it was authorized
 As agent of acting in behalf of any FC or entity not licensed to do business in the Philippines
o Any other ground as would render it unfit to transact business in Philippines
 Withdrawal of FCs: by filing a petition for withdrawal of license
o Petition has to be published for 3 consecutive weeks in newspaper of general circulation
o SEC will not issue certificate of withdrawal unless all claims have been paid, compromised or settled and all taxes, imposts, assessments, penalties
due to Philippine government have been paid
 Case for non-stock and non-profit FCs
o Corpo code does not exclude FCs which are non-stock and non-profit
o Issue of reciprocity: host country has every right to provide for terms and conditions under which a non-stock or non-profit FC shall be permitted
to undertake its eleemosynary activities within the host state
o License to engage in eleemosynary activities: registration requirement by administrative agencies in order to regulate non-stock non-profit
corporations
o The issue of presence
 Filing of suits by non-stock non-profits FC: courts acquire jurisdiction
 When NSNP FCs are sued, there is no clear doctrine yet