1
CORPORATION LAW 1. Artificial being
 Corporation is one of the types of business
organizations. It is also the most important
in economic development.
INTRODUCTION
 Sole proprietorship
- One man form of business entity, personally
answers all liabilities, but enjoys all the
profits with the exclusion of others
- Limited shareholders responsibility
- Paid subscription in full, you are no longer
liable
 Partnership
- Based on mutual trust and confidence
 Joint venture
- one time grouping of persons whether they
be natural or juridical
- does not entail continuity because after the
undertaking is completed it is already the
end
- particular partnership and joint venture
would be similar, but there is already a
decision of the Supreme Court declaring
them as different
- when they do not register, it does not exist
- Foreign corporations enters into an
agreement with a domestic corporation, it
must be registered. Generally they do not
need to be registered.
 Corporations
-They may enter into joint venture, but
generally they cannot enter into a
partnership, but there are exceptions
allowed by the SEC: the 3 exceptions must
go hand in hand
1. The articles of incorporation expressly
authorized the corporation to enter into
contracts of partnership;
2. The agreement or articles of partnership
must provide that all the partners will
manage the partnership; and
3. The articles of partnership must
stipulate that all the partners are and
shall be jointly and severally liable for all
obligations of the partnership.
DEFINITION AND ATTRIBUTES
 4 attributes of a corporation
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2. Created by operation of law
3. Right of succession
4. Powers, attributes and properties expressly
authorized by law or incident to its
existence.
 Doctrine of limited capacity
- Only such powers as are expressly granted
to it by law and by its articles of
incorporation including others which are
incidental to such conferred powers, those
reasonably necessary to accomplish its
purpose and those which may be incidental
to its existence
- Can do things as the law asks or allows it to
do
- If it does anything beyond, it shall be
considered as ULTRA VIRES
 General rule: Moral damages cannot be
granted to corporations
 Exception: Filipinas Broadcasting Network
Inc. vs. Ago Med
- In cases of slander, libel and other forms of
defamation (should not qualify because the
code does not qualify whether natural or
juridical) Art. 2219 of the civil code:
Art. 2219. Moral damages may be
recovered in the following and analogous
cases:
(1) A criminal offense resulting in physical
injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other
lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of
defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles
21, 26, 27, 28, 29, 30, 32, 34, and 35.

The parents of the female seduced,
abducted, raped, or abused, referred to in
No. 3 of this article, may also recover moral
damages.
The spouse, descendants, ascendants, and
brothers and sisters may bring the action
mentioned in No. 9 of this article, in the
order named.
 Advantages (SEE LADIA BOOK)
- No. 2 may also be a disadvantage
- No. 5 may also be a disadvantage
 A corporation is a person, therefore
protected by the due process clause and
equal protection clause of the Constitution
CLASSIFICATION OF CORPORATIONS
 Section 3 Stock and non-stock
- Importance of knowing, determining what
provisions of the code or the law may be
applicable
Section 3. Classes of corporations. -
Corporations formed or organized under this
Code may be stock or non-stock
corporations. Corporations which have
capital stock divided into shares and are
authorized to distribute to the holders of
such shares dividends or allotments of the
surplus profits on the basis of the shares
held are stock corporations. All other
corporations are non-stock corporations.
(3a)
 Non-stock- title 10
 Stock- section 51
 Stockholders must generally cast their votes
in the meeting; section 4 governed primarily
by the law creating them
Section 4. Corporations created by
special laws or charters. - Corporations
created by special laws or charters shall be
governed primarily by the provisions of the
special law or charter creating them or
applicable to them, supplemented by the
provisions of this Code, insofar as they are
applicable. (n)
 Section 3
- The two requisites must always concur
1. That they have a capital stock divided into
shares; and,
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2. That they are authorized to distribute
dividends or allotments as surplus profits to
its stockholders on the basis of the shares
held by each of them.
 Section 4
- Created by a special law, they have their
own character
- They are not immune from suit unless
provided by the law of their creation
- Primarily governed by the law creating them
- Their subsidiaries are entirely different or
independent from that of the other
 Close corporation
- There is no exemption it is absolute
 Public corporation
- Political or governmental purposes
- Those formed or organized for the
government or a portion of the State or any
of its political subdivision and which have for
their purpose the general good and welfare
 Private Corporation
- Immediate benefit, aim or advantage of
private individuals
- Those formed for some private purpose,
benefit, aim or end
- Distinction: public for governmental purpose
 Corporation Sole
- Exemption to the rule because it is
composed only of one person
- An incorporator may also be a juridical
person
 Close corporation
- There is exclusivity of shares of stock
- Section 96-105
- Restrictions to transfer shares
- Only those indicated can own shares
- Article must provide that there will be no
public offering
 Open corporation
- openly admit investors
- example: stock exchange
 Domestic/ Foreign
 Test
- Incorporation test

- If incorporated under the laws of the
Philippines it is a domestic corporation
ME Gray vs. CA
- Parent or Holding/ subsidiaries and affiliates
- Affiliates- no majority vote
SMC 12%
CBP
HERSHEY
12%
Affiliate is subject to common control by the 12 %
owners
 De jure
- cannot be attached by the state even in a
quo warranto proceeding
 De facto
- exists by virtue of colorable compliance
- Attached directly only by the state in a quo
warranto proceeding
 Corporation by estoppel
-
So defectively formed, but still considered
corporation, but only in relation to those who
cannot deny their existence section 20 and
21
FORMATION AND ORGANIZATION
 3 stages
1. Creation
2. Re-organization or quasi-reorganization
3. Dissolution/winding-up
 Purpose clause
- Defining the scope of authority of the
corporate enterprise pr undertaking. Both
confirmed and limited
 4 limitations of purpose clause
1. Lawful
2. Specific or stated concisely
3. More than one, the primary and
secondary must be specified
4. Lawfully combined
- Provision that states, cannot be issued less
than par, exception is treasury shares
because it can be issued less than par
 A corporation commences only upon
issuance of the certificate, prior thereto it
has no being and cannot transact business.
Promoters cannot act for a projected
corporation
 Metro Manila- paid up capital requirement is
10 M
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 Non- stock- mere mention of the operating
capital
 Mention the authorized capital
 Restrictions
- Mandatory in close
- Not mandatory in ordinary
 Non-stock
CBPl 12%
- If value is not more than 100,000
 A corporation cannot use any other name
unless it has been amended
 Section 19
- If confusingly similar it will not be allowed to
be registered
- Verification slip from the records officer
Section 19. Commencement of
corporate existence. - A private corporation
formed or organized under this Code
commences to have corporate existence
and juridical personality and is deemed
incorporated from the date the Securities
and Exchange Commission issues a
certificate of incorporation under its official
seal; and thereupon the incorporators,
stockholders/members and their successors
shall constitute a body politic and corporate
under the name stated in the articles of
incorporation for the period of time
mentioned therein, unless said period is
extended or the corporation is sooner
dissolved in accordance with law. (n)
- Words corporation or inc. either in full or
abbreviated form must be included
Section 18. Corporate name. - No
corporate name may be allowed by the
Securities and Exchange Commission if the
proposed name 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. When
a change in the corporate name is
approved, the Commission shall issue an
amended certificate of incorporation under
the amended name. (n)
 Doctrine of secondary meaning
- A word or phrase originally incapable of
exclusive appropriation [usually generic]
with reference to an article in the market,
because of geographically or otherwise

descriptive, might nevertheless have been
used so long and so exclusively by one
producer with reference to his article that, in
that trade and to that branch of the
purchasing public, the word or phrase has
become to mean that the article was his
product.
 Section 18
- Lyceum of the Philippines case, the
additional geographical name does not
make it confusingly similar
- actual confusion is not necessary- Philips
case “it is enough that there is probable
confusion”
 2 requisites must be proven
- that the complainant corporation acquired a
prior right over the use of such corporate
name
- identical, deceptively or confusingly,
patently deceptive
 principal office
- statement of principal office is required
- city and municipality not only province must
be specified
- principal office NOT operations office
- necessary because it will establish the
residence of corporations
- venue of actions for or against the
corporations
- venue of meetings
- section 51 meetings may only be within the
boundaries of the city where the principal
office
- non-stock may be held anywhere in the
Philippines, if provided in its by-laws
- where summons may be served
- registration of chattel mortgage must be
registered in the register of deeds where the
principal office is located
Clavecilla Radio System vs. Antillon
- action not upon a written contract
- city where the defendant resides
 term of existence
- corporate term required
- determining what point in time the juridical
personality will cease to exist
- enter into contract only when it has juridical
personality
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- once it ceases to exist, it no longer has
personality
- exist for another 3 years only for purposes
of liquidation
- Dissolution- it is automatic
 When should extension be made?
- General rule: Not earlier than 5 years
- Exception: unless there are justifiable
reasons
 May it be extended after expiration?
- Alhambra cigar vs. SEC once it ceases to
exist it has no vested politic, exist only for a
period of 3 years only for liquidation and for
that purpose only
 Article 5 How many incorporators should
there be?
- 5-15
 May a corporation be an incorporator?
- General rule: only natural persons
- Exception: cooperatives and corporation
primarily organized to hold equities in rural
banks
 How about minors?
- NO, because they must be of legal age
 May a corporation organized by
incorporators consisting solely of foreigners
- Yes, there is no nationality requirement only
residence, as long as majority are residents
of the Phil
 Define incorporators <sec.5>
- Those person mentioned in the articles as
originally forming the corporation and who
are signatories of the articles of
incorporation.
- Must be signatories to be incorporators
Section 5. Corporators and
incorporators, stockholders and members. -
Corporators are those who compose a
corporation, whether as stockholders or as
members. Incorporators are those
stockholders or members mentioned in the
articles of incorporation as originally forming
and composing the corporation and who are
signatories thereof.

Corporators in a stock corporation
are called stockholders or shareholders.
Corporators in a non-stock corporation are
called members. (4a)
 Define corporators <sec.5>
- All persons who compose the corporation at
any given time and need not be among
those who execute the articles of
incorporation at the start of its formation and
organization.
- Originally or subsequently
- Section 5 provides:
Corporators in a stock corporation
are called stockholders or shareholders.
Corporators in a non-stock corporation are
called members. (4a)
 May a corporation be a corporator?
- YES. There is nothing to prevent
corporation from being a stockholder
 Incorporator must subscribe to 1 share
 There are those that are
reserved to Filipinos
 An incorporator maybe a corporator as long
as he is a stockholder
 section 6
Section 6. Classification of shares. -
The shares of stock of stock corporations
may be divided into classes or series of
shares, or both, any of which classes or
series of shares may have such rights,
privileges or restrictions as may be stated in
the articles of incorporation: Provided, That
no share may be deprived of voting rights
except those classified and issued as
"preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided,
further, That there shall always be a class or
series of shares which have complete voting
rights. Any or all of the shares or series of
shares may have a par value or have no par
value as may be provided for in the articles
of incorporation: Provided, however, That
banks, trust companies, insurance
companies, public utilities, and building and
loan associations shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by
any corporation may be given preference in
the distribution of the assets of the
corporation in case of liquidation and in the
distribution of dividends, or such other
preferences as may be stated in the articles
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of incorporation which are not violative of
the provisions of this Code: Provided, That
preferred shares of stock may be issued
only with a stated par value. The board of
directors, where authorized in the articles of
incorporation, may fix the terms and
conditions of preferred shares of stock or
any series thereof: Provided, That such
terms and conditions shall be effective upon
the filing of a certificate thereof with the
Securities and Exchange Commission.
Shares of capital stock issued
without par value shall be deemed fully paid
and non-assessable and the holder of such
shares shall not be liable to the corporation
or to its creditors in respect thereto:
Provided; That shares without par value
may not be issued for a consideration less
than the value of five (P5.00) pesos per
share: Provided, further, That the entire
consideration received by the corporation
a for its no-par value shares shall be treated
as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore,
exclusively classify its shares for the purpose of
insuring compliance with constitutional or
legal requirements.
Except as otherwise provided in the
articles of incorporation and stated in the
certificate of stock, each share shall be
equal in all respects to every other share.
Where the articles of incorporation
provide for non-voting shares in the cases
allowed by this Code, the holders of such
shares shall nevertheless be entitled to vote
on the following matters:
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge
or other disposition of all or substantially all
of the corporate property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation
with another corporation or other
corporations;
7. Investment of corporate funds in another
corporation or business in accordance with
this Code; and

8. Dissolution of the corporation.
Except as provided in the
immediately preceding paragraph, the vote
necessary to approve a particular corporate
act as provided in this Code shall be
deemed to refer only to stocks with voting
rights. (5a)
 How many directors should there be?
- General rule: Not less than 5 not more than
15
- Exceptions:
1. Educational corporations registered as non
stock corporation whose number of
trustees, though not less than five and not
more than [15] should be divisible by five
[5], meaning they must have either five, ten,
or fifteen trustees and no other;
2. In close corporations where all the
stockholders are considered as members of
the board of directors thereby effectively
allowing twenty members in the board.
3. The by-laws of a corporation may provide
for additional qualifications and
disqualifications of its members of the board
of directors or trustees. However it may not
do away with the minimum disqualifications
lay down by the Code.
 Qualifications of the governing board
- Requires mere residency <sec. 23>
Section 23. The board of directors
or trustees. - Unless otherwise provided in
this Code, the corporate powers of all
corporations formed under this Code shall
be exercised, all business conducted and all
property of such corporations controlled and
held by the board of directors or trustees to
be elected from among the holders of
stocks, or where there is no stock, from
among the members of the corporation, who
shall hold office for one (1) year until their
successors are elected and qualified. (28a)
Every director must own at least one
(1) share of the capital stock of the
corporation of which he is a director, which
share shall stand in his name on the books
of the corporation. Any director who ceases
to be the owner of at least one (1) share of
the capital stock of the corporation of which
he is a director shall thereby cease to be a
director. Trustees of non-stock corporations
must be members thereof. A majority of the
directors or trustees of all corporations
organized under this Code must be
residents of the Philippines.
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 May a domestic corporation have a
governing board consisting solely of
foreigners?
- YES, section 23 majority of them must be
residents of the Philippines, no nationality
requirement
 Anti-dummy act <sec.2-A>
- If the business undertaking or activity is only
partially nationalized, aliens can be elected
as such directors, [unless the law provides
otherwise] but their number shall only be in
proportion to their equity or participation in
the capital stock of the corporation.
 Disqualifications <sec.27>
- The disqualifications provided for is
absolute and may not be done away with.
Corporate by-laws may, however, provide
for additional qualifications and
disqualifications.
Section 27. Disqualification of
directors, trustees or officers. - No person
convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to
the date of his election or appointment, shall
qualify as a director, trustee or officer of any
corporation. (n)
 Section 27 and 23 minimum
disqualifications and qualifications
Lee vs. CA
- By laws may provide for additional
 Gov’t vs. El hogar Filipino, Gokongwei vs.
SMC
Capital structure
Foundation- minimum paid-up capital 3M
Authorized capital 1 M No. of shares
1M shares par value 1.00
Amount of shares subscribed
50 K A
50 K B
C 250K
D

E -
PAID UP =62,500
Corporation cannot exceed more than 1 M it is the
maximum amount it cannot issue more unless
amended
Maximum shares it can issue is 1M shares unless
amended
 How much shares should be subscribed?
- Must be at least 25% of the authorized
capital stock
 Paid- up must be at least 25%-minimum
 Section 30
- Total subscription compliance with minimum
25% total
- Any combination would comply with the
minimum required by section 30
Section 30. Compensation of
directors. - In the absence of any provision
in the by-laws fixing their compensation, the
directors shall not receive any
compensation, as such directors, except for
reasonable per diems: Provided, however,
That any such compensation other than per
diems may be granted to directors by the
vote of the stockholders representing at
least a majority of the outstanding capital
stock at a regular or special stockholders'
meeting. In no case shall the total yearly
compensation of directors, as such
directors, exceed ten (10%) percent of the
net income before income tax of the
corporation during the preceding year. (n)
 Minimum for a domestic corporation?
- In no case shall the paid- up capital be less
than 5k
 Is there a minimum authorized capital
imposed by the code?
- If there is minimum paid-up logically there
should also be a minimum capital =5000
 Minimum paid-up capital for a financing
company metro manila 10 M if located in
MM
 Shares of stock
 Purpose of classification
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To specify and define the rights and
privileges of the stockholders;
- For regulation and control of the issuance of
sale of corporate securities for the
protection of purchasers and stockholders.
- As a management control device.
- To comply with statutory requirements
particularly those which provide for certain
limitations on foreign ownership and shares
like overseas employment agencies
requiring to own at least 75% of the shares
of stock thereof.
- To better insure return on investment which
can be affected through the issuance of
redeemable shares or preferred shares, i.e.,
granting the holders thereof, preference as
to dividends and/or distribution of assets in
case of liquidation; and,
- For flexibility in price, particularly, no par
shares may be issued or sold from time to
time at different price depending on the net
worth of the company since they do not
purport to represent an actual of fixed value.
 Section 6
- Each shall be equal in all respects to every
other share
 Preferred shares
- Specific preference
- Dividends or during liquidation
 No par
- Can sell it with the network of the
corporation
 Distinction between the subscribed and
outstanding stocks?
- Section 137
Section 137. Outstanding capital
stock defined. - The term "outstanding
capital stock", as used in this Code, means
the total shares of stock issued under
binding subscription agreements to
subscribers or stockholders, whether or not
fully or partially paid, except treasury
shares. (n)
- Voting and dividend rights, it refers to the
outstanding capital stocks

- Only outstanding stocks are allowed to vote
and receive dividends
- Actually the same
 Treasury shares
- are also subscribed shares
- while they remain in the treasury, no voting
and dividend rights
- may be reissued by the corporation
- once reissued they become outstanding
stocks again
 common shares
- carry the right to vote
 preferred shares
- grants the holder preference
- preference as to dividends
- preference as to distribution of the
remaining assets upon dissolution or
- both
- YOU MUST STATE THE PREFERENCE
BECAUSE IF NOT THEY ARE PRESUMED
TO BE EQUAL
- It may include such other preferences not
inconsistent with the Code. This is so
because Section 6 of the said law allows a
stock corporation to issue preferred shares
subject only to the limitations imposed
therein which are:
a. They can be issued only with sated par
value; and,
b. The preferences must be stated in the
articles of incorporation and in the certificate
of stock, otherwise, each share shall be, in
all respect, equal to every other share.
 Participating
- Must be stated because the presumption is
that it is participating
 Cumulative
- Irrespective of whether or not they where
earned
 Preferred
- May be denied
- Unless denied they are still entitled
 What if hindi i-declare kahit na may
dividends rights for the previous years? May
they be denied dividend rights because they
are non holders of non-cumulative? NOTE:
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YOU CANNOT COMPEL THE
CORPORATION TO DECLARE
DIVIDENDS UNLESS IT EXCEEDS 100 %
PAID UP CAPITAL SEC. 43
Section 43. Power to declare
dividends. - The board of directors of a
stock corporation may declare dividends out
of the unrestricted retained earnings which
shall be payable in cash, in property, or in
stock to all stockholders on the basis of
outstanding stock held by them: Provided,
That any cash dividends due on delinquent
stock shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, while stock dividends shall be
withheld from the delinquent stockholder
until his unpaid subscription is fully paid:
Provided, further, That no stock dividend
shall be issued without the approval of
stockholders representing not less than two-
thirds (2/3) of the outstanding capital stock
at a regular or special meeting duly called
for the purpose. (16a)
Stock corporations are prohibited
from retaining surplus profits in excess of
one hundred (100%) percent of their paid-in
capital stock, except: (1) when justified by
definite corporate expansion projects or
programs approved by the board of
directors; or (2) when the corporation is
prohibited under any loan agreement with
any financial institution or creditor, whether
local or foreign, from declaring dividends
without its/his consent, and such consent
has not yet been secured; or (3) when it can
be clearly shown that such retention is
necessary under special circumstances
obtaining in the corporation, such as when
there is need for special reserve for
probable contingencies. (n)
- It depends because there are three types of
non-cumulative preferred shares
- Discretionary dividend type
- Mandatory if earned
- Earned cumulative or dividend credit type
 Compare cumulative share from non-
cumulative, earned cumulative or dividend
credit type
- Cumulative share –whether or not earned
- Non-cumulative earned cumulative or
dividend credit type- only if earned
 Par
- stated par value; shall not be issued less
than par

 No par
- without stated par value
- once fully paid no longer liable
 Corporations cannot use its capitals in
declaring dividends; not all can issue no par
value section 6
 Voting
- entitled to vote at any motion brought up in
writing
 Non-voting
- not entitled to vote
 What types of shares may be denied of the
right to vote?
- Preferred and redeemable shares
 Is it correct to state that common shares
can never be denied the right to vote?
- Only preferred and redeemable shares are
denied unless provided in this code
- PWEDENG MA-DENY YUNG COMMON
SHARES, KASI YUNG FOUNDER’S
SHARES MERON SILANG EXCLUSIVE
RIGHTS NA SILA LANG ANG MERON, SO
PWEDE SILANG BUMOTO WITH
REGARDS TO SOMETHING NA HINDI NA
SAKOP NG COMMON SHARE RIGHTS
- Example: founders shares- may be given
certain rights and privileges
- Even common shares may be denied the
right to vote of founders’ shares issued
<sec.7>
Section 7. Founders' shares. -
Founders' shares classified as such in the
articles of incorporation may be given
certain rights and privileges not enjoyed by
the owners of other stocks, provided that
where the exclusive right to vote and be
voted for in the election of directors is
granted, it must be for a limited period not to
exceed five (5) years subject to the approval
of the Securities and Exchange
Commission. The five-year period shall
commence from the date of the aforesaid
approval by the Securities and Exchange
Commission. (n)
 Do you include non-voting shares in passing
a valid corporate act?
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- Even non-voting shares are entitled to vote
under section 6
 Redeemable shares
- Discretionary/optional
- Obligatory or mandatory
 Generally a corporation can reacquire its
own shares if it has unrestricted retained
earnings
 Exception: redeemable shares may be
reacquired irrespective of retained earnings
 Treasury shares
- They are treasury while in the treasury
account of the corporation
 May they be reissued by the corporation?
- YES
 If they are reissued will they be denied the
right to vote?
- Once reissued they shall become
outstanding stocks again and purchasers
shall be entitled to all the rights and
privileges as the other holders have
 Section 57 treasury shares have no voting
and dividend rights. Why not?
Section 57. Voting right for treasury
shares. - Treasury shares shall have no
voting right as long as such shares remain
in the Treasury. (n)
- Answer: commissioner vs. manning page 62
first par.
“Although authorities may differ on
the exact legal and accounting status of so-
called treasury shares, they are more or
less in agreement that treasury shares are
stocks issued and fully paid for and
reacquired by the corporation either by
purchase, donation, forfeiture or other
means. Treasury shares are therefore
issued shares but being in the treasury they
do not have the status of outstanding
shares. Consequently, although a treasury
share, not having been retired by the
corporation re-acquiring it, may be re-issued
or sold again, such shares, as long as it is
held by the corporation as a treasury share,
participates neither in dividends, because

dividends cannot be declared by the
corporation to itself, nor in meetings of the
corporation as voting stock, for otherwise
equal distribution of voting powers among
stockholders will be effectively lost and the
directors will be able to perpetrate their
control of the corporation, though it still
represents a paid for interest in the property
of the corporation. The foregoing essential
features of a treasury stocks are lacking in
the questioned shares.
In this case, and under the terms of
the trust agreement, the shares of stock of
Reese participated in dividends which
the trustee received and the said shares
were voted upon by the trustee in all
corporation meetings. They were not,
therefore, treasury shares.”
 When the law speaks of outstanding rights it
does not include treasury shares
 Treasury shares may be reissued
- They are actually assets of the corporation
- Once re-issued they become outstanding
stocks again
- The corporation may cancel them; in effect
there will be a reduction in the outstanding
capital stocks
- The code does not require ordinary
corporations to provide for restrictions, but it
does not likewise prohibit restrictions
- Example: right of first refusal
- The restriction must be contained in the
articles of incorporation
- If provided in by-laws but not in the articles
of incorporation then it will not be binding
- Restrictions and preferences are
mandatorily required in close corporations
- If it does not provide restrictions it is not a
close corporation
- Specified persons- close corporations
- If not one of those specified you are not
included because there is exclusivity in
close corporations
- Should also be in the by-laws not only in the
articles of incorporation
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 No transfer clause
 Execution clause
 Acknowledgment
 Treasurer affidavit part of the articles of
incorporation
 Section 23-27 minimum qualifications, but
there may be additional
 Grounds for disapproval
- Only substantial and not strict is required
 May the SEC refuse or reject registration?
- <Section 17>
Section 17. Grounds when articles
of incorporation or amendment may be
rejected or disapproved. - The Securities
and Exchange Commission may reject the
articles of incorporation or disapprove any
amendment thereto if the same is not in
compliance with the requirements of this
Code: Provided, That the Commission shall
give the incorporators a reasonable time
within which to correct or modify the
objectionable portions of the articles or
amendment. The following are grounds for
such rejection or disapproval:
1. That the articles of incorporation or any
amendment thereto is not substantially in
accordance with the form prescribed herein;
2. That the purpose or purposes of the
corporation are patently unconstitutional,
illegal, immoral, or contrary to government
rules and regulations;
3. That the Treasurer's Affidavit concerning
the amount of capital stock subscribed
and/or paid is false;
4. That the percentage of ownership of the
capital stock to be owned by citizens of the
Philippines has not been complied with as
required by existing laws or the Constitution.
No articles of incorporation or
amendment to articles of incorporation of
banks, banking and quasi-banking
institutions, building and loan associations,
trust companies and other financial
intermediaries, insurance companies, public
utilities, educational institutions, and other
corporations governed by special laws shall
be accepted or approved by the
Commission unless accompanied by a
favorable recommendation of the

appropriate government agency to the effect
that such articles or amendment is in
accordance with law. (n)
- But the grounds in section 17 are not
exclusive
 When will the corporation commence to
exist?
- Section 19
Section 19. Commencement of
corporate existence. - A private corporation
formed or organized under this Code
commences to have corporate existence
and juridical personality and is deemed
incorporated from the date the Securities
and Exchange Commission issues a
certificate of incorporation under its official
seal; and thereupon the incorporators,
stockholders/members and their successors
shall constitute a body politic and corporate
under the name stated in the articles of
incorporation for the period of time
mentioned therein, unless said period is
extended or the corporation is sooner
dissolved in accordance with law. (n)
 A corporation de jure can come into
existence only upon the issuance of the
certificate of registration by the SEC? TRUE
OR FALSE?
- TRUE
- EXCEPTION: CORPORATION SOLE <sec.
112>
Section 112. Submission of the
articles of incorporation. - The articles of
incorporation must be verified, before filing,
by affidavit or affirmation of the chief
archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and
accompanied by a copy of the commission,
certificate of election or letter of
appointment of such chief archbishop,
bishop, priest, minister, rabbi or presiding
elder, duly certified to be correct by any
notary public.
From and after the filing with the
Securities and Exchange Commission of the
said articles of incorporation, verified by
affidavit or affirmation, and accompanied by
the documents mentioned in the preceding
paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall
become a corporation sole and all
temporalities, estate and properties of the
religious denomination, sect or church
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theretofore administered or managed by
him as such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall
be held in trust by him as a corporation sole,
for the use, purpose, behalf and sole benefit
of his religious denomination, sect or
church, including hospitals, schools,
colleges, orphan asylums, parsonages and
cemeteries thereof. (n)
- CORPORATION SOLE- upon filing of the
verified articles of incorporation, once filed it
is vested with a judicial capacity
 General rule section 19
- Vested with judicial capacity upon issuance
of the certificate by the SEC
o However it is not accurate according
to atty. Ladia because there are
those that can issue for example
cooperatives- BUREAU OF
COOPERATIVES which register,
home insurance guaranty
corporation- HOME OWNERS
Cagayan Fishing vs. Sandika
- Corporations are created by law
- Commence to exist upon issuance by the
CONCERNED government corporation or
agency
- Prior there to it has no being
- The transfer of the property was not valid, it
likewise did not have the right to transfer
 De jure
- Strict or substantial compliance
 De facto
- 4 requisites must go hand in hand take out
anyone of them there can be no de facto
corporation
1. There is a valid statute under which the
corporation could have been created as a
de jure corporation.
2. An attempt, in good faith, to form a
corporation according to the requirements of
law, which goes far enough to amount to a
“colorable compliance” with the law;

3. A user of corporate powers, the transaction
of business in some way as if it were a
corporation; and,
4. Good faith in claiming to be and doing
business as a corporation.
 Are the rights and obligations between
officers and directors of a de jure and de
facto the same?
- YES. Governed by the same law, rules and
regulations
 Only important in determining, is for the
purpose of applying the rules with regards
to the direct and collateral attack
 The existence of a de jure cannot be
questioned even by the State, either directly
or indirectly
 Existence of a de facto can be questioned
only by the State directly in a quo warranto
proceeding only
Municipality of Malabang vs. Benito
- What is the missing link so as to consider it
a de facto? A law, because the executive
order is unconditional
- An unconditional act affords no rights,
creates no office
- Legal contemplation it was never passed at
all
- It can therefore be questioned by any
person
 If the certificate of registration has not been
issued, may a corporation de facto exist?
- NO!
- Number 4 requirement, good faith in
claiming to be and doing business as a
corporation
Hall vs. Piccio
- Missing link is good faith
- The certificate was not yet issued by the
SEC, the members knew and therefore they
were not acting in good faith, therefore
anybody can question its existence
 Corporation by estoppel
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- So defectively formed so that they are not to
be considered a de jure or de facto
- General partners- liable even beyond his
promise even his personal properties are
prone to attachment
Lozano vs. Delos Santos
- Founded on principle of equity
- Exercise corporate powers
- Enters with business with 3rd parties
- When there is no 3rd persons involved and
the problem arises between there members,
therefore they themselves know that there
is no corporation by estoppel
Albert vs. University
- 1965 case, no section 21 yet
- Applied where the rules governing agency
- A person purporting in behalf of a non
existing corporation
- Section 21, you arrive at the same decision
Chiang Kai Siek vs. CA
- SC based its decision from the provision of
the education act
- It cannot immune itself by virtue of its non
compliance with the law
 Assuming there was no law?
- YES, it may still be sued as a school for the
past 32 years the school represented itself
as possessed of juridical personality
 General rule: a 3rd party transacting with a
non existent corporation shall be estopped
to deny
Asia banking vs. standard products
- General rule: absence of fraud a person
who has dealt with a non incorporated
corporation shall be stopped to deny from
actions in which it had benefited
- Exemptions: when there is fraud the general
rule shall not apply
Salvatierra vs. Garlitos

- As a general rule a person who has
contracted it a corporation lacking
personality
- Doctrine is not applicable where fraud takes
part in the transaction
 Another exemption
International express travel and tours vs.
CA
- No fraud in this case
- How come Kahn was made liable?
- Doctrine of incorporation
- Applies only if that person is trying to
escape from a contract where he is
benefited
- In this case petitioner is not trying to escape
liability, but rather the one claiming from the
contract
 Would this apply to foreign corporation?
- YES, it may apply
- Georg Grotjahn vs. Isnami
 A foreign corporation cannot gain access to
our courts unless they attain a license to
engage in business in the Philippines but
applying corporation by estoppels, the court
allowed
 Municipality of Malabang case
- No law, hence may be questioned by any
person
- An unconstitutional act is not a law, t
confers no rights, it imposes no duties, it
affords no protections, it crates o office, it is
in legal contemplation, as inoperative as
though it had never been passes
 Hall vs. Piccio
- No good faith
 Corporation by estoppel
- Admission, conduct or agreement
- Will not apply among members themselves
there must be a 3rd party
- Cannot escape when benefited
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- General rule: you deal with a corporation, as
to estop it
- Exceptions: 1. fraudulently misrepresents
the third person may file an action directly to
those members, 2. 3rd party will not be
estopped if he is not trying to escape liability
 2 possible remedies
- Chiang kai siek case
- Albert case
 What would be the effect if the corporation
failed to commence transaction?
- Automatic
 Operated but becomes subsequently
inoperative for 5 years only a ground for
suspension, proper notice and hearing
 Commencement
- Example realty company
CORPORATE CHARTER AND ITS
AMENDMENTS
 What do you understand by the word
charter? Is it the same as articles of
incorporation?
- Corporate charter is broader
 Franchise
- Primary power granted by the state to be
and act as a corporation
- Secondary franchise is the right or privilege
that the corporation may exercise
 You cannot issue investment contracts
without a secondary franchise, kailangan
primary muna hindi pwede mauna
secondary kasi sa section 19 it does not
exist until issued with a certificate of
registration or incorporation
 Corporate entity
- Corporation exist separately and
independently from the stockholders
- Stockholders cannot bring an action, to
bring back the properties of a corporation
- Corporation has no interest in the individual
properties of its members

Sulo ng Bayan vs. Araneta
- Corporation cannot bring an action for the
recovery of the properties of its members
Caram vs. CA
- Stockholders cannot be held liable for the
legitimate obligations of the corporation,
they exist separately and independently
from one another
Cruz vs. Dalisay
- Final judgment against a corporation cannot
be enforced against stockholders
Rustan Pulp vs. CA
- Corporation exist separately
independently
- Corporation are juridical entities, they exist
only in legal contemplation, can act only
through its authorized representatives
Soriano vs. CA
- They are not personally liable
- They where signed for and in behalf of the
corporation
Palay inc. vs. Clave
- Liabilities incurred by the corporation cannot
be enforced against stockholders, etc., even
if stockholders, etc. happens to own a
substantial interest in the corporation, mere
ownership does not disregard the corporate
entity theory
 Corporate entity for legal or legitimate
purposes only
 Two or more corporations, one of them will
be treated as a mere alter-ego
 You cannot pierce the veil of corporate
fiction when there are no facts attendant in
the case
 Corporate Entity Theory
- The corporation is possessed with a
personality separate and distinct from the
individual stockholders or members and is
not affected by the personal rights,
obligations or transactions of the latter
 Instrumentality rule
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- Where one corporation is so organized and
controlled and its affairs are conducted so
that it is, in fact, a mere instrumentality or
adjunct of the other, the fiction of the
corporate entity of the “instrumentality” may
be disregarded
- Courts are concerned with reality and not
form
- Mere ownership of all or substantially all of
the shares of stock of a corporation is not, in
itself, insufficient ground for disregarding the
separate corporate personality. And for the
separate personality of the corporation to be
disregarded, the wrong doing must be
clearly and convincingly established
and - Fraud must be proven by clear and
convincingly evidence amounting to more
than preponderance. It cannot be justified
by speculation and can never be presumed.
And only if it sought to hold the stockholders
liable directly for corporate debt
Palacio vs. Fely
- Piercing the veil of corporate fiction
- Fely trans and the other corporation is one
and the same
Marvel bldg. vs. David
- There must be facts before the court will be
justified in piercing the veil of corporate
fiction
- Corporation was a mere extension of the
personality of the person
Yutivo and sons vs. Court of Tax Appeals
- What where the facts or circumstances
arrived by the court here?
- Subscribed capital where all advanced by
Yutivo, the board where the same as Yutivo
Commissioner of Internal Revenue vs.
Norton and Harrison
- Court applied the general rule
- Mere substantial ownership does not
mean that it has a same corporate entity
La Campana Coffee Factory, Inc. vs. KKM
- Two corporations managed by the same
family, workers were made interchangeably

Emilio Cano vs. CIR
- Sued in there official capacity
- Reverse of Soriano vs. CA (signed in their
official capacity)
Tesco vs. WCC
- The two corporations where located in the
same office
Claparols vs. CIR
- Same as NAFLU and A.C. Ransom
Concept builders vs. NLRC
- Instrumentality rule. What is the
instrumentality rule? “where one corporation
is so organized and controlled and its affairs
are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the
fiction of the corporate entity of the
“instrumentality” may be disregarded.”
- Has no separate mind of its own. What is
the degree of control?
1. Control, not mere majority or complete stock
control, but complete domination, not only of
finances but of policy and business practice
in respect to the transaction attacked so that
the corporate entity as to this transaction
had at the time no separate mind, will or
existence of its own.
2. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
other positive legal duty or dishonest and
unjust act in contravention of plaintiff’s legal
rights; and,
3. The aforesaid control and breach of duty
must proximately cause the injury or unjust
loss complained of.
- The absence of one of the elements
prevents “piercing the corporate veil.” In
applying the “instrumentality” or “alter ego”
doctrine, the courts are concerned with
reality and not form, with how the
corporation operated and the individual
defendant’s relationship to that operation.
 There must facts and circumstances before
warrant piercing the veil of corporate fiction
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 The control necessary does not mean stock
ownership
MCConnel vs. CA
- were located in the same floor
- “while the mere ownership of all or nearly all
of the capital stock of a corporation does not
necessary mean that it is a mere business
conduit of the stockholder, that conclusion is
amply justified where it is shown, as in the
case before us, that the operations of the
corporation were so merged with the
stockholders as to be practically
indistinguishable from them. To hold the
latter liable for the corporation’s obligations
is not to ignore the corporation’s separate
entity, but merely to apple the established
principle that such entity cannot be invoked
or used for purposes that could not have
been intended by the law that created that
separate personality.”
Tan boon bee vs. Jarencio
- Why would a drug company need a printing
machine
- The property must be in pursuance of a
company business
Cease vs. CA
- Alter-ego or the extension of the person of
forest ware does the court pierced the veil
of corporate fiction
- As to not deprive the holders of their
successional rights
- Mere ownership of all or substantially all is
not a justification of piercing the veil of
corporate fiction
 Fraud must be proven by clear and
convincing evidence cannot presume or
speculate, there must be facts and
circumstances
 Fraud must be clear and convincing
evidence more than preponderance
Remo Jr. vs. IAC
- The resolution was not entered to defraud
anyone
Del Rosario vs. National Labor Commission

- The wrongdoing must be clearly established
- There must be facts to support
- Payment of claims cannot
presumed
Indophil Textile Mill vs. CALICA
- How do you distinguish this ruling to La
Campana, having the same issues:
- La campana, one payroll, employees were
made interchangeable. Acrylic had its own
standards
PNB vs. Ritratto Group
- Control test
- Not mere majority but rather complete
- Twin ace was only a subsequent interested
party
- Assets and machineries
 Amendment of the articles of incorporation
- Express power granted to a corporation
 Section 16
- Appraisal right
- Section 81 to object on certain acts and
transactions
Section 81. Instances of appraisal
right. - Any stockholder of a corporation
shall have the right to dissent and demand
payment of the fair value of his shares in the
following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or
class of shares, or of authorizing
preferences in any respect superior to those
of outstanding shares of any class, or of
extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all
or substantially all of the corporate property
and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
- Right granted only in specified instances
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Are non-voting shares included in amending the
articles of incorporation
1 100/s XYZ-----ABC
thus be
2 100/s
To
10 100/s
=1M/S what would be
the 2/3?
Section 6 last paragraph
Voting shares are excluded except the
foregoing instances
1 1
2 2
3 3
4 4
5 5
6 6
1 & 2=absent
1&2=absent but gave their written assent
3 & 4= objected
3&4=objected
5 & 6= approved the amendment
5&6=approved
Would there be a valid amendment
 Special amendments 37 & 38 shortening
that would result to dissolution require prior
approval by the SEC
Section 37. Power to extend or
shorten corporate term. - A private
corporation may extend or shorten its term
as stated in the articles of incorporation
when approved by a majority vote of the
board of directors or trustees and ratified at
a meeting by the stockholders representing
at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of
the members in case of non-stock
corporations. Written notice of the proposed
action and of the time and place of the
meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee

in the post office with postage prepaid, or
served personally: Provided, That in case of
extension of corporate term, any dissenting
stockholder may exercise his appraisal right
under the conditions provided in this code.
(n)
Section 38. Power to increase or
decrease capital stock; incur, create or
increase bonded indebtedness. - No
corporation shall increase or decrease its
capital stock or incur, create or increase any
bonded indebtedness unless approved by a
majority vote of the board of directors and,
at a stockholder's meeting duly called for
the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the
increase or diminution of the capital stock,
or the incurring, creating or increasing of
any bonded indebtedness. Written notice of
the proposed increase or diminution of the
capital stock or of the incurring, creating, or
increasing of any bonded indebtedness and
of the time and place of the stockholder's
meeting at which the proposed increase or
diminution of the capital stock or the
incurring or increasing of any bonded
indebtedness is to be considered, must be
addressed to each stockholder at his place
of residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally.
A certificate in duplicate must be
signed by a majority of the directors of the
corporation and countersigned by the
chairman and the secretary of the
stockholders' meeting, setting forth:
(1) That the requirements of this section
have been complied with;
(2) The amount of the increase or
diminution of the capital stock;
(3) If an increase of the capital stock, the
amount of capital stock or number of shares
of no-par stock thereof actually subscribed,
the names, nationalities and residences of
the persons subscribing, the amount of
capital stock or number of no-par stock
subscribed by each, and the amount paid by
each on his subscription in cash or property,
or the amount of capital stock or number of
shares of no-par stock allotted to each
stock-holder if such increase is for the
purpose of making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to be
incurred, created or increased;
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(5) The actual indebtedness of the
corporation on the day of the meeting;
(6) The amount of stock represented at the
meeting; and
(7) The vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness.
Any increase or decrease in the
capital stock or the incurring, creating or
increasing of any bonded indebtedness
shall require prior approval of the Securities
and Exchange Commission.
One of the duplicate certificates shall
be kept on file in the office of the
corporation and the other shall be filed with
the Securities and Exchange Commission
and attached to the original articles of
incorporation. From and after approval by
the Securities and Exchange Commission
and the issuance by the Commission of its
certificate of filing, the capital stock shall
stand increased or decreased and the
incurring, creating or increasing of any
bonded indebtedness authorized, as the
certificate of filing may declare: Provided,
That the Securities and Exchange
Commission shall not accept for filing any
certificate of increase of capital stock unless
accompanied by the sworn statement of the
treasurer of the corporation lawfully holding
office at the time of the filing of the
certificate, showing that at least twenty-five
(25%) percent of such increased capital
stock has been subscribed and that at least
twenty-five (25%) percent of the amount
subscribed has been paid either in actual
cash to the corporation or that there has
been transferred to the corporation property
the valuation of which is equal to twenty-five
(25%) percent of the subscription: Provided,
further, That no decrease of the capital
stock shall be approved by the Commission
if its effect shall prejudice the rights of
corporate creditors.
Non-stock corporations may incur or
create bonded indebtedness, or increase
the same, with the approval by a majority
vote of the board of trustees and of at least
two-thirds (2/3) of the members in a meeting
duly called for the purpose.
Bonds issued by a corporation shall
be registered with the Securities and
Exchange Commission, which shall have
the authority to determine the sufficiency of
the terms thereof. (17a)

 The vote must be cast at the meeting called
for that purpose
 Written assent would not suffice
 When do amendments become valid and
effective?
- Only upon the approval of the SEC TRUE
OR FALSE?
- FALSE because it can be valid upon the
date of filing if not acted upon within 6
months without fault attributable to the
corporation
 Why is it retroactive?
 What provision may be amended, altered or
repealed
 Can you change name, address for
example she married or changed address?
- NO. you cannot change that
 Fait accompli, are beyond the powers or
authority of the corporation to change, alter
or modify. These would include the
following:
- Names of the incorporators and
- The incorporating directors or trustees,
- The name of the treasurer originally or first
elected by the subscribers or members to
act as such until his successor has been
duly elected and qualified,
- The number of shares and amount originally
subscribed and paid out of the original
authorized capital stock of the corporation,
- The date and place of execution of the
articles of incorporation,
- The signatories and acknowledgment
thereof.
- All other provisions or matters stated or
contained in the articles are subject to
amendment.
 Founder’s or signatories hindi pwede palitan
 Names, nationalities- you cannot
 Capital- right granted by
corporation
 Paid up capital- NO
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 Restriction and transfer of shares in
ordinary stock corporations
- You can, but close corporation cannot
- Section 96, otherwise it will not be a close
corporation
Section 96. Definition and
applicability of Title. - A close corporation,
within the meaning of this Code, is one
whose articles of incorporation provide that:
(1) All the corporation's issued stock of all
classes, exclusive of treasury shares, shall
be held of record by not more than a
specified number of persons, not exceeding
twenty (20); (2) all the issued stock of all
classes shall be subject to one or more
specified restrictions on transfer permitted
by this Title; and (3) The corporation shall
not list in any stock exchange or make any
public offering of any of its stock of any
class. Notwithstanding the foregoing, a
corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of
its voting stock or voting rights is owned or
controlled by another corporation which is
not a close corporation within the meaning
of this Code.
Any corporation may be
incorporated as a close corporation, except
mining or oil companies, stock exchanges,
banks, insurance companies, public utilities,
educational institutions and corporations
declared to be vested with public interest in
accordance with the provisions of this Code.
The provisions of this Title shall
primarily govern close corporations:
Provided, That the provisions of other Titles
of this Code shall apply suppletorily except
insofar as this Title otherwise provides.
 Transfer clause, executor clause,
acknowledgment, treasury affidavit-NO
Philippine First Insurance case
- Mere change in the name of a corporation
or by merely complying with the law is
general amendment
- It does not change its personality. It is the
same person in a different name. the
charter is the same
 Amendment of a corporate term
law to all - Extending the same can never be made 7
years prior? TRUE or FALSE

- FALSE. It can be if there are justifiable
reasons for earlier extension as may be
determined by the SEC
 Can you extend the corporate term if it has
already expired?
- Once the term expires without an
amendment having happen it ceases to
exist as a body politic. It is dissolved
automatically on the day it expires.
 Alhambra cigar and PNB case
 Instances when the SEC allowed extension
whose term has already expired
- All of them involved are institutions of
learning, it was the case in order to avoid
confusion that would arise later on.
BOARD OF DIRECTORS/TRUSTEES
 Section 23
Section 23. The board of directors
or trustees. - Unless otherwise provided in
this Code, the corporate powers of all
corporations formed under this Code shall
be exercised, all business conducted and all
property of such corporations controlled and
held by the board of directors or trustees to
be elected from among the holders of
stocks, or where there is no stock, from
among the members of the corporation, who
shall hold office for one (1) year until their
successors are elected and qualified. (28a)
Every director must own at least one
(1) share of the capital stock of the
corporation of which he is a director, which
share shall stand in his name on the books
of the corporation. Any director who ceases
to be the owner of at least one (1) share of
the capital stock of the corporation of which
he is a director shall thereby cease to be a
director. Trustees of non-stock corporations
must be members thereof. A majority of the
directors or trustees of all corporations
organized under this Code must be
residents of the Philippines.
- Controlled by the board of directors
- Authority are however restricted to the day
to day
- Stockholders may have all the profit but will
turn over the management to the governing
board
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- But unless the law provides the power may
be delegated
 General rule
- Corporations must sit and act as a body
- Will be bound by corporate officers if they
acted within the 5 classification page 150
Ramirez vs. Orientalist co.
- What was the position of Fernandez in this
case? TREASURER
- Why did the court rule that actions of
Fernandez bound the corporation when he
is not even a board of director?
“if a man is found acting for a
corporation with the external indicia of
authority, any person not having notice of
want of authority, may usually rely upon
those appearances; and if it be found that
the directors had permitted the agent to
exercise that authority and thereby held him
out as a person competent to bind the
corporation, or had acquiesced in a contract
and retained the benefit supposed to have
been conferred by it, the corporation will be
bound, notwithstanding the actual authority
may never have been granted.”
- Contracts must be made by the director and
not the stockholders
- Actions of the stockholders in such matters
is only advisory and not in any way binding
in the corporation
Barreto vs. La previsora Filipina
- Everything emanates from the board of
directors
- Stockholders action is merely advisory
except their approval or vote is necessary
to prove a valid corporate act
 Qualifications:
- No citizenship requirement, at least majority
must be residents
- Can have a governing board consisting
solely of foreigners
- But we have to take into consideration partly
nationalized industries and other laws which
prohibits or limits foreign ownership
 20

- Anti-dummy act  Exception:

- Utilization development of natural resources
60% must be owned by Filipino citizens,
therefore they only own 40%---10 members
they can only have 4 seats, but not entirely
correct because the law may provide
otherwise; educational institutions restricted
to Filipinos, but there are exceptions when
created by religious and charitable
institutions.
- By-laws may provide additional
qualifications and disqualifications
- Non-stock corporation can serve for a term
of 3 years
- Educational non-stock- term of the
governing board can be 5 years
 May this term exceed one year?
- Yes, they may serve in a hold over capacity
until their successors have been duly
elected and qualified
Detective and protective bureau vs. Cloribel

- To qualify as a director he must own at least - In the by-laws, managing director must be
1 share elected from among themselves

 Should the stockholder be the equitable or - Must be duly elected and qualified
beneficial owner in order to qualify as a
director? How are the directors elected?

- NO, it is not necessary, as long as you are 1-100T/S

listed in the books as owner of one share
2-100T/S
Lee vs. CA
3-100T/S
- As long as you are listed in the books as
to 10=1M/S
owner of one share
 Do you include the vote of 1 & 2 to have a
- Under the old law he must be the beneficial
quorum to have a valid meeting?
owner and legal owner thereof but in the
new law it is not required as long as it - NO, quorum requirements is 401,000
stands in his name he is qualifies
Quorum requirement is 501k
1 A-100t/S B (own in the trust of X) is B
qualified to be a director? Holders of non-voting shares are only entitled to
vote in last par. Of section 6
2
1-200k
3-10
2-200k
2– transferring there voting rights in favor of VT
3-200k
Other rights will accrue in favor of them, but not the
voting rights 4-100k

voting rights must be recorder in the books of the 5-100k

corporation that it is transferred
6-100k
PNB-IFL- wholly owned subsidiary of PNB
7-50k
PNB will assign to PNB-IFL nominal shares and
8-40k
PNB-IFL now will be able to be nominated
9-5k
 Gen. Rule:
10-5k
- Term of one year who will serve as such
until there successors are elected and =1MS
qualified

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1&2 is absent, 3&4 ayaw tumakbo and hindi
nagvote 6-10, tumakbo and ninominate nila yung
sarili nila and cast all their shares on themselves
 Who wins? Or who gets elected?
- No vote requirement, the one who gets the
most number of votes gets elected,
section24.
 What is cumulative voting?
- Process of multiplying the number of shares
to the number of director to be elected
- Matter of right granted to stockholders in a
stock corporation
1 to 5 has 200k/s and members of the same family-
majority 800k they have 4M votes they are
guaranteed 4 seats
6 to 10 are not related- 1 seat 1M votes
 Cumulative to allow the minority to have a
rightful representation in the board
 Is it allowed in a non-stock corporation?
- Not generally available
- Section 89 unless the articles or by-laws
allow cumulative voting
Section 89. Right to vote. - The right
of the members of any class or classes to
vote may be limited, broadened or denied to
the extent specified in the articles of
incorporation or the by-laws. Unless so
limited, broadened or denied, each member,
regardless of class, shall be entitled to one
vote.
Unless otherwise provided in the
articles of incorporation or the by-laws, a
member may vote by proxy in accordance
with the provisions of this Code. (n)
Voting by mail or other similar
means by members of non-stock
corporations may be authorized by the by-
laws of non-stock corporations with the
approval of, and under such conditions
which may be prescribed by, the Securities
and Exchange Commission.
 Other corporate officers other than the
governing board section 25
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Section 25. Corporate officers,
quorum. - Immediately after their election,
the directors of a corporation must formally
organize by the election of a president, who
shall be a director, a treasurer who may or
may not be a director, a secretary who shall
be a resident and citizen of the Philippines,
and such other officers as may be provided
for in the by-laws. Any two (2) or more
positions may be held concurrently by the
same person, except that no one shall act
as president and secretary or as president
and treasurer at the same time.
The directors or trustees and officers
to be elected shall perform the duties
enjoined on them by law and the by-laws of
the corporation. Unless the articles of
incorporation or the by-laws provide for a
greater majority, a majority of the number of
directors or trustees as fixed in the articles
of incorporation shall constitute a quorum
for the transaction of corporate business,
and every decision of at least a majority of
the directors or trustees present at a
meeting at which there is a quorum shall be
valid as a corporate act, except for the
election of officers which shall require the
vote of a majority of all the members of the
board.
Directors or trustees cannot attend
or vote by proxy at board meetings. (33a)
 Is the president required to be a
stockholder. YES
 The chairman may be another person
 The president may also be another person
 Prohibited is president to be secretary or
treasurer at the same time
 Board of director must sit and act as a body
to arrive at a corporate act
 What would constitute a quorum if 5 then 3
must be present
 May the vote of 2 members past a 5 man
governing board pass a valid corporate act?
- YES. Voting requirement is majority of
directors present at which there where a
quorum
1 1 and 2 present=valid voting
requirement
2 1 and 2 voted yes
3 3 voted no

4 -
5 corporate account
 Is it absolute?
- NO, except in the election because it
requires the majority of all the members of
the board
- If by-laws or articles provide a higher voting
requirement
 Artificial beings must act through its
members and act as a body to have a valid
corporate act
 Exception:
- Delegation
- Expressly conferred
- Where the officer or agent is clothed with
actual or apparent authority
- Otherwise it will not bind the corporation
 Yao ka sin trading case “already asked in
the bar”
- Only bind the corporation to the extent of
authority confined to him or virtue of
customs, usage and policy
- Must pass first the controller and counsel
 What if the notice requirement is not
complied with?
Lopez realty vs. Fotencha
- Notice requirement must be complied with
hence it should have been with force and
effect, but according to the SC, it may be
ratified expressly if there is a subsequent
meeting called for that purpose
- Impliedly through acts
- Asuncion was aware of the corporations
obligation
- There was implied ratification or she was
estopped
Pua casim vs. Neumark and Co.
- Considered 3 circumstanced
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Check which was the proceed of the loan
which was endorsed and deposit in the
- Neumark as president and also stockholder
Yu chuck vs. Kong Li Po
- General manager usually has the power to
hire but the SC said the contract must be
reasonable
- The contract here is so onerous that it
would throw the corporation into insolvency
Francisco vs. GSIS
- GSIS cannot evade the binding effect of the
telegram
- Only 15 months later that the corporation
said there was a mistake
- The silence coupled with the unconditional
acceptance of the other subsequent
remittances is binding to the corporation
Board of liquidators vs. Kalaw
“Settled jurisprudence has it that
where similar acts have been approved by
the directors as a matter of general practice,
custom and policy, the general manager
may bind the company without formal
authorization of the board of directors. In
varying language, existence of such
authority is established, by proof of the
course of business, the usages and
practices of the company and by the
knowledge which the board of directors has,
or must be presumed to have, of acts and
doings of its subordinates in and about the
affairs of the corporation. So also, “xx
authority to act for and bind a corporation
may be presumed from acts of recognition
in other instances where the power was in
fact exercised.” “xx Thus, when, in the usual
course of business of a corporation, an
officer has been allowed in his official
capacity to manage its affairs, his authority
to represent the corporation may be implied
from the manner in which he has been
permitted by the directors to manage its
business.”
In the case at bar, the practice of the
corporation has been to allow its general
manager to negotiate and execute contracts
in its copra trading activities for and in

NACOCO’s behalf without prior board
approval. If the by-laws were to be literally
followed, the board should give its stamp of
prior approval on all corporate contracts.
But that Board itself, by its acts and through
acquiescence, practically laid aside the by-
law requirement of prior approval.
- Kalaw signed alone and said contracts were
submitted to the board of directors after its
consummation and not before
Buenaseda vs. Bowen
- Express ratification is made through a
formal board action
- Implied ratification is through: silence or
acquiescence, acceptance benefits and
lastly recognition or adoption
 An unauthorized act may nevertheless be
binding either by express or implied by
estoppels
 By virtue of silence the board had impliedly
accepted the act
 By recognition or adoption
 By virtue of payment of obligations arising
therefore- Lopez realty
 May directors or trustees be disqualified to
act as such?
- YES, crime, etc. disqualifications in book
- Possess or dispossess any of the
qualifications or disqualifications , cease to
hold at least one share
 May directors be ousted from office?
- At least 2/3 of members representing
outstanding capital stock. Again notice
requirement must be complied with
1-200 1-5
family
2-200
3-200
4-100
5-100 electing
6-100 6 to 10 not
related
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7-50
8-40
9-5
10-5 outstanding
director
 Meetings called by the president or the
secretary ordered by the president
 It depends if the removal is without cause
they cannot do so because removal without
cause shall not deprive the minority
stockholders or members of the right of
representative
 If with cause they can even if it will prejudice
the rights of the minority, provided of course
additional requirements by-laws and articles
of incorporation
 Who will fill up the vacancy created due to
the ouster of a member of the board of
directors <section 29>
Section 29. Vacancies in the office
of director or trustee. - Any vacancy
occurring in the board of directors or
trustees other than by removal by the
stockholders or members or by expiration of
term, may be filled by the vote of at least a
majority of the remaining directors or
trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by
the stockholders in a regular or special
meeting called for that purpose. A director
or trustee so elected to fill a vacancy shall
be elected only or the unexpired term of his
predecessor in office.
Any directorship or trusteeship to be
filled by reason of an increase in the
number of directors or trustees shall be
filled only by an election at a regular or at a
special meeting of stockholders or members
duly called for the purpose, or in the same
meeting authorizing the increase of
same directors or trustees if so stated in the notice
of the meeting. (n)
 Other than by removal or expiration of term
they do not have the power
 When will the vacancies be filled up?
 Is notice required, to fill up vacancies due to
removal?

 What if the vacancy is due to an increase,
can it be filled up in the same meeting
where in the number is increased?
 Election due to removal-in the
meeting notice is not required
 Election due to increase in number- it must
be so stated in the meeting
 Section 30
Section 30. Compensation of
directors. - In the absence of any provision
in the by-laws fixing their compensation, the
directors shall not receive any
compensation, as such directors, except for
reasonable per diems: Provided, however,
That any such compensation other than per
diems may be granted to directors by the
vote of the stockholders representing at
least a majority of the outstanding capital
stock at a regular or special stockholders'
meeting. In no case shall the total yearly
compensation of directors, as such
directors, exceed ten (10%) percent of the
net income before income tax of the
corporation during the preceding year. (n)
- Generally not entitled to receive
compensation because they render it
gratuitously
- Unless the by-laws allows
- Stockholders may also grant pursuant to a
majority vote
- Must not exceed net income of 10% tax of
the preceding year
- Acting in special capacity
- In, sum directors may receive compensation
when
1. there is a provision in the by-laws to that
effect
2. When the stockholders, by a majority vote
of the outstanding capital stock grant the
same; and,
3. If the director renders extra-ordinary or
unsual service
Central cooperative exchange vs. Tibe
- By-laws may allow, stockholders may also
allow such
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 What do you understand by the phrase “as
such directors”
Western institute vs. Salas
same
- Compensation was granted without by-laws
authority
- Prohibition is not a sweeping rule
- Members of the board may receive when
they receive in a special capacity
- Mere act of the board will suffice
 Is the 10% ceiling applicable to other
officers?
- NO. the phrase “as such director” was used
twice <Section 30>
- The SC ruled that the 10% ceiling will not
likewise apply if they acted in a capacity
other than “as such directors”
Government vs. El Hogar
- Judicial intervention is not proper
- The appropriates remedy is to those who
can make or unmake the by-laws
 Liability of corporate officers
- Obligations incurred by those acting for and
in behalf of the corporations are not there’s
BUT there are exceptions even if they are
acting for and in behalf of the corporation
Tramat vs. CA
- General rule was applied in the case
- Ong acted as officers and acted within the
scope of his authority
- Court laid down 4 instances when even if
acting within the scope of his authority he is
held solidarily liable
1. He assents (a) to a patently unlawful act of
the corporation, or (b) for bad faith, or gross
negligence in directing its affairs, or (c) for
conflict of interest, resulting in damages to
the corporation, its stockholders or other
persons;
2. He consents to the issuance of watered
stocks or who, having knowledge thereof,
does not forthwith file with the corporate
secretary his written objection thereto;

3. He agrees to hold himself personally and
solidarily liable with the corporation;
4. He is made, by a specific provision of law,
to personally answer for his corporate
action.
- Watered stocks- issued, fully paid up when
in fact they have not been fully paid or
promised as such
Llamado vs. CA
- The corporate entity theory cannot be used
as a defense to escape liability in violation
of B.P. 22
- Where the check is drawn by a corporation
the persons who signed the check shall be
liable.
Uichico vs. NLRC
- Labor case corporate directors and officers
are solidarily liable with the corporation for
the termination of employment of corporate
employee done with malice and bad faith
 3 fold duty of directors
- obedient
- diligent
- loyal
 Business judgment rule
- Questions of policy and management are
left solely to the honest decision of the
board of directors and the courts are without
authority to substitute its judgment as
against the former. The directors are the
business managers of the corporation and
as long as they act in good faith, its
actuations are not subject to judicial review.
Montelibano vs. Bacolod Murcia Milling
- questions of policy and management are left
solely to the board of directors
- BOD, business manager of the corporation
and as long as they act in good faith, its
actuations are not subject to judicial review
- They are not insurer of the property of the
company, they were guarantors that the
enterprise undertaken by the corporation
shall be successful
Montelibano vs. Bacolod Murcia Milling Co.
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- Directors are not liable due to imprudence
or honest error of judgment
- Duty of loyalty of corporate directors
- 31,32,33,34
- 31,32,33- specific instances when corporate
officers may violate loyalty
- 32,33 self-dealing and interlocking director
 Corporate opportunity doctrine
- It places a director of a corporation in the
position of a fiduciary and prohibits him form
seizing a business opportunity and/or
developing it at the expense and with the
facilities of the corporation. He cannot
appropriate to himself a business
opportunity which in fairness should belong
to the corporation.
 Last paragraph of section 31 and the
provision of section 34 make reference to
recovery of “forbidden profits”
 Distinction between section 31 and 34
relative to the ratification by the
stockholders
- The second paragraph of section 31 which
makes a director liable to account for profits
if he attempts to acquire or acquires any
interest adverse to the corporation in
respect to any matter reposed in him in
confidence as to which equity imposes a
disability upon him to deal in his own behalf
is not subject to ratification by the
stockholders. Whereas, in section 34 if a
director acquires for himself a business
opportunity which should belong to the
corporation, he is bound to account for such
profits unless his act is ratified by the
stockholders owning ore representing at
least 2/3 of the outstanding capital stock.
- If reposed in him in confidence, not subject
to ratification
- If the acquisition is merely that of a business
opportunity which has not been reposed in
him in confidence, the same may be subject
to ratification by the stockholders.
Director x co.
A-REALTY
B

C Z owns property and is going
abroad never to Return, he
wants to sell for 25M the fair
market value is 30M
D under the circumstances; and
E 4. That in case of an officer, the contract has
E goes to Z and offers to pay the property for 26 M
and later he sells it for 30M making 4M profit, one
of the stockholders learned and complains that he
should submit the profits. E said that he will move
for ratification of his actuation. Can it be ratified?
- It can be ratified he merely acquired a
business owning to the corporation
- It would be different if it was entrusted in his
confidence
Another scenario:
Had A not attended the meeting he would not
have known of the sale it is then a matter reposed
in him in confidence
 A corporation cannot reaquire its share if it
has no restricted unretained earnings
Strong vs. Rapide
- What duty did he violate?
- He violated his duty of loyalty
- The law would be impotent if the sale were
not invalidated
 Self-dealing director and interlocking
director
 What is a self-dealing director?
- Director of a corporation dealing or
transacting business with his corporation
 Are the contracts and dealing of
self0dealing director valid?
 General rule: voidable
 May the contracts of a self-dealing director
be valid per se.
- YES. If all the 4 conditions are present they
will be valid per se
1. That the presence of such director or
trustee in the board meeting in which the
contract was approved was not necessary
to constitute a quorum for such meeting;
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2. That the vote of such director or trustee was
not necessary for the approval of the
contract;
3. That the contract is fair and reasonable
been previously authorized by the board of
directors.
 When do they become voidable?
- When any of the two requisites are absent it
is voidable, but subject to ratification by 2/3
of the outstanding capital stock or 2/3 of the
member
 Requisites for ratification (subject to
ratification by the stockholders holding or
representing at least 2/3 of the outstanding
capital stock or 2/3 of the members.)
- it must be at a meeting called for the
purpose
- full disclosure of the adverse interest of the
director concerned must be made
- the contract is fair and reasonable under the
circumstances
 Problem if self-dealing director involved
owns all or substantially all of the shares of
stock of the corporation thereby making it
easily possible to have the contract ratified
- last sentence of section 32 should be made
to apply by determining the reasonableness
and fairness of the contract
Section 32. Dealings of directors,
trustees or officers with the corporation. - A
contract of the corporation with one or more
of its directors or trustees or officers is
voidable, at the option of such corporation,
a unless all the following conditions are
present:
1. That the presence of such director or
trustee in the board meeting in which the
contract was approved was not necessary
to constitute a quorum for such meeting;
2. That the vote of such director or trustee
was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable
under the circumstances; and

4. That in case of an officer, the contract
has been previously authorized by the
board of directors.
Where any of the first two conditions
set forth in the preceding paragraph is
absent, in the case of a contract with a
director or trustee, such contract may be
ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-
thirds (2/3) of the members in a meeting
called for the purpose: Provided, That full
disclosure of the adverse interest of the
directors or trustees involved is made at
such meeting: Provided, however, That the
contract is fair and reasonable under the
circumstances. (n)
Prime white cement vs. IAC
- a director of a corporation owes a position in
trust
- in case of conflict between himself and that
of the corporation, he cannot sacrifice the
interest of the corporation to his own
advantage
- as a director he should have acted in a
manner as not to unduly prejudice the
corporation
- he cannot be allowed to enrich himself
 May corporate directors purchase
corporate property?
Mead vs. Mccullogh
- interlocking director- a director of one
corporation who deals and transacts
business with another corporation who is
himself a director
A- director of X company also a director of Y
corporation
B-
C-
D-
E-
 Both companies enter into a contract and A
sits, is the contract valid?
- Yes on the ground of fraud or if it is unfair
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- May be subject to the provision of section
32
- Section 32 contract may become voidable,
hence it may also be ratified
X Co.
Y Co.
A owe 20%
A owe 20%
Is it generally valid or voidable? VALID
25%
25% VALID
15%
25% VOIDABLE SUBJECT TO section 32
More than 20 substantial
 BOD mismanages corporate officers. Who
may file a suit?
- General rule: BOD which can institute a
case because it has all the powers. To allow
stockholders to file would violate the
doctrine of corporate entity and may result
to multiplicity of suits
- Stockholders cannot therefore generally file
a case EXCEPT of course in a
DERIVATIVE SUIT
the
 Derivative suit
- An action based on injury to the corporation-
to enforce a corporate right- wherein the
corporation itself is joined as a necessary
party, and recovery is in favor of and for the
corporation.
- Remedy granted by law to stockholders to
institute a case to remedy a wrong done
directly to the corporation and indirectly to
the stockholders, if the board refuses to do
so. Otherwise if not they would be left
without any recourse
 Available suits
 individual or personal
- Wrong done against his person as a
stockholder
 Class suit
- Filed by a stockholder in representation of
other stockholders

- A wrong or redress done, a derivative suit in
nature
 Intra-corporate remedies
- Demand to the BOD to institute such action
- Negated by the BOD
- The one who instituted must be a
stockholder at the date when the act was
done, must have been a stockholder by that
time
 Demand will not be required if the majority
of the BOD are the one’s guilty of the wrong
charged
 The corporation must be made a party in
the case whatever side will not matter
because under Philippine law misjoinder is
not a ground for dismissal
 Non-joinder is a ground for dismissal
 Any benefit should inure to the corporation
 Stockholder bringing the action is entitled to
reimbursement such as attorney’s fee
ONLY IF the case is SUCCESSFUL to
avoid harassment suit to their management
Pascual vs. Orozco
- By virtue of the fact that he is a stockholder,
may maintain a derivative suit
- Depend on how, when and what reason
- Seeking for the years 1898 all the way 1907
- Only became a stockholder in 1903
- He can sue only in 1903 forward because
he must be a stockholder
- The right of action is personal in nature. He
became a stockholder only in 1902
 Derivative suit
- By a stockholder to address a wrong done
against the corporation and the stockholder
indirectly
- Essential requisite must have been a
stockholder from the time the act
complained of took place
- Cannot institute an action from the years he
was still not a stockholder
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Everett vs. Asia Banking
- Stockholders cannot ordinarily commence
suit in equity and such is in the hands of its
BOD however there are exceptions when
the BOD will not sue since they are
themselves principals to the fraud.
Republic vs. Cuaderno
- The facts constitute sufficient cause of
action
- It is not the corporate interest to shield one
from criminal prosecution which is personal
interest
- Perez is not suing in his behalf, but in behalf
of the corporation
Western institute vs. Salas
- Assuming it was filed in the proper forum
would there argument that it is a derivative
suit prosper? NO. it is people of the
Philippines vs. individual director, it must be
stated in the complaint that it is being
instituted as a derivative suit and for and in
behalf of the corporation
- Granting arguendo, that this is a derivative
suit, the same is still outrightly dismissible
for having been wrongfully filed in the
regular court devoid of any jurisdiction to
entertain the complaint. The case should
have been filed with the SEC which
exercises original and exclusive jurisdiction
over derivative suits, they being intra-
corporate disputes, per Section 5 (b) of P.D.
902-A
San Miguel vs. Khan
- Was a demand made? NO
- It is not necessary because he objected in
the board meeting, but still it was adopted
therefore it was useless
Chase vs. Buencamino
- Argument that he should be in estoppels
since he filed in the U.S.
- Assuming the case prospered in the U.S.
would not estoppels apply as against him?
NO for estoppels to step in it must be a
case by the corporation
Reyes vs. tan

- Corporate director are guilty of breach of
trust
- A stockholder may institute an action to
remedy a wrong done
- Fraud in the conduct of corporate affairs
Gamboa vs. Victoriano
- Is derivative suit appropriate in this case
- They are not vindicatory damage done to
the corporation, but rather they where
vindicating damage against him
- Violation of their rights as individuals, hence
derivative suit is not the remedy
Evangelista vs. Santos
- Derivative suit is not proper
- Claim is not for the benefit of the
corporation, but rather his individual benefit
 From the cases above cited, these are the
requirements and the procedures that must
be followed in order that a derivative suit
may prosper
1. That the party bringing the suit should be a
stockholder as of the time the act or
transaction complained of took place, or
whose shares have evolved upon him since
by operation of law. This rule, however,
does not apply if such act or transaction
continues and is injurious to the stockholder
or affect him specifically in some other way.
The number of his hares is immaterial since
he is not suing in his own behalf or for the
protection or vindication of his own right, or
the redress of a wrong done against him,
individually, but in behalf and for the benefit
of the corporation.
2. He has tried to exhaust intra-corporate
remedies, he has made a demand on the
board of directors for the appropriate relief
but the latter had failed or refused to heed
his plea. Demand, however, is not required
if the company is under the complete control
of the directors who are the very ones to be
sued (or where it becomes obvious that a
demand upon them would have been futile
and useless) since the law does not require
a litigant to perform useless acts;
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3. The stockholder bringing the suit must
allege in his complaint that he is suing on a
derivative cause of action on behalf of the
corporation and all other stockholders
similarly situated, otherwise, the case is
dismissible. This is because the cause of
action actually devolves on the corporation
and not to a particular stockholder.
4. The corporation should be made a party,
either as party-plaintiff or defendant, in
order to make the court’s judgment binding
upon it, and thus, bar future litigation of the
same issues. On what side the corporation
appears loses importance when it is
considered that it lay within the power of the
court to direct the making of amendment of
the pleading, by adding or dropping parties,
as may be required in the interest of justice.
Misjoinder of parties is not a ground to
dismiss action; and,
5. Any benefit or damages recovered shall
pertain to the corporation. This is so
because in all instances, derivative suit is
instituted for and in behalf of the corporation
and not for the protection or vindication of a
right or rights of a particular stockholder,
otherwise, the aggrieved stockholder should
institute, instead, an individual or personal
suit to vindicate his personal or individual
right. Or, for that matter, representative or
class suit for all other stockholders whose
rights are similarly situated, injured or
violated, personally or individually.
 Executive committee
- Not allowed under the OLD law
 How may executive committee created and
constituted?
- Section 35
Section 35. Executive committee. -
The by-laws of a corporation may create an
executive committee, composed of not less
than three members of the board, to be
appointed by the board. Said committee
may act, by majority vote of all its members,
on such specific matters within the
competence of the board, as may be
delegated to it in the by-laws or on a
majority vote of the board, except with
respect to: (1) approval of any action for
which shareholders' approval is also
required; (2) the filing of vacancies in the
board; (3) the amendment or repeal of by-

laws or the adoption of new by-laws; (4) the
amendment or repeal of any resolution of
the board which by its express terms is not
so amendable or repealable; and (5) a
distribution of cash dividends to the
shareholders.
- Said committee may act and bind the
corporation by the majority vote of all its
members except with respect to those
matters provided for in sec. 35 these are:
1. Approval of any action for which
shareholders’ approval is also required
2. The filing of vacancies in the board;
3. Amendment or repeal of by-laws or the
adoption of new by-laws;
4. Amendment or repeal of any resolution of
the board which by its express terms is not
so amenable or repealable; and,
5. Distribution of cash dividends
shareholders.
 May the board alone create an executive
committee without any authority provided for
the by-laws?
- NO board of directors must sit and act as a
body to have a valid transaction
 May a non-member of the board of directors
be a member of the executive committee?
- NO, all of them must be members of the
board of directors
- BOD cannot act by proxy it would be
abdication of powers
 Purpose clauses necessary because it
confers and also limits the actual authority
of the corporation
CORPORATE POWERS AND AUTHORITY
 Corporate authority may be classified into
three classes namely:
1. Those expressly granted or authorized by
law inclusive of the corporate charter or
articles of incorporation;
2. Those impliedly granted as are essential or
reasonably necessary to the carrying out of
the express powers;
3. Those that are incidental to its existence.
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 Section 36 to 45- POWER GRANTED BY
LAW
Section 36. Corporate powers and capacity. -
Every corporation incorporated under this Code has
the power and capacity:
1. To sue and be sued in its corporate
name;
2. Of succession by its corporate name for
the period of time stated in the articles of
incorporation and the certificate of
incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in
accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law,
morals, or public policy, and to amend or
repeal the same in accordance with this
Code;
to the
6. In case of stock corporations, to issue or
sell stocks to subscribers and to 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 non-stock corporation;
7. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal
property, including securities and bonds of
other corporations, as the transaction of the
lawful business of the corporation may
reasonably and necessarily require, subject
to the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with
other corporations as provided in this Code;
9. To make reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation,
domestic or foreign, shall give donations in
aid of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and
other plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers as may
be essential or necessary to carry out its
purpose or purposes as stated in the
articles of incorporation. (13a)

Section 37. Power to extend or shorten
corporate term. - A private corporation may extend
or shorten its term as stated in the articles of
incorporation when approved by a majority vote of
the board of directors or trustees and ratified at a
meeting by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or
by at least two-thirds (2/3) of the members in case
of non-stock corporations. Written notice of the
proposed action and of the time and place of the
meeting shall be addressed to each stockholder or
member at his place of residence as shown on the
books of the corporation and deposited to the
addressee in the post office with postage prepaid,
or served personally: Provided, That in case of
extension of corporate term, any dissenting
stockholder may exercise his appraisal right under
the conditions provided in this code. (n)
Section 38. Power to increase or decrease
capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or
decrease its capital stock or incur, create or
increase any bonded indebtedness unless
approved by a majority vote of the board of
directors and, at a stockholder's meeting duly
called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or
diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness.
Written notice of the proposed increase or
diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness
and of the time and place of the stockholder's
meeting at which the proposed increase or
diminution of the capital stock or the incurring or
increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder
at his place of residence as shown on the books of
the corporation and deposited to the addressee in
the post office with postage prepaid, or served
personally.
A certificate in duplicate must be signed by a
majority of the directors of the corporation and
countersigned by the chairman and the secretary of
the stockholders' meeting, setting forth:
(1) That the requirements of this section
have been complied with;
(2) The amount of the increase or
diminution of the capital stock;
(3) If an increase of the capital stock, the
amount of capital stock or number of shares
of no-par stock thereof actually subscribed,
the names, nationalities and residences of
the persons subscribing, the amount of
capital stock or number of no-par stock
subscribed by each, and the amount paid by
each on his subscription in cash or property,
or the amount of capital stock or number of
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shares of no-par stock allotted to each
stock-holder if such increase is for the
purpose of making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to be
incurred, created or increased;
(5) The actual indebtedness of the
corporation on the day of the meeting;
(6) The amount of stock represented at the
meeting; and
(7) The vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness.
Any increase or decrease in the capital stock or the
incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file
in the office of the corporation and the other shall
be filed with the Securities and Exchange
Commission and attached to the original articles of
incorporation. From and after approval by the
Securities and Exchange Commission and the
issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing
of any bonded indebtedness authorized, as the
certificate of filing may declare: Provided, That the
Securities and Exchange Commission shall not
accept for filing any certificate of increase of capital
stock unless accompanied by the sworn statement
of the treasurer of the corporation lawfully holding
office at the time of the filing of the certificate,
showing that at least twenty-five (25%) percent of
such increased capital stock has been subscribed
and that at least twenty-five (25%) percent of the
amount subscribed has been paid either in actual
cash to the corporation or that there has been
transferred to the corporation property the valuation
of which is equal to twenty-five (25%) percent of the
subscription: Provided, further, That no decrease of
the capital stock shall be approved by the
Commission if its effect shall prejudice the rights of
corporate creditors.
Non-stock corporations may incur or create bonded
indebtedness, or increase the same, with the
approval by a majority vote of the board of trustees
and of at least two-thirds (2/3) of the members in a
meeting duly called for the purpose.
Bonds issued by a corporation shall be registered
with the Securities and Exchange Commission,
which shall have the authority to determine the
sufficiency of the terms thereof. (17a)

Section 39. Power to deny pre-emptive
right. - All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is
denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-
emptive right shall not extend to shares to be
issued in compliance with laws requiring stock
offerings or minimum stock ownership by the
public; or to shares to be issued in good faith with
the approval of the stockholders representing two-
thirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate
purposes or in payment of a previously contracted
debt.
Section 40. Sale or other disposition of
assets. - Subject to the provisions of existing laws
on illegal combinations and monopolies, a
corporation may, by a majority vote of its board of
directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets, including
its goodwill, upon such terms and conditions and
for such consideration, which may be money,
stocks, bonds or other instruments for the payment
of money or other property or consideration, as its
board of directors or trustees may deem expedient,
when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds
(2/3) of the members, in a stockholder's or
member's meeting duly called for the purpose.
Written notice of the proposed action and of the
time and place of the meeting shall be addressed to
each stockholder or member at his place of
residence as shown on the books of the corporation
and deposited to the addressee in the post office
with postage prepaid, or served personally:
Provided, That any dissenting stockholder may
exercise his appraisal right under the conditions
provided in this Code.
A sale or other disposition shall be deemed to
cover substantially all the corporate property and
assets if thereby the corporation would be rendered
incapable of continuing the business or
accomplishing the purpose for which it was
incorporated.
After such authorization or approval by the
stockholders or members, the board of directors or
trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets,
subject to the rights of third parties under any
contract relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict the
power of any corporation, without the authorization
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by the stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise dispose
of any of its property and assets if the same is
necessary in the usual and regular course of
business of said corporation or if the proceeds of
the sale or other disposition of such property and
assets be appropriated for the conduct of its
remaining business.
In non-stock corporations where there are no
members with voting rights, the vote of at least a
majority of the trustees in office will be sufficient
authorization for the corporation to enter into any
transaction authorized by this section.
Section 41. Power to acquire own shares. -
A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not
limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its
books to cover the shares to be purchased or
acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent
shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
provisions of this Code. (a)
Section 42. Power to invest corporate funds
in another corporation or business or for any other
purpose. - Subject to the provisions of this Code, a
private corporation may invest its funds in any other
corporation or business or for any purpose other
than the primary purpose for which it was organized
when approved by a majority of the board of
directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3)
of the outstanding capital stock, or by at least two
thirds (2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's
meeting duly called for the purpose. Written notice
of the proposed investment and the time and place
of the meeting shall be addressed to each
stockholder or member at his place of residence as
shown on the books of the corporation and
deposited to the addressee in the post office with
postage prepaid, or served personally: Provided,
That any dissenting stockholder shall have
appraisal right as provided in this Code: Provided,
however, That where the investment by the
corporation is reasonably necessary to accomplish
its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or
members shall not be necessary. (17 1/2a)

Section 43. Power to declare dividends. -
The board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in
property, or in stock to all stockholders on the basis
of outstanding stock held by them: Provided, That
any cash dividends due on delinquent stock shall
first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully
paid: Provided, further, That no stock dividend shall
be issued without the approval of stockholders
representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special
meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1)
when justified by definite corporate expansion
projects or programs approved by the board of
directors; or (2) when the corporation is prohibited
under any loan agreement with any financial
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and
such consent has not yet been secured; or (3)
when it can be clearly shown that such retention is
necessary under special circumstances obtaining in
the corporation, such as when there is need for
special reserve for probable contingencies. (n)
Section 44. Power to enter into
management contract. - No corporation shall
conclude a management contract with another
corporation unless such contract shall have been
approved by the board of directors and by
stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority
of the members in the case of a non-stock
corporation, of both the managing and the
managed corporation, at a meeting duly called for
the purpose: Provided, That (1) where a
stockholder or stockholders representing the same
interest of both the managing and the managed
corporations own or control more than one-third
(1/3) of the total outstanding capital stock entitled to
vote of the managing corporation; or (2) where a
majority of the members of the board of directors of
the managing corporation also constitute a majority
of the members of the board of directors of the
managed corporation, then the management
contract must be approved by the stockholders of
the managed corporation owning at least two-thirds
(2/3) of the total outstanding capital stock entitled to
vote, or by at least two-thirds (2/3) of the members
in the case of a non-stock corporation. No
management contract shall be entered into for a
period longer than five years for any one term.
The provisions of the next preceding paragraph
shall apply to any contract whereby a corporation
undertakes to manage or operate all or
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substantially all of the business of another
corporation, whether such contracts are called
service contracts, operating agreements or
otherwise: Provided, however, That such service
contracts or operating agreements which relate to
the exploration, development, exploitation or
utilization of natural resources may be entered into
for such periods as may be provided by the
pertinent laws or regulations. (n)
Section 45. Ultra vires acts of corporations.
- No corporation under this Code shall possess or
exercise any corporate powers except those
conferred by this Code or by its articles of
incorporation and except such as are necessary or
incidental to the exercise of the powers so
conferred. (n)
Section 36
 Where should the corporation be sued?
- principal office is important because it
establishes the residence of the corporation
and determining service of summons, venue
of action
- it can be sued in the city or municipality
where its principal office is found
 Principal office is also important for venue of
meetings
 Non-stock corporation may provide in its by-
laws that the venue of meeting be anywhere
in the Philippines
 Upon whom service of summons be made?
- Section 11. Service upon domestic private
juridical entity- when the defendant is a
corporation, partnership or association
organized under the laws of the Philippines
with a juridical personality, service may be
made upon the president, managing
partner, general manager, corporate
secretary, treasurer, or in house counsel.
Delta motor vs. Mangosing
- strict compliance is necessary
- should be served to those named in the
statute
- secretary of a dep’t are not those included
in the statute
E.B. Villarosa vs. Benito
- decision En Banc repeals all other
pronouncement

- section 13 Rule 14 was repealed
- the old rules was ambiguous and broad and
at all time illogical
 the particular revision under Section 11 of
Rule 14 was explained by retired Supreme
Court Justice Florenz Regalado, thus:
“xxx the then section 13 of this Rule
allowed service upon a defendant
corporation to “be made on the
president, manager, secretary,
cashier, agent or any of its
directors.” The aforesaid terms were
obviously ambiguous and
susceptible of broad and sometimes
illogical interpretations, especially
the word “agent” of the corporation.
The Filoil case, involving the
litigation lawyer of the corporation
who precisely appeared to challenge
the validity of service of summons
but whose very appearance for that
purpose was seized upon to validate
the defective service, is an
illustration of the need for this
revised section with limited scope
and specific terminology. Thus the
absurd result in the Filoil case
necessitated the amendment
permitting service only on the in-
house counsel of the corporation
who is in effect an employee of the
corporation, as distinguished from
an independent practitioner.”
o notes: additional knowledge
- special appearance enter for that particular
appearance you are not the counsel in the
case
- would apply only if it does not involve an
intra-corporate controversy (controversy
between and among the stockholders)
- upon any of the statutory officers or officers
fixed in the by-laws any secretary, any of
the directors; any managers in the by-laws
 Seal
- merely ministerial or permissive
 Power to amend
- section 16
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- special 37,38,120
 Power to adopt by-laws
- section 46-48
 Power to issue or sell stocks and to admit
members
- stock of stockholders and provision
governing non-stock
 Power to acquire or alienate real or
personal property
- is there any limitation? YES
- Two specific limitation
1. Section 36, as lawful transactions of
business of the corporation may reasonably
and necessarily require
2. Constitution and law
Luneta vs. A.D. Santos
- Importance of the purpose clause
- Cannot have the power to acquire
- Cannot engage in land transportation
- Doctrine of limited capacity
Gov’t vs. El Hogar
- As the lawful transaction of its business may
reasonably represent
Director of Lands vs. CA
- Exception to the rule in the constitution
- Alienable public land
- Converts the property to a private land
automatically once converted it can now be
registered
 Power to make donation
- Limitation section 36 par.9
- These are circumstances, however, under
which a donation by a corporation may be
to its benefit as a means of increasing its
business or promoting patronage. Thus,
paragraph 9 of section 36 expressly
authorizes a corporation to make donations.
The only limitations imposed are the
following:

1. The donation must be “reasonable”;
2. It must be for public welfare, or for hospital,
charitable, scientific, cultural or similar
purpose; and,
3. It shall not be in aid of political party or
candidate, or for purposes of partisan
political activity.
 Power to establish pension
- Include any act to promote and improve the
convenience, welfare and benefit of the
employees or offices
Republic vs. Acoje
- While as a rule an ultra-vires act is one
committed outside the object for which a
corporation is created as defined 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,” and
here it is undisputed that the establishment
local post office is a reasonable and proper
adjunct to the conduct of the business of
appellant company. Indeed, 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.
 Power to exercise such other powers
essential or necessary to carry out its
purpose (implied power)
1. Acts in the usual course of business;
2. Acts to protect debts owing
corporation;
3. Embarking in a different business;
4. Acts in part or wholly to protect or aid
employees; and,
5. Acts to increase business
Teresa Electric and Power Co. vs. P.S.C.
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- Examined the articles of incorporation to
arrive at its decision
National Power vs. Vera
- For purpose of prohibiting the NAPOCOR
- The court must decide whether or not a
logical and necessary relation exists
between the act questioned and the
corporate purpose expressed in the NPC
charter
 Importance of PLACE of registration
- Residence
- Venue
- Place of meetings
- Place or registration of chattel mortgage
 Power to extend its terms
- Once its term expires, already dissolved
automatically, thus can no longer ask for
extension
- After dissolution, it has 3 years to windup
 What are the modes of increasing capital
stock?
1. Increasing the par value of the existing
number of shares without increasing the
number of shares;
2. Increasing the number of existing shares
without increasing the par value thereof;
and,
3. Increasing the number of existing shares
and at the same time increasing the par
value of the shares.
 Why a corporation increases it capital
stock?
- Generate funds, business expansion, or
payment of liabilities, purposes of acquiring
to the
other business. (example: to buy cars for
the officers, purpose of acquiring other
business, expansion, other valid reasons)
 How do you decrease capital stock and why
a corporation decreases?
- Reduce or wipeout existing deficit where no
creditors would thereby be effected

- When capital is more than necessary to
procreate the business or reduction of
capital surplus
- To write down the value of its fixed assets to
reflect those present and actual
o NOTE: any increase or decrease of capital
stock requires approval of government
agency like SEC it can never take place
unless SEC approves the same
 Relevance of decrease of capital?
1. To reduce or wipe out existing deficit where
no creditors would thereby be affected;
2. When the capital is more than what is
necessary to procreate the business or
reduction of capital surplus; or,
3. To write down the value of its fixed assets to
reflect there present actual value in case
where there is a decline in the value of the
fixed assets of the corporation.
- Examples: Php 10M capital for grocery
business, mayor didn’t want to issue
license/permit because mayor has 3 other
grocery stores, only allowed sari-sari store
permit, reduce capital for sari-sari so that
the money will not sleep in bank
- Example: car rental agencies-Php 10M
capital for 20 taxi’s, after some time each
taxi is only 250K, nagmura ang taxi, to
reduce capital is to show actual assets
 Limitation imposed by law
- Decrease shall not in any way affect the
rights of the creditors
 Philippine Trust Company vs. Rivera
- Without the appraisal of SEC, a decrease in
capital stocks has no effect
 TRUST FUND DOCTRINE:
- Subscription to capital stock of a corporation
constitute a fund to which the creditors have
a right to look upon for satisfaction of their
claims and that the assignee in insolvency
can maintain an action upon any unpaid
stock subscription in order to realize assets
for the payment of its debts.
Madrigal vs. Zamora
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- Decrease in capital has a subterfuge to
evade payment
- Thus not valid and effective
- Must not prejudice creditors which includes
the employees
 Bond
- Commonly understood as an obligation of a
state, its subdivision or a private
corporation, represented by a certificate or
an instrument for the principal and by
detachable coupons for the payment of
interests. In its simplest term, it is one
where an obligor obliges himself to pay a
certain sum of money to another at a day
named.
- There are different kinds of bond but before
they may be issued or floated by the
corporation, the same must be registered
and approved by the SEC subject to the
rules and regulations that may be adopted
by that agency. The procedure and
requirements set forth in section 38 is the
same as in increasing or decreasing the
capital stock except that the certificate does
not have to state the matters required in
sub-section 2 & 3 thereof.
 Pre-emptive rights
- A right granted by law to all existing
stockholders of a stock corporation to
subscribe to all issues or disposition of
shares of any class, in proportion to their
respective stockholdings, subject only to the
limitations imposed under section 39 of the
Code.
- Internationally granted
 Pre-emptive rights, why it is granted?
- In order that the existing stockholders may
maintain their proportionate right as not to
dilute their right
 Power to deny pre-emptive rights
Section 39. Power to deny pre-
emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of
shares of any class, in proportion to their
respective shareholdings, unless such right
is denied by the articles of incorporation or
an amendment thereto: Provided, That such

pre-emptive right shall not extend to shares
to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public; or to shares to be
issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of
the outstanding capital stock, in exchange
for property needed for corporate purposes
or in payment of a previously contracted
debt.
 May it be denied? How?
- Yes, if provided by articles of incorporation
or by an amendment
- However, pre-emptive rights is unavailable
“All issues or depositing shares of any class” form
to shares in trading in stock exchange
part of ACS
otherwise stockholders must waive first their
right before they may sell such.
 Exceptions
1. When the shares to be issued is in
compliance with laws requiring stock
offerings or minimum stock ownership
by the public
2. Shares to be issued in good faith with
the approval of the stockholders
representing 2/3 of the outstanding
capital stock either
a. In exchange for property needed for
corporate purpose or,
b. In payment of a previously
contracted debt
- The exceptions, however will not apply to
stockholders of a close corporation by virtue
of a subsequent and specific provision of
the Code which provides that the “pre-
emptive right of a stockholder in a close
corporation shall extend to all stock to be
issued, including reissuance of treasury
shares, whether for money, property or
personal services or in payment of a
corporate debt, unless the articles of
incorporation provide otherwise, if not
entirely absolute, in that it extends to all
issuance and disposition of shares
- Such right of pre-emption may be lost by
waiver of the stockholder, expressly or
impliedly by his inability or failure to
exercise it after having been notified of the
proposed issuance or disposition of shares
 When is it unavailable?
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- In shares traded openly in stock
exchange/market
 Is it applicable to close corporations?
- See section 96, close corporations must
provide it first on its articles of incorporation,
that its articles does not really deny such
pre-emptive rights.
 Section 102, will not apply to close
corporations
 The right of pre-emptive rights is absolute in
close corporations
 Certain instances when a stockholder may
nevertheless be unable to exercise this
right:
- Issued for public ownership
- Issued in good faith, with approval of 2/3 of
outstanding capital stock either a) in
exchange for property needed or b) for
payment of a previously contracted debt
 Pre- emptive rights of stockholders in
ordinary stock corporations may be denied
- if the shares are to be issued in compliance
with laws requiring stock offering or
minimum stock ownership by the pubic
- In exchange for property needed for
corporate purposes
- In payment of previously contracted debts
 This rule, however, does not apply in a
close corporation as the pre-emptive rights
of the stockholders thereof is broadened to
include all issues without exceptions unless,
of course, denied or limited by the articles of
incorporations. Section 102 provides:
Section 102. Pre-emptive right in
close corporations. - The pre-emptive right
of stockholders in close corporations shall
extend to all stock to be issued, including
reissuance of treasury shares, whether for
money, property or personal services, or in
payment of corporate debts, unless the
articles of incorporation provide otherwise.
 Denial will not apply to a close corporation,
ABSOLUTE

- section 96
 May a stock holder in a close corporation
insist in the exercise of his pre-emptive
rights?
- Yes, section 102
 What type or shares are covered by pre-
emptive rights?
 Does it include those
unsubscribed?
- NO. Benito vs. SEC
 Will the stockholders be able to exercise
their pre-emptive right with respect to the
old unissued shares?
- Pre-emptive rights is applicable only to new
issued shares and not to the old unissued
shares because it is presumed that the
original subscribers is deemed to have
taken his shares knowing that they form a
definite proportionate part of the whole
number of authorized shares
- When the shares, left unsubscribed are re-
offered, he cannot therefore claim.
DILUTION OF INTEREST
 Will the acquiring purchaser be liable for
debts of the former corporation?
- Generally no, corporate entity theory
because there may be instances when
purchasing corporation may be held liable
 May a corporation acquire its own shares?
- Yes
 Is there any restriction provided for by law in
reacquiring its own shares?
- Yes, it must have been unrestricted retained
earnings appearing in the books of
corporation
 A corporation can never acquire its own
shares if it has no unrestricted retained
earnings
- False, exception close corporation and
redeemable shares
EXAMPLE:
ACS 2M
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SUBSCRIBED 1M
PAID UP 1M
1 100K
2 100K
TO
10 100K
originally  If 1-5 became 200K each, may 6-10
demand the exercise their pre-emptive
right?
- YES
 May 1-5 subscribe to the unsubscribed
capital stock to the exclusion of 6-10?
- If a corporation makes 2M unrestricted
retained earnings, it is the shares and not
the number of persons that matters
 May 6-10 complain for a dilution of their
interest?
- YES, it’s an internationally recognized right
because it includes “all issues and
disposition of shares of any class” and all
kinds of shares new or old
- If the remaining unsubscribed shares are
issued, it’s an issuance of any class
 May a corporation sell/dispose all or
substantially all of its corporate assets and
liabilities?
- YES
- 1) RESOLUTION 2) AUTHORIZATION 3)
RATIFICATION 4) PRIOR WRITTEN
NOTICE 5) SALE SUBJECT TO
PROVISIONS OF EXITING LAWS 6)
DISSENTING STOCKHOLDERS HAVE
THE RIGHT TO EXERCISE THEIR
APPRAISAL RIGHT
 If a corporation sells substantially all of it
assets and properties, will the buyer
assume liability?
- NO, EXCEPT
1) Express or implied agreement to the
purchase
2) Where the transaction amounts to
consolidation or merger of the corporations
 39

3) When purchasing corporation is merely a  If X is a manufacturing company, then it can

continuation of the selling corporation
4) Where the transaction is entered into
fraudulently in order to escape liability for
such debt
 Legitimate purpose: for a corporation to
reacquire its own shares
sell its only property upon approval of the
stockholders because it will render itself
capable of continuing its business, BUT if
the proceeds will be used to purchase a
better one for the continuance of its
business, then it does not need the approval
of the stockholders

 Conditions for the valid exercise of this

- Limitation: it must have surplus/unrestricted
power are the following
retained earnings
1. Resolution by the majority vote of the board
- Exception: may redeem irrespective of
of directors/trustees
unrestricted retained earnings
2. Authorization from the stockholders
1) Exercise of stockholders’ right to compel
representing at least 2/3 of the outstanding
“close corporation” to purchase his shares
capital stock or 2/3 of the members;
2) Where corporation has sufficient assets in
3. The ratification of the stockholders or
its books to cover its debts and liabilities
members must be made at a meeting duly
exclusive of capital stock
called for that purpose
ACS 1M
4. Prior written notice of the proposed action
SUBSRIBED 1M and of the time and place of meeting must
be made addressed to all stockholders of
PAID-UP 1M record, either by mail or personal service;

ASSETS 500K 5. The sale of the assets shall be subject to

the provisions of existing laws on illegal
1M PROFITS combinations and monopolies
- 500K LIABILITIES 6. Any dissenting stockholder shall have the
____________________ option to exercise his appraisal right

500K RESERVES IN A CLOSE IDP vs. CA

CORPORATION IT CAN USE THIS TO - Consent of the members was not secured
REACQUIRE ISSUED STOCKS
Edward Nell Co. vs. Pacific Farms
X – REALTY CORPORATION
- Generally where one corporation sells or
 THE ONLY otherwise transfers all of its assets to
PROPERTY OF THE another corporation, the latter is not liable
CORPORATION for the debts and liabilities of the transferor,
except:
 BOARD OF
DIRECTORS 1. Where the purchaser expressly or
DECIDED TO SELL impliedly agrees to assume such debts;
IT
2. Where the transaction amounts to a
Will it need the approval of the stockholders? consolidation or merger of the
corporations;
- NO, if the same is necessary in the usual
and regular course of business of said 3. Where the purchasing corporation is
corporation or if the proceeds of the sale or merely a continuation of the selling
other disposition of such property and corporation;
assets be appropriated for the conduct of its
remaining business

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4. Where the transaction is entered into
fraudulently in order to escape liability
for such debts.
 Power to acquire own shares
Section 41. Power to acquire own
shares. - A stock corporation shall have the
power to purchase or acquire its own shares
for a legitimate corporate purpose or
purposes, including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the shares to
be purchased or acquired:
1. To eliminate fractional shares arising out
of stock dividends;
2. To collect or compromise an
indebtedness to the corporation, arising out
of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Code.
(a)
 The corporation must at all times have
“unrestricted retained earnings” to exercise
this corporate power
Steinberg vs. Velasco
- For as long as there are debts and liabilities,
a corporation may not reacquire its shares
(subject to exceptions)
- Creditors of a corporation have the right to
assume that so long as there are
outstanding debts and liabilities, the board
of directors will not use the assets of the
corporation to purchase its own stock, and
that it will not declare dividends to
stockholders when the corporation is
insolvent.
 Power to invest funds <sec.42>
Section 42. Power to invest
corporate funds in another corporation or
business or for any other purpose. - Subject
to the provisions of this Code, a private
corporation may invest its funds in any other
corporation or business or for any purpose
other than the primary purpose for which it
was organized when approved by a majority
of the board of directors or trustees and
ratified by the stockholders representing at
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least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3)
of the members in the case of non-stock
corporations, at a stockholder's or member's
meeting duly called for the purpose. Written
notice of the proposed investment and the
time and place of the meeting shall be
addressed to each stockholder or member
at his place of residence as shown on the
books of the corporation and deposited to
the addressee in the post office with
postage prepaid, or served personally:
Provided, That any dissenting stockholder
shall have appraisal right as provided in this
Code: Provided, however, That where the
investment by the corporation is reasonably
necessary to accomplish its primary
purpose as stated in the articles of
incorporation, the approval of the
stockholders or members shall not be
necessary. (17 1/2a)
- For any other purpose other than the
primary purpose, stockholder’s consent or
approval is necessary
- Thus, if it’s for the secondary purpose, it is
necessary
- If it’s in connection with the primary
purpose, only board resolution is necessary
 Requirements and steps to be followed for a
valid investment of corporate funds are:
1. Resolution by the majority of the board of
directors or trustees;
2. Ratification by the stockholders
representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case
of non-stock corporations;
3. The ratification must be made at a meeting
duly called for that purpose;
4. Prior written notice of the proposed
investment and the time and place of the
meeting shall be made, addressed to each
stockholder or member by mail or by
personal service, and;
5. Any dissenting stockholder shall have the
option to exercise his appraisal right
Dela rama vs. Ma-ao Sugar
- There is a substantial and not remote
connection between the sugar bags and the
sugar manufacture, thus stockholder’s
approval is not necessary for validity

- A private corporation, in order to accomplish
its purpose as stated in its articles of
incorporation, and imposed by the
Corporation Law, has the power to acquire,
hold, mortgage, pledge, or dispose of
shares bonds, securities and other
evidences of indebtedness of any domestic
or foreign corporation. Such an act, if done
in pursuance of the corporate purpose, does
not need the approval of the stockholders;
but when the purchase of shares of another
corporation is done solely for investment
and not to accomplish the purpose of its
incorporation, the vote of approval of the
stockholders is necessary.
Gokongwei vs. SEC
- Investments made by SMC is necessarily
connected with its primary purpose and this
was ratified in a meeting
- Submission of previous action is a sound
corporate practice
 Redeemable shares
 Closed corporation (see section 105)
- For any reason, compel the value of shares
“withdrawal shares” provided corporation
has sufficient funds to cover its debts and
liabilities
Section 105. Withdrawal of
stockholder or dissolution of corporation. -
In addition and without prejudice to other
rights and remedies available to a
stockholder under this Title, any stockholder
of a close corporation may, for any reason,
compel the said corporation to purchase his
shares at their fair value, which shall not be
less than their par or issued value, when the
corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of
capital stock: Provided, That any
stockholder of a close corporation may, by
written petition to the Securities and
Exchange Commission, compel the
dissolution of such corporation whenever
any of acts of the directors, officers or those
in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any
stockholder, or whenever corporate assets
are being misapplied or wasted.
 If shares are reacquired, what happens?
- It becomes treasury shares
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 Stockholder’s consent/ approval is not
necessary and mere board action is
sufficient if in accordance with primary
purpose
 The logical relation of act done and primary
purpose of corporation and between the
board of directors to undertake submission
of acts is a sound corporate practice
 Dividends
Section 43. Power to declare
dividends. - The board of directors of a
stock corporation may declare dividends out
of the unrestricted retained earnings which
shall be payable in cash, in property, or in
stock to all stockholders on the basis of
outstanding stock held by them: Provided,
That any cash dividends due on delinquent
stock shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, while stock dividends shall be
withheld from the delinquent stockholder
until his unpaid subscription is fully paid:
Provided, further, That no stock dividend
shall be issued without the approval of
stockholders representing not less than two-
thirds (2/3) of the outstanding capital stock
at a regular or special meeting duly called
for the purpose. (16a)
Stock corporations are prohibited
from retaining surplus profits in excess of
one hundred (100%) percent of their paid-in
capital stock, except: (1) when justified by
definite corporate expansion projects or
programs approved by the board of
directors; or (2) when the corporation is
prohibited under any loan agreement with
any financial institution or creditor, whether
local or foreign, from declaring dividends
without its/his consent, and such consent
has not yet been secured; or (3) when it can
be clearly shown that such retention is
necessary under special circumstances
obtaining in the corporation, such as when
there is need for special reserve for
probable contingencies. (n)
 What are dividends?
- Corporate profits set aside, declared and
ordered by the Board of Directors to be paid
to the stockholders.
 What are property dividends?
- Those paid in property surplus
 Like tables and chairs? Can tables and
chairs make surplus profits?
 42

- No, they do not make surplus, bonds, etc.  Revocation

 Where should dividends come from? - No revocation of dividend may be has

unless it has not been officially
- Stock dividends are declared as stocks communicated to the stockholders or is in
coming from corporation the form of stock dividends which is
revocable at any time prior to distribution.
 Who declares dividends to be declared? Do
stockholders have any say?  Stock dividends- no reduction, you
capitalize your restricted retained earnings,
- Board of Directors, if stock approval of 2/3
what is issued is a piece of paper. The
outstanding capital stock
restricted earnings remain in the corporation
ACS-1M SUB-1M P.U.-1M
 Cash and property- reduces corporate
1M-U.R.E. (surplus profits of the
assets
corporation)
 Stock dividends increase corporate assets?
1-100k
No, it will only have the effect of increasing
2-100k the subscribed and paid-up capital of the
corporation
To
 Will there be a corresponding increase in
10-100k their proportionate interest?
1M - REMAINS THE SAME
 Board decides to declare 1M, how much will - Exception: when stock dividends will result
each receive? May the board declare stock in a fractional share
dividend
ACS-2M 1-100K 200 (10%)
- NO. that would be over issuance of shares, *VOTING AND DIVIDEND RIGHTS STILL
violation of securities regulation code THE SAME
- It must have a free portion SUB-1M TO
10%
- The corporation may increase its capital
PU-1M 10-100K
 Z co. 1M to X Co. is 2/3 of Xco.
Stockholders reacquired? ACS 2M
- No, because in property 2/3 is not required SUB 1M
 What is the effect of declaration of dividends PU 1M
with regards to the assets of a company?
1M RE
- As compared to stock dividends, the
declaration of cash or property dividends 1 100K
have the effect of reducing corporate assets
2 100K
to the extent of dividends declared.
TO
- Neither would stock dividends increase the
proportionate interest of the stockholders of 10 100K
the corporation although it will have the
effect of increasing the subscribed and paid- 1M
up capital of the corporation. It gives the
stockholders nothing in the way of  May they be compelled?
distribution of assets but merely divides his - NO. You cannot declare if it does not come
existing shares into smaller units. from unrestricted retained earnings.
 Earnings belong to the corporation until
declared or given
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 43

1. 1M-U.R.E. (is it true there is no way to ACS 2M 1M U.R.E.

compel?)
SUB 1M JULY 24 DECLARATION
2. 2M-U.R.E. JULY 31

 May they be compelled to declare dividends PU 1M

- Mandatory if earned, the board may be 1 100K 100T JULY 26-Y(NEW ONE
compelled to declare dividends WAS DECLARED TO Y) JULY 30-
100K
- if exceeds 100% of the paid-up capital the
boards may be compelled 2

ACS 2M 1M U.R.E. TO TO HAVE THE TRANSFER

RECORDED
SUB 1M
10 100K
PU 800K
1M
1-100K 50K PU
 Insofar as 1 and Y who has a better right?
2-100K 50K Already declared, but not yet paid?
TO - Right to receive vest upon declaration. Who
ever owns at the time of declaration owns
10-100K
the dividends
1M
- Unless there is a stipulation to the contrary
 Will 1 and 2 receive full amount of
dividends?  TRUST FUND DOCTRINE

- YES. They are entitled however if they are
declared delinquent, the amount due them
shall first be applied to his delinquency plus
expenses.
 Delinquency occurs, you are called to pay,
but you failed to pay. In case of stock
dividend, the delinquent stock holder will not
be entitled thereto until he has paid his
subscription in full.
- The power to declare it if paid-up capital is
not maintained or is impaired
- Trust fund must be kept intact for the
protection of creditors who have the right to
rely on such subscription and the paid-up
capital for the satisfaction of their claims
 Cannot accumulate surplus unreasonably
 Basis is the paid-up capital

 Are non-stockholders entitled to receive  Entitled to dividends

dividends?
 Irrespective of whether the subscription is
- No, tock dividends are civil fruits of the full
original investment, and to the owners of the
shares belong the civil fruits.  Illegally declared

 How did the court decide dividends in the
case of Neilsen
- Stock dividends cannot be issued to a
person who is not a stockholder in payment
of services rendered.
- Whether cash, property or stock, only
stockholders may receive dividends.
Dividends are fruits of investments. They
come from the U.R.E. or surplus profits of
the corporation.
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- Declare dividend with the belief that it
formed part of the U.R.E., but yun pala sa
capital
 Directors are not liable, unless sec31 acted
in bad faith or gross negligence in the
conduct of corporate affairs
 Directors even if acting in behalf of the
corporation, may still be held solidarily liable
 Power to enter into management contract

- New provision
Section 44. Power to enter into
management contract. - No corporation
shall conclude a management contract with
another corporation unless such contract
shall have been approved by the board of
directors and by stockholders owning at
least the majority of the outstanding capital
stock, or by at least a majority of the
members in the case of a non-stock
corporation, of both the managing and the
managed corporation, at a meeting duly
called for the purpose: Provided, That (1)
where a stockholder or stockholders
representing the same interest of both the
managing and the managed corporations
own or control more than one-third (1/3) of
the total outstanding capital stock entitled to
vote of the managing corporation; or (2)
where a majority of the members of the
board of directors of the managing
corporation also constitute a majority of the
members of the board of directors of the
managed corporation, then the
management contract must be approved by
the stockholders of the managed
corporation owning at least two-thirds (2/3)
of the total outstanding capital stock entitled
to vote, or by at least two-thirds (2/3) of the
members in the case of a non-stock
corporation. No management contract shall
be entered into for a period longer than five
years for any one term.
The provisions of the next preceding
paragraph shall apply to any contract
whereby a corporation undertakes to
manage or operate all or substantially all of
the business of another corporation,
whether such contracts are called service
contracts, operating agreements or
otherwise: Provided, however, That such
service contracts or operating agreements
which relate to the exploration,
development, exploitation or utilization of
natural resources may be entered into for
such periods as may be provided by the
pertinent laws or regulations. (n)
 The requirement for a valid management
contract are as follows:
1. Resolution of the board of directors
2. Approval by the stockholders holding or
representing a majority of the outstanding
capital stock or majority of the members in
case of non-stock corporation of both the
managing and the managed corporation
3. The approval of the stockholders or
members must be made at the meeting
called for that purpose
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4. The contract shall not be for a period longer
than 5 years for any one term, except those
which relate to exploration, development or
utilization of natural resources which may
be entered into for such periods as may be
provided by pertinent laws and regulations
 Every corporate act emanates from the
BOARD
 Is the voting requirements of a majority
stockholder ABSOLUTE?
- Not only a majority but 2/3 of the
outstanding capital stock or 2/3 of the
members in a non-stock corporation would
be required for the approval of a
management contract in the following
instances:
1. Where the stockholders representing the
same interest of both the managing and
managed corporation own or control more
than 1/3 of the total outstanding capital
stock of the managing corporation; and
2. Where a majority of the members of the
board of directors of the managing
corporation also constitute a majority of the
directors of the managed corporation
3. Where the contract would constitute the
management or operation of all or
substantially all of the business of another
corporation, whether such contracts are
called service contracts. If it will not
constitute the management of all or
substantially all of the business of another
corporation the first paragraph of section 44
will apply and not that of the second, that is,
only the vote of the stockholders holding or
representing at least a majority of the
outstanding capital stock or majority of the
members in the case of non-stock
corporation will be required.
 How long?
- Not longer than 5 years for any one term
- Exception: exploration, development or
utilization of natural resources
 What is an ultra-vires act or contract?
- Doctrine of limited capacity. Corporation can
do such acts and things as it is allowed to
do

- Acts beyond it will be ultra vires, allowing a
collateral attack
- If not illegal per se merely voidable. Can be
ratified expressly or impliedly or even
stopped as equitable grounds
- Ultra-vires acts which are not illegal per se
may become binding and enforceable either
by satisfaction, estoppels or equitable
grounds
 Consequences of ultra-vires acts?
1. On the corporation itself
- The proper forum, in accordance with the
provisions of PD 902-A, as amended and
R.A. No. 8799 may suspend or revoke, after
proper notice and hearing, the franchise or
certificate of registration of the corporation
for serious misrepresentation as to what the
corporation can do or is doing to the great
damage or prejudice of the general public
2. On the rights of the stockholders
- A stockholder may bring either an individual
or derivative suit to enjoin a threatened
ultra-vires act or contract. If the act or
contract has already been performed, a
derivative suit for damages against the
directors may be filed, but their liability will
depend on whether they acted in good faith
and with reasonable diligence in entering
into the contract.
3. On the immediate parties
- The courts have not agreed as to the legal
effect of a corporate contract outside of its
authorized business but Ballatine gives the
following summary of the doctrines evolved:
a. If the contract is fully executed on both
sides, the contract is effective and the
courts will no interfere to deprive either
party of what has been acquired under it
b. If the contract is executory on both
sides, as a rule, neither party can
maintain an action for its non-
performance
c. Where the contract is executor on one
side only, and has been fully performed
on the other, the courts differ as to
whether an action will lie on the contract
against the party who has received
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benefits of performance under it.
Majority of the courts, however, hold
that the party who has received benefits
from the performance is estopped to set
up that the contract is ultra-vires to
defeat an action on the contract. This is
more in conformity with the doctrine that
no person shall be allowed to enrich
himself at the expense of another
Privano vs. Dela Rama
- Court looked into the purpose clause
- The purpose clause empowers and limits
- Articles likewise provide that it may deal
with any of its money
- “deal” broad enough to cover the donation it
is not then ultra-vires
- Not illegal per se hence (law of agency)
excess powers are subject to ratification
- Ratified by passing the resolution in
question
Carlos vs. Mindoro sugar Co.
- PTC- trust company as such, it also has
implied powers as to make them more
attractable
- Not ultra-vires in pursuance of its legitimate
business
Japanese war notes vs. SEC
- Non-stock corporations cannot make profits
and distribute profits to its shareholders
- Ultra-vires because Japanese war notes is
a non-stock corporation
Crisologo-Jose vs. CA (ALWAYS ASKED
BY DEAN SUNDIANG)
- The negotiable instruments law which holds
an accommodation party liable on the
instrument to a holder for value, although
such holder at the time of taking the
instrument knew him to be only an
accommodation party, does not include nor
apply to corporations which are
accommodation parties. This is because the
issue or indorsement of negotiable paper by
a corporation without consideration and for
the accommodation of another is ultra-vires
 46

- Corporate officers may guarantee or - Filing of by-laws mandatory

endorse an accommodation only if
specifically authorized - Empowered by SEC

Section 36 paragraph 11 - Merely a ground, there must be proper

notice and hearing
Section 10
- Not affect the status of the corporation as a
Section 14 and 15 juridical person

 Corporate powers depend on the - Subject the corporation to a fine, as may be

agreement of the stockholders rather than issued by the SEC
any director
 When do by-laws become effective?
- It may sell and it may guarantee, contract
not necessarily illegal, it will in the absence - Until and unless the SEC gives it stamped
of proof to the contrary presumed within its of approval
power. Corporations are presumed to
- Suspension of any government agency. The
contract with in its powers- CARLOS CASE
permission must first be secured- section 46
- Purpose clause may be stretched to cover
 Elements of a valid by-law
PLDT internet. It may be within its business.
1. It must not be contrary to law, public policy
- May it sell computers? NO! other line of
or morals;
business. Its trading!
2. It must not be inconsistent with the articles
BY-LAWS
of incorporation;
 By-Laws
3. It must be general and uniform in its effect
- Rule adopted by the corporation for its or applicable to all alike or those similarly
internal governance situated;

 Is the adoption of by-laws mandatory? 4. It must not impair obligations and contracts
or vested rights; and’
 When should the by-laws be adopted or
filed? Can it not be adopted earlier? 5. It must be reasonable.

- After incorporation- within 1 month - Must not be inconsistent with existing laws.
(emanates from the BOARD) Not be inconsistent with articles of
incorporation
- Prior-more convenient (signed by the
incorporators)  By-laws

 Who will sign the adoption clause? - None filing would not affect the status of the
corporation, Loyola grand villas case
- Majority of the stockholders or members
attested to by the corporate secretary - The word “must” is not always imperative

 What happens if the corporation fails to - Stockholders are conlusively presumed to

adopt the by-laws from the tie provided by know the provisions of the by-laws
the law? Would there be an automatic
 How about 3rd persons?
revocation or suspension?
- NO. unless there is actual knowledge of the
- Proper notice and hearing, must first be
same they are not presumed to know of the
complied with
provisions of the by-laws
Loyola grand villas vs. CA
Fleischer vs. Botika Nolasco
- Not the SEC, but the HIGC
- Shares of stock are personal properties
- Must – not always imperative
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- Shares of stock may transfer to whom ever
he wishes
- The by-laws is contrary to law
 Articles of incorporation
- May provide reasonable restriction
- By-laws merely internal laws
- Articles is the contract between and among
the parties and corporation
Gov’t vs. El Hogar
- Did the court categorically ruled here that
the provision in the 5th cause of action is
valid?
- Rules governing equity, considering the fact
that there was always lack of quorum
- Section 29 BOD if still constituting a quorum
may fill up a vacancy other than by removal,
etc.
Gokongwei vs. SEC
- Section 48 allows a corporation to amend it
by-laws
- Section 47 of the code, the by-laws may
provide for the qualification and
disqualification
- It cannot be said Gokongwei has a vested
rights
- Prevent directors from taking advantage of
position to promote his individual interest to
the damage of others
- The validity or reasonableness of a by-laws
is a question of law
- Subject to the limitations that
reasonableness of a by-law is a mere
matter of judgment
- Rule of the majority and not the tyranny of
the minority
 May the by-laws be amended altered or
appealed?
- YES. HOW? Two modes
1. By a majority vote of the directors or
trustees and the majority vote of the
outstanding capital stock or members in a
47
non-stock corporation, at a regular or
special meeting called for that purpose;
2. By the board of directors alone when
delegated by 2/3 of the outstanding capital
stock or 2/3 of the members in a non-stock
corporation.
- This delegated power, however, is
considered revoked whenever a majority of
the outstanding capital stock or members
shall so vote at a regular or special meeting.
 If it is to be amended what is the
proceeding?
- Section 48 2nd paragraph provides:
Section 48. Amendments to by-
laws. - The board of directors or trustees, by
a majority vote thereof, and the owners of at
least a majority of the outstanding capital
stock, or at least a majority of the members
of a non-stock corporation, at a regular or
special meeting duly called for the purpose,
may amend or repeal any by-laws or adopt
new by-laws. The owners of two-thirds (2/3)
of the outstanding capital stock or two-thirds
(2/3) of the members in a non-stock
corporation may delegate to the board of
directors or trustees the power to amend or
repeal any by-laws or adopt new by-laws:
Provided, That any power delegated to the
board of directors or trustees to amend or
repeal any by-laws or adopt new by-laws
shall be considered as revoked whenever
stockholders owning or representing a
majority of the outstanding capital stock or a
majority of the members in non-stock
corporations, shall so vote at a regular or
special meeting.
Whenever any amendment or new
by-laws are adopted, such amendment or
new by-laws shall be attached to the original
by-laws in the office of the corporation, and
a copy thereof, duly certified under oath by
the corporate secretary and a majority of the
directors or trustees, shall be filed with the
Securities and Exchange Commission the
same to be attached to the original articles
of incorporation and original by-laws.
The amended or new by-laws shall
only be effective upon the issuance by the
Securities and Exchange Commission of a
certification that the same are not
inconsistent with this Code. (22a and 23a)
Baretto vs. La Previsora
- Any corporate act emanates from the board

- Directors themselves cannot amend the by-
laws if they were not granted the same
 Section 48
 The power granted is not subject to
revocation T or F?
- FALSE
 If the by-laws are amended when will they
become valid?
- Upon issuance of the SEC that they are not
inconsistent
 What if the SEC failed to act within 10
months without fault attributable to the
corporation?
 T or F any amendment of the by-laws will
never become valid until it gives its stamp of
approval even after 1 year
- TRUE. Articles of incorporation and by-laws
are different
MEETINGS
 Meetings
- Meetings of stockholders
fixed in the by-laws or by-law
- Meetings of director or trustees
 Meetings are regular and special
 Meetings of stockholders
 What is regular and what is special?
 When are regular meetings
stockholders held?
- Fixed date provided by the by-laws
 What if there is no date?
- April
 Why april?
- Point in time the audited financial statement
have been prepared
 What if in the date specified in the by-laws
or by the law itself the meeting was not
convened, for instance lack of quorum or
force majeure?
- It may be postponed on a reasonable date
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 Notice requirement?
- Regular- 2 weeks prior notice
- Special- 1 week
 May the notice requirement be lessened?
- By-laws may provide a longer or a shorter
duration
 What if the notice requirement is not
complied with?
 What happened to any act passed in a
meeting when notice requirement was not
required with?
- Voidable, subject to ratification
Board of directors vs. Tan
- Notice requirement is the by-laws is a
mandatory requirement
- Improperly served, any action will be
invalidated at the objection of any
stockholder or member
 Must be held in the proper place
1. Date  Where should it be held?
- Apparent from the foregoing provision is
that meetings of stockholders must, at all
times, be held in the city or municipality
where the principal office of the corporation
is located and, as far as practicable, in the
principal office of the corporation.
 May the by-laws of a corporation provide
of the that meetings be held anywhere in the
Philippines?
- While there is no provision authorizing a
stock corporation to hold stockholders’
meetings outside of the City of Municipality
where the principal office is located, the law
allows a non-stock corporation to provide in
its by-laws any place of members’ meeting
provided that proper notice is sent to all
members indicating the date, time and place
of the meeting which shall be within the
Philippines.
 T or F the by-laws of a stock corporation
may validly provide that meetings shall be
held anywhere in the Philippines?

- FALSE. Non-stock corporations lang
pwede provided nakalagay sa by-laws and
provided proper notice is given
 Corporation can do only such things as the
law allows it to do, DOCTRINE OF LIMITED
CAPACITY
 San Miguel office located in Ortigas Center.
May stockholders meeting be held in PICC
center?
- YES. Metro Manila, one single city
 Must be called by the proper party
 Who calls?
- President until and unless there is a
provision , secretary on order of the
president
 What if there is nobody who can call?
- The petitioner, stockholder may petition the
court
 What if there is a person who can call, but
he fails or neglects to call the meeting? May
a stockholder petition to authorize a
meeting?
- Ponce case only applies when there is NO
person authorized to call the meeting. If
there is a person, but neglects his duty.
Ponce will not apply.
 Writ of injunction may never be issued ex
parte
 Is there any exception?
- Section 28 only instance
Section 28. Removal of directors or
trustees. - Any director or trustee of a
corporation may be removed from office by
a vote of the stockholders holding or
representing at least two-thirds (2/3) of the
outstanding capital stock, or if the
corporation be a non-stock corporation, by a
vote of at least two-thirds (2/3) of the
members entitled to vote: Provided, That
such removal shall take place either at a
regular meeting of the corporation or at a
special meeting called for the purpose, and
in either case, after previous notice to
stockholders or members of the corporation
of the intention to propose such removal at
the meeting. A special meeting of the
stockholders or members of a corporation
for the purpose of removal of directors or
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trustees, or any of them, must be called by
the secretary on order of the president or on
the written demand of the stockholders
representing or holding at least a majority of
the outstanding capital stock, or, if it be a
non-stock corporation, on the written
demand of a majority of the members
entitled to vote. Should the secretary fail or
refuse to call the special meeting upon such
demand or fail or refuse to give the notice,
or if there is no secretary, the call for the
meeting may be addressed directly to the
stockholders or members by any
stockholder or member of the corporation
signing the demand. Notice of the time and
place of such meeting, as well as of the
intention to propose such removal, must be
given by publication or by written notice
prescribed in this Code. Removal may be
with or without cause: Provided, That
removal without cause may not be used to
deprive minority stockholders or members
of the right of representation to which they
may be entitled under Section 24 of this
Code. (n)
 Cases of removal or ouster of a director
 Mandamus would be appropriate remedy if
there is a person authorized but refuses
 Quorum and voting requirement
- Majority stockholders or members constitute
a quorum
 Is the presence of the majority owners of
the outstanding capital stock ABSOLUTE to
have a quorum?
- NO. when the code requires a higher
quorum it must also be equivalent to the
vote required
 Do you include non-voting shares in arriving
at the voting requirement to have a valid
corporate act?
- It depends.
- Section 6 last par. If it falls within the
penultimate par. Of section 6
 Five requisites of a valid meeting
1. It must be held on the date fixed in the by-
laws or in accordance with law
2. Prior notice must be given
3. It must be held at he proper place
4. It must be called by the proper party

5. Quorum and voting requirements must be
met
 Date not complied with, notice, place, not
complied with and the person who called
not authorized, what happens to any
resolution called?
- Section 51, any meeting shall be valid
provided all the stockholders are present or
duly represented and provided it is within
the power of the corporation. 3RD paragraph
of 324
- If the voting requirement is met, any
resolution passed in the meeting, even if
improperly held or called will be valid if all
the stockholders or members are present or
duly represented thereat. The last
paragraph of section 51 is clear on the
matter when it provides:
“all proceedings had and any
business transacted at any meeting
of the stockholders or members, if
within the powers or authority of the
corporation, shall be valid even if the
meeting be improperly held or
called, provided all the stockholders
or members of the corporation are
present or duly represented at the
meeting.”
 Directors/trustees meeting
 Regular (monthly) and special (anytime)
 May that be restricted (within or outside the
Phil)
- YES. unless the by-laws provide otherwise.
 Is there any notice requirement?
- YES. 1 day unless otherwise provided by
the by-laws
 What happens if notice is not complied
with?
- If the notice requirement is not complied
with the meeting is illegal and will not bind
the corporation except when subsequently
ratified or in the case of a close corporation
where the act of any one director may bind
the corporation even without a meeting
under the special provision of Section 101
of the Code.
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 Can notice be waived? <sec.53>
Section 53. Regular and special
meetings of directors or trustees. - Regular
meetings of the board of directors or
trustees of every corporation shall be held
monthly, unless the by-laws provide
otherwise.
Special meetings of the board of
directors or trustees may be held at any
time upon the call of the president or as
provided in the by-laws.
Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines, unless the by-
laws provide otherwise. Notice of regular or
special meetings stating the date, time and
place of the meeting must be sent to every
director or trustee at least one (1) day prior
to the scheduled meeting, unless otherwise
provided by the by-laws. A director or
trustee may waive this requirement, either
expressly or impliedly. (n)
- YES. Expressly and impliedly
- SEC ruling
A special meeting is valid without
notice where the directors are all
present or where they consent to the
meeting. Presence at the meeting
waives the want of notice. Moreover,
it has been ruled that the meeting of
the directors without a formal call
first being had, and notice thereof
given to the members, did not
operate to invalidate it or to render
the proceedings which were taken at
it void, for every member of the
board were present, and their joint
action had completely bound the
corporation as if the meeting has
been called with due formality, and
everyone of the directors had
received proper notice.
 What is the quorum and voting requirement
in the directors meeting?
- Majority of the members of the board of
directors (entire membership)
 Vote required to pass a valid corporate act?
- Majority of those present at which there is a
quorum (3 present, vote of 2 sufficient)

- Exception, majority of all the members of
the board in case of election of corporate
officers, unless the articles provide for a
greater quorum or voting requirement
 Should the director or trustees be physically
present?
- General rule, must sit and act as a body to
have a valid corporate act
 Five man member board, a meeting was
called today, should the physical presence
or warm bodies requires to constitute a
quorum?
- NO. it is not required. Teleconference or
video conference is allowed, E- commerce
law
 Membership subject to laws
 Stockholder not yet
 May director vote by proxy?
- NO
 If A is a director and a meeting is called for
the purpose of electing a new set of BOD
can A vote by proxy?
- YES. Because it is a stockholders meeting
 If directors meeting, cannot vote by proxy
 Stockholder’s right to vote
- Inherent in stock ownership
- However this right is not always inherent,
because it may be denied:
1. Redeemable and preferred shares,
however if founders shares are issued
others may be denied the right to vote.
2. May be denied by the articles of
incorporation or contracts
- When not denied they may do so in person
or by proxy
 May the right to vote by proxy be denied?
 May the articles of incorporation deny?
 May the by-laws validly provide that proxy
voting is not allowed?
- NO
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 Only non-stock may be denied proxy voting
(may be broaden, limited or denied)
 Proxy voting is a matter of right granted by
law
 Requirements of a valid proxy?
- Section 58
Section 58. Proxies. - Stockholders
and members may vote in person or by
proxy in all meetings of stockholders or
members. Proxies shall in writing, signed by
the stockholder or member and filed before
the scheduled meeting with the corporate
secretary. Unless otherwise provided in the
proxy, it shall be valid only for the meeting
for which it is intended. No proxy shall be
valid and effective for a period longer than
five (5) years at any one time. (n)
 How long may a proxy exist?
- Maximum of 5 years
- Valid for the meeting in which it is intended
 Is proxy revocable?
- Generally revocable, unless coupled with
interest
 Revocation
- A proxy, like agency in general is revocable
unless coupled with an interest and
revocation need not be made by formal
notice in writing. Revocation may be
expressed to the proxy holder, to the
election committee, by a subsequent proxy
to another or by sale of the shares. Thus it
may be revoke orally by conduct such that
appearing and asserting the right to vote at
a meeting by the registered owner of the
shares revokes a proxy previously given.
 Must be submitted to a validation committee
 By-laws of non-stock corporations may deny
proxy voting
 What is voting trust agreement?
- One created by an agreement between a
group of stockholders of a corporation and a
trustee, or a group of identical agreements
between individual stockholders and a
common trustee, whereby it is provided that
for a term o years or for a period contingent

upon a certain event, or until the agreement
is terminated, control over the stock owned
by such stockholders, shall be lodged in the
trustee, either with or without reservation to
the owners or persons designated by them
the power to direct how such control shall
be issued.
- It is a devise of binding stockholders to vote
as a unit and thus assuring a desirable
stability and continuity in management in
situations where it is needed.
 What is the effect of a voting trust
agreement relative to the rights?
- Lee vs. CA must pass these criteria
1. That the voting rights of the stock are
separated from the other attributes of
ownership;
2. That the voting rights granted are intended
to be irrevocable for a definite period of
time; and,
3. That the principal purpose of the grant of
voting rights is to acquire voting control of
the corporation.
 During the duration of the trust they are
irrevocable unless there is a violation either
by fraud
 Requisites
- Section 59
Section 59. Voting trusts. - One or
more stockholders of a stock corporation
may create a voting trust for the purpose of
conferring upon a trustee or trustees the
right to vote and other rights pertaining to
the shares for a period not exceeding five
(5) years at any time: Provided, That in the
case of a voting trust specifically required as
a condition in a loan agreement, said voting
trust may be for a period exceeding five (5)
years but shall automatically expire upon full
payment of the loan. A voting trust
agreement must be in writing and notarized,
and shall specify the terms and conditions
thereof. A certified copy of such agreement
shall be filed with the corporation and with
the Securities and Exchange Commission;
otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates
of stock covered by the voting trust
agreement shall be cancelled and new ones
shall be issued in the name of the trustee or
trustees stating that they are issued
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pursuant to said agreement. In the books of
the corporation, it shall be noted that the
transfer in the name of the trustee or
trustees is made pursuant to said voting
trust agreement.
The trustee or trustees shall execute
and deliver to the transferors voting trust
certificates, which shall be transferable in
the same manner and with the same effect
as certificates of stock.
The voting trust agreement filed with
the corporation shall be subject to
examination by any stockholder of the
corporation in the same manner as any
other corporate book or record: Provided,
That both the transferor and the trustee or
trustees may exercise the right of inspection
of all corporate books and records in
accordance with the provisions of this Code.
Any other stockholder may transfer
his shares to the same trustee or trustees
upon the terms and conditions stated in the
voting trust agreement, and thereupon shall
be bound by all the provisions of said
agreement.
No voting trust agreement shall be
entered into for the purpose of
circumventing the law against monopolies
and illegal combinations in restraint of trade
or used for purposes of fraud.
Unless expressly renewed, all rights
granted in a voting trust agreement shall
automatically expire at the end of the
agreed period, and the voting trust
certificates as well as the certificates of
stock in the name of the trustee or trustees
shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the
name of the transferors.
The voting trustee or trustees may
vote by proxy unless the agreement
provides otherwise. (36a)
 Does it need to be notarized?
- Yes, otherwise it is ineffective and
unenforceable
 Only legal ownership is transferred
 Being still the beneficial owner they may
transfer these rights
 Is the right granted to a voting trust
agreement absolute? (to inspect)
- NO.
 53

- The voting trust agreement filed with the
corporation shall be subject to examination
by any stockholder of the corporation in the
same manner as any other corporate book
or record. Provided, that both the transfer
and the trustee or trustees may exercise the
right of inspection of all corporate books and
records in accordance with the provisions of
this Code.
 Legal title is transferred to the voting trustee
- They will be more secured
 Voting pull agreement
- Enters into an agreement
- Pull all their shares to cast one vote
- Covered by rules governing contracts
- By pulling their votes they can decline the
resolution passed by the board

 May the voting trustee vote by proxy?  END OF MIDTERMS

- Yes, legal owner may vote by proxy

 May the proxy holder vote by proxy? STOCKS AND STOCKHOLDERS

- NO, (AGENT) an agent can have no other  3 modes

agent unless specifically allowed by the
1. By a contract of subscription with the
principal
corporation;
 Stockholder executing as a proxy, is he
2. By purchase of treasury shares from the
qualified to be voted as a director?
corporation; and,
 Why is he qualified to act as a director if the
3. By purchase or acquisition of shares from
stockholder executes as a director?
existing stockholders.
- The beneficial owner of the shares in a
 Section 60 subscription
voting trust is disqualified to be a director in
a voting trust whereas in a proxy, the owner - Any contract
of the shares may be elected as such since
legal title thereof remains with him - Whether existing or still to be formed

- YES he remains to be the owner Section 60. Subscription contract. - Any

 Is the stockholder executing in a voting trust
agreement, is he qualified to act as a
director?
- NO. ceases to be stockholder of record, no
longer the legal owner of shares
 May the corporation enforce the voting trust
agreements executed by its stockholders?
- NO. NIDC vs. AQUINO
- Not a privy to the contract
- Rights liabilities of a stockholder are there in
their individual capacity- corporate entity
theory
 Voting trust agreements
contract for the acquisition of unissued stock in
an existing corporation or a corporation still to
be formed shall be deemed a subscription
within the meaning of this Title, notwithstanding
the fact that the parties refer to it as a purchase
or some other contract. (n)
 Under the old law the 4th mode is
PURCHASE
 Purchase
- Reciprocal in nature
- Purchaser can neither require the issuance
Xco. Inc.
P

- Normally executed in favor of banking and

Authorized capital 1M
financial institutions
500 SUBSCRIBED
- So that they can vote a certain set of
directors
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500 UNISSUED STOCKS (AS LONG AS  Must it be in writing?

GALING DITO)
- NO, it may be oral
Z wants to acquire 100K
 5M should it be in writing to be valid and
Entered in June 50% shall be down payment binding as a subscription?
remainder December 08
- NO, statutes of frauds only applies to
o he will not be considered a stockholder SALES
unless he has paid in full
Trillana vs. Quezon College
August 08 property is ravaged by fire all are turned
into shares - Counter proposal, therefore there was a
need for an acceptance
 Is Z liable to pay the balance of his
acquisitions? - Facultative because it is in his own free will,
it is void
- YES, no matter how the party refer to it, it is
considered subscription  What may be used as a consideration and
how much should be the consideration?
- Once you subscribe, you become a
stockholder which is entitled to all the - Section 62 provides:
liabilities of a stockholder
Section 62. Consideration for
Z- subscribed to 100T/S of XCo. stocks. - Stocks shall not be issued for a
consideration less than the par or issued
Amount he paid 50k price thereof. Consideration for the issuance
of stock may be any or a combination of any
Z did not pay on the date called and was declared a two or more of the following:
delinquent share
1. Actual cash paid to the corporation;
 Corporation paid 100T/S therefore the
corporation reacquired the shares again, 2. Property, tangible or intangible, actually
what are they called? received by the corporation and necessary
or convenient for its use and lawful
- Treasury shares purposes at a fair valuation equal to the par
or issued value of the stock issued;
Y- 80T/S DECEMBER 08
3. Labor performed for or services actually
40 % (AUGUST) WAS DESTROYED BY FIRE, IS rendered to the corporation;
HE STILL LIABLE TO PAY THE UNPAID
PORTION? 4. Previously incurred indebtedness of the
corporation;
 IT WAS AGREED THAT IT WAS A
PURCHASE AND WILL BE A 5. Amounts transferred from unrestricted
STOCKHOLDER ONLY IF PAID IN FULL IS retained earnings to stated capital; and
HE LIABLE?
6. Outstanding shares exchanged for stocks
- NO, because that was a purchase in the event of reclassification or
conversion.
- First example galing sa unissued stock
Where the consideration is other
- 2nd example galling sa treasury shares hindi than actual cash, or consists of intangible
sa unissued share property such as patents of copyrights, the
valuation thereof shall initially be
 NO such thing as purchase of unissued determined by the incorporators or the
stocks board of directors, subject to approval by
the Securities and Exchange Commission.
 A subscription contract can be conditional
provided there is nothing in the charter or Shares of stock shall not be issued
statute prohibiting it and not against public in exchange for promissory notes or future
service.
order, law, etc.
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The same considerations provided
for in this section, insofar as they may be
applicable, may be used for the issuance of
bonds by the corporation.
The issued price of no-par value
shares may be fixed in the articles of
incorporation or by the board of directors
pursuant to authority conferred upon it by
the articles of incorporation or the by-laws,
or in the absence thereof, by the
stockholders representing at least a majority
of the outstanding capital stock at a meeting
duly called for the purpose. (5 and 16)
 “Amounts transferred from unrestricted
retained earnings to stated capital” what
does it mean?
- Stock dividends will in effect capitalize the
unrestricted retained earnings
 After 5 years the founders shares may be
converted into common shares or other
kinds of shares
 May shares of stocks be issued without
consideration? Why?
- NO, two reasons by the SC, discriminatory
against other stockholders and second
unlawful, it prejudices the right of the
creditors “Trust Fund Doctrine”
 If issued without a consideration
- Section 65, they will be considered as
watered stocks
Section 65. Liability of directors for
watered stocks. - Any director or officer of a
corporation consenting to the issuance of
stocks for a consideration less than its par
or issued value or for a consideration in any
form other than cash, valued in excess of its
fair value, or who, having knowledge
thereof, does not forthwith express his
objection in writing and file the same with
the corporate secretary, shall be solidarily,
liable with the stockholder concerned to the
corporation and its creditors for the
difference between the fair value received at
the time of issuance of the stock and the par
or issued value of the same. (n)
- Subscribers may be compelled to pay the
value
 Issuance of a certificate of stock is another
thing
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 What are the requisites for the issuance of a
valid certificate of stock?
1. It must be signed by the president or vice-
president and countersigned by the
secretary or assistant secretary;
2. It must be sealed with the corporate seal;
and the entire value thereof (together with
interest or expenses, if any) should have
been paid.
While it appears, that a subscriber to shares
of stock cannot be entitled to the issuance
of a certificate of stock until the full amount
of his subscription together with interest and
expenses (in case of delinquent shares) if
any is due, has been paid, a subscriber to
shares of stock, even if not yet fully paid, is
entitled to exercise all the rights of a
stockholder and the corresponding liability
that attach thereunder. Thus, the Code
provides:
Section 72. Rights of unpaid shares.
- Holders of subscribed shares not fully paid
which are not delinquent shall have all the
rights of a stockholder. (n)
 Is the issuance of a certificate of stock
necessary to consider the subscriber a
stockholder?
- NO, shall be considered a stockholder even
without a certificate of stock
 Instances when he may not be able to
exercise his rights as such stockholder
- Declared delinquent
- When he exercises his appraisal right
 Are certificate of stocks transferrable?
- YES
 Are certificate of stocks considered
negotiable?
- Quasi-negotiable
 Why are they considered quasi-negotiable
when it may be transferred through
endorsement and delivery?
100t/s 001 10/s
Abc co.

B stole and forged the signature
C is purchaser in good faith and for value will C
acquire title
Endorsement from
When issued by owner
Endorsed by owner- strict compliance
ANSWER: a certificate of stock is not regarded as
negotiable in the same sense that a bill or note is
negotiable, even if it is endorsed in blank. Thus,
while it may be transferred by endorsement
coupled with delivery thereof, and therefore merely
quasi-negotiable, it is nonetheless non-negotiable
in that the transferees takes it without prejudice to
all the rights and defenses which the true and
lawful owner may have except in so far as the
principles governing estoppels may apply.
He acquired it by virtue of a forged instrument; no
matter how innocent the purchaser is because it is
subject to all the rights and defenses
 What if A endorsed it?
- He is estopped, unless there are other
available defenses
 Transfer is required to be recorded in the
books of the corporation, however even if
not recorded, it will be valid between the
parties. Non-registration will not however,
affect the validity thereof at least in so far as
the contracting parties are concerned.
Section 63. Certificate of stock and
transfer of shares. - The capital stock of
stock corporations shall be divided into
shares for which certificates signed by the
president or vice president, countersigned
by the secretary or assistant secretary, and
sealed with the seal of the corporation shall
be issued in accordance with the by-laws.
Shares of stock so issued are personal
property and may be transferred by delivery
of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other
person legally authorized to make the
transfer. No transfer, however, shall be
valid, except as between the parties, until
the transfer is recorded in the books of the
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corporation showing the names of the
parties to the transaction, the date of the
transfer, the number of the certificate or
certificates and the number of shares
transferred.
No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation.
(35)
 “Until registration is accomplished, the
transfer, though valid between the parties,
cannot be effective as against the
corporation. Thus the, unrecorded transfer
cannot enjoy the status of a stockholder; he
cannot vote nor be voted for, and he will not
be entitled to dividends. The corporation will
be protected when it pays dividend to the
registered owner despite a previous transfer
of which it had no knowledge. The purpose
of registration therefore is twofold: to enable
the transferee to exercise all the rights of a
stockholder and to inform the corporation of
any change in shares ownership so that it
can ascertain the persons entitled to the
rights and subject to the liabilities of a
stockholder.”
Thus, it was also ruled by the High
Court in Nautica Canning Corp. vs.
Yumul that “A transfer of shares not
recorded in the stock and transfer
book of the corporation is non-
existent in so far as the corporation
is concerned.” This is so because
“the corporation looks only through
its books for the purpose of
determining who its stockholders
are.”
 Registration is necessary for the following:
1. To enable the corporation to know who its
stockholders are;
2. To enable the transferee to exercise his
rights a s stockholders;
3. To afford the corporation an opportunity to
object or refuse registration of the transfer in
case allowed by law;
4. To avoid fictitious and fraudulent transfers;
and,
5. To protect creditors who have the right to
look upon stockholders, in case of no-

payment or watered shares, for
satisfaction of their claims.
 Duty of the secretary is ministerial, hence
mandamus will lie if the secretary refuses to
record the transfer, but he cannot be
compelled when the transferee’s title to the
said shares has no prima facie validity or
uncertain
 Transfer- absolute and unconditional
transfer to warrant registration in the books
of the corporation in order to bind the latter
and other third persons.
 Other restrictions on the right to transfer
shares would include:
1. It is not valid, except as between the
parties, until recorded in the books of the
corporation;
2. Shares of stock against which the
corporation holds any unpaid claim shall not
be transferable in the books of the
corporation; unpaid claims, refer to claims
arising from unpaid subscription and not to
any indebtedness which a stockholder may
owe the corporation such as monthly dues;
3. Restrictions required to be indicated in the
articles of incorporation, by-laws and stock
certificates of a close corporation;
4. Restrictions imposed by special law, such
as the Public Service Act requiring the
approval of the government agency
concerned if it will vest unto the transferee
40% of the capital of the public service
company;
5. Sale to aliens in violation of maximum
ownership of shares under the
Nationalization Laws;
6. Those covered by reasonable agreement of
the parties.
Monserat vs. Ceron
- Does it include mortgage?
- NO, it is not an absolute transfer
- Will not affect the transfer through mortgage
- Absolute and unconditional transfer
- Only the transfer or absolute conveyance of
the ownership of the title to a share need be
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the entered and noted upon the books of the
corporation in order that such transfer may
be valid, therefore, inasmuch as a chattel
mortgage of the aforesaid title is not a
complete and absolute alienation of the
dominion and ownership thereof, its entry
and notation upon the books of the
corporation is not necessary requisite to its
validity
 Chua guan vs. Magsasaka
- Was the mortgage valid and effective as
against subsequent third parties
- Register of deeds where the corporation
resides and if different in the register of
deeds of owner’s domicile
 Unson vs. Dinamito
- All transferred not register will not have a
valid force and effect
 Right to transfer may be regulated
 May not be unreasonably restricted
 Violation of nationalization law- Central
Bank
Lambert vs. Fox
- Valid , may be reasonably regulated,
restricted by agreement of parties
- Reasonable agreement by the parties
- Reasonable as to length of time
Padgett vs. Babcock
- Any attempt to restrain transfer
- SC, in the absence of a valid lien upon its
shares
- Valid restrictions shares are applicable
- Any restriction on a stockholder’s right to
dispose of his shares must be construed
strictly; and any attempt to restrain a
transfer of shares is regarded as being in
restraint of trade, in the absence of a valid
lien upon its shares, and except to the
extent that valid restrictive regulations and
agreements exist and are applicable.
Subject only to such restrictions, a
stockholder cannot be controlled in or
restrained from exercising his right to
transfer by the corporation or its officers or

by other stockholders, even though the sale
is to a competitor of the company, or to an
insolvent person, or even though a
controlling interest is sold to one purchaser.
 Certificate of stocks are transferrable
- By endorsement and delivery of the stock
certificate to the transferee
 In order to be valid, must be registered in
the books. If not, will only be binding among
parties
 How may shares of stock be transferred?
- Endorsement of stock certificate by owner
or attorney-in-fact with delivery
Embassy farms vs. CA
- Must be endorsed by owner or attorney-in-
fact coupled with delivery
- Endorsed not delivered
- Proper mode and manner must be complied
with
Razon vs. IAC
- Delivered not endorsed
- Reverse of Embassy Farms
- Endorsement alone is not sufficient nor
delivery without endorsement is not allowed
- Endorsement plus delivery is mandatory
 Is there any other mode of transferring
stock?
- Notarized deed
- Deed of assignment
Rural bank of Salinas vs. CA
- If denied or refused without good cause,
mandamus will lie
Tay vs. CA
- Mandamus may issue if petition has a clear
legal right
- Never issued in doubtful cases
- Petitioner failed to establish a clear legal
right and alleged ownership is without merit
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- Did not acquire ownership by virtue of the
contract of pledge
- In a contract of pledge there must be
foreclosure
- In the case there was no attempt to
foreclose
- Petitioner must have a prima facie right
Nava vs. Peers Marketing
- A stock subscription is a subsisting liability
from the time the subscription is made
- The subscriber is as much bound to pay his
subscription as he would be to pay any
other debt
- No stock certificate was issued. Without
stock certificate, which is the evidence of
ownership of corporate stock, the
assignment of corporate shares is effective
only between the parties to the transaction
 Exception to the general rule
Rural Bank of Lipa vs. CA
- By notarized deed
- Certificate of stocks already issued must be
coupled with delivery, exception (TAN vs.
SEC)
 Stock certificate has already been issued it
must be coupled with the delivery
 After certificate of stock is issued, may it be
effectively transferred even without
endorsement or delivery of the stock
certificate?
- Person sought to be a stockholder is an
officer and has custody
 Endorsement and delivery is not necessary
(TAN vs. SEC)
Tan vs. SEC (FULL KNOWLEDGE, HE IS
ESTOPPED)
- Persons sought to be stockholder is officer
and has custody of the book (estopped)
 General Rule for valid transfer
- Certificate of stock must be endorsed by
owner or attorney-in-fact coupled with
delivery

 Exceptions
- Section 63 uses the word “may”
- Showing that there may be other modes of
transferring shares
 Is there a time frame or fixed period as
when transfer can be made?
- NO, (WON vs. WACK WACK)
Won vs. Wack Wack
- Valid between contracting parties even if not
recorded in corporation books
- Right accrues only if refused
- Statute of limitations does not apply in
registration of shares of stock
- Must determined from the time of refusal
 Why are they non-negotiable when they
may be transferred?
- Transferees pays it without prejudice to all
the rights and defenses as the true and
lawful owner may have under the law
except insofar as such rights and defenses
are subject to the limitations imposed by the
principles governing estoppels
De los Santos vs. Republic
- Why is he, not considered as the owner of
shares? When it has been said that when
endorsed by the owner it is considered as
strict certificate? Because certificate of
stocks are non-negotiable
- Although a stock-certificate is sometimes
regarded as quasi-negotiable, in the sense
that it may be transferred by endorsement,
coupled with delivery, it is well settled that
the instrument is non-negotiable, because
the holder thereof takes it without prejudice
to such rights or defenses as the registered
owner or creditor may have under the law,
except insofar as such rights or defenses
are subject to the limitations imposes by the
principles governing estoppels.
 Unauthorized issuance of stock certificates
100/s 100
XYZCo
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100 pesos per share
Stolen by B and forged the signature of A
B sells to C will C acquire title? NO
ENDORSEMENT FORM
 C armed with the endorsement form
certificate, sold to D (innocent purchaser for
value), will D acquire title?
- NO, subject to such rights and defenses as
the true and lawful owner may have
 What if C now goes to the corporation and
presents the form?
- Then the corporation shall cancel the old
certificate and issues a new one, now in the
name of C, now registered in the name of C,
will C acquire title?
 A found out what happened and goes to the
corporation who has a better title C or A?
- A, A cannot be deprived of his right by virtue
of an unauthorized transfer
 Corporation can compel C to deliver the
new stock certificate because he made a
representation that the certificate where
good.
 Armed with the new certificate issued to C,
C delivers to D a purchaser in good faith
and for value will D acquire title?
- D will acquire title took the shares not by
virtue of a forged or unauthorized transfer,
but on the reliance that the stock certificate
is valid and owned by C
 Stock certificate now in possession of D. A
knew of what happened and went to the
corporation and complains. Who will have a
better title?
- the corporation may be compelled to
recognize both, A as stockholder (non-
negotiable) D, reliance that the stock
certificate is valid and existing and owned
by C
 Forged transfers

- If the corporation should issue a new
certificate in pursuance of a forged transfer,
the corporation incurs no liability to the
person in whose favor it is issued and it may
demand its return for cancellation. The
corporation in such case has been guilty of
no misrepresentation. On the other hand, it
is the duty of the purchaser to determine
that the indorsement of the owner is
genuine. However, if the new certificate
issued to the purchaser comes into the
hands of a bona fide purchaser for value,
the corporation will be stopped from denying
validity thereof, since by issuing such new
certificate it represents that the person
named therein is a stockholder of the
corporation. The corporation is thus forced
to recognize both the original certificate and
new certificate-the original, because the true
owner could not be deprived of his title by a
forged transfer, and the new, because of its
representation that the person named
therein is the owner of shares in the
corporation. But if the recognition of both
stockholders would result in an over issue of
shares, then only the original and true
owner can be recognized as a stockholder.
The bona fide purchaser of the new
certificate will however have a right of
damages against the corporation. The
corporation, in turn, would have a right of
action against the person who made false
representations and in whose favor it issued
a new certificate. The true owner of the
shares which were wrongfully transferred
would of course have a right to compel the
corporation to issue him a certificate in lieu
of the original one which was wrongfully
cancelled.
 Authorized capital stock 1M shares
 All are subscribed who will the corporation
recognize as rightful owner A or D? if both
will be recognized there will be over
issuance
- only A citing citizens national bank vs. state
(but if recognition of both stockholders
would result in an over issue of shares, then
only the original and true owner can be
recognized as a stockholder)
- by virtue of the doctrine of non-negotiability
of certificate of stocks
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 The true and lawful owner will never be
deprived of his rights
 What happens to D?
- D will have a cause of action against the
corporation for the value of his acquisition
cost inclusive of damages, attorney’s fees
and cost of suit
 D sues the corporation for the value of his
acquisition cost, inclusive of damages,
attorney’s fees and cost of suit. What may
the corporation do?
- NO defense, no valid defense, because it was
represented to other parties that the
certificate of stocks is valid, subsisting, etc.
 2nd situation, what cause of action may the
corporation have? Remedy?
- Third party complaint against C, but what if he
is a purchaser for value? 4th party claim
against B
 When may certificate of stocks be issued?
- Section 64 provides:
Section 64. Issuance of stock
certificates. - No certificate of stock shall be
issued to a subscriber until the full amount
of his subscription together with interest and
expenses (in case of delinquent shares), if
any is due, has been paid. (37)
 A certificate of stock cannot be issued
unless he fully paid the amount subscribed
 Subscription to the capital stocks of the
corporation are indivisible
 Clear mandate of section 148 of the code is
that the ruling of the court in Baltazar vs.
Lingayen Gulf, no longer holds true
Section 148. Applicability to existing
corporations. - All corporations lawfully
existing and doing business in the
Philippines on the date of the effectivity of
this Code and heretofore authorized,
licensed or registered by the Securities and
Exchange Commission, shall be deemed to
have been authorized, licensed or
registered under the provisions of this Code,
subject to the terms and conditions of its
license, and shall be governed by the
provisions hereof: Provided, That if any
such corporation is affected by the new
requirements of this Code, said corporation
shall, unless otherwise herein provided, be
given a period of not more than two (2)

years from the effectivity of this Code within
which to comply with the same. (n)
 Subscription to shares of stocks are
indivisible
 Also apparent is that once a subscriber has
paid his subscription in full, he becomes
entitled to be issued a stock certificate and
in the event that the corporation refuses to
do so, the stockholder my institute a case
for mandamus with damages. Thus, it has
been said that the duty of the corporate
officers to issue stock certificates to those
entitled thereto is a ministerial duty
enforceable by mandamus.
Fua Cun vs. Summers and China Banking
Corp.
- The court erred in holding the plaintiff as the
owner of 250 shares of stock; “the plaintiff’s
rights consist in equity in 500 shares and
upon payment of the unpaid portion of the
subscription price he becomes entitled to
the issuance of certificate for said 500
shares in his favor.”
- No certificate of stock until the full amount
has been paid.
 Watered stock
- One which is issued by the corporation as
fully paid-up shares, when in fact the whole
amount of the value thereof has not been
paid.
- Basis is par value and not the fair market
value
 Section 62 states that stocks shall not be
issued for a consideration less than par or
issued price thereof, while section 13 states
that in no case shall be paid-up capital be
less than five thousand [P5000] pesos.
 If issued below par, issued value considered
as water
 How may watered stocks be issued?
1. For a monetary consideration less than its
par or issued value;
2. For a consideration in property, tangible or
intangible, valued in excess of its fair market
value;
3. Gratuitously or under an agreement that
nothing shall be paid at all; or
4. In the guise of stock dividends when there
are no surplus profits of the corporation.
 Why is stock watering illegal?
1. The corporation is deprived of its capital
thereby hurting its business prospects,
financial capability and responsibility;
2. Stockholders who paid their subscriptions in
full, or promised to pay the same, are
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injured and prejudiced by the reduction of
their proportionate interest in the
corporation; and,
3. Present and future creditors are deprived of
the corporate assets for the protection of
their interest.
- Corporation is prejudiced
- Stockholders, dilution of interest
- Creditors are prejudiced, virtue of right to
look upon corporations properties for the
satisfaction of their claims
 What is the effect of issuance of watered
stocks
1. As to the corporation - when a corporation is
guilty of ultra-vires or illegal acts which
constitute an injury to or fraud upon the
public, or which will tend to injure or defraud
the public, the State may institute a quo-
warranto proceeding to forfeit its charter for
the misuse or abuse of its franchise.
2. As between the corporation and the
subscriber- The subscription is void. Such
being the case, the subscriber is liable to
pay the full par or issued value thereof, to
render it valid and effective.
3. As to the consenting stockholders - They
are stopped from raising any objection
thereto;
4. As to dissenting stockholders - In view of
the dilution of their proportionate interest in
the corporation, they may compel the
payment of the “water” in the stock solidarily
against the responsible and consenting
directors and officers inclusive of the holder
of the watered stocks;
5. As to creditors - They may enforce payment
of the difference in the price, or the water in
the stock, solidarily against the responsible
directors/officers and the stockholders
concerned; and’
6. As against transferees of the watered stock
– His right is the same as that of his
transferor. If, however, a certificate of stock
has been issued and duly indorsed to a
bona fide purchaser, without knowledge,
actual or constructive, the latter cannot be
held liable, at least as against the
corporation, since he took the shares on
reliance of the misrepresentation made by
the corporation that the stock certificate is
valid and subsisting. This is because a
corporation is prohibited from issuing
certificates of stock until the full value of the
subscriptions have been paid and could not,
therefore, deny the validity of the stock

certificate it issued as against a purchaser
in good faith. Thus, Ballentine states that
whether there is any liability on the part of
the transferee of watered stock is made to
depend upon whether he acquired the same
without notice, either as purchaser or
donee. If he had knowledge thereof, he is
subject to the same liability as his
transferor.
 What is the nature of the liability of the
corporate directors consenting to the
issuance of watered stocks and the extent
of their liabilities?
- Solidarily liable with the holder of the
watered stocks to the extent of the water
from said shares of stocks
 Will all the directors be liable? What if you
objected will you also be liable?
- If you do not issue a written objection, you
are still liable
- Even passive directors may be liable
- Those having knowledge thereof, but did
not interpose their objection shall be liable
- Section 65 provides:
Section 65. Liability of directors for
watered stocks. - Any director or officer of a
corporation consenting to the issuance of
stocks for a consideration less than its par
or issued value or for a consideration in any
form other than cash, valued in excess of its
fair value, or who, having knowledge
thereof, does not forthwith express his
objection in writing and file the same with
the corporate secretary, shall be solidarily,
liable with the stockholder concerned to the
corporation and its creditors for the
difference between the fair value received at
the time of issuance of the stock and the par
or issued value of the same. (n)
 ACS-100M 100M/S
VALUE-1.00
SUBSCRIBED-50M FAIR
MARKET VALUE-12.00/S
UNSUBSCRIBED-50M
A payable and shall make the stockholder
B liable for interest at the legal rate on such
C balance, unless a different rate of interest is
D
E (30) days from the said date no payment is
There is a denial of pre-emptive rights and
directors A,B,C,D,E decided to issue the
remaining 50M and subscribed for 10M each at
2 per share.
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 Is there stock watering if the fair market
value is 12.00?
- No stock watering
- The basis is the par value
- The shares where in fact paid more than the
par value indicated in the articles of
incorporation
3 days later they sold their 10M share for
P11.00 each, therefore making a profit.
 Can you question there actuations? What
would be the cause of action?
- It may be questioned.
- Duty of loyalty or fiduciary duty as such
directors
- They cannot advance their own motives to
the damage prejudice of the corporation
which they represents and stockholders as
a whole instead of it being sold outside
- 500M would have gone to the coffers of the
corporation, 500M should be there for the
protection of creditors
- They are placed in a fiduciary relationship
- Sila lang ba ang kikita, pano naman yung
corporation, opportunity na yun para kumita
 When are unpaid subscriptions due and
payable?
- Section 67. Payment of balance of
subscription. - Subject to the provisions of
the contract of subscription, the board of
directors of any stock corporation may at
any time declare due and payable to the
corporation unpaid subscriptions to the
capital stock and may collect the same or
such percentage thereof, in either case with
accrued interest, if any, as it may deem
necessary.
Payment of any unpaid subscription or any
PAR percentage thereof, together with the
interest accrued, if any, shall be made on
the date specified in the contract of
subscription or on the date stated in the call
made by the board. Failure to pay on such
date shall render the entire balance due and
provided in the by-laws, computed from
such date until full payment. If within thirty
made, all stocks covered by said
subscription shall thereupon become
delinquent and shall be subject to sale as
hereinafter provided, unless the board of
directors orders otherwise. (38)

 Remedies of the corporation to enforce
payment of unpaid subscription
1. By board action in accordance with the
procedure laid down in sections 67 to 69 of
the code
2. By a collection case in court as provided for
in section 70
 Are subscribers of shares of stocks not fully
paid, liable to pay interest?
- General rule is they are not liable to pay
interest because the code says unless
requires in the by-laws
- Aside from the mandate of the law that
subscribers to shares of stock must pay the
full value of their subscription, they may
likewise be required to pay interest on all
unpaid subscriptions if so imposed in the
contract or in the corporate by-laws at such
rate as may be indicated thereat or the legal
rate if not so fixed. Unless so required or
provided, however, subscribers to shares of
stock, not fully paid, are not liable to pay
interest on their unpaid subscriptions. The
code thus provides:
Section 66. Interest on unpaid
subscriptions. - Subscribers for stock shall
pay to the corporation interest on all unpaid
subscriptions from the date of subscription,
if so required by, and at the rate of interest
fixed in the by-laws. If no rate of interest is
fixed in the by-laws, such rate shall be
deemed to be the legal rate. (37)
 Until a call is made, they are not due and
payable, but still subject to the provisions of
the contracts
 Procedures in case of sale of delinquent
stocks
- Section 68. Delinquency sale. - The board
of directors may, by resolution, order the
sale of delinquent stock and shall
specifically state the amount due on each
subscription plus all accrued interest, and
the date, time and place of the sale which
shall not be less than thirty (30) days nor
more than sixty (60) days from the date the
stocks become delinquent.
Notice of said sale, with a copy of
the resolution, shall be sent to every
delinquent stockholder either personally or
by registered mail. The same shall
furthermore be published once a week for
two (2) consecutive weeks in a newspaper
of general circulation in the province or city
where the principal office of the corporation
is located.
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Unless the delinquent stockholder
pays to the corporation, on or before the
date specified for the sale of the delinquent
stock, the balance due on his subscription,
plus accrued interest, costs of
advertisement and expenses of sale, or
unless the board of directors otherwise
orders, said delinquent stock shall be sold
at public auction to such bidder who shall
offer to pay the full amount of the balance
on the subscription together with accrued
interest, costs of advertisement and
expenses of sale, for the smallest number of
shares or fraction of a share. The stock so
purchased shall be transferred to such
purchaser in the books of the corporation
and a certificate for such stock shall be
issued in his favor. The remaining shares, if
any, shall be credited in favor of the
delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of
stock covering such shares.
Should there be no bidder at the
public auction who offers to pay the full
amount of the balance on the subscription
together with accrued interest, costs of
advertisement and expenses of sale, for the
smallest number of shares or fraction of a
share, the corporation may, subject to the
provisions of this Code, bid for the same,
and the total amount due shall be credited
as paid in full in the books of the
corporation. Title to all the shares of stock
covered by the subscription shall be vested
in the corporation as treasury shares and
may be disposed of by said corporation in
accordance with the provisions of this Code.
(39a-46a)
 Who is the winning bidder in a delinquency
sale?
- Bidder who shall “offer to pay the full
amount of the balance on the subscription
together with accrued interest, cost of
advertisement and expenses of sale, for the
smallest number of shares or fraction of a
share.”
X Co. has 1M authorized capital stock
500 thousand is already subscribed
A subscribed to 100 thousand shares, 50
thousand is already paid leaving 50
thousand unpaid
The corporation is at a loss of 250
thousand, the board decides to make a call
for the payment of the unpaid subscriptions,
however A could not paid, hence declared

delinquent and decides to sell his share at a
public auction
55 thousand is to be paid, remaining
balance plus cost and expenses
BIDDERS:
X-55K FOR 99,900 shares
Y-55K FOR 99,500 shares
Z-55K FOR 99,000 shares (winning bidder)
 Assume there is no bidder, may the
corporation bid?
- NO. It cannot bid because the law says,
subject to the provisions of this CODE.
Section 68 and 41 should be reconciled.
Section 68 states that:
Should there be no bidder at the
public auction who offers to pay the full
amount of the balance on the subscription
together with accrued interest, costs of
advertisement and expenses of sale, for the
smallest number of shares or fraction of a
share, the corporation may, subject to the
provisions of this Code, bid for the same,
and the total amount due shall be credited
as paid in full in the books of the
corporation. Title to all the shares of stock
covered by the subscription shall be vested
in the corporation as treasury shares and
may be disposed of by said corporation in
accordance with the provisions of this Code.
(39a-46a)
- There was no unrestricted retained earnings
in the example given therefore the
corporation cannot bid , section 41, it states
that:
Section 41. Power to acquire own
shares. - A stock corporation shall have the
power to purchase or acquire its own shares
for a legitimate corporate purpose or
purposes, including but not limited to the
following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the shares to
be purchased or acquired:
1. To eliminate fractional shares arising out
of stock dividends;
2. To collect or compromise an
indebtedness to the corporation, arising out
of unpaid subscription, in a delinquency
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sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Code.
(a)
 What if the shares of A were sold without
compliance of the requirements? May A
question the sale?
- The law prescribes two conditions before an
action to recover delinquent stocks
irregularly sold may be allowed. These are:
1. The party seeking to maintain such action
first pays or tenders to the party holding the
stock the sum for which the same was sold,
with interest from the date of the sale at the
legal rate; and,
2. The action shall be commenced by the filing
of a complaint within six months from the
date of the sale.
- The reason for such is the stability of
transactions of the shares of stock
 Suppose in the example, since there are no
unrestricted retained earnings, hence the
corporation cannot bid, is the corporation
left without any recourse?
- Section 70. Court action to recover unpaid
subscription. - Nothing in this Code shall
prevent the corporation from collecting by
action in a court of proper jurisdiction the
amount due on any unpaid subscription,
with accrued interest, costs and expenses.
(49a)
Velasco vs. Poizat
- The subscriber is as much bound to pay the
amount of the share subscribed by him as
he would be to pay any other debt, and the
right of the company to demand payment is
no less incontestable.
- Two available remedies: the first and most
special remedy given by the statute consist
in permitting the corporation to put up the
unpaid stock and dispose of it for the
account of the delinquent subscriber. The
other remedy is by action in court.
De Silva vs. Aboitiz and Co.
- Discretionary on the part of the board of
directors to do whatever is provided in the
said article relative to the application of the
part of the 70 percent of the profit

distributable in equal parts on the payment
of the shares subscribed to and fully paid
Lingayen Gulf vs. Baltazar
- Exception: pursuant to a bona fide
compromise or to set off a debt due from
the corporation, a release supported by
consideration, will be effectual as against
dissenting stockholders and subsequent
and existing creditors. A release which
might originally have been held invalid may
be sustained after a considerable lapse of
time
Apocada vs. NLRC
- Set-off is without any legal basis
- It was premature
- Unpaid subscriptions will become due and
payable only upon certain instance
- Call or if there is a stipulation in contract
- If no call and no stipulation in contract then
it will not be demandable or payable at all
Lumanlan vs. Cura
- Trust Fund Doctrine- subscription to the
capital of a corporation constitute a fund to
which the creditors have a right to look for
satisfaction of their claims and that the
assignee in insolvency can maintain an
action upon any unpaid stock subscription in
order to realize assets for the payment of its
debts.
PNB vs. Bitulak
- Where it not for the promise, the defendants
would have not subscribed
- Trust Fund Doctrine, it is established
doctrine that subscriptions to the capital of a
corporation constitute a fund to which
creditors have a right to look for satisfaction
of their claims and that the assignee in
insolvency can maintain an action upon any
unpaid stock subscription in order to realize
assets for the payment of its debts.
- A corporation has no power to release an
original subscriber to its capital stock from
the obligation of paying for his shares,
without a valuable consideration for such
release; and as against creditors a
reduction of the capital stock can take place
only in the manner and under the conditions
prescribed by the statute or the charter or
the articles of incorporation.
Edward Keller and Co. vs. COB
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- May the stockholder be held liable for the
debts of the corporation? YES. To the
extent of their unpaid subscription
- As to the liability of the stockholders, it is
settled that a stockholder is personally liable
for the financial obligations of a corporation
to the extent of his unpaid subscriptions
 Is there a prescriptive period wherein a
demand for unpaid subscription should be
made?
- NO. Garcia vs. Suarez case
Garcia vs. Suarez
- Never became due and payable until there
is a call made
- Prescription will not run until and unless
there is demand
- Prescription should be determined from the
time demand has been made and not from
the time of subscription
 If declared delinquent, what would be the
effect as to the owner of said shares?
- Section 71. Effect of delinquency. - No
delinquent stock shall be voted for or be
entitled to vote or to representation at any
stockholder's meeting, nor shall the holder
thereof be entitled to any of the rights of a
stockholder except the right to dividends in
accordance with the provisions of this Code,
until and unless he pays the amount due on
his subscription with accrued interest, and
the costs and expenses of advertisement, if
any. (50a)
- However if the shares are not delinquent,
subscribers to the capital of a corporation,
though not fully paid, are entitled to all the
rights of a stockholder, according to section
72
Section 72. Rights of unpaid shares.
- Holders of subscribed shares not fully paid
which are not delinquent shall have all the
rights of a stockholder. (n)
 May the rules governing delinquency sale
apply to a non-stock corporation? Are there
unpaid shares in a non-stock corporation?
- Rules governing stock corporations, when
applicable, also applies to a non-stock
corporation
- There are delinquent shareholders also in a
non-stock corporation. Example is
membership dues
 A corporation paid 50% of subscription and
was later on declared delinquent when he

could not pay upon call; A is also a director
of the corporation. Will A, upon declaration
of delinquency , still be able to exercise his
right as a director?
- Yes, he loses all his right as a stockholder
except his right to receive dividends
- He remains to be a director, only
qualification to be a director is he must own
at least 1 share and since it still stands in
his name pending the sale, he remains to
be and act as a director
- Even if there is sale, he may still be director
because the winning bidder may not bid or
pay for all the shares or there might be
remaining shares, which would be credited
in favor of the delinquent stockholder
- Section 43 provides:
Section 43. Power to declare
dividends. - The board of directors of a
stock corporation may declare dividends out
of the unrestricted retained earnings which
shall be payable in cash, in property, or in
stock to all stockholders on the basis of
outstanding stock held by them: Provided,
That any cash dividends due on delinquent
stock shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, while stock dividends shall be
withheld from the delinquent stockholder
until his unpaid subscription is fully paid:
Provided, further, That no stock dividend
shall be issued without the approval of
stockholders representing not less than two-
thirds (2/3) of the outstanding capital stock
at a regular or special meeting duly called
for the purpose. (16a)
Stock corporations are prohibited
from retaining surplus profits in excess of
one hundred (100%) percent of their paid-in
capital stock, except: (1) when justified by
definite corporate expansion projects or
programs approved by the board of
directors; or (2) when the corporation is
prohibited under any loan agreement with
any financial institution or creditor, whether
local or foreign, from declaring dividends
without its/his consent, and such consent
has not yet been secured; or (3) when it can
be clearly shown that such retention is
necessary under special circumstances
obtaining in the corporation, such as when
there is need for special reserve for
probable contingencies. (n)
 When a certificate of stock is loss or
destroyed, what must be done by the owner
thereof?
- Section 73. Lost or destroyed certificates. -
The following procedure shall be followed
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for the issuance by a corporation of new
certificates of stock in lieu of those which
have been lost, stolen or destroyed:
1. The registered owner of a
certificate of stock in a corporation or his
legal representative shall file with the
corporation an affidavit in triplicate setting
forth, if possible, the circumstances as to
how the certificate was lost, stolen or
destroyed, the number of shares
represented by such certificate, the serial
number of the certificate and the name of
the corporation which issued the same. He
shall also submit such other information and
evidence which he may deem necessary;
2. After verifying the affidavit and
other information and evidence with the
books of the corporation, said corporation
shall publish a notice in a newspaper of
general circulation published in the place
where the corporation has its principal
office, once a week for three (3) consecutive
weeks at the expense of the registered
owner of the certificate of stock which has
been lost, stolen or destroyed. The notice
shall state the name of said corporation, the
name of the registered owner and the serial
number of said certificate, and the number
of shares represented by such certificate,
and that after the expiration of one (1) year
from the date of the last publication, if no
contest has been presented to said
corporation regarding said certificate of
stock, the right to make such contest shall
be barred and said corporation shall cancel
in its books the certificate of stock which
has been lost, stolen or destroyed and issue
in lieu thereof new certificate of stock,
unless the registered owner files a bond or
other security in lieu thereof as may be
required, effective for a period of one (1)
year, for such amount and in such form and
with such sureties as may be satisfactory to
the board of directors, in which case a new
certificate may be issued even before the
expiration of the one (1) year period
provided herein: Provided, That if a contest
has been presented to said corporation or if
an action is pending in court regarding the
ownership of said 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
final decision by the court regarding the
ownership of said certificate of stock which
has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or
negligence on the part of the corporation
and its officers, no action may be brought
against any corporation which shall have

issued certificate of stock in lieu of those
lost, stolen or destroyed pursuant to the
procedure above-described. (R.A. 201a)
- The rationale of the above-quoted law is to
avoid duplication of certificates of stock and
the avoidance of fictitious and fraudulent
transfers.
 When will the replacement certificate be
issued?
- The code provides that:
after the expiration of one (1) year
from the date of the last publication, if no
contest has been presented to said
corporation regarding said certificate of
stock, the right to make such contest shall
be barred and said corporation shall cancel
in its books the certificate of stock which
has been lost, stolen or destroyed and issue
in lieu thereof new certificate of stock,
 Could it be issued earlier than 1 year?
- Yes it can be, the code states that:
unless the registered owner files a
bond or other security in lieu thereof as may
be required, effective for a period of one (1)
year, for such amount and in such form and
with such sureties as may be satisfactory to
the board of directors, in which case a new
certificate may be issued even before the
expiration of the one (1) year period
provided herein: Provided, That if a
contest has been presented to said
corporation or if an action is pending in
court regarding the ownership of said
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 final decision by the
court regarding the ownership of said
certificate of stock which has been lost,
stolen or destroyed.
 May corporate officers be held liable for the
unauthorized issuance?
- YES, the code provides that:
Except in case of fraud, bad faith, or
negligence on the part of the corporation
and its officers, no action may be brought
against any corporation which shall have
issued certificate of stock in lieu of those
lost, stolen or destroyed pursuant to the
procedure above-described. (R.A. 201a)
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 Assuming the last paragraph is not there;
would it be not the same, that they should
be held liable due to fraud, bad faith or
negligence?
- YES. Section 31 provides that:
Section 31. Liability of directors,
trustees or officers. - Directors or trustees
who willfully and knowingly vote for or
assent to patently unlawful acts of the
corporation or who are guilty of gross
negligence or bad faith in directing the
affairs of the corporation or acquire any
personal or pecuniary interest in conflict
with their duty as such directors or trustees
shall be liable jointly and severally for all
damages resulting there from suffered by
the corporation, its stockholders or
members and other persons.
When a director, trustee or officer
attempts to acquire or acquires, in violation
of his duty, any interest adverse to the
corporation in respect of any matter which
has been reposed in him in confidence, as
to which equity imposes a disability upon
him to deal in his own behalf, he shall be
liable as a trustee for the corporation and
must account for the profits which otherwise
would have accrued to the corporation. (n)
 Certificate of stock was lost, the owner
transfers his shares by way of a notarized
deed will it be valid?
- He cannot do so, if a certificate of stock is
issued by a corporation, a mere notarized
deed will not suffice
- Deed of assignment was not sufficient since
there was no endorsement (Rural Bank of
Lipa vs. CA)
 Rights and liabilities of stockholders
- RIGHTS
1. Participation in the management of the
corporate affairs by exercising their right to
vote and be voted upon either personally or
by proxy as provided for under sections 50
and 58 of the code;
2. To enter into a voting trust agreement
subject to the procedure, requirements and
limitations imposed under section 50;
3. To receive dividends and to compel their
declaration if warranted under section 43;
4. To transfer shares of stock subject only to
reasonable restrictions such as options and
preferences as may be allowed by law
inclusive of the right of the transferee to
compel the registration of the transfer in the
 68

books of the corporation as provided for in

section 63;
5. To be issued a certificate of stock for fully
paid-up shares in accordance with 64;
6. To exercise pre-emptive rights as provided
for in section 39;
7. To exercise their appraisal right in
accordance with the provision of section 81
and in those instance allowed by law such
as section 42 and 105;
8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold
for delinquency as may be allowed under
section 69;
10. To inspect the books of the corporation
subject only to the limitations imposed by
section 73;
11. To be furnished by the most recent financial
statement of the corporation as by section
75;
12. To be issued a new stock certificate in lieu
of the lost or destroyed one subject to the
procedure laid down in section 73;
13. To have the corporation dissolved under
section 118 to 121, and section 105 in a
close corporation;
14. To participate in the distribution of the
assets of the corporation upon dissolution
under section 122;
15. In the case of a close corporation, to petition
the SEC to arbitrate in the event of a
deadlock as allowed under section 104;
and,
16. Also in the case of a close corporation, to
withdraw therefrom, for my reason, and
compel the corporation to purchase his
shares as provided for under section 105.

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- LIABILITIES
1. To pay to the corporation the balance of his
unpaid subscriptions subject to the provision
of section 67 to 70;
2. To pay interest on his unpaid subscription if
required by the by-laws or by the contract of
subscription in accordance with section 66;
3. To answer to the creditors for the unpaid
portion of his subscription under the TRUST
FUND DOCTRINE;
4. To answer the “water” in his stocks as
provided for in section 65;
5. To be liable, as general partners, for all
debts, liabilities and damages of a
determinable corporation as envisioned
under section 21 (corporation by estoppel);
and,
6. To be personally liable for torts, in the event
that a stockholder in a close corporation
actively participates in the management of
the corporate affairs.
CORPORATE BOOKS AND RECORDS
 What are these books and records that are
required to be kept?
- Section 74. Books to be kept; stock transfer
agent. - Every corporation shall keep and
carefully preserve at its principal office a
record of all business transactions and
minutes of all meetings of stockholders
or members, or of the board of directors
or trustees, in which shall be set forth in
detail the time and place of holding the
meeting, how authorized, the notice
given, whether the meeting was regular
or special, if special its object, those
present and absent, and every act done
or ordered done at the meeting. Upon the
demand of any director, trustee,
stockholder or member, the time when
any director, trustee, stockholder or
member entered or left the meeting must
be noted in the minutes; and on a similar
demand, the yeas and nays must be
taken on any motion or proposition, and
a record thereof carefully made. The
protest of any director, trustee,
stockholder or member on any action or
proposed action must be recorded in full
on his demand.
The records of all business
transactions of the corporation and the
minutes of any meetings shall be open to
inspection by any director, trustee,
stockholder or member of the corporation at
reasonable hours on business days and he
may demand, in writing, for a copy of
excerpts from said records or minutes, at
his expense.
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Any officer or agent of the
corporation who shall refuse to allow any
director, trustees, stockholder or member of
the corporation to examine and copy
excerpts from its records or minutes, in
accordance with the provisions of this Code,
shall be liable to such director, trustee,
stockholder or member for damages, and in
addition, shall be guilty of an offense which
shall be punishable under Section 144 of
this Code: Provided, That if such refusal is
made pursuant to a resolution or order of
the board of directors or trustees, the
liability under this section for such action
shall be imposed upon the directors or
trustees who voted for such refusal: and
Provided, further, That it shall be a defense
to any action under this section that the
person demanding to examine and copy
excerpts from the corporation's records and
minutes has improperly used any
information secured through any prior
examination of the records or minutes of
such corporation or of any other
corporation, or was not acting in good faith
or for a legitimate purpose in making his
demand.
Stock corporations must also keep a
book to be known as the "stock and transfer
book", in which must be kept a record of all
stocks in the names of the stockholders
alphabetically arranged; the installments
paid and unpaid on all stock for which
subscription has been made, and the date
of payment of any installment; a statement
of every alienation, sale or transfer of stock
made, the date thereof, and by and to whom
made; and such other entries as the by-laws
may prescribe. The stock and transfer book
shall be kept in the principal office of the
corporation or in the office of its stock
transfer agent and shall be open for
inspection by any director or stockholder of
the corporation at reasonable hours on
business days.
No stock transfer agent or one
engaged principally in the business of
registering transfers of stocks in behalf of a
stock corporation shall be allowed to
operate in the Philippines unless he secures
a license from the Securities and Exchange
Commission and pays a fee as may be fixed
by the Commission, which shall be
renewable annually: Provided, That a stock
corporation is not precluded from
performing or making transfer of its own
stocks, in which case all the rules and
regulations imposed on stock transfer
agents, except the payment of a license fee
herein provided, shall be applicable. (51a
and 32a; P.B. No. 268.)

 To summarize:
1. Records of all business transactions which
include, among others, journals, ledger,
contracts, vouchers and receipts, financial
statements and other books of accounts,
income tax returns, and voting trust
agreements which must be kept and
carefully preserved at its principal office;
2. Minutes of all meetings of stockholders or
members and of the directors or trustees
setting forth in detail the date, time, and
place of meeting, how authorized, the notice
given whether the same be regular or
special, and if special, the purpose thereof
shall be specified, those present and
absent, and every act done or ordered done
there at which ,must likewise be kept at the
principal office of the corporation; and,
3. Stock and transfer book showing the names
of the stockholders, the amount paid or
unpaid on all stocks for which subscription
has been made, a statement of every
alienation, sale or transfer of stock made, if
any the date thereof, and by whom and to
whom made which must also be kept at the
principal office of the corporation or in the
office of its stock transfer agent.
These corporate books and records,
inclusive of all business transactions and
minutes of meetings, are subject to
inspection by any of the directors, trustees,
stockholders or members of the corporation
at reasonable hours on business days and a
copy of excerpts of said records may be
demanded. In fact, in so far as financial
statement is concerned, the Code clearly
provides:
Section 75. Right to financial
statements. - Within ten (10) days from
receipt of a written request of any
stockholder or member, the corporation
shall furnish to him its most recent financial
statement, which shall include a balance
sheet as of the end of the last taxable year
and a profit or loss statement for said
taxable year, showing in reasonable detail
its assets and liabilities and the result of its
operations.
At the regular meeting of stockholders or
members, the board of directors or trustees
shall present to such stockholders or
members a financial report of the operations
of the corporation for the preceding year,
which shall include financial statements,
duly signed and certified by an independent
certified public accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00, the
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financial statements may be certified under
oath by the treasurer or any responsible
officer of the corporation. (n)
 May books and records be examined? Who
may examine? Can they copy them? In
whose expense?
- Yes, according to the code:
“The records of all business
transactions of the corporation and the
minutes of any meetings shall be open to
inspection by any director, trustee,
stockholder or member of the
corporation at reasonable hours on
business days and he may demand, in
writing, for a copy of excerpts from said
records or minutes, at his expense. “
 Is there any defense available that could be
raised? By the corporate officers to justify
the refusal?
- Yes, the code provides that:
“and Provided, further, That it shall
be a defense to any action under this
section that the person demanding to
examine and copy excerpts from the
corporation's records and minutes has
improperly used any information
secured through any prior examination
of the records or minutes of such
corporation or of any other corporation,
or was not acting in good faith or for a
legitimate purpose in making his
demand.”
 What is the stock and transfer? Where
should stock and transfer be kept? Can it be
kept elsewhere?
“Stock corporations must also keep
a book to be known as the "stock and
transfer book", in which must be kept a
record of all stocks in the names of the
stockholders alphabetically arranged;
the installments paid and unpaid on all
stock for which subscription has been
made, and the date of payment of any
installment; a statement of every
alienation, sale or transfer of stock
made, the date thereof, and by and to
whom made; and such other entries as
the by-laws may prescribe. The stock and
transfer book shall be kept in the principal
office of the corporation or in the office
of its stock transfer agent and shall be
open for inspection by any director or
stockholder of the corporation at
reasonable hours on business days. “

 Stock and transfer agent
- Records every movement
- Person who monitors movement by the
minutes or by the hours
- Non-stock corporation- stock and transfer
books
- Club share- membership
 Are stockholders entitled to
statements?
- Yes, they are entitled to a copy, the code
provides that:
Section 75. Right to financial
statements. - Within ten (10) days from
receipt of a written request of any
stockholder or member, the corporation
shall furnish to him its most recent financial
statement, which shall include a balance
sheet as of the end of the last taxable year
and a profit or loss statement for said
taxable year, showing in reasonable detail
its assets and liabilities and the result of its
operations.
At the regular meeting of
stockholders or members, the board of
directors or trustees shall present to such
stockholders or members a financial report
of the operations of the corporation for the
preceding year, which shall include financial
statements, duly signed and certified by an
independent certified public accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00, the
financial statements may be certified under
oath by the treasurer or any responsible
officer of the corporation. (n)
- Audited financial statement filed in the SEC,
120 days from the end of the final year, or
must be filed on or before April of each year
- Must be stamp received by the BIR
 Those in the stock exchange
- Disclosure of any matter that have to do
with increasing and decreasing
- If not “kulong” violation of securities and
regulation act
 Why is this right of inspection granted to a
stockholder?
- The basis of the right of the stockholder to
inspect the books and records of the
corporation for a proper purpose is to
protect his interest as a stockholder. Thus, it
has been said that:
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“The right of the shareholders to
ascertain how the affairs of his
company are being conducted by its
directors and officers is founded by
his beneficial interest through
ownership of shares and the
necessity of self-protection.
Managers of some corporations
deliberately keep the shareholders in
financial ignorance or under misapprehension
as to the true condition of its affairs.
Business prudence demands that
the investor keep a watchful eye on
the management and the condition
of the business. Those in charge of
the company may be guilty of gross
incompetence or dishonesty for
years and escape liability if the
shareholders cannot inspect the
records and obtain information.”
 Is there any distinction of the right of
inspection of a stockholder and that of a
director?
- Yes, as compared to a stockholder or
member, the right of a director or trustee to
inspect and examine corporate books and
records is considered absolute and
unqualified and without regard to motive.
This is because a director supervises,
directs and manages corporate business
and it is necessary that he be equipped with
all the information and data with regard to
the affairs of the company in order that he
may manage and direct its operations
intelligently and according to his best
judgment in the interest of all the
stockholders he represents. Thus, while
stockholders and members are entitled to
inspect and examine the books and records
as provided in sections 74 and 75 they may
not gain access to highly sensitive and
confidential information. In the case of
directors. “it is not denied” that they have
such access. This would include, among
others,
a. Marketing strategies and pricing
structure;
b. Budget for expansion and
diversification;
c. Research and development;
d. Sources of funding, availability of
personnel, proposals of mergers or tie-
ups with other firms
 May this right be exercised, other than by
the stockholders themselves?
- Yes, while the right is founded on stock
ownership thus personal in nature it may be
made by the stockholder’s agent or

representative since it may be unavailing in
many instances
 What if the right of the stockholder to
inspect is denied? What is his remedy?
1. Mandamus
2. Damages either against the corporation or
responsible officer who refused the
inspection
3. Criminal complaint for violation of his right to
inspect and copy excerpts of all business
transactions and minutes of meeting.
Section 74 provides that Any officer or
agent of the corporation who shall refuse to
allow any director, trustees, stockholder or
member of the corporation to examine and
copy excerpts from its records or minutes, in
accordance with the provisions of this Code,
shall be liable to such director, trustee,
stockholder or member for damages, and in
addition, shall be guilty of an offense which
shall be punishable under Section 144 of
this Code. The latter provision imposes a
penalty of a fine of not less than P1,000 but
not more than P10,000 or an imprisonment
for not less than 30 days but not more than
5 years, or both, at the discretion of the
court. If the refusal is pursuant to a
resolution or order of the board, the liability
shall be imposed upon the directors or
trustees who voted for such refusal.
 Defense of the responsible corporate officer
1. That the person demanding has improperly
used any information secured through any
prior examination of the records or minutes
of such corporation or of any other
corporation;
2. That he was not acting in good faith or for a
legitimate purpose in making his demand;
3. The right is limited or restricted by special
law or the law of it creation.
W.G. Philpotts vs. Philippine Manufacturing
Co.
- The right of inspection given to a
stockholder can be exercised either by
himself or by any proper representative or
attorney-in-fact, and either with or without
the attendance of the stockholder
- The right may be regarded as personal, in
the sense that only a stockholder may enjoy
it; but the inspection and examination may
be made by another. Otherwise it would be
unavailing in many instances.
o Note: Usually hires an auditor or
accountant to safeguard his interest
Pardo vs. Hercules Lumber Co.
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- The law is clear, it may be exercised during
reasonable hours on any business days, the
by-laws cannot deny this right all together
- The general right given by the statute may
not be lawfully abridged to the extent
attempted in this resolution. It may be
admitted that the officials in charge of a
corporation may deny inspection when
sought at unusual hours or under other
improper conditions; but neither the
executive officers nor the board of directors
have the power to deprive a stockholder of
the right altogether.
- The corporation, or its responsible directors
and officers cannot unduly restrict this right
of inspection and may not arbitrarily set a
few days of the year within which the
stockholder may make the inspection.
- A by-law unduly restricting the right of
inspection is undoubtedly invalid
Vegaruth vs. Isabela Sugar Co.
- Directors of a corporation have the
unqualified right to inspect the books and
records of the corporation at all reasonable
hours.
- We do not conceive, however, that a
director or stockholder has any absolute
right to secure certified copies of the
minutes of the corporation until these
minutes have been written up and approved
by the directors.
 May a stockholder of a holding company
inspect the books and records of a
subsidiary?
- It depends
- The right of the stockholders to examine
corporate books extends to wholly-owned
subsidiary which is completely under the
control and management of the parent
company where he is such a stockholder.
But if the two entities (subsidiary and
parent) are legally being operated as
separate and distinct entities, there is no
such right of inspection on the part of the
stockholder of the parent company.
AYALA- HOLDING COMPANY/PARENT
COMPANY
SUBSIDIARIES: BPI/GLOBE/AYALA LAND
(not wholly-owned subsidiary)
o HOLD ATLEAST 50 +1 shares in order
to be a PARENT COMPANY
 A, is a stockholder of Ayala, does he have a
right to inspect the records of its
subsidiaries?

- If wholly owned pwede, but its subsidiaries
are not wholly owned kaya hindi pwede
Gokongwei vs. SEC
- San Miguel corporation owns all of the
shares of stock of San Miguel International
- It is wholly-owned
- It would be in accord with equity, good faith
and fair dealing to construe the statutory
right of petitioner as stockholder to inspect
the books and records of such wholly-
owned subsidiary which are in respondent
corporation’s possession and control
MERGER AND CONSOLIDATION
 If being operated as separate and distinct
corporations, there is no such right
 Telecommunications- special franchise, it is
a legislative grant
Gonzales vs. PNB
- Provisions of the old law was unqualified,
when it granted stockholders the right to
inspect
- However, whole seemingly enlarging the
right of inspection, the new code has
prescribed limitations to the same. It is now
expressly required as a condition for such
examination that the one requesting it must
not have been guilty of using improperly any
information secured through a prior
examination and that the person asking for
such examination must be acting in good
faith and for a legitimate purpose in making
his demand
- Admittedly, he sought to be a stockholder in
order to pry into transactions entered into by
the respondent bank even before he
became a stockholder. His obvious purpose
was to arm himself with materials he can
use against the respondent bank for acts
done by the latter when the petitioner was a
total stranger to the same.
- Bank was created by a special law, it has its
own charter and primarily governed by the
law creating them
- The bank is only subject to the inspection of
the Central Bank and any information
pertaining to the bank is confidential and
shall not be revealed to any person other
than the President of the Philippines, the
Secretary of Finance and the Board of
Directors, nor shall any information relative
to the funds in its custody, its current
accounts or deposits belonging to private
individuals, corporations or other entities
except by order of a Court of Competent
Jurisdiction, hence inspection sought to by
the petitioner is violative of the provisions of
its charter and is even subject to penal
sanctions
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 Assuming you are a stockholder of PNB,
and then it was privatized, may you already
have the right to inspect?
- No, unless its charter has been altered or
repealed it is still subject to the same law
 3 stages in the life of a corporation
- Formation or birth
- We now discuss the union of the
corporation
- The last would be its death or dissolution
 Merger and consolidation
- In corporate parlance it is called spin-off
- Almost a year ago San Miguel separated its
brewery business
- San Miguel Corporation is now a full time
holding company; it can later on absorb the
company
- Corporations are granted by the code to
merge or consolidate
- most common type of corporate recognition
- not the same in every case
- but most common in the weal financial or
insolvent condition, aim is to bring it back to
its financial capability
- also a method of recapitalization
o purchase and sale of corporate assets is
another form of corporate reorganization
 How do you value the assets of the merging
corporation, do you consider goodwill?
 First secure favorably recommendation of
government agency
- Section 79. Effectivity of merger or
consolidation. - The articles of merger or of
consolidation, signed and certified as herein
above required, shall be submitted to the
Securities and Exchange Commission in
quadruplicate for its approval: Provided,
That in the case of merger or
consolidation of banks or banking
institutions, building and loan
associations, trust companies, insurance
companies, public utilities, educational
institutions and other special
corporations governed by special laws,
the favorable recommendation of the
appropriate government agency shall
first be obtained. If the Commission is
satisfied that the merger or consolidation of
the corporations concerned is not
inconsistent with the provisions of this Code
and existing laws, it shall issue a certificate
of merger or of consolidation, at which time

the merger or consolidation shall be
effective.
If, upon investigation, the Securities
and Exchange Commission has reason to
believe that the proposed merger or
consolidation is contrary to or inconsistent
with the provisions of this Code or existing
laws, it shall set a hearing to give the
corporations concerned the opportunity to
be heard. Written notice of the date, time
and place of hearing shall be given to each
constituent corporation at least two (2)
weeks before said hearing. The
Commission shall thereafter proceed as
provided in this Code. (n)
 Merger
- A union effected by absorbing one or more
existing corporations by another which
survives and continues the combined
business
- It is the uniting of two or more corporations
by the transfer of property to one of them
which continue in existence, the other or the
others being dissolved and merged therein.
A B
A transfers all assets, properties, rights,
obligations, liabilities to B
B issues shares of stocks in exchange of
the transfer
A is then dissolved and B SURVIVES
o Parties to a merger are called
constituent corporation
 Consolidation
- The uniting or amalgamation of two or more
existing corporations to form a new
corporation
- In merger there is a surviving corporation,
the others are dissolved, while in
consolidation, all constituent are dissolved
and a new one organized
A B
C 3. The
 Like all other corporate acts, it emanates
from the board
1. The board of directors or trustees of each
constituent corporations shall approve a
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plan of merger or consolidation setting forth
the matters required in section 76;
2. Approval of the plan by the stockholders
representing 2/3 of the outstanding
capital stock or 2/3 of the member in
non-stock corporations of each of such
corporations at separate corporate meetings
called for the purpose;
3. Prior notice of such meeting, with a copy
or summary of the plan of merger or
consolidation shall be given to all
stockholders or members at least two (2)
weeks prior to the scheduled meeting, either
personally or registered mail stating the
purpose thereof;
4. Execution of the articles of merger or
consolidation by each constituent
corporations to be signed by the president
or vice-president and certified by the
corporate secretary or assistant
secretary setting forth the matters
required in section 78;
5. Submission of the articles of merger or
consolidation in quadruplicate to the
SEC subject to the requirement of section
79 that if it involve corporations under the
direct supervision of any other government
agency or governed by special laws the
favorable recommendation of the
government agency concerned shall first be
secured and;
6. Issuance of the certificate of merger or
consolidation by the SEC at which time
the merger or consolidation shall be
effective. If the plan, however, is believed to
be contrary to law, the SEC shall set a
hearing to give the corporations concerned
an opportunity to be heard upon proper
notice and thereafter, the Commission shall
proceed as provided in the Code.
 Although merger and consolidation is an
express power granted to corporation, it is
subject to limitations, as maybe proscribed
by law
 What would be the effect of merger or
consolidation? <sec. 80>
1. There will only be a single corporation. In
case of merger, the surviving corporation or
the consolidated corporation in case of
consolidation;
2. The termination of the corporate existence
of the constituent corporations, except that
of the surviving corporation or the
consolidated corporation;
surviving corporation or the
consolidated corporation will possess all the
rights, privileges, immunities and powers
and shall be subject to all the duties and
liabilities of a corporation organized under
the Code;

4. The surviving or consolidated corporation
shall possess all the rights, privileges,
immunities and franchises of the constituent
corporations, and all property and all
receivables due, including subscriptions to
shares and other choses in action, and
every other interest of, or belonging to or
due to the constituent corporations shall be
deemed transferred to and vested in such
surviving or consolidated corporation
without further act and deed; and,
5. The rights of creditors or any lien on the
property of the constituent corporations
shall not be impaired by the merger or
consolidation.
 Is there a liquidation process in case of
merger or consolidation?
- None, there is nothing to distribute
Associated Bank vs. CA
- By virtue of a specific provision in the
merger agreement
- Although the subject promissory note
names CBTC as the payee, the reference to
CBTC in the note shall be construed, under
the very provision of the merger agreement,
as a reference to petitioner bank, “as if such
reference (was a) direct reference to the
latter for all intents and purposes
- Section 80 par. 4 states:
The surviving or the consolidated
corporation shall thereupon and thereafter
possess all the rights, privileges, immunities
and franchises of each of the constituent
corporations; and all property, real or
personal, and all receivables due on
whatever account, including subscriptions to
shares and other choses in action, and all
and every other interest of, or belonging to,
or due to each constituent corporation, shall
be deemed transferred to and vested in
such surviving or consolidated corporation
without further act or deed; and
- Without further acts, meaning it is automatic
 When do merger and consolidation become
effective? What if the SEC fails to act on it
without fault attributable to the corporation
involved?
- It will never become valid until and unless
the SEC gives its stamp of approval
- It will be up to the constituent corporation to
follow it up
- It will never take effect until the SEC gives
its approval and issues the articles of
merger
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o Granted 3 years to wing up unless there
is a trustee to wing up its affairs
 Could there be liquidators and winding up
with respect to the corporation in
consolidation and merger?
- No, there is none
- No assets properties or rights to collect,
they are transferred
- No debts and liabilities to pay because they
become the liabilities of the surviving
corporations
- No properties transferred because they will
be the properties of the surviving
corporations
o Hardest part is the financial act,
regarding how many shares would be
issued, probability of collection and the
like
o In merger and consolidation, there is
due diligence and an economist is
usually hired
APPRAISAL RIGHT
 Define appraisal
- Right to withdraw from the corporation and
demand payment of the fair value of his
shares after dissenting from certain
corporate acts involving fundamental
changes in corporate structure <sec. 81>
 What property? When may this right be
exercises?
- Section 81 provides:
Section 81. Instances of appraisal
right. - Any stockholder of a corporation
shall have the right to dissent and demand
payment of the fair value of his shares in the
following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or
class of shares, or of authorizing
preferences in any respect superior to those
of outstanding shares of any class, or of
extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all
or substantially all of the corporate property
and assets as provided in the Code; and
3. In case of merger or consolidation. (n)

 May it be exercised by a stockholder who
dissents to the act of a business other than
a primary purpose?
X Co. inc
Principal office is in Quezon city, it was
changed to Paranaque
A objects and makes a written demand.
May he exercise his right of appraisal?
- It is not available in all amendments of the
corporation
- It must be changing or restricting the rights
of any stockholder
 What if the principal office is changed from
QC to TAWI-TAWI, will it change or affect
the rights of A?
- To some it may change or restrict the rights
to others it may not
 How is the right exercised?
- According to section 82 of the code:
Section 82. How right is exercised. -
The appraisal right may be exercised by any
stockholder who shall have voted against
the proposed corporate action, by making a
written demand on the corporation within
thirty (30) days after the date on which the
vote was taken for payment of the fair value
of his shares: Provided, That failure to make
the demand within such period shall be
deemed a waiver of the appraisal right. If
the proposed corporate action is
implemented or affected, the corporation
shall pay to such stockholder, upon
surrender of the certificate or certificates of
stock representing his shares, the fair value
thereof as of the day prior to the date on
which the vote was taken, excluding any
appreciation or depreciation in anticipation
of such corporate action.
If within a period of sixty (60) days
from the date the corporate action was
approved by the stockholders, the
withdrawing stockholder and the corporation
cannot agree on the fair value of the shares,
it shall be determined and appraised by
three (3) disinterested persons, one of
whom shall be named by the stockholder,
another by the corporation, and the third by
the two thus chosen. The findings of the
majority of the appraisers shall be final, and
their award shall be paid by the corporation
within thirty (30) days after such award is
made: Provided, That no payment shall be
made to any dissenting stockholder unless
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the corporation has unrestricted retained
earnings in its books to cover such
payment: and Provided, further, That upon
payment by the corporation of the agreed or
awarded price, the stockholder shall
forthwith transfer his shares to the
corporation. (n)
X Co.
Principal Office- QC, it was changed to
Manila
A objects and makes a written demand for
payment of fair value of shares. Can he
make a demand of payment of shares?
 True or False, no stockholder in a stock
corporation can ever demand if the principal
office is amended, changing it from QC to
Manila
- False, a stockholder in a close corporation
may for any reason compel the close
corporation that he be paid the fair value of
his shares
Can he exercise his appraisal rights in the
first place? He hasn’t even paid his
subscription in full.
 May a stockholder who hasn’t paid his
subscription in full exercise his appraisal
rights?
- Yes, he can exercise his appraisal rights, by
reconciling the provisions of section 72,
section 82 and section 86
Section 72. Rights of unpaid shares.
- Holders of subscribed shares not fully paid
which are not delinquent shall have all the
rights of a stockholder. (n)
Section 82. How right is exercised. -
The appraisal right may be exercised by any
stockholder who shall have voted against
the proposed corporate action, by making a
written demand on the corporation within
thirty (30) days after the date on which the
vote was taken for payment of the fair value
of his shares: Provided, That failure to make
the demand within such period shall be
deemed a waiver of the appraisal right. If
the proposed corporate action is
implemented or affected, the corporation
shall pay to such stockholder, upon
surrender of the certificate or certificates
of stock representing his shares, the fair
value thereof as of the day prior to the date
on which the vote was taken, excluding any
appreciation or depreciation in anticipation
of such corporate action.

If within a period of sixty (60) days
from the date the corporate action was
approved by the stockholders, the
withdrawing stockholder and the corporation
cannot agree on the fair value of the shares,
it shall be determined and appraised by
three (3) disinterested persons, one of
whom shall be named by the stockholder,
another by the corporation, and the third by
the two thus chosen. The findings of the
majority of the appraisers shall be final, and
their award shall be paid by the corporation
within thirty (30) days after such award is
made: Provided, That no payment shall be
made to any dissenting stockholder unless
the corporation has unrestricted retained
earnings in its books to cover such
payment: and Provided, further, That upon
payment by the corporation of the agreed or
awarded price, the stockholder shall
forthwith transfer his shares to the
corporation. (n)
Section 86. Notation on certificates;
rights of transferee. - Within ten (10) days
after demanding payment for his shares, a
dissenting stockholder shall submit the
certificates of stock representing his shares
to the corporation for notation thereon that
such shares are dissenting shares. His
failure to do so shall, at the option of the
corporation, terminate his rights under this
Title. If shares represented by the
certificates bearing such notation are
transferred, and the certificates
consequently cancelled, the rights of the
transferor as a dissenting stockholder under
this Title shall cease and the transferee
shall have all the rights of a regular
stockholder; and all dividend distributions
which would have accrued on such shares
shall be paid to the transferee. (n)
- Notation is not mandatory, it is even
discretionary because the code provides “at
the option of the corporation” because it
never issued one for that matter since the
subscriptions are not yet fully paid
 May the corporation be compelled to pay
the interest of A
300 T, 150T, 150T and 0 unrestricted
retained earnings
 No stockholder may be able to compel the
corporation to pay the value of his shares if
the corporation has no unrestricted retained
earnings
- False, a stockholder of a close corporation
may for any reason, provided only that the
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corporation has sufficient assets to cover its
debts and liabilities
o General rule: there should be
unrestricted retained earnings
o Exception: section 105 “close
corporation”
 The procedure and requirements for the
valid exercise of this rights are:
1. The stockholder must have voted against
the proposed corporate action in any of the
instances allowed by law for the exercise of
the right of appraisal;
2. The written demand for payment must be
made by the dissenting stockholder within
thirty (30) days after the date on which the
vote was taken thereon. Failure to make the
demand within the said period shall be
deemed a waiver on the part of the
stockholder concerned to exercise his
appraisal right;
3. Surrender of the certificate of stock by the
dissenting stockholder for notation in the
corporate books and the payment by the
corporation of the fair market value of the
said shares as of the day prior to the date
on which the vote was taken. If the
stockholder and the corporation cannot
agree on the fair market value thereof, the
same shall be determined in accordance
with the provision of paragraph 2 of section
82;
4. The fair value of the shares of the
dissenting stockholder must be paid by the
corporation only if it has “unrestricted
retained earnings” in its books to cover such
payment. If the corporation has no
unrestricted retained earnings, the
dissenting stockholder may not, therefore,
be able to effectively exercise his appraisal
rights;
5. Upon payment of the shares by the
corporation, the dissenting stockholder shall
transfer his shares to the corporation.
 What would be the effect if the stockholder
exercises his appraisal rights? What
happens to his voting and dividend rights if
he exercises his appraisal rights?
- It will be suspended, with a limitation of 30
days, as provided for by section 83 of the
code:
Section 83. Effect of demand and
termination of right. - From the time of
demand for payment of the fair value of a
stockholder's shares until either the
abandonment of the corporate action
involved or the purchase of the said shares
by the corporation, all rights accruing to

such shares, including voting and
dividend rights, shall be suspended in
accordance with the provisions of this
Code, except the right of such
stockholder to receive payment of the
fair value thereof: Provided, That if the
dissenting stockholder is not paid the
value of his shares within 30 days after
the award, his voting and dividend rights
shall immediately be restored. (n)
 How do you compare the rights of a
stockholder, declared delinquent compared
to a dissenting stockholder exercising his
appraisal rights
 What if a stockholder exercising his
appraisal rights is also a director, will he
also lose his rights as a stockholder?
- The shares remain to stand in his name
until he is paid, unless there is a stipulation
in the by-laws
 When may the right to be paid the value of
his shares cease? Can he withdraw his right
of appraisal?
- Yes, he may withdraw, but there must be
consent by the corporation as provided for
by section 83 of the code:
Section 84. When right to payment
ceases. - No demand for payment under
this Title may be withdrawn unless the
corporation consents thereto. If, however,
such demand for payment is withdrawn with
the consent of the corporation, or if the
proposed corporate action is abandoned or
rescinded by the corporation or disapproved
by the Securities and Exchange
Commission where such approval is
necessary, or if the Securities and
Exchange Commission determines that
such stockholder is not entitled to the
appraisal right, then the right of said
stockholder to be paid the fair value of his
shares shall cease, his status as a
stockholder shall thereupon be restored,
and all dividend distributions which would
have accrued on his shares shall be paid to
him. (n)
 Instances when the right of a dissenting
stockholder to be paid the fair value of his
shares ceases.
1. When he withdraws his demand for
payment and the corporation consents
thereto;
2. When the proposed action is abandoned or
rescinded by the corporation;
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3. When the proposed action is disapproved
by the SEC where such approval is
necessary;
4. When the SEC determines that he is not
entitled to exercise his appraisal right;
5. When he fails to submit the stock certificate
within ten (10) days from demand to the
corporation for notation that such shares are
dissenting shares; and,
6. If the shares are transferred and the
certificate subsequently cancelled.
 Who bears the cost of appraisal?
- It depends
- The corporation bears the cost if
a. The price offered by the corporation is
lower than the fair value of the shares of
the dissenting stockholder as
determined by the appraisers;
b. Where an action is filed by the
dissenting stockholder to recover such
fair value and the refusal of the
stockholder to receive payment is found
by the court to be justified.
- Dissenting stockholder will be liable for the
cost and expenses of appraisal when
a. When the price offered by the
corporation is approximately the same
as the fair value ascertained by the
appraisers;
b. Where the action filed by the dissenting
stockholder and his refusal to accept
payment is found by the court to be
unjustified.
 The dissenting stockholder may also sell,
transfer or assign his shares
Section 86. Notation on certificates;
rights of transferee. - Within ten (10) days
after demanding payment for his shares, a
dissenting stockholder shall submit the
certificates of stock representing his shares
to the corporation for notation thereon that
such shares are dissenting shares. His
failure to do so shall, at the option of the
corporation, terminate his rights under this
Title. If shares represented by the
certificates bearing such notation are
transferred, and the certificates
consequently cancelled, the rights of the
transferor as a dissenting stockholder
under this Title shall cease and the
transferee shall have all the rights of a
regular stockholder; and all dividend
distributions which would have accrued
on such shares shall be paid to the
transferee. (n)

NON-STOCK CORPORATIONS
 What is a non-stock corporation?
- A non-stock corporation is one where no
part of its income is distributable as
dividends to its members, trustees, or
officers, subject to the provisions of this
code on dissolution
 What provision of the code will govern non-
stock corporations? Would the provision
governing stock corporations also apply to
non-stock corporations?
- Yes, 2nd par. Of section 87 provides:
The provisions governing stock
corporation, when pertinent, shall be
applicable to non-stock corporations, except
as may be covered by specific provisions of
this Title. (n)
 How is the right to vote exercised in a non-
stock corporation compared to a stock
corporation
 May a member in a non-stock corporation
vote cumulatively?
- General rule is NO
 May it be granted or allowed by the by-
laws?
- Yes
 May the right to cumulative voting be denied
in a stock corporation?
- No, Doctrine of Limited Capacity
 May members in a non-stock corporation
vote by proxy?
- Yes, section 89 provides that:
“Unless otherwise provided in the
articles of incorporation or the by-laws, a
member may vote by proxy in accordance
with the provisions of this Code. (n) “
 May the right to vote by proxy be validly
denied in a stock corporation?
- No, it is a matter of right in a stock
corporation
 May member of a non-stock corporation
cast their vote by text?
- Yes, subject to the approval and terms and
conditions of the SEC <sec. 89>
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“Voting by mail or other similar
means by members of non-stock
corporations may be authorized by the by-
laws of non-stock corporations with the
approval of, and under such conditions
which may be prescribed by, the Securities
and Exchange Commission. “
 How about in stock?
- Voting by mail or other similar means may
also be authorized and allowed by the by-
laws of non-stock corporations. Generally,
in stock corporations, the vote must be cast
at a duly constituted meeting. The only
exception, in case of the latter, is in the
matter of general amendment of the articles
of incorporation where the written assent of
the stockholder may be sufficient.
 How is the governing board constituted in a
non-stock corporation? How many
members?
- It may exceed 15 in a non-stock corporation
unless the AOI or by-laws provide
otherwise, as provided for by section 92 of
the code:
Section 92. Election and term of
trustees. - Unless otherwise provided in the
articles of incorporation or the by-laws, the
board of trustees of non-stock corporations,
which may be more than fifteen (15) in
number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as
organized, so classify themselves that the
term of office of one-third (1/3) of their
number shall expire every year; and
subsequent elections of trustees comprising
one-third (1/3) of the board of trustees shall
be held annually and trustees so elected
shall have a term of three (3) years.
Trustees thereafter elected to fill vacancies
occurring before the expiration of a
particular term shall hold office only for the
unexpired period.
No person shall be elected as
trustee unless he is a member of the
corporation.
Unless otherwise provided in the
articles of incorporation or the by-laws,
officers of a non-stock corporation may be
directly elected by the members. (n)
 Qualifications?
1. He is a member of the association;
2. Majority thereof must be residents of the
Philippines; and,

3. Other qualifications as may be provided for
in the by-laws.
 Governing board in a non-stock
- Board of Trustees, however section 138
provides that:
Section 138. Designation of
governing boards. - The provisions of
specific provisions of this Code to the
contrary notwithstanding, non-stock or
special corporations may, through their
articles of incorporation or their by-laws,
designate their governing boards by any
name other than as board of trustees. (n)
 Disqualifications
- Section 27 also applies to a non-stock
corporation, same holds true to the manner
of removal <sec. 29 ad 30>
Section 27. Disqualification of
directors, trustees or officers. - No person
convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to
the date of his election or appointment, shall
qualify as a director, trustee or officer of any
corporation. (n)
Section 29. Vacancies in the office
of director or trustee. - Any vacancy
occurring in the board of directors or
trustees other than by removal by the
stockholders or members or by expiration of
term, may be filled by the vote of at least a
majority of the remaining directors or
trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by
the stockholders in a regular or special
meeting called for that purpose. A director
or trustee so elected to fill a vacancy shall
be elected only or the unexpired term of his
predecessor in office.
Any directorship or trusteeship to be
filled by reason of an increase in the
number of directors or trustees shall be
filled only by an election at a regular or at a
special meeting of stockholders or members
duly called for the purpose, or in the same
meeting authorizing the increase of
directors or trustees if so stated in the notice
of the meeting. (n)
Section 30. Compensation of
directors. - In the absence of any provision
in the by-laws fixing their compensation, the
directors shall not receive any
compensation, as such directors, except for
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reasonable per diems: Provided, however,
That any such compensation other than per
diems may be granted to directors by the
vote of the stockholders representing at
least a majority of the outstanding capital
stock at a regular or special stockholders'
meeting. In no case shall the total yearly
compensation of directors, as such
directors, exceed ten (10%) percent of the
net income before income tax of the
corporation during the preceding year. (n)
 Who elects the other officers?
- Directly by the general members unless the
by-laws or articles provide otherwise.
<sec.92>
“Unless otherwise provided in the
articles of incorporation or the by-laws,
officers of a non-stock corporation may be
directly elected by the members. (n) “
 In stock corporations who elect officers?
- Directors
 The provision that stock corporations cannot
validly provide that members cannot be
voted by stockholders is only a general rule
because there is an exception section 97 of
the code states that:
The articles of incorporation of a
close corporation may provide that the
business of the corporation shall be
managed by the stockholders of the
corporation rather than by a board of
directors. So long as this provision
continues in effect:
1. No meeting of stockholders need be
called to elect directors;
2. Unless the context clearly requires
otherwise, the stockholders of the
corporation shall be deemed to be directors
for the purpose of applying the provisions of
this Code; and
3. The stockholders of the corporation shall
be subject to all liabilities of directors.
The articles of incorporation may
likewise provide that all officers or
employees or that specified officers or
employees shall be elected or appointed
by the stockholders, instead of by the
board of directors.

 Nature of membership is non-transferrable
and personal in nature unless the articles of
incorporation or by-laws provide otherwise
Section 90. Non-transferability of
membership. - Membership in a non-stock
corporation and all rights arising there from
are personal and non-transferable, unless
the articles of incorporation or the by-laws
otherwise provide. (n)
 How is a membership requirement in a non-
stock corporation
A holds a membership certificate
B goes to the corporation and compels the
corporation to record the transfer in his
name
- Membership in non-stock corporations may
be acquired by complying with the
provisions of its rules prescribed in the by-
laws. This is in consonance with the
express power granted by law under section
36, paragraph 6 of the code, authorizing
them to admit members thereof and that
authority carries with it the power to
prescribe rules on membership. It has thus
been stated that in the absence of charter or
statutory restrictions, non-stock corporations
may determine who shall be admitted to
membership and how they shall be
admitted.
Section 36. Corporate powers and
capacity. - Every corporation incorporated
under this Code has the power and
capacity:
6. In case of stock corporations, to issue or
sell stocks to subscribers and to 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 non-stock corporation;
- They can provide the manner in which to
admit depending on their own rules
 The power or authority to terminate
members in non-stock corporations is said
to be inherent but strict compliance with the
manner and procedure laid down in the by-
laws must be observed, otherwise it may
render the expulsion ineffective and invalid.
Section 91. Termination of
membership. - Membership shall be
terminated in the manner and for the causes
provided in the articles of incorporation or
the by-laws. Termination of membership
shall have the effect of extinguishing all
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rights of a member in the corporation or in
its property, unless otherwise provided in
the articles of incorporation or the by-laws.
(n)
 Power is inherent and may be exercised in
certain situations:
1. When an offense is committed which,
although it has no immediate relation to
a member’s duty as such, it is so
infamous as to render him unfit for
society of honest men, which is
indictable at common law;
2. When the offense is a violation of his
duty as member of the corporation; and,
3. When the offense is of a mixed nature,
being both against his duty as a
member of the corporation, and also
indictable at common law.
If the conduct of the member comes within
any of this cases, it is a ground for valid
expulsion although it may not be expressly
made so by the by-laws
Chinese YMCA vs. Ching
- Right of the corporation to choose who the
members are, cannot be inquired or
intervened by the court
- The appealed decision thus contravened
the establish principle that the courts cannot
strip a member of a non-stock corporation of
his membership therein without cause.
Lions Club International vs. CA
- Courts will not generally interfere on matters
involving the internal affairs of an
unincorporated association such as election
contest unless the acts complained of are
arbitrary, oppressive, fraudulent, violative of
civil rights and the like
- General rule is that the courts will not
interfere with the internal affairs of an
unincorporated association so as to settle
disputes between the members, or
questions of policy, discipline, or internal
government, so long as the government of
the society is fairly and honestly
administered in conformity with its by-laws
and the law of the land, and no property or
civil rights are involved.
- Exceptions are the following:
a. Where law and justice so require, and
the proceedings of the association are
subject to judicial review where there is
fraud, oppression, or bad faith, or where
the action complained of is capricious,
arbitrary, or unjustly discriminatory

b. To grant relief in case property or civil
rights are invaded, although it has also
been held that the involvement of
property rights does not necessarily
authorize judicial intervention, in the
absence of arbitrariness, fraud or
collusion.
c. Are violative of the laws of the society,
or the law of the land, as by depriving
the person of due process of law
d. There is lack of jurisdiction on the part of
the tribunal conducting the proceedings,
where the organization exceeds its
powers, or where the proceedings are
otherwise illegal
 Corporations, stock and non-stock, may be
dissolved in accordance and pursuant to the
provisions of Sections 118 to 121 of the
Corporation Code and the pertinent
provisions of P.D. 902-A, as amended. If
such be the case, the assets of the
corporation are to be distributed in
accordance with law and established
jurisprudence.
 If a non-stock corporation is dissolved how
will its properties be distributed?
Section 94. Rules of distribution. - In
case dissolution of a non-stock
corporation in accordance with the
provisions of this Code, its assets shall
be applied and distributed as follows:
1. All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall
be made therefore;
2. Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs
by reason of the dissolution, shall be
returned, transferred or conveyed in
accordance with such requirements;
3. Assets received and held by the
corporation subject to limitations
permitting their use only for charitable,
religious, benevolent, educational or
similar purposes, but not held upon a
condition requiring return, transfer or
conveyance by reason of the
dissolution, shall be transferred or
conveyed to one or more corporations,
societies or organizations engaged in
activities in the Philippines substantially
similar to those of the dissolving
corporation according to a plan of
distribution adopted pursuant to this
Chapter;
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4. Assets other than those mentioned in
the preceding paragraphs, if any, shall
be distributed in accordance with the
provisions of the articles of incorporation
or the by-laws, to the extent that the
articles of incorporation or the by-laws,
determine the distributive rights of
members, or any class or classes of
members, or provide for distribution; and
5. In any other case, assets may be
distributed to such persons, societies,
organizations or corporations, whether
or not organized for profit, as may be
specified in a plan of distribution
adopted pursuant to this Chapter. (n)
 Non-stock corporations with 4Billion funds,
may it be distributed for and among its
members?
- Section 94 number 3 provides:
3. Assets received and held by the
corporation subject to limitations permitting
their use only for charitable, religious,
benevolent, educational or similar purposes,
but not held upon a condition requiring
return, transfer or conveyance by reason of
the dissolution, shall be transferred or
conveyed to one or more corporations,
societies or organizations engaged in
activities in the Philippines substantially
similar to those of the dissolving corporation
according to a plan of distribution adopted
pursuant to this Chapter;
- If there is no distributive agreement then
they may do so through a plan of
distribution under section 95
Section 95. Plan of distribution of
assets. - A plan providing for the distribution
of assets, not inconsistent with the
provisions of this Title, may be adopted by a
non-stock corporation in the process of
dissolution in the following manner:
The board of trustees shall, by
majority vote, adopt a resolution
recommending a plan of distribution and
directing the submission thereof to a vote at
a regular or special meeting of members
having voting rights. Written notice setting
forth the proposed plan of distribution or a
summary thereof and the date, time and
place of such meeting shall be given to
each member entitled to vote, within the
time and in the manner provided in this
Code for the giving of notice of meetings to
members. Such plan of distribution shall be
adopted upon approval of at least two-thirds
(2/3) of the members having voting rights

present or represented by proxy at such
meeting. (n)
CLOSE CORPORATIONS
 Section 96. Definition and applicability of
Title. - A close corporation, within the
meaning of this Code, is one whose articles
of incorporation provide that: (1) All the
corporation's issued stock of all classes,
exclusive of treasury shares, shall be
held of record by not more than a
specified number of persons, not
exceeding twenty (20); (2) all the issued
stock of all classes shall be subject to
one or more specified restrictions on
transfer permitted by this Title; and (3)
The corporation shall not list in any
stock exchange or make any public
offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation
when at least two-thirds (2/3) of its voting
stock or voting rights is owned or controlled
by another corporation which is not a close
corporation within the meaning of this Code.
- Between and among themselves, they feel
and act alike
- Not more than 20 stockholders
- Specified persons, if you are not specified,
you cannot be a stockholder
- All the issued stocks of all classes is subject
to restrictions
- Shall not be listed in the stock exchange not
publicly offered
- 3 qualifying conditions must be contained in
the articles of incorporation, to be
considered as a close corporation, if not, it
will not be considered as such and will be
governed by the general provisions of the
code
- Even if 100 % is owned by one person it will
not be considered a close corporation
without the 3 qualifying provisions
- Identity of stockholders, specified persons
- Active management either as directors or
partners in management
- Combination of the corporation and
partnership type of business
 May any type of corporation, be organized
as such close corporation?
- No, the 3 qualifying conditions must be
present
 What if 2/3 of the outstanding capital stock
is owned by another corporation which is
also a close corporation, will it be a close
corporation?
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- No, it will only be a closed corporation if 2/3
of the voting stocks of a close corporation is
also owned by a close corporation. It must
be “voting” stocks
- Even if another corporation owns or controls
2/3 of the voting stocks of a close
corporation, the latter may still be
considered as such close corporation if the
corporation owning or controlling the shares
is also a close corporation.
“Notwithstanding the foregoing, a
corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of
its voting stock or voting rights is owned or
controlled by another corporation which is
not a close corporation within the meaning
of this Code.”
 What kind of corporations cannot be a close
corporation?
1. Mining or oil companies,
2. Stock exchange
3. Banks and insurance companies,
4. Public utilities
5. Educational institutions
6. Corporations vested with public interest
 Classification of directors
- Ordinary stock- no such right
- Close corporation-yes there is such a right
 Section 97 is a permissive provision
Section 97. Articles of incorporation.
- The articles of incorporation of a close
corporation may provide:
1. For a classification of shares or rights and
the qualifications for owning or holding the
same and restrictions on their transfers as
may be stated therein, subject to the
provisions of the following section;
2. For a classification of directors into one or
more classes, each of whom may be voted
for and elected solely by a particular class
of stock; and
3. For a greater quorum or voting
requirements in meetings of stockholders or
directors than those provided in this Code.
 After classification what then?
- After classification, qualification and then
restriction as provided for under the 3
qualifying conditions in section 96

 Cumulative voting is restricted in close
corporations if will be elected solely by a
particular class
 In a close corporation, the articles of
incorporation may provide for a greater
quorum and voting requirement in meetings
of both stockholders or directors to increase
the veto power of minority stockholders,
unlike in a stock corporation wherein only
directors meetings may provide for greater
quorum requirement and in stockholders
meeting which may not be altered or
increased, as provide for in section 25,
following the doctrine of limited capacity
 The articles of a close corporation may
likewise provide that the business of the
corporation shall be managed by the
stockholders rather than by the board of
directors. However the same must contain
the continuing provisions required in
paragraph 2 of section 97, that is:
1. No meeting of stockholders need be
called to elect directors;
2. Unless the context clearly requires
otherwise, the stockholders of the
corporation shall be deemed to be
directors; and;
3. The stockholders of the corporation
shall be subject to all liabilities of
directors.
 Liability of stockholders acting as directors
in a close corporation are more extensive
since they are personally liable for corporate
torts unless the corporation has obtained a
reasonable adequate liability insurance,
unlike a ordinary stock corporation, wherein
directors thereof are only liable for corporate
torts only if they have been negligent or
acted fraudulently in the performance of
their functions.
 Restrictions
- In ordinary stock corporations, the
restrictions must appear in the articles of
incorporation as well as the certificate of
stocks
- In a close corporation, the restrictions must
appear in the articles of incorporation, the
by-laws and the certificate of stocks.
Otherwise, the same shall not be binding on
any purchaser thereof in good faith
 What if the stockholders do not want to
exercise their right or option to purchase
may it be sold to any person?
- Yes, any third person, section 98 provides:
Section 98. Validity of restrictions
on transfer of shares. - Restrictions on the
right to transfer shares must appear in the
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articles of incorporation and in the by-laws
as well as in the certificate of stock;
otherwise, the same shall not be binding on
any purchaser thereof in good faith. Said
restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the
shares of the transferring stockholder with
such reasonable terms, conditions or period
stated therein. If upon the expiration of
said period, the existing stockholders or
the corporation fails to exercise the
option to purchase, the transferring
stockholder may sell his shares to any
third person.
o ordinary stock corporations are liable
only if acted in Bad faith, fraud or
negligence in performance of duty
 What if there are already 20 stockholders
and they want to add 2 more, may it
compel?
- In ordinary stock corporations, they may
compel by mandamus
- In close corporations, may not be compelled
to admit because it breaches the qualifying
conditions
 Since they cannot be compelled, may they
admit?
- Yes, provided all the stockholders
consented or instead of consenting they
decide to amend their articles of
incorporation
- Will have to amend the articles of
incorporation to accommodate other
purchasers of share
- Will cease to be a close corporation if it
amends and becomes in excess of 20
o Unless all the stockholders consent
they “may”
 What if the other stockholders object to
register? What will be the remedy of the
transferee?
- His remedy is rescission. The effect of
rescission is mutual restitution
 How about the stockholder, what is his
recourse?
- He may compel the close corporation to
purchase his shares at their fair value for
any reason, provided the corporation has
sufficient assets in its books to cover the
debts and liabilities exclusive of capital
- In a close corporation, there is a
withdrawing stockholder, unlike in an

ordinary stockholder where there is none,
they may only do so in the exercise of
appraisal rights
Section 105. Withdrawal of
stockholder or dissolution of corporation. -
In addition and without prejudice to other
rights and remedies available to a
stockholder under this Title, any
stockholder of a close corporation may,
for any reason, compel the said
corporation to purchase his shares at
their fair value, which shall not be less
than their par or issued value, when the
corporation has sufficient assets in its
books to cover its debts and liabilities
exclusive of capital stock: Provided, That
any stockholder of a close corporation may,
by written petition to the Securities and
Exchange Commission, compel the
dissolution of such corporation whenever
any of acts of the directors, officers or those
in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any
stockholder, or whenever corporate assets
are being misapplied or wasted.
 Agreements may also be entered in a close
corporation <sec.100>
- They can even agree to be partners in
management
- Pre-incorporation
- Manner in which the business of the
corporation shall be managed
 Board resolution
- Ordinary stock corporations- sit and act as a
body at a duly constituted meeting, they
may do so by virtue of the E-Commerce Act
through teleconference or video conference
 Exception to the rule: other officers may be
directly appointed and hired by the
stockholders
 Close corporations may validly act even
without a meeting provided the conditions
are obtained
Section 101. When board meeting
is unnecessary or improperly held. - Unless
the by-laws provide otherwise, any action by
the directors of a close corporation without a
meeting shall nevertheless be deemed valid
if:
1. Before or after such action is taken,
written consent thereto is signed by all the
directors; or
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2. All the stockholders have actual or
implied knowledge of the action and make
no prompt objection thereto in writing; or
3. The directors are accustomed to take
informal action with the express or implied
acquiescence of all the stockholders; or
4. All the directors have express or implied
knowledge of the action in question and
none of them makes prompt objection
thereto in writing.
 Pre-emptive rights in a close corporation is
absolute
Section 102. Pre-emptive right in
close corporations. - The pre-emptive right
of stockholders in close corporations shall
extend to all stock to be issued, including
reissuance of treasury shares, whether for
money, property or personal services, or in
payment of corporate debts, unless the
articles of incorporation provide otherwise.
 Why is it said to be absolute?
- Because there is no public offering in a
close corporation, otherwise it will not be
considered as close
 In a close corporation the pre-emptive rights
is broadened to include all issues without
exception unless denied or limited by the
articles of incorporation
 Section 39 is the governing provision
concerning rights of the stockholder in an
ordinary stock corporation and it may be
denied. If it is not denied a stockholder can
exercise his pre-emptive rights for all issues
of shares whether money, property or
previously incurred indebtedness.
Section 39. Power to deny pre-
emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of
shares of any class, in proportion to their
respective shareholdings, unless such right
is denied by the articles of incorporation or
an amendment thereto: Provided, That such
pre-emptive right shall not extend to shares
to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public; or to shares to be
issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of
the outstanding capital stock, in exchange
for property needed for corporate purposes
or in payment of a previously contracted
debt.

 Are treasury shares covered in the exercise
of pre-emptive rights in ordinary stock
corporations?
 As regards amendments
Section 103. Amendment of articles
of incorporation. - Any amendment to the
articles of incorporation which seeks to
delete or remove any provision required by
this Title to be contained in the articles of
incorporation or to reduce a quorum or
voting requirement stated in said articles of
incorporation shall not be valid or effective
unless approved by the affirmative vote of at
least two-thirds (2/3) of the outstanding
capital stock, whether with or without voting
rights, or of such greater proportion of
shares as may be specifically provided in
the articles of incorporation for amending,
deleting or removing any of the aforesaid
provisions, at a meeting duly called for the
purpose.
 What happens if there is a deadlock?
- Section 104 provides for a remedy
Section 104. Deadlocks. - -
Notwithstanding any contrary provision in
the articles of incorporation or by-laws or
agreement of stockholders of a close
corporation, if the directors or stockholders
are so divided respecting the management
of the corporation's business and affairs that
the votes required for any corporate action
cannot be obtained, with the consequence
that the business and affairs of the
corporation can no longer be conducted to
the advantage of the stockholders generally,
the Securities and Exchange Commission,
upon written petition by any stockholder,
shall have the power to arbitrate the
dispute. In the exercise of such power, the
Commission shall have authority to make
such order as it deems appropriate,
including an order: (1) cancelling or altering
any provision contained in the articles of
incorporation, by-laws, or any stockholder's
agreement; (2) cancelling, altering or
enjoining any resolution or act of the
corporation or its board of directors,
stockholders, or officers; (3) directing or
prohibiting any act of the corporation or its
board of directors, stockholders, officers, or
other persons party to the action; (4)
requiring the purchase at their fair value of
shares of any stockholder, either by the
corporation regardless of the availability of
unrestricted retained earnings in its books,
or by the other stockholders; (5) appointing
a provisional director; (6) dissolving the
corporation; or (7) granting such other relief
as the circumstances may warrant.
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A provisional director shall be an
impartial person who is neither a
stockholder nor a creditor of the corporation
or of any subsidiary or affiliate of the
corporation, and whose further
qualifications, if any, may be determined by
the Commission. A provisional director is
not a receiver of the corporation and does
not have the title and powers of a custodian
or receiver. A provisional director shall have
all the rights and powers of a duly elected
director of the corporation, including the
right to notice of and to vote at meetings of
directors, until such time as he shall be
removed by order of the Commission or by
all the stockholders. His compensation shall
be determined by agreement between him
and the corporation subject to approval of
the Commission, which may fix his
compensation in the absence of agreement
or in the event of disagreement between the
provisional director and the corporation.
- Powers of the SEC in intra-corporate
concerns has been transferred to the proper
commercial courts
- Prohibit, even if acting in good faith
Provisional director appointed by the court
- Requiring the purchase, irrespective of
unrestricted retained earnings
- The provision of the law above-quoted gives
the SEC a very wide discretion in respect to
management of a close corporation in the
event of a deadlock. It may:
1. Cancel or alter any provision in the
articles of incorporation, by-laws or any
stockholders agreement
2. Cancel, alter or enjoin any resolution or
other act of the corporation or its board
of directors, stockholders or officers
3. Prohibit any act of the corporation or its
board of directors, stockholders or
officers or other persons party to the
action;
4. Requiring the purchase of the par value
of the shares of any stockholders, either
by the corporation regardless of
availability of unrestricted earnings, or
by the other shareholders,
5. Appointment of a provisional director
6. Dissolving the corporation; or
7. Other relief as the circumstances may
warrant.
 Section 105
- Dishonesty is a ground for dissolution of a
close corporation
- Even one stockholder may petition for
dissolution
 87

o when there is a relief available, stock, cumulative

dissolution would not be available in voting may, in effect,
an ordinary corporation be restricted

CLOSE ORDINARY STOCK 10. The articles of Officers are elected by

CORPORATION CORPORATION incorporation may the Board of Directors
1. The number of No limitation as to provide that all officers
stockholders cannot number of shareholder shall be elected or
exceed 20 appointed by the
stockholders
2. To the extent Maximum number of
that all stockholders directors is 15 11. It may provide Although the articles of
can be deemed for greater quorum incorporation or by-laws
directors, the number and voting may provide for greater
of directors can requirements in quorum and voting
effectively be more meetings of requirements in
than 15 stockholders and directors’ meeting under
directors section 25, those for
3. Shares of stock Generally no restriction stockholders’ meeting
are subject to on transfer of shares cannot generally be
specified restrictions altered
12. Restriction on Valid and binding if
4. Shares of stock No prohibition transfer of shares indicated in the articles
are prohibited from should be indicated in of incorporation and
being listed in the the articles of stock certificates
stock exchange or incorporation, by-laws
offered for sale to the and stock certificates
public
13. Pre-emptive Pre-emptive rights may
5. Stockholders Management is lodged rights of stockholders be denied as provided
may take an active in the Board of Directors is broader as it include for in section 39
part in corporate all issues without
management by exception
vesting management
to them rather than a 14. A stockholder Unless he sells his
Board of Director may withdraw and shares, a stockholder
compel the cannot get back his
6. Those active in Directors are liable for corporation to investment nor compel
management are torts only if they have purchase his shares the corporation to buy
personally liable for acted negligently or for any reason with the his shares except in the
corporate torts unless fraudulently limitation only that the exercise of his appraisal
the corporation has corporation has right
obtained an adequate sufficient assets to
liability insurance cover its liabilities
exclusive of capital
7. Directors can Directors must, as a stock
validly act even rule, act as a body at a
without a meeting duly constituted meeting 15. The proper Courts cannot interfere I
forum may interfere in the business judgment
8. Agreements Not valid and binding the management of a of the
between stockholders since stockholders’ close corporation in directors/stockholders
regarding the agreement cannot limit case of deadlocks “BUSINESS
operations of the the discretion of the under Section 104, JUDGMENT RULE”
business can validly Board to manage even of the
be made corporate affairs directors/stockholders
are acting in good faith
9. To the extent Ordinarily, no such
that directors may be classification and no 16. Any stockholder Dissolution may be had
classified into one or restrictions on may petition the SEC only on the grounds
more classes and to cumulative voting for corporate provided by the
be voted solely by a dissolution on grounds provisions of the Code
particular class of among others, on dissolution and P.D.
provides for in section 902-A, as amended
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Manuel Dulay Enterprises vs. CA
- What was the position of Manuel Dulay
here? President, General Manager and
Treasurer
- Cannot act both as president and treasurer
at the same time
- Since it is a close corporation owned by the
family of Manuel Dulay, save and except the
secretary, it should be governed by Title XII
- Petitioner is classified as a close
corporation and consequently a board
resolution authorizing the sale or mortgage
of the subject property is not necessary to
bind the corporation for the action of its
president. At any rate, a corporate action
taken at a board meeting without proper call
or notice in a close corporation is deemed
ratified by the absent director unless the
latter promptly files his written objection with
the secretary of the corporation after having
knowledge of the meeting which, in this
case, petitioner Virgilio Dulay failed to do.
- Virgilio Dulay is a signatory witness, he
knows very well about the deed of absolute
sale, he is estopped
Naguiat vs. NLRC
- Section 100 par. 5. To the extent that the
stockholders are actively engaged in the
management or operation of the business
and affairs of a close corporation, the
stockholders shall be held to strict fiduciary
duties to each other and among
themselves. Said stockholders shall be
personally liable for corporate torts unless
the corporation has obtained reasonably
adequate liability insurance.
 Family corporations is not automatically a
close corporation the 3 qualifying conditions
must be present.
SPECIAL CORPORATIONS
 2 types of special corporations
1. Educational corporations
2. Religious corporations
2.1 Corporation Sole
2.2 Religious Societies
 What provision governs educational
corporations?
Section 106. Incorporation. -
Educational corporations shall be governed
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by special laws and by the general
provisions of this Code. (n)
- Special laws like they Education Act of the
Philippines
- These institutions of learning, once
recognized by the government as such are
mandated by law to be incorporated within
ninety (90) days under the provisions of the
Corporation Code and must, perforce,
comply with the requirements and
procedure laid down there under. Their
failure to so will not immune the educational
institution from suit as a corporation.
(Chiang Kai Siek Case)
- Favorable recommendation of government
agency involved
 Two types of educational corporations
- Certificate of completion in the academic
field
- Vocational and technical one’s
o Recommendation of DECS if
certificate of completion in the
academic field
 How is the governing board of an
educational institution instituted?
- Non-stock- multiples of 5 only (example:
5,10,15)
- Stock- can be anywhere between 5 to 15
 Can they consist of 7 or 9 members?
- Yes, if stock
 Can they be incorporated also as non-
stock?
- Yes
- B.P. 232 allows the organization of an
educational institution that is stock
corporation, only if they do not issue a
certificate of completion in the academic
field
 Qualifications and disqualifications of the
membership in the board of an educational
corporation
- Educational corporations are governed by
special laws and general provisions, hence
if there is no provision in the special law,
you go back to section 25 and 27 of the
general provisions
- Stock- must be a stockholder
- Non-stock- must be a member
- By-laws may provide for additional
qualifications and disqualifications

Section 25. Corporate officers,
quorum. - Immediately after their election,
the directors of a corporation must formally
organize by the election of a president, who
shall be a director, a treasurer who may or
may not be a director, a secretary who shall
be a resident and citizen of the Philippines,
and such other officers as may be provided
for in the by-laws. Any two (2) or more
positions may be held concurrently by the
same person, except that no one shall act
as president and secretary or as president
and treasurer at the same time.
The directors or trustees and officers
to be elected shall perform the duties
enjoined on them by law and the by-laws of
the corporation. Unless the articles of
incorporation or the by-laws provide for a
greater majority, a majority of the number of
directors or trustees as fixed in the articles
of incorporation shall constitute a quorum
for the transaction of corporate business,
and every decision of at least a majority of
the directors or trustees present at a
meeting at which there is a quorum shall be
valid as a corporate act, except for the
election of officers which shall require the
vote of a majority of all the members of the
board.
Directors or trustees cannot attend or vote
by proxy at board meetings. (33a)
Section 27. Disqualification of directors,
trustees or officers. - No person convicted by final
judgment of an offense punishable by imprisonment
for a period exceeding six (6) years, or a violation
of this Code committed within five (5) years prior to
the date of his election or appointment, shall qualify
as a director, trustee or officer of any corporation.
(n)
 Article 14 section 4 par.
Constitutions
Educational institutions, other than
those established by religious groups and
mission boards, shall be owned solely by
citizens of the Philippines or corporations or
associations at least sixty per centum of the
capital of which is owned by such citizens.
The Congress may, however, require
increased Filipino equity participation in all
educational institutions. The control and
administration of educational institutions
shall be vested in citizens of the Philippines.
No educational institution shall be
established exclusively for aliens and no
group of aliens shall comprise more than
one-third of the enrollment in any school.
The provisions of this sub section shall not
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apply to schools established for foreign
diplomatic personnel and their dependents
and, unless otherwise provided by law, for
other foreign temporary residents.
- Management is left solely to citizens of the
Philippines
- Board of Directors manages the corporate
affairs, foreigners cannot therefore be
elected in the board
- Exceptions are, mission boards and
religious orders, which may have a
governing board consisting of foreigners
 Term of office of governing board in an
educational institutions
- Can serve a term of 5 years. If that be the
case, 1/5 of their number shall expire every
year
 Non-stock or stock, can they serve for a 1
year term only?
- Yes, the articles of incorporation may
provide that it be 1 year only
 What are these religious corporations
spoken off?
- Corporation sole and religious societies
 What is a corporation sole?
- Consists of one person only and his
successor in some particular station, who
are incorporated by law in order to give
them some legal capacities and
advantages, particularly that of perpetuity,
which in their natural persons they could not
have had
2 of the  May a corporation be organized by less
than 5 natural persons?
- General rule, 5 to 15 natural persons(except
cooperatives and corporations primarily
organized to hold equities in rural banks and
may rightfully become incorporators thereof)
- Exception, corporation sole, consist of only
one person
 May any person form or organize a
corporation sole?
- No, not any person can form a corporation
sole, section 110 provides:
Section 110. Corporation sole. - For
the purpose of administering and managing,
as trustee, the affairs, property and
temporalities of any religious denomination,

sect or church, a corporation sole may be
formed by the chief archbishop, bishop,
priest, minister, rabbi or other presiding
elder of such religious denomination, sect or
church. (154a)
 Is it required to file the articles
incorporation in the SEC?
- Yes
 What should be contained in the articles of
incorporation?
- Section 111 and section 112 provides for
the contents and procedures
Section 111. Articles of
incorporation. - In order to become a
corporation sole, the chief archbishop,
bishop, priest, minister, rabbi or presiding
elder of any religious denomination, sect or
church must file with the Securities and
Exchange Commission articles of
incorporation setting forth the following:
1. That he is the chief archbishop, bishop,
priest, minister, rabbi or presiding elder of
his religious denomination, sect or church
and that he desires to become a corporation
sole;
2. That the rules, regulations and discipline
of his religious denomination, sect or church
are not inconsistent with his becoming a
corporation sole and do not forbid it;
3. That as such chief archbishop, bishop,
priest, minister, rabbi or presiding elder, he
is charged with the administration of the
temporalities and the management of the
affairs, estate and properties of his religious
denomination, sect or church within his
territorial jurisdiction, describing such
territorial jurisdiction;
4. The manner in which any vacancy
occurring in the office of chief archbishop,
bishop, priest, minister, rabbi of presiding
elder is required to be filled, according to
the rules, regulations or discipline of the
religious denomination, sect or church to
which he belongs; and
5. The place where the principal office of the
corporation sole is to be established and
located, which place must be within the
Philippines.
The articles of incorporation may
include any other provision not contrary to
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law for the regulation of the affairs of the
corporation. (n)
Section 112. Submission of the
articles of incorporation. - The articles of
incorporation must be verified, before filing,
of by affidavit or affirmation of the chief
archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and
accompanied by a copy of the commission,
certificate of election or letter of
appointment of such chief archbishop,
bishop, priest, minister, rabbi or presiding
elder, duly certified to be correct by any
notary public.
From and after the filing with the
Securities and Exchange Commission of the
said articles of incorporation, verified by
affidavit or affirmation, and accompanied by
the documents mentioned in the preceding
paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall
become a corporation sole and all
temporalities, estate and properties of the
religious denomination, sect or church
theretofore administered or managed by
him as such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall
be held in trust by him as a corporation sole,
for the use, purpose, behalf and sole benefit
of his religious denomination, sect or
church, including hospitals, schools,
colleges, orphan asylums, parsonages and
cemeteries thereof. (n)
 Is it required to indicate its terms of
execution? Why not?
- Not required because they are supposed to
exist in perpetuity
- However, it does not mean that it shall
continue to exist forever, it merely means
that it has the capacity of continuous
existence during a particular period until
dissolved in accordance with law
 When will it acquire judicial personality?
How do you compare this to other types of
corporation?
- After the filing the verified articles of
incorporation along with the documents
required in Section 112 with the SEC,
immediately becomes endowed with
corporate personality, this serves as an
exception to the rule that a corporation
acquires juridical personality only upon the
issuance of a certificate of incorporation by
the said government agency.
- Upon filing of verified articles of
incorporation with the SEC, will not require
the approval of SEC

 A corporation sole is possessed with the
same power, rights and privileges, to own,
acquire and hold or convey properties like
any other corporation? True or False
- False, they have the same power rights and
privileges, but when it comes to alienation
and acquisition, it must possess a court
order, however when there is a regulated
method, a court order may be dispensed
with <sec. 113>
Section 113. Acquisition and
alienation of property. - Any corporation sole
may purchase and hold real estate and
personal property for its church, charitable,
benevolent or educational purposes, and
may receive bequests or gifts for such
purposes. Such corporation may sell or
mortgage real property held by it by
obtaining an order for that purpose from the
Court of First Instance of the province
where the property is situated upon proof
made to the satisfaction of the court that
notice of the application for leave to sell or
mortgage has been given by publication or
otherwise in such manner and for such time
as said court may have directed, and that it
is to the interest of the corporation that
leave to sell or mortgage should be granted.
The application for leave to sell or mortgage
must be made by petition, duly verified, by
the chief archbishop, bishop, priest,
minister, rabbi or presiding elder acting as
corporation sole, and may be opposed by
any member of the religious denomination,
sect or church represented by the
corporation sole: Provided, That in cases
where the rules, regulations and discipline
of the religious denomination, sect or
church, religious society or order concerned
represented by such corporation sole
regulate the method of acquiring, holding,
selling and mortgaging real estate and
personal property, such rules, regulations
and discipline shall control, and the
intervention of the courts shall not be
necessary. (159a)
 Since a corporation sole is consists only of
one person, will the registration of the
property in the name of the corporation sole
vest unto the head thereof the ownership of
the property?
- No, it will not vest unto the head, the head is
acting merely as a guardian
Roman Catholic Apostolic Adm. Of Davao,
inc. vs. Land Reg. Comm, et al.
- Act only as a guardian
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- Ownership devolves upon the congregation
or religious denomination
- A corporation consists of one person only
and his successors (who will always be one
at a time, in some particular station), who
are incorporated by law in order to give
them some legal capacities and
advantages, particularly that of perpetuity,
which in their natural persons they could not
have had
- Roman Catholic Church has no nationality
and that the framers of the Constitution, as
will be hereunder explained, did not have in
mind the religious corporations sole when
they provided that 60 percent of the capital
thereof be owned by Filipino citizens.
Director of Lands vs. CA
- Alienable public land is converted into
private land when the same has been
openly, continuously and exclusively in
possession of the property as concept of an
owner for 30 years, automatically that is
Republic of the Philippines vs. IAC
- Determination of the character of the land
should be in mind
- If they still form part of public domain they
cannot be owned, but if they are converted
into private land, the constitutional
prohibition will not apply
 If there is vacancy who will fill up the same?
What if there is none, what must the
successor do?
- According to section 114:
Section 114. Filling of vacancies. -
The successors in office of any chief
archbishop, bishop, priest, minister, rabbi or
presiding elder in a corporation sole shall
become the corporation sole on their
accession to office and shall be permitted to
transact business as such on the filing with
the Securities and Exchange Commission of
a copy of their commission, certificate of
election, or letters of appointment, duly
certified by any notary public.
During any vacancy in the office of
chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious
denomination, sect or church incorporated
as a corporation sole, the person or persons
authorized and empowered by the rules,
regulations or discipline of the religious
denomination, sect or church represented
by the corporation sole to administer the
temporalities and manage the affairs, estate
and properties of the corporation sole during

the vacancy shall exercise all the powers
and authority of the corporation sole during
such vacancy. (158a)
 If a corporation exists in equity may it not be
dissolved?
Section 115. Dissolution. - A
corporation sole may be dissolved and its
affairs settled voluntarily by submitting to
the Securities and Exchange Commission a
verified declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding
up;
3. The authorization for the dissolution of
the corporation by the particular religious
denomination, sect or church;
4. The names and addresses of the persons
who are to supervise the winding up of the
affairs of the corporation.
Upon approval of such declaration of
dissolution by the Securities and Exchange
Commission, the corporation shall cease to
carry on its operations except for the
purpose of winding up its affairs. (n)
- While section 115 of the code provides for
the process and procedure for the
dissolution of a corporate sole, there is
nothing in the law itself which would prohibit
it from amending its articles of incorporation
- It is believed that authorization for the
dissolution by the particular religious
denomination, sect or church, as required in
sub-paragraph 3 of section 115 would still
be necessary in the case of amending the
articles of incorporation to affect dissolution.
o Expiration of a corporate term will
not apply to a religious corporation
 May a corporation sole be dissolved by
judicial decree?
- General rule: No, because a corporation
sole, is by its very nature ecclesiastical and
religious (doctrine of separation of church
and state)
- Exception: police power of the state, if its
purpose is being carried out and is instead
being used for illegal purpose, it may be so
dissolved
 What are religious societies?
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- Under common law, a religious society is a
body of persons associated together for the
purpose of maintaining religious worship.
 Is it also required to file its articles of
incorporation to the SEC?
- No <sec. 116> “may”
 What should be contained in the articles of
incorporation?
- Section 116 provides:
Section 116. Religious societies. -
Any religious society or religious order, or
any diocese, synod, or district organization
of any religious denomination, sect or
church, unless forbidden by the constitution,
rules, regulations, or discipline of the
religious denomination, sect or church of
which it is a part, or by competent authority,
may, upon written consent and/or by an
affirmative vote at a meeting called for the
purpose of at least two-thirds (2/3) of its
membership, incorporate for the
administration of its temporalities or for the
management of its affairs, properties and
estate by filing with the Securities and
Exchange Commission, articles of
incorporation verified by the affidavit of the
presiding elder, secretary, or clerk or other
member of such religious society or
religious order, or diocese, synod, or district
organization of the religious denomination,
sect or church, setting forth the following:
1. That the religious society or religious
order, or diocese, synod, or district
organization is a religious organization of a
religious denomination, sect or church;
2. That at least two-thirds (2/3) of its
membership have given their written
consent or have voted to incorporate, at a
duly convened meeting of the body;
3. That the incorporation of the religious
society or religious order, or diocese, synod,
or district organization desiring to
incorporate is not forbidden by competent
authority or by the constitution, rules,
regulations or discipline of the religious
denomination, sect, or church of which it
forms a part;
4. That the religious society or religious
order, or diocese, synod, or district
organization desires to incorporate for the
administration of its affairs, properties and
estate;

5. The place where the principal office of the
corporation is to be established and located,
which place must be within the Philippines;
and
6. The names, nationalities, and residences
of the trustees elected by the religious
society or religious order, or the diocese,
synod, or district organization to serve for
the first year or such other period as may be
prescribed by the laws of the religious
society or religious order, or of the diocese,
synod, or district organization, the board of
trustees to be not less than five (5) nor more
than fifteen (15). (160a)
 Is it required to indicate its term of
existence?
- Likewise to exist in perpetuity, the law does
not require to indicate its term of existence
 When will it acquire juridical personality?
- Only a corporation sole may come into
existence without SEC approval, section 19
will thus govern, Vested with judicial
capacity upon issuance of the certificate by
the SEC
o However it is not accurate according
to atty. Ladia because there are
those that can issue for example
cooperatives- BUREAU OF
COOPERATIVES which register,
home insurance guaranty
corporation- HOME OWNERS
 How may religious societies be dissolved?
- Go to the general rules governing
dissolution, because the rules under special
corporations do not provide for such rule
DISSOLUTION
 What is dissolution?
- Extinguishment of the corporate franchise
and the termination of corporate existence
 3 modes of dissolution
1. By expiration of its term;
2. By voluntary surrender of its primary
franchise (voluntary dissolution);
3. By revocation of its corporate franchise
(involuntary dissolution)
Philippine National Bank vs. CFI
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- When the period of corporate life expires,
the corporation ceases to be a body
corporate for purposes of continuing the
business for which it is organized. But it
shall nevertheless be continued as a body
corporate for three years after the time
when it would have be dissolved, for the
purpose of prosecuting and defending suits
by or against it and for enabling it gradually
to settle and close its affairs to dispose of
and convey its property and to divide its
assets. There is no need for the institution
of a proceeding for quo warranto to
determine the time and date of the
dissolution of a corporation because the
period of corporate existence is provided in
the articles of incorporation. When such
period expires and without any extension
having been made pursuant to law, the
corporation is dissolved automatically
insofar as the continuation of its business is
concerned.
- The rights of the lessor and the lessee over
the improvements which the latter
constructed on the leased premises are
governed by Article 1678 of the Civil Code.
The provision gives the lessee the right to
remove the improvements if the lessor
chooses not to pay one half of the value
thereof. However, in the case at bar the law
will not apply because the parties herein
have stipulated in the contract their own
terms and conditions concerning the
improvements before the termination of the
lease. Petitioner PNB as assignee of PBM
succeeded to the obligation of the latter
under the contract of lease. It could not
possess rights more than what PBM had as
lessee under the contract. Hence, petitioner
was duly bound to remove the
improvements before the expiration of the
period of lease. Its failure to do so when the
lease was terminated was tantamount to a
waiver of its rights and interest over the
improvements on the leased premise.
o 3 modes of dissolution, 3 modes of
voluntary dissolution and 3 modes of
liquidation and winding up-
FREQUENTLY ASKED IN THE
FINALS
 What are the 3 modes of voluntary
dissolution?
1. Voluntary dissolution where no creditors are
affected; <sec.118>
2. Voluntary dissolution where creditors are
affected; <sec. 119>
3. Shortening of corporate term. <sec. 120>
 Voluntary dissolution where no creditors are
affected <sec.118>

- The formal and procedural requirements
necessary are the following:
1. Majority vote of the board of directors or
trustees;
2. Sending of notice of each stockholders or
member either by registered mail or
personal delivery at least thirty (30) days
prior to the meeting (scheduled by the board
for the purpose of submitting the board
action to dissolve the corporation for
approval of the stockholder or members.);
3. Publication of the notice of time, place and
subject of the meeting for three (3)
consecutive weeks in a newspaper
published in the place where the principal
office of said corporation is located or in a
newspaper of general circulation in the
Philippines;
4. Resolution adopted by the affirmative vote
of the stockholders owning at least 2/3 of
the outstanding capital stock or 2/3 of the
members at the meeting duly called for the
purpose;
5. A copy of the resolution authorizing the
dissolution must be certified by a majority of
the board of directors or trustees and
countersigned by the corporate secretary;
6. Issuance of a certificate of dissolution by the
SEC.
 Should this be strictly complied with?
- Yes, compliance with the requirements and
formalities prescribed above is mandatory
such that failure to comply therewith will
have no effect on the legal existence of the
corporation.
 Will dissolution be effective and valid by a
mere resolution of the BOD and
stockholders?
- No, a mere resolution by the stockholders or
the BOD of a corporation to dissolve the
same does not affect the dissolution but that
some other steps, administrative or judicial
is necessary. (Daguhoy Enterprises vs.
Ponce)
- Since it is the State which grants its right to
exist, it is only through the State which can
allow the termination of its existence;
without consent of the State, it will not be
dissolved.
 Voluntary dissolution where creditors are
affected <sec.119>
- By virtue of a petition, when there are
creditors affected
- The following formalities would thus be
required:
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1. Affirmative vote of the stockholders
representing at least 2/3 of the outstanding
capital stock or at least 2/3 of the members
at a meeting duly called for that purpose;
2. Petition for dissolution shall be filed with the
SEC signed by a majority of its board of
directors or trustees or other officers having
the management of its affairs, verified by
the president or secretary or one of its
directors or trustees, setting forth all claims
and demands against it.
3. Issuance of an order by the SEC reciting the
purpose of the petition and fixing the date
on or before which objections thereto may
be filed by any person, which date shall not
be less than thirty days nor more than sixty
days after entry of the order.
4. Before such date, a copy of the order must
be published once a week for three (3)
consecutive weeks in a newspaper of
general circulation published in the city or
municipality where the principal office is
situated or in a newspaper of general
circulation in the Philippines.
5. Posting of the same order for three (3)
consecutive weeks in three (3) public places
in such city or municipality.
6. Upon five (5) days’ notice, given after the
date on which the right to file objections has
expired, the SEC shall hear the petition and
try any issue made by the objections filed.
7. Judgment dissolving the corporation and
directing of its assets as justice requires and
the appointment of a receiver (if necessary
in its discretion) to collect such assets and
pay the debts of the corporation.
o The foregoing are also mandatory
requirements
 Is the appointment of a receiver mandatory?
- No, it is merely permissive or discretionary
on the part of the court. The code uses the
word “may”; the law intended to let the
shareholders have the control of the assets
of the corporation upon dissolution and
winding up.
- The directors may also undertake liquidation
and winding up of its corporate affairs, and
sound business judgment, on how they will
wind up
 Dissolution by shortening of corporate term
<sec.120>
- Will be valid upon approval of the SEC,
unlike general amendments, which will be
deemed approved if not acted upon by the
SEC within 6 months from the date of filing
for a cause not attributable to the
corporation.

- Shortening of the corporate term partakes
the nature of an amendment of the articles
of incorporation. Section 16 under general
amendments allows “written assent” section
37 mandates that the vote must be cast at a
duly constituted meeting.
Section 120. Dissolution by
shortening corporate term. - A voluntary
dissolution may be effected by amending
the articles of incorporation to shorten the
corporate term pursuant to the provisions of
this Code. A copy of the amended articles of
incorporation shall be submitted to the
Securities and Exchange Commission in
accordance with this Code. Upon approval
of the amended articles of incorporation of
the expiration of the shortened term, as the
case may be, the corporation shall be
deemed dissolved without any further
proceedings, subject to the provisions of
this Code on liquidation. (n)
o Intra-corporate- special commercial
courts
 Another way of dissolving a corporation is
through involuntary dissolution
Section 121. Involuntary dissolution.
- A corporation may be dissolved by the
Securities and Exchange Commission upon
filing of a verified complaint and after proper
notice and hearing on the grounds provided
by existing laws, rules and regulations. (n)
- Dissolution is tantamount to the imposition
of death penalty
- Instead of dissolving the corporation, courts
normally enjoin the further commission of
the questioned act
- The relief of dissolution will be awarded only
where no other remedy is available and it
will not be allowed where the rights of the
stockholders can be, or are, protected in
some other way (Republic vs. Bisaya Land
Trans. Co. Inc.)
 What are the grounds for involuntary
dissolution?
- It is commenced through a verified
complaint or motu proprio by the proper
courts
- Section 6 of PD 902-A provides for the
grounds for involuntary dissolution as
follows:
1. Fraud in procuring its certificate of
registration;
2. Serious misrepresentation as to what the
corporation can do or is doing to the great
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prejudice of or damage to the general
public;
3. Refusal to comply or defiance of any lawful
order of the Commission restraining
commission of acts which would amount to
a grave violation of its franchise;
4. Continuous inoperation for a period of at
least five (5) years;
5. Failure to file by-laws within the required
period;
6. Failure to file required reports in appropriate
forms as determined by the Commission
within the prescribed period.
- Other grounds are provided for in the
corporation code itself: among them are:
1. Violation of any provision of the Code under
section 144;
2. In case of deadlock in a close corporation
as provided for in section 105;
3. In a close corporation, any acts of directors,
officers or those in control of the corporation
which is illegal or fraudulent or dishonest or
oppressive or unfairly prejudicial to the
corporation or any stockholder or whenever
corporate assets are being misapplied or
wasted under section 105.
- Mere dishonesty is also a ground in a close
corporation
- Other grounds can be found in other special
laws like the Securities Regulation Code
and the General Banking Act as well as the
Insurance Code.
Government vs. Philippine Sugar Estate
- It is necessary in order to secure judicial
foreclosure of respondent’s charter to show
a mis-user of its franchise justifying such a
forfeiture
- Object is to protect the public, and not to
redress private grievances, the mis-user
must be such as to work or threaten a
substantial injury to the public, or such as to
amount to a violation of the fundamental
condition of the contract by which the
franchise was granted and thus defeat the
purpose of the grant
- Courts proceed with extreme caution which
has for their object the forfeiture of
corporate franchise, and forfeiture will not
be allowed, except under express limitation,
or for plain abuse of power by which the
corporation fails to fulfill the design and
purpose of its organization. But when the
abuse or violation constitutes or threatens a
substantial injury to the public or such as to
amount to a violation of the fundamental
conditions of its charter, or its conduct is
characterized by obduracy or pertinacity in
contempt of law, dissolution will be granted

- Did the court dissolve the corporation? No,
it did not, it granted the corporation 6
months to cease and desist the
performance of the questioned act
otherwise it will be dissolved
Government vs. El Hogar
- 3 causes of action, the first is that the
corporation violated the law by holding on
the property beyond that provide for by law,
the second is that the corporation undertook
the management f petitioners belonging to
delinquent shareholders of the association,
and lastly that the by-law provision, which
empowers the BD to cancel shares and to
return to the owners thereof the balance
returning from the liquidation
 Compare to Philippine Sugar Estate,
wherein the court ruled conditional
dissolution. Why decree conditional
dissolution in one and not in the other case?
- Because in El Hogar the government was at
fault, the government wasn’t able to issue
the certificate of title on time
- When the case was instituted, El Hogar was
already able to dispose the properties in
question, in Philippine Sugar Estate it was
still the holding the properties in order to
enrich itself at the expense of the taxpayers
Republic vs. Security Credit
Acceptance Corp. et al.
- The corporation here is a lending institution
and not a banking institution
- Defendant corporation violated the law
because before a corporation may engage
into a banking activity it must first obtain a
secondary franchise from the Central Bank
- Defendant corporation threatens substantial
injury to the general public, dissolution is
warrant
- If there is a bank run kawawa naman yung
depositors
Republic vs. Bisaya Land Transportation
Co. Inc
- The relief of dissolution will be awarded only
where no other remedy is available and it
will not be allowed where the rights of the
stockholders can be, or are, protected in
some other way
- Misuse and misapplication of the funds and
assets of the respondent were committed
particularly by the corporate officers, where
they can instead be held personally liable
- Since there is another remedy available
dissolution is not warranted
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 Assuming the above stated corporation is a
close corporation, would the court decree
otherwise?
- Yes, because in a close corporation, mere
dishonesty is a ground for the dissolution
- Can even be dissolved by petition of only
one stockholder on the grounds stated in
the code < sec. 105>
Financing Corporation of the Philippines vs.
Teodoro
- Minority stockholders may not ask for the
dissolution of a corporation in private suits
and that such actions should be brought by
the Government through its legal officers,
except in cases where the intervention of
the State, for one reason or another,
cannot be obtained, as when the State is
not interested because the complaint is
strictly a matter between the
stockholders and does not involve, in
the opinion of the legal officer of the
Government, any of the acts or
omissions warranting quo warranto
proceeding , in which minority
stockholders are entitled to have such
dissolution. It should be exercised if
necessary in order not to entirely ignore and
disregard the rights of said minority
stockholders, especially when said minority
stockholders are unable to obtain redress
and and protection of their rights within the
corporation itself. Stockholders should not
be left without recourse
 Present set up
- Any stockholder or member of a corporation
can institute a dissolution proceeding
against his own corporation before the
proper forum
- Special Commercial Courts, shall hear and
decide intra-corporate disputes
 May a corporation ask for dissolution of the
corporation when there is no prejudice to
the general public?
- Yes, in a close corporation, a petition for the
dissolution of the corporation may be
instituted by any one individual shareholder
on the ground, even by mere dishonesty
 Effects of dissolution
- The dissolution of a corporation not only
terminates its primary franchise to be a
corporation, but generally prevents it from
further exercising other or secondary
franchises which have been conferred to its.
It terminates its power to enter into
 97

contracts or t o continue the business as a Gonzales vs. Sugar Regulatory

going concern. Administration
- Based on this general rule, the Supreme
Court held that a corporation, whose - Instead of applying the corporation code,
corporate life expired, cannot lawfully the court applied the constitutional provision
pursue the business for which it was - Cannot be read as permitting to destroy the
organized. It cannot apply for a new substantive rights
certificate or a secondary franchise for it is - Such would collide with the non-impairment
incapable of receiving a grant. Neither can it of contracts clause of the constitution
enforce a contract executed prior its - Complainants will have the right to follow
dissolution for the purpose of continuing the the assets of the corporation in the hands of
business of its organization. SRA or any other agency for that matter
- In general the rights and liabilities of the
corporation are not extinguished by its  After dissolution what next?
dissolution.
- Liquidation and winding up should follow
Section 145. Amendment or repeal.
- No right or remedy in favor of or against  What is the definition of liquidation and
any corporation, its stockholders, members, winding up?
directors, trustees, or officers, nor any
liability incurred by any such corporation,
- Collection of all corporate assets, the
stockholders, members, directors, trustees,
payments of all its debts and settlement of
or officers, shall be removed or impaired
its obligations and the ultimate distribution
either by the subsequent dissolution of said
of the corporate assets, if any of it remains,
corporation or by any subsequent
to all stockholders in accordance with their
amendment or repeal of this Code or of any
proportionate stockholdings in the
part thereof. (n)
corporation or in accordance with their
respective contracts of subscription.
Buenaflor vs. Camarines Sur Industry Corp.
 Preference upon liquidation
- From that time on Camarines Sur was
plying in an activity that was illegal
- If there are preferred shares, the preference
- A corporation where the corporate life has
granted to such should be complied with
expired it cannot lawfully pursue the
- Preferred shares may give the holder
business for which it was organized.
thereof, preference only in the dividends but
- the Supreme Court held that a corporation,
also in the distribution of corporate assets
whose corporate life expired, cannot lawfully
upon liquidation or termination of the
pursue the business for which it was
corporate existence. If such is the intent, the
organized. It cannot apply for a new
contract of subscription must so indicate lest
certificate or a secondary franchise for it is
they are placed on equal footing with
incapable of receiving a grant.
common shareholders
- Awarding it to Camarines Sur is tantamount
- Preference may be participating or non-
to a medal for its illegal acts
participating
- It cannot apply for a new certificate or a
secondary franchise for it is incapable of
receiving a grant. It was not even a  Dissolved corporations are granted a period
of 3 years to liquidate
corporation de facto. And then, there is no
application subscribed by the new
corporation Section 122. Corporate liquidation. -
- And yet as stated, the new corporation has Every corporation whose charter expires by
not filed any application for certificate of its own limitation or is annulled by forfeiture
public convenience in Sabang, and has not or otherwise, or whose corporate existence
published such application. for other purposes is terminated in any other
manner, shall nevertheless be continued as
a body corporate for three (3) years after
Cebu Port Labor Union vs. State Marine Co
the time when it would have been so
dissolved, for the purpose of prosecuting
- Even a cursory reading of the provision and defending suits by or against it and
would convey the idea clearly manifested in enabling it to settle and close its affairs, to
the limitation “but not for the purpose of dispose of and convey its property and to
continuing the business for which it was distribute its assets, but not for the purpose
established,” that the 3-year period allowed of continuing the business for which it was
by the law is only for the purpose of winding established.
up its affairs.
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At any time during said three (3)
years, the corporation is authorized and
empowered to convey all of its property to
trustees for the benefit of stockholders,
members, creditors, and other persons in
interest. From and after any such
conveyance by the corporation of its
property in trust for the benefit of its
stockholders, members, creditors and
others in interest, all interest which the
corporation had in the property terminates,
the legal interest vests in the trustees, and
the beneficial interest in the stockholders,
members, creditors or other persons in
interest.
Upon the winding up of the
corporate affairs, any asset distributable to
any creditor or stockholder or member who
is unknown or cannot be found shall be
escheated to the city or municipality where
such assets are located.
Except by decrease of capital stock
and as otherwise allowed by this Code, no
corporation shall distribute any of its assets
or property except upon lawful dissolution
and after payment of all its debts and
liabilities. (77a, 89a, 16a)
 However the 3 year period is not absolute
 Liquidation may be undertaken in either of
the 3 ways
1. By the corporation itself through the BOD
- Usual method or procedure of liquidating a
corporation and although there is no law
authorizing it, neither is there anything that
prohibits the BOD from undertaking the
same
- If this method is resorted to, the board will
only have a period of 3 years to finish its
task of liquidation
- Claims for or against the corporate entity
not filed within the period will become
unenforceable as there exist no corporate
entity against which they can be enforced
- Actions pending for or against the
corporation when the 3 year period expires,
are abated since after the period, the
corporation ceases for all intents and
purposes and is no longer capable of suing
or being sued
2. By a trustee appointed by the corporation
- The corporation may opt to convey all
corporate assets to a trustees who will take
charge of liquidation
- If this method is used, the three year period
limitation imposed by section 122 will not
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apply provided the designation of the
trustee is made within that period
3. By appointment of a receiver
- A receiver may be appointed by the proper
forum on petition or motu proprio upon the
dissolution of the corporation
- The appointment of a receiver is, however,
permissive rather than mandatory and the
law tends to recognize that in cases of
voluntary dissolution there is no occasion
for the appointment of a receiver except
under special circumstances and upon
proper showing
- If a receiver is appointed, the 3 year period
fixed by law within which to complete the
task of liquidation will not likewise apply
because the dissolved corporation is
substituted by the receiver who may sue or
be sued even after that period
o Mere appointment of a receiver
without anything more does imply in
the dissolution of a corporation
National Abaca other Fibers Co. vs. Pore
- Actions pending for or against the
corporation when the 3 year period expires,
are abated since after that period, the
corporation ceases for all intents and
purposes and is no longer capable of suing
or being sued
- May be continued by the trustee provided
done within the 3 year period
- Should the corporation, therefore, finds it
difficult to finish its liquidation, it may, at any
time during the three year period, convey all
its assets and receivables to a trustee to
prosecute and defend suits by or against
the corporation begun before the expiration
of said period
- The effect of the conveyance is to make the
trustees the legal owners of the property
conveyed, subject to the beneficial interest
therein of creditors and stockholders
Sumera vs. Valencia
- Thus it was held that when a corporation is
dissolved and the liquidation of the assets is
placed in the hands of receiver or assignee,
the period of 3 years prescribed by law is
not applicable and the assignee may
institute all actions leading to the liquidation
of the corporation even after the expiration
of 3 years.
- If the corporation carries out the liquidation
of its assets through its own officers and
continues and defends the actions brought
by or against it, its existence shall terminate
at the end of three years from the time of

dissolution; but if a receiver or assignee is
appointed, with or without a transfer of its
properties within 3 years, the legal interest
passes to the assignee, the beneficial
interest remaining in the members,
stockholders, creditors and other interested
persons and said assignee may bring an
action, prosecute that which has already
been commenced for the benefit of the
corporation, or defend the latter against any
other action already instituted or which may
be instituted even outside of the period of
three years fixed for the offices of the
corporation.
Board of Liquidators vs. Kalaw
- If there is a trustee, assignee or liquidator, it
can continue prosecuting suit even beyond
the 3 year period fixed by law because he
becomes the legal owner of the rights,
assets and properties conveyed to him
Gelano vs. CA
- “Trustee” as used in the corporation statute
must be understood in its general concept
which could include the counsel to whom
was entrusted in the instant case, the
prosecution of the suit filed by the
corporation. The purpose in the transfer of
the assets of the corporation to a trustee
upon its dissolution is more for the
protection of its creditors and stockholders.
Debtors like the petitioners herein may not
take advantage of the failure of the
corporation to transfer its assets to a
trustee, assuming it has any to transfer
which petitioner has failed to show, in the
first place. To sustain petitioners’ contention
would be to allow them to enrich themselves
at the expense of another, which all
enlightened legal systems condemn.
- The counsel who prosecuted and defended
the interest of the corporation may be
considered as a “trustee” at least with
respect to the matter in litigation only
 May a corporation that is already dissolved,
transfer and assign its assets and properties
to a new corporation which will continue the
business of the dissolved one?
- Yes, provided all the stockholders gave their
consent (Chung Ka Bio vs. IAC)
Republic vs. Marsman Development
Company & Chung Ka Bio vs. IAC
- During the three year period granted to a
corporation to liquidate or wind up its affairs,
the BOD is not normally permitted to
undertake any activity outside the usual
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liquidation of the corporation. There is,
however, nothing to prevent the
stockholders from conveying their
respective shareholdings toward the
creation of a new corporation to continue
the business of the old. This is because
winding up is the sole activity of the
dissolved corporation that does not intend to
incorporate a new. If it does, however, it is
not unlawful for the old board of directors to
negotiate and transfer the assets of the
dissolved corporation to the new corporation
intended to be created as long as the
stockholders have given their consent
(Republic vs. Marsman Development
Company)
- Winding up is the sole activity of a dissolved
corporation that does not intend to
incorporate anew. If it does, however, it is
not unlawful for the old board of directors to
negotiate and transfer the assets of the
dissolved corporation to the new corporation
intended to be created as long as the
stockholders have given their consent
(Chung Ka Bio vs. IAC)
 What happens to the remaining assets and
properties of the dissolved corporation if
liquidation and winding up as provided in
section 122 is not complied with, as a result
of which the 3 year period has elapsed
- If the three year extended life has expired
without a trustee or receiver having been
expressly designated by the corporation
within that period, the board of directors o
trustees itself, following the rationale of the
Supreme Court’s decision in Gelano vs. CA
may be permitted to do so continue as”
trustees” by legal implication to complete
the liquidation. Still in the absence of a BOD
or BOT, those having any pecuniary interest
in the assets, including not only the
shareholders but likewise the creditors of
the corporation, acting for and in its behalf,
might make proper representations with the
SEC, which has primary and sufficiently
broad jurisdiction in matters of this nature,
for working out a final settlement of the
corporate concerns (Clemente vs. CA)
o According to atty. Ladia the ruling of
the Supreme Court in the case of
Clemente vs. CA is wrong, opinion is
further discussed after the Clemente
Case
Clemente vs. CA
- Who owns the properties? SOCIEDAD
ANONIMA
- The termination of the life of a juridical entity
does not by itself cause the extinction or

diminution of the rights and liabilities of such
entity or those of its owners and creditors. If
the three year extended life has expired
without a trustee or receiver having been
expressly designated by the corporation
within that period, the board of directors o
trustees itself, following the rationale of the
Supreme Court’s decision in Gelano vs. CA
may be permitted to do so continue as”
trustees” by legal implication to complete
the liquidation. Still in the absence of a BOD
or BOT, those having any pecuniary interest
in the assets, including not only the
shareholders but likewise the creditors of
the corporation, acting for and in its behalf,
might make proper representations with the
SEC, which has primary and sufficiently
broad jurisdiction in matters of this nature,
for working out a final settlement of the
corporate concerns
o the ruling is wrong according to
atty. Ladia
 According to atty Ladia: What happens to a
corporation that is already dissolved, that
has not been able to appoint a trustee with
in the 3 year period?
- a corporation dissolved which failed to
exercise its rights granted in section 122
after the 3 year period has elapsed, ceases
to exist for all intents and purposes, it can
no longer sue or be sued
- according to 122 of the code, the property
should be escheated, accordingly:
Section 122. Corporate liquidation. -
Every corporation whose charter expires by
its own limitation or is annulled by forfeiture
or otherwise, or whose corporate existence
for other purposes is terminated in any other
manner, shall nevertheless be continued as
a body corporate for three (3) years after
the time when it would have been so
dissolved, for the purpose of prosecuting
and defending suits by or against it and
enabling it to settle and close its affairs, to
dispose of and convey its property and to
distribute its assets, but not for the purpose
of continuing the business for which it was
established.
At any time during said three (3)
years, the corporation is authorized and
empowered to convey all of its property to
trustees for the benefit of stockholders,
members, creditors, and other persons in
interest. From and after any such
conveyance by the corporation of its
property in trust for the benefit of its
stockholders, members, creditors and
others in interest, all interest which the
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corporation had in the property terminates,
the legal interest vests in the trustees, and
the beneficial interest in the stockholders,
members, creditors or other persons in
interest.
Upon the winding up of the
corporate affairs, any asset distributable
to any creditor or stockholder or member
who is unknown or cannot be found
shall be escheated to the city or
municipality where such assets are
located.
Except by decrease of capital stock
and as otherwise allowed by this Code, no
corporation shall distribute any of its assets
or property except upon lawful dissolution
and after payment of all its debts and
liabilities. (77a, 89a, 16a)
FOREIGN CORPORATIONS
 Definition
- Section 123. Definition and rights of foreign
corporations. - For the purposes of this
Code, a foreign corporation is one formed,
organized or existing under any laws other
than those of the Philippines and whose
laws allow Filipino citizens and corporations
to do business in its own country or state. It
shall have the right to transact business in
the Philippines after it shall have obtained a
license to transact business in this country
in accordance with this Code and a
certificate of authority from the appropriate
government agency. (n)
 What if the law of the state of the foreign
corporation does not allow Filipino citizens
to do business in their country?
- The phrase “and whose laws allow Filipino
citizens and corporations to do business in
its own country or state” is not, however, an
accurate inclusion in the definition as ay
corporation registered or organized under
the laws of another state is necessarily a
foreign corporation whether or not the state
of its incorporation allow Filipino citizens or
corporations to do business in that forum.
- The said phrase was inserted by the
framers of the law only as a condition
precedent to the grant of a license of a
foreign corporation to do business in the
Philippines.
 Composed of 100% Americans; organized
under the laws other than the Philippines
- The test is the “incorporation test”

- General rule: the place of its incorporation
irrespective of the nationality
- Exception: control test would apply in
determining the corporate nationality, i.e.,
the citizenship of the controlling
stockholders determines the nationality of
the corporation
 If a foreign corporation wants to transact
business in the Philippines, what must it do?
- Obtain a license
 How may it do so?
- According to sec. 125:
Section 125. Application for a
license. - A foreign corporation applying for
a license to transact business in the
Philippines shall submit to the Securities
and Exchange Commission a copy of its
articles of incorporation and by-laws,
certified in accordance with law, and their
translation to an official language of the
Philippines, if necessary. The application
shall be under oath and, unless already
stated in its articles of incorporation, shall
specifically set forth the following:
1. The date and term of incorporation;
2. The address, including the street number,
of the principal office of the corporation in
the country or state of incorporation;
3. The name and address of its resident
agent authorized to accept summons and
process in all legal proceedings and,
pending the establishment of a local office,
all notices affecting the corporation;
4. The place in the Philippines where the
corporation intends to operate;
5. The specific purpose or purposes which
the corporation intends to pursue in the
transaction of its business in the Philippines:
Provided, That said purpose or purposes
are those specifically stated in the certificate
of authority issued by the appropriate
government agency;
6. The names and addresses of the present
directors and officers of the corporation;
7. A statement of its authorized capital stock
and the aggregate number of shares which
the corporation has authority to issue,
itemized by classes, par value of shares,
shares without par value, and series, if any;
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8. A statement of its outstanding capital
stock and the aggregate number of shares
which the corporation has issued, itemized
by classes, par value of shares, shares
without par value, and series, if any;
9. A statement of the amount actually paid
in; and
10. Such additional information as may be
necessary or appropriate in order to enable
the Securities and Exchange Commission to
determine whether such corporation is
entitled to a license to transact business in
the Philippines, and to determine and
assess the fees payable.
Attached to the application for
license shall be a duly executed certificate
under oath by the authorized official or
officials of the jurisdiction of its
incorporation, attesting to the fact that the
laws of the country or state of the applicant
allow Filipino citizens and corporations to do
business therein, and that the applicant is
an existing corporation in good standing. If
such certificate is in a foreign language, a
translation thereof in English under oath of
the translator shall be attached thereto.
The application for a license to
transact business in the Philippines shall
likewise be accompanied by a statement
under oath of the president or any other
person authorized by the corporation,
showing to the satisfaction of the Securities
and Exchange Commission and other
governmental agency in the proper cases
that the applicant is solvent and in sound
financial condition, and setting forth the
assets and liabilities of the corporation as of
the date not exceeding one (1) year
immediately prior to the filing of the
application.
Foreign banking, financial and
insurance corporations shall, in addition to
the above requirements, comply with the
provisions of existing laws applicable to
them. In the case of all other foreign
corporations, no application for license to
transact business in the Philippines shall be
accepted by the Securities and Exchange
Commission without previous authority from
the appropriate government agency,
whenever required by law. (68a)
 Is there any deposit or security
requirement?
- Yes, within 60 days after the issuance of the
license, a foreign corporation, except those
engaged in foreign banking or insurance,

shall deposit with the SEC, for the benefit of
creditors, securities consisting of bonds or
other evidence of indebtedness of the
Philippine government or its political
subdivision, or of government owned or
controlled corporation, shares of stock in
“registered enterprises” as this term is
defined in R.A. 5186, shares of stock in
domestic insurance companies and banks
or any combination thereof with an actual
market value of 100,000
- Additional securities may be required by the
SEC if the actual market value of the
securities on deposit has decreased by at
least 10%. Section 126 of the code
provides:
Section 126. Issuance of a license. -
If the Securities and Exchange Commission
is satisfied that the applicant has complied
with all the requirements of this Code and
other special laws, rules and regulations,
the Commission shall issue a license to the
applicant to transact business in the
Philippines for the purpose or purposes
specified in such license. Upon issuance of
the license, such foreign corporation may
commence to transact business in the
Philippines and continue to do so for as long
as it retains its authority to act as a
corporation under the laws of the country or
state of its incorporation, unless such
license is sooner surrendered, revoked,
suspended or annulled in accordance with
this Code or other special laws.
Within sixty (60) days after the
issuance of the license to transact business
in the Philippines, the license, except
foreign banking or insurance corporation,
shall deposit with the Securities and
Exchange Commission for the benefit of
present and future creditors of the licensee
in the Philippines, securities satisfactory to
the Securities and Exchange Commission,
consisting of bonds or other evidence of
indebtedness of the Government of the
Philippines, its political subdivisions and
instrumentalities, or of government-owned
or controlled corporations and entities,
shares of stock in "registered enterprises"
as this term is defined in Republic Act No.
5186, shares of stock in domestic
corporations registered in the stock
exchange, or shares of stock in domestic
insurance companies and banks, or any
combination of these kinds of securities,
with an actual market value of at least one
hundred thousand (P100,000.) pesos;
Provided, however, That within six (6)
months after each fiscal year of the
licensee, the Securities and Exchange
Commission shall require the licensee to
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deposit additional securities equivalent in
actual market value to two (2%) percent of
the amount by which the licensee's gross
income for that fiscal year exceeds five
million (P5,000,000.00) pesos. The
Securities and Exchange Commission shall
also require deposit of additional securities
if the actual market value of the securities
on deposit has decreased by at least ten
(10%) percent of their actual market value
at the time they were deposited. The
Securities and Exchange Commission may
at its discretion release part of the additional
securities deposited with it if the gross
income of the licensee has decreased, or if
the actual market value of the total
securities on deposit has increased, by
more than ten (10%) percent of the actual
market value of the securities at the time
they were deposited. The Securities and
Exchange Commission may, from time to
time, allow the licensee to substitute other
securities for those already on deposit as
long as the licensee is solvent. Such
licensee shall be entitled to collect the
interest or dividends on the securities
deposited. In the event the licensee ceases
to do business in the Philippines, the
securities deposited as aforesaid shall be
returned, upon the licensee's application
therefor and upon proof to the satisfaction of
the Securities and Exchange Commission
that the licensee has no liability to Philippine
residents, including the Government of the
Republic of the Philippines. (n)
 Other than section 125 and 126. What other
requirements are set under Philippine Law
before a foreign corporation may transact
business in the Philippines
- Yes. A Resident agent is required. As a
condition precedent to the grant of a license
to do or transact business in the Philippines,
the foreign corporation is required to
designate its resident agent on whom
summons and other legal processes may be
served in all actions or legal proceedings
against such corporation
- Section 128 provides:
Section 128. Resident agent;
service of process. - The Securities and
Exchange Commission shall require as a
condition precedent to the issuance of the
license to transact business in the
Philippines by any foreign corporation that
such corporation file with the Securities and
Exchange Commission a written power of
attorney designating some person who must
be a resident of the Philippines, on whom
any summons and other legal processes
may be served in all actions or other legal

proceedings against such corporation, and
consenting that service upon such resident
agent shall be admitted and held as valid as
if served upon the duly authorized officers of
the foreign corporation at its home office.
Any such foreign corporation shall likewise
execute and file with the Securities and
Exchange Commission an agreement or
stipulation, executed by the proper
authorities of said corporation, in form and
substance as follows:
"The (name of foreign corporation)
does hereby stipulate and agree, in
consideration of its being granted by the
Securities and Exchange Commission a
license to transact business in the
Philippines, that if at any time said
corporation shall cease to transact business
in the Philippines, or shall be without any
resident agent in the Philippines on whom
any summons or other legal processes may
be served, then in any action or proceeding
arising out of any business or transaction
which occurred in the Philippines, service of
any summons or other legal process may
be made upon the Securities and Exchange
Commission and that such service shall
have the same force and effect as if made
upon the duly-authorized officers of the
corporation at its home office."
Whenever such service of summons
or other process shall be made upon the
Securities and Exchange Commission, the
Commission shall, within ten (10) days
thereafter, transmit by mail a copy of such
summons or other legal process to the
corporation at its home or principal office.
The sending of such copy by the
Commission shall be necessary part of and
shall complete such service. All expenses
incurred by the Commission for such
service shall be paid in advance by the
party at whose instance the service is
made.
In case of a change of address of
the resident agent, it shall be his or its duty
to immediately notify in writing the
Securities and Exchange Commission of the
new address. (72a; and n)
- The necessity of the appointment of a
resident agent is only for the purpose of
receiving summons and other legal
processes in any legal action or proceeding
against the foreign corporation
 Who may be appointed as a resident agent?
- Section 127 provides that:
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Section 127. Who may be a
resident agent. - A resident agent may be
either an individual residing in the
Philippines or a domestic corporation
lawfully transacting business in the
Philippines: Provided, That in the case of an
individual, he must be of good moral
character and of sound financial standing.
(n)
 May a partnership be appointed as a
resident agent?
- Yes, domestic corporation taken in its
general sense not legal sense
 If there is a resident agent appointed. May
summons be served to any officers of the
corporation?
- No, if there is a resident agent, the
designation is exclusive and service must
be made only to the resident agent or else
the service is without force and effect unless
made to him
- Thus, while the law allows service upon the
SEC or any of its officers or agents within
the Philippines
- The two modes may become effective only
if the foreign corporation failed or neglected
to designate such a person or an agent
- Summons must be made only to resident
agent except when there is no resident
agent appointed
- Where such foreign corporation actually
doing business here has not applied for a
license to do and has not designated an
agent to receive summons, then service of
summons on it will be made pursuant to the
provisions of the rules of court. If such
foreign corporation has a license to do
business, then summons to it will be served
on the agent designated by it for the
purpose, or otherwise in accordance with
the Corporation Law (General Corporation
of the Philippines vs. Union Insurance Soc.
Of Canton Ltd.)
 If the foreign corporation conducts business
in the Philippines without the license
requirement. What is the effect?
- Section 133 provides:
Section 133. Doing business
without a license. - No foreign corporation
transacting business in the Philippines
without a license, or its successors or
assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in
any court or administrative agency of the
Philippines; but such corporation may be
sued or proceeded against before Philippine
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courts or administrative tribunals on any business in the business in the

valid cause of action recognized under Philippines, even Philippines, it cannot
Philippine laws. (69a) without a license, it be sued in Philippine
can sue before the Courts for lack of
- if they do so, the responsible officers may Philippine Courts jurisdiction
be subjected to the penal sanctions
provided for in section 144 of the code,  A foreign corporation not doing business in
which may either be fine or imprisonment the Philippines, may it be sued?

 What if it is not doing business without a - If it is not transacting business in the

license? country it cannot be sued for lack of
jurisdiction
- If it is not transacting business in the
Philippines, even without a license, it can  Is there any sanction that can be enforced
sue before the Philippine Courts to foreign corporations which are doing
business without the required license?
 The general rule is that “it is not the lack of
required license but doing business without - Penal sanctions under section 144
a license which bars a foreign corporation - Any violation of the code is subject to such
form access to our courts.” penal sanctions
 Exception:
 What would constitute doing business?
1. Foreign corporations can sue before the
Philippine Courts if the act or transaction - The true test, however, seems to be
involved is an “isolated transaction” or whether the foreign corporation is
the corporation is not seeking to enforce continuing the body or substance of the
any legal or contractual rights arising business or enterprise for which it was
from, or growing out of, any business organized or whether it has substantially
which it has transacted in the retired from it and turned it over to another.
Philippines The term implies a continuity of commercial
2. Neither is a license required before a dealings and arrangements, and
foreign corporation may sue before the contemplates, to that extent, the
forum if the purpose of the suit is to performance of acts or works or the
protect its trademark, trade name, exercise of some of the functions normally
corporate name, reputation or goodwill; incident to, and in progressive prosecution
3. Or where it is based on a violation of the of, the purpose and object of its
Revised Penal Code; organization (Mentholatum Co. Inc. vs.
4. Or merely defending a suit filed against Mangaliman)
it
5. Or where a party is stopped to challenge Mentholatum vs. Mangaliman
the personality of the corporation by
entering into a contract with it. - The true test, however, seems to be
whether the foreign corporation is
 Rules laid down by the SC continuing the body or substance of the
business or enterprise for which it was
A. As to whether B. As to whether organized or whether it has substantially
or not it can or not it can be retired from it and turned it over to another.
sue sued The term implies a continuity of commercial
dealings and arrangements, and
A foreign corporation A foreign corporation contemplates, to that extent, the
transacting or doing transacting business performance of acts or works or the
business in the in the Philippines with exercise of some of the functions normally
Philippines with a the requisite license incident to, and in progressive prosecution
license can sue before can be sued in the of, the purpose and object of its
Philippine Courts Philippine Courts organization
Subject to certain A foreign corporation - Whatever transaction the Philippine-
exceptions, a foreign transacting business American Drug Co. had executed in view of
corporation doing in the Philippines the law, the Mentholatum Co. did it itself.
business in the without a license can And the Mentholatum Co. being a foreign
country without a be sued in Philippine corporation doing business in the
license cannot sue in Courts Philippines without the license required by
Philippine Courts section 68 of the Corporation Law, it may
If it is not transacting if it is not doing
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not prosecute this action for violation of
trade mark and unfair competition
 Why is foreign corporations barred access
from our courts if they do business without a
license?
- Marshall-Wells Co. vs. Henry W. Elser and
Co.
Marshall-Wells Co. vs. Henry W. Elser and
Co.
- The object of the statute was to subject the
foreign corporation doing business in the
Philippines to the jurisdiction of its courts.
The object of the statute was not to prevent
the foreign corporation from performing
single acts, but to prevent it from acquiring a
domicile for the purpose of business without
taking the steps necessary to render it
amenable to suit in local courts.
Bulakhidas vs. Navarro
- It is settled that if a foreign corporation is not
engaged in business in the Philippines, it
may not be denied the right to file an action
in Philippine courts for isolated transactions
- The object of section 68 and 69 of the
Corporation law was not to prevent the
foreign corporation from performing single
acts, but to prevent it from acquiring a
domicile for the purpose of business without
taking the steps necessary to render it
amenable to suit in the local courts. It was
never the purpose of the Legislature to
exclude a foreign corporation which
happens to obtain an isolated order for
business from the Philippines, from securing
redress in the Philippine courts
The Swedish East Asia Co., Ltd. Vs. Manila
Port Service
- It must stated that the section is not
applicable to a foreign corporation
performing single acts or “isolated
transactions.” There is nothing to show that
the petitioner has been in the Philippines
engaged in continuing business or
enterprise for which it was organized, when
the sixteen bundles were erroneously
discharged in manila, for it to be considered
as transacting business in the Philippines.
The fact is that the bundles, the value of
which is sought to be recovered, were
landed not as a result of a business
transaction, isolated or otherwise, but due to
a mistaken belief that they were part of the
shipment of forty similar bundles consigned
to persons or entities in the Philippines,
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there is no justification therefore, for
invoking the section
 There were 3 contracts entered into, how
come they were still not considered as
doing business? (Antam Consolidted, Inc.
vs. CA)
- Every case shall be judged in the light of its
peculiar circumstances, where a single act
or transaction however, is not merely
incidental or casual but indicates the foreign
corporation’s intention to do other business
in the Philippines, said single act or
transaction constitutes “doing” or “engaging
in” or “transacting” business in the
Philippines
- In the case at bar, the transaction entered
into by the respondent with the petitioners
are not a series of commercial dealings
which signify an intent on the part of the
respondent to do business in the Philippines
but constitute an isolated one which does
not fall under the category of “doing
business.”
- The records show that the only reason why
the respondent entered into the second and
third transactions with the petitioner was
because it wanted to recover the loss it
sustained from the failure of the petitioners
to deliver the crude coconut oil under the
first transaction and in order to give the
latter a chance to make good on their
obligation. From these facts alone, it can be
deducted that in reality there was only one
agreement between the petitioners and the
respondent.
- The three seemingly different transactions
were entered into by the parties only in an
effort to fulfill the basic agreement and in no
way indicate an intent on the part of the
respondent to engage in a continuity of
transactions with petitioners which will
categorize it as a foreign corporation doing
business in the Philippines
- 3 contracts, but according to the court was
not doing business in the Philippines
Far East Int’l import vs. Nankai Kogyo Co.
Ltd.
- Only one contract , but according to the
Supreme Court was doing business in the
Philippines
- Every case shall be judged in the light of its
peculiar circumstances, where a single act
or transaction however, is not merely
incidental or casual but indicates the foreign
corporation’s intention to do other business
in the Philippines, said single act or
transaction constitutes “doing” or “engaging
in” or “transacting” business in the
Philippines

- In the instant case, the testimony of Atty.
Pablo Ocampo, that appellant was doing
business in the Philippines corroborated by
no less than Nabuo Toshida, one of
appellant’s officers, that he was sent to the
Philippines to look into the operation of
mines, thereby revealing the defendant’s
desire to continue engaging in business
here, after receiving the shipment of the
scrap iron under consideration, making the
Philippines a base thereof.
- In such a case, the single act of transaction
is not merely incidental or casual, but is of
such character as distinctly to indicate a
purpose on the part of the operations for the
conduct of a part of corporation’s ordinary
business
 If a corporation appoints a distributor or a
representative, will it necessarily imply
doing business in the country?
- If the foreign corporation maintained an
independent status during the existence of
the disputed contract.
- Appointment of a distributor or
representative in the Philippines, unless it
has an independent status (transacts and
does business in its own name and for its
account and not of the foreign corporation)
- if that be the case the mere appointment of
a distributor will not constitute doing
business
 How do you know if it has an independent
status?
- Communications Materials and Design vs.
CA
Communications Materials and Design vs.
CA
- A perusal of the agreements between
petitioner ASPAC and the respondents
show that there are provisions which are
highly restrictive in nature, such as to
reduce petitioner ASPAC to a mere
extension or instrument of the private
respondents
- ITEC was doing business without a license,
however ASPAC is estopped
- by entering into the Representative
Agreement” with ITEC, petitioner is charge
with knowledge that ITEC was not licensed
to engage in business activities in the
country, and is thus stopped from raising in
defense such incapacity of ITEC, having
chosen to ignore or even presumptively take
advantage of the same
- In top-weld we ruled that a foreign
corporation may be exempted from the
license requirements in order to institute an
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action in our courts if its representative in
the country maintained an independent
status during the existence of the disputed
contract. Petitioner is deemed to have
acceded to such independent character
when it entered into the Representative
Agreement with ITEC
Western Equipment and Supply Co. vs.
Reyes
- The company is not here seeking to enforce
any legal or contract rights arising from, or
growing out of any business which it has
transacted in the Philippine Islands. The
sole purpose of the action is to protect its
reputation, its corporate name, its goodwill,
whenever that reputation, corporate name
or goodwill have through the natural
development of its trade, established
themselves
- And it contends that its rights to the use of
its corporate and trade name, is a property
right, a right in rem, which may assert and
protect against all the world, in any of the
courts of the world even in jurisdictions
where it does not transact business just the
same as it may protect its tangible property,
real or personal, against trespass, or
conversion
- Since it is the trade and not the mark that is
to be protected a trademark acknowledges
no territorial boundaries or municipalities or
states or nations, but extends to every
market where the trader’s goods have
become known and identified by the use of
the mark
General Garments Corporation vs. Director
of Patents
- A foreign corporation which has never done
business in the Philippine Islands and which
is unlicensed and unregistered to do
business here, but is widely and favorably
known in the Islands through the use therein
of its products bearing its corporate and
trade name has a legal right to maintain an
action in the Islands
- Mentholatum case was subsequently
derogated when Congress, purposely to
“counteract the effects” of said case,
enacted R.A. 638, inserting Section 21-A in
the Trademark Law, which allows a foreign
corporation or juristic person to bring an
action in Philippine Courts for infringement
of a mark or trade-name, for unfair
competition, or false designation of origin
and false description, “whether or not it has
been licensed to do business in the
Philippines under Act Numbered Fourteen
hundred and fifty-nine, as amended,

otherwise known as Corporation Law, at the
time it brings complaint.
Puma Sporschufabriken Rudolf Dassler,
K.G. vs. IAC and MIL-ORO MFG. Corp.
- Treaties for part of the law of the land
- Quoting the Paris Convention and the case
of Vanity Fair Mills Inc. vs. T. Eaton Co. this
court further said:
“By the same token, the petitioner
should be given the same treatment
in the Philippines as we make
available to our own citizens. We are
obliged to assure to nationals of
countries of the Union an effective
protection against unfair competition
on the same way that they are
obligated to similarly protect Filipino
Citizen and firms
- The ruling in the aforecited case is in
consonance with the Convention of the
Union of Paris for the protection of Industrial
Property to which the Philippines became a
party. Article 8 thereof provides that a trade
name shall be protected in all the countries
of the Union without the obligation of filing
or registration, whether or not it forms part
of the trademark
Le Chemiste Lacoste vs. Fernandez
- The French company may gain access to
our courts, in the first place it was not doing
business in the Philippines
- The marketing of its products in the
Philippines is done through an exclusive
distributor, Rustan Commercial Corporation.
The latter is an independent entity which
buys and then markets not only products of
the petitioner but also many other products
bearing equally well-known and established
trademarks and trade-names
 Assuming Rustans had no independent
status would the SC grant Lacoste access
to our courts?
- Even if Lacoste did business in the
Philippines it can bring action because the
case involves a violation of our penal code
- Such was a violation of article 189 of the
RPC, if prosecution follows after the
completion of the preliminary investigation
being conducted by the Special Prosecutor
the information shall be in the name of the
People of the Philippines and no longer the
petitioner which is only an aggrieved party
since a criminal offense is essentially an act
against the State. It is the latter which is
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principally the injured party although there is
a private right violated
- The records show that the goodwill and
reputation of the petitioner’s products
bearing the trademark Lacoste date back
even before 1964 when Lacoste clothing
apparels were forst marketed in the
Philippines. To allow Hemandas to continue
using the trademark Lacoste for the simple
reason that he was the first registrant in the
Supplemental Register of a trademark used
in international commerce and not
belonging to him is to render nugatory the
very essence of the law on trademarks and
trade names
Atlantic Mutual Insurance Co. vs. Cebu
Stevedoring Co.
- The law denies to a foreign corporation the
right to maintain suit unless it has previously
complied with a certain requirement, then
such compliance, or the fact that the suing
corporation is exempt there from, becomes
a necessary averment in the complaint
- These are matters peculiarly within the
knowledge of appellants alone, and it would
be unfair to impose upon appellee the
burden of asserting and proving the
contrary. It is enough that foreign
corporations are allowed by law to seek
redress in our courts under certain
conditions: the interpretation of the law
should not go so far as to include, in effect,
an inference than those conditions have
been met from the mere fact that the party
suing is a foreign corporation
Olympia Business Machines Co. vs. E.
Razon
- How do you distinguish this case with
Atlantic?
- In Atlantic it dismissed the case, while in
Olympia it did not
Time Inc. vs. Reyes
- We fail to see how these doctrines can be a
propos in the case at bar, since the
petitioner is not “maintaining any suit” but is
merely defending one against itself; it did
not file any complaint but only a corollary
defensive petition to prohibit the lower court
from further proceeding with a suit that it
had no jurisdiction to entertain
 What law govern foreign corporation doing
and transacting business in the Philippines
with a license
- Laws of the Republic of the Philippines save
and except that would normally be those

matters which concern its formation,
organization or dissolution, or those fixing
the relationship, liabilities, responsibilities,
or duties of the stockholders, members or
officers of the foreign corporation or their
relations to each other.
- In effect, intra-corporate or internal matters
not affecting creditors or the public in
general are governed not by Philippine laws
but the law under which the foreign
corporation was formed or organized
Section 129. Law applicable. - Any
foreign corporation lawfully doing business
in the Philippines shall be bound by all laws,
rules and regulations applicable to domestic
corporations of the same class, except such
only as provide for the creation, formation,
organization or dissolution of corporations
or those which fix the relations, liabilities,
responsibilities, or duties of stockholders,
members, or officers of corporations to each
other or to the corporation. (73a)
 Will the pre-emptive rights of a foreign
corporation be governed by the same
section of the code? Is the pre-emptive
rights of a stockholder in a domestic
corporation same as the pre-emptive of a
stockholder of a foreign corporation.
- No
M.E. Grey vs. Insular Lumber Company
- PNB vs. Gonzales, will this apply to a
foreign corporation? How do you distinguish
this case from a Philippine law?
- Since it concerns the rights of stockholders
it is the law of New York that should govern
 Is the license to do business of a foreign
corporation subject to suspension or
revocation? What are the grounds?
- Section 134 provides:
Section 134. Revocation of license.
- Without prejudice to other grounds
provided by special laws, the license of a
foreign corporation to transact business in
the Philippines may be revoked or
suspended by the Securities and Exchange
Commission upon any of the following
grounds:
1. Failure to file its annual report or pay any
fees as required by this Code;
2. Failure to appoint and maintain a resident
agent in the Philippines as required by this
Title;
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3. Failure, after change of its resident agent
or of his address, to submit to the Securities
and Exchange Commission a statement of
such change as required by this Title;
4. Failure to submit to the Securities and
Exchange Commission an authenticated
copy of any amendment to its articles of
incorporation or by-laws or of any articles of
merger or consolidation within the time
prescribed by this Title;
5. A misrepresentation of any material
matter in any application, report, affidavit or
other document submitted by such
corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully
due to the Philippine Government or any of
its agencies or political subdivisions;
7. Transacting business in the Philippines
outside of the purpose or purposes for
which such corporation is authorized under
its license;
8. Transacting business in the Philippines
as agent of or acting for and in behalf of any
foreign corporation or entity not duly
licensed to do business in the Philippines;
or
9. Any other ground as would render it unfit
to transact business in the Philippines. (n)
 SEC does not have the sole authority to
suspend or revoke the license of a foreign
corporation doing business in the
Philippines, other government agencies like
the Central Bank , the Insurance
Commission may also do so within their
respective dominion, despite the provision
of section 134
 If the SEC believes that revocation is
warranted, section 135 provides that:
Section 135. Issuance of certificate
of revocation. - Upon the revocation of any
such license to transact business in the
Philippines, the Securities and Exchange
Commission shall issue a corresponding
certificate of revocation, furnishing a copy
thereof to the appropriate government
agency in the proper cases.
The Securities and Exchange
Commission shall also mail to the
corporation at its registered office in the
Philippines a notice of such revocation
accompanied by a copy of the certificate of
revocation. (n)

 Voluntary withdrawal of license
- All 3 conditions must be complied with
Section 136. Withdrawal of foreign
corporations. - Subject to existing laws and
regulations, a foreign corporation licensed
to transact business in the Philippines may
be allowed to withdraw from the Philippines
by filing a petition for withdrawal of license.
No certificate of withdrawal shall be issued
by the Securities and Exchange
Commission unless all the following
requirements are met;
1. All claims which have accrued in the
Philippines have been paid, compromised
or settled;
2. All taxes, imposts, assessments, and
penalties, if any, lawfully due to the
Philippine Government or any of its
agencies or political subdivisions have been
paid; and
3. The petition for withdrawal of license has
been published once a week for three (3)
consecutive weeks in a newspaper of
general circulation in the Philippines.
P.D. 902-A
 P.D. 902-A was amended by R.A. 8799 or
the SECURITIES REGULATION CODE in
the year 2000
 The jurisdiction of SEC for cases falling
under section 5 thereof was transferred to
the courts of general jurisdiction designated
by the SC, they were called special
commercial courts, the only exceptions
were revocation of corporate franchise and
calling of elections
 However the SEC retained receivership or
suspension payments within June 20,2000
 Jurisdiction of special commercial courts are
exclusive and original, jurisdiction is
conferred by law; 1 Special Commercial
Court per region except MAKATI and
QUEZON CITY which has two
 Devices or Schemes
- Pyramid scheme (misrepresentation)-
Special Commercial Courts
- Syndicated estafa- not bailable
 Alleje case
- Falls squarely under sec. 5 (a) Special
Commercial Courts
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- Allegation corporate officers employing
schemes in diverting
- Not only detrimental to corporation, but
general membership
- Fraud must be stated with particularity
Abad vs. CFI of Pangasinan
- Fraud must be stated with particularity
otherwise it may be filed to any court
 Intra-corporate
- Exclusive and original jurisdiction of special
commercial courts
- Sole criteria is there must be an intra-
corporate relationship
- Pertaining to a controversy (speaks also of
intra-partnership controversy, that
partnership must be registered with the
SEC)
 Rule now
1. Necessarily be an intra-corporate
relationship; and,
2. The controversy must arise out of said
relationship
 Intra-corporate relationship alone will not
suffice to put it in the ambit of special
commercial courts and courts of general
jurisdiction may take cognizance
 Case of a transferee of shares of stock to
compel the corporation to recognize him as
a stockholder
 How can it be intra-corporate when he is
not yet fully paid
- When the transferee has done all he can be
required to do to render the transfer
effectual and the corporation refuses to
register the transfer, the requirement of the
registration is waived and the transferee is
considered technically a stockholder who
may sue to enforce the right to have the
transfer registered
 Florendo vs. rivera, Embassy Farms
- The transferor withheld the delivery, they
are not yet prima facie; it will not be
considered intra-corporate
 Controversies in the appointment (asked in
the bar)
- Cases involving election, appointment and
removal
 In Andaya the court said that a corporate
officer elected or appointed by the BOD is
always a corporate act
- The fact that petitioner sought payment of
his back wages, other benefits as well as
moral and exemplary damages and
attorney’s fees in his complaint will not
operate to prevent the SEC from exercising

its jurisdiction under P.D. 902-A. The
jurisdiction will not wrest on the NLRC just
because of that
Tabang vs. NLRC
- Jurisdiction lies originally and exclusively to
special commercial courts and not in the
NLRC
- SEC has jurisdiction over cases of removal
from employment of corporate officers
- The relationship of a person to a
corporation, whether as officer or as agent
or employee or not determined by the
nature of the servides performed, but by the
incidents of the relationship on they actually
exist
- Corporate officers dismissal is always a
corporate act or intra-corporate controversy
Midland construction vs. Movilla
- NLRC will be possessed of jurisdiction
exception will not apply to mere recovery
 Main consideration
- Asserts his right to the office or questions
the propriety or validity of his ouster or
removal, it will be the special commercial
courts and not the NLRC
 Securities Regulation Code
- Transferred jurisdiction of the SEC to
Special Commercial Courts
- Suspension of payment, appointment of
management receivership
 What is the reason for suspension of all
claims?
- The reason for suspending actions for
claims against the corporation is not really
to enable the management committee or the
rehabilitation receiver to substitute the
defendant in any pending action against it
before any court, tribunal or body. The real
justification is to enable the management
committee or rehabilitation receiver to
effectively exercise his powers free from
any Judicial or extra-judicial interference
that might unduly hinder or prevent the
“rescue” of the debtor company. To allow
such other actions to continue would only
add to the burden of the management
committee pr rehabilitation receiver, whose
time, effort and resources would be wasted
in defending claims against the corporation
instead of being directed towards
restructuring and rehabilitation.(PAL vs.
Spouses Sadic and Kurangking)
- To enable the receiver to effectively
exercise his or her power free form any
judicial or extra-judicial that may disturb
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 3 types of suspension of payments
1. Simple suspension of payments
- where deferment of payment of claims
against a distress company; ask the court to
be given time to the payment of liability by
postponing the payment
- When it has sufficient assets and liabilities
but forces the impossibility of meeting them
when they respectively fall due
2. Suspension of receiver with a management
committee with a rehabilitation play or
suspension of payments accompanied by a
proposal for rehabilitation (with or without
rehabilitation)
- corporation has sufficient assets to cover
its liabilities, but sees the possibility; is or
without rehabilitation plans; normally would
attach the rehabilitation plan
- For purpose of economic development
3. Suspension of payments when the
corporation has no sufficient assets to its
liabilities
 May it still be revived?
- Yes, it may still be revived
 How can a corporation with more liabilities
than assets continue its operations
profitably?
- Even if the distressed company has no
sufficient assets and liabilities it can go for
suspension
- It asked for a management committee
without a receiver plan (Victorius Milling
case)
 Convert their claims into equity
- Their liability was almost wiped out they
became stockholders instead of creditors
- After 5 years those who converted sold it
back to the corporation, thereby making
profits
 Amendment is for the economic
development of the country
 What if walang amendment, e mas
maraming liabilities kesa assets
 Suspension order- all actions for claims
against the corporation are accordingly
suspended at whatever stage the
proceedings maybe
 Effect of suspension- you cannot foreclose
 What are claims?
- Debts or demands of pecuniary nature.
Assertion of a right to have money paid
- Claims against the corporation shall be
suspended, assertion of a right to have
money paid; it must present a monetary
claim, liquidated or unliquidated

 Nullification of corporations does not
present a monetary claim of pecuniary
nature
Union vs. CA
- It does not allow a mere individual to file the
petition which is limited to corporations
partnership or associations.
- Where no authority is granted to hear
petitions of individuals for suspension of
payments, such petition are beyond the
competence of the SEC
 What happens if there is a suspension
order?
 Explain the key phrase “quality is equity”
- All creditors stand on equal footing, secure
or unsecure, holding or lien or without a lien,
no creditor may enforce his lien while
rehabilitation is going (Alemar case)
- No preference shall be given
RCBC vs. IAC
- Decided on motion for reconsideration
- It court 7 years to decide authentication
 Rule of the thumb
- Automatic suspension even if not decreed in
the decision itself
- Once lifted the preferred creditors will regain
their preference
 Appointment of a management committee
- Take over the management committee of
the distressed corporation
- Extraordinary and drastic remedy
- Without any remedy
 What is an intra-corporate controversy?
- Section 5(B)
- Sole criteria is whether there exists an intra-
corporate dispute is that if there is an intra-
corporate relationship
 Why is there suspension of all actions
against claims when a receiver is
appointed?
- To enable the management committee to
exercise its powers
Sy Chim vs. Sy Siy Ho (before a
management committee may be opt by a
court)
- 2 requisites for a valid appointment of
management committee
1. Imminent danger of dissipation, loss,
wastage or destruction of assets or other
corporate properties
2. Paralysis of business operations, the mere
apprehension of future misconduct based
upon prior management
- Save and except in the case of a close
corporation in case of deadlock
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management committee is allowed to take
over right away
Jacinto case
- 2nd par of page 676
- 2 requisites where present
- Wala ng mapautang, there was a
paralyzation
Sy Chim
- Did not appoint a management committee
- In the absence of a strong showing of an
imminent danger of dissipation, loss
wastage or destruction of assets or other
properties of a corporation and paralysis of
its business operations, the mere
apprehension of future misconduct based
upon prior mismanagement will not
authorize the appointment of a management
committee
 Section 5 and 6(D) governed by separate
rules; interim rules and intra-corporate
controversy
 Venue of actions
- Rules of court- where the parties are
residing
- Intra-corporate- no matter where the parties
are residing it will be in the city or
municipality where the principal office is
located
 Rehabilitation proceedings venue
- In rem
- Acquired upon publication without furnishing
the creditors a copy of the petition and
attachments thereof
- A creditor may now file the suspension
proceedings; provides that creditors owns at
least 25%
 Intra-corporate- rule 1 section 6
 Service of summons- rule 2 section 5
- Summons may be made to anyone
 In case of intra-corporate dispute, elections,
fraud, etc; if they are governed by interim
rules of procedure on intra-corporate
controversies
 Venue
- Special commercial courts where principal
office is located/established (section 5 rule
1)
- Matters of payment/suspension must be
filed in the city/ municipality where
corporation is located
 Under old rule, creditors have no right to
institute an action for receivership; now
creditors, if they sold 20% they can institute
an action for receivership
 Section 5

- Service of summons may be made by fax/e-
mail
E.B. Villarosa vs. Benito
- Will apply only if it is not an intra-corporate
controversy
 If the controversy arose out of an intra-
corporate dispute rules on interim rules of
procedure of intra-corporate controversies
shall govern
 Rule 4 section 17- immunity from suit
 Rehabilitation receiver shall not subject to
any action, claim or demand in connection
with any act done omitted by him in good
faith in the exercise of his functions and
powers herein conferred
 Claim
- Right to payment, whether or not it is
reduced to judgment, liquidated or
unliquidated, fixed or contingent, matured or
unmatured, disputed or undisputed, legal or
equitable and secured or unsecured
 Investment contracts
- A contract, transaction or scheme whereby
a person invests his money in a common
enterprise and is led to expect profits
primarily from the effects of others
 The management committee and
rehabilitation receiver are empowered to:
1. Take custody and control of all assets of the
corporation
2. Evaluate assets and liabilities, earnings
operations of the corporation
3. Determine the best way to protect the
investors and creditors
4. Study, review evaluate the feasibility of
continuing operation and structures
5. Submit recommendations to the RTC
regarding rehabilitation plan
6. Rehabilitate the corporation if determined to
be feasible by the RTC
7. Report to the RTC until the corporation is
dissolved
THE SECURITIES REGULATION CODE
(RA8799)
- Also known as the Blue Sky Law since it was
enacted to protect the public from unscrupulous
promoters who stake business which have no basis
and sell shares and interest therein to investors,
who are then left holding certificates representing
nothing more than a claim to a square of the blue
sky.
-SEC. 2. Declaration of State Policy. – The State
shall establish a socially conscious, free market
that regulates itself, encourage the widest
participation of ownership in enterprises, enhance
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the democratization of wealth, promote the
development of the capital market, protect
investors, ensure full and fair disclosure about
securities, minimize if not totally eliminate insider
trading and other fraudulent or manipulative
devices and practices which create distortions in
the free market.
BROKER - person who buys and sells securities for
the account of others.
DEALER - person who buys and sells securities for
his/her own account in the ordinary course of
business.
NOTE: No person shall engage in
the business of buying or selling
securities in the Philippines as a broker
or dealer, or act as a salesman, or an
associated person of any broker or
dealer unless registered as such with
the Commission. (Sec 28)
SECURITES - shares, participation or interests in a
corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate,
contract, instrument, whether written or electronic in
character. It includes:
CODE: COFDIPS
a) Certificates of assignments, certificates of
participation, trust certificates, voting trust
certificates or similar instruments;
b) Other instruments as may in the future be
determined by the Commission;
c) Fractional undivided interests in oil, gas or
other mineral rights;
d) Derivatives like option and warrants;
e) Investment contracts, certificates of interest
or participation in a profit sharing
agreement, certificates of deposit for a
future subscription;
f) Proprietary or non proprietary membership
certificates incorporations; and
g) Shares of stock, bonds, debentures, notes,
evidences of indebtedness, asset-backed
securities;
GR: Securities shall not be sold or offered for sale
or distribution within the PH, without a registration
statement filed with and approved by SEC. Prior to
such sale, information on the securities, in such
form and with such substance as the Commission
may prescribe, shall be made available to each
prospective purchaser. (Sec 8)
EXCEPT: Exempt Securities under Sec 9
a) Any security issued or guaranteed by the
Government of the PH, or by any political
subdivision or agency thereof, or by any
person controlled or supervised by, and
acting as an instrumentality of said
Government.
b) Any security issued or guaranteed by the
government of any country with diplomatic

relations with the PH, or by any state,
province or political subdivision thereof on
the basis of reciprocity: Provided, that the
SEC may require compliance with the form
and content of disclosures the Commission
may prescribe.
c) Certificates issued by a receiver or by a
trustee in bankruptcy duly approved by the
proper adjudicatory body.
d) Any security or its derivatives the sale or
transfer of which, by law, is under the
supervision and regulation of the Office of
the Insurance Commission, Housing and
Land Use Regulatory Board, or the Bureau
of Internal Revenue.
e) Any security issued by a bank except its
own shares of stock.
AND Exempt Transactions under Sec 10
a) A judicial sale, or sale by an executor,
administrator, guardian or receiver or
trustee in insolvency or bankruptcy.
b) By or for the account of a pledge holder, or
mortgagee or any other similar lien holder
selling or offering for sale or delivery in the
ordinary course of business and not for the
purpose of avoiding the provisions of this
Code, to liquidate a bona fide debt, a
security pledged in good faith as security for
such debt.
c) An isolated transaction in which any security
is sold, offered for sale, subscription or
delivery by the owner thereof, or by his
representative for the owner’s account, such
sale or offer for sale, subscription or delivery
not being made in the course of repeated
and successive transactions of a like
character by such owner, or on his account
by such representative and such owner or
representative not being the underwriter of
such security.
d) Distribution by a corporation, actively
engaged in the business authorized by its
AOI, of securities to its stockholders or other
security holders as a stock dividend or other
distribution out of surplus.
e) Sale of capital stock of a corporation to its
own stockholders exclusively, where no
commission or other remuneration is paid or
given directly or indirectly in connection with
the sale of such capital stock.
f) Issuance of bonds or notes secured by
mortgage upon real estate or tangible
personal property, where the entire
mortgage together with all the bonds or
notes secured thereby are sold to a single
purchaser at a single sale.
g) Issue and delivery of any security in
exchange for any other security of the same
issuer pursuant to a right of conversion
entitling the holder of the security
surrendered in exchange to make such
conversion: Provided, That the security so
surrendered has been registered under this
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Code or was, when sold, exempt from the
provisions of this Code, and that the security
issued and delivered in exchange, if sold at
the conversion price, would at the time of
such conversion fall within the class of
securities entitled to registration under this
Code. Upon such conversion the par value
of the security surrendered in such
exchange shall be deemed the price at
which the securities issued and delivered in
such exchange are sold.
h) Broker’s transactions, executed upon
customer’s orders, on any registered
Exchange or other trading market.
i) Subscriptions for shares of the capital stock
of a corporation prior to the incorporation
thereof or in pursuance of an increase in its
authorized capital stock under the
Corporation Code, when no expense is
incurred, or no commission, compensation
or remuneration is paid or given in
connection with the sale or disposition of
such securities, and only when the purpose
for soliciting, giving or taking of such
subscriptions is to comply with the
requirements of such law as to the
percentage of the capital stock of a
corporation which should be subscribed
before it can be registered and duly
incorporated, or its authorized capital
increased.
j) The exchange of securities by the issuer
with its existing security holders exclusively,
where no commission or other remuneration
is paid or given directly or indirectly for
soliciting such exchange.
k) The sale of securities by an issuer to fewer
than twenty (20) persons in the Philippines
during any twelve-month period.
l) The sale of securities to any number of the
following qualified buyers: (i) Bank; (ii)
Registered investment house; (iii)insurance
company; (iv) Pension fund or retirement
plan maintained by the Government of the
Philippines or any political subdivision
thereof or managed by a bank or other
persons authorized by the Bangko Sentral
to engage in trust functions; (v) investment
company or; (vi) Such other person as the
Commission may by rule determine as
qualified buyers, on the basis of such
factors as financial sophistication, net worth,
knowledge, and experience in financial and
business matters, or amount of assets
under management.
PROTECTION OF SHAREHOLDERS INTEREST
1. Tender Offers (Sec 19)
2. Proxy solicitation (Sec 20)
3. Internal record keeping and accounting (Sec
22)

TENDER OFFER – A publicly announced intention
acting alone or in concert with others to acquire
equity securities of a company. (2002 Bar Exams)
Instances when Tender Offer is Required
1. When the person intends to acquire 15% or
more of the equity share of a public
company pursuant to an agreement made
between or among the person and one or
more sellers;
2. When the person intends to acquire 30% or
more of the equity share of a public
company within a period of 12 months;
3. When the person intends to acquire shares
that would result in an ownership of more
than 50% of the equity shares of a public
company.
PROXY SOLICITATION
NOTE: A broker or dealer who holds or acquires
the proxy for at least ten per centum (10%) or such
percentage as the Commission may prescribe of
the outstanding share of the issuer, shall submit a
report identifying the beneficial owner within ten
(10) days after such acquisition, for its own account
or customer, to the issuer of the security, to the
Exchange where the security is traded and to the
Commission. (Sec 20.5)
FRAUDULENT TRANSACTIONS AND OTHER
MARKET MANIPULATIONS
1. Wash Sale (Sec 24.1(a)(i)) – any
transaction in a security which involves no
change in the beneficial ownership thereof.
2. Matched Order (Sec 24.1(a)(ii)) – order or
orders for the purchase or sale of security
with the knowledge that a simultaneous
order or orders of substantially the same
size, time and price for the sale or purchase
of such security has, or will be entered by or
for the same or different parties.
Note: Wash sale and matched orders
become illegal when they are used as a
means to create false appearance of active
trading in the security concerned.
3. Marking the close – placing the purchase
order, at or near the close of the trading
period. The price that was closed will then
be the price that will be posted on the
following trading day.
4. Painting the tape – involves a series of
transactions that are reported publicly to
give the impression of an activity in a
security.
5. Squeezing the float – the part of an
outstanding security intentionally held by
dealers or other persons with a view of
reselling them later for profit.
6. Hype and dump – Act employed by a
person or group of persons of purchasing
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the outstanding capital stock of a dormant
public shell company for a nominal amount
and merge it with their privately held
company. They would then gain control of
the majority stocks of the merged entity.
Stock certificates are often re-issued in the
name of the merged entity to relatives and
associates who act as nominees of the
person or persons employing the device.
They would then look for a broker-dealer
who would be willing to make a “hype” of the
securities. The broker-dealer then
generates volume and advance bid price.
When the market reaches a high price, they
would “dump” their shareholdings and bail
out.
7. Boiler Room Operations – involves an
intensive selling campaign through
numerous salesmen by telephone or
through direct mail offerings for securities of
either a certain type or from a specific
issuer. Investors are induced to purchase
through hard-sell based on unfounded
predictions and mailing of misleading
market letters.
Note: Marking the close, Painting the tape,
Squeezing the float, Hype and dump, Boiler
Room Operations become unlawful if it is
effected to either raise the price or induce
the purchase of a security or of a controlling,
controlled, or commonly controlled company
by others or to depress the price to induce
the sale of a security, whether of the same
or of a different class, of the same issuer or
of a controlling, controlled company or
common controlled company by others or to
create active trading to induce the purchase
through said devices or schemes.
8. Circulating or Disseminating Information
– circulating an information that any of the
security listed in the exchange will or is
likely to rise or fall because of manipulative
market operations of any one or more
persons conducted for the purpose of
raising or depressing the price of the
security and thus inducing the purchase of
such security.
9. Making False or Misleading Statements
with respect to any material fact which he
knew or had reasonable ground to believe
was so false or misleading for the purpose
of inducing the purchase or sale of such
security.
10. Pegging or Fixing Or Stabilizing the price
of security effected either alone or with
others through any series of transactions for
the purchase or sale thereof, if done for
such purpose.
11. Short sale – selling of security which the
vendor does not own unless done in
accordance with the rules and regulations of
the SEC.

12. Insider Trading – the act of an insider to
buy or sell security of the issuer while in
possession of material information with
respect to such security that is not generally
made known to the public unless (a) The
insider proves that the information was not
gained from such relationship; or (b) If the
other party selling to or buying from the
insider (or his agent) is identified, the insider
proves: (i) that he disclosed the information
to the other party, or (ii) that he had reason
to believe that the other party otherwise is
also in possession of the information.
Note: When is information “material non-
public”? - if: (a) It has not been generally
disclosed to the public and would likely
affect the market price of the security after
being disseminated to the public and the
lapse of a reasonable time for the market to
absorb the information; or (b) would be
considered by a reasonable person
important under the circumstances in
determining his course of action whether to
buy, sell or hold a security.
Note: Who is an “insider”? - “Insider”
means: (a) the issuer; (b) a director or
officer (or person performing similar
functions) of, or a person controlling the
issuer; (c) a person whose relationship or
former relationship to the issuer gives or
gave him access to material information
about the issuer or the security that is not
generally available to the public; (d) a
government employee, or director, or officer
of an exchange, clearing agency and/or self-
regulatory organization who has access to
material information about an issuer or a
security that is not generally available to the
public; or (e) a person who learns such
information by a communication from any of
the foregoing insiders.
INDEPENDENT DIRECTOR
Person other than an officer or employee of
the corporation, its parent or subsidiaries, or any
other individual having a relationship with the
corporation, which would interfere with the exercise
of independent judgment in carrying out the
responsibilities of a director.
Corporations which require an Independent
Director
1. An exchange; or
2. Any corporation with a class of equity
securities listed for trading on an Exchange
or with assets in excess of P50M and
having 200 or more holders, at least 200 of
which are holding at least 100 shares of a
class of its equity securities or which has
sold a class of equity securities to the public
pursuant to an effective registration
statement shall have at least two (2)
Notes on Corporation Law
“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva
115
independent directors or such independent
directors shall constitute at least 20% of the
members of such board, whichever is the
lesser.
OPTION TRADING
 Put – a transferrable option or offer to
deliver a given number of shares of stock at
a stated price on any given time during the
stated period.
 Call – a transferrable option to buy a
specified number of share at a stated price
 Straddle – a combination of put and call.
SETTLEMENT OFFERS
At any time, during an investigation or
proceeding under this Code, parties being
investigated and/or charged may propose in writing
an offer of settlement with the Commission. The
Commission may only agree to a settlement offer
based on its findings that such settlement is in the
public interest. Any agreement to settle shall have
no legal effect until publicly disclosed. Such
decision may be made without a determination of
guilt on the part of the person making the offer.
DAMAGES
All suits to recover damages shall be
brought before the Regional Trial Court, which shall
have exclusive jurisdiction to hear and decide such
suits. The Court is authorized to award damages in
an amount not exceeding triple the amount of the
transaction plus actual damages.
NOTES
 If there are goods involved in the
multimarket, it is beyond the jurisdiction of
SEC (Ex First Quadrant)
 Criminal charge for violation of SRC is a
specialized dispute, hence it must be first
referred with SEC (Baviera vs. Paglinawan
G.R. No. 168380 Feb 8, 2007)
 T3 Rule in trading of Securities – Trading
day + 3 more days you must comply with
your obligations.