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• JRS BUSINESS VS IMPERIAL INSURANCE • International Express Travel and Tour v CA
Franchises, so far as relating to corporations, are divisible into It is a basic postulate that before a corporation may acquire
[1] corporate or general franchises; and juridical personality, the State must give its consent either in
[2] special or secondary franchises. the form of a special law or a general enabling act. Nowhere
can it be found in R.A. 3135 or P.D. 604 any provision creating
The former is the franchise to exist as a corporation, while the the Philippine Football Federation. Accordingly, we rule that
latter are certain rights and privileges conferred upon existing the Philippine Football Federation is not a national sports
corporations such as the right to use the streets of municipality association within the purview of the aforementioned laws and
to lay pipes or tracks, erect poles or string wires." does not have corporate existence of its own.
The primary franchise of a corporation - is, the right to exist as Thus being said, it follows that private respondent Henry Kahn
such, is vested "in the individuals who compose the should be held liable for the unpaid obligations of the
corporation and not in the corporation itself and cannot be unincorporated Philippine Football Federation.
conveyed in the absence of a legislative authority so to do,
The special or secondary franchises of a corporation - are It is a settled principal in corporation law that any person
vested in the corporation and may ordinarily be conveyed or acting or purporting to act on behalf of a corporation which has
mortgaged under a general power granted to a corporation to no valid existence assumes such privileges and becomes
dispose of its property, except such special or secondary personally liable for contract entered into or for other acts
franchises as are charged with a public use. performed as such agent.
The word ―person here was extended to private corporations A corporation has a personality distinct and separate from its
insofar as their property is concerned. Therefore, Smith, Bell individual stockholders or members. Being an officer or
& Co., as a person by fiction of law, is entitled as well to the stockholder of a corporation does not make one's property the
guarantees of due process and equal protection of laws. property also of the corporation, for they are separate entities.
Thus, property belonging to a corporation cannot be attached
• Stonehill v Diokno to satisfy the debt of a stockholder and vice versa, the latter
having only an indirect interest in the assets and business of
The right to object to the unlawful search and seizure belongs the former.
exclusively to the corporations, from whom the seized effects
belong, and may not be invoked by the corporate officers in • Good Earth Emporium v CA
proceedings against them in their individual capacity.
As a consequence of the separate juridical personality of a
• Bataan Shipyard v PCGG corporation, the corporate debt or credit is not the debt or
credit of the stockholder, nor is the stockholder's debt or credit
The right against self-incrimination has no application to that of the corporation.
juridical persons. Corporations are not entitled to all of the
constitutional protections which private individuals have. • DBP V NLRC
A corporation is a creature of the state. It is presumed to be Ownership of a majority of capital stock and the fact that a
incorporated for the benefit of the public. It received certain majority of directors of a corporation are directors of another
special privileges and franchises, and holds them subject to corporation created no employer-employee relationship nor
the laws of the state and the limitations of its charter. Thus, its did it make the controlling stockholders liable for employee’s
rights to act as a corporation are only preserved to it so long claim of the subject corporation.
as it obeys the laws of its creation.
Legal Consequences of the application of the Doctrine of
While an individual may lawfully refuse to answer Separate Juridical Personality (Villanueva):
incriminating questions, it does not follow that a corporation,
vested with special privileges and franchises, may refuse to 1. The property of the corporation is not the property
show its hand when charged with an abuse of such privileges. of it stockholders and vice versa
2. A parent or holding corporation has no proprietary
• San Fernando v Cargill Philippines interest in the property, rights and interests of its
subisdiaries or affiliates, consequently any suit
As a rule, moral damages are not awarded to a corporation against the parent company does not bind the
unless it enjoyed good reputation that the offender debased subsidiaries and vice versa
and besmirched by his actuations. 3. A corporation may not be held liable for the
obligations of the stockholders or members
comprising it, or those of its officers and vice versa
SEPARATE JURIDICAL PERSONALITY 4. Corporate officers are not personally liable for their
official acts in pursuing the affairs and business of
• Stockholders of Guenon and Sons v ROD of the corporation ubless it is shown that they
Manila exceeded their authority
5. Substantial ownership in the capital stock entitling
the stockholder a significant vote in corporate
CORPORATION LAW 1ST EXAM REVIEWER 3
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affairs allows them no standing or claims pertaining Piercing the veil of corporate fiction may be allowed only if the
to corporate affairs. following elements concur:
6. The following facts by themselves or in combination
would not warrant a disregard of the veil of [1] control — not mere stock control, but complete domination
corporate fiction absence fraud or other public — not only of finances, but of policy and business practice in
policy considerations: respect to the transaction attacked, must have been such that
i. Ownership by a single stockholder or by the corporate entity as to this transaction had at the time no
another corporation of all or nearly all of the separate mind, will or existence of its own;
capital stock
ii. Substantial identity of the incorporators of two
corporations does not imply fraud [2] such control must have been used by the defendant to
iii. Interlocking directors of officers commit a fraud or a wrong to perpetuate the violation of a
iv. Location of head offices or facilities in the same statutory or other positive legal duty, or a dishonest and an
address unjust act in contravention of plaintiff's legal right; and
[3] the said control and breach of duty must have proximately
DOCTRINE OF PIERCING OF CORPORATE FICTION caused the injury or unjust loss complained of.
GR: Doctrine of Separate Juridical Entity Note: the fact that a stockholder is ruled liable for unpaid
subscription is not enough to pierce the corporate veil.
EXP: When the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the • CONCEPT BUILDERS. V. NLRC (alter ego)
law will regard the corporation as an association of persons.
Clearly, petitioner ceased its business operations in order to
• GENERAL CREDIT CORP. V. ALSONS DEV AND evade the payment to private respondents of back wages and
INVESTMENT CORP. to bar their reinstatement to their former positions. HPPI is
obviously a business conduit of petitioner corporation and its
3 grounds for piercing the veil: emergence was skillfully orchestrated to avoid the financial
liability that already attached to petitioner corporation.
[1] defeat of public convenience, as when the corporate fiction
is used as vehicle for the evasion of an existing obligation; • PNB vs RITRATTO
[2] fraud cases or when the corporate entity is used to justify The mere fact that a corporation owns all of the stocks of
a wrong, protect fraud, or defend a crime; or another corporation, taken alone is not sufficient to justify their
being treated as one entity. If used to perform legitimate
[3] alter ego cases, where a corporation is merely a farce since functions, a subsidiary's separate existence may be
it is a mere alter ego or business conduit of a person, or where respected, and the liability of the parent corporation as well as
the corporation is so organized and controlled and its affairs the subsidiary will be confined to those arising in their
are so conducted as to make it merely an instrumentality, respective business.
agency, conduit or adjunct of another corporation.
Circumstance rendering the subsidiary an
The corporate veil was pierced due to the presence of the instrumentality:
following circumstances: (1) the commonality of directors,
officers and stockholders and sharing of office between 1. The parent corporation owns all or most of the
petitioner GCC and respondent EQUITY; (2) certain financing capital stock of the subsidiary.
and management arrangements between the two, allowing 2. The parent and subsidiary corporations have
the petitioner to handle the funds of the latter; (3) the virtual common directors or officers
domination if not control wielded by the petitioner over the 3. The parent corporation finances the subsidiary.
finances, business policies and practices of respondent 4. The parent corporation subscribes to all the capital
EQUITY; (4) and the establishment of respondent EQUITY by stock of the subsidiary or otherwise causes its
the petitioner to circumvent CB rules. incorporation.
5. The subsidiary has grossly inadequate capital.
ALTER EGO CASES 6. The parent corporation pays the salaries and other
expenses or losses of the subsidiary.
7. The subsidiary has substantially no business
• PNB V ANDRADA (alter ego)
except with the parent corporation or no assets
except those conveyed to or by the parent
The mere fact that PNB acquired ownership or management corporation.
of some assets of PASUMIL, which had earlier been 8. In the papers of the parent corporation or in the
foreclosed and purchased at the resulting public auction by statements of its officers, the subsidiary is
DBP, will not make PNB liable for the PASUMIL's contractual described as a department or division of the parent
debts to Andrada Electric & Engineering Company corporation, or its business or financial
responsibility is referred to as the parent
The corporate veil may be lifted only if it has been used to corporation's own.
shield fraud, defend crime, justify a wrong, defeat public 9. The parent corporation uses the property of the
convenience, insulate bad faith or perpetuate injustice. subsidiary as its own.
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10. The directors or executives of the subsidiary do not considerations, other unjustifiable aims or intentions, in which
act independently in the interest of the subsidiary case, the fiction will be disregarded and the individuals
but take their orders from the parent corporation. composing it and the two corporations will be treated as
11. The formal legal requirements of the subsidiary are identical.
not observed.
• FRANCISCO V. MEJIA
Doctrinal Summation of Alter Ego Piercing Cases
(Villanueva): If it is proven that the officer has used the corporate fiction to
defraud a third party, or that he has acted negligently,
1. Even when the controlling stockholder/managing maliciously or in bad faith, then the corporate veil shall be lifted
officer conciosuly intends to do no evil, the use of and he shall be held personally liable for the particular
the corporation as an alter ego for personal agenda corporate obligation involved.
is a violation. Consequently, they make themselves
personally liable for having cast away the protective Doctrinal Summation of Fraud Piercing Cases
characteristic of limited liability of the separate (Villanueva):
juridical personality.
2. When the underlying business enterprise does not
really change and only the medium by which that 1. There must have been fraud or an evil motive in the
business enterise is changed, then there would be affected transaction, and the mere proof of control
occasion to pierce the veil of corporate fiction. of the corporation would not authorize piercing
2. Corporate entity has been used in the perpetration
• LANUZA JR. V. BF CORP. of the fraud or in the justification of wrong or to
escape personally liability
3. The main action should seek for the enforcement of
When corporate veil is pierced, the corporation and persons pecuniary claims pertaining to the corporation
who are normally treated as distinct from the corporation are against corporate officers or stockholders or vice
treated as one person, such that when the corporation is versa
adjudged liable, these persons, too, become liable as if they
were the corporation.
DEFEAT PUBLIC CONVENIENCE OR EQUITY CASES
When there are allegations of bad faith or malice against
corporate directors or representatives, it becomes the duty of Equity cases applying the piercing doctrine are termed the
courts or tribunals to determine if these persons and the dumping ground where no fraud or alter ego circumstances
corporation should be treated as one. can be culled by the courts to warrant piercing.
• CIR V. MENGUITO (fraud) Although Amador was at one time the sole owner of the taxi
business that employed Vasquez, which was later transferred
to AD Santos Inc, such testimony should not be allowed to
The following show that the two are actually one juridical confuse the facts relating to employer-employee relationship,
taxable personality: for when the veil of corporate fiction is used to confuse
legitimate issues, the same should be pierced.
1. the owner of one directs and controls the operations
of the other,
2. the payments effected or received by one are for
NATIONALITY OF A CORPORATION
the accounts due from or payable to the other;
3. when the properties or products of one are all sold
to the other, which in turn immediately sells them to Five tests:
the public, 1. Incorporation test - Determined by the state of
incorporation, regardless of the nationality of the
stockholders.
• MENDOZA AND YOTOKO V. BANCO REAL
2. Domicillary test - Determined by the principal place
(fraud)
of business of the corporation.
3. Control test – the nationality of a corporation is
GR: obligations incurred by a corporation, acting through its determined by the nationality of the majority of the
directors, officers or employees, are its sole liabilities. stockholders on whom equity control is vested.
4. War time test – in times of war, the nationality of a
EXP: the veil with which the law covers and isolates the private corporation is determined by the citizenship
corporation from its directors, officers or employees will be of its controlling stockholders.
lifted when the corporation is used by any of them as a cloak 5. Grand father rule - Nationality is attributed to the
or cover for fraud or illegality or injustice. percentage of equity in the corporation used in
nationalized or partly nationalized area.
• LIVESEY V. BINSWANGER PHILIPPINES (fraud)
Under the Philippine jurisdiction, the primary test is always
the place of incorporation since a corporation is a creature
The corporate existence may be disregarded where the entity of the state whose laws has been created.
is formed or used for non-legitimate purposes, such as to
evade a just and due obligation, or to justify a wrong, to shield
or perpetrate fraud or to carry out similar or inequitable Control Test applies in the following instances:
CORPORATION LAW 1ST EXAM REVIEWER 5
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substantial evidence of a violation of the Foreign Equity
1. Sec 2 Art. 12 Consti The exploration, Restriction.
development, and utilization of natural resources
shall be under the full control and supervision of the • NARRA NICKEL MINING AND DEVELOPMENT
State. The State may directly undertake such CORP., ET AL. V. REDMONT CONSOLIDATED
activities, or it may enter into co-production, joint MINES CORP.,
venture, or production-sharing agreements with
Filipino citizens, or corporations or associations at
least sixty per centum of whose capital is owned by The control testǁ is still the prevailing mode of
such citizens. determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. XII of the 1987
Villanueva: It must be neccesarily presumed that Constitution, entitled to undertake the exploration,
the control test would pertain only to domestic development and utilization of the natural resources of the
corporations and that a foreign corporation even Philippines.
though controlled by Filipinos would ne be qualified
to exploit our natural resources. When in the mind of the Court, there is doubt, based on
the attendant facts and circumstances of the case, in the
2. Sec 11 Art. 12 Consti No franchise, certificate, or 60-40 Filipino equity ownership in the corporation, then it may
any other form of authorization for the operation of apply the grandfather rule
a public utility shall be granted except to citizens of
the Philippines or to corporations or associations The Grandfather Rule is the method by which the
organized under the laws of the Philippines at least percentage of Filipino equity in a corporation engaged in
sixty per centum of whose capital is owned by such nationalized and/or partly nationalized areas of activities,
citizens. provided for under the Constitution and other nationalization
3. Sec 11 Art. 15 Consti The ownership and laws, is computed, in cases where corporate shareholders
management of mass media shall be limited to are present, by attributing the nationality of the second or
citizens of the Philippines, or to corporations, even subsequent tier of ownership to determine the
cooperatives or associations, wholly- owned and nationality of the corporate shareholder. Thus, to arrive at
managed by such citizens. Xxx the actual Filipino ownership and control in a corporation, both
the direct and indirect shareholdings in the corporation are
Only Filipino citizens or corporations or determined.
associations at least seventy per centumof the
capital of which is owned by such citizens shall be
allowed to engage in the advertising industry. It is a three level test. The target company is the grandson,
the holding company is the father, and the person or entity
holding the shares in the holding company is the grandfather.
Note: the control test is only applicable if there are
restrictions on owenship. The primary test is the incorporation
test. You apply the control test and Grand Father test if the SEC Memorandum 1977: Apply the Grandfather Rule on two
industry to which the corporation belongs is a restricted, levels of corporate relations for publicly-held corporations or
where shares are traded in the stock exchange, and to three
nationalized or partly nationalized industry.
levels for closely held ones or those which are not traded in
any stock exchange.
Paragraph 12.2.2 of the ON PDR would show that there is What constitutes capital?
some control – definitely not zero – granted to the foreign
holder. It clearly says that when a corporate action would
affect the PDR holders, the stockholders must consult the ON Gamboa Decision Gamboa Resolution
PDR holders and obtain their approval. Thus, there is
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The term capital in Section The 60-40 ownership [1] Mere investment as a shareholder by a foreign entity
11 Article 12 refers only to requirements under the in a foreign corporation duly registered to do business.
shares of stock entitled to Constitution must apply to [2] The exercise of rights as a stock investor and
vote in the election of shares with voting rights [3] Having a nominee director or officer to represent its
directors. Considering that and also to those without interest in such corporation
common shares have voting rights. Preferred [4] Appointing a representative or distributor domiciled in
voting rights which shares, denied the right to the Philippines which transacts business in its own name
translate to control as vote in the election of and for its own account.
opposed to preferred directors, are still entitled to [5] Publication of general advertisement through any print
shares, capital refers only vote on the 8 specific or broadcast media
to the latter and not to the corporate matters. [6] Maintaining a stock of goods in the Philippines solely
total outstanding capital for the purpose of having the same processed by another
stock comprising both Thus, the 60-40 entity in the Philippines.
common and non-voting requirement must apply [7] Consignment by a foreign entity of equipment with a
preferred shares. separately to each class of local company to be used in the processing of products
shares whether common, for export and
preferred non-voting, [8] Performing services auxiliary to an existing isolated
preferred voting or any contract of sale which are not on a continuing basis, such
other class of chares. 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.
Issue resolved in ROY III V HERBOSA: Section 125. Application for a license.— A foreign
corporation applying for a license to transact business in the
Affirmed the Gamboa Decision. The application of the control Philippines shall submit to the Securities and Exchange
test in the Constitution pertains only to voting shares in the Commission a copy of its articles of incorporation and by-laws,
target company. 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
FOREIGN INVESTMENTS ACT OF 1991 its articles of incorporation, shall specifically set forth the
following: xxx
SEC 3 (D) The praise "doing business" shall include:
Section 127. Who may be a resident agent. – A resident
1. soliciting orders, service contracts, opening offices, agent may be either an individual residing in the Philippines
whether called "liaison" offices or branches; or a domestic corporation lawfully transacting business in the
2. appointing representatives or distributors domiciled Philippines: Provided, That in the case of an individual, he
in the Philippines or who in any calendar year stay must be of good moral character and of sound financial
in the country for a period or periods totalling one standing.
hundred eighty (180) days or more;
3. participating in the management, supervision or Section 128. Resident agent; service of process.—The
control of any domestic business, firm, entity or Securities and Exchange Commission shall require as a
corporation in the Philippines; condition precedent to the issuance of the license to transact
4. and any other act or acts that imply a continuity of business in the Philippines by any foreign corporation that
commercial dealings or arrangements, and such corporation file with the Securities and Exchange
contemplate to that extent the performance of acts Commission a written power of attorney designating some
or works, or the exercise of some of the functions person who must be a resident of the Philippines, on whom
normally incident to, and in progressive prosecution any summons and other legal processes may be served in all
of, commercial gain or of the purpose and object of actions or other legal proceedings against such corporation
the business organization: xxx
Provided, however, That the phrase "doing business: shall Section 133. Doing business without a license.— No
not be deemed to include mere investment as a foreign corporation transacting business in the Philippines
shareholder by a foreign entity in domestic corporations without a license, or its successors or assigns, shall be
duly registered to do business, and/or the exercise of rights permitted to maintain or intervene in any action, suit or
as such investor; nor having a nominee director or officer to proceeding in any court or administrative agency of the
represent its interests in such corporation; nor appointing a Philippines; but such corporation may be sued or proceeded
representative or distributor domiciled in the Philippines which against before Philippine courts or administrative tribunals on
transacts business in its own name and for its own account; any valid cause of action recognized under Philippine laws.
Foreign corporations need license to: Can a foreign corporation sue even without license? Yes,
by Doctrine of Estoppel. Gained benefit from foreign
[1] Place them under the jurisdiction of the court; corporation. A foreign corporation doing business in the
[2] Place them in the same footing as domestic corporation;
Philippines may sue in Philippine Courts although not
[3] Protect the public in dealing with the said corporation. authorized to do business here against a Philippine citizen or
entity who had contracted with and benefited by said
Not considered doing business: corporation. To put it in another way, a party is estopped to
CORPORATION LAW 1ST EXAM REVIEWER 7
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challenge the personality of a corporation after having Foreigners may acquire condominium UNITS and SHARES in
acknowledged the same by entering into a contract with it. condominium corporations up to not more than 40% of the
total and outstanding capital stock of a Filipino-owned or
controlled corporation.
11th REGULAR FOREIGN INVESTMENT NEGATIVE LIST
1. Advertising
DEFINITION Corporations which All other pirvate
have capital stock corporations are
FOREIGN EQUITY ALLOWED UP TO 40% divided into shares non stock
and are authorized to corporations
1. contracts for the construction and repair of locally- distribute to the
funded public works except holders of such
Infrastructure/development projects shares dividends or
2. Exploration, development and utilization of natural allotments of the
resources surplus profits on the
3. Ownership of private lands basis of the shares
4. Operation of public utilities held are stock
5. Educational institutions other than those corporations
established by religious groups and mission
boards, for foreign diplomatic personnel and their PURPOSE Primarily for profits For charitable,
dependents, and other foreign temporary residents religious,
or for short-term high-level skills development that educational,
do not form part Of the formal education system professional,
6. Culture, production, milling, processing, trading cultural, fraternal,
except retailing, of rice and corn and acquiring, by literary, scientific,
barter, purchase or otherwise, rice and corn and the social, civic
by-products thereof service, or similar
7. Contracts for the supply of materials, goods and purposes, like
commodities to government-owned or controlled trade, industry,
corporation, company, agency or municipal agricultural and
corporation like chambers, or
8. Operation of deep sea commercial fishing vessels any combination
9. Ownership of condominium units thereof
10. Private radio communications network
the fact that MORONG ELECTRIC had no corporate Purpose of the De Facto Corporation Doctrine
existence on the day the franchise was granted in its name
does not render the franchise invalid, because later MORONG The de facto corporation doctrine is meant to protect the
ELECTRIC obtained its certificate of incorporation and then enforceability of corporate dealings and contracts, to allow the
accepted the franchise in accordance with the terms and public to take at least reasonable face value the authority of
conditions thereof. the corporation and its officer to enter into valid and binding
contracts, thereby providing a healthy system by which to
DE FACTO CORPORATION encourage the public to deal with corporate entities.
CORPORATION BY ESTOPPEL
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, Section21. Corporation by estoppel. – All persons who
shall not be inquired into collaterally in any private suit to assume to act as a corporation knowing it to be without
which such corporation may be a party. Such inquiry may be authority to do so shall be liable as general partners for all
made by the Solicitor General in a quo warranto proceeding. debts, liabilities and damages incurred or arising as a result
thereof:
REQUISITES:
Provided, however, That when any such ostensible
1. The existence of a valid law under which the corporation is sued on any transaction entered by it as a
corporation may be incorporated; corporation or on any tort committed by it as such, it shall not
2. An attempt in good faith to incorporate. Or be allowed to use as a defense its lack of corporate
existence of a colorable compliance with the personality.
provisions on incorporation; and
3. The assumption by the enterprise of corporate On who assumes an obligation to an ostensible corporation
power. as such, cannot resist performance thereof on the ground that
there was in fact no corporation
The main consequences of the de facto corporation doctrine
are as follows: • ASIA BANKING CORPORATION V. STANDARD
PRODUCTS,
[1] The enterprise enters into a contract with an outsider,
who later brings an action against the enterprise as The general rule is that in the absence of fraud a person who
though it were a corporation, and the enterprise is held has contracted or otherwise dealt with an association in such
liable in corporate form; a way as to recognize and in effect admit its legal existence
as a corporate body is thereby estopped to deny its corporate
CORPORATION LAW 1ST EXAM REVIEWER 10
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existence in any action leading out of or involving such Subscription Contract – it is indivisible. The subscription
contract or dealing, unless its existence is attacked for cause contract is between you only and the corporation. You cannot
which have arisen since making the contract or other dealing have someone pay for your deficiency.
relied on as an estoppel and this applies to foreign as well as
to domestic corporations. PAID UP CAPITAL:
The STANDARD PRODUCTS having recognized the • MSCI-NACUSIP LOCAL CHAPTER VS NWPC
corporate existence of the ASIA BANKING by making a
promissory note in its favor and making partial payments on
the same is therefore estopped to deny said ASIA BANKING's Paid-up capital is that portion of the authorized capital
corporate existence. It is, of course, also estopped from stock which has been both subscribed and paid. To
denying its own corporate existence. illustrate, where the authorized capital stock of a corporation
is worth P1 million and the total subscription amounts
toP250,000.00, at least 25% of this amount, namely,
CAPITAL STRUCTURE - Refers to the mixture of liabilities P62,500.00 must be paid up per Section 13. The latter,
and capital (investments/debt financing) P62,500.00, is the paid-up capital or what should more
accurately be termed as "paid-up capital stock."
• THE PRESIDENT OF PDIC V. REYES
Note: the subscription cannot be greater than the authorized
Does an investment earn interest? No. capital stock. The excess shall be void since the corporation
is not authorized to issue that shares.
An investment is an expenditure to acquire property or other
assets in order to produce revenue. Thus, unlike a deposit of SHARE PREMIUM:
money or a loan that earns interest, the investment of the
Singaporeans cannot be assured of a dividend or an interest The share premium is an equity account found on a
on the amount invested. For, interests or dividends are company's balance sheet. The amount in the account
granted only after profits or gains are generated. represents the additional amount shareholders paid for their
issued shares that was in excess of the par value of those
SHARES shares.
Section 174. Outstanding Capital Stock. Defined. The term WATERED STOCK:
outstanding capital stock, as used in this Code, means the
total shares of stock issued under binding subscription Watered stock is stock that is issued at a price far higher than
agreements to subscribers or stockholders, whether fully or the value of the issuer's assets.
partially paid, except treasury shares.
Par value is that amount that is indicated in the certificate of
• PLDT VS NTC shares. It is the designation of a particular share.
Dividends, regardless of the form these are declared, that is, Section 6. The classification of shares, their corresponding
cash, property or stocks, are valued at the amount of the rights, privileges, or restrictions, and their stated par value, if
declared dividend taken from the unrestricted retained any, must be indicated in the articles of incorporation. Each
earnings of a corporation. Thus, the value of the declaration share shall be equal in all respects to every other share,
in the case of a stock dividend is the actual value of the except as otherwise provided in the articles of incorporation
original issuance of said stocks. and in the certificate of stock.
It cannot be said that no consideration is involved in the The shares in stock corporations may be divided into classes
issuance of stock dividends. In fact, the declaration of stock of series of shares, or both. No share may be deprived of
dividends is akin to a forced purchase of stocks. By declaring voting rights except those classified and issued as preferred
stock dividends, a corporation ploughs back a portion or its or redeemable shares, unless otherwise provided in this
entire unrestricted retained earnings either to its working Code: Provided, that there shall always be a class or series of
capital or for capital asset acquisition or investments. shares with complete voting rights.
When stock dividends are distributed, the amount declared Holders of non-voting shares shall nevertheless be entitled to
ceases to belong to the corporation but is distributed among vote on the following matters:
the shareholders.
[1] Amendment of the articles of incorporation;
In essence, therefore, the stockholders by receiving stock [2] Adoption and amendment of by-laws;
dividends are forced to exchange the monetary value of their [3] Sale, lease, exchange, mortgage, pledge, or other
dividend for capital stock, and the monetary value they forego disposition of all or substantially all of the corporate property;
is considered the actual payment for the original issuance of
the stocks given as dividends
[4] Incurring, creating or increasing bonded indebtedness;
[5] Increase or decrease of capital stock
CAPITAL STOCK - is composed of the authorized capital [6] Merger or consolidation of the corporation with another
stock, subscribed capital, and paid up capital.
corporation or other corporation
[7] Investment of corporate funds in another corporation or
business in accordance with this Code; and
CORPORATION LAW 1ST EXAM REVIEWER 11
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[8] Dissolution of the corporation subscribe for shares of a corporation. Preferred shares take a
multiplicity of forms.
Except as provided in the immediately preceding paragraph,
the vote required under the Code to approve a particular The most common forms may be classified into two:
corporate act shall be deemed to refer only to stocks with
voting rights.
(1) preferred shares as to assets - gives the holder thereof
preference in the distribution of the assets of the corporation
The shares or series may or may not have a par value in case of liquidation
except that banks, trust, insurance, and pre-need companies,
public utilities, building and loan associations, and other
(2) Preferred shares as to dividends - holder of which is
corporations authorized to obtain or access funds from the
entitled to receive dividends on said share to the extent
public, whether publicly listed or not, shall not be permitted to
agreed upon before any dividends at all are paid to the holders
issue no- par value shares of stocks.
of common stock.
• CIR VS CA AND A SORIANO CORP The holder of no-par shares may see from the certificate itself
that he is only an aliquot sharer in the assets of the
A common stock represents the residual ownership interest corporation. But this character of proportionate interest is not
in the corporation. It is a basic class of stock ordinarily and hidden beneath a false appearance of a given sum in money,
usually issued without extraordinary rights or privileges and as in the case of par value shares.
entitles the shareholder to a pro rata division of profits.
The capital stock of a corporation issuing only no-par value
PREFRRED STOCK: shares is not set forth by a stated amount of money, but
instead is expressed to be divided into a stated number of
shares, such as, 1,000 shares. This indicates that a
• REPUBLIC PLANTERS BANK VS AGANA
shareholder of 100 such shares is an aliquot sharer in the
assets of the corporation, no matter what value they may
A preferred share of stock, is one which entitles the holder have, to the extent of 100/1,000 or 1/10.
thereof to certain preferences over the holders of common
stock. The preferences are designed to induce persons to
CORPORATION LAW 1ST EXAM REVIEWER 12
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Section 7. Founders’ Share.—Founders‘ Share may be Treasury shares can be
given certain rights and privileges not enjoyed by the owners issued lower than the par-
of other stocks. value
Where the exclusive right to vote and be voted for in election This is the exception to the
of directors is granted, it must be for a limited period not to rule that you cannot issue
exceed five (5) years from the date of incorporation or shares lower than the par
approval of increase of additional authorized capital stock. value. It may be disposed
Provided, that such exclusive right shall not be allowed if its of for a reasonable price
exercise will violate Commonwealth Act No. 108 or the Anti- fixed by the board of
Dummy Law, Republic Act No. 7042 or the foreign Investment directors.
Act and other pertinent laws.
• PLDT V NTC
CORPORATION LAW 1ST EXAM REVIEWER 13
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As a fund in trust for creditors in case of liquidation, the actual
value of the subscriptions and the value of stock dividends
distributed may not be decreased or increased by the
fluctuating market value of the stocks.