SY 2018-2019 501_Corporation – GAVIOLA

(3) Commencement From the moment of the execution From the date of the issuance of the
For brevity: of Juridical Personality of the contract of partnership certificate of incorporation by the
• RCC – Revised Corporation Code SEC
• Articles – articles of incorporation (4) Powers Any power authorized by the Only the powers expressly granted
partners except if contrary to law, by law or implied from those
• ACS – Authorized Capital Stock
morals, good customs, public order granted or incident to its existence
• 2/3 (s//m) – Vote of the stockholders representing at least 2/3 of the outstanding capital stock or of at
or public policy
least 2/3 of the members in a meeting called for the purpose
(5) Management When not agreed upon, every Board of directors or trustees
• TS – treasury shares
partner is an agent
• OCS – outstanding capital stock
(6) Effect of Mismanagement A partner can sue a co-partner who Suit against a member of the board
• Majority of the board (quorum) – majority of the board present in a meeting where there is a quorum
mismanages who mismanages must be in the
• IOW – in other words name of the corporation
• OW – otherwise (7) Right of Succession None Has
(8) Extent of Liability to Third Liable personally and subsidiarily Only to the extent of their
Persons for partnership debts to third investments
persons (sometimes solidarily in
GENERAL PROVISIONS case of wrongful acts, etc)
(9) Transferability of Interest Cannot transfer as to make the Has the right to transfer without
transferee a partner without the prior consent of other stockholders
TYPES OF BUSINESS ORGANIZATIONS:
consent of all other partners
(10) Firm Name For limited partnership, required to Any, provided it is not identical or
1. Sole Proprietorship
add the word “Ltd.” deceptively similar to any
It is the most basic form of business organization. It has only one proprietary owner personally conducting business
registered firm name or contrary to
under his own name or under a business name. The individual himself is the business. You cannot separate the
existing laws
individual from the business.
(11) Dissolution Any time by the will of any or all With the consent of the State
partners
2. Partnership
(12) Governing laws Civil Code Revised Corporation Code (RCC)
Article 1767, NCC. By the contract of partnership, two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.
ATTRIBUTES OF A CORPORATION (Sec. 2, RCC)
Two or more persons may also form a partnership for the exercise of a profession.
1. It is an artificial being;
The essence of partnership is that it is “contractual in nature”. It is created by mere consent. The moment the 2. Created by operation of law;
partners agree as to what they will contribute and how to conduct business, there will now be a contract of 3. Has the right of succession; and
partnership between them. You don’t need to register the partnership with the SEC in order to create it. Aside from 4. Has the powers, attributes and properties expressly authorized by law or incident to its existence
being a contract, a partnership is a separate and distinct entity from that of the partners. It is basically a bridge
between sole proprietorship and a corporation. Partnership is a contract and at the same time an entity, a business
Artificial being
organization thus, reflecting its peculiarity.
§ Corporation has a separate juridical personality. It can enter into obligations and contracts, and when it has
3. Corporation liabilities, the corporation shall be liable but its members or stockholders could not be held personally liable as
Section 2, RCC: A corporation is an artificial being created by operation of law, having the right of succession and the they are considered to be separate from the corporation itself.
powers, attributes, and properties expressly authorized by law or incidental to its existence.. § Doctrine of Piercing the Veil of Corporate Fiction: Basic in corporate law is the principle that a corporation has
a separate personality distinct from its stockholders and from other corporations to which it may be connected.
DISTINCTIONS PARTNERSHIP CORPORATION It is a fiction created by law with the intent that it should be treated as true. However, under this doctrine, the
(1) Manner of Creation By mere agreement of the parties By law or by operation of law corporation’s separate juridical personality may be disregarded when there is an abuse of the corporate form.
(2) Number of partners/ At least 2 persons; no max limit Not more than 15 persons; no min Whenever the doctrine applies, the principal and the conduit will be treated as one. The controlled corporation
incorporators limit will be deemed to have, so to speak, no separate mind, will or existence of its own, and is but a conduit for its
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principal. If applicable, the corporation is merely an aggregation of persons whose liabilities must be treated as
one with the corporation. The conduit corporation will then be solidarily liable with the principal.
§ It means that the veil or the artificial or separate personality of the corporation is disregarded and that the
members or the stockholders thereof are made personally liable because they are using the corporation as an
alter ego as a means to defeat public convenience, justify a wrong, protect a fraud, defend a crime, to commit
injustice or as a vehicle for the evasion of an existing obligation.
Heirs of Fe Tan Uy vs. International Exchange Bank
iBank granted loans to Hammer Garments Corporation, covered by PNs and deeds of assignment. The loans were
likewise secured by a P9M REM executed by Goldkey Development Corporation over several of its properties and
a P25M Surety Agreement signed by Chua and his wife, Uy. However, Hammer defaulted in the payment of its
loans, prompting iBank to foreclose on Goldkey’s REM. The mortgaged properties were foreclosed, leaving an
unpaid balance. For failure of Hammer to pay the deficiency, iBank filed a Complaint for sum of money against
Hammer, Chua, Uy, and Goldkey before the RTC. Uy claimed that she was not liable to iBank because she never
executed a surety agreement in favor of iBank. Goldkey also denies liability, averring that it acted only as a third-
party mortgagor and that it was a corporation separate and distinct from Hammer.
A reading of the complaint reveals that Uy, together with her husband Chua, acted as surety of Hammer, as
evidenced by her signature on the Surety Agreement which was later found by the RTC to have been forged.
Despite such finding, it still rendered Uy liable for the obligation of Hammer not on the ground that she signed
the surety agreement, but due to the fact that she was an officer of such corporation.
WON Uy, the wife of Chua, can be personally liable being the officer of Hammer Garment? NO
WON the doctrine of piercing the veil is applicable to Goldkey being the surety where its property has been used
as the mortgage on the loan by the hammer garment? NO
§ Under a variation of the doctrine of piercing the veil of corporate fiction, when two business enterprises are
owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect
the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them
as identical or one and the same. Considering that the only basis for holding Uy liable for the payment of the
loan was proven to be a falsified document, there was no sufficient justification for the RTC to have ruled that
Uy should be held jointly and severally liable to iBank for the unpaid loan of Hammer. Liability would not
attach directly to Uy for the sole reason that she was an officer and stockholder of Hammer. The fact that Uy
was an officer and director of the corporation is insufficient to hold him liable since the corporation has its
separate personality distinct from the persons composing it.
§ It is a recognition that while a corporation is granted by law a personality distinct and separate from its
stockholder – meaning it’s a separate person, it’s an artificial being which is recognized as a person under the
law separate from its stockholder and its members. That artificial being is only created by law, a mere legal
fiction, because in reality, there is no real person there. That recognition as a person is a mere legal fiction
created by law so that when that artificial being is used as a means to commit fraud or injustice, then the law
allows that this legal fiction will be taken down. The law allows that it will pierce the veil of this separate entity
and consider it as one with the persons opposing it. That is the reason behind the Doctrine of Piercing the
Veil.
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Solidbank Corporation vs. Mindanao Ferroalloy Corporation
MINFACO secured loans from Solidbank. The loans were later consolidated and restructured, evidenced by a PN
signed by Cu and Hong, both officers of the corporation. Thereafter, the corporation stopped its operations and
the loan was left unpaid. The bank filed a complaint against the corporation, and with it, impleading the officers
who signed the agreement and PNs. Petitioner argues that Cu and Hong were jointly or solidarily liable with
Minfaco, either because their participation in the loan contract and the loan documents made them co-makers;
or because they committed fraud and deception, which justifies the piercing of the corporate veil. In the PN, they
signed above the printed name of the corporation – on the space provided for Maker/Borrower, not on that
provided for Co-maker. Petitioner contends the following badges of fraud and evident bad faith: 1) the individual
respondents misrepresented the corporation as solvent and financially capable of paying its loan; 2) they knew
that prices of ferrosilicon were declining in the world market when they secured the loan in June 1991; 3) not a
single centavo was paid for the loan; and 4) the corporation suspended its operations shortly after the loan was
granted.
WON the officers should be liable solidarily with the corporation? NO
§ Being an artificial entity, a corporation can only act through its board of directors. It, having no physical hands
to sign a contract, acts through its officers or board of directors.
§ When they act on behalf of the corporation, it doesn’t mean that the obligations created are the obligations
of the board or its officers because pursuant to Sec. 2, BP 68, a corporation is an artificial being having a
separate and distinct personality from its stockholders and officers. But if the representatives would
voluntarily take on themselves the obligation, that’s allowed. In which case, they would be solidarily liable
with the corporation because they bound themselves as such.
§ Hong and Cu actually signed in one set of signature – as mere representatives of the corporation. It would
have been different if the officers signed the second time around because in this case, they are already signing
in their own capacity and not mere representatives of the corporation. By signing, it means that they are
really liable to the loan. In that case, they will be solidary liable because they already bind themselves not as
officers of corporation but in their personal capacity.
§ There is a principle in NIL that was discussed in the case: if you are only signing as a representative of a
particular corporation and you are actually authorized to represent the corporation, you should not be held
liable because your personality is distinct from the corporation. You are merely acting on behalf of the
corporation.
Remedy left for creditors when the doctrine of piercing the corporate veil is disregarded.
Remedy is against the corporation, when it is proved that the grounds of piercing the corporate veil are not present
or when they did not bind themselves voluntarily, the creditors have no other remedy but to go after the corporation.
When the assets of the corporation are not enough, they will have to go through insolvency proceeding and follow
the rule in preference of credits. Just because a corporation is liable does not mean that its people are liable also, as
long as they did not voluntarily bind themselves and as long as there are no grounds to pierce the veil.
Effect of officers signing as co-maker or co-debtor
That is not piercing the veil. They are liable because of the contract entered into. There is no need to pierce the veil;
no need to prove that they were in bad faith. Piercing the veil is based on different grounds.
Corporation as an artificial personality
Corporation has a personality which is separate and distinct from its stockholders, board of directors and officers.
This means that the corporation can own properties and it can incur obligations in its own name. By fiction of law,
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the person of the corporation is separate from the person of stockholders. Stockholders may compose the
corporation but they are not the corporation. However, in certain instances the fiction or the veil of the corporation
and its stockholders may be lifted, in which case, the corporation is considered as one with its board of directors and
stockholders. There are only very specific instances where this is allowed because the law considers the corporation
as a separate entity for the convenience of the parties involved and to facilitate economic transactions. If this
artificial being is being used to commit injustice or to defraud the public, the law will lift the veil because this is only
a legal fiction, it’s not reality. The law will pierce the veil of legal fiction and consider the corporation as one with its
stockholders.
Zambrano vs. Phil Carpet Manufacturing Corp
The employees of Philippine Carpet Manufacturing Corporation were notified of the termination of their
employment on the ground of cessation of operation due to serious business losses. They were of the belief that
their dismissal was without just cause and in violation of due process because the closure was a mere pretense
to transfer its operations to its wholly owned and controlled corporation, Pacific Carpet Manufacturing
Corporation (Pacific Carpet). They claimed that the job orders of some regular clients of Phil Carpet were
transferred to Pacific Carpet; and that several machines were moved from the premises of Phil Carpet to Pacific
Carpet. The petitioners, in asking the Court to disregard the separate corporate personality of Pacific Carpet and
to make it liable for the obligations of Phil Carpet, rely heavily on the former being a subsidiary of the latter. So,
now they are claiming from both corporations since alter ego principle applies. In its defense, Phil Carpet
countered that it permanently closed and totally ceased its operations because there had been a steady decline
in the demand for its products due to global recession, stiffer competition, and the effects of a changing market.
WON Pacific Carpet may be held liable for Phil Carpet’s obligations? NO
§ The concept of corporation, being an artificial being, does not only apply to the directors, officers or
stockholders (natural persons), it also applies to ANY OTHER ENTITY to whom the corporation may be related,
even if that entity is a (Juridical entity).
§ Since a corporation has a separate entity of its own, the owners may protect themselves by creating an entity
that would absorb the obligations that they may incur and therefore shield them on the doctrine of limited
liability. What happens then is the whole obligation of the supposed obligors may not be enforced against
them because of the shield of the corporate fiction. In this case, the creditors will be prejudiced on such use
of the corporation. That’s why the legal fiction will not be allowed to prevail.
§ As regards the piercing of veil, it is allowed only in 3 instances:
(1) evasion of obligation
(2) protection of commission of a wrong
(3) alter ego cases (one given in this case) – a corporation is created by another person or juridical person
through which the transactions of that person is directly done through the corporation. The essence of
alter ego principle is that the person is using the corporation in shielding himself from any possible
liabilities that may arise from its transactions.
§ The difference between the first instance and the third one is that in the former, there might be a pre-existing
intent to defraud; whereas in the third one, there might be none, that he is just shielding himself from any
possible liability.
§ In alter ego cases, it must pass the three tests:
ü instrumentality test – requires that the subsidiary be completely under the control and domination of the
parent (finances, policy and business practice in respect to the transaction attacked; the person has control
including the financial activities and policies
ü fraud test – there must be a clear proof of fraud that the corporation was used to commit a fraud
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ü harm test – there is a causal connection between the injury to the person and the use of the corporate
fiction
§ In this case, the mere fact that Pacific is a subsidiary will not allow piercing. With regard to the transfer of
assets, it was found out that the transfer of asset was actually a sale from Philippine carpet to Pacific Carpet
which explains the claim of the petitioners why there are income generated by the Philippine carpet.
§ The essence of the alter ego principle is CONTROL. If somebody is controlling the corporation such that the
corporation basically does not have its own mind because a person is controlling the complete dominion (not
just majority) of its finances, policies and business practice. So, whatever the decision of this controlling
person is considered the decision of the corporation. So control, not just financial but also with respect to
business decisions and operations, and you use this control in order to commit a fraud or wrong, and that the
control causes harm or injury to other persons. In this case, the corporation is merely your alter ego such that
whatever obligations incurred by the corporation because of your control can be attributed to you and that
person controlling the corporation becomes liable.
§ The ruling of the SC in this case is that, there was no alter ego or control because while there is control in the
subsidiary, it does not amount to alter ego. There is absence of harm and fraud because the move of Philippine
Carpet to cease its operation is lawful and there is no unfair labor practice committed.
§ In order for there to be piercing of the veil based on alter ego the three elements must occur together. The
fact that you own all the stocks in a certain corporation and another corporation owns the stocks in another
corporation does not mean automatically that you will apply the alter ego rule. All three elements must occur.
There was complete control, there was an intention to defraud using that control, and you caused harm to
another person because of that control. In this case, it is true that there was control by Phil Carpet of Pacific
Carpet. It owned 100% of the shares. However, it was also found that there was no fraud and there was no
harm because Phil carpet’s reason for closure was legitimate. It was shown by the audited FS of the
corporation that it was really losing money and based on the Labor Code, that is a sufficient ground to
terminate your employees. There was no fraud and technically there was no harm.
Letter of Credit
It is a financial instrument. It is used basically as a bridge between buyer and seller especially if they are located in
different countries.
Illustration: if I were a buyer, I am not going to pay you until I get the goods because if I pay you, what if I don’t get
the goods? On the other hand, if I was the seller, I’m not also going to deliver because what if I don’t get paid? Okay
ra if we’re in the same City. What if you’re in HK and I’m in Cebu. So how do you reconcile? You do a letter of credit
transaction. As the buyer, you’re going to go to a bank, open a letter of credit and then the bank will contact its
correspondent bank where the seller is, and then you will say “hey, seller, I have here a letter of credit in your favor,
you ship the goods to the buyer then give me the shipping documents, the moment you give the complete shipping
docs, the bank and I will pay you.” So the seller, knowing that he will get paid by the bank, will ship the goods, the
bank now will turn around and tells the buyer “hey Mr. buyer, the goods are on their way, these are the docs you will
need to claim the goods. Now pay me what I paid to the seller”
Martinez vs. CA
• CLL – a foreign corporation engaged in buy and sell of molasses. One of its suppliers was Mar Tierra
• Mar Tierra – domestic corporation owned partially (42%) by RJL Fishing Corp; president: Wilfredo Martinez
(son of Ruben); Executive VP: Gonzales
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• RJL – one of its majority stockholders is Ruben Martinez (68%).
As part of the transaction, CLL opened a letter of credit in favor of Mar Tierra. Mar Tierra shipped goods to CLL
knowing that it’s going to get paid under the letter of credit. (But ultimately, the letter of credit is a liability of the
buyer because iya man i-reimburse ang bank, so the letter of credit is the liability of CLL.) BPI International Finance
granted CLL a letter of credit for US$3M. CLL then opened 2 money market placements (mao ni ila gamiton pag
bayad2x) with BPI where Wilfredo Martinez was the authorized signatory in both accounts but the 2 signature
cards also bore Ruben Martinez and Lacson’s signatures. The three of them became the joint account holders of
the said money market placements. Martinez and BPI executed a back-to-back credit facility. Wilfredo Martinez
and the other owners of CLL executed a suretyship agreement where they obliged themselves solidarily with CLL
in order to pay for CLL’s credit facility.
Gonzales, as a representative of CLL, requested BPI to transfer US$340k to an account registered to Mar Tierra as
payee. Months later, Martinez also made the same request for the transfer. BPI complied but instead of deducting
the funds from either of the three accounts mentioned, it posted the US$340k as A/R of CLL since the money
market placements hadn’t matured yet. Worse, when these have matured, they just allowed Wilfredo to make
withdrawals and did not collect the US$340k. So, it failed to secure its reimbursement. BPI pressured Martinez
and Gonzales to pay for such. They had CLL’s account audited and it was confirmed that the corporation owed
BPI this amount. Despite demands, they did not make any remittance. BPI then filed a suit to recover the sum
stating that the CLL was merely a paper company or an alter ego of Wilfredo and Ruben since the majority of the
stockholders of the concerned corporations are the same.
WON the mere identity of the officers is sufficient to pierce the corporate veil? NO
§ Ruben – not liable. The ground for including him as one of the solidary debtor was merely on the basis of
piercing the veil or the alter ego doctrine. It alleged that CLL was merely a paper corporation and a sham used
to defraud the bank. The only proof that they had is the common stockholding between Mar Tierra and CLL.
That is not a sufficient ground to apply the alter ego principle because for such to apply, it must pass the 3-
pronged test (control, fraud, harm). In this case, the bank may have able to establish the common
shareholdings between CLL and Mar Tierra, but it had no proof to show that Mar Tierra was using CLL to
conduct fraud. In fact, there was a valid business transaction between these 2 corporations. Moreover, Mar
Tierra has other clients other than CLL.
§ Wilfredo and others – solidarily liable NOT because of the application of the doctrine of piercing of veil but
because they voluntarily entered into a surety agreement. They were bound by the contract they entered
into.
By operation of law
§ A corporation is different from a partnership for the latter can be formed by mere consent. A corporation,
however, is formed once it gains the approval of the SEC. Technically, a corporation needs to comply with the
necessary requirements set forth by law and from that, the issuance of the Certificate of Incorporation follows
which in turn starts its corporate existence.
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Right of succession / Perpetual Succession
§ A corporation has a capacity of continuous existence irrespective of the death, withdrawal, insolvency or
incapacity of the individual members or stockholders and regardless of the transfer of their interest or shares of
stock.
§ Perpetual Succession is that continuous existence which enables a corporation to manage its affairs, and hold
property without the necessity of perpetual conveyances, for purposes of transmitting it. By reason of this
quality, the ideal and artificial person remains the same in its legal entity and personality though frequent
changes may be made of its members.”
§ Blackstone on the concept of perpetual succession: “All individual members that have existed from the
foundation to the present time, or that shall ever hereafter exist, are but one person in law, a person that never
dies; in like manner as the River Thames is still the same river, though parts which compose it are changing every
instant.” (char)
§ IOW, a corporation continues to exist even if there is a change in those who compose it. Death of a shareholder
or a transfer of his shares will not dissolve it.
§ When a stockholder transfers his share, it does not even need the consent of the other stockholders as opposed
to partnership. In the transfer or assignment of shares or rights in a corporation, a stockholder does not need
the consent of the other stockholders because they own it in their own right. Moreover, the relationship in a
partnership involves high fiduciary relationship.
§ GR: A stockholder can transfer his share in the corporation even without the consent of the other stockholders.
Exc: If they expressly provide for a restriction on transfers as reflected in their Articles of Incorporation.
Powers, attributes, and properties of a corporation
§ Once a corporation is registered or has been approved by the SEC, it can immediately perform the different
obligations or exercise rights related to the purpose for which it is formed.
§ Kinds of Powers: express, implied, incidental
CLASSIFICATION OF CORPORATIONS
(1) As to number of persons who compose them:
a. Corporation aggregate – A corporation consisting of at least 5 members or stockholders defined as an
artificial body of men. It is composed of diverse individuals, the ligaments of which body, the franchises and
liberties bestowed upon it, bind and unite all into one, and consists the whole frame and essence of the
corporation.
TN: Technically, the corporation will not be dissolved if you only have 3 corporators
but the law requires that you must have at least 5 members in the board, and each
member of the board must have at least 1 share. The failure of non-compliance will
result to penalty by the SEC.
b. Corporation sole – It consists of only one person or member. It is for the purpose of administering and
managing, as trustee, the affairs, property and temporalities of any religious, denomination, sect or church.
It may be formed by the chief archbishop, bishop, priest, minister, rabbi, or other presiding elder of such
religious denomination, sect or church.
c. One Person Corporation. – It is a corporation with a single stockholder. Only a natural person, trust, or an
estate may form such.
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(2) As to whether they are for religious purpose or not:
a. Ecclesiastical corporation – organized for religious purposes
b. Lay corporation – organized for a purposes other than for religion
(3) As to whether they are for charitable purposes or not (Lay Corp classification):
a. Eleemosynary corporation – established for charitable purposes
b. Civil corporation – established for business or profit
(4) As to their legal right to corporate existence:
a. De jure corporation – existing in fact and in law
b. De facto corporation – existing in fact but not in law
ü valid law under which the corporation may be incorporated;
ü attempt in good faith to incorporate; and
ü exercise or use of corporate powers
(5) As to whether they are open to the public or not:
a. Close corporation – corporation's issued stocks are held of record by not more than a specified number of
persons, not exceeding 20
b. Open corporation – open to any person who may wish to become a stockholder or member thereto
(6) As to their relation to another corporation:
a. Parent or holding corporation – has the power, either directly or indirectly, to elect the majority of the
directors of the subsidiary corporation.
b. Subsidiary corporation – one which is so related to another corporation that the majority of its directors can
be elected directly or indirectly by the parent corporation; parent corporation owns at least a majority of its
shares and thus has control.
c. Affiliated corporation – owning or being owned by common management or by a long-term lease of its
properties or other control device.
(7) As to whether they are corporations in a true sense or only in a limited sense:
a. True corporation – exists by statutory authority
b. Quasi-corporation – exists without formal legislative grant. It is an exception to the general rule that a
corporation can exist only by authority of law; and it may be:
o Corporation by prescription – not formally organized as a corporation as such but has been duly recognized
by immemorial usage as a corporation, with rights and duties enforceable under the law.
o Corporation by estoppel – in reality is not a corporation (de jure nor de facto) because it is so defectively
formed, but is considered a corporation in relation to those only who, by reason of their acts or admissions,
are precluded from asserting that it is not a corporation. There is a group of persons holding itself out in
the public as a corporation and it enters into a contract with third persons, thus they cannot deny their
existence to those persons. The persons making the corporation by estoppel is solidarily liable. They are
liable as an association because they are not considered as a corporation. They are estopped from claiming
that they are not a corporation but their liability is individual.
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(8) As to functions:
a. Public corporation – formed or organized for the government of a portion of the State for the purpose of
serving general good and welfare (ex. LGUs)
b. Private corporation – formed for some private purpose, benefit, or end; may include, stock, non-stock, GOCC,
quasi-public or publicly listed corporations
(9) As to existence of stocks:
a. Stock corporation – has capital stock divided into shares and is authorized to distribute to the holders of such
shares dividends or allotments of the surplus profits on the basis of the shares held; composed of
stockholders
b. Non-stock corporation – does not issue stocks and does not declare or distribute dividends; organized for
non-profit purposes; composed of members
(10) As to manner of creation:
a. Corporation created by special law
b. Corporation created under a general law
(11) As to nationality:
i. Place of incorporation test (RCC):
a. Domestic corporation – formed, organized or existing under Philippine laws
b. Foreign corporation – 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
IOW, we are talking about the classification based on the law of the place of Incorporation. It does
not speak about the citizenship of its corporators. Thus, it can be possible that you have a domestic
corporation but all of its stockholders are foreign. There is no prohibition as to organizing a
corporation that is 100% foreign-owned except in cases of nationalized activities/corporations
ii. Citizenship of stockholders (Foreign Investment Act):
a. Philippine National – 100% owned by Filipino citizens even if incorporated abroad
b. Foreign-owned corporation – majority of stockholdings are owned by foreigners, even if incorporated in the
Philippines; any corporation that doesn’t meet the definition of ‘Philippine National’ as discussed below.
TN:
ü Which classification you apply depends on what’s the purpose. If it’s a matter on “can the corporation do
business?” and to secure a permit, then you take a look at the place of incorporation and apply the RCC. If it’s a
question on “what activity can that corporation engage in?” Look at the citizenship of the stockholders and apply
the FIA.
ü How do you determine nationality based on the FIA? Apply the Control test: 60% of the Capital stock outstanding
and entitled to vote must be owned by Filipino Citizen.
ü Corporate Layering
o a type of arrangement whereby a corporation has for its stockholder another corporation. It is a valid structure
UNLESS it can be established that it is used to circumvent the law or the constitution.
o FIA only requires that the investee corporation and investor corporation should be owned by Filipino citizens
owning at least 60% of OCS entitled to vote and its board of directors should be composed of Filipino citizens
owning at least 60% as well.
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Philippine National Definition [Sec. 3, FIA]:
(1) citizen of the Philippines or a domestic partnership or association wholly owned by citizens of the Philippines;
or
(2) a corporation organized under the laws of the Philippines of which at least 60% of the OCS and entitled to vote
is owned and held by citizens of the Philippines; or
(3) a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a
Philippine national and at least 60% of the fund will accrue to the benefit of the Philippine nationals.
TN: Where a corporation and its non-Filipino stockholders own stocks in a SEC-registered
enterprise, at least 60% of the OCS 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 the Board
of Directors of both corporations must be citizens of the Philippines, in order that the
corporations shall be considered a Philippine national.
TESTS TO DETERMINE CITIZENSHIP OF STOCKHOLDINGS
A. Control test – shares belonging to corporations at least 60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality
B. Grandfather rule – if the percentage of the Filipino ownership in the corporation is less than 60%, only the
number of shares corresponding to such percentage shall be counted as Philippine nationality
NATIONALIZED ACTIVITY
Sec. 8, Foreign Investment Negative List (FINL) enumerates the activities which are limited or reserved to Filipinos.
It is a list of areas of economic activity whose foreign ownership is limited to a maximum of 40% of the equity capital
of the enterprise engaged therein. If the activity is not listed, that activity can be performed by a corporation
incorporated in the Philippines which is 100% foreign-owned. Going back, the FINL shall have 2 component lists:
a) List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and
specific laws.
Ex. Natural resource exploration, development and use; public utility
corporations; land ownership; educational institutions; and advertising
companies.
b) List B shall contain the areas of activities and enterprises regulated pursuant to law:
1. which are defense-related activities, requiring prior clearance and authorization from the Department of
National Defense [DND] to engage in such activity, such as the manufacture, repair, storage and/or distribution
of firearms, ammunition, lethal weapons, military ordnance, explosives, pyrotechnics and similar materials;
UNLESS such manufacturing or repair activity is specifically authorized, with a substantial export component,
to a non-Philippine national by the Secretary of National Defense; or
2. which have implications on public health and morals, such as the manufacture and distribution of dangerous
drugs; all forms of gambling; nightclubs, bars, beer houses, dance halls, sauna and steam bathhouses and
massage clinics.
§ Small and medium-sized domestic market enterprises with paid-in equity capital less than US$200k
- reserved to Philippine nationals
§ Exception – allowed to non-Philippine nationals, having a minimum paid-in capital of US$100k if:
ü they involve advanced technology as determined by the Department of Science and Technology; or
ü they employ at least 50 direct employees.
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Narra Nickel Mining and Dev. Corp. vs. Redmont Consolidated Mines
Redmont, a domestic corporation, filed an action in order to cancel or revoke the mineral production sharing
agreements (MPSAs) of the 3 corporations – Narra, McArthur and Tesoro. MPSAs are like permits which allow or
authorize a foreign corporation to exploit, explore or extract minerals or do mining in certain portions of the
country. Redmont tried to apply for the same permits in certain parts in Palawan but it learned that these permits
were already distributed to said corporations. Redmont then claimed that they are disqualified from having such
MPSAs because they are basically foreign-owned and pursuant to our Constitution, conduct of mining activities
is a nationalized activity (referring to exploitation, development and utilization of natural resources).
Mcarthur Mining, Inc. (MMI) capital structure:
ü MBMI – 40% (owns 3,998 out of 10k shares); 100% owned by Canadian
ü MMC – 60%; Filipino Corp
MMC shareholders:
ü MBMI – 33%; paid-up capital = P2M
ü Olympic – 67%; paid-up capital = P0
WON the nationality of MMI is Filipino? NO
(TN: bisag di ni MBMI basta kay if i-add tanan interest sa shareholders na foreign corps nya
ila gi-own in total kay ni exceed sa 40%, not Philippine national gihapon)
The “Control Test” is still the prevailing mode of determining WON a corporation is a Filipino corporation, within
the ambit of Sec. 2, Art. II of the 1987 Constitution. When there is doubt based on the attendant facts and
circumstances of the case in the 60-40 Filipino-equity ownership in the corporation, then it may apply the
“Grandfather Rule”.
Steps:
1. Apply control test
o If failed – automatically disqualified from being considered a Philippine National
o If passed without any doubt – automatically considered a Philippine National.
o If passed, but with doubt = apply grandfather rule
“Doubt” is any circumstance, which renders the beneficial ownership and control of the corporation outside of
Filipino ownership. It is not when you fall below 60%. In this case, the following circumstances casted doubt:
ü MBMI fully funded the joint ventures or ventures that MMI will enter into. The fund of MMC actually came
from MBMI;
ü Foreign corporation practically provides all the technical support and supplies for that particular venture;
ü Foreign corporation, although has minor ownership in said corporation, is the onne which prepares its
economic viability studies;
ü During the pendency of the case, the 3 corporations converted its MPSA application to an FTAA application,
thus confirming that they did not have the capacity to be given the MPSA.
Consequently, grandfather rule was applied and then concluded that MMI is indeed a foreign corporation because
it has to account MBMI's shareholdings in MMC which in turn is a shareholder of MMI. Applying the 60-40 foreign
equity requirement based on the Constitution, it is evident that MBMI adding up his percentage of shares in MMC
and MMI, it will exceed the 40% limitation.
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Solution:
MMI owned by foreign national [(3,998/10k) + (60% x 33%)] = 59.78% / 60%
This is a clear violation of the foreign equity limitation.
Gamboa vs. Teves
PLDT shareholders:
ü GTE – American company; major stockholder
… For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not
ü PTIC – owns 26% which was bought from GTE; owns 13.847% of the total outstanding common shares of PLDT
… voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens
o PHI – became the ower of 111,415 shares of the ‘26% owned by PTIC’ representing 46.125% of the OCS
of PTIC; incorporators: Gapud and Campos, among others
o First Pacific – Bermuda-registered & HK-based firm; acquired the remaining 54%.
In 1986, the 111,415 shares of stock (46.125%) of PTIC held by PHI were sequestered by the PCGG. They were
later declared to be owned by the Republic of the Philippines. Subsequently, upon selling the 111,415 shares or
46.125% of PTIC through a public bidding, Parallax won the bid. Thereafter, First Pacific announced to match the
bid of Parallax but failed to do so. Through its subsidiary MPAH, First Pacific entered into a Conditional Sale &
Purchase Agreement with the government for the 111, 415 shares. It was then contended that since PTIC is a
stockholder of PLDT, the sale by the Philippine Government of 46.125% of PTIC shares is actually an indirect sale
of 12M shares or about 6.3% of the OCS of PLDT. With the sale, First Pacific’s common shareholdings in PLDT
increased from 30.7% to 37%, thereby increasing the common shareholdings of foreigners in PLDT to about
81.47%. This violates Section 11, Article XII of the 1987 Philippine Constitution which provides, “No franchise,
certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens
of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per
centum of whose capital is owned by such citizens of the Philippines.”
Petitioner
The sale should be nullified as it would result in an increase in First Pacific’s common shareholdings in PLDT from
30.7% to 37%, and this, combined with Japanese NTT DoCoMo’s common shareholdings in PLDT would result to
51.56% foreign shareholdings which is over the 40% constitutional limit. And when you say ‘capital’, you have to
look at common shares only. If that is the basis, foreigners already own 80% which is beyond the 60% limitation.
Respondent
If you look at all the outstanding shares, the 80% ownership in common shares of the foreigners will only be
around 17%. Hence, PLDT is compliant since this is below 60%.
WON the 60% is to be applied based on the total outstanding shares instead of shares with voting right?
The term "capital" in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in
the election of directors, and thus in the present case only to common shares, and not to the total outstanding
capital stock comprising both common (CS) and non-voting preferred shares (PS).
Under FIA, which governs foreign investments in the Philippines, Capital is considered 60% of the capital stock
outstanding and entitled to vote. Capital was explained through differentiating common from preferred shares
of PLDT. The shares that foreign nationals own was already in violation of the Constitutional requirement. First,
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the foreigners owned 64% of the common shares. Common shares include the sole, exclusive right to vote in the
election of directors. Thus, when they are such conferred with that right, they are already in control and in
management of the corporation. However, Filipinos only owned 35% of the PLDT’s common shares. In preferred
shares, the Supreme Court described them as mere investors who do not have the right to vote in the election of
directors and officers. The preferred shares of PLDT is owned by 99% Filipinos. Thus, they do not have the voting
rights—they cannot control, manage or participate. However, the rest are already owned by the foreigners.
enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
cannot be considered held by Philippine citizens or Philippine nationals. Individuals or juridical entities not
meeting the aforementioned qualifications are considered as non-Philippine nationals.
Gamboa vs. Teves (MR)
SC denied the MR. The SC now realized that their ruling in the First Gamboa v. Teves case actually narrowed down
the definition of capital. Because of the MR, the SC revised their ruling although they did not admit that they
revised it. They just maintained that it was their ruling all along. But it’s not true because they said “entitled to
vote in the election of directors.” According to them, what they focused on is on the pronouncement “that mere
legal title is not sufficient, but full beneficial ownership.”
Since a specific class of shares may have rights and privileges or restrictions different from the rest of the shares
in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting rights but also to shares without voting rights. Preferred
shares, denied the right to vote in the election of directors, are anyway still entitled to vote on the 8 specific
corporate matters (Sec. 6 – ABS ICMID). Thus, if a corporation, engaged in a partially nationalized industry, issues
a mixture of shares, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each
class of shares, whether common, preferred non-voting, preferred voting or any other class of shares. Such
uniform application to each class of shares insures that the "controlling interest" in public utilities always lies in
the hands of Filipino citizens.
Roy vs. Herbosa
“60 % outstanding capital stock & entitled to vote”
§ Gamboa Case: 60% should be based on the total shares entitled to vote in the election of directors
§ Gamboa Resolution: 60% should be based on each class of shares regardless if voting or non-voting; apply it
to each class separately
§ SEC: (1) 60% of the total voting shares (CS), and (2) 60% of the total outstanding shares, whether voting or
not.
The rulings in the first Gamboa case and its MR caused a lot of confusion. This prompted the SEC to clarify how
to apply the 60-40 reqt. So here comes the SEC coming out on its own rules, which was not based on the First
Gamboa Case neither was it based on the Gamboa Resolution. The petitioners then filed a case questioning the
validity of such Memorandum Circular issued by the SEC.
Which is the prevailing rule?
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The prevailing rule is the SEC Memo Circular. The SC said that everything it discussed in the Gamboa Resolution
regarding the basis of the 60% capital requirement was a mere Obiter. And the prevailing rule is still the Gamboa
Decision. The 60 % should be based on the Total Capital stock entitled to vote on the election of directors. But
since the SEC requirement is more stringent because it does not look at the total voting but also takes a look at
the total OCS, then its SEC memorandum circular is valid. So as long as the memorandum circular exists, that is
the prevailing rule.
COMPONENTS OF A CORPORATION
1. Corporators (incorporators; stockholders; members)
o Incorporators are always corporators, but corporators are not always incorporators because incorporators
refer only to those persons who first formed the corporation and signed the Articles of Incorporation.
o Some incorporators stop being corporators after they sell their share but they never stop being incorporator
because their names will remain in the Articles of Incorporation of the corporation.
o Under the law, in order to be an incorporator, you have to be a stockholder but not all stockholders are
incorporators.
o Members are the corporators in a non-stock corporation
2. Board of Directors/Trustees – governing body of the corporation; to be a director, he must own at least one
share; to be a trustee, he must be a member.
3. Officers – The law provides that a corporation must have a President, Corporate Secretary and Treasurer. The
corporation, however, may add more positions under its by-laws.
TN:
§ Promoters – bring about the formation of the corporation but they are not necessarily part of the corporation.
§ Underwriters – you need them in case the corporation intends to list its shares or to issue its shares to the public.
Their role is to guarantee the sale of the securities to be issued by the offeror corporation such that if the sales
are not sold, the underwriter undertakes to purchase the remainder. So, an underwriter is not necessarily part
of the corporation. They can become part of the corporation if they become stockholders by purchasing the
shares but their undertaking as an underwriting is separate from the components of the corporation.
§ Subscribers – are also stockholders of the corporation. The only way that the subscriber cannot be a stockholder
of the corporation is if the ACS of the corporation is not sufficient to cover the subscription. The subscriber
becomes a stockholder only when the corporation gets a permit from the SEC to increase their ACS. So generally,
subscribers are stockholders because you don’t need to fully pay your subscription to become a stockholder. The
moment you subscribe, you start to enjoy the rights of a stockholder already.
STOCK OR SHARE OF STOCK
§ It is one of the units into which the capital stock is divided.
§ Example: You have 1M capital divided into 1M shares, that means that your capital is divided into 1M parts and
each share represents 1 part.
§ It represents the interest or right which the owner has:
ü in the management of the corporation through the exercise of the voting right (if permitted for such class of
stock by the Articles)
ü interest or right of the stockholder in a portion of the corporate earnings in the form of the dividends to be
distributed; and
ü interest or right of the stockholder in the residual assets (assets-liabilities) of the corporation upon its
dissolution and winding up.
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§ GR: Stockholders do not have a right to the earnings of the corporation. It’s not a matter of right, the earnings
only become a matter of right once it is declared by the board of directors as dividends.
§ Stock is an asset on the part of the shareholder. It is an intangible asset representing its right and interest in the
corporation.
TYPES OF CAPITAL:
1) Authorized Capital Stock (ACS) – amount of stock indicated in the Articles which the corporation is authorized
to issue. This is your basic capital. A corporation cannot issue more than its ACS. If you want to issue more, you
have to amend your Articles to increase your ACS.
2) Issued/Subscribed Capital Stock – amount of the capital stock subscribed whether fully paid or not.
o Deed of Assignment – buying shares from issued capital stock
3) Unissued/Unsubscribed Capital Stock – (ACS – SCS)
o Deed of Subscription – buying shares from the unissued capital stock
4) Paid-up Capital Stock – the amount of the subscribed capital which are actually paid by the subscribers or the
stockholders
5) Outstanding Capital Stock (OCS) – portion of the capital stock which is issued and held by persons other than
the corporation itself; Subscribed Capital Stock (SCS) is the same Outstanding Capital Stock (OCS) if there are no
Treasury Shares. If you have treasury shares then you have a different OCS. (OCS = SCS – TS)
6) Treasury stock – have been issued by the corporation, but are no longer outstanding because they have been
acquired by the corporation. They are not retired shares. They do not revert to the unissued shares of the
corporation but are regarded as property acquired by the corporation which may be reissued or resold by the
corporation at a price to be fixed by the board of directors.
Legal Capital
§ De Leon: It is the amount equal to the aggregate par value and/or issued value of the OCS. It does not include
Share Premium or Additional Paid-In Capital (APIC). APIC results when par value shares are issued above par. (Ex.
issued 10k shares, par P10, at P15 per share; APIC = P50k). In the case of no par value shares, the entire
consideration received forms part of legal capital and shall not be available for distribution as dividends.
§ Atty: This refers to capital contribution. But financially, capital is not just the financial contribution. It includes
the earnings in the corporation in the form of RE. So assets-liabilities, that composes your legal capital. But this
term is not really used here in the Philippine practice.
Illustration:
A newly established corporation with:
§ ACS – P10M divided into 1M shares at P10 per share.
§ Subscribed Capital Stock – P5M
§ Unissued Capital Stock – P5M
§ Paid-up Capital Stock – P4M
§ TS – P1M
In this case:
o Under the RCC, the 25-25 reqt as to the subscribed capital stock and paid-up capital stock is no longer required
in a newly established corp. It is only a reqt when it comes to an ‘increase’ in ACS (IOW, in operation na si
corp).
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o TS is still included in the Subscribed/Issued Capital Stock since somebody already paid for it, even if the which are unpaid. If you want to do that, there is a way but it is not an outright sale of the unpaid shares. You
corporation was the one which has reacquired and paid for it. But they are no longer OCS. are not selling the shares. You are going to sell your ‘right to the subscription’ through Deed of Assignment.
o Total OCS – P4M. (5M-1M) § Let’s say you paid 70% of your 1M subscription and 300k remains unpaid. You are still considered as a stockholder
o There’s no difference in the right of stockholders who have paid or have not yet paid their subscription. for the whole 1M. If the directors make a call for payment, and you did not pay, the directors will render your
They’re all entitled to the same right, even the right to the dividends. Only when your shares are declared as entire subscription (1M) delinquent, not just the unpaid portion (300k). Now, again, we go to public bidding,
delinquent will be the time that you stop enjoying stockholder rights. there’s publication, etc. If no one will buy up to third publication or public bidding, then the corporation has that
option to buy the delinquent shares (1M). Now, when the corporation buys back the subscription, that means it
TREASURY SHARES (Sec. 9, RCC) now owns the 1M.
§ These are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing
corporation through purchase, redemption, donation, or some other lawful means. Classification of Shares
§ Such shares may again be disposed of for a reasonable price fixed by the board of directors. When the corporation is established, then the incorporators will set the characteristics of the shares of stock of the
§ They are not retired shares. Retired shares are those which the corporation reacquires with no intention of corporation. So they are the ones who initially establish the rights and obligations of the shares. After the
reissuing. And when that happens, you decrease your ACS. You go to the SEC and apply for a reduction. And it is establishment of the corporation, you can still reclassify the shares through amendment. The BOD has to make the
not easy because you have to have the consent of all your creditors because of the trust fund doctrine. The proposal, approved by the majority of the Board, and then it has to be ratified by the stockholders.
capital of the corporation is the trust fund for its creditors.
§ When you acquire TS, it doesn’t mean that you decrease your ACS. They do no revert to unissued capital stock. Classes of Shares
They are still part of the issued capital of the corporation, but no longer outstanding.
§ The corporation now has the option of reissuing or retiring the shares. But in order to retire them, you need to 1. Par value or no par value
file your amended Articles first with the SEC and wait for its approval. § Par value share – one with a specific money value fixed or stated in the articles of incorporation and appearing
§ TS do not give the corporation the right to dividends nor the right to vote. Although TS form part of the assets of in the certificate of stock for each share of stock of the same issue. The primary purpose thereof is to fix the
the corporation, the corporation does not become a stockholder of itself. minimum issue price of the shares; thus, assuring creditors that the corporation would receive a minimum
§ You cannot reissue retired shares but you can reissue TS. amount for its stock. These cannot be issued below par but can be issued more than par and the excess thereof
shall form part of the paid-in capital but it is accounted for as a share premium (SP) or as an additional paid-in
Requirements before a corporation can purchase its own shares capital (APIC).
It depends whether the shares concerned are: § No par value share – one without any stated or par value appearing on the face of the certificate of stock.
a) Redeemable shares (Sec. 8, RCC) IOW, it is a stock which does not state how much money it represents. This has no “par value” but it has always
- These may be issued by the corporation when expressly provided in the articles of incorporation. These are an “issued value” based on the consideration for which it is issued. This kind of shares shall be deemed fully
shares which may be purchased by the corporation from the holders of such shares upon the expiration of a paid and non-assessable and the holder of such shall not be liable to the corporation or to its creditors in
fixed period, REGARDLESS of the existence of unrestricted RE in the books of the corporation, and upon such respect thereto. The consideration given shall be considered as the full amount of the issue price. IOW, there
other terms and conditions stated in the articles of incorporation and the certificate of stock representing the can be no subscription receivable. These shares may not be issued for a consideration less than the value of
shares, subject to rules and regulations issued by the SEC. P5.00 per share. The entire consideration received by the corporation for its non-par value shares shall be
treated as capital and shall NOT be available for distribution as dividends (Sec. 6 (h), RCC). However, there are
b) Non-redeemable shares (Sec. 40, RCC) shares that cannot be issued without par, namely:
ü board approval o Preferred Shares
ü unrestricted RE o Shares in banks
ü for a legitimate corporate purpose o Shares in trust companies
o Shares in insurance companies
Delinquent Shares (to be discussed thoroughly later on) o Shares in public utilities, and
§ If the directors already make a call for payment, and the subscribers still do not pay, the shares are declared as o Shares in building and loan associations.
delinquent. Consequently, you have to go through a public bidding. If no one will bid on the shares, the
corporation is allowed to acquire them. But in acquiring such, the corporation is deemed to have paid for the Distinction Par Value No Par
shares. So, in a sense, the TS are deemed fully paid. When you subscribe shares, let’s say 1M imung subscription, As stated in the articles of Seventh: That the authorized Seventh: That the capital stock of
one rule that you have to learn about subscription is that subscription is indivisible (principle of indivisibility of incorporation capital stock of the corporation is the corporation is
shares). When it becomes delinquent, you cannot say that I will just get the part that I paid and then bahala na ___________ PESOS (P______), __________________ shares
ang corporation for the part that I did not pay. It does not work that way. In fact, you cannot sell your shares divided into ________ shares with without par value.

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the par value of _________ PESOS the SEC because they will not allow you to change without going through conversion. So, take note that
(P______) per share. conversion needs 2 amendments UNLESS the convertibility feature is already provided.
As to subscription You can subscribe without paying You cannot subscribe without
the subscription. You only have to paying. They are always considered 7. Founders’ share – Such classification must be provided in the Articles. This is an exception to the rule that “no
pay the moment the date for the to be fully paid and non-assessable. share may be deprived of voting rights except those classified and issued as ‘preferred’ or ‘redeemable’ shares
payment comes as specified in the unless otherwise provided in this Code.” They are not deprived of their right to vote but it has the effect of
subscription agreement or when depriving the common shareholders of their right to vote. Where the exclusive right to vote and be voted for in
the BOD makes the call. the election of directors is granted, such right must be for a limited period not exceeding 5 years and must be
approved by the SEC.
2. Voting or non-voting
§ Voting share – It is generally customary to give the right to vote to common stock and to withhold it from the 8. Redeemable share – This may be issued only when expressly provided in the Articles. Unrestricted RE is not
preferred. Whenever a vote is necessary to approve a particular corporate act, such vote refers only to stocks required. The only requirement by the SEC is that after redemption, the corporation should have sufficient assets
with voting rights except in certain cases when even non-voting shares may also vote (ABS ICMID). The rule is to pay for liabilities and to cover capital stocks as required. Redeemable shares can be redeemed either by the
not “one stockholder, one vote” but “one share, one vote”. corporation or shareholder or both at a certain redemption price. If you have shares that are redeemable, it
§ Non-voting share – No share may be deprived of voting rights except those classified and issued as “preferred” means that the parties have already agreed beforehand whether it is redeemable at the option of the
or “redeemable” shares, UNLESS otherwise provided in the Code (ABS ICMID). Where non-voting shares are corporation or whether redeemable at the option of the stockholder. The date of redemption depends on the
provided for, the Code requires that there shall always be a class or series of shares which have complete Redemption Rights & Agreement. When the redemption date comes, the stockholder can compel redemption
voting rights. Moreover, if stock is originally issued as voting stock, it cannot thereafter be deprived of the right because it’s a matter of right already. If the corporation does not redeem and the stockholders do not compel
without the consent of the holder. redemption, it’s now a matter of agreement between the two. If the stockholder dili ganahan magpa redeem sa
iyahang shares, then the corporation and the stockholder can just agree that they’ll just amend their Articles to
3. Common or preferred put in there that such are no longer redeemable. But if the redemption date arrives and the stockholders and
§ Common shares (CS) – basic shares issued by the corporation. You cannot have a corporation that has no corporation do not say anything and after a few years, the stockholders now say “ui redeem our shares”, it’s now
common shares. a matter on how the redemption date was worded in the Articles and the agreement. For example, if it states
§ Preferred shares (PS) – They may be voting, convertible, or redeemable. PS are shares specified in the Articles “Redemption can take place anytime after March 30”, then the redemption can still be done. But if it is worded
which may be: as “Redemption shall only be until March 30”, then they can no longer redeem. If the corporation acquires
ü Preferred as to assets in case of liquidation – TN: the dividends in arrears in this case are fully payable. redeemable shares, they may thereafter be:
or o Retired – amendment of the Articles is required to decrease the ACS.
ü Preferred as to dividends, and which in turn, may be either: o Not retired – the corporation can sell the shares or they can be issued as property dividends because these
o Cumulative or non-cumulative; or shares, once reacquired by the corporation, become its property.
o Participating or non-participating
9. Treasury share – shares may be lawfully issued by the corporation and fully paid for and later reacquired by it
4. Promotion share – Issued to those who may originally own the mining ground or valuable rights connected either by purchase, redemption, donation, forfeiture or other lawful means. Unrestricted RE is required.
therewith, for incorporating the company or for services rendered in launching or promoting the welfare of the
company, such as advancing the fees for incorporation, attorney’s fees, surveying, advertising, etc. Kinds of Preferred Shares AS TO DIVIDENDS
1. Cumulative PS – entitles the holder thereof not only to the payment of current dividends but also to dividends
5. Share in escrow – is subject to an escrow agreement. It is in effect the issuance of shares subject to suspensive in arrears. All these dividends must be paid to the holder of such PS first before any dividends can be paid to the
condition. holders of CS. This kind of shares protects PS against manipulation of the financial accounts of the corporation
to conceal profits.
6. Convertible stock – is convertible or changeable by the stockholder from one class to another class (such as from 2. Non-Cumulative PS – entitles the holder thereof to the payment of current dividends only in preference to
preferred to common) at a certain price and within a certain period. Conversion of shares is a 2-step process of common stockholders. If dividends are not declared in a given year, the right to the dividends for that particular
amendment (1) providing convertibility feature in the Articles (if your Articles do not provide such right to year is extinguished.
convert, you need to amend the articles first to allow such conversion); and (2) actual conversion (wipe out or 3. Participating PS – gives the holder thereof not only the right to receive the stipulated dividends at the preferred
delete the convertible shares). When you do convert , you need to amend the Articles to provide for example rate but also to participate with the holders of the CS in the remaining profits pro rata after the CS have been
the issuance or addition of new common shares and delete the convertible preferred shares as you no longer paid the amount of the stipulated dividend at the same preferred rate.
have those class of shares once conversion takes place. The two amendments can be filled simultaneously with
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4. Non-Participating PS – entitles the holder thereof to receive the stipulated preferred dividends and no more. Case 4 – Non-participating PS; (if silent, presume non-cumulative)
The balance, if any, is given entirely to the common stocks. Unrestricted RE Preference Share Capital Common Share
5. Cumulative-participating PS – entitles the holder not only to dividends in arrears but also, after receiving his Capital
preferred share of dividends, to participation with the holders of CS in the remaining profits. Balances 3.6M
Preference dividend (300k) 300k
Illustration Balance to common 3.3M 3.3M
The shareholders’ equity in the statement of financial position on December 31, 2019 showed the following:
Case 5 – Cumulative-Participating PS
Preference Share Capital, 12% P100 par, 25k shares P 2,500,000 Unrestricted RE Preference Share Capital Common Share
Common Share Capital, P100 par, 50k shares 5,000,000 Capital
Retained Earnings 3,600,000 Balances 3.6M
Total Shareholders’ Equity (SHE) P11,100,000 Preference dividend (600k) 600k
Common dividend (600k) 600k
Dividends have been paid on the preference share up to December 31, 2017. Balance for participation 2.4M
Preferred (1/3 x 2.4M) 800k
Case 1 – Cumulative PS (if silent, presume non-participating) Common (2/3 x 2.4M) 80d0k 1.6M
Unrestricted RE Preference Share Capital Common Share Total 1.4M 2.2M
Capital
Balances 3.6M Instances where non-voting shares are still required to vote: (Sec. 6, RCC) [ABS ICMID]
Preference dividend (600k) 600k a. Amendment of the articles of incorporation;
Balance to common 3M 3M b. Adoption and amendment of bylaws;
The shareholders holding preferred shares get dividends for 2 years, 2018 and 2019. (2.5M x 12% x 2 yrs) c. Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate property;
d. Incurring, creating, or increasing bonded indebtedness
Case 2 – Non-cumulative PS (if silent, presume non-participating) e. Increase or decrease of authorized capital stock;
Unrestricted RE Preference Share Capital Common Share f. Merger or consolidation of the corporation with another corporation or other corporations;
Capital g. Investment of corporate funds in another corporation or business in accordance with this Code; and
Balances 3.6M h. Dissolution of the corporation.
Preference dividend (300k) 300k
Balance to common 3.3M 3.3M DOCTRINE OF EQUALITY OF SHARES
The shareholders holding preferred shares get dividends only for the current year (2019). (2.5M x 12% x 1 yr) § In the absence of any provision in the articles of incorporation and in the certificate of stock to the contrary, all
stocks, regardless of their class nomenclature, enjoy the same rights and privileges and subject to the same
Case 3 – Participating PS (if silent, presume non-cumulative) liabilities.
Unrestricted RE Preference Share Capital Common Share § Regardless of the nomenclature as to how the shares are called in the Articles, if such does not expressly provide
Capital the difference in the characteristics of the shares, all shares are considered equal. IOW, if the Articles provides
Balances 3.6M only of ‘common and preferred shares’ but does not provide for anything else, the two shares are treated equally.
Preference dividend (300k) 300k § TN: Having cumulative shares is not in conflict with those shares being participating. Cumulative means you have
Common dividend (600k) 600k the right to dividends in arrears. Participating means you have the right to participate with the common shares.
Balance for participation 2.7M So, preferred shares can actually be both cumulative and participating.
Preferred (1/3 x 2.7M) 900k
Common (2/3 x 2.7M) 80d0k 1.8M
Total 1.2M 2.4M INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS
Preferred = 2.5M/7.5M = 1/3; Common = 5M/7.5 = 2/3
How to incorporate:
1. Make a name reservation online on the SEC website + pay the reservation fee
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2. Submission to the SEC of: ü Of legal age
a. Name reservation ü Must own or be a subscriber to at least 1 share of the capital stock.
b. Articles of Incorporation ü Majority must be residents of the Philippines. (amended? No longer required under RCC?)
c. By-laws § If the corporation is engaged in nationalized activities – comply with the minimum Filipino stockholdings required
under special laws or Constitution.
PURPOSE(S) OF THE CORPORATION
§ Primary Purpose – if the corporation has more than one state purpose, it shall state which is the primary or main NAME OF THE CORPORATION
purpose and which is/are the secondary or subsidiary purpose/purposes. § In practice, you will have to ask 3 corporate names from your client just in case the first name won’t pass.
§ Secondary Purpose – this refers to the secondary activities the corporation can do. § Once you have the name, apply for reservation and once reserved, put that in the Articles of Incorporation.
§ Requirements for a valid corporate name:
PRINCIPAL OFFICE ü Must not be similar or identical with any other existing corporation; or
§ It is important because any notice or communication or any letters that the government will issue or send to you ü Must not be patently deceptive, confusing or, contrary to existing laws; or
will be addressed or directed to that address that you have indicated in the Articles. It must be specific and must ü Nature of the business is somewhat similar.
contain the street number, street name, barangay, building name, unit number, municipality or the city where it § Test in determining identity/similarity: if it has the tendency to mislead a person using ordinary care and
is located. discrimination.
§ GR: if there is a change of address, you have to amend the articles of incorporation § TN: The SEC allows the parent and subsidiary corporations to have the same name. Provided, that the
§ Exc: if there is a change of address but within the same city, you can file a general information sheet (GIS) with corporation which had a priority right will send a letter of consent. In this case, you cannot reserve your name
the new address. online. You will have to write a letter to the SEC’s main office in Manila to basically grant permission for the
subsidiary to use the name of the parent.
CORPORATE TERM § Under Intellectual Property Law (IPL), if you use a generic name for a product, that name will not be protected.
§ A corporation shall have perpetual existence unless its articles of incorporation provides otherwise. You cannot register it, and other companies can use that name. For example, your product name is “bag”. You
§ A corporate term for a specific period may be extended or shortened by amending the articles of incorporation. cannot prevent other corporations from using that word because that is a generic word.
§ GR: No extension may be made earlier than 3 years prior to the original or subsequent expiry date(s) § The right of succession in corporate law basically is that any change in the stockholdings or in the board of
§ Exc: There are justifiable reasons for an earlier extension as may be determined by the Commission. directors of the corporation will not change the continuity of the corporation. A change in name is basically just
§ Date of effectivity: The extension shall take effect only on the day following the original or subsequent expiry ancillary to the right of succession, in the sense that the corporate entity continues to exist, even if it changes its
date(s). name or amend its articles.
§ Certificate of revival – This is given, upon approval by the SEC, to a corporation whose term has expired and § Unlike in a partnership where if you amend anything in its articles of partnership, it automatically dissolves such
applied for a revival of its corporate existence, together with all the rights and privileges under its certificate of partnership and creates another one. In a corporation, such is not the case. A corporation continues to exist even
incorporation and subject to all of its duties, debts and liabilities existing prior to its revival. This givies the if you amend its articles.
corporation perpetual existence, unless its application for revival provides otherwise. § Take note that Trade name and Corporate name need not be the same.
§ Certificate of revival + favorable recommendation of the appropriate government agency: Ex. Trade name: Penshoppe; Corporate name: Golden ABC
ü banks, § SEC came out with a new regulation concerning corporate names. Under the Intellectual Property Code, the
ü banking and quasi-banking institutions, moment you create a trade name and start using a trade name, it is already protected even if it is not yet
ü preneed, registered under the IP Code. But under this new regulation, if the corporation is doing business under a trade
ü insurance and trust companies, name different from its corporate name, the trade name should be included in its Articles of Incorporation. In
ü non-stock savings and loan associations (NSSLAs), that regard, the protection granted by the RCC is extended to that trade name.
ü pawnshops, § Effect if the trade name is not included in the Articles of Incorporation: SEC rules provide that such trade name
ü corporations engaged in money service business, and can be used by some other corporations subject to the consent of the owner of the trade name.
ü other financial intermediaries.
Industrial Refractories Corporation of the Philippines vs. Refractories Corporation of the Pihlippines
INCORPORATORS Refractories Corporation of the Philippines (RCP) is a corporation duly organized on October 13, 1976 for the
§ Qualifications: purpose of engaging in the business of manufacturing, producing, selling, exporting and otherwise dealing in any
ü Natural persons – juridical persons such as corporations and partnerships can never be incorporators but and all refractory bricks, its by-products and derivatives. It was registered on June 22, 1977.
they can be initial stockholders.
ü Not be more than 15

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IRCP on the other hand, was incorporated on August 23, 1979 originally under the name "Synclaire Manufacturing
Corporation." It amended its Articles of Incorporation on August 23, 1985 to change its corporate name to
"Industrial Refractories Corp. of the Philippines." It is engaged in the business of manufacturing all kinds of
ceramics and other products, except paints and zincs. Both companies are the only local suppliers of monolithic
gunning mix. RCP filed with the SEC a petition to compel IRCP to change its corporate name on the ground that
its corporate name is confusingly similar such that the public may be confused or deceived into believing that
they are one and the same corporation.
By express mandate, SEC has absolute jurisdiction, supervision and control over all corporations. It also exercises
regulatory and administrative powers to implement and enforce the Corporation Code, one of which is Sec 18. It
is the SEC's duty to prevent confusion in the use of corporate names not only for the protection of the
corporations involved but more so for the protection of the public, and it has authority to de-register at all times
and under all circumstances corporate names which in its estimation are likely to generate confusion. The said
provision expressly prohibits the use of a corporate name which is "identical or deceptively or confusingly similar
to that of any existing corporation or to any other name already protected by law or is patently deceptive,
confusing or contrary to existing laws." The policy behind the foregoing prohibition is to avoid fraud upon the
public that will have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and
the reduction of difficulties of administration and supervision over corporation.
Revised Guidelines in the Approval of Corporate and Partnership Names specifically requires that: (1) a corporate
name shall not be identical, misleading or confusingly similar to one already registered by another corporation
with the Commission; and (2) if the proposed name is similar to the name of a registered firm, the proposed name
must contain at least one distinctive word different from the name of the company already registered.
To fall within the prohibition of the law, 2 requisites must be proven, to wit:
(1) that the complainant corporation acquired a prior right over the use of such corporate name; and
(2) the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary
to existing law.
As regards the first requisite, IRCP only started using such name when it amended its Articles of Incorporation 9
years after RCP started using its name. Thus, being the prior registrant, respondent RCP has acquired the right to
use the word "Refractories" as part of its corporate name.
Anent the second requisite, in determining the existence of confusing similarity in corporate names, the test is
whether the similarity is such as to mislead a person using ordinary care and discrimination and the Court must
look to the record as well as the names themselves. Obviously, both names contain the identical words
"Refractories," "Corporation" and "Philippines." The only word that distinguishes them is the word "Industrial"
which merely identifies a corporation's general field of activities or operations. It must be noted that both cater
to the same clientele, i.e., the steel industry.
Ang mga Kaanib sa Iglesia ng Dios kay Kristo Hesus v. Iglesia ng Dios kay Cristo Jesus
Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan is a non-stock religious society or corporation
registered in 1936. Sometime in 1976, Soriano and several other members of such corporation disassociated
themselves from the latter and succeeded in registering on March 30, 1977 a new non-stock religious society or
corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan. On July 16, 1979,
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respondent corporation filed with the SEC a petition to compel the Iglesia ng Dios Kay Kristo Hesus, Haligi at
Saligan ng Katotohanan to change its corporate name. During the pendency of the case at the SEC, Soriano, et al.,
caused the registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo
Hesus, H.S.K, sa Bansang Pilipinas. The acronym "H.S.K." stands for Haligi at Saligan ng Katotohanan. Petitioner
claims that it complied with the SEC Guidelines on Corporate Names which provides that if the proposed name
contains a word similar to a word already used as part of the firm name or style of a registered company, the
proposed name must contain two other words different from the name of the company already registered by
adding not only 2 but 8 words to their registered name, to wit: "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.".
The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in petitioner's name are merely
descriptive of and also referring to the members of the corporation. These words can hardly serve as an effective
differentiating medium necessary to avoid confusion or difficulty in distinguishing petitioner from respondent.
This is especially so, since both petitioner and respondent corporations are using the same acronym — H.S.K.; not
to mention the fact that both are espousing religious beliefs and operating in the same place.
Significantly, the only difference between the corporate names of petitioner and respondent are the words
SALIGAN and SUHAY. These words are synonymous — both mean ground, foundation or support. It is evident
that even under the test of "reasonable care and observation", confusion may arise. The wholesale appropriation
by petitioner of respondent's corporate name cannot find justification under the generic word rule. A contrary
ruling would encourage other corporations to adopt verbatim and register an existing and protected corporate
name, to the detriment of the public. IOW, generic names, although not protected in the IP Code, they are
protected as corporate names. This is the essence of this case.
Zuellig Freight and Cargo Systems v. NLRC
Zeta Brokerage Corporation amended its articles of incorporation for the purpose of changing its corporate name
to Zuellig Freight and Cargo Systems, broadening the primary functions, and increasing its capital stock. San
Miguel brought a complaint for illegal dismissal against the company for terminating him on the ground of
cessation of business operations (kay change of name ra man daw na-happen). The company argued that Zeta
complied with the requirements for termination due to the cessation of business operations; that Zuellig had no
obligation to employ San Miguel in the exercise of its valid management prerogative; that all employees had been
given sufficient time to make their decision whether to accept its offer of employment or not, but San Miguel had
not responded to its offer within the time set; that because of his failure to meet the deadline, the offer had
expired.
The amendments of the articles of incorporation of Zeta to change its corporate name did not produce the
dissolution of the former as a corporation. The different modes of dissolving a corporation do not include
amendment of the Articles. The effect of the change of name was not a change of the corporate being. The effect
of the change of name was not a change of the corporate being, for the changing of the name of a corporation is
no more the creation of a corporation than the changing of the name of a natural person is begetting of a natural
person. It has no effect on the identity of the corporation, or on its property, rights, or liabilities. The situation
was not similar to that of an enterprise buying the business of another company where the purchasing company
had no obligation to rehire terminated employees of the latter. Petitioner, despite its new name, was the mere
continuation of Zeta's corporate being, and still hold the obligation to honor all of Zeta's obligations, one of which
was to respect San Miguel's security of tenure.
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COMMENCEMENT OF CORPORATE EXISTENCE
The moment the SEC issues the certificate of incorporation, a relationship exists between:
1) State and the corporation
- since it is the state which granted life to the corporation
2) Corporation and its stockholders
- stockholders are the ones who compose the corporation
3) Stockholders and the state
- in reality, the corporation is just an artificial being. The stockholder, being the ones making up the
corporation, the franchise granted by the state to the corporation is a privilege granted to the stockholders
Seventh Day Adventist Conference Church of Southern Phil. Inc. v. Northeastern Mindanao Mission of Seventh
Day Adventist, Inc.
This case involves a lot covered by a TCT originally owned by Spouses Cosio. On April 21, 1959, they donated the
land to the South Philippine Union Mission of Seventh Day Adventist Church of Bayugan Esperanza, Agusan
(SPUM-SDA Bayugan). The donation was allegedly accepted by Liberato Rayos, an elder of the Seventh Day
Adventist Church, on behalf of the donee. 21 years later, however, the same parcel of land was sold by the spouses
Cosio to the Seventh Day Adventist Church of Northeastern Mindanao Mission (SDA-NEMM). TCT was thereafter
issued in its name. Declaring themselves a de facto corporation, petitioners allege that they should benefit from
the donation. This was opposed by respondents who argued that at the time of the donation, SPUM-SDA Bayugan
could not legally be a donee because, not having been incorporated yet, it had no juridical personality.
Should SDA-NEMM's ownership of the lot be upheld? YES
The alleged donation to petitioners was void. Donation is an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another person who accepts it. The donation could not have been made
in favor of an entity yet inexistent at the time it was made. Nor could it have been accepted as there was yet no
one to accept it.
There are stringent requirements before one can qualify as a de facto corporation:
(a) the existence of a valid law under which it may be incorporated;
(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.
The filing of articles of incorporation and the issuance of the certificate of incorporation are essential for the
existence of a de facto corporation. Corporate existence begins only from the moment a certificate of
incorporation is issued. No such certificate was ever issued to petitioners or their supposed predecessor-in-
interest at the time of the donation. Petitioners obviously could not have claimed succession to an entity that
never came to exist. Neither could the principle of separate juridical personality apply since there was never any
corporation to speak of.
The de facto doctrine thus effects a compromise between two conflicting public interests — the one opposed to
an unauthorized assumption of corporate privileges; the other in favor of doing justice to the parties and of
establishing a general assurance of security in business dealing with corporations. Generally, the doctrine exists
to protect the public dealing with supposed corporate entities, not to favor the defective or non-existent
corporation.
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DE FACTO CORPORATION
§ GR: De facto corporation’s existence can only be attacked directly, through a quo warranto proceeding.
Collateral attacks are not allowed.
§ A quo warranto proceeding is a direct attack which questions the very existence of the corporation.
§ When there has been no attempt in good faith to create a corporation de jure, there can be no de facto
corporation.
§ Mere intent is not sufficient. In addition, there must be a bona fide attempt to comply with the requirements of
the law.
§ To be considered a de facto corporation, the following are the minimum requirements:
ü The corporation must have filed the articles of incorporation and by-laws with the SEC; and
ü The SEC must have actually issued the certificate of incorporation.
§ If you did not comply with the preceding minimum requirements, that is not a de facto corporation. Hence, the
existence of such may be attacked collaterally.
§ If the SEC issued the certificate of incorporation, even if there was a defect in the issuance by the SEC, that
corporation is a de facto corporation, and its existence cannot be attacked collaterally. It must be done through
a direct attack (quo warranto proceeding).
Seventh Day Adventist Conference Church of Southern Phil. Inc. v. Northeastern Mindanao Mission of Seventh
Day Adventist, Inc.
The donee was saying that you cannot just question its existence through the revocation of the donation. You
cannot say that it does not exist since it is only the state that can question its existence through quo warranto.
Since it is considered a de facto corporation, collateral attacks cannot be allowed. You cannot just say that the
donation is revoked because it doesn’t exist. You have to file a quo warranto case first.
Is this contention valid? NO.
The Northeastern Seventh Day Adventist did not even attempt to file their articles of incorporation; hence, it is
not a de facto corporation. Therefore, it is not protected and its existence can be attacked collaterally.
Steps in the creation of a corporation:
(1) Promotion
(2) Incorporation
(3) Formal organization and commencement of business operations
Steps in incorporation:
(1) Drafting and execution of the articles of incorporation by the incorporators;
(2) Filing with the SEC of the articles of incorporation. (Take note of those corporations which need a favorable
recommendation of the appropriate government agency. Such has to be attached to the Articles);
(3) Payment of the filing and publication fees.
(4) Issuance of the certificate of incorporation by the SEC if all papers filed after verification and examination are
found in order.
o Such certificate commences the corporate existence, it’s juridical personality and legal existence.
o The certificate of incorporation is a final determination of the corporation’s right to do business or enter
into contracts in its name.
o Once issued, the certificate becomes the charter or corporate franchise from which the authority of the
corporation to operate as such flows. It is the primary franchise of the corporation akin to a birth certificate.
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CORPORATION BY ESTOPPEL ü other financial intermediaries.
§ It is a mere fiction existing for the particular case where the element of estoppel is present. It exists only between
the persons who misrepresented their status and the parties who relied on the misrepresentation. CONDITIONS SUBSEQUENT
§ It has exercised rights as a corporation and has undertaken obligations as a corporation, even without validly § The issuance of the certificate of incorporation calls the corporation into being but it is not ready to do business
incorporating, in which case, the persons who made up the corporation are estopped from claiming that they until it is organized. There are conditions to be complied with after acquiring corporate existence in order that a
are not. But they cannot, because there is no real corporation, they will not be liable as a corporation. They will corporation may legally continue as such.
be liable as partners. They will be solidarily liable in their personal capacity. § Organization includes:
o Adoption of by-laws
AMENDMENT OF THE ARTICLES OF INCORPORATION o Election of the corporate officers
§ Majority of the board + vote OR written assent of 2/3 (s/m), without prejudice to the appraisal right of dissenting o Putting up of corporate office as the principal place of their business (as indicated in the Articles)
stockholders in accordance with the provisions of this Code. o Application for permits (eg. Mayor’s or business permits)
§ What to submit to the SEC: § Incorporation Without Commencement of Operations (Failure to Organize) – If a corporation does not formally
ü Amendments to the articles – indicated by underscoring the change or changes made; organize and commence its business within 5 years from the date of its incorporation, its certificate of
ü A copy thereof must be duly certified under oath by the corporate secretary and a majority of the directors incorporation shall be deemed revoked as of the day following the end of the 5-year period. (automatic; no need
or trustees; and for notice and hearing)
ü It must be accompanied with a statement that the amendments have been duly approved by the required § Inoperative after Commencement of Operations
vote of the stockholders or members. o If a corporation has commenced its business but subsequently becomes inoperative for a period of at least
§ How to amend: Underscore all changes made and indicate the date of the meeting under the provision changed. 5 consecutive years, the SEC may, after due notice and hearing, place the corporation under delinquent
Take note that such date pertains to the date the amended was approved/ratified by the stockholders. status.
§ Effectivity: o A delinquent corporation shall have a period of 2 years to resume operations and comply with all
(1) upon approval by SEC or requirements that the SEC shall prescribe.
(2) from the date of filing with the SEC – if not acted upon within 6 months from the date of filing for a cause ü If complied – the SEC shall issue an order lifting the delinquent status.
not attributable to the corporation ü Failure to comply – cause the revocation of the corporation's certificate of incorporation.
§ The original incorporators do not change despite the approval of the amended Articles of Incorporation by a new
set of stockholders.
§ SEC will only require the original signature page bearing the signatures of the original Articles and append it to BY-LAWS
the amended articles. The original incorporators will never change, it being an accomplished fact.

REJECTION OF DISAPPROVAL OF ARTICLES § By- laws may be defined as the rules of action adopted by a corporation (or association) for its internal
§ The following are grounds for such disapproval: government and for the government of its stockholder or members and those having the direction, management
(a) The articles of incorporation or any amendment thereto is not substantially in accordance with the form and control of its affairs in their relation to the corporation and as among themselves, including rules for routine
prescribed herein; matters such as calling meetings and the like.
(b) The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral or contrary to § It is not an essential requisite for the existence of the corporation because what gives life to a corporation is the
government rules and regulations; issuance of certificate of incorporation
(c) The certification concerning the amount of capital stock subscribed and/or paid is false; and § TN: If there is a conflict between the by-laws and Constitution, RCC, other special laws, and the articles of
(d) The required percentage of Filipino ownership of the capital stock under existing laws or the Constitution incorporation, substantive laws will prevail.
has not been complied with.
§ Industries requiring prior authority before incorporation (Regulated Corporations): EFFECT OF FAILURE TO ADOPT BY-LAWS:
ü banks, § Only gives a ground to penalize the Corporation; NOT an automatic dissolution or termination of its franchise.
ü banking and quasi-banking institutions, § Basis of penalty: Section 6 of P.D. 902-A with respect to the power of the SEC to suspend or revoke a corporation’s
ü preneed, registration; not BP 68 nor RCC.
ü insurance and trust companies, § Under the said PD, it is still a requirement that the corporation is accorded with due process which is satisfied by
ü non-stock savings and loan associations (NSSLAs), due notice and hearing. Therefore, still not automatic suspension or revocation.
ü pawnshops,
ü corporations engaged in money service business, and

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EFFECT OF FAILURE TO FILE. (Loyola Grand Villas Homeowners (South) Association, Inc. v. Court of Appeals, G.R.
No. 117188, [August 7, 1997])
Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences
of the non-filing of the same within the period provided for in Section 46. However, such omission has been
rectified by PD No. 902-A, the pertinent provisions on the jurisdiction of the SEC of which state:
"SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers: . . .
(1) to suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law, including the following: . . .
Failure to file by-laws within the required period; . . .
The decision, ruling or order of any such Commissioner, bodies, boards, committees and/or officer may be
appealed to the Commission sitting en banc within 30 days after receipt by the appellant of notice of such
decision, ruling or order. The Commission shall promulgate rules of procedures to govern the proceedings,
hearings and appeals of cases falling within its jurisdiction. The aggrieved party may appeal the order, decision or
ruling of the Commission sitting en banc to the Supreme Court by petition for review in accordance with the
pertinent provisions of the Rules of Court. Even under the foregoing express grant of power and authority, there
can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing
of by-laws embodied in Section 46 of the Corporation Code. There is no outright "demise" private of corporate
existence. Proper notice and hearing are cardinal components of due process in any democratic institution,
agency or society. In other words, the incorporators must be given the chance to explain their neglect or omission
and remedy the same.
CONTENTS
1. Time, place and manner of calling and conducting regular or special meetings of the directors or trustees;
o The place of the meeting is required to be stated since the board can hold their meeting anywhere
2. Time and manner of calling and conducting regular or special meetings and mode of notifying the stockholders
or members;
o The by-laws does not provide for the place of the meeting for Stockholders or Members because the Articles
of Incorporation has provided for it which is the principal place of business.
3. Required quorum and manner of voting
o The by-laws may provide for quorum but must not be less than what is required in the corporation code.
Therefore, it cannot be less than 50% + 1.
o Super Majority – anything more than 50%+1%
o If the by-laws does not provide for the quorum, default is what is Stated in RCC which refers to the “majority
holding the outstanding capital stock”. It is counted by shares and not by the number of persons.
4. Form for proxies and how it should be submitted
o Proxy is basically akin to a power of attorney to allow another person to vote your shares.
o As to ‘how’ rules examples: WON it should be notarized; how many days before the meeting should it be
presented
5. Qualifications, duties, and compensation of the directors or trustees
6. Time for holding the annual election of directors of trustees
o The by-laws need not provide the manner of voting of the election of board of directors.
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o Voting for election of directors is not the same as the voting for other matters by the stockholders. Voting
for other matter or approval by the stockholder requirement is based from the number of shares. If the law
or the by-laws allow for the majority, then base it from the OCS. If it requires 2/3 votes, then you just need
to get the approval of the holders of the 2/3 of OCS. Take population as a whole. That’s ordinary ratification
or approval by stockholders. However, voting for election of directors is not the same. This requires
cumulative voting of stockholders. Meaning, your vote is counted by the number of vacancies in the board
multiplied by the number of shares in the corporation. For example, there are 5 vacancies and you have 100
shares. The corporation gives the stockholder 500 votes. For ordinary matter, you can only vote 100 or the
number of votes that you have. For election of directors, its cumulative or the number of vacancies multiplied
the number of shares you have.
o The by-laws cannot provide for any other manner of voting in the election of directors, other than what is
provided in the law which is cumulative voting.
7. Manner of election or appointment and the term of office of all officers other than directors or trustees
o If the position is provided in the By-Laws, that position is considered as a corporate officer; OW, the position
is that of an employee.
8. Penalties for violation of the by-laws
9. For stock corporations, the manner of issuing stock certificates
10. Other matters necessary for the proper or convenient transaction of its corporate business and affairs
AMENDMENT OF BY-LAWS
§ 1st mode: Direct Method – majority of the board + majority (s/m)
§ 2nd mode: Indirect Method – delegation to the board the power to amend or repeal the bylaws or adopt new
bylaws – 2/3 (s/m)
§ In the 1st mode, the stockholders actually approve what’s in the amended by-laws. First, the BOD then the
Stockholders approve. In the 2nd mode, the stockholders do not actually see what’s in the amended by-laws
because the stockholder’s approval comes first (approval to delegate to the BOD the power to amend the by-
laws).
Revocation of delegation: by majority vote of the stockholders. (Take note of the voting requirements for the
delegation and revocation, it is easier to revoke than to delegate.)
§ Revocation of the delegation – majority (s/m)
§ Procedure: File with SEC the following:
ü amended or new bylaws; and
ü if applicable, the stockholders' or members' resolution authorizing the delegation of the power, duly
certified under oath by the corporate secretary and a majority of the directors or trustees.
§ Effectivity: upon the issuance by the SEC of a certification that the same is in accordance with the RCC and other
relevant laws.
Time and Procedure for the Adoption of By-laws:
1) Pre-incorporation
§ This is the one required now in practice, you cannot incorporate without it.
§ It shall be approved and signed by ALL the incorporators and submitted to the SEC, together with the articles
of incorporation.
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§ It is submitted simultaneously with the articles of the incorporation in which case how are by-laws are adopted
by the approval of ALL INCORPORATORS even though the incorporators do not present the majority of the
outstanding capital stock of the corporation.
2) Post-incorporation
§ Majority (s/m)
§ It shall be signed by the stockholders or members voting for them and shall be kept in the principal office of
the corporation, subject to the inspection of the stockholders or members during office hours.
§ A copy of the by-laws, duly certified by a majority of the directors or trustees and countersigned by the
secretary of the corporation, shall be filed with the Commission and attached to the original articles of
incorporation.
Loyola Grand Villas Homeowners vs. CA
§ Loyola Grand Villas Homeowners Association (LGVHA) – organized on February 8, 1983 as the association of
homeowners and residents of the Loyola Grand Villas; did not file its corporate by-laws; registered with the
Home Financing Corporation (predecessor of HIGC), as the sole homeowners’ organization in the said
subdivision; first president: Soliven.
§ Solid Homes, Inc. – developer of LGVHA; owned by Soliven
§ Loyola Grand Villas Homeowners (North) Association Incorporated (North for brevity) – headed by a non-
resident; none of the members of the LGVHA was listed as member; registered with the HIGC and submitted
its by-laws
§ Loyola Grand Villas Homeowners (South) Association Incorporated (South for brevity) – headed by Soliven
himself; 3 members of LGVHA were listed as members;
Sometime in 1988, LGVHA tried to register its by-laws but failed. They discovered that there were 2 other
organizations within the subdivision – North and South. They also discovered that these associations had 5
registered homeowners each who were also the incorporators, directors and officers thereof. When Soliven
inquired about the status of LGVHA, Atty. Bautista, the head of the legal department of the HIGC, said that it had
been automatically dissolved since it did not submit its by-laws within the period required by the Corporation
Code and there was non-use of corporate charter because HIGC had not received any report on the association's
activities. LGVHA then questioned the revocation of its certificate of registration without due notice and hearing
and concomitantly prayed for the cancellation of the certificates of registration of the North and South.
South:
o Since Sec 46 of the Corp Code uses the word "must" with respect to the filing of by-laws, noncompliance
therewith would result in "self-extinction" either due to non-occurrence of a suspensive condition or the
occurrence of a resolutory condition under the hypothesis that by the issuance of the certificate of registration
alone the corporate personality is deemed already formed.
o Section 22 mandates that the corporation must be formally organized and should commence transactions
within 2 years from date of incorporation. OW, the corporation would be deemed dissolved. If the corporation
commences operations but becomes continuously inoperative for 5 years, then it may be suspended or its
corporate franchise revoked.
o Section 46 and the other provisions of the Corporation Code do not provide for sanctions for non-filing of the
by-laws, not because it is not mandatory, but because no sanction need be provided since in the first place,
no corporate identity has been completed.
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501_Corporation – GAVIOLA
o Non-provision for remedy or sanction is itself the tacit proclamation that non-compliance is fatal and no
corporate existence had yet evolved, and therefore, there was no need to proclaim its demise.
LGVHA:
o Requirement of adoption of by-laws is not mandatory. Section 6(I) of the decree provides that non-filing of
by-laws is only a ground for suspension or revocation of the certificate of registration of corporations and,
therefore, it may not result in automatic dissolution of the corporation.
o The adoption and filing of by-laws is a condition subsequent which does not affect the corporate personality
of a corporation.
o Even if the by-laws have not yet been filed, a corporation may be considered a de facto corporation.
May the failure of a corporation to file its by-laws within 1 month from the date of its incorporation (reqt under
BP 68) result in its automatic dissolution?
In the deliberations of BP 68 (governing law prior to RCC), automatic corporate dissolution for failure to file the
by-laws on time was never the intention of the legislature. Moreover, even without resorting to the records of
deliberations, the law itself provides the answer. Taken as a whole and under the principle that the best
interpreter of a statute is the statute itself (optima statuli interpretatix est ipsum statutum), Section 46 reveals
the legislative intent to attach a directory, and not mandatory, meaning for the word ''must" in the first sentence
thereof. Note should be taken of the second paragraph of the law which allows the filing of the by-laws even prior
to incorporation. This provision in the same section of the Code rules out mandatory compliance with the
requirement of filing the by-laws within 1 month after receipt of official notice of the issuance of its certificate of
incorporation by the SEC.
IOW, failure to file the by-laws within the required period does not imply the demise of the corporation. By-laws
may be necessary for the government of the corporation but these are subordinate to the articles of incorporation
as well as to the Corporation Code and related statutes. It has been said that the by-laws of a corporation are the
rule of its life, and that until by-laws have been adopted, the corporation may not be able to act for the purposes
of its creation, and that the first and most important duty of the members is to adopt them. The adoption of by-
laws is a matter of practical necessity. The peculiar circumstances attending the formation of a corporation may
impose the obligation to adopt certain by-laws, as in the case of a close corporation organized for specific
purposes. And the statute or general laws from which the corporation derives its corporate existence may
expressly require it to make and adopt by-laws and specify to some extent what they shall contain and the manner
of their adoption. The mere fact, however, of the existence of power in the corporation to adopt by-laws does
NOT ordinarily and of necessity make the exercise of such power essential to its corporate life, or to the validity
of any of its acts.
Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section 6(I) of PD 902-
A, the SEC is empowered to suspend or revoke, after proper notice and hearing, the franchise or certificate of
registration of a corporation on the ground inter alia of failure to file by-laws within the required period. It is clear
from this provision that there must first of all be a hearing to determine the existence of the ground, and secondly,
assuming such finding, the penalty is not necessarily revocation but may be only suspension of the charter. In
fact, under the rules and regulations of the SEC, the corporation may be penalized merely with the imposition of
an administrative fine. Organization, commencement of transaction of corporate business and adoption and filing
of by-laws are but conditions subsequent and not prerequisites for acquisition of corporate personality.
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Grace Christian High School vs. CA
In 1968, when the by-laws of the Grace Village Association Inc. was adopted, it states that the director shall be
elected every year and shall serve for 1 year. An amendment was made in 1975 in the by-laws, making the
representative of Grace Christian High School as permanent Director of the Association. This draft was never
presented to the general membership for approval. It was merely a proposal and has never been ratified by its
members. In 1990, Mr. James Tan, the principal of the said school was informed by the association that “it was
the sentiment that all directors should be elected by members of the association”. A suit for mandamus in the
HIGC was brought by the school to compel the board to recognize its right to a permanent seat in the board.
The board of corporations must be elected from among the stockholders or members. In this case, the
representative of Grace Christian High School is not a member of the village association. He just sits in the board
as a representative of Grace Christian High School. This is not allowed under the law. It is more accurate to say
that the members merely tolerated the school’s representative and tolerance cannot be considered ratification.
Since the provision in question is contrary to law, it cannot attain validity through acquiescence because it is
beyond the power of the members of the association to waive its invalidity. Nor can petitioner claim a vested
right to sit in the board on the basis of “practice.” Practice, no matter how long continued, cannot give rise to any
vested right if it is contrary to law because the law gives a specific qualification on who can be considered as
directors or trustees. If you do not fall within the requirements of the law, then you cannot be elected as director
or trustee even if it is provided in the by-laws. By-laws cannot be contrary to the Corporation Code. Clearly, the
latter should prevail.
PERSONS BOUND BY THE BY-LAWS:
1. Corporation
2. Directors
3. Board of Trustees
4. Stockholders
PERSONS NOT BOUND BY THE BY-LAWS
1. Any person who has no actual knowledge of the corporation
2. Employees of the corporation
China Banking Corp. v. CA
§ Valley Golf & Country Club, Inc.’s By-laws provides that a member cannot sell his shares if there are unpaid
obligations to the country club.
§ Calapatia, a stockholder of the said country club, pledged his stock certificate to CBC. CBC then requested to
record the pledge agreement in the country club’s books, which replied in the affirmative.
§ Due to Calapatia's failure to pay his obligation, CBC filed a petition for extrajudicial foreclosure. CBC informed
the country club of the above-mentioned foreclosure proceedings and requested that the pledged stock be
transferred to its name and the same be recorded in its corporate books. However, it did not agree since
Calapatia has unsettled accounts with the club (monthly dues).
§ CBC advised the country club that it is the new owner of Calapatia's Stock Certificate by virtue of being the
highest bidder in the 1985 auction and requested that a new certificate of stock be issued in its name. But the
country club replied that for reason of delinquency, Calapatia's stock was sold at the public auction in 1986.
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501_Corporation – GAVIOLA
Country Club:
ü It has a prior right over the subject share anchored mainly on Sec. 3, Art VIII of its by-laws which provides that
after a member shall have been posted as delinquent, the Board may order his/her/its share sold to satisfy
the claims of the Club.
ü CBC is bound by its by-laws. The general rule is that third persons are not bound by the by-laws of a
corporation since they are not privy thereto EXCEPT when third persons have actual or constructive
knowledge of the same. In this case, CBC had actual knowledge of the by-laws of the country club on the date
of the foreclosure sale. Hence, the by-laws was already binding upon CBC when it purchased the share of
Calapatia and consequently, purchased such subject to the right of the country club to sell the said share for
reasons of delinquency and the right of the country club to have a first lien on said shares as these rights are
provided for in the by-laws very clearly.
By-laws signifies the rules and regulations or private laws enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and its stockholders or members and directors and officers with
relation thereto and among themselves in their relation to it. The purpose of a by-law is to regulate the conduct
and define the duties of the members towards the corporation and among themselves. They are self-imposed
and, although adopted pursuant to statutory authority, have no status as public law. Therefore, third persons are
not bound by by-laws, except when they have knowledge of the provisions either actually or constructively.
In this case, the pledgor became delinquent only in 1975. Thus, CBC was in good faith when the pledge agreement
was contracted (1974). Knowledge of by-laws provisions, either actual or constructive, at the time of foreclosure
will not affect pledgee's right over the pledged share. Pursuant to the Civil Code, the pledgee is entitled to retain
possession of the stock until the pledgor pays or tenders to him the amount due on the debt secured. IOW, the
pledgee has the right to resort to its collateral for the payment of the debts. The pledgor or his representative or
registered stockholders has no right to require a return of the pledged stock until the debt for which it was given
as security is paid and satisfied, regardless of the length of time which have elapsed since debt was created. It is
significant to note that the country club only began sending notices of delinquency to Calapatia after it was
informed by CBC of the foreclosure proceedings initiated against Calapatia's pledged share, although Calapatia
has been delinquent in paying his monthly dues to the club since 1975. Stranger still, CBC, whom the country club
had officially recognized as the pledgee of Calapatia's share, was neither informed nor furnished copies of these
letters of overdue accounts until the club itself sold the pledged share at another public auction.
Sec. 63 of the Corporation Code which provides that "no shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the corporation" cannot be utilized by the country club. The
term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any indebtedness
which a subscriber or stockholder may owe the corporation arising from any other transaction." In the case at
bar, the subscription for the share in question has been fully paid as evidenced by the issuance of Membership
Certificate. What Calapatia owed the corporation were merely the monthly dues.
Cebu Mactan Members Inc. vs. Tsukahara
§ February 1994 – CMMCI President, purportedly on behalf of CMMCI, obtained a loan amounting to P6.5M
from Tsukahara. As payment for the loan, CMMCI issued 7 postdated checks of CMMCI payable to Tsukahara.
§ April 1994 – Sugimoto, again purportedly on behalf of CMCI, obtained another loan amounting to P10M from
Tsukahara. Sugimoto executed and signed a PN in his capacity as CMMCI President and Chairman, as well as
in his personal capacity.
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§ Upon maturity, the checks were presented for payment but the same were dishonored by PNB (DB). After
several failed attempts to collect the loan, Tsukahara filed a case for collection of sum of money against
CMMCI and Sugimoto with the RTC.
Tsukahara
ü The amount of P16.5M was used by CMMCI for the improvement of its beach resort, which included the
construction of a wave fence, the purchase of air conditioners and curtains, and the provision of salaries of
resort employees.
ü Sugimoto, as the President of CMMCI, “has the power to borrow money for said corporation by any legal
means whatsoever and to sign, endorse and deliver all checks and PNs on behalf of the corporation.”
501_Corporation – GAVIOLA
In this case, the voting of the Justices was tied. They dismissed the question on the validity of the by-laws for
failure to acquire the necessary votes. However, it was mentioned in the decision that the stockholders can
amend the by-laws because as a rule, when a stockholder enters into corporation, it submits to the idea that the
decisions are controlled by the majority and in this case, he cannot acquire any vested right to the position and
that by virtue of the fact that he has antagonistic claims or being the controlling stockholder of 2 corporations
which are in competition with SMC. SMC therefore has a right to protect its interest that is why the stockholders
can validly amend the by-laws. The qualifications and disqualifications fixed by the corporation must be
reasonable. Reasonableness is a question of WON the provisions in the by-laws are applied without qualification.
In this case, the provision is reasonable because it applies to all, it does not apply to a specific person.

CMMCI By-Laws: BOARD OF DIRECTORS / TRUSTEES / OFFICERS

ü The CMMCI President is given the power to borrow money for the company by any legal means whatsoever,
including the arrangement of letters of credit and overdrafts with any and all banking institutions; execute
on behalf of the company all contracts and agreements which the said company may enter into; sign, indorse, Directors Trustees
and deliver all checks, drafts, bill of exchange, promissory notes and orders of payment of sum of money in Qualifications ü Own at least 1 share of the capital stock (IOW, ü Must be a member
the name and on behalf of the corporation, among others. must be a stockholder); ü Majority must be residents of
With such powers expressly conferred under the corporate by-laws, the CMMCI president, in exercising such ü The share of stock held by the director must be the Philippines (amended? No
powers, need not secure a resolution from the company’s board of directors. A corporate officer may represent registered in his name on the books of the longer required under RCC?)
and bind the corporation in transactions with third persons to the extent that the authority to do so has been corporation – legal ownership is sufficient (as
intentionally, incidentally or impliedly conferred upon him, or by apparent powers as corporation has caused written in the stock and transfer book); not
persons dealing with its officer or agent to believe that it has conferred. necessarily beneficial ownership
ü Must continuously own at least a share of stock
The corporation, its stockholders and officers are bound by its by-laws. The third person therefore has the right during his term
to rely on the provision or authority in the by-laws. The corporation, when it provides for certain authority in its ü Majority must be residents of the Philippines
by-laws is bound by such authority. When the corporation provide for certain authorities for its officers in its by- (amended? No longer required under RCC?)
laws, it cannot thereafter retract and say later on that it is not what they intend to so long as such authority is Term 1 year 3 years
expressly provided in the by-laws and so long as it is not contrary to laws and public policy. Ordinarily, any Voting requirement Majority (s), entitled to vote Majority (m), entitled to vote
transaction entered into by the corporation should be done by the board of directors, so supposedly without the
approval of the board of directors the corporation cannot transact business. In this case there was no approval § What is required is only legal ownership. SO, under the stock and transfer book, their names will appear as
by the board of directors. It was just the president himself who signed the documents; however, such is still stockholders, but, beneficially, the shares actually belong to another person. The legal owner cannot receive
binding to the corporation because it is expressly provided in their by-laws. dividends, and the beneficial owner can direct them on how to vote the shares. Generally, this is a valid
arrangement. The only limitation is when you use this arrangement to circumvent the law, such as when there
Gokongwei Jr. v SEC is a nationalization requirement, because it now has to be legal and beneficial ownership to the Filipinos.
Gokongwei is a stockholder of San Miguel Corporation (SMC). Under the proposed amendment of San Miguel, it § A majority of the directors or trustees of all corporations organized under this Code must be residents of the
provides that a nominee who holds a competing interest or conflicting interest against the corporation may not Philippines.
be elected as a director. Gokongwei filed a case for the declaration of nullity of the amended by-laws of o GR: There is no citizenship requirement
respondent corporation because he alleged that the said amendment made by the stockholders is done to o Exc: The corporation engages in nationalized activities, in which case, rule in the FRIA is followed.
prejudice him because at that time, he was qualified to be elected as a board of director. The respondent, on the
other hand, contended that Gokongwei cannot successfully impugn the amendment of the by-laws because they DISQUALIFICATION OF DIRECTORS, TRUSTEES OR OFFICERS
discovered that Gokongwei, although he was a stockholder of SMC, he was also at the same time a controlling If within 5 years prior to the election or appointment, the person was:
stockholder of UFC AND CFC who are also stockholders of SMC and in that instance, they discovered that these 2 (a) Convicted by final judgment:
corporations which are controlled by Gokongwei, are also engaged in businesses in competition with SMC. Taking (1) Offense punishable by imprisonment for a period exceeding 6 years;
from this, in most of the meetings that they had, the stockholders voted against the election of Gokongwei. In (2) Violation of RCC; and
fact, in one meeting, the stockholders voted 80% against Gokongwei and in another meeting, 90% against him. (3) Violation of SRC.

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(b) Found administratively liable for any offense involving fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those
enumerated in paragraphs (a) and (b).
ELECTION OF DIRECTORS OR TRUSTEES (Sec. 23, RCC)
§ GR: Each stockholder or member has the right to nominate any director or trustee.
§ Exc: The exclusive right is reserved for holders of founders' shares (Sec. 7, RCC)
§ When: at any meeting called for the election of BOD
§ Owners of majority of the OCS or majority of the members entitled to vote must be present:
ü in person
ü by written proxy
ü remote communication or in absentia – only when authorized in (1) bylaws or (2) by a majority of the board
o EXC: corporations vested with public interest – despite the absence of a provision in the by-laws, the right
to vote through such modes may be exercised.
§ GR: Voting by viva voces or roll call (raising hands) is valid
§ EXC: If requested by any voting stockholder or member, the election must be by ballot.
§ Stockholders entitled to vote shall have the right to vote the number of shares of stock standing in their own
names in the stock books of the corporation at the time fixed in the bylaws or where the bylaws are silent, at the
time of the election.
METHODS OF VOTING
Ex. Najen owns 100 shares in XYZ Corporation. There are 5 seats to be filled during the election of the board. The
candidates are A B C D E F G. In this case, Najen is only allowed to have 500 votes. The by-laws cannot provide for
more nor less. 1 share = 1 vote
1. Straight Voting – Najen may give to 5 candidates she wants to be elected 100 votes each.
2. Cumulative voting for one candidate – Najen is entitled to 500 votes, all of which she may cast in favor of any
one candidate.
o The privilege of cumulative voting is permitted for the purpose of giving minority stockholders representation
in the board of directors. A director elected because of the vote of minority stockholders who united in
cumulative voting cannot be removed without cause.
3. Cumulative voting by distribution – Najen may cumulate her shares and distribute her votes to candidates A, B,
and C, giving A, 100 votes, B, 150 and C, 250. She may cast her votes in any combination she desires, provided
that the total number of votes cast by her will not exceed 500.
Delinquent Shares
§ GR: As long as the voting shares are outstanding, they are allowed to vote.
§ EXC: Delinquent Shares. A share is considered delinquent when a share subscribed has not been paid on the
specific date required, or if not specified, upon the call for payment. If a share has not yet been paid, but there
is no call yet, you aren’t considered delinquent, therefore, you can vote. Delinquency has to be declared by the
board. As long as there’s no declaration, they are entitled to vote, provided they are voting shares.
COMPENSATION OF DIRECTORS OR TRUSTEES (Sec. 29, RCC)
§ GR: Directors are not entitled to compensation
§ EXC:
o Reasonable per diems
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o By-laws; or
o Resolution [majority (s/m)]
§ The compensation shall not exceed 10% of the net income before income tax of the corporation during the
preceding year.
§ Directors or trustees shall not participate in the determination of their own per diems or compensation.
§ Corporations vested with public interest: submit to their shareholders and SEC an annual report of the total
compensation of each of their directors or trustees.
§ After election, the board of directors controls the management of the corporation. They now have the authority
to do all acts of management. They conduct day-to-day business operations. They control and hold all corporate
properties.
§ The board holds the administrative powers; but the stockholders still hold the ownership powers.
BUSINESS JUDGMENT RULE
§ If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors
and/or officers are not liable. Bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty through
some motive or interest or ill-will partaking of the nature of fraud.
§ Questions of policy or of management are left solely to the honest decision of the board as the business manager
of the corporation, and the court is without authority to substitute its judgment for that of the board, and as
long as it acts in good faith and in the exercise of honest judgment in the interest of the corporation, its orders
are not reviewable by the courts.
§ Any decision made by directors in the regular course of the performance of their duties are considered as valid
and the directors cannot be held liable for them. Courts have no authority to supplant the judgment of the
directors because, precisely, the directors are supposed to be elected on the basis of their expertise with regard
to the operations of the corporation. This is binding on the corporation and the stockholders.
§ As long as the directors are acting in good faith, even if it resulted in a loss, they cannot be held liable for any
damages suffered by the corporation.
§ GR: Courts cannot replace the judgment of the board over the affairs of the corporation.
§ Exc (Sec. 30, RCC): [PCG]
o willfully and knowingly vote for or assent to patently unlawful acts of the corporation;
o guilty of gross negligence or bad faith in directing the affairs of the corporation; or
o acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees.
§ Effect if exceptions are present: Solidary liability of the directors/trustees/officers involved for damages to the
corporation, stockholders, members, and injured third persons.
DOCTRINE OF CORPORATE OPPORTUNITY [Sec. 33, RCC; Sec. 30 (par. 2, RCC)]
§ A director who, by virtue of his office, acquires for himself a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such corporation, is guilty of disloyalty and should,
therefore, account to the latter for all such profits by refunding the same, notwithstanding that he risked his
funds in the venture.
§ This is applied when a director, trustee, or officer acquires pecuniary interest against the corporation or acquires
a business opportunity reserved for the corporation.
§ Business Opportunity – transactional in nature; does not contemplate a general undertaking (i.e. investing in a
competitor corporation)
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§ For example: The corporation was approached by Samantha who intends to buy a lot owned by the ABC
Corporation. Alexandre, a director of the corporation, with knowledge of the intent of Samantha to purchase the
lot, goes to the latter and offers a land she owns beside the lot owned by the said corporation, with a cheaper
price. Alexandre’s position as a director abled her to know about the business opportunity (purchase of the lot
by Samantha) and the use of such information undermines the interest of the corporation – the taking of the
opportunity or transaction that should have benefited the corporation.
§ Exception: Ratification – a vote of the stockholders owning or representing at least 2/3 of the OCS.
§ A director, trustee or officer shall not attempt to acquire, or acquire any interest adverse to the corporation in
respect of any matter which has been reposed in them in confidence, and upon which, equity imposes a disability
upon themselves to deal in their own behalf; otherwise, the said director, trustee or officer shall be liable as a
trustee for the corporation and must account for the profits which otherwise would have accrued to the
corporation.
INDEPENDENT DIRECTOR
§ He is a person who, apart from shareholdings and fees received from the corporation, is independent of
management and free from any business or other relationship which could, or could reasonably be perceived to
materially interfere with the exercise of independent judgment in carrying out the responsibilities as a director.
§ He must be elected by the shareholders present or entitled to vote in absentia during the election of directors.
§ The board of the following corporations vested with public interest shall have independent directors constituting
at least 20% of such board:
1. Corporations covered by SRC:
ü those whose securities are registered with the SEC
ü those listed with an exchange or with assets of at least P50,000,000.00
ü those having 200 or more holders of shares, each holding at least 100 shares of a class of its equity shares
2. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service business, preneed, trust
and insurance companies, and other financial intermediaries; and
3. Other corporations engaged in businesses vested with public interest similar to the above, as may be
determined by the SEC.
ELECTION REPORT
§ Election was conducted – Within 30 days after the election, the secretary, or any other officer of the corporation,
shall submit to the SEC, the elected directors/trustees/officers’ names, nationalities, shareholdings, and
residence addresses.
§ No election was conducted – The non-holding of elections and the reasons therefor shall be reported to the SEC
within 30 days from the date of the scheduled election. The report shall specify a new date for the election,
which shall not be later than 60 days from the scheduled date.
§ SEC may, upon the application of a stockholder, member, director or trustee, and after verification of the
unjustified non-holding of the election, summarily order that an election be held:
o If no new date has been designated, or
o if the rescheduled election is likewise not held.
GENERAL INFORMATION SHEET
§ Within 30 days after election, GIS has to be submitted to the SEC to report such election.
§ You will find here all the details of the corporation.
§ If you elect directors during your annual stockholders meeting, just file a GIS.
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501_Corporation – GAVIOLA
§ If you elect directors outside the annual stockholders meeting, file an amended GIS because you’re only
supposed to file a GIS once a year.
§ Also, if there are any changes in the information required to be stated in the GIS, like changing of directors, in
that case, you file an amendment to the SEC.
EXECUTIVE COMMITTEE
§ The board may only create such if the by-laws so provide.
§ They are as powerful as the board of directors and in effect acting for the board itself.
§ Composition: at least 3 directors.
§ GR: It may act, by majority vote of all its members, on such specific matters within the competence of the board,
as may be delegated to it (1) in the bylaws or (2) by majority vote of the board.
§ EXC:
(a) approval of any action for which shareholders' approval is also required;
(b) filling of vacancies in the board;
(c) amendment or repeal of bylaws or the adoption of new bylaws;
(d) amendment or repeal of any resolution of the board which by its express terms is not amendable or
repealable; and
(e) distribution of cash dividends to the shareholders.
SPECIAL COMMITTEE
§ It can be created by the board even without the authority under the by-laws.
§ The board may create special committees of temporary or permanent nature and determine the members' term,
composition, compensation, powers, and responsibilities.
§ No authority required in the by-laws and is within the competency of the board to create. Any other committee
exercising a mere recommendatory power whose actions require ratification and confirmation by the board. It
cannot approve resolutions on its own. Reason here is that the board is the corporation's governing body, clearly
upholding the power of its board to exercise its prerogatives in managing the business affairs of the corporation.
Filipina Port Services Inc vs. Go
Principle: creation of committees (Sec. 34, RCC)
Cruz was the president of Filport since 1968. He lost his bid for re-election in 1991. A year thereafter, Cruz wrote
a letter to the corporation’s BOD questioning the creation of 6 positions and the election of certain members of
the board thereto. It is Cruz’s contention that the creation of an executive committee is not provided for in the
by-laws and the increase in the emoluments of several members of the board is greatly disproportionate to the
volume and character of work of said directors. Further, he questions the re-creation of the positions of Assistant
Vice President for corporate planning, operations, finance and administration and additional positions where
those holding said offices are not doing any work but earning compensation. These acts of mismanagement
according to Cruz are detrimental to the corporation and its stockholders and so the board must account for the
amounts incurred in creating these positions and made to pay damages.
Amended Bylaws of Filport provides the following:
Officers of the corporation, as provided for by the by-laws, shall be elected by the board of directors at their first
meeting after the election of Directors. xxx
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The officers of the corporation shall be a Chairman of the Board, President, a Vice-President, a Secretary, a
Treasurer, a General Manager and such other officers as the Board of Directors may from time to time provide,
and these officers shall be elected to hold office until their successors are elected and qualified.
The governing body of a corporation is its board of directors. The Corporation Code (now RCC) explicitly provides
that unless otherwise provided therein, the corporate powers of all corporations formed under the Code shall be
exercised, all business conducted and all property of the corporation shall be controlled and held by a board of
directors. Thus, with the exception only of some powers expressly granted by law to stockholders/members, the
board of directors/trustees has the sole authority to determine policies, enter into contracts, and conduct the
ordinary business of the corporation within the scope of its charter, i.e., its articles of incorporation, by-laws and
relevant provisions of law. The concentration in the board of the powers of control of corporate business and of
appointment of corporate officers and managers is necessary for efficiency in any large organization. Stockholders
are too numerous, scattered and unfamiliar with the business of a corporation to conduct its business directly.
And so the plan of corporate organization is for the stockholders to choose the directors who shall control and
supervise the conduct of corporate business.
In the present case, the board's creation of the positions of Assistant Vice Presidents for Corporate Planning,
Operations, Finance and Administration, and those of the Special Assistants to the President and the Board
Chairman, was in accordance with the regular business operations of Filport as it is authorized to do so by the
corporation's by-laws. Likewise, the fixing of the corresponding remuneration for the positions in question is
provided for in the same by-laws of the corporation. Unfortunately, the bylaws of the corporation are silent as to
the creation by its board of directors of an executive committee. Under Section 35 of the Corporation Code (now,
Sec 34, RCC), the creation of an executive committee must be provided for in the by-laws of the corporation.
However, we cannot rule that such creation is illegal or unlawful. One reason is the absence of a showing as to
the true nature and functions of said executive committee considering that the "executive committee," referred
to in the Corporation Code which is as powerful as the board of directors and in effect acting for the board itself,
should be distinguished from other committees which are within the competency of the board to create at
anytime and whose actions require ratification and confirmation by the board. Another reason is that the Board
of Directors has the power to create positions not provided for in Filport's by-laws since the board is the
corporation's governing body, clearly upholding the power of its board to exercise its prerogatives in managing
the business affairs of the corporation.
ü Only recommendatory authority; cannot act on its own – no need for by-laws ang creation of committees
ü Committee is acting as a board itself – authority under the by-laws is required
Magaling vs. Ong
Principle: (relevant provision in the new law: Sec. 30, RCC)
Spouses Magaling are the controlling stockholders/owner of Thermo Loans and Credit Corporation. H Magaling
induced Ong to lend him and/or his company P350k at the interest rate of 2.5% per month. 3 years thereafter,
Magaling issued and tendered to Ong series of postdated checks for the payment of interest and principal of the
loan. Upon failure of Thermo Loans and Credit Corporation to pay its outstanding loan despite demand from Mr.
Ong, the latter filed a complaint with the RTC for the collection of the loan with interest, attorney’s fees and cost
of suit, with prayer for issuance of a writ of preliminary attachment against the spouses Reynaldo Magaling and
Lucia Magaling and Thermo Loans and Credit Corporation. Magaling resigned as President of Thermo Loans in
1998 when the company already became insolvent. He also admitted that no one or nobody took over as
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president of the corporation, when he resigned. Neither was the investor informed about the bankruptcy thereof,
nor was any bankruptcy or involvers proceeding instituted to protect the assets of the corporation and the
interest of its investor. During the cross-examination, Magaling’s answers were merely ‘I don’t know, I don’t
remember…’ He never told the investors of the risks that their investment will be subjected to in his testimony
when he said upon cross-examination, that “I did not tell that to investors, what is going on for fear that they
might be afraid of what is happening, Your Honor.” Worse, he didn’t pursue the investments when Termo Loans
close down because he was also managing other loan companies simultaneously.
The general rule is that obligations incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities, and vice versa. There are times, however, when solidary liabilities may be
incurred and the veil of corporate fiction may be pierced. Exceptional circumstances warranting such
disregard of a separate personality are summarized as follows:
1. When directors and trustees or, in appropriate case, the officers of a corporation: (a) vote for or
assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing
the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation, its
stockholders or members, and other persons;
2. When a director or officer has consented to the issuance of watered down stocks or who, having knowledge
thereof, did not forthwith file with the corporate secretary his written objection thereto;
3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and
solidarily liable with the corporation; or
4. When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action.
Although there’s no bad faith and fraud in this instance, the Court still cannot totally absolve Magaling from
any liability considering his gross negligence in directing the affairs of Thermo Loans; thus, he must be made
personally liable for the debt of Thermo Loans to Ong. Gross negligence is one that is characterized by the want
of even slight care, acting or omitting to act in a situation where there is a duty to act, not inadvertently but
willfully and intentionally with a conscious indifference to consequences insofar as other persons may be affected;
and must be established by clear and convincing evidence. Parenthetically, gross or willful negligence could
amount to bad faith. When he answered that way during cross-examination, it only shows that he appeared
indifferent to the operations of the corporation. To think, president sya. An attitude of I don’t care shows his gross
negligence. So, solidary liability was attached (loan to the creditor). So, GR: no liability; one of the exceptions is
gross negligence.
Ient vs Prebon
Petitioners are employees of Tradition Group. Tradition Group and Tullett are competitors in the inter-dealer
broking business. On the Tradition Group's motive of expansion and diversification in Asia, Ient and Schulze were
tasked with the establishment of Tradition Financial Services Philippines, Inc. However, Tullett filed a Complaint-
Affidavit against the officers/employees of the Tradition Group for violation of Sections 31 and 34 of the
Corporation Code which made them criminally liable under Section 144. Impleaded as respondents in the
Complaint-Affidavit were petitioners Ient and Schulze, Villalon (formerly President and Managing Director of
Tullett), Chuidian (formerly a member of Tullett's BOD). Villalon and Chuidian were charged with using their
former positions in Tullett to sabotage said company by orchestrating the mass resignation of its entire brokering
staff in order for them to join Tradition Philippines which was evident on their conduct of several meetings with
the employees. According to Tullett, petitioners Ient and Schulze have conspired with Villalon and Chuidian in the
latter's acts of disloyalty against the company.
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Pursuant to the principle of liberal interpretation in favor of the accused, when the court is faced with 2 possible
interpretations of a penal statute, one that is prejudicial to the accused and another that is favorable to him, the
rule calls for the adoption of an interpretation which is more lenient to the accused. A close reading of Section
144 shows that it is not purely a penal provision because it provides that when the violator is a corporation, an
administrative penalty is imposed in the form of dissolution, which is not a criminal sanction. There is no provision
in the Corporation Code using an emphatic language to compel the SC to construe the provision as a penal
offense. SC held that through a thorough scrutinizing of the different provisions in the Corporation Code including
Sections 31 and 34, they only impose civil liability aside from Section 74. Had it been the intention of the drafters
of the law to define Sections 31 and 34 as offenses, they could have easily included similar language as that found
in Section 74.
Section 144 is not applicable since sections 31 and 34 already provide penalty for violations of those provisions.
Section 144 will only apply if the act is not penalized in the sections that are violated.
Section 144. Violations of the Code. - Violations of any of the provisions of this Code or its amendments not
otherwise specifically penalized therein shall be punished by a fine … or by imprisonment ...
TN: Sec 144 (now Sec 170, RCC) is no longer a criminal offense. It is now civil. However, application is the same -
applies only to violations of the RCC not otherwise specifically penalized therein.
SELF-DEALING DIRECTORS (Sec. 31, RCC)
§ GR: Self-dealing contract is voidable, at the option of the corporation. This refers to a contract of the corporation
with 1 or more of its directors, trustees, officers or their spouses and relatives within the 4th civil degree of
consanguinity or affinity.
§ EXC: such is valid when the following are present
ü The presence of such director or trustee in the board meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
For ex. There are only 5 directors. To constitute quorum, 3 directors must be present but the
presence of the self-dealing director should not be counted.
ü The vote of such director or trustee was not necessary for the approval of the contract; and
TN: His vote is still counted, but should not be necessary for the approval for such contract.
ü The contract is fair and reasonable under the circumstances.
§ Remedy: Ratification – Where any of the first 2 is absent, in the case of a contract with a director or trustee (kay
if officer, valid lang if previously authorized by the board), such contract may be ratified.
ü 2/3 (s/m)
ü full disclosure of the adverse interest of the directors or trustees involved is made at the meeting
ü the contract must be fair and reasonable under the circumstances
CORPORATIONS VESTED WITH PUBLIC INTEREST
§ Material contracts – approved by at least 2/3 of the entire membership of the board, with at least a majority of
the independent directors
INTERLOCKING DIRECTORS (Sec. 32, RCC)
§ Interlocking directors – one, some, or all of the directors in one corporation is/are also director(s) in another
corporation.
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§ GR: Contracts between corporations with interlocking directors are valid.
§ EXC: Such are voidable:
ü in cases of fraud
ü the contract is NOT fair and reasonable under the circumstances
ü The interest of the interlocking director in 1 corporation is substantial and the interest in the other
corporation or corporations is merely nominal.
o Effect: the rule governing self-dealing contracts shall be applied; so there’s still a remedy of ratification
§ Substantial interest – when the stockholdings in the corporation exceed 20% of its OCS
REMOVAL OF DIRECTORS / TRUSTEES
§ Voting reqt: 2/3 (s/m), entitled to vote
§ When:
o Regular meeting
o Special meeting – must be called by:
ü the secretary on order of the president, or
ü upon written demand of majority (s/m), entitled to vote.
§ Stockholder or member signing the demand may call for the meeting by directly addressing the stockholders or
members:
ü no secretary, or
ü secretary fails or refuses to call the special meeting or to give notice thereof.
§ Previous notice to stockholders or members of the corporation is always required.
ü time and place of such meeting
ü intention to propose removal
ü must be given by publication or by written notice prescribed in this Code
§ Removal may be:
ü with cause
ü without cause – may not be used to deprive minority stockholders or members of the right of
representation to which they may be entitled under Sec. 23, RCC
§ The SEC shall, motu proprio or upon verified complaint, and after due notice and hearing, order the removal of
a director or trustee elected despite the disqualification, or whose disqualification arose or is discovered
subsequent to an election.
§ IOW, removal of directors may be done either by the stockholders or the SEC.
Bernas v. Cinco
Bernas group had been managing the sports club. And then there were rumors that such group was mismanaging
and certain funds were missing. The Oversight Committee which is made up of previous/past presidents (Cinco
Group) of the organization, called for a special meeting to remove the incumbent directors. And they were able
to call that meeting and, in that meeting, they were able to remove and replace the Bernas group. Subsequently,
they expelled Bernas from the club and sold his shares at the public auction. A case was then brought by the
Bernas Group contending that the special meeting was invalid since the Oversight Committee has no authority to
call for such. Consequently, it had no right to remove them as directors.
Makati Sports Club (MSC) by-laws which govern the manner of calling and sending of notices of the annual
stockholders' meeting and the special stockholders' meeting provides:
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SEC. 8. Annual Meetings. — The annual meeting of stockholders shall be held at the Clubhouse on the third
Monday of April of every year unless such day be a holiday in which case the annual meeting shall be held on the
next succeeding business day. At such meeting, the President shall render a report to the stockholders of the
clubs.
xxx xxx xxx
SEC. 10. Special Meetings. — Special meetings of stockholders shall be held at the Clubhouse when called by the
President or by the Board of Directors or upon written request of the stockholders representing not less than
one hundred (100) shares. Only matters specified in the notice and call will be taken up at special meetings.
xxx xxx xxx
The Special Stockholders' Meeting was not called by the corporate secretary upon order of the president. The
corporate secretary and the president would not call because they were part of the ruling group. It was not even
called by the members, but rather it was called by the oversight committee.
The relationship of the directors and the stockholder is a Fiduciary Relationship. Such that the stockholder being
the proprietor of the corporate interest and the beneficiary of the corporate interest should have the power to
console the directors, such that if the directors fail to perform their duty, then the stockholders have the right
under the law or under the by-laws of the corporation to remove and replace the erring director. However, even
if you have the right to remove the directors you have to follow the procedure.
While the MSCOC is created for the purpose of overseeing the affairs of the corporation, nowhere in the by-laws
does it state that it is authorized to exercise corporate powers, such as the power to call a special meeting, solely
vested by law and the MSC by-laws on the President or the Board of Directors. The subsequent ratification made
by the stockholders did not cure the substantive infirmity, the defect having set in at the time the void act was
done. The defect goes into the very authority of the persons who made the call for the meeting. The law is very
specific, in order to remove a director, you have to comply with the requirements of the corporation code or the
by-laws. Void act cannot serve as basis for a court action, nor acquire validity by performance, ratification or
estoppel.
o corporate acts or contracts which are illegal – doing of an act which are contrary to law, morals or public policy
or public duty; cannot serve as basis of a court action nor acquire validity by performance, ratification or
estoppel.
o merely ultra vires acts – not illegal or void ab initio; not merely within the scope of the articles of
incorporation; are merely voidable and may become binding and enforceable when ratified by the
stockholders.
Consequently, such Special Stockholders' Meeting called by the Oversight Committee cannot have any legal
effect. The removal of the Bernas Group, as well as the election of the Cinco Group, effected by the assembly in
that improperly called meeting is void, and since the Cinco Group has no legal right to sit in the board, their
subsequent acts of expelling Bernas from the club and the selling of his shares at the public auction, are likewise
invalid. The Cinco Group cannot invoke the application of de facto officership doctrine to justify the actions taken
after the invalid election since the operation of the principle is limited to third persons who were originally not
part of the corporation but became such by reason of voting of government-sequestered shares.
If it be true that the Corporate Secretary refused to call a meeting despite fervent demand from the MSCOC, the
remedy of the stockholders would have been to file a petition to the SEC to direct him to call a meeting by giving
proper notice required under the Code. To rule otherwise would open the floodgates to abuse where any
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stockholder, who consider himself aggrieved by certain corporate actions, could call a special stockholders'
meeting for the purpose of removing the sitting officers in direct violation of the rules pertaining to the call of
meeting laid down in the by-laws.
However, all other actions of the Cinco Group and stockholders taken during the Regular Stockholders' Meetings
held in April 1998, 1999 and 2000, including the election of the Cinco Group as directors after the expiration of
the term of office of Bernas Group as directors, are valid.
VACANCIES IN THE OFFICE OF DIRECTOR OR TRUSTEE (Sec. 28, RCC)
§ may be filled by the majority of the remaining directors or trustees:
ü if still constituting a quorum
ü reasons OTHER THAN by removal or by expiration of term (mandatory na by stockholders/members)
§ TN: Stockholders ALWAYS have inherent right to fill the vacancy bisag pwede ra unta si board. Any ground that
the BOD may fill in, stockholders can also fill in; unlike if BOD – some grounds lang.
§ Rationale: The reason why the law allows the directors to fill-in the vacancies is for convenience because it’s very
hard to call a stockholders’ meeting especially if you have a lot of stockholders. It will be difficult to get quorum,
and it’s also the directors who manage the corporation. So, if the board of directors cannot act, because they’re
missing a member, then that is not good for the corporation. That’s why the law allows the directors to fill in a
vacancy. But only in certain instances. But if the stockholders really insist on holding a meeting to fill in the
vacancy, then that is their prerogative. Because the power of the board, as mentioned in the Valle Verde case,
to fill in the vacancy is merely a delegated power coming from the stockholders. IT’S INHERENT IN THE
STOCKHOLDERS TO FILL IN OR ELECT MEMBERS OF THE BOARD.
§ WHEN the election shall be held:
ü due to term expiration – election is held no later than the day of such expiration
ü as a result of removal by the stockholders or members – election may be held on the same day of the
meeting authorizing the removal and this fact must be so stated in the agenda and notice of said meeting.
ü all other cases – election must be held no later than 45 days from the time the vacancy arose.
ü due to an increase in the number of directors or trustees – election at a regular or at a special meeting of
stockholders or members duly called for the purpose, OR in the same meeting authorizing the increase of
directors or trustees if so stated in the notice of the meeting
§ Replacement director/trustee – A director or trustee elected to fill a vacancy; shall serve only for the unexpired
term of the predecessor in office.
§ Emergency Board – When the vacancy prevents the remaining directors from constituting a quorum and
emergency action is required to prevent grave, substantial, and irreparable loss or damage to the corporation,
the vacancy may be temporarily filled from among the officers of the corporation by unanimous vote of the
remaining directors or trustees.
o The action by the designated director or trustee shall be limited to the emergency action necessary
o Expiration of term: within a reasonable time from the termination of the emergency or upon election of the
replacement director or trustee, whichever comes earlier.
o SEC must be notified within 3 days from the creation of the emergency board, stating therein the reason for
its creation.
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Valle Verde Club vs. Africa
Relevant provision: Sec. 28, RCC
During the Annual Stockholders' Meeting of VVCC (1996) Dinglasan and Makalintal, among others, were elected
as members of the BOD. In the years 1997, 1998, 1999, 2000, and 2001, however, the requisite quorum for the
holding of the stockholders' meeting could not be obtained. Thus, these directors continued to serve in a hold-
over capacity. In 1998, Dinglasan and Makalintal resigned as members of the Board. They were replaced by Roxas
and Ramirez, respectively, who were elected by the remaining members of the VVCC Board, still constituting a
quorum.
WON the remaining directors can elect another director to fill in a vacancy caused by the resignation of a hold-
over director? NO
The holdover period is not part of the term of office of a member of the BOD. “Term” is defined as the time during
which the officer may claim to hold the office as a right and fixes the interval after which the several incumbents
shall succeed one another. It is fixed by statute and it does not change simply because the office may have become
vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor
has not been elected and has failed to qualify. Term is distinguished from tenure in that an officer's "tenure"
represents the term during which the incumbent actually holds office.
Section 23 of the Corporation Code which declares that the BOD shall hold office for 1 year until their successors
are elected and qualified is construed to mean that the TERM shall be only for 1 year. The holdover period — that
time from the lapse of one year from a member's election to the Board and until his successor's election and
qualification — is not part of the director's original term of office, nor is it a new term; the holdover period,
however, constitutes part of his tenure. In this case, Makalintal's term of office began in 1996 and expired in 1997,
but, by virtue of the holdover doctrine in Section 23 of the Corporation Code, he continued to hold office until his
resignation in 1998. This holdover period, however, is not to be considered as part of his term, which had already
expired. With the expiration of Makalintal's term of office, a vacancy resulted which, by the terms of Section 29
of the Corporation Code, must be filled by the stockholders in a regular or special meeting called for the purpose.
The powers of the corporation's BOD emanate from its stockholders. The BOD is the directing and controlling
body of the corporation. The shareholder vote is critical to the theory that legitimizes the exercise of power by
the directors or officers over properties that they do not own. This theory of delegated power of the board of
directors explains why in cases where the vacancy in the corporation's board is caused not by the expiration of a
member's term, the successor so elected to fill in a vacancy shall be elected only for the unexpired term of his
predecessor in office. The law has authorized the remaining members of the board to fill in a vacancy only in
specified instances, so as not to retard or impair the corporation's operations; yet, in recognition of the
stockholders' right to elect the members of the board, it limited the period during which the successor shall serve
only to the "unexpired term of his predecessor in office".
STOCKS AND STOCKHOLDERS
HOW TO BE A STOCKHOLDER
1. Subscription – purchasing unissued stocks from issuing corporation
2. Assignment – purchasing issued stocks from issuing corporation (TS) or from stockholder
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TYPES OF SUBSCRIPTION
1. Pre-incorporation subscription
§ subscription before the corporation is incorporated
§ refers to original subscriptions
§ Once entered, it constitutes a binding contract among the subscribers.
§ GR: Irrevocable for a period of 6 months from the date of subscription
§ EXC: (1) All of the other subscribers consent to the revocation, OR (2) the corporation fails to incorporate
within the same period or within a longer period stipulated in the contract of subscription.
§ Rationale of revocability: Generally, a contract is revocable when it is not consummated. We apply the same
logic here in a sense that when a subscriber pays for his subscription pre-incorporation, it is given with the
condition that it shall be used for the formation of the corporation. The failure of such event to happen would
allow the subscriber to revoke his subscription but this is subject to the period provided in Sec.60 that the
corporation is given 6 months to comply with its obligation. And once the corporation files its articles of
incorporation then it is as if it had complied with its obligation thus, making the subscription irrevocable
(contract is consummated).
§ EXC to the EXC: irrevocable after the articles of incorporation has already been submitted to the SEC
2. Post-incorporation subscription
§ Subscription after the corporation is incorporated
§ The law is silent as to the revocability or irrevocability of the subscription but actually it is irrevocable.
§ This subscription is akin to a valid and binding contract already perfected; hence, it is irrevocable. The
subscription now becomes a part of the capital stock of the corporation; thus, the corporation cannot allow
such subscriptions to be revoked without prejudicing its interests and that of its stockholders.
§ The moment a subscriber subscribes, he becomes a stockholder, regardless of non-payment of the
subscription yet.
§ The subscriber can enjoy the rights of a stockholder. The corporation now must comply with its obligations
to its stockholders.
LIABILITY OF DIRECTORS FOR WATERED STOCKS
§ Watered Stock – the amount of the consideration of the stock is less than its par value or issued price.
§ A director or officer of a corporation is liable to the corporation or its creditors if he: [LEK]
(a) consents to the issuance of stocks for a consideration less than its par or issued value;
(b) consents to the issuance of stocks for a consideration other than cash, valued in excess of its fair value; or
(c) having knowledge of the insufficient consideration, does not file a written objection with the corporate
secretary.
§ Effect: Solidarily liability with the stockholder concerned for the difference between the value received at the
time of issuance of the stock and the par or issued value of the same.
TRUST FUND DOCTRINE
§ The assets of the corporation as represented by its capital stock are "trust funds" to be maintained unimpaired
and to be used to pay corporate creditors in the sense that there can be no distribution of such assets among
the stockholders without provision being first made for the payment of corporate debts and that any such
disposition of it is a fraud on the creditors of the corporation who extend credit to the corporation on the faith
of its outstanding capital stock and, therefore, void.
§ As between the stockholders and the creditors, the creditors have preference over the assets of the corporation.
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§ TN: The unpaid subscription of the stockholders is considered as assets of the corporation. They are receivables.
So, even without going through piercing the veil, the stockholders, really, are liable for their unpaid subscription.
§ When you have an unpaid subscription, your true creditor is the corporation as it owns the accounts receivables
(A/R). It’s just that the creditors can look into the unpaid subscription for the fulfillment of their obligation. Under
normal circumstances, the creditors don’t go directly at the stockholders. They go after the corporation. If the
corporation does not have sufficient funds, that’s the time they go after the receivables, which is the unpaid
subscription.
§ Supposedly, the liability of the subscriber is only to the corporation because it is an asset of the corporation. But
in rare instances, the courts allow the creditor to collect directly from the subscribers. The creditors have to
implead the corporation because the obligation is supposedly to the corporation.
Halley v. Printwell, Inc.
The petitioner was an incorporator and original director of Business Media Philippines, Inc. (BMPI):
Subscriber No. of shares Total Amount paid
subscription
Donnina C. Halley 35,000 P350,000.00 P87,500.00
xxx xxx xxx xxx
—————— —————— ——————
— ——
TOTAL 75,000 P750,000.00 P187,500.00
Printwell is engaged in commercial and industrial printing. BMPI commissioned Printwell for the printing of
magazines that BMPI published and sold. Printwell extended 30-day credit accommodations to it. BMPI placed
with Printwell several orders on credit totaling P316,342.76. Considering that BMPI paid only P25,000.00,
Printwell sued BMPI. It also impleaded as defendants all the original stockholders and incorporators to recover
on their unpaid subscriptions. The defendants filed a consolidated answer, averring that they all had paid their
subscriptions in full; that BMPI had a separate personality from those of its stockholders. To prove payment of
their subscriptions, the defendant stockholders submitted in evidence ITRs, relevant FS and ORs. Halley’s OR
indicated that her supposed payment had been made by means of a check. Printwell impleaded her and the other
stockholders (a) to reach the unpaid subscriptions because it appeared that such subscriptions were the
remaining visible assets of BMPI; and (b) to avoid multiplicity of suits. Halley submits that she had no participation
in the transaction between BMPI and Printwell; that BMPI acted on its own; and that she had no hand in
persuading BMPI to renege on its obligation to pay. Hence, she should not be personally liable.
WON Halley was liable pursuant to the trust fund doctrine for the corporate obligation of BMPI by virtue of her
subscription being still unpaid? YES
The trust fund doctrine enunciates a rule that the property of a corporation is a trust fund for the payment of
creditors, but such property can be called a trust fund 'only by way of analogy or metaphor.' As between the
corporation itself and its creditors, it is a simple debtor, and as between its creditors and stockholders, its assets
are in equity a fund for the payment of its debts. This doctrine is not limited to reaching the stockholder's unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock,
but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts.
All assets and property belonging to the corporation held in trust for the benefit of creditors that were distributed
or in the possession of the stockholders, regardless of full payment of their subscriptions, may be reached by the
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creditor in satisfaction of its claim. Also, under the trust fund doctrine, a corporation has no legal capacity to
release an original subscriber to its capital stock from the obligation of paying for his shares, in whole or in part,
without a valuable consideration, or fraudulently, to the prejudice of creditors. The creditor is allowed to maintain
an action upon any unpaid subscriptions and thereby steps into the shoes of the corporation for the satisfaction
of its debt.
In this case, the extent of Halley’s liability is only up to the full amount of her unpaid subscription. It’s the same
as to the other stockholders – they are liable only up to the extent of their unpaid subscription. It is not pro-rated
per stockholder. It is to the exact peso amount of the unpaid subscription.
TRANSFER OF SHARES
§ 2 ways:
1. Delivery + Indorsement
2. Deed of Assignment
§ Transfer = secondary; pertains to issued shares only
§ Effect: It merely transfers the ownership of the shares to the transferee or the assignee. There is already a valid
transfer of ownership. However, it does not make the transferee or assignee a stockholder yet.
§ Registration in the stock and transfer book – what makes the assignee a stockholder; regardless of the issuance
or non-issuance of a new certificate.
Teng vs. SEC
Relevant provision in the new law: Sec. 62, RCC
Ting Ping purchased shares of TCL Sales Corporation (TCL) from Chiu, his brother Teng Ching Lay (President and
operations manager of TCL), and Maluto. Teng Ching died. Ting Ping, to protect his shareholdings with TCL,
requested Teng (TCL's Corporate Secretary), to enter the transfer in the Stock and Transfer Book of TCL for the
proper recording of his acquisition. He also demanded the issuance of new certificates of stock in his favor. TCL
and Teng refused despite repeated demands. Ting Ping filed mandamus with the SEC which was granted. Teng
argued that prior to registration of stocks in the corporate books, it is mandatory that the stock certificates are
first surrendered because a corporation will be liable to a bona fide holder of the old certificate if, without
demanding the said certificate, it issues a new one.
WON the surrender of the certificates of stock is a requisite before registration of the transfer may be made in the
corporate books and for the issuance of new certificates in its stead? NO
To compel Ting Ping to deliver to the corporation the certificates as a condition for the registration of the transfer
would amount to a restriction on his right to have the stocks transferred to his name. In a sale of shares of stock,
title may be vested in the transferee by the mere delivery of the duly indorsed certificate of stock. It is only
required if you are going to transfer ownership, not when you ask to register the transfer. IOW, the surrender of
stock certificate is not required in the registration of the transfer in the Stock and Transfer Book. Nevertheless,
to be valid against third parties and the corporation, the transfer must be recorded or registered in the books of
corporation. Upon registration of the transfer in the books of the corporation, the transferee may now then
exercise all the rights of a stockholder, which include the right to have stocks transferred to his name. Take note
that what makes the transferee a stockholder is the registration of the transfer of the shares in the Stock and
Transfer Book; not the issuance of the new stock certificate in the transferee’s name.
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F&S Velasco vs. Madrid
F&S Velasco Company, Inc. (FSVCI) was duly organized and registered as a corporation with its incorporators: Sps
Velasco, their daughter Angela Madrid whose husband is Dr. Madrid (respondent), and Saturnino Velasco
(petitioner). Sps Velasco died, thus, their daughter Angela inherited their shares thereby giving her control of
70.82%. Angela was also then the Chairman of the BOD. Her husband, as reflected in the Stock and Transfer book
Madrid, only has 4.16% share. When Angela died intestate and w/o issue, her husband Madrid executed an
Affidavit of Self-Adjudication which includes the shares she owned. Without registration on the corporate book
of such transfer, Madrid called for a meeting for the Re-Organization of the BOD, to which meeting, other
respondents (Madrid Group) was given one share, and such group took over the BODs. At the same time, Velasco
also had a meeting for the election of the Pres and Vice-Pres of the BOD. So, there were 2 separate meetings (by
Madrid and by Velasco).
WON Madrid’s meeting is legal and valid? NO
WON a Management Committee should be created? NO
The death of Angela Madrid immediately transferred the 70.82% ownership of shares to her husband Dr. Madrid
as he was her sole heir. Thus, he can compel issuance of certificates of stock in his favor. However, this does not
ipso facto afford him the rights accorded to such majority ownership of FSVCI’s shares. Sec. 63 of the Corporation
Code provides that all transfers of shares of stock must be registered in the corporate books (Stock and Transfer
Book) in order to be binding on the corporation. An owner of shares of stock cannot be accorded the rights
pertaining to a stockholder — such as the right to call for a meeting and the right to vote, or be voted for — if his
ownership of such shares is not recorded in the Stock and Transfer Book. Until registration is accomplished, the
transfer, though valid between the parties, cannot be effective as against the corporation. The purpose of
registration, therefore, is two-fold: (1) to enable the transferee to exercise all the rights of a stockholder, including
the right to vote and to be voted for, and (2) to inform the corporation of any change in share ownership so that
it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder.
The submission of a GIS of a corporation before the SEC is pursuant to the objective sought by Section 26 of the
Corporation Code which is to give the public information, under sanction of oath of responsible officers, of the
nature of business, financial condition, and operational status of the company, as well as its key officers or
managers, so that those dealing and who intend to do business with it may know or have the means of knowing
facts concerning the corporation's financial resources and business responsibility. The contents of the GIS,
however, should not be deemed conclusive as to the identities of the registered stockholders of the corporation,
as well as their respective ownership of shares of stock, as the controlling document should be the corporate
books, specifically the Stock and Transfer Book. As between the GIS and the corporate books, it is the latter that
is controlling.
Since as reflected in the Stock and Transfer book, Madrid only has 4.16%, his Meeting is null and void. And
considering that RTC’s decision of Velasco’s Meeting’s nullity, BODs should only act in a hold-over capacity until
their successors are elected and qualified.
The creation of a management committee may not be sought for since such requires the concurrence of 2
elements:
(a) Dissipation, loss, wastage or destruction of assets or other properties; and
(b) Paralyzation of its business operations which may be prejudicial to the interest of the minority stockholders,
parties- litigants or the general public.
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The requisites must be strictly considered since appointed management committees will immediately take over
the management of the corporation and exercise the management powers specified in the law. This may have a
negative effect on the operations and affairs of the corporation with third parties, as persons who are more
familiar with its operations are necessarily dislodged from their positions in favor of appointees who are strangers
to the corporation's operations and affairs. Absent any actual evidence from the records showing such imminent
danger, there is no legal or factual basis to support the appointment/constitution of a Management Committee
for FSVCI.
SCRIPLESS TRADING
§ “Scrip” – a duly signed stock certificate
§ Scripless Trading refers to transfer of ownership of shares without actually delivering stock certificates. It is done
through book entries
§ This kind of trading is usually done when the stocks are listed in the Philippine Stock Exchange (PSE).
§ Rationale: For convenience of buying and selling securities. To strictly follow the traditional way of transferring
shares, the stock market will not survive because the transactions will take from days to months.
§ Procedure:
o Deliver all the corporation’s securities on their shares to the Philippine Depository and Trust Corporation
(PDTC). PDTC holds all the shares.
o The shares in the book of PDTC will now be assigned or given to the brokers who purchased the shares.
o Stock and Transfer Agent records the stocks in the Stock and Transfer Book and issues the Stock Certificates
of the Corporation.
o The entity recorded in the Stock and Transfer Book will be PDTC (legal owner).
o Stock and transfer books are not changed every transfer. What the PDTC will only do is to make book of
entries.
§ Uplifting of Shares – If the shares are desired to be kept for a long time without intent to trade it, the shares can
be uplifted by—
1. Requesting the PDTC to take out the shares from their custody and record it in the Stock and Transfer Book
under the name of the purchaser (Corporation/Stockholder)
2. Stock and Transfer Agent will issue the shares to that person
3. If later on you decide to sell it, the stock certificate should be returned to the Stock and Transfer Agent,
which will again take time. (This is the delay and complication that scripless trading avoids)
§ There is only one owner – PDTC, the listed stockholder in the books of the Corporation.
§ PDTC will have its own list of brokers who hold the shares for their clients.
§ Brokers will have their own list of their own clients as well.
§ Legal Owner – PDTC; Beneficial Owner – Client of the Brokers
§ During elections, the beneficial owner should ask for a certification from the broker that he is the owner of this
certain number of shares; that certification (NOT a stock certificate) should be brought by the beneficial owner
during the election; akin to proxy allowing to vote shares.
RIGHTS OF A STOCKHOLDER (among others)
1. Right to inspect corporate books and records and to receive financial report of the corporation’s operations
2. Right to attend and vote at stockholder’s meetings, if he has a voting share
3. Right to receive dividends when declared
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CERTIFICATE OF STOCK ü If stock dividend - the stockholder’s share in the dividend is withheld by the corporation until the subscription
§ It is a written instrument signed by the proper officer of a corporation stating or acknowledging that the person is fully paid.
named in the document is the owner of a designated number of shares of its stock. o These stocks shall be subject to sale UNLESS the board of directors orders otherwise.
§ It is a prima facie evidence that the holder is a shareholder of a corporation. o TN: The corporation is not prohibited from collecting through court action, the amount due on any unpaid
§ It is merely a tangible evidence of ownership of shares of stock. subscription, with accrued interest, costs and expenses.
§ It is not a stock in the corporation. It merely expresses the contract between the corporation and the stockholder.
§ The shares of stock evidenced by said certificates, meanwhile, are regarded as property and the owner of such Procedure for Delinquency Sale
shares may, as a general rule, dispose of them as he sees fit, unless the corporation has been dissolved, or unless 1. Board resolution declaring the subscription delinquent
the right to do so is properly restricted, or the owner's privilege of disposing of his shares has been hampered by 2. The sale must be made not less than 30 days but not more than 60 days from the date the stock became
his own action. delinquent.
§ The moment you subscribe post-incorporation, you already enjoy all the benefits of being a stockholder. 3. Notice and copy of the resolution must be made to all delinquent stockholders personally, or through registered
However, you will not be issued a stock certificate if you have not yet fully paid your subscription. mail, or through other means provided in the by-laws.
4. Publication once a week for 2 consecutive weeks in a newspaper of general circulation in the province or city
STOCK CERTIFICATE OF STOCK where the principal office of the corporation is located.
ownership interest in the corporation mere evidence of your ownership interest 5. Before the sale, the stockholder may stop the delinquency sale by paying the unpaid subscription, interest, cost
intangible tangible of advertisement, and expenses.
merely represent the number of shares or ownership in 6. Failure of the stockholder to pay, the delinquent stock shall be sold at a public auction.
a corporation
can acquire whether you pay it or not can only be acquired upon full payment ILLUSTRATION:
Total subscription – 20,000 shares valued at P1M (50% paid; 50% unpaid)
PAYMENT OF BALANCE OF SUBSCRIPTION (Sec. 66, RCC)
§ The board of directors may, at any time, declare due and payable to the corporation unpaid subscriptions Pursuant to the principle of indivisibility of subscription, the entire subscription
(subject to the provisions of the subscription contract) of 20,000 shares are considered delinquent stock.
§ Payment of unpaid subscription or any percentage thereof, together with any interest accrued, shall be made
on: 7. The winning bidder is determined by the bidder who is willing to pay for the smallest number of shares or fraction
o date specified in the subscription contract or of a share.
o date stated in the call made by the board
A call is made by a resolution of the Board of Director’s in a meeting where there ILLUSTRATION:
is a quorum and approved by majority of the Director’s present in a meeting. The Bidder A - 2,000 shares valued at P10k; P5/share
call is only required when there is no date fixed for the payment of the shares. Bidder B - 1,500 shares value at P10k; P6.67 /share
§ Effect of failure to pay: The entire balance will be due and payable and shall make the stockholder liable for Bidder C - 1,000 shares value at P10k; P10/share
interest at the legal rate on such balance, UNLESS a different interest rate is provided in the subscription contract.
§ Accrued Interest: from the date specified until full payment of the subscription. In this case Bidder C should be declared the highest bidder because he is the bidder who is
willing to pay the smallest number of shares or fraction of a share. This means that the
DELINQUENT STOCKS highest bidder must be the bidder who is willing to pay the highest amount per share.

If no payment is made within 30 days from the date specified in the subscription contract or date stated in the call
made by the board, all stocks covered by such subscription shall thereupon become delinquent.
Effects:
o The stockholder will remain to be a stockholder but the exercise of any of the stockholder’s right is suspended,
EXCEPT the right to dividends.
o The distribution of share in the dividend by a delinquent shareholder shall be applied in the following manner:
ü If cash/property dividend – the corporation will off-set the payment of the unpaid subscription from the
stockholder’s share in the dividend.
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8. Upon payment of the highest bidder, the stock so purchased shall be transferred to such purchaser in the books
of the corporation and a certificate for such stock shall be issued in the purchaser's favor.
9. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock covering such shares.
ILLUSTRATION: Based on the illustration above 1k shares out of the 10k delinquent shares
shall be given to Bidder C. The remaining 9k shares shall be given to the delinquent
stockholder.
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10. If there is no bidder, the corporation is authorized to purchase the shares and shall form part of the treasury
shares.
EFFECT: There will be no shares given to the stockholder. Applying the illustration above, all
the 10,000 delinquent shares shall pertain to the corporation. This shall form part of the
corporation’s TS.
LOST OR DESTROYED CERTIFCICATES
Procedure:
1. The registered owner or such person's legal representative shall file with the corporation an affidavit in triplicate
setting forth, if possible:
ü circumstances as to how the certificate was lost, stolen or destroyed,
ü number of shares represented by such certificate,
ü serial number of the certificate, and
ü name of the issuing corporation
2. The owner shall also submit such other information and evidence as may be deemed necessary
3. Verify the affidavit and other information and evidence with the books of the corporation
4. Publication of a notice in a newspaper of general circulation in the place where the corporation has its principal
office, once a week for 3 consecutive weeks at the expense of the registered owner of the certificate of stock. \
ü name of the corporation,
ü name of the registered owner,
ü serial number of the certificate,
ü number of shares represented by such certificate,
ü state that after the expiration of 1 year from the date of the last publication, if no contest has been
presented to the corporation, the right to make such contest shall be barred and the corporation shall
cancel the lost, destroyed or stolen certificate of stock in its books.
5. If no contest after 1 year, the corporation shall issue a new certificate of stock.
EXCEPTION: Issuance of new certificate PRIOR to the 1-yr period
§ The registered owner shall file a bond or other security as may be required, effective for a period of 1 year, for
such amount and in such form and with such sureties as may be satisfactory to the board of directors.
§ If a contest has been presented to the corporation or if an action is pending in court regarding the ownership of
the certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in
lieu thereof shall be suspended until the court renders a final decision regarding the ownership of the certificate
of stock which has been lost, stolen or destroyed.
DEED OF ASSIGNMENT
§ If there is a stock certificate, transfer will be done by delivery and indorsement and then you record it in the
stock and transfer book
§ If there is no stock certificate, transfer can still be done by deed of assignment of shares.
a. Execute the deed of assignment
b. Have it recorded in the Stock and Transfer book as well
§ Generally, the law says that you cannot transfer shares where there is an unpaid subscription. But in practice,
you can transfer shares by deed of assignment of subscription rights. What happens is that you assign your
rights to the subscription. You don’t assign the shares because you are not allowed.
§ Principle of Indivisibility still existS when you assign your rights to the subscription. Meaning, you assign the
subscription as a whole.
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POWERS OF CORPORATION
CLASSIFICATION OF CORPORATE POWERS
1. Express Powers
o The powers expressly conferred upon the corporation by law. These powers can be ascertained from the
special law creating the corporation, or from the general incorporation law under which it is created, the
general laws of the land applicable to corporations (RCC), and its articles of incorporation.
o Ordinarily, these are provided under the primary purpose in the Articles of Incorporation.
2. Implied Powers
o The powers which are reasonably necessary to exercise the express powers and to accomplish or carry out the
purposes for which the corporation was formed.
o The implied power of the corporation is one which is related or exist by virtue of the express power even if it
is not expressly provided. They need not be expressly provided in the Articles of Incorporation but they exist
by virtue of the express powers.
Examples:
a. Acts in the usual course of business
b. Acts to protect debts owing to a corporation
c. Embarking in different business
d. Acts in part or wholly to protect or aid employees
e. Acts to increase business
3. Incidental Powers
o These are powers which a corporation can exercise by the mere fact of its being a corporation or powers which
are necessary to corporate existence and are, therefore, impliedly granted. As powers inherent in the
corporation as a legal entity, they exist independently of the express powers.
o Those powers enumerated under Sec. 35, RCC.
o There was a problem before on the secondary purpose of a corporation because it was just enumerated in the
secondary purpose in the Articles subparagraph (g) of Sec. 35 which is to sell or lease property. A few years
back, BIR strictly enforced imposition of VAT and income tax on ordinary assets and Capital Gains Tax on capital
assets. Ordinarily, you can say that it is an ordinary asset of the corporation if it is related to its express powers
in its primary purpose; such that real estate is an ordinary asset if the corporation is engaged in real estate
business. However, if the corporation is engaged in retail, sale of land ordinarily is considered a capital asset
unless it is used for business. The problem with the BIR is that, if they see it in your secondary purpose, “to
purchase, receive, take or grant real and personal property,” they consider that you are a real estate company.
So, there is a disconnection between SEC and BIR as to this issue.
Teresa Electric & Power Co., Inc. vs. Public Service Commission
Implied Power
§ Teresa Electric Light and Power Co., Inc. (Teresa) – a domestic corporation which is operating an electric plant
under a subsisting certificate of public convenience and necessity.
§ Filipinas – a domestic corporation engaged in the manufacture and sale of cement.
§ Teresa’s load capacity – 2,000 kilowatts
§ Filipinas – needs 6,000 kilowatts power to operate its cement factory.
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Filipinas filed an application with the Public Service Commission (PSC) for a certificate of public convenience (CPC)
to install, maintain and operate an electric plant for the purpose of supplying electric power and light to its cement
factory and its employees living within its compound.
Teresa
It alleged that it is the duly authorized operator of an electric light, heat and power service in that place. Filipinas
is not authorized by its articles of incorporation to operate an electric plant.
Filipinas
Par. 7 of its articles provides for authority to secure from any governmental, state, municipality, or provincial, city
or other authority, and to utilize and dispose of in any lawful manner, rights, powers, and privileges, franchises
and concessions — obviously necessary or at least related to the operation of its cement factory. Moreover, said
articles also provide that the corporation may generally perform any and all acts connected with the business of
manufacturing portland cement or arising therefrom or incidental thereto. IOW, it is authorized to operate the
proposed electric plant.
The operation of an electric light, heat and power plant is necessarily connected with the business of
manufacturing cement. If in the modern world where we live today electricity is virtually a necessity for our daily
needs, it is more so in the case of industries like the manufacture of cement. Filipinas needed 6,000 kilowatts,
and the load capacity of the petitioner was only 2,000 kilowatts so petitioner was in no condition to supply the
power needs of Filipinas. If Filipinas will not put up its own its electric power, it cannot continue its operation.
Though putting up a power plant is not expressly provided in their purpose in the Articles of Incorporation,
Filipinas’ Articles of incorporation provides for the authority to secure from any governmental, state municipality,
or provincial, city or other authority and to utilize and dispose of in any lawful manner rights, powers, and
privileges, franchises, and concessions obviously necessary or at least related to the operation of the cement
factory.
Republic v. Acoje Mining Co., Inc.
Acoje Mining Company, Inc. wrote the Director of Posts requesting the opening of a post, telegraph and money
order offices at its mining camp in Zambales to service its employees and their families that were living in said
camp. The Director of Posts wrote in reply stating that if aside from free quarters, the company would provide
for all essential equipment and assign a responsible employee to perform the duties of a postmaster without
compensation from his office until such time as funds therefor may be available, he would agree to put up the
offices requested. The company in turn replied signifying its willingness to comply.
It suggested that a resolution be adopted expressing conformity to the condition that in the event a post office
branch is opened, the company shall assume direct responsibility for whatever pecuniary loss that may be
suffered by the Bureau of Posts by reason of any act of dishonesty, carelessness or negligence on the part of the
employee of the company who is assigned to take charge of the post office. The company then informed the
Director of Posts of the passage by its board of a resolution: "That the requirement of the Bureau of Posts that
the Company should accept full responsibility for all cash received by the Postmaster be complied with, and that
a copy of this resolution be forwarded to the Bureau of Posts." The company then requested that an inspector be
sent to the camp for the purpose of acquainting the postmaster with the details of the operation of the branch
office. The post office branch was opened with Sanchez as postmaster. The postmaster went on a 3-day leave but
never returned. The company immediately informed the officials of the Manila post office and the provincial
auditor of Zambales of Sanchez' disappearance. A shortage was found in the amount of P13,867.24.
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Corporation
It denied liability. The resolution is ultra vires. In any event, its liability is only that of a guarantor who answers
only after the exhaustion of the properties of the principal, aside from the fact that the loss claimed by the plaintiff
is not supported by the office record.
WON the resolution adopted by the company is ultra vires? NO
A mere reading of the resolution would show that the responsibility of the company is not just that of a guarantor.
Notice that the phraseology and the terms employed are so clear and sweeping and that the defendant assumed
'full responsibility for all cash received by the Postmaster.' Here the responsibility of the defendant is not just that
of a guarantor. It is clearly that of a principal.
Accepting the condition set by the Director of Post, the company, thru its board, adopted the assailed resolution.
It cannot now go back on its plighted word on the ground of estoppel. While as a rule an ultra vires act is one
committed outside the object for which a corporation is created as defined by the law of its organization and
therefore beyond the powers conferred upon it by law, there are however certain corporate acts that may be
performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest
or welfare of the corporation. Thus, it has been held that although not expressly authorized to do so, a corporation
may become a surety where the particular transaction is reasonably necessary or proper to the conduct of its
business. In this case, although the power to establish a local post office was not expressly granted by the Articles
or the Corporation Code, such is a reasonable and proper adjunct to the conduct of the business of the
corporation. It was necessary to promote the interest/welfare of the corporation. IOW, it was part of the implied
power of the corporation based on the nature of the operations of the company as a mining industry. Such post
office is a vital improvement in the living condition of its employees and laborers who came to settle in its mining
camp which is far removed from the postal facilities or means of communication accorded to people living in a
city or municipality.
Even assuming arguendo that the resolution in question constitutes an ultra vires act, the same however is not
void for it was approved not in contravention of law, customs, public order or public policy. The term ultra vires
should be distinguished from an illegal act for the former is merely voidable which may be enforced by
performance, ratification, or estoppel, while the latter is void and cannot be validated. It being merely voidable,
an ultra vires act can be enforced or validated if there are equitable grounds for taking such action.
The defense of ultra vires rests on violation of trust or duty toward stockholders, and should not be entertained
where its allowance will do greater wrong to innocent parties dealing with corporation. The acceptance of
benefits arising from the performance by the other party may give rise to an estoppel precluding repudiation of
the transaction. Where the ultra vires transaction has been executed by the other party and the corporation has
received the benefit of it, the law interposes an estoppel.
INCIDENTAL POWERS OF A CORPORATION (Sec. 35, RCC)
a. To sue and be sued in its corporate name;
As a juridical entity, the corporation can directly pursue all actions to enforce its rights. It does not have to go
through its stockholders. At the same time, the corporation can directly be held liable for its obligations. The
creditor does not have to go through the stockholders.
b. To have perpetual existence unless the certificate of incorporation provides otherwise;
c. To adopt and use a corporate seal;
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d. To amend its articles of incorporation in accordance with the provisions of this Code;
e. To adopt bylaws, not contrary to law, morals or public policy, and to amend or repeal the same in accordance
with this Code;
f. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with
the provisions of this Code; and to admit members to the corporation if it be a nonstock corporation;
501_Corporation – GAVIOLA
- electronically – when allowed in the bylaws or done with the consent of the stockholder; must be in
accordance with the rules and regulations of the Commission on the use of electronic data messages.
§ Right of appraisal – if extension, applicable (express); if shortening, also applicable (implied).
§ Requires amendment of the articles of incorporation (articles for brevity)
§ The amended articles must be filed with the SEC; effectivity: once approved by the SEC.

Sec. 35 (f) Sec. 37 Power to Increase or Decrease Capital Stock (Sec. 37, RCC)
Sale of unissued but authorized stock; includes sale Increase of ACS
of treasury stocks;
Voting Reqt: majority of the board (quorum); does Voting Reqt: majority of the board (quorum) + 2/3 § Exclusive only to stock corporations
not require amendment of the Articles (s/m); requires an amendment of the articles of § majority of the board (quorum) + 2/3 (s)
incorporation § Written notice is required:
No change in ACS, but only the subscribed and issued There is a change in ACS, subscribed and issued o Contents: time, place, purpose
capital capital o To: Stockholders at their places of residence as shown in the books of the corporation
o Service:
No minimum subscription required at least 25% of the increase in capital stock has been
subscribed and at least 25% of the amount - personally, or
- electronically – recognized by the bylaws and/or the Commission's rules
subscribed has been paid
§ Requires amendment of the articles.
§ A certificate must be signed by a majority of the directors and countersigned by the chairperson and secretary
g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise deal with such
of the stockholders' meeting, setting forth:
real and personal property,
ü requirements have been complied with;
ü amount of the increase or decrease of the capital stock;
Sec. 35 (g) Sec. 39
ü In case of an increase:
Sale of any asset of the corporation, as long as it is Sale or disposition of all or substantially all of the
- amount of capital stock or number of shares of no-par stock thereof actually subscribed
not all, or substantially all of the assets assets
- names, nationalities and addresses of the persons subscribing
Voting Reqt: majority of the board (quorum) Voting Reqt: majority of the board (quorum) + 2/3 - amount of capital stock or number of no-par stock subscribed by each
(s/m)
- amount paid by each or the amount of capital stock or number of shares of no-par stock allotted to each
stockholder
§ If the primary purpose of the corporation is to sell assets, there’s no need for approval by the board. Any § The amended articles and certificate must be filed before the SEC; copies thereof must also be kept in the
authorized officer/employee can transact as long as it is in the ordinary course of business. corporation’s office and attached to the original articles.
§ If it’s not in the ordinary course of business of the corporation and it’s not all or substantially all, then you § This requires prior approval of the SEC, and where appropriate, of the Philippine Competition Commission (PCC).
need board approval. § Application: within 6 months from the date of approval of the board and stockholders, which period may be
extended for justifiable reasons.
Power to Extend or Shorten Corporate Term (Sec. 36, RCC) § Copies of the certificate shall be kept on file in the office of the corporation and filed with the Commission and
attached to the original articles.
§ Effectovoty: After approval by the SEC and the issuance of its certificate of filing.
§ Approval by majority vote of the BOD in a meeting where there is a quorum [‘majority of the board’ (quorum)
§ If increase: The certificate must be accompanied by the Treasurer’s Affidavit, showing that at least 25% of the
for brevity], and ratified at a meeting by the stockholders or members representing at least two-thirds (2/3) of
increase in capital stock has been subscribed and that at least 25% of the amount subscribed has been paid (TN:
the outstanding capital stock or of its members [‘2/3 (s/m’) for brevity].
this 25-25 reqt is no longer required in the opening of the corporation).
§ Written notice is required:
§ If decrease: shall not be approved by the Commission if its effect shall prejudice the rights of corporate creditors.
o Contents: proposed action, time and place of the meeting
o To: Stockholders or members at their respective place of residence as shown in the books of the corporation;
Difference Sec. 35 (f) Sec 37
must be deposited to the addressee in the post office with postage prepaid
o Service: § Increase in subscription but no § Increase in ACS
- personally; or As to coverage increase or change in ACS. (TN: Nothing in the law requires
that the ACS should be fully

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§ Only focuses on issuances/sales subscribed first before the Power to Deny Pre-emptive Right (Sec. 38, RCC)
of shares. corporation can increase it)
§ Only the subscribed and the
outstanding capital stock is § Pre-emptive right – whenever the capital stock of a corporation is increased and new shares of stock are issued,
changed, not the ACS. the new issue must be offered first to the stockholders who are such at the time the increase was made in
As to amendment of the articles § Not required § Required proportion to their existing stockholdings and on equal terms with other holders of the original stocks before
As to filing of amended GIS § Required § Required subscriptions are received from the general public.
§ Required (pursuant to SRC) § Not required § Purpose: To preserve the stockholder’s proportionate influence and interest in the corporation; to protect from
§ SEC Form 10-1 – a form to show impairment and dilution of the basic rights of the stockholder (right to vote, right to net earnings as dividends,
that the increase or that the new right to net corporate assets after liquidation)
issuance is not covered by the § Effect of Dilution of Share: Reducing percentage of voting and the economic benefit of the share.
registration requirement under § The stockholder cannot insist on more than his shareholdings; but they can buy more if other shareholders waive
As to reporting requirement the SRC (IOW, it is among the their pre-emptive right, also in proportion to their shares.
exempt transactions or exempt § GR: If the articles are silent, pre-emptive rights can be exercised.
securities under the SRC). § EXC: denial of pre-emptive rights
§ This is not really relevant for o Expressly denied in the articles
approval, but merely a o Shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the public;
notice/reportorial requirement. o Shares issued in good faith with the approval of the stockholders representing 2/3 (s), in exchange for
§ majority of the board (quorum) § majority of the board (quorum) property needed for corporate purposes or in payment of a previously contracted debt.
As to voting requirement § EXC TO EXC: If the directors acted in breach of trust and their primary purpose is to perpetuate or shift control
+ 2/3 (s)
of the corporation, or to “freeze out” the minority interest, the preemptive right may be exercised (Majority
25-25 requirement § Not applicable § Applicable
Stockholders of Ruby International v Lim)
§ Prior approval from SEC is not § Upon approval by the SEC of the
Effectivity needed certificate and the issuance of
ILLUSTRATION
the SEC of a certificate of filing.
10,000 ACS; 100 par; 5,000 issued. There is a move to issue another 5000.
Power to Incur, Create or Increase Bonded Indebtedness. (Sec. 37, RCC)
Shareholdings:
§ Bonded Indebtedness – a borrowing which is evidenced by a bond; a long term debt instrument that is issued A 1,000
by a corporation. It is different from a PN as the latter is more of a short or medium term and it’s normally B 1,000
issued to a particular person ( payee); which is not the case in a bond. C 2,000
§ When a corporation issues a bond, it borrows from the public. D 1,000
§ majority of the board (quorum) + 2/3 (s/m) Total subscribed 5,000
§ No need to amend the Articles because if you look at its contents, the amount of the corp’s liability is not The existing shareholders must first be given the opportunity to purchase the new issuance. Before selling it to
provided. third persons, it must first be offered to stockholders in proportion to their shareholdings even if the Articles is
§ There is still a need to secure an approval from SEC. The issuance of bonds is governed by the SRC which provides silent. Hence, A B C D are entitled to 1000, 1000, 2000, and 1000 shares, respectively. If the articles is silent, pre-
that no security may be issued within the Philippines unless it is first registered in the SEC. A bond, being a type emptive rights are present. But the corporation, through its Articles, can also expressly provide that pre-emptive
of security, is registrable under the SRC. rights are denied. In this case, if the articles is silent, and E wants to acquire 5,000 shares, before E can even
Sec. 8, SRC: Securities shall not be sold or offered for sale or distribution within the Philippines, acquire or before the Board can even offer the 5000 shares to third persons, it must first offer first to its existing
without a registration statement duly filed with and approved by the Commission. Prior to such stockholders in proportion to their existing capital stock. The stockholder cannot insist on more as a right. But if
sale, information on the securities, in such form and with such substance as the Commission the other stockholders do not exercise their pre-emptive right, then the other existing shareholders can exercise
may prescribe, shall be made available to each prospective purchaser. their pre-emptive right also in proportion to their current shareholdings. For example, if C declines, the shares
§ The securities under Commercial Law are different from the securities that are governed under Civil Law. In Civil pertaining to C can now be shared among A, B and D if they want. But if the current stockholders do not exercise
Law, security is used to ensure payment of a debt; whereas in Commercial Law, securities are issuances of the their pre-emptive rights, the SEC will require you to submit proof through a waiver of pre-emptive rights. It is
issuer. Such include equity securities (i.e. stocks) and debt securities (i.e. PNs, bonds) one of the reportorial requirements to the SEC if you are increasing your subscribed capital.

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Majority Stockholders of Ruby Industrial Corp. vs. Lim
Relevant Provisions: Sec. 36 & 38, RCC
§ Ruby Industrial Corporation (RUBY) – a domestic corporation engaged in glass manufacturing.
§ Benhar International, Inc. (BENHAR) – a domestic corporation engaged in the importation and sale of vehicle
spare parts which is wholly owned by the Yu family and headed by Henry Yu, who is also a director and
majority stockholder of RUBY.
Reeling from severe liquidity problems beginning in 1980, RUBY filed a petition for suspension of payments with
the SEC. SEC issued an order declaring it under suspension of payments and enjoining the disposition of its
properties pending hearing of the petition, except insofar as necessary in its ordinary operations, and making
payments outside of the necessary or legitimate expenses of its business.
SEC Hearing Panel created the MANCOM for RUBY, one of which is RUBY represented by Mr. Yu Kim Giang. 2
rehabilitation plans were submitted to the SEC:
1. BENHAR/RUBY Rehabilitation Plan – majority stockholders led by Yu Kim Giang; and
2. Alternative Plan – minority stockholders represented by Lim.
Plan 1: BENHAR shall lend its P60M credit line in CB to RUBY, payable within 10 years. Moreover, it shall purchase
the credits of RUBY's creditors and mortgage RUBY's properties to obtain credit facilities. Upon approval of the
rehabilitation plan, BENHAR shall control and manage RUBY's operations. For its service, BENHAR shall receive a
management fee equivalent to 7.5% of RUBY's net sales.
Plan 2: proposed to: (1) pay all RUBY's creditors without securing any bank loan; (2) run and operate RUBY without
charging management fees; (3) buy-out the majority shares or sell their shares to the majority stockholders; (4)
rehabilitate RUBY's two plants; and (5) secure a loan at 25% interest, as against the 28% interest charged in the
loan under the BENHAR/RUBY Plan.
Both plans were endorsed by the SEC to the MANCOM for evaluation. SEC approved BENHAR/RUBY Plan.
Meanwhile, BENHAR started to pay off secured creditors of RUBY and executed deeds of assignments of credit
and mortgage rights in favor of BENHAR. These were done despite the TRO and injunction and even before the
SEC Hearing Panel. AFLC and Lim moved to nullify the deeds of assignment in favor of BENHAR and cite the parties
in contempt for willful violation of SEC order on suspension of payments. They also charged that in paying of
FEBTC debts, it was given undue preference over the other creditors of Ruby.
Even during the pendency of appeals, BENHAR and Ruby have performed other acts in pursuance of
BENHAR/RUBY Plan approved by SEC (even if there was an injunction). Lim received a notice of stockholder’s
meeting signed by Mr Magtalas the “designated secretary” of Ruby and stating the matters to be taken up in said
meeting which includes extension of Ruby’s corporate term for another 25 years and election of directors. At the
scheduled stockholder’s meeting, Lim together with other minority stockholders appeared in order to put on
record their objections on the validity of the holding thereof and the matters taken therein. Specifically, they
questioned the percentage of stockholders present in the meeting which the majority claimed stood at 74.75%
of Ruby. Lim also argued that a majority of the stockholders claiming to be 74.75% of Ruby increased their shares
to 75.75% by subscribing from the unissued shares of the authorized capital stock as “capital infusion”.
Accordingly, Lim said that the extension of corporate term and increase in capital stock were done in violation
and without compliance to legal requirements of Corporation Code.
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SEC Ruling: It denied the petition on the ground of violation of SEC Rules of Procedure on Corporate Recovery.
SEC declared the MANCOM dissolved and ordered it to make an inventory, render an accounting, and submit the
final report. The SEC’s basis for its ruling was Sec 4-9 of Rules of Procedure on Corporate Recovery, which provides
180 days for suspension of payments, and so it already lapsed. On the objection of the minority on the issuance
of shares of stock by majority stockholders and extension of corporate term, SEC cited presumption of regularity
in the act of a government entity (SEC) which approved Ruby’s amendment of AOI. It pointed out that Lim raised
the issue only in the year 2000. Moreover, the SEC found that notwithstanding allegations of fraud, Lim never
proved the illegality of the additional infusion of the capitalization by Ruby.
CA: set aside the ruling of SEC and declared the infusion of additional capital void, restoring the capital structure
of Ruby to its original structure. It also declared the extension of the corporate term to another 25 years void. It
invalidated all illegal assignments of credit/purchase of credits and the cancellation of mortgages made by
creditors of Ruby during the effectivity of the suspension of payments. It ordered the delivery of the deeds of
assignments and registered titles to the MANCOM or Liquidator. Lastly, it ordered SEC to supervise the liquidation
of Ruby. Ruby’s BOD meeting was illegal because the MANCOM was neither involved nor consulted in the
resolution approving the issuance of additional shares of Ruby.
WON the minority’s pre-emptive rights were violated by the BOD meeting conducted to issue additional shares
and to extend the corporate term of Ruby to 25 years? YES
There was a blatant violation of the pre-emptive right of minority stockholders. Pre-emptive right under Sec. 39
of the Corporation Code (Sec. 38, RCC) refers to the right of a stockholder of a stock corporation to subscribe to
all issues or disposition of shares of any class, in proportion to their respective shareholdings. The right may be
restricted or denied under the articles of incorporation, and subject to certain exceptions and limitations. The
stockholder must be given a reasonable time within which to exercise their pre-emptive rights. Upon the
expiration of said period, any stockholder who has not exercised such right will be deemed to have waived it.
The validity of issuance of additional shares may be questioned if done in breach of trust by the controlling
stockholders. Thus, even if the pre-emptive right does not exist, either because the issue comes within the
exceptions or because it is denied or limited in the articles, an issue of shares may still be objectionable if the
directors acted in breach of trust and their primary purpose is to perpetuate or shift control of the corporation,
or to “freeze out” the minority interest.
In this case, the following relevant observations should have signaled greater circumspection on the part of the
SEC to demand transparency and accountability from the majority stockholders, in view of the illegal assignments
and objectionable features of the Revised BENHAR/RUBY Plan. The will of the majority shall govern in all matters
within the limits of the act of incorporation and lawfully enacted by-laws not proscribed by law. It is, however,
equally true that other stockholders are afforded the right to intervene especially during critical periods in the
life of a corporation like reorganization, or in this case, suspension of payments, more so, when the majority seek
to impose their will and through fraudulent means, attempt to siphon off Ruby’s valuable assets to the great
prejudice of Ruby itself, as well as the minority stockholders and the unsecured creditors. Certainly, the minority
stockholders and the unsecured creditors are given some measure of protection by the law from the abuses and
impositions of the majority. Indeed, equity cannot deprive the minority of a remedy against the abuses of the
majority, and the present action has been instituted precisely for the purpose of protecting the true and
legitimate interests of Ruby against the Majority Stockholders.
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Generally speaking, the voice of the majority of the stockholders is the law of the corporation, but there are
exceptions to this rule. There must necessarily be a limit upon the power of the majority. Without such a limit,
the will of the majority will be absolute and irresistible and might easily degenerate into absolute tyranny.
Lamentably, the SEC refused to heed the plea of the minority stockholders and MANCOM for the SEC to order
RUBY to commence liquidation proceedings, which is allowed under Sec. 4-9 of the Rules on Corporate Recovery.
Under the circumstances, liquidation was the only hope of the minority stockholders for effecting an orderly and
equitable settlement of RUBY’s obligations, and compelling the majority stockholders to account for all funds,
properties and documents in their possession, and make full disclosure on the nullified credit assignments.
Oblivious to these pending incidents so crucial to the protection of the interest of the majority of creditors and
minority shareholders, the SEC simply stated that in the interim, RUBYs corporate term was validly extended, as
if such extension would provide the solution to RUBYs myriad problems.
Extension of corporate term requires the vote of 2/3 of the outstanding capital stock in a stockholders meeting
called for the purpose. The actual percentage of shareholdings in RUBY when the majority stockholders allegedly
ratified the board resolution approving the extension of RUBY’s corporate life to another 25 years was seriously
disputed by the minority stockholders.
Sale or Other Disposition of Assets (Sec. 39, RCC)
§ Board resolution by a majority vote of the board (quorum):
o Sale of all or substantial all of the assets of the corporation in the regular course of business of the corporation;
or
o Sale of NOT all or substantially all of the assets of the corporation.
§ Majority of the board (quorum) + 2/3 (s/m):
o sale of all or substantially all of the assets of the corporation
§ “Sale of all or substantially all” – the corporation would be rendered (1) incapable of continuing the business or
(2) accomplishing the purpose for which it was incorporated.
§ Subject to the provisions of Republic Act No. 10667, otherwise known as the "Philippine Competition Act," – any
mergers or acquisitions in excess of P1B requires the approval of the Philippine Competition Commission.
Otherwise, the transaction is void. The aim is to prevent monopolies or unfair practices in trade.
Y-I Leisure Phils., Inc. vs. Yu
§ Mt. Arayat Development Co., Inc. (MADCI) – a real estate development corporation; offered for sale shares of
a golf and country club located in the vicinity of Mt. Arayat.
§ Yu – businessman, interested in purchasing golf and country club shares.
Yu
ü Petitioners inherited the obligations of MADCI.
ü He discovered in the RD that substantially, all the assets of MADCI, consisting of 120 hectares of land, were
sold to YIL, YILPI and YICRI.
ü The lands sold to the petitioners were the only assets of MADCI. After the sale, MADCI became incapable of
continuing its business.
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ü Unless the creditors had agreed to the sale of all the assets of the corporation and had accepted the
purchasing corporation as the new debtor, sufficient assets should have been reserved to pay their claims.
ü The transfer was done to defraud MADCI's creditors, and without the required approval of its stockholders
and board of directors.
Sangil
ü Yu dealt with MADCI as a juridical person and that he did not benefit from the sale of shares.
ü The return of Yu's money was no longer possible because its approval had been blocked by the new set of
officers of MADCI, which controlled the majority of its board.
ü MADCI failed to develop the golf course because its properties were taken over by YIL after he allegedly
violated the MOA.
ü The lands of MADCI were eventually sold to YICRI for a consideration of P9.3 million, which was definitely
lower than their market price. Unfortunately, the case assailing the transfers was dismissed by the court.
MADCI
ü It was Sangil who defrauded Yu.
ü Under the MOA, which was entered into by MADCI, Sangil and Yats International Ltd. (YIL), Sangil undertook
to redeem MADCI proprietary shares sold to third persons or settle in full all their claims for refund of
payments.
YIL, YILPI and YICRI
ü They did not assume such liabilities because the transfer of assets was not committed in fraud of the MADCI's
creditors, which is an element required for a third party buyer to be liable to the seller's creditors.
ü They only had an interest in MADCI 2 years after Yu bought his golf and country club shares from MADCI.
ü As a mere stockholder of MADCI, YIL could not be held responsible for the liabilities of the corporation.
ü As to the transfer of properties from MADCI to YILPI and subsequently to YICRI, it was not undertaken to
defraud MADCI's creditors and it was done in accordance with the MOA. In fact, it was stipulated in the MOA
that Sangil undertook to settle all claims for refund of third parties.
ü Due to Sangil's subsequent default, a deed of absolute sale over the lands of MADCI was eventually executed
in favor of YICRI, its designated company.
ü Fraud must exist to hold third party buyers liable to the seller’s creditors. The sale in this case was not in any
way tainted by any of the "badges of fraud".
MOA:
o Sangil controlled 60% of the capital stock of MADCI, while the latter owned 120 hectares of agricultural land
in Magalang, Pampanga, the property intended for the development of a golf course;
o YIL was to subscribe to the remaining 40% of the capital stock of MADCI for a consideration of P31M;
o YIL also gave P500k to acquire the shares of minority stockholders;
o Should MADCI and Sangil fail in their obligations, they must return the amounts paid by YIL with interests;
o If they would still fail to return the same, YIL would be authorized to sell the 120 hectare land to satisfy their
obligation;
o As an additional security, Sangil undertook to redeem all the MADCI proprietary shares sold to third parties
or to settle in full all their claims for refund.
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WON fraud must exist in the transfer of all the corporate assets in order for the transferee to assume the liabilities
of the transferor? NO
Nell Doctrine
Generally (principle of relativity), where one corporation sells or OW transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor, except:
1. Where the purchaser expressly or impliedly agrees to assume such debts (contract of suretyship);
2. Where the transaction amounts to a consolidation or merger of the corporations (Corp Code);
3. Where the purchasing corporation is merely a continuation of the selling corporation (business-enterprise
transfer) (Sec. 40, BP 68 or Sec. 39, RCC); and
4. Where the transaction is entered into fraudulently in order to escape liability for such debts (Art. 1388, NCC).
In the transfer contemplated in the 3rd exception, the transferee corporation's interest goes beyond the assets of
the transferor's assets and its desires to acquire the latter's business enterprise, including its goodwill. The
transferee purchases not only the assets of the transferor, but also its business. To reiterate, Section 40 (Sec. 39
in RCC) refers to the sale, lease, exchange or disposition of all or substantially all of the corporation's assets,
including its goodwill. The sale under this provision does not contemplate an ordinary sale of all corporate assets;
the transfer must be of such degree that the transferor corporation is rendered incapable of continuing its
business or its corporate purpose. Section 40 suitably reflects the business-enterprise transfer under the
exception of the Nell Doctrine because the purchasing or transferee corporation necessarily continued the
business of the selling or transferor corporation. Given that the transferee corporation acquired not only the
assets but also the business of the transferor corporation, then the liabilities of the latter are inevitably assigned
to the former.
It must be clarified, however, that not every transfer of the entire corporate assets would qualify under Section
40. It does not apply (1) if the sale of the entire property and assets is necessary in the usual and regular course
of business of corporation, or (2) if the proceeds of the sale or other disposition of such property and assets will
be appropriated for the conduct of its remaining business. Thus, the litmus test to determine the applicability of
Section 40 would be the capacity of the corporation to continue its business after the sale of all or substantially
all its assets.
The transfer of all or substantially all the properties from one corporation to another under Section 40 necessarily
entails the assumption of the assignor's liabilities, notwithstanding the absence of any agreement on the
assumption of obligations. The transfer of all its business, properties and assets without the consent of its
creditors must certainly include the liabilities; or else, the assignment will place the assignor's assets beyond the
reach of its creditors.
Fraud is not an essential consideration in a business-enterprise transfer. The purpose of the business-enterprise
transfer is to protect the creditors of the business by allowing them a remedy against the new owner of the assets
and business enterprise.
Business-enterprise transfer rule, 2 requisites:
(a) the transferor corporation sells all or substantially all of its assets to another entity; and
(b) the transferee corporation continues the business of the transferor corporation.
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Both requisites are present in this case. In this case, MADCI’s sale to the petitioners rendered it incapable of
continuing its intended golf and country club business. Consequently, the transfer of the assets of MADCI to the
petitioners should have complied with the requirements under Section 40. Nonetheless, the present petition is
NOT concerned with the validity of the transfer; but the respondent's claim of refund of his P650k payment for
golf and country club shares.
Free and Harmless Clause
The petitioners, however, are not left without recourse as they can invoke the free and harmless clause under
the MOA. In business-enterprise transfer, it is possible that the transferor and the transferee may enter into a
contractual stipulation stating that the transferee shall not be liable for any or all debts arising from the business
which were contracted prior to the time of transfer. Such stipulations are valid, but only as to the transferor and
the transferee. In the present case, the petitioners may resort to this provision to recover damages in a third-
party complaint from Sangil.
WAYS TO TRANSFER A CORPORATE BUSINESS
1. Share Purchase Agreement (SPA)
EXAMPLE: A owns all the shares of B Corp. If A wants to transfer the business of B Corp, A can enter into a SPA with
C. With that, C now becomes the owner of B corp. In this case, there is no change in entity in B Corporation. The
corporation has the power of succession and its identity is separate and distinct from the stockholders. IOW, in SPA,
there’s no change in the entity, only the stockholders. There is even no change/transfer of liability because B Corp
continues to exist. B Corp’s assets remain its own assets and its liabilities remain its own liabilities. In fact, according
to the Labor Code, in case of transfer of shares, the employees of the corporation continue to be its employees. No
termination of employment because the corporation continues to exist.
2. Asset Purchase (AP)
In this case, there is no change in stockholders but you are taking away the assets of B Corp and giving it to C. B Corp
continues to be owned by A. The rule on Asset Purchase in terms of transfer of Liability is the Nell Doctrine which
tells us that the purchaser only acquires the assets; liabilities remain with the corporation. The exceptions are:
1. when there is an agreement that the purchaser will assume the liability;
2. when the transaction amounts to a merger or consolidation;
3. transferee corporation is merely a continuation of the business of the corporation; (Sec. 39)
4. transaction is fraudulently entered into to escape liability.
BUSINESS-ENTERPRISE TRANSFER
§ Sec. 39, RCC falls under this 3rd exception.
§ Requisites:
ü The transferor corporation sells all or substantially all its assets to another entity; and
ü The transferee corporation will continue the business of the transferor corporation.
§ When a corporation sells all or substantially all its assets and the corporation can no longer continue its
operations, the presumption is that the transferee corporation will now be the one to continue the business of
the corporation.
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§ While the form of its transfer is merely a sale of its assets, substantially, it is actually a business transfer. Being a § EXC: Limitation under Section 42 where it prohibits corporations from retaining unrestricted RE in excess of 100%
business transfer, the transferee continues the business of its transferor. Since it continues the operations, it will of their paid-up capital (this includes additional paid-in capital or share premium).
also acquire the liabilities of the transferor corporation. § Effect of violation: The corporation will be liable for penalties with the SEC as well as with the BIR for improperly
§ Rationale: To avoid a situation where the creditors can no longer go after the assets of the corporation because accumulated earnings tax (IAET).
it has already transferred the assets to another entity. § How to avoid liability from Section 42: Restrict the RE (discussed below)
§ An agreement where the transferor retains the liability is a valid agreement but it is only enforceable between
the transferor and transferee. The creditors, not being a party to their agreement, are not bound by such. Types of Dividends
3. Stock Dividends
Power to Acquire Own Shares (Sec. 40, RCC) ü Existence of unrestricted RE;
ü Majority of the board (quorum) + 2/3 (s)
4. Cash Dividends and 3. Property Dividends
Requisites: ü Existence of unrestricted RE;
§ Majority of the board (quorum) ü Majority of the board (quorum)
- The quorum is required to determine whether the meeting is valid or not. The voting will now depend on
how many directors are present. It has to be majority of the directors present in the meeting where there is Retained Earnings
a quorum. § RE is the difference between the total present value of the corp’s assets after deducting losses and
§ Unrestricted RE liabilities and the amount of its capital stock (total OCS, not the ACS)
§ Legitimate purpose: (not exclusive) § RE = Assets – (Liabilities + Capital)
o To eliminate fractional shares arising out of stock dividends § Net Assets = Total Assets – Total Liabilities
Ex. If a stockholder owns 350 shares and the corporation declares 25% stock dividend, his total shares will be § Stockholder’s Equity = capital invested + RE
437.5 (350*1.25). inasmuch as fractional shares cannot be represented at corporate meetings, the § RE refers to the accumulated undistributed earnings or profits realized by a corporation arising from the
corporation may purchase the .5 from such stockholder or issue fractional scrip certificates to such transaction of its business and the management of its affairs, out of current and prior years.
stockholder who may negotiate for sale thereof with other stockholders also owning fractional shares so as § If the corporation has been experiencing losses, there will be no RE. Rather, there will be deficits.
to convert them into full shares. § Types of RE:
o Repurchase delinquent shares o Restricted RE – not available for dividend declaration
o Pay dissenting/withdrawing stockholders o Unrestricted RE – available for dividend declaration

TN: This rule in Section 40 applies to all shares OTHER than redeemable shares because there is a different provision Restricted RE
regarding redeemable shares. One of the rules on redeemable shares is that it does not require the existence of
unrestricted RE. 1. DECLARATION BY THE BOARD OF DIRECTORS
To know whether it’s available for dividend declaration, it is provided under the law that the board can restrict RE
Power to Invest Corporate Funds in Another Corporation or Business or for Any Other Purpose (Sec. 41, RCC) but only for the purpose of a valid corporate expansion project.

§ A corporation, as a GR, cannot engage in a business outside of its primary purpose. The only instance when a
corporation can is when they amend the Articles and include that activity as part of its primary purpose.
§ Investment pursuant to primary purpose – majority of the board (quorum)
§ Investment not pursuant to the primary purpose – majority of the board (quorum) + 2/3 (s/m)
§ Amendment of the Articles is required.
§ Effect of failure to amend the primary purpose in the Articles: the activity will be considered as ultra vires.
Power to Declare Dividends (Sec. 42, RCC)
§ GR: The board cannot be compelled to declare dividends. Dividends are not liabilities of the corporation until
declared.
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36 | Page| K.D.Alianza
2. CONTRACTUAL COVENANTS
If, for example, there is a loan agreement, and the creditor expressly provides that the corporation cannot declare
dividends out of a certain amount of its RE, that portion that is restricted under the contract becomes restricted RE.
3. OTHER SPECIAL CIRCUMSTANCES
For example, when a corporation acquires TS, it is required to restrict a portion of its RE in the same amount as the
TS they acquired. If the corporation has been experiencing losses, such that it has zero or negative RE, then it cannot
declare dividend at all.
Instances when a corporation can declare dividends from capital (paid-up capital)
§ GR: Dividends cannot be distributed out of the capital since it would be violative of the trust fund doctrine. Under
the trust fund doctrine, you cannot return capital to the stockholders unless all the creditors have been paid first.
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§ EXCEPTIONS:
o Liquidating dividend – distribution of corp assets upon dissolution or winding up; the trust fund doctrine no
longer applies because the corporation is already being liquidated, which means that before you can even
distribute your liquidating dividends, you have to pay your creditors first. Whatever is left can be distributed
as dividends.
o Wasting asset corporation – a type of corporation where the corporation has a limited life because its assets
are consumed during the operation of the corporation and it’s not replenished. For example, a mining
corporation. If a corporation is created to mine a certain area, once the minerals are gone in that area, the
corporation’s purpose no longer exists. So slowly, as the minerals are consumed, the assets of the corporation
are being depleted. In that sense, the corporation is allowed to return capital to its stockholder. The idea is
that the corporation is only for a limited period – as long as the assets are existing. Once the assets are
depleted, then the corporation can return capital to the stockholders.
Relevant dates:
1. DECLARATION DATE
Before the declaration date, the dividends are not a liability of the corporation. In fact, the corporation is not obliged
to declare dividends, even if it has unrestricted RE. The board cannot be compelled to declare dividends. Dividends do
not become a liability of the corporation unless and until it is actually declared. The moment of declaration is the time
that the corporation now recognizes the liability. If silent, the record date is considered the same as the declaration
date.
2. RECORD DATE
This refers to the date which determines who are the stockholders entitled to receive dividends. The stockholders of
record as of the record date are the stockholders who will be receiving the dividends. Before such date, the stocks
are considered sold at DIVIDENDS ON. Meaning, before the record date, you are also selling with it the right to receive
the dividends, which means that there is actually a premium on the price of those shares because they carry with it
the right to receive dividends. When we sell the stocks after the record date, normally we call it as DIVIDENDS OFF,
because even if you sell shares or transfer ownership, the person who was the owner as of the record date will be the
one entitled to receive the dividends. The record date is important to determine who is receives the dividends.
EXAMPLE:
Declaration date March 10
Record date March 30
A is holder of the share on declaration date. On March 15, A sells the shares to B, that is still considered
as dividends on. B sells the shares to C on March 25, still considered as dividends on. On March 30,
the record date, if C is still the owner of the shares by that time, C is the stockholder entitled to the
dividends. If on April 5, C sells the shares to D, it is still C who is entitled to receive dividends.
3. PAYMENT DATE
This is the date when the dividends are actually paid by the corporation.
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Ultra Vires Acts of Corporations (Sec. 44, RCC)
§ One not within the express, implied, and incidental powers of the corporation conferred by the Corporation Code
or Articles.
§ An act which is beyond the conferred powers of a corporation or the purposes or objects for which it is created
as defined by the law of its organization.
§ Consequence: merely voidable which may be enforced by performance, ratification, or estoppel
§ Different from Illegal Act – void and cannot be validated; contrary to law, morals, good customs, public order, or
public policy.
University of Mindanao, Inc. v. Bangko Sentral ng Pilipinas
§ University of Mindanao – an educational institution; in 1982, its Board of Trustees was chaired by (H) Torres;
(W) Torres sat as the corp’s treasurer.
§ First Iligan Savings & Loan Association, Inc. (FISLAI) and Davao Savings and Loan Association, Inc. (DSLAI) –
thrift banks incorporated and organized by the spouses before 1982
§ FISLAI – chairman and pres: (H) Torres; treasurer: (W) Torres
§ DSLAI – chairman: (H) Torres; pres: (W) Torres
§ MSLAI – when FISLAI and DSLAI merged; latter is the surviving corp
(every mag loan si FISLAI, mu REM si UM VP-Finance)
First (CDO)
Upon (H) Torres' request, BSP issued a P1.9M standby emergency credit to FISLAI. The release of standby
emergency credit was evidenced by 3 PNs. All these PNs were signed by (H) Torres, and were co-signed by either
his wife or Ramos, FISLAI's Special Assistant to the President.
UM’s VP-Finance, Petalcorin, executed a deed of REM over UM’s property in CDO in favor of BSP as security for
FISLAI's P1.9M loan. It was allegedly executed on UM's behalf (Proof of his authority: Secretary's Certificate by
UM’s Corporate Secretary de Leon, stating that a resolution was adopted giving him such authority). The
Secretary's Certificate was supported by an excerpt from the minutes of the alleged meeting of UM’s Board of
Trustees. The excerpt was certified by de Leon to be a true copy. The mortgage deed executed by Petalcorin and
de Leon's certification were annotated on the certificate of title of the CDO property.
Second (Iligan)
BSP granted FISLAI an additional loan of P620.7k. (H) Torres and Ramos executed a PN to cover such amount.
Petalcorin executed another deed of REM, allegedly on behalf of UM, over its 2 properties in Iligan City. This
mortgage served as additional security for FISLAI's loans. BSP's mortgage lien over such properties and de Leon's
certification were annotated on their respective TCTs and also annotated on the tax declarations covering them.
BSP also granted emergency advances to DSLAI.
FISLAI, DSLAI, and Land Bank entered into a MOA intended to rehabilitate the thrift banks, which had been
suffering from their depositors' heavy withdrawals. Among the terms of the agreement was the merger of FISLAI
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and DSLAI, with DSLAI as the surviving corporation. DSLAI later became known as Mindanao Savings and Loan
Association, Inc. (MSLAI).
(H) Torres died. MSLAI failed to recover from its losses and was liquidated. BSP sent a letter to UM, informing it
that the bank would foreclose its properties if MSLAI's total outstanding obligation remained unpaid.
UM
ü Through its VP-Accounting, it denied that UM’s properties were mortgaged.
ü It also denied having received any loan proceeds from BSP.
ü It then filed for nullification and cancellation of mortgage.
ü de Leon's certification was anomalous. It never authorized Petalcorin to execute REM contracts involving its
properties to secure FISLAI's debts. It never ratified the execution of the mortgage contracts.
ü As an educational institution, it may not secure the loans of third persons. Securing loans of third persons is
not among the purposes for which petitioner was established.
de Leon's
ü The UM’s Board of Trustees did not issue a board resolution that would support the Secretary's Certificate
she issued.
ü She signed the Secretary's Certificate only upon (H) Torres' orders.
Petalcorin
ü He had no authority to execute a mortgage contract on UM's behalf. He merely executed the contract because
of (H) Torres' request.
BSP’s witness
ü He admitted that there was no board resolution giving Petalcorin authority to execute mortgage contracts on
behalf of UM.
BSP
ü UM’s act of mortgaging its properties to guarantee FISLAI's loans was consistent with its business interests,
since it was presumably a FISLAI shareholder whose officers and shareholders interlock with FISLAI.
ü UM and its key officers held substantial shares (exceeding 20%) in MSLAI when DSLAI and FISLAI merged.
Therefore, it was safe to assume that when the mortgages were executed in 1982, UM held substantial shares
in FISLAI.
Third persons dealing with corporations cannot assume that corporations have powers. It is up to those persons
dealing with corporations to determine their competence as expressly defined by the law and their articles of
incorporation. A corporation may exercise its powers only within those definitions. Corporate acts that are
outside those express definitions under the law or articles of incorporation or those committed outside the object
for which a corporation is created are ultra vires.
Exc: Acts are necessary and incidental to carry out a corporation's purposes, and to the exercise of powers
conferred by the Corporation Code and under a corporation's articles of incorporation. This exception is
specifically included in the general powers of a corporation under Sec. 36 of the Corporation Code (Sec. 35, RCC).
(gi-enumerate ra: express, implied and incidental powers)
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The TEST to determine if a corporate act is in accordance with its purposes is whether the act in question is in
direct and immediate furtherance of the corporation's business, fairly incident to the express powers and
reasonably necessary to their exercise.
UM does not have the power to mortgage its properties in order to secure loans of other persons. As an
educational institution, it is limited to developing human capital through formal instruction. It is not a corporation
engaged in the business of securing loans of others. Hiring professors, instructors, and personnel; acquiring
equipment and real estate; establishing housing facilities for personnel and students; hiring a concessionaire; and
other activities that can be directly connected to the operations and conduct of the education business may
constitute the necessary and incidental acts of an educational institution. Securing FISLAI's loans by mortgaging
its properties does not appear to have even the remotest connection to the operations of petitioner as an
educational institution. Securing loans is not an adjunct of the educational institution's conduct of business. It
does not appear that securing third-party loans was necessary to maintain petitioner's business of providing
instruction to individuals. This court upheld the validity of corporate acts when those acts were shown to be
clearly within the corporation's powers or were connected to the corporation's purposes.
There is a presumption that corporate acts are valid if, on their face, the acts were within the corporation's powers
or purposes. Parties dealing with corporations cannot simply assume that their transaction is within the corporate
powers. The acts of a corporation are still limited by its powers and purposes as provided in the law and its articles
of incorporation
(express, implied, incidental). Without an amendment, what is ultra vires before a corporation acquires shares in
other corporations is still ultra vires after such acquisition. Thus, regardless of the number of shares that UM had
with FISLAI, DSLAI, or MSLAI, securing loans of third persons is still beyond its power to do.
Contracts entered into by persons without authority from the corporation shall generally be considered ultra vires
and unenforceable against the corporation. Not having the proper board resolution to authorize Petalcorin to
execute the mortgage contracts for UM, the contracts he executed are unenforceable against UM. However,
personal liabilities may be incurred by directors who assented to such unauthorized act and by the person who
contracted in excess of the limits of his or her authority without the corporation's knowledge.
Unauthorized acts that are merely beyond the powers of the corporation under its articles of incorporation are
not void ab initio. A distinction should be made between corporate acts or contracts which are:
o Illegal – doing of an act which is contrary to law, morals, or public order, or contravene some rules of public
policy or public duty; cannot serve as basis of a court action, nor acquire validity by performance, ratification,
or estoppel
o ultra vires – not illegal but are not merely within the scope of the articles of incorporation; merely voidable;
may become binding and enforceable when ratified by the stockholders.
Even though the Spouses Torres were officers of both the thrift banks and UM, their knowledge of the mortgage
contracts cannot be considered as knowledge of the corporation. The rule that knowledge of an officer is
considered knowledge of the corporation applies only when the officer is acting within the authority given to
him or her by the corporation. The Spouses Torres' knowledge cannot be interpreted as knowledge of UM. They
were not acting for and within the authority given by UM when they acquired knowledge of the loan transactions
and the mortgages. The knowledge was obtained in the interest of and as representatives of the thrift banks, not
of UM.
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Doctrine of apparent authority Place of Regular Meetings § principal office of the corporation § anywhere in or outside of the
There is a presumed or apparent authority or capacity to bind corporate representatives in instances when the as set forth in the articles Philippines, UNLESS the bylaws
corporation, through its silence or other acts of recognition, allowed others to believe that persons, through their § if not practicable, in the city or provide otherwise
usual exercise of corporate powers, were conferred with authority to deal on the corporation's behalf. The municipality where the principal
doctrine of apparent authority does not go into the question of the corporation's competence or power to do a office of the corporation is located
particular act. It involves the question of whether the officer has the power or is clothed with the appearance Notice of Regular Meetings § written notice shall be sent to all § sent to every d/t at least 2 days
of having the power to act for the corporation. A finding that there is apparent authority is not the same as a s/m of record at least 21 days prior to the scheduled meeting,
finding that the corporate act in question is within the corporation's limited powers. The rule on apparent prior to the meeting, UNLESS a UNLESS a longer time is provided
authority is based on the principle of estoppel. Petalcorin's authority to transact on behalf of petitioner cannot different period is required in the in the bylaws
be presumed based on a Secretary's Certificate and excerpt from the minutes of the alleged board meeting that bylaws, law, or regulation
were found to have been simulated. These documents cannot be considered as the corporate acts that held out § (manner: by-laws)
Petalcorin as UM’s authorized representative for mortgage transactions. They were not supported by an actual Notice of Special Meetings § written notice shall be sent to all § sent to every d/t at least 2 days
board meeting. s/m of record at least 1 week prior prior to the scheduled meeting,
to the meeting UNLESS a different UNLESS a longer time is provided
The Secretary's Certificate was void WON it was notarized. Notarization creates a presumption of regularity and period is provided in the bylaws, in the bylaws
authenticity on the document. This presumption may be rebutted by "strong, complete and conclusive proof" to law or regulation
the contrary. Since the notarized Secretary's Certificate was found to have been issued without a supporting Postponement of regular meetings § written notice and the reason of
board resolution, it produced no effect. It should not have been relied on by BSP especially given its status as a postponement shall be sent to all
bank which is required to exercise the highest degree of diligence in its transactions. For its failure to exercise s/m of record at least 2 weeks
such degree of diligence, BSP cannot claim good faith in the execution of the mortgage contracts with Petalcorin. prior to the date of the meeting,
Its witness even testified that there was no board resolution authorizing Petalcorin. It did not inquire further as UNLESS a different period is
to Petalcorin's authority. required under the bylaws, law or
regulation
As to the issue of constructive notice – annotation in TCTs Proxy § allowed § prohibited
Annotations of adverse claims on certificates of title to properties operate as constructive notice only to third § proxy form shall be submitted to
parties — not to the court or the registered owner. Annotations are merely claims of interest or claims of the the corporate secretary within a
legal nature and incidents of relationship between the person whose name appears on the document and the reasonable time prior to the
person who caused the annotation. It does not say anything about the validity of the claim or convert a defective meeting
claim or document into a valid one.
Tan v. Sycip
§ Grace Christian High School (GCHS) – a nonstock, non-profit educational corporation with 15 regular
MEETINGS members, who also constitute the board of trustees.
§ By-Laws: Membership in the corporation shall, among others, be terminated by the death of the member;
prescribed the specific mode of filling up existing vacancies in its board of trustees – by a majority vote of the
Meetings Stockholders/Members Board of Directors/Trustees
remaining members of the board.
Time of Regular Meeting § annually: § monthly, UNLESS the by-laws
o on a date fixed in the bylaws, or provide otherwise.
During the annual members' meeting, there were only 11 living member-trustees, 4 had already died. Out of the
o if not so fixed, on any date after
11, 7 attended the meeting through their respective proxies. Atty. Pacis argued that there was no quorum. In the
April 15 of every year as
meeting, Tanchi, Ngo, Khoo, and Tan were voted to replace the 4 deceased member-trustees.
determined by the board
Time of Special Meetings § any time deemed necessary or § any time upon the call of the
Petitioners
§ as provided in the bylaws president or The deceased member-trustees should not be counted in the computation of the quorum because, upon their
§ as provided in the bylaws death, members automatically lost all their rights (including the right to vote) and interests in the corporation.
The best evidence of who are the present members of the corporation is the "membership book". In nonstock
corporations, the voting rights attach to membership. Members vote as persons, in accordance with the law and
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the bylaws of the corporation. Each member shall be entitled to one vote unless so limited, broadened, or denied
in the articles or bylaws. Under Section 52 of the Corporation Code, the majority of the members representing
the actual number of voting rights, not the number or numerical constant that may originally be specified in the
articles of incorporation, constitutes the quorum.
Section 25 of the Code specifically provides that a majority of the directors or trustees, as fixed in the articles of
incorporation, shall constitute a quorum for the transaction of corporate business (unless the articles of
incorporation or the bylaws provide for a greater majority).
The quorum in a members' meeting is to be reckoned as the actual number of members of the corporation. In
stock corporations, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the
executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to
vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the
administrator or executor.
On the other hand, membership in and all rights arising from a nonstock corporation are personal and non-
transferable, UNLESS the articles or the bylaws provide otherwise.
Section 91 of the Corporation Code provides that termination extinguishes all the rights of a member of the
corporation, UNLESS otherwise provided in the articles of incorporation or the bylaws. With 11 remaining
members, the quorum in the present case should be 6. Therefore, there being a quorum, the annual members'
meeting, conducted with 6 members present, was valid.
As regards the filling of vacancies in the board, Section 29 of the Corporation Code provides that any vacancy
occurring in the board 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; OW,
said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director
or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office.
Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still constitute a quorum.
The phrase "may be filled" in Section 29 shows that the filling of vacancies in the board by the remaining directors
or trustees constituting a quorum is merely permissive, not mandatory. While a majority of the remaining
corporate members were present, however, the "election" of the 4 trustees cannot be legally upheld for the
obvious reason that it was held in an annual meeting of the members, not of the board of trustees. We are not
unmindful of the fact that the members of GCHS themselves also constitute the trustees, but we cannot ignore
the GCHS bylaw provision, which specifically prescribes that vacancies in the board must be filled up by the
remaining trustees. IOW, these remaining member-trustees must sit as a board in order to validly elect the new
ones.
Indeed, there is a well-defined distinction between a corporate act to be done by the board and that by the
constituent members of the corporation. The board of trustees must act, not individually or separately, but as a
body in a lawful meeting. On the other hand, in their annual meeting, the members may be represented by their
respective proxies, as in the contested annual members' meeting of GCHS.
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Reason for the difference in the rule of the place of meetings of the board and stockholders
§ The meetings of the board can be anywhere, within or even outside the Philippines, unless the by-laws provides
otherwise. The rule for the place of holding the meetings is more lenient in the case of the BOD because the
presumption is that the BOD will go to wherever place the meeting will be held and in fact it is normally the
corporation which pays their travel expenses and they even got paid to attend such meetings.
§ As regards the stockholders, they have to pay for their own expenses when they will attend the meeting. The
corporation will not pay for their expenses that’s why the place is always fixed for the stockholders.
QUORUM IN BOARD MEETINGS
§ Quorum: Majority of the directors or trustees stated in the Articles of Incorporation. (50%+1)
§ For there to be a valid corporate act:
o GR: approval by the majority of the directors/trustees present in a meeting where there is a quorum
o EXC: In election of officers, the vote required is a majority of ALL the Board of Directors.
RIGHT TO VOTE OF SECURED CREDITORS AND ADMINISTRATOR (Sec. 54, RCC)
§ GR: Stockholder-grantor shall have the right to attend and vote at meetings of stockholders
§ EXC: The secured creditor is expressly given by the stockholder-grantor such right in writing which is recorded in
the appropriate corporate books (stock and transfer book).
§ People who may attend and vote in behalf of the stockholders or members without need of any written proxy:
ü Executors,
ü administrators,
ü receivers, and
ü other legal representatives duly appointed by the court
VOTING TRUST AGREEMENTS (VTA)
§ This happens when a stockholder creates a voting trust for the purpose of conferring upon a trustee or trustees
the right to vote and other rights pertaining to the shares.
§ GR: period not exceeding 5 years.
§ EXC: in the case of a voting trust specifically required as a condition in a loan agreement – may be for a period
exceeding 5 years but shall automatically expire upon full payment of the loan.
§ Agreement must be:
ü in writing
ü notarized, and
ü shall specify the terms and conditions
§ Procedure:
1. A certified copy of the VTA shall be filed with the corporation and with the SEC.
2. The certificate of stock covered by the VTA shall be cancelled and new ones shall be issued in the name of
the trustee, stating that they are issued pursuant to said agreement.
3. The books of the corporation shall state that the transfer in the name of the trustee is made pursuant to the
VTA.
4. The trustee shall execute and deliver to the transferor voting trust certificates.
5. Unless expressly renewed, all rights granted in a VTA shall automatically expire at the end of the agreed
period.
6. The voting trust certificates as well as the certificates of stock in the name of the trustee shall thereby be
deemed cancelled and new certificate of stock shall be reissued in the name of the trustors.
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§ VTA shall be subject to examination by any stockholder of the corporation in the same manner as any other § Serves as the best evidence of the transactions that must be entered or stated therein. However, the entries are
corporate book or record: Provided, that both the trustor and the trustee or trustees may exercise the right of considered prima facie evidence only and may be subject to proof of the contrary.
inspection of all corporate books and records. § It is the primary evidence of being a stockholder, but if the corporation refuses to produce it, other evidences may
§ Unless the agreement provides otherwise, voting trustee may vote: be presented (Insigne vs. Abra GR 2040089)
o by proxy or § Contents:
o any manner authorized under the bylaws. (1) All stocks in the name of the stockholders alphabetically arranged
(2) installments paid and unpaid on all stocks for which subscription has been made and the date of any installment
(3) statement of every alienation, sale or transfer of stock made, the date thereof, by and to whom made
CORPORATE BOOKS AND RECORDS (4) such other entries as the bylaws may prescribe

INSPECTION OF CORPORATE RECORDS

CORPORATE BOOKS § Open to inspection by any director, trustee, stockholder or member of the corporation in person or by a
1. Records of all business transactions i.e. accounting books, ledgers, and journals representative at reasonable hours on business days.
2. Minutes book for Stockholders - minutes of the meetings of the stockholders § Copies of such records or excerpts from said records – they may demand such in writing at their expense.
3. Minutes book for Directors and Trustees - minutes meetings of the Board of Directors and Trustees § The inspecting or reproducing party shall remain bound by confidentiality rules under prevailing laws, such as
4. Stock and Transfer Book the rules on trade secrets or processes under Intellectual Property Code of the Philippines, Data Privacy Act of
2012, and the SRC.
CORPORATE RECORDS § The right to inspect covers all the books of the corporation:
1. Charter documents - Articles of Incorporation, Bylaws, and it’s amendments. o Journal
2. Reports filed with the SEC - general information sheets (GIS), and all other reports required under the Securities o Ledger
Regulation Code (SRC) o financial statements
o income tax returns
Book of Minutes o vouchers
§ The mere certification of the Corporate Secretary gives the Minutes probative value, the signatures of the directors o receipts
is not necessary. o contracts and
§ Minutes of the meeting of the BOD may be proof of the existence of a contract (considered as a written contract o all papers pertaining to the operation of the corporation which are of interest to its stockholders.
for the purposes of extinctive prescription under Article 1144(1) of the New Civil Code) § EXC: a corporation engaged in manufacturing goods can keep secret the formula or process which is not generally
§ Contents: well known.
(1) date and time of meeting
(2) place of holding the meeting REQUISITES FOR EXERCIESE OF RIGHT
(3) how the meeting was authorized 1. must be exercised at reasonable hours on business days
(4) the fact that notice was given 2. has not improperly used any information he secured through any previous examination
(5) whether the meeting was regular or special 3. demand is made in good faith or for a legitimate purpose
(6) if the meeting is special, object must be stated
(7) those present and absent WHO CANNOT INSPECT
(8) every act done or ordered done at the meeting ü A requesting party that is not a stockholder or member of record, or
(9) upon demand of a director, trustee, stockholder or member, the time when any director, trustee, stockholder ü a competitor, director, officer, controlling stockholder or otherwise represents the interest of a competitor.
or member entered or left the meeting must be noted in the minutes
(10) upon demand of a director, trustee, stockholder or member, a carefully made record of the yeas and nays LIABILITY FOR REFUSAL TO ALLOW INSPECTION OR REPRODUCTION OF RECORDS
must be taken on any motion or proposition § Any officer or agent of the corporation who shall refuse shall be liable to such director, trustee, stockholder or
(11) upon demand of a director, trustee, stockholder, or member, the protest on any action or proposed action member:
ü damages
Stock and Transfer Book ü guilty of an offense punishable under Sec. 161, RCC:
§ It shall be kept in the principal office of the corporation or in the office of its stock transfer agent. o GR: P10k – P200k
§ Only the Corporate Secretary is duly authorized to make entries on the stock and transfer book. Entries made by o EXC: P20k to P400k (violation is injurious or detrimental to the public)
the Chairman or President are invalid.
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§ If such refusal is made pursuant to a resolution or order of the board, the liability shall be imposed upon the
directors or trustees who voted for such refusal.
§ Available defenses – the person demanding:
ü has improperly used any information secured through any prior examination of the records or minutes of
such corporation OR of any other corporation, or
ü was not acting in good faith or for a legitimate purpose in making the demand to examine or reproduce
corporate records, or
ü is a competitor, director, officer, controlling stockholder or otherwise represents the interests of a
competitor.
REMEDY OF AGGRIEVED PARTY
(1) Report such denial or inaction for the demand for inspection and/or reproduction to the SEC
(2) Within 5 days from receipt of such report, SEC shall conduct a summary investigation
(3) It shall issue an order directing the inspection or reproduction of the requested records.
Yujuico v. Quiambao
During the annual stockholder's meeting of STRADEC, Yujuico was elected as president and chairman of the
company. He replaced Quiambao. With Yujuico at the helm, STRADEC appointed Sumbilla as treasurer and Blando
as corporate secretary. Blando replaced Pilapil.
Petitioners filed a criminal complaint against respondents and Casanova (corp’s accountant). They alleged that
during the stockholders' meeting, Yujuico demanded Quiambao for the turnover of the corporate records of the
company, particularly the accounting files, ledgers, journals and other records of the corporation's business.
Quiambao refused. As it turns out, such were in the possession of Casanova. After a stockholders' meeting,
Quiambao and Casanova removed the corporate records of STRADEC from the company's office.
Blando likewise demanded Pilapil for the turnover of the stock and transfer book of STRADEC. Pilapil refused.
Instead, he proposed to Blando to have the stock and transfer book deposited in a safety deposit box with
Equitable-PCI Bank. Blando acceded. Such may only be opened in the presence of both Quiambao and Blando.
However, Quiambao and Pilapil were able to withdraw the stock and transfer book from the safety deposit box
and brought it to the offices of STRADCOM. After how many requests by Blando, they repetitively refused in
returning the stock and transfer book.
Petitioners theorize that the refusal to turnover STRADEC's corporate records and stock and transfer book violates
their right, as stockholders, directors and officers of the corporation, to inspect such records and book under
Section 74 of the Corporation Code. For such violation, petitioners conclude, respondents may be held criminally
liable pursuant to Section 144 of the Corporation Code.
2 informations were filed: (1) for removing the stock and transfer book from its principal office, and (2) for refusing
access to, and examination of, the corporate records and the stock and transfer book of STRADEC at its principal
office.
Refusal to allow inspection is subject to a criminal liability. However, the case was still dismissed because the
person who refused to show the corporate books was not an officer of a corporation. Since the liability is criminal
in nature, it is construed strictly. Therefore, only an officer or a director of a corporation can be held liable.
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A perusal of Section 74 reveals that the obligations found therein are of a corporation. Hence, they can only be
violated by a corporation. Criminal action based on the violation of the 2nd and 4th pars. of Sec 74 can only be
maintained against corporate officers or such other persons that are acting on behalf of the corporation. In this
case, petitioners are not actually invoking their right to inspect the records and the stock and transfer book of
STRADEC. What they seek to enforce is the proprietary right of STRADEC to be in possession of such records and
book.
No longer applicable: (RCC: only subject to civil liability under Sec. 161, no longer criminal in nature)
Section 144 of the Corporation Code is the general penal provision of the Corporation Code. it provides that
violations of any of the provisions of this Code or its amendments not OW specifically penalized therein shall be
punished by:
1. a fine of NOT LESS THAN P1k pesos but NOT MORE THAN P10k (now 10k-P10M) or
2. by imprisonment for NOT LESS THAN 30 days but NOT MORE THAN 5 years (now deleted), or
3. both
Terelay Investment and Development Corp. v. Yulo
Asserting her right as a stockholder, Yulo wrote a letter addressed to TERELAY requesting that she be allowed to
examine its books and records at 1:30 pm at the latter's office. In its reply-letter, TERELAY denied the request for
inspection and instead demanded that she show proof that she was a bona fide stockholder. Yulo again sent
another letter clarifying that her request for examination of the corporate records was for the purpose of
inquiring into the financial condition of TERELAY and the conduct of its affairs by the principal officers. TELERAY
alleged that Yulo was not a stockholder entitled to inspect its books and records. She cannot be allowed to inspect
its corporate records since her shareholding is measly .001% interest. Her purpose for the inspection was not a
valid ground to examine the corporate records. She was in bad faith or had an ulterior motive in demanding
inspection of the record.
Yulo has presented enough evidence that she is a stockholder of TERELAY. The corporate documents presented
support her claim that she is a registered stockholder in TERELAY's stock and transfer book thus giving her the
right, under Section 74 par. 2 and Section 75 of the Philippine Corporation Law, to inspect TERELAY's books,
records, and FS. Accordingly, Yulo has the right to be fully informed of TERELAY's corporate condition and the
manner its affairs are being managed. It is well-settled that the ownership of shares of stock gives stockholders
the right under the law to be protected from possible mismanagement by its officers. This right is predicated
upon self-preservation. The Corporation Code has granted to all stockholders the right to inspect the corporate
books and records, and in so doing has not required any specific amount of interest for the exercise of the right
to inspect. When the law has made no distinction, we ought not to recognize any distinction. Hence, that Yulo
has only an "insignificant holding" of only .001% of the corporation’s stockholding did not justify the denying of
her application for inspection of the corporate books and records. Neither could TERELAY arbitrarily deny Yulo’s
right to inspect the corporate books and records on the basis that her inspection would be used for a doubtful or
dubious reason. Under Section 74, third paragraph, of the Corporation Code, the only time when the demand to
examine and copy the corporation's records and minutes could be refused is when the corporation puts up as a
defense to any action that "the person demanding" had "improperly used any information secured through any
prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in
good faith or for a legitimate purpose in making his demand."
Among the purposes held to justify a demand for inspection are the following:
(1) To ascertain the financial condition of the company or the propriety of dividends;
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(2) the value of the shares of stock for sale or investment;
(3) whether there has been mismanagement;
(4) in anticipation of shareholders' meetings to obtain a mailing list of shareholders to solicit proxies or
influence voting;
(5) to obtain information in aid of litigation with the corporation or its officers as to corporate transactions.
Among the improper purposes which may justify denial of the right of inspection are:
(1) Obtaining of information as to business secrets or to aid a competitor;
(2) to secure business "prospects" or investment or advertising lists;
(3) to find technical defects in corporate transactions in order to bring "strike suits" for purposes of blackmail
or extortion.
The burden is not upon Yulo to show the propriety of his examination or that the refusal by the officers or
directors was wrongful, except under statutory provisions. In general, officers and directors have no legal
authority to close the office doors against shareholders for whom they are only agents, and withhold from them
the right to inspect the books which furnishes the most effective method of gaining information. The burden is
usually held to be upon the corporation to establish a probability that the applicant is attempting to gain
inspection for a purpose not connected with his interests as a shareholder, or that his purpose is otherwise
improper.
Insigne vs. Abra Valley
Is the Stock and Transfer Book (STB) the only basis to determine WON a person is a stockholder of a corporation?
It is the primary record, so absent any other showing, it is the STB which should determine whether or not a
person is a shareholder. But if the person can present other evidence as basis of his stockholdings, then he is not
precluded from bringing up that evidence in order to support his contention that he is a shareholder. In this case,
the corporation refused to present the STB. The reason of such refusal is that they said that based on the STB, he
is not a shareholder, but they refused to show the STB. SC ruled that just because you say that they are not listed
in the STB, we cannot just take your word for it because the STB is not the only proof that a person is a
shareholder. Besides, there is a rule under ROC that “an evidence willfully suppressed would be adversed if
produced”. STB is not the only source of proof that a person is a shareholder. Again, as a rule, you cannot deny
the right to inspect as long as the name of the shareholder is in the STB. And if the name is not in the STB, the
corporation should present the STB because non-presentation thereof would mean that there is no valid ground
to deny. The stock certificate is one of the proofs of ownership, but it is not the only proof. The STB is the best
evidence in proving WON a person is a shareholder, but it is not the only proof. In this case, the SEC allowed other
evidence to prove ownership like the SEC’s certificate of subscription, the receipts of subscription, and their
elction as directors (because they cannot be elcted directors if they are not shareholders).
MERGER AND CONSOLIDATION
MERGER
§ A + B = A or B
§ 2 corporations combined; one is dissolved and the other becomes the surviving corporation
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CONSOLIDATION
§ A+B=C
§ When 2 corporations combined, they form an entirely new corporation. When A & B consolidate, none of the
combining corporations survive. What is created in its place is a new corporation.
REQUIREMENTS
1. Creation of “Plan of Merger and Consolidation “ by the Board of each corporation
o first document that the corporation needs to create
o the plan should specify what will happen to the surviving corporation or the newly created corporation
2. Approval of Majority vote of each of the BOD or trustees of such plan
3. Approval of such plan by 2/3 Stockholders and Members
4. Execution of Articles of Merger or Consolidation
Its shall be:
a) executed by each of the constituent corporation
b) signed by the President or Vice President, and
c) certified by the Secretary or assistant secretary
5. Submission of the Articles to SEC for approval
o 4 copies of the Articles of Merger or Consolidation (together with favorable recommendation of a pertinent
government agency in certain cases) shall be submitted to the SEC for approval.
6. Issuance by SEC of certificate of merger
o It shall be issued if the SEC is satisfied that the merger or consolidation of the corporations concerned is not
inconsistent with the provisions of this code and existing laws.
Effectivity of Merger & Consolidation
§ GR: only upon the approval of the SEC.
TN: no approval of the SEC no valid merger or consolidation
§ EXC: Any merger or acquisition in excess of P1B
ü additional requirement: Notice to Philippine Competition Commission (PCC has power to deny or
disallow the merger or acquisition)
Effects of merger or consolidation
o The Constituent corporations shall become a single corporation;
o The separate existence of the constituents shall cease EXCEPT that of the surviving corporation ( in merger) or
the consolidated corporation (in consolidation);
o The surviving or the consolidated corporation shall possess all the rights, privileges , immunities and powers and
shall be subject to all duties and liabilities of a corporation;
o All liabilities of the constituents shall pertain to the surviving or the consolidated corporation.
o Merger: the constituent corporations becomes a single entity.
o Consolidation: there is a now a consolidated corporation.
ü The separate existence of constituent corporations cease except the surviving or consolidated corporation.
So automatically the non-surviving or the non-consolidated corporation will be dissolved.
ü The surviving or consolidated corporation will now possess all the rights, privileges, immunities and powers,
and shall be subject to the duties and liabilities of a corporation organized under this code.
IOW, the new corporation need not be registered again with the SEC. Automatically upon approval of the merger or
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consolidation, that new corporation whether it’s the surviving corporation or a consolidated corporation, possesses
all the powers of a corporation under this Code. The surviving corporation or the consolidated corporation shall also
possess all the rights, privileges, immunities and franchises of the constituent corporation and all the properties and
receivables including subscriptions and other interest of the constituent corporation shall be deemed transferred to
the surviving or consolidated corporation. The surviving corporation or the consolidated corporation shall also be
responsible for all the liabilities and obligations of the constituent corporation (one exception of the NELL
DOCTRINE).
Prohibitions under Philippine Competition Act
1. Anti- competitive Agreements (Sec. 14)
o Agreements that are per se violative of the Act, such as agreements between competitors that (a) restrict competition, as
to the price components thereof, or as to the other terms or trade; or (b) fix the price at an auction or in any form of
bidding, including cover bidding, bid suppression, bid rotation, market allocation and other analogous practices of bid
manipulations.
o Agreements that are prohibited if shown to have the object or effect of substantially preventing, or restricting competition,
i.e. setting, limiting or controlling production, markets, technical development, or investment, dividing or sharing the
market.
2. Abuse of Dominant Positions
o Conduct that would substantially prevent, restrict or lessen competition.
o It is basically a situation where a company is in a dominant position (50% or more of the market share). Being in the
dominant position is not illegal per se, so in the same way that being an insider is not illegal. What is illegal is when you
abuse your dominant position in such a way that you do predatory pricing, imposing barriers to entry, discrimination in
price or other terms, tying and bundling.
o Example for predatory pricing: If you are the ‘go to’ supplier for that particular market, you can get control in the sense
that because you have more customers, pwede nimo paubsan imo price because you exchange volume for the price. But
if you do it in such a way that you will now edge out your competitors because you are doing predatory pricing nga dili na
maapas sa imo competitors so they have to close down because if they follow your pricing malugi na sila. That’s not
allowed.
o Example for tying and bundling: Suppliers that have a product which is dominant in the market, and then they have
ancillary products that they tie to their main product, i.e. printer, if the producer of the printer will create a printer na dili
ka makagamit ug any other ink except ang ink na ilang gi produce, that is an abuse of dominant position. IOW, this refers
to bundling of your ancillary product with your main product.
3. Anti-competitive mergers and acquisitions.
o Those mergers or acquisitions that substantially prevent, restrict or lessen competition.
Anti-Competitive Agreements
§ Horizontal Agreements – these are agreements between parties who are similarly situated meaning a supplier
of a certain commodity entering into an agreement of a supplier of the same commodity.
§ Vertical Agreements – this is when a supplier or producer of a certain goods will enter into an agreement with
the supplier of the raw materials for the production of that goods. It is vertical because it goes up the supply
chain or it goes down the supply chain.
o Horizontal or vertical agreements are NOT prohibited. They become prohibited only when they become
agreements between competitors that restrict competition as to the price component thereof or as to the
other terms or trade. For example, an agreement between Globe and Smart that they will now charge P5 per
text message. So they fix the price and no one can go against them because they are the major players in the
market. So if they agree, people will normally have no choice because you are either a Globe or a Smart
subscriber. So wala kay choice but to pay up. If ang Globe lang ang mag-increase sa price and Smart does not,
people will go to Smart. But if they both agree, then the market has no choice. Take note that the essence of
competition is to give the public a choice kung kinsa imong source of your goods or services. So, any agreement
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which restricts a choice for the public in terms of price or any other terms or trade, that can be considered as
an anti-competitive agreement.
§ Bid Manipulation
o Cover bidding – participants to an auction will agree to basically pad their bid price in order to allow one
competitor to win.
o Bid suppression – participants agree that the competitor will not submit their bid to allow whoever is
participating to win.
o Bid rotation – similar to cover bidding and bid suppression except that the parties agree that for this bidding,
ikaw makadaog, for the second bidding, ako na sad. So you agree or fix who will win per bidding/auction.
§ Setting, limiting or controlling production markets, technical development, investment dividing, or sharing the
market – So if the competitors agree nga sige akong area ang Luzon so don’t come in here. And I won’t go to
Visayas and Mindanao sad. This can be in the form of a vertical agreement where you have an agreement with
the supplier that any raw material that they produce will only be supplied to you. You may also agree with the
supplier to lessen the production of that raw material so that your competitors will now not have any materials
for production.
COMPULSORY NOTIFICATION FOR MERGERS AND ACQUISITIONS (Sec. 17)
§ Parties to the merger or acquisition agreement wherein the value of the transaction exceeds P1B are prohibited
from consummating their agreement until 30 days after providing notification to the Commission in the form
and containing the information specified in the regulations issued by the Commission.
§ An agreement consummated in violation of this requirement to notify the Commission shall be considered void
and subject the parties to an administrative fine of 1% to 5% of the value of the transaction.
EFFECT OF NOTIFICATION (Sec. 20)
The Commission may, upon notification to the PCC:
o Prohibit the implementation of the agreement;
- Just like what it did with the acquisition by Globe of the San Miguel cell sites (a case currently pending in the SC). This
case would rule if the PCC can be granted such power to prohibit certain transaction. It is a very far reaching power that
was granted to the PCC
o Prohibit the implementation of the agreement unless and until it is modified by changes specified by the
Commission;
- The PCC can add or modify some portions in the contract. If the parties do not agree to the proposed changes, then the
PCC can deny the merger/acquisition
o Prohibit the implementation of the agreement unless and until the pertinent party or parties enter into legally
enforceable agreements specified by the Commission.
- If the commission finds out that there are anti-competitive terms in the transaction, then the commission can take out
those terms.
Anti-competitive mergers/acquisitions are prohibited; EXCEPTIONS
1. If there could be gains in efficiency brought about by the combination, and that gain in efficiency is more than
any adverse effect of the limitation on competition
If, for example, 2 competitors will combine. With the combination, the new company will be producing double the
volume of what they ordinarily produce before the merger. The production has doubled because the assets of the
2 competitors have been combined. And also, with that double production, the production cost became less
(greater production, lesser cost. Meaning, economy of scale). If it can be shown that that economy of scale
resulting from greater efficiency in production will redound to the benefit of the public, shown by reduced prices
of the goods, then that combination can be allowed. So, if there are certain efficiencies created by the combination
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which efficiencies will be shown to be of greater benefit than the disadvantage of restricting competition, then the
merger/acquisition can be allowed.
2. If the other party is faced with actual or imminent financial failure
If a corporation is about to go bankrupt and is acquired by its competitor, the combination, even if it restricts
competition, will not be considered as disadvantageous. Because if that other party actually goes bankrupt, it’s the
same effect, because the surviving competitor will still be the sole source in the market.
APPRAISAL RIGHT
It is the right of the stockholder to compel the corporation to purchase his/her share. Appraisal right is strictly
construed because it violates and is actually an exception to the trust fund doctrine.
TRUST FUND DOCTRINE:
§ GR: All assets and capital of the corporation is a trust fund to be held for the benefit of its creditors. So, a
stockholder cannot just withdraw his shares/stockholdings.
§ EXC: if it is pursuant to the exercise of appraisal right:
(a) Amendment to the articles of incorporation;
It has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate
existence. If you look at the provision on amendment of the articles, it also expressly provides there that any amendment is
subject to appraisal right of the stockholders
(b) Sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate
property and assets as provided in this Code;
(c) Merger or consolidation;
(d) Investment of corporate funds for any purpose other than the primary purpose of the corporation
MANNER OF EXERCISING APPRAISAL RIGHT
1. Vote against the corporation
- It can only be exercised by a stockholder who actually dissented or voted against that particular corporate action, where the
right is allowed. Meaning, if you, a stockholder, voted to approve the amendment in the articles, you cannot exercise
appraisal right.
2. Make a written demand on the corporation within 30 days after the date on which the vote was taken for the
FV of your shares
- Failure to make that demand shall be deemed a waiver of the appraisal right.
3. Submit the stock certificate to the corporation within 10 days after demanding payment
- There can be an annotation on the stock certificate that he is a dissenting stockholder, and the shares/stocks are dissenting
shares. Failure to do so shall terminate his appraisal right at the option of the corporation. So, even if you have dissented
and thereafter notified, but you failed to surrender the stock certificate, appraisal right is terminated.
HOW RIGHT IS EXERCISED (Sec. 81)
§ If the proposed corporate action is implemented: The corporation shall pay the stockholder the FV thereof as of
the day before the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate
action upon surrender of the certificate of stock representing the stockholder's shares.
§ If the proposed corporate action is not implemented: Appraisal right is also terminated.
§ Appraisal by 3 disinterested persons:
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o If, within 60 days from the approval of the corporate action, the withdrawing stockholder and the
corporation cannot agree on the FV of the shares, it
o 1 shall be named by the stockholder, 1 by the corporation, and the last 1 by the 2 thus chosen.
o Basically, this will be an independent appraisal committee to determine the value of the shares. The findings
of this appraisers will be final and the award shall be paid by the corporation within 30 days after the award
is made. The stockholder and the corporation cannot anymore question on the value given by the appraisers.
§ The exercise of appraisal right is strictly construed against the stockholder, such that the failure to comply with
one requirement automatically terminates the appraisal right because this is an exception to the trust fund
doctrine.
§ Appraisal right can only be granted if there is unrestricted RE in the books of the corporation. IOW, you don’t
take into account the RE that has been restricted for corporate expansion, for certain contractual provisions, and
for contingencies or any other valid restriction of RE.
§ Appraisal Right is not an inherent right of a stockholder, because upon being one, there is an understanding that
the stockholder does not have a say in a corporation and will be subject to the whims of the majority of the
stockholders.
Illustration
(This is most applicable in publicly listed corporations because the corporate action will normally be published by
the issuer corporation. So, it can affect the price of the shares)
You acquire another subsidiary. If the market deems that acquisition to be advantageous to the corporation, it can
result to an increase in the shares. If the market deems that acquisition to be disadvantageous to the corporation,
it can result to a decrease in the price of shares. Being a dissenting stockholder, the stockholder who wants to
exercise his appraisal right, should be immune from any of those fluctuations. He cannot benefit nor can he be
disadvantaged of any change in the price brought about by the action which he dissented from.
EFFECT OF DEMAND AND TERMINATION OF RIGHT (Sec. 82, RCC)
§ GR: All rights accruing to such shares, including voting and dividend rights, shall be suspended – from the time
of demand for payment of the FV of a stockholder’s shares until either (1) the abandonment of the corporate
action involved or (2) the purchase of the said shares by the corporation. IOW, no more voting right, right to
inspect, or right to dividends during the period where you notified that you want to exercise your appraisal right.
§ EXC: Right of such stockholder to receive payment of the fair value thereof is not suspended.
§ EXC to the EXC: Voting and dividend rights shall immediately be restored if the dissenting stockholder is not paid
the value of the said shares within 30 days after the award.
CESSATION OF RIGHT TO PAYMENT (Sec. 83, RCC)
§ When right to payment ceases:
1. Demand for payment is withdrawn with the consent of the corporation
2. Proposed corporate action is abandoned or rescinded by the corporation
3. Proposed corporate action is disapproved by the Commission where sun approval is necessary
4. Commission determines that such stockholder is not entitled to the appraisal right
5. Failure to make a written demand within the 30-day period provided
6. The shares are transferred by the dissenting shareholder
7. The dissenting shareholder failed to submit the stock certificate within 10 days from demand
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§ Effect: The status as a stockholder shall be restored, and all dividend distributions which would have accrued on
the shares shall be paid to him.
SUMMARY: (Voting Requirement)
Powers
Extend or shorten corporate term
Increase or Decrease Capital Stock (applicable only to stock
corps)
Incur, Create or Increase Bonded Indebtedness
Deny Pre-emptive Right
Sale or Other Disposition of Assets
Sale of all or substantially all
Abandon the sale or disposition even after approval by
stockholders or members
Invest Corporate Funds in Another Corporation or Business or
for Any Other Purpose.
Declare Dividends (cash, property, stock)
Issue stock dividends
Enter into management contracts
Vote for a presiding officer in a special meeting called by a
petition s/m
Who will preside in the meeting called by a petitioning s/m
Amendment of the Articles of Incorporation
Election of d/t
Removal of d/t
Call for a special meeting for the purpose of removing
director(s); written demand
Election of officers
Calling of a special meeting to remove d/t
Ratification of a self-dealing contract
501_Corporation – GAVIOLA
Material contracts in corporations vested with public interest § 2/3 of the entire membership of the board + majority of the
independent directors
Filling the vacancy in the board (reasons other than by § majority of the remaining directors or trustees, if still
removal or by expiration of term) constituting a quorum
Emergency Board; officer who will fill the vacancy § unanimous vote of the remaining directors or trustees
Plan of Merger of Consolidation § majority of the board + 2/3 (s/m) of each of the constituent
approval by the corporations
Required vote § Dissenting stockholder’s right of appraisal, applicable
§ majority of the board (quorum) + 2/3 (s/m) Amendment to the plan of merger or consolidation § majority of the board + 2/3 (s/m) of each of the constituent
§ Dissenting stockholder’s right of appraisal, extension
corporations
(express power) and shortening (implied power)
Adoption of by-laws § majority (s/m)
§ majority of the board + 2/3 (s)
Amendment, Repeal, Adoption of By-Laws § majority of the board + majority (s/m)
§ approved by SEC and PCC (where appropriate)
Delegation to the Board the power to amend/repeal or adopt § 2/3 (s/m)
§ majority of the board + 2/3 (s/m)
by-laws
§ approved by SEC and PCC (where appropriate)
Revocation of the delegation § majority (s/m)
§ 2/3 (s)
Fixing of the issued price of no par value shares § majority of the Board (quorum) – if authorized by the
§ majority of the board
articles
§ Dissenting stockholder’s right of appraisal, applicable
§ if silent, majority (s)
§ Majority of the board + 2/3 (s/m)
Dissolution § majority of the board + 2/3 (s/m), entitled to vote
§ If no voting rights (nonstock corp), majority of the board
§ Majority of the board (quorum)
§ majority of the board + 2/3 (s/m); except if the investment
is reasonably necessary to accomplish the corp’s primary
purpose
§ Dissenting stockholder’s right of appraisal, applicable
§ majority of the board (quorum)
§ majority of the board (quorum) + 2/3 (s)
§ majority of the board (quorum) + majority of s/m of both
the managing and managed corps
§ Exc: 2/3 (s/m), entitled to vote
a) stockholders have interest in both the managing and
the managed corporations and own or control MORE
THAN 1/3 of the total OCS entitled to vote of the
managing corporation; or
b) majority of the members of the board of the managing
corporation also constitute a majority of the members
of the board of the managed corporation
§ majority of s/m
§ majority (s/m) present (from among themselves)
§ majority of the board
§ 2/3 (s/m) [may be done by written assent]
§ majority (s/m), entitled to vote
§ 2/3 (s/m), entitled to vote
§ majority (s/m), entitled to vote
§ majority of the board (ALL)
§ majority (s/m), entitled to vote
§ 2/3 (s/m)

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