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HISTORICAL BACKGROUND
PHILIPPINE CORPORATION IS CODIFICATION OF AMERICAN
CORPORATE LAW
✾ When the Philippines passed into the sovereignty of the
US, attention was given to the fact that there was no entity
in Spanish law exactly corresponding to the nation of the
corporation in English and American law
✾ With the enactment of the Corporation law, the purpose
was to introduce the American corporation into the
Philippines as the standard commercial entity and to
hasten the day when the sociedad anonima of the Spanish
law would be obsolete. That statute is sort of a codification
of the American Corporate Law.
OLD CORPORATION LAW: ACT 1459
✾ First corporate statute in Philippine jurisdiction
✾ It had various piece-meal amendments during its 74-year
history
CORPORATION CODE
✾ It adopted various corporate doctrines previously
enunciated by the Supreme Court under the old
Corporation law
✾ It clarified the obligations of corporate directors and
officers, expressed in statutory language established
principles and doctrines, and provided for a chapter on
close corporations
✾ The code was enacted to establish a new concept of
business corporations so that they are not merely entities
established for private gain but effective partners of the
national government in spreading the benefits of
capitalism for the social and economic development of the
nation
PROPER TREATMENT OF CORPORATE LAW
✾ Philippine corporate law comes from the common law
system of the US
✾ Although we have a corporation code that provides for
statutory principles, Philippine Corporate Law is essentially
and continues to be the product of commercial
developments
✾ Much of the development in Corporate Law can be
expected to happen in jurisprudential rules that apply and
adopt corporate principles into the changing concepts and
mechanism of the commercial world
CONCEPTS OF CORPORATE LAW
DEFINITION OF A CORPORATION
Section 2. Corporation defined. - A corporation is an artificial
being created by operation of law, having the right of succession
and the powers, attributes and properties expressly authorized
by law or incident to its existence. (2)
✾ The present statutory definition is essentially narrow and
antiquated since it only looks at one aspect—THE
RELATIONSHIP BETWEEN THE CORPORATION AND THE
STATE—of the otherwise multi-faceted relationships that a
corporation would have in the business environment
✾ The statutory definition looks only at a corporation as a
creation of law when actually judicial personality is merely
one aspect of corporate existence
✾ CC definition: a corporation is a juridical personality,
separate and distinct from that of each shareholder,
partner, or member
✾ A corporation is a creature of limited powers—except for
the powers which are expressly conferred on it by the
Corporation Code and those that are implied by or are
incidental to its existence, a corporation has no powers. It
exercises its powers through its board of directors and/or
duly authorized agent.
FOUR ATTRIBUTES OF A CORPORATION IN REFERENCE TO
SECTION 2
1. ARTIFICIAL BEING—by operation of law it becomes a being
with the attributes of an individual with full capacity to
enter into contractual relations (ability to contract and
transact)
2. CREATURE OF LAW—juridical existence is dependent on the
consent or grant of the sovereign; there must be a contract
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between the individuals forming the corporation upon
which the state grant may be conferred—thus, there is an
interplay of state grant and contractual relations
3. RIGHT OF SUCCESSION—capacity for continuous existence
despite the death or replacement of its shareholders or
member for it has a personality separate and distinct from
those who compose it (strong juridical personality)
4. CREATURE OF ENUMERATED POWERS, ATTRIBUTES, AND
PROPERTIES (creature of limited powers)
TRI-LEVEL EXISTENCE OF A CORPORATION
1. Aggregation of assets and resources
2. Business enterprise or economic unit
3. Juridical entity
NOTE
1. Knowing the tri-level existence in the corporate setting
provides a better way to explain the varying and
interweaving doctrines prevailing in Corporate Law.
2. In practice, piercing the corporate fiction is achieved by
looking at the corporation as an aggregation of individuals
doing business.
RELATIONSHIPS INVOLVED IN A CORPORATE SETTING
1. Juridical entity level—relationship between the State and
the corporation
2. Intra-corporate level
✾ Between the corporation and its agents or
representatives to act in the real world
✾ Between the corporation and the shareholders
✾ Between the shareholders in a common venture
3. Extra-corporate level—Between the corporation and third
parties or outsiders
THEORIES ON FORMATION OF A CORPORATION: THEORY OF
CONCESSION
✾ A corporation is an artificial being and is created by
operation of law. It owes its life to the State and its birth
being purely dependent on its will.
✾ Although fiction cannot be created unless there is an
enterprise or group upon which it may be conferred, and in
spite of the underlying contract among the persons
wanting to form the corporation, the grant is only by virtue
of a primary franchise given by the State
✾ The theory looks at the corporation as a creature of the
State and completely under the control of the latter
THEORY OF ENTERPRISE ENTITY
✾ The corporate entity takes its being from the reality of the
underlying enterprise, formed or in formation; that the
state’s approval of the corporate form sets up a prima facie
case that the assets, liabilities, and operations of the
corporation are those of the enterprise
✾ Where the corporate entity is defective or otherwise
challenged, its existence, entity and circumstances may be
determined by the actual existence and operations of the
underlying enterprise, which by these very qualities and
operations acquires an entity of its own, recognized by law
✾ This theory breeds on situation where the courts have
either erected corporate personality which the state had
not granted or disregarded corporate personality where the
state granted it
✾ The corporation is seen to be emerging as an enterprise
bounded by economics, rather than as an artificial juridical
personality bounded by the form of words in a charter or
minute books, and books of account
✾ The theory draws its vitality from the fact that it is not legal
fiction alone that creates a corporate entity
✾ A corporation is but an association of individuals, allowed
to transact under an assumed corporate name, and with a
distinct legal personality and that in organizing itself as a
collective body, it waives no constitutional immunities and
prerequisites appropriate to such a body
✾ This theory hinges itself on the fact that there can be no
corporate existence without persons to compose it; there
can be no association without associates
ADVANTAGES OF CORPORATE FORM
1. STRONG LEGAL PERSONALITY—the corporation has legal
capacity to act and contract as a distinct unit in its own
name and has continuity of existence
2. LIMITED LIABILITY OF INVESTORS—the liability of investors
is limited to their shares and this can be distinguished from
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partnerships wherein if the assets of the same are
exhausted, creditors may go after the separate property of
the partners
3. FREE TRANSFERABILITY OF UNITS OF INVESTMENT—as a
general rule, shares of stock may be transferred without
the consent of the other stockholders
4. CENTRALIZED MANAGEMENT—centralized in the board of
directors which poses a more stable and efficient system of
governance and dealings with third parties
5. ADVANTAGES OVER UNREGISTERED ASSOCIATIONS—
a. It enjoys perpetual succession in its corporate
name and in artificial form
b. It can sue and be sued in its corporate name as a
juridical person
c. It has the capacity to receive and enjoy common
grants of immunities and privileges
d. Its members or stockholders generally have no
personal liability beyond the value of their shares
DISADVANTAGES OF CORPORATE FORM
1. Complicated and costly formation and maintenance—there
is a greater degree of government control and supervision
than other forms of business organizations
2. Lack of personal element
3. Abuse of corporate management—the stockholder’s voting
rights have become theoretically because of the use of
proxies and widespread ownership
4. Limited liability hits innocent victims—abused by business
to avoid having to provide adequate protection and
compensation for victims of the business ventures they
undertake
5. Double taxation—corporations are subject to heavier loads
of taxation than other forms of business organizations
COMPARING CORPORATIONS WITH OTHER BUSINESS MEDIA
1. Sole proprietorship—are less saddled with the many
requisites and requirements which corporations are often
subjected to by law
2. Partnerships—a corporation has a stronger legal
personality, enabling it to continue despite the death,
insolvency or withdrawal of any of its stockholders or
members. In a partnership, the death or insolvencv of any
partner would automatically cause the dissolution of the
partnership
CAN A DEFECTIVE ATTEMPT TO FORM A
CORPORATION RESULT AT LEAST IN A
PARTNERSHIP?
CLV believes in the negative.
First, both corporate and partnership relationship are
fundamentally contractual relations created by the co-
venturers who consent to come together under said
relationship. If the parties had intended to create a
corporation, a partnership cannot be created in its stead since
such isn’t within their intent and therefore doesn’t constitute a
part of their consent to the contractual relationship.
Second, the important differences between a corporation and a
partnership cannot lead to the conclusion that in the absence
of the first, the contracting parties would have gone along with
the latter.
As held in jurisprudence, when parties come together intending
to form a corporation, and no corporation is formed due to
some legal cause, then:
a. Parties who had intended to participate or actually
participated in the business affairs of the proposed
corporation would be considered as partners under a
de facto partnership, and would be liable as such in an
action for settlement of partnership obligations
b. Parties who took no part except to subscribe for stock
in a proposed corporation don’t become partners with
other subscribers who engaged in the business under
the name of the pretended corporation, and are not
liable for action for settlement of the alleged
partnership contribution
3. Joint ventures—a form of partnership and should be
governed by the law on partnerships (useful mechanism to
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engage in business)
4. Cooperatives—registered association of persons, with a
common bond of interest, who have voluntarily joined
together to achieve a lawful common social or economic
end, making equitable contributions to the capital required
and accepting a fair share of the risks and benefits of the
undertaking in accordance with universally accepted
cooperative principles
5. Business trusts—simply a deed of trust which is easier and
less expensive to constitute for it is not bound by any legal
requirements like a corporation. It doesn’t have a separate
juridical personality and is mainly governed by contractual
doctrines and the common law principles on trust
6. Sociedades anonima—
a. A commercial partnership, a sort of corporation,
where upon the execution of a public instrument in
which its articles of agreement appear, and the
contribution of funds and personal property,
becomes a juridical person—an artificial being,
invisible, intangible, and existing only in
contemplation of law—with power to buy, and sell
property, and to sue and be sued—a corporation—
not a general partnership nor a limited co-
partnership
b. Although there are similarities, such as the features
of limited liability and centralized management
granted to such juridical entity, the sociedad
aninoma didn’t exactly correspond to the notion of
a corporation in English or American law
7. Cuenta en participacion—as a sort of accidental
partnership constituted in such a manner that its existence
was only known to those who had an interest in the same,
there being no mutual agreement between the partners,
and without a corporate name indicating to the public in
some way that there are other people besides the one who
ostensibly managed and conducted the business, governed
under Code of Commerce
NATURE AND ATTRIBUTES OF A CORPORATION
NATURE AND POWER TO CREATE A CORPORATION
Constitutional Provisions
✾ The power to create corporations is one of the attributes of
sovereignty
✾ The exercise of the power is legislative in character and the
legislature may, subject to the restrictions of the
Constitution, create a particular corporation by direct act,
or make provisions, by general law, for the organization of
corporations by natural persons upon compliance with the
prescribed conditions
Article 12, Section 16. The Congress shall not, except by general
law, provide for the formation, organization, or regulation of
private corporations. Government-owned or controlled
corporations may be created or established by special charters
in the interest of the common good and subject to the test of
economic viability.
✾ Congress cannot under the Constitution, except by general
law, provide for the formulation, organization and
regulation of private corporations
✾ It has been held that private corporations pursuant to a
special law is a nullity, and such special law is
unconstitutional for being violative of the Constitution
✾ The constitutional provision taking away from Congress the
power to grant specific franchises to private corporations
comes from a history of corruption when such power were
exercised by legislatures in common law jurisdiction
✾ In Philippine jurisdiction, the Corporation Code is the
general law under which private corporations are organized
pursuant to the mandates of the Constitution
Civil Code Provisions
✾ Recognizes corporations, partnerships and associations for
private interest or purpose to which they are granted a
juridical personality separate and distinct from that of each
shareholder, partner, or member (Article 44 of the CC)
Franchises of Corporations
1. Primary franchise
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a. Franchise to exist as a corporation
b. Right to exist as such and is vested in the
individuals who compose the corporation and not
in the corporation itself and cannot be conveyed in
the absence of legislative authority to do so
2. Secondary franchise
a. Certain rights and privileges conferred upon
existing corporations
b. Special or secondary franchises of a corporation
are vested in the corporation and may ordinarily be
conveyed or mortgaged under a general power
granted to a corporation to dispose of its property,
except such secondary or special franchises as are
charged with a public use
CORPORATION AS A PERSON
Entitled to due process and equal protection
✾ The guarantees of the bill of rights are universal in
application to all persons within the territorial jurisdiction,
without regard to any differences in race, color, or
nationality. The word person includes aliens… Private
corporations, likewise, are persons within the scope of the
guarantees insofar as their property is concerned
Unreasonable Searches and Seizures
✾ Corporations are protected by the constitutional guarantee
against unreasonable searches and seizures
✾ But officers of a corporation from which documents,
papers, and things were seized have no cause of action to
assail the legality of the seizures, regardless of the amount
of shares of stock or of the interest of each of them in said
corporation, and whatever the offices they hold therein
may be, because the corporation has a personality
separate and distinct from those of said officers
✾ Corporation is entitled to immunity against unreasonable
searches and seizures
✾ A corporation after all is but an association of individuals
under an assumed name and with a distinct legal entity. In
organizing itself as a collective body it waives no
constitutional immunities appropriate for such body. Its
property cannot be taken without compensation. It can
only be proceeded against by due process of law, and is
protected, under the 14th Amendment, against unlawful
discrimination. (Bache case)
Corporation is not entitled to privilege against self-
incrimination
✾ In the same Bache case, it was mentioned that
corporations are not entitled to the privilege against self-
incrimination
✾ The corporation is a creature of the State. It is presumed
to be incorporated for the benefit of the public. It receives
certain special privileges and franchises, and holds them
subject to the laws of the State and the limitations of its
charter. Its right to act as a corporation is only preserved
to it as long as it obeys the laws of its creation.
The abovementioned made the great CLV to contemplate on
the circumstances…
✾ There is a distinction between the application of the rights
to due process, equal protection, and against unreasonable
searches and seizures, and the right against self-
incrimination
✾ The great CLV contemplates that the diff may lie on the
fact that the right against self-incrimination doesn’t result
in a physical intrusion into the premises of the corporation,
because it would require only that the corporation, through
its agents, produce records and books before the courts.
This right only denies individuals the right to abuse the
corporate medium to do folly.
✾ On the other hand, to deny the due process rights or rights
against unreasonable searches and seizures to
corporations would actually be to invite the State to
physically intrude into the personal and business privacy of
the stockholders or members who compose it
✾ Another view is the protected rights with respect to
corporations is all meant to curb the abuse that the State
and its representatives may employ upon the citizenry,
including the modes upon which they conduct their lives
and businesses.
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✾ The right against self-incrimination is not meant to prevent
an actual State abuse but to avoid pressuring the
individual from having to tell a lie.
PRACTICE OF PROFESSION
✾ Corporations cannot engage in the practice of profession
since they lack the actual and technical competence
required by the PRC
✾ COUNTER-REVOLUTION is the Architectural Professional
Corporations is now allowed under RA9266
LIABILITY FOR TORTS
✾ A corporation is civilly liable in the same manner as natural
persons for torts, because generally speaking, the rules
governing the liability of a principal or master for a tort
committed by an agent or servant are the same whether
the principal or master be a natural person or a
corporation, and whether the servant or agent be a natural
or artificial person
✾ PNB CASE—A corporation is liable whenever a tortuous act
committed by an officer or agent under an express
direction or authority from the stockholders or members
acting as a body, or generally, from the directors as the
governing body
✾ Not every tortuous act committed by an officer can be
ascribed to the corporation as its liability, for it is
reasonable to presume that in the granting of the authority
by the corporation to its agent, such a grant did not include
the direction to commit tortuous acts against third parties
—only when the corporation has expressly directed the
commission of such tortuous act, would the damages
resulting therefrom be ascribable to the corporation
✾ The direction of the corporation may be manifested either
by its board expressly or impliedly ratifying such act or is
estopped from impugning such an act
✾ Atty. Dy posts the question on what if you are the one
making the authority, being a member of the Board of
Directors, authorized yourself to do a certain act?
CRIMINAL LIABILITY OF CORPORATIONS
✾ WEST COAST LIFE CASE—there are no provisions relating to
the practice and procedure in criminal actions whereby a
corporation may be proceeded against criminally and
brought into court
✾ When it comes to criminal jurisdiction, our courts have no
common law jurisdiction or powers, and being creatures of
statute have only those powers conferred upon them by
statute
✾ PEOPLE V. CONCEPCION—when a criminal statute forbids a
corporation itself from doing an act, the prohibition extends
to the board of directors, and to each director separately
and individually
✾ Note that a corporation can only act through its officers
and agents, and where the business itself involves a
violation of law, the correct rule is that all who participate
in it are liable (PEOPLE V. TAN BOON KONG)
✾ PEOPLE V. TAN BOON KONG—Essentially in the field of
Criminal Law, the Court refuses to apply the fiction of
corporate entity to shield the individual actors in the
criminal act, even when they do the criminal act for or in
behalf of the corporation they represent
✾ The other reason why a corporation cannot be held liable
for a crime is the difficulty if not impossibility, of imposing
the penal sanction
✾ Also, a crime cannot be imputed to a corporation, being a
mere artificial being without a mind, since criminal intent
as an essential ingredient of a crime is missing
✾ SIA V. PEOPLE—Court made a clear distinction when a
corporate officer can be held personally liable criminally for
acts done in behalf of the corporation—
o The performance of an act is an obligation directly
imposed by the law on the corporation. Since it is
a responsible officer or officers of the corporation
who actually perform the act for the corporation,
they must of necessity be the ones to assume the
criminal liability; otherwise this liability as created
by the law would be illusory, and the deterrent
effect of the law, negated.
✾ If we pursue the doctrine of Sia that a corporate officer can
only be held personally liable for the crime committed by
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or in behalf of a corporation only in cases when the
corporation was directly required by the law to do an act in
a given manner, and the same law makes the person who
fails to perform the act in the prescribed manner expressly
criminally liable.
✾ COMETA V. CA—although a criminal case can only be filed
against the officers of a corporation and not against the
corporation itself, it doesn’t follow that the corporation
cannot be a real-party-in-interest for the purpose of
bringing a civil action for malicious prosecution for the
damages incurred by the corporation for the criminal
proceedings brought against its officer
UNDER THE CASE OF CHING V. CA, A CORPORATION CAN
BE HELD CRIMINALLY LIABLE… HOW? READ BELOW.
If the crime is committed by a corporation or other juridical
entity, the directors, officers, employees or other officers thereof
responsible for the offense shall be charged and penalized for
the crime, precisely because of the nature of the crime and the
penalty therefor. A corporation cannot be arrested and
imprisoned; hence, cannot be penalized for a crime punishable
by imprisonment. However, a corporation may be charged and
prosecuted for a crime if the imposable penalty is fine. Even if
the statute prescribes both fine and imprisonment as penalty, a
corporation may be prosecuted and, if found guilty, may be
fined.
A crime is the doing of that which the penal code forbids to be
done, or omitting to do what it commands. A necessary part of
the definition of every crime is the designation of the author of
the crime upon whom the penalty is to be inflicted. When a
criminal statute designates an act of a corporation or a crime
and prescribes punishment therefor, it creates a criminal offense
which, otherwise, would not exist and such can be committed
only by the corporation. But when a penal statute does not
expressly apply to corporations, it does not create an offense for
which a corporation may be punished. On the other hand, if the
State, by statute, defines a crime that may be committed by a
corporation but prescribes the penalty therefor to be suffered by
the officers, directors, or employees of such corporation or other
persons responsible for the offense, only such individuals will
suffer such penalty. Corporate officers or employees, through
whose act, default or omission the corporation commits a crime,
are themselves individually guilty of the crime.
The principle applies whether or not the crime requires the
consciousness of wrongdoing. It applies to those corporate
agents who themselves commit the crime and to those, who, by
virtue of their managerial positions or other similar relation to
the corporation, could be deemed responsible for its commission,
if by virtue of their relationship to the corporation, they had the
power to prevent the act. Moreover, all parties active in
promoting a crime, whether agents or not, are principals.
Whether such officers or employees are benefited by their
delictual acts is not a touchstone of their criminal liability. Benefit
is not an operative fact.
In this case, petitioner signed the trust receipts in question. He
cannot, thus, hide behind the cloak of the separate corporate
personality of PBMI. In the words of Chief Justice Earl Warren, a
corporate officer cannot protect himself behind a corporation
where he is the actual, present and efficient actor.
HOWEVER, COMPARED WITH CONSOLIDATED BANK V.
CONTINENTAL CEMENT…
By all indications, then, it is apparent that there was really no
trust receipt transaction that took place. Evidently, respondent
Corporation was required to sign the trust receipt simply to
facilitate collection by petitioner of the loan it had extended to
the former.
Finally, we are not convinced that respondent Gregory T. Lim and
his spouse should be personally liable under the subject trust
receipt. Petitioner’s argument that respondent Corporation and
respondent Lim and his spouse are one and the same cannot be
sustained. The transactions sued upon were clearly entered into
by respondent Lim in his capacity as Executive Vice President of
respondent Corporation. We stress the hornbook law that
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corporate personality is a shield against personal liability of its
officers. Thus, we agree that respondents Gregory T. Lim and his
spouse cannot be made personally liable since respondent Lim
entered into and signed the contract clearly in his official
capacity as Executive Vice President. The personality of the
corporation is separate and distinct from the persons composing
it.
*The above was mentioned because no violation was committed.
Will there be the same pronouncement if there was a finding of
criminal liability?
ENTITLEMENT TO MORAL DAMAGES
✾ Obiter in Mabitao case—a corporation may have a good
reputation which, if besmirched, may also be a ground for
the award of moral damages
✾ In recent decisions, nonetheless, the SC held that even
when a corporation’s reputation and goodwill have been
prejudiced, there can be no award for moral damages
under Article 2217 and succeeding articles of the CC
✾ Recovery of corporation would be under Articles 19, 20,
and 21 of the CC, but which requires a clear proof of malice
or bad faith
✾ A claim for moral damages arising from libel falls under
Article 2219, which expressly authorizes the recovery of
moral damages in cases of libel, slander or any form of
defamation, and doesn’t qualify whether the plaintiff is a
natural or juridical person. Therefore, a jurisdictional
person can validly complain or any other form of
defamation and claim for moral damages.
CORPORATE NATIONALITY
✾ Corporate nationality serves as legal basis for subjecting
the enterprise or its activities to the laws, the economic
and fiscal powers, and the various social and financial
policies of the state to which its supposed to belong.
✾ PLACE OF INCORPORATION TEST is the principal test of
nationality of a corporate entity—a corporation is a
national of the country under whose laws it has been
organized and registered
SEC. 123. Definition and rights of foreign corporations. - For the
purposes of this Code, a foreign corporation is one formed,
organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state. It shall
have the right to transact business in the Philippines after it shall
have obtained a license to transact business in this country in
accordance with this Code and a certificate of authority from the
appropriate government agency. (n)
✾ CONTROL TEST—the nationality of a corporation is
determined by the nationality of the majority of the
stockholders on whom control is vested
✾ PLACE OF PRINCIPAL BUSINESS TEST is also used to
determine whether a state has jurisdiction over the
existence and legal character of a corporation, its capacity
or powers, internal organization, capital structure, the
rights and liabilities of directors, officers, and shareholders
towards each other and to creditors and third persons—
corporation is a national or subject to the jurisdiction of the
place where its principal office or center of management is
located
WHY IS THE PLACE OF INCORPORATION TEST THE PRIMARY
TEST?
✾ This follows the theory of concession wherein a corporation
is a creature of the State
NOTE, ALTHOUGH THE PLACE OF INCORPORATION IS THE PRIMARY
TEST, IN THE FOLLOWING DISCUSSIONS, THE CONTROL TEST IS
ALSO USED…
EXPLOITATION OF NATURAL RESOURCES
Section 2. All lands of the public domain, waters, minerals, coal,
petroleum, and other mineral oils, all forces of potential energy,
fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be
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alienated. The exploration, development, and utilization of
natural resources shall be under the full control and supervision
of the State. The State may directly undertake such activities, or
it may enter into co-production, joint venture, or production-
sharing agreements with Filipino citizens, or corporations or
associations at least sixty per centum of whose capital is owned
by such citizens. Such agreements may be for a period not
exceeding twenty-five years, renewable for not more than
twenty-five years, and under such terms and conditions as may
be provided by law. In cases of water rights for irrigation, water
supply fisheries, or industrial uses other than the development of
water power, beneficial use may be the measure and limit of the
grant.
The State shall protect the nation's marine wealth in its
archipelagic waters, territorial sea, and exclusive economic zone,
and reserve its use and enjoyment exclusively to Filipino citizens.
The Congress may, by law, allow small-scale utilization of natural
resources by Filipino citizens, as well as cooperative fish farming,
with priority to subsistence fishermen and fish- workers in rivers,
lakes, bays, and lagoons.
The President may enter into agreements with foreign-owned
corporations involving either technical or financial assistance for
large-scale exploration, development, and utilization of minerals,
petroleum, and other mineral oils according to the general terms
and conditions provided by law, based on real contributions to
the economic growth and general welfare of the country. In such
agreements, the State shall promote the development and use of
local scientific and technical resources.
The President shall notify the Congress of every contract entered
into in accordance with this provision, within thirty days from its
execution.
Section 7. Save in cases of hereditary succession, no private
lands shall be transferred or conveyed except to individuals,
corporations, or associations qualified to acquire or hold lands of
the public domain.
✾ The above-quoted provision doesn’t include the place of
incorporation test. Even if the corporation is a creature
and technically under the control of the State, there is a
need to further safeguard the exploitation of natural
resources
✾ There is no distinction between non-voting and voting
shares since there are instances when non-voting shares
can vote
✾ REGISTER OF DEEDS OF RIZAL V. UNG SUI SI TEMPLE—The
purpose of the sixty per centum requirement is to ensure
that corporations or associations allowed to acquire
agricultural land or to exploit natural resources shall be
controlled by Filipinos and that the spirit of the Constitution
demands that in the absence of capital stock, the
controlling membership should be composed of Filipino
citizens
✾ JG SUMMIT HOLDINGS CASE
o If the foreign shareholdings in a landholding
corporation exceed 40%, it is not the foreign
stockholder’s ownership of the shares which is
adversely affected by the capacity of the
corporation to own land, that is the corporation
becomes disqualified to own land
o The Constitutional prohibition only extends to land
ownership and it doesn’t extend to immovable
property
OWNING AND OPERATING PUBLIC UTILITIES
Section 11. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens; nor
shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither shall any
such franchise or right be granted except under the condition
that it shall be subject to amendment, alteration, or repeal by
the Congress when the common good so requires. The State
shall encourage equity participation in public utilities by the
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general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to
their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be
citizens of the Philippines.
✾ The abovementioned expressly includes the place of
incorporation test and requires that only domestic
corporations with at least 60% of the capital stock owned
by Filipinos may own and operate public utilities in the
Philippines
✾ PEOPLE V. QUASHA—the Constitution doesn’t prohibit the
formation of a public utility corporation without the
required proportion of Filipino capital. What it prohibits is
the granting of a franchise or other form of authorization
for the operation of a public utility of a corporation already
in existence but without the requisite proportion of Filipino
capital
✾ The above case then draws the distinction between the
primary and secondary franchise of a corporation
✾ Given this ruling however, according to the great CLV,
shows that the constitutional provision on the formation of
corporations really serves no useful benefit then since all it
covers is the primary franchise but it is through a
secondary franchise by which the corporation may be
granted special privileges, etc.
MASS MEDIA AND ADVERTISING INDUSTRY
Section 11. (1) The ownership and management of mass media
shall be limited to citizens of the Philippines, or to corporations,
cooperatives or associations, wholly-owned and managed by
such citizens.
The Congress shall regulate or prohibit monopolies in
commercial mass media when the public interest so requires. No
combinations in restraint of trade or unfair competition therein
shall be allowed.
(2) The advertising industry is impressed with public interest,
and shall be regulated by law for the protection of consumers
and the promotion of the general welfare.
Only Filipino citizens or corporations or associations at least
seventy per centum of the capital of which is owned by such
citizens shall be allowed to engage in the advertising industry.
The participation of foreign investors in the governing body of
entities in such industry shall be limited to their proportionate
share in the capital thereof, and all the executive and managing
officers of such entities must be citizens of the Philippines.
✾ Although the constitutional provision with regard mass
media doesn’t expressly include the place of incorporation
test, the same should be deemed included under the same
principles of exploitation of natural resources
✾ The ancillary control test for mass media under the
Constitution is actually more stringent than in other
defined areas since it requires not only 100% Filipino
ownership of the capital stock of the corporation but also
100% Filipino management of the entity, with respect to
mass media
Summarizing them all…
Exploitation of natural resources At least 60% Filipino-owned
Ownership of private lands At least 60%
Public utilities and franchise At least 60%
Mass media 100% control and management
Advertising industry At least 70% with foreign
participation limited to their
proportionate share in the
capital and that all executive
and management officers must
be Filipino citizens
WAR TIME TEST
✾ In times of war, the nationality of the corporation is
determined by the character or citizenship of its controlling
stockholders

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INVESTMENT TEST AND GRANDFATHER RULE
✾ GRANDFATHER RULE is the method by which the
percentage of Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of activities,
provided for under the Constitution and other
nationalization laws, is computed, in cases where corporate
stockholders are present in the situation, by attributing the
nationality of the second or even subsequent tier of
ownership to determine the nationality of the corporate
shareholder
✾ SEC Rule: corporations and partnerships with 60% of the
capital is owned by Filipinos is of Filipino nationality but if
the percentage is lesser than 60% only the number of
shares corresponding to such percentage shall be counted
as of Philippine nationality—this however, pertains only to
investments
✾ Foreign Investments Act of 1991: Philippine national refers
to a corporation organized under the laws of the Philippines
which at least 60% of the capital stock outstanding and
entitled to vote is owned and held by citizens of the
Philippines
o Where a corporation and its non-Filipino
shareholders own stocks in a SEC-registered
corporation, at least 60% of the outstanding capital
stock and entitled to vote of BOTH corporations
must be owned and held by Filipino citizens and at
least 60% of the Board of Directors must be
citizens of the Philippines
✾ PALTING V. SAN JOSE PETROLEUM—application of the
grandfather rule to determine the nationality of the
ultimate controller of the subject corporation cannot go
beyond the level of what is reasonable. The further away
the level of ownership from the subject corporation, the
less can one practically associate control of the subject
corporation
Sec. 140. Stock ownership in certain corporations. - Pursuant to
the duties specified by Article XIV of the Constitution, the
National Economic and Development Authority shall, from time
to time, make a determination of whether the corporate vehicle
has been used by any corporation or by business or industry to
frustrate the provisions thereof or of applicable laws, and shall
submit to the Batasang Pambansa, whenever deemed
necessary, a report of its findings, including recommendations
for their prevention or correction.
Maximum limits may be set by the Batasang Pambansa for
stockholdings in corporations declared by it to be vested with a
public interest pursuant to the provisions of this section,
belonging to individuals or groups of individuals related to each
other by consanguinity or affinity or by close business interests,
or whenever it is necessary to achieve national objectives,
prevent illegal monopolies or combinations in restraint or trade,
or to implement national economic policies declared in laws,
rules and regulations designed to promote the general welfare
and foster economic development.
In recommending to the Batasang Pambansa corporations,
business or industries to be declared vested with a public
interest and in formulating proposals for limitations on stock
ownership, the National Economic and Development Authority
shall consider the type and nature of the industry, the size of the
enterprise, the economies of scale, the geographic location, the
extent of Filipino ownership, the labor intensity of the activity,
the export potential, as well as other factors which are germane
to the realization and promotion of business and industry.
SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF
PIERCING THE VEIL OF CORPORATE FICTION
INTRODUCTION
✾ There is a complementary relationship of the piercing
doctrine to the main doctrine that a corporation has a
juridical personality separate and distinct from the
stockholders or members who compose it
MAIN DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
✾ A corporation has a personality distinct and separate from
its stockholders and members
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✾ A corporation is a juridical entity with legal personality
separate and distinct from those acting for and in his
behalf and, in general, from the people composing it, and
that obligations incurred by the corporation, acting through
its directors, officers, and employees are its sole liabilities
✾ A corporation’s strong juridical personality has been
considered as the attribute most characteristic of
corporations—right of succession, limited liability,
centralized management, and generally free transferability
of shares of stock
✾ The separate juridical personality of the corporation
facilitates and preserves the going concern value of the
underlying business enterprise, saves on transaction costs,
and prevents disruption of that value because of investors
who withdraw or are deceased
✾ The stability of the main doctrine of separate juridical
personality is inextricably linked with the attractiveness of
the corporation as an effective medium by which
businessmen can pursue business enterprises
✾ A stockholder’s right in corporate property is purely
inchoate and will not entitle them to intervene in a
litigation involving corporate property. If there exists any
right, it is indirect, contingent, remote, conjectural,
consequential and collateral. At the very least, their
interest is very inchoate, or in sheer expectancy of a right
in the management of a corporation and to share in the
profits thereof and in the properties and assets thereof on
dissolution, after payment of the corporate debts and
obligations
APPLICATION: MAJORITY EQUITY OWNERSHIP AND
INTERLOCKING DIRECTORSHIP
✾ DBP V. NLRC—ownership of a majority of capital stock and
the fact that a majority of directors of a corporation are the
directors of another corporation created no employer-
employee relationship, nor did it make the controlling
stockholder liable for employee’s claim of the subject
corporation
✾ Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a
corporation isn’t of itself sufficient ground for disregarding
the separate juridical personality
✾ A corporate defendant in a case, against whom a writ of
possession has been issued, cannot use the fact that it has
obtained controlling equities in the corporate plaintiffs to
suspend enforcement of the writ, for their separate
juridical personality and thus their separate business and
proprietary interests remain
✾ Mere substantial identity of incorporators of two
corporations doesn’t necessarily imply fraud nor warrant
the piercing of the veil of corporate fiction. In the absence
of clear and convincing evidence to show that the
corporate personalities were used to perpetrate fraud, or
circumvent the law, the corporations are to be rightly
treated as distinct and separate from each other
✾ Having interlocking directors, corporate officers and
shareholders isn’t enough justification to pierce the veil of
corporate fiction in the absence of fraud or other public
policy considerations
APPLICATION: BEING CORPORATE OFFICER
✾ Being an officer or stockholder of a corporation doesn’t by
itself make one’s property also of the corporation, and vice-
versa, for they are separate entities, and that shareholders
who are officers are in no legal sense the owners of
corporate property which is owned by the corporation as a
distinct and legal person
✾ The mere fact that one is president doesn’t render the
property he owns or possesses the property of the
corporation, since the president as an individual and the
corporation are separate entities
✾ Corporate personality is a shield against personal liability
of its officers—a corporate officer and his spouse cannot be
made personally liable under a trust receipt where he
entered into and signed the contract clearly in his official
capacity
✾ The fact alone that one is president is not sufficient to hold
him solidarily liable for the liabilities adjudged against the
corporation and the employees
✾ When the compulsory counterclaim filed against corporate
officers for their alleged fraudulent act indicate that such
corporate officers are indispensable parties in the litigation,
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the original inclusion of the corporation in the suit doesn’t
thereby allow the denial of a specific counterclaim being
filed to make the corporate officers personally liable. A
corporation has a legal personality entirely separate and
distinct from that of its officers and cannot act for and on
their behalf, without being so authorized
APPLICATION: DEALINGS BETWEEN CORPORATION AND
STOCKHOLDERS
✾ The fact that a majority stockholder had used his own
money to pay part of the loan of the corporation cannot be
used as basis to pierce
✾ Mere fact that stockholder sells his shares of stock in the
corporation during the pendency of a collection suit against
the corporation, doesn’t make such stockholder personally
liable for the corporate debt, since the disposing
stockholder has no personal obligation to the creditor, and
it is inherent right of the stockholder to dispose of his
shares of stock anytime he so desires
APPLICATION: ON PRIVILEGES ENJOYED
✾ The tax exemption clause in the charter of a corporation
cannot be extended nor is enjoyed by even its controlling
stockholders
APPLICATION: OBLIGATIONS AND DEBTS
✾ Corporate debt or credit is not the debt or credit of the
stockholder nor is the stockholder’s debt or credit that of
the corporation
✾ Stockholders have no right to intervene in a collection case
covering loans of the corporation since the interest of
shareholders in corporate property is purely fictitious
PIERCING THE VEIL OF CORPORATE FICTION: SOURCE OF
INCANTATION
✾ The notion of corporate entity will be pierced or
disregarded and the individuals composing it will be
treated as identical if the corporate entity is being used as
a cloak or cover for fraud or illegality, as a justification for
the sole benefit of the stockholders
✾ As a general rule, a corporation will be looked upon as a
legal entity, unless and until sufficient reason to the
contrary appears. When the notion of legal entity is used
to defeat public convenience, justify wrong, protect fraud,
or defend crime, the law will regard the corporation as an
association of persons. Also, the corporate entity will be
disregarded in the interest of justice in such cases as fraud
that may work inequities among members of the
corporation internally, involving no rights of the public or
third persons. In both instances, there must have been
fraud and proof of it. For the separate juridical personality
of a corporation to be disregarded, the wrongdoing must
be clearly and convincingly established. It cannot be
presumed.
✾ The main treatment of the piercing doctrine to both
corporate practicioners and their clients has always been
to prevent it being applied by the courts to their particular
situation and avoid the dire consequences of piercing,
which is mainly holding the associates in the venture
personally liable for corporate obligations
NATURE AND EFFECT OF THE DOCTRINE
✾ FRANSISCO MOTORS V. CA—the rationale behind piercing
the corporation’s identity in a given case is to remove the
barrier between the corporation from the persons
comprising it to thwart the fraudulent and illegal schemes
of those who use the corporate personality as a shield for
undertaking certain proscribed activities. However, in the
case at bar, instead of holding certain individuals or person
responsible for an alleged corporate act, the situation has
been reversed. It is the petitioner as a corporation which is
being ordered to answer for the personal liability of certain
individual directors, officers and incorporators concerned.
Hence, it appears to us that the doctrine has been turned
down because of its erroneous invocation.
✾ The notion of separate personality however may be
disregarded under the doctrine “piercing the veil of
corporate fiction” as in fact the court will often look at the
corporation as a mere collection of individuals or an
aggregations of persons undertaking business as a group,
disregarding the separate juridical personality of the
corporation unifying the group
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Equitable Remedy
✾ The doctrine of piercing the corporate veil is an equitable
doctrine developed to address situations where the
separate corporate personality of a corporation is abused
or used for wrongful purposes
✾ Whether the separate personality of the corporation should
be pierced hinges on the obtaining facts, appropriately
pleaded or proved. However, any piercing of the corporate
veil has to be done with caution, albeit the court will not
hesitate to disregard the corporate veil when it is misused
or when necessary in the interest of justice. After all, the
concept of corporate entity was not mean to promote
unfair objectives.
Remedy of Last Resort
✾ Piercing the corporate veil isn’t allowed unless the remedy
sought is not available and when other remedies are still
available
Objectives for Availing of the Piercing
✾ Piercing isn’t allowed unless the remedy sought is to make
the officer or another corporation pecuniarily liable for the
corporate debts
✾ Piercing is not available when personal obligations of an
individual are to be enforced against the corporation
✾ Piercing doctrine is meant to prevent fraud, and cannot be
employed when the end result would be to perpetrate
fraud or a wrong
✾ The theory of corporate entity wasn’t meant to promote
unfair objectives or otherwise, nor to shield them
✾ The attempt to make the security agencies appear as two
separate entities when in reality they were but one, was a
devise to defeat the law and shouldn’t be permitted
Basis must be Clear Evidence
✾ To disregard the separate juridical personality of a
corporation, it is elementary that the wrongdoing cannot
be presumed and must be clearly and convincingly
established. The organization of the corporation at the
time when the relationship between the landholder and the
developer were still cordial cannot be used as a basis to
hold the corporation liable later on for the obligations of
the landowner to the developer under the mere allegation
that the corporation is being used to evade the
performance of obligation by one of its stockholders
✾ Application of the doctrine of piercing the corporate veil
should be done with caution
Not Available To Theorizing
✾ BOYER-ROXAS V. COURT OF APPEALS—Piercing of the
corporate veil isn’t allowed when it is resorted under the
theory of co-ownership to justify continued use and
possession of stockholders of corporate properties
✾ The piercing doctrine cannot be availed of to dislodge from
SEC’s jurisdiction the petition for suspension of payments
under PD 902-A on the ground that the petitioning
individuals should be treated as the real petitioners to the
exclusion of petitioning corporation. The doctrine of
piercing the veil of corporate fiction relied heavily upon the
petitioner is entirely misplaced, as said doctrine only
applies when such corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime.
Application to Third Parties
✾ GO CHAN V. YOUNG—That respondents aren’t stockholders
of the sister corporations doesn’t make them non-parties to
this case, since it is alleged that the sister corporations are
mere alter egos to the directors-petitioners, and that the
sister corporations acquired the properties sought to be
reconveyed to the FGSRC in violation of director-
petitioner’s fiduciary duty to the FGSRC. The notion of
corporate entity will be pierced and the individuals
composing it will be treated as identical if the corporate
entity is being used as a cloak or cover for fraud or
illegality; as a justification for a wrong, or as an alter ego,
an adjunct, or a business conduit for the sole benefit of the
stockholders
Piercing Application Is Essentially Of Judicial Prerogative
✾ Under the case of Cruz v. Dalisay, it was held that piercing
the corporate veil is a judicial remedy not available to a
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sheriff…
✾ According to the CLV, the more appropriate application of
Cruz would be that the administrative determination of the
facts upon which the piercing doctrine is to be applied is
subject to judicial or quasi-judicial review, as the case may
be
Consequences Available Of Piercing Doctrine (Concept Of
Res Judicata)
✾ Application of the doctrine to a particular case doesn’t
deny the corporation of legal personality for any and all
purposes, but only for the particular transaction or instance
or the particular obligation for which the doctrine was
applied
✾ Piercing application, ergo, has only res judicata effect
✾ Once pierced, it doesn’t mean that it is always pierced.
The purpose is not the revoke the separate personality of
the corporation.
CLASSIFICATION OF PIERCING CASES
1. Fraud cases—when the corporate entity is used to commit
fraud or to justify a wrong, or to defend a crime
a. There is always the element of malice or evil
motive
2. Alter ego cases—when the corporate entity is used to
defeat public convenience, or a mere farce, since the
corporation is merely the alter ego, business conduit or
instrumentality of a person or another equity
a. Even in the absence of evil motive, piercing is
allowed
3. Equity cases—When the piercing of the corporate fiction is
necessary to achieve justice or equity
a. Dumping ground or added flourish when it had to
apply the piercing doctrine but could find it
convenient to do so because no evil had been
sought to be achieved, but at the same time, the
corporate juridical personality of the subject
corporation cannot be respected in order to
achieve justice
✾ Authorities are agreed on three basic areas where piercing
the veil, with which the law covers and isolates the
corporation from any other legal entity to which it may be
related, is allowed (GCC V. ALSONS DEVELOPMENT AND
INVESTMENT CORP.)
o Defeat of public inconvenience, as when the
corporation is used as vehicle for the evasion of
existing obligation
o Fraud cases or when the corporate entity is used to
justify wrong, protect fraud, or defend a crime
o Alter ego cases, where the corporation is merely a
farce since it is mere alter ego or business conduit
of a person, or where a corporation is so organized
and controlled and its affairs are conducted as to
make it merely an instrumentality, agency, conduit
or adjunct of another corporation
✾ RUNDOWN ON PIERCING APPLICATION—the SC pierced the
corporate veil to ward off a judgment credit, to avoid
inclusion of corporate assets as part of the estate of the
decedent, to escape liability arising for a debt, or to
perpetuate fraud and/or confuse legitimate issues either to
promote or to shield unfair objectives to cover up an
otherwise blatant violation of the prohibition against forum
shopping
SUMMARY OF PROBATIVE FACTORS (CONCEPT BUILDERS
CASE)
1. Stock ownership by one or common ownership of both
corporations
2. Identity of directors and officers
3. The manner of keeping corporate books and records
4. Methods of conducting the business
TESTS IN DETERMINING THE APPLICABILITY OF DOCTRINE
OF PIERCING CORPORATE VEIL
1. Control, not mere majority of complete stock control, but
complete denomination, not only of finances but of policy
and business practice, in respect to the transaction
attacked so that the corporation as to this transaction had
at the time to separate mind, will or existence of its own
2. Such control must have been used by the defendant to
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commit fraud or wrong, to perpetuate the violation of
statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal rights
3. The aforesaid control and breach of duty proximately
caused the injury or unjust loss complained of
FRAUD CASES
✾ FRANSISCO V. MEJIA—When the legal fiction of the separate
corporate personality is abused, such as when the same is
used for fraudulent or wrongful ends, the courts haven’t
hesitated to pierce the corporate veil
✾ The general rule is that obligations incurred by a
corporation, acting through the directors, officers, or
employees, are its sole liabilities. However, the veil with
which the law covers and isolates the corporation from its
directors, officers, or employees will be lifted when the
corporation is used by any of them as a cloak or cover for
fraud or illegality or injustice. Here the fraud was
committed by the petitioners to the prejudice of the bank.
✾ Fraud or bad faith on the part of certain corporate officers
or stockholders may warrant the piercing of the veil of
corporate fiction so that the said individual may not seek
refuge therein, but may be held individually and personally
liable for his or her actions.
✾ Mere allegation of fraud or bad faith, without evidence
supporting such claims cannot warrant the piercing of
corporate veil.
Acts by Controlling Stockholder
✾ NAMARCO V. ASSOCIATED FINANCE CO.—where a
stockholder, who has absolute control over the business
and affairs of the corporation, entered into a contract with
another corporation through fraud and false
representations, such stockholder shall be liable jointly and
severally with his co-defendant corporation even when the
contract sued upon was entered into on behalf of the
corporation
✾ In fraud cases, the alter ego concept pertains to employing
the corporation even for a single transaction, to do evil,
unlike in pure alter ego cases, where the courts go into
findings of systematic disregard and disrespect of the
separate juridical person of the corporation
Avoidance of Taxes
✾ With regard to the companies were meant to be used as
mere tools for the avoidance of estate taxes, suffice it to
say that the legal right of a taxpayer to reduce the amount
of what otherwise could be his taxes or altogether avoid
them, by means which the law permits cannot be doubted
✾ If it’s used as a tax avoidance measure, it seems that the
SC gave the notion that it is perfectly normal and
permissible to do so
✾ 天使: I think this is a question of fact. Was the corporation
used to perpetrate fraud or commit tax evasion or what-
have-you? There should be a grasp of the circumstances
to say if the piercing doctrine should be applied.
Nonetheless, practically I think, if you use a corporation to
evade personal liabilities, doesn't a corporation entail
bigger tax liabilities? Isn’t that one of its disadvantages as
previously mentioned way above this notes.
Avoidance of Contractual Commitments or Civil Liabilities
✾ PALACIO V. FELY TRANSPORTATION—one cannot evade civil
liability by incorporating properties or the business
o This is contrary to another ruling saying that
piercing isn’t available when personal obligations
of an individual are to be enforced against a
corporation
o With this, does it mean that piercing can go both
ways? No, in this present case, the purpose of the
incorporation was to evade the liability. This is
different from the previous case discussed. Look at
the purpose of incorporation always so that you will
not be misled.
✾ VILLA REY TRANSIT V. FERRER—when the fiction of legal
entity is urged as a means to avoid a contractual
commitment against non-competition (monopoly)
Liability of Officers
✾ Unless sufficient proof exists on record that an officer has
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used the corporation to defraud private respondents, he
cannot be made personally liable just because he appears
to be the controlling stockholder
✾ Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a
corporation isn’t of itself sufficient ground for disregarding
the separate corporate personality
✾ An officer may not be held liable personally for damages if
he acted in good faith within the scope of his authority
Avoidance of Legal Restrictions
✾ Corporate veil cannot be used to shield an otherwise
blatant violation of the prohibition against forum-shopping.
Shareholders, whether suing as the majority in direct
actions or as the minority in a derivative suit, cannot be
allowed to trifle with court processes, particularly where
the corporation itself hasn’t been remiss in vigorously
prosecuting or defending corporate causes and in using
and applying remedies available to it
Under-Capitalization
✾ Note: in the book, this was placed by CLV under alter-ego
cases and yet it is being discussed in the outline as part of
the fraud cases
✾ Important case is MCCONNELL V. CA
✾ Although it held that mere ownership of all and nearly all of
the stocks doesn’t make a corporation a business conduit
of the stockholders, but in this case, the operation of the
corporation was so merged with those of the stockholders
as to be practically be indistinguishable—they had the
same office, the funds were held by the stockholders, etc.
✾ There is no clear-cut distinction by the court if the
abovementioned case is a fraud case or alter ego case for
piercing the corporate veil since it applied the Milwaukee
doctrine to the alter ego formula. Though, reading the
case would show that there has bee no finding of fraud
✾ In this end, undercapitalizing a corporation is therefore a
species of alter ego cases especially when it didn’t
consider prudent business practice for ventures to shoulder
all the capital needed for the venture when credit therefor
is available
✾ Indeed, leveraging is accepted and often idealized business
practice. More importantly, creditors extend credit fully
aware of the risk involved in case of under-capitalization,
and the element of fraud generally doesn’t attain by that
fact alone
✾ 天使: Just a thought then…my 2-cents worth—if this is an
alter-ego case, then what is it doing under the fraud ones
in the outline? Probably, when this was answered, I was not
around =P
Rules in Labor Cases
✾ In the field of labor, the rule on liability of officers have
taken two different strains
✾ Following AC RANSOM, since a corporate employer is an
artificial person, it must have an officer who can be
presumed to be the employer, being the person acting in
the interest of the employer—AC RANSOM then held that
the responsible officer of the employer corporation can be
held liable personally, not to say even criminally, for non-
payment of backwages; and that in the absence of definite
proof as to the identity of an officer or officers of a
corporation directly liable for failure to pay backwages, the
responsible officer is the president of the corporation
jointly and severally with other presidents of the same
corporation
✾ In effect then, AC RANSOM held that a corporate officer is
liable for corporate obligations by the mere fact that he is
the highest officer of the corporation
✾ But a different turn was made in the case of DEL ROSARIO
V. NLRC when it was held that for a separate juridical
personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established.
It cannot be presumed.
Parent-Subsidiary Relations: Affiliates
✾ The fact that a corporation owns all of the stocks of
another corporation taken alone, is not sufficient to justify
their being treated as one entity. If used to legitimate
functions, a subsidiary’s separate existence shall be
respected, and the liability of the parent corporation, as
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well as the subsidiary shall be confined to those arising in
their respective business. A corporation has a separate
personality distinct from its stockholders and from other
corporations to which it may be conducted. This separate
and distinct personality of a corporation is a fiction created
by law for convenience and to prevent injustice.
✾ Mere ownership by a single stockholder or another
corporation of all or nearly all of the capital stock of the
corporation isn’t by itself a sufficient ground to disregard
the separate corporate personality. The substantial
identity of the incorporators of two or more corporations
doesn’t warrantly imply that there was fraud so as to justify
the piercing of the writ of corporate fiction. To disregard
the said separate juridical personality of a corporation, the
wrongdoing must be proven clearly and convincingly.
GUIDING PRINCIPLES IN FRAUD CASES
1. There must have been fraud or an evil motive in the
affected transaction, and the mere proof of control of the
corporation by itself wouldn’t authorized piercing
2. The main action should seek for the enforcement of
pecuniary claims pertaining to the corporation against
corporate officers or stockholders, or vice-versa
3. The corporate entity has been used in the perpetration of
the fraud or in justification of wrong, or to escape personal
liability
✾ Fraud cases requiring the piercing of the corporate veil
should be properly perceived as viewing the corporate
entity from the outside—from the position of those in the
business community who have to deal with corporations on
the other side of the bargaining table
✾ Piercing in fraud cases is an assurance to the dealing
public that in cases of mischief by the actors behind the
corporation, the piercing doctrine allows them remedy
against the very actors themselves
✾ Basic public policy—without the fraud cases of piercing,
then the corporate entity would become a shield behind
which unscrupulous businessmen can hide and perhaps
even become dangerously aggressive in undertaking
duplicitous deals because they would never have to be
personally liable for their fraudulent or unlawful acts
✾ WHY IS THERE A SHOWING OF ALTER EGO ELEMENTS, CLV
ASKED IN HIS OUTLINE? There is showing of alter-ego
elements because it is through the alter ego mechanism
that fraud is perpetuated
ALTER EGO CASES
✾ The question of whether a corporation is a mere alter ego
is purely one of fact, and the burden is on the party who
alleges it
Using Corporation as Conduit or Alter ego
✾ ARNOLD V. WILLETS AND PATTERSON—where the stock of a
corporation is owned by one person whereby the
corporation functions only for the benefit of such individual
owner, the corporation and the individuals should be
deemed the same
✾ When corporation is merely an adjunct, business conduit or
alter ego of another corporation, the fiction of separate and
distinct corporation be disregarded
✾ GENERAL CREDIT CORPORATION V. ALSONS DEVT. AND
INVESTMENT CORP.—the SC agrees with the disposition of
the appellate court on the application of the piercing
doctrine to the transaction subject of the case. Per the
Court’s count, the trial court enumerated no less than 20
documented circumstances and transaction, which taken
as a package, indeed strongly supported the conclusion
that respondent EQUITY was but an adjunct, as
instrumentality or business conduit of petitioner.
Tax Avoidance Cases
✾ YUTIVO CASE—Southern Motors was found to be the
subsidiary of Yutivo only…
✾ Use of nominees to constitute the corporation for the
benefit of the controlling stockholder who sought to avoid
the payment of taxes
Mixing-up of Operations; Disrespect to the Corporate Entity
✾ LA CAMPANA COFFEE—employment of same workers,
single place of business, same payroll, etc. may indicate
alter ego situation
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✾ PADILLA V. CA—The facts that two corporations may be
sister companies and that they may be sharing personnel
and resources, without more, is insufficient to prove that
their separate corporate personalities are being used to
defeat public inconvenience, justify wrong, protect fraud,
or defend crime.
✾ Where two business enterprises are owned, conducted,
and controlled by the same parties, both law and equity
will, when necessary to protect the rights of third persons,
disregard the legal fiction that two corporations are distinct
earlier and treat them as illogical
✾ Mixing of personal accounts with corporate bank deposit
accounts
Parent-Subsidiary Relationship
✾ Absence of proof that control over a corporation is being
used by a mother company to commit fraud or wrong,
there would be no basis to disregard their separate juridical
personalities
✾ If used to perform legitimate functions, a subsidiary’s
separate existence shall be respected and the liability of
the parent corporation as well as the subsidiary will be
confined to those arising in their respective businesses.
Even when the parent corporation agreed to the terms to
support a standby credit agreement in favor of the
subsidiary, doesn’t mean that its personality has merged
with that of the subsidiary
GUIDING PRINCIPLES IN EQUITY CASES
1. Doctrine applies in the absence of evil intent, because of
the direct violation of the central corporate law principle of
separating ownership from management
2. Doctrine of such cases is based on estoppel; if stockholders
don’t respect the separate entity, others cannot be
expected to be bound by the separate juridical entity
3. Piercing in alter ego cases may prevail even when no
monetary claims are sought to be enforced against the
stockholders or officers of the corporation
4. ONLY IN THE BOOK: when the underlying business
enterprise doesn’t really change and only the medium by
which that business enterprise is changed, then there
would be occasion to pierce the veil of corporate fiction to
allow business creditors to recover from whoever has
control of the business enterprise
EQUITY CASES
✾ When used to confuse legitimate issues
o Where a corporate fiction was used to perpetrate
social injustice or as a vehicle to evade obligations
or confuse the legitimate issues, it would be
discarded and the two corporations would be
merged as one
✾ When used to raise technicalities
DUE PROCESS CLAUSE
✾ Need to bring a new case against the officer
o A suit against individual shareholders in a
corporation isn’t a suit against the corporation.
Failure to implead the complainants is a violation
of due process for it would be in effect be
disregarding their distinct and separate personality
without a hearing
o PADILLA V. CA—the general principle is that no
person shall be affected by any proceedings to
which he is a stranger, and strangers to a case
aren’t bound by the judgment rendered by a court
✾ When corporate officers are sued in their official capacity
when the corporation wasn’t made a party, the corporation
isn’t denied due process
✾ JACINTO V. COURT OF APPEALS—Provided the evidential
basis has been adduced during trial to apply the piercing
doctrine
CORPORATE CONTRACT LAW
MERGING PRINCIPLES OF CORPORATE LAW AND CONTRACT
LAW
✾ Essential elements of a contract are consent of the
contracting parties, subject matter of the contract, and
cause or consideration
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✾ The essential requisite of consent requires that the two
contracting parties are legally capacitated by law to bind
and be bound by the obligations, and also shouldn’t
represent the same interests
✾ Although the corporate entity is a juridical person, being a
legal fiction it cannot act in the world except through its
duly authorized officers or representatives—therefore, the
issue in Corporate law impinges on Contract law on what
happens to contracts entered into where the corporation
either has not been legally constituted, or has been
defectively constituted; there is also the issue as to
contracts involving duly constituted corporations, but
which were entered into by officers who either were not
duly authorized, or who exceeded their scope of authorities
✾ When a corporation hasn’t been constituted by law, there
is as yet no juridical person which can validly enter into a
contract—contract law would consider a contract entered
into in behalf of the corporation as a void contract for lack
of the essential requisite of consent being given by two
contracting parties. However, in Corporate law, such
contracts would have binding effects pending on prevailing
circumstances
✾ A distinction also has to be drawn between a situation
where such a contract is entered into with the parties
knowing fully well that a corporation doesn’t yet legally
exist (promoter’s contracts), and the other situation where
at least one of the parties is unaware that a corporation
hasn’t been duly constituted (de facto corporations and
corporations by estoppel)
PRE-INCORPORATION STAGES: PROMOTER’S CONTRACT
Who is a promoter?
✾ A person who, acting alone, or with others, takes initiative
in founding and organizing the business or enterprise of
the issuer and receives consideration therefor
Pre-incorporation Subscription Agreement
Section 60. Subscription contract. - Any contract for the
acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription
within the meaning of this Title, notwithstanding the fact that the
parties refer to it as a purchase or some other contract. (n)
Section 61. Pre-incorporation subscription. - A subscription for
shares of stock of a corporation still to be formed shall be
irrevocable for a period of at least six (6) months from the date
of subscription, unless all of the other subscribers consent to the
revocation, or unless the incorporation of said corporation fails to
materialize within said period or within a longer period as may
be stipulated in the contract of subscription: Provided, That no
pre-incorporation subscription may be revoked after the
submission of the articles of incorporation to the Securities and
Exchange Commission. (n)
✾ The above have effectively adopted into our jurisdiction 1a
fused version of both the contract theory and offer theory
in defining the nature of pre-incorporation subscription
agreements
Theories Fused With Respect to Pre-Incorporation
Agreements (following Section 60 and 61)
1. Contract theory—a subscription agreement among several
persons to take shares in a proposed corporation becomes
a binding contract and is irrevocable from the time of
subscription, unless cancelled by all the parties before
acceptance by the corporation
2. Offer theory—a subscription agreement is only a
continuing offer to a proposed corporation, which offer
doesn’t ripen into a contract until accepted by the
corporation when organized
Note: Subscription agreements are special contracts in the sense
that they go beyond what we would term as ordinary contracts.
Although subscription agreements are contracts between the
subscriber and the corporation, at the same time they are deemed
to be contracts among the stockholders of a corporation. Such a
special relationship among the subscribers of the corporation can
be sustained only if we look beyond the pale of the corporate
fiction and see that actually, beneath the corporate shell, is an
association of warm-blooded persons who decided to band
together in the corporation to pursue a business. This is clear from
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the fact that Section 61 wherein a pre-incorporation subscription
agreement is generally irrevocable within the stipulated 6-month
period unless all of the other subscribers consent to the revocation.
Theories In Pre-Incorporation Contracts (As found in the
Code and in jurisprudence)
1. Since a promoter’s contract is the promoter’s own, the only
reason why the corporation, once it is organized becomes
liable is when the corporation adopts it as its own. The
promoter’s real contract theory is one of the three theories
by which to validate a contract prior to incorporation
2. Continuing offer—the continuing offer that exists as to the
time of the issuance of the certificate of incorporation. And
if it is accepted, then the offer means the acceptance, and
there arises a contract
3. Once the promoter enters into a contract for and in behalf
of a non-existent principal, the promoter becomes
personally liable like an agent who acts without authority
from the principal. The contract entered into then is valid
unless the agent acted without authority. But it is possible
for the contract to be adopted by the principal by
accepting it.
Note: in all three instances, there is deemed to be a valid contract
of a valid offer. That is the basis of a promoter’s contract—so that
the people will be willing to risk without such fear, investing their
money into a venture prior to the incorporation of a company or a
corporation.
DE FACTO CORPORATIONS
Section 20. De facto corporations. - The due incorporation of any
corporation claiming in good faith to be a corporation under this
Code, and its right to exercise corporate powers, shall not be
inquired into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding. (n)
✾ Every corporation is deemed de jure until proven otherwise
Rationale for the Doctrine
✾ It prevents any party from raising the defect of authority as
a means to avoid fulfillment of a contract or a transaction
entered into in good faith
✾ The essence of the doctrine is to protect the sanctity of
dealing by the public with persons or entities whose
authority emanates from the State, to allow the public to
take such authority at face value, provided nothing is
clearly shown to be defective in such authority. Even it is
proven that such authority was indeed defective, such
defect cannot be used as an excuse to set aside the
relationship or transaction entered into in good faith
✾ This doctrine is meant in corporate law to protect the
enforceability of corporate dealings and contracts, to allow
the public to take at reasonable face value the authority of
the corporation to enter into valid and binding contracts,
thereby providing a healthy system by which to encourage
the public to deal with corporate entities
✾ Therefore this is meant to apply to the level of existence
that pertains to the relationship of the corporation with the
dealing public; and isn’t meant to govern nor be applicable
to other levels of existence, such as those pertaining to
intra-corporate relationships
Various Scopes Of De Facto Corporation Doctrine
1. The enterprise contracts with an outsider, who later brings
action against the enterprise as though it were a
corporation, and the enterprise is held liable in corporate
form
2. The enterprise contracts with an outsider, and
subsequently brings actions in corporate form against the
outsider, the outsider is held liable to the enterprise
3. The enterprise contracts with an outsider, and the outsider
brings action against the component individuals, they are
absolved from liability and the outsider held to his remedy
against the enterprise only
4. The enterprise contracts with an outsider, and the
component individuals seek to hold the outsider liable on
the contract, were logically, the individuals are not allowed
to recover, recovery must be by the enterprise
Requisites for De Facto status
1. The existence of a valid law under which it may be
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incorporated
2. An attempt in good faith to incorporate, or colorable
compliance with provisions on incorporation
3. Assumption by the enterprise of corporate powers
✾ Related to the above discussion is the case of Hall v. Piccio,
nonetheless, the case cannot be taken as doctrinal in
matters of de facto corporations and corporations by
estoppel
✾ If the case has value at all, it would be that the de facto
corporation and estoppel have no applications to issue and
controversies that deal on the level of those that fall within
the intra-corporate level
✾ Another value brought by the case is that good faith is an
essential element of the de facto corporation. The case
made it an essential test of good faith that the
incorporators must have been aware of the issuance of the
certificate of incorporation of the corporation
Valid statute under which organized
✾ The valid statute under which private corporations are
mostly organized is the Corporation Code
✾ Can there be a de facto corporation organized with an
enabling statute that is unconstitutional?
o Using the prevailing view, the answer would be no,
that an unconstitutional enabling law has the same
effect as though there is no law under which to
organize, and even if the associates organize in
good faith in reliance upon it, the resulting
association cannot claim to be a de facto
corporation
o A qualified view however is that the actual
existence of a statute prior to such determination
is an operative fact and may have consequences
which cannot always be erased by a new judicial
declaration—it’s after the declaration of the
invalidity or unconstitutionality of a statute, any
corporation cannot claim the status of being a de
facto corporation, since the element of good faith
would no longer exist
Colorable Compliance with the Law
✾ While substantial compliance is not required, colorable
compliance should be shown
✾ There must be a bona fide attempt to comply with the
requirements of the law
✾ The outward manifestation of the existence of a corporate
being is therefore a necessary as the basis upon with the
dealing public may be led to believe that they are dealing
with a juridical person
✾ Some defects that do not preclude the creation of a de
facto corporation are as follows—
o Defects in the incorporation papers
o Corporate name
o Ineligibility of incorporators
o Defects in the execution of incorporation papers
Continued Good Faith
✾ CLV raises two questions—one, of despite a substantial
defect the SEC still issues the certificate of incorporation
and the incorporators knew of such defect at the time of
issuance, would the situation still call for the application of
the de facto doctrine? Second, if there was good faith at
the time of incorporation which would have brought about
the creation of a de facto corporation with the issuance of
the SEC certificate, but later on the directors and the
officers of the corporation came to know of such defects,
would the corporation then lose its standing as a
corporation de facto?
✾ In following Section 20 of the Corporation Code as well as
the Piccio ruling that the issuance of certificate is a basis
for good faith, then the proper answer would be that the
issuance of the SEC certificate would raise it to the level of
a de facto corporation and therefore, its right to exercise
corporate powers, shall not be inquired into collaterally in
any private suit to which such corporation may be a party
✾ This is bolstered by PD902-A, on which the SEC is given
authority after proper notice and hearing, the franchise or
certificate of incorporation when there has been fraud in
procuring its certificate of registration—in other words, the
SEC has to go through a quasi-judicial process before it can
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revoke the certificate of a corporation which has used fraud
in the process of its incorporation, clearly indicating that
prior to such revocation, the corporation has all the powers
and attributes of a corporation de facto
✾ To allow the collateral attack on a corporation’s personality
because of existing defects known to the corporation and
its board would circumvent the very rationale of the de
facto doctrine which seeks to prevents any party from
raising the defect of authority as a means to avoid
fulfillment of a contract or a transaction entered into
✾ On the other hand, in a suit between and among the
parties who knew that there was a defect in the
incorporation of the corporation, there certainly is no good
faith on their part and in their case, the de facto doctrine
cannot be availed of in order to further their fraud
CORPORATION BY ESTOPPEL DOCTRINE
Rationale of Doctrine
✾ The doctrine is meant to hold contractual parties to their
representations or expectations at the time the contract
was perfected and it doesn’t allow parties to draw on a
basic defect—lack of one contracting party—to avoid the
enforcement of the contract
✾ The doctrine has evolved in corporate law primarily as a
rule to promote the integrity of commercial contracts; the
basic role of the doctrine of corporation by estoppel is to
promote the public’s underlying faith in contracts drawn
with corporate entities, rather than to promote corporate
principles
Current Status Of The Doctrine
Section 21. Corporation by estoppel. - All persons who assume to
act as a corporation knowing it to be without authority to do so
shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided,
however, That when any such ostensible corporation is sued on
any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
✾ Fusion of the strict estoppel doctrine and the Albert
rationale for piercing, amply covers both fraud and non-
fraud cases
✾ On liability, in fraud cases the section makes the actor
personally liable on the contract as a general partner. On
the other hand, if there has been no fraud, it would prevent
both parties from raising the non-existence of the
corporation as a means to avoid enforcement of the
contract.
✾ If there has been no fraud or misrepresentation, the
Section 21 would create a corporation when none exists to
uphold the validity and enforceability of the contract, but
ultimately does it make the persons acting for the
purported corporation liable? Importing the words used in
Section 21, it means that persons who act for a purported
corporation without knowing it to be without authority to
do so would not be personally liable for the debts, liabilities
and damages incurred or arising from the contract
✾ One who acts for a purported corporation not knowing that
it had no authority to do so would be liable as a limited
partner, that is, he would only be liable to the extent only
of his investment or promised investment in the purported
corporate venture
✾ LIM V. PHILIPPINE FISHING GEAR INDUSTRIES—it is not only
those who participated in the contract or transactions that
can be held as general partners but also that the liability
for a contract entered into behalf of an unincorporated
association or ostensible corporation may lie in a person
who may not have directly transacted on its behalf, but
reaped benefits from that contract
✾ PIONEER INSURANCE V. CA—when there was a clear
intention to form a partnership venture through a
corporate venture which essentially means that the
partners had intended to be active participants in the
business of the corporation, then even those who didn’t
directly participated in the contracts or transactions being
sued upon, but benefited therefrom may be held liable as
general partners under the corporation by estoppel
doctrine. On the other hand, when the investors merely
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invested in a corporate venture with no intention of
participating in its corporate affairs, and the corporation
wasn’t formed, no partnership relation is deemed
established by the failure to incorporate, and such
investors cannot even be held liable for the contracts and
transaction sued upon even when such contracts and
transactions were entered into by the corporate actors in
the name of the ostensible corporation
CASES OUTSIDE THE DE FACTO CORPORATION AND
CORPORATION BY ESTOPPEL DOCTRINE
✾ A possible solution would be the application of the in pari
delicto doctrine but it doesn’t fit squarely as a solution
✾ The more ample solution according to the great CLV is to
paraphrase Salvatierra—since a non-existent organization
has no personality and is incompetent to act and
appropriate for itself the powers and attributes of a
corporation, it cannot create agents or confer authority on
another to act in its behalf, in contracts entered into for
such purported corporations, where both parties knew that
no such corporation existed, the actors enter the contracts
without authority and at their own risk
✾ Following the aforementioned, an elementary principle of
law is then applied, when actors to a contract act or allow
others to act as agents without authority or without a
principal, the law considers such agents as principals,
possessed of all the rights and subjected to all liabilities of
a principal
TRUST FUND DOCTRINE
Commercial/Common law Premise: Debt v. Equity
Art. 2236. The debtor is liable with all his property, present and
future, for the fulfillment of his obligations, subject to the
exemptions provided by law. (1911a)
✾ The capital stock of the corporation, especially its unpaid
subscription, is a trust fund for the benefit of the general
creditors of the corporation
✾ When a corporation is solvent, the theory is that the capital
stock is a trust fund upon which there is any lien for the
payment of its debts, has in fact very little foundation. No
general creditor has any lien upon the fund under such
circumstances, and the right of the corporation to deal with
its property is absolute so long as it doesn’t violate the
charter or the law applicable to such corporation
✾ Generally accepted that the scope of the trust fund
doctrine is that the capital stock of the corporation, as well
as other property and assets are generally regarded in
equity as a trust fund for the payment of corporate debts,
the creditors of the corporation have the right of priority
payment over any stockholder thereof
Trust Fund Doctrine Applies In Four Cases In The Philippine
Setting—
1. Where the corporation has distributed its capital among
the stockholders without providing for the payment of
creditors
2. Where it had released the subscribers to the capital stock
from their subscriptions
3. Where it has transferred the corporate property in fraud of
its creditors
4. Where the corporation is insolvent
Application Of Trust Fund Doctrine In Philippine Setting
✾ The definition of the doctrine adhered to by the Philippines
is the one by Fletcher, which says that the capital stock of
a corporation, or the assets of the insolvent corporation
representing its capital is a trust fund for the benefit of the
company’s creditors
✾ PHIL. TRUST CO. V. RIVERA—it is an established doctrine
that subscriptions to the capital of a corporation constitute
a fund to which the creditors have a right to look for
satisfaction of their claims and the assignee in the
insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its
debts
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
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terminated in any other manner, shall nevertheless be continued
as a body corporate for three (3) years after the time when it
would have been so dissolved, for the purpose of prosecuting
and defending suits by or against it and enabling it to settle and
close its affairs, to dispose of and convey its property and to
distribute its assets, but not for the purpose of continuing the
business for which it was established.
At any time during said three (3) years, the corporation is
authorized and empowered to convey all of its property to
trustees for the benefit of stockholders, members, creditors, and
other persons in interest. From and after any such conveyance
by the corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all
interest which the corporation had in the property terminates,
the legal interest vests in the trustees, and the beneficial interest
in the stockholders, members, creditors or other persons in
interest.
Upon the winding up of the corporate affairs, any asset
distributable to any creditor or stockholder or member who is
unknown or cannot be found shall be escheated to the city or
municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by
this Code, no corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of all
its debts and liabilities. (77a, 89a, 16a)
Fraud theory
✾ Due to the difficulties met with the terminology and
application of the trust fund doctrine, there have been
advocates of the position that most issues relating to the
capital stock or corporate assets and as to unpaid
subscriptions properly belong to the question of fraud
rather than the trust fund doctrine
✾ Under this theory, the actionable wrong is the fraud or
misrepresentation by directors, officers, or stockholders in
falsely representing that the capital stock has been fully
paid or covered by binding subscription contracts
✾ Consequently, only creditors who have been defrauded are
entitled to relief, creditors without notice may not be
protected
✾ This varies with the principle of the trust fund doctrine
which seeks to protect ALL corporate creditors
Coverage of the Doctrine
✾ In our jurisdiction, we have adopted through statutory
provisions the two precursors of the trust fund doctrine—
capital impairment doctrine and the profit rule
✾ A fixed capital must be preserved for protecting the claims
of the creditors so that dividend distributions to
stockholders should be limited to profits earned or
accumulated by the corporation
✾ Impliedly therefore, for a solvent corporation, the trust
fund doctrine encompasses only the capital stock of the
corporation
Concept of the Capital Stock
✾ The protective reach of the trust fund doctrine, when the
corporation isn’t insolvent, would only be to the extent of
the capital stock
✾ Since retained earnings isn’t part of the capital stock, it is
not covered by the doctrine and the corporation is at
liberty to declare and pay out assets to the stockholders in
way of dividends up to the extent of unrestricted retained
earnings
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)
✾ SEC has defined capital stock or authorized capital stock as
—the amount fixed in the articles of incorporation to be
subscribed and paid by the stockholders of the corporation.
✾ When shares are subscribed out of the authorized capital
stock, that portion of the paid-in capital arising from the
subscriptions becomes the legal capital of the corporation
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which cannot be returned to the stockholders in any form
during the lifetime of the corporation unless otherwise
authorized by law.
Rescission of Subscription Agreement Based on Breach
(Ong v. Tiu case)
✾ The violation of terms embodied in a subscription
agreement, with are personal commitments, don’t
constitute legal ground to rescind the subscription
agreement since such would violate the Trust Fund
Doctrine and the procedures for a valid distribution of
assets and property under the Corporation Code.
To Purchase Own Shares
Section 8. Redeemable shares. - Redeemable shares may be
issued by the corporation when expressly so provided in the
articles of incorporation. They may be purchased or taken up by
the corporation upon the expiration of a fixed period, regardless
of the existence of unrestricted retained earnings in the books of
the corporation, and upon such other terms and conditions as
may be stated in the articles of incorporation, which terms and
conditions must also be stated in the certificate of stock
representing said shares. (n)
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 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 122.
xxx
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)
Distribution of Corporation Assets (again from Ong v. Tiu
case)
✾ The distribution of corporate assets and property cannot be
made to depend on the whims and caprices of the
stockholders, officers, or directors of the corporation, or
even, for that matter, on the earnest desire of the court a
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quo to prevent further squabbles and future litigations
unless the indispensable conditions and procedures for the
protection of the corporate creditors are followed.
✾ Otherwise, the corporate peace laudably hoped for by the
court will remain nothing but a dream because this time, it
will be the creditor’s turn to engage in squabbles and
litigations should the court order an unlawful distribution in
blatant disregard of the Trust Fund doctrine
ARTICLES OF INCORPORATION
NATURE OF CHARTER
✾ It is the contract between the corporation and the State,
and they are both bound by its provisions
✾ It is a contract between three parties
o Between the state and the corporation
o Between the stockholders and the state
o Between the corporation and the stockholders
✾ Amendments thereto can be made by one party only with
the consent of the other parties under the strict provisions
of the Corporation Code, and the contents thereof as
mandated by law are treated with strictness
REGISTRATION OF ARTICLES OF INCORPORATION
✾ It doesn’t become binding as the charter of the corporation
unless they have been filed with and registered with the
SEC
✾ In the case of the articles of incorporation of special types
of corporations, they will not be registered with the SEC
unless they are accommodated with the appropriate
recommendations from supervising agencies
PROCEDURE AND DOCUMENTARY REQUIREMENTS
Section 14. Contents of the articles of incorporation. - All
corporations organized under this code shall file with the
Securities and Exchange Commission articles of incorporation in
any of the official languages duly signed and acknowledged by all
of the incorporators, containing substantially the following
matters, except as otherwise prescribed by this Code or by special
law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is
being incorporated. Where a corporation has more than one
stated purpose, the articles of incorporation shall state which is
the primary purpose and which is/are the secondary purpose or
purposes: Provided, That a non-stock corporation may not include
a purpose which would change or contradict its nature as such;
3. The place where the principal office of the corporation is to be
located, which must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less
than five (5) nor more than fifteen (15);
7. The names, nationalities and residences of persons who shall
act as directors or trustees until the first regular directors or
trustees are duly elected and qualified in accordance with this
Code;
8. If it be a stock corporation, the amount of its authorized capital
stock in lawful money of the Philippines, the number of shares into
which it is divided, and in case the share are par value shares, the
par value of each, the names, nationalities and residences of the
original subscribers, and the amount subscribed and paid by each
on his subscription, and if some or all of the shares are without
par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the
names, nationalities and residences of the contributors and the
amount contributed by each; and
10. Such other matters as are not inconsistent with law and which
the incorporators may deem necessary and convenient.
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The Securities and Exchange Commission shall not accept the
articles of incorporation of any stock corporation unless
accompanied by a sworn statement of the Treasurer elected by
the subscribers showing that at least twenty-five (25%) percent of
the authorized capital stock of the corporation has been
subscribed, and at least twenty-five (25%) of the total subscription
has been fully paid to him in actual cash and/or in property the
fair valuation of which is equal to at least twenty-five (25%)
percent of the said subscription, such paid-up capital being not
less than five thousand (P5,000.00) pesos.
Section 15. Forms of Articles of Incorporation. - Unless otherwise
prescribed by special law, articles of incorporation of all domestic
corporations shall comply substantially with the following form:
ARTICLES OF INCORPORATION OF
__________________________
(Name of Corporation)
KNOW ALL MEN BY THESE PRESENTS:
The undersigned incorporators, all of legal age and a majority of
whom are residents of the Philippines, have this day voluntarily
agreed to form a (stock) (non-stock) corporation under the laws of
the Republic of the Philippines;
AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation shall be
"_____________________, INC. or CORPORATION";
SECOND: That the purpose or purposes for which such corporation
is incorporated are: (If there is more than one purpose, indicate
primary and secondary purposes);
THIRD: That the principal office of the corporation is located in the
City/Municipality of ________________________, Province of
_______________________, Philippines;
FOURTH: That the term for which said corporation is to exist is
_____________ years from and after the date of issuance of the
certificate of incorporation;
FIFTH: That the names, nationalities and residences of the
incorporators of the corporation are as follows:
NAME NATIONALITY RESIDENCE
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
SIXTH: That the number of directors or trustees of the corporation
shall be _______; and the names, nationalities and residences of
the first directors or trustees of the corporation are as follows:
NAME NATIONALITY RESIDENCE
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
SEVENTH: That the authorized capital stock of the corporation is
______________________ (P___________) PESOS in lawful money of the
Philippines, divided into __________ shares with the par value of
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____________________ (P_____________) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is ______________ shares
without par value. (In case some shares have par value and some
are without par value): That the capital stock of said corporation
consists of _____________ shares of which ______________ shares are
of the par value of _________________ (P____________) PESOS each,
and of which _________________ shares are without par value.
EIGHTH: That at least twenty five (25%) per cent of the authorized
capital stock above stated has been subscribed as follows:
Name of Subscriber Nationality No of Shares Amount
Subscribed Subscribed
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________
NINTH: That the above-named subscribers have paid at least
twenty-five (25%) percent of the total subscription as follows:
Name of Subscriber Amount Subscribed Total Paid-In
_________________ ___________________ _______________
_________________ ___________________ _______________
_________________ ___________________ _______________
_________________ ___________________ _______________
_________________ ___________________ _______________
(Modify Nos. 8 and 9 if shares are with no par value. In case the
corporation is non-stock, Nos. 7, 8 and 9 of the above articles may
be modified accordingly, and it is sufficient if the articles state the
amount of capital or money contributed or donated by specified
persons, stating the names, nationalities and residences of the
contributors or donors and the respective amount given by each.)
TENTH: That _____________________ has been elected by the
subscribers as Treasurer of the Corporation to act as such until his
successor is duly elected and qualified in accordance with the by-
laws, and that as such Treasurer, he has been authorized to
receive for and in the name and for the benefit of the corporation,
all subscription (or fees) or contributions or donations paid or
given by the subscribers or members.
ELEVENTH: (Corporations which will engage in any business or
activity reserved for Filipino citizens shall provide the following):
"No transfer of stock or interest which shall reduce the ownership
of Filipino citizens to less than the required percentage of the
capital stock as provided by existing laws shall be allowed or
permitted to be recorded in the proper books of the corporation
and this restriction shall be indicated in all stock certificates
issued by the corporation."
IN WITNESS WHEREOF, we have hereunto signed these Articles of
Incorporation, this __________ day of ________________, 19 ______ in
the City/Municipality of ____________________, Province of
________________________, Republic of the Philippines.
_______________________ _______________________
_______________________ _______________________
________________________________
(Names and signatures of the incorporators)
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__________________ with Res. Cert. No. ___________ issued at

SIGNED IN THE PRESENCE OF: _______________________ on ____________, 19 ______

_______________________ _______________________ NOTARY PUBLIC

(Notarial Acknowledgment) My commission expires on

_________, 19 _____

Doc. No. _________;

Page No. _________;

TREASURER'S AFFIDAVIT Book No. ________;

REPUBLIC OF THE PHILIPPINES ) Series of 19____ (7a)

CITY/MUNICIPALITY OF ) S.S. As To The Number And Residency Of The Incorporators

PROVINCE OF ) Section 10. Number and qualifications of incorporators. - Any

I, ____________________, being duly sworn, depose and say:
That I have been elected by the subscribers of the corporation as
Treasurer thereof, to act as such until my successor has been duly
elected and qualified in accordance with the by-laws of the
corporation, and that as such Treasurer, I hereby certify under
oath that at least 25% of the authorized capital stock of the
corporation has been subscribed and at least 25% of the total
subscription has been paid, and received by me, in cash or
property, in the amount of not less than P5,000.00, in accordance
with the Corporation Code.
____________________
(Signature of Treasurer)
SUBSCRIBED AND SWORN to before me, a Notary Public, for and in
the City/Municipality of ___________________ Province
_____________________, this _______ day of ___________, 19 _____; by
number of natural persons not less than five (5) but not more
than fifteen (15), all of legal age and a majority of whom are
residents of the Philippines, may form a private corporation for
any lawful purpose or purposes. Each of the incorporators of s
stock corporation must own or be a subscriber to at least one (1)
share of the capital stock of the corporation. (6a)
✾ It is possible for a business to be wholly owned by one
individual, and the validity of its incorporation isn’t affected
when given nominal ownership of only one share of stock
to each of the other four incorporators. This arrangement
isn’t necessarily illegal, but it is valid only between and
among the incorporators privy to the agreement. It
doesn’t bind the corporations, which will consider all
stockholders of record as the lawful owners of their
registered shares. As between the corporation on the one
hand and its stockholders and third persons on the other,
the corporation looks only to its books for the purpose of
of
determining who its stockholders are.
✾ Only natural persons can be incorporators. However,

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corporations and partnerships are not precluded from
becoming stockholders and members as long as they are
not incorporators—derives its support exclusively from the
fiction theory of corporate existence (artificial persons,
existing only in appear through legislative command and
incapable of thought or action except through natural
persons, cannot create other artificial persons…)
Is It Advisable To Have A Corporation As An Original
Stockholder?
✾ No.
✾ According to CLV, in practice the SEC would allow the
incorporation which would have as original stockholder in
the articles of incorporation, as long as the minimum
number of individuals appear.
✾ In one opinion, the SEC has posited that both domestic and
foreign corporations, if allowed by their charters, may be
initial subscribers to the capital stock of the corporation,
but their subscription will not be considered in the
computation of the 25% requirement for incorporation
Corporate Name
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)
Section 14. Contents of the articles of incorporation. - All
corporations organized under this code shall file with the
Securities and Exchange Commission articles of incorporation in
any of the official languages duly signed and acknowledged by
all of the incorporators, containing substantially the following
matters, except as otherwise prescribed by this Code or by
special law:
1. The name of the corporation;
✾ The corporate name is essential to the existence of a
corporation and it cannot be changed except in the manner
provided for by statute, by that name alone is it authorized
to transact business, and it is by that name that a
corporation can sue and be sued, and perform all other
legal acts
✾ Red Line Transportation v. Rural Transit—a corporation may
use another name as a business or brand name, but a
corporation cannot use another corporation’s name
because it will only confuse the public. The name of the
corporation is essential to its existence.
Purpose Clause
✾ The best proof of the purpose of a corporation is its articles
of incorporation and by-laws. The articles of incorporation
must state the primary and secondary purposes of the
corporation, while the by-laws outline the administrative
organization of the corporation, which, in turn, is supposed
to insure or facilitate the accomplishment of said purpose.
Corporate Term
Section 11. Corporate term. - A corporation shall exist for a
period not exceeding fifty (50) years from the date of
incorporation unless sooner dissolved or unless said period is
extended. The corporate term as originally stated in the articles
of incorporation may be extended for periods not exceeding fifty
(50) years in any single instance by an amendment of the
articles of incorporation, in accordance with this Code; Provided,
That no extension can be made earlier than five (5) years prior
to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined
by the Securities and Exchange Commission. (6)
✾ The corporation may virtually have a perpetual lifespan
renewable every 50 years. The limit of a 50-year period
emphasizes the contractual nature of a corporation—
people would be discouraged to invest if it lasts forever,
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management would theoretically be more honest—a
renewal of the corporate term would be a vote of
confidence by the stockholders or members
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)
Principal Place of Business
Art. 51. When the law creating or recognizing them, or any other
provision does not fix the domicile of juridical persons, the same
shall be understood to be the place where their legal
representation is established or where they exercise their
principal functions. (41a)
✾ The residence of the corporation is the place where its
principal office is established; it can be sued in that place,
not in the place where its branch office is located
✾ Well established in our jurisprudence is the rule that the
residence of a corporation is the place where its principal
office is located, as stated in the articles of incorporation.
It now becomes apparent that the residence or domicile of
a juridical person is fixed by the law creating or recognizing
it.
✾ Although the Rules of Court don’t provide that when the
plaintiff is a corporation, the complaint should be filed in
the location of its principal office as indicated in its articles
of incorporation, jurisprudence however, settled that the
price where the principal office of a corporation is located,
as stated in the articles, indeed establishes its residence.
This ruling is important in determining the venue of an
action by or against the corporation.
Minimum Capitalization
Section 12. Minimum capital stock required of stock
corporations. - Stock corporations incorporated under this Code
shall not be required to have any minimum authorized capital
stock except as otherwise specifically provided for by special
law, and subject to the provisions of the following section.
Why is maximum capitalization required to be indicated?
✾ This is required to protect the stockholders—limits the
issuance of the capital stock and extent of voting power or
capacity of a stockholder; it is also intended to delineate
the pre-emptive rights of stockholders to future issuances
of capital stock.
Subscription and Paid-up Requirements
Section 13. Amount of capital stock to be subscribed and paid for
the purposes of incorporation. - At least twenty-five percent
(25%) of the authorized capital stock as stated in the articles of
incorporation must be subscribed at the time of incorporation,
and at least twenty-five (25%) per cent of the total subscription
must be paid upon subscription, the balance to be payable on a
date or dates fixed in the contract of subscription without need
of call, or in the absence of a fixed date or dates, upon call for
payment by the board of directors: Provided, however, That in no
case shall the paid-up capital be less than five Thousand
(P5,000.00) pesos. (n)
✾ Capital stock—amount fixed in the articles of incorporation
procured to be subscribed and paid-in. stocks issued in
excess of this is void.
✾ Outstanding capital stock—total shares of stock issued to
subscribers or stockholders, whether or not fully or
partially, except treasury shares
✾ Subscribed capital stock—portion of the capital stock
subscribed
✾ Subscription—mutual agreement of the corporation and
the subscriber to take and pay for the stock of the
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corporation
✾ Paid up capital stock—total paid up subscription
✾ The entries in the articles of incorporation of the original
issuance of shares of stock has a stronger weight that the
stock
GROUNDS FOR DISAPPROVAL
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)
✾ Illustration—when the proposed articles show that the
object is to organize a barrio into a separate corporation
for the purpose of taking possession and having control of
all municipal property within the incorporated barrio and
administer it exclusively for the benefit of the residents,
the object is unlawful and the articles can be denied
registration
✾ It is well to note that, if a corporation’s purpose, as stated
in the Articles of Incorporation, then the SEC has no
authority to inquire whether the corporation has purposes
other than those stated, and mandamus will lie to compel
it to issue the certificate of incorporation
AMENDMENTS TO THE ARTICLES OF INCORPORATION
Section 16. Amendment of Articles of Incorporation. - Unless
otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the
articles of incorporation may be amended by a majority vote of
the board of directors or trustees and the vote or written assent
of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right
of dissenting stockholders in accordance with the provisions of
this Code, or the vote or written assent of at least two-thirds
(2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all
provisions required by law to be set out in the articles of
incorporation. Such articles, as amended shall be indicated by
underscoring the change or changes made, and a copy thereof
duly certified under oath by the corporate secretary and a
majority of the directors or trustees stating the fact that said
amendment or amendments have been duly approved by the
required vote of the stockholders or members, shall be
submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the
Securities and Exchange Commission or from the date of filing
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with the said Commission if not acted upon within six (6) months
from the date of filing for a cause not attributable to the
corporation.
COMMENCEMENT OF CORPORATE EXISTENCE
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)
BY-LAWS
NATURE AND FUNCTIONS
✾ By-laws are meant to be an intramural document, to
govern the relationship between and among the members
of the corporate family
o By-laws are intended merely for the protection of
the corporation, and prescribe regulation, not
restrictions
o Although the power of the corporation to adopt by-
laws is an inherent right, by-law provisions cannot
contravene the law
o On the basis of their nature and functions, one may
therefore conclude that provisions of the articles of
incorporation prevail over by-law provisions with
respect to third parties—by-laws have non-binding
effects to third parties (this is the prevailing
doctrine)
✾ GOKONGWEI V. SEC: Every corporation has the inherent
power to adopt by-laws for its internal government, and to
regulate the conduct and prescribe the rights and duties of
its members towards itself and among themselves in
reference to the management of its affairs
WHAT ARE BY-LAWS IN THE FIRST PLACE?
✾ Traditionally been defined as regulations, ordinances, rules
or laws adopted by an association or corporation or the like
for its internal governance, including rules for routine
matters such as calling meetings and the like, if those key
by-law provisions on matters such as quorum
requirements, meeting, or on the internal governance of
the local/chapter are themselves already provided for in
the constitution, then it would be feasible to overlook the
requirements for by-laws. Indeed, in such an event, to
insist on the submission of a separate document
denominated as by-laws would be undue technicality, as
well as a redundancy.
Section 46. Adoption of by-laws. - Every corporation formed
under this Code must, within one (1) month after receipt of
official notice of the issuance of its certificate of incorporation by
the Securities and Exchange Commission, adopt a code of by-
laws for its government not inconsistent with this Code. For the
adoption of by-laws by the corporation the affirmative vote of the
stockholders representing at least a majority of the outstanding
capital stock, or of at least a majority of the members in case of
non-stock corporations, shall be necessary. The by-laws shall be
signed by the stockholders or members voting for them and shall
be kept in the principal office of the corporation, subject to the
inspection of the stockholders or members during office hours. A
copy thereof, duly certified to by a majority of the directors or
trustees countersigned by the secretary of the corporation, shall
be filed with the Securities and Exchange Commission which
shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-
laws may be adopted and filed prior to incorporation; in such
case, such by-laws shall be approved and signed by all the
incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by
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the Securities and Exchange Commission of a certification that
the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for
filing the by-laws or any amendment thereto of any bank,
banking institution, building and loan association, trust company,
insurance company, public utility, educational institution or other
special corporations governed by special laws, unless
accompanied by a certificate of the appropriate government
agency to the effect that such by-laws or amendments are in
accordance with law. (20a)
COMMON LAW LIMITATIONS ON BY-LAWS (WHAT ARE THE
REQUIREMENTS FOR A VALID BY-LAWS?)
1. BY-LAWS CANNOT BE CONTRARY TO LAW AND CHARTER
a. Section 36 of the Corporation Code—the power to
adopt by-laws shouldn’t contrary to law, morals
and public policy
b. The corporation is a creature of the law and
therefore, its by-laws cannot prevail over legal
provisions and the lawful court orders and
processes
c. A by-law provision granting to a stockholder
permanent seat in the Board of Directors is
contrary to the Corporation Code requiring all
members to the Board to be elected by the
stockholders. Even when the members of the
association may have formally adopted the
provision, their action would be of no avail because
no provision of the by-laws can be adopted if it is
contrary to law
2. BY-LAW PROVISIONS CANNOT BE UNREASONABLE OR BE
CONTRARY TO THE NATURE OF BY-LAWS
Section 47. Contents of by-laws. - Subject to the
provisions of the Constitution, this Code, other special
laws, and the articles of incorporation, a private
corporation may provide in its by-laws for:
1. The time, place and manner of calling and conducting
regular or special meetings of the directors or trustees;
2. The time and manner of calling and conducting
regular or special meetings of the stockholders or
members;
3. The required quorum in meetings of stockholders or
members and the manner of voting therein;
4. The form for proxies of stockholders and members and
the manner of voting them;
5. The qualifications, duties and compensation of
directors or trustees, officers and employees;
6. The time for holding the annual election of directors of
trustees and the mode or manner of giving notice
thereof;
7. The manner of election or appointment and the term
of office of all officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of
issuing stock certificates; and
10. Such other matters as may be necessary for the
proper or convenient transaction of its corporate
business and affairs. (21a)
3. BY-LAW PROVISIONS CANNOT DISCRIMINATE
a. The validity and reasonableness of by-laws are a
question of law and in such case, the issue to be
resolved would be whether a by-law provision
conflicts with a provision of law, or with the charter
of the corporation; or is in the legal sense
unreasonable and therefore unlawful.
b. Abovementioned is subject to the limitation that
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where the reasonableness of a by-law is a mere
matter of judgment, and one upon which
reasonable minds must necessarily differ, a court
wouldn’t be warranted in substituting its judgment
instead of the judgment of those who are
authorized to make by-laws and who have
exercised their authority.
c. The circumstance that one of the provisions
contained in the by-laws of a corporation is invalid
as conflicting with the express provision of law isn’t
a misdemeanor on the part of the corporation for
which the corporation may be penalized by the
forfeiture of its charter; instead, the proper remedy
is to render such offending provision invalid and of
no force and effect.
BINDING EFFECTS OF BY-LAWS TO OUTSIDERS (CHINA
BANKING CORPORATION CASE)
✾ By-laws signify the rules and regulations or private laws
enacted by the corporation to regulate, govern and control
its own actions, affairs and concerns and its stockholders
or members or directors and officers with relation thereto
and among themselves in their relation to it. In other
words, by-laws are the relatively permanent and continuing
rules of action adopted by the corporation for its
government and that of individuals composing it and
having the directions, management and control of its
affairs, in whole or in part, in the management and control
of its affairs and activities
✾ The purpose of the by-law is to regulate the conduct and
define the duties of the members toward the corporation
and among themselves. They are self-imposed and
although adopted pursuant to statutory authority, having
no status as public law
✾ Therefore, it is generally accepted rule that third persons
aren’t bound by-laws, except when they have knowledge of
the provisions either actually or constructively
WHAT IS THE REASON FOR THE DIFFERENCE BETWEEN PEÑA
AND CHINA BANK CASE?
✾ Peña was regarding the disposition of corporate property
while in China bank, it was about the disposition of the
property of stockholder
✾ What’s good about these two cases is that in practice,
what you will use will depend on what spectrum you are in
✾ Ask if the act is of the corporation’s. If you are the lawyer
of the person dealing with the corporation, make sure that
all the officers that should provide authorization has
provided the same. It is good to give your client maximum
protection. In the contract itself, check the warranties and
guarantees (not in contravention with law, properly
authorized by corporate authorities). In case there is need
to enforce the contract, then all will be covered. Another,
don’t be lax with dealing with shareholders. Example is
the Chinabank case. Check if there are any restrictions,
which may affect the sale or pledge agreement. Normally,
if you are a stockholder, there are sometimes tag-along
rights. You have to take a look at internal agreements. It’s
better to know than not to know.
✾ ATTY. DY’S ADVICE: in practice, as an advocate, you have to
adopt the maximum position because for sure, the other
side will be adopting the other maximum position
ADOPTION PROCEDURE
Section 46. Adoption of by-laws. - Every corporation formed
under this Code must, within one (1) month after receipt of
official notice of the issuance of its certificate of incorporation by
the Securities and Exchange Commission, adopt a code of by-
laws for its government not inconsistent with this Code. For the
adoption of by-laws by the corporation the affirmative vote of the
stockholders representing at least a majority of the outstanding
capital stock, or of at least a majority of the members in case of
non-stock corporations, shall be necessary. The by-laws shall be
signed by the stockholders or members voting for them and shall
be kept in the principal office of the corporation, subject to the
inspection of the stockholders or members during office hours. A
copy thereof, duly certified to by a majority of the directors or
trustees countersigned by the secretary of the corporation, shall
be filed with the Securities and Exchange Commission which
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shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-
laws may be adopted and filed prior to incorporation; in such
case, such by-laws shall be approved and signed by all the
incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by
the Securities and Exchange Commission of a certification that
the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for
filing the by-laws or any amendment thereto of any bank,
banking institution, building and loan association, trust company,
insurance company, public utility, educational institution or other
special corporations governed by special laws, unless
accompanied by a certificate of the appropriate government
agency to the effect that such by-laws or amendments are in
accordance with law. (20a)
CONTENTS
Section 47. Contents of by-laws. - Subject to the provisions of the
Constitution, this Code, other special laws, and the articles of
incorporation, a private corporation may provide in its by-laws
for:
1. The time, place and manner of calling and conducting regular
or special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or
special meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or members
and the manner of voting therein;
4. The form for proxies of stockholders and members and the
manner of voting them;
5. The qualifications, duties and compensation of directors or
trustees, officers and employees;
6. The time for holding the annual election of directors of
trustees and the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office
of all officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock
certificates; and
10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and affairs.
(21a)
WHAT WOULD HAPPEN IN CASE OF A CONFLICT BETWEEN
THE ARTICLES OF INCORPORATION AND BY-LAWS?
✾ In reference to the hierarchy, the articles of incorporation
will prevail over the by-laws
✾ This however may not be the case all the time. For
example, the by-laws will provide for a higher majority to
constitute a quorum. In this case, one may be confused
since articles should prevail over the by-laws normally but
in this case, with reference to Section 25, the law is the
one prevailing and not the by-laws over the articles of
incorporation. (Section 25—xxx 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.)
AMENDMENTS
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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)
WHY IS THERE A DIFFERENCE BETWEEN AMENDMENT OF
ARTICLES OF INCORPORATION AND OF BY-LAWS?
✾ A majority is needed to amend the by-laws
✾ A 2/3 vote is needed to amend the articles of incorporation
✾ The difference lies because the by-laws are internal in
nature and will not really affect the nature of the
corporation
CORPORATE POWERS, AUTHORITY, AND ACTIVITIES
CORPORATE POWER AND CAPACITY
Article 46, Civil Code—
Juridical persons may acquire and possess property of all kinds,
as well as incur obligations and bring civil or criminal actions, in
conformity with the laws and obligations of their organization.
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;
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;
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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 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)
✾ A corporation has only such powers as are expressly
granted to it by law and by its articles of incorporation,
those which may be incidental to such conferred powers,
those reasonably necessary to accomplish its purpose and
those which may be incident to its existence
✾ The underlying doctrine on corporate powers and capacity
is covered by the theory of concession which looks at the
corporation as a mere creature of, and completely under
the control of the State.
WHERE DOES CORPORATE POWERS COME FROM?
✾ Corporate powers emanate basically from the articles of
incorporation and the law
WHERE IS CORPORATE POWER LODGED?
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.
✾ There are specific instances in the Corporation Code where
the particular exercise of the power of the corporation by
the board, in order to be binding and effective, requires the
consent or ratification of the stockholders or members, and
on the part of the State
✾ In the aforementioned instances, what usually is the case
is the need to validate or give legal effect to a corporate
power, that shows that each of those specified instances,
the underlying contractual relationship is being amended
or altered, and therefore the appropriate consent of all
parties concerned must be obtained
✾ The principle of corporate power being primarily vested in
the board of the corporation is therefore circumscribed by
the greater doctrine of underlying corporate contractual
relationship between and among the members of a
particular corporate family, in line with the principle in
contract law, that a party to a contract cannot release
himself from the contractual terms and conditions, much
less amend or alter them, without the consent or approval
of the other party or parties
CLASSIFICATION OF CORPORATE POWERS: EXPRESS,
IMPLIED, AND INCIDENTAL
Express Implied Incidental
Those powers given Those powers that Those powers that:
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to a corporation exist as a necessary behalf, such an purposes as

either: consequence of: ✾ Attach to a action is absent stated in the
corporation at ✾ The power of a articles of
By clear and express The exercise of the moment of corporation to incorporation
provision of law: express powers of its creation sue and be sued
✾ Some of the the corporation or ✾ Without regard in any court is
other powers to its express lodged with the
enumerated in The pursuit of its powers or board of
Section 36 are purpose as provided particularly directors that
considered for in the articles of primary exercise its
inherent or incorporation purposes corporate
incidental, which ✾ The ✾ Is said to be powers
even if not given management of inherent in it as ✾ By-laws are not
by express grant the corporation, a legal entity or sources of any
are even so in the absence a legal power
deemed to be of express organization ✾ Art 46 of the CC ✾ Section 2 of the
within the restrictions, has ✾ Powers that go expressly Corp. Code
capacity of the discretionary into the very provides for the provides the
foreign entities authority to nature and powers of the corporation as
(such as the enter into extent of a corporation as a having the
power to adopt contracts or corporation’s juridical powers,
by-laws) transactions juridical entity personality attributes, and
which may be cannot be possesses properties
By the charter or deemed presumed to be ✾ Sec 36 of the expressly
articles of reasonably incidental or Corporation authorized by
incorporation: necessary or inherent powers. Code expressly law or incident to
✾ Express grant of incidental to the This juridical enumerates the its existence
authority from business entity is State- 10 powers which
the board of purpose grant and cannot the corporation
directors needed ✾ Sub-paragraph be altered or may exercise
to validly bind 11 of Section 36 amended ✾ Sec 45 of the
the corporation provide that a without State same Code
✾ Unless there is a corporation has authority recognizes other
board resolution the power and powers provided
authorizing an capacity to for in the
officer to exercise such Articles of
exercise express powers as may Incorporation
powers given to be essential or ✾ Generally ✾ Generally, ✾ Generally, purely
a corporation necessary to exercised by the purely members members of the
such as filing a carry out its Board of of the Board of Board of
suit on its purpose or

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Directors with Directors Directors laws

exception to exercise this exercise this
certain
instances where
the
stockholders’
assent are
needed
✾ The ultra vires doctrine is connected with ancillary
doctrines of apparent authority and estoppel
✾ One has to look at the corporation as a person before the
law because of the issue of—
o Consent
o Liability—who commits itself to the obligations
✾ The corporation is only given limited powers and not
general powers as an individual because of consent and
liability
ULTRA VIRES DOCTRINE
Concept
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)
✾ Stems in part from the principle that a corporation is a
creature of the law and has only such powers and
privileges as are granted by the State
✾ Upholds the duty of trust and obedience owed by the
corporations’ directors and officers to the stockholders and
members
Three Types Of Ultra Vires Acts
Those illegal per se because they are contrary to law
Those, which are contrary to the articles of incorporation and by-
Those done by persons without corporate authority
But this is how CLV arranges it by level…
1. Acts done beyond the powers of the corporation as
provided for in the laws and articles of corporation
2. Acts entered into in behalf of the corporation by persons
who have no corporate authority
3. Acts or contracts which are per se illegal as being contrary
to law
Test To Determine Ultra Vires
✾ Whether the act in question is in direct and immediate
furtherance of the corporation’s business, fairly incident to
the express powers and reasonably necessary to their
exercise.
✾ The strict terms “direct and immediate” refers to the
business of the corporation while the liberal terms “fairly
incident” and “reasonably necessary” with reference to the
powers of the corporation.
✾ With regard to the business of the corporation as the
reference point, much latitude is given to the corporation
to enter into various contracts as long as they have logical
relations to the pursuit of such business.
✾ On the other hand, when the purpose clause uised limiting
words that Court will hold such corporation to such limited
business
Policies Supervening Ultra Vires Issues
1. Public convenience
2. Contravention of contractual expectations
3. Principle of business judgment
4. Nature of business of operations
Distinguishing From Acts Which Are Per Se Illegal
✾ Illegal acts of a corporation are those acts which is contrary
to law, morals, public order, or contravenes some rules of
public policy or public duty, and are void
✾ Ultra vires are those which are not illegal and void ab initio

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but are within the scope of the articles of incorporation, are
merely voidable and may become binding and enforceable
when ratified by stockholders
EXPRESS POWERS
What Are The Enumerated Powers?
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;
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)
Power To Extend or Shorten Corporate Term
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 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;
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✾ Extension of corporate term—any dissenting stockholder
may exercise his appraisal right to have his shares brought
back by the corporation at its fair value
✾ This appraisal right is also available when the corporate
term is shortened
✾ However, the appraisal right is rightly within the ambits of
the extension of corporate term because every extension
novates the original corporate relationship by extending it
beyond the original term provided for in the articles of
incorporation
✾ According to CLV, there shouldn’t be any appraisal right
when it comes to the shortening of corporate term because
there is really no Novation of the original contractual intent
✾ The power to extend the corporate term is not an inherent
power since the corporate term isn’t only a matter that
constitutes an integral clause in the articles of
incorporation, but also the state in granting juridical
personality to a corporation is presumed to have granted
only for the period of time provided in the corporation’s
charter
✾ Power to shorten the corporate term is for practical
purposes an inherent right on the part of the corporation
since the decision to shorten the business endeavor should
really be addressed to the business decision of the co-
ventures
Power To Increase or Decrease The Capital Stock
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;
(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.
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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)
✾ It is not an inherent right to increase or decrease the
capital stock—it is not only because it is expressly provided
for in the articles of incorporation but also because it is
governed by many common law principles such as trust
fund doctrine, pre-emptive rights, among others
✾ The implied policy under Section 38—it doesn’t include an
appraisal right on the part of the stockholder on the reason
that every stockholder should come into the corporate
setting fully aware that the expediencies of corporate life
may require eventually the corporation may need to
increase capitalization to fund its operations or expansions,
and need to look primarily into its equity investors to fund
the same
✾ Prior to the approval of the SEC of the increase in capital
stock, and despite the board resolution approving the
increase in capital stock, and the receipt of payment on the
future issues of shares from the increased capital stock,
such funds don’t constitute part of the capital stock of the
corporation until approval of the increase of the SEC
✾ Present SEC rules provide that no announcement of an
offer of rights to acquire share or to issue stock dividends
to stockholders shall be made after an increase of the
capital stock without a definite fixed date for the exercise
of such right or issuance of stock dividends
Power to Incur, Create, or Increase Bonded Indebtedness
✾ BOND—security representing denominated units of
indebtedness issued by a corporation to raise money or
capital obliging the issuer to pay the maturity value at the
end of a specified period which shouldn’t be less than 360
days, and where applicable, payment of interest on
stipulated dates
✾ Bonded indebtedness is limited by the SEC to cover only
indebtedness of the corporation which are incurred by
mortgage on real or personal property as distinguished
from debentures, which are unsecured corporate
indebtedness
✾ Written notice of the proposed incurring, creating, 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 addresses in the post office with postage
prepaid, or served personally
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✾ Any incurring, creating or increasing of bonded
indebtedness shall require prior approval of the SEC
✾ An application for registration and issuance of bonds can
only be filed by the issuing corporation which has a
minimum net worth of P25 million at the time of the filing
of the application, and must have been in operation for
three years
✾ It must also fulfill the financial ratios mandated by the SEC
in its interim guidelines
✾ This power to incur or create liabilities is an inherent power
on the part of the business corporation since it is presumed
that they need to incur or create liabilities as part of the
normal operations of the business and the pursuit of the
business of the corporation
✾ No appraisal right is granted to dissenting stockholders
when the corporation validly incurs, creates or increases
bonded indebtedness since the granting of the appraisal
right would deprive the corporation of financial resources
contrary to the purpose of the bonded indebtedness
Power To Sell, Dispose, Lease or Encumber Assets
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 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.
✾ This power affects the contractual relationship between the
corporation’s board of directors and its stockholders and
not really as much of that between the corporation itself
and the State
✾ The sale, disposition or encumbrance of all or substantially
all of the assets of the corporation doesn't render it empty,
since the corporation is still left with assets received in
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exchange and neither does it change its primary purpose
indicated in the articles of incorporation
✾ Section 40 distinguishes between onerous contracts and
gratuitous ones and therefore in each instance, the
corporation always receive something of equal value to
what has been sold, disposed or encumbered
✾ The determination of a sale, disposition, or encumbrance of
all the corporate property is a quantitative test, which
when covered would require the necessary stockholders’ or
members’ approval
✾ A formula for the determination of a sale, disposition, or
encumbrance of substantially all corporate property is also
provided in Section 40 but when is it “substantially all”—if
the corporation would be rendered incapable of
o Continuing its business
o Accomplishing the purpose for which it was
incorporated
✾ The test on whether it is substantial is a qualitative test—
sale of one piece of machinery, if it is essential in the
continuation of the business, amounts to sale of
substantially all the assets
✾ Aside from the requirements of Section 40, the sale of all or
substantially all of the corporate assets or property may
require compliance with the Bulk Sales Law, when the
transaction falls within the classification of the law as bulk
sale
✾ Section 40 doesn't provide for the legal consequences to a
contract or transaction entered into by the corporation
through its board without obtaining the ratificatory votes of
the stockholders or members
✾ Appraisal right is afforded the dissenting stockholders as a
matter of equity and fairness since they should be allowed
to plough their investments into ventures they feel they
could get a better return rather than with a corporation
that is no longer capable of pursuing the business
Power To Purchase 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)
Power To Invest Corporate Funds In Another Corporation or
Business
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
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purpose as stated in the articles of incorporation, the approval of
the stockholders or members shall not be necessary. (17 1/2a)
✾ The law therefore presumes rather strongly that when
stockholders invest, or members join, a corporation, it is
with the primary expectation that the corporation through
its Board, will only pursue the primary purpose indicated in
its articles and the Board feels that it is propitious to
pursue a secondary purpose, then it would do so only if the
stockholders/members have had a chance to evaluate and
decide upon such diversion of corporate funds from the
primary business of the corporation
✾ Funds—any corporate property to be used in the
furtherance of the business, and consequently when
property is devoted in any business other than pursuit of
the primary purpose for which the corporation was
incorporated, it would need the ratificatory vote of two-
thirds of the outstanding capital stock
Power To Declare 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)
✾ Any declaration of dividends whether cash or stock, shall
be reported to the SEC within 15 days from the date of
declaration
✾ If the corporation is listed or registered or licensed under
the Securities Regulation Code, the report shall be made
simultaneously or before with the release of the notice of
declaration of dividends
Power To Enter Into Management Contract
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
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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)
✾ Management contract covers any contract whereby a
corporation undertakes to manage or operate all or
substantially all of the businesses of another corporation,
whether such contracts are called service contracts,
operating agreements, or otherwise
✾ Rationale for the ratification requirement for the managed
corporation—it is a deviation from Section 23 that the
corporate affairs shall be managed by the board of
directors
✾ Rationale for the ratification requirement for the managing
corporation—management arrangement is a deviation from
the principle that the board of directors in the managing
corporation assumed office with the understanding that
they would devote their time and resources to the affairs of
the corporation, and the entering into the management
contract whereby the board, as the direct agents of the
managing corporation would be devoting their time and
resources towards the operations of another corporation,
would be a deviation from such a contractual relationship,
and thereby would require the confirmation of the
stockholders of the managing corporation
WHAT IS THE DIFF BETWEEN ENTITY AND INDIVIDUAL?
✾ When it comes to management contracts between the
managed corporation and an individual or partnership, the
same is not covered by the rules of Section 44
✾ On the side of the managing individual, he need not get
consent from anyone to start managing a corporation
Power To Make Donations
Section 36.
xxx
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;
Power To Grant Gratuities To Employees
xxx
10. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and employees; and
✾ Providing gratuity pay for its employees is one of the
corporation’s express powers of a corporation under the
Corporation Code, and cannot be considered to be ultra
vires to avoid any liability arising from the issuance of
resolution granting such gratuity pay
✾ Such resolution doesn't also require the ratification of the
stockholders
Power To Enter Into Partnerships
✾ A corporation may validly enter into a joint venture
agreement
✾ Joint venture—partnership agreement that pertains to a
particular project or undertaking
✾ What makes a project or undertaking a joint venture to
authorize a corporation to be a co-venturer therein is not
the name or nomenclature given to the undertaking but
the nature and essence of the undertaking that limits it to
a particular project which allows the Board of Directors of
the participating corporations to properly evaluate all the
consequences and likely liabilities to which the corporation
would be held liable for
✾ SEC ruled that the corporation cannot enter into a
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partnership with another corporation or individual for the
reason that it would be bound by the acts of the persons
who aren’t its duly appointed and authorized agents and
officers, which is inconsistent with the rule that the
corporation shall manage its own affairs separately and
exclusively
✾ The SEC admits of exceptions however when the following
are present—
o The authority to enter into a partnership relation is
expressly conferred by the charter or the articles of
incorporation, and the nature of business venture
to be undertaken by the partnership is in line with
the business authorized by the charter of the
corporation involved
o The agreement on the articles of partnership must
provide that all the partners shall manage the
partnership and the articles might stipulate that all
the partners shall be jointly and severally liable for
all the obligations of the partnership
DIRECTORS, TRUSTEES, AND OFFICERS
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.
DOCTRINE OF CENTRALIZED MANAGEMENT
✾ Just as a natural person may authorize another to do
certain acts in his behalf, so may the board of directors of a
corporation validly delegate some of its functions to
individual officers or agents appointed by it
✾ Contracts or acts of a corporation must be made either by
the board of directors or by a corporate agent duly
authorized by the board
✾ Absent such valid delegation/authorization, the rule is that
the declarations of an individual director relating to the
affairs of the corporation but not in the course of, or
connected with the performance of authorized duties of a
director are held not binding on the corporation
Rationale for the Doctrine (As provided for in the case of
FILIPINAS PORT SERVICES, 2007)
✾ Section 23 of the Corporation Code explicitly provides that
unless otherwise provided therein, the corporate powers of
all corporations formed under the Code shall be exercised,
all business conducted and all property of the corporation
shall be controlled and held by a board of directors.
✾ Thus, with the exception only of some powers expressly
granted by law to stockholders (or members, in case of
non-stock corporations), the board of directors (or trustees,
in case of non-stock corporations) has the sole authority to
determine policies, enter into contracts, and conduct the
ordinary business of the corporation within the scope of its
charter, i.e., its articles of incorporation, by-laws and
relevant provisions of law. Verily, the authority of the
board of directors is restricted to the management of the
regular business affairs of the corporation, unless more
extensive power is expressly conferred.
✾ The raison d’etre behind the conferment of corporate
powers on the board of directors is not lost on the Court.
Indeed, the concentration in the board of the powers of
control of corporate business and of appointment of
corporate officers and managers is necessary for efficiency
in any large organization. Stockholders are too numerous,
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scattered and unfamiliar with the business of a corporation
to conduct its business directly. And so the plan of
corporate organization is for the stockholders to choose the
directors who shall control and supervise the conduct of
corporate business.
Primary Objective of the Board
✾ It is the obligation of the Board to seek the maximum
amount of profits for the corporation
✾ It is a position of trust
✾ The fiduciary or trust relationship is not a matter of
statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs
and property, and hence of the property interest of the
stockholders
THEORIES ON THE SOURCE OF POWER
Theory of Original Power
✾ The source of power comes directly from the law and that
the Board is originally and directly granted corporate
power as the embodiment of the corporation
✾ This has no democratic notions but more akin to the
principles of autocracy
✾ This finds support in Section 23 of the Corporation Code
Theory of Delegated Power
✾ The authority exercised by the Board of Directors is viewed
as derived or delegated authority, delegated to them by
stockholders or members of the corporation
✾ The source of primary theory can override the decisions of
the delegates
✾ This promotes the notion of democracy in the corporate
set-up, where the real source of power are the stockholders
or members, and the representatives thereof would be the
Board
✾ Under this theory, a corporation has a personality distinct
and separate from the individuals that compose it, but the
fact remains that it cannot act without the medium of
human beings
BOARD MUST ACT AS A BODY
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)
✾ A corporation through its Board of Directors should act in a
manner and within the formalities prescribed by its charter
or by the general law
✾ The board must act as a body in a meeting called pursuant,
otherwise, any action taken therein may be questioned by
any objecting director or stockholder
✾ Be that as it may, jurisprudence tells us that an action of
the board of directors during a meeting, which was illegal
for lack of notice, may be ratified either expressly, by the
action of the directors in subsequent legal meeting, or
impliedly, by the corporation’s subsequent course of
conduct
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EFFECTS OF BOGUS BOARD
✾ The acts or contracts effected by a bogus board would be
void pursuant to Article 1318 of the CC because of the lack
of consent
EXECUTIVE COMMITTEE
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.
✾ Take note that in a SEC opinion, an executive committee
can only be created by virtue of a provision in the by-laws
and that in the absence of a provision in the by-laws, the
board of directors cannot simply create or appoint an
executive committee to perform some of its functions
THE BUSINESS JUDGMENT RULE
✾ A resolution or transaction pursued within the corporate
powers and business operations of the corporation, and
passed in good faith by the board of directors, is valid and
binding, and generally the courts have no authority to
review the same or substitute their own judgment, even
when the exercise of such power may cause losses to the
corporation or decrease the profits of a department
✾ No court can, as an integral part of resolving the issues
between squabbling stockholders, order the corporation to
undertake certain corporate acts, since it would be in
violation of the business judgment rule
Theoretical Basis for the Rule (As provided for by PSE case)
✾ A corporation is but an association of individuals, allowed
to transact under an assumed corporate name, and with a
distinct legal personality
✾ In organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate to
such a body
✾ As to its management decisions, therefore, the state will
generally not interfere with the same
✾ Questions of policy and of management are left to the
honest discretion of the officers and directors of the
corporation, and the court are without authority to
substitute the judgment for the judgment of the board of
directors
✾ The board is the manager of the corporation, and so long
as it acts in good faith, the orders are not reviewable by
the courts.
✾ In the case of PSE, the business judgment rule was applied
because the SEC is the entity with the primary say as to
whether or not securities may be traded or not in the stock
exchange
When is the Business Judgment Rule applicable?
✾ Resolutions and transactions entered into by the Board of
Directors within the powers of the corporation cannot be
reversed by the courts not even on the behest of the
stockholders of the corporation
✾ Directors and officers acting within such business judgment
cannot be held liable personally for the consequences of
such acts
o This doesn't apply when—
 When the director willfully and knowingly
vote for patently illegal acts of the
corporation
 When he is guilty of gross negligence or
bad faith in directing the corporate affairs
 When he acquires any personal or
pecuniary interest in conflict with his duty
as such directors
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✾ The business judgment rule is a rule on evidence and not
only a substantial rule of law
COUNTER-VAILING DOCTRINES TO PROTECT CORPORATE
CONTRACTS
Doctrine of Estoppel and Ratification
✾ Even when a particular corporate transaction doesn’t pass
the lenient Montelibano test and is held ultra vires, the
transaction would nevertheless be held binding on the
corporation under the estoppel doctrine.
✾ When a contract isn’t on its face necessarily beyond the
scope of the power of the corporation by which it is made,
it will, in the absence of proof to the contrary, be
presumed to be valid. Corporations are presumed to
contract within their powers. The doctrine of ultra vires,
when invoked for or against the corporation shouldn’t be
allowed to prevail where it would defeat the ends of justice
or work a legal wrong.
✾ Where a transaction is merely ultra vires and not malum in
se or prohibitum, although it may be made for forfeiture of
corporate charter or dissolution of the corproration, such
transaction is, if performed by one party, not void as
between the parties, and an action may be brought
directly upon the transaction and relief had according to
its terms
✾ Even in the case of ultra vires acts which are not per se
illegal, a corporation cannot be heard to complain that it is
not liable for the acts of its board, because of estoppel by
representation
✾ Even when the contract entered into behalf of the
corporation is outside the usual powers of the corporate
officer, the corporation’s ratification of the contract and
acceptance of the benefits arising therefrom have made
such contract binding upon the corporation, and the
enforceability of such contract has been ratified by the
acceptance of benefits under them
✾ Ratification would have to come from the Board of
Directors or a properly authorized representative
✾ For ratification to be sustained—
o The act must be consummated and not executory
o Creditors aren’t prejudiced or all of them have
given their consent
o Rights of the public or the State aren’t involved
o All the stockholders must have given their consent
Does Apparent Authority Have To Exist Before Estoppel Will
Lie?
✾ No
If You Are The Third Party, What Should Be Done?
✾ If you are the third party, don't give room for the other
party to fault you for lack of due diligence
✾ If you can, do a background check.
Theory of Apparent Authority
✾ If a corporation knowingly permits one of its officers, or any
other agent, to act within the scope of apparent authority,
it holds him out to the public possessing the power to so do
those acts; and thus, the corporation will, as against
anyone who has in good faith dealt with it through such
agent, be estopped from denying the agent’s authority
✾ Its existence may be ascertained through—
o The general manner in which the corporation holds
out an officer or agent as having the power to act,
or in other words, the apparent authority to act in
general, with which it clothes him,
o Or the acquiescence in his acts of a particular
nature, with actual or constructive knowledge
thereof, whether within or beyond the scope of his
ordinary powers
✾ Necessarily, the application of apparent authority requires
presentation of evidence of similar acts executed either in
its favor or in favor of third parties
✾ It is not the quantity of similar acts which establishes
apparent authority, but the vesting of a corporate officer
with the power to bind the corporation
Note:
In the case of FRANSISCO, there was a series of acts that led to a
ruling against the corporation. To be noted also is the long period
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of time before the corporation raised its defenses.
In the case of YAO KA SIN, can’t the China Bank case be invoked,
by saying that the by-laws are not binding upon third parties?
Using this case as context, when you prove that the President has
been dealing with you, the burden of proof then shifts. It is
comparable to a ping-pong game.
In NYCO and YAO KA SIN, which would prevail in case of
discrepancy, the by-laws or the previous transaction? In answering
this, you should ask the following—
1. Does the person dealing with you have the authority?
2. If there a third party involved? Is there a corporate insider
or someone who has knowledge of the by-laws?
3. In case third party doesn't know, ask what authority the
person has. Also ask what transaction is. Always be on
toes and on notice on every aspect as much as possible.
QUALIFICATIONS OF DIRECTORS OR TRUSTEES
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.
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)
In connection with Section 23, doesn't this encourage the
use of dummies or nominees?
✾ In a sense yes but with this flexibility comes rules of
rigidity or standards, such as representative responsibility,
requirements in ascertaining who has beneficial ownership,
etc.
Note:
1. A director must have at least one share of stock
2. Beneficial ownership under voting trust agreement no
longer qualifies
3. As a safety measure, once there is change is the roster of
officers, inform the SEC outright and fast. You can also
amend the GIS.
4. With respect to corporate stockholders, they cannot be
seated as one of the directors or trustees. A corporation
cannot act by itself but through its officers and agents, and
as such a corporation cannot attend personally board
meetings of the corporation wherein it is elected as a
director, but only through a representative or a proxy,
would contravene the established rule that a director may
not be represented by a proxy.
5. In addition to what is provided in the Code with respect to
disqualification, the by-laws of a corporation can supplant
this
ELECTION OF BOARD OF DIRECTORS/TRUSTEES
Section 24. Election of directors or trustees. - At all elections of
directors or trustees, there must be present, either in person or
by representative authorized to act by written proxy, the owners
of a majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote. The
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election must be by ballot if requested by any voting stockholder
or member. In stock corporations, every stockholder entitled to
vote shall have the right to vote in person or by proxy the
number of shares of stock standing, at the time fixed in the by-
laws, in his own name on the stock books of the corporation, or
where the by-laws are silent, at the time of the election; and said
stockholder may vote such number of shares for as many
persons as there are directors to be elected or he may cumulate
said shares and give one candidate as many votes as the
number of directors to be elected multiplied by the number of his
shares shall equal, or he may distribute them on the same
principle among as many candidates as he shall see fit: Provided,
That the total number of votes cast by him shall not exceed the
number of shares owned by him as shown in the books of the
corporation multiplied by the whole number of directors to be
elected: Provided, however, That no delinquent stock shall be
voted. Unless otherwise provided in the articles of incorporation
or in the by-laws, members of corporations which have no capital
stock may cast as many votes as there are trustees to be elected
but may not cast more than one vote for one candidate.
Candidates receiving the highest number of votes shall be
declared elected. Any meeting of the stockholders or members
called for an election may adjourn from day to day or from time
to time but not sine die or indefinitely if, for any reason, no
election is held, or if there are not present or represented by
proxy, at the meeting, the owners of a majority of the
outstanding capital stock, or if there be no capital stock, a
majority of the member entitled to vote. (31a)
Section 26. Report of election of directors, trustees and officers. -
Within thirty (30) days after the election of the directors, trustees
and officers of the corporation, the secretary, or any other officer
of the corporation, shall submit to the Securities and Exchange
Commission, the names, nationalities and residences of the
directors, trustees, and officers elected. Should a director,
trustee or officer die, resign or in any manner cease to hold
office, his heirs in case of his death, the secretary, or any other
officer of the corporation, or the director, trustee or officer
himself, shall immediately report such fact to the Securities and
Exchange Commission. (n)
TRUSTEES
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)
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)
CUMULATIVE VOTING
✾ Voting procedure wherein minority stockholders are
allowed the capacity to be able to elect representatives to
the board of directors
✾ This is reckoned to be equitable since it allowed
stockholders the opportunity for representation in the
Board of Directors in proportion to their holdings
D’Hondt Remainders Table
✾ Offers a simple method for determining the number of
candidates form whom a bloc should vote
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✾ This is constructed by dividing the number of votes each unexpired term of his predecessor in office.
bloc can cast by the integers 1 through D, which will
indicate the number of shares controlled and the number Any directorship or trusteeship to be filled by reason of an
of candidates for whom votes are cast increase in the number of directors or trustees shall be filled only
✾ This is first used to determine the number of directors each by an election at a regular or at a special meeting of
block is certain of electing. The largest entries in the table stockholders or members duly called for the purpose, or in the
are circled, indicating D, the number of directors is elected same meeting authorizing the increase of directors or trustees if
so stated in the notice of the meeting. (n)
Illustration:
ABC Corporation ✾ A by-law provision or company practice of giving a
100 outstanding capital stock stockholder a permanent seat in the Board would be
5 directors to be elected against the provisions of Section 28 and 29 of the
Bloc 1 has 66 shares Corporation Code which requires members of the Board of
Bloc 2 has 34 shares the corporation to be elected
1 2 3 4 5
Bloc 1 330 165 110 82.5 66 TERM OF OFFICE, HOLD-OVER PRINCIPLE
Bloc 2 170 85 56.5 42.5 34 ✾ The term of office of the members of the Board in a stock
corporation shall be one year and until their successors are
Step-by-Step Procedure for D’ Hondt Remainders Table: elected and qualified
1. In the table, make allocation for the D number of directors ✾ In the event that no new board is elected or qualified after
to be elected, in this case D=5 the original one-year term of the board of directors, then
2. N (Total number of votes to be used) = Sn x D wherein Sn is under the hold-over principle, the existing board, if still
the total number of shares per bloc constituting a quorum, is still a legitimate board with full
3. Divide the number of votes a bloc can cast by the integers authority to bind the corporation
1 to D ✾ Directors may lawfully fill vacancies occurring in the board,
4. Encircle the largest entries in the table, indicating D as well as the original directors, hold-over until
5. A bloc can safely nominate for n directors if the nth entry in qualification of their successors
the bloc’s row is greater than the first uncircled entry in the ✾ The remedy is quo warranto to question the legality and
next row. proper qualification of persons elected to the board

VACANCY IN BOARD REMOVAL OF DIRECTORS AND TRUSTEES

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
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

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previous notice to stockholders or members of the corporation of
the intention to propose such removal at the meeting. A special
meeting of the stockholders or members of a corporation for the
purpose of removal of directors or trustees, or any of them, must
be called by the secretary on order of the president or on the
written demand of the stockholders representing or holding at
least a majority of the outstanding capital stock, or, if it be a
non-stock corporation, on the written demand of a majority of
the members entitled to vote. Should the secretary fail or refuse
to call the special meeting upon such demand or fail or refuse to
give the notice, or if there is no secretary, the call for the
meeting may be addressed directly to the stockholders or
members by any stockholder or member of the corporation
signing the demand. Notice of the time and place of such
meeting, as well as of the intention to propose such removal,
must be given by publication or by written notice prescribed in
this Code. Removal may be with or without cause: Provided, That
removal without cause may not be used to deprive minority
stockholders or members of the right of representation to which
they may be entitled under Section 24 of this Code. (n)
✾ General rule however is that by 2/3 vote is already enough
to remove a director.
✾ Exception is that when the director is elected by the
minority through cumulative voting, he may not be
removed without cause even if there is 2/3 votes
✾ There is no legal definition for cause but the Code
enumerates three duties of a director/trustee—loyalty,
obedience, diligence—violation thus of either three will
constitute cause for removal
✾ Only stockholders or members have the power to remove
the directors and trustees elected by them as laid down in
Section 28 of the Code
DIRECTORS’ OR TRUSTEES’ MEETINGS
Section 49. Kinds of meetings. - Meetings of directors, trustees,
stockholders, or members may be regular or special. (n)
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)
Section 54. Who shall preside at meetings. - The president shall
preside at all meetings of the directors or trustee as well as of
the stockholders or members, unless the by-laws provide
otherwise. (n)
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
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elected by the members. (n)
Quorum
✾ Shall be the presence of the majority of the number of
directors as fixed in the articles of incorporation
✾ The required vote to pass a resolution shall be a majority
vote of the directors present at such meeting where
quorum is achieved
✾ In the election of officers however, the vote of the majority
of all the members of the board is necessary
✾ For stock corporations, this is based on the number of
outstanding voting stocks
✾ For non-stock, voting rights shall be counted in determining
the existence of a quorum during members’ meetings.
Dead members shall not be counted.
Abstention
✾ General rule is that an abstention is counted in favor of the
issue that won the majority vote since by their act of
abstention, the abstaining directors are deem to abide by
the rule of the majority
Requisites for a Valid Meeting
1. Meeting of the directors or trustees duly assembled as a
board, at the place, time, and manner provided in the by-
laws
2. Presence of the required quorum
3. Decision of the majority of the quorum or in other cases,
majority of the entire board
Mode of Attendance of Board Members
✾ A director or trustee cannot attend nor be represented in a
board meeting by proxy
✾ Since the board is the governing body of the corporation
upon whom all corporate powers are vested by law, each
elected member are supposed to exercise their judgment
and discretion in running the affairs of the corporation
✾ The each have been elected by the stockholders or
members on the basis of their personal qualifications and
capabilities with full expectations that they would
discharge their duties and functions
COMPENSATION OF DIRECTORS/TRUSTEES
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)
✾ Directors and trustees are not entitled to salary or other
compensation when they perform nothing more than the
usual and ordinary duties of their office, founded on the
presumption that directors and trustees render service
gratuitously, and that the return upon their services
adequately furnishes the motives for service, without
compensation. But they can receive renumeration for
executive officer position
✾ There are two ways of receiving additional remuneration
aside from the per diems—one, when there is a provision in
the by-laws fixing their compensation, and two, when the
stockholders representing a majority of the outstanding
capital stock at a regular or special meeting agree to give
them compensation
FIDUCIARY DUTIES OF DIRECTORS AND TRUSTEES
Pre-Corporation Code/Common Law Nature of Duties of
Directors, Trustees and Officers (As Held in Palting case)
✾ These provisions are in direct opposition to our corporation
law and corporate practices in this country. These
provisions alone would outlaw any corporation locally
organized or doing business in this jurisdiction. Consider
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the unique and unusual provision that no contract or
transaction between the company and any other
association or corporation shall be affected except in case
of fraud, by the fact that any of the directors or officers of
the company may be interested in or are directors or
officers of such other association or corporation; and that
none of such contracts or transactions of this company
with any person or persons, firms, associations or
corporations shall be affected by the fact that any director
or officer of this company is a party to or has an interest in
such contract or transaction or has any connection with
such person or persons, firms associations or corporations;
and that any and all persons who may become directors or
officers of this company are hereby relieved of all
responsibility which they would otherwise incur by reason
of any contract entered into which this company either for
their own benefit, or for the benefit of any person, firm,
association or corporation in which they may be interested.
✾ The impact of these provisions upon the traditional
judiciary relationship between the directors and the
stockholders of a corporation is too obvious to escape
notice by those who are called upon to protect the interest
of investors. The directors and officers of the company can
do anything, short of actual fraud, with the affairs of the
corporation even to benefit themselves directly or other
persons or entities in which they are interested, and with
immunity because of the advance condonation or relief
from responsibility by reason of such acts. This and the
other provision which authorizes the election of non-
stockholders as directors, completely disassociate the
stockholders from the government and management of the
business in which they have invested.
Nature of Duties of Officers and Directors
(As Held in Prime White Cement case)
✾ A director of a corporation holds a position of trust and as
such, he owes a duty of loyalty to his corporation. In case
his interests conflict with those of the corporation, he
cannot sacrifice the latter to his own advantage and
benefit. As corporate managers, directors are committed to
seek the maximum amount of profits for the corporation.
This trust relationship "is not a matter of statutory or
technical law. It springs from the fact that directors have
the control and guidance of corporate affairs and property
and hence of the property interests of the stockholders."’
Duty of Obedience
✾ Board will direct the affairs of the corporation only in
accordance with the purposes for which it was organized
✾ The powers exercised by the directors and officers are
necessarily limited, because all the limitations imposed by
law on private corporation are necessarily imposed also on
the board of directors who act on behalf of the corporation
✾ A corporation, through its board of directors, should act in
a manner and within the formalities if any, prescribed by
its charter or by the general law
Duty of Diligence
Section 31. Liability of directors, trustees or officers. - Directors
or trustees who wilfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and
other persons.
When a director, trustee or officer attempts to acquire or
acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon
him to deal in his own behalf, he shall be liable as a trustee for
the corporation and must account for the profits which otherwise
would have accrued to the corporation. (n)
Steinberg v. Velasco
52 PHIL 953
✾ FACTS—plaintiff sues the directors and officers of the
trading corporation for allegedly unlawfully authorizing the
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purchase of stocks from other corporations as well as
declaring dividends to the prejudice of its creditors
✾ HELD:
o Directors of a corporations are bound to care for its
property and manage its affairs in good faith, and
for violation of these duties resulting in waste of its
assets or injury to the property they are liable to
account the same as other trustees. And there can
be no doubt that if they do acts clearly beyond
their power, whereby loss ensues to the
corporation, or dispose of its property or pay away
its money without authority, they will be required
to make good the loss out of their private estates.
This is the rule where the disposition made of
money or property of the corporation is one either
not within the lawful power of the corporation, or if
within the power of the corporation, is not within
the power or authority of the particular officer or
director.
o 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 will not declare dividends to stockholders
when the corporation is insolvent
Bates v. Dresser
251 US 524
✾ FACTS: Numerous acts of theft were committed by the
bank’s bookkeeper. Because of this, the bank suffered
some losses. This prompted Bates to file a case against
Dresser, among others, as officer of the bank for allowing
such theft to happen.
✾ HELD:
o In accepting the presidency Dresser must be taken
to have contemplated responsibility for losses to
the bank, whatever they were, if chargeable to his
fault. Those that happened were chargeable to his
fault, after he had warnings that should have led to
steps that would have made fraud impossible, even
though the precise form that the fraud would take
hardly could have been foreseen.
o The position of the president is different. Practically
he was the master of the situation. He was daily at
the bank for hours, he had the deposit ledger in his
hands at times and might have had it at any time.
He had had hints and warnings in addition to those
that we have mentioned, warnings that should not
be magnified unduly, but still that taken with the
auditor's report of 1903, the unexplained
shortages, the suggestion of the teller, Cutting, in
1905, and the final seeming rapid decline in
deposits, would have induced scrutiny but for an
invincible repose upon the status quo.
Smith v. Van Gorkam
488 A.2D 858
✾ FACTS: Trans Union was a publicly-traded, diversified
holding company, the principal earnings of which were
generated by its railcar leasing business. During the
period here involved, the Company had a cash flow of
hundreds of millions of dollars annually. However, the
Company had difficulty in generating sufficient taxable
income to offset increasingly large investment tax credits
(ITCs). Accelerated depreciation deductions had
decreased available taxable income against which to offset
accumulating ITCs. The Company took these deductions,
despite their effect on usable ITCs, because the rental price
in the railcar leasing market had already impounded the
purported tax savings. Efforts were made to lobby in
Congress the refund of ITCs but to no avail.
In trying to solve the taxable income problem, the
company started with acquiring the smaller companies.
This accelerated growth but still wasn't enough. Then the
president thought of selling the company out which
eventually happened. A cash-out merger was done and
this prompted the stockholders to file an action against Van
Gorkam.
✾ HELD:
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o In carrying out their managerial roles, directors are
charged with an unyielding fiduciary duty to the
corporation and its shareholders. The business
judgment rule exists to protect and promote the
full and free exercise of the managerial power
granted. The rule itself “is a presumption that in
making a business decision, the directors of a
corporation acted on an informed basis, in good
faith and in the honest belief that the action taken
was in the best interests of the company.”
o Since a director is vested with the responsibility for
the management of the affairs of the corporation,
he must execute that duty with the recognition that
he acts on behalf of others. Such obligation does
not tolerate faithlessness or self-dealing. But
fulfillment of the fiduciary function requires more
than the mere absence of bad faith or fraud.
Representation of the financial interests of others
imposes on a director an affirmative duty to protect
those interests and to proceed with a critical eye in
assessing information of the type and under the
circumstances present here. Thus, a director's duty
to exercise an informed business judgment is in
*873 the nature of a duty of care, as distinguished
from a duty of loyalty. Here, there were no
allegations of fraud, bad faith, or self-dealing, or
proof thereof. Hence, it is presumed that the
directors reached their business judgment in good
faith, considerations of motive are irrelevant to the
issue before us.
o With the circumstances on record, it must be held
that the directors didn't reach a sound business
judgment in approving the merger agreement.
They solely relied on the representations of the
president without prior knowledge on the matter.
Duty of Loyalty
Section 31. Liability of directors, trustees or officers. - Directors
or trustees who wilfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and
other persons.
When a director, trustee or officer attempts to acquire or
acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon
him to deal in his own behalf, he shall be liable as a trustee for
the corporation and must account for the profits which otherwise
would have accrued to the corporation. (n)
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, 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
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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)
Section 33. Contracts between corporations with interlocking
directors. - Except in cases of fraud, and provided the contract is
fair and reasonable under the circumstances, a contract between
two or more corporations having interlocking directors shall not
be invalidated on that ground alone: Provided, That if the
interest of the interlocking director in one corporation is
substantial and his interest in the other corporation or
corporations is merely nominal, he shall be subject to the
provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the
outstanding capital stock shall be considered substantial for
purposes of interlocking directors. (n)
Section 34. Disloyalty of a director. - Where a director, by virtue
of his office, acquires for himself a business opportunity which
should belong to the corporation, thereby obtaining profits to the
[qprejudice of such corporation, he must account to the latter for
all such profits by refunding the same, unless his act has been
ratified by a vote of the stockholders owning or representing at
least two-thirds (2/3) of the outstanding capital stock. This
provision shall be applicable, notwithstanding the fact that the
director risked his own funds in the venture. (n)
✾ Difference between Section 31 and 34—
o While they both cover the same subject matter
which is business opportunity but they concern
different personalities, Section 34 is only applicable
to directors and not to officers while Section 31 is
applicable to directors, trustees, and officers
o Section 34 allows ratification of a transaction by a
self-dealing director by the vote of stockholders
representing 2/3 of the outstanding capital stock
✾ Why is a self-dealing transaction entered into by a director
can be ratified while that entered into by an officer cannot
be ratified?
o One theory—directors and trustees are the direct
elected representatives of the
stockholders/members (under theory of delegated
power) while officers are generally elected by the
Board
o Other theory—officers are mandated to have a
greater loyalty compared to the directors since
they spend more time with corporate affairs,
getting salary from the corporation, etc.
✾ Take note also the gravity of the acts comprised in Section
31 compared to Section 34. The acts in Section 31
committed by a director, trustee or officer is graver than
that in Section 34
✾ This duty also applies to confidential employees
Mead v. McCullough
21 PHIL 95
✾ FACTS: Mead was the general manager of an engineering
and construction firm. While he was away on a trip to
China, the board entered into a contract with defendant
company. Pursuant to this, his effects were sold
✾ HELD: there was nothing wrong with the transaction
entered into by the company.
Doctrine of Corporate Opportunity (As Mentioned in the
Gokongwei case)
✾ If there is presented to a corporate officer or director a
business opportunity which the corporation is financially
able to undertake, is from its nature, in the line of the
corporation's business and is of practical advantage to it, is
one in which the corporation has an interest or a
reasonable expectancy, and by embracing the opportunity,
the self-interest of the officer or director will be brought
into seize the opportunity for himself. And, if, in such
circumstances, the interests of the corporation are
betrayed, the corporation may elect to claim all of the
benefits of the transaction for itself. and the law will
impress a trust in favor of the corporation upon the
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property interests and profits so acquired.
✾ The doctrine of "corporate opportunity" is precisely a
recognition by the courts that the fiduciary standards could
not be upheld where the fiduciary was acting for two
entities with competing interests. This doctrine rests
fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of
an opportunity for his own personal profit when the interest
of the corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of
the San Miguel Corporation has access to sensitive and
highly confidential information, such as: (a) marketing
strategies and pricing structure; (b) budget for expansion
and diversification; (c) research and development; and (d)
sources of funding, availability of personnel, proposals of
mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for
an officer or director of San Miguel Corporation, who is also
the officer or owner of a competing corporation, from
taking advantage of the information which he acquires as
director to promote his individual or corporate interests to
the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-
laws was made. Certainly, where two corporations are
competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to
discharge effectively his duty, to satisfy his loyalty to both
corporations and place the performance of his corporation
duties above his personal concerns.
Self-Dealings
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, 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)
Section 33. Contracts between corporations with interlocking
directors. - Except in cases of fraud, and provided the contract is
fair and reasonable under the circumstances, a contract between
two or more corporations having interlocking directors shall not
be invalidated on that ground alone: Provided, That if the
interest of the interlocking director in one corporation is
substantial and his interest in the other corporation or
corporations is merely nominal, he shall be subject to the
provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the
outstanding capital stock shall be considered substantial for
purposes of interlocking directors. (n)
SEC Code of Corporate Governance
SEC MEMORANDUM CIRCULAR NO._____ 2
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Series of 2002
CODE OF CORPORATE GOVERNANCE
In accordance with the State’s policy to actively promote
corporate governance reforms aimed to raise investor confidence,
develop capital market and help achieve high sustained growth
for the corporate sector and the economy, the Commission, in its
Resolution No.135, Series of 2002 dated April 04 2002, approved
the promulgation and implementation of this Code, which shall be
applicable to corporations whose securities are registered or
listed, corporations which are grantees of permits/licenses and
secondary franchise from the Commission and public companies.
This Code also applies to branches or subsidiaries of foreign
corporations operating in the Philippines whose securities are
registered or listed.
I. Definitions
A. Board of Directors – refers to the collegial body that exercises
the corporate powers of all corporations formed under the
Corporation Code. It conducts all business and controls or
holds all property of such corporations.
B. Corporate Governance – refers to a system whereby
shareholders, creditors and other stakeholders of a
corporation ensure that management enhances the value of
the corporation as it competes in an increasingly global
market place.
C. Independent Director – refers to a person other than an officer
or employee of the corporation, its parent or subsidiaries, or
any other individual having any relationship with the
corporation, which would interfere with the exercise of
independent judgment in carrying out the responsibilities of a
director. This means that apart from the directors’ fees and
shareholdings, he should be independent of management and
free from any business or other relationship which could
materially interfere with the exercise of his independent
judgment.
D. Public Company – refers to any corporation with a class of
equity securities listed in an Exchange or with assets in excess
of Fifty Million Pesos (P50,000,000.00) and having two
hundred (200) or more stockholders each holding at least one
hundred (100) shares of a class of its securities.
E. Management – refers to the body given the authority to
implement the policies determined by the Board in directing
the course/business activity/ies of the corporation.
F. Executive Director – refers to a director who is at the same
time appointed to head a department/unit within the
corporate organization.
G. Non-executive director – refers to a Board member with non-
executive functions.
H. Non-audit work – refers to other services offered by the
external auditor to a corporation that are not directly related
and relevant to its statutory audit function. Examples include
accounting, payroll, bookkeeping, reconciliation, computer
project management, data processing or information
technology outsourcing services, internal auditing, and
services that may compromise the independence and
objectivity of the external audit.
I. Internal control – refers to the process effected by a
company’s Board of Directors, management and other
personnel, designed to provide reasonable assurance
regarding the achievement of objectives in the effectiveness
and efficiency of operations, the reliability of financial
reporting, and compliance with applicable laws, regulations,
and internal policies.
J. Internal control environment – refers to the framework under
which internal controls are developed, implemented, alone or
in concert with other policies or procedures, to manage and
control a particular risk or business activity, or combination of
risks or business activities, to which the company is exposed.
K. Internal auditing – refers to an independent, objective
assurance and consulting activity designed to add value and
improve an organization’s operations. It helps an organization
accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk
management, control, and governance processes.
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L. Internal audit department – refers to a department, division,
team of consultants, or other practitioner(s) that provide
independent, objective assurance and consulting services
designed to add value and improve an organization’s
operations.
M. Chief Audit Executive – refers to the top position within the
organization responsible for internal audit activities. In a
traditional internal audit activity, this would be the internal
audit director. In the case where internal audit activities are
obtained from outside service providers, the chief audit
executive is the person responsible for overseeing the service
contract and the overall quality assurance of these activities,
and follow-up of engagement results. The term also includes
such titles as general auditor, chief internal auditor, and
inspector general.
N. Independence – refers to that environment which allows the
person to carry out his/her work freely and objectively.
O. Objectivity – refers to unbiased mental attitude that requires
the person to carry out his/her work in such a manner that
he/she has an honest belief in his/her work product and that
no significant quality compromises are made. Objectivity
requires the person not to subordinate his/her judgment to
that of others.
P. Standards for the Professional Practice of Internal Auditing
(SPPIA) – refers to the criteria by which the operations of an
internal auditing department are evaluated and measured. They
are intended to represent the practice of internal auditing as it
should be, provide a framework for performing and promoting a
broad range of value-added internal audit activities and foster
improved organizational processes and operations.
II. The Board Governance
The Board of Directors (Board) is primarily responsible for the
governance of the corporation. It needs to be structured so that it
provides an independent check on management. As such, it is
vitally important that a number of board members be independent
from management.
1. Composition of the Board
The Board shall be composed of at least five (5) but not more than
fifteen (15) members elected by shareholders. Public companies
shall have at least two (2) independent directors or such
independent directors shall constitute at least twenty percent
(20%) of the members of such Board, whichever is the lesser. All
other companies are encouraged to have independent directors as
well.
The Board may include a balance of executive and non-executive
directors (including independent non-executives), having a clear
division of responsibilities such that no individual or small group of
individuals can dominate the Board’s decision making.
The non-executive directors should be of sufficient qualifications,
stature and number to carry significant weight in the Board’s
decisions. Non-executive directors considered by the Board to be
independent shall be identified in the annual report.
2. Multiple Board Seats
The Board may consider guidelines on the number of directorships
for its members. The optimum number is related to the capacity
of a director to perform his duties diligently in general. The Chief
Executive Officer and other executive directors may submit
themselves to a low indicative limit on membership in other
corporate Boards. The same low limit may apply to independent,
non-executive directors who serve as full-time executives in other
corporations. In any case, the capacity of directors to serve with
diligence shall not be compromised.
3. The Chairman and the Chief Executive Officer
The roles of the Chairman and the Chief Executive Officer (“CEO”)
may be separate to ensure an appropriate balance of power,
increased accountability and greater capacity of the Board for
independent decision-making. The company shall disclose the
relationship between the Chairman and the CEO upon their
election.
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Where both positions of the Chairman and CEO are unified, there The following shall be grounds for the disqualification of a director:
is clearly one leader to provide a single vision and mission. In this
instance, checks and balances should be clearly provided to help a) Any person who has been finally convicted by a competent
ensure that independent, outside views, perspectives, and judicial or administrative body of the following: (i) any crime
judgments are given proper hearing in the Board. involving the purchase or sale of securities, e.g., proprietary
or non-proprietary membership certificate, commodity futures
The Chairman’s responsibilities may include: contract, or interest in a common trust fund, pre-need plan,
pension plan or life plan; (ii) any crime arising out of the
1. schedule meetings to enable the Board to perform its duties person’s conduct as an underwriter, broker, dealer,
responsibly while not interfering with the flow of the investment company, investment adviser, principal
company’s operations distributor, mutual fund dealer, futures commission merchant,
2. prepare meeting agenda in consultation with the CEO; commodity trading advisor, floor broker; and (iii) any crime
3. exercise control over quality, quantity and timeliness of the arising out of his relationship with a bank, quasi-bank, trust
flow of information between Management and the Board; company, investment house or as an affiliated person of any
and of them.
4. assist in ensuring compliance with company’s guidelines on b) Any person who, by reason of any misconduct, after hearing
corporate governance. or trial, is permanently or temporarily enjoined by order,
judgment or decree of the Commission or any court or other
The responsibilities set out in the above guidelines may pertain administrative body of competent jurisdiction from: (i) acting
only to the Chairman’s role in respect to the Board proceedings. It as an underwriter, broker, dealer, investment adviser,
should not be taken as a comprehensive list of all the duties and principal distributor, mutual fund dealer, futures commission
responsibilities of a Chairman. merchant, commodity trading advisor, or a floor broker; (ii)
acting as a director or officer of a bank, quasi-bank, trust
4. Qualifications of Directors company, investment house, investment company or an
affiliated person of any of them; (iii) engaging in or continuing
Every director shall own at least one (1) share of the capital stock any conduct or practice in connection with any such activity or
of the corporation of which he is a director, which share shall willfully violating laws governing securities, and banking
stand in his name in the books of the corporation. activities. Such disqualification shall also apply when such
person is currently subject to an effective order of the
The Board may provide for additional qualifications of a director Commission or any court or other administrative body
such as, but not limited to, the following: refusing, revoking or suspending any registration, license or
permit issued under the Corporation Code, Securities
a) Educational attainment Regulation Code, or any other law administered by the
b) Adequate competency and understanding of business Commission or Bangko Sentral ng Pilipinas, or under any rule
c) Age requirement or regulation promulgated by the Commission or Bangko
d) Integrity/probity Sentral ng Pilipinas, or otherwise restrained to engage in any
e) Assiduousness activity involving securities and banking. Such person is also
disqualified when he is currently subject to an effective order
5. Disqualification of Directors of a self-regulatory organization suspending or expelling him
from membership or participation or from associating with a

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member or participant of the organization.
c) Any person finally convicted judicially or administratively of an
offense involving moral turpitude, fraud, embezzlement, theft,
estafa, counterfeiting, misappropriation, forgery, bribery, false
oath, perjury or other fraudulent act or transgressions.
d) Any person finally found by the Commission or a court or
other administrative body to have willfully violated, or willfully
aided, abetted, counseled, induced or procured the violation
of, any provision of the Securities Regulation Code, the
Corporation Code, or any other law administered by the
Commission or Bangko Sentral ng Pilipinas, or any rule,
regulation or order of the Commission or Bangko Sentral ng
Pilipinas, or who has filed a materially false or misleading
application, report or registration statement required by the
Commission, or any rule, regulation or order of the
Commission.
e) Any person judicially declared to be insolvent.
f) Any person finally found guilty by a foreign court or equivalent
financial regulatory authority of acts, violations or misconduct
similar to any of the acts, violations or misconduct listed in
paragraphs (a) to (e) hereof.
g) Any affiliated person who is ineligible, by reason of
paragraphs (a) to (e) hereof to serve or act in the capacities
listed in those paragraphs.
h) Conviction by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a
violation of the Corporation Code, committed within five (5)
years prior to the date of his election or appointment.
The Board may also provide for the temporary disqualification of a
director for the following reasons:
a. Refusal to fully disclose the extent of his business interest as
required under the Securities Regulation Code and its
Implementing Rules and Regulations. This disqualification
shall be in effect as long as his refusal persists.
b. Absence or non-participation for whatever reason/s for more
than fifty percent (50%) of all meetings, both regular and
special, of the Board of directors during his incumbency, or
any twelve (12) month period during said incumbency. This
disqualification applies for purposes of the succeeding
election.
c. Dismissal/termination from directorship in another listed
corporation for cause. This disqualification shall be in effect
until he has cleared himself of any involvement in the alleged
irregularity.
d. Being under preventive suspension by the corporation.
e. If the independent director becomes an officer or employee of
the same corporation he shall be automatically disqualified
from being an independent director.
f. If the beneficial security ownership of an independent director
in the company or in its related companies shall exceed the
10% limit.
g. Conviction that has not yet become final referred to in the
grounds for the disqualification of directors.
6. Duties, Functions and Responsibilities
It is the Board’s responsibility to foster the long-term success of
the corporation and secure its sustained competitiveness in a
manner consistent with its fiduciary responsibility, which it should
exercise in the best interest of the corporation and its
shareholders.
a. General Responsibility
A director’s office is one of trust and confidence. He should act in
the best interest of the corporation in a manner characterized by
transparency, accountability and fairness. He should exercise
leadership, prudence and integrity in directing the corporation
towards sustained progress over the long term. A director
assumes certain responsibilities to different constituencies or
stakeholders, who have the right to expect that the institution is
being run in a prudent and sound manner.
To ensure good governance of the corporation, the Board should
establish the corporation’s vision and mission, strategic
objectives, policies and procedures that may guide and direct the
activities of the company and the means to attain the same as
well as the mechanism for monitoring management’s
performance. While the management of the day-to-day affairs of
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the institution is the responsibility of the management team, the
Board is, however, responsible for monitoring and overseeing
management action.
b. Duties and Functions
To insure a high standard of best practice for the company and its
stakeholders, the Board should conduct itself with utmost honesty
and integrity in the discharge of its duties, functions and
responsibilities which include, among others, the following:\
i. Install a process of selection to ensure a mix of competent
directors, each of whom can add value and contribute
independent judgment to the formulation of sound corporate
strategies and policies. Select and appoint the CEO and other
senior officers, who must have the motivation, integrity,
competence and professionalism at a very high level. Adopt a
professional development program for employees and officers,
and succession planning for senior management.
ii. Determine the corporation’s purpose and value as well as
strategies and general policies to ensure that it survives and
thrives despite financial crises and its assets and reputation are
adequately protected. Provide sound written policies and strategic
guidelines to the corporation that will help decide on major capital
expenditures. Determine important policies that bear on the
character of the corporation with a view towards ensuring its long-
term viability and strength. It must periodically evaluate and
monitor implementation of such strategies and policies, business
plans and operating budgets as well as management’s over-all
performance to ensure optimum results.
iii. Ensure that the corporation complies with all relevant
laws, regulations and codes of best business practices.
iv. Identify the corporation’s major and other stakeholders
and formulate a clear policy on communicating or relating with
them accurately, effectively and sufficiently. There must be an
accounting rendered to them regularly in order to serve their
legitimate interests.
Likewise, an investor relations program that reaches out to all
shareholders and fully informs them of corporate activities should
be developed. As a best practice, the chief financial officer or CEO
should have oversight of this program and should actively
participate in public activities
v. Adopt a system of internal checks and balances, which
may be applied in the first instance to the Board. A regular review
of the effectiveness of such system must be conducted so that the
decision-making capability and the integrity of corporate
operations and reporting systems are maintained at a high level
at all times.
vi. Endeavor to provide appropriate technology and systems
rating to account for available resources to ensure a position of a
strong and meaningful competitor. Identify key risk areas and key
performance indicators and monitor these factors with due
diligence.
vii. Constitute an Audit and Compliance Committee.
viii. Properly discharge Board functions by meeting regularly.
Independent views during Board meetings should be given due
consideration and all such meetings should be duly minuted.
ix. Keep Board authority within the powers of the institution
as prescribed in the articles of incorporation, by-laws and in
existing laws, rules and regulation. Conduct and maintain the
affairs of the institution within the scope of its authority as
prescribed in its charter and in existing laws, rules and
regulations.
c. Specific Duties and Responsibilities of a Director
i. To conduct fair business transactions with the
corporation and to ensure that personal interest does not
bias Board decisions. The basic principle to be observed is that
a director should not use his position to make profit or to acquire
benefit or advantage for himself and/or his related interests. He
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should avoid situations that may compromise his impartiality. If
an actual or potential conflict of interest should arise on the part
of directors or senior executives, it should be fully disclosed and
the concerned director should not participate in the decision
making. A director who has a continuing conflict of interest of a
material nature should consider resigning.
ii. To devote time and attention necessary to properly
discharge his duties and responsibilities. A director should
devote sufficient time to familiarize himself with the institution’s
business. He should be constantly aware of the institution’s
condition and be knowledgeable enough to contribute
meaningfully to the Board’s work. He should attend and actively
participate in Board and committee meetings, request and review
meeting materials, ask questions, and request explanations.
iii. To act judiciously. Before deciding on any matter
brought before the Board of directors, every director should
thoroughly evaluate the issues, ask questions and seek
clarifications when necessary.
iv. To exercise independent judgment. A director should
view each problem/situation objectively. When a disagreement
with others occurs, he should carefully evaluate the situation and
state his position. He should not be afraid to take a position even
though it might be unpopular. Corollarily, he should support plans
and ideas that he thinks are beneficial to the corporation.
v. To have a working knowledge of the statutory and
regulatory requirements affecting the corporation,
including the contents of its articles of incorporation and
by-laws, the requirements of the Commission, and where
applicable, the requirements of other regulatory agencies.
A director should also keep himself informed of industry
developments and business trends in order to safeguard the
corporation’s competitiveness.
vi. To observe confidentiality. A director should observe
the confidentiality of non-public information acquired by reason of
his position as director. He should not disclose any information to
any other person without the authority of the Board.
vii. To ensure the continuing soundness, effectiveness
and adequacy of the company’s control environment.
d. Internal Control Responsibilities of the Board
The control environment is composed of: (a) the Board which
ensures that the company is appropriately and effectively
managed and controlled, (b) a management that actively
manages and operates the company in a sound and prudent
manner, (c) the organizational and procedural controls supported
by an effective management information system and risk
management reporting system, and (d) the independent audit
mechanisms to monitor the adequacy and effectiveness of the
organization’s governance, operations, information systems, to
include reliability and integrity of financial and operational
information, effectiveness and efficiency of operations,
safeguarding of assets, and compliance with laws, rules,
regulations, and contracts.
i. The minimum internal control mechanisms for the Board’s
oversight responsibility may include:
• Defining the duties and responsibilities of the CEO;
• Selecting or approving an individual with appropriate ability,
integrity, experience to fill the CEO role;
• Reviewing proposed senior management appointments;
• Ensuring the selection, appointment and retention of qualified
and competent management;
• Reviewing the company’s personnel and human resource
policies and sufficiency, conflict of interest situations, changes
to the compensation plan for employees and officers and
management succession plan.
ii. The minimum internal control mechanisms for
management’s operational responsibility would center on the
CEO, being ultimately accountable for the company’s
organizational and procedural controls.
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iii. The scope and particulars of a system of effective
organizational and procedural controls may differ among
companies depending on factors such as: the nature and
complexity of business and the business culture; the volume, size
and complexity of transactions; the degree of risk; the degree of
centralization and delegation of authority; the extent and
effectiveness of information technology; and the extent of
regulatory compliance.
iv. Each company may have in place an independent audit
function, through which the company’s Board, senior
management, and stockholders may be provided with reasonable
assurance that its key organizational and procedural controls are
effective, appropriate, and complied with. The Board may appoint
a chief audit executive to carry out the audit function, and may
require the chief audit executive to report to a level within the
organization that allows the internal audit activity to fulfill its
responsibilities.
7. Board Meetings and Quorum Requirement
Members of the Board should attend regular and special meetings
of the Board in person. In view of modern technology, however,
attendance at Board meetings through teleconference may be
allowed.
An independent director should always be in attendance.
However, the absence of an independent director may not affect
the quorum requirements if he is duly notified of the meeting but
deliberately and without justifiable cause fails to attend the
meeting. Justifiable causes may only include grave illness or
death of immediate family and serious accidents.
To monitor compliance with the above requirement, corporations
may, at the end of every fiscal year, provide the Commission with
a sworn certification that the foregoing requirement has been
complied with. The said certification may be submitted with the
company’s current report (SEC Form 17-1) or on a separate filing.
8. Remuneration of the Members of the Board and Officers
Levels of remuneration shall be sufficient to attract and retain the
directors, if any, and officers needed to run the company
successfully. Corporations, however, should avoid paying more
than what is necessary for this purpose. A proportion of executive
directors’ remuneration may be structured so as to link rewards to
corporate and individual performance.
Corporations may establish a formal and transparent procedure
for developing a policy on executive remuneration and for fixing
the remuneration packages of individual directors, if any, and
officers. No director should be involved in deciding his or her own
remuneration.
The corporations’ annual reports, information and proxy
statements shall include a clear, concise and understandable
disclosure of all plan and non-plan compensation awarded to,
earned by, paid to, or estimated to be paid to, directly or indirectly
to all individuals serving as the CEO or acting in a similar capacity
during the last completed fiscal year, regardless of the
compensation level and the corporation’s four (4) most highly
compensated executive officers other than the CEO who were
serving as executive officers at the end of the last completed year.
To protect the funds of the corporation, the Commission may
regulate the payment by the corporation to directors and officers
of compensation, allowance, fees and fringe benefits in very
exceptional cases, e.g., when a corporation is under receivership
or rehabilitation.
9. Board Committees
The Board shall constitute Committees in aid of good corporate
governance.
A. The Audit Committee shall be composed of at least three (3)
Board members, preferably with accounting and finance
background, one of whom shall be an independent director and
another should have related audit experience. It shall have the
following specific functions:
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a. Provide oversight over the senior management’s activities in
managing credit, market, liquidity, operational, legal and
other risks of the corporation. This function shall include
receiving from senior management periodic information on
risk exposures and risk management activities. However, in
consideration of the risk profile of the corporation, the Board
may constitute a separate Risk Management Committee to
focus on carrying out this oversight role over risk
management;
b. Provide oversight of the corporation’s internal and external
auditors;
c. Review and approve audit scope and frequency, and the
annual internal audit plan;
d. Discuss with the external auditor before the audit commences
the nature and scope of the audit, and ensure coordination
where more than one audit firm is involved;
e. Responsible for the setting-up of an internal audit department
and consider the appointment of an internal auditor as well as
an independent external auditor, the audit fee and any
question of resignation or dismissal;
f. Monitor and evaluate the adequacy and effectiveness of the
corporation’s internal control system;
g. Receive and review reports of internal and external auditors
and regulatory agencies, where applicable and ensure that
management is taking appropriate corrective actions, in a
timely manner in addressing control and compliance functions
with regulatory agencies;
h. Review the quarterly, half-year and annual financial
statements before submission to the Board, focusing
particularly on:
• Any change/s in accounting policies and practices
• Major judgmental areas
• Significant adjustments resulting from the audit
• Going concern assumption
• Compliance with accounting standards
• Compliance with tax, legal, and stock exchange requirements
i. Responsible for coordinating, monitoring and facilitating
compliance with existing laws, rules and regulations. It may
also constitute a Compliance Unit for this purpose.
j. Evaluate and determine non-audit work by external auditor
and keep under review the non-audit fees paid to the external
auditor both in relation to their significance to the auditor and
in relation to the company’s total expenditure on consultancy.
The non-audit work should be disclosed in the annual report.
k. Establish and identify the reporting line of the chief audit
executive so that the reporting level allows the internal audit
activity to fulfill its responsibilities. The chief audit executive
shall report directly to the Audit Committee functionally. The
Audit Committee shall ensure that the internal auditors shall
have free and full access to all the company’s records,
properties and personnel relevant to the internal audit activity
and that the internal audit activity should be free from
interference in determining the scope of internal auditing
examinations, performing work, and communicating results,
and shall provide a venue for the Audit Committee to review
and approve the annual internal audit plan.
The Chairman of this committee should be an independent
director. He should be responsible for inculcating in the minds of
the Board members the importance of management
responsibilities in maintaining a sound system of internal control
and the Board’s oversight responsibility.
For Philippine branches or subsidiaries of foreign corporations
covered by this Code, the local audit head for such entities should
be independent of the Philippine operations and should report to
the regional or corporate headquarters.
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B. The Board may also constitute the following committees:
a. The Nomination Committee which may be composed of at
least three (3) members, one of whom should be an independent
director may review and evaluate the qualifications of all persons
nominated to the Board as well as those nominated to other
positions requiring appointment by the Board and provide
assessment on the Board’s effectiveness in directing the process
of renewing and replacing Board members.
b. The Compensation or Remuneration Committee may be
composed of at least three (3) members, one of whom should be
an independent director. It may establish a formal and transparent
procedure for developing a policy on executive remuneration and
for fixing the remuneration packages of corporate officers and
directors, and provide oversight over remuneration of senior
management and other key personnel ensuring that
compensation is consistent with the corporation’s culture,
strategy and control environment.
10. The Corporate Secretary
The Corporate Secretary, who must be a Filipino, is an officer of
the corporation. Perfection in performance and no surprises are
expected of him. Likewise, his loyalty to the mission, vision and
specific business objectives of the corporate entity come with his
duties.
Like the CEO, he should work and deal fairly and objectively with
all the constituencies of the corporation, namely, the Board,
management, stockholders and other stakeholders. As such, he
should be someone his colleagues and these constituencies can
turn to, trust and confide with on a regular basis.
He should have the administrative skills of the chief
administrative officer of the corporation and the interpersonal
skills of the chief human resources officer. If the Corporate
Secretary is not the general counsel, then he must have the legal
skills of a chief legal officer. He must also have the financial and
accounting skills of a chief financial officer, and, lastly the vision
and decisiveness of the CEO.
Since there are different individuals on top of various corporate
activities, the Corporate Secretary should be fully informed and be
part of the scheduling process of the different activities. As to
agendas, he should have the schedule thereof at least for the
current year and should put the Board on notice before every
meeting. It is a very important discipline to get the Board to think
ahead. He should serve as an adviser to director’s responsibilities
and obligations.
The Corporate Secretary should make sure that directors have
before them everything that they need to make an informed
decision. When the Board makes a decision, it is covered by a
business judgment that can be arrived at by the members acting
in good faith with the assistance of the Corporate Secretary who
should review carefully the information presented to the directors
at the time they are to make a decision.
III. Supply Information
In order to fulfill their responsibilities, Board members, should be
provided with complete, adequate and timely information prior to
Board meetings on an on-going basis.
Management should have an obligation to supply the Board with
complete, adequate information in a timely manner. Reliance
purely on what is volunteered by Management is unlikely to be
enough in all circumstances and further inquiries may be required
if the particular director is to fulfill his or her duties properly.
Hence, the Board may have separate and independent access to
the company’s senior management.
The information may include the background or explanatory
information relating to matters to be brought before the Board,
copies of disclosure documents, budgets, forecasts and monthly
internal financial statements. With respect to the budget, any
variance between the projections and actual results should also be
disclosed and explained.
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Directors should also have a separate and independent access to
the Corporate Secretary. The role of the Corporate Secretary
should be clearly defined and should include responsibility for
ensuring that Board procedures are being followed and that
applicable rules and regulations are complied with. The Corporate
Secretary should attend all Board meetings.
The Board should have a procedure for directors, either
individually or as a group, in the furtherance of their duties, to
take independent professional advice, if necessary, at the
corporation’s expense.
IV. Accountability and Audit
1. The Board is primarily accountable to the shareholders and
Management is primarily accountable to the Board. The Board
should provide the shareholders with a balanced and
understandable assessment of the corporation’s performance,
position and prospects on a quarterly basis. The Management
should provide all members of the Board with a balanced and
understandable account of the corporation’s performance,
position and prospects on a monthly basis. This responsibility
should extend to interim and other price sensitive public reports
and reports to regulators (if required). It should be primarily
responsible in making financial reporting and internal control in
accordance with the following guidelines:
a. Present a balanced and understandable assessment of the
company’s position and prospects. The Board’s responsibility to
present a balanced and understandable assessment should
extend to interim and other price-sensitive public reports and
reports to regulators as well as to information required to be
presented by statutory requirements;
b. Explain their responsibility for preparing the accounts, for
which there should be a statement by the auditors about their
reporting responsibilities;
c. Report that the business is a going concern, with
supporting assumptions or qualifications, if necessary;
d. Maintain a sound system of internal control to safeguard
stakeholders’ investment and the company’s assets;
e. Based on the approved audit plans, scope and frequency
of audits, ensure that internal audit examinations cover, at least,
the evaluation of adequacy and effectiveness of controls
encompassing the organization’s governance, operations,
information systems, to include reliability and integrity of financial
and operational information, effectiveness and efficiency of
operations, safeguarding of assets, and compliance with laws,
rules, regulations, and contracts.
f. Require the chief audit executive to render to the Audit
Committee and senior management an annual report on the
internal audit department’s activity, purpose, authority,
responsibility and performance relative to the audit plans and
strategies approved by the Audit Committee of the Board. Such
annual report should include significant risk exposures and control
issues, corporate governance issues, and other matters needed or
requested by the Board and senior management. The chief audit
executive’s annual report shall likewise be made available to the
stockholders of the company. Internal auditors shall report that
their activities are “conducted in accordance with the Standards
for the Professional Practice of Internal Auditing”. Otherwise, the
chief audit executive shall disclose to the Board and senior
management that it has not yet achieved full compliance with the
standards for the professional practice of internal auditing.
2. Selection/Appointment, Resignation, Dismissal or
Cessation of Service of an External Auditor
The Board, through the Audit Committee, shall recommend to the
stockholders a duly accredited external auditor who shall
undertake an independent audit and shall provide an objective
assurance on the way in which financial statements shall have
been prepared and presented. Such external auditor cannot at the
same time provide the services of an internal auditor to the same
client. Other non-audit work should not be in conflict with the
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functions of the external auditor.
The external auditor should be rotated every five (5) years or
earlier or the handling partner shall be changed.
The reason/s for the resignation, dismissal or cessation from
service and the date thereof of an external auditor shall be
reported in the company’s annual and current reports. Said report
shall include a discussion of any disagreement with said former
external auditor on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or
procedure, which if not resolved to the satisfaction of the former
auditor, would have cause making reference to the subject matter
of the disagreement in connection with its report.
If an external auditor believes that the statements made in an
annual report, information statement or proxy statement filed
during his engagement are incorrect or incomplete, he shall also
present his views in said reports.
V. Stockholders’ Rights and Protection of Minority
Stockholders’ Interests
The Board shall be committed to respect the following rights of
the stockholders:
1. Voting Right
Shareholders have the right to elect, remove and replace directors
and vote on certain corporate acts in accordance with the
Corporation Code.
The Code mandates the use of cumulative voting in the election of
directors. Although directors may be removed with or without
cause, the Code prohibits removal without cause if it will deny
minority shareholders representation in the Board. Removal of
directors requires an affirmative vote of two-thirds of the
outstanding capital.
2. Pre-emptive Right
All stockholders have pre-emptive rights, unless there is a specific
denial of this right in the articles of incorporation or an
amendment thereto. They shall have the right to subscribe to the
capital stock of the corporation. The Articles of Incorporation may
lay down the specific rights and powers of shareholders with
respect to the particular shares they hold, all of which are
protected by law so long as they are not in conflict with the
Corporation Code.
3. Power of Inspection
The Corporation Code mandates corporations to allow
shareholders to inspect corporate books and records including
minutes of Board meetings and stock registries in accordance with
the Corporation Code and to provide them an annual report,
including financial statements, without cost or restrictions.
4. Right to Information
The Shareholders shall be provided, upon request, with periodic
reports which disclose personal and professional information
about the directors and officers and certain other matters such as
their holdings of the company’s shares, dealings with the
company, relationships among directors and key officers, and the
aggregate compensation of directors and officers. The
Information Statement/Proxy Statement where these are found
must be distributed to the shareholders before annual general
meetings and in the Registration Statement and Prospectus in
case of registration of shares for public offering with the
Commission.
The minority shareholders should be granted the right to propose
the holding of a meeting, and the right to propose items in the
agenda of the meeting, provided the items are for legitimate
business purposes.
The minority shareholders should have access to any and all
information relating to matters for which the management is
accountable for and to those relating to matters for which the
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management should include such information and, if not included,
then the minority shareholders can propose to include such
matters in the agenda of stockholders’ meeting, being within the
definition of “legitimate purposes”.
5. Right to Dividends
Shareholders have the right to receive dividends subject to the
discretion of the Board. However, the Commission may direct the
corporation to declare dividends when its retained earnings is in
excess of 100% of its paid-in capital stock, except: a) when
justified by definite corporate expansion projects or programs
approved by the Board or b) when the corporation is prohibited
under any loan agreement with any financial institution or
creditor, whether local or foreign, from declaring dividends
without its consent, and such consent has not been secured; or c)
when it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation, such as
when there is a need for special reserve for probable
contingencies.
6. Appraisal Right
The Corporation Code allows the exercise of the shareholders’
appraisal rights under the following circumstances:
a. In case any amendment to the articles of incorporation has
the effect of changing or restricting the rights of any stockholders
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;
b. 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 Corporation
Code; and
c. In case of merger or consolidation.
It is the duty of the directors to promote shareholder rights,
remove impediments to the exercise of shareholders rights and
allow possibilities to seek redress for violation of their rights.
They shall encourage the exercise of shareholders’ voting rights
and the solution of collective action problems through appropriate
mechanisms. They shall be instrumental in removing excessive
costs and other administrative or practical impediments to
shareholders participating in meetings and/or voting in person.
The directors shall pave the way for the electronic filing and
distribution of shareholder information necessary to make
informed decisions subject to legal constraints.
VI. Evaluation Systems
The management may establish a performance evaluation system
to measure the performance of the Board and top-level
management of the corporation.
The establishment of such evaluation system, including the
features thereof, may be disclosed in the company’s annual report
(SEC Form 17-A).
VII. Disclosure and Transparency
A dominant theme in all issues related to corporate governance is
the vital importance of disclosure. The more transparent the
internal workings of the company and cash flows, the more
difficult it will be for management and controlling shareholders to
misappropriate company assets or mismanage the company.
The most basic and all encompassing disclosure requirement is
that all material information, i.e., any thing that could potentially
affect share price, should be publicly disclosed. Such information
would include earnings results, acquisition or disposal of assets,
board changes, related party transactions, shareholdings of
directors and changes to ownership. Other information that
should always be disclosed includes remuneration (including stock
options) of all directors and senior management corporate
strategy, and off balance sheet transactions. All disclosed
information should be released via the approved stock exchange
procedure for company announcements as well as through the
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annual report.
The Board shall therefore, commit at all times to full disclosure of
material information dealings. It shall cause the filing of all
required information for the interest of the stakeholders.
VIII. Commitment to Corporate Governance
Corporations shall promulgate and adopt its corporate governance
rules and principles in accordance with this Code. Said rules shall
be in manual form and available as reference by the directors. It
shall be submitted to the Commission, which shall evaluate the
same and their compliance with this Code taking into account the
size and nature of business. The said manual shall be available for
inspection by any stockholder of the corporation at reasonable
hours on business days. The Chairman of the Board shall be
specifically tasked with the responsibility of ensuring adherence to
the corporate governance code and practices.
Unless mandated by law, other corporations are likewise
encouraged to observe this Circular in the absence of any
mandated corporate governance rules adopted by other agencies.
IX. Administrative Sanction
Failure to adopt a manual of corporate governance as specified
therein shall subject a corporation, after due notice and hearing,
to a penalty of P100,000.00.
X. Transitory Provision
All corporations affected by this Code shall submit their manual by
July 1, 2002 to be effective January 1, 2003. A model manual will
be drafted by the Commission and will be available by May 15,
2002 in the SEC web page.
CORPORATE OFFICERS
✾ The general principles of agency govern the relation
between the corporation and its officers and agents,
subject to the articles of incorporation, by-laws, or relevant
provisions of law—when authorized, their acts bind the
corporation, otherwise, their acts cannot bind it
Who Are Corporate Officers?
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)
✾ There are two levels of discussion with respect to corporate
officers
✾ The first level of discussion relates to the power of the
Board of Directors to hire and terminate officers in the
exercise of business judgment
✾ The test of officers in the first level is based on an arbitrary
formula and doesn't necessarily go into the nature or
importance of the position held, and that the nature of the
office is not essential in determining the type of officership
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✾ The second level deals on the distinction of corporate
officers from non-officers to determine who are bound by
the duties of loyalty and diligence
✾ Both officers and directors are jointly and severally lisble
for assenting to patently unlawful acts or who are guilty of
bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with
their duty as such directors and officers
✾ Thus, non-officers are not lodged with the duties of
diligence and loyalty
Gurrea v. Lezema
103 PHIL 553
✾ By board resolution, Gurrea was removed from his position
as manager of the corporation
✾ We can only regard as officers of a corporation those who
are given that character either by the Corporation Law or
by its by-laws. The rest can be considered merely as
employees or subordinate officials. And considering that
plaintiff has been appointed manager by the board of
directors and as such does not have the character of an
officer, the conclusion is inescapable that he can be
suspended or removed by said board of directors under
such terms as it may see fit and not as provided for in the
by-laws. Evidently, the power to appoint carries with it the
power to remove, and it would be incongruous to hold that
having been appointed by the board of directors he could
only be removed by the stockholders.
Mita Pardo de Tuvera v. Tuberculosis Society
112 SCRA 423
✾ Tuvera was a doctor who specializes in the treatment of
tuberculosis. She was a member of the board of directors
and was later appointed as acting executive secretary. By
board resolution, she was removed from the same and this
prompted her to file an action against the board and its
officers for her allegedly unlawful removal.
✾ The absence of a fixed term in the letter addressed to
petitioner informing her of her appointment as Executive
Secretary is very significant. This could have no other
implication than that petitioner held an appointment at the
pleasure of the appointing power.
✾ An appointment held at the pleasure of the appointing
power is in essence temporary in nature. It is co-extensive
with the desire of the Board of Directors. Hence, when the
Board opts to replace the incumbent, technically there is
no removal but only an expiration of term and in an
expiration of term, there is no need of prior notice, due
hearing or sufficient grounds before the incumbent can be
separated from office.
De Rossi v. NLRC
314 SCRA 245
✾ De Rossi was an executive secretary of the MICC. For
alleged unlawful acts committed by the plaintiff, he was
dismissed from his office. He then filed an action for illegal
dismissal against the corporation and its board directors.
✾ Note that a corporate officer's removal from his office is a
corporate act. If such removal occasions an intra-corporate
controversy, its nature is not altered by the reason or
wisdom, or lack thereof, with which the Board of Directors
might have in taking such action. 11 When petitioner, as
Executive Vice-President allegedly diverted company funds
for his personal use resulting in heavy financial losses to
the company, this matter would amount to fraud. Such
fraud would be detrimental to the interest not only of the
corporation but also of its members. 12 This type of fraud
encompasses controversies in a relationship within the
corporation covered by SEC jurisdiction. 13 Perforce, the
matter would come within the area of corporate affairs and
management, and such a corporate controversy would call
for the adjudicative expertise of the SEC, not the Labor
Arbiter or the NLRC.
Nacpil v. International Broadcasting Corporation
379 SCRA 653
✾ Petitioner was the Assistant General Manager for
Finance/Administration and Comptroller of respondent
corporation. With the change in the corporation’s
presidency, he was dismissed from his office. He then was
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prompted to file a case for illegal dismissal against the
corporation.
✾ The Court has held that in most cases the "by-laws may
and usually do provide for such other officers,"14 and that
where a corporate office is not specifically indicated in the
roster of corporate offices in the by-laws of a corporation,
the board of directors may also be empowered under the
by-laws to create additional officers as may be necessary.
✾ An "office" has been defined as a creation of the charter of
a corporation, while an "officer" as a person elected by the
directors or stockholders. On the other hand, an
"employee" occupies no office and is generally employed
not by action of the directors and stockholders but by the
managing officer of the corporation who also determines
the compensation to be paid to such employee.
✾ As petitioner's appointment as comptroller required the
approval and formal action of the IBC's Board of Directors
to become valid, it is clear therefore holds that petitioner is
a corporate officer whose dismissal may be the subject of a
controversy cognizable by the SEC under Section 5(c) of
P.D. 902-A which includes controversies involving both
election and appointment of corporate directors, trustees,
officers, and managers.18 Had petitioner been an ordinary
employee, such board action would not have been
required.//
Theory on Power of Board to Appoint or Terminate
Corporate Officers
✾ Officers of the corporation are within the business
judgment of the Board of Directors to terminate in the
absence of a specific period of employments provided in
their contracts or in the by-laws
✾ A corporate officer’s dismissal is always a corporate act or
an intra-corporate controversy, and the nature isn’t
affected by the reason or wisdom with which the board of
directors may have in taking such action
What Are The Two Converging Disciplines With Respect To
Corporate Officers?
✾ In strict corporate sense, the terms of corporate officers
are coterminous with that of the board of directors
✾ It can be even said that they serve at the pleasure of the
Board
✾ Fundamental doctrine in Corporate Law because the ability
to hire and terminate officers lies at the very heart of the
operations of the corporation—part of the business
judgment of the Board
✾ On the other end of the spectrum is Labor Law wherein
corporate officers are looked at as employees and the
corporation is the employer
✾ It is important to determine existence of officership to
determine which has jurisdiction over matter in case of
removal or dismissal—whether it is the RTC or the NLRC
Powers of Corporate Officers
✾ While the Court agrees that those who belong to the upper
corporate echelons would have some privileges, it cannot
be presumed the existence of such privileges or benefits—
he who claims the same is burdened to prove not only the
existence of such benefits but also that he is entitled to the
same
✾ Even though a judgment, decree or order is addressed to
the corporation only, the officers as well as the corporation
itself, may be punished for contempt for disobedience to its
terms, at least if they knowingly disobey the court’s
mandate, since a lawful judicial command to a corporation
is in effect a command to the officers
Rule on Corporate Officer’s Power to Bind the Corporation
✾ An officer’s power as an agent of the corporation must be
sought from statute, charter, the by-laws or in a delegation
of authority to such officer, from the acts of the board of
directors formally expressed or implied from a habit or
custom of doing business
✾ As a general rule, the acts of corporate officers within the
scope of their authority are binding on the corporation, but
when the officers exceeded their authority, their actions
cannot bind the corporation, unless it has ratified such acts
or is estopped from disclaiming them
✾ The general principles of agency govern the relation
between the corporation and the officers or agents, subject
to the articles of incorporation, by-laws, or by statute
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President
✾ Inasmuch as a corporate president is often given general
supervision and control over corporate operations, the
strict rule that said officer has no inherent power to act for
the corporation is slowly giving way to the realization that
such officer has certain limited powers in the transaction of
the usual and ordinary business of the corporation. 31 In
the absence of a charter or bylaw provision to the contrary,
the president is presumed to have the authority to act
within the domain of the general objectives of its business
and within the scope of his or her usual duties.
✾ Hence, it has been held in other jurisdictions that the
president of a corporation possesses the power to enter
into a contract for the corporation, when the "conduct on
the part of both the president and the corporation [shows]
that he had been in the habit of acting in similar matters
on behalf of the company and that the company had
authorized him so to act and had recognized, approved and
ratified his former and similar actions." 33 Furthermore, a
party dealing with the president of a corporation is entitled
to assume that he has the authority to enter, on behalf of
the corporation, into contracts that are within the scope of
the powers of said corporation and that do not violate any
statute or rule on public policy.
People’s Aircargo Warehousing v. Court of Appeals
297 SCRA 170 (1998)
✾ Facts: President transacted with private respondent for an
operations manual that would help the corporation in
securing license from Bureau of Customs to operate their
customs warehouse. He did this without board approval.
Nonetheless, there wasn't any repudiation from the
corporation. He then resigned as president and the
corporation subsequently failed to pay private respondent.
✾ Held: In the case at bar, petitioner, through its president
Antonio Punsalan Jr., entered into the First Contract without
first securing board approval. Despite such lack of board
approval, petitioner did not object to or repudiate said
contract, thus "clothing" its president with the power to
bind the corporation. Hence, private respondent should not
be faulted for believing that Punsalan's conformity to the
contract in dispute was also binding on petitioner. It is
familiar doctrine that if a corporation knowingly permits
one of its officers, or any other agent, to act within the
scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts; and thus,
the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from
denying the agent's authority.
✾ Note that it is the board of directors and not the president
that exercise corporate powers. It must be emphasized
that the basis for agency is representation and a person
dealing with an agent is put upon inquiry and must
discover upon his peril the authority of the agent
✾ A corporation may not distance itself from the acts of a
senior officer
Corporate Secretary
✾ Unless otherwise provided, the corporate secretary is
deemed to be the custodian of corporate records—he
keeps the stock and transfer book and makes proper and
necessary entries therein
✾ It is his duty and obligation to register valid transfers of
stock in the books of the corporation and in the event he
refuses to comply with such duty, the transferor-
stockholder may rightfully bring an action to compel
performance
✾ When a secretary’s certificate is regular on its face, it can
be relied upon by a third party who doesn't have to
investigate the truth of the facts contained in such
certification, otherwise, business transactions of
corporations would become tortuously slow and
unnecessarily hampered
Corporate Treasurer
✾ Generally described to have the function to receive and
keep funds of the corporation and to disburse them in
accordance with the authority given him by the board or
the properly authorized officers
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✾ Unless duly authorized, a treasurer whose power is limited,
cannot bind the corporation in the sale of its assets—
selling is completely foreign to a corporate treasurer’s
functions
Service of Summons on Corporations
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 on the president, managing
partner, general manager, corporate secretary, treasurer, or in-
house counsel. (13a)
LIABILITIES OF CORPORATE OFFICERS
Section 31. Liability of directors, trustees or officers. - Directors
or trustees who wilfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and
other persons.
When a director, trustee or officer attempts to acquire or
acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon
him to deal in his own behalf, he shall be liable as a trustee for
the corporation and must account for the profits which otherwise
would have accrued to the corporation. (n)
Vasquez v. Borja
74 PHIL 560
✾ Borja filed individual claims against Vasquez and others for
failing to deliver the cavans of palay he ordered from the
latter. According to him, he entered into an agreement to
buy from Vasquez and others cavans of palay but the latter
failed to comply. Vasquez answered the claim and averred
that the contract wasn't entered into his personal capacity
but instead, it was entered into on behalf of the
corporation Natividad-Vasquez Sabani Development
Corporation. The trial court decided in favor of the plaintiff.
✾ The action in this case is a contract and it was conclusively
found that the contract was entered into by Vasquez not in
his personal capacity but as the manager of the
corporation.
✾ The legal fiction can only be disregarded when there is an
attempt is made to use it as a cloak to hide an unlawful or
fraudulent purpose. No such thing has been alleged or
proven in this case. It has not been alleged nor even
intimated that Vasquez personally benefited by the
contract of sale in question and he merely invoked the
legal fiction as an excuse to avoid personal liability.
✾ General rule is that if an officer acts within his authority,
then he wouldn't be held liable personally. But if the act
wasn't authorized or otherwise, the tortuous act was
authorized by the corporation, then the officer may be held
liable.
Palay v. Clave
124 SCRA 638 (1993)
✾ Corporation through its president entered into a contract to
sell a parcel of land to Dumpit. The latter was able to pay
some of the installments but stopped paying after a
relevant date. After six years, he sought to update his
accounts with the corporation but he was informed that his
contract has long been rescinded.
✾ Petitioner Olscott was made liable since he was the
president of the corporation but there is no sufficient proof
that petitioner used the corporation to defraud Dumpit. He
cannot therefore be made personally liable just because he
appears to be the controlling stockholder. Mere ownership
by a single stockholder or by another stockholder of all or
nearly all of the capital stock of a corporation isn’t in itself
sufficient ground for disregarding the separate corporate
personality
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Aratea v. Suico
538 SCRA 501 (2007)
✾ Aratea and Canonigo are the controlling stockholders of
SAMDECO. Suico entered into a memorandum of
agreement with SAMDECO. It was the two who signed the
agreement on behalf of the corporation. It was agreed
upon that Suico would supply loans and cash advances to
the corporation in exchange to the right to market 50% of
the total coal extraxcted by the corporation. The
agreement ran smoothly until in contravention of its
provisions, the two sold the mining rights and operations of
the corporation to another and sold their shares to the
corporation’s president. This was made without the
consent and knowledge of Suico. This prompted Suico to
file for collection of money and damages against the two
stockholders, SAMDECO, and SPMI. The trial and appellate
courts rendered judgment in favor of Suico.
✾ The general rule is that obligations incurred by the
corporation, acting through its directors, officers and
employees are its sole liabilities. There are times however,
when solidary liabilities may be incurred but only when
exceptional circumstances warrant such as when they act
in bad faith or with gross negligence in directing its
corporate affairs.
✾ Petitioners may be held personally liable even though the
corporation has a separate and distinct personality from
them. They may be held liable personally for the loans and
advances made by Suico to SAMDECO which they
represent on account of their bad faith in carrying out the
business of the corporation. There was bad faith when
they prevented Suico from selling the coal they extracted,
which was in violation of the agreement.
Singian v. Sandiganbayan
478 SCRA 348 (2005)
✾ Salvador was on detail with the Presidential Good
Government Consultant on detail with the Presidential Ad
Hoc Committee on Behest Loans. Among the accounts
acted upon by the committee was that of the loan granted
to ISI by PNB. The committee found that the loans granted
to ISI were of the character of behest loans for not being
secured with sufficient collaterals and obtained with undue
haste. This prompted Salvador to file a complaint against
the bank and its officers.
✾ It is true that the board of directors has the powers to
increase collateralization and to offer or give collateral to
secure indebtedness are lodged with the corporation’s
board of directors. However, this doesn't mean that the
officers of the corporation other than the board of directors
cannot be made criminally liable for their criminal acts if it
can be proven that they participated therein. In the instant
case, there is evidence that petitioner participated in the
loan transactions when he signed the undertaking.
General Rule
✾ As laid down in Palay v. Clave: unless sufficient proof exists
on record, that an officer has used the corporation to
defraud private respondent he cannot be made liable
personally just because he appears to be the controlling
stockholder
✾ Mere ownership by a single stockholder or by another
corporation of all or nearly all the capital stock of the
corporation isn’t of itself sufficient ground for disregarding
the separate corporate personality
Rundown on Officer’s Liabilities
1. He assents to a patently unlawful act of the corporation, or
for bad faith or gross negligence in directing its affairs, or
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, doesn't 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
5. An officer may also be solidarily liable with the corporation
for simulated or fraudulent contracts entered into in behalf
of the corporation
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Tramat Mercantile Inc. v. CA
238 SCRA 14 (1994)
✾ De La Cuesta sold to Ong, president of Tramat a tractor.
This was in turn sold to
Special Provisions in Labor Law
✾ In the field of labor, the liability of corporate officers seem
to have taken two different strains
✾ It is mentioned that since a corporate employer is an
artificial person, it must have an officer who can be
presumed to be the employer, being the officer acting in
the interest of the employer
✾ There is another strain which holds only the officer
personally liable when it is clearly shown he had
participated in the fraudulent or unlawful acts
AC Ransom Labor Union-CCLU v. NLRC
142 SCRA 269 (1986)
Limiting the AC Ransom Ruling to Insolvent Corporations
✾ AC Ransom isn’t in point because there the corporation
actually ceased operations after the decision of the court
was promulgated against it, making it necessary to enforce
it against the former president. When the corporation is
still existing and able to satisfy the judgment in favor of the
private respondent, the corporate officers cannot be held
personally liable.
✾ AC Ransom will apply only where the persons who are
made personally liable for the employee’s claims are
stockholders-officers of the employer-corporation.
STOCKHOLDERS AND MEMBERS
SHAREHOLDERS NOT CORPORATE CREDITORS
✾ Shares of stock constitute personal property of the
stockholder
✾ They don't represent proprietary rights to the assets or
properties of the corporation
✾ If a stockholder’s interest exists at all, it is indirect,
contingent, remote, conjectural, consequential and
collateral. At the very least, there interest is purely
inchoate, or in sheer expectancy of a right in the
management of the corporation and to share in the profits
thereof and in the properties and assets thereof on
dissolution after payment of the corporate debts and
obligations
Garcia v. Lim Chu Sing
59 Phil 562 (1934)
✾ Defendant is a shareholder of the plaintiff bank and is also
the surety of Lim Cuan Sy for a promissory note executed
in favor of the bank. The bank, unknown to the debtor,
foreclosed the chattel mortgage securing the promissory
note and held the defendant liable for the promissory note.
The defendant was able to make partial payments but still
was not enough.
✾ The issue in this case is whether there can be
compensation between a shareholder’s debt with the value
of his share in the corporation?
✾ A share of stock is not an indebtedness to the owner nor
evidence of indebtedness and therefore, is not credit.
Stockholders are not creditors of the corporation. The
capital stock of the corporation is a trust fund to be used
particularly for the security of creditors of the corporation
who presumably deal with it on credit of its capital stock.
SUBSCRIPTION CONTRACT
Section 60. Subscription contract. - Any contract for the
acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription
within the meaning of this Title, notwithstanding the fact that the
parties refer to it as a purchase or some other contract. (n)
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)
✾ The subscription agreement underpins the relationship
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between the stockholder and the corporation
✾ It is a special contract in contract law and although it is
governed by the law on contracts, the subscription
agreement has characteristics that go beyond the
discipline and delve into the very core of Corporate Law
When Are Shares Deemed Subscribed
✾ A subscription contract exists upon the meeting of the
minds of the corporation and the subscriber as to the
number and subscription value of the shares
✾ And since a subscription agreement shall exist upon
meeting of the minds of the parties, it would necessarily
mean that the covered shares have therefore been issued
by the corporation at that point in time, since subscription
and issuance as to a particular share of stock happen
exactly at the same point of time, being merely opposite
sides of the same coin
✾ It could be drawn from the pertinent provisions that upon
entering the contract would constitute itself the tradition
by which the subscriber becomes a subscriber to the
corporation and through which he becomes the owner of
the shares of stock subscribed and exercise acts of
ownership, subject to the limiting provisions of Corporation
Code
Are Subscription Agreements Covered By The Statute of
Frauds?
This is a question that CLV wishes to delve on…
✾ It is his opinion that NO, they are not covered
✾ The special treatment accorded to subscription contracts
requires that subscription contracts, even when they have
been entered into orally, should be allowed to be proved
and enforced by oral evidence, in order to fully protect
corporate creditors under the trust fund doctrine
✾ Even if subscription agreements are covered by the Statute
of Frauds, but by their nature which upon the consent
would make the subscriber a stockholder and owner of the
covered shares, which would constitute partial execution,
they are deemed to be exempted from the prohibition
against the presenting of oral evidence to prove and
enforce them
Characteristics of Subscription Agreements
1. The original issuance from the authorized capital stock at
the time of incorporation
2. The opening, during the life of the corporation, of the
portion of the original authorized capital stock previously
unissued
3. The increase of authorized capital stock achieved through
a formal amendment of the articles of incorporation and
registration thereof with the SEC
Purchase Agreement
Bayla v. Silang Traffic
73 Phil 557
✾ Petitioners filed a claim against the corporation to recover
certain sums of money, which they had paid severally to
the corporation pursuant to an installment sale of shares of
stock. Under the said contract, the subscriber agreed that
if he fails to pay any of said installment when due, or to
perform any of the aforesaid conditions, or if said shares
shall be attached or levied upon by creditors of the said
subscriber, then the said shares are to revert to the seller
and the payments already made are to be forfeited in favor
of said seller, and the latter may then take possession,
without resorting to court proceedings. The trial court
absolved the defendant from the complaint and declared
canceled (forfeited) in favor of the defendant the shares of
stock in question. It held that the resolutionwas null and
void, since "a corporation has no legal capacity to release
an original subscriber to its capital stock from the
obligation to pay for shares; and any agreement to this
effect is invalid".
✾ HELD:
o Whether a particular contract is a subscription or a
sale of stock is a matter of construction and
depends upon its terms and the intention of the
parties. It seems clear from the terms of the
contracts in question that they are contracts of sale
and not of subscription. The lower courts erred in
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overlooking the distinction between subscription
and purchase "A subscription, properly speaking, is
the mutual agreement of the subscribers to take
and pay for the stock of a corporation, while a
purchase is an independent agreement between
the individual and the corporation to buy shares of
stock from it at stipulated price." (18 C. J. S., 760.)
In some particulars the rules governing
subscriptions and sales of shares are different. For
instance, the provisions of our Corporation Law
regarding calls for unpaid subscription and
assessment of stock (sections 37-50) do not apply
to a purchase of stock. Likewise the rule that
corporation has no legal capacity to release an
original subscriber to its capital stock from the
obligation to pay for his shares, is inapplicable to a
contract of purchase of shares.
Subscription contract Purchase agreement
A subscriber becomes a Promise to issue the shares and
stockholder even if he hasn't the promise to pay the price are
fully paid for his subscription considered dependent and
concurrent duties and payment
is a condition to a right to a
certificate for shares
The unpaid subscription is a The purchaser is not a debtor
debt to the corporation and according to some, the
measure of liability if he defaults
is the damages for the
difference between the contract
price and market value of the
shares
Insolvency of the corporation Bankruptcy and insolvency
makes the undue subscription automatically terminates the
immediately demandable and claim against the purchaser
due because it means that the
corporation cannot actually do
its part of the obligation
Provisions regarding calls for
unpaid subscription and
assessment of stock is not
applicable
Corporation has legal capacity to
release a purchaser to its capital
stock from the obligation to pay
for his shares
o The provision regarding interest on deferred
payments would not have been inserted if it had
been the intention of the parties to provide for
automatic forfeiture and cancelation of the
contract. Moreover, the contract did not expressly
provide that the failure of the purchaser to pay any
installment would give rise to forfeiture and
cancelation without the necessity of any demand
from the seller; and under article 1100 of the Civil
Code persons obliged to deliver or do something
are not in default until the moment the creditor
demands of them judicially or extrajudicially the
fulfillment of their obligation, unless (1) the
obligation or the law expressly provides that
demand shall not be necessary in order that
default may arise, (2) by reason of the nature and
circumstances of the obligation it shall appear that
the designation of the time at which that thing was
to be delivered or the service rendered was the
principal inducement to the creation of the
obligation.
o On the question of validity of the resolution
rescinding the agreements, the contract in
question being one of purchase and not
subscription, there is no legal impediment to its
rescission by agreement of the parties. According
to the resolution of August 1, 1937, the rescission
was made for the good of the corporation and in
order to terminate the then pending civil case
involving the validity of the sale of the shares in
question among others. To that rescission the
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herein petitioners apparently agreed, as shown by
their demand for the refund of the amounts they
had paid as provided in said resolution. It appears
from the record that said civil case was
subsequently dismissed, and that the purchasers of
shares of stock, other than the herein petitioners,
who were mentioned in said resolution were able to
benefit by said resolution. It would be an unjust
discrimination to deny the same benefit to the
herein petitioners. Further, there is no intimation
in this case that the corporation was insolvent, or
that the right of any creditor of the same was in
any way prejudiced by the rescission.
Pre-Incorporation Subscription
Section 61. Pre-incorporation subscription. - A subscription for
shares of stock of a corporation still to be formed shall be
irrevocable for a period of at least six (6) months from the date
of subscription, unless all of the other subscribers consent to the
revocation, or unless the incorporation of said corporation fails to
materialize within said period or within a longer period as may
be stipulated in the contract of subscription: Provided, That no
pre-incorporation subscription may be revoked after the
submission of the articles of incorporation to the Securities and
Exchange Commission. (n)
✾ The abovequoted provision combined the best features of
the offer and contract theory—it recognized that the
subscription agreements is a contract between the
subscriber and the corporation and although the
corporation is still non-existent since it is still in the process
of incorporation, it is still bound under the pre-
incorporation agreement.
✾ The provision also recognizes the contractual relationship
amongst the subscribers.
Ong Yong v. Tiu
375 SCRA 614 (2002)
✾ When properties were assigned pursuant to a pre-
incorporation subscription agreement, but the corporation
fails to issue the covered shares, the return of such
properties to the subscriber is a direct consequence of
rescission, and doesn't amount to a corporate distribution
of assets prior to dissolution
Release from Subscription Obligation
✾ A corporation can release a subscriber from liability, in part
or whole, only with the express or implied consent of all the
shareholders and when there is no prejudice to the
corporate creditors
Tan v. Sycip
499 SCRA 216 (2006)
✾ In stock corporations, shareholders may generally transfer
their shares. Thus, on the death of a shareholder, the
executor or administrator duly appointed by the Court is
vested with the legal title to the stock and entitled to vote
it. Until a settlement and division of the estate is effected,
the stocks of the decedent are held by the administrator or
executor. On the other hand, membership in and all rights
arising from a nonstock corporation are personal and non-
transferable, unless the articles of incorporation or the
bylaws of the corporation provide otherwise. In other
words, the determination of whether or not “dead
members” are entitled to exercise their voting rights
(through their executor or administrator) depends on those
articles of incorporation or bylaws.
When Condition Of Payment Provided In By-Laws
CONSIDERATION
Section 62. Consideration for stocks. - Stocks shall not be issued
for a consideration less than the par or issued price thereof.
Consideration for the issuance of stock may be any or a
combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
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corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of
the stock issued;
3. Labor performed for or services actually rendered to the
corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to
stated capital; and
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.
Where the consideration is other than actual cash, or consists of
intangible property such as patents of copyrights, the valuation
thereof shall initially be determined by the incorporators or the
board of directors, subject to approval by the Securities and
Exchange Commission.
Shares of stock shall not be issued in exchange for promissory
notes or future service.
The same considerations provided for in this section, insofar as
they may be applicable, may be used for the issuance of bonds
by the corporation.
The issued price of no-par value shares may be fixed in the
articles of incorporation or by the board of directors pursuant to
authority conferred upon it by the articles of incorporation or the
by-laws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding capital stock
at a meeting duly called for the purpose. (5 and 16)
Cash and Promissory Notes For Consideration
✾ Despite wordings of the provision, it is not required that the
actual payment of the cash consideration is required to
make the subscription agreement valid and binding
✾ But CLV asks, why is it in the books of a corporation, there
is an account name called subscription receivables when
promissory notes are clearly prohibited as consideration?
o The prohibition may be based on two factors. First,
on the underlying difference in legal consequences
between notes receivable, accounts receivable and
subscription receivable. Second, the philosophical
basis behind the trust fund doctrine.
o If notes receivable shall be accepted by the
corporation, its face value shall be added to the
assets of the corporation without affecting the
paid-up capital, which could mislead the creditors
upon examination of the books because they would
think that all the paid-up capital stock is fully paid
for
o Subscription receivables are correctly not assets of
the corporation, and are reflected properly in the
balance sheet as a deduction from stockholder’s
equity and the difference shows only a net amount
of the stockholder’s equity which is backed up by
assets actually received by the corporation which
have values that don't depend on the credit
standing of another person
Property Consideration
✾ The property by which the corporation may accept as
exchange for its stock must be of the kind which the
corporation may lawfully acquire and hold in carrying out
the purposes of the corporation, and which is necessary or
proper for it to own in carrying on its business
✾ Financial instruments and receivables can be proper
considerations but are subject to the following—
o Actually received by the corporation
o Necessary and convenient for the corporation’s use
and purposes
o At a fair valuation equal to the par value of the
stock issued to be approved by the SEC
Debts and Service
✾ Although a previously incurred debt is valid consideration
for subscription, future services is not because the value of
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the service to the corporation would depend on the future
performance of the subscriber of the service offered, and
there would be a tendency to short-change the corporation
Retained Earnings
✾ Amounts transferred from unrestricted retained earnings to
stated capital, and outstanding shares exchanged for
stocks in the event of reclassification or conversion are
merely booking entries
✾ The amounts transferred from unrestricted earnings to
stated capital covers the declaration of stock dividends
which has the effect of capitalizing unrestricted retained
earnings
✾ Stock dividends are in the nature of shares of stock where
the consideration is the amount of unrestricted retained
earnings converted into equity in the corporation’s books
Consequences of Unlawful Consideration
✾ It would be against the trust fund doctrine to declare the
agreements void
✾ This being the case, then the subscription agreements
would be considered valid and binding upon the
corporation and subscribers and the consideration void as
to the effect that it will be considered made in cash
WATERED STOCK
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)
✾ Watered stock—shares issued as fully paid when in truth
the consideration received is known to be less than the par
value of the stock
✾ It is prohibited due the damage it may cause—
o The corporation for being deprived of the needed
capital
o Existing and future stockholders, by the dilution of
the proportionate interests in the corporation and
who pay the full value of the shares
o Present and future creditors who are injured as the
corporation is deprived of the assets or capital
required to be contributed
o Persons who deal with the company and purchase
its securities
Three Underlying Doctrines As Basis For Holding Officers
and Directors Liable
1. Subscription contract theory—the subscription contract is
the source and measure of the duty of a subscriber to pay
for his shares; if the contract releases him from further
liability, the subscriber ceases to be liable (this is
unacceptable under our jurisdiction because of Sections 61
and 65)
2. Fraud theory—the wrong done to the creditor is fraud in
falsely representing that the par value has been paid or
agreed to be paid in full
3. Trust fund doctrine—this is the doctrine prevalent in
Philippine jurisdiction
PAYMENT OF BALANCE OF SUBSCRIPTION
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)
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
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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 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 payable and shall make
the stockholder liable for interest at the legal rate on such
balance, unless a different rate of interest is provided in the by-
laws, computed from such date until full payment. If within thirty
(30) days from the said date no payment is made, all stocks
covered by said subscription shall thereupon become delinquent
and shall be subject to sale as hereinafter provided, unless the
board of directors orders otherwise. (38)
✾ A stockholder who is employed with the company cannot
set off his unpaid subscription with his actual claims for
wages, where there has been no call for the payment of
such subscription
DELIQUENCY ON SUBSCRIPTION
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.
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)
Section 69. When sale may be questioned. - No action to recover
delinquent stock sold can be sustained upon the ground of
irregularity or defect in the notice of sale, or in the sale itself of
the delinquent stock, unless 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
sale at the legal rate; and no such action shall be maintained
unless it is commenced by the filing of a complaint within six (6)
months from the date of sale. (47a)
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)
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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)
✾ 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 the name of
such purchaser in the books of such corporation and a
certificate for such stock shall be issued in his favor
✾ The remaining shares 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, the corporation may bid for the
stocks and the total amount due shall be credited in the
books of the corporation. Title shall be vested as treasury
share
Questioning the Delinquency Sale
✾ No action to recover the delinquent stock shall be
sustained on the ground of irregularity or defect in the
notice of sale, or in the sale itself of the delinquent stock
unless the party holding the stock the sum for which the
same was sold, with interest from the date of sale at the
legal rate, and no such action shall be sustained unless it is
commanded by the filing of a complaint within 6 months
from the date of sale
CERTIFICATE OF STOCK
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
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)
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)
Nature of Certificate
Tan v. SEC
206 SCRA 740 (1992)
✾ Involves issues between intra-corporate members, namely
the corporation and the stockholder
✾ A certificate of stock is not necessary to render one as a
stockholder in a corporation
✾ The certificate of stock is the paper representative or
tangible evidence of the stock itself and of the various
interests therein
De Los Santos v. Republic
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96 Phil 577 (1955)
✾ A certificate of stock is not a negotiable instrument but has
a character of a quasi-negotiable in the sense that it may
be transferred by endorsement, coupled with delivery, but
it is not negotiable because the holder thereof takes it
without prejudice to such rights or defenses as the
registered owners or transferor’s creidtor may have under
the law, except insofar as such rights and defenses are
subject to the limitations imposed by the principles
governing estoppel
Ponce v. Alsons Cement Corporation
393 SCRA 602 (2002)
Quasi-Negotiable Character of Certificate of Stock
Bachrach Motor Co. v. Lacson Ledesma
64 Phil 681 (1937)
Razon v. IAC
207 SCRA 234 (1992)
Bitong v. CA
292 SCRA 503 (1998)
✾ The endorsement of a certificate of stock by the owner, his
attorney-in-fact or any other legally authorized person to
make the transfer shall be sufficient to effect the transfer
of shares only if the same is coupled with delivery, and that
the delivery of the stock certificate duly endorsed by the
owner is the operative act of the transfer of the shares
✾ The following are the requirements—
o There must be delivery of the stock certificate
o The certificate must be endorsed by the owner or
his attorney in fact or other persons legally
authorized to make the transfer
o To be valid against third persons, the transfer must
be recorded in the books of the corporation
Rural Bank of Lipa City v. CA
366 SCRA 168 (2001)
Right to Issuance
✾ Purpose of the above prohibition is to prevent the partial
disposition of the subscription which is not fully paid,
because if it is permitted, and the subscriber subsequently
becomes delinquent in the payment of his subscription, the
corporation may not be able to sell as many of his
subscribed shares as would be necessary to cover the total
amount due from him
✾ In absence of provisions in the by-laws to the contrary, a
corporation may apply payments made by subscribers on
account of their subscriptions either as:
o Full payment for the corresponding number of
shares, the par value of which is covered by such
payment
o Payment pro-rata to each and all the entire number
of shares subscribed for
Issuance of Certificate of Stock
✾ A formal certificate of stock cannot be considered issued in
contemplation of law unless signed by the president or
vice-president and countersigned by the secretary or
assistant secretary
✾ Remedies available to a stockholder if a corporation
wrongfully refuses to issue a certificate of stock—
o To file a suit for specific performance of an express
or implied contract’
o To file for an alternative relief by way of damages
where specific performance cannot be granted
o To file for a petition for mandamus to compel the
issuance of the certificate where the conditions,
facts and circumstances of a particular case bring
it within the legal rules which govern the granting
of the writ
o To rescind the contract of subscription if the
corporation wrongfully refuses to deliver a
certificate, and sue to recover back what has been
paid
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Lost or Destroyed Certificates
Section 73. Lost or destroyed certificates. - The following
procedure shall be followed 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)
✾ According to the SEC, the requirements above are not
mandatory and admits of exceptions to the rule
✾ The corporation may issue a new certificate of stock
without compliance above provided that the corporation is
certain as to the real owner of the shares to whom the new
certificates shall be issued
Forged and Unauthorized Transfers
✾ Since shares of stock are quasi-negotiable, they don't
afford the same protection to a holder in good faith and for
value who receives them in the course of their being
negotiated, and that the ownership of the true owner
would be preferred
✾ The only exception to the above rule is when the true
owner is negligent and in causing the loss
Santamaria v. HSBC
89 Phil 780
✾ Santamaira bought shares of stock from a mining
corporation. The certificates were issued in the name of
the brokerage firm and indorsed to her in blank. She then
delivered the same to another brokerage firm as security to
purchase stocks from another mining firm. These was
delivered by the second brokerage firm to the bank and the
latter had no knowledge that Santamaria owned the shares
of stock.
✾ Santamria was negligent and couldn't recover the shares of
stock given that she should have asked the corporation to
issue another certificate in her name .
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✾ It held that a bona fide pledgee or transferee of a stock
from an apparent owner is not chargeable with knowledge
of the limitations placed on said certificates by the real
owner or of any secret agreement relating to the use which
might be made of the stock by the holder
✾ When a stock certificate is endorsed in blank by the owner
thereof, it constitutes what is termed as street certificate,
so that upon its face, the holder is entitled to demand its
transfer into his name from the issuing corporation
Neugene Marketing v. CA
303 SCRA 295
✾ The registered owners of the stock certificate had indorsed
them in blank for custody and safekeeping of the beneficial
owners thereof, who kept them in the family vault but
where subsequently stolen
✾ No negligence was found to have actuated the acts of the
registered owners. In addition, the proper officers of the
corporation were aware of the blank endorsement of the
certificates and therefore were adjudged to have acted in
bad faith in assigning the certificates to other parties and
in recording the transfers in the stock and transfer book
✾ The court held in this case—
o When the certificates of stock have been endorsed
in blank for purposes of showing nominee relations,
the eventual delivery and registration of the shares
in violation of the trust agreement and after their
having been stolen, shall be void, even when such
transfers have been registered in the stock and
transfer book
o When the certificates have been endorsed in blank
and delivered for safekeeping and not in the
process of negotiation, it was essential that the
beneficial owners must give their approval for the
transfer of certificates for such transfers to be valid
and effective
SPECIAL RULES ON REGISTERED OR LISTED SHARES
Rule on Uncertified Shares
43.1. A corporation whose securities are registered pursuant to
this Code or listed on a securities Exchange may:
a) If so resolved by its Board of Directors and agreed by a
shareholder, investor or securities intermediary, issue shares to,
or record the transfer of some or all of its shares into the name
of said shareholders, investors or, securities intermediary in the
form of uncertificated securities. The use of uncertificated
securities in these circumstances shall be without prejudice to
the rights of the securities intermediary subsequently to require
the corporation to issue a certificate in respect of any shares
recorded in its name; and
b) If so provided in its articles of incorporation and by-laws, issue
all of the shares of a particular class in the form of uncertificated
securities and subject to a condition that investors may not
require the corporation to issue a certificate in respect of any
shares recorded in their name.
Binding Effect On Share Transactions
43.3. Transfers of securities, including an uncertificated
securities, may be validly made and consummated by
appropriate book-entries in the securities accounts maintained
by securities intermediaries, or in the stock and transfer book
held by the corporation or the stock transfer agent and such
bookkeeping entries shall be binding on the parties to the
transfer. A transfer under this subsection has the effect of the
delivery of a security in bearer form or duly indorsed in blank
representing the quantity or amount of security or right
transferred, including the unrestricted negotiability of that
security by reason of such delivery. However, transfer of
uncertificated shares shall only be valid, so far as the corporation
is concerned, when a transfer is recorded in the books of the
corporation so as to show the names of the parties to the
transfer and the number of shares transferred.
However, nothing in this Code shall preclude compliance by
banking and other institutions under the supervision of the
Bangko Sentral ng Pilipinas and their stockholders with the
applicable ceilings on shareholdings prescribed under pertinent
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banking laws and regulations.
Evidentiary Value of Clearing Agency Record
SEC. 44. Evidentiary Value of Clearing Agency Record. - The
official records and book entries of a clearing agency shall
constitute the best evidence of such transactions between
clearing agency and its participants and members, without
prejudice to the right of participants’ or members’ clients to
prove their rights, title and entitlement with respect to the book-
entry security holdings of the participants or members held on
behalf of the clients. However, the corporation shall not be
bound by the foregoing transactions unless the corporate
secretary is duly notified in such manner as the Commission may
provide.
Pledging Security or Interest Therein
SEC. 45. Pledging a Security or Interest Therein. - In addition to
other methods recognized by law, a pledge of, or release of a
pledge of, a security, including an uncertificated security, is
properly constituted and the instrument proving the right
pledged shall be considered delivered to the creditor under
Articles 2093 and 2095 of the Civil Code if a securities
intermediary indicates by book-entry that such security has been
credited to a specially designated pledge account in favor of the
pledgee. A pledge under this subsection has the effect of the
delivery of a security in bearer form or duly indorsed in blank
representing the quantity or amount of such security or right
pledged. In the case of a registered clearing agency, the
procedures by which, and the exact time at which, such book-
entries are created shall be governed by the registered clearing
agency’s rules. However, the corporation shall not be bound by
the foregoing transactions unless the corporate secretary is duly
notified in such manner as the Commission may provide.
Issuer’s Responsibility for Wrongful Transfer To Registered
Clearing Agency
SEC. 46. Issuer’s Responsibility for Wrongful Transfer to
Registered Clearing Agency. - The registration of a transfer of a
security into the name of and by a registered clearing agency or
its nominee shall be final and conclusive unless the clearing
agency had notice of an adverse claim before the registration
was made. The above provision shall be without prejudice to any
rights which the claimant may have against the issuer for
wrongful registration in such circumstances.
Power of SEC on Issuing Rules Covering Shares
SEC. 47. Power of the Commission With Respect to Securities
Ownership. - The Commission is authorized, having due regard to
the public interest and the protection of investors, to promulgate
rules and regulations which:
47.1. Validate the transfer of securities by book-entries rather
than the delivery of physical certificates;
47.2. Establish when a person acquires a security or an interest
therein and when delivery of a security to a purchaser occurs;
47.3. Establish which records constitute the best evidence of a
person’s interests in a security and the effect of any errors in
electronic records of ownership;
47.4. Codify the rights of investors who choose to hold their
securities indirectly through a registered clearing agency and/or
other securities intermediaries;
47.5. Codify the duties of securities intermediaries (including
clearing agencies) who hold securities on behalf of investors;
and
47.6. Give first priority to any claims of a registered clearing
agency against a participant arising from a failure by the
participant to meet its obligations under the clearing agency’s
rules in respect of the clearing and settlement of transactions in
securities, in a dissolution of the participant, and any such rules
and regulations shall bind the issuers of the securities, investors
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in the securities, any third parties with interests in the securities,
and the creditors of a participant of a registered clearing agency.
STOCK AND TRANSFER BOOK
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
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)
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 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.
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
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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.)
Fua Cun v. Summers
44 Phil 704
Monserrat v. Ceran
58 Phil 469
Chua Guan v. Samahang Magsasaka
62 Phil 472
Uson v. Diosomito
61 Phil 535
Escano v. Filipinas Mining Corporation
74 Phil 71
Bachrach Motors v. Lacson-Ledesma
64 Phil 681
Nava v. Peers Marketing Corporation
74 SCRA 65
Validity of Transfers
✾ The purpose of registration, therefore, is two-fold: to
enable the transferee to exercise all the rights of a
stockholder, including the right to vote and to be voted for,
and to inform the corporation of any change in share
ownership so that it can ascertain the persons entitled to
the rights and subject to the liabilities of a stockholder.
Until challenged in a proper proceeding, a stockholder of
record has a right to participate in any meeting; his vote
can be properly counted to determine whether a
stockholders' resolution was approved, despite the claim of
the alleged transferee. On the other hand, a person who
has purchased stock, and who desires to be recognized as
a stockholder for the purpose of voting, must secure such a
standing by having the transfer recorded on the corporate
books. Until the transfer is registered, the transferee is not
a stockholder but an outsider.
Batangas Laguna Transit v. Bitanga
362 SCRA 635
(Dissenting opinion of Puno)
Under this provision, the sale of the stocks shall not be recognized
as valid unless registered in the books of the corporation, but only
insofar as third persons, including the corporation, are concerned.1
The reasons behind the registration requirement are:
(1) to enable the corporation to know at all times who its actual
stockholders are, because mutual rights and obligations exist
between the corporation and its stockholders;
(2) to afford to the corporation an opportunity to object or refuse
its consent to the transfer in case it has any claim against the
stock sought to be transferred, or for any other valid reason; and
(3) to avoid fictitious or fraudulent transfers.2
The rule is intended to protect the interest of the corporation and
third persons who may be prejudiced by the transfer of the shares
of stocks. It follows, therefore, that as between the parties to the
sale, the transfer shall be valid even if not recorded in the books of

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the corporation.
The present controversy involves only the sellers and buyer of the
BLTB shares of stock � the Potencianos and Bitanga. It has not
been shown that either the corporation or third persons are
involved in the sale. Thus, the sellers, the Potencianos, cannot
deny that they no longer have rights as shareholders as they have
already relinquished said rights to the buyer, Bitanga, pursuant to
the contract of sale. Unless the sale of the shares is annulled, the
rights of the buyer under the contract must be respected and
upheld.
Who May Make Entries?
✾ Entries made on the stock and transfer book by any person
other than the corporate secretary such as those made by
the president and chairman, cannot be given any valid
effect
Attachments
✾ Attachments of shares of stock are not included in the term
transfer as provided for in Section 63 of Corporation Code
✾ Both the Revised Rules of Court and the Corporation Code
do not require annotation in the corporation’s stock and
transfer book for the attachment of shares to be valid and
binding on the corporation and third parties
Meaning of Unpaid Claims
✾ Refers to any unpaid subscription and not to any
indebtedness which a stockholder may owe to the
corporation arising from any other transactions, like unpaid
monthly dues
Equitable Mortgage Assignment
✾ It seems that the assignment of voting shares as security
for a loan operates to give the assignee not only the right
to vote on the shares, but would also treat the assignee as
the owner of the shares
SITUS OF SHARES OF STOCKS
Section 55. Right to vote of pledgors, mortgagors, and
administrators. - In case of pledged or mortgaged shares in stock
corporations, the pledgor or mortgagor shall have the right to
attend and vote at meetings of stockholders, unless the pledgee
or mortgagee is expressly given by the pledgor or mortgagor
such right in writing which is recorded on the appropriate
corporate books. (n)
Executors, administrators, receivers, and other legal
representatives duly appointed by the court may attend and vote
in behalf of the stockholders or members without need of any
written proxy. (27a)
RIGHTS OF STOCKHOLDERS AND MEMBERS
WHAT DOES SHARE REPRESENT?
✾ While shares of stock constitute personal property, they
don't represent property of the corporation. A share of
stock only typifies an aliquot part of the corporation’s
property, or the right to share in its proceeds to that extent
when distributed according to law and equity, but the
holder is not the owner of any part of the capital of the
corporation, nor is he entitled to the possession of any
definite portion of its assets. The stockholder isn’t a co-
owner of corporate property
✾ The registration of shares in a stockholder’s name, the
issuance of stock certificate, and the right to receive
dividends which pertain to the shares are all rights that
flow from ownership
RIGHT TO CERTIFICATE OF STOCK FOR FULLY PAID SHARES
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)
PREEMPTIVE RIGHTS
Section 39. Power to deny pre-emptive right. - All stockholders of
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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.
RIGHT TO TRANSFER SHAREHOLDINGS
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
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)
Non-Transferability Of Membership
Section 90. Non-transferability of membership. - Membership in a
non-stock corporation and all rights arising therefrom are
personal and non-transferable, unless the articles of
incorporation or the by-laws otherwise provide. (n)
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 rights of a
member in the corporation or in its property, unless otherwise
provided in the articles of incorporation or the by-laws. (n)
Restriction on Transfers
Lambert v. Fox
26 Phil 588
✾
Right of First Refusal: Padgett v. Babcock and Templeton
59 Phil 232
Flescher v. Botica Nolasco
47 Phil 583
RIGHTS TO 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
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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)
RIGHT TO VOTE AND TO ATTEND MEETINGS, SECTION 6 AND
89
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 of
incorporation which are not violative of the provisions of this
Code: Provided, That preferred shares of stock may be issued
only with a stated par value. The board of directors, where
authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof:
Provided, That such terms and conditions shall be effective upon
the filing of a certificate thereof with the Securities and
Exchange Commission.
Shares of capital stock issued without par value shall be deemed
fully paid and non-assessable and the holder of such shares shall
not be liable to the corporation or to its creditors in respect
thereto: Provided; That shares without par value may not be
issued for a consideration less than the value of five (P5.00)
pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be
treated as capital and shall not be available for distribution as
dividends.
A corporation may, furthermore, classify its shares for the
purpose of insuring compliance with constitutional or legal
requirements.
Except as otherwise provided in the articles of incorporation and
stated in the certificate of stock, each share shall be equal in all
respects to every other share.
Where the articles of incorporation provide for non-voting shares
in the cases allowed by this Code, the holders of such shares
shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
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hasn't been dissolved corporations as a means of

Except as provided in the immediately preceding paragraph, the gauging the ability of the
vote necessary to approve a particular corporate act as provided corporation to pay-back the loan
in this Code shall be deemed to refer only to stocks with voting at the specified period
rights. (5a) Since the equity investors Since he doesn't place any stake
clearly undertook to place their to the corporation and his rights
Section 89. Right to vote. - The right of the members of any class investment to the risk of the are based on contract, then the
or classes to vote may be limited, broadened or denied to the venture, they can only receive a corporate venture must in case
extent specified in the articles of incorporation or the by-laws. return of their investment only of insolvency, devote and prefer
Unless so limited, broadened or denied, each member, from the remaining assets of the all corporate assets towards the
regardless of class, shall be entitled to one vote. venture, if any, after payment to payment of its creditors
the creditors
Unless otherwise provided in the articles of incorporation or the
by-laws, a member may vote by proxy in accordance with the NATURE OF SHARE OF STOCK FROM POINT OF VIEW OF
provisions of this Code. (n) CORPORATION
✾ It only signifies a aliquot part of the corporation’s property,
Voting by mail or other similar means by members of non-stock or the contingent right to share in its proceeds to that
corporations may be authorized by the by-laws of non-stock extent when distributed according to law and equity, but
corporations with the approval of, and under such conditions its holder it not the owner of any part of the capital of the
which may be prescribed by, the Securities and Exchange corporation, nor is he entitled to the possession of any
Commission. definite portion of its property or assets, and the
stockholder cannot be treated as a co-owner or tenant in
common of the corporate property
CAPITAL STRUCTURE: SHARES OF STOCK
CONCEPT OF CAPITAL STOCK
PRINCIPLES CONTRASTING EQUITY INVESTMENTS FROM
CORPORATE DEBTS Section 137. Outstanding capital stock defined. - The term
EQUITY INVESTMENTS CORPORATE DEBTS "outstanding capital stock", as used in this Code, means the total
Expects that his returns shall be shares of stock issued under binding subscription agreements to
tied-up with the success or loss subscribers or stockholders, whether or not fully or partially paid,
of the operations of the except treasury shares. (n)
corporation
✾ SEC ruled that capital stock or authorized capital stock is
Therefore he places his the amount fixed in the articles of incorporation to be
investment ready and willing to subscribed and paid by the stockholders of the corporation.
take the risk with When shares subscribed out of the authorized capital
management’s style of stock, that portion of that paid-in capital arising from
operating the corporation subscriptions becomes the legal capital of the corporation
Generally non-withdrawable for Only looks at the financial which cannot be returned to the stockholders in any form
so long as the corporation condition and operations of the during the lifetime of the corporation, unless otherwise

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allowed by law
✾ The definition of capital stock clearly shows that it is
composed of two items—the paid-up capital and
subscriptions receivables
✾ In defining the relationship between the corporation and
the stockholders, the capital stock represents the legal and
proportional standing of the stockholders with respect to
the corporation and corporate matters, such as their rights
to vote and to receive dividends
CLASSIFICATION OF SHARES
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 of
incorporation which are not violative of the provisions of this
Code: Provided, That preferred shares of stock may be issued
only with a stated par value. The board of directors, where
authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof:
Provided, That such terms and conditions shall be effective upon
the filing of a certificate thereof with the Securities and
Exchange Commission.
Shares of capital stock issued without par value shall be deemed
fully paid and non-assessable and the holder of such shares shall
not be liable to the corporation or to its creditors in respect
thereto: Provided; That shares without par value may not be
issued for a consideration less than the value of five (P5.00)
pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be
treated as capital and shall not be available for distribution as
dividends.
A corporation may, furthermore, classify its shares for the
purpose of insuring compliance with constitutional or legal
requirements.
Except as otherwise provided in the articles of incorporation and
stated in the certificate of stock, each share shall be equal in all
respects to every other share.
Where the articles of incorporation provide for non-voting shares
in the cases allowed by this Code, the holders of such shares
shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
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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)
Policies On Classification Of Shares
1. It expressly recognizes the freedom and power of a
cop[oration to classify shares.
a. The shares of stock of a corporationj may be
divided into classes or series of shares or both, any
of which classes or series of shares may have
rights, privileges, or restrictions as may be stated
in the articles of incorporation.
b. However no share may be deprived of voting rights
except those classified and issued as preferred or
redeemable shares, unless otherwise provided by
the Code
2. Expressly adopts the presumption of equality of rights and
features of shares when nothing is expressly provided to
the contrary
3. The Code provides for voting rights for all types of shares
on matters it considers as fundamental measures. Where
the articles of incorporation provide for non-voting shares,
the holders of such shares shall nevertheless be entiled to
vote on the following—
a. Amendment of the articles of incorporation;
b. Adoption and amendment of by-laws;
c. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property;
d. Incurring, creating or increasing bonded indebtedness;
e. Increase or decrease of capital stock;
f. Merger or consolidation of the corporation with another
corporation or other corporations;
g. Investment of corporate funds in another corporation or
business in accordance with this Code; and
h. Dissolution of the corporation.
COMMON STOCK
✾ A common stock represents the residual ownership interest
in the corporation. It is a basic class of stock ordinarily and
usually issued without extraordinary rights or privileges
and entities the shareholders ton a pro rata division of
profits
✾ Common stock don't have any special contract rights or
preferences.
✾ Frequently, it is the only class of stock outstanding
✾ It generally represents the greatest proportion of the
corporation’s capital structure and bears the greatest risk
of loss in the event of failure of the enterprise
PREFERRED SHARES
✾ One which entitles the holder thereof to certain
preferences over the holders of the common stock
designed to induce persons to subscribe for shares of a
corporation
✾ Preferred shares as to assets gives the holder thereof
preference to the distribution of the assets of the
corporation in case of liquidation
✾ Preferred shares as to the dividends give the holder the
right to receive dividends on said shares to the extent
agreed upon before any dividends at all paid to the holders
of common stock
✾ The contractual rights and preferences of an issue of
preferred stocks must be provided for in the articles of
incorporation
✾ Preferred 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
✾ The naming of shares wouldn't give such preferred shares
any right in addition to those enjoyed by common shares
Republic Planters Bank v. Agana
269 SCRA 1 (1997)
✾ Private respondent corporation secured a loan from
petitioner bank. The loan wasn't given in full legal tender.
Part was cash and part was preferred shares. Part of the
conditions of the preferred shares was its entitlement to
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1% quarterly dividends and that it is redeemable by
drawing lots after two years by the corporation.
Thereafter, the private respondent proceeded against the
petitioner to have the latter pay the dividends due to them
allegedly as well as to redeem the shares in accordance to
the terms and conditions stated in the certificate
✾ A preferred share of stock, on one hand, is one which
entitles the holder thereof to certain preferences over the
holders of common stock. The preferences are designed to
induce persons to subscribe for shares of a corporation.
Preferred shares take a multiplicity of forms. The most
common forms may be classified into two: (1) preferred
shares as to assets; and (2) preferred shares as to
dividends. The former is a share which gives the holder
thereof preference in the distribution of the assets of the
corporation in case of liquidation; the latter is a share the
holder of which is entitled to receive dividends on said
share to the extent agreed upon before any dividends at all
are paid to the holders of common stock. There is no
guaranty, however, that the share will receive any
dividends. Under the old Corporation Law in force at the
time the contract between the petitioner and the private
respondents was entered into, it was provided that "no
corporation shall make or declare any dividend except from
the surplus profits arising from its business, or distribute its
capital stock or property other than actual profits among
its members or stockholders until after the payment of its
debts and the termination of its existence by limitation or
lawful dissolution." Similarly, the present Corporation Code
provides that the board of directors of a stock corporation
may declare dividends only out of unrestricted retained
earnings. The Code, in Section 43, adopting the change
made in accounting terminology, substituted the phrase
unrestricted retained earnings," which may be a more
precise term, in place of "surplus profits arising from its
business" in the former law. Thus, the declaration of
dividends is dependent upon the availability of surplus
profit or unrestricted retained earnings, as the case may
be. Preferences granted to preferred stockholders,
moreover, do not give them a lien upon the property of the
corporation nor make them creditors of the corporation,
the right of the former being always subordinate to the
latter. Dividends are thus payable only when there are
profits earned by the corporation and as a general rule,
even if there are existing profits, the board of directors has
the discretion to determine whether or not dividends are to
be declared. Shareholders, both common and preferred,
are considered risk takers who invest capital in the
business and who can look only to what is left after
corporate debts and liabilities are fully paid.
✾ The respondent judge also stated that since the stock
certificate granted the private respondents the right to
receive a quarterly dividend of one Per Centum (1%),
cumulative and participating, it "clearly and unequivocably
(sic) indicates that the same are 'interest bearing stocks' or
stocks issued by a corporation under an agreement to pay
a certain rate of interest thereon. As such, plaintiffs
(private respondents herein) become entitled to the
payment thereof as a matter of right without necessity of a
prior declaration of dividend." There is no legal basis for
this observation. Both Sec. 16 of the Corporation Law and
Sec. 43 of the present Corporation Code prohibit the
issuance of any stock dividend 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. These provisions
underscore the fact that payment of dividends to a
stockholder is not a matter of right but a matter of
consensus. Furthermore, "interest bearing stocks", on
which the corporation agrees absolutely to pay interest
before dividends are paid to common stockholders, is legal
only when construed as requiring payment of interest as
dividends from net earnings or surplus only. Clearly, the
respondent judge, in compelling the petitioner to redeem
the shares in question and to pay the corresponding
dividends, committed grave abuse of discretion amounting
to lack or excess of jurisdiction in ignoring both the terms
and conditions specified in the stock certificate, as well as
the clear mandate of the law.
Cumulative and Non-Cumulative Preferred Shares
✾ Cumulative preferred shares entitle the holders thereof to
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payment not only of cumulative dividends but also of back
dividends not previously paid, when and if dividends are
declared, to the extend agreed upon, before holders of
common shares are paid
✾ Fundamental characteristic of cumulative stock is that if
the preferred dividend isn’t paid in full in any year, whether
or not entered, the deficiency must be made up before any
dividend may be paid on the common stock
✾ Non-cumulative preferred stock entitle the holders merely
to the payment of current dividends that are paid, to the
extent agreed upon before the holders of common shares
are paid
Entitlement to Preferences
✾ The preference lawfully granted to preferred shares must
be interpreted and construed in accordance with applicable
Corporate Law doctrines and cannot be deemed absolute
Participating and Non-Participating Preferred Shares
✾ Participating preferred shares that entitle the holders to
participate with the holders of common shares in the
retained earnings after the amount of stipulated dividend
has been paid to the preferred shares
✾ Non-participating preferred shares are those that entitle
holders of preferred shares only to the stipulated preferred
dividends and no more
✾ The nature and extent of participation on a specified basis
with the common stock must be stated in the articles of
incorporation
REDEEMABLE SHARES
Republic Planters Bank v. Agana
269 SCRA 1
✾ Redeemable shares, on the other hand, are shares usually
preferred, which by their terms are redeemable at a fixed
date, or at the option of either issuing corporation, or the
stockholder, or both at a certain redemption price. A
redemption by the corporation of its stock is, in a sense, a
repurchase of it for cancellation. The present Code allows
redemption of shares even if there are no unrestricted
retained earnings on the books of the corporation. This is a
new provision which in effect qualifies the general rule that
the corporation cannot purchase its own shares except out
of current retained earnings. However, while redeemable
shares may be redeemed regardless of the existence of
unrestricted retained earnings, this is subject to the
condition that the corporation has, after such redemption,
assets in its books to cover debts and liabilities inclusive of
capital stock. Redemption, therefore, may not be made
where the corporation is insolvent or if such redemption
will cause insolvency or inability of the corporation to meet
its debts as they mature.
✾ What respondent Judge failed to recognize was that while
the stock certificate does allow redemption, the option to
do so was clearly vested in the petitioner bank. The
redemption therefore is clearly the type known as
"optional". Thus, except as otherwise provided in the stock
certificate, the redemption rests entirely with the
corporation and the stockholder is without right to either
compel or refuse the redemption of its stock.[22]
Furthermore, the terms and conditions set forth therein use
the word "may". It is a settled doctrine in statutory
construction that the word "may" denotes discretion, and
cannot be construed as having a mandatory effect. We fail
to see how respondent judge can ignore what, in his words,
are the "very wordings of the terms and conditions in said
stock certificates" and construe what is clearly a mere
option to be his legal basis for compelling the petitioner to
redeem the shares in question.
✾ The redemption of said shares cannot be allowed. As
pointed out by the petitioner, the Central Bank made a
finding that said petitioner has been suffering from chronic
reserve deficiency, and that such finding resulted in a
directive, issued on January 31, 1973 by then Gov. G. S.
Licaros of the Central Bank, to the President and Acting
Chairman of the Board of the petitioner bank prohibiting
the latter from redeeming any preferred share, on the
ground that said redemption would reduce the assets of
the Bank to the prejudice of its depositors and creditors.
Redemption of preferred shares was prohibited for a just
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and valid reason. The directive issued by the Central Bank
Governor was obviously meant to preserve the status quo,
and to prevent the financial ruin of a banking institution
that would have resulted in adverse repercussions, not only
to its depositors and creditors, but also to the banking
industry as a whole. The directive, in limiting the exercise
of a right granted by law to a corporate entity, may thus be
considered as an exercise of police power. The respondent
judge insists that the directive constitutes an impairment
of the obligation of contracts. It has, however, been settled
that the Constitutional guaranty of non-impairment of
obligations of contract is limited by the exercise of the
police power of the state, the reason being that public
welfare is superior to private rights
Section 8. Redeemable shares. - Redeemable shares may be
issued by the corporation when expressly so provided in the
articles of incorporation. They may be purchased or taken up by
the corporation upon the expiration of a fixed period, regardless
of the existence of unrestricted retained earnings in the books of
the corporation, and upon such other terms and conditions as
may be stated in the articles of incorporation, which terms and
conditions must also be stated in the certificate of stock
representing said shares. (n)
✾ When the certificates of stock recognizes redemption, but
the option to do so is clearly vested in the corporation, the
redemption is clearly the type known as optional and rest
entirely with the corporation and the stockholder is without
right to either compel or refuse the redemption of its stock
✾ Redemption—repurchase, a reacquisition of stock by a
corporation which issued the stock in exchange for
property, whether or not the acquired stock is cancelled,
retired or held in the treasury and that essentially, the
corporation gets back some of its stock, distributes cash or
property to the stockholder in payment for the stock, and
continues in business as before
✾ Why would one want a redeemable share? It is a way to
opt out of the investment midway
✾ Isn’t a forced redemption not a violation of the trust fund
doctrine? There should be sinking fund for the creditors
Taxability of Redemption of Stock Dividends
✾ When the corporation redeems shares coming from those
issued upon establishment of the corporation or from initial
capital investment, the redemption to their concurrent
value of acquisition wouldn't be subject to tax because that
would constitute merely a return of investment
✾ On the other hand, redemption is from previously declared
stock dividends, the proceeds of the redemption constitute
additional wealth, for it is no longer merely a return of
capital but a gain thereon, and subject to tax
FOUNDER’S SHARES
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)
✾ The classification of founder’s shares may be interpreted to
be based on 2 aspects—nomenclature or certain exclusive
rights granted to such shares
✾ ISSUE! Whether founders’ shares are such because they
have been classified and have been given the
nomenclature of founder’s shares under the articles of
incorporation
✾ Consequently, we must presume that what makes shares
founders’ shares would be that they are given the
exclusive rights not given to other stockholders, and
specially the right to vote and to be voted in the election of
directors
Effect When Exclusivity Period Expires
✾ Such exclusive right would only be transferred to common
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shareholders who are supposed to exercise such right had
there been no founders’ shares
NO-PAR VALUE SHARES
✾ Shares of 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
✾ Shares without par value may not be issued for a
consideration less than P5 per share and that the
consideration received by the corporation for its no-par
shares be treated as capital and shall not be available for
distribution as dividends
TREASURY SHARES
STOCK WARRANTS
Section 9. Treasury shares. - Treasury shares are shares of stock
which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption,
donation or through some other lawful means. Such shares may
again be disposed of for a reasonable price fixed by the board of
directors. (n)
✾ Treasury shares have no effect on the stated capital of the
corporation unless and until they are cancelled or retired,
in which event the stated capital is reduced by the amount
then representing the shares
✾ The acquisition of treasury shares doesn't reduce the
number of issued shares or the amount of stated capital
and their sale doesn't increase the number of issued
shares or the amount of the stated capital
✾ Features of treasury shares—
o Although authorities differ on the exact legal and
accountable statutes of so-called treasury share,
they are more or less in agreement that treasury
shares are stocks issued and fully paid for and re-
acquired by the corporation either by purchase,
donation, forfeiture, and other means
o Treasury shares are therefore issued shares, but
being in the treasury, they don't have the status of
outstanding shares
o Consequently, although a treasury share, not
having been retired by the corporation reacquiring
it, may be reissued or sold again, such share, 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 the 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
✾ A type of security which entitles the holder the right to
subscribe to, the unissued capital stock of a corporation or
to purchase issued shares in the future, evidenced by a
warrant certificate, whether detachable or not, which may
be sold or offered for sale to the public but doesn't apply to
a right granted under an option plan duly approved by the
SEC for the benefit of the employees, offices and/or
directors of the issuing corporation
✾ SEC Amended rules recognizes 2 types of issuers of
warrants—
o A duly registered domestic corporation which
issues or proposes to issue subscription warrants
o A person or a group of persons who issues or
proposes to issue covered warrants
✾ Rules allow for two types of warrants
o Subscription warrant—which entitle the holder
thereof the right to subscribe to a pre-determined
number of shares out of the unissued capital stock
of the issuer
o Covered warrant—entitles the holder thereof the
right to purchase from the issuer a pre-determined
number of existing shares
✾ Two types of warrant certificates—
o Detachable warrant—which may be sold,
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transferred or assigned tto any person by the
warranholder separate from and independent of
the corresponding beneficiary securities
o Non-detachable warrant—which cannot be sold,
transferred or assigned to any person by the
warrantholder separate from, or independent of the
beneficiary securities
✾ Warrantholders may exercise the right granted within a
period approved by the SEC which shall not be less than 1
year, nor more than 5 years from the date of issue of the
warrants
✾ The exercise price for the warrants shall be the price per
share at which the issuer is required to sell the underlying
shares, upon the exercise of the rights granted in the
warrant, which shall be at the price fixed at the time of
application for registration of the warrant or computed
using the stated formula approved by the SEC
✾ The exercise price must be paid in full upon exercise, and
shall not be less than the par value of the underlying
shares, or not less than P5 if the underlying shares are
without par value
✾ All warrants authorized for issuance by the SEC shall be
transferrable witout need for approval of the SEC
STOCK OPTIONS
✾ A privilege granted to a p-arty to subscribe to a certain
portion of the unissued capital stock of a corporation within
a specified period and under the terms and conditions of
the grant, exercisable by the grantee at any time within
the period granted
✾ Approval of the SEC is needed
✾ No exercise of the right of the option shall be valid unless
accompanied by the payment of not less than 40% of the
total price of the shares so purchased, which payment shall
be properly receipted for by the corporate treasurer,
except where the grantee is an employee or officer who is
not a director of the corporation in which case only 25% of
the total price shall be required, or allow a planned payroll
deduction scheme
✾ Rules also provide for the following guidelines—
o Sotck options may be granted on the basis of
proportionate interests of stockholders in the
capital stock
o Stock otpions granted to employees or officers who
are not members of the board may also be allowed
after the review of the scheme since it would be in
consonance with the policy of the government to
widen corporate base and to distribute corporate
profits wider and more equitable
o Stock options granted to non-stockholders may be
granted only upon showing that the board has
been duly authorized to grant the same by its
charter or by a resolution of the stockholders
owning at least 2/3 of the outstanding capital stock
of the corporation, both non-voting and voting
o Options granted to directors, managing groups and
corporate officers must be approved in a
stockholde’rs meeting by stockholders owning at
least 2/3 of the outstanding capital stock, voiting
and non-voting
o The options must be exercised within a period of
three years from the approval thereof by the SEC
or upon extension thereof duly approved by the
SEC
o No transfer of the right to an option shall be made
without the approval of the SEC
✾ The rules anticipated possible circumvention through
favorable subscriptions which are really stock options
RECLASSIFICATION OF SHARES AND EXCHANGE
✾ Reclassification of shares doesn't always bring any
substantial alteration in the subscriber’s proportional
interest, while an exchange would effect a shifting of the
balance of stock features like priority in dividend
declarations or absence of voting rights
✾ The mere exchange of shares without more produces no
realized income to the stockholder because it would only
involve a modification of the stockholder’s rights and
privileges—which is not a flow of wealth for tax purposes,
since the issue of taxable dividend may arise only once a
subscriber disposes of his entire interests and not when
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there is still maintenance of proprietary interest
HYBRID SECURITIES
✾ Equity securities—represent an ownership interest in the
corporation and include both common and preferred stock.
In addition, corporations finance much of their continued
operations through debt securities
✾ Debt securities—don't represent ownership interest in the
corporation but rather create a debtor-creditor relationship
between the corporation and the bondholder
Government v. Phil. Sugar Estate
38 Phil 15 (1918)
✾ This was an action on an alleged violation of the old
Corporation Code. The defendant corporation has
allegedly committed a violation by engaging in the
business of purchasing and selling real estate, which is
prohibited under the old Corporation Code. The
corporation has allegedly contracted with the Tayabas Land
Company in the purchase and later selling of real estate.
The Attorney-General sought for the revocation of the
corporation’s franchise. The lower court held that the
agreement wasn't a loan but it was in the character of a
co-partnership.
✾ The old corporation code then provided that corporations
are not authorized to conduct the business of buying and
selling real estate or be permitted to hold or own real
estate such as may be reasonably necessary to enable it to
carry out the purpose for which it is created. However,
they are allowed to extend loans, etc. to real estate
businesses. It is in this qualification that the defendant
corporation banks its defense that the agreement was a
loan.
✾ There are a number of features that say that this is a
partnership/co-partnership agreement—
o There was no period fixed in the contract for the
repayment of money, except that the first returns
from the sale of the land was to be devoted to the
payment of the capital
o The entire amount of the credit was not to be
turned over at once but was to be used by the
Tayabas company as it was needed
o The return on the capital wasn't by a fixed rate of
interest but 25% of the profits earned by the
company in “todo los negocios” was to be paid by
the defendant
o The defendant corporation agreed to pay 25% of
necessary and general expenses for the
development of the corporation
o Consent of the corporation was desired to sell the
land at a price under P.50 per sq.m but wasn't
required if the selling price was over the amount
o The defendant corporation acted as treasurer of
the enterprise
QUASI-REORGANIZATION
1. Through the use of the reappraisal surplus of a
corporations’ assets to wipe-out the deficit or negative
retained earnings
2. By the reduction of a corporation’s capital stock through
the formal filing of an application for amendment of its
articles of incorporation with the SEC
REDUCTION OF CAPITAL STOCK
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
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shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
personally.
A certificate in duplicate must be signed by a majority of the
directors of the corporation and countersigned by the chairman
and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied
with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock
or number of shares of no-par stock thereof actually subscribed,
the names, nationalities and residences of the persons
subscribing, the amount of capital stock or number of no-par
stock subscribed by each, and the amount paid by each on his
subscription in cash or property, or the amount of capital stock
or number of shares of no-par stock allotted to each stock-holder
if such increase is for the purpose of making effective stock
dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or
increased;
(5) The actual indebtedness of the corporation on the day of the
meeting;
(6) The amount of stock represented at the meeting; and
STOCK SPLITS
(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.
STOCK CONSOLIDATION
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)
✾ Each of the issued and outstanding shares is simply broken
up into a greater number of shares, each representing a
proportionately smaller interest in the corporation
✾ Purpose for stock splits is to lower the price to a more
marketable price and thus increase the number of the
potential shareholders
✾ New shares are issued in replacement old shares with a
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higher par or issued value, without affecting the total value properties of the business enterprise
of the issued shares b. The primary interest is essentially to obtain the
✾ Are resorted to make each share have a higher par or earning capability of the venture
issued value or issued value and thereof make them more c. However, the purchaser isn’t interested in
expensive in acquiring and to bring the stock within higher obtaining the juridical entity that owns the
end of the market business enterprise, and therefore purchases
directly the business from the corporate entity
ACQUISITIONS, MERGERS AND CONSOLIDATIONS 3. Equity level
a. Looking at the entirety of the business enterprise
ACQUISITIONS AND TRANSFERS as it is owned and operated by the corporation
b. The purchaser takes control and ownership of the
CONCEPT OF ECONOMIC UNIT/ENTERPRISE/GOING CONCERN business by purchasing the shareholdings of the
✾ A business enterprise apart from the juridical personality corporate owner
under which it operates, has a separate being of its own c. The control of the business is therefore indirect
✾ Properly speaking, a buisness enterprise comprises more
than just the properties of the business but includes a CONTRACTUAL LABOR TAX
concern that covers the employees, goodwill, list of LIABILITY CLAIMS
clientele and suppliers, etc. which give it value separate ASSETS-ONLY Transferor liable Transferor
and distinct from itsd owner or the juridical entity under TRANSFER Exceptions: liable
which it operates 1. Assumption of
✾ It is itself a concern that has a separate economic or selling liability
value from its owner’s other assets and that business men 2. In fraud of
evaluating whether to purchaser such business enterprise creditors
don't look at the properties of the business but many other 3. Continuation
intangibles that really have no definite monetary value, 4. Merger
except when expressed as goodwill and assigned a value (Edward Nell case
under principles of Accounting such as the moral and laid down the
technical competence of the employees, etc. premise on why
there is
TYPES OF ACQUISITIONS/TRANSFERS transferee’s
1. Assets only level liability in
a. The purchaser is only interested in the raw assets business
and properties of the business, perhaps to be used enterprise
to establish his own business enterprise or to be transfer)
used for his on-going business enterprise BUSINESS Transferee liable— Transferor
b. In such acquisition, the purchaser is not interested ENTERPRISE technically, the liable
in the entity of the corporate owner of the assets business
nor of the goodwill and other factors relating to the enterprise transfer
business itself is a continuation
2. Business-enterprise level There could be
a. The purchaser’s interest goes beyond the assets or

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exception when
there is stipulation
to the contrary
EQUITY Transferor liable Transferor
liable
GENERAL RULES ON LIABILITY TRANSFERS
Edward Nell Co. v. Pacific Farms
15 SCRA 415
✾ Plaintiff sought a writ of execution against Insular Farms for
the unpaid balance for a pump sold by the former. There
was no execution however because there was allegedly no
leviable property. Plaintiff then sought recovery from
Pacific Farms, averring that the latter is merely the alter-
ego of Insular Farms, having purchased the properties of
the latter.
✾ This case delves on the issue on whether or not the
defendant was the alter-ego of Insular Farms and that it
could be held liable for the debts and liabilities of the
latter?
✾ Generally, where one corporation sells or otherwise
transfers all of its assets to another corporation, the
transferee isn’t liable for the debts and liabilities of the
transferor
✾ Exceptions to the rule—
o Where the purchaser expressly or impliedly agrees
to assume such debts
o Where the transaction is entered into fraudulently
in order to escape liability for such debts
o Where the purchasing corporation is merely a
continuation of the selling corporation
o Where the transaction amounts to a consolidation
or merger of the corporation
✾ The following rules apply to the enforceability of liabilities
against the transferee regardless of the separate juridical
personality of the transferor and transferee—
o In a pure assets-only transfer, the transferee isn’t
liable for the debts and liabilities of the transferor,
except where the transferee expressly or impliedly
agrees to assume such debts, or when there was
fraud
o In a transfer of the business enterprise, the
transferee is liable for the debts and liabilities of
the transferor
o In an equity transfer, the transferee is not liable for
the debts and liabilities of the transferor, except
where the transferee expressly or impliedly agrees
to assume such debts
McLeod v. NLRC
512 SCRA 222 (2007)
Caltex v. PNOC Shipping and Transport Corp.
498 SCRA 400 (2006)
ASSETS ONLY TRANSFER
✾ Coverage of bulk sales law—if the transfer constitutes a
bulk sale, it would then affect the transferee in the sense
that if the sale has not complied with the requirements of
the law, the sale could be classified as fraudulent and void,
and therefore title of the transferee over the assets would
be void, even if he were a purchaser in good faith
✾ Special rule in corporate dissolution—when another
corporation takes over the assets of another corporation
which is dissolved, the succeeding corporation is liable for
the claims against the dissolved corporation to the extent
of the fair value of the assets assumed
✾ Voluntary assumption of liabilities: another instance when
the transferee is held liable in an assets-only transfer
BUSINESS ENTERPRISE TRANSFERS
✾ The transferee is liable for the debts and liabilities of his
transferor and this is to protect the creditors of the
business by allowing them a remedy against the new
controller or owner of the business enterprise
✾ Otherwise, the creditors would be left holding the bag since
they may not be able to recover from the transferor who
has disappeared with the loot nor against the transferee
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who can claim that he is a purchaser in good faith and for
value
✾ There is a question on whether this is a sub-classification of
the piercing doctrine but it should be noted that in several
cases, the Court didn't consider fraud as an essential
ingredient for the application of the business transfer
doctrine
✾ Rationale for the doctrine—reality in the business world is
that although no formal mortgage contract is executed,
creditors and suppliers extend credit to the business
enterprise because they see the business’ earning capacity
and assets as security to the undertaking they will
eventually be paid back
AD Santos v. Vasquez
22 SCRA 1156
Laguna Transportation v. SSS
107 Phil 833
corporations are absorbed by another corporation which
survives and continues the combined business
✾ Consolidation is the union of two or more exsiting
corporations to form a new corporation called the
consolidated corporation. it is a combination by agreement
between two or more corporations by which their rights,
franchises, privileges and properties are united and
become those of a single new corporation composed
generally although not necessarily of the stockholders of
the old corporation.
PROCEDURE
Plan Of Merger Or Consolidation
Section 76. Plan or merger of consolidation. - Two or more
corporations may merge into a single corporation which shall be
one of the constituent corporations or may consolidate into a
new single corporation which shall be the consolidated
corporation.

Free and Harmless Clause
✾ Such stipulations are valid and binding but only as to
between the transferor and transferee, and their respective
successors-in-interest
✾ The jurisprudential doctrine on business-enterprise
transfers has evolved for the protection of business
creditors, therefore neither the transferor or transferee can
waive or modify such right or cause of action of the
creditors without the latter’s consent
EQUITY TRANSFERS
✾ The transferee isn’t liable for the debts of the corporation
unless he impliedly or expressly agrees to
✾ Logic of the doctrine finds support in the separate juridical
personality and limited liability feature of a corporation
MERGERS AND CONSOLIDATIONS
The board of directors or trustees of each corporation, party to
the merger or consolidation, shall approve a plan of merger or
consolidation setting forth the following:
1. The names of the corporations proposing to merge or
consolidate, hereinafter referred to as the constituent
corporations;
2. The terms of the merger or consolidation and the mode of
carrying the same into effect;
3. A statement of the changes, if any, in the articles of
incorporation of the surviving corporation in case of merger; and,
with respect to the consolidated corporation in case of
consolidation, all the statements required to be set forth in the
articles of incorporation for corporations organized under this
Code; and

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

✾ Merger is a union whereby one or more existing

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consolidation as are deemed necessary or desirable. (n)
Stockholder’s or Member’s Approval
Section 77. Stockholder's or member's approval. - Upon approval
by majority vote of each of the board of directors or trustees of
the constituent corporations of the plan of merger or
consolidation, the same shall be submitted for approval by the
stockholders or members of each of such corporations at
separate corporate meetings duly called for the purpose. Notice
of such meetings shall be given to all stockholders or members
of the respective corporations, at least two (2) weeks prior to the
date of the meeting, either personally or by registered mail. Said
notice shall state the purpose of the meeting and shall include a
copy or a summary of the plan of merger or consolidation. The
affirmative vote of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock of each corporation in the
case of stock corporations or at least two-thirds (2/3) of the
members in the case of non-stock corporations shall be
necessary for the approval of such plan. Any dissenting
stockholder in stock corporations may exercise his appraisal
right in accordance with the Code: Provided, That if after the
approval by the stockholders of such plan, the board of directors
decides to abandon the plan, the appraisal right shall be
extinguished.
Any amendment to the plan of merger or consolidation may be
made, provided such amendment is approved by majority vote
of the respective boards of directors or trustees of all the
constituent corporations and ratified by the affirmative vote of
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds (2/3) of the members
of each of the constituent corporations. Such plan, together with
any amendment, shall be considered as the agreement of
merger or consolidation. (n)
Articles of Merger or Consolidation
Section 78. Articles of merger or consolidation. - After the
approval by the stockholders or members as required by the
preceding section, articles of merger or articles of consolidation
shall be executed by each of the constituent corporations, to be
signed by the president or vice-president and certified by the
secretary or assistant secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or
in the case of non-stock corporations, the number of members;
and
3. As to each corporation, the number of shares or members
voting for and against such plan, respectively. (n)
Approval of the SEC
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
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this Code. (n)
Effects of Merger and Consolidation
Section 80. Effects of merger or consolidation. - The merger or
consolidation shall have the following effects:
1. The constituent corporations shall become a single
corporation which, in case of merger, shall be the surviving
corporation designated in the plan of merger; and, in case of
consolidation, shall be the consolidated corporation designated
in the plan of consolidation;
2. The separate existence of the constituent corporations shall
cease, except that of the surviving or the consolidated
corporation;
3. The surviving or the consolidated corporation shall possess all
the rights, privileges, immunities and powers and shall be
subject to all the duties and liabilities of a corporation organized
under this Code;
4. 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
5. The surviving or consolidated corporation shall be responsible
and liable for all the liabilities and obligations of each of the
constituent corporations in the same manner as if such surviving
or consolidated corporation had itself incurred such liabilities or
obligations; and any pending claim, action or proceeding brought
by or against any of such constituent corporations may be
prosecuted by or against the surviving or consolidated
corporation. The rights of creditors or liens upon the property of
any of such constituent corporations shall not be impaired by
such merger or consolidation. (n)
SALIENT ADVANTAGES OF A MERGER OR CONSOLIDATION
✾ There is a continuous flow of the juridical personalities and
business enterprises of the constituent corporation, and
under the clear rules under Section 80, there is no legal
break in such juridical personalities and business
enterprises as they end up combined in the surviving or
consolidated corporation
✾ This allows corporate planners to achieve certain ends not
available to other forms of transfers and acquisitions
✾ In the field of taxation—
(2) Exception. - No gain or loss shall be recognized if in
pursuance of a plan of merger or consolidation -
(a) A corporation, which is a party to a merger or
consolidation, exchanges property solely for stock in a
corporation, which is a party to the merger or
consolidation; or
(b) A shareholder exchanges stock in a corporation, which
is a party to the merger or consolidation, solely for the
stock of another corporation also a party to the merger or
consolidation; or
(c) A security holder of a corporation, which is a party to
the merger or consolidation, exchanges his securities in
such corporation, solely for stock or securities in such
corporation, a party to the merger or consolidation.
No gain or loss shall also be recognized if property is
transferred to a corporation by a person in exchange for
stock or unit of participation in such a corporation of which
as a result of such exchange said person, alone or together
with others, not exceeding four (4) persons, gains control
of said corporation: Provided, That stocks issued for
services shall not be considered as issued in return for
property.
✾ Contrary ruling though when it comes to BOI incentives
EFFECTS OF TRANSFERS ON EMPLOYEES
1. Assets only transfer
a. The transferee isn’t bound to retain the employees
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of the transferor since the former doesn't really
step into the shoes of the latter
b. Issue of whether or not the purchaser of the assets
can be considered the successor employer has
been answered in the negative following the
principles and rationale behind the assets only
transfer
2. Business enterprise transfers
a. Following the general rule, the transferee should be
bound to retain the services of the employees of
the business that it has acquired, although it is not
liable for the violations that the transferor had
committed in the past and for which the transferor
remains liable solely
b. Following Sunio case, the termination of
employment by the transferor and payment of all
the proper benefits prior to actual sale is
recognized as the proper means to avoid a
situation where the transferee shall then be bound
to continue with the employments of the
employees if the assumed business enterprise
c. Following Central Azucarera case, the change of
ownership or management of a business enterprise
is not of the just causes under the law and may not
be construed as synonymous to closing or
cessation of operation of an establishment or
enterprise and therefore cannot exempt the
transferor from liability for separation pay. But it is
recognized that it is within the employer’s
legitimate sphere of management control of the
business to adopt economic policies to make some
changes or adjustments in the organization that
would ensure profit to itself or protect the
investments. It may merge or consolidate its
business with another or sell or dispose all or
substantially all of its assets and properties which
may bring about the dismissal or termination of its
employees in the process provided it is done in
good faith and in which case is not liable to the
employees for termination pay. On the other hand,
the transferee has no liability unless it assumes it.
d. The rule on business enterprise transfers therefore
is not applicable when it comes to labor cases
3. Equity transfers
a. Since the only result of the transaction is a change
in the ownership or control of the corporate
employer, the employees remain with the
corporate employer in exactly the same manner as
before the equity transfer, and therefore the
purchaser doesn't assume any personal liability to
the employees
4. Mergers and consolidations
a. The surviving or consolidated corporation must
necessarily assume the liabilities of the constituent
corporations, it would be logical to expect the
contractual rights of employees and the existing
collective bargaining agreement, if any would have
to be absorbed by the surviving or consolidated
corporation
b. Filipinas Port Services (1989)—employees of the
predecessor corporation cannot avail of their
previous tenure when determining their
termination benefits with the surviving corporation
in the merger and this is in direct opposition to the
subsequent Filipinas Port Services case (1991)
wherein the employees have the right to their
retirement benefits computed from the time
worked with the predecessor-constituent
corporations saying there was no break in the
employee-employer relationship
SPIN OFFS
✾ Has the opposite effect of a merger or consolidation
whereby a department, division, or portions of a corporate
business enterprise is sold-off or assigned into a new
corporation that will arise by the process which may
constitute it into a subsidiary of the original corporation
✾ It exists when a parent corporation organizes a subsidiary
to which is transferred part of its assets in exchange for all
of capital stock of subsidiary and stock of subsidiary is
transferred to parent’s stockholders without surrender of
their stock in parent
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✾ Where part of assets of corporation is distributed to
shareholders of transferor without surrender by them of
stock to transferor
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 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.
DISSOLUTION
NO VESTED RIGHTS TO CORPORATE FICTION
Gonzales v. Sugar Regulatory Administration
174 SCRA 377 (1989)
✾ Juridical persons, whether incorporated or not, whether
owned by the government or the private sector, may come
to an end at one time or another for a variety of reasons.
Thus, the corporation was set up. Thus, the corporation
code provides for termination of corporate life, the
dissolution of the corporation, the winding up of
operations, the liquidation of assets, the payment of its
obligations, and dissolution of any residual assets to its
stockholders
✾ The termination of the life of a juridical entity doesn't by
itself imply the diminution or extinction of rights
demandable against a juridical entity. Consequently, when
the assets of a dissolved entity are taken over by another
entity, the successor entity must be held liable for the
obligations of the dissolved entity pertaining to the assets
so assumed, to the extent of the fair value of assets
actually taken over.
NATURE OF DISSOLUTION
✾ Dissolution of the corporation signifies the extinguishment
of its franchise and the termination of its corporate
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existence for business purpose
✾ It may either be de jure or de facto
o De jure—one adjudged and determined by
administrative or judicial sentence, or brought
about by an act of the sovereign power, or which
results from the expiration of the charter period of
corporate life
o De facto—one which takes place in substance and
in fact when the corporation by reason of
insolvency, cessation of the business, or
suspension of all its operations, as the case may
be, goes into liquidation, still retaining its primary
franchise of the corporation (dissolution of the
business enterprise)
METHODS OF DISSOLUTION
Section 117. Methods of dissolution. - A corporation formed or
organized under the provisions of this Code may be dissolved
voluntarily or involuntarily. (n)
VOLUNTARY DISSOLUTION
1. Where no creditors are affected, by an administratrive
application for dissolution filed with the SEC
2. Where creditors are affected by dissolution, by a formal
petition for dissolution filed with the SEC, with due notice,
and hearing to be duly conducted
3. Shortening of corporate term by the amendment of the
articles of incorporation
4. Another is allowing the expiration of the corporate term as
indicated in the articles of incorporation
VOLUNTARY DISSOLUTION WHERE NO CREDITORS AFFECTED
Section 118. Voluntary dissolution where no creditors are
affected. - If dissolution of a corporation does not prejudice the
rights of any creditor having a claim against it, the dissolution
may be effected by majority vote of the board of directors or
trustees, and by a resolution duly adopted by the affirmative
vote of the stockholders owning at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the
members of a meeting to be held upon call of the directors or
trustees after publication of the notice of time, place and object
of the meeting for three (3) consecutive weeks in a newspaper
published in the place where the principal office of said
corporation is located; and if no newspaper is published in such
place, then in a newspaper of general circulation in the
Philippines, after sending such notice to each stockholder or
member either by registered mail or by personal delivery at least
thirty (30) days prior to said meeting. A copy of the resolution
authorizing the dissolution shall be certified by a majority of the
board of directors or trustees and countersigned by the secretary
of the corporation. The Securities and Exchange Commission
shall thereupon issue the certificate of dissolution. (62a)
VOLUNTARY DISSOLUTION WHERE CREDITORS ARE
AFFECTED
Section 119. Voluntary dissolution where creditors are affected. -
Where the dissolution of a corporation may prejudice the rights
of any creditor, the petition for dissolution shall be filed with the
Securities and Exchange Commission. The petition shall be
signed by a majority of its board of directors or trustees or other
officers having the management of its affairs, verified by its
president or secretary or one of its directors or trustees, and
shall set forth all claims and demands against it, and that its
dissolution was resolved upon by the affirmative vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of the
members at a meeting of its stockholders or members called for
that purpose.
If the petition is sufficient in form and substance, the
Commission shall, by an order reciting the purpose of the
petition, fix a date on or before which objections thereto may be
filed by any person, which date shall not be less than thirty (30)
days nor more than sixty (60) days after the entry of the order.
Before such date, a copy of the order shall be published at least
once a week for three (3) consecutive weeks in a newspaper of
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general circulation published in the municipality or city where
the principal office of the corporation is situated, or if there be no
such newspaper, then in a newspaper of general circulation in
the Philippines, and a similar copy shall be posted for three (3)
consecutive weeks in three (3) public places in such municipality
or city.
Upon five (5) day's notice, given after the date on which the right
to file objections as fixed in the order has expired, the
Commission shall proceed to hear the petition and try any issue
made by the objections filed; and if no such objection is
sufficient, and the material allegations of the petition are true, it
shall render judgment dissolving the corporation and directing
such disposition of its assets as justice requires, and may
appoint a receiver to collect such assets and pay the debts of the
corporation. (Rule 104, RCa)
VOLUNTARY DISSOLUTION BY SHORTENING THE CORPORATE
TERM
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)
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)
Section 6L, PD 902-A
Section 2, Rule 66
Grounds for Involuntary Dissolution
1. If the corporation doesn't formally organize and commence
the transaction of its business or the construction of its
works within 2 years from the date of its incorporation, its
corporate power ceases and the corporation shall be
deemed dissolved
2. If the corporation has commenced the transaction of its
business, but subsequently becomes continuously
inoperative for a period of at least 5 years, the same shall
be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation
3. When the corporation fails to adopt and file a code of by-
laws in the manner provided for by law
4. When the corporation has offended against a provision of
law for its creation and renewal
5. When it has committed or omitted an act which amounts to
the surrender of its corporate rights, privileges or
franchises
6. When it has misused a right, privilege, or franchise
conferred upon it by law, or when it has exercised a right,
privilege or franchise in contravention of law, such as
commission by the corporation of ultra vires or illegal acts
7. When on the basis of findings and recommendations of a
duly appointed management committee or rehabilitation
receiver, or based on the SEC’s own findings, the
continuance of the business of the corporation would not
be feasible or profitable nor work to the best interest of the
stockholders, parties-litigants, creditors or the general
public
8. When the corporation is guilty of fraud in procuring its
certificate of registration
9. When the corporation is guilty of serious misrepresentation
as to what the corporation can do or is doing great
prejudice of or damage to the general public
10. Refusal of the corporation to comply with or defiance to the
general order of the SEC restraining commission of acts
which would amount to grave violation of its franchise
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11. Failure of the corporation to file required reports in
appropriate forms as determined by the SEC within the
prescribed period
NON-USER OF CHARTER AND CONTINUOUS INOPERATION
Section 22. Effects on non-use of corporate charter and
continuous inoperation of a corporation. - If a corporation does
not formally organize and commence the transaction of its
business or the construction of its works within two (2) years
from the date of its incorporation, its corporate powers cease
and the corporation shall be deemed dissolved. However, if a
corporation has commenced the transaction of its business but
subsequently becomes continuously inoperative for a period of
at least five (5) years, the same shall be a ground for the
suspension or revocation of its corporate franchise or certificate
of incorporation. (19a)
This provision shall not apply if the failure to organize,
commence the transaction of its businesses or the construction
of its works, or to continuously operate is due to causes beyond
the control of the corporation as may be determined by the
Securities and Exchange Commission.
When Corporation Deemed Organized
✾ Organize when used in reference to corporations, involves
th3e election of officers, providing for the subscription and
payment of the capital stock, the adoption of the by-laws,
and such other steps as are necessary to endow the legal
entity with the capacity to transact the legitimate business
for which it was created
✾ Organization relates to the systematization and orderly
arrangement of the internal and managerial affairs and
organs of the corporation
✾ A corporation is deemed formally organized if it has
accomplished the following—
o Adoption of the by-laws and the filing and approval
of the same with and by the SEC in the event the
same is not adopted and filed simultaneously with
the articles of incorporation
o Election of the board of directors or trustees and of
the officers
o Establishment of the principal office
o Providing for the subscription and payment of the
capital stock and the taking of such other steps as
are necessary to endow the legal entity with
capacity to transact the legitimate business for
which it was created
When Corporation Deemed To Have “Commenced Business”
1. Entering into contracts or negotiations for lease or sale of
properties to be used as business or factory site
2. Making plans for and the construction of the factory
3. Taking steps to expedite the construction of the company’s
working equipment
SEC RULES ON SUSPENSION/REVOCATION OF REGISTRATION
CERTIFICATE
1. Corporations which have failed to formally organize and
commence the transaction of their business or the
construction of their works within 2 years from the date of
incorporation
2. Corporations which have been inoperative for a continuous
period of at least 5 years
3. Corporation which have failed to file by-laws within the
prescribed period
4. Corporation which have failed to file/register for a period of
5 years their financial statements, general information
sheet, or stock and transfer book or membership book
✾ In any of the foregoing, the SEC shall mail the corporation
and the controlling stockholders a show-cause order within
30 days from receipt thereof why the certificate of
registration shall not be suspended or revoked
✾ A second show-cause order shall be published in a
newspaper of general circulation, directing the corporation
which failed to failed to respond to the first order to appear
before the SEC on asset date and time dated in the order
✾ If the corporation doesn't comply with the directives of the
orders or when the corporation fails to appear, the SEC
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may issue the lesser sanction which is suspension which
shall immediately be executory
✾ The corporation shall have 90 days from receipt thereof
within which to file petition for reconsideration of the order.
After the lapse of the 90-day period and no petition for
reconsideration has been filed, the order of revocation shall
be issued which shall become final and executory
✾ The SEC has opined that notwithstanding Section 22, there
is no automatic dissolution of a corporation after its
incorporation has been approved by the SEC
RIGHT OF MINORITY STOCKHOLDERS TO DEMAND
DISSOLUTION
✾ Minority stockholders don't have a common law right nor a
statutory right to demand for the dissolution of a
corporation
✾ Why? This is based on the principle that minority
stockholders invest in the corporate vehicle fully aware
that the affairs of the corporation would be subject to the
control of the majority stockholders
✾ Remember Gokongwei case where it was held that any
person who buys stock in a corporation does so with the
knowledge that his affairs are dominated by a majority of
the stockholders and that he impliedly contracts that the
will of the majority shall govern in all matters within the
limits of the act of incorporation and lawfully enacted by-
laws and not forbidden by law
✾ Peculiar ruling though in Financing Corporation v. Teodoro
—ture that the general rule is that the minority
stockholders of a corporation cannot sue and demand its
dissolution. However, there are cases that hold that even
minority stockholders may ask for dissolution, this, under
the theory that such minirty members if unable to obtain a
redress and protection of their rights within the
corporation, must not and should not be left without
redress and remedy.
✾ Take note that the ruling in the aforementioned has
became a part of PD 902-A when it rules that the SEC has
the power to rule on the dissolution of the corporation after
a n appointment of a management committee or receiver…
JURISPRUDENTIAL ATTITUDE TOWARDS INVOLUNTARY
DISSOLUTION
✾ The court has a solicitous attitude in remedying violations
of corporations before resorting to the extreme punishment
for forfeiture of franchise and dissolution
OBTAINING TAX CLEARANCE
✾ Every corporation shall within 30 days after the adoption of
the resolution or plan for its dissolution, or for the
liquidation of the whole or any part of the capital, including
corporations which have been notified of possible
involuntary dissolution by the SEC, or for its reorganization,
file the nexessary return with the BIR, setting rforth the
terms of such resolution or plan; and that prior to the
issuance of the SEC of the certificate of dissolution or
reorganization, such corporation must secure a tax
clearance from the BIR to be submitted to the SEC
✾ Whenever a corporation undergoes dissolution, whether
voluntary or involuntary, a tax clearance must be first
obtained by filing with the BIR income tax returns covering
the income earned by them from the beginning of the
taxable year to the date of dissolution
NATURE OF CORPORATE LIQUIDATION
✾ Liquidation—settlement of affairs of a corporation which
consists of adjusting the debts and claims, that is, of
collecting all that is due the corporation, the settlement
and adjustment of claims against it and the payment of its
debts
✾ Process by which all assets of the corporation are
converted into liquid assets in order to pay for all claims of
corporate creditors and the remaining balance if any is to
be distributed to the stockholders or members of the
corporation
✾ Dissolution always precedes liquidation, and there is no
legal basis to proceed with liquidation without the
corporation first having been dissolved
METHODS OF LIQUIDATION
1. Liquidation through board of directors or trustees
a. The normal method of procedure is for the
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directors and executive officers to have charge of distributable to any creditor or stockholder or member who is
the winding up operations, through there is an unknown or cannot be found shall be escheated to the city or
alternative method of assigning the property of the municipality where such assets are located.
corporation to the trustees for the benefits of its
creditors and shareholders. While the appointment Except by decrease of capital stock and as otherwise allowed
of the receiver rests within the judicial discretion of by this Code, no corporation shall distribute any of its assets
the court, such discretion must however always be or property except upon lawful dissolution and after payment
exercised with caution and governed by legal and of all its debts and liabilities. (77a, 89a, 16a)
equitable principles, the violation of which will
amount to its abuse, and in making such
Board of Liquidators v. Kalaw
appointment, the court should take into
20 SCRA 967
consideration all the facts and weigh the relative
advantages and disadvantages of appointing a
receiver to wind up the corporate business 3. Liquidation through receiver
2. Liquidation through trustees a. The appointment of a receiver by the court to wind
up the affairs of the corporation upon petition for
voluntary dissolution doesn't empower the court to
Section 122. Corporate liquidation. - Every corporation
hear and pass on the claims of the creditors of the
whose charter expires by its own limitation or is annulled by
corporation at first hand..all claims must be
forfeiture or otherwise, or whose corporate existence for
presented for allowance to the receiver or trustee
other purposes is terminated in any other manner, shall
or other persons during the wind-up proceedings
nevertheless be continued as a body corporate for three (3)
which in this jurisdiction would be within 3 years
years after the time when it would have been so dissolved,
provided by Sections 77 and 78 of the Corporation
for the purpose of prosecuting and defending suits by or
Law as the term for the corporate existence of the
against it and enabling it to settle and close its affairs, to
corporation, and if a claim is disputed or
dispose of and convey its property and to distribute its
unliquidated so that the receiver cannot safely
assets, but not for the purpose of continuing the business for
allow the same, it should be transferred to the
which it was established.
proper court for trial and allowance, and the
amount so allowed then presented to the receiver
At any time during said three (3) years, the corporation is
or trustee for payment. The rulings of the receiver
authorized and empowered to convey all of its property to
on the validity of claims submitted are subject to
trustees for the benefit of stockholders, members, creditors,
review of the court appointing such receiver
and other persons in interest. From and after any such
though no appeal is taken to the latter’s ruling.
conveyance by the corporation of its property in trust for the
b. A receiver in liquidation stands on a different legal
benefit of its stockholders, members, creditors and others in
basis from a trustee in liquidation—a trusteeship is
interest, all interest which the corporation had in the
basically a contractual relationship governed by
property terminates, the legal interest vests in the trustees,
the Law on Trust and generally centered upon
and the beneficial interest in the stockholders, members,
property, such the trustee assumes naked title to
creditors or other persons in interest.
the property placed in trust. It is therefore a
relationship that can be created by the corporation
Upon the winding up of the corporate affairs, any asset
through its board of directors without the need of

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judicial authorization. A receivership on the other
hand is created through quasi-judicial or judicial
appointment of a receiver.
c. When liquidation is done, either by a receiver or by
a trustee, the corporate personality isn’t important.
For the next 3 years after dissolution, there is no
corporate personality to do business other than to
pursue liquidation. After the 3-year period, there is
no more corporate personality either in these two
cases, but even then it no longer matters, s8ince
from the time the assets of the corporation are
transferred to the trustee or receiver pursuant to a
liquidation, all such assets are then held by and in
the name of the trustee or receiver who can
lawfully proceed with liquidation even if the
corporation no longer exists, because he has title
to the assets.
LEGAL EFFECTS OF DISSOLUTION AND LIQUIDATION
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 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)
No Authority To Enter Into New Business
✾ The general rule is there is no judicial personality after
dissolution. If there is, there is only juridical personality to
serve one purpose—for all transactions pertaining to
liquidation. Any matter entered into that is not for the
purposes of liquidation will be a void transaction because
of the non-existence of the corporate entity.
Summary on Dissolution and Liquidation Proceedings
1. The termination of the life of a juridical entity doesn't by
itself cause the extinction or dimunition of the rights and
liabilities nor those of its owners and creditor
2. The corporation continues to be a body corporate for three
years after its dissolution for purposes of prosecuting and
defending suits by and against it and for enabling it to
settle and close its affairs, culminating in the disposition
and distribution of its remaining assets
3. It may during the 3-year term, appoint a trustee or a
receiver who may act beyond that period
4. If the 3-year extended life has expired without a trustee or
receiver having been expressly designated by the
corporation, within that period, the board of directors or
trustees themselves, following the rationale in Gelano v. CA
may be permitted to do so continue as trustees by legal
implication to complete the corporate liquidation
5. Still in the absence of a board of directors or trustees,
those having any pecuniary interest in the assets, including
not only the shareholders but likewise the creditors of the
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corporation, acting for and in its behalf, might make proper and dissenting stockholders
representations with the SEC, which has primary and
sufficient broad jurisdiction in matters of this nature, for Extension of Corporate Life During Period of Dissolution
working out a final settlement of the corporate concerns ✾ It would be illegal for the corporation when it takes the
stage of dissolution, to seek to extend its corporate life,
REINCORPORATION even with the amendment of the articles of incorporation,
because the same would constitute new business contrary
Chung Ka Bio v. IAC to the injunction of the law that upon dissolution the
163 SCRA 534 corporation cannot go into transaction for the purpose of
✾ Philippine Blooming Mills’ term was supposed to end at a continuing the business for which it was established
certain date. Four months after this date, the corporation ✾ When the corporate life expires, the corporation ceases to
has issued a deed of assignment of all its assets in favor of be a body corporate for the purpose of continuing the
the treasurer, indicating therein the corporation was under business for which it was organized
the process of reincorporation. One month later, a ✾ A corporation cannot extend its life by amendment of its
certificate of incorporation was issued to the new PBM. articles of incorporation effected during the three-year
This prompted the stockholders of the old and new PBM to statutory period for liquidation when its original term of
seek liquidation, averring that the failure to extend the existence has already expired, as the same would
corporate life meant that the corporation has ipso facto constitute new business
been dissolved.
✾ It was held that since there is no proof that the 2/3 vote Distinction Between Extension of Corporate Life, Revival,
wasn't given by the stockholders, there is the presumption and Reincorporation
of regularity which must operate in favor of the private
respondents, who insist that the proper authorization as Extension Revival Reincorporation
required by the corporation law was obtained in the To increase the time To give a new Taking out of a new
meeting called for that purpose. It was further held that for the existence of existence to one charter of the
had not the required approval of the stockholders been one which would which has been corporation in order
obtained, the new PBM wouldn't have been issued a otherwise reach its forfeited, or which to correct errors or
certificate of incorporation. limit at an earlier has lost its validity defects in the
✾ There is nothing to prevent the stockholders from period by lapse of time original
conveying their respective shareholdings toward the incorporation, or to
creation of a new corporation to continue the business of enlarge the power or
the old. Winding up is to the sole activity of a dissolved limit the liabilities of
corporation that does not intend to incorporate anew. If it the corporation, or to
does, however, it is not unlawful for the old board to lengthen or revive
negotiate and transfer the assets of the dissolved the corporate life
corporation to the new corporation intended to be created
as long as the stockholders have given their consent. CLOSE CORPORATIONS
✾ There is nothing in the new Corporation Code prohibiting
this DEFINITION
✾ Note that this case failed to discuss the rights of creditors ✾ Under American jurisprudence, close corporations are

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those in which the major part of the persons to whom the
powers have been granted, on the happening of vacancies
among them, have the right of themselves to appoint
others to fill such vacancies, without allowing to the
stockholders in general any vote or choice in the selection
of such new offices, or where the business policy and
activities are entirely dominated for practical purposes by
the majority stock ownership of a family whose stock isn’t
traded in any market and is very infrequently sold
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
NEED FOR A CLOSE CORPORATION
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.
ARTICLES OF INCORPORATION REQUIREMENTS
What Are The Problems With The Abovementioned
Statutory Definition?
1. By limiting the applicability of the statutory provisions to
corporations having all the three enumerated requisites, a
significant portion of what otherwise would be generally
accepted close corporations wouldn't be covered by the
pertinent provisions on close corporations but instead
would still be covered by provisions applicable to publicly
held corporations
2. By requiring that all the three requisties must be stated in
the articles of incorporation, it would seem that those
corporations possessing all the requisites in actual practice
wouldn't be covered by the provisions if their articles of
incorporation are silent on the matter
3. Even for corporations which has mentioned the 3 requisites
in the articles of incorporation, the provisions wouldn't still
apply if in actual operations, one of the requisites is
absent.
Manuel Dulay Enterprises v. Court of Appeals
225 SCRA 678
San Juan Structural v. CA
296 SCRA 631
✾ A close corporation is a progeny of a marriage of
convenience between the essence of a partnership and
that of a corporation
✾ The same is considered a distinct type of business
organization embodying what businessmen perceive to be
the best features of a corporation and partnership
✾ Under the free market system, businessmen should be left
at liberty to adopt a business medium which they feel is
best for the pursuit of their commercial affairs so long as
the route chosen by them is not contrary to law, morals,
public policy and public order
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

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owning or holding the same and restrictions on their transfers as

may be stated therein, subject to the provisions of the following The restriction on the
section; transferability of shares of stock
in a close corporation is limited
2. For a classification of directors into one or more classes, each to what in general parlance is
of whom may be voted for and elected solely by a particular called a right of first refusal and
class of stock; and it is the most onerous restriction
allowed.
3. For a greater quorum or voting requirements in meetings of For a classification of directors The power to classify the
stockholders or directors than those provided in this Code. into one or more classes, each directors in ordinary
of whom may be voted for and corporations seems to be denied
The articles of incorporation of a close corporation may provide elected solely by a particular under Section 24
that the business of the corporation shall be managed by the class of stock
stockholders of the corporation rather than by a board of For a greater quorum or voting The same is also granted for
directors. So long as this provision continues in effect: requirements in meetings of ordinary corporations
stockholders or directors than
1. No meeting of stockholders need be called to elect directors; those provided in this Code.
The articles of incorporation of a An ordinary corporation is
2. Unless the context clearly requires otherwise, the stockholders close corporation may provide managed and controlled by a
of the corporation shall be deemed to be directors for the that the business of the board of directors or trustees
purpose of applying the provisions of this Code; and corporation shall be managed
by the stockholders of the
3. The stockholders of the corporation shall be subject to all corporation rather than by a
liabilities of directors. board of directors.

The articles of incorporation may likewise provide that all officers PRE-EMPTIVE RIGHTS
or employees or that specified officers or employees shall be
elected or appointed by the stockholders, instead of by the Section 102. Pre-emptive right in close corporations. - The pre-
board of directors. emptive right of stockholders in close corporations shall extend
to all stock to be issued, including reissuance of treasury shares,
Comparing The Two Types of Corporations… whether for money, property or personal services, or in payment
of corporate debts, unless the articles of incorporation provide
Close corporation Publicly-held corporation otherwise.
For a classification of shares or Has the same feature as close
rights and the qualifications for corporations AMENDMENT
owning or holding the same and
restrictions on their transfers as Section 103. Amendment of articles of incorporation. - Any
may be stated therein, subject amendment to the articles of incorporation which seeks to delete
to the provisions of the or remove any provision required by this Title to be contained in
following section

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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.
RESTRICTIONS ON TRANSFER OF SHARES
Section 98. Validity of restrictions on transfer of shares. -
Restrictions on the right to transfer shares must appear in the
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.
Section 99. Effects of issuance or transfer of stock in breach of
qualifying conditions. -
1. If stock of a close corporation is issued or transferred to any
person who is not entitled under any provision of the articles of
incorporation to be a holder of record of its stock, and if the
certificate for such stock conspicuously shows the qualifications
of the persons entitled to be holders of record thereof, such
person is conclusively presumed to have notice of the fact of his
ineligibility to be a stockholder.
2. If the articles of incorporation of a close corporation states the
number of persons, not exceeding twenty (20), who are entitled
to be holders of record of its stock, and if the certificate for such
stock conspicuously states such number, and if the issuance or
transfer of stock to any person would cause the stock to be held
by more than such number of persons, the person to whom such
stock is issued or transferred is conclusively presumed to have
notice of this fact.
3. If a stock certificate of any close corporation conspicuously
shows a restriction on transfer of stock of the corporation, the
transferee of the stock is conclusively presumed to have notice
of the fact that he has acquired stock in violation of the
restriction, if such acquisition violates the restriction.
4. Whenever any person to whom stock of a close corporation
has been issued or transferred has, or is conclusively presumed
under this section to have, notice either (a) that he is a person
not eligible to be a holder of stock of the corporation, or (b) that
transfer of stock to him would cause the stock of the corporation
to be held by more than the number of persons permitted by its
articles of incorporation to hold stock of the corporation, or (c)
that the transfer of stock is in violation of a restriction on
transfer of stock, the corporation may, at its option, refuse to
register the transfer of stock in the name of the transferee.
5. The provisions of subsection (4) shall not be applicable if the
transfer of stock, though contrary to subsections (1), (2) or (3),
has been consented to by all the stockholders of the close
corporation, or if the close corporation has amended its articles
of incorporation in accordance with this Title.
6. The term "transfer", as used in this section, is not limited to a
transfer for value.
7. The provisions of this section shall not impair any right which
the transferee may have to rescind the transfer or to recover
under any applicable warranty, express or implied.
AGREEMENTS BY STOCKHOLDERS
Section 100. Agreements by stockholders. -
1. Agreements by and among stockholders executed before the
formation and organization of a close corporation, signed by all
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stockholders, shall survive the incorporation of such corporation
and shall continue to be valid and binding between and among
such stockholders, if such be their intent, to the extent that such
agreements are not inconsistent with the articles of
incorporation, irrespective of where the provisions of such
agreements are contained, except those required by this Title to
be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing
and signed by the parties thereto, may provide that in exercising
any voting rights, the shares held by them shall be voted as
therein provided, or as they may agree, or as determined in
accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the
stockholders, relating to any phase of the corporate affairs, shall
be invalidated as between the parties on the ground that its
effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders in
a close corporation shall not be invalidated on the ground that it
so relates to the conduct of the business and affairs of the
corporation as to restrict or interfere with the discretion or
powers of the board of directors: Provided, That such agreement
shall impose on the stockholders who are parties thereto the
liabilities for managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary
duties to each other and among themselves. Said stockholders
shall be personally liable for corporate torts unless the
corporation has obtained reasonably adequate liability
insurance.
NO NECESSITY OF BOARD
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
2. All the stockholders have actual or implied knowledge of the
action and make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the
express or implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the
action in question and none of them makes prompt objection
thereto in writing.
If a director's meeting is held without proper call or notice, an
action taken therein within the corporate powers is deemed
ratified by a director who failed to attend, unless he promptly
files his written objection with the secretary of the corporation
after having knowledge thereof.
Sergio Naguiat v. NLRC
259 SCRA 564
DEADLOCKS
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
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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.
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.
WITHDRAWAL AND DISSOLUTION
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.
PIERCING THE VEIL OF CORPORATE FICTION
✾ When a close corporation is being used to promote fraud,
injustice, illegality, or wrong, such circumstnaces would
always warrant a piercing of the veil of the corporate
fiction
✾ In alter0ego cases, with the formal recognition of a close
corporation there can be no application of the above
doctrine to a close corporation as defined under Section 96
thereof, when such a close corporation is merely intended
as an alter ego or conduit of the stockholders
✾ For the de facto corporations, on the other hand, they
would be susceptible to the application of the doctrine for
being mere conduits or alter-egos of the stockholders
NON-STOCK CORPORATIONS, FOUNDATIONS AND
COOPERATIVES
NON-STOCK CORPORATIONS
✾ One where no part of its income is distributable as
dividends to its members, trustees or officers and that any
profit it may obtain as an incident to its operation shall,
whenever necessary or proper, be used for the furtherance
of the purpose or purposes for which the corporation was
organized
✾ It may be formed for organized for chartiable, religious,
educational, professional, cultural, recreational, fraternal,
literary, scientific, social, civil service, or similar purposes,
like trade, industry, agriculture and like chambers or any
combination thereof
✾ The articles of incorporation may not include a purpose
which would change or contradict its nature as such
✾ The abovementioned is quite interesting as they clearly
recognize that a non-stock or non-profit corporation may
actually realize profits from its operations so long as its
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profits are devoted for its eleemosynary purpose
Distribution of Net Assets and Profits Upon Dissolution
✾ In the event of dissolution, after the payment of all
liabilities and after the payment of all liabilities and return
of assets received subject to limitations permitting their
use, the remaining assets may be distributed to the
members, or any classes of members, as provided for in
the articles of incorporation and by-laws; in the absence of
distribution rules, the remaining assets may be distributed
to such persons, societies, organizations or associations,
whether or not organized for profit, as may be specified in
a plan for distribution as adopted by the board of trustees
and ratified by the members
Applicability of Stock Corporation Provisions
✾ Provisions applicable to stock corporations shall
applicable when pertinent to non-stock corporations
THEORY ON NON-STOCK CORPORATIONS
✾ While all net earnings and residual value of the business of
a stock corporation can be distributed to its stockholders,
there is an expressed legal prohibition from making such
distributions in a non-stock corporation
✾ Rationale for the use of non-profit form for eleemosynary
endeavors lies in the chief function of the non-distribution
constraint, namely, that it helps to overcome contractual
failure in situations where such failure is quite likely to
occur
✾ Contractual failure—inability of the buyer of services to
assure himself that he is getting what he intends to be
contracting for; in general terms, it denotes high
monitoring and enforcement costs
✾ Whenever general goals cannot be reduced or agreed upon
to operationally define set of particular objectives and
results, it is obviously difficult or impossible to monitor and
assess performance of those who undertake to provide
services aimed at achieving the general goals.
Accordingly, consumers may have a preference for non-
profit service organizations.
Section 14. Contents of the articles of incorporation. - All
corporations organized under this code shall file with the
Securities and Exchange Commission articles of incorporation in
any of the official languages duly signed and acknowledged by
all of the incorporators, containing substantially the following
matters, except as otherwise prescribed by this Code or by
special law:
2. The specific purpose or purposes for which the corporation is
being incorporated. Where a corporation has more than one
stated purpose, the articles of incorporation shall state which is
the primary purpose and which is/are the secondary purpose or
purposes: Provided, That a non-stock corporation may not
include a purpose which would change or contradict its nature as
such;
be
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
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is need for special reserve for probable contingencies. (n)
Section 87. Definition. - For the purposes of this Code, 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: Provided,
That any profit which a non-stock corporation may obtain as an
incident to its operations shall, whenever necessary or proper,
be used for the furtherance of the purpose or purposes for which
the corporation was organized, subject to the provisions of this
Title.
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)
Section 88. Purposes. - Non-stock corporations may be formed or
organized for charitable, religious, educational, professional,
cultural, fraternal, literary, scientific, social, civic service, or
similar purposes, like trade, industry, agricultural and like
chambers, or any combination thereof, subject to the special
provisions of this Title governing particular classes of non-stock
corporations. (n)
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;
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)
Collector of Internal Revenue v. Club Filipino
5 SCRA 321
Collector of Internal Revenue v. University of Visayas
1 SCRA 669
NON-APPLICABILITY OF NATIONALIZATION LAWS
✾ A foreigner maybe a member or an officer of a non-stock
corporation
✾ Save for the position of Secretary, who must be a Filipino
citizen and a resident of the Philippines, the prohibition on
foreign citizens becoming officers of a corporation which
don't fail within the coverage of a nationalized industry or
area of business reserved by law exclusively to Filipino
citizens
CONVERSION OF NON-STOCK CORPORATION TO STOCK
CORPORATION
✾ The SEC has ruled that while it was possible to convert a
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stock corporation into a non-stock corporation by mere
amendment of the articles of incorporation, the converse is
not true
✾ This is based on Section 87 as mentioned above
✾ The SEC has held that for purposes of transformation, it is
fundamental that the non-stock corporation must be
dissolved first under any of the methods allowed by law
and thereafter, the members may organize a stock
corporation directed to bring profits and pecuniary gains to
themselves
✾ The amendment of the articles of incorporation to convert
the non-stock corporation doesn't seek to dissolve the
corporation but to change its nature to a stock corporation,
the crediting of the member’s equity to stockholder’s
equity would constitute a distribution of the profits and
dividends of the corporation to its members which is
prohibited by the Corporation Code
✾ Also, the change of the purpose clause would violate
Section 14 (2) of the Corporation Code, which in
enumerating the contents of the articles of incorporation,
clearly prohibits a non-stock corporation in including the
purpose clause of its articles of incorporation any purpose
which would change or contradict its nature as such
WHAT IS A FOUNDATION?
✾ The code doesn't have specific provisions nor does it even
refer to foundations as separate types of corporations
different from non-stock corporations
✾ A foundation is a non-stock corporation governed by the
same rules governing the latter
✾ What distinguishes it are privileges granted by special
laws, essentially in the field of taxation
SEC. 30. Exemptions from Tax on Corporations. - The following
organizations shall not be taxed under this Title in respect to
income received by them as such:
(E) Nonstock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net
income or asset shall belong to or inures to the benefit of any
member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not
organized for profit and no part of the net income of which inures
to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
✾ Under existing revenue regulations, in order to have tax
exemption, it is necessary that they file an affidavit with
the Commissioner of Internal Revenue showing the
character of their organizations, the purpose for which they
are organized, their actual activities, the source of their
income and the disposition thereof, and whether or not any
of the income is credited to surplus or inures or may inure
to the benefit of any private stockholder or individual
✾ When it comes to charitable contributions, a foundation is
limited in the manner by which it distributes the same by
the 30% limitation on its administrative expenses, whereas
no limitation applies to regular non-stock corporations
✾ In addition, both the donors to, the management of,
foundations are saddled with reportorial requirements on
donations given and received, as the case may be
✾ Because donations to foundations are fully deductible in
ascertaining taxable income, this might become a bigger
motivation to donate to foundations rather than non-stock
corporations
DISSOLUTION
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
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therefore;
2. Assets held by the corporation upon a condition requiring
return, transfer or conveyance, and which condition occurs by
reason of the dissolution, shall be returned, transferred or
conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to
limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes, but not held upon a
condition requiring return, transfer or conveyance by reason of
the dissolution, shall be transferred or conveyed to one or more
corporations, societies or organizations engaged in activities in
the Philippines substantially similar to those of the dissolving
corporation according to a plan of distribution adopted pursuant
to this Chapter;
4. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or the by-laws, to the
extent that the articles of incorporation or the by-laws,
determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and
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)
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)
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)
✾ Although wrongfully placed, the inclusion of the element of
reciprocity in the definition emphasizes the Philippine
policy that unless our own nationals are granted business
access in a foreign state, then the corporate entities of
such foreign state would likewise not be granted legal
business access in the Philippines
STATUTORY CONCEPT OF “DOING BUSINESS”
As defined in the Foreign Investments Act
✾ Soliciting orders, service contracts, opening offices,
whether called “liaison” offices or branches
✾ Appointing representatives or distributors domiciled in the
Philippines or who may in any calendar year stay in the
country for a period or periods totaling 180 days or more
✾ Participating in the management, supervision, or control of
any domestic business, firm, entity or corporation in the
Philippines
✾ Any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some
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of the functions normally incident to, and in progressive
prosecution of, commercial gain or the purpose or object of
the business organization
It doesn't include…
✾ Mere investment as a stockholder by a foreign entity in a
domestic corporation duly registered to do business, and/or
exercise of rights as such investor
✾ Having a nominee director or officer to represent its
interest in such corporation
✾ Appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and
for its own account
✾ Publication of a general advertisement through any print or
broadcast media
✾ Maintaining a stock of goods in the Philippines for the
purpose of having the same processed by another entity in
the Philippines
✾ Consignment by a foreign entity of equipment with a local
company to be used in the processing of products for
export
✾ Collecting information in the Philippines
✾ Performing services auxiliary to an existing isolated
contract of sale which are not on a continuity basis, such
as installing in the Philippines machinery it has
manufactured or exported to the Philippines, servicing the
same, training domestic workers to operate it, and similar
incidental services
Application for License
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;
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.
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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)
Rationale for Requiring License To Do Business
✾ To subject the foreign corporations to the jurisdiction of the
courts
Issuance of License
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 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
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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)
Amendment of License
Section 131. Amended license. - A foreign corporation authorized
to transact business in the Philippines shall obtain an amended
license in the event it changes its corporate name, or desires to
pursue in the Philippines other or additional purposes, by
submitting an application therefor to the Securities and
Exchange Commission, favorably endorsed by the appropriate
government agency in the proper cases. (n)
JURISPRUDENTIAL CONCEPT OF “DOING BUSINESS”
✾ Doing business implies continuity of commercial dealings
and arrangements and the performance of acts or works or
the exercise of some of the functions normally incident to
the purpose or object of its organization
✾ Single transaction—where a single act or transaction,
however, isn’t 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
business
✾ Territoriality rule—to be doing or transaction business in
the Philippines for purposes of Section 133 of the
Corporation Code, the foreign corporation must actually
transact business in the Philippines, that is, perform
specific business transactions within the Philippine territory
on a continuing basis in its own name and for its own
account
✾ Acts of solicitations—solicitation of business contracts
constitutes doing business in the Philippines
✾ On insurance business—a foreign corporation with a
settling agent in the Philippines which issues 12 marine
policies covering different shipments to the Philippines is
doing business in the Philippines
Summary of Doing Business
1. If a foreign corporation does business in the Philippines
without a license, it cannot sue before the Philippine courts
2. If a foreign corporation isn’t doing business in the
Philippines, it needs no license to sue before Philippine
courts on an isolated transaction or on a cause of action
entirely independent of any business transaction
3. If a foreign corporation does business in the Philippines
without a license, a Philippine citizen or entity who has
contracted with said corporation may be estopped from
challenging the foreign corporation’s corporate personality
in a suit brought before the Philippine courts
4. If a foreign corporation does business in the Philippines
with the required license it can sue before Philippine courts
on any transaction
JURISPRUDENTIAL TEST: Isolated Transactions
✾ Not every activity undertaken in the Philippines amounts to
doing business as to require the foreign corporation to
obtain such license
✾ Single acts or transactions of foreign corporations are not
regarded as doing or carrying on a business in the
Philippines
✾ Take note! The fact that a foreign corporation isn’t doing
business in the Philippines must be alleged if a foreign
corporation desires to sue in Philippine courts under the
isolated transactions rule
Twin Characterization Test
✾ Whether the foreign corporation is continuing a body or
substance of the business or enterprise for which it is
organized or whether it has substantially retired from it and
turned it over to another.
✾ The term implies a continuity of commercial dealings or
arrangements, and contemplates, to that extent the
performance of acts or works or the exercise of some of the
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functions normally incident to, and in progressive
prosecution of, the purpose and object of its organization
Contract Test
✾ As may be implied in jurisprudence, the implication of this
doctrine is that if the salient points of a contract don't find
themselves in the Philippines, Philippine authorities have
no business subjecting the parties to local registration and
licensing requirements
✾ This test has also been applied as part of the
jurisprudential ruling subjecting the foreign corporation no
doing business in the Philippines to the jurisdiction of local
courts on isolated contracts that have been entered into or
performed within Philippine territorial jurisdiction
DIFFERENT RULES ON TRADEMARKS AND TRADENMAES
✾ The right to use of the corporate name and trade name of
a foreign corporation is a property right which it may assert
and protect in any of the courts of the world even in
countries where it doesn't personally transact any business
✾ There has been an evolution of rulings with regard to the
matter given the change in laws applicable
✾ With the passing of the Intellectual Property Code, any
foreign national or juridical person who meet the
requirements of Section 3 of the Act and doesn't engage in
business in the Philippines may bring a civil or
administrative action hereunder for opposition,
cancellation, infringement, unfair competition, or false
designation of origin and false description, whether or not
it is licensed to do business in the Philippines under
existing laws
EFFECT OF FAILURE OF A FOREIGN CORPORATION TO
OBTAIN A LICENSE WHEN IT CONDUCTS BUISNESS IN THE
PHILIPPINES
1. To be denied access in Philippine courts and administrative
bodies to obtain relief on the contracts and transactions it
has entered into
2. And yet to be amenable to suits on those contracts and
transactions it has entered into
3. But that the subsequent obtaining of a license prior to the
filing of a suit would cure the defect and allow the foreign
corporation to sue in local courts and administrative bodies
on said contracts and transactions
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
courts or administrative tribunals on any valid cause of action
recognized under Philippine laws. (69a)
In Pari Delicto Doctrine
✾ The local party to a contract with a foreign corporation that
does business in the Philippines without license cannot
maintain suit against the foreign corporation just as the
foreign corporation cannot maintain suit, under the
principle of pari delicto
Estoppel Doctrine
✾ A foreign corporation doing business in the Philippines may
sue in Philippine courts although it is without license to do
business here against a citizen who had contracted with
and had been benefited by said corporation and knew it to
be without the necessary license to do business under the
principle of estoppel
Proper Doctrine (Erik’s Ltd. v. CA)
✾ Given the facts of this case, we cannot see how petitioner's
business dealings will fit the category of "isolated
transactions" considering that its intention to continue and
pursue the corpus of its business in the country had been
clearly established. It has not presented any convincing
argument with equally convincing evidence for us to rule
otherwise.
✾ Accordingly and ineluctably, petitioner must be held to be
incapacitated to maintain the action a quo against private
respondent.
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✾ It was never the intent of the legislature to bar court
access to a foreign corporation or entity which happens to
obtain an isolated order for business in the Philippines.
Neither, did it intend to shield debtors from their legitimate
liabilities or obligations. 15 But it cannot allow foreign
corporations or entities which conduct regular business any
access to courts without the fulfillment by such
corporations of the necessary requisites to be subjected to
our government's regulation and authority. By securing a
license, the foreign entity would be giving assurance that it
will abide by the decisions of our courts, even if adverse to
it.
✾ The requirement of a license is not meant to put foreign
corporations at a disadvantage. Rather, the doctrine of lack
of capacity to sue is based on considerations of sound
public policy. While we agree with petitioner that the
county needs to develop trade relations and foster friendly
commercial relations with other states, we also need to
enforce our laws that regulate the conduct of foreigners
who desire to do business here. Such strangers must follow
our laws and must subject themselves to reasonable
regulation by our government.
SUITS AGAINST FOREIGN CORPORATIONS
✾ When it is shown that a foreign corporation is doing
business in the Philippines, summons may be served on
o Its resident agent designated in accordance with
law
o If there is no resident agent, the government
official designated by law to that effect
o Any of its officers or agents within the Philippines
✾ Although doing business is the nexus by which local courts
are granted the right to obtain jurisdiction over the person
of foreign corporation, consent may also authorize local
courts and administrative agencies to exercise jurisdiction
over foreign corporations even when they are not doing
business in the Philippines
Objection to Jurisdiction
✾ Appearance of a foreign corporation to a suit precisely to
question the tribunal’s jurisdiction over its person is not
equivalent to service of summons nor does it constitute an
acquiescence to the court’s jurisdiction
Facilities Management Corp. v. De La Osa
89 SCRA 131
FMC may be considered as "doing business in the Philippines"
within the scope of Section 14 (Service upon private foreign
corporations), Rule 14 of the Rules of Court which provides that "If
the defendant is a foreign corporation, or a non-resident joint stock
company or association, doing business in the Philippines, service
may be made on its resident agent designated in accordance with
law for that purpose or, if there be no such agent, on the
government official designated by law to that effect, or on any of
its officers or agents within the Philippines." Indeed, FMC, in
compliance with Act 2486 as implemented by Department of Labor
Order IV dated 20 May 1968 had to appoint Jaime V. Catuira, 1322
A. Mabini, Ermita, Manila "as agent for FMC with authority to
execute Employment Contracts and receive, in behalf of that
corporation, legal services from and be bound by processes of the
Philippine Courts of Justice, for as long as he remains an employee
of FMC." It is a fact that when the summons for FMC was served on
Catuira he was still in the employ of the FMC. Hence, if a foreign
corporation, not engaged in business in the Philippines, is not
barred from seeking redress from courts in the Philippines (such as
in earlier cases of Aetna Casualty & Surety Company, vs. Pacific
Star Line, etc. [GR L-26809], In Mentholatum vs. Mangaliman, and
Eastboard Navigation vs. Juan Ysmael & Co.), a fortiori, that same
corporation cannot claim exemption from being sued in Philippine
courts for acts done against a person or persons in the Philippines.
Avon Insurance PLC v. CA
278 SCRA 312
In the alternative, private respondent submits that foreign
corporations not doing business in the Philippines are not exempt
from suits leveled against them in courts, citing the case of
Facilities Management Corporation vs. Leonardo Dela Osa, et. al.
20 where we ruled "that indeed, if a foreign corporation, not
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engaged in business in the Philippines, is not barred from seeking
redress from Courts in the Philippines, a fortiori, that same
corporation cannot claim exemption from being sued in Philippine
Courts for acts done against a person or persons in the
Philippines."
We are not persuaded by the position taken by the private
respondent. In Facilities Management case, the principal issue
presented was whether the petitioner had been doing business in
the Philippines, so that service of summons upon its agent as
under Section 14, Rule 14 of the Rules of Court can be made in
order that the Court of First Instance could assume jurisdiction over
it. The Court ruled that the petitioner was doing business in the
Philippines, and that by serving summons upon its resident agent,
the trial court had effectively acquired jurisdiction. In that case, the
court made no prescription as the absolute suability of foreign
corporations not doing business in the country, but merely
discounts the absolute exemption of such foreign corporations from
liabilities particularly arising from acts done against a person or
persons in the Philippines.
RESIDENT AGENT
Concept of Residence
✾ The domicile of a corporation in the strict technical sense
belongs to the state wherein it was incorporated and is
single in its essence and a corporation can only have one
domicile which is the state of its creation
✾ The residence of a corporation on the other hand is where
it exercises its corporate functions or the place where its
business is done
✾ A foreign corporation licensed to do business in a state is a
resident of any country where it maintains an office or
agent for transactions of its usual and customary business
for venue purposes
✾ That a corporation may be domiciled in one state and be a
resident in another
✾ Its legal domicile is the state of its creation which presents
no impediment to its residence in a real and practical
sense in the state of business activities
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)
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
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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)
LAWS APPLICABLE TO FOREIGN CORPORATIONS
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)
✾ An illustration of this is the case of Grey v. Insular Lumber
Co., wherein a foreign corporation was doing business here
in the Philippines. According to the Stock Corporation Code
then of New York, only stockholders owning at least 3% of
the shares may inspect the books and records of the
corporation. Grey was a stockholder who owned less than
3% of the shares. He wanted to inspect the books and
records, but was denied. He invoked the Philippine laws.
The Court has held that intramural matters such as the
qualification to inspect corporate records are governed by
the laws where the corporation was incorporated.
AMENDMENT OF ARTICLES OF INCORPORATION OR BY-LAWS
Section 130. Amendments to articles of incorporation or by-laws
of foreign corporations. - Whenever the articles of incorporation
or by-laws of a foreign corporation authorized to transact
business in the Philippines are amended, such foreign
corporation shall, within sixty (60) days after the amendment
becomes effective, file with the Securities and Exchange
Commission, and in the proper cases with the appropriate
government agency, a duly authenticated copy of the articles of
incorporation or by-laws, as amended, indicating clearly in
capital letters or by underscoring the change or changes made,
duly certified by the authorized official or officials of the country
or state of incorporation. The filing thereof shall not of itself
enlarge or alter the purpose or purposes for which such
corporation is authorized to transact business in the Philippines.
(n)
MERGERS AND CONSOLIDATIONS
Section 132. Merger or consolidation involving a foreign
corporation licensed in the Philippines. - One or more foreign
corporations authorized to transact business in the Philippines
may merge or consolidate with any domestic corporation or
corporations if such is permitted under Philippine laws and by
the law of its incorporation: Provided, That the requirements on
merger or consolidation as provided in this Code are followed.
Whenever a foreign corporation authorized to transact business
in the Philippines shall be a party to a merger or consolidation in
its home country or state as permitted by the law of its
incorporation, such foreign corporation shall, within sixty (60)
days after such merger or consolidation becomes effective, file
with the Securities and Exchange Commission, and in proper
cases with the appropriate government agency, a copy of the
articles of merger or consolidation duly authenticated by the
proper official or officials of the country or state under the laws
of which merger or consolidation was effected: Provided,
however, That if the absorbed corporation is the foreign
corporation doing business in the Philippines, the latter shall at
the same time file a petition for withdrawal of its license in
accordance with this Title. (n)
REVOCATION OF LICENSE TO DO BUSINESS
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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
courts or administrative tribunals on any valid cause of action
recognized under Philippine laws. (69a)
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;
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)
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)
WITHDRAWAL OF LICENSE
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
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general circulation in the Philippines.
MISCELLANEOUS PROVISIONS
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)
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)
Section 139. Incorporation and other fees. - The Securities and
Exchange Commission is hereby authorized to collect and
receive fees as authorized by law or by rules and regulations
promulgated by the Commission. (n)
Section 140. Stock ownership in certain corporations. - Pursuant
to the duties specified by Article XIV of the Constitution, the
National Economic and Development Authority shall, from time
to time, make a determination of whether the corporate vehicle
has been used by any corporation or by business or industry to
frustrate the provisions thereof or of applicable laws, and shall
submit to the Batasang Pambansa, whenever deemed
necessary, a report of its findings, including recommendations
for their prevention or correction.
Maximum limits may be set by the Batasang Pambansa for
stockholdings in corporations declared by it to be vested with a
public interest pursuant to the provisions of this section,
belonging to individuals or groups of individuals related to each
other by consanguinity or affinity or by close business interests,
or whenever it is necessary to achieve national objectives,
prevent illegal monopolies or combinations in restraint or trade,
or to implement national economic policies declared in laws,
rules and regulations designed to promote the general welfare
and foster economic development.
In recommending to the Batasang Pambansa corporations,
businesses or industries to be declared vested with a public
interest and in formulating proposals for limitations on stock
ownership, the National Economic and Development Authority
shall consider the type and nature of the industry, the size of the
enterprise, the economies of scale, the geographic location, the
extent of Filipino ownership, the labor intensity of the activity,
the export potential, as well as other factors which are germane
to the realization and promotion of business and industry.
Section 141. Annual report or corporations. - Every corporation,
domestic or foreign, lawfully doing business in the Philippines
shall submit to the Securities and Exchange Commission an
annual report of its operations, together with a financial
statement of its assets and liabilities, certified by any
independent certified public accountant in appropriate cases,
covering the preceding fiscal year and such other requirements
as the Securities and Exchange Commission may require. Such
report shall be submitted within such period as may be
prescribed by the Securities and Exchange Commission. (n)
Section 142. Confidential nature of examination results. - All
interrogatories propounded by the Securities and Exchange
Commission and the answers thereto, as well as the results of
any examination made by the Commission or by any other
official authorized by law to make an examination of the
operations, books and records of any corporation, shall be kept
strictly confidential, except insofar as the law may require the
same to be made public or where such interrogatories, answers
or results are necessary to be presented as evidence before any
court. (n)
Section 143. Rule-making power of the Securities and Exchange
Commission. - The Securities and Exchange Commission shall
have the power and authority to implement the provisions of this
Code, and to promulgate rules and regulations reasonably
necessary to enable it to perform its duties hereunder,
particularly in the prevention of fraud and abuses on the part of
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the controlling stockholders, members, directors, trustees or and Exchange Commission, shall be deemed to have been
officers. (n) authorized, licensed or registered under the provisions of this
Code, subject to the terms and conditions of its license, and shall
Section 144. Violations of the Code. - Violations of any of the be governed by the provisions hereof: Provided, That if any such
provisions of this Code or its amendments not otherwise corporation is affected by the new requirements of this Code,
specifically penalized therein shall be punished by a fine of not said corporation shall, unless otherwise herein provided, be
less than one thousand (P1,000.00) pesos but not more than ten given a period of not more than two (2) years from the effectivity
thousand (P10,000.00) pesos or by imprisonment for not less of this Code within which to comply with the same. (n)
than thirty (30) days but not more than five (5) years, or both, in
the discretion of the court. If the violation is committed by a Section 149. Effectivity. - This Code shall take effect immediately
corporation, the same may, after notice and hearing, be upon its approval.
dissolved in appropriate proceedings before the Securities and
Exchange Commission: Provided, That such dissolution shall not
preclude the institution of appropriate action against the
director, trustee or officer of the corporation responsible for said
violation: Provided, further, That nothing in this section shall be
construed to repeal the other causes for dissolution of a
corporation provided in this Code. (190 1/2 a)

Section 145. Amendment or repeal. - No right or remedy in favor

of or against any corporation, its stockholders, members,
directors, trustees, or officers, nor any liability incurred by any
such corporation, stockholders, members, directors, trustees, or
officers, shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent amendment
or repeal of this Code or of any part thereof. (n)

Section 146. Repealing clause. - Except as expressly provided by

this Code, all laws or parts thereof inconsistent with any
provision of this Code shall be deemed repealed. (n)

Section 147. Separability of provisions. - Should any provision of

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

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

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