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(2) Doctrine of Separate Personality: A Feliciano vs. COA (G.R. No. 147402
corporation, upon coming into existence, is
January 14, 2004)
invested by law with a personality separate and
distinct from those persons composing it as well Facts:
as from any other legal entity to which it may
be related. (Yutivo Sons Hardware v. CTA, COA assessed Leyte Metropolitan Water District
(LMWD) auditing fees. Petitioner Feliciano, as
1961) General Manager of LMWD, contended that the
water district could not pay the said fees on the
CREATED BY OPERATION OF LAW
basis of Sections 6 and 20 of P.D. No. 198 as well
as Section 18 of R.A. No. 6758. He primarily claimed
1
that LMWD is a private corporation not covered by Filipinas Broadcasting Network vs. AGO Medical
COA's jurisdiction. Petitioner also asked for refund and Educational Center (G.R. No. 141994
of all auditing fees LMWD previously paid to COA. January 17, 2005)
COA Chairman denied petitioners requests.
Petitioner filed a motion for reconsideration which
- A juridical person is generally not entitled
COA denied. Hence, this petition.
to moral damages because, unlike a natural
person, it cannot experience physical
Issue: suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or
w/o LMWD is a GOCC subject to the COAs audit
moral shock.
jurisdiction.
- Nevertheless, AMECs claim for moral
Ruling: damages falls under item 7 of Article 2219
of the Civil Code. This provision expressly
- The Constitution and existing laws mandate authorizes the recovery of moral damages
COA to audit all government agencies, in cases of libel, slander or any other form
including government-owned and of defamation. Article 2219(7) does not
controlled corporations ("GOCCs") with qualify whether the plaintiff is a natural or
original charters. An LWD is a GOCC with juridical person. Therefore, a juridical
an original charter. person such as a corporation can validly
- Private corporations may exist only under a complain for libel or any other form of
general law. If the corporation is private, it defamation and claim for moral damages.
must necessarily exist under a general law.
Stated differently, only corporations Corporators and incorporators,
created under a general law can qualify as stockholders and members. (Sec. 5)
private corporations.
Corporators are those who compose a
- The Constitution authorizes Congress to
corporation, whether as stockholders or as
create government-owned or controlled
members.
corporations through special charters.
Since private corporations cannot have Incorporators are those stockholders or
special charters, it follows that Congress members mentioned in the articles of
can create corporations with special incorporation as originally forming and
charters only if such corporations are composing the corporation and who are
government owned or controlled. signatories thereof.
Obviously, LWDs are not private
Corporators in a stock corporation are called
corporations because they are not created
stockholders or shareholders. Corporators in a
under the Corporation Code. LWDs are not
non-stock corporation are called members.
registered with the Securities and
Exchange Commission. Classification of shares (Sec. 6)
- LWDs exist by virtue of PD 198, which
constitutes their special charter. Since Shares of stock of stock corporations may
under the Constitution only government- be divided into classes or series of shares
owned or controlled corporations may have or both. Each class or series of shares may
special charters, LWDs can validly exist only have rights, privileges or restrictions, as
if they are government-owned or stated in the AOI.
controlled. To claim that LWDs are private
Classification of shares:
corporations with a special charter is to
admit that their existence is constitutionally (1) Common shares
infirm. (2) Preferred shares
- By the term "original charters," what (3) Par value shares
exactly do we mean? (4) No-par value shares
Ans: they were created by law, by an act of (5) Founders shares
Congress, or by special law. (6) Redeemable shares
- GOCCs without original charters refer to (7) Treasury shares
(8) Convertible shares
corporations created under the Corporation
(9) Non-voting shares
Code but are owned or controlled by the
General rule: No share may be deprived of
government. voting rights (Sec. 6)
Exceptions:
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(1) Preferred or (1) No-par value shares cannot have an issue
(2) Redeemable shares, price of less than P5.00 per share (Sec. 6).
(3) SProvided by the Code (e.g., Treasury (2) They shall be deemed fully paid and non-
shares) assessable and the holders of such shares shall
- There shall always be a class/series of shares not be liable to the corporation or to its
which have a COMPLETE VOTING RIGHTS (Sec. creditors in respect thereto (Sec. 6).
6) (3) Entire consideration received by the
Doctrine of Equality of Shares: Each share corporation for its no-par value shares shall be
shall be EQUAL in ALL respects to every other treated as capital and shall not be available for
share, except as otherwise provided in the distribution as dividends (Sec. 6).
AOI (Articles of Incorporation) and stated in (4) AOI must state the fact that the corporation
the certificate of stock issues no par shares and the number of shares.
(Sec. 6) (5) Banks, insurance companies, trust
Common shares companies, building and loan associations, and
The most common type of shares, which public utilities cannot issue no-par value shares
enjoy no preference but the owners thereof (Sec. 6).
are entitled to management of the (6) The issued price may be fixed in the AOI,
corporation and to equal pro-rata division of or by the BOD pursuant to authority conferred
profits after preference. It represents a upon it by the AOI, or, in the absence thereof,
residual ownership interest in the corporation. by majority vote of the outstanding shares in a
Preferred shares meeting called for the purpose (Sec. 62).
Stocks which are given preference by the
issuing corporation in dividends and the Non-voting shares (Sec. 6)
distribution of assets of the corporation in case General rule: Non-Voting Shares are not
of liquidation or such other preferences as may entitled to vote.
be stated in the AOI which do not violate Exceptions:
the Corporation Code. (1) Amendment of the AOI
Limitations: (2) Adoption and amendment of by-laws
(1) Preferred shares can only be issued with (3) Sale, lease, exchange, other disposition
par value. of all or substantially all of the corporate
(2) Preferred shares must be stated in the property
Articles of Incorporation and in the certificate (4) Incurring, creating or increasing bonded
of stock. indebtedness
(3) The BOD may fix the terms and conditions (5) Increase or decrease of capital stock
only when so authorized by the AOI and such (6) Merger and consolidation
terms and conditions shall be effective upon (7) Investment of corporate funds in another
filing a certificate thereof with the SEC. corporation or business
(8) Dissolution of the corporation
Par value shares
These are shares with a stated value set out in Founders shares (Sec. 7)
the AOI. This remains the same regardless of These are shares, classified as such in the
the profitability of the corporation. This AOI, which are given certain rights and
gives rise to financial stability and is the privileges not enjoyed by the owners of other
reason why banks, trust corporations, stocks.
insurance companies and building and loan Where exclusive right to vote and be voted
associations must always be organized with for in the election of directors is granted,
par value shares. such right must be for a limited period not
to exceed 5 years subject to approval by
Par value is minimum issue price of such SEC. The 5 year period shall commence from
share in the AOI which must be stated in the date of approval by SEC.
certificate
No-par value shares Redeemable shares (Sec. 8)
These are shares without a stated value. These are shares which permit the issuing
corporation to redeem or purchase its shares.
A no par share does not purport to Limitations:
represent any stated proportionate interest (1) Redeemable shares may be issued only
in the capital stock measured by value, but when expressly provided for in the AOI (Sec.
only an aliquot part of the whole number of 8).
such shares of the issuing corporation (2) The terms and conditions affecting said
(Agbayani) shares must be stated both in the AOI and in
Limitations: the certificate of stock (Sec. 8).
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(3) Redeemable shares may be deprived of Nationality of Corporations
voting rights in the AOI.
(4) The corporation is required to maintain a PLACE OF INCORPORATION TEST
sinking fund to answer for redemption price if The corporation is a national of the country
the corporation is required to redeem. under whose laws it is organized or
(5) The redeemable shares are deemed retired incorporated (Sec. 123).
upon redemption unless otherwise provided in Domestic corporations organized and
the AOI (i.e., if the AOI allows for reissuance of governed under and by Philippine laws
such shares). Foreign Corporations organized under laws
(6) URE (unrestricted retains earnings) is NOT other than those of the Philippines and can
necessary before shares can be redeemed operate only in the territory of the state under
but there must be sufficient assets to pay the whose laws it was formed. However, they may
creditors and to answer for operations be licensed to do business here (Campos).
(Republic Planters Banks v. Agana, 1997).
Redemption cannot be made if such CONTROL TEST
redemption will result in insolvency or A corporation shall be considered a Filipino
inability of the corporation to meet its corporation if the Filipino ownership of its
obligations (SEC Opinion, 24 Aug capital stock is at least 60%, and where the
1987). 60-40 Filipino-alien equity ownership is NOT in
doubt (SEC Opinion dated 6 November 1989;
Note: Redeemable shares reacquired shall be DOJ Opinion No. 18, s. 1989).
considered retired and no longer issuable, unless Therefore, its shareholdings in another
otherwise provided in the Articles of the redeeming corporation shall be considered to be of Filipino
corporation (SEC Rules Governing Redeemable nationality when computing the percentage of
and Treasury Shares, 26 April 1982). Filipino equity of that second corporation
(SEC Opinion dated 23 November 1993).
Treasury shares (Sec. 9)
These are shares which have been issued and Control test is applied in the following:
fully paid for, but subsequently re-acquired by (1) Exploitation of natural resources - Only
the issuing corporation by purchase, Filipino citizens or corporations whose capital
redemption, donation or through some other stock are at least 60% owned by Filipinos
lawful means. Such shares may again be can qualify to exploit natural resources.
disposed of for a reasonable price fixed by the (Sec. 2, Art. XII, Consti.)
BOD. Treasury shares are therefore issued (2) Public Utilities - xxx no franchise,
shares, but being in the treasury, do not have certificate or any other form of authorization
the status of outstanding shares. Consequently, for the operation of a public utility shall be
although a treasury share, not retired by granted except to citizens of thePhilippines
reacquisition, may be re-issued or resold, or to corporations or associations organized
such share, as long as it is held by the under the laws of the Philippines at least 60%
corporation as a treasury share, participates of whose capital is owned by such citizens.
neither in the dividends, because dividends (Sec.11, Art. XII, Consti.)
cannot be declared by the corporation to Note: In the recently decided case of Gamboa
itself nor in the vs. Teves (G.R. No. 176579, June 28, 2011),
meetings of the corporation as voting stock, the SC ruled as follows:
for otherwise equal distribution of voting The term "capital" in Section 11, Article
powers among stockholders will be effectively XII of the 1987 Constitution refers only to
lost and the directors will be able to shares of stock entitled to vote in the election
perpetuate their control of the corporation, of directors, and thus in the present case only
though it still represents a paid for interest to common shares, and not to the total
in the property of the corporation. (CIR v. outstanding capital stock (common and non-
Manning, 1975) voting preferred shares).
Note: Delinquent stocks, which are stocks The 60 percent of the "capital" assumes, or
that have not been fully paid, may become should result in, "controlling interest" in the
treasury stocks upon bid of the corporation in corporation. Compliance with the required
absence of other bidders (Sec.68). Filipino ownership of a corporation shall be
determined on the basis of outstanding
Convertible shares capital stock whether fully paid or not, but
A type of preferred stock that the holder can only such stocks which are generally entitled
exchange for a predetermined number of to vote are considered.
common shares at a specified time.
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For stocks to be deemed owned and held to each class of shares, whether common,
by Philippine citizens or Philippine nationals, preferred non-voting, preferred voting or any
mere legal title is not enough to meet the other class of shares. This uniform application
required Filipino equity. Full beneficial of the 60-40 ownership requirement in favor of
ownership of the stocks, coupled with Filipino citizens clearly
appropriate voting rights is essential. Thus, breathes life to the constitutional command
stocks, the voting rights of which have been that the ownership and operation of public
assigned or transferred to aliens cannot be utilities shall be reserved exclusively to
considered held by Philippine citizens or corporations at least 60 percent of whose
Philippine nationals. capital is Filipino-owned. Applying uniformly the
60-40 ownership requirement in favor of
Individuals or juridical entities not meeting Filipino citizens to each class of shares,
the aforementioned qualifications are regardless of differences in voting rights,
considered as non Philippine nationals. privileges and restrictions, guarantees
effective Filipino control of public utilities, as
In the later 2012 case of Gamboa v. Teves, mandated by the Constitution.
(G.R. No. 176579, October 9, 2012) The SC
reversed the previous ruling and held that: GRANDFATHER RULE
Method used to determine the nationality of a
Since the constitutional requirement of at least corporation, in cases where corporate
60 percent Filipino ownership applies not only shareholders are present in the situation, by
to voting control of the corporation but also which the percentage of Filipino equity in
to the beneficial ownership of the a corporation engaged in nationalized and/or
corporation, it is therefore imperative that such partly nationalized areas of activities, is
requirement apply uniformly and across the computed by attributing the nationality of
board to all classes of shares, regardless of second or even subsequent tier ownership to
nomenclature and category, comprising the determine the nationality of the corporate
capital of a corporation. Under the shareholder (Villanueva).
Corporation Code, capital stock consists of
all classes of shares issued to stockholders, It involves the computation of Filipino
that is, common shares as well as preferred ownership of a corporation in which another
shares, which may have different rights, corporation of partly Filipino and partly
privileges or restrictions as stated in the foreign equity owns capital stock. The
articles of incorporation. percentage of shares held by the second
corporation in the first is multiplied by the
Since a specific class of shares may have latters own Filipino equity, and the product of
rights and privileges or restrictions different these percentages is determined to be the
from the rest of the shares in a corporation, the ultimate Filipino ownership of the subsidiary
60-40 ownership requirement in favor of corporation (SEC Opinion re; Silahis Intl Hotel
Filipino citizens in Section 11, Article XII of May 4, 1987).
the Constitution must apply not only to
shares with voting rights but also to shares The Grandfather Rule must be applied to
without voting rights. Preferred shares, accurately determine the actual participation,
denied the right to vote in the election of both direct and indirect, of foreigners in a
directors, are anyway still entitled to vote corporation engaged in a nationalized activity
on the eight specific corporate matters or business.
mentioned above under Section 6 of the
Corporation Code. Thus, if a corporation, Compliance with the constitutional
engaged in a partially nationalized industry, limitation(s) on engaging in nationalized
issues a mixture of common and preferred activities must be determined by ascertaining
non-voting shares, at least 60 percent of if 60% of the investing corporations
the common shares and at least 60 percent of outstanding capital stock is owned by Filipino
the preferred nonvoting shares must be citizens, or as interpreted, by natural or
owned by Filipinos. Of course, if a individual Filipino citizens. If such investing
corporation issues only a single class of corporation is in turn owned to some extent by
shares, at least 60 percent of such shares another investing corporation, the same
must necessarily be owned by process must be observed. One must not stop
Filipinos. until the citizenships of the individual or
natural stockholders of layer after layer of
In short, the 60-40 ownership requirement in investing corporations have been established,
favor of Filipino citizens must apply separately the very essence of the Grandfather Rule
5
(Redmont Consolidated Mines, Corp v. entitled to the privilege against self-
McArthur Mining, Inc., et al., 2010). incrimination (Bataan Shipyard & Engg Co. v.
PCGG, 1987)
Corporate Juridical Personality
DOCTRINE OF PIERCING THE CORPORATE
A private corporation formed or organized VEIL
under this code commences to have Piercing the veil of corporate entity is
corporate existence and juridical personality merely an equitable remedy, and may be
and is deemed incorporated from the date granted only in cases when the corporate
the SEC issues a certificate of incorporation fiction is used to defeat public convenience,
under its official seal(Sec. 19) justify wrong, protect fraud or defend crime
(Yutivo Sons v. CTA, 1961) or where the
DOCTRINE OF SEPARATE JURIDICAL corporation is a mere alter ego or business
PERSONALITY conduit of a person. (Koppel Phil v. Yatco)
(Asked in 1995, 1996, 1999, 2000)
Concept: A corporation has a personality Note: The corporate veil may be lifted only if it
separate and distinct from that of its has been used to shield fraud, defend
stockholders and members and is not crime, justify a wrong, defeat public
affected by the personal rights, obligations, convenience, insulate bad faith or perpetuate
and transactions of the latter. injustice. (PNB case)
General rule: Not less than 5 but not Any provision or matter stated in the
more than 15 directors/ trustees articles of incorporation may be amended
(1) By a majority vote of the board of
Exception: Non-stock corporations whose directors or trustees
articles or bylaws may provide for more (2) And the vote or written assent of:
than 15 trustees (Sec. 92) (a) 2/3 of the outstanding capital
stock, without prejudice to the
Educational non-stock corporations: appraisal right of dissenting
(a) trustees may NOT be less than 5 stockholders in accordance with the
NOR exceed 15 provisions of this Code,
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(b) 2/3 of the members if it be a
non-stock corporation. (Sec. 16) NON-AMENABLE ITEMS
The following items state accomplished
Limitations facts, therefore, cannot be amended:
(1) Cannot effect amendment when it (1) The names, nationalities and residences
will contravene any provision of of the incorporators (Otherwise, an
requirement imposed by the Code or by amendment would go against the definition
special laws of incorporators in Sec. 5)
(2) The amendment must be for a (2) First set of directors or trustees
legitimate purpose (3) Original stock subscriptions and paid-in
(3) Must be approved by the capital
directors/trustees and the (4) Treasurer-in-trust
stockholders/members through the vote (5) Place and date of execution
requirement (6) Witnesses (De Leon)
(4) Appraisal Right
(5) Both the original and the amended Notes: AOI must be accompanied by
articles together must contain all the Treasurers sworn statement of compliance
provisions required by law to be set out in with Sec. 13 on amount of capital to be
the articles. subscribed and paid for the purposes of
(6) If the corporation is governed by a incorporation; otherwise, SEC shall not
special law the amended articles must be accept the AOI. (Sec. 14)
accompanied by a favorable
recommendation of the appropriate REGISTRATION AND ISSUANCE OF
government agency to the effect that such CERTIFICATE OF INCORPORATION
amendment is in accordance with law
(Lopez, 2004) Registration of articles of incorporation
(7) Will take effect only
(a) Upon their approval by the SEC Documents to be filed with SEC (Asked in 2002):
by the issuance of a certificate of [BAT-LaNG]
amended articles (1) Articles of Incorporation
(b) Or from the date of filing with the (2) Treasurers Affidavit certifying that 25% of
SEC if not acted upon within 6 months the total authorized capital stock has been
from the date of filing for a cause not subscribed and at least 25% of such has been
attributable to the corporation fully paid in cash or property.
Procedure (3) Bank certificate covering the paid-up
(1) The original and amended articles capital.(Note: Current SEC rules no longer require
together shall contain all provisions this if payment for shares is made in cash)
required by law to be set out in the articles (4) Letter authority authorizing the SEC to
of incorporation examine the bank deposit and other corporate
(2) The articles, as amended shall be books and records to determine the existence of
indicated by underscoring the change or paid-up capital.
changes made (5) Undertaking to change the corporate Name
(3) A copy shall be submitted to the SEC in case there is another person or entity with
(a) Duly certified under oath by the same or similar name that was previously
corporate secretary and a majority of registered.
the directors or trustees (6) Certificate of authority from proper
(b) Stating the fact that the Government agency whenever appropriate like BSP
amendment or amendments have for banks and Insurance Commission for insurance
been duly approved by the corporations. (Sundiang and Aquino)
required vote of the stockholders
or members ISSUANCE OF CERTIFICATE OF INCORPORATION
BY SEC
The following items are amendable under Effect: Commencement of corporate existence and
Sec. 16: juridical personality (Sec. 19)
(1) Change of name of the Corporation Revocation of certificate of incorporation: If
(2) Adding to or changing the purpose/s incorporators are found guilty of fraud in procuring
(3) Change of principal office the same after due notice and hearing (Sec. 6(i),
(4) Change in the number of directors or PD 902-A)
trustees
(5) Increase or decrease in authorized GROUNDS FOR DISAPPROVING AOI (SEC.17)
capital stock (subject to Sec. 38) (F2P2)
10
corporations corporate powers cease and the
(1) AOI does not SUBSTANTIALLY comply with corporation is deemed dissolved. Organization
the form prescribed includes: the filing & approval of bylaws with the
(2) Purpose is patently unconstitutional, illegal, SEC and the election of directors and officers
immoral, contrary to government rules and (Campos).
regulations
(3) Treasurers Affidavit concerning the amount of NATURE AND FUNCTION OF BY LAWS
capital subscribed and or paid is false (1) Product of agreement of the
(4) Required percentage of ownership of Filipino stockholders/members and establish the rules for
citizens has not been complied with. internal government of the corporation (Campos
(2) A rule or law of a corporation for its
Remedy in case of rejection of AOI: Petition government (13 Am. Jur., 283)
for review in accordance with the Rules of Court (3) Mere internal rules among stockholders and
(Sec. 6, last par., PD 902-A) cannot affect or prejudice 3rd persons who deal
with the corporation unless they have knowledge
SEC shall give the incorporators reasonable time of the same (China Banking Corp v CA, 1997)
to correct or modify objectionable portions of the (4) According to its function, by-laws may be
articles or amendment (Sec. 17) defined as the rules and regulations or private laws
enacted by the corporation to regulate, govern
Doctrine of Non-use (sec. 22) and control its own actions, affairs and concerns
If a corporation does not formally organize and and its stockholders or members and directors
commence the transaction of its business or the and officers with relation thereto and among
construction of its works within two (2) years from themselves in their relation to it. (9 Fletcher
the date of its incorporation, its corporate powers Cyc. Corp., 1963 rev. ed., Sec. 4166 at 622 cited in
cease and the corporation shall be deemed Lopez, 1994)
dissolved. However, if a corporation has
commenced the transaction of its business but REQUISITES OF VALID BY-LAWS
subsequently becomes continuously inoperative for 1. Must not be contrary to law nor with CC;
a period of at least five (5) years, the same shall be 2. Must not be contrary to morals and public
a ground for the suspension or revocation of its policy;
corporate franchise or certificate of incorporation. 3. Must not impair obligations and contracts;
4. Must be general and uniform in their
This provision shall not apply if the failure to operation and not directed against
organize, commence the transaction of its particular individuals;
businesses or the construction of its works, or to 5. Must be consistent with the charter or
continuously operate is due to causes beyond the articles of incorporation; and
control of the corporation as may be determined by 6. Must be reasonable, not arbitrary or
the Securities and Exchange Commission. oppressive.
BOARD IS SEAT OF CORPORATE POWERS However, just as a natural person may authorize
another to do certain acts for and on his behalf, the
General rule: Unless otherwise provided in this board of directors may validly delegate some of its
Code, the corporate powers of all corporations functions and powers to its officers, committees or
formed under this Code shall be exercised, all agents. The authority of these individuals to bind
business conducted and all property of such the corporation is generally derived from law,
corporations controlled and held by the board corporate by-laws or authorization from the board,
of directors or trustees to be elected from among either expressly or impliedly by habit, custom or
the holders of stocks, or where there is no stock, acquiescence in the general course of business.
from among the members of the corporation, who (Banate v. Philippine Countryside Rural Bank, 2010)
shall hold office for one (1) year until their
successors are elected and qualified. (Sec. 23) Requisites of a valid corporate act by the
Board of Directors
Exceptions: (1) The Board must act as a BODY in a meeting
(1) In case of an Executive Committee duly (2) There must be a VALIDLY constituted meeting
authorized in the by-laws; (Sec. 35) (3) There act must be supported by a
(2) In case of a contracted manager which may be MAJORITY OF THE QUORUM duly assembled
an individual, a partnership, or another corporation (Exception: Election of officers requires a vote of
Note: In case the contracted manager is another majority of ALL the members of the board
corporation, the special rule in Sec. 44 applies. (4) The act must be within the powers conferred
(3) In case of close corporations, the stockholders to the Board.
may manage the business of the corporation rather
than by a board of directors, if the AOI so provide. Limitations on powers of Board of
(Sec. 97) Directors/Trustees
(1) Limitations imposed by the Constitution,
The power to purchase real property is vested in statutes, articles of incorporation or by-laws
the board of directors or trustees. While a (2) Certain acts of the corporation that require
corporation may appoint agents to negotiate for joint action of the stockholders and board of
the purchase of real property needed by the directors:
corporation, the final say will have to be with the (a) Removal of director (Sec. 28)
board, whose approval will finalize the (b) Amendments of AOI (Sec. 16)
transaction. (Spouses Constantine Firme v. Bukal (c) Fundamental changes (Sec. 6)
Enterprises and Development Corporation, 2003) (d) Declaration of stock dividends (Sec. 43)
(e) Entering into management contracts (Sec.
The Corporation Code of the Philippines vests in the 44)
board of directors the exercise of the corporate (f) Fixing of consideration of non-par shares
powers of the corporation, save in those instances (Sec. 62)
where the Code requires stockholders approval (g) Fixing of compensation of directors (Sec.
for certain specific acts. (Great Asian Sales Center 30)
Corp v. CA, 2002) (3) Cannot exercise powers not possessed by the
corporation.
Indisputably, one of the rights of a stockholder is
the right to participate in the control or PRINCIPLE ON DELEGATION OF BOARD POWER
management of the corporation. This is exercised
through his vote in the election of directors Under Sec 23, the power and the responsibility
because it is the board of directors that controls or to decide whether the corporation should enter
manages the corporation. (Gamboa v. Teves, into a contract that will bind the corporation is
2011) lodged in the board, subject to the articles of
incorporation, by-laws, or relevant provisions of
Section 23 of the Corporation Code expressly law. However, just as a natural person may
provides that the corporate powers of all authorize another to do certain acts for and on his
corporations shall be exercised by the board of behalf, the board of directors may validly delegate
12
some of its functions and powers to officers, not in a position to validly exercise its business
committees or agents. The authority of such judgment for the protection of the corporation,
individuals to bind the corporation is generally e.g., when the Board itself has committed an
derived from law, corporate by-laws or act causing damage to the corporation or when the
authorization from the board, either expressly or Board is placed in a conflict of interests scenario
impliedly by habit, custom or acquiescence in whereby it is unlikely that it would use such
the general course of business. (Peoples business discretion to file such suit for the best
Aircargo v. CA, 1998) interest of the corporation.
Accordingly, the members of the board of directors The rule shall be applied notwithstanding the fact
(1) Duty of Obedience - shall direct the affairs of that the director risked his own funds in the
the corporation only in accordance with the venture. (Sec. 34)
purposes for which it was organized;
15
By embracing the opportunity, the self-interest of The provisions on seizing corporate opportunity and
the officer or director will be brought into conflict disloyalty (Secs. 31 and 34) shall also apply to
with that of his corporation. Hence, the law corporate officers.
does not permit him to seize the opportunity
even if he will use his own funds in the Note: Members of the BOD who are also officers are
venture. (Sundiangand Aquino) held to a more stringent liability because they are
in charge of dayto-day activities (Campos)
Note: Differences between Section 31 and Section
34:
(1) While both involve the same subject matter Doctrine of Limited Doctrine of
(business opportunity) they concern different Liability Immunity
personalities; Sec. 34 is applicable only to Shields the corporators Protects a person
directors and not to officers, whereas Sec. 31 from corporate liability acting for and in
applies to directors, trustees and officers. beyond their agreed behalf of the
(2) Sec. 34 allows a ratification of a transaction contribution to the corporation from
by a self-dealing director by vote of stockholders capital or shareholding being himself
representing at least 2/3 of the outstanding capital in the corporation. personally liable for
stock. (Villanueva) his authorized actions
20
Ultra Vires Acts Illegal Acts HOW (CORPORATE POWERS) EXERCISED
Not necessarily Unlawful; against law, BY THE SHAREHOLDERS
unlawful, but outside morals, public policy, Corporate acts requiring approval of stockholdersor
the powers of the and public order members (voting and non-voting shares)
corporation
Can be ratified Cannot be ratified General rule: Vote necessary to approve a
Can bind the parties if Cannot bind the parties particular corporate act as provided in this Code
wholly or partly shall be deemed to refer only to stocks with voting
executed rights (Sec. 6)
An ultra vires act is distinguished from illegal act, Exceptions (Sec. 6): Voting and non-voting
the former being voidable which may be shares shall be entitled to vote in the following
enforced by performance ratification, or estoppel, cases:
while the latter is void and cannot be validated. (1) Amendment of AOI
(Seaoilvs. Autocorp Group, 2008, Nachura) (2) Adoption, Amendment and Repeal of By-Laws
(Sec. 48)
Remedies in Case of Ultra Vires Acts (3) Sale, Lease, Mortgage or Other Disposition
(1) State: of Substantially all corporate assets (Sec. 40)
(a) Forfeiture by judgment of Court (4) Incurring, Creating or Increasing Bonded
(b) Suspension or revocation of the certificate Indebtedness (Sec. 38)
of registration by the SEC (5) Increase or Decrease of Capital Stock (Sec. 38)
(2) Stockholders: (6) Merger and Consolidation(Sec. 76-80)
(a) Injunction (7) Investment of funds in another corporation
(b) Derivative suit or business or for any purpose other than the
(3) Creditors: Nullification of contract in fraud of primary purpose for which it was organized (Sec.
creditors 42)
Requisites (Sec. 42) (Asked in 95):
DOCTRINE OF INDIVISIBILITY OF SUBSCRIPTION (a) Approval of majority of the board of
directors or trustees
Section 64 of the Corporation Code implicitly sets (b) Ratification by the stockholders
forth the doctrine that subscription is one entire representing at least 2/3 of the OCS or the
and indivisible contract. Thus, if the stockholder members at a meeting duly called for the
has not paid the full amount of his subscription, purpose
he cannot transfer part of it in view of the (c) Written notice addressed to each
indivisible nature of subscription contract. It is stockholder or member at his place of
only upon full payment of the whole residence as shown on the books of the
subscription that a stockholder can transfer a corporation
portion of his subscription. (d) Appraisal right available to dissenting
stockholders or members
However, the entire subscription although not yet (8) Dissolution of the Corporation (Sec. 118-121)
fully paid, may be transferred to a single
transferee. It is necessary, however, to secure the Corporate acts requiring approval of
consent of the corporation since the transfer of stockholdersor members (voting shares only)
subscription right contemplates a novation of (1) Declaration of Stock Dividends (Sec. 43)
contract which, under Article 1293 of the Civil (2) Management Contracts (Sec. 44)
Code of the Philippines, cannot be made without (3) Fixing the Consideration of No-Par shares (Sec.
the consent of the creditor. Likewise, it has to 62)
be emphasized that under Section 63 of the (4) Fixing the Compensation of Directors (Sec. 30)
Corporation Code, no transfer shall be valid,
except as between the parties, until the transfer BY THE BOARD OF DIRECTORS
is recorded in the books of the corporation.
(SEC Opinion, August 7, 1991) Board as repository of corporate powers
The transferee must also undertake to pay the General rule (doctrine of centralized management):
balance of the subscription amount when due or The corporate powers of the corporation shall
upon call by the BOD. be exercised, all business conducted and all
property of such corporation controlled and held
DOCTRINE OF EQUALITY OF SHARES by the board of directors or trustees.
Each share shall be EQUAL in ALL respects to (Sec. 23)
every other share, except as otherwise provided in Exceptions:
the AOI and stated in the certificate of stock (Sec. (1) Executive Committee duly authorized in the
6) by-laws(Sec. 35);
21
(2) A contracted manager which may be an (2) purchase of redeemable shares by the
individual, a partnership, or another corporation. corporation, regardless of the existence of
Note: In case the contracted manager is another unrestricted retained earnings, and
corporation, the special rule in Sec. 44 applies. (3) dissolution and eventual liquidation of the
(3) In case of close corporations, the stockholders corporation. Furthermore, the doctrine is
may manage the business of the corporation rather articulated in Sec. 41 on the power of a
than by a board of directors, if the AOI so provide corporation to acquire its own shares and in Sec.
(Sec. 97) 122 on the prohibition against the distribution of
corporate assets and property unless the
The power to purchase real property is vested in stringent requirements therefore are complied
the board of directors or trustees. While a with. (Ong Yong v. Tiu, 2003)
corporation may appoint agents to negotiate for
the purchase of real property needed by the Trust Fund Doctrine means that the capital
corporation, the final say will have to be with the stock, properties and other assets of a corporation
board, whose approval will finalize the are regarded as equity in trust for the payment
transaction. (Spouses Constantine Firme v. Bukal of corporate creditors.
Enterprises and Development Corporation, 2003)
Stated simply, the trust fund doctrine states that
Requisites of a valid corporate act by the all funds received by the corporation in payment
Board of Directors (Sec. 25) of the shares of stock shall be held in trust for
(1) The Board must act as a BODY in a meeting. the corporate creditors and other stockholders of
(Note:Current SEC regulations allow BOD the corporation. Under such doctrine no fund shall
meetings by teleconferencing or videoconferencing be used to buy back the issued shares of stock
(2) There must be a VALIDLY constituted meeting. except only in instances specifically allowed by
(3) Their act must be supported by a MAJORITY the Corporation Code. (Boman Environmental
OF THE QUORUM duly assembled (Exception: Development Corporation v. CA, 1988):
Election of officers requires a vote of majority of
ALL the members of the board) The creditors of a corporation have the right to
(4) The act must be within the powers conferred assume that so long as there are debts and
to the Board. liabilities, the Board of Directors will not use
corporate assets to purchase its own shares of
TRUST FUND DOCTRINE stock or to declare dividends to its stockholders
Under Sec. 43 of Code, the corporation can when the corporation is insolvent. (Steinberg v.
declare dividends only out of "unrestricted Velasco, 1929)
retained earnings;" and that under Sec. 122, no
corporation shall distribute any of its assets or MEETINGS
property except upon lawful dissolution and after
payment of all its debts and liabilities. These REGULAR OR SPECIAL
provisions in essence provide for the "trust fund Who may attend? The members of the Board
doctrine" where the "subscription to the capital themselves; directors in Board meetings cannot be
of a corporation constitute a fund to which represented or voted by proxies.
creditors have a right to look for satisfaction of their
claims." Philippine Trust Co. v. Rivera, 44 Phil. 469 In the Philippines, teleconferencing and
(1923) (cited in Villanueva) videoconferencing of members of board of directors
of private corporations is a reality, in light of
The Trust Fund Doctrine, first enunciated by this Republic Act No. 8792. The Securities and Exchange
Court in the 1923 case of Philippine Trust Co. v. Commission issued SEC Memorandum Circular
Rivera, provides that subscriptions to the capital No. 15, on November 30, 2001, providing the
stock of a corporation constitute guidelines to be complied with related to such
a fund to which the creditors have a right to conferences. (Expertravel&Tours, Inc. v.CA, May
look for the satisfaction of their claims. 26, 2005)
By a majority vote When the AOI or the BOD does not provide for the
(a) Power to enter into management contracts value of no-par shares, the value of such shares
(Sec. 44) shall be determined by the stockholders
representing at least a majority of the
General rule: Requires approval by majority of outstanding capital stock
the BOD/BOT and approval by stockholders
owning at least the majority of the outstanding By a two-thirds vote
capital stock/majority of members of both the (a) Amendment of Articles of Incorporation (Sec.
managing and the managed corporation 16)
Exceptions:
(1) Where a stockholder/s representing the same Amendment of the AOI may be made by a
interest of both the managing and the managed majority vote of the BOD/BOT and the vote
corporations own or control more than one- or written assent of the stockholders
third (1/3) of the total outstanding capital stock representing at least two-thirds 2/3 of the
entitled to vote of the managing corporation; or outstanding capital stock, without prejudice to
(2) Where a majority of the members of the the appraisal right of dissenting stockholders.
managing corporations BOD also constitute a
majority of the managed corporations BOD Includes all stockholders/members with or
Requires at least 2/3 votes of the outstanding without voting rights
capital stock/membership of the managed
corporation. (b) Amendment of AOI of close corporations (Sec
103)
BUT only majority vote is required for the Amendment to the AOI which seeks to delete or
managing corporation. remove any provision required to be contained
in the AOI of Close Corporations or to reduce
(b) Amendments to by-laws (Sec. 48) Requires a quorum or voting requirement stated in said
approval by majority of the BOD/BOT and approval AOI requires the affirmative vote of at least
by stockholders owning at least the majority of the 2/3 of the outstanding capital stock, whether with
outstanding capital stock/majority of members or without voting rights, or of such greater
proportion of shares as may be specifically
Includes all stockholders/members with or provided in the AOI at a meeting duly called.
without voting rights
(c) Delegating the power to amend or repeal
(c) Revocation of delegation to the BOD of the by-laws or adopt new by-laws (Sec. 48)
power to amend or repeal or adopt by-laws (Sec. Delegation to the BOD/BOT of the power to
48) amend or repeal by-laws or adopt new by-laws
requires approval by at least two-thirds (2/3) of
Requires approval by majority of the BOD/BOT the outstanding capital stock/membership.
and approval by stockholders owning at least the Revocation of the delegation requires only
majority of the outstanding capital stock/majority majority vote of the outstanding capital
of members stock/membership.
(d) Calling a meeting to remove directors (Sec. 28) (d) Extending/shortening corporate term (Sec. 37)
Meeting for the removal of directors or trustees, Requires approval by a majority vote of the
or any of them, must be called by the secretary BOD/BOT and approval by at least two-thirds
on order of the president or on the written (2/3) of the outstanding capital stock/membership.
demand of the stockholders representing or Includes all stockholders/members with or
holding at least a majority of the outstanding without voting rights
capital stock/majority of members
(e) Increasing/decreasing capital stock (Sec. 38)
(e) Granting compensation other than per diems to Requires approval by a majority vote of the
directors (Sec. 30) BOD and approval by at least two-thirds (2/3)
of the outstanding capital stock.
Compensation other than per diems may be Includes all stockholders/members with or
granted to directors by the vote of the without voting rights
25
(f) Incurring, creating, increasing bonded A contract of the corporation with one or
indebtedness (Sec. 38) more of its directors is voidable, at the option
Requires approval by a majority vote of the of such corporation, unless all the following
BOD and approval by at least two-thirds (2/3) conditions are present:
of the outstanding capital stock. (1) The directors presence in the BOD meeting
Includes all stockholders/members with or in which the contract was approved was not
without voting rights necessary to constitute a quorum
(2) The vote of such director was not
(g) Issuance of shares not subject to pre- necessary for the approval of the contract
emptive right (Sec. 39) (3) The contract is fair and reasonable under
Shares issued in good faith in exchange for the circumstances
property or previously incurred indebtedness (4) In case of an officer, the contract has
with the approval of the stockholders been previously authorized by the BOD.
representing two-thirds (2/3) of the
outstanding capital stock are not subject to Where any of the first two conditions is
pre-emptive rights. absent, but necessary that the contract be fair
and reasonable, in the case of a contract with
(h) Sale/disposition of all or substantially all of a director, such contract may be ratified by
corporate assets(Sec. 40) the vote of the stockholders representing at least
Requires approval by a majority vote of the two-thirds (2/3) of the outstanding capital stock.
BOD/BOT and approval by at least two-thirds
(2/3) of the outstanding capital (n) Ratifying acts of disloyalty of a director (Sec.
stock/membership. 34)
Includes all stockholders/members with or General rule: Where a director, by virtue of
without voting rights his office, acquires for himself a business
opportunity which should belong to the
Note: In non-stock corporations where there are corporation, thereby obtaining profits, he must
NO members with voting rights, the vote of at least account to the corporation for all such profits
the majority of the BOT will be sufficient by refunding it.
authorization for any sale or disposition of all
or substantially all of corporate assets. Exception: His act may be ratified by a vote
(Sec. 40) of the stockholders owning or representing at
least two-thirds (2/3) of the outstanding capital
(i) Investment of funds in another business (Sec. stock.
42)
Requires approval by a majority vote of the (o) Stockholders approval of the plan of merger
BOD/BOT and approval by at least two-thirds or consolidation (Sec. 77)
(2/3) of the outstanding capital stock/membership. Requires approval by majority of each of the
BOD/BOT of the constituent corporations of
Includes all stockholders/members with or without the plan of merger or consolidation and
voting rights approval by at least two-thirds (2/3) of the
outstanding capital stock/membership of each
(j) Dividend declaration (Sec. 43) corporation at separate corporate meetings duly
No stock dividend shall be issued without the called.
approval of stockholders representing not less than
two-thirds (2/3) of the outstanding capital stock. Amendments to the plan of merger or
consolidation also requires approval by majority
(k) Power to enter into management contracts vote of each of the BOD and two-thirds (2/3)
(Sec. 44) vote of the outstanding capital
stock/membership of each corporation voting
Please see discussion under By a Majority Vote separately.
(l) Removal of directors or trustees (Sec. 28) Includes all stockholders/members with or
Any director or trustee may be removed from office without voting rights
by a vote of the stockholders holding or
representing at least two thirds (2/3) of the (p) Distribution of assets in non-stock corporations
outstanding capital stock/membership. (Sec. 96)
The BOT shall, by majority vote, adopt a
(m) Ratifying contracts with respect to dealings resolution recommending a plan of distribution
with directors/ trustees (Sec. 32) which shall be approved by at least two-thirds
(2/3) of the members with voting rights.
26
(q) Incorporation of a religious society (Sec. 116) Subsequent transfer of stock would not carry with
Any religious society or religious order, or any it right to dividends UNLESS agreed upon by the
diocese, synod, or district organization of any parties.
religious denomination, sect or church, unless
forbidden by the constitution, rules, regulations, RIGHT OF APPRAISAL
or discipline of the religious denomination, sect Right to withdraw from the corporation and
or church of which it is a part, or by demand payment of the fair value of the shares
competent authority, may, upon written consent after dissenting from certain corporate acts
and/or by an affirmative vote at a meeting called involving fundamental changes in corporate
for the purpose of at least two-thirds (2/3) of its structure (Sec. 81).
membership, incorporate for the administration
of its temporalities or for the management of Instances of appraisal right
its affairs, properties and estate. (1) Extension or reduction or corporate term (Sec.
81)
(r) Voluntary dissolution of a corporation (Sec. 118- (2) Amendment to AOI - Change in the rights of
119) stockholders, authorize preferences superior to
Requires a resolution adopted by a majority those stockholders, or restrict the right of any
vote of the BOD/BOT, and by a resolution stockholder (Sec. 81)
duly adopted by the affirmative vote of the (3) Investment of corporate funds in another
stockholders owning at least twothirds (2/3) of business or purpose (Sec. 42)
the outstanding capital stock/membership of a (4) Sale or disposal of all or substantially all assets
meeting to be held upon call for such purpose. of the corporation (Sec. 81)
(5) Merger or consolidation (Sec. 81)
By cumulative voting
Requirements for exercise of appraisal right
Election of Directors or Trustees (Sec. 24) - A (Secs. 82, 86)
stockholder may vote such number of shares for (1) Stockholder must have voted against the
as many persons as there are directors to be corporate act.
elected or he may cumulate said shares and give (2) Stockholder must make a written demand
one candidate as many votes as the number on the corporation within 30 days after the vote
of directors to be elected multiplied by the was taken for payment of the fair value of his shares
number of his shares shall equal, or he may on the said date.
distribute them on the same principle among as (3) Stockholder must submit the certificates to
many candidates as he shall see fit: the corporation for notation within ten (10) days
after demand for payment. Otherwise, right to
Provided, That the total number of votes cast by appraisal may be terminated at the option of
him shall not exceed the number of shares owned corporation.
by him as shown in the books of the corporation
multiplied by the whole number of directors to be Effect of demand (Sec. 83)
elected. ALL rights accruing to such shares, including
voting and dividend rights, shall be suspended
PROPRIETARY RIGHTS EXCEPT the right of such stockholder to receive
payment of the fair value thereof
RIGHT TO DIVIDENDS
Immediate RESTORATION of voting and dividend
General rule: The right to dividends vests upon rights if the dissenting stockholder is not paid the
lawful declaration by the BOD. From that time, value of his shares within 30 days after the award.
dividends become a debt owing to the SH. No
revocation can be made. Extinguishment of appraisal right (Sec. 84)
Exceptions: (1) Withdrawal of demand by the stockholder
(1) Dividends are revocable if NOT yet announced WITH CONSENT of the corporation
or communicated to the stockholders. (2) Abandonment of the proposed action
(2) Stock dividends, even if already declared, (3) Disapproval by SEC of the proposed action
may be revoked prior to actual issuance since
these are not distributions but merely RIGHT TO INSPECT
representations of changes in the capital structure.
Basis of right
Note: Right to dividends vests upon declaration so As the beneficial owners of the business, the
whoever owns the stock at such time also owns stockholders have the right to know the financial
the dividends. condition and management of corporate affairs.
27
A stockholders right of inspection is based on his (3) Demand is made in good faith or for a
ownership of the assets and property of the legitimate purpose. If the corporation or its
corporation. Therefore, it is an incident of officers contest such purpose or contend that
ownership of the corporate property, whether this there is evil motive behind the inspection, the
ownership or interest is termed an equitable burden of proof is with the corporation or such
ownership, a beneficial ownership, or quasi- officer to show the same.
ownership. Such right is predicated upon the
necessity of self-protection. (Gokongwei Jr. v. Test to determine whether the purpose is
SEC, 1979) legitimate A legitimate purpose is one which is
germane to the interests of the stockholder as such
Records/books to be kept (Sec. 74) and not contrary to the interests of the corporation
(1) Books that record all business transactions of (Gokongwei v. SEC, 1979)
the corporation which shall include contract,
memoranda, journals, ledgers, etc; Remedies when inspection is refused
(2) Minute book for meetings of the (1) Mandamus
stockholders/members; (2) Injunction
(3) Minute book for meetings of the (3) Action for damages
board/trustees; (4) File an action under Sec. 144 to impose a penal
(4) Stock and transfer book offense by fine and/or imprisonment
The corporate secretary is the one duly authorized Pre-emptive right is an option privilege of an
to make entries in the stock and transfer book. existing stockholder to subscribe to a
It is the corporate secretary's duty and obligation to proportionate part of shares subsequently issued
register valid transfers of stocks and if said by the corporation before the same can be
corporate officer refuses to comply, the disposed of in favor of others; this right
transferor-stockholder may rightfully bring suit to includes all issues and disposition of shares of any
compel performance. (Torres et al. v. CA , 1997) class. It is a common law right and may be
exercised by stockholders even without legal
Financial statements (Sec. 75) provision. On the other hand, a right of first
Within 10 days from written request, the refusal arises only by virtue of contract
corporation shall furnish its most recent financial stipulations, by which the right is strictly
statement (balance sheet and profit or loss construed against the right of person to dispose
statement as of last taxable year) or deal with their property.
At a regular meeting, the Board shall present Stockholders of a corporation shall enjoy pre-
a financial report of the operations of the emptive right to subscribe to ALL ISSUES OR
corporation for the preceding year, which shall DISPOSITIONS OF SHARES OF ANY CLASS, in
include financial statements duly signed and proportion to their respective shareholdings. The
certified by an independent CPA. purpose is to enable the shareholder to retain his
proportionate control in the corporation and to
Exception: If the paid-up capital is less than retain his equity in the surplus.
P50,000 the financial statements may be
certified under oath by the treasurer or any Note: The broad phrase all issues or disposition of
responsible officer of the corporation (instead of shares of any class is construed to include not only
an independent CPA). new shares issued in pursuance of an increase
in capital stock or from the unissued shares
Requirements for the exercise of the right of which form part of the ACS, but also covers
inspection (Sec. 74) treasury shares. Treasury shares would come
(1) It must be exercised at reasonable hours under the term disposition. Likewise considering
on business days and in the place where the that it is not included among the exceptions
corporation keeps all its records (i.e., principal enumerated therein, where pre-emptive right shall
office). not extend, the intention is to include it in its
(2) The stockholder has not improperly used application. (SEC Opinion, 14 January 1993)
any information he secured through any previous
examination. A pre-emptive right is a right claimed against
the corporation on unissued shares of its capital
28
stock, and likewise on treasury shares held by RIGHT TO VOTE
the corporation; while (1) Non-voting shares are not entitled to vote
the right of first refusal is a right exercisable except as provided for in the last paragraph of Sec.
against another stockholder on his shares of stock. 6.
(Villanueva) (2) Preferred or redeemable shares may be
deprived of the right to vote
Basis of Preemptive Right: to preserve the (3) Fractional shares of stock cannot be voted
existing proportional rights of the stockholders (4) Treasury shares have no voting rights as
(Campos) long as they remain in the treasury.
(5) No delinquent stock shall be voted (Sec. 71)
Limitations to exercise of pre-emptive right (6) A transferee of stock cannot vote if his
(Sec. 39) transfer is not registered in the stock and
(1) Such pre-emptive right shall NOT extend to transfer book of the corporation.
shares to be issued in compliance with laws
requiring stock offerings or minimum stock RIGHT OF FIRST REFUSAL
ownership by the public; The right of first refusal provides that a
(2) It shall also NOT extend to shares to be issued stockholder who may wish to sell or assign his
in good faith with the approval of the stockholders shares must first offer the shares to the
representing two-thirds (2/3) of the outstanding corporation or to the other existing stockholders
capital stock, in exchange for property needed for under terms and conditions which are
corporate purposes or in payment of a previously reasonable; and that only when the corporation or
contracted debt the other stockholders do not or fail to exercise
(3) It shall not take effect if denied in the their option, is the offering stockholder at liberty
AOI or an amendment thereto. to dispose of his shares to third parties.
(4) If one shareholder does not want to exercise
his preemptive right, the other shareholders are An agreement entered into between the two
not entitled to purchase the corresponding shares majority stockholders of a corporation whereby
of the shareholder who declined. But if nobody they mutually agreed not to sell, transfer, or
purchased the same and later on the board re- otherwise dispose of any part of their shareholdings
issued the shares, the pre-emptive right applies. till after one year from the date of the
(Sundiang and Aquino) agreement. (Lambert v. Fox, 1914)
Remedies in case of unwarranted denial The right of first refusal is primarily an attribute
(1) Injunction of ownership, and consequently can be effected
(2) Mandamus only through a contractual commitment by the
(3) The suit should be individual and not derivative owner of the shares; consequently, the waiver of
because the wrong done is to the stockholders a right of first refusal when duly constituted can be
individually effected only by the registered owner (PCGG v.
(4) SEC can cancel shares if the third party is not SEC, unreported, 1988)
innocent
REMEDIAL RIGHTS
Waiver/ denial of preemptive right
(1) Allowed by the Code provided that it is made in INDIVIDUAL SUIT
the AOI A suit brought by the shareholder in his own name
(a) Waiver made through AOI would bind against the corporation when a wrong is directly
present and subsequent SH inflicted against him.
(b) 2/3 vote of the outstanding capital stock
is necessary before waiver is binding REPRESENTATIVE SUIT
(c) Result of Non-placement of waiver clause in A suit brought by the stockholder in behalf of
AOI: waiver shall not bind future stockholders himself and all other stockholders similarly
but only those who agreed to it situated when a wrong is committed against a
(2) The SH must be given reasonable time within group of stockholders.
which to exercise their pre-emptive rights. Upon
expiration of such period, any SH who did not DERIVATIVE SUIT
exercise such will be deemed to have waived it It is a suit by a shareholder to enforce a corporate
(3) May be necessary so as to not hinder cause of action. The corporation is a necessary
future financing plans of the corporation party to the suit, and the relief which is granted
(4) Because some new investors may be willing is a judgment against a third person in favor of
only to invest ONLY if all the new shares will be the corporation (Chua v. CA, 2004)
issued to them
(Campos)
29
It is a suit brought by one or more (1) The cause of action actually devolves on the
stockholders/members in the name and on behalf corporation, the wrong or harm having been, or
of the corporation to redress wrongs committed being caused to it and not the shareholder filing
against it, or protect/vindicate corporate rights the suit. (Evangelista vs. Santos, 1950; SMC v.
whenever the officials of the corporation refuse Kahn, 1989).
to sue, or the ones to be sued, or has control (2) The reliefs sought pertain to the
of the corporation. (Sundiang and Aquino) corporation. (Symaco Trading Corp. v. Santos,
2005).
Suits of stockholders based on wrongful or
fraudulent acts of directors or other persons. Recent rulings on the matter
(1) Status of heirs as co-owners of shares before
Requisites of derivative actions partition of estate does not make them
(1) That the person instituting the action be a shareholders until there is compliance with Sec.
stockholder or member at the time the acts or 63 on the manner of transferring shares, thus the
transactions subject of the action occurred and the heirs are not automatically registered
time the action was filed; shareholders of the corporation. (Reyes v. RTC of
(2) That the stockholder or member exerted all Makati, 2008)
reasonable efforts, and alleges the same with (2) Stockholder may commence a derivative suit
particularity in the complaint, to exhaust all for mismanagement, waste or dissipation of
remedies available under the Articles of corporate assets because of a special injury to him
Incorporation, by-laws, laws or rules governing for which he is otherwise without redress. In effect,
the corporation or partnership to obtain the the suit is an action for specific performance of
relief he desires. an obligation owed by thecorporation to the
(3) That there is no appraisal right available stockholders to assist its right of action when
for the act(s) complained of; and the corporation is put on default by the wrongful
(4) That the suit is not a nuisance or harassment refusal of the directors or management to make
suit. (Rule 8, Interim Rules of Procedure for suitable measures for its protection. (Yu v.
Intra-Corporate Controversies) Yukayguan, June 18, 2009)
Requisites of a derivative suit according to The power to sue and be sued in any court by a
jurisprudence corporation even as a stockholder is lodged in the
(1) the party bringing the suit should be a BOD that exercises its corporate powers and not in
shareholder as of the time of the act or the president or officer thereof.
transaction complained of, the number of his
shares not being material; But where corporate directors are guilty of a breach
(2) he has tried to exhaust intra-corporate of trust, not of mere error of judgment or abuse
remedies, i.e., has made a demand on the of discretion, and intra-corporate remedy is futile
board of directors for the appropriate relief but or useless, a SH may institute a derivative suit
the latter has failed or refused to heed his plea; and in behalf of himself and other stockholders and
(3) the cause of action actually devolves on the for the benefit of the corporation, to bring about a
corporation, the wrongdoing or harm having redress of the wrong inflicted directly upon the
been, or being caused to the corporation and not corporation and indirectly upon the stockholders.
to the particular stockholder bringing the suit. (Bitong v. CA, 1998)
(Lisam Enterprises, Inc., represented by Lolita
A. Soriano and Lolita A. Soriano v. Banco de Jurisdiction over derivative suits lies with the RTC
Oro Unibank, Inc., et al., 2012) (Sec. 5.2, Securities Regulation Code)
34
NECESSITY OF A LICENSE TO DO BUSINESS SUABILITY OF FOREIGN CORPORATIONS
Requisites for issuance of a license A foreign corporation whether or not doing
(1) The foreign corporation should file a copy of its business in the Philippines may be sued for acts
articles of incorporation and by-laws, and a verified done against persons in the Philippines.
application (See Sec. 125) accompanied by the Indeed if a foreign corporation, not engaged in
following: business in the Philippines, is not barred from
seeking redress from courts in the Philippines,
(a) Name and address of its designated resident a fortiori, that same corporation cannot claim
agent who will receive summons and notices for the exemption from being sued in Philippine courts
corporation; a special power of attorney should also for acts done against a person or persons in
be submitted for such purpose the Philippines. (Facilities Management Corporation
(b) An agreement that if it ceases to transact v. De La Osa, 1979)
business or if there is no more resident agent,
summons shall then be served through the SEC INSTANCES WHEN UNLICENSED FOREIGN
(c) Oath of Reciprocity stating that the foreign CORPORATIONSMAY BE ALLOWED TO SUE
corporations country allows Filipino citizens and ISOLATED TRANSACTIONS
corporations to do business in said country (1) Isolated transactions, i.e. not doing
business in the Philippines, (Sec. 133, Corporation
(2) Within 60 days from issuance of license, the Code);
corporation should deposit at least P100,000 (cash, (2) Action to protect good name, goodwill, and
property, bond) for the benefit of creditors subject reputation of a foreign corporation;
to further deposit every six months (See Sec. 126). (3) The subject contracts provide that Philippine
courts will be the venue to controversies;
Resident agent (4) A license subsequently granted enables the
Resident agent is an individual, who must be of foreign corporation to sue on contracts executed
good moral character and of sound financial before the grant of the license;
standing, residing in the Philippines, or a (5) Recovery of misdelivered property;
domestic corporation lawfully transacting business (6) Where the unlicensed foreign corporation
in the Philippines, designated in a written power of has a domestic corporation.
attorney by a foreign corporation authorized to do (7) When the Philippine citizen or entity is
business in the Philippines, on whom any summons estopped from challenging the foreign corporations
and other legal processes may be served in all personality to sue (Merrill Lynch Futures v. Court of
actions or other legal proceedings against the Appeals, G.R. No. 97816, 24 July 1992, 211 SCRA
foreign corporation (Sec. 127-128). 824) without a license, a Philippine citizen or entity
which has contracted with said corporation may be
PERSONALITY TO SUE estopped from challenging the foreign
A foreign corporation transacting business in the corporations corporate personality in a suit
Philippines is required to secure a license to brought before Philippine courts (Merrill Lynch
have the personality to sue before, or intervene Futures v. Court of Appeals, G.R. No. 97816,
in, any court or administrative proceeding. 24 July 1992, 211 SCRA 824); and
(Campos; Sec. 133) (4) if a foreign corporation does business in the
Philippines with the required license, it can sue
The principles regarding the right of a foreign before Philippine
corporation to bring suit in Philippine courts may
thus be condensed in four statements: Status Consequence
(1) if a foreign corporation does business in the Doing Business in the May be sued an can be
Philippines without a license, it cannot sue PH, WITH a license sued
before the Philippine courts (Sec. 133, Corporation Doing Business in the Cannot sue, but may
Code); PH, WITHOUT a be sued in the PH
(2) if a foreign corporation is not doing business license
in the Philippines, it needs no license to sue before NOT doing business May sue;may be sued
Philippine courts on an isolated transaction or on a in the PH, on isolated (Facilities Management
cause of action entirely independent of any transactions v. Dela Osa 89
business transaction (Eastboard Navigation, Ltd. SCRA 131)
v. Juan Ysmael & Company, Inc., 102 Phil. 1, GROUNDS FOR REVOCATION OF LICENSE
1957); Under the Corporation Code
(3) if a foreign corporation does business in the (1) Failure to file its annual report or pay any
Philippines courts on any transaction. (Agilent fees as required by this Code;
Technologies Singapore v. Integrated Silicon (2) Failure to appoint and maintain a resident agent
Technologies, 2004) in the Philippines as required by this Title;
35
(3) Failure, after change of its resident agent record by not more than a specified number of
or of his address, to submit to the Securities persons, not exceeding twenty (20);
and Exchange Commission a statement of such (2) All the issued stock of all classes shall be subject
change as required by this Title; to one or more specified restrictions on transfer
(4) Failure to submit to the Securities and permitted by this Title; and
Exchange Commission an authenticated copy of (3) The corporation shall not list in any stock
any amendment to its articles of incorporation exchange or make any public offering of any of its
or by laws or of any articles of merger or stock of any class (Sec. 96).
consolidation within the time prescribed by this
Title; Notes: A corporation shall not be deemed a
(5) A misrepresentation of any material matter close corporation when at least two-thirds (2/3) of
in any application, report, affidavit or other its voting stock or voting rights is owned or
document submitted by such corporation pursuant controlled by another corporation which is not
to this Title; a close corporation within the meaning of this
(6) Failure to pay any and all taxes, imposts, Code.
assessments or penalties, if any, lawfully due to
the Philippine Government or any of its agencies Any corporation may be incorporated as a close
or political subdivisions; corporation, except mining or oil companies,
(7) Transacting business in the Philippines stock exchanges, banks, insurance companies,
outside of the purpose or purposes for which public utilities, educational institutions and
such corporation is authorized under its license; corporations declared to be vested with public
(8) Transacting business in the Philippines as interest.
agent of or acting for and in behalf of any
foreign corporation or The AOI must state that the number of
entity not duly licensed to do business in the stockholders shall not exceed 20.
Philippines; or
(9) Any other ground as would render it unfit The AOI must contain restriction on the transfer
to transact business in the Philippines (Sec. 134) of issued stocks (which must appear in the AOI,
Under special laws by-laws and certificate of stock)
38
The petition must be verified by its president, or (2) If the shortened term expires after the SEC
secretary or one of its director or trustees. approval -the corporation will be dissolved upon
the expiration of the shortened term
Approval of the stockholders representing at
least 2/3 of the OCS or 2/3 of members in a According to Campos:
meeting called for that purpose.
(1) If SEC fails to act within 6 months from
Filing of a petition with the SEC signed by filing of the amended AOI and shortened term
majority of directors or trustees or other officers expires after the 6-month period - the
having the management of its affairs verified by corporation will be dissolved upon the expiration
the President or Secretary or Director. Claims and of the shortened term.
demands must be stated in the petition.
(2) If SEC fails to act within 6 months from
If the petition is sufficient in form and filing of the amended AOI and shortened term
substance, the SEC shall issue an order fixing a expires before the 6-month period- the
hearing date for objections. corporation will be dissolved at the end of the
6-month period.
A copy of the order shall be published at least once
a week for 3 consecutive weeks in a newspaper INVOLUNTARY
of general circulation, or if there is no
newspaper in the city or municipality of the By expiration of corporate term
principal office, posting for 3 consecutive weeks in Once the period expires, the corporation is
3 public places is sufficient. automatically dissolved without any other
proceeding and it cannot thereafter be considered
Objections must be filed no less than 30 days
a de facto corporation.
nor more than 60 days after the entry of the Order.
39
Failure to operate for at least 5 consecutive of acts which would amount to a grave violation
years after commencement of business - ground of its franchise
for suspension or revocation of its corporate
(4) Continuous inoperation for a period of at least
franchise or certificate of incorporation.
five years
Note: Dissolution in this case is not automatic.
(Campos) (5) Failure to file by-laws within the required period
BY MANAGEMENT COMMITTEE OR
REHABILITATION RECEIVER