Corporation Law Reviewer

Arellano University School of Law NOTES IN CORPORATION LAW; Atty. Ruben C. Ladia

Disclaimer: This is not my property. Credits to the real owner of this material.

CORPORATION LAW

Corporation is one of the types of business organizations. It is also the most important

in economic development.

INTRODUCTION

Sole proprietorship

- One man form of business entity, personally answers all liabilities, but enjoys all the

profits with the exclusion of others

- Limited shareholders responsibility

- Paid subscription in full, you are no longer liable

Partnership

-Based on mutual trust and confidence

Joint venture

- one time grouping of persons whether they be natural or juridical

- does not entail continuity because after the undertaking is completed it is already the

end

- particular partnership and joint venture would be similar, but there is already a

decision of the Supreme Court declaring them as different

- when they do not register, it does not exist

- Foreign corporations enters into an agreement with a domestic corporation, it must be

registered. Generally they do not need to be registered.

Corporations

- They may enter into joint venture, but generally they cannot enter into a partnership,

but there are exceptions allowed by the SEC: the 3 exceptions must go hand in hand

1. The articles of incorporation expressly authorized the corporation to enter into

contracts of partnership;

2. The agreement or articles of partnership must provide that all the partners will

manage the partnership; and

3. The articles of partnership must stipulate that all the partners are and shall be

jointly and severally liable for all obligations of the partnership.



DEFINITION AND ATTRIBUTES

4 attributes of a corporation

1. Artificial being

2. Created by operation of law

3. Right of succession

4. Powers, attributes and properties expressly authorized by law or incident to its

existence.

Doctrine of limited capacity

- Only such powers as are expressly granted to it by law and by its articles of

incorporation including others which are incidental to such conferred powers, those

reasonably necessary to accomplish its purpose and those which may be incidental to

its existence

- Can do things as the law asks or allows it to do

- If it does anything beyond, it shall be considered as

ULTRA VIRES

General rule: Moral damages cannot be granted to corporations

Exception: Filipinas Broadcasting Network Inc. vs. Ago Med

- In cases of slander, libel and other forms of defamation (should not qualify because the

code does not qualify whether natural or juridical) Art. 2219 of the civil code:

Art. 2219. Moral damages may be recovered in the following and analogous

cases:

(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;

(3) Seduction, abduction, rape, or other lascivious acts;

(4) Adultery or concubinage;

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;



(7) Libel, slander or any other form of defamation;

(8) Malicious prosecution;

(9) Acts mentioned in Article 309;

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of

this article, may also recover moral damages.

The spouse, descendants, ascendants, and brothers and sisters may bring the action

mentioned in No. 9 of this article, in the order named.

Advantages (SEE LADIA BOOK)

- No. 2 may also be a disadvantage

- No. 5 may also be a disadvantage

A corporation is a person, therefore protected by the due process clause and equal

protection clause of the Constitution

CLASSIFICATION OF CORPORATIONS

Section 3 Stock and non-stock

- Importance of knowing, determining what provisions of the code or the law may be

applicable

Section 3. Classes of corporations. - Corporations formed or

organized under this Code may be stock or non-stock corporations. Corporations

which have capital stock divided into shares and are authorized to distribute to the

holders of such shares dividends or allotments of the surplus profits on the basis of

the shares held are stock corporations. All other corporations are non-stock

corporations. (3a)

Non-stock- title 10

Stock- section 51

Stockholders must generally cast their votes in the meeting; section 4 governed

primarily by the law creating them



Section 4. Corporations created by special laws or charters. - Corporations created by special laws or charters shall be governed primarily by the

provisions of the special law or charter creating them or applicable to them,

supplemented by the provisions of this Code, insofar as they are applicable. (n)

Section 3

-The two requisites must always concur

1. That they have a capital stock divided into shares; and,

2. That they are authorized to distribute dividends or allotments as surplus profits

to its stockholders on the basis of the shares held by each of them.

Section 4

- Created by a special law, they have their own character

- They are not immune from suit unless provided by the law of their creation

- Primarily governed by the law creating them

- Their subsidiaries are entirely different or independent from that of the other

Close corporation

-There is no exemption it is absolute

Public corporation

- Political or governmental purposes

- Those formed or organized for the government or a portion of the State or any of its

political subdivision and which have for their purpose the general good and welfare

Private Corporation

- Immediate benefit, aim or advantage of private individuals

- Those formed for some private purpose, benefit, aim or end

- Distinction: public for governmental purpose

Corporation Sole

- Exemption to the rule because it is composed only of one person

- An incorporator may also be a juridical person



Close corporation

- There is exclusivity of shares of stock

- Section 96-105

- Restrictions to transfer shares

- Only those indicated can own shares

- Article must provide that there will be no public offering

Open corporation

- openly admit investors

- example: stock exchange

Domestic/ Foreign

Test

- Incorporation test

- If incorporated under the laws of the Philippines it is a domestic corporation

•ME Gray vs. CA

- Parent or Holding/ subsidiaries and affiliates

- Affiliates- no majority vote

SMC 12%

HERSHEY

CBPl 12%

12

%

CBP

Affiliate is subject to common control by the 12 % owners

De jure

- cannot be attached by the state even in a quo warranto proceeding

De facto



- exists by virtue of colorable compliance

- Attached directly only by the state in a quo warranto proceeding

Corporation by estoppel

- So defectively formed, but still considered corporation, but only in relation to those who

cannot deny their existence section 20 and 21

FORMATION AND ORGANIZATION

3 stages

1. Creation

2. Re-organization or quasi-reorganization

3. Dissolution/winding-up

Purpose clause

- Defining the scope of authority of the corporate enterprise pr undertaking. Both

confirmed and limited

4 limitations of purpose clause

1. Lawful

2. Specific or stated concisely

3. More than one, the primary and secondary must be specified

4. Lawfully combined

- Provision that states, cannot be issued less than par, exception is treasury shares because

it can be issued less than par

A corporation commences only upon issuance of the certificate, prior thereto it has no

being and cannot transact business. Promoters cannot act for a projected corporation

Metro Manila - paid up capital requirement is 10 M

Non- stock- mere mention of the operating capital

Mention the authorized capital



Restrictions

- Mandatory in close

- Not mandatory in ordinary

Non-stock

-If value is not more than 100,000

A corporation cannot use any other name unless it has been amended

Section 19

- If confusingly similar it will not be allowed to be registered

- Verification slip from the records officer

Section 19. Commencement of corporate existence. - A private

corporation formed or organized under this Code commences to have corporate

existence and juridical personality and is deemed incorporated from the date the

Securities and Exchange Commission issues a certificate of incorporation under its

official seal; and thereupon the incorporators, stockholders/members and their

successors shall constitute a body politic and corporate under the name stated in the

articles of incorporation for the period of time mentioned therein, unless said period

is extended or the corporation is sooner dissolved in accordance with law. (n)

- Words corporation or inc. either in full or abbreviated form must be included

Section 18. Corporate name. - No corporate name may be allowed by

the Securities and Exchange Commission if the proposed name is identical or

deceptively or confusingly similar to that of any existing corporation or to any other

name already protected by law or is patently deceptive, confusing or contrary to

existing laws. When a change in the corporate name is approved, the Commission

shall issue an amended certificate of incorporation under the amended name. (n)

Doctrine of secondary meaning



- A word or phrase originally incapable of exclusive appropriation [usually generic] with

reference to an article in the market, because of geographically or otherwise

descriptive, might nevertheless have been used so long and so exclusively by one

producer with reference to his article that, in that trade and to that branch of the

purchasing public, the word or phrase has become to mean that the article was his

product.

Section 18

- Lyceum of the Philippines case, the additional geographical name does not

make it confusingly similar

- actual confusion is not necessary - Philips case “it is enough that there is probable

confusion”

2 requisites must be proven

- that the complainant corporation acquired a prior right over the use of such corporate

name

- identical, deceptively or confusingly, patently deceptive

principal office

- statement of principal office is required

- city and municipality not only province must be specified

- principal office NOT operations office

- necessary because it will establish the residence of corporations

- venue of actions for or against the corporations

- venue of meetings

- section 51 meetings may only be within the boundaries of the city where the principal

office

- non-stock may be held anywhere in the Philippines, if provided in its by-laws

- where summons may be served

- registration of chattel mortgage must be registered in the register of deeds where the

principal office is located



• Clavecilla Radio System vs. Antillon - action not upon a written

contract

-city where the defendant resides

term of existence

- corporate term required

- determining what point in time the juridical personality will cease to exist

- enter into contract only when it has juridical personality

- once it ceases to exist, it no longer has personality

- exist for another 3 years only for purposes of liquidation

- Dissolution- it is automatic

When should extension be made?

- General rule: Not earlier than 5 years

- Exception: unless there are justifiable reasons May it be extended after expiration?

- Alhambra cigar vs. SEC once it ceases to exist it has no vested politic, exist only for

a period of 3 years only for liquidation and for that purpose only

Article 5 How many incorporators should there be?

- 5-15

May a corporation be an incorporator?

- General rule: only natural persons

- Exception: cooperatives and corporation primarily organized to hold equities in rural

banks

How about minors?

-NO, because they must be of legal age

May a corporation organized by incorporators consisting solely of foreigners

- Yes, there is no nationality requirement only residence, as long as majority are residents of

the Phil



Define incorporators <sec.5>

- Those person mentioned in the articles as originally forming the corporation and who are

signatories of the articles of incorporation.

- Must be signatories to be incorporators

Section 5. Corporators and incorporators, stockholders and members. - Corporators are those who compose a corporation, whether as stockholders

or as members. Incorporators are those stockholders or members mentioned in the articles

of incorporation as originally forming and composing the corporation and who are

signatories thereof.

Corporators in a stock corporation are called stockholders or shareholders.

Corporators in a nonstock corporation are called members. (4a)

Define corporators <sec.5>

- All persons who compose the corporation at any given time and need not be among

those who execute the articles of incorporation at the start of its formation and

organization. - Originally or subsequently

- Section 5 provides:

Corporators in a stock corporation are called stockholders or shareholders.

Corporators in a nonstock corporation are called members. (4a)

May a corporation be a corporator?

- YES. There is nothing to prevent a corporation from being a stockholder

Incorporator must subscribe to 1 share

There are those that are exclusively reserved to

Filipinos

An incorporator maybe a corporator as long as he is a stockholder

section 6

Section 6. Classification of shares. - The shares of stock of stock

corporations may be divided into classes or series of shares, or both, any of which

classes or series of shares may have such rights, privileges or restrictions as may be

stated in the articles of incorporation: Provided, That no share may be deprived of

voting rights except those classified and issued as "preferred" or "redeemable" shares,



unless otherwise provided in this Code: Provided, further, That there shall always be

a class or series of shares which have complete voting rights. Any or all of the shares

or series of shares may have a par value or have no par value as may be provided for

in the articles of incorporation: Provided, however, That banks, trust companies,

insurance companies, public utilities, and building and loan associations shall not be

permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in

the distribution of the assets of the corporation in case of liquidation and in the

distribution of dividends, or such other preferences as may be stated in the articles 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.

Except as provided in the immediately preceding paragraph, the vote necessary to

approve a particular corporate act as provided in this Code shall be deemed to refer only

to stocks with voting rights.

(5a)

How many directors should there be? - General rule: Not less than 5 not more than 15

- Exceptions:

1. Educational corporations registered as non stock corporation whose number of trustees,

though not less than five and not more than [15] should be divisible by five [5], meaning

they must have either five, ten, or fifteen trustees and no other;

2. In close corporations where all the stockholders are considered as members of the board

of directors thereby effectively allowing twenty members in the board.

3. The by-laws of a corporation may provide for additional qualifications and

disqualifications of its members of the board of directors or trustees. However it may not

do away with the minimum disqualifications lay down by the Code.

Qualifications of the governing board

- Requires mere residency <sec. 23>

Section 23. The board of directors or trustees. - Unless otherwise

provided in this Code, the corporate powers of all corporations formed under this Code

shall be exercised, all business conducted and all property of such corporations controlled

and held by the board of directors or trustees to be elected from among the holders of

stocks, or where there is no stock, from among the members of the corporation, who shall

hold office for one (1) year until their successors are elected and qualified. (28a)



Every director must own at least one (1) share of the capital stock of the

corporation of which he is a director, which share shall stand in his name on the books

of the corporation. Any director who ceases to be the owner of at least one (1) share of

the capital stock of the corporation of which he is a director shall thereby cease to be a

director. Trustees of non-stock corporations must be members thereof. A majority of the

directors or trustees of all corporations organized under this Code must be residents of

the Philippines.

May a domestic corporation have a governing board consisting solely of foreigners?

- YES, section 23 majority of them must be residents of the Philippines, no nationality

requirement

Anti-dummy act <sec.2-A>

- If the business undertaking or activity is only partially nationalized, aliens can be elected

as such directors, [unless the law provides otherwise] but their number shall only be

in proportion to their equity or participation in the capital stock of the corporation.

Disqualifications <sec.27>

- The disqualifications provided for is absolute and may not be done away with.

Corporate by-laws may, however, provide for additional qualifications and

disqualifications.

Section 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for

a period exceeding six (6) years, or a violation of this Code committed within five (5)

years prior to the date of his election or appointment, shall qualify as a director, trustee

or officer of any corporation. (n)

Section 27 and 23 minimum disqualifications and qualifications

• Lee vs. CA

-By laws may provide for additional

Gov’t vs. El hogar Filipino, Gokongwei vs. SMC

Capital structure

Foundation- minimum paid-up capital 3M

Authorized capital 1 MNo. of shares 1M shares

par value 1.00

Amount of shares subscribed 50K A

50K B

C 250K



D

E

PAID UP =62,500

Corporation cannot exceed more than 1 M it is the maximum amount it cannot issue more

unless amended Maximum shares it can issue is 1M shares unless amended

How much shares should be subscribed?

-Must be at least 25% of the authorized capital stock

Paid- up must be at least 25%-minimum

Section 30

- Total subscription compliance with minimum 25% total

- Any combination would comply with the minimum required by section 30

Section 30. Compensation of directors. - In the absence of any

provision in the by-laws fixing their compensation, the directors shall not receive any

compensation, as such directors, except for reasonable per diems: Provided, however,

That any such compensation other than per diems may be granted to directors by the

vote of the stockholders representing at least a majority of the outstanding capital stock

at a regular or special stockholders' meeting. In no case shall the total yearly

compensation of directors, as such directors, exceed ten (10%) percent of the net

income before income tax of the corporation during the preceding year. (n)

Minimum for a domestic corporation?

- In no case shall the paid- up capital be less than 5k

Is there a minimum authorized capital imposed by the code?

- If there is minimum paid-up logically there should also be a minimum capital =5000

Minimum paid-up capital for a financing company metro manila 10 M if located in MM

Shares of stock

Purpose of classification



- To specify and define the rights and privileges of the stockholders;

- For regulation and control of the issuance of sale of corporate securities for the protection

of purchasers and stockholders.

- As a management control device.

- To comply with statutory requirements particularly those which provide for certain

limitations on foreign ownership and shares like overseas employment agencies requiring

to own at least 75% of the shares of stock thereof.

- To better insure return on investment which can be affected through the issuance of

redeemable shares or preferred shares, i.e., granting the holders thereof, preference as to

dividends and/or distribution of assets in case of liquidation; and,

- For flexibility in price, particularly, no par shares may be issued or sold from time to time

at different price depending on the net worth of the company since they do not purport to

represent an actual of fixed value.

Section 6

-Each shall be equal in all respects to every other share

Preferred shares

- Specific preference

- Dividends or during liquidation

No par

-Can sell it with the network of the corporation

Distinction between the subscribed and outstanding stocks?

- Section 137

Section 137. Outstanding capital stock defined. - The term

"outstanding capital stock", as used in this Code, means the total shares of stock issued

under binding subscription agreements to subscribers or stockholders, whether or not

fully or partially paid, except treasury shares. (n)

- Voting and dividend rights, it refers to the outstanding capital stocks

- Only outstanding stocks are allowed to vote and receive dividends

- Actually the same

Treasury shares

- are also subscribed shares



- while they remain in the treasury, no voting and dividend rights

- may be reissued by the corporation

- once reissued they become outstanding stocks again

common shares-carry the right to vote

preferred shares

- grants the holder preference

- preference as to dividends

- preference as to distribution of the remaining assets upon dissolution or

- both

- YOU MUST STATE THE PREFERENCE BECAUSE IF NOT THEY ARE

PRESUMED TO BE EQUAL

- It may include such other preferences not inconsistent with the Code. This is so

because Section 6 of the said law allows a stock corporation to issue preferred shares

subject only to the limitations imposed therein which are:

a. They can be issued only with sated par value; and,

b. The preferences must be stated in the articles of incorporation and in the certificate of

stock, otherwise, each share shall be, in all respect, equal to every other share.

Participating

- Must be stated because the presumption is that it is participating

Cumulative

-Irrespective of whether or not they where earned

Preferred

- May be denied

- Unless denied they are still entitled

What if hindi i-declare kahit na may dividends rights for the previous years? May they

be denied dividend rights because they are non holders of noncumulative? NOTE:

YOU CANNOT COMPEL THE CORPORATION TO DECLARE DIVIDENDS

UNLESS IT EXCEEDS 100 % PAID UP CAPITAL SEC. 43



Section 43. Power to declare dividends. - The board of directors of

a stock corporation may declare dividends out of the unrestricted retained earnings

which shall be payable in cash, in property, or in stock to all stockholders on the basis

of outstanding stock held by them: Provided, That any cash dividends due on

delinquent stock shall first be applied to the unpaid balance on the subscription plus

costs and expenses, while stock dividends shall be withheld from the delinquent

stockholder until his unpaid subscription is fully paid: Provided, further, That no stock

dividend shall be issued without the approval of stockholders representing not less

than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting

duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one

hundred (100%) percent of their paid-in capital stock, except:

(1) when justified by definite corporate expansion projects or programs approved by the

board of directors; or (2) when the corporation is prohibited under any loan agreement

with any financial institution or creditor, whether local or foreign, from declaring

dividends without its/his consent, and such consent has not yet been secured; or (3) when

it can be clearly shown that such retention is necessary under special circumstances

obtaining in the corporation, such as when there is need for special reserve for probable

contingencies. (n)

- It depends because there are three types of noncumulative preferred shares

- Discretionary dividend type

- Mandatory if earned

- Earned cumulative or dividend credit type

Compare cumulative share from non-cumulative, earned cumulative or dividend credit

type

- Cumulative share –whether or not earned

- Non-cumulative earned cumulative or dividend credit type- only if earned

Par

-stated par value; shall not be issued less than par

No par

- without stated par value

- once fully paid no longer liable



Corporations cannot use its capitals in declaring dividends; not all can issue no par value

section 6

Voting

-entitled to vote at any motion brought up in writing

Non-voting

-not entitled to vote

What types of shares may be denied of the right to vote?

-Preferred and redeemable shares

Is it correct to state that common shares can never be denied the right to vote?

- Only preferred and redeemable shares are denied unless provided in this code

- PWEDENG MA-DENY YUNG COMMON SHARES, KASI YUNG FOUNDER’S

SHARES MERON SILANG EXCLUSIVE

RIGHTS NA SILA LANG ANG MERON, SO PWEDE SILANG BUMOTO WITH

REGARDS TO SOMETHING NA HINDI NA SAKOP NG COMMON SHARE

RIGHTS

- Example: founders shares- may be given certain rights and privileges

- Even common shares may be denied the right to vote of founders’ shares issued <sec.7>

Section 7. Founders' shares. - Founders' shares classified as such in the

articles of incorporation may be given certain rights and privileges not enjoyed by the

owners of other stocks, provided that where the exclusive right to vote and be voted for

in the election of directors is granted, it must be for a limited period not to exceed five

(5) years subject to the approval of the Securities and Exchange Commission. The five-

year period shall commence from the date of the aforesaid approval by the

Securities and Exchange Commission. (n)

Do you include non-voting shares in passing a valid corporate act?

- Even non-voting shares are entitled to vote under section 6

Redeemable shares

- Discretionary/optional

- Obligatory or mandatory

Generally a corporation can reacquire its own shares if it has unrestricted retained

earnings

Exception: redeemable shares may be reacquired irrespective of retained earnings

Treasury shares



- They are treasury while in the treasury account of the corporation

May they be reissued by the corporation?

- YES

If they are reissued will they be denied the right to vote?

- Once reissued they shall become outstanding stocks again and purchasers shall be

entitled to all the rights and privileges as the other holders have

Section 57 treasury shares have no voting and dividend rights. Why not?

Section 57. Voting right for treasury shares. - Treasury shares shall

have no voting right as long as such shares remain in the Treasury. (n)

-Answer: commissioner vs. manning page 62 first par.

“Although authorities may differ on the exact legal and accounting status of so-

called treasury shares, they are more or less in agreement that treasury shares are

stocks issued and fully paid for and reacquired by the corporation either by purchase,

donation, forfeiture or other means. Treasury shares are therefore issued shares but

being in the treasury they do not have the status of outstanding shares. Consequently,

although a treasury share, not having been retired by the corporation re-acquiring it,

may be re-issued or sold again, such shares, as long as it is held by the corporation as

a treasury share, participates neither in dividends, because dividends cannot be

declared by the corporation to itself, nor in meetings of the corporation as voting stock,

for otherwise equal distribution of voting powers among stockholders will be

effectively lost and the directors will be able to perpetrate their control of the

corporation, though it still represents a paid for interest in the property of the

corporation. The foregoing essential features of a treasury stocks are lacking in the

questioned shares.

In this case, and under the terms of the trust agreement, the shares of stock of

Reese participated in dividends which the trustee received and the said shares were

voted upon by the trustee in all corporation meetings. They were not, therefore,

treasury shares.”

When the law speaks of outstanding rights it does not include treasury shares

Treasury shares may be reissued

- They are actually assets of the corporation

- Once re-issued they become outstanding stocks again



- The corporation may cancel them; in effect there will be a reduction in the outstanding

capital stocks

- The code does not require ordinary corporations to provide for restrictions, but it does

not likewise prohibit restrictions

- Example: right of first refusal

- The restriction must be contained in the articles of incorporation

- If provided in by-laws but not in the articles of incorporation then it will not be binding

- Restrictions and preferences are mandatorily required in close corporations

- If it does not provide restrictions it is not a close corporation

- Specified persons- close corporations

- If not one of those specified you are not included because there is exclusivity in close

corporations

- Should also be in the by-laws not only in the articles of incorporation

No transfer clause

Execution clause

Acknowledgment

Treasurer affidavit part of the articles of incorporation

Section 23-27 minimum qualifications, but there may be additional

Grounds for disapproval

-Only substantial and not strict is required

May the SEC refuse or reject registration?

- <Section 17>

Section 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange

Commission may reject the articles of incorporation or disapprove any amendment

thereto if the same is not in compliance with the requirements of this Code: Provided,



That the Commission shall give the incorporators a reasonable time within which to

correct or modify the objectionable portions of the articles or amendment. The following

are grounds for such rejection or disapproval:

1. That the articles of incorporation or any amendment thereto is not substantially in

accordance with the form prescribed herein;

2. That the purpose or purposes of the corporation are patently unconstitutional, illegal,

immoral, or contrary to government rules and regulations;

3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed

and/or paid is false;

4. That the percentage of ownership of the capital stock to be owned by citizens of the

Philippines has not been complied with as required by existing laws or the Constitution.

No articles of incorporation or amendment to articles of incorporation of banks,

banking and quasi-banking institutions, building and loan associations, trust companies

and other financial intermediaries, insurance companies, public utilities, educational

institutions, and other corporations governed by special laws shall be accepted or

approved by the Commission unless accompanied by a favorable recommendation of the

appropriate government agency to the effect that such articles or amendment is in

accordance with law. (n)

- But the grounds in section 17 are not exclusive

When will the corporation commence to exist?

- Section 19

Section 19. Commencement of corporate existence. - A private

corporation formed or organized under this Code commences to have corporate

existence and juridical personality and is deemed incorporated from the date the

Securities and Exchange Commission issues a certificate of incorporation under its

official seal; and thereupon the incorporators, stockholders/members and their

successors shall constitute a body politic and corporate under the name stated in the

articles of incorporation for the period of time mentioned therein, unless said period

is extended or the corporation is sooner dissolved in accordance with law. (n)

A corporation de jure can come into existence only upon the issuance of the certificate

of registration by the SEC? TRUE OR FALSE?

- TRUE



- EXCEPTION: CORPORATION SOLE <sec. 112>

Section 112. Submission of the articles of incorporation. - The

articles of incorporation must be verified, before filing, by affidavit or affirmation of

the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may

be, and accompanied by a copy of the commission, certificate of election or letter of

appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding

elder, duly certified to be correct by any notary public.

From and after the filing with the Securities and Exchange Commission of the

said articles of incorporation, verified by affidavit or affirmation, and accompanied

by the documents mentioned in the preceding paragraph, such chief archbishop,

bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and

all temporalities, estate and properties of the religious denomination, sect or church

theretofore administered or managed by him as such chief archbishop, bishop, priest,

minister, rabbi or presiding elder shall be held in trust by him as a corporation sole,

for the use, purpose, behalf and sole benefit of his religious denomination, sect or

church, including hospitals, schools, colleges, orphan asylums, parsonages and

cemeteries thereof. (n)

- CORPORATION SOLE- upon filing of the verified articles of incorporation, once

filed it is vested with a judicial capacity

General rule section 19

- Vested with judicial capacity upon issuance of the certificate by the SEC

o However it is not accurate according to atty. Ladia because there are those

that can issue for example cooperatives- BUREAU OF COOPERATIVES

which register, home insurance guaranty corporation- HOME OWNERS

•Cagayan Fishing vs. Sandika

- Corporations are created by law

- Commence to exist upon issuance by the CONCERNED government corporation or

agency

- Prior there to it has no being

- The transfer of the property was not valid, it likewise did not have the right to transfer

De jure

-Strict or substantial compliance



De facto

- 4 requisites must go hand in hand take out anyone of them there can be no de facto

corporation

1. There is a valid statute under which the corporation could have been created as a de jure

corporation.

2. An attempt, in good faith, to form a corporation according to the requirements of law,

which goes far enough to amount to a “colorable compliance” with the law;

3. A user of corporate powers, the transaction of business in some way as if it were a

corporation; and,

4. Good faith in claiming to be and doing business as a corporation.

Are the rights and obligations between officers and directors of a de jure and de facto the

same?

-YES. Governed by the same law, rules and regulations

Only important in determining, is for the purpose of applying the rules with regards to

the direct and collateral attack

The existence of a de jure cannot be questioned even by the State, either directly or

indirectly

Existence of a de facto can be questioned only by the State directly in a quo warranto

proceeding only

•Municipality of Malabang vs. Benito

- What is the missing link so as to consider it a de facto? A law, because the executive

order is unconditional

- An unconditional act affords no rights, creates no office

- Legal contemplation it was never passed at all

- It can therefore be questioned by any person

If the certificate of registration has not been issued, may a corporation de facto exist?

- NO!

- Number 4 requirement, good faith in claiming to be and doing business as a corporation

•Hall vs. Piccio



- Missing link is good faith

- The certificate was not yet issued by the SEC, the members knew and therefore they were

not acting in good faith, therefore anybody can question its existence


- So defectively formed so that they are not to be considered a de jure or de facto

- General partners- liable even beyond his promise even his personal properties are prone

to attachment

•Lozano vs. Delos Santos

- Founded on principle of equity

- Exercise corporate powers

- Enters with business with 3rd parties

- When there is no 3rd persons involved and the problem arises between there members,

therefore they themselves know that there is no corporation by estoppel

•Albert vs. University

- 1965 case, no section 21 yet

- Applied where the rules governing agency

- A person purporting in behalf of a non existing corporation

- Section 21, you arrive at the same decision

•Chiang Kai Siek vs. CA

- SC based its decision from the provision of the education act

- It cannot immune itself by virtue of its non compliance with the law

Assuming there was no law?

- YES, it may still be sued as a school for the past 32 years the school represented itself

as possessed of juridical personality

General rule: a 3rd party transacting with a non existent corporation shall be estopped

to deny

•Asia banking vs. standard products



- General rule: absence of fraud a person who has dealt with a non incorporated

corporation shall be stopped to deny from actions in which it had benefited

- Exemptions: when there is fraud the general rule shall not apply

•Salvatierra vs. Garlitos

- As a general rule a person who has contracted it a corporation lacking personality

- Doctrine is not applicable where fraud takes part in the transaction

Another exemption

•International express travel and tours vs. CA

- No fraud in this case

- How come Kahn was made liable?

- Doctrine of incorporation

- Applies only if that person is trying to escape from a contract where he is benefited

- In this case petitioner is not trying to escape liability, but rather the one claiming from

the contract

Would this apply to foreign corporation?

- YES, it may apply

- Georg Grotjahn vs. Isnami

A foreign corporation cannot gain access to our courts unless they attain a license to

engage in business in the Philippines but applying corporation by estoppels, the court

allowed

Municipality of Malabang case

- No law, hence may be questioned by any person

- An unconstitutional act is not a law, t confers no rights, it imposes no duties, it affords

no protections, it crates

o office, it is in legal contemplation, as inoperative as though it had never been passes

Hall vs. Piccio

- No good faith




- Admission, conduct or agreement

- Will not apply among members themselves there must be a 3rd party

- Cannot escape when benefited

- General rule: you deal with a corporation, as to estop it

- Exceptions: 1. fraudulently misrepresents the third person may file an action directly

to those members, 2. 3rd party will not be estopped if he is not trying to escape liability

2 possible remedies

- Chiang kai siek case

- Albert case

What would be the effect if the corporation failed to commence transaction?

- Automatic

Operated but becomes subsequently inoperative for 5 years only a ground for

suspension, proper notice and hearing

Commencement

-Example realty company

CORPORATE CHARTER AND ITS AMENDMENTS

What do you understand by the word charter? Is it the same as articles of

incorporation?

-Corporate charter is broader

Franchise

- Primary power granted by the state to be and act as a corporation

- Secondary franchise is the right or privilege that the corporation may exercise

You cannot issue investment contracts without a secondary franchise, kailangan

primary muna hindi pwede mauna secondary kasi sa section 19 it does not exist until

issued with a certificate of registration or incorporation

Corporate entity

- Corporation exist separately and independently from the stockholders

- Stockholders cannot bring an action, to bring back the properties of a corporation



- Corporation has no interest in the individual properties of its members

•Sulo ng Bayan vs. Araneta

- Corporation cannot bring an action for the recovery of the properties of its members

•Caram vs. CA

- Stockholders cannot be held liable for the legitimate obligations of the corporation, they

exist separately and independently from one another

•Cruz vs. Dalisay

- Final judgment against a corporation cannot be enforced against stockholders

•Rustan Pulp vs. CA

- Corporation exist separately and independently

- Corporation are juridical entities, they exist only in legal contemplation, can act only

through its authorized representatives

•Soriano vs. CA

- They are not personally liable

- They where signed for and in behalf of the corporation

•Palay inc. vs. Clave

- Liabilities incurred by the corporation cannot be enforced against stockholders, etc.,

even if stockholders, etc. happens to own a substantial interest in the corporation,

mere ownership does not disregard the corporate entity theory

Corporate entity for legal or legitimate purposes only

Two or more corporations, one of them will be treated as a mere alter-ego

You cannot pierce the veil of corporate fiction when there are no facts attendant in the

case

Corporate Entity Theory

- The corporation is possessed with a personality separate and distinct from the individual

stockholders or members and is not affected by the personal rights, obligations or

transactions of the latter

Instrumentality rule

- Where one corporation is so organized and controlled and its affairs are conducted so

that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the

corporate entity of the “instrumentality” may be disregarded



- Courts are concerned with reality and not form

- Mere ownership of all or substantially all of the shares of stock of a corporation is not,

in itself, insufficient ground for disregarding the separate corporate personality. And

for the separate personality of the corporation to be disregarded, the wrong doing must

be clearly and convincingly established

- Fraud must be proven by clear and convincingly evidence amounting to more than

preponderance. It cannot be justified by speculation and can never be presumed. And

only if it sought to hold the

stockholders liable directly for corporate debt

•Palacio vs. Fely

- Piercing the veil of corporate fiction

- Fely trans and the other corporation is one and the same

•Marvel bldg. vs. David

- There must be facts before the court will be justified in piercing the veil of corporate

fiction

- Corporation was a mere extension of the personality of the person

•Yutivo and sons vs. Court of Tax Appeals

- What where the facts or circumstances arrived by the court here?

- Subscribed capital where all advanced by Yutivo, the board where the same as Yutivo

• Commissioner of Internal Revenue vs. Norton and

Harrison

- Court applied the general rule

- Mere substantial ownership does not mean that it has a same corporate entity

• La Campana Coffee Factory, Inc. vs. KKM

- Two corporations managed by the same family, workers were made interchangeably

•Emilio Cano vs. CIR

- Sued in there official capacity

- Reverse of Soriano vs. CA (signed in their official capacity)



•Tesco vs. WCC

-The two corporations where located in the same office

•Claparols vs. CIR

-Same as NAFLU and A.C. Ransom

•Concept builders vs. NLRC

- Instrumentality rule. What is the instrumentality rule? “where one corporation is so

organized and controlled and its affairs are conducted so that it is, in fact, a mere

instrumentality or adjunct of the other, the fiction of the corporate entity of the

“instrumentality” may be disregarded.”

- Has no separate mind of its own. What is the degree of control?

1. Control, not mere majority or complete stock control, but complete domination, not only

of finances but of policy and business practice in respect to the transaction attacked so

that the corporate entity as to this transaction had at the time no separate mind, will or

existence of its own.

2. Such control must have been used by the defendant to commit fraud or wrong, to

perpetuate the violation of a statutory or other positive legal duty or dishonest and unjust

act in contravention of plaintiff’s legal rights; and,

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss

complained

of.

- The absence of one of the elements prevents “piercing the corporate veil.” In applying the

“instrumentality” or “alter ego” doctrine, the courts are concerned with reality and not

form, with how the corporation operated and the individual defendant’s relationship to

that operation.

There must facts and circumstances before warrant piercing the veil of corporate fiction

The control necessary does not mean stock ownership

•MCConnel vs. CA

- were located in the same floor

- “while the mere ownership of all or nearly all of the capital stock of a corporation does

not necessary

mean that it is a mere business conduit of the stockholder, that conclusion is amply

justified where it is shown, as in the case before us, that the operations of the



corporation were so merged with the stockholders as to be practically

indistinguishable from them. To hold the latter liable for the corporation’s obligations

is not to ignore the corporation’s separate entity, but merely to apple the established

principle that such entity cannot be invoked or used for purposes that could not have

been intended by the law that created that separate personality.”

•Tan boon bee vs. Jarencio

- Why would a drug company need a printing machine

- The property must be in pursuance of a company business

•Cease vs. CA

- Alter-ego or the extension of the person of forest ware does the court pierced the veil

of corporate fiction

- As to not deprive the holders of their successional rights

- Mere ownership of all or substantially all is not a justification of piercing the veil of

corporate fiction

Fraud must be proven by clear and convincing evidence cannot presume or speculate,

there must be facts and circumstances

Fraud must be clear and convincing evidence more than preponderance

•Remo Jr. vs. IAC

-The resolution was not entered to defraud anyone

•Del Rosario vs. National Labor Commission

- The wrongdoing must be clearly established

- There must be facts to support

- Payment of claims cannot thus be presumed

•Indophil Textile Mill vs. CALICA

- How do you distinguish this ruling to La Campana, having the same issues:

- La campana, one payroll, employees were made interchangeable. Acrylic had its

own standards



•PNB vs. Ritratto Group

- Control test

- Not mere majority but rather complete

- Twin ace was only a subsequent interested party

- Assets and machineries

Amendment of the articles of incorporation

-Express power granted to a corporation

Section 16

- Appraisal right

- Section 81 to object on certain acts and transactions

Section 81. Instances of appraisal right. - Any stockholder of a corporation

shall have the right to dissent and demand payment of the fair value of his shares in

the following instances:

1. In case any amendment to the articles ofincorporation has the effect of changing or

restricting the rights of any stockholder or class of shares, or of authorizing

preferences in any respect superior to those of outstanding shares of any class, or of

extending or shortening the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all

or substantially all of the corporate property and assets as provided in the Code; and

3. In case of merger or consolidation. (n)

- Right granted only in specified instances

Are non-voting shares included in amending the articles of incorporation

1 100/s XYZ-----ABC

2 100/s

To

10 100/s

=1M/S what would be the 2/3?

Section 6 last paragraph

Voting shares are excluded except the foregoing instances

1 1



2 2

3 3

4 4

5 5

6 6

1 & 2=absent

1&2=absent but gave their written assent

3 & 4= objected

3&4=objected

5 & 6= approved the amendment 5&6=approved

Would there be a valid amendment

Special amendments 37 & 38 shortening that would result to dissolution require prior

approval by the SEC

Section 37. Power to extend or shorten corporate term. - A

private corporation may extend or shorten its term as stated in the articles of

incorporation when approved by a majority vote of the board of directors or trustees

and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of

the outstanding capital stock or by at least two-thirds (2/3) of the members in case of

non-stock corporations. Written notice of the proposed action and of the time and

place of the meeting shall be addressed to each stockholder or member at his place of

residence as shown on the books of the corporation and deposited to the addressee in

the post office with postage prepaid, or served personally: Provided, That in case of

extension of corporate term, any dissenting stockholder may exercise his appraisal

right under the conditions provided in this code. (n)

Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or

decrease its capital stock or incur, create or increase any bonded indebtedness unless

approved by a majority vote of the board of directors and, at a stockholder's meeting

duly called for the purpose, twothirds (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.

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 twentyfive (25%) percent of the amount subscribed has been paid either

in actual cash to the corporation or that there has been transferred to the corporation

property the valuation of which is equal to twenty-five (25%) percent of the

subscription: Provided, further, That no decrease of the capital stock shall be approved

by the Commission if its effect shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase

the same, with the approval by a majority vote of the board of trustees and of at least

two-thirds (2/3) of the members in a meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Securities and

Exchange Commission, which shall have the authority to determine the sufficiency of

the terms thereof. (17a)

The vote must be cast at the meeting called for that purpose

Written assent would not suffice

When do amendments become valid and effective?

- Only upon the approval of the SEC TRUE OR FALSE?

- FALSE because it can be valid upon the date of filing if not acted upon within 6 months

without fault attributable to the corporation

Why is it retroactive?

What provision may be amended, altered or repealed

Can you change name, address for example she married or changed address?

-NO. you cannot change that

Fait accompli, are beyond the powers or authority of the corporation to change, alter

or modify. These would include the following:

- Names of the incorporators and

- The incorporating directors or trustees,

- The name of the treasurer originally or first elected by the subscribers or members to act

as such until his successor has been duly elected and qualified,



- The number of shares and amount originally subscribed and paid out of the original

authorized capital stock of the corporation,

- The date and place of execution of the articles of incorporation,

- The signatories and acknowledgment thereof.

- All other provisions or matters stated or contained in the articles are subject to

amendment.

Founder’s or signatories hindi pwede palitan

Names, nationalities- you cannot

Capital- right granted by law to all corporation

Paid up capital- NO

Restriction and transfer of shares in ordinary stock corporations

- You can, but close corporation cannot

- Section 96, otherwise it will not be a close corporation

Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of

incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive

of treasury shares, shall be held of record by not more than a specified number of persons,

not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or

more specified restrictions on transfer permitted by this Title; and (3) The corporation

shall not list in any stock exchange or make any public offering of any of its stock of any

class. Notwithstanding the foregoing, a corporation shall not be deemed a close

corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or

controlled by another corporation which is not a close corporation within the meaning of

this Code.

Any corporation may be incorporated as a close corporation, except mining or oil

companies, stock exchanges, banks, insurance companies, public utilities, educational

institutions and corporations declared to be vested with public interest in accordance with

the provisions of this Code.

The provisions of this Title shall primarily govern close corporations: Provided,

That the provisions of other Titles of this Code shall apply suppletorily except insofar

as this Title otherwise provides.



Transfer clause, executor clause, acknowledgment, treasury affidavit-NO

•Philippine First Insurance case

- Mere change in the name of a corporation or by merely complying with the law is

general amendment

- It does not change its personality. It is the same person in a different name. the charter

is the same

Amendment of a corporate term

- Extending the same can never be made 7 years prior? TRUE or FALSE

- FALSE. It can be if there are justifiable reasons for earlier extension as may be

determined by the SEC

Can you extend the corporate term if it has already expired?

- Once the term expires without an amendment having happen it ceases to exist as a body

politic. It is dissolved automatically on the day it expires.

Alhambra cigar and PNB case

Instances when the SEC allowed extension whose term has already expired

- All of them involved are institutions of learning, it was the case in order to avoid

confusion that would arise later on.

BOARD OF DIRECTORS/TRUSTEES

Section 23

Section 23. The board of directors or trustees. - Unless otherwise

provided in this Code, the corporate powers of all corporations formed under this Code

shall be exercised, all business conducted and all property of such corporations

controlled and held by the board of directors or trustees to be elected from among the

holders of stocks, or where there is no stock, from among the members of the

corporation, who shall hold office for one (1) year until their successors are elected

and qualified. (28a)

Every director must own at least one (1) share of the capital stock of the

corporation of which he is a director, which share shall stand in his name on the books

of the corporation. Any director who ceases to be the owner of at least one (1) share

of the capital stock of the corporation of which he is a director shall thereby cease to

be a director. Trustees of non-stock corporations must be members thereof. A majority

of the directors or trustees of all corporations organized under this Code must be

residents of the Philippines.



- Controlled by the board of directors

- Authority are however restricted to the day to day

- Stockholders may have all the profit but will turn over the management to the

governing board

- But unless the law provides the power may be delegated

General rule

- Corporations must sit and act as a body

- Will be bound by corporate officers if they acted within the 5 classification page 150

•Ramirez vs. Orientalist co.

- What was the position of Fernandez in this case? TREASURER

- Why did the court rule that actions of Fernandez bound the corporation when he is

not even a board of director?

“if a man is found acting for a corporation with the external indicia of authority,

any person not having notice of want of authority, may usually rely upon those

appearances; and if it be found that the directors had permitted the agent to exercise

that authority and thereby held him out as a person competent to bind the corporation,

or had acquiesced in a contract and retained the benefit supposed to have been

conferred by it, the corporation will be bound, notwithstanding the actual authority

may never have been granted.”

- Contracts must be made by the director and not the stockholders

- Actions of the stockholders in such matters is only advisory and not in any way

binding in the corporation

•Barreto vs. La previsora Filipina

- Everything emanates from the board of directors

- Stockholders action is merely advisory except their approval or vote is necessary to

prove a valid corporate act

Qualifications:



- No citizenship requirement, at least majority must be residents

- Can have a governing board consisting solely of foreigners

- But we have to take into consideration partly nationalized industries and other laws

which prohibits or limits foreign ownership

- Anti-dummy act

- Utilization development of natural resources 60% must be owned by Filipino citizens,

therefore they only own 40%---10 members they can only have 4 seats, but not

entirely correct because the law may provide otherwise; educational institutions

restricted to Filipinos, but there are exceptions when created by religious and

charitable institutions.

- By-laws may provide additional qualifications and disqualifications

- To qualify as a director he must own at least 1 share

Should the stockholder be the equitable or beneficial owner in order to qualify as a

director?

- NO, it is not necessary, as long as you are listed in the books as owner of one share

• Lee vs. CA

- As long as you are listed in the books as owner of one share

- Under the old law he must be the beneficial owner and legal owner thereof but in the

new law it is not required as long as it stands in his name he is qualifies

1 A-100t/S B (own in the trust of X) is B qualified to be a director?

2

3-10

2– transferring there voting rights in favor of VT Other rights will accrue in favor of them,

but not the voting rights

voting rights must be recorder in the books of the corporation that it is transferred

PNB-IFL- wholly owned subsidiary of PNB

PNB will assign to PNB-IFL nominal shares and PNB-IFL now will be able to be nominated

Gen. Rule:

- Term of one year who will serve as such until there successors are elected and

qualified



Exception:

- Non-stock corporation can serve for a term of 3 years

- Educational non-stock- term of the governing board can be 5 years

May this term exceed one year?

- Yes, they may serve in a hold over capacity until their successors have been duly

elected and qualified

•Detective and protective bureau vs. Cloribel

- In the by-laws, managing director must be elected from among themselves

- Must be duly elected and qualified

How are the directors elected?

1-100T/S

2-100T/S 3-100T/S to 10=1M/S

Do you include the vote of 1 & 2 to have a quorum to have a valid meeting?

- NO, quorum requirements is 401,000

Quorum requirement is 501k

Holders of non-voting shares are only entitled to vote in last par. Of section 6

1-200k

2-200k

3-200k

4-100k

5-100k

6-100k

7-50k

8-40k

9-5k

10-5k

=1MS

1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10, tumakbo and ninominate nila

yung sarili nila and cast all their shares on themselves

Who wins? Or who gets elected?

- No vote requirement, the one who gets the most number of votes gets elected, section24.

What is cumulative voting?

- Process of multiplying the number of shares to the number of director to be elected

- Matter of right granted to stockholders in a stock corporation



1 to 5 has 200k/s and members of the same family- majority

800k they have 4M votes they are guaranteed 4 seats

6 to 10 are not related- 1 seat 1M votes

Cumulative to allow the minority to have a rightful representation in the board

Is it allowed in a non-stock corporation?

- Not generally available

- Section 89 unless the articles or by-laws allow cumulative voting

Section 89. Right to vote. - The right of the members of any class or

classes to vote may be limited, broadened or denied to the extent specified in the

articles of incorporation or the by-laws. Unless so limited, broadened or denied, each

member, regardless of class, shall be entitled to one vote.

Unless otherwise provided in the articles of incorporation or the by-laws, a

member may vote by proxy in accordance with the provisions of this Code. (n)

Voting by mail or other similar means by members of non-stock corporations

may be authorized by the by-laws of non-stock corporations with the approval of, and

under such conditions which may be prescribed by, the Securities and Exchange

Commission.

Other corporate officers other than the governing board section 25

Section 25. Corporate officers, quorum. - Immediately after their

election, the directors of a corporation must formally organize by the election of a

president, who shall be a director, a treasurer who may or may not be a director, a

secretary who shall be a resident and citizen of the Philippines, and such other officers

as may be provided for in the by-laws. Any two (2) or more positions may be held

concurrently by the same person, except that no one shall act as president and secretary

or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties

enjoined on them by law and the by-laws of the corporation. Unless the articles of

incorporation or the by-laws provide for a greater majority, a majority of the number

of directors or trustees as fixed in the articles of incorporation shall constitute a

quorum for the transaction of corporate business, and every decision of at least a

majority of the directors or trustees present at a meeting at which there is a quorum



shall be valid as a corporate act, except for the election of officers which shall require

the vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings. (33a)

Is the president required to be a stockholder. YES

The chairman may be another person

The president may also be another person

Prohibited is president to be secretary or treasurer at the same time

Board of director must sit and act as a body to arrive at a corporate act

What would constitute a quorum if 5 then 3 must be present

May the vote of 2 members past a 5 man governing board pass a valid corporate act?

- YES. Voting requirement is majority of directors present at which there where a quorum

1 1 and 2 present=valid voting

requirement

2 1 and 2 voted yes

3 3 voted no

4

5

Is it absolute?

- NO, except in the election because it requires the majority of all the members of the

board

- If by-laws or articles provide a higher voting requirement

Artificial beings must act through its members and act as a body to have a valid

corporate act

Exception:

- Delegation

- Expressly conferred

- Where the officer or agent is clothed with actual or apparent authority



- Otherwise it will not bind the corporation

Yao ka sin trading case “already asked in the bar”

- Only bind the corporation to the extent of authority confined to him or virtue of

customs, usage and policy

- Must pass first the controller and counsel

What if the notice requirement is not complied with?

•Lopez realty vs. Fotencha

- Notice requirement must be complied with hence it should have been with force and

effect, but according to the SC, it may be ratified expressly if there is a subsequent

meeting called for that purpose

- Impliedly through acts

- Asuncion was aware of the corporations obligation - There was implied

ratification or she was estopped

•Pua casim vs. Neumark and Co.

- Considered 3 circumstanced

- Check which was the proceed of the loan which was endorsed and deposit in the

corporate account

- Neumark as president and also stockholder

•Yu chuck vs. Kong Li Po

- General manager usually has the power to hire but the

SC said the contract must be reasonable

- The contract here is so onerous that it would throw the corporation into insolvency

•Francisco vs. GSIS

- GSIS cannot evade the binding effect of the telegram

- Only 15 months later that the corporation said there was a mistake

- The silence coupled with the unconditional acceptance of the other subsequent

remittances is binding to the corporation



•Board of liquidators vs. Kalaw

“Settled jurisprudence has it that where similar acts have been approved by the

directors as a matter of general practice, custom and policy, the general manager may

bind the company without formal authorization of the board of directors. In varying

language, existence of such authority is established, by proof of the course of business,

the usages and practices of the company and by the knowledge which the board of

directors has, or must be presumed to have, of acts and doings of its subordinates in and

about the affairs of the corporation. So also, “xx authority to act for and bind a

corporation may be presumed from acts of recognition in other instances where the power

was in fact exercised.” “xx Thus, when, in the usual course of business of a corporation,

an officer has been allowed in his official capacity to manage its affairs, his authority to

represent the corporation may be implied from the manner in which he has been permitted

by the directors to manage its business.”

In the case at bar, the practice of the corporation has been to allow its general

manager to negotiate and execute contracts in its copra trading activities for and in

NACOCO’s behalf without prior board approval. If the by-laws were to be literally

followed, the board should give its stamp of prior approval on all corporate contracts.

But that Board itself, by its acts and through acquiescence, practically laid aside the by-

law requirement of prior approval.

- Kalaw signed alone and said contracts were submitted to the board of directors after its

consummation and not before

•Buenaseda vs. Bowen

- Express ratification is made through a formal board action

- Implied ratification is through: silence or acquiescence, acceptance benefits and lastly

recognition or adoption

An unauthorized act may nevertheless be binding either by express or implied by

estoppels

By virtue of silence the board had impliedly accepted the act

By recognition or adoption

By virtue of payment of obligations arising therefore- Lopez realty

May directors or trustees be disqualified to act as such?

- YES, crime, etc. disqualifications in book



- Possess or dispossess any of the qualifications or disqualifications , cease to hold at least

one share May directors be ousted from office?

- At least 2/3 of members representing outstanding capital stock. Again notice requirement

must be complied with

1-200 1-5 same

family 2-200

3-200

4-100

5-100 electing

6-100 6 to 10 not

related 7-50

8-40

9-5

10-5 outstanding

director

Meetings called by the president or the secretary ordered by the president

It depends if the removal is without cause they cannot do so because removal without

cause shall not deprive the minority stockholders or members of the right of

representative

If with cause they can even if it will prejudice the rights of the minority, provided of

course additional requirements by-laws and articles of incorporation

Who will fill up the vacancy created due to the ouster of a member of the board of

directors <section 29>

Section 29. Vacancies in the office of director or trustee. - Any

vacancy occurring in the board of directors or trustees other than by removal by the

stockholders or members or by expiration of term, may be filled by the vote of at least

a majority of the remaining directors or trustees, if still constituting a quorum;

otherwise, said vacancies must be filled by the stockholders in a regular or special

meeting called for that purpose. A director or trustee so elected to fill a vacancy shall

be elected only or the unexpired term of his predecessor in office.



Any directorship or trusteeship to be filled by reason of an increase in the

number of directors or trustees shall be filled only by an election at a regular or at a

special meeting of stockholders or members duly called for the purpose, or in the same

meeting authorizing the increase of directors or trustees if so stated in the notice of

the meeting. (n)

Other than by removal or expiration of term they do not have the power

When will the vacancies be filled up?

Is notice required, to fill up vacancies due to removal?

What if the vacancy is due to an increase, can it be filled up in the same meeting where

in the number is increased?

Election due to removal-in the same meeting notice is not required

Election due to increase in number- it must be so stated in the meeting

Section 30



compensation, as such directors, except for reasonable per diems: Provided, however,

That any such compensation other than per diems may be granted to directors by the

vote of the stockholders representing at least a majority of the outstanding capital

stock at a regular or special stockholders' meeting. In no case shall the total yearly

compensation of directors, as such directors, exceed ten (10%) percent of the net

income before income tax of the corporation during the preceding year. (n)

- Generally not entitled to receive compensation because they render it gratuitously

- Unless the by-laws allows

- Stockholders may also grant pursuant to a majority vote

- Must not exceed net income of 10% tax of the preceding year

- Acting in special capacity

- In, sum directors may receive compensation when

1. there is a provision in the by-laws to that effect



2. When the stockholders, by a majority vote of the outstanding capital stock grant the

same; and,

3. If the director renders extra-ordinary or unsual service • Central cooperative

exchange vs. Tibe

-By-laws may allow, stockholders may also allow such

What do you understand by the phrase “as such directors”

•Western institute vs. Salas

- Compensation was granted without by-laws authority

- Prohibition is not a sweeping rule

- Members of the board may receive when they receive in a special capacity

- Mere act of the board will suffice

Is the 10% ceiling applicable to other officers?

- NO. the phrase “as such director” was used twice <Section 30>

- The SC ruled that the 10% ceiling will not likewise apply if they acted in a capacity other

than “as such directors”

•Government vs. El Hogar

- Judicial intervention is not proper

- The appropriates remedy is to those who can make or unmake the by-laws

Liability of corporate officers

- Obligations incurred by those acting for and in behalf of the corporations are not there’s

BUT there are exceptions even if they are acting for and in behalf of the corporation

•Tramat vs. CA

- General rule was applied in the case

- Ong acted as officers and acted within the scope of his authority

- Court laid down 4 instances when even if acting within the scope of his authority he is

held solidarily liable



1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or

gross negligence in directing its affairs, or (c) for conflict of interest, resulting in

damages to the corporation, its stockholders or other persons;

2. He consents to the issuance of watered stocks or who, having knowledge thereof, does

not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation;

4. He is made, by a specific provision of law, to personally answer for his corporate

action.

- Watered stocks- issued, fully paid up when in fact they have not been fully paid or

promised as such

•Llamado vs. CA

- The corporate entity theory cannot be used as a defense to escape liability in violation

of B.P. 22

- Where the check is drawn by a corporation the persons who signed the check shall be

liable.

•Uichico vs. NLRC

- Labor case corporate directors and officers are solidarily liable with the corporation for

the termination of employment of corporate employee done with malice and bad faith

3 fold duty of directors

- obedient

- diligent

- loyal

Business judgment rule

- Questions of policy and management are left solely to the honest decision of the board

of directors and the courts are without authority to substitute its judgment as against

the former. The directors are the business managers of the corporation and as long as

they act in good faith, its actuations are not subject to judicial review. Montelibano

vs. Bacolod Murcia Milling

- questions of policy and management are left solely to the board of directors



- BOD, business manager of the corporation and as long as they act in good faith, its

actuations are not subject to judicial review

- They are not insurer of the property of the company, they were guarantors that the

enterprise undertaken by the corporation shall be successful

•Montelibano vs. Bacolod Murcia Milling Co.

- Directors are not liable due to imprudence or honest error of judgment

- Duty of loyalty of corporate directors

- 31,32,33,34

- 31,32,33- specific instances when corporate officers may violate loyalty

- 32,33 self-dealing and interlocking director

Corporate opportunity doctrine

- It places a director of a corporation in the position of a fiduciary and prohibits him form

seizing a business opportunity and/or developing it at the expense and with the

facilities of the corporation. He cannot appropriate to himself a business opportunity

which in fairness should belong to the corporation.

Last paragraph of section 31 and the provision of section 34 make reference to

recovery of “forbidden profits”

Distinction between section 31 and 34 relative to the ratification by the stockholders

- The second paragraph of section 31 which makes a director liable to account for

profits if he attempts to acquire or acquires any interest adverse to the corporation in

respect to any matter reposed in him in confidence as to which equity imposes a

disability upon him to deal in his own behalf is not subject to ratification by the

stockholders. Whereas, in section 34 if a director acquires for himself a business

opportunity which should belong to the corporation, he is bound to account for such

profits unless his act is ratified by the stockholders owning ore representing at least

2/3 of the outstanding capital stock.

- If reposed in him in confidence, not subject to ratification

- If the acquisition is merely that of a business opportunity which has not been reposed

in him in confidence, the same may be subject to ratification by the stockholders.

Director x co.

A-REALTY



B

CZ owns property and is going abroad never to Return,

he wants to sell for 25M the fair market value is 30M

D

E

E goes to Z and offers to pay the property for 26 M and later he sells it for 30M making 4M

profit, one of the stockholders learned and complains that he should submit the profits. E

said that he will move for ratification of his actuation. Can it be ratified?

- It can be ratified he merely acquired a business owning to the corporation

- It would be different if it was entrusted in his confidence

Another scenario:

Had A not attended the meeting he would not have known of the sale it is then

a matter reposed in him in confidence

A corporation cannot reaquire its share if it has no restricted unretained earnings

•Strong vs. Rapide

- What duty did he violate?

- He violated his duty of loyalty

- The law would be impotent if the sale were not invalidated

Self-dealing director and interlocking director

What is a self-dealing director?

- Director of a corporation dealing or transacting business with his corporation

Are the contracts and dealing of a self0dealing director valid?

General rule: voidable

May the contracts of a self-dealing director be valid per se.

- YES. If all the 4 conditions are present they will be valid per se

1. That the presence of such director or trustee in the board meeting in which the contract

was approved was not necessary to constitute a quorum for such meeting;

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.

When do they become voidable?

- When any of the two requisites are absent it is voidable, but subject to ratification by

2/3 of the outstanding capital stock or 2/3 of the member

Requisites for ratification (subject to ratification by the stockholders holding or

representing at least 2/3 of the outstanding capital stock or 2/3 of the members.)

- it must be at a meeting called for the purpose

- full disclosure of the adverse interest of the director concerned must be made

- the contract is fair and reasonable under the circumstances

Problem if self-dealing director involved owns all or substantially all of the shares of

stock of the corporation thereby making it easily possible to have the contract ratified

- last sentence of section 32 should be made to apply by determining the reasonableness

and fairness of the contract

Section 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its directors or

trustees or officers is voidable, at the option of such corporation, unless all the

following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the

contract was approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of

the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in case of an officer, the contract has been previously authorized by the

board of directors.

Where any of the first two conditions set forth in the preceding paragraph is

absent, in the case of a contract with a director or trustee, such contract may be ratified

by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding

capital stock or of at least two-thirds (2/3) of the members in a meeting called for the

purpose: Provided, That full disclosure of the adverse interest of the directors or



trustees involved is made at such meeting: Provided, however, That the contract is fair

and reasonable under the circumstances. (n)

•Prime white cement vs. IAC

- a director of a corporation owes a position in trust

- in case of conflict between himself and that of the corporation, he cannot sacrifice the

interest of the corporation to his own advantage

- as a director he should have acted in a manner as not to unduly prejudice the

corporation

- he cannot be allowed to enrich himself

May corporate directors purchase the corporate property?

•Mead vs. Mccullogh

- interlocking director- a director of one corporation who deals and transacts business

with another corporation who is himself a director

A-director of X company also a director of Y corporation

B-

C- D- E-

Both companies enter into a contract and A sits, is the contract valid?

- Yes on the ground of fraud or if it is unfair

- May be subject to the provision of section 32

- Section 32 contract may become voidable, hence it may also be ratified

X Co.

Y Co.

A owe 20%

A owe 20%

Is it generally valid or voidable? VALID

25%

25% VALID

15%

25% VOIDABLE SUBJECT TO section 32

More than 20 substantial



BOD mismanages corporate officers. Who may file a suit?

- General rule: BOD which can institute a case because it has all the powers. To allow

stockholders to file would violate the doctrine of corporate entity and may result to

multiplicity of suits

- Stockholders cannot therefore generally file a case EXCEPT of course in a

DERIVATIVE SUIT

Derivative suit

- An action based on injury to the corporation-to enforce a corporate right- wherein the

corporation itself is joined as a necessary party, and recovery is in favor of and for the

corporation.

- Remedy granted by law to stockholders to institute a case to remedy a wrong done

directly to the corporation and indirectly to the stockholders, if the board refuses to

do so. Otherwise if not they would be left without any recourse

Available suits

•individual or personal

-Wrong done against his person as a stockholder

• Class suit

- Filed by a stockholder in representation of other stockholders

- A wrong or redress done, a derivative suit in nature

Intra-corporate remedies

- Demand to the BOD to institute such action

- Negated by the BOD

- The one who instituted must be a stockholder at the date when the act was done, must

have been a stockholder by that time

Demand will not be required if the majority of the BOD are the one’s guilty of the

wrong charged



The corporation must be made a party in the case whatever side will not matter

because under Philippine law misjoinder is not a ground for dismissal

Non-joinder is a ground for dismissal

Any benefit should inure to the corporation

Stockholder bringing the action is entitled to reimbursement such as attorney’s fee

ONLY IF the case is SUCCESSFUL to avoid harassment suit to their management

•Pascual vs. Orozco

- By virtue of the fact that he is a stockholder, may maintain a derivative suit

- Depend on how, when and what reason

- Seeking for the years 1898 all the way 1907

- Only became a stockholder in 1903

- He can sue only in 1903 forward because he must be a stockholder

- The right of action is personal in nature. He became a stockholder only in 1902

Derivative suit

- By a stockholder to address a wrong done against the corporation and the stockholder

indirectly

- Essential requisite must have been a stockholder from the time the act complained of

took place

- Cannot institute an action from the years he was still not a stockholder

•Everett vs. Asia Banking

- Stockholders cannot ordinarily commence suit in equity and such is in the hands of its

BOD however there are exceptions when the BOD will not sue since they are

themselves principals to the fraud.

•Republic vs. Cuaderno

- The facts constitute sufficient cause of action

- It is not the corporate interest to shield one from criminal prosecution which is

personal interest

- Perez is not suing in his behalf, but in behalf of the corporation



•Western institute vs. Salas

- Assuming it was filed in the proper forum would there argument that it is a derivative

suit prosper? NO. it is people of the Philippines vs. individual director, it must be

stated in the complaint that it is being instituted as a derivative suit and for and in

behalf of the corporation

- Granting arguendo, that this is a derivative suit, the same is still outrightly dismissible

for having been wrongfully filed in the regular court devoid of any jurisdiction to

entertain the complaint. The case should have been filed with the SEC which exercises

original and exclusive jurisdiction over derivative suits, they being intra-corporate

disputes, per Section 5 (b) of

P.D. 902-A

•San Miguel vs. Khan

- Was a demand made? NO

- It is not necessary because he objected in the board meeting, but still it was adopted

therefore it was useless

•Chase vs. Buencamino

- Argument that he should be in estoppels since he filed in the U.S.

- Assuming the case prospered in the U.S. would not estoppels apply as against him? NO

for estoppels to step in it must be a case by the corporation

•Reyes vs. tan

- Corporate director are guilty of breach of trust

- A stockholder may institute an action to remedy a wrong done

- Fraud in the conduct of corporate affairs

•Gamboa vs. Victoriano

- Is derivative suit appropriate in this case

- They are not vindicatory damage done to the corporation, but rather they where

vindicating damage against him

- Violation of their rights as individuals, hence derivative suit is not the remedy

•Evangelista vs. Santos

- Derivative suit is not proper



- Claim is not for the benefit of the corporation, but rather his individual benefit

From the cases above cited, these are the requirements and the procedures that must be

followed in order that a derivative suit may prosper

1. That the party bringing the suit should be a stockholder as of the time the act or

transaction complained of took place, or whose shares have evolved upon him since by

operation of law. This rule, however, does not apply if such act or transaction continues

and is injurious to the stockholder or affect him specifically in some other way.

The number of his hares is immaterial since he is not suing in his own behalf or for the

protection or vindication of his own right, or the redress of a wrong done against him,

individually, but in behalf and for the benefit of the corporation.

2. He has tried to exhaust intra-corporate remedies, he has made a demand on the board of

directors for the appropriate relief but the latter had failed or refused to heed his plea.

Demand, however, is not required if the company is under the complete control of the

directors who are the very ones to be sued (or where it becomes obvious that a demand

upon them would have been futile and useless) since the law does not require a litigant

to perform useless acts;

3. The stockholder bringing the suit must allege in his complaint that he is suing on a

derivative cause of action on behalf of the corporation and all other stockholders similarly

situated, otherwise, the case is dismissible. This is because the cause of action actually

devolves on the corporation and not to a particular stockholder.

4. The corporation should be made a party, either as party-plaintiff or defendant, in order to

make the court’s judgment binding upon it, and thus, bar future litigation of the same

issues. On what side the corporation appears loses importance when it is considered that

it lay within the power of the court to direct the making of amendment of the pleading,

by adding or dropping parties, as may be required in the interest of justice. Misjoinder of

parties is not a ground to dismiss action; and,

5. Any benefit or damages recovered shall pertain to the corporation. This is so because in

all instances, derivative suit is instituted for and in behalf of the corporation and not for

the protection or vindication of a right or rights of a particular stockholder, otherwise, the

aggrieved stockholder should institute, instead, an individual or personal suit to vindicate

his personal or individual right. Or, for that matter, representative or class suit for all

other stockholders whose rights are similarly situated, injured or violated, personally or

individually.

Executive committee



-Not allowed under the OLD law

How may executive committee created and constituted?

- Section 35

Section 35. Executive committee. - The bylaws of a corporation may

create an executive committee, composed of not less than three members of the board,

to be appointed by the board. Said committee may act, by majority vote of all its

members, on such specific matters within the competence of the board, as may be

delegated to it in the by-laws or on a majority vote of the board, except with respect

to: (1) approval of any action for which shareholders' approval is also required; (2)

the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the

adoption of new by-laws; (4) the amendment or repeal of any resolution of the board

which by its express terms is not so amendable or repealable; and (5) a distribution of

cash dividends to the shareholders.

- Said committee may act and bind the corporation by the majority vote of all its

members except with respect to those matters provided for in sec. 35 these are:

1. Approval of any action for which shareholders’ approval is also required

2. The filing of vacancies in the board;

3. Amendment or repeal of by-laws or the adoption of new by-laws;

4. Amendment or repeal of any resolution of the board which by its express terms is not

so amenable or repealable; and,

5. Distribution of cash dividends to the shareholders.

May the board alone create an executive committee without any authority provided

for the by-laws?

- NO board of directors must sit and act as a body to have a valid transaction

May a non-member of the board of directors be a member of the executive committee?

- NO, all of them must be members of the board of directors

- BOD cannot act by proxy it would be abdication of powers

Purpose clauses necessary because it confers and also limits the actual authority of

the corporation

CORPORATE POWERS AND AUTHORITY



Corporate authority may be classified into three classes namely:

1. Those expressly granted or authorized by law inclusive of the corporate charter or

articles of incorporation;

2. Those impliedly granted as are essential or reasonably necessary to the carrying out

of the express powers;

3. Those that are incidental to its existence.

Section 36 to 45- POWER GRANTED BY LAW

Section 36. Corporate powers and capacity. - Every corporation incorporated

under this Code has the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of

incorporation and the certificate of incorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or

repeal the same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks

to subscribers and to sell treasury stocks in accordance with the provisions of this

Code; and to admit members to the corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and

otherwise deal with such real and personal property, including securities and bonds

of other corporations, as the transaction of the lawful business of the corporation

may reasonably and necessarily require, subject to the limitations prescribed by law

and the Constitution;

8. To enter into merger or consolidation with other corporations as provided in this

Code;

9. To make reasonable donations, including those for the public welfare or for hospital,

charitable, cultural, scientific, civic, or similar purposes: Provided, That no



corporation, domestic or foreign, shall give donations in aid of any political party or

candidate or for purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors,

trustees, officers and employees; and

11. To exercise such other powers as may be essential or necessary to carry out its

purpose or purposes as stated in the articles of incorporation. (13a)

Section 37. Power to extend or shorten corporate term. - A private

corporation may extend or shorten its term as stated in the articles of incorporation when

approved by a majority vote of the board of directors or trustees and ratified at a meeting by

the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by

at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of

the proposed action and of the time and place of the meeting shall be addressed to each

stockholder or member at his place of residence as shown on the books of the corporation

and deposited to the addressee in the post office with postage prepaid, or served personally:

Provided, That in case of extension of corporate term, any dissenting stockholder may

exercise his appraisal right under the conditions provided in this code. (n)

Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or

decrease its capital stock or incur, create or increase any bonded indebtedness unless

approved by a majority vote of the board of directors and, at a stockholder's meeting duly

called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the

increase or diminution of the capital stock, or the incurring, creating or increasing of any

bonded indebtedness. Written notice of the proposed increase or diminution of the capital

stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time

and place of the stockholder's meeting at which the proposed increase or diminution of the

capital stock or the incurring or increasing of any bonded indebtedness is to be considered,

must be addressed to each stockholder at his place of residence as shown on the books of the

corporation and deposited to the addressee in the post office with postage prepaid, or served

personally.

A certificate in duplicate must be signed by a majority of the directors of the corporation

and countersigned by the chairman and the secretary of the stockholders' meeting, setting

forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;



(3) If an increase of the capital stock, the amount of capital stock or number of

shares of no-par stock thereof actually subscribed, the names, nationalities and

residences of the persons subscribing, the amount of capital stock or number of no-

par stock subscribed by each, and the amount paid by each on his subscription in cash

or property, or the amount of capital stock or number of shares of no-par stock allotted

to each stock-holder if such increase is for the purpose of making effective stock

dividend therefor authorized;

(4) Any bonded indebtedness to be incurred, created or increased;

(5) The actual indebtedness of the corporation on the day of the meeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the capital stock, or the

incurring, creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing of any

bonded indebtedness shall require prior approval of the Securities and Exchange

Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the

other shall be filed with the Securities and Exchange Commission and attached to the

original articles of incorporation. From and after approval by the Securities and Exchange

Commission and the issuance by the Commission of its certificate of filing, the capital stock

shall stand increased or decreased and the incurring, creating or increasing of any bonded

indebtedness authorized, as the certificate of filing may declare: Provided, That the

Securities and Exchange Commission shall not accept for filing any certificate of increase

of capital stock unless accompanied by the sworn statement of the treasurer of the

corporation lawfully holding office at the time of the filing of the certificate, showing that

at least twenty-five (25%) percent of such increased capital stock has been subscribed and

that at least twenty-five (25%) percent of the amount subscribed has been paid either in

actual cash to the corporation or that there has been transferred to the corporation property

the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided,

further, That no decrease of the capital stock shall be approved by the Commission if its

effect shall prejudice the rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase the same, with

the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the

members in a meeting duly called for the purpose.



Bonds issued by a corporation shall be registered with the Securities and Exchange

Commission, which shall have the authority to determine the sufficiency of the terms

thereof. (17a)

Section 39. Power to deny pre-emptive right. - All stockholders of a stock

corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares

of any class, in proportion to their respective shareholdings, unless such right is denied by

the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right

shall not extend to shares to be issued in compliance with laws requiring stock offerings or

minimum stock ownership by the public; or to shares to be issued in good faith with the

approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock,

in exchange for property needed for corporate purposes or in payment of a previously

contracted debt.

Section 40. Sale or other disposition of assets. - Subject to the provisions

of existing laws on illegal combinations and monopolies, a corporation may, by a majority

vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise

dispose of all or substantially all of its property and assets, including its goodwill, upon such

terms and conditions and for such consideration, which may be money, stocks, bonds or

other instruments for the payment of money or other property or consideration, as its board

of directors or trustees may deem expedient, when authorized by the vote of the stockholders

representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock

corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or

member's meeting duly called for the purpose. Written notice of the proposed action and of

the time and place of the meeting shall be addressed to each stockholder or member at his

place of residence as shown on the books of the corporation and deposited to the addressee

in the post office with postage prepaid, or served personally: Provided, That any dissenting

stockholder may exercise his appraisal right under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property

and assets if thereby the corporation would be rendered incapable of continuing the business

or accomplishing the purpose for which it was incorporated.

After such authorization or approval by the stockholders or members, the board of directors

or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage,

pledge or other disposition of property and assets, subject to the rights of third parties under

any contract relating thereto, without further action or approval by the stockholders or

members.

Nothing in this section is intended to restrict the power of any corporation, without the

authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or

otherwise dispose of any of its property and assets if the same is necessary in the usual and



regular course of business of said corporation or if the proceeds of the sale or other

disposition of such property and assets be appropriated for the conduct of its remaining

business.

In non-stock corporations where there are no members with voting rights, the vote of at least

a majority of the trustees in office will be sufficient authorization for the corporation to enter

into any transaction authorized by this section.

Section 41. Power to acquire own shares. - A stock corporation shall have

the power to purchase or acquire its own shares for a legitimate corporate purpose or

purposes, including but not limited to the following cases: Provided, That the corporation

has unrestricted retained earnings in its books to cover the shares to be purchased or

acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;

and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under

the provisions of this Code. (a)

Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this Code, a

private corporation may invest its funds in any other corporation or business or for any

purpose other than the primary purpose for which it was organized when approved by a

majority of the board of directors or trustees and ratified by the stockholders representing at

least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the

members in the case of non-stock corporations, at a stockholder's or member's meeting duly

called for the purpose. Written notice of the proposed investment and the time and place of

the meeting shall be addressed to each stockholder or member at his place of residence as

shown on the books of the corporation and deposited to the addressee in the post office with

postage prepaid, or served personally: Provided, That any dissenting stockholder shall have

appraisal right as provided in this Code: Provided, however, That where the investment by

the corporation is reasonably necessary to accomplish its primary purpose as stated in the

articles of incorporation, the approval of the stockholders or members shall not be necessary.

(17 1/2a)

Section 43. Power to declare dividends. - The board of directors of a stock

corporation may declare dividends out of the unrestricted retained earnings which shall be

payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock



held by them: Provided, That any cash dividends due on delinquent stock shall first be

applied to the unpaid balance on the subscription plus costs and expenses, while stock

dividends shall be withheld from the delinquent stockholder until his unpaid subscription is

fully paid: Provided, further, That no stock dividend shall be issued without the approval of

stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a

regular or special meeting duly called for the purpose. (16a)

Stock corporations are prohibited from retaining surplus profits in excess of one hundred

(100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate

expansion projects or programs approved by the board of directors; or (2) when the

corporation is prohibited under any loan agreement with any financial institution or creditor,

whether local or foreign, from declaring dividends without its/his consent, and such consent

has not yet been secured; or (3) when it can be clearly shown that such retention is necessary

under special circumstances obtaining in the corporation, such as when there is need for

special reserve for probable contingencies. (n)

Section 44. Power to enter into management contract. - No

corporation shall conclude a management contract with another corporation unless such

contract shall have been approved by the board of directors and by stockholders owning at

least the majority of the outstanding capital stock, or by at least a majority of the members

in the case of a non-stock corporation, of both the managing and the managed corporation,

at a meeting duly called for the purpose: Provided, That (1) where a stockholder or

stockholders representing the same interest of both the managing and the managed

corporations own or control more than one-third (1/3) of the total outstanding capital stock

entitled to vote of the managing corporation; or (2) where a majority of the members of the

board of directors of the managing corporation also constitute a majority of the members of

the board of directors of the managed corporation, then the management contract must be

approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of

the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the

members in the case of a non-stock corporation. No management contract shall be entered

into for a period longer than five years for any one term.

The provisions of the next preceding paragraph shall apply to any contract whereby a

corporation undertakes to manage or operate all or substantially all of the business of another

corporation, whether such contracts are called service contracts, operating agreements or

otherwise: Provided, however, That such service contracts or operating agreements which

relate to the exploration, development, exploitation or utilization of natural resources may

be entered into for such periods as may be provided by the pertinent laws or regulations. (n)

Section 45. Ultra vires acts of corporations. - No corporation under this Code

shall possess or exercise any corporate powers except those conferred by this Code or by its



articles of incorporation and except such as are necessary or incidental to the exercise of the

powers so conferred. (n)

Section 36

Where should the corporation be sued?

- principal office is important because it establishes the residence of the corporation

and determining service of summons, venue of action

- it can be sued in the city or municipality where its principal office is found

Principal office is also important for venue of meetings

Non-stock corporation may provide in its by-laws that the venue of meeting be

anywhere in the Philippines Upon whom service of summons be made?

- Section 11. Service upon domestic private juridical entity- when the defendant is a

corporation, partnership or association organized under the laws of the Philippines

with a juridical personality, service may be made upon the president, managing

partner, general manager, corporate secretary, treasurer, or in house counsel.

•Delta motor vs. Mangosing

- strict compliance is necessary

- should be served to those named in the statute

- secretary of a dep’t are not those included in the statute

•E.B. Villarosa vs. Benito

- decision En Banc repeals all other pronouncement

- section 13 Rule 14 was repealed

- the old rules was ambiguous and broad and at all time illogical

the particular revision under Section 11 of Rule 14 was explained by retired Supreme

Court Justice Florenz Regalado, thus:

“xxx the then section 13 of this Rule allowed service upon a defendant corporation

to “be made on the president, manager, secretary, cashier, agent or any of its

directors.” The aforesaid terms were obviously ambiguous and susceptible of broad

and sometimes illogical interpretations, especially the word “agent” of the

corporation. The Filoil case, involving the litigation lawyer of the corporation who

precisely appeared to challenge the validity of service of summons but whose very



appearance for that purpose was seized upon to validate the defective service, is an

illustration of the need for this revised section with limited scope and specific

terminology. Thus the absurd result in the Filoil case necessitated the amendment

permitting service only on the in-house counsel of the corporation who is in effect

an employee of the corporation, as distinguished from an independent

practitioner.” o notes: additional knowledge

- special appearance enter for that particular appearance you are not the counsel in the case

- would apply only if it does not involve an intracorporate controversy (controversy

between and among the stockholders)

- upon any of the statutory officers or officers fixed in the by-laws any secretary, any of

the directors; any managers in the by-laws

Seal

-merely ministerial or permissive

Power to amend

- section 16

- special 37,38,120

Power to adopt by-laws

-section 46-48

Power to issue or sell stocks and to admit members

- stock of stockholders and provision governing nonstock

Power to acquire or alienate real or personal property

- is there any limitation? YES

- Two specific limitation

1. Section 36, as lawful transactions of business of the corporation may reasonably and

necessarily require

2. Constitution and law

•Luneta vs. A.D. Santos

- Importance of the purpose clause

- Cannot have the power to acquire

- Cannot engage in land transportation



- Doctrine of limited capacity

•Gov’t vs. El Hogar

- As the lawful transaction of its business may reasonably represent

•Director of Lands vs. CA

- Exception to the rule in the constitution

- Alienable public land

- Converts the property to a private land automatically once converted it can now be

registered

Power to make donation

- Limitation section 36 par.9

- These are circumstances, however, under which a donation by a corporation may be

to its benefit as a means of increasing its business or promoting patronage. Thus,

paragraph 9 of section 36 expressly authorizes a corporation to make donations. The

only limitations imposed are the following:

1. The donation must be “reasonable”;

2. It must be for public welfare, or for hospital, charitable, scientific, cultural or similar

purpose; and,

3. It shall not be in aid of political party or candidate, or for purposes of partisan political

activity.

Power to establish pension

- Include any act to promote and improve the convenience, welfare and benefit of the

employees or offices

•Republic vs. Acoje

- While as a rule an ultra-vires act is one committed outside the object for which a

corporation is created as defined by law, there are however certain corporate acts that

may be performed outside of the scope of the powers expressly conferred if they are

necessary to promote the interest or welfare of the corporation. Thus, it has been held

that “although not expressly authorized to do so a corporation may become a surety

where the particular transaction is reasonably necessary or proper to the conduct of

its business,” and here it is undisputed that the establishment local post office is a

reasonable and proper adjunct to the conduct of the business of appellant company.

Indeed, such post office is a vital improvement in the living condition of its employees

and laborers who came to settle in its mining camp which is far removed from the



postal facilities or means of communication accorded to people living in a city or

municipality.

Power to exercise such other powers essential or necessary to carry out its purpose

(implied power)

1. Acts in the usual course of business;

2. Acts to protect debts owing to the corporation;

3. Embarking in a different business;

4. Acts in part or wholly to protect or aid employees; and,

5. Acts to increase business

•Teresa Electric and Power Co. vs. P.S.C.

- Examined the articles of incorporation to arrive at its decision

•National Power vs. Vera

- For purpose of prohibiting the NAPOCOR

- The court must decide whether or not a logical and necessary relation exists between the

act questioned and the corporate purpose expressed in the NPC charter

Importance of PLACE of registration

- Residence

- Venue

- Place of meetings

- Place or registration of chattel mortgage

Power to extend its terms

- Once its term expires, already dissolved automatically, thus can no longer ask for

extension

- After dissolution, it has 3 years to windup

What are the modes of increasing capital stock?

1. Increasing the par value of the existing number of shares without increasing the number

of shares;

2. Increasing the number of existing shares without increasing the par value thereof; and,

3. Increasing the number of existing shares and at the same time increasing the par value of

the shares.



Why a corporation increases it capital stock?

- Generate funds, business expansion, or payment of liabilities, purposes of acquiring other

business. (example: to buy cars for the officers, purpose of acquiring other business,

expansion, other valid reasons)

How do you decrease capital stock and why a corporation decreases?

- Reduce or wipeout existing deficit where no creditors would thereby be effected

- When capital is more than necessary to procreate the business or reduction of capital

surplus

- To write down the value of its fixed assets to reflect those present and actual

o NOTE: any increase or decrease of capital stock requires approval of government agency

like SEC it can never take place unless SEC approves the same Relevance of decrease of

capital?

1. To reduce or wipe out existing deficit where no creditors would thereby be affected;

2. When the capital is more than what is necessary to procreate the business or reduction of

capital surplus; or,

3. To write down the value of its fixed assets to reflect there present actual value in case

where there is a decline in the value of the fixed assets of the corporation.

- Examples: Php 10M capital for grocery business, mayor didn’t want to issue

license/permit because mayor has 3 other grocery stores, only allowed sarisari store

permit, reduce capital for sari-sari so that the money will not sleep in bank

- Example: car rental agencies-Php 10M capital for 20 taxi’s, after some time each taxi

is only 250K, nagmura ang taxi, to reduce capital is to show actual assets

Limitation imposed by law

- Decrease shall not in any way affect the rights of the creditors

Philippine Trust Company vs. Rivera

- Without the appraisal of SEC, a decrease in capital stocks has no effect

TRUST FUND DOCTRINE:

- Subscription to capital stock of a corporation constitute a fund to which the creditors

have a right to look upon for satisfaction of their claims and that the assignee in

insolvency can maintain an action upon any unpaid stock subscription in order to

realize assets for the payment of its debts.

•Madrigal vs. Zamora



- Decrease in capital has a subterfuge to evade payment

- Thus not valid and effective

- Must not prejudice creditors which includes the employees

Bond

- Commonly understood as an obligation of a state, its subdivision or a private

corporation, represented by a certificate or an instrument for the principal and by

detachable coupons for the payment of interests. In its simplest term, it is one where

an obligor obliges himself to pay a certain sum of money to another at a day named.

- There are different kinds of bond but before they may be issued or floated by the

corporation, the same must be registered and approved by the SEC subject to the rules

and regulations that may be adopted by that agency. The procedure and requirements

set forth in section 38 is the same as in increasing or decreasing the capital stock

except that the certificate does not have to state the matters required in sub-section 2

& 3 thereof.

Pre-emptive rights

- A right granted by law to all existing stockholders of a stock corporation to subscribe

to all issues or disposition of shares of any class, in proportion to their respective

stockholdings, subject only to the limitations imposed under section 39 of the Code.

- Internationally granted

Pre-emptive rights, why it is granted?

- In order that the existing stockholders may maintain their proportionate right as not to

dilute their right

Power to deny pre-emptive rights

Section 39. Power to deny pre-emptive right. - All stockholders of

a stock corporation shall enjoy pre-emptive right to subscribe to all issues or

disposition of shares of any class, in proportion to their respective shareholdings,

unless such right is denied by the articles of incorporation or an amendment thereto:

Provided, That such pre-emptive right shall not extend to shares to be issued in

compliance with laws requiring stock offerings or minimum stock ownership by the

public; or to shares to be issued in good faith with the approval of the stockholders

representing two-thirds (2/3) of the outstanding capital stock, in exchange for property

needed for corporate purposes or in payment of a previously contracted debt.

May it be denied? How?



- Yes, if provided by articles of incorporation or by an amendment

- However, pre-emptive rights is unavailable to shares in trading in stock exchange

otherwise stockholders must waive first their right before they may sell such.

Exceptions

1. When the shares to be issued is in compliance with laws requiring stock offerings

or minimum stock ownership by the public

2. Shares to be issued in good faith with the approval of the stockholders representing

2/3 of the outstanding capital stock either

a. In exchange for property needed for corporate purpose or,

b. In payment of a previously contracted debt

- The exceptions, however will not apply to stockholders of a close corporation by

virtue of a subsequent and specific provision of the Code which provides that the “pre-

emptive right of a stockholder in a close corporation shall extend to all stock to be

issued, including reissuance of treasury shares, whether for money, property or

personal services or in payment of a corporate debt, unless the articles of incorporation

provide otherwise, if not entirely absolute, in that it extends to all issuance and

disposition of shares

- Such right of pre-emption may be lost by waiver of the stockholder, expressly or

impliedly by his inability or failure to exercise it after having been notified of the

proposed issuance or disposition of shares When is it unavailable?

- In shares traded openly in stock exchange/market

Is it applicable to close corporations?

- See section 96, close corporations must provide it first on its articles of incorporation,

that its articles does not really deny such pre-emptive rights.

Section 102, will not apply to close corporations

The right of pre-emptive rights is absolute in close corporations

“All issues or depositing shares of any class” form part of ACS

Certain instances when a stockholder may nevertheless be unable to exercise this

right:



- Issued for public ownership

- Issued in good faith, with approval of 2/3 of outstanding capital stock either a) in

exchange for property needed or b) for payment of a previously contracted debt

Pre- emptive rights of stockholders in ordinary stock corporations may be denied

- if the shares are to be issued in compliance with laws requiring stock offering or

minimum stock ownership by the pubic

- In exchange for property needed for corporate purposes

- In payment of previously contracted debts

This rule, however, does not apply in a close corporation as the pre-emptive rights of

the stockholders thereof is broadened to include all issues without exceptions unless,

of course, denied or limited by the articles of incorporations. Section 102 provides:

Section 102. Pre-emptive right in close corporations. - The pre-

emptive right of stockholders in close corporations shall extend to all stock to be

issued, including reissuance of treasury shares, whether for money, property or

personal services, or in payment of corporate debts, unless the articles of incorporation

provide otherwise.

Denial will not apply to a close corporation, ABSOLUTE

- section 96

May a stock holder in a close corporation insist in the exercise of his pre-emptive

rights?

-Yes, section 102

What type or shares are covered by pre-emptive rights?

Does it include those originally unsubscribed?

-NO. Benito vs. SEC

Will the stockholders be able to exercise their preemptive right with respect to the old

unissued shares?

- Pre-emptive rights is applicable only to new issued shares and not to the old unissued

shares because it is presumed that the original subscribers is deemed to have taken his

shares knowing that they form a definite proportionate part of the whole number of

authorized shares



- When the shares, left unsubscribed are re-offered, he cannot therefore claim.

DILUTION OF INTEREST

Will the acquiring purchaser be liable for debts of the former corporation?

- Generally no, corporate entity theory because there may be instances when purchasing

corporation may be held liable

May a corporation acquire its own shares?

- Yes

Is there any restriction provided for by law in reacquiring its own shares?

- Yes, it must have been unrestricted retained earnings appearing in the books of

corporation

A corporation can never acquire its own shares if it has no unrestricted retained

earnings

- False, exception close corporation and redeemable shares

EXAMPLE:

ACS 2

M

SUBSCRIBE

D

1

M

PAID UP 1M

1 100K

2 100K

TO

10100K

If 1-5 became 200K each, may 6-10 demand the exercise their pre-emptive right?

- YES

May 1-5 subscribe to the unsubscribed capital stock to the exclusion of 6-10?

- If a corporation makes 2M unrestricted retained earnings, it is the shares and not the

number of persons that matters

May 6-10 complain for a dilution of their interest?

- YES, it’s an internationally recognized right because it includes “all issues and

disposition of shares of any class” and all kinds of shares new or old

- If the remaining unsubscribed shares are issued, it’s an issuance of any class

May a corporation sell/dispose all or substantially all of its corporate assets and

liabilities?

- YES



- 1) RESOLUTION 2) AUTHORIZATION 3) RATIFICATION 4) PRIOR WRITTEN

NOTICE 5) SALE SUBJECT TO PROVISIONS OF EXITING LAWS 6)

DISSENTING

STOCKHOLDERS HAVE THE RIGHT TO EXERCISE THEIR APPRAISAL

RIGHT

If a corporation sells substantially all of it assets and properties, will the buyer assume

liability?

-NO, EXCEPT

1) Express or implied agreement to the purchase

2) Where the transaction amounts to consolidation or merger of the corporations

3) When purchasing corporation is merely a continuation of the selling corporation

4) Where the transaction is entered into fraudulently in order to escape liability for such

debt

Legitimate purpose: for a corporation to reacquire its own shares

- Limitation: it must have surplus/unrestricted retained earnings

- Exception: may redeem irrespective of unrestricted retained earnings

1) Exercise of stockholders’ right to compel “close corporation” to purchase his shares

2) Where corporation has sufficient assets in its books to cover its debts and liabilities

exclusive of capital stock

ACS 1M

SUBSRIBED1M

PAID-UP 1M

ASSETS 500K

1M PROFITS

-500K LIABILITIES

____________________

500K RESERVES IN A CLOSE

CORPORATION IT CAN USE THIS TO REACQUIRE ISSUED STOCKS

X – REALTY CORPORATION •



THE ONLY PROPERTY OF THE CORPORATION

• BOARD OF DIRECTORS

DECIDED TO SELL IT

Will it need the approval of the stockholders?

- NO, 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

If X is a manufacturing company, then it can sell its only property upon approval of

the stockholders because it will render itself capable of continuing its business, BUT

if the proceeds will be used to purchase a better one for the continuance of its business,

then it does not need the approval of the stockholders

Conditions for the valid exercise of this power are the following

1. Resolution by the majority vote of the board of directors/trustees

2. Authorization from the stockholders representing at least 2/3 of the outstanding

capital stock or 2/3 of the members;

3. The ratification of the stockholders or members must be made at a meeting duly called

for that purpose

4. Prior written notice of the proposed action and of the time and place of meeting must

be made addressed to all stockholders of record, either by mail or personal service;

5. The sale of the assets shall be subject to the provisions of existing laws on illegal

combinations and monopolies

6. Any dissenting stockholder shall have the option to exercise his appraisal right

•IDP vs. CA

-Consent of the members was not secured

•Edward Nell Co. vs. Pacific Farms

- Generally where one corporation sells or otherwise transfers all of its assets to another

corporation, the latter is not liable for the debts and liabilities of the transferor, except:

1. Where the purchaser expressly or impliedly agrees to assume such debts;

2. Where the transaction amounts to a consolidation or merger of the corporations;



3. Where the purchasing corporation is merely a continuation of the selling

corporation;

4. Where the transaction is entered into fraudulently in order to escape liability for

such debts.

Power to acquire own shares

Section 41. Power to acquire own shares. - A stock corporation

shall have the power to purchase or acquire its own shares for a legitimate corporate

purpose or purposes, including but not limited to the following cases: Provided, That

the corporation has unrestricted retained earnings in its books to cover the shares to

be purchased or acquired:


2. To collect or compromise an indebtedness to the corporation, arising out of

unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold

during said sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their

shares under the provisions of this Code. (a)

The corporation must at all times have “unrestricted retained earnings” to exercise

this corporate power

•Steinberg vs. Velasco

- For as long as there are debts and liabilities, a corporation may not reacquire its shares

(subject to exceptions)

- Creditors of a corporation have the right to assume that so long as there are outstanding

debts and liabilities, the board of directors will not use the assets of the corporation to

purchase its own stock, and that it will not declare dividends to stockholders when the

corporation is insolvent.

Power to invest funds <sec.42>

Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions

of this Code, a private corporation may invest its funds in any other corporation or

business or for any purpose other than the primary purpose for which it was organized

when approved by a majority of the board of directors or trustees and ratified by the



stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by

at least two thirds (2/3) of the members in the case of non-stock corporations, at a

stockholder's or member's meeting duly called for the purpose. Written notice of the

proposed investment and the time and place of the meeting shall be addressed to each

stockholder or member at his place of residence as shown on the books of the corporation

and deposited to the addressee in the post office with postage prepaid, or served

personally: Provided, That any dissenting stockholder shall have appraisal right as

provided in this Code: Provided, however, That where the investment by the corporation

is reasonably necessary to accomplish its primary purpose as stated in the articles of

incorporation, the approval of the stockholders or members shall not be necessary. (17

1/2a)

- For any other purpose other than the primary purpose, stockholder’s consent or approval

is necessary

- Thus, if it’s for the secondary purpose, it is necessary

- If it’s in connection with the primary purpose, only board resolution is necessary

Requirements and steps to be followed for a valid investment of corporate funds are:

1. Resolution by the majority of the board of directors or trustees;

2. Ratification by the stockholders representing at least 2/3 of the outstanding capital stock

or 2/3 of the members in case of non-stock corporations;

3. The ratification must be made at a meeting duly called for that purpose;

4. Prior written notice of the proposed investment and the time and place of the meeting

shall be made, addressed to each stockholder or member by mail or by personal service,

and;

5. Any dissenting stockholder shall have the option to exercise his appraisal right

•Dela rama vs. Ma-ao Sugar

- There is a substantial and not remote connection between the sugar bags and the sugar

manufacture, thus stockholder’s approval is not necessary for validity

- A private corporation, in order to accomplish its purpose as stated in its articles of

incorporation, and imposed by the Corporation Law, has the power to acquire, hold,

mortgage, pledge, or dispose of shares bonds, securities and other evidences of

indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance

of the corporate purpose, does not need the approval of the stockholders; but when the

purchase of shares of another corporation is done solely for investment and not to



accomplish the purpose of its incorporation, the vote of approval of the stockholders is

necessary.

•Gokongwei vs. SEC

- Investments made by SMC is necessarily connected with its primary purpose and this

was ratified in a meeting

- Submission of previous action is a sound corporate practice

Redeemable shares

Closed corporation (see section 105)

- For any reason, compel the value of shares “withdrawal shares” provided corporation

has

sufficient funds to cover its debts and liabilities

Section 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without prejudice to other rights and remedies

available to a stockholder under this Title, any stockholder of a close corporation may,

for any reason, compel the said corporation to purchase his shares at their fair value,

which shall not be less than their par or issued value, when the corporation has

sufficient assets in its books to cover its debts and liabilities exclusive of capital stock:

Provided, That any stockholder of a close corporation may, by written petition to the

Securities and Exchange Commission, compel the dissolution of such corporation

whenever any of acts of the directors, officers or those in control of the corporation is

illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the

corporation or any stockholder, or whenever corporate assets are being misapplied or

wasted.

If shares are reacquired, what happens?

-It becomes treasury shares

Stockholder’s consent/ approval is not necessary and mere board action is sufficient

if in accordance with primary purpose

The logical relation of act done and primary purpose of corporation and between the

board of directors to undertake submission of acts is a sound corporate practice

Dividends

Section 43. Power to declare dividends. - The board of directors of

a stock corporation may declare dividends out of the unrestricted retained earnings

which shall be payable in cash, in property, or in stock to all stockholders on the basis



of outstanding stock held by them: Provided, That any cash dividends due on

delinquent stock shall first be applied to the unpaid balance on the subscription plus

costs and expenses, while stock dividends shall be withheld from the delinquent

stockholder until his unpaid subscription is fully paid: Provided, further, That no stock

dividend shall be issued without the approval of stockholders representing not less

than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting

duly called for the purpose. (16a)


hundred (100%) percent of their paid-in capital stock, except: (1) when justified by

definite corporate expansion projects or programs approved by the board of directors;

or (2) when the corporation is prohibited under any loan agreement with any financial

institution or creditor, whether local or foreign, from declaring dividends without

its/his consent, and such consent has not yet been secured; or (3) when it can be clearly

shown that such retention is necessary under special circumstances obtaining in the

corporation, such as when there is need for special reserve for probable contingencies.

(n)

What are dividends?

- Corporate profits set aside, declared and ordered by the Board of Directors to be paid

to the stockholders.

What are property dividends?

- Those paid in property surplus

Like tables and chairs? Can tables and chairs make surplus profits?

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

Where should dividends come from?

- Stock dividends are declared as stocks coming from corporation

Who declares dividends to be declared? Do stockholders have any say?

- Board of Directors, if stock approval of 2/3 outstanding capital stock

ACS-1M SUB-1MP.U.-1M1M-U.R.E. (surplus

profits of the corporation)

1-100k

2-100k

To

10-100k

1M

Board decides to declare 1M, how much will each receive? May the board declare

stock dividend

- NO. that would be over issuance of shares, violation of securities regulation code



- It must have a free portion

- The corporation may increase its capital

Z co. 1M to X Co. is 2/3 of Xco. Stockholders reacquired?

-No, because in property 2/3 is not required

What is the effect of declaration of dividends with regards to the assets of a company?

- As compared to stock dividends, the declaration of cash or property dividends have

the effect of reducing corporate assets to the extent of dividends declared.

- Neither would stock dividends increase the proportionate interest of the stockholders

of the corporation although it will have the effect of increasing the subscribed and

paid-up capital of the corporation. It gives the stockholders nothing in the way of

distribution of assets but merely divides his existing shares into smaller units.

Earnings belong to the corporation until declared or given

Revocation

- No revocation of dividend may be has unless it has not been officially communicated

to the stockholders or is in the form of stock dividends which is revocable at any time

prior to distribution.

Stock dividends- no reduction, you capitalize your restricted retained earnings, what

is issued is a piece of paper. The restricted earnings remain in the corporation

Cash and property- reduces corporate assets

Stock dividends increase corporate assets? No, it will only have the effect of

increasing the subscribed and paid-up capital of the corporation

Will there be a corresponding increase in their proportionate interest?

- REMAINS THE SAME

- Exception: when stock dividends will result in a fractional share

ACS-2M1-100K 200 (10%)*VOTING AND

DIVIDEND RIGHTS STILL THE SAME

SUB-1M TO

10%



PU-1M 10-100K

ACS 2M

SUB 1M

PU 1M

1M RE

1 100K

2 100K

TO

10 100K

1M

May they be compelled?

- NO. You cannot declare if it does not come from unrestricted retained earnings.

1. 1M-U.R.E. (is it true there is no way to compel?)

2. 2M-U.R.E.

May they be compelled to declare dividends

- Mandatory if earned, the board may be compelled to declare dividends

- if exceeds 100% of the paid-up capital the boards may be compelled

ACS 2M 1M U.R.E.

SUB 1M

PU 800K

1-100K50K PU

2-100K50K

TO

10-100K

1M

Will 1 and 2 receive full amount of dividends?

- YES. They are entitled however if they are declared delinquent, the amount due them

shall first be applied to his delinquency plus expenses.

Delinquency occurs, you are called to pay, but you failed to pay. In case of stock

dividend, the delinquent stock holder will not be entitled thereto until he has paid his

subscription in full.



Are non-stockholders entitled to receive dividends?

- No, tock dividends are civil fruits of the original investment, and to the owners of the

shares belong the civil fruits.

How did the court decide dividends in the case of Neilsen

- Stock dividends cannot be issued to a person who is not a stockholder in payment of

services rendered.

- Whether cash, property or stock, only stockholders may receive dividends. Dividends

are fruits of investments. They come from the U.R.E. or surplus profits of the

corporation.

ACS 2M 1M U.R.E.

SUB 1M JULY 24 DECLARATION

JULY 31

PU 1M

1 100K100T JULY 26-Y(NEW ONE WAS DECLARED

TO Y) JULY 30- 100K

2

TO TO HAVE THE TRANSFER

RECORDED

10 100K

1M

Insofar as 1 and Y who has a better right? Already declared, but not yet paid?

- Right to receive vest upon declaration. Who ever owns at the time of declaration owns

the dividends

- Unless there is a stipulation to the contrary

TRUST FUND DOCTRINE

- The power to declare it if paid-up capital is not maintained or is impaired

- Trust fund must be kept intact for the protection of creditors who have the right to rely

on such subscription and the paid-up capital for the satisfaction of their claims

Cannot accumulate surplus unreasonably

Basis is the paid-up capital

Entitled to dividends



Irrespective of whether the subscription is full

Illegally declared

- Declare dividend with the belief that it formed part of the U.R.E., but yun pala sa capital

Directors are not liable, unless sec31 acted in bad faith or gross negligence in the

conduct of corporate affairs

Directors even if acting in behalf of the corporation, may still be held solidarily liable

Power to enter into management contract

-New provision

Section 44. Power to enter into management contract. - No

corporation shall conclude a management contract with another corporation unless

such contract shall have been approved by the board of directors and by stockholders

owning at least the majority of the outstanding capital stock, or by at least a majority

of the members in the case of a nonstock corporation, of both the managing and the

managed corporation, at a meeting duly called for the purpose: Provided, That (1)

where a stockholder or stockholders representing the same interest of both the

managing and the managed corporations own or control more than one-third (1/3) of

the total outstanding capital stock entitled to vote of the managing corporation; or (2)

where a majority of the

members of the board of directors of the managing corporation also constitute a

majority of the members of the board of directors of the managed corporation, then

the management contract must be approved by the stockholders of the managed

corporation owning at least two-thirds (2/3) of the total outstanding capital stock

entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-

stock corporation. No management contract shall be entered into for a period longer

than five years for any one term.

The provisions of the next preceding paragraph shall apply to any contract

whereby a corporation undertakes to manage or operate all or substantially all of the

business of another corporation, whether such contracts are called service contracts,

operating agreements or otherwise: Provided, however, That such service contracts or

operating agreements which relate to the exploration, development, exploitation or

utilization of natural resources may be entered into for such periods as may be

provided by the pertinent laws or regulations. (n)

The requirement for a valid management contract are as follows:

1. Resolution of the board of directors



2. Approval by the stockholders holding or representing a majority of the outstanding

capital stock or majority of the members in case of non-stock corporation of both the

managing and the managed corporation

3. The approval of the stockholders or members must be made at the meeting called for

that purpose

4. The contract shall not be for a period longer than 5 years for any one term, except

those which relate to exploration, development or utilization of natural resources

which may be entered into for such periods as may be provided by pertinent laws and

regulations

Every corporate act emanates from the BOARD

Is the voting requirements of a majority stockholder ABSOLUTE?

- Not only a majority but 2/3 of the outstanding capital stock or 2/3 of the members in a

non-stock corporation would be required for the approval of a management contract

in the following instances:

1. Where the stockholders representing the same interest of both the managing and

managed corporation own or control more than 1/3 of the total outstanding capital

stock of the managing corporation; and

2. Where a majority of the members of the board of directors of the managing

corporation also constitute a majority of the directors of the managed corporation

3. Where the contract would constitute the management or operation of all or

substantially all of the business of another corporation, whether such contracts are

called service contracts. If it will not constitute the management of all or substantially

all of the business of another corporation the first paragraph of section 44 will apply

and not that of the second, that is, only the vote of the stockholders holding or

representing at least a majority of the outstanding capital stock or majority of the

members in the case of non-stock corporation will be required.

How long?

- Not longer than 5 years for any one term

- Exception: exploration, development or utilization of natural resources

What is an ultra-vires act or contract?

- Doctrine of limited capacity. Corporation can do such acts and things as it is allowed

to do

- Acts beyond it will be ultra vires, allowing a collateral attack



- If not illegal per se merely voidable. Can be ratified expressly or impliedly or even

stopped as equitable grounds

Ultra-vires acts which are not illegal per se may become binding and enforceable either

by satisfaction, estoppels or equitable grounds

Consequences of ultra-vires acts?

1.On the corporation itself

- The proper forum, in accordance with the provisions of PD 902-A, as amended and R.A.

No. 8799 may suspend or revoke, after proper notice and hearing, the franchise or

certificate of registration of the corporation for serious misrepresentation as to what the

corporation can do or is doing to the great damage or prejudice of the general public

2.On the rights of the stockholders

- A stockholder may bring either an individual or derivative suit to enjoin a threatened ultra-

vires act or contract. If the act or contract has already been performed, a derivative suit

for damages against the directors may be filed, but their liability will depend on whether

they acted in good faith and with reasonable diligence in entering into the contract.

3.On the immediate parties

- The courts have not agreed as to the legal effect of a corporate contract outside of its

authorized business but Ballatine gives the following summary of the doctrines evolved:

a. If the contract is fully executed on both sides, the contract is effective and the courts

will no interfere to deprive either party of what has been acquired under it

b. If the contract is executory on both sides, as a rule, neither party can maintain an

action for its non-performance

c. Where the contract is executor on one side only, and has been fully performed on the

other, the courts differ as to whether an action will lie on the contract against the party

who has received benefits of performance under it. Majority of the courts, however,

hold that the party who has received benefits from the performance is estopped to set

up that the contract is ultra-vires to defeat an action on the contract. This is more in

conformity with the doctrine that no person shall be allowed to enrich himself at the

expense of another

•Privano vs. Dela Rama

- Court looked into the purpose clause

- The purpose clause empowers and limits

- Articles likewise provide that it may deal with any of its money

- “deal” broad enough to cover the donation it is not then ultra-vires



- Not illegal per se hence (law of agency) excess powers are subject to ratification - Ratified

by passing the resolution in question

•Carlos vs. Mindoro sugar Co.

- PTC- trust company as such, it also has implied powers as to make them more attractable

- Not ultra-vires in pursuance of its legitimate business

•Japanese war notes vs. SEC

- Non-stock corporations cannot make profits and distribute profits to its shareholders

Ultra-vires because Japanese war notes is a non-stock corporation

• Crisologo-Jose vs. CA (ALWAYS ASKED BY DEAN SUNDIANG)

- The negotiable instruments law which holds an accommodation party liable on the

instrument to a holder for value, although such holder at the time of taking the

instrument knew him to be only an accommodation party, does not include nor apply

to corporations which are accommodation parties. This is because the issue or

indorsement of negotiable paper by a corporation without consideration and for the

accommodation of another is ultra-vires

- Corporate officers may guarantee or endorse an accommodation only if specifically

authorized

Section 36 paragraph 11

Section 10

Section 14 and 15

Corporate powers depend on the agreement of the stockholders rather than any

director

- It may sell and it may guarantee, contract not necessarily illegal, it will in the absence

of proof to the contrary presumed within its power. Corporations are presumed to

contract with in its powers- CARLOS CASE

- Purpose clause may be stretched to cover PLDT internet. It may be within its business.

- May it sell computers? NO! other line of business. Its trading!

BY-LAWS

By-Laws

- Rule adopted by the corporation for its internal governance

Is the adoption of by-laws mandatory?



When should the by-laws be adopted or filed? Can it not be adopted earlier?

- After incorporation- within 1 month (emanates from the BOARD)

- Prior-more convenient (signed by the incorporators) Who will sign the adoption

clause?

- Majority of the stockholders or members attested to by the corporate secretary

What happens if the corporation fails to adopt the bylaws from the tie provided by the

law? Would there be an automatic revocation or suspension?

-Proper notice and hearing, must first be complied with

•Loyola grand villas vs. CA

- Not the SEC, but the HIGC

- Must – not always imperative

- Filing of by-laws mandatory

- Empowered by SEC

- Merely a ground, there must be proper notice and hearing

- Not affect the status of the corporation as a juridical person

- Subject the corporation to a fine, as may be issued by the SEC

When do by-laws become effective?

- Until and unless the SEC gives it stamped of approval

- Suspension of any government agency. The permission must first be secured- section 46

Elements of a valid by-law

1. It must not be contrary to law, public policy or morals;

2. It must not be inconsistent with the articles of incorporation;

3. It must be general and uniform in its effect or applicable to all alike or those similarly

situated;

4. It must not impair obligations and contracts or vested rights; and’

5. It must be reasonable.



- Must not be inconsistent with existing laws. Not be inconsistent with articles of

incorporation

By-laws

- None filing would not affect the status of the corporation, Loyola grand villas case

- The word “must” is not always imperative

- Stockholders are conlusively presumed to know the provisions of the by-laws

How about 3rd persons?

- NO. unless there is actual knowledge of the same they are not presumed to know of the

provisions of the bylaws

•Fleischer vs. Botika Nolasco

- Shares of stock are personal properties

- Shares of stock may transfer to whom ever he wishes

- The by-laws is contrary to law

Articles of incorporation

- May provide reasonable restriction

- By-laws merely internal laws

- Articles is the contract between and among the parties and corporation

•Gov’t vs. El Hogar

- Did the court categorically ruled here that the provision in the 5th cause of action is valid?

- Rules governing equity, considering the fact that there was always lack of quorum

- Section 29 BOD if still constituting a quorum may fill up a vacancy other than by

removal, etc.


- Section 48 allows a corporation to amend it by-laws

- Section 47 of the code, the by-laws may provide for the qualification and

disqualification

- It cannot be said Gokongwei has a vested rights



Prevent directors from taking advantage of position to promote his individual interest

to the damage of others

- The validity or reasonableness of a by-laws is a question of law

- Subject to the limitations that reasonableness of a bylaw is a mere matter of judgment

- Rule of the majority and not the tyranny of the minority

May the by-laws be amended altered or appealed?

-YES. HOW? Two modes

1. By a majority vote of the directors or trustees and the majority vote of the outstanding

capital stock or members in a non-stock corporation, at a regular or special meeting

called for that purpose;

2. By the board of directors alone when delegated by 2/3 of the outstanding capital stock

or 2/3 of the members in a non-stock corporation.

- This delegated power, however, is considered revoked whenever a majority of the

outstanding capital stock or members shall so vote at a regular or special meeting.

If it is to be amended what is the proceeding?

-Section 48 2nd paragraph provides:

Section 48. Amendments to by-laws. - The board of directors or

trustees, by a majority vote thereof, and the owners of at least a majority of the

outstanding capital stock, or at least a majority of the members of a non-stock

corporation, at a regular or special meeting duly called for the purpose, may amend or

repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the

outstanding capital stock or two-thirds (2/3) of the members in a non-stock

corporation may delegate to the board of directors or trustees the power to amend or

repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the

board of directors or trustees to amend or repeal any by-laws or adopt new by-laws

shall be considered as revoked whenever stockholders owning or representing a

majority of the outstanding capital stock or a majority of the members in nonstock

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 bylaws.



The amended or new by-laws shall only be effective upon the issuance by the

Securities and Exchange Commission of a certification that the same are not

inconsistent with this Code. (22a and 23a)

•Baretto vs. La Previsora

- Any corporate act emanates from the board

- Directors themselves cannot amend the by-laws if they were not granted the same

Section 48

The power granted is not subject to revocation T or F?

- FALSE

If the by-laws are amended when will they become valid?

Upon issuance of the SEC that they are not

inconsistent

What if the SEC failed to act within 10 months without fault attributable to the

corporation?

T or F any amendment of the by-laws will never become valid until it gives its stamp

of approval even after 1 year

- TRUE. Articles of incorporation and by-laws are different

MEETINGS

Meetings

- Meetings of stockholders 1. Date fixed in the by-laws or by-law

- Meetings of director or trustees

Meetings are regular and special

Meetings of stockholders

What is regular and what is special?

When are regular meetings of the stockholders held?

-Fixed date provided by the by-laws

What if there is no date?

- April

Why april?



- Point in time the audited financial statement have been prepared

What if in the date specified in the by-laws or by the law itself the meeting was not

convened, for instance lack of quorum or force majeure? - It may be postponed on a

reasonable date

Notice requirement?

- Regular- 2 weeks prior notice

- Special- 1 week

May the notice requirement be lessened?

-By-laws may provide a longer or a shorter duration

What if the notice requirement is not complied with?

What happened to any act passed in a meeting when notice requirement was not

required with?

-Voidable, subject to ratification

•Board of directors vs. Tan

- Notice requirement is the by-laws is a mandatory requirement

- Improperly served, any action will be invalidated at the objection of any stockholder

or member

Must be held in the proper place

Where should it be held?

- Apparent from the foregoing provision is that meetings of stockholders must, at all

times, be held in the city or municipality where the principal office of the corporation

is located and, as far as practicable, in the principal office of the corporation.

May the by-laws of a corporation provide that meetings be held anywhere in the

Philippines?

While there is no provision authorizing a stock corporation to hold stockholders’

meetings outside of the City of Municipality where the principal office is located, the

law allows a non-stock corporation to provide in its by-laws any place of members’

meeting provided that proper notice is sent to all members indicating the date, time

and place of the meeting which shall be within the Philippines.

T or F the by-laws of a stock corporation may validly provide that meetings shall be

held anywhere in the Philippines?



- FALSE. Non-stock corporations lang pwede provided nakalagay sa by-laws and

provided proper notice is given

Corporation can do only such things as the law allows it to do, DOCTRINE OF

LIMITED CAPACITY

San Miguel office located in Ortigas Center. May stockholders meeting be held in

PICC center?

- YES. Metro Manila, one single city Must be called by the proper party

Who calls?

- President until and unless there is a provision , secretary on order of the president

What if there is nobody who can call?

-The petitioner, stockholder may petition the court

What if there is a person who can call, but he fails or neglects to call the meeting?

May a stockholder petition to authorize a meeting?

- Ponce case only applies when there is NO person authorized to call the meeting. If there

is a person, but neglects his duty. Ponce will not apply. Writ of injunction may never

be issued ex parte

Is there any exception?

-Section 28 only instance

Section 28. Removal of directors or trustees. - Any director or

trustee of a corporation may be removed from office by a vote of the stockholders

holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if

the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the

members entitled to vote: Provided, That such removal shall take place either at a

regular meeting of the corporation or at a special meeting called for the purpose, and

in either case, after previous notice to stockholders or members of the corporation of

the intention to propose such removal at the meeting. A special meeting of the

stockholders or members of a corporation for the purpose of removal of directors or

trustees, or any of them, must be called by the secretary on order of the president or

on the written demand of the stockholders representing or holding at least a majority

of the outstanding capital stock, or, if it be a non-stock corporation, on the written

demand of a majority of the members entitled to vote. Should the secretary fail or

refuse to call the special meeting upon such demand or fail or refuse to give the notice,

or if there is no secretary, the call for the meeting may be addressed directly to the

stockholders or members by any stockholder or member of the corporation signing

the demand. Notice of the time and place of such meeting, as well as of the intention



to propose such removal, must be given by publication or by written notice prescribed

in this Code. Removal may be with or without cause: Provided, That removal without

cause may not be used to deprive minority stockholders or members of the right of

representation to which they may be entitled under Section 24 of this Code. (n)

Cases of removal or ouster of a director

Mandamus would be appropriate remedy if there is a person authorized but refuses

Quorum and voting requirement

-Majority stockholders or members constitute a quorum

Is the presence of the majority owners of the outstanding capital stock ABSOLUTE to

have a quorum?

- NO. when the code requires a higher quorum it must also be equivalent to the vote required

Do you include non-voting shares in arriving at the voting requirement to have a valid

corporate act?

- It depends.

- Section 6 last par. If it falls within the penultimate par.

Of section 6

Five requisites of a valid meeting

1. It must be held on the date fixed in the by-laws or in accordance with law

2. Prior notice must be given

3. It must be held at he proper place

4. It must be called by the proper party

5. Quorum and voting requirements must be met

Date not complied with, notice, place, not complied with and the person who called not

authorized, what happens to any resolution called?

- Section 51, any meeting shall be valid provided all the stockholders are present or duly

represented and

provided it is within the power of the corporation. 3RD paragraph of 324

- If the voting requirement is met, any resolution passed in the meeting, even if improperly

held or called will be valid if all the stockholders or members are present or duly

represented thereat. The last paragraph of section 51 is clear on the matter when it

provides:



“all proceedings had and any business transacted at any meeting of the

stockholders or members, if within the powers or authority of the corporation, shall

be valid even if the meeting be improperly held or called, provided all the

stockholders or members of the corporation are present or duly represented at the

meeting.”

Directors/trustees meeting

Regular (monthly) and special (anytime)

May that be restricted (within or outside the Phil)

-YES. unless the by-laws provide otherwise.

Is there any notice requirement?

- YES. 1 day unless otherwise provided by the by-laws What happens if notice is not

complied with?

- If the notice requirement is not complied with the meeting is illegal and will not bind the

corporation except when subsequently ratified or in the case of a close corporation where

the act of any one director may bind the corporation even without a meeting under the

special provision of Section 101 of the Code.

Can notice be waived? <sec.53>

Section 53. Regular and special meetings of directors or trustees. - Regular meetings of the

board of directors or trustees of every corporation shall be held monthly, unless the

by-laws provide otherwise.

Special meetings of the board of directors or trustees may be held at any time

upon the call of the president or as provided in the by-laws.

Meetings of directors or trustees of corporations may be held anywhere in or

outside of the Philippines, unless the by-laws provide otherwise. Notice of regular or

special meetings stating the date, time and place of the meeting must be sent to every

director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise

provided by the by-laws. A director or trustee may waive this requirement, either

expressly or impliedly. (n)

- YES. Expressly and impliedly

- SEC ruling



A special meeting is valid without notice where the directors are all present or

where they consent to the meeting. Presence at the meeting waives the want of

notice. Moreover, it has been ruled that the meeting of the directors without a

formal call first being had, and notice thereof given to the members, did not

operate to invalidate it or to render the proceedings which were taken at it void,

for every member of the board were present, and their joint action had

completely bound the corporation as if the meeting has been called with due

formality, and everyone of the directors had received proper notice.

What is the quorum and voting requirement in the directors meeting?

-Majority of the members of the board of directors

(entire membership)

Vote required to pass a valid corporate act?

- Majority of those present at which there is a quorum (3 present, vote of 2 sufficient)

- Exception, majority of all the members of the board in case of election of corporate

officers, unless the articles provide for a greater quorum or voting requirement

Should the director or trustees be physically present?

- General rule, must sit and act as a body to have a valid corporate act

Five man member board, a meeting was called today, should the physical presence or

warm bodies requires to constitute a quorum?

- NO. it is not required. Teleconference or video conference is allowed, E- commerce law

Membership subject to laws Stockholder not yet

May director vote by proxy?

- NO

If A is a director and a meeting is called for the purpose of electing a new set of BOD

can A vote by proxy?

-YES. Because it is a stockholders meeting

If directors meeting, cannot vote by proxy

Stockholder’s right to vote

- Inherent in stock ownership

However this right is not always inherent, because it may be denied:

1. Redeemable and preferred shares, however if founders shares are issued others may

be denied the right to vote.

2. May be denied by the articles of incorporation or contracts



- When not denied they may do so in person or by proxy

May the right to vote by proxy be denied?

May the articles of incorporation deny?

May the by-laws validly provide that proxy voting is not allowed?

- NO

Only non-stock may be denied proxy voting (may be broaden, limited or denied) Proxy

voting is a matter of right granted by law

Requirements of a valid proxy?

- Section 58

Section 58. Proxies. - Stockholders and members may vote in person or by

proxy in all meetings of stockholders or members. Proxies shall in writing, signed by the

stockholder or member and filed before the scheduled meeting with the corporate

secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting

for which it is intended. No proxy shall be valid and effective for a period longer than

five (5) years at any one time. (n)

How long may a proxy exist?

- Maximum of 5 years

- Valid for the meeting in which it is intended Is proxy revocable?

- Generally revocable, unless coupled with interest

Revocation

- A proxy, like agency in general is revocable unless coupled with an interest and revocation

need not be made by formal notice in writing. Revocation may be expressed to the proxy

holder, to the election committee, by a subsequent proxy to another or by sale of the

shares. Thus it may be revoke orally by conduct such that appearing and asserting the

right to vote at a meeting by the registered owner of the shares revokes a proxy previously

given.

Must be submitted to a validation committee

By-laws of non-stock corporations may deny proxy voting

What is voting trust agreement?

- One created by an agreement between a group of stockholders of a corporation and a

trustee, or a group of identical agreements between individual stockholders and a



common trustee, whereby it is provided that for a term o years or for a period contingent

upon a certain event, or until the agreement is terminated, control over the stock owned

by such stockholders, shall be lodged in the trustee, either with or without reservation to

the owners or persons designated by them the power to direct how such control shall be

issued.

- It is a devise of binding stockholders to vote as a unit and thus assuring a desirable

stability and continuity in management in situations where it is needed.

What is the effect of a voting trust agreement relative to the rights?

-Lee vs. CA must pass these criteria

1. That the voting rights of the stock are separated from the other attributes of ownership;

2. That the voting rights granted are intended to be irrevocable for a definite period of

time; and,

3. That the principal purpose of the grant of voting rights is to acquire voting control of

the corporation.

During the duration of the trust they are irrevocable unless there is a violation either

by fraud

Requisites

- Section 59

Section 59. Voting trusts. - One or more stockholders of a stock

corporation may create a voting trust for the purpose of conferring upon a trustee or

trustees the right to vote and other rights pertaining to the shares for a period not

exceeding five (5) years at any time: Provided, That in the case of a voting trust

specifically required as a condition in a loan agreement, said voting trust may be for

a period exceeding five (5) years but shall automatically expire upon full payment of

the loan. A voting trust agreement must be in writing and notarized, and shall specify

the terms and conditions thereof. A certified copy of such agreement shall be filed

with the corporation and with the Securities and Exchange Commission; otherwise,

said agreement is ineffective and unenforceable. The certificate or certificates of stock

covered by the voting trust agreement shall be cancelled and new ones shall be issued

in the name of the trustee or trustees stating that they are issued pursuant to said

agreement. In the books of the corporation, it shall be noted that the transfer in the

name of the trustee or trustees is made pursuant to said voting trust agreement.



The trustee or trustees shall execute and deliver to the transferors voting trust

certificates, which shall be transferable in the same manner and with the same effect

as certificates of stock.

The voting trust agreement filed with the corporation shall be subject to

examination by any stockholder of the corporation in the same manner as any other

corporate book or record: Provided, That both the transferor and the trustee or trustees

may exercise the right of inspection of all corporate books and records in accordance

with the provisions of this Code.

Any other stockholder may transfer his shares to the same trustee or trustees

upon the terms and conditions stated in the voting trust agreement, and thereupon shall

be bound by all the provisions of said agreement.

No voting trust agreement shall be entered into for the purpose of

circumventing the law against monopolies and illegal combinations in restraint of

trade or used for purposes of fraud.

Unless expressly renewed, all rights granted in a voting trust agreement shall

automatically expire at the end of the agreed period, and the voting trust certificates

as well as the certificates of stock in the name of the trustee or trustees shall thereby

be deemed cancelled and new certificates of stock shall be reissued in the name of the

transferors.

The voting trustee or trustees may vote by proxy unless the agreement provides

otherwise. (36a)

Does it need to be notarized?

-Yes, otherwise it is ineffective and unenforceable

Only legal ownership is transferred

Being still the beneficial owner they may transfer these rights

Is the right granted to a voting trust agreement absolute? (to inspect)

- NO.

- The voting trust agreement filed with the corporation shall be subject to examination

by any stockholder of the corporation in the same manner as any other corporate book

or record. Provided, that both the transfer and the trustee or trustees may exercise the

right of inspection of all corporate books and records in accordance with the

provisions of this Code. Legal title is transferred to the voting trustee



May the voting trustee vote by proxy?

-Yes, legal owner may vote by proxy

May the proxy holder vote by proxy?

- NO, (AGENT) an agent can have no other agent unless specifically allowed by the

principal

Stockholder executing as a proxy, is he qualified to be voted as a director?

Why is he qualified to act as a director if the stockholder executes as a director?

- The beneficial owner of the shares in a voting trust is disqualified to be a director in

a voting trust whereas in a proxy, the owner of the shares may be elected as such since

legal title thereof remains with him

- YES he remains to be the owner

Is the stockholder executing in a voting trust agreement, is he qualified to act as a

director?

- NO. ceases to be stockholder of record, no longer the legal owner of shares

May the corporation enforce the voting trust agreements executed by its stockholders?

- NO. NIDC vs. AQUINO

- Not a privy to the contract

- Rights liabilities of a stockholder are there in their individual capacity- corporate

entity theory

Voting trust agreements

- Normally executed in favor of banking and financial institutions

- So that they can vote a certain set of directors

- They will be more secured

Voting pull agreement

- Enters into an agreement

- Pull all their shares to cast one vote

- Covered by rules governing contracts

- By pulling their votes they can decline the resolution passed by the board

E N D O F M I D T E R M S



STOCKS AND STOCKHOLDERS

3 modes

1. By a contract of subscription with the corporation;

2. By purchase of treasury shares from the corporation; and,

3. By purchase or acquisition of shares from existing stockholders.

Section 60 subscription

- Any contract

- Whether existing or still to be formed

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)

Under the old law the 4th mode is PURCHASE

Purchase

- Reciprocal in nature

- Purchaser can neither require the issuance Xco. Inc.

P

Authorized capital 1M

500SUBSCRIBED

500UNISSUED STOCKS (AS LONG AS GALING DITO)

Z wants to acquire 100K

Entered in June 50% shall be down payment remainder

December 08

o he will not be considered a stockholder unless he has paid in full

August 08 property is ravaged by fire all are turned into shares Is Z liable to pay the

balance of his acquisitions?

- YES, no matter how the party refer to it, it is considered subscription



- Once you subscribe, you become a stockholder which is entitled to all the liabilities

of a stockholder

Z- subscribed to 100T/S of XCo.

Amount he paid 50k

Z did not pay on the date called and was declared a delinquent share

Corporation paid 100T/S therefore the corporation reacquired the shares again, what

are they called?

-Treasury shares

Y- 80T/S DECEMBER 08

40 % (AUGUST) WAS DESTROYED BY FIRE, IS HE STILL LIABLE TO PAY THE

UNPAID PORTION?

IT WAS AGREED THAT IT WAS A PURCHASE AND WILL BE A

STOCKHOLDER ONLY IF PAID IN FULL IS HE LIABLE?

- NO, because that was a purchase

- First example galing sa unissued stock

- 2nd example galling sa treasury shares hindi sa unissued share

NO such thing as purchase of unissued stocks

A subscription contract can be conditional provided there is nothing in the charter or

statute prohibiting it and not against public order, law, etc.

Must it be in writing?

-NO, it may be oral

5M should it be in writing to be valid and binding as a subscription?

-NO, statutes of frauds only applies to SALES

•Trillana vs. Quezon College

- Counter proposal, therefore there was a need for an acceptance

- Facultative because it is in his own free will, it is void

What may be used as a consideration and how much should be the consideration?

-Section 62 provides:



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 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)

“Amounts transferred from unrestricted retained earnings to stated capital” what does it

mean?

- Stock dividends will in effect capitalize the unrestricted retained earnings

After 5 years the founders shares may be converted into common shares or other kinds

of shares

May shares of stocks be issued without consideration? Why?



- NO, two reasons by the SC, discriminatory against other stockholders and second unlawful,

it prejudices the right of the creditors “Trust Fund Doctrine”

If issued without a consideration

- Section 65, they will be considered as watered stocks

Section 65. Liability of directors for watered stocks. - Any director

or officer of a corporation consenting to the issuance of stocks for a consideration less

than its par or issued value or for a consideration in any form other than cash, valued in

excess of its fair value, or who, having knowledge thereof, does not forthwith express his

objection in writing and file the same with the corporate secretary, shall be solidarily,

liable with the stockholder concerned to the corporation and its creditors for the

difference between the fair value received at the time of issuance of the stock and the par

or issued value of the same. (n)

- Subscribers may be compelled to pay the value

Issuance of a certificate of stock is another thing

What are the requisites for the issuance of a valid certificate of stock?

1. It must be signed by the president or vice-president and countersigned by the secretary

or assistant secretary;

2. It must be sealed with the corporate seal; and the entire value thereof (together with

interest or expenses, if any) should have been paid.

While it appears, that a subscriber to shares of stock cannot be entitled to the issuance of

a certificate of stock until the full amount of his subscription together with interest and

expenses (in case of delinquent shares) if any is due, has been paid, a subscriber to shares

of stock, even if not yet fully paid, is entitled to exercise all the rights of a stockholder

and the corresponding liability that attach thereunder. Thus, the Code provides:

Section 72. Rights of unpaid shares. - Holders of subscribed shares not

fully paid which are not delinquent shall have all the rights of a

stockholder. (n)

Is the issuance of a certificate of stock necessary to consider the subscriber a stockholder?

- NO, shall be considered a stockholder even without a certificate of stock

Instances when he may not be able to exercise his rights as such stockholder

- Declared delinquent

- When he exercises his appraisal right

Are certificate of stocks transferrable?

- YES



Are certificate of stocks considered negotiable?

-Quasi-negotiable

Why are they considered quasi-negotiable when it may be transferred through

endorsement and delivery?

100t/s 001

10/s

Notes on Corporation Law

“Notes come in handy only when you have studied…”

©GTan; ASoguilon;

VVillanueva Abc co.

B stole and forged the signature

C is purchaser in good faith and for value will C acquire title

Endorsement from

When issued by owner

Endorsed by owner- strict compliance

ANSWER: a certificate of stock is not regarded as negotiable in the same sense that a bill or

note is negotiable, even if it is endorsed in blank. Thus, while it may be transferred by

endorsement coupled with delivery thereof, and therefore merely quasi-negotiable, it is

nonetheless non-negotiable in that the transferees takes it without prejudice to all the rights

and defenses which the true and lawful owner may have except in so far as the principles

governing estoppels may apply.

He acquired it by virtue of a forged instrument; no matter how innocent the purchaser is

because it is subject to all the rights and defenses

What if A endorsed it?

- He is estopped, unless there are other available defenses

Transfer is required to be recorded in the books of the corporation, however even if

not recorded, it will be valid between the parties. Non-registration will not however,

affect the validity thereof at least in so far as the contracting parties are concerned.



Section 63. Certificate of stock and transfer of shares. - The

capital stock of stock corporations shall be divided into shares for which certificates

signed by the president or vice president, countersigned by the secretary or assistant

secretary, and sealed with the seal of the corporation shall be issued in accordance

with the by-laws. Shares of stock so issued are personal property and may be

transferred by delivery of the certificate or certificates indorsed by the owner or his

attorney-in-fact or other person legally authorized to make the transfer. No transfer,

however, shall be valid, except as between the parties, until the transfer is recorded in

the books of the corporation showing the names of the parties to the transaction, the

date of the transfer, the number of the certificate or certificates and the number of

shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall

be

transferable in the books of the corporation. (35)

“Until registration is accomplished, the transfer, though valid between the parties,

cannot be effective as against the corporation. Thus the, unrecorded transfer cannot

enjoy the status of a stockholder; he cannot vote nor be voted for, and he will not be

entitled to dividends. The corporation will be protected when it pays dividend to the

registered owner despite a previous transfer of which it had no knowledge. The

purpose of registration therefore is twofold: to enable the transferee to exercise all the

rights of a stockholder and to inform the corporation of any change in shares

ownership so that it can ascertain the persons entitled to the rights and subject to the

liabilities of a stockholder.”

Thus, it was also ruled by the High Court in Nautica Canning Corp. vs. Yumul that “A transfer of shares not recorded in the stock and transfer book

of the corporation is nonexistent in so far as the corporation is concerned.” This

is so because “the corporation looks only through its books for the purpose of

determining who its stockholders are.”

Registration is necessary for the following:

1. To enable the corporation to know who its stockholders are;

2. To enable the transferee to exercise his rights a s stockholders;

3. To afford the corporation an opportunity to object or refuse registration of the transfer in

case allowed by law;

4. To avoid fictitious and fraudulent transfers; and,



5. To protect creditors who have the right to look upon stockholders, in case of no-payment

or watered shares, for the satisfaction of their claims.

Duty of the secretary is ministerial, hence mandamus will lie if the secretary refuses to

record the transfer, but he cannot be compelled when the transferee’s title to the said

shares has no prima facie validity or uncertain

Transfer- absolute and unconditional transfer to warrant registration in the books of the

corporation in order to bind the latter and other third persons.

Other restrictions on the right to transfer shares would include:

1. It is not valid, except as between the parties, until recorded in the books of the

corporation;

2. Shares of stock against which the corporation holds any unpaid claim shall not be

transferable in the books of the corporation; unpaid claims, refer to claims arising from

unpaid subscription and not to any indebtedness which a stockholder may owe the

corporation such as monthly dues;

3. Restrictions required to be indicated in the articles of incorporation, by-laws and stock

certificates of a close corporation;

4. Restrictions imposed by special law, such as the Public Service Act requiring the

approval of the government agency concerned if it will vest unto the transferee 40% of

the capital of the public service company;

5. Sale to aliens in violation of maximum ownership of shares under the Nationalization

Laws;

6. Those covered by reasonable agreement of the parties.

•Monserat vs. Ceron

- Does it include mortgage?

- NO, it is not an absolute transfer

- Will not affect the transfer through mortgage

- Absolute and unconditional transfer

- Only the transfer or absolute conveyance of the ownership of the title to a share need be

entered and noted upon the books of the corporation in order that such transfer may be



valid, therefore, inasmuch as a chattel mortgage of the aforesaid title is not a complete

and absolute alienation of the dominion and ownership thereof, its entry and notation

upon the books of the corporation is not necessary requisite to its validity

Chua guan vs. Magsasaka

- Was the mortgage valid and effective as against subsequent third parties

- Register of deeds where the corporation resides and if different in the register of deeds of

owner’s domicile

Unson vs. Dinamito

- All transferred not register will not have a valid force and effect

Right to transfer may be regulated

May not be unreasonably restricted

Violation of nationalization law- Central Bank

•Lambert vs. Fox

- Valid , may be reasonably regulated, restricted by agreement of parties

- Reasonable agreement by the parties

- Reasonable as to length of time • Padgett vs. Babcock

- Any attempt to restrain transfer

- SC, in the absence of a valid lien upon its shares

- Valid restrictions shares are applicable

- Any restriction on a stockholder’s right to dispose of his shares must be construed strictly;

and any attempt to restrain a transfer of shares is regarded as being in restraint of trade,

in the absence of a valid lien upon its shares, and except to the extent that valid restrictive

regulations and agreements exist and are applicable. Subject only to such restrictions, a

stockholder cannot be controlled in or restrained from exercising his right to transfer by

the corporation or its officers or by other stockholders, even though the sale is to a

competitor of the company, or to an insolvent person, or even though a controlling

interest is sold to one purchaser.

Certificate of stocks are transferrable

- By endorsement and delivery of the stock certificate to the transferee



In order to be valid, must be registered in the books. If not, will only be binding among

parties

How may shares of stock be transferred?

- Endorsement of stock certificate by owner or attorneyin-fact with delivery

•Embassy farms vs. CA

- Must be endorsed by owner or attorney-in-fact coupled with delivery

- Endorsed not delivered

- Proper mode and manner must be complied with

•Razon vs. IAC

- Delivered not endorsed

- Reverse of Embassy Farms

- Endorsement alone is not sufficient nor delivery without endorsement is not allowed

- Endorsement plus delivery is mandatory

Is there any other mode of transferring stock?

- Notarized deed

- Deed of assignment

•Rural bank of Salinas vs. CA

- If denied or refused without good cause, mandamus will lie

•Tay vs. CA

- Mandamus may issue if petition has a clear legal right

- Never issued in doubtful cases

- Petitioner failed to establish a clear legal right and alleged ownership is without merit

- Did not acquire ownership by virtue of the contract of pledge

- In a contract of pledge there must be foreclosure

- In the case there was no attempt to foreclose

- Petitioner must have a prima facie right

•Nava vs. Peers Marketing



- A stock subscription is a subsisting liability from the time the subscription is made

- The subscriber is as much bound to pay his subscription as he would be to pay any other

debt

- No stock certificate was issued. Without stock certificate, which is the evidence of

ownership of corporate stock, the assignment of corporate shares is effective only

between the parties to the transaction

Exception to the general rule

•Rural Bank of Lipa vs. CA

- By notarized deed

- Certificate of stocks already issued must be coupled with delivery, exception (TAN vs.

SEC)

Stock certificate has already been issued it must be coupled with the delivery

After certificate of stock is issued, may it be effectively transferred even without

endorsement or delivery of the stock certificate?

- Person sought to be a stockholder is an officer and has custody

Endorsement and delivery is not necessary (TAN vs. SEC)

•Tan vs. SEC (FULL KNOWLEDGE, HE IS ESTOPPED)

- Persons sought to be stockholder is officer and has custody of the book (estopped)

General Rule for valid transfer

- Certificate of stock must be endorsed by owner or attorney-in-fact coupled with delivery

Exceptions

- Section 63 uses the word “may”

- Showing that there may be other modes of transferring shares

Is there a time frame or fixed period as when transfer can be made?

-NO, (WON vs. WACK WACK)

• Won vs. Wack Wack

- Valid between contracting parties even if not recorded in corporation books



- Right accrues only if refused

- Statute of limitations does not apply in registration of shares of stock

- Must determined from the time of refusal

Why are they non-negotiable when they may be transferred?

- Transferees pays it without prejudice to all the rights and defenses as the true and

lawful owner may have under the law except insofar as such rights and defenses are

subject to the limitations imposed by the principles governing estoppels

• De los Santos vs. Republic

- Why is he, not considered as the owner of shares? When it has been said that when

endorsed by the owner it is considered as strict certificate? Because certificate of

stocks are non-negotiable

- Although a stock-certificate is sometimes regarded as quasi-negotiable, in the sense

that it may be transferred by endorsement, coupled with delivery, it is well settled that

the instrument is non-negotiable, because the holder thereof takes it without prejudice

to such rights or defenses as the registered owner or creditor may have under the law,

except insofar as such rights or defenses are subject to the limitations imposes by the

principles governing estoppels.

Unauthorized issuance of stock certificates

100/s

100

XYZCo

100 pesos per share

Stolen by B and forged the signature of A

B sells to C will C acquire title? NO

ENDORSEMENT FORM

C armed with the endorsement form certificate, sold to D (innocent purchaser for

value), will D acquire title?

- NO, subject to such rights and defenses as the true and lawful owner may have



What if C now goes to the corporation and presents the form?

- Then the corporation shall cancel the old certificate and issues a new one, now in the

name of C, now registered in the name of C, will C acquire title?

A found out what happened and goes to the corporation who has a better title C or A?

- A, A cannot be deprived of his right by virtue of an unauthorized transfer

Corporation can compel C to deliver the new stock certificate because he made a

representation that the certificate where good.

Armed with the new certificate issued to C, C delivers to D a purchaser in good faith

and for value will D acquire title?

- D will acquire title took the shares not by virtue of a forged or unauthorized transfer, but

on the reliance that the stock certificate is valid and owned by C

Stock certificate now in possession of D. A knew of what happened and went to the

corporation and complains. Who will have a better title?

- the corporation may be compelled to recognize both, A as stockholder (non-negotiable)

D, reliance that the stock certificate is valid and existing and owned by C

Forged transfers

- If the corporation should issue a new certificate in pursuance of a forged transfer, the

corporation incurs no liability to the person in whose favor it is issued and it may demand

its return for cancellation. The corporation in such case has been guilty of no

misrepresentation. On the other hand, it is the duty of the purchaser to determine that the

indorsement of the owner is genuine. However, if the new certificate issued to the

purchaser comes into the hands of a bona fide purchaser for value, the corporation will

be stopped from denying validity thereof, since by issuing such new certificate it

represents that the person named therein is a stockholder of the corporation. The

corporation is thus forced to recognize both the original certificate and new certificate-

the original, because the true owner could not be deprived of his title by a forged transfer,

and the new, because of its representation that the person named therein is the owner of

shares in the corporation. But if the recognition of both stockholders would result in an

over issue of shares, then only the original and true owner can be recognized as a

stockholder. The bona fide purchaser of the new certificate will however have a right of

damages against the corporation. The corporation, in turn, would have a right of action

against the person who made false representations and in whose favor it issued a new

certificate. The true owner of the shares which were wrongfully transferred would of

course have a right to compel the corporation to issue him a certificate in lieu of the

original one which was wrongfully cancelled.

Authorized capital stock 1M shares



All are subscribed who will the corporation recognize as rightful owner A or D? if both

will be recognized there will be over issuance

- only A citing citizens national bank vs. state (but if recognition of both stockholders would result in an over issue of shares, then only the original and true owner can be recognized as a stockholder)

- by virtue of the doctrine of non-negotiability of certificate of stocks

The true and lawful owner will never be deprived of his rights

What happens to D?

- D will have a cause of action against the corporation for the value of his acquisition cost

inclusive of damages, attorney’s fees and cost of suit

D sues the corporation for the value of his acquisition cost, inclusive of damages,

attorney’s fees and cost of suit. What may the corporation do?

- NO defense, no valid defense, because it was represented to other parties that the certificate

of stocks is valid, subsisting, etc.

2nd situation, what cause of action may the corporation have? Remedy?

- Third party complaint against C, but what if he is a purchaser for value? 4th party claim

against B When may certificate of stocks be issued?


Section 64. Issuance of stock certificates. - No certificate of stock shall

be issued to a subscriber until the full amount of his subscription together with interest

and expenses (in case of delinquent shares), if any is due, has been paid. (37)

A certificate of stock cannot be issued unless he fully paid the amount subscribed

Subscription to the capital stocks of the corporation are indivisible

Clear mandate of section 148 of the code is that the ruling of the court in Baltazar vs.

Lingayen Gulf, no longer holds true

Section 148. Applicability to existing corporations. - All corporations

lawfully existing and doing business in the Philippines on the date of the effectivity of



this Code and heretofore authorized, licensed or registered by the Securities and

Exchange Commission, shall be deemed to have been authorized, licensed or registered

under the provisions of this Code, subject to the terms and conditions of its license, and

shall be governed by the provisions hereof: Provided, That if any such corporation is

affected by the new requirements of this Code, said corporation shall, unless otherwise

herein provided, be given a period of not more than two (2) years from the effectivity of

this Code within which to comply with the same. (n)

Subscription to shares of stocks are indivisible

Also apparent is that once a subscriber has paid his subscription in full, he becomes

entitled to be issued a stock certificate and in the event that the corporation refuses to do

so, the stockholder my institute a case for mandamus with damages. Thus, it has been

said that the duty of the corporate officers to issue stock certificates to those entitled

thereto is a ministerial duty enforceable by mandamus.

•Fua Cun vs. Summers and China Banking Corp.

- The court erred in holding the plaintiff as the owner of 250 shares of stock; “the plaintiff’s

rights consist in equity in 500 shares and upon payment of the unpaid portion of the

subscription price he becomes entitled to the issuance of certificate for said 500 shares in

his favor.”

- No certificate of stock until the full amount has been paid.

Watered stock

- One which is issued by the corporation as fully paid-up shares, when in fact the whole

amount of the value thereof has not been paid.

- Basis is par value and not the fair market value

Section 62 states that stocks shall not be issued for a consideration less than par or issued

price thereof, while section 13 states that in no case shall be paid-up capital be less than five

thousand [P5000] pesos. If issued below par, issued value considered as water How

may watered stocks be issued?

1. For a monetary consideration less than its par or issued value;

2. For a consideration in property, tangible or intangible, valued in excess of its fair market

value;



3. Gratuitously or under an agreement that nothing shall be paid at all; or

4. In the guise of stock dividends when there are no surplus profits of the corporation.

Why is stock watering illegal?

1. The corporation is deprived of its capital thereby hurting its business prospects, financial

capability and responsibility;

2. Stockholders who paid their subscriptions in full, or promised to pay the same, are injured

and prejudiced by the reduction of their proportionate interest in the corporation; and,

3. Present and future creditors are deprived of the corporate assets for the protection of their

interest.

- Corporation is prejudiced

- Stockholders, dilution of interest

- Creditors are prejudiced, virtue of right to look upon corporations properties for the

satisfaction of their claims

What is the effect of issuance of watered stocks

1. As to the corporation - when a corporation is guilty of ultra-vires or illegal acts which

constitute an injury to or fraud upon the public, or which will tend to injure or defraud

the public, the State may institute a quowarranto proceeding to forfeit its charter for the

misuse or abuse of its franchise.

2. As between the corporation and the subscriber- The subscription is void. Such being the

case, the subscriber is liable to pay the full par or issued value thereof, to render it valid

and effective.

3. As to the consenting stockholders - They are stopped from raising any objection thereto;

4. As to dissenting stockholders - In view of the dilution of their proportionate interest in

the corporation, they may compel the payment of the “water” in the stock solidarily

against the responsible and consenting directors and officers inclusive of the holder of

the watered stocks;

5. As to creditors - They may enforce payment of the difference in the price, or the water in

the stock, solidarily against the responsible directors/officers and the stockholders

concerned; and’



6. As against transferees of the watered stock – His right is the same as that of his transferor.

If, however, a certificate of stock has been issued and duly indorsed to a bona fide

purchaser, without knowledge, actual or constructive, the latter cannot be held liable, at

least as against the corporation, since he took the shares on reliance of the

misrepresentation made by the corporation that the stock certificate is valid and

subsisting. This is because a corporation is prohibited from issuing certificates of stock

until the full value of the subscriptions have been paid and could not, therefore, deny the

validity of the stock certificate it issued as against a purchaser in good faith. Thus,

Ballentine states that whether there is any liability on the part of the transferee of

watered stock is made to depend upon whether he acquired the same without notice, either

as purchaser or donee. If he had knowledge thereof, he is subject to the same liability as

his transferor.

What is the nature of the liability of the corporate directors consenting to the issuance of

watered stocks and the extent of their liabilities?

- Solidarily liable with the holder of the watered stocks to the extent of the water from said

shares of stocks

Will all the directors be liable? What if you objected will you also be liable?

- If you do not issue a written objection, you are still liable

- Even passive directors may be liable

- Those having knowledge thereof, but did not interpose their objection shall be liable


Section 65. Liability of directors for watered stocks. - Any director

or officer of a corporation consenting to the issuance of stocks for a consideration less

than its par or issued value or for a consideration in any form other than cash, valued in

excess of its fair value, or who, having knowledge thereof, does not forthwith express his

objection in writing and file the same with the corporate secretary, shall be solidarily,

liable with the stockholder concerned to the corporation and its creditors for the

difference between the fair value received at the time of issuance of the stock and the par

or issued value of the same. (n)

ACS-100M 100M/S PAR VALUE-

1.00

SUBSCRIBED-50MFAIR MARKET VALUE-

12.00/S

UNSUBSCRIBED-50M

A



B C

D

E

There is a denial of pre-emptive rights and directors A,B,C,D,E decided to issue the

remaining 50M and subscribed for 10M each at 2 per share.

Is there stock watering if the fair market value is

12.00?

- No stock watering

- The basis is the par value

- The shares where in fact paid more than the par value indicated in the articles of

incorporation

3 days later they sold their 10M share for P11.00 each, therefore making a profit.

Can you question there actuations? What would be the cause of action?

- It may be questioned.

- Duty of loyalty or fiduciary duty as such directors

- They cannot advance their own motives to the damage prejudice of the corporation which

they represents and stockholders as a whole instead of it being sold outside

- 500M would have gone to the coffers of the corporation, 500M should be there for the

protection of creditors

- They are placed in a fiduciary relationship

- Sila lang ba ang kikita, pano naman yung corporation, opportunity na yun para kumita

When are unpaid subscriptions due and payable?

- Section 67. Payment of balance of subscription. - Subject to the provisions of

the contract of subscription, the board of directors of any stock corporation may at any

time declare due and payable to the corporation unpaid subscriptions to the capital stock

and may collect the same or such percentage thereof, in either case with accrued interest,

if any, as it may deem necessary.

Payment of any unpaid subscription or any 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)

Remedies of the corporation to enforce payment of unpaid subscription

1. By board action in accordance with the procedure laid down in sections 67 to 69 of the

code

2. By a collection case in court as provided for in section 70

Are subscribers of shares of stocks not fully paid, liable to pay interest?

- General rule is they are not liable to pay interest because the code says unless requires in

the by-laws

- Aside from the mandate of the law that subscribers to shares of stock must pay the full

value of their subscription, they may likewise be required to pay interest on all unpaid

subscriptions if so imposed in the contract or in the corporate by-laws at such rate as may

be indicated thereat or the legal rate if not so fixed. Unless so required or provided,

however, subscribers to shares of stock, not fully paid, are not liable to pay interest on

their unpaid subscriptions. The code thus provides:

Section 66. Interest on unpaid subscriptions. - Subscribers for stock

shall pay to the corporation interest on all unpaid subscriptions from the date of

subscription, if so required by, and at the rate of interest fixed in the by-laws. If no rate

of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. (37)

Until a call is made, they are not due and payable, but still subject to the provisions of

the contracts

Procedures in case of sale of delinquent stocks

- Section 68. Delinquency sale. - The board of directors may, by resolution, order

the sale of delinquent stock and shall specifically state the amount due on each

subscription plus all accrued interest, and the date, time and place of the sale which shall

not be less than thirty (30) days nor more than sixty (60) days from the date the stocks

become delinquent.

Notice of said sale, with a copy of the resolution, shall be sent to every delinquent

stockholder either personally or by registered mail. The same shall furthermore be

published once a week for two (2) consecutive weeks in a newspaper of general

circulation in the province or city where the principal office of the corporation is located.



Unless the delinquent stockholder pays to the corporation, on or before the date

specified for the sale of the delinquent stock, the balance due on his subscription, plus

accrued interest, costs of advertisement and expenses of sale, or unless the board of

directors otherwise orders, said delinquent stock shall be sold at public auction to such

bidder who shall offer to pay the full amount of the balance on the subscription together

with accrued interest, costs of advertisement and expenses of sale, for the smallest

number of shares or fraction of a share. The stock so purchased shall be transferred to

such purchaser in the books of the corporation and a certificate for such stock shall be

issued in his favor. The remaining shares, if any, shall be credited in favor of the

delinquent stockholder who shall likewise be entitled to the issuance of a certificate of

stock covering such shares.

Should there be no bidder at the public auction who offers to pay the full amount

of the balance on the subscription together with accrued interest, costs of advertisement

and expenses of sale, for the smallest number of shares or fraction of a share, the

corporation may, subject to the provisions of this Code, bid for the same, and the total

amount due shall be credited as paid in full in the books of the corporation. Title to all

the shares of stock covered by the subscription shall be vested in the corporation as

treasury shares and may be disposed of by said corporation in accordance with the

provisions of this Code. (39a-46a)

Who is the winning bidder in a delinquency sale?

- Bidder who shall “offer to pay the full amount of the balance on the subscription together

with accrued interest, cost of advertisement and expenses of sale, for the smallest number

of shares or fraction of a share.”

X Co. has 1M authorized capital stock

500 thousand is already subscribed

A subscribed to 100 thousand shares, 50 thousand is already paid leaving 50 thousand

unpaid

The corporation is at a loss of 250 thousand, the board decides to make a call for the

payment of the unpaid subscriptions, however A could not paid, hence declared

delinquent and decides to sell his share at a public auction

55 thousand is to be paid, remaining balance plus cost and expenses BIDDERS:

X-55K FOR 99,900 shares



Y-55K FOR 99,500 shares

Z-55K FOR 99,000 shares (winning bidder)

Assume there is no bidder, may the corporation bid?

- NO. It cannot bid because the law says, subject to the provisions of this CODE. Section

68 and 41 should be reconciled. Section 68 states that:

Should there be no bidder at the public auction who offers to pay the full amount

of the balance on the subscription together with accrued interest, costs of advertisement

and expenses of sale, for the smallest number of shares or fraction of a share, the

corporation may, subject to the provisions of this Code, bid for the same,

and the total amount due shall be credited as paid in full in the books of the corporation.

Title to all the shares of stock covered by the subscription shall be vested in the

corporation as treasury shares and may be disposed of by said corporation in accordance

with the provisions of this Code. (39a-46a)

- There was no unrestricted retained earnings in the example given therefore the

corporation cannot bid , section 41, it states that:

Section 41. Power to acquire own shares. - A stock corporation shall

have the power to purchase or acquire its own shares for a legitimate corporate purpose

or purposes, including but not limited to the following cases: Provided, That the

corporation has unrestricted retained earnings in its books to cover the

shares to be purchased or acquired:


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)

What if the shares of A were sold without compliance of the requirements? May A

question the sale?



- The law prescribes two conditions before an action to recover delinquent stocks irregularly

sold may be allowed. These are:

1. The party seeking to maintain such action first pays or tenders to the party holding the

stock the sum for which the same was sold, with interest from the date of the sale at the

legal rate; and,

2. The action shall be commenced by the filing of a complaint within six months from the

date of the sale.

- The reason for such is the stability of transactions of the shares of stock

Suppose in the example, since there are no unrestricted retained earnings, hence the

corporation cannot bid, is the corporation left without any recourse?

- Section 70. Court action to recover unpaid subscription. - Nothing in this

Code shall prevent the corporation from collecting by action in a court of proper

jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and

expenses. (49a)

•Velasco vs. Poizat

- The subscriber is as much bound to pay the amount of the share subscribed by him as he

would be to pay any other debt, and the right of the company to demand payment is no

less incontestable.

- Two available remedies: the first and most special remedy given by the statute consist in

permitting the corporation to put up the unpaid stock and dispose of it for the account of

the delinquent subscriber. The other remedy is by action in court.

•De Silva vs. Aboitiz and Co.

- Discretionary on the part of the board of directors to do whatever is provided in the said

article relative to the application of the part of the 70 percent of the profit distributable in

equal parts on the payment of the shares subscribed to and fully paid

•Lingayen Gulf vs. Baltazar

- Exception: pursuant to a bona fide compromise or to set off a debt due from the corporation,

a release supported by consideration, will be effectual as against dissenting stockholders

and subsequent and existing creditors. A release which might originally have been held

invalid may be sustained after a considerable lapse of time

•Apocada vs. NLRC



- Set-off is without any legal basis

- It was premature

- Unpaid subscriptions will become due and payable only upon certain instance

- Call or if there is a stipulation in contract

- If no call and no stipulation in contract then it will not be demandable or payable at all

•Lumanlan vs. Cura

- Trust Fund Doctrine- subscription to the capital of a corporation constitute a fund to which

the creditors have a right to look for satisfaction of their claims and that the assignee in

insolvency can maintain an action upon any unpaid stock subscription in order to realize

assets for the payment of its debts.

•PNB vs. Bitulak

- Where it not for the promise, the defendants would have not subscribed

- Trust Fund Doctrine, it is established doctrine that subscriptions to the capital of a

corporation constitute a fund to which creditors have a right to look for satisfaction of

their claims and that the assignee in insolvency can maintain an action upon any unpaid

stock subscription in order to realize assets for the payment of its debts.

- A corporation has no power to release an original subscriber to its capital stock from the

obligation of paying for his shares, without a valuable consideration for such release; and

as against creditors a reduction of the capital stock can take place only in the manner and

under the conditions prescribed by the statute or the charter or the articles of

incorporation.

•Edward Keller and Co. vs. COB

- May the stockholder be held liable for the debts of the corporation? YES. To the extent

of their unpaid subscription

- As to the liability of the stockholders, it is settled that a stockholder is personally liable

for the financial obligations of a corporation to the extent of his unpaid subscriptions

Is there a prescriptive period wherein a demand for unpaid subscription should be made?

-NO. Garcia vs. Suarez case

•Garcia vs. Suarez

- Never became due and payable until there is a call made

- Prescription will not run until and unless there is demand



- Prescription should be determined from the time demand has been made and not from the

time of subscription

If declared delinquent, what would be the effect as to the owner of said shares?

- Section 71. Effect of delinquency. - No delinquent stock shall be voted for or

be entitled to vote or to representation at any stockholder's meeting, nor shall the holder

thereof be entitled to any of the rights of a stockholder except the right to dividends in

accordance with the provisions of this Code, until and unless he pays the amount due on

his subscription with accrued interest, and the costs and expenses of advertisement, if

any. (50a)

- However if the shares are not delinquent, subscribers to the capital of a corporation,

though not fully paid, are entitled to all the rights of a stockholder, according to section

72


fully paid which are not delinquent shall have all the rights of a

stockholder. (n)

May the rules governing delinquency sale apply to a non-stock corporation? Are there

unpaid shares in a non-stock corporation?

- Rules governing stock corporations, when applicable, also applies to a non-stock

corporation

- There are delinquent shareholders also in a non-stock corporation. Example is

membership dues

A corporation paid 50% of subscription and was later on declared delinquent when he

could not pay upon call; A is also a director of the corporation. Will A, upon declaration

of delinquency , still be able to exercise his right as a director?

- Yes, he loses all his right as a stockholder except his right to receive dividends

- He remains to be a director, only qualification to be a director is he must own at least 1

share and since it still stands in his name pending the sale, he remains to be and act as a

director

- Even if there is sale, he may still be director because the winning bidder may not bid or

pay for all the shares or there might be remaining shares, which would be credited in

favor of the delinquent

stockholder




Section 43. 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)


hundred (100%) percent of their paid-in capital stock, except: (1) when justified by

definite corporate expansion projects or programs approved by the board of directors; or

(2) when the corporation is prohibited under any loan agreement with any financial

institution or creditor, whether local or foreign, from declaring dividends without its/his

consent, and such consent has not yet been secured; or (3) when it can be clearly shown

that such retention is necessary under special circumstances obtaining in the corporation,

such as when there is need for special reserve for probable contingencies. (n)

When a certificate of stock is loss or destroyed, what must be done by the owner thereof?

- Section 73. Lost or destroyed certificates. - The following procedure shall be

followed for the issuance by a corporation of new certificates of stock in lieu of those

which have been lost, stolen or destroyed:

1. The registered owner of a certificate of stock in a corporation or his legal

representative shall file with the corporation an affidavit in triplicate setting forth, if

possible, the circumstances as to how the certificate was lost, stolen or destroyed, the

number of shares represented by such certificate, the serial number of the certificate and

the name of the corporation which issued the same. He shall also submit such other

information and evidence which he may deem necessary;

2. After verifying the affidavit and other information and evidence with the books

of the corporation, said corporation shall publish a notice in a newspaper of general

circulation published in the place where the corporation has its principal office, once a

week for three (3) consecutive weeks at the expense of the registered owner of the

certificate of stock which has been lost, stolen or destroyed. The notice shall state the

name of said corporation, the name of the registered owner and the serial number of said

certificate, and the number of shares represented by such certificate, and that after the



expiration of one (1) year from the date of the last publication, if no contest has been

presented to said corporation regarding said certificate of stock, the right to make such

contest shall be barred and said corporation shall cancel in its books the certificate of

stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of

stock, unless the registered owner files a bond or other security in lieu thereof as may be

required, effective for a period of one (1) year, for such amount and in such form and

with such sureties as may be satisfactory to the board of directors, in which case a new

certificate may be issued even before the expiration of the one (1) year period provided

herein: Provided, That if a contest has been presented to said corporation or if an action

is pending in court regarding the ownership of said certificate of stock which has been

lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall

be suspended until the final decision by the court regarding the ownership of said

certificate of stock which has been lost, stolen or destroyed.

Except in case of fraud, bad faith, or negligence on the part of the corporation and

its officers, no action may be brought against any corporation which shall have issued

certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure

above-described. (R.A. 201a)

- The rationale of the above-quoted law is to avoid duplication of certificates of stock and

the avoidance of fictitious and fraudulent transfers.

When will the replacement certificate be issued?

-The code provides that:

after the expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said

certificate of stock, the right to make such contest shall be barred and said corporation

shall cancel in its books the certificate of stock which has been lost, stolen or destroyed

and issue in lieu thereof new certificate of stock,

Could it be issued earlier than 1 year?

-Yes it can be, the code states that:

unless the registered owner files a bond or other security in lieu thereof as may be

required, effective for a period of one (1) year, for such amount and in such form and

with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been

presented to said corporation or if an action is pending in court regarding the ownership



of said certificate of stock which has been lost, stolen or destroyed, the issuance of the

new certificate of stock in lieu thereof shall be suspended until the final decision by the

court regarding the ownership of said certificate of stock which has been lost, stolen or

destroyed.

May corporate officers be held liable for the unauthorized issuance?

-YES, the code provides that:

Except in case of fraud, bad faith, or negligence on the part of the corporation and

its officers, no action may be brought against any corporation which shall have issued

certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure

above-described. (R.A. 201a)

Assuming the last paragraph is not there; would it be not the same, that they should be

held liable due to fraud, bad faith or negligence?

-YES. Section 31 provides that:

Section 31. Liability of directors, trustees or officers. - Directors or

trustees who willfully and knowingly vote for or assent to patently unlawful acts of the

corporation or who are guilty of gross negligence or bad faith in directing the affairs of

the corporation or acquire any personal or pecuniary interest in conflict with their duty

as such directors or trustees shall be liable jointly and severally for all damages resulting

there from suffered by the corporation, its stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of

his duty, any interest adverse to the corporation in respect of any matter which has been

reposed in him in confidence, as to which equity imposes a disability upon him to deal

in his own behalf, he shall be liable as a trustee for the corporation and must account for

the profits which otherwise would have accrued to the

corporation. (n)

Certificate of stock was lost, the owner transfers his shares by way of a notarized deed

will it be valid?

- He cannot do so, if a certificate of stock is issued by a corporation, a mere notarized deed

will not suffice

- Deed of assignment was not sufficient since there was no endorsement (Rural Bank of

Lipa vs. CA)

Rights and liabilities of stockholders



- RIGHTS

1. Participation in the management of the corporate affairs by exercising their right to vote

and be voted upon either personally or by proxy as provided for under sections 50 and 58

of the code;

2. To enter into a voting trust agreement subject to the procedure, requirements and

limitations imposed under section 50;

3. To receive dividends and to compel their declaration if warranted under section 43;

4. To transfer shares of stock subject only to reasonable restrictions such as options and

preferences as may be allowed by law inclusive of the right of the transferee to compel

the registration of the transfer in the books of the corporation as provided for in section

63;

5. To be issued a certificate of stock for fully paid-up shares in accordance with 64;

6. To exercise pre-emptive rights as provided for in section 39;

7. To exercise their appraisal right in accordance with the provision of section 81 and in

those instance allowed by law such as section 42 and 105;

8. To institute and file a derivative suit;

9. To recover shares of stock unlawfully sold for delinquency as may be allowed under

section 69;

10. To inspect the books of the corporation subject only to the limitations imposed by section

73;

11. To be furnished by the most recent financial statement of the corporation as by section

75;

12. To be issued a new stock certificate in lieu of the lost or destroyed one subject to the

procedure laid down in section 73;

13. To have the corporation dissolved under section 118 to 121, and section 105 in a close

corporation;

14. To participate in the distribution of the assets of the corporation upon dissolution under

section 122;

15. In the case of a close corporation, to petition the SEC to arbitrate in the event of a

deadlock as allowed under section 104; and,

16. Also in the case of a close corporation, to withdraw therefrom, for my reason, and compel

the corporation to purchase his shares as provided for under section 105.

- LIABILITIES

1. To pay to the corporation the balance of his unpaid subscriptions subject to the

provision of section 67 to 70;



2. To pay interest on his unpaid subscription if required by the by-laws or by the contract

of subscription in accordance with section 66;

3. To answer to the creditors for the unpaid portion of his subscription under the TRUST

FUND DOCTRINE;

4. To answer the “water” in his stocks as provided for in section 65;

5. To be liable, as general partners, for all debts, liabilities and damages of a

determinable corporation as envisioned under section 21 (corporation by estoppel);

and,

6. To be personally liable for torts, in the event that a stockholder in a close corporation

actively participates in the management of the corporate affairs.

CORPORATE BOOKS AND RECORDS

What are these books and records that are required to be kept?

- Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand.

The records of all business transactions of the corporation and the minutes of

any meetings shall be open to inspection by any director, trustee, stockholder or

member of the corporation at reasonable hours on business days and he may demand,

in writing, for a copy of excerpts from said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director,

trustees, stockholder or member of the corporation to examine and copy excerpts from



its records or minutes, in accordance with the provisions of this Code, shall be liable

to such director, trustee, stockholder or member for damages, and in addition, shall be

guilty of an offense which shall be punishable under Section 144 of this Code:

Provided, That if such refusal is made pursuant to a resolution or order of the board

of directors or trustees, the liability under this section for such action shall be imposed

upon the directors or trustees who voted for such refusal: and Provided, further, That

it shall be a defense to any action under this section that the person demanding to

examine and copy excerpts from the corporation's records and minutes has improperly

used any information secured through any prior examination of the records or minutes

of such corporation or of any other corporation, or was not acting in good faith or for

a legitimate purpose in making his demand.

Stock corporations must also keep a book to be known as the "stock and transfer

book", in which must be kept a record of all stocks in the names of the stockholders

alphabetically arranged; the installments paid and unpaid on all stock for which

subscription has been made, and the date of payment of any installment; a statement

of every alienation, sale or transfer of stock made, the date thereof, and by and to

whom made; and such other entries as the by-laws may prescribe. The stock and

transfer book shall be kept in the principal office of the corporation or in the office of

its stock transfer agent and shall be open for inspection by any director or stockholder

of the corporation at reasonable hours on business days.

No stock transfer agent or one engaged principally in the business of registering

transfers of stocks in behalf of a stock corporation shall be allowed to operate in the

Philippines unless he secures a license from the Securities and Exchange Commission

and pays a fee as may be fixed by the Commission, which shall be renewable annually:

Provided, That a stock corporation is not precluded from performing or making transfer

of its own stocks, in which case all the rules and regulations imposed on stock transfer

agents, except the payment of a license fee herein provided, shall be applicable. (51a and

32a; P.B. No.

268.)

To summarize:

1. Records of all business transactions which include, among others, journals, ledger,

contracts, vouchers and receipts, financial statements and other books of accounts,

income tax returns, and voting trust agreements which must be kept and carefully

preserved at its principal office;

2. Minutes of all meetings of stockholders or members and of the directors or trustees setting

forth in detail the date, time, and place of meeting, how authorized, the notice given

whether the same be regular or special, and if special, the purpose thereof shall be



specified, those present and absent, and every act done or ordered done there at which

,must likewise be kept at the principal office of the corporation; and,

3. Stock and transfer book showing the names of the stockholders, the amount paid or

unpaid on all stocks for which subscription has been made, a statement of every

alienation, sale or transfer of stock made, if any the date thereof, and by whom and to

whom made which must also be kept at the principal office of the corporation or in the

office of its stock transfer agent.

These corporate books and records, inclusive of all business transactions and minutes of

meetings, are subject to inspection by any of the directors, trustees, stockholders or

members of the corporation at reasonable hours on business days and a copy of excerpts

of said records may be demanded. In fact, in so far as financial statement is concerned,

the Code clearly provides:

Section 75. Right to financial statements. - Within ten (10) days from

receipt of a written request of any stockholder or member, the corporation shall furnish

to him its most recent financial statement, which shall include a balance sheet as of the

end of the last taxable year and a profit or loss statement for said taxable year, showing

in reasonable detail its assets and liabilities and the result of its operations.

At the regular meeting of stockholders or members, the board of directors or trustees

shall present to such stockholders or members a financial report of the operations of the

corporation for the preceding year, which shall include financial statements, duly signed

and certified by an independent certified public accountant.

However, if the paid-up capital of the corporation is less than P50,000.00, the financial

statements may be certified under oath by the treasurer or any

responsible officer of the corporation. (n)

May books and records be examined? Who may examine? Can they copy them? In whose

expense?

-Yes, according to the code:

“The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. “



Is there any defense available that could be raised? By the corporate officers to justify

the refusal?

-Yes, the code provides that:

“and Provided, further, That it shall be a defense to any action under this section

that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.”

What is the stock and transfer? Where should stock and transfer be kept? Can it be

kept elsewhere?

“Stock corporations must also keep a book to be known as the "stock and

transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the bylaws may prescribe. The stock

and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall

be open for inspection by any director or stockholder of the corporation at

reasonable hours on business days. “

Stock and transfer agent

- Records every movement

- Person who monitors movement by the minutes or by the hours

- Non-stock corporation- stock and transfer books - Club share- membership

Are stockholders entitled to financial statements?

- Yes, they are entitled to a copy, the code provides that:

Section 75. Right to financial statements. - Within ten (10) days

from receipt of a written request of any stockholder or member, the corporation shall

furnish to him its most recent financial statement, which shall include a balance sheet



as of the end of the last taxable year and a profit or loss statement for said taxable

year, showing in reasonable detail its assets and liabilities and the result of its

operations.

At the regular meeting of stockholders or members, the board of directors or

trustees shall present to such stockholders or members a financial report of the

operations of the corporation for the preceding year, which shall include financial

statements, duly signed and certified by an independent certified public accountant.

However, if the paid-up capital of the corporation is less than P50,000.00, the

financial statements may be certified under oath by the treasurer or any responsible

officer of the corporation. (n)

- Audited financial statement filed in the SEC, 120 days from the end of the final year,

or must be filed on or before April of each year

- Must be stamp received by the BIR

Those in the stock exchange

- Disclosure of any matter that have to do with increasing and decreasing

- If not “kulong” violation of securities and regulation act

Why is this right of inspection granted to a stockholder?

- The basis of the right of the stockholder to inspect the books and records of the

corporation for a proper purpose is to protect his interest as a stockholder. Thus, it has

been said that:

“The right of the shareholders to ascertain how the affairs of his company are

being conducted by its directors and officers is founded by his beneficial

interest through ownership of shares and the necessity of self-protection.

Managers of some corporations deliberately keep the shareholders in ignorance

or under misapprehension as to the true condition of its affairs. Business

prudence demands that the investor keep a watchful eye on the management

and the condition of the business. Those in charge of the company may be guilty

of gross incompetence or dishonesty for years and escape liability if the

shareholders cannot inspect the records and obtain information.”

Is there any distinction of the right of inspection of a stockholder and that of a director?

- Yes, as compared to a stockholder or member, the right of a director or trustee to inspect

and examine corporate books and records is considered absolute and unqualified and



without regard to motive. This is because a director supervises, directs and manages

corporate business and it is necessary that he be equipped with all the information and

data with regard to the affairs of the company in order that he may manage and direct its

operations intelligently and according to his best judgment in the interest of all the

stockholders he represents. Thus, while stockholders and members are entitled to inspect

and examine the books and records as provided in sections 74 and 75 they may not gain

access to highly sensitive and confidential information. In the case of directors. “it is not

denied” that they have such access. This would include, among others,

a. Marketing strategies and pricing structure;

b. Budget for expansion and diversification;

c. Research and development;

d. Sources of funding, availability of personnel, proposals of mergers or tie-ups with

other firms

May this right be exercised, other than by the stockholders themselves?

- Yes, while the right is founded on stock ownership thus personal in nature it may be made

by the stockholder’s agent or representative since it may be unavailing in many instances

What if the right of the stockholder to inspect is denied? What is his remedy?

1. Mandamus

2. Damages either against the corporation or responsible officer who refused the inspection

3. Criminal complaint for violation of his right to inspect and copy excerpts of all business

transactions and minutes of meeting. Section 74 provides that Any officer or agent of the

corporation who shall refuse to allow any director, trustees, stockholder or member of

the corporation to examine and copy excerpts from its records or minutes, in accordance

with the provisions of this Code, shall be liable to such director, trustee, stockholder or

member for damages, and in addition, shall be guilty of an offense which shall be

punishable under Section 144 of this Code. The latter provision imposes a penalty of a

fine of not less than P1,000 but not more than P10,000 or an imprisonment for not less

than 30 days but not more than 5 years, or both, at the discretion of the court. If the refusal

is pursuant to a resolution or order of the board, the liability shall be imposed upon the

directors or trustees who voted for such refusal.

Defense of the responsible corporate officer



1. That the person demanding has improperly used any information secured through any

prior examination of the records or minutes of such corporation or of any other

corporation;

2. That he was not acting in good faith or for a legitimate purpose in making his demand;

3. The right is limited or restricted by special law or the law of it creation.

•W.G. Philpotts vs. Philippine Manufacturing Co.

- The right of inspection given to a stockholder can be exercised either by himself or

by any proper representative or attorney-in-fact, and either with or without the

attendance of the stockholder

- The right may be regarded as personal, in the sense that only a stockholder may enjoy

it; but the inspection and examination may be made by another. Otherwise it would

be unavailing in many instances.

o Note: Usually hires an auditor or accountant to safeguard his interest

•Pardo vs. Hercules Lumber Co.

- The law is clear, it may be exercised during reasonable hours on any business days,

the by-laws cannot deny this right all together

- The general right given by the statute may not be lawfully abridged to the extent

attempted in this resolution. It may be admitted that the officials in charge of a

corporation may deny inspection when sought at unusual hours or under other

improper conditions; but neither the executive officers nor the board of directors have

the power to deprive a stockholder of the right altogether.

- The corporation, or its responsible directors and officers cannot unduly restrict this

right of inspection and may not arbitrarily set a few days of the year within which the

stockholder may make the inspection.

- A by-law unduly restricting the right of inspection is undoubtedly invalid

•Vegaruth vs. Isabela Sugar Co.

- Directors of a corporation have the unqualified right to inspect the books and records

of the corporation at all reasonable hours.

- We do not conceive, however, that a director or stockholder has any absolute right to

secure certified copies of the minutes of the corporation until these minutes have been

written up and approved by the directors.



May a stockholder of a holding company inspect the books and records of a

subsidiary?

- It depends

- The right of the stockholders to examine corporate books extends to wholly-owned

subsidiary which is completely under the control and management of the parent

company where he is such a stockholder. But if the two entities (subsidiary and parent)

are legally being operated as separate and distinct entities, there is no such right of

inspection on the part of the stockholder of the parent company.

AYALA- HOLDING COMPANY/PARENT COMPANY

SUBSIDIARIES: BPI/GLOBE/AYALA LAND (not whollyowned subsidiary)

o HOLD ATLEAST 50 +1 shares in order to be a PARENT COMPANY

A, is a stockholder of Ayala, does he have a right to inspect the records of its

subsidiaries?

- If wholly owned pwede, but its subsidiaries are not wholly owned kaya hindi pwede


- San Miguel corporation owns all of the shares of stock of San Miguel International

- It is wholly-owned

- It would be in accord with equity, good faith and fair dealing to construe the statutory

right of petitioner as stockholder to inspect the books and records of such wholly-

owned subsidiary which are in respondent corporation’s possession and control

If being operated as separate and distinct corporations, there is no such right

Telecommunications- special franchise, it is a legislative grant

•Gonzales vs. PNB

- Provisions of the old law was unqualified, when it granted stockholders the right to

inspect

- However, whole seemingly enlarging the right of inspection, the new code has

prescribed limitations to the same. It is now expressly required as a condition for such

examination that the one requesting it must not have been guilty of using improperly

any information secured through a prior examination and that the person asking for



such examination must be acting in good faith and for a legitimate purpose in making

his demand

- Admittedly, he sought to be a stockholder in order to pry into transactions entered into

by the respondent bank even before he became a stockholder. His obvious purpose

was to arm himself with materials he can use against the respondent bank for acts

done by the latter when the petitioner was a total stranger to the same.

- Bank was created by a special law, it has its own charter and primarily governed by

the law creating them

- The bank is only subject to the inspection of the Central Bank and any information

pertaining to the bank is confidential and shall not be revealed to any person other

than the President of the Philippines, the Secretary of Finance and the Board of

Directors, nor shall any information relative to the funds in its custody, its current

accounts or deposits belonging to private individuals, corporations or other entities

except by order of a Court of Competent Jurisdiction, hence inspection sought to by

the petitioner is violative of the provisions of its charter and is even subject to penal

sanctions

Assuming you are a stockholder of PNB, and then it was privatized, may you already

have the right to inspect?

- No, unless its charter has been altered or repealed it is still subject to the same law

3 stages in the life of a corporation

- Formation or birth

- We now discuss the union of the corporation - The last would be its death

or dissolution

MERGER AND CONSOLIDATION

Merger and consolidation

- In corporate parlance it is called spin-off

- Almost a year ago San Miguel separated its brewery business

- San Miguel Corporation is now a full time holding company; it can later on absorb

the company

- Corporations are granted by the code to merge or consolidate

- most common type of corporate recognition

- not the same in every case



- but most common in the weal financial or insolvent condition, aim is to bring it back

to its financial capability

- also a method of recapitalization

o purchase and sale of corporate assets is another form of corporate reorganization

How do you value the assets of the merging corporation, do you consider goodwill?

First secure favorably recommendation of government agency

- Section 79. Effectivity of merger or consolidation. - The articles of merger or of

consolidation, signed and certified as herein above required, shall be submitted to the

Securities and Exchange Commission in quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. If the Commission is satisfied that the merger or consolidation of the corporations

concerned is not inconsistent with the provisions of this Code and existing laws, it

shall issue a certificate of merger or of

consolidation, at which time the merger or consolidation shall be effective.

If, upon investigation, the Securities and Exchange Commission has reason to

believe that the proposed merger or consolidation is contrary to or inconsistent with

the provisions of this Code or existing laws, it shall set a hearing to give the

corporations concerned the opportunity to be heard. Written notice of the date, time

and place of hearing shall be given to each constituent corporation at least two (2)

weeks before said hearing. The Commission shall thereafter proceed as provided in

this Code. (n)

Merger

- A union effected by absorbing one or more existing corporations by another which

survives and continues the combined business

- It is the uniting of two or more corporations by the transfer of property to one of them

which continue in existence, the other or the others being dissolved and merged

therein.

A B

A transfers all assets, properties, rights, obligations, liabilities to B



B issues shares of stocks in exchange of the transferA is then dissolved and B

SURVIVES

o Parties to a merger are called constituent corporation

Consolidation

- The uniting or amalgamation of two or more existing corporations to form a new

corporation

- In merger there is a surviving corporation, the others are dissolved, while in

consolidation, all constituent are dissolved and a new one organized

A B

C

Like all other corporate acts, it emanates from the board

1. The board of directors or trustees of each constituent corporations shall approve

a plan of merger or consolidation setting forth the matters required in section 76;

2. Approval of the plan by the stockholders representing 2/3 of the outstanding capital stock or 2/3 of the member in non-stock corporations of each of such corporations at separate corporate meetings called

for the purpose;

3. Prior notice of such meeting, with a copy or summary of the plan of

merger or consolidation shall be given to all stockholders or members at

least two (2) weeks prior to the scheduled meeting, either personally or

registered mail stating the purpose thereof;

4. Execution of the articles of merger or consolidation by each constituent corporations

to be signed by the president or vice-president and certified by the corporate secretary or assistant secretary setting forth the matters required in section 78;

5. Submission of the articles of merger or consolidation in

quadruplicate to the SEC subject to the requirement of section 79 that if it

involve corporations under the direct supervision of any other government agency or



governed by special laws the favorable recommendation of the government agency

concerned shall first be secured and;

6. Issuance of the certificate of merger or consolidation by the

SEC at which time the merger or consolidation shall be effective. If the plan,

however, is believed to be contrary to law, the SEC shall set a hearing to give the

corporations concerned an opportunity to be heard upon proper notice and thereafter,

the Commission shall proceed as provided in the Code.

Although merger and consolidation is an express power granted to corporation, it is

subject to limitations, as maybe proscribed by law

What would be the effect of merger or consolidation? <sec. 80>

1. There will only be a single corporation. In case of merger, the surviving corporation or

the consolidated corporation in case of consolidation;

2. The termination of the corporate existence of the constituent corporations, except that of

the surviving corporation or the consolidated corporation;

3. The surviving corporation or the consolidated corporation will possess all the rights,

privileges, immunities and powers and shall be subject to all the duties and liabilities of

a corporation organized under the Code;

4. The surviving or consolidated corporation shall possess all the rights, privileges,

immunities and franchises of the constituent corporations, and all property and all

receivables due, including subscriptions to shares and other choses in action, and every

other interest of, or belonging to or due to the constituent corporations shall be deemed

transferred to and vested in such surviving or consolidated corporation without further

act and deed; and,

5. The rights of creditors or any lien on the property of the constituent corporations shall

not be impaired by the merger or consolidation.

Is there a liquidation process in case of merger or consolidation?

-None, there is nothing to distribute

•Associated Bank vs. CA

- By virtue of a specific provision in the merger agreement

- Although the subject promissory note names CBTC as the payee, the reference to CBTC

in the note shall be construed, under the very provision of the merger agreement, as a

reference to petitioner bank, “as if such reference (was a) direct reference to the latter for

all intents and purposes - Section 80 par. 4 states:



The surviving or the consolidated corporation shall thereupon and thereafter

possess all the rights, privileges, immunities and franchises of each of the constituent

corporations; and all property, real or personal, and all receivables due on whatever

account, including subscriptions to shares and other choses in action, and all and every

other interest of, or belonging to, or due to each constituent corporation, shall be deemed

transferred to and vested in such surviving or consolidated corporation without further

act or deed; and

- Without further acts, meaning it is automatic

When do merger and consolidation become effective? What if the SEC fails to act on it

without fault attributable to the corporation involved?

- It will never become valid until and unless the SEC gives its stamp of approval

- It will be up to the constituent corporation to follow it up

- It will never take effect until the SEC gives its approval and issues the articles of merger

o Granted 3 years to wing up unless there is a trustee to wing up its affairs

Could there be liquidators and winding up with respect to the corporation in consolidation

and merger?

- No, there is none

- No assets properties or rights to collect, they are transferred

- No debts and liabilities to pay because they become the liabilities of the surviving

corporations

- No properties transferred because they will be the properties of the surviving

corporations

o Hardest part is the financial act, regarding how

many shares would be issued, probability of collection and the like

o In merger and consolidation, there is due diligence and an economist is usually hired

APPRAISAL RIGHT

Define appraisal

- Right to withdraw from the corporation and demand payment of the fair value of his

shares after dissenting from certain corporate acts involving fundamental changes in

corporate structure <sec. 81> What property? When may this right be exercises?




Section 81. Instances of appraisal right. - Any stockholder of a corporation

shall have the right to dissent and demand payment of the fair value of his shares in

the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or

restricting the rights of any stockholder or class of shares, or of authorizing

preferences in any respect superior to those of outstanding shares of any class, or of

extending or shortening the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all

or substantially all of the corporate property and assets as provided in the Code; and

3. In case of merger or consolidation. (n)

May it be exercised by a stockholder who dissents to the act of a business other than

a primary purpose?

X Co. inc

Principal office is in Quezon city, it was changed to Paranaque

A objects and makes a written demand. May he exercise his right of appraisal?

- It is not available in all amendments of the corporation

- It must be changing or restricting the rights of any stockholder

What if the principal office is changed from QC to TAWI-TAWI, will it change or

affect the rights of A?

- To some it may change or restrict the rights to others it may not

How is the right exercised?

-According to section 82 of the code:

Section 82. How right is exercised. - The appraisal right may be

exercised by any stockholder who shall have voted against the proposed corporate

action, by making a written demand on the corporation within thirty (30) days after

the date on which the vote was taken for payment of the fair value of his shares:

Provided, That failure to make the demand within such period shall be deemed a



waiver of the appraisal right. If the proposed corporate action is implemented or

affected, the corporation shall pay to such stockholder, upon surrender of the

certificate or certificates of stock representing his shares, the fair value thereof as of

the day prior to the date on which the vote was taken, excluding any appreciation or

depreciation in anticipation of such corporate action.

If within a period of sixty (60) days from the date the corporate action was

approved by the stockholders, the withdrawing stockholder and the corporation cannot

agree on the fair value of the shares, it shall be determined and appraised by three (3)

disinterested persons, one of whom shall be named by the stockholder, another by the

corporation, and the third by the two thus chosen. The findings of the majority of the

appraisers shall be final, and their award shall be paid by the corporation within thirty

(30) days after such award is made: Provided, That no payment shall be made to any

dissenting stockholder unless the corporation has unrestricted retained earnings in its

books to cover such payment: and Provided, further, That upon payment by the

corporation of the agreed or awarded price, the stockholder shall forthwith transfer his

shares to the corporation. (n) X Co.

Principal Office- QC, it was changed to Manila

A objects and makes a written demand for payment of fair value of shares. Can he make

a demand of payment of shares?

True or False, no stockholder in a stock corporation can ever demand if the principal

office is amended, changing it from QC to Manila

- False, a stockholder in a close corporation may for any reason compel the close corporation

that he be paid the fair value of his shares

Can he exercise his appraisal rights in the first place? He hasn’t even paid his subscription

in full.

May a stockholder who hasn’t paid his subscription in full exercise his appraisal rights?

- Yes, he can exercise his appraisal rights, by reconciling the provisions of section 72,

section 82 and section 86


fully paid which are not delinquent shall have all the rights of a stockholder. (n)

Section 82. How right is exercised. - The appraisal right may be

exercised by any stockholder who shall have voted against the proposed corporate action,



by making a written demand on the corporation within thirty (30) days after the date on

which the vote was taken for payment of the fair value of his shares: Provided, That

failure to make the demand within such period shall be deemed a waiver of the appraisal

right. If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof

as of the day prior to the date on which the vote was taken, excluding any appreciation

or depreciation in anticipation of such corporate action.

If within a period of sixty (60) days from the date the corporate action was

approved by the stockholders, the withdrawing stockholder and the corporation cannot

agree on the fair value of the shares, it shall be determined and appraised by three (3)

disinterested persons, one of whom shall be named by the stockholder, another by the

corporation, and the third by the two thus chosen. The findings of the majority of the

appraisers shall be final, and their award shall be paid by the corporation within thirty

(30) days after such award is made: Provided, That no payment shall be made to any

dissenting stockholder unless the corporation has unrestricted retained earnings in its

books to cover such payment: and Provided, further, That upon payment by the

corporation of the agreed or awarded price, the stockholder shall forthwith transfer his

shares to the corporation. (n)

Section 86. Notation on certificates; rights of transferee. - Within

ten (10) days after demanding payment for his shares, a dissenting stockholder shall

submit the certificates of stock representing his shares to the corporation for notation

thereon that such shares are dissenting shares. His failure to do so shall, at the option of the corporation, terminate his rights under this Title. If shares

represented by the certificates bearing such notation are transferred, and the certificates

consequently cancelled, the rights of the transferor as a dissenting stockholder under this

Title shall cease and the transferee shall have all the rights of a regular stockholder; and

all dividend distributions which would have accrued on such shares shall be paid to the

transferee. (n)

- Notation is not mandatory, it is even discretionary because the code provides “at the

option of the corporation” because it never issued one for that matter since the

subscriptions are not yet fully paid

May the corporation be compelled to pay the interest of A

300 T, 150T, 150T and 0 unrestricted retained earnings

No stockholder may be able to compel the corporation to pay the value of his shares

if the corporation has no unrestricted retained earnings



- False, a stockholder of a close corporation may for any reason, provided only that the

corporation has

sufficient assets to cover its debts and liabilities

o General rule: there should be unrestricted retained earnings

o Exception: section 105 “close corporation”

The procedure and requirements for the valid exercise of this rights are:

1. The stockholder must have voted against the proposed corporate action in any of the

instances allowed by law for the exercise of the right of appraisal;

2. The written demand for payment must be made by the dissenting stockholder within

thirty (30) days after the date on which the vote was taken thereon. Failure to make

the demand within the said period shall be deemed a waiver on the part of the

stockholder concerned to exercise his appraisal right;

3. Surrender of the certificate of stock by the dissenting stockholder for notation in the

corporate books and the payment by the corporation of the fair market value of the

said shares as of the day prior to the date on which the vote was taken. If the

stockholder and the corporation cannot agree on the fair market value thereof, the

same shall be determined in accordance with the provision of paragraph 2 of section

82;

4. The fair value of the shares of the dissenting stockholder must be paid by the

corporation only if it has “unrestricted retained earnings” in its books to cover such

payment. If the corporation has no unrestricted retained earnings, the dissenting

stockholder may not, therefore, be able to effectively exercise his appraisal rights;

5. Upon payment of the shares by the corporation, the dissenting stockholder shall

transfer his shares to the corporation.

What would be the effect if the stockholder exercises his appraisal rights? What

happens to his voting and dividend rights if he exercises his appraisal rights?

- It will be suspended, with a limitation of 30 days, as provided for by section 83 of the

code:

Section 83. Effect of demand and termination of right. - From

the time of demand for payment of the fair value of a stockholder's shares until either

the abandonment of the corporate action involved or the purchase of the said shares

by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right



of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. (n)

How do you compare the rights of a stockholder, declared delinquent compared to a

dissenting

stockholder exercising his appraisal rights

What if a stockholder exercising his appraisal rights is also a director, will he also lose

his rights as a stockholder?

- The shares remain to stand in his name until he is paid, unless there is a stipulation in

the by-laws

When may the right to be paid the value of his shares cease? Can he withdraw his

right of appraisal?

- Yes, he may withdraw, but there must be consent by the corporation as provided for

by section 83 of the code:

Section 84. When right to payment ceases. - No demand for

payment under this Title may be withdrawn unless the corporation consents thereto.

If, however, such demand for payment is withdrawn with the consent of the

corporation, or if the proposed corporate action is abandoned or rescinded by the

corporation or disapproved by the Securities and Exchange Commission where such

approval is necessary, or if the Securities and Exchange Commission determines that

such stockholder is not entitled to the appraisal right, then the right of said stockholder

to be paid the fair value of his shares shall cease, his status as a stockholder shall

thereupon be restored, and all dividend distributions which would have accrued on his

shares shall be paid to him. (n)

Instances when the right of a dissenting stockholder to be paid the fair value of his

shares ceases.

1. When he withdraws his demand for payment and the corporation consents thereto;

2. When the proposed action is abandoned or rescinded by the corporation;

3. When the proposed action is disapproved by the SEC where such approval is

necessary;

4. When the SEC determines that he is not entitled to exercise his appraisal right;



5. When he fails to submit the stock certificate within ten (10) days from demand to the

corporation for notation that such shares are dissenting shares; and,

6. If the shares are transferred and the certificate subsequently cancelled.

Who bears the cost of appraisal?

- It depends

- The corporation bears the cost if

a. The price offered by the corporation is lower than the fair value of the shares of

the dissenting stockholder as determined by the appraisers;

b. Where an action is filed by the dissenting stockholder to recover such fair value

and the refusal of the stockholder to receive payment is found by the court to be

justified.

- Dissenting stockholder will be liable for the cost and expenses of appraisal when

a. When the price offered by the corporation is approximately the same as the fair

value ascertained by the appraisers;

b. Where the action filed by the dissenting stockholder and his refusal to accept

payment is found by the court to be unjustified.

The dissenting stockholder may also sell, transfer or assign his shares

Section 86. Notation on certificates; rights of transferee. -

Within ten (10) days after demanding payment for his shares, a dissenting stockholder

shall submit the certificates of stock representing his shares to the corporation for

notation thereon that such shares are dissenting shares. His failure to do so shall, at

the option of the corporation, terminate his rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee. (n)

NON-STOCK CORPORATIONS

What is a non-stock corporation?



- A non-stock corporation is one where no part of its income is distributable as dividends

to its members, trustees, or officers, subject to the provisions of this code on

dissolution

What provision of the code will govern non-stock corporations? Would the provision

governing stock corporations also apply to non-stock corporations?

-Yes, 2nd par. Of section 87 provides:

The provisions governing stock corporation, when pertinent, shall be applicable

to non-stock corporations, except as may be covered by specific provisions of this

Title. (n)

How is the right to vote exercised in a non-stock corporation compared to a stock

corporation

May a member in a non-stock corporation vote cumulatively?

-General rule is NO

May it be granted or allowed by the by-laws?

- Yes

May the right to cumulative voting be denied in a stock corporation?

-No, Doctrine of Limited Capacity

May members in a non-stock corporation vote by proxy?

-Yes, section 89 provides that:

“Unless otherwise provided in the articles of incorporation or the by-laws, a

member may vote by proxy in accordance with the provisions of this Code. (n) “

May the right to vote by proxy be validly denied in a stock corporation?

-No, it is a matter of right in a stock corporation

May member of a non-stock corporation cast their vote by text?

- Yes, subject to the approval and terms and conditions of the SEC <sec. 89>

“Voting by mail or other similar means by members of non-stock corporations

may be authorized by the by-laws of non-stock corporations with the approval of, and



under such conditions which may be prescribed by, the Securities and Exchange

Commission. “

How about in stock?

- Voting by mail or other similar means may also be authorized and allowed by the by-

laws of non-stock corporations. Generally, in stock corporations, the vote must be cast

at a duly constituted meeting. The only exception, in case of the latter, is in the matter

of general amendment of the articles of incorporation where the written assent of the

stockholder may be sufficient.

How is the governing board constituted in a non-stock corporation? How many

members?

- It may exceed 15 in a non-stock corporation unless the AOI or by-laws provide

otherwise, as provided for by section 92 of the code:

Section 92. Election and term of trustees. - Unless otherwise

provided in the articles of incorporation or the by-laws, the board of trustees of non-

stock corporations, which may be more than fifteen (15) in number as may be fixed

in their articles of incorporation or by-laws, shall, as soon as organized, so classify

themselves that the term of office of one-third (1/3) of their number shall expire every

year; and subsequent elections of trustees comprising one-third (1/3) of the board of

trustees shall be held annually and trustees so elected shall have a term of three (3)

years. Trustees thereafter elected to fill vacancies occurring before the expiration of a

particular term shall hold office only for the unexpired period.

No person shall be elected as trustee unless he is a member of the corporation.

Unless otherwise provided in the articles of incorporation or the by-laws, officers

of a non-stock corporation may be directly elected by the members.

(n)

Qualifications?

1. He is a member of the association;

2. Majority thereof must be residents of the Philippines; and,

3. Other qualifications as may be provided for in the bylaws.

Governing board in a non-stock

-Board of Trustees, however section 138 provides that:



Section 138. Designation of governing boards. - The provisions of

specific provisions of this Code to the contrary notwithstanding, non-stock or special corporations may, through their articles of incorporation or their by-laws, designate their governing boards by any name other than as board of trustees. (n)

Disqualifications

- Section 27 also applies to a non-stock corporation, same holds true to the manner of

removal <sec. 29 ad

30>

Section 27. Disqualification of directors, trustees or officers. - No

person convicted by final judgment of an offense punishable by imprisonment for a

period exceeding six (6) years, or a violation of this Code committed within five (5) years

prior to the date of his election or appointment, shall qualify as a director, trustee or

officer of any corporation. (n)

Section 29. Vacancies in the office of director or trustee. - Any

vacancy occurring in the board of directors or trustees other than by removal by the

stockholders or members or by expiration of term, may be filled by the vote of at least a

majority of the remaining directors or trustees, if still constituting a quorum; otherwise,

said vacancies must be filled by the stockholders in a regular or special meeting called

for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or

the unexpired term of his predecessor in office.

Any directorship or trusteeship to be filled by reason of an increase in the number

of directors or trustees shall be filled only by an election at a regular or at a special

meeting of stockholders or members duly called for the purpose, or in the same meeting

authorizing the increase of directors or trustees if so stated in the notice of the meeting.

(n)



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) Who elects the other officers?

- Directly by the general members unless the by-laws or articles provide otherwise. <sec.92>



“Unless otherwise provided in the articles of incorporation or the by-laws,

officers of a non-stock corporation may be directly elected by the members.

(n) “

In stock corporations who elect officers?

- Directors

The provision that stock corporations cannot validly provide that members cannot be

voted by stockholders is only a general rule because there is an exception section 97

of the code states that:

The articles of incorporation of a close corporation may

provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect:

1. No meeting of stockholders need be called to elect directors;

2. Unless the context clearly requires otherwise, the stockholders of the

corporation shall be deemed to be directors for the purpose of applying the provisions

of this Code; and

3. The stockholders of the corporation shall be subject to all liabilities of directors.

The articles of incorporation may likewise provide that all

officers or employees or that specified officers or employees

shall be elected or appointed by the stockholders, instead of by the board of directors.

Nature of membership is non-transferrable and personal in nature unless the articles

of incorporation or by-laws provide otherwise

Section 90. Non-transferability of membership. - Membership in a non-

stock corporation and all rights arising there from are personal and nontransferable,

unless the articles of incorporation or the by-laws otherwise provide. (n)

How is a membership requirement in a non-stock corporation

A holds a membership certificate

B goes to the corporation and compels the corporation to record the transfer in his name



- Membership in non-stock corporations may be acquired by complying with the

provisions of its rules prescribed in the by-laws. This is in consonance with the

express power granted by law under section 36, paragraph 6 of the code, authorizing

them to admit members thereof and that authority carries with it the power to prescribe

rules on membership. It has thus been stated that in the absence of charter or statutory

restrictions, non-stock corporations may determine who shall be admitted to

membership and how they shall be admitted.

Section 36. Corporate powers and capacity. - Every corporation

incorporated under this Code has the power and capacity:

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks

to subscribers and to sell treasury stocks in accordance with the provisions of this

Code; and to admit members to the corporation if it be a non-stock corporation;

- They can provide the manner in which to admit depending on their own rules

The power or authority to terminate members in nonstock corporations is said to be

inherent but strict compliance with the manner and procedure laid down in the by-

laws must be observed, otherwise it may render the expulsion ineffective and invalid.

Section 91. Termination of membership. Membership shall be terminated in

the manner and for the causes provided in the articles of incorporation or the by-laws.

Termination of membership shall have the effect of extinguishing all rights of a member

in the corporation or in its property, unless otherwise provided in the articles of

incorporation or the by-laws. (n)

Power is inherent and may be exercised in certain situations:

1. When an offense is committed which, although it has no immediate relation to a

member’s duty as such, it is so infamous as to render him unfit for society of honest

men, which is indictable at common law;

2. When the offense is a violation of his duty as member of the corporation; and,

3. When the offense is of a mixed nature, being both against his duty as a member of the

corporation, and also indictable at common law.

If the conduct of the member comes within any of this cases, it is a ground for valid

expulsion although it may not be expressly made so by the by-laws

•Chinese YMCA vs. Ching



- Right of the corporation to choose who the members are, cannot be inquired or intervened

by the court

- The appealed decision thus contravened the establish principle that the courts cannot strip

a member of a non-stock corporation of his membership therein without cause.

•Lions Club International vs. CA

- Courts will not generally interfere on matters involving the internal affairs of an

unincorporated association such as election contest unless the acts complained of are

arbitrary, oppressive, fraudulent, violative of civil rights and the like

- General rule is that the courts will not interfere with the internal affairs of an

unincorporated association so as to settle disputes between the members, or questions of

policy, discipline, or internal government, so long as the government of the society is

fairly and honestly administered in conformity with its by-laws and the law of the land,

and no property or civil rights are involved.

- Exceptions are the following:

a. Where law and justice so require, and the proceedings of the association are subject

to judicial review where there is fraud, oppression, or bad faith, or where the action

complained of is capricious, arbitrary, or unjustly discriminatory

b. To grant relief in case property or civil rights are invaded, although it has also been

held that the involvement of property rights does not necessarily authorize judicial

intervention, in the absence of arbitrariness, fraud or collusion.

c. Are violative of the laws of the society, or the law of the land, as by depriving the

person of due process of law

d. There is lack of jurisdiction on the part of the tribunal conducting the proceedings,

where the organization exceeds its powers, or where the proceedings are otherwise

illegal

Corporations, stock and non-stock, may be dissolved in accordance and pursuant to

the provisions of Sections 118 to 121 of the Corporation Code and the pertinent

provisions of P.D. 902-A, as amended. If such be the case, the assets of the corporation

are to be distributed in accordance with law and established jurisprudence.

If a non-stock corporation is dissolved how will its properties be distributed?

Section 94. Rules of distribution. - In case dissolution of a non-stock

corporation in accordance with the provisions of this Code, its assets shall be applied

and distributed as follows:



1. All liabilities and obligations of the corporation shall be paid, satisfied and

discharged, or adequate provision shall be made therefore;

2. Assets held by the corporation upon acondition 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)

Non-stock corporations with 4Billion funds, may it be distributed for and among its

members?

- Section 94 number 3 provides:

3. Assets received and held by the corporation subject to limitations permitting

their use only for charitable, religious, benevolent, educational or similar purposes,

but not held upon a condition requiring return, transfer or conveyance by reason of

the dissolution, shall be transferred or conveyed to one or more corporations, societies

or organizations engaged in activities in the Philippines substantially similar to those

of the dissolving corporation according to a plan of distribution adopted pursuant to

this Chapter;

- If there is no distributive agreement then they may do so through a plan of distribution

under section 95



Section 95. Plan of distribution of assets. - A plan providing for the

distribution of assets, not inconsistent with the provisions of this Title, may be adopted

by a non-stock corporation in the process of dissolution in the following manner:

The board of trustees shall, by majority vote, adopt a resolution recommending

a plan of distribution and directing the submission thereof to a vote at a regular or

special meeting of members having voting rights. Written notice setting forth the

proposed plan of distribution or a summary thereof and the date, time and place of

such meeting shall be given to each member entitled to vote, within the time and in

the manner provided in this Code for the giving of notice of meetings to members.

Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3)

of the members having voting rights present or represented by proxy at such meeting.

(n)

CLOSE CORPORATIONS

Section 96. Definition and applicability of Title. - A close corporation,

within the meaning of this Code, is one whose articles of incorporation provide that:

(1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class.

Notwithstanding the foregoing, a corporation shall not

be deemed a close corporation when at least twothirds (2/3) of its voting stock or voting

rights is owned or controlled by another corporation which is not a close corporation

within the meaning of this Code.

- Between and among themselves, they feel and act alike

- Not more than 20 stockholders

- Specified persons, if you are not specified, you cannot be a stockholder

- All the issued stocks of all classes is subject to restrictions

- Shall not be listed in the stock exchange not publicly offered

- 3 qualifying conditions must be contained in the articles of incorporation, to be

considered as a close corporation, if not, it will not be considered as such and will be

governed by the general provisions of the code



- Even if 100 % is owned by one person it will not be considered a close corporation

without the 3 qualifying provisions

- Identity of stockholders, specified persons

- Active management either as directors or partners in management

- Combination of the corporation and partnership type of business

May any type of corporation, be organized as such close corporation?

-No, the 3 qualifying conditions must be present

What if 2/3 of the outstanding capital stock is owned by another corporation which is

also a close corporation, will it be a close corporation?

- No, it will only be a closed corporation if 2/3 of the voting stocks of a close corporation

is also owned by a close corporation. It must be “voting” stocks

- Even if another corporation owns or controls 2/3 of the voting stocks of a close

corporation, the latter may still be considered as such close corporation if the corporation

owning or controlling the shares is also a close corporation.

“Notwithstanding the foregoing, a corporation shall not be deemed a close

corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or

controlled by another corporation which is not a close corporation within the meaning of

this Code.”

What kind of corporations cannot be a close corporation?

1. Mining or oil companies,

2. Stock exchange

3. Banks and insurance companies,

4. Public utilities

5. Educational institutions

6. Corporations vested with public interest Classification of directors

- Ordinary stock- no such right

- Close corporation-yes there is such a right

Section 97 is a permissive provision

Section 97. Articles of incorporation. - The articles of incorporation of a

close corporation may provide:



1. For a classification of shares or rights and the qualifications for owning or holding the

same and restrictions on their transfers as may be stated therein, subject to the provisions

of the following section;

2. For a classification of directors into one or more classes, each of whom may be voted

for and elected solely by a particular class of stock; and

3. For a greater quorum or voting requirements in meetings of stockholders or directors

than those provided in this Code.

After classification what then?

- After classification, qualification and then restriction as provided for under the 3

qualifying conditions in section 96

Cumulative voting is restricted in close corporations if will be elected solely by a

particular class

In a close corporation, the articles of incorporation may provide for a greater quorum

and voting requirement in meetings of both stockholders or directors to increase the

veto power of minority stockholders, unlike in a stock corporation wherein only

directors meetings may provide for greater quorum requirement and in stockholders

meeting which may not be altered or increased, as provide for in section 25, following

the doctrine of limited capacity

The articles of a close corporation may likewise provide that the business of the

corporation shall be managed by the stockholders rather than by the board of directors.

However the same must contain the continuing provisions required in paragraph 2 of

section 97, that is:

1. No meeting of stockholders need be called to elect directors;

2. Unless the context clearly requires otherwise, the stockholders of the corporation

shall be deemed to be directors; and;

3. The stockholders of the corporation shall be subject to all liabilities of directors.

Liability of stockholders acting as directors in a close corporation are more extensive

since they are personally liable for corporate torts unless the corporation has obtained

a reasonable adequate liability insurance, unlike a ordinary stock corporation, wherein

directors thereof are only liable for corporate torts only if they have been negligent or

acted fraudulently in the performance of their functions.

Restrictions



- In ordinary stock corporations, the restrictions must appear in the articles of

incorporation as well as the certificate of stocks

- In a close corporation, the restrictions must appear in the articles of incorporation, the

by-laws and the certificate of stocks. Otherwise, the same shall not be binding on any

purchaser thereof in good faith

What if the stockholders do not want to exercise their right or option to purchase may

it be sold to any person?

-Yes, any third person, section 98 provides:

Section 98. Validity of restrictions on transfer of shares. -

Restrictions on the right to transfer shares must appear in the articles of incorporation

and in the by-laws as well as in the certificate of stock; otherwise, the same shall not

be binding on any purchaser thereof in good faith. Said restrictions shall not be more

onerous than granting the existing stockholders or the corporation the option to

purchase the shares of the transferring stockholder with such reasonable terms,

conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person.

o ordinary stock corporations are liable only if acted in Bad faith, fraud or

negligence in performance of duty

What if there are already 20 stockholders and they want to add 2 more, may it compel?

- In ordinary stock corporations, they may compel by mandamus

- In close corporations, may not be compelled to admit because it breaches the

qualifying conditions

Since they cannot be compelled, may they admit?

- Yes, provided all the stockholders consented or instead of consenting they decide to

amend their

articles of incorporation

- Will have to amend the articles of incorporation to accommodate other purchasers of

share

- Will cease to be a close corporation if it amends and becomes in excess of 20

o Unless all the stockholders consent they “may”



What if the other stockholders object to register? What will be the remedy of the

transferee?

- His remedy is rescission. The effect of rescission is mutual restitution

How about the stockholder, what is his recourse?

- He may compel the close corporation to purchase his shares at their fair value for any

reason, provided the corporation has sufficient assets in its books to cover the debts and

liabilities exclusive of capital

- In a close corporation, there is a withdrawing stockholder, unlike in an ordinary

stockholder where there is none, they may only do so in the exercise of appraisal rights

Section 105. Withdrawal of stockholder or dissolution of corporation. - In addition and without prejudice to other rights and remedies available

to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by written petition

to the Securities and Exchange Commission, compel the dissolution of such corporation

whenever any of acts of the directors, officers or those in control of the corporation is

illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation

or any stockholder, or whenever corporate assets are being misapplied or wasted.

Agreements may also be entered in a close corporation <sec.100>

- They can even agree to be partners in management

- Pre-incorporation

- Manner in which the business of the corporation shall be managed

Board resolution

- Ordinary stock corporations- sit and act as a body at a duly constituted meeting, they may

do so by virtue of the E-Commerce Act through teleconference or video conference

Exception to the rule: other officers may be directly appointed and hired by the

stockholders

Close corporations may validly act even without a meeting provided the conditions are

obtained



Section 101. When board meeting is unnecessary or improperly held. - Unless the by-laws provide otherwise, any action by the directors of a close

corporation without a meeting shall nevertheless be deemed valid if:

1. Before or after such action is taken, written consent thereto is signed by all the

directors; or

2. All the stockholders have actual or implied knowledge of the action and make no

prompt

objection thereto in writing; or

3. The directors are accustomed to take informal action with the express or implied

acquiescence of all the stockholders; or

4. All the directors have express or implied knowledge of the action in question and none

of them makes prompt objection thereto in writing.

Pre-emptive rights in a close corporation is absolute

Section 102. Pre-emptive right in close A provisional director shall be

an impartial corporations. - The pre-emptive right of stockholders in person who is

neither a stockholder nor a creditor of close corporations shall extend to all stock to be

the corporation or of any subsidiary or affiliate of the issued, including reissuance of

treasury shares, corporation, and whose further qualifications, if any, whether for money,

property or personal services, or may be determined by the Commission. A provisional

in payment of corporate debts, unless the articles of director is not a receiver of the

corporation and does incorporation provide otherwise. 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

Why is it said to be absolute? 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

- Because there is no public offering in a close stockholders. His compensation shall be

determined corporation, otherwise it will not be considered as by agreement between him

and the corporation close subject to approval of the Commission, which may fix his

compensation in the absence of agreement or in

In a close corporation the pre-emptive rights is the event of disagreement between the

provisional broadened to include all issues without exception director and the corporation.

unless denied or limited by the articles of

incorporation -Powers of the SEC in intra-corporate

concerns has



Section 39 is the governing provision concerning rights been transferred to the proper

commercial courts of the stockholder in an ordinary stock corporation and - Prohibit,

even if acting in good faith it may be denied. If it is not denied a stockholder can -

Provisional director appointed by the court exercise his pre-emptive rights for all issues

of shares - Requiring the purchase, irrespective of unrestricted whether money, property

or previously incurred retained earnings

indebtedness. -The provision of the law above-quoted

gives the SEC a

very wide discretion in respect to

management of a Section 39. Power to deny pre-emptive close

corporation in the event of a deadlock. It may:

right. - All stockholders of a stock corporation shall

enjoy pre-emptive right to

subscribe to all issues or

disposition of shares of any class,

in proportion to their respective

shareholdings, unless such right is

denied by the articles of

incorporation or an amendment

thereto: Provided, That such pre-

emptive right shall not extend to

shares to be issued in compliance

with laws requiring stock offerings

or minimum stock ownership by

the public; or to shares to be issued

in good faith with the approval of

the stockholders representing two-

thirds (2/3) of the outstanding

capital stock, in exchange for

property needed for corporate

purposes or in payment of a

previously contracted debt.

Are treasury shares covered in the

exercise of preemptive rights in

ordinary stock corporations?

1.

2.

3.

4.

5.

6.

7.

Cancel or alter any provision in

the articles of incorporation, by-

laws or any stockholders

agreement

Cancel, alter or enjoin any

resolution or other act of the

corporation or its board of

directors, stockholders or

officers

Prohibit any act of the

corporation or its board of

directors, stockholders or

officers or other persons party

to the action;

Requiring the purchase of the

par value of the shares of any

stockholders, either by the

corporation regardless of

availability of unrestricted

earnings, or by the other

shareholders,

Appointment of a provisional

director

Dissolving the corporation; or

Other relief as the

circumstances may warrant.

As regards amendments



Section 103. Amendment of articles of Section 105

incorporation. - Any amendment to the articles of

incorporation which seeks to delete or remove any - Dishonesty is a ground for

dissolution of a close provision required by this Title to be contained in the corporation

articles of incorporation or to reduce a quorum or - Even one stockholder may petition

for dissolution voting requirement stated in said articles of incorporation shall not be

valid or effective unless

CLOSE

CORPORATION

ORDINARY

STOCK

CORPORATION

1. The number of

stockholders

cannot exceed 20

No limitation as to

number of

shareholder

2. To the extent that

all stockholders

can be deemed

directors, the

number of

directors can

effectively be

more than 15

Maximum number

of directors is 15

3. Shares of stock

are subject to

specified

restrictions

Generally no

restriction on

transfer of shares

4. Shares of stock

are prohibited

from being listed

in the stock

exchange or

offered for sale to

the public

No prohibition

5. Stockholders

may take an

active part in

corporate

management by

vesting

management to

Management is

lodged in the Board

of Directors



them rather than a

Board of Director

6. Those active in

management are

personally liable

for corporate torts

unless the

corporation has

obtained an

adequate

liability insurance

Directors are liable

for torts only if they

have acted

negligently or

fraudulently

7. Directors can

validly act even

without a meeting

Directors must, as a

rule, act as a body

at a duly

constituted meeting

8. Agreements

between

stockholders

regarding the

operations of the

business can

validly be made

Not valid and

binding since

stockholders’

agreement cannot

limit the discretion

of the Board to

manage

corporate affairs

9. To the extent that

directors may be

classified into one

or more classes

and to be voted

solely by a

particular

Ordinarily, no such

classification and

no restrictions on

cumulative voting

approved by the affirmative vote of at least two-thirds o when there is a relief available,

dissolution (2/3) of the outstanding capital stock, whether with or would not be available

in an ordinary without voting rights, or of such greater proportion of corporation shares

as may be specifically provided in the articles of incorporation for amending, deleting or

removing any of the aforesaid provisions, at a meeting duly called for the purpose.

What happens if there is a deadlock?

- Section 104 provides for a remedy



Section 104. Deadlocks. - Notwithstanding

any contrary provision in the articles of incorporation or by-laws or agreement of

stockholders of a close corporation, if the directors or stockholders are so divided

respecting the management of the corporation's business and affairs that the votes

required for any corporate action cannot be obtained, with the consequence that the

business and affairs of the corporation can no longer be conducted to the advantage of

the stockholders generally, the Securities and Exchange Commission, upon written

petition by any stockholder, shall have the power to arbitrate the dispute. In the exercise

of such power, the Commission shall have authority to make such order as it deems

appropriate, including an order: (1) cancelling or altering any provision contained in the

articles of incorporation, by-laws, or any stockholder's agreement; (2) cancelling, altering

or enjoining any resolution or act of the corporation or its board of directors,

stockholders, or officers; (3) directing or prohibiting any act of the corporation or its

board of directors, stockholders, officers, or other persons party to the action; (4)

requiring the purchase at their fair value of shares of any stockholder, either by the

corporation regardless of the availability of unrestricted retained earnings in its books, or

by the other stockholders; (5) appointing a provisional director; (6) dissolving the

corporation; or (7) granting such other relief as the circumstances may warrant.

class of stock,

cumulative voting

may, in effect, be

restricted

10. The articles of

incorporation may

provide that all

officers shall be

elected or

appointed by the

stockholders

Officers are elected

by the Board of

Directors

11. It may provide

for greater quorum

and voting

requirements in

meetings of

stockholders and

directors

Although the

articles of

incorporation or

by-laws may

provide for greater

quorum and voting

requirements in

directors’ meeting

under section 25,

those for

stockholders’



meeting cannot

generally be

altered

12. Restriction on

transfer of shares

should be indicated

in the articles of

incorporation, by-

laws and stock

certificates

Valid and binding

if indicated in the

articles of

incorporation and

stock certificates

13. Pre-emptive

rights of

stockholders is

broader as it

include all issues

without exception

Pre-emptive rights may be denied as provided for in

section 39

14. A stockholder

may withdraw and

compel the

corporation to

purchase his shares

for any reason with

the limitation only

that the corporation

has sufficient

assets to cover its

liabilities exclusive

of capital stock

Unless he sells his

shares, a

stockholder cannot

get back his

investment nor

compel the

corporation to buy

his shares except in

the exercise of his

appraisal right

15. The proper

forum may

interfere in the

management of a

close corporation

in case of

deadlocks under

Section

104, even of the

directors/stockhold

Courts cannot interfere I the business judgment of the

directors/stockhold

ers

“BUSINESS

JUDGMENT

RULE”



ers are acting in

good faith

16. Any stockholder

may petition the

SEC for corporate

dissolution on

grounds among

others,

provides for in

section 105

Dissolution may be

had only on the

grounds provided

by the provisions

of the Code on

dissolution and

P.D. 902-A, as

amended

•Manuel Dulay Enterprises vs. CA

- What was the position of Manuel Dulay here?

President, General Manager and Treasurer

- Cannot act both as president and treasurer at the same time

- Since it is a close corporation owned by the family of Manuel Dulay, save and except

the secretary, it should be governed by Title XII

- Petitioner is classified as a close corporation and consequently a board resolution

authorizing the sale or mortgage of the subject property is not necessary to bind the

corporation for the action of its president. At any rate, a corporate action taken at a

board meeting without proper call or notice in a close corporation is deemed ratified

by the absent director unless the latter promptly files his written objection with the

secretary of the corporation after having knowledge of the meeting which, in this case,

petitioner Virgilio Dulay failed to do.

- Virgilio Dulay is a signatory witness, he knows very well about the deed of absolute

sale, he is estopped

•Naguiat vs. NLRC

- Section 100 par. 5. To the extent that the stockholders are actively engaged in the

management or operation of the business and affairs of a close corporation, the

stockholders shall be held to strict fiduciary duties to each other and among

themselves. Said stockholders shall be personally liable for corporate torts unless the

corporation has obtained reasonably adequate liability insurance.

Family corporations is not automatically a close corporation the 3 qualifying

conditions must be present.



SPECIAL CORPORATIONS

2 types of special corporations

1. Educational corporations

2. Religious corporations

2.1 Corporation Sole

2.2 Religious Societies

What provision governs educational corporations?

Section 106. Incorporation. - Educational corporations shall be

governed by special laws and by the general provisions of this Code. (n)

- Special laws like they Education Act of the Philippines

- These institutions of learning, once recognized by the government as such are

mandated by law to be incorporated within ninety (90) days under the provisions of

the Corporation Code and must, perforce, comply with the requirements and

procedure laid down there under. Their failure to so will not immune the educational

institution from suit as a corporation. (Chiang Kai Siek Case)

- Favorable recommendation of government agency involved

Two types of educational corporations

- Certificate of completion in the academic field - Vocational and technical

one’s

o Recommendation of DECS if certificate of completion in the academic field

How is the governing board of an educational institution instituted?

- Non-stock- multiples of 5 only (example: 5,10,15) - Stock- can be anywhere

between 5 to 15 Can they consist of 7 or 9 members?

- Yes, if stock

Can they be incorporated also as non-stock?

- Yes



- B.P. 232 allows the organization of an educational institution that is stock corporation,

only if they do not issue a certificate of completion in the academic field

Qualifications and disqualifications of the membership in the board of an educational

corporation

- Educational corporations are governed by special laws and general provisions, hence

if there is no provision in the special law, you go back to section 25 and 27 of the

general provisions

- Stock- must be a stockholder

- Non-stock- must be a member

- By-laws may provide for additional qualifications and disqualifications

Section 25. Corporate officers, quorum. - Immediately after their

election, the directors of a corporation must formally organize by the election of a

president, who shall be a director, a treasurer who may or may not be a director, a

secretary who shall be a resident and citizen of the Philippines, and such other officers

as may be provided for in the by-laws. Any two (2) or more positions may be held

concurrently by the same person, except that no one shall act as president and secretary

or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties

enjoined on them by law and the by-laws of the corporation. Unless the articles of

incorporation or the by-laws provide for a greater majority, a majority of the number

of directors or trustees as fixed in the articles of incorporation shall constitute a

quorum for the transaction of corporate business, and every decision of at least a

majority of the directors or trustees present at a meeting at which there is a quorum

shall be valid as a corporate act, except for the election of officers which shall require

the vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings. (33a)

Section 27. Disqualification of directors, trustees or officers. - No

person convicted by final judgment of an offense punishable by imprisonment for a period

exceeding six (6) years, or a violation of this Code committed within five (5) years prior to

the date of his election or appointment, shall qualify as a director, trustee or officer of any

corporation. (n)

Article 14 section 4 par. 2 of the Constitutions

Educational institutions, other than those established by religious groups and

mission boards, shall be owned solely by citizens of the Philippines or corporations



or associations at least sixty per centum of the capital of which is owned by such

citizens. The Congress may, however, require increased Filipino equity participation

in all educational institutions. The control and administration of educational

institutions shall be vested in citizens of the Philippines.

No educational institution shall be established exclusively for aliens and no group of

aliens shall comprise more than one-third of the enrollment in any school. The

provisions of this sub section shall not apply to schools established for foreign

diplomatic personnel and their dependents and, unless otherwise provided by law, for

other foreign temporary residents.

- Management is left solely to citizens of the Philippines

- Board of Directors manages the corporate affairs, foreigners cannot therefore be

elected in the board

- Exceptions are, mission boards and religious orders, which may have a governing

board consisting of foreigners

Term of office of governing board in an educational institutions

- Can serve a term of 5 years. If that be the case, 1/5 of their number shall expire every

year

Non-stock or stock, can they serve for a 1 year term only?

-Yes, the articles of incorporation may provide that it be

1 year only

What are these religious corporations spoken off?

- Corporation sole and religious societies What is a corporation sole?

- Consists of one person only and his successor in some particular station, who

are incorporated by law in order to give them some legal capacities and

advantages, particularly that of perpetuity, which in their natural persons

they could not have had

May a corporation be organized by less than 5 natural persons?

- General rule, 5 to 15 natural persons(except cooperatives and corporations primarily

organized to hold equities in rural banks and may rightfully become incorporators

thereof)



- Exception, corporation sole, consist of only one person May any person form or

organize a corporation sole?

- No, not any person can form a corporation sole, section 110 provides:

Section 110. Corporation sole. - For the purpose of administering and

managing, as trustee, the affairs, property and temporalities of any religious

denomination, sect or church, a corporation sole may be formed by the chief

archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious

denomination, sect or church. (154a)

Is it required to file the articles of incorporation in the SEC?

- Yes

What should be contained in the articles of incorporation?

- Section 111 and section 112 provides for the contents and procedures

Section 111. Articles of incorporation. - In order to become a

corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder

of any religious denomination, sect or church must file with the Securities and Exchange

Commission articles of incorporation setting forth the following:

1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his

religious denomination, sect or church and that he desires to become a corporation sole;

2. That the rules, regulations and discipline of his religious denomination, sect or church

are not inconsistent with his becoming a corporation sole and do not forbid it;

3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is

charged with the administration of the temporalities and the management of the affairs,

estate and properties of his religious denomination, sect or church within his territorial

jurisdiction, describing such territorial jurisdiction;

4. The manner in which any vacancy occurring in the office of chief archbishop, bishop,

priest, minister, rabbi of presiding elder is required to be filled, according to the rules,

regulations or discipline of the religious denomination, sect or church to which he

belongs; and



5. The place where the principal office of the corporation sole is to be established and

located, which place must be within the Philippines.

The articles of incorporation may include any other provision not contrary to law

for the regulation of the affairs of the corporation. (n)

Section 112. Submission of the articles of incorporation. - The

articles of incorporation must be verified, before filing, by affidavit or affirmation of the

chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be,

and accompanied by a copy of the commission, certificate of election or letter of

appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder,

duly certified to be correct by any notary public.

From and after the filing with the Securities and Exchange Commission of the said

articles of incorporation, verified by affidavit or affirmation, and accompanied by the

documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest,

minister, rabbi or presiding elder shall become a corporation sole and all temporalities,

estate and properties of the religious denomination, sect or church theretofore

administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi

or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose,

behalf and sole benefit of his religious denomination, sect or church, including hospitals,

schools, colleges, orphan asylums, parsonages and cemeteries thereof. (n)

Is it required to indicate its terms of execution? Why not?

- Not required because they are supposed to exist in perpetuity

- However, it does not mean that it shall continue to exist forever, it merely means that it

has the capacity of continuous existence during a particular period until dissolved in

accordance with law

When will it acquire judicial personality? How do you compare this to other types of

corporation?

- After the filing the verified articles of incorporation along with the documents required in

Section 112 with the SEC, immediately becomes endowed with corporate personality,

this serves as an exception to the rule that a corporation acquires juridical personality

only upon the issuance of a certificate of incorporation by the said government agency.

Upon filing of verified articles of incorporation with the SEC, will not require the

approval of SEC

A corporation sole is possessed with the same power, rights and privileges, to own,

acquire and hold or convey properties like any other corporation? True or False



- False, they have the same power rights and privileges, but when it comes to alienation

and acquisition, it must possess a court order, however when there is a regulated

method, a court order may be dispensed with <sec. 113>

Section 113. Acquisition and alienation of property. - Any

corporation sole may purchase and hold real estate and personal property for its

church, charitable, benevolent or educational purposes, and may receive bequests or

gifts for such purposes. Such corporation may sell or mortgage real property held by

it by obtaining an order for that purpose from the Court of First Instance of the

province where the property is situated upon proof made to the satisfaction of the court

that notice of the application for leave to sell or mortgage has been given by

publication or otherwise in such manner and for such time as said court may have

directed, and that it is to the interest of the corporation that leave to sell or mortgage

should be granted. The application for leave to sell or mortgage must be made by

petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or

presiding elder acting as corporation sole, and may be opposed by any member of the

religious denomination, sect or church represented by the corporation sole: Provided,

That in cases where the rules, regulations and discipline of the religious denomination,

sect or church, religious society or order concerned represented by such corporation

sole regulate the method of acquiring, holding, selling and mortgaging real estate and

personal property, such rules, regulations and discipline shall control, and the

intervention of the courts shall not be necessary. (159a)

Since a corporation sole is consists only of one person, will the registration of the

property in the name of the corporation sole vest unto the head thereof the ownership

of the property?

- No, it will not vest unto the head, the head is acting merely as a guardian

• Roman Catholic Apostolic Adm. Of Davao, inc. vs. Land Reg. Comm, et al.

- Act only as a guardian

- Ownership devolves upon the congregation or religious denomination

- A corporation consists of one person only and his successors (who will always be one

at a time, in some particular station), who are incorporated by law in order to give

them some legal capacities and advantages, particularly that of perpetuity, which in

their natural persons they could not have had

- Roman Catholic Church has no nationality and that the framers of the Constitution,

as will be hereunder explained, did not have in mind the religious corporations sole

when they provided that 60 percent of the capital thereof be owned by Filipino

citizens.



•Director of Lands vs. CA

- Alienable public land is converted into private land when the same has been openly,

continuously and exclusively in possession of the property as concept of an owner for

30 years, automatically that is

•Republic of the Philippines vs. IAC

- Determination of the character of the land should be in mind

- If they still form part of public domain they cannot be owned, but if they are converted

into private land, the constitutional prohibition will not apply

If there is vacancy who will fill up the same? What if there is none, what must the

successor do?

-According to section 114:

Section 114. Filling of vacancies. - The successors in office of any chief

archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole shall

become the corporation sole on their accession to office and shall be permitted to transact

business as such on the filing with the Securities and Exchange Commission of a copy of

their commission, certificate of election, or letters of appointment, duly certified by any

notary public.

During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi

or presiding elder of any religious denomination, sect or church incorporated as a

corporation sole, the person or persons authorized and empowered by the rules,

regulations or discipline of the religious denomination, sect or church represented by the

corporation sole to administer the temporalities and manage the affairs, estate and

properties of the corporation sole during the vacancy shall exercise all the powers and

authority of the corporation sole during such vacancy. (158a)

If a corporation exists in equity may it not be dissolved?

Section 115. Dissolution. - A corporation sole may be dissolved and its

affairs settled voluntarily by submitting to the Securities and Exchange

Commission a verified declaration of dissolution.

The declaration of dissolution shall set forth:

1. The name of the corporation;

2. The reason for dissolution and winding up;



3. The authorization for the dissolution of the corporation by the particular religious

denomination, sect or church;

4. The names and addresses of the persons who are to supervise the winding up of the

affairs of the corporation.

Upon approval of such declaration of dissolution by the Securities and Exchange

Commission, the corporation shall cease to carry on its operations except for the purpose

of winding up its

affairs. (n)

- While section 115 of the code provides for the process and procedure for the dissolution

of a corporate sole, there is nothing in the law itself which would prohibit it from

amending its articles of incorporation

- It is believed that authorization for the dissolution by the particular religious

denomination, sect or church, as required in sub-paragraph 3 of section 115 would still

be necessary in the case of amending the articles of incorporation to affect dissolution.

o Expiration of a corporate term will not apply to a religious corporation

May a corporation sole be dissolved by judicial decree?

- General rule: No, because a corporation sole, is by its very nature ecclesiastical and

religious (doctrine of separation of church and state)

- Exception: police power of the state, if its purpose is being carried out and is instead

being used for illegal purpose, it may be so dissolved

What are religious societies?

- Under common law, a religious society is a body of persons associated together for the

purpose of maintaining religious worship.

Is it also required to file its articles of incorporation to the SEC?

-No <sec. 116> “may”

What should be contained in the articles of incorporation?

Section 116 provides:

Section 116. Religious societies. - Any religious society or religious

order, or any diocese, synod, or district organization of any religious denomination,



sect or church, unless forbidden by the constitution, rules, regulations, or discipline of

the religious denomination, sect or church of which it is a part, or by competent

authority, may, upon written consent and/or by an affirmative vote at a meeting called

for the purpose of at least two-thirds (2/3) of its membership, incorporate for the

administration of its temporalities or for the management of its affairs, properties and

estate by filing with the Securities and Exchange Commission, articles of

incorporation verified by the affidavit of the presiding elder, secretary, or clerk or

other member of such religious society or religious order, or diocese, synod, or district

organization of the religious denomination, sect or church, setting forth the following:

1. That the religious society or religious order, or diocese, synod, or district

organization is a religious organization of a religious denomination, sect or church;

2. That at least two-thirds (2/3) of its membership have given their written consent

or have voted to incorporate, at a duly convened meeting of the body;

3. That the incorporation of the religious society or religious order, or diocese,

synod, or district organization desiring to incorporate is not forbidden by competent

authority or by the constitution, rules, regulations or discipline of the religious

denomination, sect, or church of which it forms a part;

4. That the religious society or religious order, or diocese, synod, or district

organization desires to incorporate for the administration of its affairs, properties and

estate;

5. The place where the principal office of the corporation is to be established and

located, which place must be within the Philippines; and

6. The names, nationalities, and residences of the trustees elected by the religious

society or religious order, or the diocese, synod, or district organization to serve for

the first year or such other period as may be prescribed by the laws of the religious

society or religious order, or of the diocese, synod, or district organization, the board

of trustees to be not less than five (5) nor more than fifteen (15). (160a)

Is it required to indicate its term of existence?

- Likewise to exist in perpetuity, the law does not require to indicate its term of existence

When will it acquire juridical personality?



- Only a corporation sole may come into existence without SEC approval, section 19 will

thus govern, Vested with judicial capacity upon issuance of the certificate by the SEC

o However it is not accurate according to atty. Ladia because there are those

that can issue for example cooperatives- BUREAU OF COOPERATIVES

which register, home insurance guaranty corporation- HOME OWNERS

How may religious societies be dissolved?

- Go to the general rules governing dissolution, because the rules under special

corporations do not provide for such rule

DISSOLUTION

What is dissolution?

- Extinguishment of the corporate franchise and the termination of corporate existence

3 modes of dissolution

1. By expiration of its term;

2. By voluntary surrender of its primary franchise

(voluntary dissolution);

3. By revocation of its corporate franchise (involuntary dissolution)

•Philippine National Bank vs. CFI

- When the period of corporate life expires, the corporation ceases to be a body corporate

for purposes of continuing the business for which it is organized. But it shall nevertheless

be continued as a body corporate for three years after the time when it would have be

dissolved, for the purpose of prosecuting and defending suits by or against it and for

enabling it gradually to settle and close its affairs to dispose of and convey its property

and to divide its assets. There is no need for the institution of a proceeding for quo

warranto to determine the time and date of the dissolution of a corporation because the

period of corporate existence is provided in the articles of incorporation. When such

period expires and without any extension having been made pursuant to law, the

corporation is dissolved automatically insofar as the continuation of its business is

concerned.

- The rights of the lessor and the lessee over the improvements which the latter constructed

on the leased premises are governed by Article 1678 of the Civil Code. The provision

gives the lessee the right to remove the improvements if the lessor chooses not to pay one



half of the value thereof. However, in the case at bar the law will not apply because the

parties herein have stipulated in the contract their own terms and conditions concerning

the improvements before the termination of the lease. Petitioner PNB as assignee of PBM

succeeded to the obligation of the latter under the contract of lease. It could not possess

rights more than what PBM had as lessee under the contract. Hence, petitioner was duly

bound to remove the improvements before the expiration of the period of lease. Its failure

to do so when the lease was terminated was tantamount to a waiver of its rights and

interest over the improvements on the leased premise.

o 3 modes of dissolution, 3 modes of voluntary dissolution and 3 modes of

liquidation and winding up- FREQUENTLY ASKED IN THE FINALS

What are the 3 modes of voluntary dissolution?

1. Voluntary dissolution where no creditors are affected; <sec.118>

2. Voluntary dissolution where creditors are affected;

<sec. 119>

3. Shortening of corporate term. <sec. 120>

Voluntary dissolution where no creditors are affected <sec.118>

- The formal and procedural requirements necessary are the following:

1. Majority vote of the board of directors or trustees;

2. Sending of notice of each stockholders or member either by registered mail or personal

delivery at least thirty (30) days prior to the meeting (scheduled by the board for the

purpose of submitting the board action to dissolve the corporation for approval of the

stockholder or members.);

3. Publication of the notice of time, place and subject of the meeting for three (3)

consecutive weeks in a newspaper published in the place where the principal office of

said corporation is located or in a newspaper of general circulation in the Philippines;

4. Resolution adopted by the affirmative vote of the stockholders owning at least 2/3 of the

outstanding capital stock or 2/3 of the members at the meeting duly called for the purpose;

5. A copy of the resolution authorizing the dissolution must be certified by a majority of the

board of directors or trustees and countersigned by the corporate secretary;

6. Issuance of a certificate of dissolution by the SEC.

Should this be strictly complied with?



Yes, compliance with the requirements and formalities prescribed above is mandatory

such that failure to comply therewith will have no effect on the legal existence of the

corporation.

Will dissolution be effective and valid by a mere resolution of the BOD and

stockholders?

- No, a mere resolution by the stockholders or the BOD of a corporation to dissolve the

same does not affect the dissolution but that some other steps, administrative or

judicial is necessary. (Daguhoy Enterprises vs. Ponce)

- Since it is the State which grants its right to exist, it is only through the State which

can allow the termination of its existence; without consent of the State, it will not be

dissolved.

Voluntary dissolution where creditors are affected <sec.119>

- By virtue of a petition, when there are creditors affected

- The following formalities would thus be required:

1. Affirmative vote of the stockholders representing at least 2/3 of the outstanding capital

stock or at least 2/3 of the members at a meeting duly called for that purpose;

2. Petition for dissolution shall be filed with the SEC signed by a majority of its board

of directors or trustees or other officers having the management of its affairs, verified

by the president or secretary or one of its directors or trustees, setting forth all claims

and demands against it.

3. Issuance of an order by the SEC reciting the purpose of the petition and fixing the

date on or before which objections thereto may be filed by any person, which date

shall not be less than thirty days nor more than sixty days after entry of the order.

4. Before such date, a copy of the order must be published once a week for three (3)

consecutive weeks in a newspaper of general circulation published in the city or

municipality where the principal office is situated or in a newspaper of general

circulation in the Philippines.

5. Posting of the same order for three (3) consecutive weeks in three (3) public places in

such city or municipality.

6. Upon five (5) days’ notice, given after the date on which the right to file objections

has expired, the SEC shall hear the petition and try any issue made by the objections

filed.



7. Judgment dissolving the corporation and directing of its assets as justice requires and

the appointment of a receiver (if necessary in its discretion) to collect such assets and

pay the debts of the corporation.

o The foregoing are also mandatory requirements

Is the appointment of a receiver mandatory?

- No, it is merely permissive or discretionary on the part of the court. The code uses the

word “may”; the law intended to let the shareholders have the control of the assets of

the corporation upon dissolution and winding up.

- The directors may also undertake liquidation and winding up of its corporate affairs,

and sound business judgment, on how they will wind up

Dissolution by shortening of corporate term <sec.120>

- Will be valid upon approval of the SEC, unlike general amendments, which will be

deemed approved if not acted upon by the SEC within 6 months from the date of filing

for a cause not attributable to the corporation.

- Shortening of the corporate term partakes the nature of an amendment of the articles

of incorporation. Section 16 under general amendments allows “written assent”

section 37 mandates that the vote must be cast at a duly constituted meeting.

Section 120. Dissolution by shortening corporate term. - A

voluntary dissolution may be effected by amending the articles of incorporation to

shorten the corporate term pursuant to the provisions of this Code. A copy of the

amended articles of incorporation shall be submitted to the Securities and Exchange

Commission in accordance with this Code. Upon approval of the amended articles of

incorporation of the expiration of the shortened term, as the case may be, the

corporation shall be deemed dissolved without any further proceedings, subject to the

provisions of this Code on liquidation. (n) o Intra-corporate- special commercial

courts

Another way of dissolving a corporation is through involuntary dissolution

Section 121. Involuntary dissolution. - A corporation may be dissolved

by the Securities and Exchange Commission upon filing of a verified complaint and after

proper notice and hearing on the grounds provided by existing laws, rules and

regulations. (n)



- Dissolution is tantamount to the imposition of death penalty

- Instead of dissolving the corporation, courts normally enjoin the further commission of

the questioned act

- The relief of dissolution will be awarded only where no other remedy is available and it

will not be allowed where the rights of the stockholders can be, or are, protected in some

other way (Republic vs. Bisaya Land Trans. Co. Inc.)

What are the grounds for involuntary dissolution?

- It is commenced through a verified complaint or motu proprio by the proper courts

- Section 6 of PD 902-A provides for the grounds for involuntary dissolution as follows:

1. Fraud in procuring its certificate of registration;

2. Serious misrepresentation as to what the corporation can do or is doing to the great

prejudice of or damage to the general public;

3. Refusal to comply or defiance of any lawful order of the Commission restraining

commission of acts which would amount to a grave violation of its franchise;

4. Continuous inoperation for a period of at least five (5) years;

5. Failure to file by-laws within the required period;

6. Failure to file required reports in appropriate forms as determined by the Commission

within the prescribed period.

- Other grounds are provided for in the corporation code itself: among them are:

1. Violation of any provision of the Code under section 144;

2. In case of deadlock in a close corporation as provided for in section 105;

3. In a close corporation, any acts of directors, officers or those in control of the corporation

which is illegal or fraudulent or dishonest or oppressive or unfairly prejudicial to the

corporation or any stockholder or whenever corporate assets are being misapplied or

wasted under section 105.

- Mere dishonesty is also a ground in a close corporation

- Other grounds can be found in other special laws like the Securities Regulation Code and

the General Banking Act as well as the Insurance Code.

•Government vs. Philippine Sugar Estate

- It is necessary in order to secure judicial foreclosure of respondent’s charter to show a

mis-user of its franchise justifying such a forfeiture



- Object is to protect the public, and not to redress private grievances, the mis-user must

be such as to work or threaten a substantial injury to the public, or such as to amount to

a violation of the fundamental condition of the contract by which the franchise was

granted and thus defeat the purpose of the grant

- Courts proceed with extreme caution which has for their object the forfeiture of corporate

franchise, and forfeiture will not be allowed, except under express limitation, or for plain

abuse of power by which the corporation fails to fulfill the design and purpose of its

organization. But when the abuse or violation constitutes or threatens a substantial injury

to the public or such as to amount to a violation of the fundamental conditions of its

charter, or its conduct is

characterized by obduracy or pertinacity in contempt of law, dissolution will be

granted

- Did the court dissolve the corporation? No, it did not, it granted the corporation 6 months

to cease and desist the performance of the questioned act otherwise it will be dissolved

•Government vs. El Hogar

- 3 causes of action, the first is that the corporation violated the law by holding on the

property beyond that provide for by law, the second is that the corporation undertook

the management f petitioners belonging to delinquent shareholders of the association,

and lastly that the by-law provision, which empowers the BD to cancel shares and to

return to the owners thereof the balance returning from the

liquidation

Compare to Philippine Sugar Estate, wherein the court ruled conditional dissolution.

Why decree conditional dissolution in one and not in the other case?

- Because in El Hogar the government was at fault, the government wasn’t able to issue

the certificate of title on time

- When the case was instituted, El Hogar was already able to dispose the properties in

question, in Philippine Sugar Estate it was still the holding the properties in order to

enrich itself at the expense of the taxpayers

• Republic vs. Security Credit and Acceptance Corp. et al.

- The corporation here is a lending institution and not a banking institution

- Defendant corporation violated the law because before a corporation may engage into

a banking activity it must first obtain a secondary franchise from the Central Bank



- Defendant corporation threatens substantial injury to the general public, dissolution is

warrant

- If there is a bank run kawawa naman yung depositors

•Republic vs. Bisaya Land Transportation Co. Inc

- The relief of dissolution will be awarded only where no other remedy is available and

it will not be allowed where the rights of the stockholders can be, or are, protected in

some other way

- Misuse and misapplication of the funds and assets of the respondent were committed

particularly by the corporate officers, where they can instead be held personally liable

- Since there is another remedy available dissolution is not warranted

Assuming the above stated corporation is a close corporation, would the court decree

otherwise?

- Yes, because in a close corporation, mere dishonesty is a ground for the dissolution

- Can even be dissolved by petition of only one stockholder on the grounds stated in

the code < sec.

105>

•Financing Corporation of the Philippines vs. Teodoro

- Minority stockholders may not ask for the dissolution of a corporation in private suits

and that such actions should be brought by the Government through its legal officers,

except in cases where the intervention of the State, for one reason or another, cannot be obtained, as when the State is not interested because the complaint is strictly a matter between the stockholders and does not involve, in the opinion of the legal officer of the Government, any of the acts or omissions warranting quo warranto proceeding , in which minority stockholders are entitled to have such dissolution. It should be exercised if necessary in order not to entirely ignore and

disregard the rights of said minority stockholders, especially when said minority

stockholders are unable to obtain redress and protection of their rights within the

corporation itself. Stockholders should not be left without recourse

Present set up

- Any stockholder or member of a corporation can institute a dissolution proceeding

against his own corporation before the proper forum



- Special Commercial Courts, shall hear and decide intra-corporate disputes

May a corporation ask for dissolution of the corporation when there is no prejudice to the

general public?

- Yes, in a close corporation, a petition for the dissolution of the corporation may be

instituted by any one individual shareholder on the ground, even by mere dishonesty

Effects of dissolution

- The dissolution of a corporation not only terminates its primary franchise to be a

corporation, but generally prevents it from further exercising other or secondary

franchises which have been conferred to its. It terminates its power to enter into contracts

or t o continue the business as a going concern.

- Based on this general rule, the Supreme Court held that a corporation, whose corporate

life expired, cannot lawfully pursue the business for which it was organized. It cannot

apply for a new certificate or a secondary franchise for it is incapable of receiving a grant.

Neither can it enforce a contract executed prior its dissolution for the purpose of

continuing the business of its organization.

- In general the rights and liabilities of the corporation are not extinguished by its

dissolution.

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)

•Buenaflor vs. Camarines Sur Industry Corp.

- From that time on Camarines Sur was plying in an activity that was illegal

- A corporation where the corporate life has expired it cannot lawfully pursue the business

for which it was organized.

- the Supreme Court held that a corporation, whose corporate life expired, cannot lawfully

pursue the business for which it was organized. It cannot apply for a new certificate or a

secondary franchise for it is incapable of receiving a grant.

- Awarding it to Camarines Sur is tantamount to a medal for its illegal acts



- It cannot apply for a new certificate or a secondary franchise for it is incapable of

receiving a grant. It was not even a corporation de facto. And then, there is no application

subscribed by the new corporation

- And yet as stated, the new corporation has not filed any application for certificate of

public convenience in Sabang, and has not published such application.

•Cebu Port Labor Union vs. State Marine Co

- Even a cursory reading of the provision would convey the idea clearly manifested in the

limitation “but not for the purpose of continuing the business for which it was

established,” that the 3-year period allowed by the law is only for the purpose of winding

up its affairs.

•Gonzales vs. Sugar Regulatory Administration

- Instead of applying the corporation code, the court applied the constitutional provision

- Cannot be read as permitting to destroy the substantive rights

- Such would collide with the non-impairment of contracts clause of the constitution

- Complainants will have the right to follow the assets of the corporation in the hands of

SRA or any other agency for that matter

After dissolution what next?

-Liquidation and winding up should follow

What is the definition of liquidation and winding up?

- Collection of all corporate assets, the payments of all its debts and settlement of its

obligations and the ultimate distribution of the corporate assets, if any of it remains,

to all stockholders in accordance with their proportionate stockholdings in the

corporation or in accordance with their respective contracts of subscription.

Preference upon liquidation

- If there are preferred shares, the preference granted to such should be complied with

- Preferred shares may give the holder thereof, preference only in the dividends but also

in the distribution of corporate assets upon liquidation or termination of the corporate

existence. If such is the intent, the contract of subscription must so indicate lest they

are placed on equal footing with common shareholders

- Preference may be participating or non-participating

Dissolved corporations are granted a period of 3 years to liquidate



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)

However the 3 year period is not absolute

Liquidation may be undertaken in either of the 3 ways

1.By the corporation itself through the BOD

- Usual method or procedure of liquidating a corporation and although there is no law

authorizing it, neither is there anything that prohibits the BOD from

undertaking the same

- If this method is resorted to, the board will only have a period of 3 years to finish its

task of liquidation

- Claims for or against the corporate entity not filed within the period will become

unenforceable as there exist no corporate entity against which they can be enforced

- Actions pending for or against the corporation when the 3 year period expires, are

abated since after the period, the corporation ceases for all intents and purposes and

is no longer capable of suing or being sued



2.By a trustee appointed by the corporation

- The corporation may opt to convey all corporate assets to a trustees who will take

charge of liquidation

- If this method is used, the three year period limitation imposed by section 122 will

not apply provided the designation of the trustee is made within that period

3.By appointment of a receiver

- A receiver may be appointed by the proper forum on petition or motu proprio upon the

dissolution of the corporation

- The appointment of a receiver is, however, permissive rather than mandatory and the law

tends to recognize that in cases of voluntary dissolution there is no occasion for the

appointment of a receiver except under special circumstances and upon proper showing

- If a receiver is appointed, the 3 year period fixed by law within which to complete the

task of liquidation will not likewise apply because the dissolved corporation is substituted

by the receiver who may sue or be sued even after that period

o Mere appointment of a receiver without anything more does imply in the

dissolution of a corporation

•National Abaca other Fibers Co. vs. Pore

- Actions pending for or against the corporation when the 3 year period expires, are abated

since after that period, the corporation ceases for all intents and purposes and is no longer

capable of suing or being sued

- May be continued by the trustee provided done within the 3 year period

- Should the corporation, therefore, finds it difficult to finish its liquidation, it may, at any

time during the three year period, convey all its assets and receivables to a trustee to

prosecute and defend suits by or against the corporation begun before the expiration of

said period

- The effect of the conveyance is to make the trustees the legal owners of the property

conveyed, subject to the beneficial interest therein of creditors and stockholders

•Sumera vs. Valencia

- Thus it was held that when a corporation is dissolved and the liquidation of the assets is

placed in the hands of receiver or assignee, the period of 3 years prescribed by law is not



applicable and the assignee may institute all actions leading to the liquidation of the

corporation even after the expiration of 3 years.

- If the corporation carries out the liquidation of its assets through its own officers and

continues and defends the actions brought by or against it, its existence shall terminate at

the end of three years from the time of dissolution; but if a receiver or assignee is

appointed, with or without a transfer of its properties within 3 years, the legal interest

passes to the assignee, the beneficial interest remaining in the members, stockholders,

creditors and other interested persons and said assignee may bring an action, prosecute

that which has already been commenced for the benefit of the corporation, or defend the

latter against any other action already instituted or which may be instituted even outside

of the period of three years fixed for the offices of the corporation.

•Board of Liquidators vs. Kalaw

- If there is a trustee, assignee or liquidator, it can continue prosecuting suit even beyond the

3 year period fixed by law because he becomes the legal owner of the rights, assets and

properties conveyed to him

•Gelano vs. CA

- “Trustee” as used in the corporation statute must be understood in its general concept

which could include the counsel to whom was entrusted in the instant case, the

prosecution of the suit filed by the corporation. The purpose in the transfer of the

assets of the corporation to a trustee upon its dissolution is more for the protection of

its creditors and stockholders. Debtors like the petitioners herein may not take

advantage of the failure of the corporation to transfer its assets to a trustee, assuming

it has any to transfer which petitioner has failed to show, in the first place. To sustain

petitioners’ contention would be to allow them to enrich themselves at the expense of

another, which all enlightened legal systems condemn.

- The counsel who prosecuted and defended the interest of the corporation may be

considered as a “trustee” at least with respect to the matter in litigation only

May a corporation that is already dissolved, transfer and assign its assets and

properties to a new corporation which will continue the business of the dissolved one?

- Yes, provided all the stockholders gave their consent (Chung Ka Bio vs. IAC)

•Republic vs. Marsman Development Company &

Chung Ka Bio vs. IAC



- During the three year period granted to a corporation to liquidate or wind up its affairs,

the BOD is not normally permitted to undertake any activity outside the usual

liquidation of the corporation. There is, however, nothing to prevent the stockholders

from conveying their respective shareholdings toward the creation of a new

corporation to continue the business of the old. This is because winding up is the sole

activity of the dissolved corporation that does not intend to incorporate a new. If it

does, however, it is not unlawful for the old board of directors to negotiate and transfer

the assets of the dissolved corporation to the new corporation intended to be created

as long as the stockholders have given their consent (Republic vs. Marsman

Development Company)

- Winding up is the sole activity of a dissolved corporation that does not intend to

incorporate anew. If it does, however, it is not unlawful for the old board of directors

to negotiate and transfer the assets of the dissolved corporation to the new corporation

intended to be created as long as the stockholders have given their consent (Chung

Ka Bio vs. IAC)

What happens to the remaining assets and properties of the dissolved corporation if

liquidation and winding up as provided in section 122 is not complied with, as a result

of which the 3 year period has elapsed

- If the three year extended life has expired without a trustee or receiver having been

expressly designated by the corporation within that period, the board of directors o

trustees itself, following the rationale of the Supreme Court’s decision in Gelano vs.

CA may be permitted to do so continue as” trustees” by legal implication to complete

the liquidation. Still in the absence of a BOD or BOT, those having any pecuniary

interest in the assets, including not only the shareholders but likewise the creditors of

the corporation, acting for and in its behalf, might make proper representations with

the SEC, which has primary and sufficiently broad jurisdiction in matters of this

nature, for working out a final settlement of the corporate concerns (Clemente vs. CA)

o According to atty. Ladia the ruling of the Supreme Court in the case of Clemente

vs. CA is wrong, opinion is further discussed after the Clemente Case

•Clemente vs. CA

- Who owns the properties? SOCIEDAD ANONIMA

- The termination of the life of a juridical entity does not by itself cause the extinction

or diminution of the rights and liabilities of such entity or those of its owners and



creditors. If the three year extended life has expired without a trustee or receiver

having been expressly designated by the corporation within that period, the board of

directors o trustees itself, following the rationale of the Supreme Court’s decision in

Gelano vs. CA may be permitted to do so continue as” trustees” by legal implication

to complete the liquidation. Still in the absence of a BOD or BOT, those having any

pecuniary interest in the assets, including not only the shareholders but likewise the

creditors of the corporation, acting for and in its behalf, might make proper

representations with the SEC, which has primary and sufficiently broad jurisdiction

in matters of this nature, for working out a final settlement of the corporate concerns

othe ruling is wrong according to atty.

Ladia

According to atty Ladia: What happens to a corporation that is already dissolved, that

has not been able to appoint a trustee with in the 3 year period?

- a corporation dissolved which failed to exercise its rights granted in section 122 after

the 3 year period has elapsed, ceases to exist for all intents and purposes, it can no

longer sue or be sued

- according to 122 of the code, the property should be escheated, accordingly:

Section 122. Corporate liquidation. - Every corporation whose

charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose

corporate existence for other purposes is terminated in any other manner, shall

nevertheless be continued as a body corporate for three (3) years after the time when

it would have been so dissolved, for the purpose of prosecuting and defending suits

by or against it and enabling it to settle and close its affairs, to dispose of and convey

its property and to distribute its assets, but not for the purpose of continuing the

business for which it was established.

At any time during said three (3) years, the corporation is authorized and

empowered to convey all of its property to trustees for the benefit of stockholders,

members, creditors, and other persons in interest. From and after any such conveyance

by the corporation of its property in trust for the benefit of its stockholders, members,

creditors and others in interest, all interest which the corporation had in the property

terminates, the legal interest vests in the trustees, and the beneficial interest in the

stockholders, members, creditors or other persons in interest.

Upon the winding up of the corporate affairs, any asset distributable

to any creditor or stockholder or member who is unknown or



cannot be found shall be escheated to the city or

municipality where such assets are located.

Except by decrease of capital stock and as otherwise allowed by this Code, no

corporation shall distribute any of its assets or property except upon lawful dissolution

and after payment of all its debts and liabilities. (77a, 89a, 16a)

FOREIGN CORPORATIONS

Definition

- Section 123. Definition and rights of foreign corporations. - For the

purposes of this Code, a foreign corporation is one formed, organized or existing

under any laws other than those of the Philippines and whose laws allow Filipino

citizens and corporations to do business in its own country or state. It shall have the

right to transact business in the Philippines after it shall have obtained a license to

transact business in this country in accordance with this Code and a certificate of

authority from the appropriate government agency. (n)

What if the law of the state of the foreign corporation does not allow Filipino citizens

to do business in their country?

- The phrase “and whose laws allow Filipino citizens and corporations to do business

in its own country or state” is not, however, an accurate inclusion in the definition as

ay corporation registered or organized under the laws of another state is necessarily a

foreign corporation whether or not the state of its incorporation allow Filipino citizens

or corporations to do business in that forum.

- The said phrase was inserted by the framers of the law only as a condition precedent

to the grant of a license of a foreign corporation to do business in the

Philippines.

Composed of 100% Americans; organized under the laws other than the Philippines

- The test is the “incorporation test”

- General rule: the place of its incorporation irrespective of the nationality

- Exception: control test would apply in determining the corporate nationality, i.e., the

citizenship of the controlling stockholders determines the nationality of the

corporation

If a foreign corporation wants to transact business in the Philippines, what must it do?



-Obtain a license

How may it do so?

-According to sec. 125:

Section 125. Application for a license. - A foreign corporation

applying for a license to transact business in the Philippines shall submit to the

Securities and Exchange Commission a copy of its articles of incorporation and by-

laws, certified in accordance with law, and their translation to an official language of

the Philippines, if necessary. The application shall be under oath and, unless already

stated in its articles of incorporation, shall specifically set forth the following:

1. The date and term of incorporation;

2. The address, including the street number, of the principal office of the corporation

in the country or state of incorporation;

3. The name and address of its resident agent authorized to accept summons and

process in all legal proceedings and, pending the establishment of a local office, all

notices affecting the corporation;

4. The place in the Philippines where the corporation intends to operate;

5. The specific purpose or purposes which the corporation intends to pursue in the

transaction of its business in the Philippines: Provided, That said purpose or

purposes are those specifically stated in the certificate of authority issued by the

appropriate government agency;

6. The names and addresses of the present directors and officers of the corporation;

7. A statement of its authorized capital stock and the aggregate number of shares which

the corporation has authority to issue, itemized by classes, par value of shares, shares

without par value, and series, if any;

8. A statement of its outstanding capital stock and the aggregate number of shares

which the corporation has issued, itemized by classes, par value of shares, shares

without par value, and series, if any;

9. A statement of the amount actually paid in; and



10. Such additional information as may be necessary or appropriate in order to

enable the Securities and Exchange Commission to determine whether such

corporation is entitled to a license to transact business in the Philippines, and to

determine and assess the fees payable.

Attached to the application for license shall be a duly executed certificate under

oath by the authorized official or officials of the jurisdiction of its incorporation,

attesting to the fact that the laws of the country or state of the applicant allow Filipino

citizens and corporations to do business therein, and that the applicant is an existing

corporation in good standing. If such certificate is in a foreign language, a translation

thereof in English under oath of the translator shall be attached thereto.

The application for a license to transact business in the Philippines shall

likewise be accompanied by a statement under oath of the president or any other

person authorized by the corporation, showing to the satisfaction of the Securities and

Exchange Commission and other governmental agency in the proper cases that the

applicant is solvent and in sound financial condition, and setting forth the assets and

liabilities of the corporation as of the date not exceeding one (1) year immediately

prior to the filing of the application.

Foreign banking, financial and insurance corporations shall, in addition to the

above requirements, comply with the provisions of existing laws applicable to them. In

the case of all other foreign corporations, no application for license to transact business

in the Philippines shall be accepted by the Securities and Exchange Commission without

previous authority from the appropriate government agency, whenever required by law.

(68a)

Is there any deposit or security requirement?

- Yes, within 60 days after the issuance of the license, a foreign corporation, except those

engaged in foreign banking or insurance, shall deposit with the SEC, for the benefit of

creditors, securities consisting of bonds or other evidence of indebtedness of the

Philippine government or its political subdivision, or of government owned or controlled

corporation, shares of stock in “registered enterprises” as this term is defined in R.A.

5186, shares of stock in domestic insurance companies and banks or any combination

thereof with an actual market value of 100,000

- Additional securities may be required by the SEC if the actual market value of the

securities on deposit has decreased by at least 10%. Section 126 of the code provides:

Section 126. Issuance of a license. - If the Securities and Exchange

Commission is satisfied that the applicant has complied with all the requirements of this

Code and other special laws, rules and regulations, the Commission shall issue a license



to the applicant to transact business in the Philippines for the purpose or purposes

specified in such license. Upon issuance of the license, such foreign corporation may

commence to transact business in the Philippines and continue to do so for as long as it

retains its authority to act as a corporation under the laws of the country or state of its

incorporation, unless such license is sooner surrendered, revoked, suspended or annulled

in accordance with this Code or other special laws.

Within sixty (60) days after the issuance of the license to transact business in the

Philippines, the license, except foreign banking or insurance corporation, shall deposit

with the Securities and Exchange Commission for the benefit of present and future

creditors of the licensee in the Philippines, securities satisfactory to the Securities and

Exchange Commission, consisting of bonds or other evidence of indebtedness of the

Government of the Philippines, its political subdivisions and instrumentalities, or of

government-owned or controlled corporations and entities, shares of stock in "registered

enterprises" as this term is defined in Republic Act No. 5186, shares of stock in domestic

corporations registered in the stock exchange, or shares of stock in domestic insurance

companies and banks, or any combination of these kinds of securities, with an actual

market value of at least one hundred thousand (P100,000.) pesos; Provided, however,

That within six (6) months after each fiscal year of the licensee, the Securities and

Exchange Commission shall require the licensee to deposit additional securities

equivalent in actual market value to two (2%) percent of the amount by which the

licensee's gross income for that fiscal year exceeds five million (P5,000,000.00) pesos.

The Securities and Exchange Commission shall also require deposit of additional

securities if the actual market value of the securities on deposit has decreased by at least

ten (10%) percent of their actual market value at the time they were deposited. The

Securities and Exchange Commission may at its discretion release part of the additional

securities deposited with it if the gross income of the licensee has decreased, or if the

actual market value of the total securities on deposit has increased, by more than ten

(10%) percent of the actual market value of the securities at the time they were deposited.

The Securities and Exchange Commission may, from time to time, allow the licensee to

substitute other securities for those already on deposit as long as the licensee is solvent.

Such licensee shall be entitled to collect the interest or dividends on the securities

deposited. In the event the licensee ceases to do business in the Philippines, the securities

deposited as aforesaid shall be returned, upon the licensee's application therefor and upon

proof to the satisfaction of the Securities and Exchange Commission that the licensee has

no liability to Philippine residents, including the Government of the Republic of the

Philippines. (n)

Other than section 125 and 126. What other requirements are set under Philippine Law

before a foreign corporation may transact business in the Philippines



- Yes. A Resident agent is required. As a condition precedent to the grant of a license

to do or transact business in the Philippines, the foreign corporation is required to

designate its resident agent on whom summons and other legal processes may be

served in all actions or legal proceedings against such corporation


Section 128. Resident agent; service of process. - The Securities

and Exchange Commission shall require as a condition precedent to the issuance of

the license to transact business in the Philippines by any foreign corporation that such

corporation file with the Securities and Exchange Commission a written power of

attorney designating some person who must be a resident of the Philippines, on whom

any summons and other legal processes may be served in all actions or other legal

proceedings against such corporation, and consenting that service upon such resident

agent shall be admitted and held as valid as if served upon the duly authorized officers

of the foreign corporation at its home office. Any such foreign corporation shall

likewise execute and file with the Securities and Exchange Commission an agreement

or stipulation, executed by the proper authorities of said corporation, in form and

substance as follows:

"The (name of foreign corporation) does hereby stipulate and agree, in

consideration of its being granted by the Securities and Exchange Commission a

license to transact business in the Philippines, that if at any time said corporation shall

cease to transact business in the Philippines, or shall be without any resident agent in

the Philippines on whom any summons or other legal processes may be served, then

in any action or proceeding arising out of any business or transaction which occurred

in the Philippines, service of any summons or other legal process may be made upon

the Securities and Exchange Commission and that such service shall have the same

force and effect as if made upon the duly-authorized officers of the corporation at its

home office."

Whenever such service of summons or other process shall be made upon the

Securities and Exchange Commission, the Commission shall, within ten (10) days

thereafter, transmit by mail a copy of such summons or other legal process to the

corporation at its home or principal office. The sending of such copy by the

Commission shall be necessary part of and shall complete such service. All expenses

incurred by the Commission for such service shall be paid in advance by the party at

whose instance the service is made.

In case of a change of address of the resident agent, it shall be his or its duty to

immediately notify in writing the Securities and

Exchange Commission of the new address. (72a; and n)



- The necessity of the appointment of a resident agent is only for the purpose of

receiving summons and other legal processes in any legal action or proceeding against

the foreign corporation Who may be appointed as a resident agent?

- Section 127 provides that:

Section 127. Who may be a resident agent. - A resident agent may

be either an individual residing in the Philippines or a domestic corporation lawfully

transacting business in the Philippines: Provided, That in the case of an individual, he

must be of good moral character and of sound financial standing. (n)

May a partnership be appointed as a resident agent?

- Yes, domestic corporation taken in its general sense not legal sense

If there is a resident agent appointed. May summons be served to any officers of the

corporation?

- No, if there is a resident agent, the designation is exclusive and service must be made

only to the resident agent or else the service is without force and effect unless made to

him

- Thus, while the law allows service upon the SEC or any of its officers or agents within

the Philippines

- The two modes may become effective only if the foreign corporation failed or neglected

to designate such a person or an agent

- Summons must be made only to resident agent except when there is no resident agent

appointed

- Where such foreign corporation actually doing business here has not applied for a license

to do and has not designated an agent to receive summons, then service of summons on

it will be made pursuant to the provisions of the rules of court. If such foreign corporation

has a license to do business, then summons to it will be served on the agent designated

by it for the purpose, or otherwise in accordance with the Corporation Law (General

Corporation of the Philippines vs. Union Insurance Soc. Of Canton Ltd.)

If the foreign corporation conducts business in the Philippines without the license

requirement. What is the effect?


Section 133. 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)

- if they do so, the responsible officers may be subjected to the penal sanctions provided

for in section 144 of the code, which may either be fine or imprisonment

What if it is not doing business without a license?

- If it is not transacting business in the Philippines, even without a license, it can sue before

the Philippine Courts

The general rule is that “it is not the lack of required license but doing business without

a license which

bars a foreign corporation form access to our courts.”

Exception:

1. Foreign corporations can sue before the

Philippine Courts if the act or transaction involved is an “isolated transaction” or the

corporation is not seeking to enforce any legal or contractual rights arising from, or

growing out of, any business which it has transacted in the

Philippines

2. Neither is a license required before a foreign corporation may sue before the forum if

the purpose of the suit is to protect its trademark, trade name, corporate name,

reputation or goodwill;

3. Or where it is based on a violation of the Revised Penal Code;

4. Or merely defending a suit filed against it

5. Or where a party is stopped to challenge the personality of the corporation by entering

into a contract with it.

Rules laid down by the SC

A.As to

whether or

not it can sue

B.As to

whether or

not it can be sued

A foreign

corporation

transacting or

doing

A foreign

corporation

transacting

business in the



business in the

Philippines with a

license can sue

Philippines with

the requisite

license can be

sued in the

Philippine Courts

before Philippine

Courts

Subject to certain

exceptions, a

foreign

corporation doing

business in the

country without a

license cannot sue

in

Philippine Courts

A foreign

corporation

transacting

business in the

Philippines

without a license

can be sued in

Philippine

Courts

If it is not

transacting

if it is not doing

business in the

Philippines, it

cannot be sued in

Philippine Courts

for

business in the

Philippines, even

without a license,

it

can sue before the

Philippine Courts

lack of

jurisdiction

A foreign corporation not doing business in the

Philippines, may it be sued?

- If it is not transacting business in the country it cannot be sued for lack of jurisdiction

Is there any sanction that can be enforced to foreign corporations which are doing

business without the required license?

- Penal sanctions under section 144

- Any violation of the code is subject to such penal sanctions

What would constitute doing business?

- The true test, however, seems to be whether the foreign corporation is continuing the

body or substance of the business or enterprise for which it was organized or whether

it has substantially retired from it and turned it over to another. The term implies a

continuity of commercial dealings and arrangements, and contemplates, to that extent,

the performance of acts or works or the exercise of some of the functions normally



incident to, and in progressive prosecution of, the purpose and object of its

organization (Mentholatum Co. Inc. vs. Mangaliman)

•Mentholatum vs. Mangaliman

- The true test, however, seems to be whether the foreign corporation is continuing the

body or substance of the business or enterprise for which it was organized or whether

it has substantially retired from it and turned it over to another. The term implies a

continuity of commercial dealings and arrangements, and contemplates, to that extent,

the performance of acts or works or the exercise of some of the functions normally

incident to, and in progressive prosecution of, the purpose and object of its

organization

- Whatever transaction the Philippine-American Drug Co. had executed in view of the

law, the Mentholatum Co. did it itself. And the Mentholatum Co. being a foreign

corporation doing business in the Philippines without the license required by section

68 of the Corporation Law, it may not prosecute this action for violation of trade mark

and unfair competition

Why is foreign corporations barred access from our courts if they do business without

a license?

-Marshall-Wells Co. vs. Henry W. Elser and Co.

•Marshall-Wells Co. vs. Henry W. Elser and Co.

- The object of the statute was to subject the foreign corporation doing business in the

Philippines to the jurisdiction of its courts. The object of the statute was not to prevent

the foreign corporation from performing single acts, but to prevent it from acquiring

a domicile for the purpose of business without taking the steps necessary to render it

amenable to suit in local courts.

•Bulakhidas vs. Navarro

- It is settled that if a foreign corporation is not engaged in business in the Philippines,

it may not be denied the right to file an action in Philippine courts for isolated

transactions

- The object of section 68 and 69 of the Corporation law was not to prevent the foreign

corporation from performing single acts, but to prevent it from acquiring a domicile

for the purpose of business without taking the steps necessary to render it amenable

to suit in the local courts. It was never the purpose of the Legislature to exclude a



foreign corporation which happens to obtain an isolated order for business from the

Philippines, from securing redress in the Philippine courts

•The Swedish East Asia Co., Ltd. Vs. Manila Port Service

- It must stated that the section is not applicable to a foreign corporation performing

single acts or “isolated transactions.” There is nothing to show that the petitioner has

been in the Philippines engaged in continuing business or enterprise for which it was

organized, when the sixteen bundles were erroneously discharged in manila, for it to

be considered as transacting business in the Philippines. The fact is that the bundles,

the value of which is sought to be recovered, were landed not as a result of a business

transaction, isolated or otherwise, but due to a mistaken belief that they were part of

the shipment of forty similar bundles consigned to persons or entities in the

Philippines, there is no justification therefore, for invoking the section

There were 3 contracts entered into, how come they were still not considered as doing

business? (Antam Consolidted, Inc. vs. CA)

- Every case shall be judged in the light of its peculiar circumstances, where a single act or

transaction however, is not merely incidental or casual but indicates the foreign

corporation’s intention to do other business in the Philippines, said single act or

transaction constitutes “doing” or “engaging in” or “transacting” business in the

Philippines

- In the case at bar, the transaction entered into by the respondent with the petitioners are

not a series of commercial dealings which signify an intent on the part of the respondent

to do business in the Philippines but constitute an isolated one which does not fall under

the category of “doing business.”

- The records show that the only reason why the respondent entered into the second and

third transactions with the petitioner was because it wanted to recover the loss it sustained

from the failure of the petitioners to deliver the crude coconut oil under the first

transaction and in order to give the latter a chance to make good on their obligation. From

these facts alone, it can be deducted that in reality there was only one agreement between

the petitioners and the respondent.

- The three seemingly different transactions were entered into by the parties only in an

effort to fulfill the basic agreement and in no way indicate an intent on the part of the

respondent to engage in a continuity of transactions with petitioners which will categorize

it as a foreign corporation doing business in the Philippines

- 3 contracts, but according to the court was not doing business in the Philippines

•Far East Int’l import vs. Nankai Kogyo Co. Ltd.



- Only one contract , but according to the Supreme Court was doing business in the

Philippines

- Every case shall be judged in the light of its peculiar circumstances, where a single act or

transaction however, is not merely incidental or casual but indicates the foreign

corporation’s intention to do other business in the Philippines, said single act or

transaction constitutes “doing” or “engaging in” or “transacting” business in the

Philippines

- In the instant case, the testimony of Atty. Pablo Ocampo, that appellant was doing

business in the

Philippines corroborated by no less than Nabuo Toshida, one of appellant’s officers, that

he was sent to the Philippines to look into the operation of mines, thereby revealing the

defendant’s desire to continue engaging in business here, after receiving the shipment of

the scrap iron under consideration, making the Philippines a base thereof.

- In such a case, the single act of transaction is not merely incidental or casual, but is of

such character as distinctly to indicate a purpose on the part of the operations for the

conduct of a part of corporation’s ordinary business

If a corporation appoints a distributor or a representative, will it necessarily imply doing

business in the country?

- If the foreign corporation maintained an independent status during the existence of the

disputed contract.

- Appointment of a distributor or representative in the Philippines, unless it has an

independent status (transacts and does business in its own name and for its account and

not of the foreign corporation)

- if that be the case the mere appointment of a distributor will not constitute doing business

How do you know if it has an independent status?

-Communications Materials and Design vs. CA

•Communications Materials and Design vs. CA

- A perusal of the agreements between petitioner ASPAC and the respondents show

that there are provisions which are highly restrictive in nature, such as to reduce

petitioner ASPAC to a mere extension or instrument of the private respondents

- ITEC was doing business without a license, however ASPAC is estopped

- by entering into the Representative Agreement” with ITEC, petitioner is charge with

knowledge that ITEC was not licensed to engage in business activities in the country,



and is thus stopped from raising in defense such incapacity of ITEC, having chosen

to ignore or even presumptively take advantage of the same

- In top-weld we ruled that a foreign corporation may be exempted from the license

requirements in order to institute an action in our courts if its representative in the

country maintained an independent status during the existence of the disputed

contract. Petitioner is deemed to have acceded to such independent character when it

entered into the Representative Agreement with ITEC

•Western Equipment and Supply Co. vs. Reyes

- The company is not here seeking to enforce any legal or contract rights arising from,

or growing out of any business which it has transacted in the Philippine Islands. The

sole purpose of the action is to protect its reputation, its corporate name, its goodwill,

whenever that reputation, corporate name or goodwill have through the natural

development of its trade, established themselves

- And it contends that its rights to the use of its corporate and trade name, is a property

right, a right in rem, which may assert and protect against all the world, in any of the

courts of the world even in jurisdictions where it does not transact business just the

same as it may protect its tangible property, real or personal, against trespass, or

conversion

- Since it is the trade and not the mark that is to be protected a trademark acknowledges

no territorial boundaries or municipalities or states or nations, but extends to every

market where the trader’s goods have become known and identified by the use of the

mark

•General Garments Corporation vs. Director of Patents

- A foreign corporation which has never done business in the Philippine Islands and

which is unlicensed and unregistered to do business here, but is widely and favorably

known in the Islands through the use therein of its products bearing its corporate and

trade name has a legal right to maintain an action in the Islands

- Mentholatum case was subsequently derogated when Congress, purposely to

“counteract the effects” of said case, enacted R.A. 638, inserting Section 21-A in the

Trademark Law, which allows a foreign corporation or juristic person to bring an

action in Philippine Courts for infringement of a mark or trade-name, for unfair

competition, or false designation of origin and false description, “whether or not it

has been licensed to do business in the Philippines under Act Numbered Fourteen

hundred and fifty-nine, as amended, otherwise known as Corporation Law, at the time

it brings complaint.



• Puma Sporschufabriken Rudolf Dassler, K.G. vs. IAC and MIL-ORO MFG. Corp.

- Treaties for part of the law of the land

- Quoting the Paris Convention and the case of Vanity

Fair Mills Inc. vs. T. Eaton Co. this court further said:

“By the same token, the petitioner should be given the same treatment in the

Philippines as we make available to our own citizens. We are obliged to assure

to nationals of countries of the Union an effective protection against unfair

competition on the same way that they are obligated to

similarly protect Filipino Citizen and firms

- The ruling in the aforecited case is in consonance with the Convention of the Union

of Paris for the protection of Industrial Property to which the Philippines became a

party. Article 8 thereof provides that a trade name shall be protected in all the

countries of the Union without the obligation of filing or registration, whether or not

it forms part of the trademark

•Le Chemiste Lacoste vs. Fernandez

- The French company may gain access to our courts, in the first place it was not doing

business in the Philippines

- The marketing of its products in the Philippines is done through an exclusive distributor,

Rustan Commercial Corporation. The latter is an independent entity which buys and then

markets not only products of the petitioner but also many other products bearing equally

well-known and established trademarks and trade-names

Assuming Rustans had no independent status would the SC grant Lacoste access to our

courts?

- Even if Lacoste did business in the Philippines it can bring action because the case

involves a violation of our penal code

- Such was a violation of article 189 of the RPC, if prosecution follows after the completion

of the preliminary investigation being conducted by the Special Prosecutor the

information shall be in the name of the People of the Philippines and no longer the

petitioner which is only an aggrieved party since a criminal offense is essentially an act

against the State. It is the latter which is principally the injured party although there is a

private right violated

- The records show that the goodwill and reputation of the petitioner’s products bearing

the trademark Lacoste date back even before 1964 when Lacoste clothing apparels were



forst marketed in the Philippines. To allow Hemandas to continue using the trademark

Lacoste for the simple reason that he was the first registrant in the Supplemental Register

of a trademark used in international commerce and not belonging to him is to render

nugatory the very essence of the law on trademarks and trade names

•Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co.

- The law denies to a foreign corporation the right to maintain suit unless it has previously

complied with a certain requirement, then such compliance, or the fact that the suing

corporation is exempt there from, becomes a necessary averment in the complaint

- These are matters peculiarly within the knowledge of appellants alone, and it would be

unfair to impose upon appellee the burden of asserting and proving the contrary. It is

enough that foreign corporations are allowed by law to seek redress in our courts under

certain conditions: the interpretation of the law should not go so far as to include, in

effect, an inference than those conditions have been met from the mere fact that the party

suing is a foreign corporation

•Olympia Business Machines Co. vs. E. Razon

- How do you distinguish this case with Atlantic?

- In Atlantic it dismissed the case, while in Olympia it did not

•Time Inc. vs. Reyes

- We fail to see how these doctrines can be a propos in the case at bar, since the petitioner is

not “maintaining any suit” but is merely defending one against itself; it did not file any

complaint but only a corollary defensive petition to prohibit the lower court from further

proceeding with a suit that it had no jurisdiction to entertain

What law govern foreign corporation doing and transacting business in the Philippines

with a license

- Laws of the Republic of the Philippines save and except that would normally be those

matters which concern its formation, organization or dissolution, or those fixing the

relationship, liabilities, responsibilities, or duties of the stockholders, members or officers

of the foreign corporation or their relations to each other.

- In effect, intra-corporate or internal matters not affecting creditors or the public in general

are governed not by Philippine laws but the law under which the foreign corporation was

formed or organized



Section 129. Law applicable. - Any foreign corporation lawfully doing

business in the Philippines shall be bound by all laws, rules and regulations applicable to

domestic corporations of the same class, except such only as provide for the creation,

formation, organization or dissolution of corporations or those which fix the relations,

liabilities, responsibilities, or duties of stockholders, members, or officers of corporations

to each other or to the corporation. (73a)

Will the pre-emptive rights of a foreign corporation be governed by the same section

of the code? Is the preemptive rights of a stockholder in a domestic corporation same

as the pre-emptive of a stockholder of a foreign corporation.

- No

•M.E. Grey vs. Insular Lumber Company

- PNB vs. Gonzales, will this apply to a foreign corporation? How do you distinguish

this case from a Philippine law?

- Since it concerns the rights of stockholders it is the law of New York that should

govern

Is the license to do business of a foreign corporation subject to suspension or

revocation? What are the grounds?

-Section 134 provides:

Section 134. Revocation of license. - Without prejudice to other

grounds provided by special laws, the license of a foreign corporation to transact

business in the Philippines may be revoked or suspended by the Securities and

Exchange

Commission upon any of the following grounds:

1. Failure to file its annual report or pay any fees as required by this Code;

2. Failure to appoint and maintain a resident agent in the Philippines as required

by this Title;

3. Failure, after change of its resident agent or of his address, to submit to the

Securities and Exchange Commission a statement of such change as required

by this Title;



4. Failure to submit to the Securities and Exchange Commission an authenticated

copy of any amendment to its articles of incorporation or by-laws or of any articles of

merger or consolidation within the time prescribed by this Title;

5. A misrepresentation of any material matter in any application, report, affidavit

or other document submitted by such corporation pursuant to this Title;

6. Failure to pay any and all taxes, imposts, assessments or penalties, if any,

lawfully due to the Philippine Government or any of its agencies or

political subdivisions;

7. Transacting business in the Philippines outside of the purpose or purposes for

which such corporation is authorized under its license;

8. Transacting business in the Philippines as agent of or acting for and in behalf

of any foreign corporation or entity not duly licensed to do business in the

Philippines; or

9. Any other ground as would render it unfit to transact business in the Philippines.

(n)

SEC does not have the sole authority to suspend or revoke the license of a foreign

corporation doing business in the Philippines, other government agencies like the

Central Bank , the Insurance Commission may also do so within their respective

dominion, despite the provision of section 134

If the SEC believes that revocation is warranted, section 135 provides that:

Section 135. Issuance of certificate of revocation. - Upon the

revocation of any such license to transact business in the Philippines, the Securities

and Exchange Commission shall issue a corresponding certificate of revocation,

furnishing a copy thereof to the appropriate government agency in the proper cases.

The Securities and Exchange Commission shall also mail to the corporation at

its registered office in the Philippines a notice of such revocation accompanied by a

copy of the certificate of revocation.

(n)

Voluntary withdrawal of license

-All 3 conditions must be complied with



Section 136. Withdrawal of foreign corporations. - Subject to

existing laws and regulations, a foreign corporation licensed to transact business in

the Philippines may be allowed to withdraw from the Philippines by filing a petition

for withdrawal of license. No certificate of withdrawal shall be issued by the Securities

and Exchange Commission unless all the following requirements are met;

1. All claims which have accrued in the Philippines have been paid, compromised

or settled;

2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the

Philippine Government or any of its agencies or political subdivisions have been paid;

and

3. The petition for withdrawal of license has been published once a week for three

(3) consecutive weeks in a newspaper of general circulation in the

Philippines.

P.D. 902-A

P.D. 902-A was amended by R.A. 8799 or the SECURITIES REGULATION CODE

in the year 2000

The jurisdiction of SEC for cases falling under section 5 thereof was transferred to the

courts of general jurisdiction designated by the SC, they were called special

commercial courts, the only exceptions were revocation of corporate franchise and

calling of elections

However the SEC retained receivership or suspension payments within June 20,2000

Jurisdiction of special commercial courts are exclusive and original, jurisdiction is

conferred by law; 1 Special Commercial Court per region except MAKATI and

QUEZON CITY which has two

Devices or Schemes

- Pyramid scheme (misrepresentation)-Special

Commercial Courts

- Syndicated estafa- not bailable

Alleje case

- Falls squarely under sec. 5 (a) Special Commercial Courts



- Allegation corporate officers employing schemes in diverting

- Not only detrimental to corporation, but general membership

- Fraud must be stated with particularity

•Abad vs. CFI of Pangasinan

- Fraud must be stated with particularity otherwise it may be filed to any court

Intra-corporate

- Exclusive and original jurisdiction of special commercial courts

- Sole criteria is there must be an intra-corporate relationship

- Pertaining to a controversy (speaks also of intrapartnership controversy, that

partnership must be registered with the SEC)

Rule now

1. Necessarily be an intra-corporate relationship; and,

2. The controversy must arise out of said relationship

Intra-corporate relationship alone will not suffice to put it in the ambit of special

commercial courts and courts of general jurisdiction may take cognizance

Case of a transferee of shares of stock to compel the corporation to recognize him as

a stockholder

How can it be intra-corporate when he is not yet fully paid

- When the transferee has done all he can be required to do to render the transfer effectual

and the corporation refuses to register the transfer, the requirement of the registration

is waived and the transferee is considered technically a stockholder who may sue to

enforce the right to have the transfer registered

Florendo vs. rivera, Embassy Farms

- The transferor withheld the delivery, they are not yet prima facie; it will not be

considered intra-corporate

Controversies in the appointment (asked in the bar)

-Cases involving election, appointment and removal

In Andaya the court said that a corporate officer elected or appointed by the BOD is

always a corporate act

- The fact that petitioner sought payment of his back wages, other benefits as well as

moral and exemplary damages and attorney’s fees in his complaint will not operate to



prevent the SEC from exercising its jurisdiction under P.D. 902-A. The jurisdiction

will not wrest on the NLRC just because of that

•Tabang vs. NLRC

- Jurisdiction lies originally and exclusively to special commercial courts and not in the

NLRC

- SEC has jurisdiction over cases of removal from employment of corporate officers

- The relationship of a person to a corporation, whether as officer or as agent or

employee or not determined by the nature of the servides performed, but by the

incidents of the relationship on they actually exist

- Corporate officers dismissal is always a corporate act or intra-corporate controversy

•Midland construction vs. Movilla

- NLRC will be possessed of jurisdiction exception will not apply to mere recovery

Main consideration

- Asserts his right to the office or questions the propriety or validity of his ouster or

removal, it will be the special commercial courts and not the NLRC

Securities Regulation Code

- Transferred jurisdiction of the SEC to Special

Commercial Courts

- Suspension of payment, appointment of management receivership

What is the reason for suspension of all claims?

- The reason for suspending actions for claims against the corporation is not really to

enable the management committee or the rehabilitation receiver to substitute the

defendant in any pending action against it before any court, tribunal or body. The real

justification is to enable the management committee or rehabilitation receiver to

effectively exercise his powers free from any Judicial or extra-judicial interference that

might unduly hinder or prevent the “rescue” of the debtor company. To allow such other

actions to continue would only add to the burden of the management committee pr

rehabilitation receiver, whose time, effort and resources would be wasted in defending

claims against the corporation instead of being directed towards restructuring and

rehabilitation.(PAL vs. Spouses Sadic and Kurangking)

- To enable the receiver to effectively exercise his or her power free form any judicial or

extra-judicial that may disturb

3 types of suspension of payments

1.Simple suspension of payments



- where deferment of payment of claims against a distress company; ask the court to be

given time to the payment of liability by postponing the payment

- When it has sufficient assets and liabilities but forces the impossibility of meeting them

when they

respectively fall due

2. Suspension of receiver with a management committee with a rehabilitation play or

suspension of payments accompanied by a proposal for rehabilitation (with or without

rehabilitation)

- corporation has sufficient assets to cover its liabilities, but sees the possibility; is or

without rehabilitation plans; normally would attach the rehabilitation plan

- For purpose of economic development

3. Suspension of payments when the corporation has no sufficient assets to its liabilities

May it still be revived?

-Yes, it may still be revived

How can a corporation with more liabilities than assets continue its operations profitably?

- Even if the distressed company has no sufficient assets and liabilities it can go for

suspension

- It asked for a management committee without a receiver plan (Victorius Milling case)

Convert their claims into equity

- Their liability was almost wiped out they became stockholders instead of creditors

- After 5 years those who converted sold it back to the corporation, thereby making profits

Amendment is for the economic development of the country

What if walang amendment, e mas maraming liabilities kesa assets

Suspension order- all actions for claims against the corporation are accordingly

suspended at whatever stage the proceedings maybe

Effect of suspension- you cannot foreclose

What are claims?

- Debts or demands of pecuniary nature. Assertion of a right to have money paid



- Claims against the corporation shall be suspended, assertion of a right to have money

paid; it must present a monetary claim, liquidated or unliquidated

Nullification of corporations does not present a monetary claim of pecuniary nature

•Union vs. CA

- It does not allow a mere individual to file the petition which is limited to corporations

partnership or associations.

- Where no authority is granted to hear petitions of individuals for suspension of

payments, such petition are beyond the competence of the SEC

What happens if there is a suspension order?

Explain the key phrase “quality is equity”

- All creditors stand on equal footing, secure or unsecure, holding or lien or without a

lien, no creditor may enforce his lien while rehabilitation is going

(Alemar case)

- No preference shall be given

•RCBC vs. IAC

- Decided on motion for reconsideration

- It court 7 years to decide authentication

Rule of the thumb

- Automatic suspension even if not decreed in the decision itself

- Once lifted the preferred creditors will regain their preference

Appointment of a management committee

- Take over the management committee of the distressed corporation

- Extraordinary and drastic remedy

- Without any remedy

What is an intra-corporate controversy?

- Section 5(B)

- Sole criteria is whether there exists an intra-corporate dispute is that if there is an

intra-corporate relationship

Why is there suspension of all actions against claims when a receiver is appointed?

- To enable the management committee to exercise its powers



• Sy Chim vs. Sy Siy Ho (before a management committee may be opt by a court)

- 2 requisites for a valid appointment of management committee

1. Imminent danger of dissipation, loss, wastage or destruction of assets or other

corporate properties

2. Paralysis of business operations, the mere apprehension of future misconduct based

upon prior

management

- Save and except in the case of a close corporation in case of deadlock management

committee is allowed to take over right away

• Jacinto case

- 2nd par of page 676

- 2 requisites where present

- Wala ng mapautang, there was a paralyzation

• Sy Chim

- Did not appoint a management committee

- In the absence of a strong showing of an imminent danger of dissipation, loss wastage or

destruction of assets or other properties of a corporation and paralysis of its business

operations, the mere apprehension of future misconduct based upon prior

mismanagement will not authorize the appointment of a management committee

Section 5 and 6(D) governed by separate rules; interim rules and intra-corporate

controversy

Venue of actions

- Rules of court- where the parties are residing

- Intra-corporate- no matter where the parties are residing it will be in the city or

municipality where the principal office is located

Rehabilitation proceedings venue

- In rem

- Acquired upon publication without furnishing the creditors a copy of the petition and

attachments thereof



- A creditor may now file the suspension proceedings; provides that creditors owns at least

25%

Intra-corporate- rule 1 section 6

Service of summons- rule 2 section 5

-Summons may be made to anyone

In case of intra-corporate dispute, elections, fraud, etc; if they are governed by interim

rules of procedure on intra-corporate controversies

Venue

- Special commercial courts where principal office is located/established (section 5 rule 1)

- Matters of payment/suspension must be filed in the city/ municipality where corporation

is located

Under old rule, creditors have no right to institute an action for receivership; now

creditors, if they sold 20% they can institute an action for receivership

Section 5

-Service of summons may be made by fax/e-mail

•E.B. Villarosa vs. Benito

- Will apply only if it is not an intra-corporate controversy

If the controversy arose out of an intra-corporate dispute rules on interim rules of

procedure of intracorporate controversies shall govern

Rule 4 section 17- immunity from suit

Rehabilitation receiver shall not subject to any action, claim or demand in connection

with any act done omitted by him in good faith in the exercise of his functions and

powers herein conferred

Claim

- Right to payment, whether or not it is reduced to judgment, liquidated or unliquidated,

fixed or contingent, matured or unmatured, disputed or undisputed, legal or equitable

and secured or unsecured

Investment contracts

- A contract, transaction or scheme whereby a person invests his money in a common

enterprise and is led to expect profits primarily from the effects of others



The management committee and rehabilitation receiver are empowered to:

1. Take custody and control of all assets of the corporation

2. Evaluate assets and liabilities, earnings operations of the corporation

3. Determine the best way to protect the investors and creditors

4. Study, review evaluate the feasibility of continuing operation and structures

5. Submit recommendations to the RTC regarding rehabilitation plan

6. Rehabilitate the corporation if determined to be feasible by the RTC

7. Report to the RTC until the corporation is dissolved

THE SECURITIES REGULATION CODE (RA8799)

- Also known as the Blue Sky Law since it was enacted to protect the public from

unscrupulous promoters who stake business which have no basis and sell shares and interest

therein to investors, who are then left holding certificates representing nothing more than a

claim to a square of the blue sky.

-SEC. 2. Declaration of State Policy. – The State shall establish a socially conscious, free

market that regulates itself, encourage the widest participation of ownership in enterprises,

enhance the democratization of wealth, promote the development of the capital market,

protect investors, ensure full and fair disclosure about securities, minimize if not totally

eliminate insider trading and other fraudulent or manipulative devices and practices which

create distortions in the free market.

BROKER - person who buys and sells securities for the account of others.

DEALER - person who buys and sells securities for his/her own account in the ordinary

course of business.

NOTE: No person shall engage in the business of buying or selling securities in the Philippines as a broker or dealer, or act as a salesman, or an associated person of any broker or dealer unless registered as such with the Commission. (Sec 28)

SECURITES - shares, participation or interests in a corporation or in a commercial

enterprise or profit-making venture and evidenced by a certificate, contract, instrument,

whether written or electronic in character. It includes:

CODE: COFDIPS

a) Certificates of assignments, certificates of participation, trust certificates, voting trust

certificates or similar instruments;



b) Other instruments as may in the future be determined by the Commission;

c) Fractional undivided interests in oil, gas or other mineral rights;

d) Derivatives like option and warrants;

e) Investment contracts, certificates of interest or participation in a profit sharing

agreement, certificates of deposit for a future subscription;

f) Proprietary or non proprietary membership certificates incorporations; and

g) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed

securities;

GR: Securities shall not be sold or offered for sale or distribution within the PH, without a

registration statement filed with and approved by SEC. Prior to such sale, information on

the securities, in such form and with such substance as the Commission may prescribe, shall

be made available to each prospective purchaser. (Sec 8)

EXCEPT: Exempt Securities under Sec 9

a) Any security issued or guaranteed by the

Government of the PH, or by any political subdivision or agency thereof, or by any

person controlled or supervised by, and acting as an instrumentality of said

Government.

b) Any security issued or guaranteed by the government of any country with

diplomatic relations with the PH, or by any state, province or political

subdivision thereof on the basis of reciprocity: Provided, that the SEC may

require compliance with the form and content of disclosures the Commission

may prescribe.

c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by

the proper adjudicatory body.

d) Any security or its derivatives the sale or transfer of which, by law, is under the

supervision and regulation of the Office of the Insurance Commission, Housing

and Land Use Regulatory Board, or the Bureau of Internal Revenue.

e) Any security issued by a bank except its own shares of stock.

AND Exempt Transactions under Sec 10

a) A judicial sale, or sale by an executor, administrator, guardian or receiver or

trustee in insolvency or bankruptcy.

b) By or for the account of a pledge holder, or mortgagee or any other similar lien

holder selling or offering for sale or delivery in the ordinary course of business and

not for the purpose of avoiding the provisions of this Code, to liquidate a bona fide

debt, a security pledged in good faith as security for such debt.



c) An isolated transaction in which any security is sold, offered for sale,

subscription or delivery by the owner thereof, or by his representative for the owner’s

account, such sale or offer for sale, subscription or delivery not being made in the

course of repeated and successive transactions of a like character by such owner, or

on his account by such representative and such owner or representative not being the

underwriter of such security.

d) Distribution by a corporation, actively engaged in the business authorized by

its AOI, of securities to its stockholders or other security holders as a stock dividend

or other distribution out of surplus.

e) Sale of capital stock of a corporation to its own stockholders exclusively, where

no commission or other remuneration is paid or given directly or indirectly in

connection with the sale of such capital stock.

f) Issuance of bonds or notes secured by mortgage upon real estate or tangible

personal property, where the entire mortgage together with all the bonds or notes

secured thereby are sold to a single purchaser at a single sale.

g) Issue and delivery of any security in exchange for any other security of the same

issuer pursuant to a right of conversion entitling the holder of the security surrendered

in exchange to make such conversion: Provided, That the security so surrendered has

been registered under this Code or was, when sold, exempt from the provisions of this

Code, and that the security issued and delivered in exchange, if sold at the conversion

price, would at the time of such conversion fall within the class of securities entitled

to registration under this Code. Upon such conversion the par value of the security

surrendered in such exchange shall be deemed the price at which the securities issued

and delivered in such exchange are sold.

h) Broker’s transactions, executed upon customer’s orders, on any registered

Exchange or other trading market.

i) Subscriptions for shares of the capital stock of a corporation prior to the

incorporation thereof or in pursuance of an increase in its authorized capital stock

under the Corporation Code, when no expense is incurred, or no commission,

compensation or remuneration is paid or given in connection with the sale or

disposition of such securities, and only when the purpose for soliciting, giving or

taking of such subscriptions is to comply with the requirements of such law as to the

percentage of the capital stock of a corporation which should be subscribed before it

can be registered and duly incorporated, or its authorized capital increased.

j) The exchange of securities by the issuer with its existing security holders

exclusively, where no commission or other remuneration is paid or given directly or

indirectly for soliciting such exchange.



k) The sale of securities by an issuer to fewer than twenty (20) persons in the

Philippines during any twelve-month period.

l) The sale of securities to any number of the following qualified buyers: (i) Bank;

(ii) Registered investment house; (iii)insurance company; (iv) Pension fund or

retirement plan maintained by the Government of the Philippines or any political

subdivision thereof or managed by a bank or other persons authorized by the Bangko

Sentral to engage in trust functions; (v) investment company or; (vi) Such other person

as the Commission may by rule determine as qualified buyers, on the basis of such

factors as financial sophistication, net worth, knowledge, and experience in financial

and business matters, or amount of assets under management.

PROTECTION OF SHAREHOLDERS INTEREST

1. Tender Offers (Sec 19)

2. Proxy solicitation (Sec 20)

3. Internal record keeping and accounting (Sec 22)

TENDER OFFER – A publicly announced intention acting alone or in concert with others

to acquire equity securities of a company. (2002 Bar Exams)

Instances when Tender Offer is Required

1. When the person intends to acquire 15% or more of the equity share of a public

company pursuant to an agreement made between or among the person and one or

more sellers;

2. When the person intends to acquire 30% or more of the equity share of a public

company within a period of 12 months;

3. When the person intends to acquire shares that would result in an ownership of

more than 50% of the equity shares of a public company.

PROXY SOLICITATION

NOTE: A broker or dealer who holds or acquires the proxy for at least ten per centum (10%) or such percentage as the Commission may prescribe of the outstanding share of the issuer, shall submit a report identifying the beneficial owner within ten (10) days after such acquisition, for its own account or customer, to the issuer of the security, to the Exchange where the security is traded and to the Commission. (Sec 20.5)

FRAUDULENT TRANSACTIONS AND OTHER MARKET

MANIPULATIONS



1. Wash Sale (Sec 24.1(a)(i)) – any transaction in a security which involves no

change in the beneficial ownership thereof.

2. Matched Order (Sec 24.1(a)(ii)) – order or orders for the purchase or sale of

security with the knowledge that a simultaneous order or orders of substantially the same

size, time and price for the sale or purchase of such security has, or will be entered by or for

the same or different parties.

Note: Wash sale and matched orders become illegal when they are used as a means to create false appearance of active trading in the security concerned.

3. Marking the close – placing the purchase order, at or near the close of the

trading period. The price that was closed will then be the price that will be posted on the

following trading day.

4. Painting the tape – involves a series of transactions that are reported publicly

to give the impression of an activity in a security.

5. Squeezing the float – the part of an outstanding security intentionally held by

dealers or other persons with a view of reselling them later for profit.

6. Hype and dump – Act employed by a person or group of persons of purchasing

the outstanding capital stock of a dormant public shell company for a nominal amount and

merge it with their privately held company. They would then gain control of the majority

stocks of the merged entity. Stock certificates are often re-issued in the name of the merged

entity to relatives and associates who act as nominees of the person or persons employing

the device. They would then look for a broker-dealer who would be willing to make a “hype”

of the securities. The broker-dealer then generates volume and advance bid price. When

the market reaches a high price, they would “dump” their shareholdings and bail out.

7. Boiler Room Operations – involves an intensive selling campaign through

numerous salesmen by telephone or through direct mail offerings for securities of either a

certain type or from a specific issuer. Investors are induced to purchase through hard-sell

based on unfounded predictions and mailing of misleading market letters.

Note: Marking the close, Painting the tape, Squeezing the float, Hype and dump, Boiler Room Operations become unlawful if it is effected to either raise the price or induce the purchase of a security or of a controlling, controlled, or commonly controlled company by others or to depress the price to induce the sale of a security, whether of the same or of a different class, of the same issuer or of



a controlling, controlled company or common controlled company by others or to create active trading to induce the purchase through said devices or schemes.

8. Circulating or Disseminating Information – circulating an information

that any of the security listed in the exchange will or is likely to rise or fall because of

manipulative market operations of any one or more persons conducted for the purpose of

raising or depressing the price of the security and thus inducing the purchase of such security.

9. Making False or Misleading Statements with respect to any material

fact which he knew or had reasonable ground to believe was so false or misleading for the

purpose of inducing the purchase or sale of such security.

10. Pegging or Fixing Or Stabilizing the price of security effected either alone

or with others through any series of transactions for the purchase or sale thereof, if done for

such purpose.

11. Short sale – selling of security which the vendor does not own unless done in

accordance with the rules and regulations of the SEC.

12. Insider Trading – the act of an insider to buy or sell security of the issuer while

in possession of material information with respect to such security that is not generally made

known to the public unless (a) The insider proves that the information was not gained from

such relationship; or (b) If the other party selling to or buying from the insider (or his agent)

is identified, the insider proves: (i) that he disclosed the information to the other party, or

(ii) that he had reason to believe that the other party otherwise is also in possession of the

information.

Note: When is information “material non- public”? - if: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security.

Note: Who is an “insider”? - “Insider” means: (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling the issuer; (c) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; (d) a government employee, or



director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a communication from any of the foregoing insiders.

INDEPENDENT DIRECTOR

Person other than an officer or employee of the corporation, its parent or subsidiaries,

or any other individual having a relationship with the corporation, which would interfere

with the exercise of independent judgment in carrying out the responsibilities of a director.

Corporations which require an Independent Director

1. An exchange; or

2. Any corporation with a class of equity securities listed for trading on an Exchange or

with assets in excess of P50M and having 200 or more holders, at least 200 of which

are holding at least 100 shares of a class of its equity securities or which has sold a

class of equity securities to the public pursuant to an effective registration statement

shall have at least two (2) independent directors or such independent directors shall

constitute at least 20% of the members of such board, whichever is the lesser.

OPTION TRADING

• Put – a transferrable option or offer to deliver a given number of shares of stock at a

stated price on any given time during the stated period.

• Call – a transferrable option to buy a specified number

of share at a stated price

• Straddle – a combination of put and call.

SETTLEMENT OFFERS

At any time, during an investigation or proceeding under this Code, parties being

investigated and/or charged may propose in writing an offer of settlement with the

Commission. The Commission may only agree to a settlement offer based on its findings

that such settlement is in the public interest. Any agreement to settle shall have no legal

effect until publicly disclosed. Such decision may be made without a determination of guilt

on the part of the person making the offer.

DAMAGES

All suits to recover damages shall be brought before the Regional Trial Court, which

shall have exclusive jurisdiction to hear and decide such suits. The Court is authorized to

award damages in an amount not exceeding triple the amount of the transaction plus actual

damages.

NOTES



• If there are goods involved in the multimarket, it is beyond the jurisdiction of SEC

(Ex First Quadrant)

• Criminal charge for violation of SRC is a specialized dispute, hence it must be first

referred with SEC (Baviera vs. Paglinawan G.R. No. 168380 Feb 8, 2007)

T3 Rule in trading of Securities – Trading day + 3 more days you must comply

with your obligations.

Corporation Law Reviewer

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