A. Corporation 1. Definition

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. (Sec. 2, CC)

2. Attributes of the Corporation(1) it is an artificial being(2) it is created by operation of law(3) it has the right of succession(4) it has only the powers, attributes and properties expressly authorized by law or

incident to its existence.

B. Classes of Corporations As to whether they are for public or private purpose: (a) Public Corporations - formed or organized for the government or a portion of the

State or any of its political subdivisions for the general good and welfare; governed by special laws.

(b)Private Corporations - formed by private persons alone or with the state; governed by the law on Private Corporations.

Test: If the corporation is created by the State as its own agency or instrumentality for political or public purpose connected with the administration of government, then it is a public corporation.

Note: (Dual status of public corporations) a public or municipal corporation possesses two kinds of power, governmental or public and proprietary or private. In the exercise of the former, it is a municipal government, while as to the latter, it is a “corporate legal individual.”

As to number of persons who compose them:(a) Corporation aggregate – consists of more than one member or corporator; or(b)Corporation sole – a religious corporation which consist of one member or

corporator only and his successors

As to their legal right to corporate existence:(a) De Jure Corporations – juridical entities created or organized in strict or

substantial compliance with the statutory requirements of incorporation and whose rights to exist as such cannot be successfully attacked even by the State in a quo warranto proceeding.

(b)De Facto Corporation – organized with a colorable compliance with the requirements of a valid law. Its existence cannot be inquired collaterally. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (Sec. 20, Corporation Code)

(c) Corporation by Estoppel – exists when a group of persons assumes to act as a corporation knowing it to be without authority to do so, and enters into a transaction with a third person on the strength of such appearance. It cannot be permitted to deny its existence in an action under said transaction. (Sec. 21, Corporation Code) It is neither a de jure nor a de facto corporation.

(d)Corporation by Prescription – one which has exercised corporate powers for an indefinite period without interference on the part of the sovereign powers, i.e. Roman Catholic Church.

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As to their relation to another corporation:(a) Parent or Holding corporation – corporation that controls another as a subsidiary

by the power to elect management. It is one that holds stocks in other companies for purposes of control rather than for mere investment.

(b)Subsidiary corporation– a corporation under the control of another corporation which is the holding company.

(c) Affiliated corporation – corporations which are subject to common control of the mother holding company and operated as part of a system. They are sometimes called “sister” company.

As to the Existence of Shares of Stock(a) Stock Corporation – a corporation whose capital stock is divided into shares and

which is authorized to distribute to holders thereof dividends on the basis of the shares held. (Sec.3, Corporation Code)

(b)Non–Stock Corporation – corporation which does not issue stocks and do not distribute dividends to their members. (Sec. 87, Corporation Code)

As to State under or by whose laws they have been created:(a) Domestic Corporations - organized or created under or by a virtue of Philippine

Laws, either by legislative act or under the provisions of the General Corporation Law.

(b)Foreign Corporations - formed or organized or existing under any laws other than the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country (Sec. 123, CC).

As to whether they are for religious purpose or not:(a) Ecclesiastical or Religious Corporations – composed exclusively of ecclesiastics

organized for spiritual purposes or for administering properties held for religious ones.

(b)Lay corporation – one organized for a purpose other than for religion

As to whether they for charitable purposes or not:(a) Eleemosynary corporation – one established for or devoted to charitable purposes

or those supported by charity(b)Civil corporation – one established for business or profit

As to whether they are open to the public or not:(a) Open Corporations – formed to openly accept outsiders or stockholders or

investors.(b) Close Corporations – one which is limited to selected persons or members of a

family or other closely-knit group.

Other Corporations:(a) Investment Companies - active in the sale or purchase of shares of stock or

securities, parent or holding companies that have passive portfolios and hold the securities merely for purposes of control and management.

(b)Quasi-Public Corporations - private corporations which have accepted from the State the grant of a franchise or contract involving the performance of public duties.

(c) Quasi-Corporations - possess some corporate functions and attributes but they are primarily political subdivisions.

C. Nationality of Corporations

Incorporation test – Determined by the state of incorporation, regardless of the nationality of the stockholders.

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Domiciliary  test  –  Determined  by  the principal  place  of  business  of  the corporation.  

Control test – Determined by the nationality of the controlling stockholders or members. This test is applied in times of war.

Grandfather rule – Nationality is attributed to the percentage of equity in the corporation used in nationalized or partly nationalized area.

Note: This application of the test is limited however to resolving issues on investments. Under the Foreign Investment Act, the grandfather rule is merely an ancillary rule to the main method of determining nationality, wherein corporations that are 60% owned by Filipinos are automatically considered as 100% Filipino-owned. Only when a corporation is less than 60% owned shall the grandfather rule be applied.

DOJ Opinion No.19, s. 1989 (the “1998 DOJ Ruling”), which states:

“The Grandfather Rule, which was evolved and applied by the SEC in several cases, will not apply in cases where the 60-40 Filipino-alien equity ownership in a particular natural resource corporation is not in doubt.” Therefore, the “Control Test” generally applies.

D. Corporate Juridical Personality

1. Doctrine of Separate Juridical Personality A corporation is juridical person capable of having rights and obligations, with a personality separate and distinct from its members or stockholders.

(a) Liability for tort and crimes It is liable when the act is committed by the officer or agent under express direction

or authority from the stockholder or members acting as a body or generally from directors as governing body. (PNB vs. Court of Appeals, G.R. No. L-27155, [May 1978])

Corporations are incapable of intent, hence, they cannot commit felonies that are punishable under the Revised Penal Code. They cannot commit crimes that are punishable under special laws because crimes are personal in nature requiring a personal performance of overt acts. In addition, the penalty of imprisonment cannot be imposed.

Note: Since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers since it does not have malice, EXCEPT, if by express provision of law (i.e. Anti-Dummy Act Law and Anti-Money Laundering Act), the corporation is held criminally liable. In such case, the responsible officers would be criminally liable (People vs. Tan Boon Kong, GR. 32652, [Mar. 1930])

Note: Doctrine of Corporate Negligence – the hospital’s failure to supervise its resident physicians and nurses and to take an active step in order to remedy their negligence renders it directly liable. The duty of providing quality medical service is no longer the sole prerogative and responsibility of the physician. This is because the modern hospital now tends to organize a highly-professional medical staff whose competence and performance need also to be monitored by the hospital commensurate with its inherent responsibility to provide quality medical care. Such responsibility includes the proper supervision of the members of its medical staff. Accordingly, the

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hospital has the duty to make a reasonable effort to monitor and oversee the treatment prescribed and administered by the physicians practicing in its premises. (Divina 2010, p. 83 citing Professional Services, Inc. vs CA, G.R. No. 126297 [Feb. 2008])

(b)Recovery of damages - A corporation is not entitled to moral damages because it has no feelings, no emotions and no senses (ABS-CBN vs. Court of Appeals, GR. 128690 [Jan. 1999])

Exception: When the corporation has a good reputation that is debased, resulting in its humiliation in the business realm (Coastal Pacific Trading, Inc. vs. Southern Rolling Mills Co., Inc. [July 2006))

General Rule: Corporation cannot held liable for acts or liabilities of its stockholders or members, and vice versa.

Ratio: Doctrine of Separate Juridical Personality

Exception: Doctrine of piercing the corporate veil

The corporate existence is disregarded under this doctrine when the corporation is formed or used for illegitimate purposes, particularly, as a shield to perpetuate fraud, defeat public convenience, justify wrong, evade a just and valid obligation or defend a crime.

Rationale: To remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. (Velarde vs. Lopez, Inc., G.R. No. 153886 [Jan. 2004])

Nature of the Doctrine of Piercing the Veil of Corporate Fiction1. The question of whether a corporation is a mere alter ego is purely one of fact (Heirs of

Ramon Durano, Sr. vs. Uy, G.R. No. 136456 [Oct. 2000]).2. The doctrine has res judicata effect (Cesar Villanueva, Philippine Corporate Law, 2001)

The doctrine could not be employed by a corporation to complete its claims against another corporation and cannot therefore be employed by the claimant who does not appear to be the victim of any wrong or fraud.

When the piercing doctrine is applied against a corporation in a particular case, such corporation still possessed such separate personality in any other case, or with respect to other issues. (Tantoco vs. Kaisahan ng mga Manggagawa sa La Campana and CIR, G.R. No. L-13119 [Sept. [1959])

3. It is essentially a judicial prerogative only to pierce the veil of corporate fiction being a power belonging to the courts. A sheriff who has ministerial duty to enforce a final and executory decision cannot pierce the veil of corporate fiction by enforcing the decision against the stockholders who are not parties to the action. (Cruz vs. Dalisay, Adm. Matter No. R-181-P [July 1987])

4. Must be shown to be necessary and with factual basis. (a) Grounds for application of doctrine

1. Used as a cloak to cover fraud, illegality, or it results in injustice 2. To defeat public convenience, justify wrong, defend crime 3. Where necessary to achieve equity or to protect creditors and other valid grounds

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4. Where two factories are made to appear as one and used as a device to defeat the ends of law, or as a shield to confuse legitimate issues

5. Where the parent corporation assumes complete control of its subsidiary’s business

Note: The circumstance that a single stockholder owns 40% of the outstanding capital stock of two corporations, standing alone, is insufficient to establish identity. There must be at least a substantial identity of stockholders for both corporations in order to consider this factor to be constitutive of corporate identity. (Kukan International Corp. vs. Reyes, GR. 182729 [Sept. 2010])

(b) Test in determining applicability

1. Complete domination not only of finances but also of policies and business practice;2. Such control must have been used by the defendant to commit fraud or wrong to

perpetuate the violation of statutory or positive legal duty;3. Such control and breach of duty must be the proximate cause of the injury. (Concept

Builder vs. NLRC G.R. No. 108734. [May 1996])

The two entities cannot be deemed as separate and distinct, where there is no showing that one is merely the continuation of the other. In fact, even a change in the corporate name does not make a new corporation, whether effected by a special act or under a general law. It has no effect on the identity of the corporation or on its property, rights or liabilities. (Avon Dale Garments, Inc vs. NLRC, G.R. No. 11793 [July 1995])

When Not Applied (When the Veil Cannot Be Pierced)1. When the director has no participation to a representation made by the President, and

the execution of a promissory note with “we” as maker has a reference to the corporation and not to the directors

2. The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business

3. Fiction of separate and distinct entities cannot be disregarded there being no indication that the second corporation is a dummy or serves as a client of the first corporate entity

4. Piercing the veil cannot be availed of by one who is not a victim of a fraud or wrong 5. Where real properties included in the inventory of the estate of a decedent are in the

possession of and are registered in the name of the corporations, in the absence of any cogency to shred the veil of corporate fiction, the presumption of the conclusiveness of said titles in favor of the said corporations should stand undisturbed.

Consequences if Veil is Pierced1. If only one corporation is involved, to regard its existence as an association of persons;

and2. If two corporations participate, to merge them, and consider them only as one entity.

(Remo vs. IAC, G.R. No. L-67626 [April 1989))Corporate Entity Theory - A corporation comes into existence upon the issuance of the certificate of incorporation. Only then will it acquire a juridical personality to sue and be sued, enter into contracts, hold or convey property or perform any legal act, in its own name. As a legal entity, it is possessed with a personality separate and distinct from the individual stockholders or members. The properties it possesses belong to it

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exclusively as a separate juridical entity. The corporation is not likewise liable for debt, obligation or liabilities of its stockholder. (Sec. 19, Corporation Code)

Mere consent of the parties to form a corporation is NOT sufficient; the State must give its consent either through a special law (in the case of government corporation) or a general law (for a private corporation)

The general law under which a private corporation may be formed or organized is the Corporation Code

E. Incorporation and Organization 1. Promoter

One who takes it upon himself to organize a corporation: to procure the necessary legislation, if necessary; to procure the necessary subscribers to the articles of the incorporation ; to see that the necessary document is presented to the proper office to be recorded and the certificate of incorporation issued; and generally, to “float the company” (De Leon, 2010, p. 121)

(a) Liability of Promoter If the proposed corporation failed to organize as a corporation:

Personally liable – if money is paid by a subscriber for shares in a projected corporation

Ratio: it is a case of money paid on a consideration which has failed

Not personally liable – if subscriber agrees that the amount paid on his subscription may be applied on certain promotional expenses and it is so applied

(b)Liability of Corporation for Promoter’s Contracts

Before incorporation – A corporation cannot be liable upon any contract which a promoter attempts to make for it prior to its organization

Ratio: A corporation has no being, franchise or faculties until the certificate of incorporation has been issued by SEC. (Sec. 19, CC)

XPN: When the corporation expressly or impliedly adopts or ratifies the contract after incorporation.

After incorporation – A corporation can assume liability on a promoter’s contract. PROVIDED: it is not an ultra vires contract. (De Leon, 2010, p.126)

2. Number and Qualifications of Incorporators

Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. (Sec. 10, CC)

3. Corporate Name—Limitations on Use of Corporate Name

Incorporators may not propose to use a name that is:

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1. identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law

2. patently deceptive3. confusing or contrary to existing laws

Test: Whether the similarity us such as to mislead a person using ordinary care and discrimination and the court must look to the record as well as the names themselves. Actual confusion need not be shown; it suffices that confusion is probably or likely to occur. (Philips Export B.VS. vs. CA, G.R. No. 96161, [Feb. 1992].

Note: Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having a prior right, by a suit for injunction against the new corporation to prevent the use of the name. (Ang Mga Kaanib sa Iglesia ng Diyos kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng Diyos kay Kristo Hesus, Haligi at Suhay ng Katotohanan, G.R. No. 137592 [Dec. 2001])

4. Corporate Term

General Rule: Corporate Term depends on the period stated in the Articles of Incorporation.

Exception: Unless sooner dissolved or unless said period is extended.

Note: The term shall not exceed 50 years in any one instance and amendment must be effected before the expiration of the corporate term of existence.

5. Minimum Capital Stock and Subscription Requirements

GR: There is no minimum authorized capital stock as long as the paid‐up capital is not less than P5,000.00

XPN: As provided by special law (e.g. Banks).

Note: Each subscriber is NOT required to pay 25% of each subscribed share, the law only requires that at least 25% of the subscribed capital must be paid.

6. Articles of Incorporation

a. Nature and Function of Articles It is one that defines the charter of the corporation and the contractual relationships between the State and the corporation, the stockholders and the State, and between the corporation and its stockholders. (Lanuza vs. CA, G.R. No. 131394 [March 2005]

b. Contents 1) Name of corporation;2) Purpose/s, indicating the primary and secondary purposes;3) Place of principal office;4) Duration;5) Names, citizenship and residences of incorporators;6) Number, names, citizenship and residences of directors;7) Names, nationalities, and residences of the persons who shall act as directors of

trustees until the first regular ones are elected and qualified;

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8) If stock corporation, amount of capital stocks, number of shares and in case of par value stock corporations, the par value of each shares;

9) Names, residences, number of shares and amounts of subscription, which shall not be less than 25% of ACS;

10)Name, residences, and amount paid by each subscriber on their subscription, which shall not be less than 25% of total subscription;

11)Name of treasurer elected by subscribers; and 12) If the corporation engages in a nationalized industry, a statement that no transfer of

stock will be allowed if it will reduce the stock ownership of Filipinos to a percentage below the required legal minimum. (Sec. 14, CC)

c. Amendment Unless otherwise prescribed by CC or by special law and for legitimate purposes, any provision or matter in the AOI may be amended by:(1) Majority vote of the BOD/T; and(2) Vote or written assent of the stockholders representing at least 2/3 of the OCS or

members if it be a non-stock

Note: Validity of amendments may retroact to the date of filing if not acted upon by SEC within 6 months without fault attributable to the corporation

d. Non-Amenable Items (1) The names and address of incorporators and incorporating directors or trustees.(2) The name of treasurer originally or first elected by the subscribers or members to act

as such until his successor has been duly elected and qualified.(3) The number of shares and amount originally subscribed and paid out of the original

authorized capital stock of the corporation.(4) The date and place of execution of the AOI.(5) The signatories and acknowledgement thereof.(6) Nationalities of founders

GR: Restriction and transfer of shares may be amended

XPN: in case of close corporations, restriction and transfer of shares cannot be amended otherwise it will not be a close corporation

7. Registration and Issuance of Certificate of Incorporation

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. (Sec. 19, CC)

1. Adoption of By-Laws

Procedure in adopting By-laws:

Pre - Incorporation: It shall be signed and approved by all the incorporators and filed with the SEC together with the AOI.

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Post - Incorporation: It must be filed within 1 month after receipt of the official notice of the issuance of its certificate of incorporation by the SEC with the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or at least a majority of the members shall be necessary.

(a) Nature and Function of By-Laws By-laws signifies the rules and regulations or private laws enacted by the corporation

to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it. (China Banking Corporation vs. CA, G.R. No. 117604 [March 1997])

(b)Requisites of valid by-laws 1. It must be general and uniform in its effect or applicable to all alike or those similarly

situated;2. It must be reasonable, not arbitrary.3. It must be consistent with the AOI 4. It must not be contrary to law, public policy or morals;5. It must not impair obligations and contracts and vested rights;

(c) Binding effects By-laws are subordinates to the charter of the corporation and part of its charter is its

articles of incorporation. A by-law which is not consistent with the charter but is in conflict with it is void. A by-law can neither enlarge the rights and powers conferred by the charter nor

restrict the duties and liabilities imposed thereby, and in case it attempts to do so, the charter will prevail.

(d)Amendments By a majority vote of the directors or trustees and the majority vote of the owners of

outstanding capital stock or members in a non-stock corporation, at a regular or special meeting called for that purpose.

By the Board of Directors alone when delegated by the owners of 2/3 of the outstanding capital stock or 2/3 of members in a non-stock corporation.

Provided: 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 stockholders or members in a non-stock corporation, shall so vote at a regular or special meeting.

F. Corporate Powers

KINDS:1. Express Powers – granted by law, the Corporation Code and its Articles of Incorporation

or Charter.2. Inherent/Incidental Powers – not expressly stated but are deemed to be within the

capacity of corporate entities.3. Implied/Necessary Powers – exist as a necessary consequence of the exercise of the

express powers of the corporation or the pursuit of its purposes.

Implied Powers Test - To determine whether an act is within the implied powers of a corporation, it must be ascertained whether the act in question is in direct and immediate furtherance of the corporation’s business, fairly incident to the express powers and reasonably necessary to their exercise.

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1. General Powers, Theory of General Capacity

a. To sue and be sued in its corporate name; Venue of action- instituted at the place of the principal office of the corporation. Service upon domestic private juridical entity may be made through:

1) President;2) Managing partner;3) General partner;4) Corporate secretary;5) Treasurer; or6) In-house Counsel.

Note: Rule 14 Section 11 on Service of Summons is not applicable to intra-corporate dispute.

b. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation;

c. To adopt and use a corporate seal;d. To amend its articles of incorporation in accordance with the provisions of this Code;e. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or

repeal the same in accordance with this Code;f. In case of stock corporations, to issue or sell stocks to subscribers and to sell 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;

g. 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;

h. To enter into merger or consolidation with other corporations as provided in this Code;

i. 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;

j. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and

k. 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.

Theory of general capacity - The Corporation is said to hold such powers as are not prohibited or withheld from it by general laws.

Note: A corporation cannot enter into a partnership contract but may engage in a joint venture with the other. (Aurbach vs. Sanitary Wares Manufacturing Corp., G.R. No. 75875

[Dec. 1989])

2. Specific Powers, Theory of Specific Capacity

Theory of specific capacity - No corporation under the Corporation Code shall possess or exercise any corporate powers, except those conferred by law, its articles of incorporation, those implied from express powers, and those as are necessary or incidental to the exercise of the powers so conferred.

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(a) Power to extend or shorten corporate term (Sec. 37, CCP)

Requirements and Procedure:a. Approval by the majority vote of the board of directors or trustees.b. 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 corporation.c. The ratification must be at a meeting duly called for the purpose.d. Prior written notice of the proposal to extend or shorten corporate term must be made

stating the time and place of meeting addressed to each stock holder or member at his place of residence, either by mail or personal service;

e. In case of extension, the same cannot be made earlier than 5 years prior to the original or subsequent expiry date unless there are justifiable reasons for an earlier extension.

f. In case of extension, the same must be made during the lifetime of corporation.g. Any dissenting stockholder may exercise his appraisal right;h. Submission of amended AOI with SEC.i. Approval thereof by SEC.

(b) Power to increase or decrease capital stock or incur, create, increase bonded indebtedness

1. Power to increase or decrease capital stock

Methods of Increasing the Capital stocka. Increasing the par value of the existing number of shares without increasing the

number of shares;b. Increasing the number of existing shares without increasing the par value;c. Increasing the number of existing shares and at the same time increasing the par

value of the shares.

Valid Reasons for Increasing the Capital Stock To generate more working capital. To issue shares to sell to acquire assets. To have extra shares to meet the requirement for declaration of stock dividend. (Bar

Review Materials in Commercial Law, Jorge Miravide, 2002);

Valid Reasons for Decreasing the Capital Stock To reduce or wipe out existing deficit where no creditors would thereby be affected. When the capital is more than what is necessary to procreate the business or

reduction of capital surplus To write down the value of its fixed assets to reflect their present actual value in case

where there is a decline in the value of the fixed assets of the corporation. (The Corporation Code of the Philippines – Annotated, Ruben C. Ladia, 2007)

Requirements:a. Approval by the majority vote of the board of directors.b. Ratification by the stockholders holding or representing at least 2/3 of the

outstanding capital stock at a meeting duly called for that purpose.c. Prior written notice of the proposed increase or decrease of the capital stock

indicating the time and place of meeting addressed to each stockholder must made either by mail or personal service.

d. A certificate in duplicate must be signed by a majority of the directors, countersigned by the chairman and the secretary of the stockholders meeting.

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e. In case of increase in capital stock, 25% of such capital must be subscribed and at least 25% of the amount must be paid either in cash or property.

f. In case of decrease in capital stock, the same must not prejudice the right of creditors.

g. Filing of the certificate of increase and amended articles with SEC.h. Approval thereof by the SEC.

2. Power to Incur, Create or Increase Bonded IndebtednessThe weight of authority is to the effect that in the course of corporate dealings, the corporation may need additional funds to carry the purpose of its organization such that it may source its funding requirements by borrowing them evidenced by bonds, notes or debentures.

Bonded Indebtedness - a long term indebtedness secured by real or personal property (corporate assets).

Note: Not all borrowings made by a corporation needs the approval of the stockholders. Only bonded indebtedness requires such approval.

Requirements:Same with the power to increase or decrease capital stock.

(c) Power to deny pre-emptive rights (Sec. 39, CC)

Pre-Emptive Right - is the preferential right of shareholders to subscribe to all issues or dispositions of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the AOI or any amendment thereof.

The purpose of pre-emptive right is to enable the shareholder to retain his proportionate control in the corporation and retain his equity in the surplus.

Pre-Emptive Rights Shall Not Extend to Shares: To be issued in compliance with laws requiring stock offerings or minimum stock

ownership by the public; or To be issued in good faith with the approval of the stockholders representing 2/3 of

the outstanding capital stock: In exchange for property needed for corporate purposes; or In payment of a previously contracted debt. In case the right is denied in the articles of incorporation.

Note: These exemptions will not apply to close corporations.

(d) Power to sell or dispose of corporate assets (Sec. 41, CC)

GR: Where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for debts and liabilities of the transferor.

XPNs: 1. Where the purchaser expressly or impliedly agrees to assume such debts;2. Where the transaction amounts to a consolidation or merger of the corporation;3. Where the purchasing corporation is merely a continuation of the selling corporation;

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Where the transaction is entered into fraudulently in order to escape liability for such debts. (Edward J. Nell Co. vs. Pacific Farms, Inc., L-20850 [November 1965])

Condition for Valid Exercise of this Powera. Resolution by the majority vote of the board of directors/trusteesb. Authorization from stockholders representing at least 2/3 of the outstanding capital

stock or 2/3 of the members.c. The ratification of the stockholders or members must be made at meeting duly called

for that purpose.d. 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.e. The sale of the assets shall be subject to the provisions of existing laws on illegal

combinations and monopolies.f. Any dissenting stockholder shall have the option to exercise his appraisal right.

(e) Power to acquire own shares (Sec. 41, CC)A stock corporation shall have the power to purchase or acquire its own shares for legitimate corporate purposes, provided that the corporation has unrestricted retained earnings in its books to cover the shares to be purchased/ acquired.

Instances: a. To redeem redeemable shares. b. To acquire treasury sharesc. To pay dissenting or withdrawing stockholders entitled to payment for their shares –

in the exercise of appraisal right.d. To effect a decrease of capital stock;e. To collect or compromise an indebtedness to the corporation arising out of unpaid

subscription. f. In close corporations, when there is a deadlock in the management of the business.g. To eliminate fractional shares arising out of stock dividends.

Note: Corporation cannot use its capital stock to purchase its own shares, that is, corporate assets below the Legal or Stated Capital but only Surplus Profits.

Exception:a. In the redemption of redeemable shares.b. In case of a close corporation, the stockholders can exercise their right to compel the

corporation to purchase their share for any reason, provided the corporation has sufficient assets in its book to cover its debts and liabilities.

(f) Power to invest corporate funds in another corporation or business (Sec. 42, CC)

Requirements and Steps to be followed for valid investment:a. Resolution by the majority of the board of directors or trustees.b. 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.c. The ratification must be made in a meeting duly called for that purpose.d. 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.

e. Any dissenting stockholder shall have the option to exercise his appraisal right.

(g) Power to declare dividends (Sec. 43, CC)

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Dividends – Part or portion of the profits of the enterprise which the corporation sets apart for ratable distribution among the holders of the capital stock. The board of directors may declare dividends only out of the unrestricted retained earnings with approval of the stockholders representing not less than 2/3 of the outstanding capital – stock dividends.

Unrestricted Retained Earnings – undistributed earnings of the corporation which have not been allocated for any managerial, contractual or legal purposes and which are free for distribution to the stockholders as dividends.

GR: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-up capital stock.

XPNs: [CPR]a. When justified by definite Corporate expansion projects or programs approved by the

board of directors;b. When the corporation is Prohibited under any loan agreement with any financial

institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or

c. Retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies.

(h) Power to enter into management contract (Sec. 44, CC)

Management Contract - One entered into between two corporations whereby one corporation undertakes to manage all or substantially all of the business of the other corporation for a certain period of time.

Note: Section 44 of the Corporation Code refers only to a management contract with another corporation. Hence, it applies only to contracts for management of all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise.

Requirements:1. Resolution of the Board of Directors/Trustees; and2. Majority vote of the outstanding capital stock or members, as the case may be, in a

meeting duly called for the purpose.

Except: 2/3 votes shall be necessary if:a. The stockholder(s) represent(s) the interests of both corporations and who owns 1/3 of

outstanding capital stocks of the managing corporation.b. Majority of the members of the board of managing corporation composes also majority of

the members of the board of the managed corporation.

Note: The action undertaken must be voted upon at a duly constituted meeting.

Period of Management Contract

GR: Not longer than 5 years for any 1 term

XPN: Contracts which relate to the exploration, development exploitation, or utilization of natural resources that may be entered into for such periods as may be provided by pertinent laws or regulations.

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A management contract cannot delegate entire supervision and control over the officers and business of a corporation to another as this will contravene. (Sec. 23)

(I) Ultra vires acts Sec. 45, CC – Pertains to acts that cannot be executed or performed by a corporation because they are not within its express, inherent or implied powers as defined by its charter or articles of incorporation.

i.) Applicability of ultra vires doctrine(a) Acts done beyond the powers of the corporation as provided in the law or its articles

of incorporation;(b) Acts or contracts entered into in behalf of a corporation by persons who have no

corporate authority (Note: This is technically ultra vires acts of officers and not of the corporation.)

(c) Acts or contracts, which are per se illegal as being contrary to law.

ii.) Consequences of ultra vires acts(a) On the corporation – The franchise or certificate of incorporation may be

suspended or revoked, after proper notice and hearing, for serious misrepresentation as to what the corporation can do or is doing to the great damage or prejudice of the general public

(b) On the rights of stockholders – Stockholders 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

(c) On the immediate parties If the contract is fully executed on both sides, the contract is effective and the

courts will not interfere to deprive either party of what has been acquired under it If the contract is executor on both sides, as a rule, neither party can maintain an

action for its non-performance

(3) 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. 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.

(j) Doctrine of individuality of subscription – Subscription to shares of stock are deemed indivisible and no certificate of stock can be issued unless and until the full amount of the subscription including interest and expenses, if any, is paid.

(k) Doctrine of equality of shares - Where the Articles of Incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities.

Sec. 6 par. 5 provides:

“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.”

(3) How exercised: (a) By the shareholders – by exercising their right to vote in the following:

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(1) Election or removal of directors/trustees(2) Management contract (3) Adoption, amendment or repeal of by-laws (4) Fixing the issued price of no-par value shares, if BOD is not authorized by the

articles of incorporation(5) Amendment of articles of incorporation(6) Ratification of certain acts of directors(7) Extension or shortening of corporate term(8) Increase or decrease of capital stock(9) Incur, create or increase bonded indebtedness(10) Denial of pre-emptive right(11) Sale, lease, exchange, mortgage, pledge or disposal of all or substantially all of

corporate assets(12) Investment of corporate funds in another corporation or business or for any other

purpose other than the primary purpose(13) Issuance of stock dividends (14) Merger or consolidation

(b) By the Board of Directors – The Board of Directors exercises the powers of the corporation. Generally, the Board alone, without the concurrence of the stockholders, may exercise the powers. The stockholders cannot overrule the directors in its exercise of the corporate powers.

(c) By the Officers – In some cases, corporate officers like the President can also bind the corporation. The authority of such individuals to bind the corporation is generally derived from:(1) Law(2) Corporate by-laws(3) Authorization from the board, either expressly or impliedly by habit, custom or

acquiescence in the general course of business

A corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that the authority to do so has been conferred upon him, and these include:

(1.)Powers that, in the usual course of the particular business, are incidental to those expressly provided

(2.)Powers that may be implied from the powers intentionally conferred(3.)Powers added by custom and usage, as usually pertaining to the particular officer or

agent(4.)Such apparent powers as the corporation has caused person dealing with the officer or

agent to believe that it has conferred

An officer may also bind the corporation if he has apparent authority.

Note: The following officials or employees of the company can sign the verification and certification without need of a board resolution: 1) the Chairperson of the Board of Directors, (2) the President of a corporation, (3) the General Manager or Acting General Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case. (Cagayan Valley Drug Corporation vs. CIR, G.R. No. 151413 [Feb. 2008])

(4) Trust fund doctrine - The capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. The subscribed capital stock of the corporation is a trust fund for the payment of debts of the

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corporation which the creditors have the right to look up to satisfy their credits. Corporation may not dissipate this and the creditors may sue stockholders directly for the unpaid subscription. (CIR vs. CA, G.R. No. 108576 [Jan. 1999])

G. Board of Directors and Trustees

1. Doctrine of Centralized Management As can be gleaned from Sec. 23 of Corporation Code “It is the board of directors or trustees which exercises almost all the corporate powers in a corporation.” (Spouses Firme vs. Bukal Enterprises and Devs. Corp., G.R. No. 146608 [Oct. 2003])

The exercise of the corporate powers of the corporation rest in the Board of Directors save in those instances where the Corporation Code requires stockholders’ approval for certain specific acts. (Great Asian Sales Center Corp. vs. Court of Appeals, G.R. No. 105774 [April 2002])

2. Business Judgment Rule Contracts intra vires entered into by the board of directors are binding upon the corporation Courts will not interfere in the decisions made by the BOD as regards the internal affairs of the corporation. (Yong vs. Tiu, G.R. No. 144476 [April 2003])

XPN: Unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of rights of the minority. (Ingersoll vs. Malabon Sugar Co., G.R. No. L‐16977 [Apr. 1922])

Note: The consequences of business judgment rule are:1. Resolutions and transactions entered into by the Board within the powers of the

corporation cannot be reversed by the courts not even on the behest of the stockholders.

2. Directors and officers acting within such business judgment cannot be he held personally liable for such acts.

Note: A board resolution authorizing a corporate officer to obtain a loan includes the authority to assign the receivables to secure the loan if the resolution also empowers the officer to agree to the terms and conditions of the loan and sign the implementing documents. The officer who signed the deed of assignment is however, not personally liable if he indicated in the deed that he was signing in behalf of the corporation. (Divina 2010, p. 79)

(5) Intra Corporate DisputeNot all conflicts between the stockholders and the corporation are classified as intra-corporate. Other factors such as the status or relationship of the parties and the nature of the question that is the subject of the controversy must be considered in determining whether the dispute involves corporate matters so as to regard them as intra-corporate controversies. (Marc II Marketing, Inc. vs. Joson, GR. 171993 [Dec., 2011])

The dismissal of a corporate officer is always regarded as a corporate and/or an intra-corporate controversy; Intra-corporate controversies also includes controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships, or associations. (Marc II Marketing, Inc. vs. Joson, GR. 171993 [Dec., 2011])

The fact that the parties involved in the controversy are all stockholders or that the parties involved are the stockholders and the corporation does not necessarily place the

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dispute within the ambit of the jurisdiction of the SEC (now the Regional Trial Court). (Real vs. Sangu Philippines, Inc., GR.168757 [Jan., 2011])

3. Tenure, Qualifications and Disqualifications of Directors or Trustees

GR: Directors or trustees shall hold office for 1 year.

XPN: If no election is held, the directors and officers shall hold position under a hold‐over capacity until their successors are elected and qualified. (SEC Opinion, Dec. 15, 1989).

Note: hold-over situation arises only when no successors are elected due to valid and justifiable reasons (SEC-OGC Opinion No. 07-08, April 2007)

Qualifications of a director1. Must own at least 1 share of the capital stock;

Note: Ownership of stock shall stand in his name on the books of the corporation.

A person who does not own a stock at the time of his election or appointment does not disqualify him as director if he becomes a shareholder before assuming the duties of his office. (SEC Opinions, Novs. 9, 1987 & April 5, 1990)

2. Must be a natural person;

Note: What is material is the legal title, not beneficial ownership of the stock as appearing on the books of the corporation.

Grounds for disqualification of a director1. Conviction by final judgment of an offense punishable by imprisonment exceeding 6

years2. Violation of the Corporation Code committed within 5 years prior to his election or

appointment (Sec 27)

4. Elections a. Cumulative Voting/Straight Voting

1. Straight voting – every stockholder may vote such number of shares for as many persons as there are directors to be elected.

2. Cumulative voting for one candidate – a stockholder is allowed to concentrate his votes and give one candidate, as many votes as the number of directors to be elected multiplied by the number of his shares shall equal.

3. Cumulative voting by distribution – a stockholder may cumulate his shares by multiplying the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. (De Leon, 2010, p. 249)

Note: Cumulative voting in case of non‐stock corporations only if it is provided in the AOI.

b. Quorum 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. (Sec. 25, CC)

Note: A director who is disqualified by reason of personal interest in the matter before a director’s meeting, loses, pro hac vice, his capacity as a director and he cannot be

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counted for the purpose of making a quorum, nor can the vote of such director be counted for the purpose of determining whether the corporate act was (sic) passed by a majority vote. (SEC Opinion, July 1994)

5. Removal The power to remove directors or trustees belongs exclusively to the stockholders.

Requisites: 1. It  must  take  place  either at a regular meeting or special meeting of

the stockholders or members called for the purpose 2. Previous notice to the stockholders or members of the intention to remove  a

director 3. A vote of the stockholders representing 2/3 of outstanding  capital stock or

2/3 of members4. Generally,  removal  may  be  with  or without cause 

Note: If the director to be removed was elected by the minority, there must be cause for removal because the minority may not be deprived of the right to representation to which they may be entitled under Sec. 24 of the Code. (Sec. 28) 

6. Filling of Vacancies Stockholders or members may fill the vacancy, if it is due to:

l. If the vacancy may be filled by the remaining directors or trustees but the board refers the matter to stockholders or members; or

m. Expiration of term n. Removalo. Increase in the number of directorsp. Grounds other than removal or expiration of term, e.g. death, resignation,

abandonment, or disqualification where the remaining directors do not constitute a quorum for the purpose of filling the vacancy

Any vacancy occurring in the BOD/T other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least majority of the remaining directors or trustees, if still constituting a quorum. (Sec. 29, CC) 

7. Compensation GR: Directors, in their capacity as such, are not entitled to receive any compensation except for reasonable per diems. 

XPNs:1. Compensation is fixed in the by‐laws 2. Granted by vote of stockholders representing at least a majority of the outstanding

capital stock at a regular or special meeting 3. When they are also officers of the corporation

Note: In no case shall the total yearly compensation of directors, as such directors, exceed ten percent (10%) of the net income before income tax of the corporation during the preceding year.

8. Fiduciaries Duties and Liability Rules Directors are considered in equity as bearing a “fiduciary relation” to the corporation

and its stockholders. Directors are expected and are obliged to act with utmost candor and fair dealing for the interest of the corporation and without taint of selfish motives. (Ladia 2007, p. 194 citing Fletcher)

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Doctrine of Corporate Opportunity – Under this rule, Corporate Directors are personally liable if guilty of gross negligence or bad faith in directing affairs of the corporation, which results in damage or injury to the corporation, its stockholders and other persons. (Sanchez vs. Republic, G.R. 172885 [October 2009]

There is disloyalty when:o A director or trustee acquires any personal or pecuniary interest in conflict with (his)

duty as such director or trusteeo He attempts to acquire or acquires, in violation of his duty, any interest adverse to

the corporation in respect to any matter which has been resposed in him in confidence.

o He, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profit to the prejudice of such corporation. (Ladia 2007, p. 195)

Note: The above enumerations are the grounds by which a director may be held liable for damages and thus, the veil of corporate fiction may be pierced. (De Leon 2010, p. 305)

Personal liability may also attach when the director:

o Assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders or other persons.

o Consents to the issuance of watered stocks or who, having knowledge thereof, does not file with the corporate secretary his written objection thereto (Sec. 65, CC)

o Is made personally liable by specific provision of law (Sec. 144, CC)o Agrees to hold himself personally and solitarily liable with the corporation (Tramat

Mercantile Inc., vs. CA, G.R. No. 111008 [Nov. 1994])

9. Responsibility for Crimes A director or officer may be held criminally liable when the corporation was directly required by law to do an act in a given manner, and the same law makes the person who fails to perform the act in the prescribed manner expressly liable criminally.

Ratio: The performance of the act is an obligation directly imposed by the law on the corporation. Since it is a responsible officer or officers of the corporation who actually perform the act for the corporation, they must of necessity be the ones to assume the criminal liability; otherwise this liability as created by the law would be illusory, and the deterrent effect of the law, negated. (Sia vs. People, G.R. No. L-30896 [April 1983]

10. Inside Information Information not known to the public that one has obtained by virtue of being an insider like a director (Miriam Webster Dictionary, 2006). 

11. Contracts (a) By self-dealing directors with the corporation (Sec. 32, CC) - 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 of 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 20

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, provided:1. The contract is 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

2. Such ratification is made at a meeting called for that purpose;3. Full disclosure of the adverse interest of the directors or trustees involved is made;

and 4. The contract is fair and reasonable under the circumstances.

(b) Between corporations with interlocking directors (Sec. 33, CC) - Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors.

c. Management Contracts It is a 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. (Sec. 44) 

16. Executive Committee (1.)Creation - The by-laws of a corporation may create an executive committee, composed

of not less than three members of the board, to be appointed by the board.(2.)Limitations on its powers - The 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: Approval of any action for which shareholders' approval is also required; The filing of vacancies in the board; The amendment or repeal of by-laws or the adoption of new by-laws; The amendment or repeal of any resolution of the board which by its express terms is

not so amendable or repealable; and A distribution of cash dividends to the shareholders.

Note: In case there is an absence of authority in the by-laws allowing the creation of an executive committee, the principle on de facto officers may be applied insofar as third persons are concerned and as to the corporation, the unauthorized act of appointment may be subject to Sec. 144, CC. (De Leon 2010, p. 316-317)

17. Meetings (a) Regular or special

(i) When and where Regular - monthly, unless the by-laws provide otherwise (Sec. 53, CC) Special - at any time upon the call of the president or as provided in the by-laws

(Sec. 53, CC)

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Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. (Sec. 53, CC)

Teleconference: BOD may conduct their meeting through teleconferencing or Videoconferencing provided (SEC Memorandum Circular No.15, 2001 in rel. to Electronic Commerce Act and Sec. 25, CC):1. The secretary shall safeguard the integrity of the meeting and to record and

safe keep the same.2. Notice to directors in accordance with by-laws3. Consent of the director4. Roll call shall be made by the Secretary.5. All participants shall identify themselves for the record, before speaking and

must clearly hear and/or see each other in the course of the meeting6. Signature of the directors who attended the meeting on the minutes of the

meeting.

(ii) Notice: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. (Sec. 53, CC) b) Who presides - The president shall preside at the meeting, unless the by-laws provide otherwise. (Sec. 54, CC)

c) Quorum (Sec. 25, CC)

General Rule: 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.Exception: unless the articles of incorporation or the by-laws provide for a greater majority. Note: Quorum is based on the totality of the shares which have been subscribed and issued, whether it be founders’ shares or common shares. (Lanuza vs. CA, G.R. No. 131394 [Mar. 2005])

(3.) Rule on abstentionAn abstention represents a shareholders affirmative choice to decline to vote on a proposal. Abstained shares are considered to be "present" and "entitled to vote" at the meeting and are therefore included in quorum calculations. In most cases, however, abstentions are not considered "votes cast." Therefore, where a majority of "votes cast" is required for passage, abstentions will have no effect, but where a proposal requires a majority of the shares "present" at the meeting or "present and entitled to vote on the subject matter," abstentions will have the effect of votes cast "against".

H. Stockholders and Members

A person may become a stockholder in a corporation by:(1.)A contract of subscription with the corporation(2.)Purchase of treasury shares from the corporation(3.)Purchase or acquisition of shares from existing stockholders (Ladia 2007, p. 338 citing

Ballantine)

1. Rights of a Stockholder and Members a. Participation in the management of the corporate affairs by exercising their right to

vote and be voted upon either personally or by proxyb. Right to enter into a voting trust agreement c. Right to receive dividends and to compel their declaration if warranted

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d. Right 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

e. Right to be issued a certificate of stock for fully paid-up shares f. Pre-emptive rightsg. Appraisal righth. Right to institute derivative suiti. Right to recover shares of stock unlawfully sold for delinquency as may be allowedj. Right to inspect the books of the corporation, subject to limitationsk. Right to be furnished by the most recent financial statementsl. Right to be issued a new stock certificate in lieu of the lost or destroyed onem. Right to have the corporation dissolvedn. Right to participate in the distribution of the assets of the corporation upon

dissolutiono. Right to petition the SEC to arbitrate in the event of a deadlock, in case of a close

corporationp. Right to withdraw from a closed corporation for any reason, and compel the

corporation to purchase his shares (Ladia 2007, p. 405)

Note: A stockholder may compel the corporation to declare dividends when the corporation’s paid up capital exceeds 100%. (Sec. 43, CC)

a. Doctrine of Equality of Shares - Where the Articles of Incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities (Sec. 6, CC)

2. Participation in Management (a) Proxy (Sec. 58, CC)

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.

It shall be valid only for the meeting for which it is intended, unless otherwise provided in the proxy

No proxy shall be valid and effective for a period longer than five (5) years at any one time.

(b) Voting trust – An agreement whereby 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 5 years at any one time.

Voting Trust Agreement vs. Proxy

VOTING TRUST PROXYTrustee votes as an owner rather a mere agent.

Proxy holder votes as an agent.

The trustee may vote in person or by proxy unless the agreement provides otherwise.

Proxy must vote in person.

Trustee acquires legal title to the share/s of the transferring stockholder.

Proxy has no legal title to the share/s of the principal.

The agreement is irrevocable. Revocable at any time except when coupled

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VOTING TRUST PROXYwith interest

A trustee can vote and exercise all the rights of a stockholder even when the latter is present.

A proxy can only vote in the absence of the owner of the stock.

Trustee is not limited to act at any particular meeting

A proxy can only act at a specified stockholders’ meeting (if not continuing)

Agreement must be notarized. Proxy need not be notarized. The agreement must not exceed 5 years at any one time, except when the same is made a condition of a loan.

Unless otherwise provided in the proxy, it shall be valid for the meeting for which it was intended but it cannot exceed 5 years at any one time

The voting right is divorced from the ownership of stocks

The right to vote is inherent in or inseparable from the right to ownership of stock.

c. Cases When Stockholders’ Action is Required

Limitations on the Voting Trust Cannot be entered into for a period exceeding 5 years at any 1 time except when it is

a condition in a loan agreement but said contract shall automatically expire upon full payment of the loan.

The agreement must not be used for the purpose of fraud. It must be in writing and notarized and specify the terms and conditions thereof. A certified copy of the agreement must be filed with the corporation and with the

SEC. The agreement shall be subject to examination by any stockholder of the corporation. Unless expressly renewed, all rights granted in the agreement shall automatically

expire at the end of the agreed period.

A corporation cannot enforce the voting trust agreement executed by the stockholder and trustees. Voting is personal in nature for those who are qualified and willing to vote. The voting trust is personal to the stockholder and trustees. (NIDC vs. Aquino’ 163 SCRA 153 [1988])

Powers or Rights of Voting Trustees Shall posses the right to vote and other rights pertaining to the shares so transferred

and registered in his or their names subject to the terms and conditions of and for the period specified in the agreement.

May vote in person or by proxy unless the agreement provides otherwise. The trustee may exercise the rights of inspection of all corporate books and records. The trustee is the legal title holder or owner of the shares so transferred under the

agreement. He is therefore qualified to be a director.

(c) Cases when stockholders’ action is requiredi. By a majority vote

1. Election of directors/trustees (Sec. 24, CC)2. Management contract (Sec. 44, CC)3. Adoption of by-laws (Sec. 46, CC)4. Amendment or repeal of by-laws (Sec. 48, CC)5. Fixing the issued price of no-par value shares, if BOD is not authorized by the

articles of incorporation (Sec. 62, CC)%

ii. By a two-thirds votea. Amendment of articles of incorporation

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b. Removal of directors/trustees (Sec. 28, CC)c. Ratification of a contract of self-dealing directors (Sec. 32, CC)d. Ratification of an act of a disloyal director (Sec. 34, CC)e. Extension or shortening of corporate term (Sec. 37, CC)f. Increase or decrease of capital stock (Sec. 38, CC)g. Incur, create or increase bonded indebtedness (Sec. 38, CC)h. Denial of pre-emptive right (Sec. 39, CC)i. Sale, lease, exchange, mortgage, pledge or disposal of all or substantially all of

corporate assets (Sec. 40, CC)j. Investment of corporate funds in another corporation or business or for any other

purpose other than the primary purpose (Sec. 42, CC)k. Issuance of stock dividends (Sec. 43, CC)l. Managed corporation in a management contract:

i. 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

ii. 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 (Sec. 44, CC)

m. Delegation of the power to amend, repeal or adopt new by-laws to BOD (Sec. 48, CC)

n. Merger or consolidation (Sec. 77, CC)o. Adoption of plan or distribution of assets of non-stock corporation (Sec. 95, CC)p. Dissolution (Sec. 118 & 199, CC)

iii. By cumulative voting (Sec. 32, CC)Where the presence of a director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting, and the vote of such director or trustee was not necessary for the approval of the contract, such contract with a director or trustee may be ratified, provided: a. The contract is 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

b. Such ratification is made at a meeting called for that purpose;c. Full disclosure of the adverse interest of the directors or trustees involved is

made; and d. The contract is fair and reasonable under the circumstances.

3. Proprietary Rights a. Right to Dividends – the right of the stockholder to demand payment of dividends

after board declaration. Stockholders are entitled to dividends pro rata based on the total number of shares that they own and not on the amount paid for the shares. 

b. Right of 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.

c. Right to Inspect – the right of a director, trustee, stockholder or member of the corporation to inspect records of all business transactions and minutes of any meetings of the corporation provided the following requisites are present:  (1) It must be exercised at reasonable hours on business days; (2) The stockholder inspecting has not improperly used any information he has

secured through any prior examination of the records of such corporation or any other corporation

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(3) Must act in good faith or for  a legitimate purpose in making his demand

Distinction of the right of inspection of a stockholder and that of a directorSTOCKHOLDER/MEMBER DIRECTOR

May inspect and examine the books and records as provided in Sections 74 and 75 but may not gain access to highly sensitive and confidential information.

Absolute and unqualified and without regard to motive

d. Pre-Emptive Right – the preferential right granted to all stockholders of a corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. (Sec. 39, CC)

e. Right to Vote Note: Preferred, redeemable and common shares may be denied the right to vote.

f. Right of First Refusal – the right granted to stockholders of existing corporations to buy the shares of stock of another stockholder at a fixed price and only valid if made on reasonable terms and consideration. 

4. Remedial Rights (a) Individual suit – a suit instituted by a shareholder for his own behalf against the

corporation; (b) Representative suit – a suit filed by a shareholder in his behalf and in behalf likewise

of other stockholders similarly situated and with a common cause against the corporation; and

(c) Derivative suit – a suit filed in behalf of the corporation by its shareholders (not creditors whose remedies are merely subsidiary such as accion subrogatoria and accion pauliana) upon a cause of action belonging to the corporation, but not duly pursued by it, against any person or against the directors, officers and/or controlling shareholders of the corporation.

Requisites:(1.)The party bringing suit should be a shareholder as of the time of the act or

transaction complained of, the number of his shares not being material; (2.)He has tried to exhaust intra-corporate remedies, i.e., has made a demand on the

board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and

(3.)The cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit.

5. Obligation of a Stockholder

A stockholder has the following obligations (a) Liability for failure to create corporation(b) Liability for watered stock;(c) Liability for dividends unlawfully paid;(d) To pay the corporation for unpaid subscription including interest, when se required

by the by laws;(e) To pay the creditors of the corporation for unpaid subscription;

6. Meetings (a) Regular or special

i. When and where

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(a) Regular - annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees. (Sec. 50, CC)

(b) Special - any time deemed necessary or as provided in the by-laws. (Sec. 50, CC) Stockholders' or members' meetings, whether regular or special, shall be

held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation.

Metro Manila is considered a city or municipality. A non-stock corporation may provide in its by-laws for any place within

the Philippines (Sec. 51, CC)

ii. Notice – written notice must be sent to stockholders of members(a) Regular - at least two (2) weeks prior to the meeting, unless a different period

is required by the by-laws. (b) Special - at least 1 week written notice shall be sent to all stockholders or

members, unless otherwise provided in the by-laws.

Note: Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.

(b) Who calls the meetings - It must be called by the proper party. The following persons who may call the meeting:1. The person or persons authorized under the by-laws;2. Absent of any provision in the by-laws, the president;3. Under Sec. 28 (removal of director), by the secretary on order of the president or

on written demand of the stockholder representing or holding at least a majority of the outstanding capital stock or majority of the members entitled to vote in a non-stock corporation, or the stockholder or member making the demand if there is no secretary or he refuses to do so; and

4. On order of the proper forum under Sec. 50, CC.

Note: A stockholder may only petition the SEC to issue an order directing the petitioner to call a meeting when there is no person authorized to call a meeting. Otherwise, the remedy is to file a petition for mandamus.

(c) Quorum (Sec. 52, CC) General Rule: Quorum consists of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations.Exception: unless otherwise provided for in this Code or in the by-laws

(d) Minutes of meetings (Sec. 74, CC) – The minutes of all meetings must set forth in detail the following: 1. time and place of holding the meeting 2. how authorized 3. the notice given 4. whether the meeting was regular or special; if special, its object 5. those present and absent6. every act done or ordered done at the meeting

Upon demand of any director, trustee, stockholder or member, the following must be noted in the minutes:

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7. time when any director, trustee, stockholder or member entered or left the meeting

8. yeas and nays 9. protest on any action or proposed actionMinutes of meetings are subject to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and a copy of excerpts of said records may be demanded.

I. Capital Structure 1. Subscription Agreements

Any contract for the acquisition of unissued stocks in an existing corporation or a corporation still to be formed. (CIR vs. First Express Pawnshop, Inc., G.R. Nos. 172045-46 [June 2009])

2. Consideration for Stocks Stocks may be issued for the following considerations:1. Actual cash paid to the corporation2. 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;6. Outstanding shares exchanged for stocks in the event of reclassification or

conversion.

3. Shares of Stock a. Nature of Stock

The ownership of share of stock confers no immediate legal right or title to any of the property of the corporation. Each share merely represents a distinct undivided share or interest in the common property of the corporation. (De Leon 2010, p. 80)

Incorporeal in nature, the shares are personal property of the stockholder (except treasury shares in the treasury of the corporation).

They do not constitute an indebtedness of the corporation.

b. Subscription Agreements

c. Consideration for Shares of Stock(a) Actual cash paid to the corporation;(b) 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;

(c) Labor performed for or services actually rendered to the corporation;(d) Previously incurred indebtedness of the corporation;(e) Amounts transferred from unrestricted retained earnings to stated capital; and(f) Outstanding shares exchanged for stocks in the event of reclassification or

conversion.

Stocks shall not be issued for a consideration less than the par or issued price thereof

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.

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Shares of stock shall not be issued in exchange for promissory notes or future service.

d. Watered Stock (a) Definition – those issued for a consideration less than par or issued value or those

issued not in exchange for its equivalent either in cash, property, share, stock dividends, or services. These include stocks:i. Issued without consideration (Bonus Share);i. Issued as fully paid when the corporation has received less sum of money than its

par or issued value (Discounted Shares);ii. Issued for consideration other than actual cash (property or service), the fair

valuation of which is less than its par or issued value;iii. Issued as stock dividends when there are no sufficient retained earnings or

surplus to justify it.

(b) 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. (Sec. 65, CC)

Note: The solidary liability of the directors emanates from the fiduciary character of the position of director or corporate officer. 

(c) Trust fund doctrine for liability for watered stocks – Capital stock, inclusive of unpaid subscription, is a trust fund which the creditors have the right to look up to for the satisfaction of their claims.

e. Situs of shares of stock - The property in the shares may be deemed to be situated in the province in which the corporation has its principal office or place of business. (Guan vs. Samahang Magsasaka, G.R. No. L-42091 [November 1935])

f. Classes of Shares of Stock 1. Common Stock - represents the residual ownership interest in the corporation. It is a

basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. It usually carries with it the right to vote, and frequently, the exclusive the right to do so.

2. Preferred Stocks - are those which entitle the shareholder to some priority on dividends and asset distribution. The amount of preference is stated in the contract of subscription and is usually on a fixed percentage or by a specified amount indicated therein.i. Participating - the holder is still given a right to participate with the common

stocks holder dividends beyond the stated preference.ii. Non-participating - where there is no such participation.iii. Cumulative - those that entitle the owner to payment or not only of current

dividend but also back dividends not previously paid whether or not during the past years, dividends were declared or paid. In order that a preferred stock may be considered cumulative, the same must be provided for and specified in the contract of subscription.

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iv. Non-Cumulative - those which grants the holder of such share only to the payment of current dividends when dividends are paid, to the extent agreed upon before any other stockholders are paid the same.1. Discretionary Dividend Type - gives the holder such share the right to have

dividends paid in a particular years depending on the judgment and discretion of the board.

2. Mandatory Type - impose a positive duty on directors to declare dividends every year when profits are earned.

3. Earned Cumulative or Dividend Credit Type - the holder the right to arrears in dividends every year when profits are earned during the previous year but dividends were not declared. The right to receive dividends is merely postponed to a later date.

3. Founders’ Shares - issued to the founders of the corporation and may be given certain rights and privileges not enjoyed by the owners of other stocks. Where, however, the exclusive right to vote and be voted for in the election of directors is granted, said right cannot exceed five years, subject to SEC approval and counted from the date of said approval. (Sec. 7, CC)

4. Treasury Shares - shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, or donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the Board (Sec. 9, CC).

5. Redeemable Shares – those which may be issued by the corporation when expressly so provided in the articles of incorporation, and which may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained. (Sec. 8, CC).

6. Voting Shares - gives the holder thereof the right to vote and participate in the management of the corporation through the exercise of such right.

Note: The term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock comprising both common and non-voting preferred shares. (Gamboa vs. Teves, GR. 176579 [Jun, 2011])

7. Non-Voting Shares - those which do not grant the holder thereof voting rights.

8. Street Certificate – stock certificate indorsed by the registered holder in blank and the transferee can command its transfer to his name from the issuing corporation.

9. Share in Escrow – share is subject to an agreement that the same must be deposited by the grantor or his agent with a third person to be delivered to a stockholder or his assign after complying with certain conditions, usually payment of the subscription price. This arrangement is similar to an express trust in Article 1440 of the Civil Code.

10. Convertible Share - a share that is changeable by the stockholder from one class to another at a certain price and with a certain period.

11. Par Value Shares - those whose values are fixed in the articles of incorporation and are indicated in the certificate of stock, the primary function of which is to fix a minimum subscription or original issue price of the shares.

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12. No Par Value Shares - those whose issued price are not stated in the certificate of stock, but which may be fixed in the articles of incorporation, or by the board of directors when so authorized by said articles or by-laws, or in the absence thereof, by the stockholders themselves.

13. Over-Issued/Spurious Stock – stock issued in excess of the authorized capital stock and its issuance are thus void.

14. Watered Stock – those issued for a consideration less than par or issued value or those issued not in exchange for its equivalent either in cash, property, share, stock dividends, or services. These include stocks: Issued without consideration (Bonus Share); Issued as fully paid when the corporation has received less sum of money than its

par or issued value (Discounted Shares); Issued for consideration other than actual cash (property or service), the fair

valuation of which is less than its par or issued value; Issued as stock dividends when there are no sufficient retained earnings or

surplus to justify it.

4. Payment of Balance of Subscription

GR: The unpaid subscriptions are not due and payable until a call is made by the corporation for payment. XPN: 1. when the corporation has become insolvent2. if the contract of subscription provides the date or dates when payment is due

(a) Call by board of directors – The BOD, by a formal Resolution, declares the whole or any percentage of unpaid subscriptions to be due and payable on a specified date. However, if the contract of subscription provides the date or dates when payment is due, no “call” or declaration by the Board is necessary.

(b) Notice requirement – The stockholders concerned are given notice of the Resolution by the corporation either personally or by registered mail. Publication of the notice of call is not required unless the by-laws provide otherwise. Notice is likewise not necessary if the contract of subscription stipulates a specific date when any unpaid portion is due and payable.

Note: To make out a prima facie case in a suit against stockholders of an insolvent corporation to compel them to contribute to the payment of its debts by making good unpaid balances upon their subscriptions, it is only necessary to establish that the stockholders have not in good faith paid the par value of the stocks of the corporation. (Halley vs. Printwell, Inc., GR. 157549 [May, 2011])

(c) Sale of Delinquent Shares i. Effect of delinquency – No delinquent stock shall be voted for 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. (Sec. 71, CC)

ii. Call by resolution of the board of directors - 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

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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. (Sec. 68, CC)

iii. Notice of sale - 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. (Sec. 68, CC)

iv. Auction sale - 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.

v. 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. (Sec. 68, CC)

5. Certificate of Stock The document or instrument evidencing the interest of a stockholder in a corporation (Ladia 2007) (a) Nature of the certificate – personal property (Sec. 63, CC)(b) Uncertificated shares – The issuance of a stock certificate is not a condition sine qua

non to consider a subscriber as a stockholder. The moment his subscription becomes effective, he becomes a stockholder for all intents and purposes, except only that he cannot be entitled to be issued a certificate of stock until the full amount of his subscription is paid. The only other instance when he may not be able to exercise his rights as such stockholder is when his shares have been declared delinquent. (The Corporation Code of the Philippines, Ladia)

(c) Negotiability – Stock certificate is not negotiable because transferee takes it without prejudice to defenses of the true owner, except when estoppel applies. (The Corporation Code of the Philippines, Ladia)

Note: A stock certificate is quasi-negotiable, because it is transferable by endorsement and delivery.

(i) Requirements for valid transfer of stocks1. There must be delivery of the stock certificate2. The certificate must be endorsed by the owner or his attorney-in-fact or other

persons legally authorized to make the transfer

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3. To be valid against third parties, the transfer must be recorded in the books of the corporation. (Rural Bank of Lipa, Inc. vs. CA, G.R. No. 124535 [September 2001])

(d) Issuance – transaction by which a person becomes the owner of shares and by which new share contracts are created (The Corporation Code of the Philippines, Ladia)i. Full payment - 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. (Sec. 64, CC)

ii. Payment pro-rata – Subscriptions to shares of stock are indivisible, such that a subscriber to such shares will not be entitled to the issuance of a stock certificate until he has paid the full amount of his subscription (The Corporation Code of the Philippines, Ladia)

(e) 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:i. File affidavit of circumstances – The registered owner of a certificate of stock 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;

ii. Verification and Publication – 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

iii. Cancellation and Issuance – 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

iv. Early Issuance – If the registered owner files a bond or other security effective for a period of one (1) year, a new certificate may be issued even before the expiration of the one (1) year period

e) Stock and transfer book(i) Contents

(a) All stocks in the names of the stockholders alphabetically arranged; (b) Installments paid and unpaid on all stock for which subscription has been made,

and the date of payment of any installment(c) Statement of every alienation, sale or transfer of stock made, the date thereof,

and by and to whom made; (d) Other entries as the by-laws may prescribe. (Sec. 74, CC)

(ii) Who may make valid entries:

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(1.)Employee so authorized(2.)Stock and transfer agent

7. Disposition and Encumbrance of Shares (a) Allowable restrictions on the sale of shares - No transfer of stock or interest which

shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation. (Sec. 15, CC)

(b) Sale of partially paid shares - Shares whose full par value has not been paid by their holders. Issuing firm has to make a 'call' for collecting the remaining amount

(c) Sale of a portion of shares not fully paid(d) Sale of all of shares not fully paid(e) Sale of fully paid shares - shares issued in which no more money is required to be

paid to the company by shareholders on the value of the shares. When a company issues shares upon incorporation or through an issuance, either initial or secondary, shareholders are required to pay a set amount for those shares. Once the company has received the full amount from shareholders, the shares become fully paid shares.

(f) Requisites of a valid transfer:1. There must be delivery of the stock certificate;2. The certificate must be endorsed by the owner or his attorney-in-fact or other

persons legally authorized to make the transfer;3. To be valid against third parties, the transfer must be recorded in the books of

the corporation. (Rural Bank of Lipa, Inc. vs. CA, .R. No. 124535 [September 2001])

(g) Involuntary dealings - It refers to transactions affecting shares of stocks in which the consent or cooperation of the registered owner is not needed

J. Dissolution and Liquidation1. Modes of Dissolution

(a) Voluntaryi. Where no creditors are affected (Sec. 118, CC)

Procedure:1. Publication - 3 consecutive weeks publication of the notice of time, place and

object of the meeting in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least 30 days prior to said meeting

2. Board Resolution - majority vote of the board of directors or trustees3. Stockholders or members approval -affirmative vote of the stockholders

owning at least 2/3 of the outstanding capital stock or of at least 2/3 of the members of a meeting to be held upon call of the directors or trustees

4. Certification - a copy of the resolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation

5. Issuance of certificate of Dissolution - the SEC shall thereupon issue the certificate

ii. Where creditors are affected - Petition for dissolution (Sec. 119, CC)Formalities:a. signed by a majority of its board of directors or trustees or other officers

having the management of its affairsb. verified by its president or secretary or one of its directors or trustees

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c. affirmative vote of the stockholders representing at least 2/3 of the outstanding capital stock or by at least 2/3 of the members at a meeting of its stockholders or members called for the purpose

Contents - set forth all claims and demands against itWhere filed - with SEC

Procedure by the SEC:1. by order reciting the purpose of the petition, fix a date on or before which

objections thereto may be filed by any person, which date shall not be less than 30 days nor more than 60 days after the entry of the order

2. a copy of the order shall be published at least once a week for 3 consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for 3 consecutive weeks in 3 public places in such municipality or city

3. upon 5 day’s notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation.

iii. By shortening of corporate term - A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term. A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange Commission in accordance with the 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 the Code on liquidation. (Sec. 120, CC)

(b) Involuntaryi. By expiration of corporate term – A corporation registered under the Corporation

Code, except a religious corporation, is required to indicate its term of existence in the articles of incorporation. It ceases to exist and is deemed automatically dissolved upon the expiration of the term indicated thereat without the need of any formal proceeding.

ii. Failure to organize and commence business within 2 years from incorporation - If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. (Sec. 22, CC)

iii. Legislative dissolution - If a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. (Sec. 22, CC)

iv. Dissolution by the SEC on grounds under existing laws

Under Sec. 6(i) of P.D. 902 (SEC Reorganization Act)1. Fraud in procuring its certificate of registration2. Serious misrepresentation as to what the corporation can do or is doing to the

great prejudice of or damage to the general public

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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 5 years5. Failure to file by-laws within the required period6. Failure to file required reports in appropriate forms as determined by the

Commission within the prescribed period

Grounds under the Corporation Code1. Violation of any of the provisions of the Code (Sec. 144)2. Deadlock in a close corporation (Sec. 105)3. In a close corporation, any act 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 (Sec. 105)

2. Methods of Liquidation(a) By the corporation itself

The power of the board to manage the corporate affairs is broad enough to cover a situation where the corporation affairs are to be liquidated. 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 corporation not filed within the period become unenforceable as there exists 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 that period, the corporation ceases for all intents and purposes and is no longer capable of suing or being sued. (The Corporation Code of the Philippines, Ladia)

(b) Conveyance to a trustee within a 3-year period

If this method is used, the 3-year period limitation imposed will not apply provided the designation of the trustee is made within that period. Should the corporation find it difficult to finish its liquidation, it may, at any time during the 3-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. During the period of liquidation, but before completion thereof, a corporation, as represented by its trustee, can sue and be sued even beyond the 3-year period fixed by law. (The Corporation Code of the Philippines, Ladia)

(c) By management committee or rehabilitation receiver

A receiver may be appointed by the proper forum on petition or motu proprio upon the dissolution of the corporation. Appointment of a receiver is permissive and may be granted only upon special circumstances. 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. However, mere appointment of a receiver without anything more does not result in the dissolution of a corporation. (The Corporation Code of the Philippines, Ladia)

Corporate rehabilitation connotes the restoration of the debtor to a position of successful operation and solvency. There is no reason why criminal proceedings should be suspended during corporate rehabilitation. (Panilio vs. Regioonal Trial Court, GR. 173846, [Feb., 2011])

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Rehabilitation does not restrict the power of the corporation to sue (Umale vs. ASB Realty Corp., GR. 181126, [Jun., 2011])

Asking to participate in the rehabilitation proceedings does not later on amount to estoppel estoppel that would bar it from questioning the rehabilitation court’s jurisdiction. (Asiatrust Development Bank vs. First Aikka Development, Inc., GR. 179558, [Jun., 2011])

Rehabilitation proceedings are summary and non-adversarial in nature, and do not contemplate adjudication of claims that must be threshed out in ordinary court proceedings. (Advent Capital and Finance Corporation vs. Alcantara, 664 SCRA 224 [Jan 2012])

(d) Liquidation after three years

If the 3-year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors (or trustees) itself may be permitted to so continue as trustees by legal implication to complete the corporate liquidation. Still in the absence of board of directors or trustees, those having 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 representation with SEC. (Clemente vs. CA)

K. Other Corporations 1. Close corporations

A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: 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);

All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and

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. (Sec. 96, CC)

a) Characteristics of a close corporationi. The number of stockholders cannot exceed 20.ii. To the extent that all stockholders can be deemed directors, the number of

directors can effectively be more than 15.iii. Shares of stock are subject to specified restrictions.iv. Shares of stock are prohibited from being listed in the stock exchange or offered

for sale to the public.v. Stockholders may take an active part in the corporate management by vesting

management to them rather than the BOD.vi. Those active in management are personally liable for corporate torts unless the

corporation has obtained adequate liability insurance.vii. Directors can validly act even without a meeting.viii.Agreements between stockholders regarding the operations of the business can

validly be made.

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ix. To the extent that directors may be classified into one or more classes and be voted solely by a particular class of stock, cumulative voting may, in effect, be restricted.

x. The articles of incorporation may provide that all officers shall be elected or appointed by the stockholders.

xi. It may provide for greater quorum and voting requirements in meetings of stockholders and directors.

xii. Restriction on transfer of shares should be indicated in the articles of incorporation/by-laws, and stock certificates.

xiii.Pre-emptive right of stockholders is broader as it includes all issues without exception.

xiv.A stockholder may withdraw and compel the corporation to purchase his share for any reason with the limitation only that the corporation has sufficient assets to cover its liabilities exclusive of capital stock.

xv. Any stockholder may petition SEC for corporate dissolution on grounds, among others, provided for in Sec. 105. (The Corporation Code of the Philippines, Ladia)

b) 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. (Sec. 98, CC)

c) Issuance or transfer of stock in breach of qualifying conditionsi. If stock of a close corporation is issued or transferred to any person who is not

entitled under any provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder.

ii. If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact.

iii. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction.

iv. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee.

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v. The provisions of subsection (4) shall not applicable if the transfer of stock, though contrary to subsections (1), (2) of (3), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation.

vi. The term "transfer", as used in this section, is not limited to a transfer for value.vii. The provisions of this section shall not impair any right which the transferee may

have to rescind the transfer or to recover under any applicable warranty, express or implied. (Sec. 99, CC)

d) 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:i. Before or after such action is taken, written consent thereto is signed by all the

directors; orii. All the stockholders have actual or implied knowledge of the action and make no

prompt objection thereto in writing; oriii. The directors are accustomed to take informal action with the express or implied

acquiescence of all the stockholders; oriv. All the directors have express or implied knowledge of the action in question and

none of them makes prompt objection thereto in writing. (Sec. 101, CC)

Note: If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof.

e) Preemptive right - 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. (Sec 102, CC)

f) Amendment of articles of incorporation - Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose. (Sec 103, CC)

g) 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) canceling or altering any provision contained in the articles of incorporation, by-laws, or any stockholder's agreement; (2) canceling, 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,

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officers, or other persons party to the action; (4) requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; (5) appointing a provisional director; (6) dissolving the corporation; or (7) granting such other relief as the circumstances may warrant.

A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Commission. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders. His compensation shall be determined by agreement between him and the corporation subject to approval of the Commission, which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation. (Sec. 104, CC)

2. Non-stock corporations(a) Definition - one where no part of its income is distributable as dividends to its

members, trustees, or officers, subject to the provisions of the Corporation Code on dissolution (Sec. 87, CC)

(b) Purposes - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions governing particular classes of non-stock corporations. (Sec. 88, CC)

(c) Treatment of profits - Any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized (Sec. 87, CC)

(d) Distribution of assets upon dissolution - 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:i. All liabilities and obligations of the corporation shall be paid, satisfied and

discharged, or adequate provision shall be made therefore;ii. Assets held by the corporation upon a condition requiring return, transfer or

conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements;

iii. 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;

iv. 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

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v. 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. (Sec. 94, CC)

3. Religious corporations (exclude)

4. Foreign corporationsOne 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 (Sec. 123, CC)

a) Bases of authority over foreign corporations(i) Consent(ii) Doctrine of “doing business” (relate to definition under the Foreign Investments

Act, RA 7042)

The test of doing business is 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)

Doing business under the Foreign Investments Act includes:(a) Soliciting orders, service contracts, opening offices, whether liaison or branch;(b) Appointing representatives domiciled in the country for 180 days or more;(c) Participating in the management, supervision and control of any domestic

business;(d) Any other acts that imply continuity of commercial dealings or arrangements

b) Necessity of a license to do business 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 the local courts. (Marshall-Wells vs. Elser, G.R. No. 22015 [September 1924])

Note: For banking institutions, a certificate of authority from the Board of Investment is no longer required under Foreign Investments Act of 1991 (R.A. 7042). Said certificate of authority is necessary only for the purpose of availing of the incentives granted and allowed under the Omnibus Investment Code. (Ladia 2007, p. 529)

i. Requisites for issuance of 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:

(a) The date and term of incorporation;(b) The address, including the street number, of the principal office of the corporation in

the country or state of incorporation;

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(c) 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;

(d) The place in the Philippines where the corporation intends to operate;(e) 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;

(f) The names and addresses of the present directors and officers of the corporation;(g) 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;

(h) 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;

(i) A statement of the amount actually paid in; and(j) 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. (Sec. 125, CC)

ii. Resident agent1. Purpose:

The resident agent shall be authorized to accept summons and processes in all legal proceedings

Pending the establishment of a local office, he shall receive all notices affecting corporation

2. A resident agent can be: An Individual who must residing in the Philippines and of good moral character

and of sound financial standing. A domestic corporation lawfully transacting business in the Philippines

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Note: A resident agent is not necessarily authorized to execute the requisite certification against forum shopping. This is because while a resident agent may be aware of actions filed against his principal (a foreign corporation doing business in the Philippines), such resident may not be aware of actions initiated by its principal, whether in the Philippines against a domestic corporation or private individual, or in the country where such corporation was organized and registered, against a Philippine registered corporation or a Filipino citizen. (Expertravel vs. CA, G.R. No. 152392 [May 2005])

c) Personality to sue(1) A foreign corporation transacting or doing business in the Philippines with a

license can sue before Philippine courts.(2) Subject to certain exceptions, a foreign corporation doing business in the

country without a license cannot sue in Philippine courts.(3) If it is not transacting business in the Philippines, even without a license, it can

sue before Philippine courts. (The Corporation Code of the Philippines, Ladia)

d) Suability of foreign corporations(a) A foreign corporation transacting business in the Philippines with the requisite

license can be sued in Philippine courts.(b) A foreign corporation transacting business in the Philippines without a license

can be sued in Philippine courts.(c) If it is not doing business in the Philippines, it cannot be sued in Philippine

courts for lack of jurisdiction. (Ladia)

e) Instances when unlicensed foreign corporations may be allowed to sue - Isolated transactions(a) 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;

(b) If the purpose of the suit is to protect its trademark, tradename, corporate name, reputation or goodwill;

(c) Where it is based on violation of the Revised Penal Code;(d) If it is merely defending a suit filed against it;(e) Where the party is stopped to challenge the personality of the corporation by

entering into a contract with it.

f) Grounds for revocation of license(a) Failure to file its annual report or pay any fees as required by this Code;(b) Failure to appoint and maintain a resident agent in the Philippines as required

by this Title;(c) 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;

(d) 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;

(e) A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title;

(f) 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;

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(g) Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license;

(h) 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

(i) Any other ground as would render it unfit to transact business in the Philippines.

(j) Other grounds that may be provided by special laws

L. Mergers and Consolidations

1. Definition and concept Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation. (Sec. 76, CC)

MERGER CONSOLIDATIONuniting 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

uniting or amalgamation of two or more existing corporations to form a new corporation

There is no new corporation created A single new corporation is created

The other constituent corporations are dissolved except the surviving corporation

All corporations are dissolved, but a new one is created.

2. Constituent vs. consolidated corporation

CONSTITUENT CORPORATION CONSOLIDATED CORPORATIONa corporation which is merged with or into one or more other corporations or one or more other business entities and includes a surviving corporation

the united concern resulting from the union of two or more constituent corporations

Contents of Plan of merger or consolidation: (a) The names of the corporations proposing to merge or consolidate(b) The terms and mode of carrying out the merger or consolidation;(c) A statement of the changes, if any, in the articles of incorporation of the surviving

corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and

(d) Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. (Sec. 76, CC)

3. Articles of merger or consolidationAfter the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation setting forth:i. The plan of the merger or the plan of consolidation;ii. As to stock corporations, the number of shares outstanding, or in the case of non-

stock corporations, the number of members; andiii. As to each corporation, the number of shares or members voting for and against such

plan, respectively. (Sec. 78, CC)

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4. Procedure (a) Approval of merger or consolidation plan by BOD/T of each constituent corporations,

setting forth the matters required in Sec. 76.(b) Approval of the plan by stockholders representing 2/3 of the outstanding capital

stock, or 2/3 of the members in non-stock corporations, of each of such corporations at separate corporate meetings called for the purpose.

(c) 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 2 weeks prior to the scheduled meeting, either personally of by registered mail, stating the purpose thereof.

(d) Execution of the articles of merger or consolidation by each constituent corporation to be signed by the president or vice-president and certified by the corporate secretary or assistant secretary, setting forth the matters required in Sec. 78.

(e) Submission of the articles of merger or consolidation in quadruplicate to sec, subject to the requirement of sec. 79, that if it involves 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.

(f) Issuance of the certificate of merger or consolidation by the sec at which time the merger or consolidation shall be effective.

5. Effectivity 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. (Sec. 79, CC)

6. Limitations - 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. (Sec. 79, CC)

7. Effects:(a) The constituent corporations shall become a single corporation which, in case of merger,

shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation;

Note: Although there is a dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of their assets, because the surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities. (Associated Bank vs. CA, G.R. No. 123793 [June 1998])

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(b) The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation;

(c) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code;

GR: Where one corporation that sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor

XPN: 1) Purchaser expressly or impliedly agrees to assume such debts;2) Fraudulent transaction to escape liability for debts;3) Transaction amounts to a consolidation or merger of the corporations;4) Purchasing corporation is merely a continuation of the selling corporation;

(Edward J. Nell Company vs. Pacific Farms Inc., G.R. No. L-20850 [November 1965])

(d) 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

Note: A bank which merged with another bank can sue a debtor of the absorbed bank because it acquired the rights of the latter. Novation (because of the change of creditor) is not a valid defense because it is settled that in a merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its assets, rights, properties and liabilities are acquired by the surviving corporation. (Divina 2010, p. 110 on Babst vs. CA, G.R. No. 99398 [January 2001])

(e) The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation.

Note: The surviving or consolidated corporation assumes automatically the liabilities of the dissolved corporations, regardless of whether the creditors have consented or not to such merger or consolidation. (Mcleod vs. NLRC, G.R. No. 146667 [Jan. 2007])

SECURITIES REGULATION CODE

A. State policy (purpose)

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

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fraudulent or manipulative devices and practices which create distortions in the free market. (Sec. 2, SRC)

B. Powers and functions of the SEC

1. Regulatory(a) Have jurisdiction and supervision over all corporations, partnerships or associations

who are the grantees of primary franchises and/or a license or permit issued by the Government; 

(b) Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspects of the securities market and propose legislation and amendments thereto;

(c) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications;

(d) Regulate, investigate or supervise the activities of persons to ensure compliance;(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing

agencies and other SROs;(f) Impose sanctions for the violation of laws and the rules, regulations and orders

issued pursuant thereto;(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions

and provide guidance on and supervise compliance with such rules, regulations and orders;

(h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions under this Code;

(i) Issue cease and desist orders to prevent fraud or injury to the investing public;(j) Punish for contempt of the Commission, both direct and indirect, in accordance with

the pertinent provisions of and penalties prescribed by the Rules of Court;(k) Compel the officers of any registered corporation or association to call meetings of

stockholders or members thereof under its supervision;(l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of

the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws;

(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law; and

(n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws. (Sec. 5, SRC)

2. AdjudicativeThe Commission’s jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, that the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed. (Sec. 5, SRC)

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C. Securities required to be registered

Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. 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, SRC)

1. Exempt securities(a) Any security issued or guaranteed by the Government of the Philippines, 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 which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the Commission 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. (Sec. 9, SRC)2. Exempt transactions

(a) At any 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) The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus.

(e) The 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) The 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) The 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.

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(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; orvi. 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.

D. Procedure for registration of securities(a) All securities required to be registered shall be registered through the filing by the

issuer in the main office of the Commission, of a sworn registration statement with respect to such securities, in such form and containing such information and documents as the Commission shall prescribe.

(b) In promulgating rules governing the content of any registration statement (including any prospectus made a part thereof or annexed thereto), the Commission may require the registration statement to contain such information or documents as it may, by rule, prescribe. It may dispense with any such requirement, or may require additional information or documents, including written information from an expert, depending on the necessity thereof or their applicability to the class of securities sought to be registered.

(c) The information required for the registration of any kind, and all securities, shall include, among others, the effect of the securities issue on ownership, on the mix of ownership, especially foreign and local ownership.

(d) The registration statement shall be signed by the issuer’s executive officer, its principal operating officer, its principal financial officer, its comptroller, principal accounting officer, its corporate secretary or persons performing similar functions accompanied by a duly verified resolution of the board of directors of the issuer corporation. The written consent of the expert named as having certified any part of the registration statement or any document used in connection therewith shall also be filed. Where the registration statement includes shares to be sold by selling shareholders, a written certification by such selling shareholders as to the accuracy

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of any part of the registration statement contributed to by such selling shareholders shall also be filed.

(e) Upon filing of the registration statement, the issuer shall pay to the Commission a fee of not more than one-tenth (1/10) of one per centum (1%) of the maximum aggregate price at which such securities are proposed to be offered. The Commission shall prescribe by rule diminishing fees in inverse proportion to the value of the aggregate price of the offering.

(f) Notice of the filing of the registration statement shall be immediately published by the issuer, at its own expense, in two (2) newspapers of general circulation in the Philippines, once a week for two (2) consecutive weeks, or in such other manner as the Commission by rule shall prescribe, reciting that a registration statement for the sale of such security has been filed, and that the aforesaid registration statement, as well as the papers attached thereto are open to inspection at the Commission during business hours, and copies thereof, photostatic or otherwise, shall be furnished to interested parties at such reasonable charge as the Commission may prescribe.

(g) Within forty-five (45) days after the date of filing of the registration statement, or by such later date to which the issuer has consented, the Commission shall declare the registration statement effective or rejected, unless the applicant is allowed to amend the registration statement as provided in Section 14 hereof. The Commission shall enter an order declaring the registration statement to be effective if it finds that the registration statement together with all the other papers and documents attached thereto, is on its face complete and that the requirements have been complied with. The Commission may impose such terms and conditions as may be necessary or appropriate for the protection of the investors.

(h) Upon effectivity of the registration statement, the issuer shall state under oath in every prospectus that all registration requirements have been met and that all information are true and correct as represented by the issuer or the one making the statement. Any untrue statement of fact or omission to state a material fact required to be stated therein or necessary to make the statement therein not misleading shall constitute fraud.

E. Prohibitions on fraud, manipulation and insider trading

1. Manipulation of security pricesIt shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly:

(a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading market (hereafter referred to purposes of this Chapter as “Exchange”):(1) By effecting any transaction in such security which involves no change in the

beneficial ownership thereof;(2) By entering an order or orders for the purchase or sale of such security with the

knowledge that a simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties; or

(3) By performing similar act where there is no change in beneficial ownership.

(b) To effect, alone or with others, a series of transactions in securities that:

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(1) Raises their price to induce the purchase of a security, whether of the same or a different class of the same issuer or of a controlling, controlled, or commonly controlled company by others;

(2) Depresses their price to induce the sale of a security, whether of the same or a different class, of the same issuer or of a controlling, controlled, or commonly controlled company by others; or

(3) Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close, painting the tape, squeezing the float, hype and dump, boiler room operations and such other similar devices.

(c) To circulate or disseminate information that the price of any security listed in an 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 for the purpose of inducing the purchase or sale of such security.

(d) To make false or misleading statement 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 any security listed or traded in an Exchange.

(e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security, unless otherwise allowed by this Code or by rules of the Commission. (Sec. 24, SRC)

2. Short salesNo person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in connection with the purchase or sale of any security except in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. (Sec. 24, SRC)

In a short sale, the seller sells a security or commodity which he does not own, expecting to make a profit when the market price declines.

3. Fraudulent transactionsIt shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to:

(a) Employ any device, scheme, or artifice to defraud;

(b) Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or

(c) Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person. (Sec. 26, SRC)

4. Insider tradingIt shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public, unless:

(a) The insider proves that the information was not gained from such relationship; or

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(b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves:

(c) that he disclosed the information to the other party, or (d) that he had reason to believe that the other party otherwise is also in possession of

the information. 

A purchase or sale of a security of the issuer made by an insider, or such insider’s spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in possession of material non-public information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for the market to absorb such information: Provided, however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was not aware of the material non-public information at the time of the purchase or sale.

Information is “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.

It shall be unlawful for any insider to communicate material non-public information about the issuer or the security to any person who, by virtue of the communication, becomes an insider as defined in Subsection 3.8, where the insider communicating the information knows or has reason to believe that such person will likely buy or sell a security of the issuer while in possession of such information.

It shall be unlawful where a tender offer has commenced or is about to commence for:

(a) Any person (other than the tender offeror) who is in possession of material non-public information relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is non-public and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer; and

(b) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, and any insider of such issuer to communicate material non-public information relating to the tender offer to any other person where such communication is likely to result in a violation of Subsection 27.4 (a)(i).

For purposes of this subsection the term “securities of the issuer sought or to be sought by such tender offer” shall include any securities convertible or exchangeable into such securities or any options or rights in any of the foregoing securities.

F. Protection of investors

1. Tender offer ruleAny person or group of persons acting in concert who intends to acquire at least fifteen per cent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with assets of at least Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more stockholders with at least one

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hundred (100) shares each or who intends to acquire at least thirty per cent (30%) of such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information required in Section 17 of this Code as the Commission may prescribe. (Sec. 19, SRC)

2. Rules on proxy solicitation(1) Proxies must be issued and proxy solicitation must be made in accordance with rules

and regulations to be issued by the Commission;(2) Proxies must be in writing, signed by the stockholder or his duly authorized

representative and filed before the scheduled meeting with the corporate secretary.(3) 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 one time.

(4) No broker or dealer shall give any proxy, consent or authorization, in respect of any security carried for the account of a customer, to a person other than the customer, without the express written authorization of such customer.

(5) 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.

3. Disclosure RuleAll information filed with the Commission in compliance with the requirements of this Code shall be made available to any member of the general public, upon request, in the premises and during regular office hours of the Commission, except as set forth in this Section. Nothing in this Code shall be construed to require, or to authorize the Commission to require, the revealing of trade secrets or processes in any application, report, or document filed with the Commission.

Any person filing any such application, report or document may make written objection to the public disclosure of information contained therein, stating the grounds for such objection, and the Commission may hear objections as it deems necessary.  The Commission may, in such cases, make available to the public the information contained in any such application, report, or document only when a disclosure of such information is required in the public interest or for the protection of investors; and copies of information so made available may be furnished to any person having a legitimate interest therein at such reasonable charge and under such reasonable limitations as the Commission may prescribe.

It shall be unlawful for any member, officer, or employee of the Commission to disclose to any person other than a member, officer or employee of the Commission or to use for personal benefit, any information contained in any application, report, or document filed with the Commission which is not made available to the public pursuant to Subsection 66.3. (Sec. 66, SRC)

G. Civil liability

(a) Civil Liabilities on Account of False Registration Statement - Any person acquiring a security, the registration statement of which or any part thereof contains on its effectivity an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make such statements not misleading, and who suffers damage, may sue and recover damages from the following enumerated

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persons, unless it is proved that at the time of such acquisition he knew of such untrue statement or omission:

(1) The issuer and every person who signed the registration statement;(2) Every person who was a director of, or any other person performing similar functions,

or a partner in, the issuer at the time of the filing of the registration statement or any part, supplement or amendment thereof with respect to which his liability is asserted;

(3) Every person who is named in the registration statement as being or about to become a director of, or a person performing similar functions, or a partner in, the issuer and whose written consent thereto is filed with the registration statement;

(4) Every auditor or auditing firm named as having certified any financial statements used in connection with the registration statement or prospectus.

(5) Every person who, with his written consent, which shall be filed with the registration statement, has been named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement, report, or valuation, which purports to have been prepared or certified by him.

(6) Every selling shareholder who contributed to and certified as to the accuracy of a portion of the registration statement, with respect to that portion of the registration statement which purports to have been contributed by him.

(7) Every underwriter with respect to such security.

If the person who acquired the security did so after the issuer has made generally available to its security holders an income statement covering a period of at least twelve months beginning from the effective date of the registration statement, then the right of recovery under this subsection shall be conditioned on proof that such person acquired the security relying upon such untrue statement in the registration statement or relying upon the registration statement and not knowing of such income statement, but such reliance may be established without proof of the reading of the registration statement by such person. (Sec. 56, SRC)

(b)Civil Liabilities Arising in Connection With Prospectus, Communications and Reports - Any person who:(1) Offers to sell or sells a security in violation of Chapter III; or(2) Offers to sell or sells a security, whether or not exempted by the provisions of this

Code, by the use of any means or instruments of transportation or communication, by means of a prospectus or other written or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall fail in the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable to the person purchasing such security from him, who may sue to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.

Any person who shall make or cause to be made any statement in any report, or document filed pursuant to this Code or any rule or regulation thereunder, which statement was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, shall be liable to any person who, not knowing that such statement was false or misleading, and relying upon such statements shall have purchased or sold a security at a price which was

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affected by such statement, for damages caused by such reliance, unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading. (Sec. 57, SRC)

(c) Civil Liability for Fraud in Connection With Securities Transactions. - Any person who engages in any act or transaction in violation of Sections 19.2, 20 or 26, or any rule or regulation of the Commission thereunder, shall be liable to any other person who purchases or sells any security, grants or refuses to grant any proxy, consent or authorization, or accepts or declines an invitation for tender of a security, as the case may be, for the damages sustained by such other person as a result of such act or transaction. (Sec. 58, SRC)

(d) Civil Liability for Manipulation of Security Prices. - Any person who willfully participates in any act or transaction in violation of Section 24 shall be liable to any person who shall purchase or sell any security at a price which was affected by such act or transaction, and the person so injured may sue to recover the damages sustained as a result of such act or transaction. (Sec. 59, SRC)

(e) Civil Liability With Respect to Commodity Futures Contracts and Pre-need Plans. - Any person who engages in any act or transaction in willful violation of any rule or regulation promulgated by the Commission under Section 11 or 16, which the Commission denominates at the time of issuance as intended to prohibit fraud in the offer and sale of pre-need plans or to prohibit fraud, manipulation, fictitious transactions, undue speculation, or other unfair or abusive practices with respect to commodity future contracts, shall be liable to any other person sustaining damage as a result of such act or transaction. (Sec. 60, SRC)

(f) Civil Liability on Account of Insider Trading. - Any insider who violates Subsection 27.1 and any person in the case of a tender offer who violates Subsection 27.4 (a)(i), or any rule or regulation thereunder, by purchasing or selling a security while in possession of material information not generally available to the public, shall be liable in a suit brought by any investor who, contemporaneously with the purchase or sale of securities that is the subject of the violation, purchased or sold securities of the same class unless such insider, or such person in the case of a tender offer, proves that such investor knew the information or would have purchased or sold at the same price regardless of disclosure of the information to him.

An insider who violates Subsection 27.3 or any person in the case of a tender offer who violates Subsection 27.4 (a), or any rule or regulation thereunder, by communicating material non-public information, shall be jointly and severally liable under Subsection 61.1 with, and to the same extent as, the insider, or person in the case of a tender offer, to whom the communication was directed and who is liable under Subsection 61.1 by reason of his purchase or sale of a security. (Sec. 61, SRC)

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