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APPRAISAL RIGHT

Sec. 81: APPRAISAL RIGHT
- right of shareholder to demand payment of the fair value of his shares after dissenting from a proposed corporate action involving
a fundamental change in the corporation in the cases provided by law.

INSTANCES WHEN THE APPRAISAL RIGHT MAY BE EXERCISED
1. In case of any amendment to the AI which has the effect of changing or restricting the rights of any shareholder or class of
shares, or authorizing preferences in any respect superior to those of outstanding shares of any class;
2. Amendment which has the effect of extending or shortening the term of corporate existence;
3. In case of sale, lease, exchange, transfer, mortgage, pledge, or other disposition of all or substantially all of corporate
property and assets;
4. In case of merger or consolidation;
5. Investment of corporate funds to another corporation or business for any purpose other than its primary purpose;
6. Shareholder of any close corporation may compel the corporation to allow him to exercise the right when the corporation has
sufficient assets in the books to cover its debts and liabilities exclusive of capital stock. (Sec. 85)

HOW TO EXERCISE APPRAISAL RIGHT (Sec. 82)
1. By voting against the proposed action
2. By making a written demand within 30 days after the vote was taken.
3. By surrendering the Certificate of Stock within 10 days from demand (for notation only that such is dissenting share,
once noted, return to shareholder)
- importance of surrender Sec. 86 so that shareholder rights will not be terminated
4. All rights accruing to the shares from demand for payment until either abandonment of the corporate action involved or
the purchase of said shares by the corp. shall be suspended (30 days) including voting and dividend rights EXCEPT the
right to receive the payment of fair value.
- Note: Failure to make a written demand within 30 days shall be deemed a waiver of appraisal right
- If the withdrawing shareholder and corp. cannot agree on the fair value of the shares within 60 days appraised
by 3 disinterested persons (1 by shareholder, 1 by corp, 1 chosen by the 2) findings of the majority of the
appraisers shall be final and the award be paid by the corp within 30 days after award is made.
5. Corp. pays the shareholder the fair market value of the share fair value as of the day prior to the date on which the vote
was taken, excluding any appreciation or depreciation in anticipation of such corporate action
6. Upon payment, shareholder shall transfer his shares to the corp.
- effect if dissenting shareholder Is not paid the value of his shares within 30 days after the award
- His voting and dividend rights shall immediately be received (back as shareholder)

EXTINGUISHMENT OF RIGHT OF PAYMENT
Gen Rule: No demand of payment of the FV of shares may be withdrawn
Exceptions:
1. Such shareholder withdraws his demand for payment and the corporation consents thereto;
2. Proposed corporate action is abandoned or rescinded by the corporation;
3. The proposed corporate action is disapproved by SEC, where its approval is necessary;
4. The SEC determines that such shareholder is not entitled to appraisal right.

Effects when right of Payment has ceased:
1. Restored as shareholder
2. All dividends which would have accrued in his shares shall be paid to him

Sec. 85: WHO BEARS THE COST OF APPRAISAL
1. the corporation
a. Where the price offered by the stockholder is approximately the same as the FV ascertained by the appraisers; or
b. In case of an action to recover such FV is filed by the dissenting shareholder and his refusal to accept payment is
found by the court to be justified.
2. the Stockholder
a. Where the price offered by the corporation is approximately the same as the FV ascertained by the appraisers; or
b. In case of an action to recover such FV is filed by the dissenting shareholder and his refusal to accept payment is
found by the court to be unjustified.
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Effects of Transfer of Shares/COS
1. The rights of transferor as dissenting shareholder shall cease and transferee shall have all the rights of a regular
shareholder.
2. All dividends which or would have accrued to such shares shall be paid to transferee.
- purchasing the dissenting shares is an indication on the part of the transferee to become a shareholder which is in
contrast to the right of appraisal.

NON-STOCK CORPORATIONS

NON-STOCK CORPORATION (Sec. 87)
-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
- Any profit obtained as an incident to its operations shall be used for the furtherance of the purpose(s) for which it was organized.
Purposes (Sec. 88): charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil
service, or similar purposes, like trade, industry, agricultural and like chambers or combination thereof.
*NSCs are governed by the same rules established for stock corporations, whenever pertinent, subject, however, to a number of
special features.

STOCK CORPORATION vs. NON-STOCK CORPORATION
SC NSC
1. Has capital stock divided into shares and with authority
to distribute to its stockholders
1. Does not have shares and may not distribute profits to its
members
2. Stockholders may transfer their shares 2. Members cannot transfer their membership unless
allowed by the AI or by-laws
3. Cumulative voting is available in the election of
directors
3. cumulative voting not available unless otherwise provided
in the AI or by-laws
4. Directors cannot exceed 15 in number 4. Trustees may exceed 15 in number
5. The term of a director is 1 year 5. The term of a trustee is 3 years; 1/3 of the Board shall be
elected annually
6. Stockholders may vote by proxy 6. Members may be deprived of the right to vote by proxy in
the AI or by-laws
7. Officers are elected by the Board of Directors 7. Officers may be directly elected by the members unless
otherwise provided in the AI or by-laws
8. Stockholders and directors must act in a meeting,
except where a mere written assent is sufficient or a
formal meeting unnecessary
8. Members may be allowed by the by-laws to vote by mail or
other similar means.
9. Stockholders meeting to be held at the place where the
principal office is located
9. Members meeting in or out of the place where the principal
office is located.

Sec. 89: RIGHT TO VOTE
Gen Rule: Each member regardless of class, shall be entitled to 1 vote
Except: If limited, broadened or denied by the AI or by-laws
Power of Courts:
- Courts have no power to strip a member of his membership therein without cause.
-Who can be trustees? Any member of the NSC
- Vacancy filled by election only for unexpired term
Sec. 93: PLACE OF MEETINGS
- Members meeting In or out of the place where the principal office of the corporation is located, so long as it is within the
Philippines
- notice be sent to all members indicating the date, time and place of meeting.

Sec. 94: DISTRIBUTION OF ASSETS
-Dissolution execute a plan of distribution of assets
Procedure:
1. Adoption of a resolution recommending a plan of distribution by or majority vote of the BOT.
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2. Submission for voting at a regular or special meeting.
3. Written notice to each member entitled to vote, set forth the proposed plan or summary thereof; date, time and place of
meeting.
4. Adoption of the plan upon approval of at least 2/3 of the members having voting rights present or by proxy.
Conversion of NSC to SC:
- Dissolution of NSC before organizing a stock corporation.
(SC to NSC : Mere amendment of AI)
RULES ON DISTRIBUTION
1. All liabilities shall be paid or satisfied for adequate provisions.
2. Assets held subject to return upon dissolution shall be delivered back to their respective transferors;
3. Assets held for charitable, religious, etc, without a condition for their return on dissolution shall be conveyed to one or
more organizations engaged in similar activities as the dissolved corporation;
4. Other assets shall be distributed to members as provided for in the AI or by-laws;
5. In any other case, assets may be distributed as provided in the plan of distribution.

CLOSE CORPORATIONS
CLOSE CORPORATION (Sec. 96)
- A special kind of stock corporation:
1. whose Articles of Incorporation provide that:
a) all shares except treasury shares are held on record by persons not exceeding 20;
b) issued stock s are subject to one or more restrictions, with a right of preemption in favor of the stockholders or the
corporation; and
c) the corporation shall not be listed in the stock exchange or its stocks should not be publicly offered; AND
2. whose 2/3 of the voting stocks or voting rights is NOT owned or controlled by another corporation which is not a close
corporation.

What kind of restrictions can the corporation put?
-Any restriction provided it does not violate Sec. 98:
1. Restrictions on the right to transfer shares must appear in the AI or By-Laws and in the Certificate of Stock, otherwise not
binding upon a purchaser in good faith.
2. Restrictions shall not be more onerous than granting the existing shareholder or the corporation the option to purchase
the shares of the transferring shareholder with such reasonable terms, conditions or period stated thereon.
e.g.
a) FMV of shares = 100 if sold less 10% ( cant because it is more burdensome)
b) Transferring without prior consent of the board
If corp. fails to exercise the option Shareholder may now transfer to third person who wishes to buy.
3. Close Corp. may not list in a stock exchange or make any public offering of its shares.
- Corp. must be listed in the Phil Stock Exchange (reason: shares may be held by anybody who is unknown/not denied)
Public Offering offering ones share for the unknown public
Can a corp. be part of a close corp.? Yes provided it does not own or control 2/3 of OCS of a close corporation or control 2/3
of stocks having voting rights.
Right of First Refusal
- The shareholder who wants to sell his shares must first offer it either to the corporation or to the other existing shareholders.
If the corporation or existing shareholders fail to exercise the option to purchase within the period stated (1 month) the
transferring shareholder may sell his shares to any third person.
Gen Rule: Any corporation may be incorporated as a close corporation
Exceptions:
1. mining companies;
2. oil companies;
3. stock exchanges;
4. banks;
5. insurance companies;
6. public utilities;
7. education institutions;
8. other corporations declared to be vested with public interest

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CHARACTERISTICS OF CLOSE CORPORATIONS:
1. Stockholders may act as directors without need of election and therefore are liable as directors;
2. Stockholder who are involved in the management of the corporation are liable in the same manner as directors are;
3. Quorum may be greater than mere majority;
4. Transfers of stocks to others, which would increase the number of stockholders to more than the maximum, are invalid;
5. Corporate actuations may be binding even without a formal board meeting, if the stockholder had knowledge or ratified
the informal action of the others;
6. Preemptive right extends to all stock issues;
7. Deadlocks in board are settled by the SEC, on the written petition by any stockholder; and
8. A stockholder may withdraw and avail of his right of appraisal.

Articles of Incorporation (Sec. 97):
-Aside from the general matters of Art. 14, the AI of a close corporation may provide:
1. For a
a) classification of shares or rights
b) prescribe qualification for owning/holding shares
c) restrictions on their transfer
2. For a classification of directors into one or more classes, each of which may be voted for and elected solely by a particular class of
stocks;
3. For a greater quorum or voting requirements in meetings of stockholders or directors
4. That the business of the corporation shall be managed by the stockholders rather than the BOD so long as this provision
continues in effect:
a) No meeting of stockholders need be called to elect directors;
b) Unless the context clearly requires otherwise, the stockholders shall be deemed to be directors for all intents
c) The stockholders and the corporation shall be subject to all liabilities of directors.
5. That all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders instead of
the BOD.

Terms of directors: 1 year

Issuance or Transfer of Stock of a Close Corporation in Breach of Qualifying Conditions (Sec. 99):
1. A person holding stocks
- if the qualification for ownership is conspicuously stated in the certificate of stock, the person holding such certificate
is conclusively presumed to have knowledge of such qualification.
- Effect: Corp at its option may refuse the transfer in its favor
2. If the AI states the number of persons not in excess of 20 to be entitled to be holders on record of its stock and the certificate
conspicuously states such numbers, the person to whom such stock is issued in excess of the nos. required is conclusively
presumed to have knowledge of the fact.
- Effect: Corp. may refuse to record the transfer to its books
3. If a stock certificate conspicuously shows a restriction on transfer of stocks, transferee 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.
- If transfer actually violates the restriction without prejudice to the right of transferee to proceed against transferor

Effect of Violation of the Presumption
Gen. Rule:- The corporation may at its option, refuse to register the transfer of the stock in the name of the transferee
Except:
1. if the transfer of the stock has been consented to by all shareholders of the close corporation; or
2. if the corporation has amended its AI.

Transfer not limited to a transfer for value
Note: Better to dissolve the corp. and incorporate again if it wants to convert it into another kind
Amendment that may terminate the status of a close corp. 2 kinds:
1. To delete/remove any of the provisions under the title;
2. To reduce the quorum or voting requirement
- reduction of what is required by law to ordinary shareholder 2/3 to effect amendment
- include all shareholder with or without voting rights
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Rights of transferee not impaired by the provisions of this section:
1. Right to rescind the transaction; or
2. Right to recover under any applicable warranty, express or implied.

Rules on Agreements By Stockholders (Sec. 100)
1. Agreements by and among shareholders before the formation and organization of a close corporation signed by all stockholders:
- survive the incorporation of such corporation and
- valid and binding, if not inconsistent with the AI, irrespective if embodied in AI or not, except those required by
the Corporation Code to be embodied in the AI.
*Prior to incorp. Shareholder can enter into any agreement as long as it is legal.
*After incorp. agreement continues to subsist/ valid and binding
2. Shareholders agreement, in writing and signed by the parties thereto, may provide that in exercising any voting rights, the
shares held by them shall be voted:
a) as therein provided;
b) as they may agree; or
c) as determined in accordance with a procedure agreed upon by them
How shares will be voted?
- Agree at the time of voting how to vote
- Procedure to determine how they will vote
- Voting trust / voting by proxy as equivalent in ordinary situation
3. No provision in any written agreement signed by stockholders, relating to any phase of the corporate affairs, shall be invalidated
between the parties on the ground that its effect is to make them partners among themselves.
must be consistent with the AI
4. Shareholders agreement restricting or interfering with the discretion and powers of the BOD it will not be invalidated but the
stockholders who are parties thereto shall be liable for managerial acts imposed by the Corporation Code on directors
5. Stockholders who actively engage in the management or operation of the business and affairs of the corporation shall be held to
strict fiduciary duties to each other and among themselves
- Corporate torts shareholders are personally liable UNLESS the corporation has obtained reasonably adequate liability
insurance

Sec. 101: When Board Meeting Is Unnecessary Or Improperly Held
Gen Rule: Any action by the director without a meeting shall be valid if the following conditions are present:
1. Before or after such action is taken, written consent thereto is signed by all the directors; or
2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or implied acquiescence of all stockholders; or
4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection
thereto in writing.
Exception: If by- laws provide otherwise

Note: Ordinary corp. without / improper meeting question of impropriety
*If a directors meeting is held without a 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.

Sec. 102: Preemptive Right In Close Corporation
- extend to all kinds of stock, including reissuance of treasury shares, unless the AI provide otherwise (ordinary corp. extend only
to new issuances)

Sec. 104: DEADLOCKS (RBQ)
- If the directors or stockholders are so divided respecting the management of the corporations 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 shareholders generally. the SEC, with the power to arbitrate, upon written petition of
any shareholder shall have authority to make such orders as it deems appropriate, including an order:
1. Canceling or altering any provision contained in AI or By-Laws or any stockholders agreement;
2. Canceling, altering, or enjoining any resolution, or other act of the corporation or its BOD, officers or stockholders;
3. Directing or prohibiting any act of the corporation or its BOD, stockholders, officers or other persons party to the action;
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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 other stockholders;
5. Appointing a provisional director;
6. Dissolving the corporation; OR
7. Granting such other relief as the circumstances may warrant.

PROVISIONAL DIRECTOR (Sec. 104)
An impartial person who is neither a stockholder nor a creditor of the corporation, and whose further qualifications, if any,
may be determined by the SEC.
He is NOT a receiver of the corporation and does not have the title and powers of a custodian or receiver.
He shall have all the rights and powers of a duly elected director, 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 SEC or by all the stockholders.

REMEDIES IN CASE OF DEADLOCKS
1. Written petition with SEC for it to arbitrate
2. Withdrawal Shareholder may for any reason compel the corporation to purchase his shares at the FMV provided the
close corp. has sufficient assets in its books to cover its debts and liabilities exclusive of capital stocks (Sec 105)
3. Written petition with SEC to compel dissolution on grounds of the acts of the directors, officers or those in control of the
corporation is :
a) Illegal,
b) fraudulent,
c) dishonest,
d) oppressive or unfairly prejudicial to the corporation or any stockholder, or
e) whenever corporate assets are being misappropriated or wasted.

Ordinary Stock Corporation vs. Close Corporation
ORDINARY STOCK CORPORATION CLOSE CORPORATION
1. Its AI need only contain the general matters
enumerated in Sec. 14 of the Corporation Code
1. Aside from the general matters in Sec. 14, its AI must contain the
special matters prescribed by Sec. 97. Failure to do so precludes a de
jure close corporation status
2. Its status as an ordinary stock corporation is not
affected by the ownership of its voting stock or
voting rights
2. The 2/3 of its voting stock or voting rights must not be owned or
controlled by another corporation which is not a close corporation
3. Its AI cannot classify its directors 3. Its AI may classify its directors
4. Business of the corporation is managed by the
BOD
4. Business of the corporation may be managed by the stockholders if
the AI so provide, but they are liable as directors
5. The corporate officers and employees are
elected by a majority vote of all the directors
5. Its AI may provide that any or all of the corporate officers or
employees may be elected or appointed by the stockholders
6. The pre-emptive right is subject to the
exceptions found in Sec. 39
6. The pre-emptive right is subject to no exceptions unless denied in the
AI
7. The appraisal right may be exercised by a
stockholder only in the case provided in Secs. 81
and 42 of the Corporation Code
7. The appraisal right may be exercised and compelled against the
corporation by a stockholder for any reason
8. Except as regards redeemable shares, the
purchase of the corporation of its own stock must
always be made from the unrestricted retained
earnings
8. In case of an arbitration of an intra-corporate deadlock by the SEC,
the corporation may be ordered to purchase its own shares from the
stockholders regardless of the availability of unrestricted retained
earnings
9. Arbitration of intra-corporate deadlock by the
SEC is not a remedy in case the directors or
stockholders are so divided respecting
management of the corporation
9. Arbitration of intra-corporate deadlock by the SEC is an available
remedy in case the directors or stockholders are so divided respecting
the management of the corporation

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SPECIAL CORPORATIONS

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1. EDUCATIONAL CORPORATION (Sec. 106)
- A stock or non-stock corporation organized to provide facilities for teaching or instructions
- must obtain favorable recommendation from DECS for the approval of its AI and By-Laws by SEC. [DepEd = Elementary and
High School; CHED = Tertiary]
- it is primarily governed by special laws and, suppletorily, by the provisions of the Corporation Code
- Board of Trustees (NSEC) not less than 5 members and not more than 15 the term of office is 5 years
It is different from an ordinary non-stock corporation organized for educational purposes.

2.RELIGIOUS CORPORATION (Sec. 109)
- A corporation composed entirely of spiritual persons which is organized for the furtherance of a religion or for perpetuating the
rights of the church or for the administration of church or religious work or property
* It is different from an ordinary non-stock corporation organized for religious purposes, like the Knights of Columbus,
Opus Dei etc.
Kinds:
a. Corporation Sole incorporated by one person and consist of one member or corporator only and his successors, such
as a bishop
- can sell, acquire, encumber property
- to dissolve, file a declaration to that effect
b. Religious Society a non-stock corporation governed by a board but with religious purposes. It is incorporated by an
aggregate of persons, e.g. religious order, diocese, synod, sect, etc.
--Articles of incorporation - submit to SEC with affidavit of affirmations

DISSOLUTION
Dissolution refers to the extinguishment of its franchise to be a corp. and the termination of its corporate existence
- Corp ceases its operation altogether, BUT it continues to exist for 3 years for purposes of winding up of its affairs
Steps:
1. Termination
2. Winding up
3. Liquidation

KINDS :
1. VOLUNTARY DISSOLUTION by the act of the corporation.
a) If there are no creditors who are prejudiced, dissolution may be effected:
i. by the majority vote of BOD/BOT, and by a resolution duly adopted by the affirmative vote of the stockholders
owning at least 2/3 of the OCS or of at least 2/3 members at a meeting duly called for the purpose after notice of
the meeting was published in a newspaper of general circulation.
Procedure
1. File with the SEC the resolution duly certified by the Board and countersigned by the Secretary
2. Issuance by the SEC of a certificate of dissolution dissolution takes effect
b) If there are creditors affected, by judgment of the SEC after hearing of the petition for voluntary dissolution. (Sec. 119)
Procedure:
1. Petition filed with SEC
Petition must:
Be signed by a majority of its board or other officers, having the management of its affairs, verified
by its president or secretary or any of its directors or trustees;
Set forth all claims and demands against it;
That the dissolution was resolved upon by affirmative vote of stockholders owning at least 2/3 of the
OCS or at least 2/3 o f the members, at a meeting duly called for the purpose
2. If petition is sufficient in form and substance, the SEC, by an order reciting the purpose of the petition, shall fix a
date on or before which objections thereto may be filed, but which shall not be less than 30 days nor more than 60
days after the entry of the order;
3. Publication of the SEC order at least once a week in 3 consecutive weeks in a newspaper of general circulation,
and a similar copy shall be posted for 3 consecutive weeks in 3 public places, in the municipality or city where the
principal office of the corporation is situated;
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4. Five days after the expiration of the date set for filing objections, the SEC shall hear the petition and try any
issue made by objections filed;
5. Dissolution takes effect upon judgment by SEC ordering distribution of assets of corp.

c) by amending the AI to shorten the corporate term (Sec. 120)
Procedure:
1. Amendment of the AI approved by the Board and ratified by stockholders owning at least 2/3 of OCS or 2/3 of the
members
2. Submit the amended AI to the SEC
Note: The Rule that when the SEC does not take action in 6 months from the date of filing for a cause not
attributable to the corporation the amendment is deemed effective, is not applicable in this case.
Submit also an affidavit of publication setting forth that the corporation has amended its articles to shorten
the term to effect dissolution upon arrival of date stated

3. Dissolution takes effect upon approval of the amendment or expiration of the shortened term.

If there are creditors what is the proper way of dissolving?
- Any of the 3 ways so long as creditors are not prejudiced.
In case of corporation sole, dissolution is effected by submitting to the SEC a verified declaration of dissolution for approval.

2. INVOLUNTARY DISSOLUTION
- Brought about by filing of a verified complaint with SEC and after proper notice and hearing on the grounds provided for by
existing laws, rules and regulations.
Grounds:
1. Violation of the corporation code
2. When there is a deadlock in a close corp.
3. When a close corp. is mismanaged
4. When the certificate of registration is suspended or revoked in ff. instances:
a. when there is fraud in processing its certificate of registration
b. when there is serious misrepresentation as to what the corp. can do or is doing to the great prejudice of or
damage to the general public
c. refusal to comply or defiance of any lawful order of the commission restraining the commission of an act which
would amount to a grave violation of its franchise
d. continuous inoperation for 5 years
e. failure to file BL within the required period
f. failure to file reports in appropriate form within the presented period

Kinds of Involuntary Dissolution
1. Expiration of the corporate term corp. continues to operate for a period of 3 years for purposes of winding up its affairs
2. Legislative enactment except: it must not impair any right or remedy
3. Failure to organize and commence transaction within 2 years from incorporation (However, the SEC has opined that
the dissolution in this case is not automatic. The corporation continues to exist as such, notwithstanding its non-
operational status until the SEC orders its dissolution after notice and hearing)
4. Dissolution by judicial decree forfeiture of its privilege or franchise as non user
5. Quo warranto suit against a de facto corporation
6. Minority stockholders suit for dissolution on justifiable grounds
7. SEC dissolution, upon complaint and after notice and hearing, on the following grounds:
a) The corporation was illegally organized;
b) Continuous inactivity (subsequent to incorporation, organization and commencement of business) for at least 5
years;
c) Serious dissension in the corporation; or
d) Commission by the corporation of illegal or ultra vires acts or violations of the Corporation Code.

EFFECTS OF DISSOLUTION
1. Legal title to corporate assets is vested in the shareholder, who become co-owners thereof
2. The corporation ceases as a body politic or to continue the business for which it was established
3. Can no longer be revived (but may reincorporated by filing a new AI and BL)
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4. The dissolution does not by itself imply the extinction of rights demandable against the corporation
5. Ceases to have any personality whatsoever after the expiration of the 3-year winding period and as a general rule it can no
longer sue or be sued as such

LIQUIDATION
The winding up of the affairs of the corporation by reducing its assets in money, settling with creditors and debtors, and
apportioning the amount of profit and loss.
Methods of Liquidation
1. Liquidation by the corporation itself
- converts assets with cash, settle with creditors, apportion profit and loss
2. Liquidation by a duly appointed trustee
- transfer assets in the name of the trustee, has responsibility to liquidate the corporation.
3. Liquidation by a management committee or rehabilitation receiver appointed by the SEC.
*The 3-year period of liquidation does not apply to Methods 2 and 3 as long as the trustee or receiver is appointed within the said period.

If corp. cannot wind up its affairs within 3 years
a. It is best to appoint a trustee or receiver because he can act as such even beyond 3 years, (the corp. can only act
for 3 years)
b. If the property liquidation is transmitted to a trustee or a receiver, the corporation ceases, legal interest vests in
the trustee and beneficial interest in the stockholders, members, or creditors.

* The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of
such entity nor those of its owners and creditors alike (Sec. 145).
* Where, in the case of a corporation, the 3-year extended life has expired without a trustee or receiver having been expressly
designated within the said period, those who have been charged to wind up its affairs or, in their absence, the BOD/BOT shoul d be
permitted to continue as trustees by legal implication to complete the corporate liquidation.

How to Distribute Assets
-In the following order:
1. Creditors
2. Shareholders/members who are likewise creditors
3. Shareholders in proportion to their shareholding preference

What amount shareholder is entitled to:
Fair Market Value of the shares of stock. If there is a loss below FMV. If there are profits in proportion to their shareholdings

Upon winding up of the corporate affairs, any asset distributable to any creditor of shareholder or member who is unknown or
cannot be found shall be escheated to the city or municipality where such asset is located.

Gen Rule: Dissolution authority given to the corporation to distribute assets to shareholders or members
Except: (even if no dissolution, the corp. can distribute assets)
1. Decrease of capital stock (Sec. 38)
2. When corp. is redeemed by redeemable shares
3. When corporation is purchasing treasury shares (Sec. 42)
4. When the corporation is acquiring its own shares, converting it into treasury shares (Sec. 42)
5. When declared as dividends (Sec 43)
6. When there is withdrawal from a close corp (Sec 105)
*These are the exceptions to the TRUST FUND DOCTRINE

FOREIGN CORPORATION
FOREIGN CORPORATION is one formed, organized or existing under any laws other than those of the Philippines, and whose
laws allow Filipino citizens and corporations to do business in its own country or State. (Sec. 123)

*This definition espouses the incorporation test and the reciprocity rule and is significant for licensing purposes. It does not say that it
is required that the laws under which foreign corporations are formed give Philippine national reciprocal rights.
- A foreign corporation shall have the right to transact business in the Phil. after obtaining a license to transact business i n this
country and a certificate of authority from the appropriate government agency concerned. (Sec. 123)
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- Test: Incorporation Test (Place of incorporation), regardless of the nationality of the shareholders

-During wartime, the control test will apply, that is, a domestic corp. controlled by enemy aliens shall be deemed a foreign
corporation with a nationality identical with that of its controlling shareholder

Foreign Corporation becomes a Philippine resident the moment it is granted a license to transact business in the Philippines.
Corporate residence is where its business is transacted

OBJECTIVES OF REGULATION OF FOREIGN CORPORATION
1. To place them in equal footing with domestic corporation;
2. To subject them to inspection so that their condition may be known;
3. To protect the residents of the State doing business with them by subjecting them to the courts of the State.

FOREIGN INVESTMENT ACT OF 1991 (RA 7092)
A foreign corporation may now acquire and own 100% Filipino corporation.
Except when limited by Constitution (owning land)

Problem: Corporation A with Shareholder = 31% Filipino and 69% owned by Corporation B ( 47% Fil and 53% Alien)
Engaged in partially nationalized industry
Q: Is the 60% requirement met?
A: Yes, requirement met
* Because a FC cannot extend its jurisdiction beyond its limits, it exist only in contemplation of law and by the consent of such state
or country

APPLICATION FOR A LICENSE (Sec. 125)
Procedure for the Issuance of License
I. Submit application with SEC which shall be under oath and specifically set forth the following unless stated in its AI:
1. The date and term of incorporation;
2. The address including the street number of the principal office of the corporation in the country or state of
incorporation;
3. Name and address of its resident agent authorized to accept summons and process in all legal proceedings and,
pending the establishment of a local office, all notices affecting the corporation;
4. The place in the Philippines where the corporation intends to operate;
5. The specific purposes of the corporation which it intends to pursue in the transactions of its business in the Philippines.
Provided that said purpose are those specifically stated in the certificate of authority issued by the appropriate
government agency;
6. The names and addresses of the present directors and officers of the corporation;
7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to
issue;
8. A statement of its OCS and the aggregate number of shares which the corp. has issued;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary in order to enable the SEC to determine whether such corp. is
entitled to a license to transact business in the Philippines and to determine and assess the fees payable.

II. Submit Articles of Incorporation and By-laws, duly certified and their translation to an official language in the Phil.

III. Submit and attach a certificate under oath by an authorized official 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 corporation to do business therein and the applicant
is an existing corp. of good standing with a translation of the certificate in English under oath of the translator if it is in foreign
language

IV. A statement under oath of the President or any authorized officer of the corp. showing to the satisfaction of the SEC and other
government agency in proper cases that the applicant is solvent and in sound financial condition and setting forth its assets and
liabilities for the previous year

V. Other requirement provided by law a certificate of Authority from the appropriate government agency whenever required by
law
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VI. Power (written) of Attorney designating a resident agent on whom summons and other legal processes against the corp. may be
served and a written agreement and stipulation consenting that such services may be made upon the SEC, if anytime, it shall cease
to transact business in the Phils. or shall be without resident agent (Rule XIV, Sec 13).

RESIDENT AGENT
- An individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic
corporation lawfully transacting business in the Philippines, designated by a written power of attorney by a foreign corporation
authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other
legal proceedings against the foreign corporation. (Secs. 127 -128)
*When a corporation has designated a person to receive service of summons pursuant to the Corporation Code, that designation is
exclusive and service of summons on any other person is inefficacious.

- Service of summons to a corp. with license (In the ff. order)
1. Resident agent exclusive
2. SEC ( If no resident agent and the corp ceases to transact business SEC transmit within 10 days from receipt a copy
of such summons to the corp. at its home or principal office (act of mailing within 10 days complete the service
expenses born by the party on whose instance the service is made)
3. Officers or agent in the Philippines.

- Note: the above order of examination is to be followed only if a foreign corp. is transacting business in the Phils. with a license
(Wang Labora vs. Mendoza)
- If without license service be made upon any agent of the corp.
- If domestic corp. Rules of Court will apply

CONDITIONS IMPOSED SUBSEQUENT TO THE ISSUANCE OF LICENSE:
1. The FC shall transact business and for the purpose/s for which it is authorized under its license;
2. Within 60 days after the issuance of its license, it shall deposit with SEC satisfactorily securities in the actual market value
of at least P100k consists of:
a. bonds or other evidence of indebtedness of the government of the Phils, its political subdivisions and
instrumentalities or of government owned or controlled corporation;
b. shares of stock in Registered Enterprises (registered under Omnibus Investment Code)
c. Shares of stock in domestic corporation registered in the stock exchange
d. Shares of stock in domestic insurance co. and banks
e. Any combination of these kinds of securities EXCEPT foreign banking or insurance corp.
3. Within 6 months after the end of each fiscal year of the license
a. additional deposit of securities equivalent in actual market value of 2% of the amount by which the licenses
gross income for that fiscal year exceeds 5M if less than 5M no additional
b. If the market value of the deposit decreased by at least 10% of such value at the time they were deposited , the
deposit shall be increased; if the deposit increased by 10% - allowed to withdraw
Can you exchange the deposits with another one? Yes, substitution can be allowed provided the corp. is solvent.
c. If there are dividends/interest due on the deposited securities, the license shall be entitled to collect
d. Deposits be returned when the license ceases to do business in the Phils. provided it is able to show the absence
of any liability to Phil residents including the Government of the Pgils.
4. It must comply with the provisions of existing laws, rules and regulations otherwise its license may be revoked, suspended
or annulled by SEC

EFFECT OF ISSUANCE OF LICENSE:
-FC may now commence to transact its business in the Philippines for as long the corporation continues to exist as a corporation
under the laws of its State of incorporation EXCEPT when the license is surrendered, revoked, suspended, or annulled.

TESTS OF DOING OR TRANSACTING BUSINESS IN THE PHILIPPINES:

A. JURSIPRUDENTIAL TESTS:
1. Twin Characterization Test
a) Whether the foreign corporation is maintaining or continuing in the Philippines the body or substance of the business for
which it was organized or whether it has substantially retired from it and turned it over to another (Substance Test); and
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b) Whether there is continuity of commercial dealings and arrangements, contemplating to some extent the performance
of acts or works or the exercise of some functions normally incident to and in progressive prosecution of the purpose and obj ect of
its organization (Continuity Test).

2. Contract Test
- Whether the contracts entered into by the foreign corporation, or by an agent acting under the control and direction of
the foreign corporation, are consummated in the Philippines.

B. STATUTORY TESTS
1. Foreign Investment Act of 1991 (RA 7042)
Acts constituting doing business:
a) Soliciting orders, service contracts, opening offices, whether called liaison offices or branches;
b) Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country
for a period or periods totaling to 180 days or more;
c) Participating in the management, supervision or control of any domestic business, firm or entity or corporation in the
Philippines;
d) Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purposes of the business organization.

2. Implementing Rules of RA 7042
- Acts NOT constituting doing business:
a) Mere investment as a shareholder in a domestic corporation and/or the exercise of the rights of such investor;
b) Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for
its own account;
c) Publication of a general advertisement through any print or broadcast media;
d) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in
the Philippines;
e) Consignment by the foreign corporation of equipment with a local company to be used in the processing of products for
export;
f) Collecting information in the Philippines; and
g) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis.

Law Applicable (Sec 129)
Gen. Rule: Any FC lawfully doing business in the Phils. shall be bound by all laws, rules and regulations applicable to domestic
corporation.
Except: (Governed by the state of Incorp.)
1. Matters relative to formation, creation, organization or dissolution of corporation
2. The relations, liabilities, responsibilities or duties of shareholders, members or officers of corp. to each other or to the corp.
(Citibank vs. Chilia)
- By laws of a FC can be given application without approval by the SEC since the SEC grants a license only when
the FC has complied with all the requirements of law, it follows that when it decides to issue such license, it is
deemed to have approved its foreign enacted by laws

AMENDMENTS TO ARTICLES OF INCORPORATION OR BY-LAWS OF FOREIGN CORPORATIONS (Sec. 130)
-Note: The law that governs the amendment of AI of the FC is the law of State of its incorporation
Limitation in the amendments of AI/BL of FC: it shall not of itself enlarge or alter the purpose/s for which such corporation is
authorized to transact business in the Philippines.

AMENDED LICENSE (Sec 131)
Q: When required?
A: 1. The FC changes its corporate name
2. The FC desires to pursue in the Phils. other or additional purposes
How by submitting an application thereof to the SEC favorably endorsed by the appropriate government agency in the
proper cases
Merger/Consolidation involving a FC licensed in the Phils.
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- FC merged/consolidated with a domestic corp laws of the Phils will be followed as to requirements or merger or
consolidation
- If FC with another FC such FC licensed to do business in the Phil. within 60 days after such merger/consolidation
becomes effective, file with the SEC and in appropriate cases, with the proper government agency, a copy of the
articles of merger or consolidation duly authenticated by the proper official of the State under the laws of which
such merger or consolidation was effected.
- If FC with another FC if the one absorbed is the corp. licensed to do business in the Phils. it shall file a petition
for the withdrawal of its license.

REVOCATION OF LICENSE (Sec. 135)
Grounds:
1. Failure to file annual report or pay any fees required by this Code.
2. Failure to appoint and maintain a resident agent in the Philippines;
3. Failure after change of its resident agent or of his address to submit to the SEC a statement of such change;
4. Failure to submit to the SEC an authenticated copy of any amendments to its AIC or BL or any articles of merger or
consolidation;
5. A misrepresentation of any material matter in any application, report, affidavit or other documents submitted by such
corporation pursuant to this title;
6. Failure to pay any and all taxes imposed, penalties and assessments, if any, lawfully due to the Philippine government or
any of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the purpose/s for which such corp. is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corp. or entity not duly licensed
to do business in the Philippines;
9. Any other ground as would render it unfit to transact business in the Philippines.

What happens when there is revocation of license?
The SEC will issue a certificate of revocation, furnishing a copy thereof to the appropriate government agency in the
proper cases. SEC shall mail to the corp. at its registered office in the Phils. a notice of such revocation accompanied by a copy of
the certificate of revocation

EFFECTS OF LACK OF LICENSE:
A. ON SUITS
1. Foreign corporation doing business in the Philippines:
a) may not sue in any action in any court or administrative agency of the Philippines; and
b) may be sued on any valid cause of action recognized in the Philippines (under the doctrine of quasi-estoppel by
acceptance of benefits). (Sec. 133)

2. Foreign corporation NOT doing business in the Philippines:
a) Generally, it may not sue and be sued in any court or administrative agency of the Philippines;
b) However, it may sue and be sued on isolated transactions, as well as for those which are casual or incidental thereto.

Doctrine of Isolated Transactions
-Foreign corporations, even unlicensed ones, can sue or be sued on a transaction or series of transactions set apart from their
common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business
transaction.
- However, it is not the lack of the prescribed license to do business in the Philippines but the doing of business without license
which bars a foreign corporation from access to Philippine courts. An unlicensed foreign corporation is not ipso facto barred from
bringing an action. The legal prohibition is confined to cases relating to its business activity in the country.

Instances when a foreign corporation may sue in the Philippines whether or not licensed to do business thereat:
1. To seek redress for isolated business transaction;
2. To protect its corporate name, reputation or goodwill;
3. To enforce a right not arising out of a business transaction in the Philippines;
4. When the parties have contractually stipulated that the Philippines is the venue of actions; and
5. When the party sued is barred by the principle of estoppel and/or principle of unjust enrichment from questioning the
capacity of the foreign corporation.

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B. ON CONTRACTS
- The contracts contemplated are those that satisfy the contract test or those that make a foreign corporation as one doing
business in the Philippines.

General Rule: The contracts are unenforceable. They are enforceable only upon securing a license.
Exception: However, the contracts are null and void if they are contrary to law, morals, good customs, public policy and public
order.

WITHDRAWAL OF FOREIGN CORPORATIONS (Sec. 136)
How to effect surrender/ withdrawal
-by filing a petition for withdrawal of license

Essential Requirements for Withdrawal:
1. All claims which have accrued in the Philippines have been paid, compromised or settled;
2. All taxes, imposts, assessments and penalties, if any, lawfully due the Phil. government or any of its agencies or political
subdivisions have been paid;
3. The petition for withdrawal of license has been published once a week for 3 consecutive weeks in a newspaper of general
circulation in the Phil;

Formal Requirements to Legally Effect the Withdrawal of Foreign Corporations License:
The following must be submitted to the SEC:
1. The letter petition of the Resident Agent requesting the withdrawal of the license to do business
2. Filing fee of P10.00
3. A copy of the resolution of the BOD authorizing the closing of the Phil. branch and empowering the RA to effectuate the
withdrawal thereof, duly authenticated in accordance with law to be submitted in triplicate
4. Latest balance sheet and sworn statement that no creditors will be prejudiced by the withdrawal also to be submitted in
triplicate
5. Proof of publication of the Notice of withdrawal once a week for 3 consecutive weeks in a newspaper of general circulation
in the Phil.
6. The license issued by the commission to the corp. which shall be surrendered


2 Things to Consider to Determine Whether a FOREIGN CORPORATION has Access to Phil Courts
1. Does it have license
2. Is it transacting business in the Phil.
- How to determine no hard and fast rule but there are guidelines provided
a. If the FC is continuing the business for which it was created in the Phil. then it is transacting business
(Menthrelatura case)
b. If acts of the corp. indicates a purpose by the corp. to engage in some parts of its regular business, then
doing business (Microwe____ case)
c. When a single act is not merely incidental or casual but such but of such character as to distinctly indicate
its intention to perform other business in the Phils (Way lab)
d. The volume of the business does not matter, it is the performance of acts for which the corp. was created
that determines whether it was transacting business (Granger)
e. The continuity of conduct of which an intention can be inferred of establishing a business in the Phils (JAL)
4 Exceptions when FC Without license can sue
I. Isolated business transaction single transaction
- solicited by domestic corp., entity or person
- Note: If FC who solicits the transaction then it is already transacting business in the Phils.
Rationale for the exceptions: not the intention of law to favor domestic corp.
3 Requisites (to file an action based on this)
1. FC must disclose that it is not doing business in the Phils. And it is suing under the isolated business transaction
disclose in complaint
2. Suing entity must be a FC
3. Name its duly authorized representative or RA for purposes of action, it must appoint a resident agent to whom
notice upon the FC must be served for the purpose of pre trial

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II. To protect corporate name, reputation and goodwill ( Puma vs. IAC)
- Rule NOW, foreign trademarks/ trade names
1. owner of the same is domiciled in the country of which it is a member of the treaty agreement on trademarks
2. widely known in the Phils.

2 Requirements BEFORE ( no longer applied)
1. Trade name/trademark registered in the Phils.
2. Country of the FC allows or gives Filipino Corp/citizen reciprocal rights

III. To enforce a right not arising out of Business Transaction
- Bulakhidas and Universal Shopping transaction between 2 foreign entities
IV. Intends to hold person/entity for actionable acts or omission
- Rule on equity allows Filipino to sue FC
- Lack of license is not an excuse for its non-suability (FBA)

RULES
1. Burden of proof that it is FC transacting business without a license suing under the 4 exceptions is on the FC
2. The defendant must specifically deny the allegation of FC capacity to sue
3. Proof of doing business is not necessary to confer jurisdiction on th FC (Marubers case and Signetics vs, CA)

MISCELLANEOUS PROVISIONS
Sec 137: - OCS all shares of stock issued to subscribers or shareholders of a stock corp. whether or not fully paid or partially as long
as there is a bonding subscription agreement, except treasury shares.
- All OCS are issued because not outstanding if not issued but not all issued shares of stocks are outstanding (e.g. treasury shares
issued but not OCS)

OCS
Not all OCS are considered subscribed
Subscribed
All subscribed capital stocks are considered outstanding

Reason: Because it is possible that shares of stock are fully paid. If fully paid, no longer considered as subscribed.

Sec. 138: Q: Is it possible for a corp. to have its affairs managed by Board of Governors?
A: Yes, but only limited to non-stock and special corp. who may designate another name for its BOT
Sec 142:
Gen Rule: Examination results of the operation, books and records of any corp are strictly confidential
Except: When a law requires disclosure