MIDTERMS
Ø Effect: The corporate character is not necessarily abrogated, but the
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa
Blg. 68)
Q: What is a corporation?
Ø Sec. 2. Corporation defined. - A corporation is an artificial being
created by operation of law, having the right of succession and the
powers, attributes and properties expressly authorized by law or
incident to its existence.
Q: What are the 4 attributes of a corporation?
Ø (SOAP)
Ø 1. It has the Right of Succession
Ø 2. It is created by operation of law
Ø 3. It is an artificial being with separate and distinct personality
Ø 4. It has the powers, attributes, and properties expressly authorized by
law or incident to its existence
Q: What is the doctrine of corporate entity?
Ø A corporation is a legal or juridical person with a personality separate
and apart from its individual SH or members and from any other legal
entity to which it may be connected
Q: What is the doctrine of piercing the corporate veil? What is the test?
Ø The court will not hesitate to disregard the corporate veil when it is
misused or when necessary in the interest of justice. The concept of
corporate entity was not meant to promote unfair objectives
Ø The doctrine is used for
o 1. Convenience
o 2. To subserve the ends of justice
Ø Instances:
o 1. Separate personality will be disregarded
o 2. The veil of corporate fiction will be pierced
o 3. A corporation will be treated as a mere alter ego
Ø Some purposes:
o To defeat public convenience, to justify a wrong, to protect
fraud, to defend a crime
Ø Caveat: the doctrine is frowned upon and must be proceeded with
caution
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Ø Presumption: Separate and distinct
corporation continues for legitimate purposes
o Effect as to liability:
o 1. Corpo = mere association of persons
o 2. SH or members = may be personally liable
o 3. Where there are 2 corpos = merged into 1
Q: What is the instrumentality or alter ego rule?
Ø Instrumentality Rule – a corporation controls another corporation
o Where one corporation is so organized and controlled and its
affairs are conducted so that it is in fact a mere instrumentality
or adjunct of the other
Ø Alter Ego – a SH of a group or a group of SH of a stock corporation
controls another corporation
o Where the corporation is a mere alter ego/farce/conduit of
individual SH; Where a subsidiary corporation is created by a
parent company merely as an agency especially if SH/officers
are the same
§ Factors:
§ 1. Parent owns all/most of capital stock
§ 2. They have common directors/officers
§ 3. Parent finances subsidiary
§ 4. Parent subscribes to all the capital stock
§ 5. Subsidiary has inadequate capital
§ 6. Subsidiary is only a department
§ 7. Parent uses property as its own
Q: What are the 3 tests IF BASED ON THE INSTRUMENTALITY RULE?
Ø 1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its
own;
Ø 2. Such control must have been used by the defendant to commit
Fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiff's legal rights; and
Ø 3. The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of. (Harm)
Q: What is the difference between a corporation and a partnership? o 4. Management is with BOD
Ø As to creation 5. Creation, Organization, Management, and Dissollution is
Ø As to # of incorporators Standardized
Ø As to commencement o 6. Makes feasible gigantic financial undertakings
Ø As to powers o 7. SH have Limited Liability
Ø As to management o 8. Not general agents
Ø As to effect of mismanagement o 9. Shares of stock may be transferred
Ø As to existence of right of succession Ø Disadvantages: (CEWL-LGS-TV)
Ø As to extent of liability to third persons o 1. Complicated in formation
Ø As to transferability of interest o 2. Entails high cost
Ø As to term of existence o 3. Credit is weakened
Ø As to firm name o 4. Lack of personal element
Ø As to dissolution o 5. Greater degree of governmental control
Ø As to law governing o 6. Management and control is separated from ownership
o 7. Voting rights have become theoretized
Q: Can a corporation become a partner? o 8. SH have little voice
Ø GR: No. In entering into partnership, the identity of a corporation is Hypos from quiz:
lost or merged with that of another and the direction of its affairs is Ø Redeemable shares problem
placed in the hands of other persons other than those provided for by Ø Can Redeemable shares become treasury shares?
law of its creation Ø Mismanagement problem
o EXPN:
o 1. Corpo may enter into a Joint Venture with another where Q: What are the classes of corporation?
the nature of the venture is in line with the business authorized Ø Sec. 3. Classes of corporations. - Corporations formed or organized
by its charter under this Code may be stock or non-stock corporations.
o 2. SEC allowed the JVP o Stock Corporation - Corporations which have capital stock
o 3. Where the agreement provides that the 2 will manage the divided into shares and are authorized to distribute to the
partnership so that the management of the corporate interest is holders of such shares dividends or allotments of the surplus
not surrendered profits on the basis of the shares held are stock corporations.
o REQ: § Purpose: profit
§ 1. All corpos are managing partners o Non-stock Corporation - All other corporations are non-
§ 2. Law/charter/AOI expressly allows it stock corporations.
§ 3. Foreign corpo has license to transact here § Purpose: public goal or welfare
Ø As to # of persons:
Q: What are the advantages and disadvantages of a corporation? o Corporation Aggregate
Ø Advantages (ACS-MS-LAT) o Corporation Sole
o 1. Legal capacity to Act in its own name Ø As to whether they are for religious purposes or not:
o 2. Continuity of existence o Ecclesiastical Corporation
o 3. Credit is Strengthened by continuity o Lay Corporation
Ø As to whether they are for charitable purpose or not:
o Eleemosynary Corporation

Escudero|Dansal|Gutierrez (2016-2017) 2
 o Civil Corporation Q: Who are the persons composing a corporation?
Ø As to State under whose laws they have been created: Ø 1. Corporators – those who compose the corporation whether
o Domestic Corporation o Stockholders; or
o Foreign Corporation o Members
Ø As to their legal right to corporate existence Ø 2. Incorporators – those corporations mentioned in the AOI as
o De Jure Corporation originally forming and composing a corporation; and who executed and
o De Facto Corporation signed the AOI; and acknowledged the same before a notary public
Ø As to whether they are open to public ownership or not o Function: to enable a corporation to become a body politic
o Open Corporation under the law
o Close Corporation Ø 3. Stockholders – the owners of shares of stock in a stock corporation
Ø As to whether their relation to other corporation Ø 4. Members – corporators of a stock corporation which has no capital
o Parent/Holding Corporation stock
o Subsidiary Corporation Ø 3 OTHER CLASSES:
o Affiliated Corporation o 1. Promoter – persons who bring about the formation and
Ø As to whether they are for government purposes organization of a corporation by bringing together
o Public Corporation – mere instrumentality of the State subj incorporators or persons interested in the enterprise, procuring
to gov’t visitation and control subscriptions or capital for the corporation and setting in
o Private Corporation - - A contract between the State and motion the machinery which leads to the incorporation of the
corporation not subj to visitation by the State corporation itself; they lay the “groundwork”
§ GOCC’s o 2. Subscriber – persons who have agreed to take and pay for
§ Quasi-Public Corporation original, unissued shares of a corporation formed or to be
Ø As to whether they are corporation in a true sense or limited sense only formed
o True Corporation o 3. Underwriter
o Quasi-corporation
§ Corporation by prescription Q: What are the classifications of shares?
§ Corporation by estoppel Ø Common
Ø Preferred
Sec. 4. Corporations created by special laws or charters. - Corporations Ø Voting
created by special laws or charters shall be governed primarily by the Ø Non-voting
provisions of the special law or charter creating them or applicable to them, Ø Share in escrow
supplemented by the provisions of this Code, insofar as they are applicable. Ø Over-issued
Ø Watered
Sec. 5. Corporators and incorporators, stockholders and members. - Ø Par value
Corporators are those who compose a corporation, whether as stockholders or as Ø No par value
members. Incorporators are those stockholders or members mentioned in the Ø Convertible
articles of incorporation as originally forming and composing the corporation Ø Fractional
and who are signatories thereof. Ø Promotion
Ø Founder’s
Corporators in a stock corporation are called stockholders or shareholders. Ø Redeemable
Corporators in a non-stock corporation are called members. Ø Treasury

Escudero|Dansal|Gutierrez (2016-2017) 3

Sec. 6. Classification of shares. - The shares of stock of stock corporations may
be divided into classes or series of shares, or both, any of which classes or series
of shares may have such rights, privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no share may be deprived of voting
rights except those classified and issued as "preferred" or "redeemable" shares,
unless otherwise provided in this Code: Provided, further, That there shall
always be a class or series of shares which have complete voting rights. Any or
all of the shares or series of shares may have a par value or have no par value as
may be provided for in the articles of incorporation: Provided, however, That
banks, trust companies, insurance companies, public utilities, and building and
loan associations shall not be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in
the distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code:
Provided, That preferred shares of stock may be issued only with a stated par
value. The board of directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire consideration received
by the corporation for its no-par value shares shall be treated as capital and shall
not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the
cases allowed by this Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:
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1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or
other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary
to approve a particular corporate act as provided in this Code shall be deemed to
refer only to stocks with voting rights.
Sec. 7. Founders' shares. - Founders' shares classified as such in the articles of
incorporation may be given certain rights and privileges not enjoyed by the
owners of other stocks, provided that where the exclusive right to vote and be
voted for in the election of directors is granted, it must be for a limited period
not to exceed five (5) years subject to the approval of the Securities and
Exchange Commission. The five-year period shall commence from the date of
the aforesaid approval by the Securities and Exchange Commission.
Sec. 8. Redeemable shares. - Redeemable shares may be issued by the
corporation when expressly so provided in the articles of incorporation. They
may be purchased or taken up by the corporation upon the expiration of a fixed
period, regardless of the existence of unrestricted retained earnings in the books
of the corporation, and upon such other terms and conditions as may be stated in
the articles of incorporation, which terms and conditions must also be stated in
the certificate of stock representing said shares.
Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been
issued and fully paid for, but subsequently reacquired by the issuing corporation
by purchase, redemption, donation or through some other lawful means. Such
shares may again be disposed of for a reasonable price fixed by the board of
directors.
Sec. 10. Number and qualifications of incorporators. - Any number of natural
persons not less than five (5) but not more than fifteen (15), all of legal age and
a majority of whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes. Each of the incorporators of s
stock corporation must own or be a subscriber to at least one (1) share of the
capital stock of the corporation.
Q: What are the qualifications of incorporators a corporation?
Ø (5-MOAN)
Ø 1. Not less than 5 but not more than 15
Ø 2. Majority must be residents
Ø 3. Each must own or subscribe to at least 1 share of the capital stock
Ø 4. Of legal age
Ø 5. Natural Person not suffering from legal incapacity
Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding
fifty (50) years from the date of incorporation unless sooner dissolved or unless
said period is extended. The corporate term as originally stated in the articles of
incorporation may be extended for periods not exceeding fifty (50) years in any
single instance by an amendment of the articles of incorporation, in accordance
with this Code; Provided, That no extension can be made earlier than five (5)
years prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission.
Q: What is the term of existence of a corporation?
Ø GR: Not exceeding 50 years
o Unless: sooner dissolved; period is shortened or extended
o Provided: not earlier than 5 years prior to the expiration date
§ EXPN: SEC determines that there are justifiable
reasons for an earlier extension
Ø Extension may be made but not exceeding 50 years in a single instance
Ø There is no limit to the number of extensions
Q: What is the requirement as to capital stock requirement?
Ø GR: Sec. 12. Minimum capital stock required of stock
corporations. - Stock corporations incorporated under this Code shall
not be required to have any minimum authorized capital stock (as long
as the paid up capital is not less than 5,000)
Ø EXPN: except as otherwise specifically provided for by special law,
and subject to the provisions of the following section.
o Sec. 13: The 25%-25% rule
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Sec. 13. Amount of capital stock to be subscribed and paid for the purposes
of incorporation. - At least twenty-five percent (25%) of the authorized capital
stock as stated in the articles of incorporation must be subscribed at the time of
incorporation, and at least twenty-five (25%) per cent of the total subscription
must be paid upon subscription, the balance to be payable on a date or dates
fixed in the contract of subscription without need of call, or in the absence of a
fixed date or dates, upon call for payment by the board of directors: Provided,
however, That in no case shall the paid-up capital be less than five Thousand
(P5,000.00) pesos.
Sec. 14. Contents of the articles of incorporation. - All corporations organized
under this code shall file with the Securities and Exchange Commission articles
of incorporation in any of the official languages duly signed and acknowledged
by all of the incorporators, containing substantially the following matters, except
as otherwise prescribed by this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purpose, the articles
of incorporation shall state which is the primary purpose and which is/are he
secondary purpose or purposes: Provided, That a non-stock corporation may not
include a purpose which would change or contradict its nature as such;
3. The place where the principal office of the corporation is to be located, which
must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5) nor
more than fifteen (15);
7. The names, nationalities and residences of persons who shall act as directors
or trustees until the first regular directors or trustees are duly elected and
qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in
lawful money of the Philippines, the number of shares into which it is divided,
and in case the share are par value shares, the par value of each, the names,
nationalities and residences of the original subscribers, and the amount
subscribed and paid by each on his subscription, and if some or all of the shares
are without par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names,
nationalities and residences of the contributors and the amount contributed by
each; and
10. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.
The Securities and Exchange Commission shall not accept the articles of
incorporation of any stock corporation unless accompanied by a sworn statement
of the Treasurer elected by the subscribers showing that at least twenty-five
(25%) percent of the authorized capital stock of the corporation has been
subscribed, and at least twenty-five (25%) of the total subscription has been
fully paid to him in actual cash and/or in property the fair valuation of which is
equal to at least twenty-five (25%) percent of the said subscription, such paid-up
capital being not less than five thousand (P5,000.00) pesos.
Sec. 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by
special law, articles of incorporation of all domestic corporations shall comply
substantially with the following form:
First Meeting.
Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise
prescribed by this Code or by special law, and for legitimate purposes, any
provision or matter stated in the articles of incorporation may be amended by a
majority vote of the board of directors or trustees and the vote or written assent
of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, without prejudice to the appraisal right of dissenting stockholders
in accordance with the provisions of this Code, or the vote or written assent of at
least two-thirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required
by law to be set out in the articles of incorporation. Such articles, as amended
shall be indicated by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary and a majority of the
directors or trustees stating the fact that said amendment or amendments have
been duly approved by the required vote of the stockholders or members, shall
be submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and
Exchange Commission or from the date of filing with the said Commission if
not acted upon within six (6) months from the date of filing for a cause not
attributable to the corporation.
Q: What is a Charter?
Escudero|Dansal|Gutierrez (2016-2017) 6
Ø It is an instrument or authority from the sovereign power bestowing the
right or privilege to be and act as a corporation
Q: How is it different from a Franchise?
Ø Franchise is the right or privilege itself of being a corporation
Ø Charter applies to the instrument bestowing such right and privilege
Q: What are the components of a corporate charter?
Ø It depends.
Ø As to corporations formed under the general incorporation law:
1. Law under which it was organized (B.P. 68)
2. Articles of Incorporation
3. By laws
4. All applicable provisions of the Constitution and the general laws of
the state in force at the time the corporation was incorporated
Ø As to corporations created by special laws, the charter consists of:
1. Special law which creates the corporation
2. Executive Orders of the President
3. Rules & Regulations applicable to such corps
4. All laws applicable thereto including the Corporation Code
Q: What are the requirements to Amend the Articles of Incorporation under
Section 16?
Ø Not otherwise prohibited by Corporation Code or by special law
Ø For legitimate purposes,
Ø With respect to Stock corporations: (RVS)
o (resolution) By a majority vote of the board of directors or
trustees and
o The vote or WRITTEN ASSENT of the stockholders
representing at least two-thirds (2/3) of the outstanding capital
stock, without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of this Code,
§ WRITEN ASSENT – the SH vote on the amendment
need not be taken at a meeting
o Submission and filing to SEC
Ø With respect to Non-stock corporations:
o The vote or written assent of at least two-thirds (2/3) of the
members if it be a non-stock corporation.
o Submission and filing to SEC
 Ø The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation.
Ø Such articles, as amended shall be indicated by underscoring the
change or changes made, and a copy thereof duly certified under oath
by the corporate secretary and a majority of the directors or trustees
stating the fact that said amendment or amendments have been duly
approved by the required vote of the stockholders or members, shall be
(submitted) to the Securities and Exchange Commission. Aside from
the filing the amendment, the corresponding fees must be paid.
Ø Date of effectivity: The amendments shall take effect upon their
approval by the Securities and Exchange Commission or from the date
of filing with the said Commission if not acted upon within six (6)
months from the date of filing for a cause not attributable to the
corporation.
Sec. 17. Grounds when articles of incorporation or amendment may be
rejected or disapproved. - The Securities and Exchange Commission may reject
the articles of incorporation or disapprove any amendment thereto if the same is
not in compliance with the requirements of this Code: Provided, That the
Commission shall give the incorporators a reasonable time within which to
correct or modify the objectionable portions of the articles or amendment. The
following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional,
illegal, immoral, or contrary to government rules and regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock
subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by citizens
of the Philippines has not been complied with as required by existing laws or the
Constitution.
No articles of incorporation or amendment to articles of incorporation of banks,
banking and quasi-banking institutions, building and loan associations, trust
companies and other financial intermediaries, insurance companies, public
utilities, educational institutions, and other corporations governed by special
laws shall be accepted or approved by the Commission unless accompanied by a
favorable recommendation of the appropriate government agency to the effect
that such articles or amendment is in accordance with law.
Escudero|Dansal|Gutierrez (2016-2017) 7
Q: What are the grounds for disapproval or rejection of amendment of the
AOI? (NUTO)
1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
3. That the Treasurer's Affidavit concerning the amount of capital
stock subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned
by citizens of the Philippines has not been complied with as required by
existing laws or the Constitution.
Q: Is the enumeration under Section 17 exclusive?
Ø No. Under PD 902-A, the SEC may suspend or revoke after proper
notice and hearing the franchise of corporations, partnerships or
associations upon any of the grounds:
1. Fraud in procuring its certificate of incorporation
2. Serious misrepresentation
3. Refusal to comply with or defiance of a lawful order of the
commission
4. Continuous inoperation for a period of at least 5 years
5. Failure to file by laws within the required period
6. Failure to file required reports in appropriate forms as determined by
the commission within the prescribed period
Q: Can you think of any other ground?
Ø Sec. 18. Corporate name. - No corporate name may be allowed by the
Securities and Exchange Commission if the proposed name is identical
or deceptively or confusingly similar to that of any existing corporation
or to any other name already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in the corporate
name is approved, the Commission shall issue an amended certificate
of incorporation under the amended name.
Q: What are the limitations on the corporate name?
Ø Similarity with another trade name
o This is important for lawyers because the first thing that must
be done when organizing and usually it is done by reserving a
corporate name online
 Ø Prohibited use of certain names under special laws
o ‘United Nations/UN’
o ‘Bonded’ if the company is not a licensed bonding company
o ‘Bank’, ‘Rural Bank’
o Savings and Loan association
o Financing companies
Ø Doctrine of Secondary Meaning
o A word or phrase originally incapable of exclusive
appropriation with reference to an article on the market,
because geographically or other descriptive, might
nevertheless have been used so long and so exclusively by one
producer with reference to his article, in that trade and to that
branch of the purchasing public, the word or phrase has come
to mean that the article was his product
Ø Part of name
o Corporation or Corp; Incorporation or Inc
Q: What is the undertaking required to be submitted to the SEC by the
corporation?
Ø The undertaking which is attached to articles of incorporation is that the
corporation will change its name later on in case it is discovered that it
is in use already by an existing corporation
LYCEUM V. CA
Ø Q: What is the meaning of Lyceum?
o Root word “Liceo” means institution for learning
Ø Q: Won’t it be confusingly similar?
o No, in the other schools, they put the geographical phrase so
as not to confuse the public (i.e. Lyceum of Aparri)
7TH DAY ADVENTIST V. NORTHEASTERN
Ø Q: One argument was that the church was a de facto government to
give them personality. How did SC rule?
o SC says that not all of the 3 requisites of a de facto corporation
was complied with
Ø Q: Which requisite was not complied with?
o There was no bona fide attempt to organize. There was no
application to become a corporation
Ø Q: Assuming that there was application, is this sufficient?
Escudero|Dansal|Gutierrez (2016-2017) 8
o No, mere application is not sufficient. In order to complete the
2nd requisite, there must be issuance of the Articles of
Incorporation by SEC
INDUSTRIAL REFRACTORIES V. CA
Ø Q: What are the instances that made the public confused?
o 1. Both have the same 3 words
o 2. Similar packaging
o 3. They cater to the same clientele – steel
Ø Q: How did the SC rule on the issue of jurisdiction?
o The SEC has the authority to approve the corporate name
Q: When does the corporation acquire juridical personality?
Ø Sec. 19. Commencement of corporate existence. - A private
corporation formed or organized under this Code commences to have
corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission
issues a certificate of incorporation under its official seal; and
thereupon the incorporators, stockholders/members and their successors
shall constitute a body politic and corporate under the name stated in
the articles of incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is sooner dissolved in
accordance with law
Q: What is the effect when the AOI are issued by SEC?
Ø The incorporators, stockholders/members and their successors shall
constitute a body politic and corporate under the name stated in the
articles of incorporation for the period of time mentioned therein,
unless said period is extended or the corporation is sooner dissolved in
accordance with law.
Q: What is the corporate maximum term?
Ø 50 years extendible for another 50 years
Sec. 20. De facto corporations. - The due incorporation of any corporation
claiming in good faith to be a corporation under this Code, and its right to
exercise corporate powers, shall not be inquired into collaterally in any private
suit to which such corporation may be a party. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding.
Q; Does a de facto corporation have juridical personality?
Ø Yes. A de facto may exercise the same power that a de jure exercises
Q: What is the difference between de facto and de jure as to the exercise of
corporate powers?
Ø No difference, as to the exercise of corporate powers.
Ø De Jure Corporation – a corporation created in strict or substantial
conformity with the mandatory or statutory requirements for
incorporation and the right of which to exist as a corporation cannot be
successfully attacked or questioned by any party even in a direct
proceeding for that purpose by the state
Ø De Facto Corporation – organized with a colorable compliance with
the requirements of a valid law and its existence cannot be inquired
collaterally but such inquiry may be made by the SolGen in a quo
warranto proceeding
Q: What are the requisites of a De Facto Corporation?
Ø (LAC)
Ø 1. A valid law under which a corporation with powers assumed might
be incorporated
Ø 2. A bona fide attempt in GF to organize a corporation under such law
Ø 3. Actual user or exercise in Good Faith of corporate powers upon it
by law
Q: What do you mean when you say collateral attack of the corporate
existence
Ø One whereby corporate existence is questioned in some incidental
proceedings not provided by law for the express purpose of attacking
the corporate existence
Q: So can a private person attack the existence of a corporation?
Ø No. Only the State can do so.
Q: What must be done to attack the corporate existence?
Ø Direct Attack
o One whereby the State, in a proceeding brought for that
purpose, attacks the existence of an association claiming to be
a corporation
o Can only be instituted by the Solicitor General by Quo
Warranto proceedings
Escudero|Dansal|Gutierrez (2016-2017) 9
Q: Instances of De Facto Corporation? What is a good example? –
Q: What is meant by the 2nd requisite, “bona fide” intention to organize?
Ø Application to organize corporation
Ø Submission of all requirements
Ø Issuance of AOI
HALL V. PICCIO
Ø To become a De Facto Corporation, the articles of incorporation need
to be filed and the SEC must issue the certificate of incorporation. This
is the same doctrine reiterated in the 7th day Adventist case.
Assignment: starting from corporation by estoppel up to Sec. 25 plus 4 add’l
cases
Second Meeting.
Q: What is a corporation by Estoppel?
Ø Sec. 21. Corporation by estoppel. - All persons who assume to act
as a corporation knowing it to be without authority to do so shall
be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided, however, That
when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it
shall not be allowed to use as a defense its lack of corporate
personality.
Ø On who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was in fact
no corporation
INTERNATIONAL BUSINESS TRAVEL V. CA & KHAN
Ø Q: Was the doctrine of corporation by estoppel applied here? Yes.
Ø Q: Why did the SC say that the CA misapplied the doctrine?
LIM TONG LIM V. PHILPPINE FISHING GEAR
Ø Q: How did the SC address that he was not even a signatory?
Ø Q: Does the fact that he benefitted mean that he was already part of the
corporation?
LOZANO V. DE LOS SANTOS
Ø Q: Why does the doctrine of corporation by estoppel apply?
Ø Q: So when does the principle only apply?
o When 3rd person believed in GF
Q: Is there such a thing as automatic dissolution?
Ø Yes.
Ø Sec. 22. Effects on non-use of corporate charter and continuous
inoperation of a corporation. If a corporation does not formally
organize and commence the transaction of its business or the
construction of its works within two (2) years from the date of its
incorporation, its corporate powers cease and the corporation shall
be deemed dissolved.
Ø However, if a corporation has commenced the transaction of its
business but subsequently becomes continuously inoperative for a
period of at least five (5) years, the same shall be a ground for the
suspension or revocation of its corporate franchise or certificate of
incorporation.
Ø This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange
Commission.
Q: What are the grounds for revocation or suspension?
Ø Sec 22, 2nd par: However, if a corporation has commenced the
transaction of its business but subsequently becomes continuously
inoperative for a period of at least five (5) years, the same shall be a
ground for the suspension or revocation of its corporate franchise or
certificate of incorporation
Q: What is the meaning of “failure to formally organize”? What acts must be
done?
Ø This does NOT include the filing of the AOI. R: If there is already an
existing corporation, it already presupposes that AOI has been filed
with the SEC and the latter has already issued Cert. of Incorporation.
Ø Refers to the act of conducting election of directors and officers,
adoption of by-laws, and filing of the same with the SEC;
establishment of a principal office; providing for subscription and
payment of capital stock
Escudero|Dansal|Gutierrez (2016-2017) 10
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on the
books of the corporation. Any director who ceases to be the owner of at least
one (1) share of the capital stock of the corporation of which he is a director
shall thereby cease to be a director. Trustees of non-stock corporations must be
members thereof. A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.
Q: Who is the governing body?
Ø Board of directors which shall exercise the powers of the corporation;
enter into business on behalf of the corporation; and hold the property
of the corporation
Q: What is the Business Judgment Rule?
Ø Questions of policy or management are left solely to the honest
decisions of officers and directors of a corporation and so long as they
act in GF, their orders are not reviewable by the courts
Ø GR: Courts cannot interfere acts of directors so long as they are intra
vires
o EXPN: The act is so oppressive and it adversely affects the
minority status of the corporation
Q: What is the term of the officers?
Ø 1 year until a successor is elected and qualified
Ø There is a hold over status of a member of the Board of Directors (or
simply ‘Director’). Meaning, he will continue on the business unless a
successor is elected and qualified
Q: What are the qualifications of a Director?
Ø At least 1 share
o Which must be continuously owned by him. Otherwise, he
ceases to become a director
 Ø His name is registered in the books of the corporation
Ø Majority of the members are residents of the Philippines
Q: Can the AOI or By-laws provide for other qualifications?
Ø Yes. Provided, that it will not be in conflict with the qualifications set
out in the Corpo Code
GRACE CHRISTIAN HIGH SCHOOL V. CA
Ø Issue as to the validity of the clause granting to a permanent seat on the
board.
Ø Doctrine: Directors must be elected, not appointed.
GOKONGWEI V. SEC
Ø Doctrine of Corporate Opportunity – Director occupies a position of
trust and confidence; of a fiduciary nature; he cannot take advantage of
his position for his own personal interest
Ø Cannot serve 2 masters
Ø 3 issues:
(1) WON the amended by-laws which provide for disqualification is
valid? Yes.
(2) WON petitioner has the right to look into the books of the
corporation as a shareholder? The SC did not allow the inspection.
Reason?
(3) WON SEC was correct in allowing the ratification of petitioner in
investing in a foreign corporation?
INTER-ASIA INVESTMENTS V. CA
Ø Q: Why was the corporation bound even if there was no delegation?
Ø Q: How did the SC come up with the implied authority?
o The power of buying stocks includes all acts necessary
thereto, such as to enter into a payment scheme in order to
settle an obligation of the corporation
Sec. 24. Election of directors or trustees. - At all elections of directors or
trustees, there must be present, either in person or by representative authorized
to act by written proxy, the owners of a majority of the outstanding capital stock,
or if there be no capital stock, a majority of the members entitled to vote. The
election must be by ballot if requested by any voting stockholder or member. In
stock corporations, every stockholder entitled to vote shall have the right to vote
in person or by proxy the number of shares of stock standing, at the time fixed in
Escudero|Dansal|Gutierrez (2016-2017) 11
the by-laws, in his own name on the stock books of the corporation, or where the
by-laws are silent, at the time of the election; and said stockholder may vote
such number of shares for as many persons as there are directors to be elected or
he may cumulate said shares and give one candidate as many votes as the
number of directors to be elected multiplied by the number of his shares shall
equal, or he may distribute them on the same principle among as many
candidates as he shall see fit: Provided, That the total number of votes cast by
him shall not exceed the number of shares owned by him as shown in the books
of the corporation multiplied by the whole number of directors to be elected:
Provided, however, That no delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the by-laws, members of
corporations which have no capital stock may cast as many votes as there are
trustees to be elected but may not cast more than one vote for one candidate.
Candidates receiving the highest number of votes shall be declared elected. Any
meeting of the stockholders or members called for an election may adjourn from
day to day or from time to time but not sine die or indefinitely if, for any reason,
no election is held, or if there not present or represented by proxy, at the
meeting, the owners of a majority of the outstanding capital stock, or if there be
no capital stock, a majority of the member entitled to vote
Q: We said that directors must be elected. What are the limitations/conditions
of election?
Ø A meeting must be called for the purpose
o Presence of majority of stockholders representing the
outstanding capital stock/members
Ø Method of voting permitted
o Viva voce (raising of hands), if there is a shareholder who
wants to vote by ballot, then it shall be mandatory
Ø In case of failure of election, then the meeting may adjourn from day-
to-day (except indefinitely)
Q: Is notice required? For what?
Ø Yes. For the meeting
Q: What does the law provide as to owners of delinquent stock?
Ø They cannot vote nor be voted for
Q: Stockholders cannot be deprived of the method of voting. What are the
methods?
Ø (1) Straight voting method
 o Every SH may vote such number of shares for as many
persons as there are directors to be elected
§ A shareholder can vote such number of shares for as
many persons as there are directors equally
Ø (2) Cumulative voting for 1 candidate method
o A SH is allowed to concentrate his votes and give one
candidate as many votes as the number of directors to be
elected multiplied by the number of shares shall equal
§ A shareholder can give one candidate all his votes
Ø (3) Cumulative voting by distribution
o By this method, a SH may cumulate his shares by multiplying
also the number of his shares by the number of directors to be
elected and distribute the same among as many candidates as
he shall see fit
§ A shareholder can distribute his votes to diff directors
as he may see fit
Sec. 25. Corporate officers, quorum. - Immediately after their election, the
directors of a corporation must formally organize by the election of a president,
who shall be a director, a treasurer who may or may not be a director, a secretary
who shall be a resident and citizen of the Philippines, and such other officers as
may be provided for in the by-laws. Any two (2) or more positions may be held
concurrently by the same person, except that no one shall act as president and
secretary or as president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation. Unless the articles
of incorporation or the by-laws provide for a greater majority, a majority of the
number of directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business, and every decision
of at least a majority of the directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act, except for the election of
officers which shall require the vote of a majority of all the members of the
board.
Directors or trustees cannot attend or vote by proxy at board meetings.
Q: Who are the corporate officers?
Ø President, Treasurer, and Secretary
Escudero|Dansal|Gutierrez (2016-2017) 12
Q: Are they exclusive?
Ø No. Can elect as indicated in the AOI or by-laws additional officers as
the need of the nature of the business so require
o Ex: VP, auditor, assistant treasurer or secretary
Q: What are the qualifications to become a president?
Ø Must be a director (he is the only officer required to be a member of the
board)
Ø Must own at least 1 share
Q: What are the qualifications to be secretary?
Ø Need not be a director
Ø Resident and citizen
o Does not need to be natural-born citizen. Does not need to
own one share
Q: What are the qualifications to be treasurer?
Ø No requirements
Q: Can a person hold 2 positions?
Ø GR: Yes
o EXPN: A president cannot be a secretary; he also cannot be a
treasurer. These are the Prohibited Concurrent Positions.
§ Reason: to ensure effective monitoring of each
officer’s separate functions
Q: What does the term ‘quorom’ mean?
Ø Requires persons to be present in order to competently transact
business
Q: What is the required number of persons to constitute a quorum?
Ø Majority of the directors fixed in the AOI
Q: What is the required vote for a corporate act?
Ø Majority of the directors present of the meeting where there is a
quorum (majority of the quorum itself)
o EXPN: except for the election of officers which shall require
the vote of a majority of all the members of the board.
Ø Ex: there are 5 persons present. The vote of 3 of them would constitute
a quorum. Thus, the vote of 2 is sufficient to pass upon a corporate act
Q: What is the required vote for purposes of election?
Ø 50% of the entire membership
NACPIL V. INT’L BROADCASTING CORP
Ø Q: What is the test to determine if the assistant manager is a corporate
officer?
o Under the Labor code, there are only 3 corporate officers
§ However, if there is board approval to constitute one
as a corporate officer, (not just approval of the human
resources), then he is a recognized corporate officer
o The jurisdiction of intra-corporate disputes under PD 902-A
has been transferred from the SEC to the RTC by virtue of the
SRC.
o If the employee is not a corporate officer, then the Labor
arbiter/NLRC has jurisdiction
Q: Can directors vote by proxy?
Ø GR: No. They cannot attend or vote by proxy in Board Meetings. R:
they are elected officers
o EXPN: In a Shareholders or Members Meeting
Assignment: Sec. 26-35 plus 5 cases
Third Meeting.
Sec. 26. Report of election of directors, trustees and officers. — Within
thirty (30) days after the election of the directors, trustees and officers of the
corporation, the secretary, or any other officer of the corporation, shall submit to
the Securities and Exchange Commission, the names, nationalities and
residences of the directors, trustees and officers elected. Should a director,
trustee or officer die, resign or in any manner cease to hold office, his heirs in
case of his death, the secretary, or any other officer of the corporation or the
director, trustee or officer himself, shall immediately report such fact to the
Securities and Exchange Commission, (n)
Q: After election, what must be done?
Ø Sec. 26. Report of election of directors, trustees and officers. -
Within thirty (30) days after the election of the directors, trustees and
officers of the corporation, the secretary, or any other officer of the
Escudero|Dansal|Gutierrez (2016-2017) 13
corporation, shall submit to the Securities and Exchange Commission,
the names, nationalities and residences of the directors, trustees, and
officers elected.
Q: What happens when a director, trustee or officer dies?
Ø Should a director, trustee or officer die, resign or in any manner cease
to hold office, his heirs in case of his death, the secretary, or any other
officer of the corporation, or the director, trustee or officer himself,
shall immediately report such fact to the Securities and Exchange
Commission.
Q: Aside from the corporate secretary or the officer, who else may report the
death?
Ø The heirs of the director /trustee or officer in case of the latter's death,
the secretary, or any other officer of the corporation, or the
director/trustee or officer himself, shall immediately report to the
Commission any death, resignation, or cessation in any manner of
holding office of a director/trustee or officer.
Ø The objective sought to be achieved by Section 26 is to give the public
information, under sanction of oath of responsible officers, of the
nature of the business, financial condition, and operational status of the
corporation together with information on its key officers or managers
so that those dealing with it and those who intend to do business with it
may know or have the means of knowing facts concerning the
corporation's financial resources and business responsibility.
Sec. 27. Disqualification of directors, trustees or officers. - No person
convicted by final judgment of an offense punishable by imprisonment for a
period exceeding six (6) years, or a violation of this Code committed within five
(5) years prior to the date of his election or appointment, shall qualify as a
director, trustee or officer of any corporation.
Q: How may directors, trustees or officers be disqualified?
Ø 2 grounds:
o (1) Conviction by final judgment of an offense punishable by
imprisonment for a period exceeding 6 years, or
o (2) Commission of a violation of the Corporation Code
committed within 5 years prior to the date of his election or
appointment, and the duration of imprisonment is immaterial.
Q: Are the grounds under Sec. 27 exclusive?
Ø No. Refer to the qualifications to become a Director, Corporate
Secretary, Treasurer or any other officer. The absence of a qualification
will be a ground for disqualification.
Note: read Gokongwei case
Sec. 28. Removal of directors or trustees. - Any director or trustee of a
corporation may be removed from office by a vote of the stockholders holding
or representing at least two-thirds (2/3) of the outstanding capital stock, or if the
corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of
the members entitled to vote: Provided, That such removal shall take place
either at a regular meeting of the corporation or at a special meeting called for
the purpose, and in either case, after previous notice to stockholders or members
of the corporation of the intention to propose such removal at the meeting. A
special meeting of the stockholders or members of a corporation for the purpose
of removal of directors or trustees, or any of them, must be called by the
secretary on order of the president or on the written demand of the stockholders
representing or holding at least a majority of the outstanding capital stock, or, if
it be a non-stock corporation, on the written demand of a majority of the
members entitled to vote. Should the secretary fail or refuse to call the special
meeting upon such demand or fail or refuse to give the notice, or if there is no
secretary, the call for the meeting may be addressed directly to the stockholders
or members by any stockholder or member of the corporation signing the
demand. Notice of the time and place of such meeting, as well as of the intention
to propose such removal, must be given by publication or by written notice
prescribed in this Code. Removal may be with or without cause: Provided, That
removal without cause may not be used to deprive minority stockholders or
members of the right of representation to which they may be entitled under
Section 24 of this Code.
Q: What is the rule on the removal of a director?
Ø The REQUISITES under Sec. 28 are:
(1) Regular meeting or special meeting called for the purpose;
(2) Notice to stockholders or members of the corporation of the
intention to propose such removal at the meeting
(3) Two-thirds (2/3) of the outstanding capital stock, or if the
corporation be a non-stock corporation, by a vote of two-thirds
(2/3) of the members entitled to vote.
Escudero|Dansal|Gutierrez (2016-2017) 14
Q: Who must call the meeting?
Ø The secretary, upon order of the president; or
Ø The written demand of the stockholders representing or holding at least
a majority of the outstanding capital stock, or, if it be a non-stock
corporation, on the written demand of a majority of the members
entitled to vote
Q: Before hearing, a notice must be transmitted. How is this done?
Ø Publication; or
Ø Written Notice thru ordinary mail or registered mail or courier mail. It
does not matter, so long as the notice is in writing
Q: Do you need to have cause in order to remove a director?
Ø No. So long as the 3 requisites are present, then removal is valid
Ø Sec 28 provides for only on limitation: Without prejudice to the right of
representation of the minority stockholder under Sec. 24
Ø Q: What does Sec. 24 provide with respect to minority
stockholders? How is elections related to removal?
o A director or trustee may be removed by the prescribed vote
without cause subject to the limitation that a director or trustee
cannot be removed without cause if the effect of such removal
is to deprive minority stockholders or members who united in
cumulative voting to elect such director, of right of
representation to which they may be entitled under Section 24.
This proviso is necessary to protect the minority against any
abuse by the majority since there is no cumulative voting in
the removal of directors.
o The rule does not apply where the removal is initiated by the
minority stockholders or members themselves.
Ø Q: Does the proviso apply even if the removal is with cause?
o No. The proviso only applies if the removal is without cause.
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring
in the board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a
majority of the remaining directors or trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or trustee so elected to fill a
vacancy shall be elected only or the unexpired term of his predecessor in office.
A directorship or trusteeship to be filled by reason of an increase in the number
of directors or trustees shall be filled only by an election at a regular or at a
special meeting of stockholders or members duly called for the purpose, or in
the same meeting authorizing the increase of directors or trustees if so stated in
the notice of the meeting.
Q: Assuming that there has already been a vacancy, when should the vacancy
be filled?
Ø In the same meeting which provided for the removal; or
Ø In another regular meeting or special meeting
Q: What are the requirements if the filling the vacancy is done in a separate
meeting?
Ø 2 Basic Requirements:
o (1) Prior notice
o (2) Meeting called of the specific purpose of filling the
vacancy.
* This means that that it was the agenda of the meeting
Q: Under Sec. 29, how is a vacancy filled in? (memorize)
Ø By the stockholders or members. — In a vacancy in the office of
director or trustee may be filled by the stockholders or members in any
of the following cases:
a) If the vacancy results from the removal by the stockholders or members
or the expiration of term;
b) If the vacancy occurs other than by removal or by expiration of term
(see Sec. 23, par. 1.), such as death, resignation, abandonment, or
disqualification, if the remaining directors or trustees do not constitute
a quorum for the purpose of filling the vacancy;
c) If the vacancy may be filled by the remaining directors or trustees
(infra.) but the board refers the matter to the stockholders or members;
or
d) If the vacancy is created by reason of an increase in the number of
directors or trustees.
Ø By the members of the board. — If still constituting a quorum, at
least a majority of the members are empowered to fill any vacancy
occurring in the board other than by removal by the stockholders or
members or by expiration of term.
a) Allowing the remaining directors or trustees to fill up vacancies avoid
the expenses and inconveniences attending the calling of stockholders'
Escudero|Dansal|Gutierrez (2016-2017) 15
or members' meeting, especially where there are many of them.
b) The power of the board of directors or trustees is not suspended by
vacancies in the board unless the number is reduced below a quorum.
c) The board has no power to fill any directorship or trusteeship by reason
of an increase in the number of directors or trustees. The amendment
increasing the number of directors or trustees which results in a
vacancy becomes effective upon its approval. This is deducible from
the last clause of Section 29 which authorizes the filling of the vacancy
"in the same meeting authorizing the increase of directors or trustees in
the notice of meeting."
Q: How to increase the number of the Directors?
Ø By amendment of the Articles of Incorporation.
Sec. 30. Compensation of directors. - In the absence of any provision in the by-
laws fixing their compensation, the directors shall not receive any compensation,
as such directors, except for reasonable pre diems: Provided, however, That any
such compensation other than per diems may be granted to directors by the vote
of the stockholders representing at least a majority of the outstanding capital
stock at a regular or special stockholders' meeting. In no case shall the total
yearly compensation of directors, as such directors, exceed ten (10%) percent of
the net income before income tax of the corporation during the preceding year
Q: Are directors entitled to compensation under Sec. 30?
Ø GENERAL RULE: No. Except reasonable per diems.
EXCEPTION:
(1) Provided for under the By-laws; or
(2) Authorized by a vote of the stockholders representing at
least a majority of the outstanding capital stock or a
majority of the members entitled to vote.
Q: How is Compensation different from Per diem?
Ø Per diem is an allowance; it is the ‘motivation’ of a director to attend
the meetings; expense reimbursements; paid per attendance of board
meetings.
Ø Compensation connotes fixed salary; paid reagularly, each month;
WESTERN INSTITUTE OF TECHNOLOGY V. SALAS
Ø GR: Directors or Trustees are not entitled to compensation because
there is a presumption that they give their services gratuitously to the
corporation.
Ø EXPN: Unless it is provided under the by-laws or by majority vote by
stockholders representing OCS
Ø Doctrine: When a person holds a position in a capacity other than that
of a director, (i.e. corporate officer), then he is entitled to his income in
the capacity in which he acted
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in conflict
with their duty as such directors or trustees shall be liable jointly and severally
for all damages resulting therefrom suffered by the corporation, its stockholders
or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of
his duty, any interest adverse to the corporation in respect of any matter which
has been reposed in him in confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise would have
accrued to the corporation.
Q: What are the instances under Sec. 31 that make a Director, Officer, or
Trustee solidarily liable for damages with the corporation (or personally liable
for the actions of the corporation)?
Ø Under Section 31:
a) Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or;
b) Who are guilty of gross negligence or bad faith in directing the
affairs of the corporation; or
c) Acquire any personal or pecuniary interest in conflict with
their duty as such directors or trustees.
Ø Personal liability of a corporate director/trustee or officer along
(although not necessarily) with the corporation may also validly attach:
a) When he consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto (see Sec. 65.);
Escudero|Dansal|Gutierrez (2016-2017) 16
b) When he is made, by a specific provision of law, to personally
answer for his corporate action (see Sec. 144; Pres. Decree
No. 115 [Trust Receipts Law], Sec. 13.); and
c) When he agrees to hold himself personally and solidarily
liable with the corporation.
Q: What is a watered stock?
Ø It is stock issued below its par value
SANTOS vs. NLRC
Ø GENERAL RULE: Directors, Trustees, or Officers are not personally
liable for the corporation’s actions. R: Doctrine of Corporate Entity
(Separate and distinct)
Ø EXCEPTIONS:
(1) He assents (a) to a patently unlawful act of the corporation, or (b)
for bad faith or gross negligence in directing its affairs, or (c) for
conflict of interest, resulting in damages to the corporation, its
stockholders or other persons;
(2) He consents to the issuance of watered stocks or who, having
knowledge thereof, does not forthwith file with the corporate secretary
his written objection thereto;
(3) He agrees to hold himself personally and solidarily liable with the
corporation; or
(4) He is made, by a specific provision of law, to personally answer for
his corporate action.
NOTE: In the case at bar, none of the exceptions apply.
SPS. DAVID vs. CONSTRUCTION INDUSTRY
Ø This is a good example of the first exception which makes a director
personally liable
Ø Q: What made Sps. David revise the design?
o To reduce the cost of construction. Thus, it is prejudicial to the
interest of Sps. Quiambao. There was the commission of
patently unlawful acts
o Doctrine: This is a case where the separate and distinct
personality of the corporation was NOT pierced, however, the
corporate officers/director were still made liable for the
corporate acts if they fall under any of the enumerated
exceptions (Sir says this is the same doctrine enunciated in the
 Santos case. However, it must be noted that the corporate
officers were not held personally liable in the Santos case)
MALAYANG SAMAHAN vs. RAMOS
Ø Same doctrine as the Santos and Sps. David
Ø In labor cases, particularly, the Court has held corporate directors and
officers solidarily liable with the corporation for the termination of
employment of corporate employees done with malice or in bad faith.
Bad faith or negligence is a question of fact and is evidentiary. It has
been held that bad faith does not connote bad judgment or negligence;
it imports a dishonest purpose or some moral obliquity and conscious
doing of wrong; it means breach of a known duty thru some motive or
interest or ill will; it partakes of the nature of fraud.
Ø In the instant case, there is nothing substantial on record to show that
respondent officers acted in patent bad faith or were guilty of gross
negligence in terminating the services of petitioners so as to warrant
personal liability.
Sec. 32. Dealings of directors, trustees or officers with the corporation.- A
contract of the corporation with one or more of its directors or trustees or
officers is voidable, at the option of such corporation, unless all the following
conditions are present:
1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting;
2. That the vote of such director or trustee was nor necessary for the approval of
the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the
board of directors.
Where any of the first two conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director or trustee, such contract may be
ratified by the vote of the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock or of at least two-thirds (2/3) of the members in a
meeting called for the purpose: Provided, That full disclosure of the adverse
interest of the directors or trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the circumstances.
Escudero|Dansal|Gutierrez (2016-2017) 17
Q: Who is a self-dealing director under Sec. 32?
Ø GENERAL RULE: When a corporation enters into a contract with a
director, the GR is that it is VOIDABLE at the option of the
corporation
Ø EXCEPTION: It could be ratified by the presence of all 4 conditions
1. That the presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was nor necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized
by the board of directors.
Q: What if only the 3rd requisite is present, can there be ratification?
Ø YES. If the contract is ratified by the required vote (2/3) of the
stockholders or members in a meeting called for the purpose, provided
that full disclosure of the adverse interest of the directors or trustees
involved is made at such meeting.
Ø This applies in the case of contracts entered into by a Director or
Trustee.
Q: What if there is an absence of all the conditions, is it possible that the
contract be ratified?
Ø Yes. The contract is voidable, which means that it is valid until
annulled
Ø Not all the conditions set forth are present but the corporation (through
the board) elects not to question the validity of the contract without
prejudice to the liability of the consenting directors or trustees for
damages under Section 31. In such case, a dissenting stockholder or
member may file a derivative suit in behalf of the corporation.
PRIME WHITE CEMENT vs. IAC
Ø Although the powers were delegable to Respondent Te and the contract
were ratified, still Respondent Te is a self-dealing director who failed
to prove that the contract complied with Sec. 32. Thus, the corporation
can rescind the contract.
Ø The SC ruled that the contract was not fair and reasonable
 Ø Q: What was the SC’s ruling as to Respondent Te entering into
contracts with other companies?
ISSUE: whether or not the "dealership agreement" referred by the President and
Chairman of the Board of Petitioner Corporation is a valid and enforceable
contract.
RULING: No. Under the Corporation Law, which was then in force at the time
this case arose, as well as under the present Corporation Code, all corporate
powers shall be exercised by the Board of Directors, except as otherwise
provided by law. 6 Although it cannot completely abdicate its power and
responsibility to act for the juridical entity, the Board may expressly delegate
specific powers to its President or any of its officers. In the absence of such
express delegation, a contract entered into by its President, on behalf of the
corporation, may still bind the corporation if the board should ratify the same
expressly or impliedly.
Implied ratification may take various forms – like silence or acquiescence; by
acts showing approval or adoption of the contract; or by acceptance and
retention of benefits flowing therefrom.
The situation is quite different where a director or officer is dealing with his own
corporation. In the instant case respondent Te was not an ordinary stockholder;
he was a member of the Board of Directors and Auditor of the corporation as
well. He was what is often referred to as a "self-dealing" director.
A director of a corporation holds a position of trust and as such, he owes a duty
of loyalty to his corporation. In case his interests conflict with those of the
corporation, he cannot sacrifice the latter to his own advantage and benefit.
On the other hand, a director's contract with his corporation is not in all
instances void or voidable. If the contract is fair and reasonable under the
circumstances, it may be ratified by the stockholders provided a full disclosure
of his adverse interest is made.
DECISION:
Granting arguendo that the "dealership agreement" involved here would be valid
and enforceable if entered into with a person other than a director or officer of
the corporation, the fact that the other party to the contract was a Director and
Auditor of the petitioner corporation changes the whole situation. First of all,
We believe that the contract was neither fair nor reasonable. The "dealership
agreement" entered into in July, 1969, was to sell and supply to respondent Te
Escudero|Dansal|Gutierrez (2016-2017) 18
20,000 bags of white cement per month, for five years starting September, 1970,
at the fixed price of P9.70 per bag. Respondent Te is a businessman himself and
must have known, or at least must be presumed to know, that at that time, prices
of commodities in general, and white cement in particular, were not stable and
were expected to rise. At the time of the contract, petitioner corporation had not
even commenced the manufacture of white cement, the reason why delivery was
not to begin until 14 months later. He must have known that within that period
of six years, there would be a considerable rise in the price of white cement. In
fact, respondent Te's own Memorandum shows that in September, 1970, the
price per bag was P14.50, and by the middle of 1975, it was already P37.50 per
bag. Despite this, no provision was made in the "dealership agreement" to allow
for an increase in price mutually acceptable to the parties. Instead, the price was
pegged at P9.70 per bag for the whole five years of the contract. Fairness on his
part as a director of the corporation from whom he was to buy the cement,
would require such a provision. In fact, this unfairness in the contract is also a
basis which renders a contract entered into by the President, without authority
from the Board of Directors, void or voidable, although it may have been in the
ordinary course of business. We believe that the fixed price of P9.70 per bag for
a period of five years was not fair and reasonable. Respondent Te, himself, when
he subsequently entered into contracts to resell the cement to his "new dealers"
Henry Wee 13 and Gaudencio Galang 14 stipulated as follows:
"The price of white cement shall be mutually determined by us but in no case
shall the same be less than P14.00 per bag (94 lbs)."
The contract with Henry Wee was on September 15, 1969, and that with
Gaudencio Galang, on October 13, 1967. A similar contract with Prudencio Lim
was made on December 29, 1969. 15 All of these contracts were entered into
soon after his "dealership agreement" with Petitioner Corporation, and in each
one of them he protected himself from any increase in the market price of white
cement. Yet, except for the contract with Henry Wee, the contracts were for only
two years from October, 1970. Why did he not protect the corporation in the
same manner when he entered into the "dealership agreement"? For that matter,
why did the President and the Chairman of the Board not do so either? As
director, specially since he was the other party in interest, respondent Te's
bounden duty was to act in such manner as not to unduly prejudice the
corporation.
In the light of the circumstances of this case, it is to Us quite clear that he was
guilty of disloyalty to the corporation; he was attempting in effect, to enrich
himself at the expense of the corporation. There is no showing that the
stockholders ratified the "dealership agreement" or that they were fully aware of
its provisions. The contract was therefore not valid and this Court cannot allow
him to reap the fruits of his disloyalty.
Private respondent Alejandro Te is hereby ordered to pay petitioner corporation
the sum of P20,000.00 for attorney's fees, plus the cost of suit and expenses of
litigation.
Sec. 33. Contracts between corporations with interlocking directors. - Except
in cases of fraud, and provided the contract is fair and reasonable under the
circumstances, a contract between two or more corporations having interlocking
directors shall not be invalidated on that ground alone: Provided, That if the
interest of the interlocking director in one corporation is substantial and his
interest in the other corporation or corporations is merely nominal, he shall be
subject to the provisions of the preceding section insofar as the latter corporation
or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock
shall be considered substantial for purposes of interlocking directors.
Q: What is a contract between interlocking directors under Sec. 33?
Q: Who is an interlocking director?
Ø Section 33 recognizes as valid a contract between two or more
corporations which have interlocking directors (i.e., one, some, or all of
the directors in one corporation is / are also director / directors in
another corporation) as long as there is no fraud and the contract is fair
and reasonable under the circumstances,
Ø However, if the interest of the interlocking director in one corporation
is substantial, i.e., his stockholdings exceed 20% of the outstanding
capital stock and in the other merely nominal, i.e., his stockholdings do
not exceed 20%, the rules of Section 32 on self-dealing directors shall
apply insofar as the latter corporation is concerned.
Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office,
acquires for himself a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such corporation, he
must account to the latter for all such profits by refunding the same, unless his
act has been ratified by a vote of the stockholders owning or representing at least
two-thirds (2/3) of the outstanding capital stock. This provision shall be
Escudero|Dansal|Gutierrez (2016-2017) 19
applicable, notwithstanding the fact that the director risked his own funds in the
venture.
Q: What is the doctrine of “Corporate Opportunity”?
Ø Under this doctrine, a director who, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation,
thereby obtaining profits to the prejudice of such corporation, is guilty
of disloyalty and should, therefore, account to the latter for all such
profits by refunding the same, notwithstanding that he risked his funds
in the venture.
Ø This doctrine rests fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of an
opportunity for his own personal profit when the interest of the
corporation justly calls for protection. And, if, in such circumstances,
the interests of the corporation are betrayed, the corporation may elect
to claim all of the benefits of the transaction for itself and the law will
impress a trust in favor of the corporation upon the property interest
and profits acquired.
Q: Who is a disloyal director under Sec. 34?
Ø One who acquires for himself a business opportunity in which he gains
profit but which should belong to the corporation
Ø GENERAL RULE: The consequence is that such director must
account, return/refund the amount to the corporation
o EXCEPTION: Unless the act was ratified by 2/3rd vote of the
stockholders representing the OCS
Ø Give a specific example of a disloyal director
EXAMPLE: An amendment to the by-laws of a corporation requiring
that a director shall not be an officer, manager or controlling person of,
or the owner (either of record or beneficially) of 10% or more of any
outstanding class of shares, of any other corporation or entity engaged
in any line of business competitive or antagonistic to that of the former,
was sustained as valid and reasonable, as "it is obviously to prevent the
creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing
corporation, from taking advantage of the information which he
acquires as director to promote his individual or corporate interests to
the prejudice of San Miguel Corporation and its stockholders.
Certainly, where two corporations are competitive in a substantial
 sense, it would seem improbable, if not impossible, for the director, if
he were to discharge effectively his duty, to satisfy his loyalty to both
corporations and place the performance of his corporation duties above
his personal concerns." (Gokongwei, Jr. vs. Securities and Exchange
Commission, supra.)
Sec. 35. Executive committee. - The by-laws of a corporation may create an
executive committee, composed of not less than three members of the board, to
be appointed by the board. Said committee may act, by majority vote of all its
members, on such specific matters within the competence of the board, as may
be delegated to it in the by-laws or on a majority vote of the board, except with
respect to: (1) approval of any action for which shareholders' approval is also
required; (2) the filing of vacancies in the board; (3) the amendment or repeal of
by-laws or the adoption of new by-laws; (4) the amendment or repeal of any
resolution of the board which by its express terms is not so amendable or
repealable; and (5) a distribution of cash dividends to the shareholders.
Q: What is an executive committee?
Ø The board of directors delegates to an executive committee composed
of some members of the board corporate powers to assure prompt and
speedy action and solution to important matters without the need for a
board meeting, especially where such meetings cannot readily be held.
Thus, the committee directly manages the operations of the corporation
between meetings of the board, thereby reducing the work load of the
latter.
Q: What is its composition?
Ø Composed of not less than three members of the board to be appointed
by the board.
Q: What are the powers of the executive committee?
Ø Within the competence of the board, as may be delegated to it in the
by-laws or on a majority vote of the board, except with respect to: (1)
approval of any action for which shareholders' approval is also
required; (2) the filing of vacancies in the board; (3) the amendment or
repeal of by-laws or the adoption of new by-laws; (4) the amendment
or repeal of any resolution of the board which by its express terms is
not so amendable or repealable; and (5) a distribution of cash dividends
to the shareholders.
Escudero|Dansal|Gutierrez (2016-2017) 20
Q: Can they issue cash dividends? How about stock dividends?
Ø No.
Assignment: 36-45 + cases
Fourth Meeting.
Sec. 36. Corporate powers and capacity. - Every corporation incorporated under
this Code has the power and capacity: (PIMPS-DO-SCAB)
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of
this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend
or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell
stocks to subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the corporation if it be a non-
stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and otherwise deal with such real and personal property, including securities and
bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in
this Code;
9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided,
That no corporation, domestic or foreign, shall give donations in aid of any
political party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out
its purpose or purposes as stated in the articles of incorporation
Q: What are the powers of a corporation?
Ø Express
Ø Incidental to its existence
Ø Implied from express power
Q: What are the necessary powers of a Corporation?
Ø That which is needed to exercise express powers.
i.e. power to enter into contracts in own name
DEE vs. SEC
Q: What power was exercised?
Ø Power to issue shares of stocks in a corporation
Sec. 37. Power to extend or shorten corporate term. - A private corporation
may extend or shorten its term as stated in the articles of incorporation when
approved by a majority vote of the board of directors or trustees and ratified at a
meeting by the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of the members in case
of non-stock corporations. Written notice of the proposed action and of the time
and place of the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That in case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right under the conditions provided in
this code.
Q: What are the requirements of extending or shortening the corporate term
Ø Approval by majority vote of BOD
Ø Written notice (personal/registered mail)
Ø Ratification by SH representing 2/3rds of the OCS
Ø A copy of the amended AOI shall be submitted to the SEC for approval
Ø Q: What if notice is thru LBC or Fedex?
o Valid. Reason: it is equivalent to personal service because
what you are doing is to merely deputize the personal service
to these couriers
Q: What is the appraisal right of dissenting shareholders?
Ø Section 37 grants appraisal right to a dissenting stockholder (right of
stockholder in the cases provided by law to demand payment of the fair
Escudero|Dansal|Gutierrez (2016-2017) 21
value of his shares) "in case of extension of corporate term." Such right
should also be available to a dissenting stockholder if the corporate
term is shortened as it is expressly recognized in Section 81(1).
Ø Right to demand the fair market value of SH shares
Note: The appraisal right applies only to a stockholder of a stock corporation.
Q: What is the implication as to the shareholder?
Ø Deemed a withdrawal from the Corporation
Q:When a corporate term is shortened, is there an appraisal right of a
dissenting stockholder?
Ø Yes. See Sec. 81, it provides instances when appraisal rights is
available
Q: Is the appraisal right applying both to extending and shortening?
Ø Yes
Ø Sec. 37 applies to extension
Ø Sec. 81 applies to shortening
Sec. 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. - No corporation shall increase or decrease its capital
stock or incur, create or increase any bonded indebtedness unless approved by a
majority vote of the board of directors and, at a stockholder's meeting duly
called for the purpose, two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock, or the incurring, creating or
increasing of any bonded indebtedness. Written notice of the proposed increase
or diminution of the capital stock or of the incurring, creating, or increasing of
any bonded indebtedness and of the time and place of the stockholder's meeting
at which the proposed increase or diminution of the capital stock or the incurring
or increasing of any bonded indebtedness is to be considered, must be addressed
to each stockholder at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage
prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities and
residences of the persons subscribing, the amount of capital stock or number of
no-par stock subscribed by each, and the amount paid by each on his
subscription in cash or property, or the amount of capital stock or number of
shares of no-par stock allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission and the issuance by
the Commission of its certificate of filing, the capital stock shall stand increased
or decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare: Provided, That
the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at the time
of the filing of the certificate, showing that at least twenty-five (25%) percent of
such increased capital stock has been subscribed and that at least twenty-five
(25%) percent of the amount subscribed has been paid either in actual cash to
the corporation or that there has been transferred to the corporation property the
valuation of which is equal to twenty-five (25%) percent of the subscription:
Provided, further, That no decrease of the capital stock shall be approved by the
Commission if its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the
same, with the approval by a majority vote of the board of trustees and of at
least two-thirds (2/3) of the members in a meeting duly called for the purpose.
Escudero|Dansal|Gutierrez (2016-2017) 22
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof
Q: What are the requirements to increase or decrease capital stock or incur,
create, and in increase?
Ø (PDAF-CART)
Ø Certificate
Ø Sworn statement by Treasurer (in re: increase: compliance to 25-25%)
Ø No-decrease to prejudice corporate creditors
Q: What is the limitation to this power?
Ø As a general rule, a corporation cannot lawfully decrease its capital
stock if such decrease will have the effect of relieving existing
subscribers from the obligation of paying for their unpaid subscriptions
without a valuable consideration for such release, as such an act of the
corporation constitutes an attempted withdrawal of so much capital
upon which corporate creditors are entitled to rely. The corporation
must submit proof to the SEC that such decrease will not prejudice the
rights of creditors.
Ø A corporation cannot issue stock in excess of the amount limited by its
articles of incorporation; such issue is ultra vires and the stock so
issued is void even in the hands of a bona fide purchaser for value; and
Ø A reduction or increase of the capital stock can take place only in the
manner and under the conditions prescribed by law.
Q: What are the ways?
(CRAC-PaNuNu)
Ø There are at least three (3) ways by which the authorized capital stock
may be increased (decreased):
(1) By increasing (decreasing) the number of shares authorized to be issued
without increasing (decreasing) the par value thereof;
(2) By increasing (decreasing) the par value of each share without
increasing (decreasing) the number thereof; and
(3) By increasing (decreasing) both the number of shares authorized to be
issued and the par value thereof.
Q: What is bonded indebtedness?
Ø It is the corporation indebtedness evidenced by bonds or notes
Q: What is the difference between bond v. note?
Ø As to the amount
Ø As to the term
Ø As to the persons involved
The normal distinction between a corporate "bond" (bonded indebtedness) and a
corporate "debenture" or "note" is that the former is usually secured by a
mortgage on corporate property while the latter usually is not
Q: What are the parties to a corporate bond?
Ø There are three (3) parties to a corporation bond contract: the
borrowing corporation, the bondholders, and the trustee. The trustee is
a bank or trust company, which is chosen and paid by the corporation
but serves mainly to protect the bondholders.
Q: Give at least 3 kinds of bond
SECURED:
Ø Mortgage bond - debt instruments of financing secured by a lien on
specifically named property. Land, building, equipment, and other
fixed assets are the kinds of property most commonly pledged as
security;
Ø Equipment bond/obligation - debt instruments to secure financing loans
on locomotives, railway cars, buses, large trucks, and similar
equipment. The most outstanding characteristics of an equipment
obligation is the railroad equipment trust certificate secured by title to
rolling stock, such as cars and locomotives;
Ø Collateral trust bond - debt instruments secured by a pledge of either
stocks or bonds, or both which are deposited with a trustee;
UNSECURED BONDS:
Ø Straight debenture bonds - general credit bonds not secured by any
specific property. The earning of the issuing corporation provides the
protection to the debenture bondholders;
Ø Guaranteed bonds - that type for which one or more individuals or
corporations other than the issuer guarantees the payment of interest or
principal or both; and
Ø Subordinated debenture bonds - debt instruments specifying that the
holder's rights are inferior in the event of liquidation or reorganization
to any existing and future debt defined in the indenture as senior debt.
Escudero|Dansal|Gutierrez (2016-2017) 23
SPECIAL TYPES:
(a) Convertible debentures - bonds which may be exchanged for the common
stock of the issuing corporation at a fixed price by a predetermined redemption
rate at the option of the bondholder;
(b) Income bonds - sometimes referred to as adjustment bonds, or debt
instruments with a fixed rate of interest payable only if earned and declared by
the board of directors.
They are hybrid securities combining some of the characteristics of preferred
and straight bonds; and
(c) Bonds with warrant - stock purchase warrant, or an option or a right,
exercisable by its holder, to purchase stock at a stated price during a stipulated
period of time. Bond warrant issues are usually debentures, and the warrants are
detachable or non-detachable. Detachable warrants are preferred by investors
because such warrants may be sold or exercised apart from the bond, whereas
non-detachable warrants cannot be sold or exercised separately from the bond.
Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to subscribe to all issues or disposition
of shares of any class, in proportion to their respective shareholdings, unless
such right is denied by the articles of incorporation or an amendment thereto:
Provided, That such pre-emptive right shall not extend to shares to be issued in
compliance with laws requiring stock offerings or minimum stock ownership by
the public; or to shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate purposes or in payment of a
previously contracted debt.
DEE V. SEC
1. CORPORATION LAW; SECURITIES AND EXCHANGE
COMMISSION; POWERS AND JURISDICTION; SCOPE. — In
order that the SEC can take cognizance of a case, the controversy must
pertain to any of the following relationship: (a) between corporation,
partnership or association and the public; (b) between the corporation,
partnership, or association and its stockholders, partners, members or
of cers; (c) between the corporation, partnership or association and the
state insofar as its franchise, permit or license to operate is concerned;
and (d) among the stockholders, partners, or associates themselves
(Union Glass & Container Corp. vs. SEC, 126 SCRA 31 [1983]). The
jurisdiction of the SEC is limited to matters intrinsically connected with
 the regulation of corporations, partnerships and associations and those
dealing with internal affairs of such entities P.D. 902-A does not
conferjurisdiction to SEC over all matters affecting corporations
(Pereyra vs. IAC, 181 SCRA 244 [1990]; Sales vs. SEC, 169 SCRA
121 [1989]). The jurisdiction of the SEC in SEC Case No. 1748 is
limited to deciding the controversy in the election of the directors and
officers of Natelco. Thus, the SEC was correct when it refused to rule
on whether the issuance of the shares of Natelco stocks to CSI violated
Sec. 20 (h) of the Public Service Act.
2. ID.; ID.; STOCKHOLDERS; POWER TO ISSUE SHARES OF
STOCKS LODGED IN THE BOARD OF DIRECTORS. — While the
group of Luciano Maggay was in control of Natelco by virtue of the
restraining order issued in G.R. NO. 50885, the Maggay Board issued
113,800 shares of stock to CSI. Petitioner said that the Maggay Board,
in issuing said shares without notifying Natelco stockholders, violated
their right of pre-emption to the unissued shares. The questioned
issuance of the 113,800 stocks is not invalid even assuming that it was
made without notice to the stockholders as claimed by the petitioner.
The power to issue shares of stocks in a corporation is lodged in the
board of directors and no stockholders meeting is required to consider it
because additional issuance of shares of stocks does not need approval
of the stockholders. Consequently, no preemptive right of Natelco
stockholders was violated by the issuance of the 113,800 shares to CSI.
DOCTRINE: The general rule is that pre-emptive right is recognized only
with respect to new issues of shares, and not with respect to additional
issues of originally authorized shares.
Q: Why did SC say that there is no pre-emptive right?
Ø Additional issuance of original shares, not new issuances. New
issuances arise only when capital stock is increased.
Q: What is a pre-emptive right? When is it available to a shareholder?
Ø The preferential right of SH to subscribe to all issues or disposition of
shares of any class in proportion to their present stockholdings
Ø Whenever the capital stock of a corporation is increased and new shares
of stock are issued, the new issue must be offered first to the
stockholders who are such at the time the increase was made in
proportion to their existing shareholdings14 and on equal terms with
Escudero|Dansal|Gutierrez (2016-2017) 24
other holders of the original stocks before subscriptions are received
from the general public.
Q: What is the purpose of the rule?
Ø To enable SH to retain his proportionate control in the corporation and
to retain his equity in the surplus
Q: When there is no dilution, is there pre-emptive right?
Ø No. Because the purpose of the right is to protect from impairment and
dilution the basic rights of the existing stockholders in the corporation.
Q: When can the right be denied?
Ø If provided for in the Articles of Incorporation.
Q: When will a corporation have new issuances?
Ø When it increases its capital stock
Ø See illustration in book
Q: When is pre-emptive right not available?
Ø Under Section 39, the pre-emptive right of stockholders to subscribe to
all issues or disposition of shares in proportion to their respective
shareholdings extends "to all issues or disposition of shares of any
class" (such as treasury shares) unless denied by the articles of
incorporation or an amendment thereto18 (in which case they are
deemed to have waived the right), and except to the following:
(1) Shares to be issued in compliance with laws requiring stock offerings
or minimum stock ownership by the public;
(2) Shares to be issued in good faith with the approval of stockholders
representing 2 / 3 of the outstanding capital stock in exchange for
property needed for corporate purposes; and
(3) Shares to be issued in good faith with the approval of the stockholders
representing 2 / 3 of the outstanding capital stock in payment of
previously contracted debt.
Q: How will you deny a shareholder pre-emptive right?
Ø The pre-emptive right of stockholders of a stock corporation "to
subscribe to all issues or disposition of shares of any class in proportion
to their respective shareholdings" may be "denied by the articles of
incorporation or an amendment thereto" or may fall under any of the
exceptions." (Sec. 39.) Unless so denied or excepted, the right should
 be granted to a holder of shares although they are of a class different
from those issued or disposed of.
Q: What are the requisites to the validity of the sale of all or substantially all
of the property of the corporation?
Ø The requisites for the validity of such sale, etc. are as follows:
(a) The sale, etc., must be approved by the board of directors or
trustees;
Ø (b) The action of the board of directors or trustees must be authorized
by the vote of stockholders representing 2 /3 of the outstanding capital
stock including holders of nonvoting shares (see Sec. 6, par. 6[3].) or 2
/ 3 of the members, as the case may be; and
Ø (c) The authorization must be done at a stockholders' or members'
meeting duly called for that purpose after written notice.
MCLEOD vs NLRC
Ø As a rule, a corporation that purchases the assets of another will NOT
be liable for the debts of the selling corporation, provided the former
acted in good faith and paid adequate consideration for such assets,
except when any of the following circumstances is present:
(1) where the purchaser expressly or impliedly agrees to assume the
debts;
(2) where the transaction amounts to a consolidation or merger of the
corporations;
(3) where the purchasing corporation is merely a continuation of the
selling corporation; and
(4) where the selling corporation fraudulently enters into the transaction
to escape liability for those debts.
Ø None of the foregoing exceptions is present in this case.
Ø Andrada v. Mcleod
Sec. 40. Sale or other disposition of assets. - Subject to the provisions of
existing laws on illegal combinations and monopolies, a corporation may, by a
majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as its board of directors or
trustees may deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or in case
Escudero|Dansal|Gutierrez (2016-2017) 25
of non-stock corporation, by the vote of at least to two-thirds (2/3) of the
members, in a stockholder's or member's meeting duly called for the purpose.
Written notice of the proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions provided in
this Code.
A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it
was incorporated.
After such authorization or approval by the stockholders or members, the board
of directors or trustees may, nevertheless, in its discretion, abandon such sale,
lease, exchange, mortgage, pledge or other disposition of property and assets,
subject to the rights of third parties under any contract relating thereto, without
further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation,
without the authorization by the stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise dispose of any of its property and
assets if the same is necessary in the usual and regular course of business of said
corporation or if the proceeds of the sale or other disposition of such property
and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the
vote of at least a majority of the trustees in office will be sufficient authorization
for the corporation to enter into any transaction authorized by this section.
Q: What are the requirements?
PARDS
Q: In sale of all or substantially all of the property, is there appraisal right of
a dissenting shareholder?
Ø Yes. It is the right to demand the fair value of the SH share, after
dissenting from a proposed corporate action involving fundamental
change in the corporation in cases provided by law
Q: Do all shareholders have such right?
Ø Yes. Shareholders have right to demand payment to the fair value of his
share
Q: When do you consider an asset substantial?
Ø Sale or other disposition shall be deemed to cover substantially all the
corporate assets if
o 1. The corporation would be rendered incapable of continuing
the business; or
o 2. Accomplishing the purpose for which it was incorporated
Q: Can board change its mind and not push through with the sale?
Ø Yes. The board has such discretion
ISLAMIC DIRECTORATE OF THE PHILIPPINES vs CA
1. COMMERCIAL LAW; SECURITIES AND EXCHANGE
COMMISSION; JURISDICTION; AUTHORITY TO DECIDE THE
LEGITIMATE BOARD OF TRUSTEES OF IDP. — There can be no
question as to the authority of the SEC to pass upon the issue as to who
among the different contending groups is the legitimate Board of
Trustees of the IDP since this is a matter properly falling within the
original and exclusive jurisdiction of the SEC by virtue of Sections 3
and 5(c) of Presidential Decree No. 902-A. If the SEC can declare who
is the legitimate IDP Board, then by parity of reasoning it can also
declare who is not the legitimate IDP Board. This is precisely what the
SEC did in SEC Case. No. 4012 when it adjudged the election of the
Carpizo Group to the IDP Board of Trustees to be null and void.
Consequently, the Carpizo Group is bereft of any authority whatsoever
to bind IDP in any kind of transaction including the sale or disposition
of IDP property.
2. CIVIL LAW; CONTRACTS; REQUISITES; CONSENT; WANTING
IN CASE AT BAR. — Article 1318 of the New Civil Code lays down
the essential requisites of contracts. All these elements must be present
to constitute a valid contract. For, where even one is absent, the
contract is void. As succinctly put by Tolentino, consent is essential for
the existence of a contract, and where it is wanting, the contract is
nonexistent. In this case, the IDP, owner of the subject parcels of land,
never gave its consent, thru a legitimate Board of Trustees, to the
disputed Deed of Absolute Sale executed in favor of INC. This is,
Escudero|Dansal|Gutierrez (2016-2017) 26
therefore, a case not only of vitiated consent, but one where consent on
the part of one of the supposed contracting parties is totally wanting.
Ineluctably, the subject sale is void and produces no effect whatsoever.
PNB vs ANDRARA
SYNOPSIS
Respondent filed an action against petitioners for the unpaid balance on
electrical services it previously rendered to Pampanga Sugar Mill (PASUMIL).
Respondent alleged that petitioners became liable to them when the former
acquired the assets of, took over, and operated PASUMIL.
The Court disagreed with respondent. The following precludes the piercing of
the corporate veil in the case at bar: Other than the fact that petitioners acquired
the assets of PASUMIL, there was no showing that their control over it warrants
the disregard of corporate personalities, there was no evidence that their juridical
personality was used to commit fraud or to do a wrong, or that the separate
corporate entity was farcically used as a mere alter ego, business conduit or
instrumentality of another entity or person; respondent was not defrauded or
injured when petitioners acquired the assets of PASUMIL. Neither is there
merger nor consolidation with respect to PASUMIL and PNB.
1. COMMERCIAL LAW; PRIVATE CORPORATIONS; WHERE
CORPORATION PURCHASED THE ASSETS OF ANOTHER
CORPORATION, THE FORMER WILL NOT BE LIABLE TO THE
DEBTS OF THE LATTER; EXCEPTIONS. — As a rule, a corporation
that purchases the assets of another will not be liable for the debts of
the selling corporation, provided the former acted in good faith and
paid adequate consideration for such assets, except when any of the
following circumstances is present: (1) where the purchaser expressly
or impliedly agrees to assume the debts, (2) where the transaction
amounts to a consolidation or merger of the corporations, (3) where the
purchasing corporation is merely a continuation of the selling
corporation, and (4) where the transaction is fraudulently entered into
in order to escape liability for those debts.
2. ID.; ID.; CORPORATION; ELUCIDATED. — A corporation is an
artificial being created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly
authorized by law or incident to its existence. It has a personality
separate and distinct from the persons composing it, as well as from
any other legal entity to which it may be related. This is basic.
 3. ID.; ID.; DOCTRINE OF PIERCING THE VEIL OF CORPORATE
FICTION; WHEN PROPER. — Equally well-settled is the principle
that the corporate mask may be removed or the corporate veil pierced
when the corporation is just an alter ego of a person or of another
corporation. For reasons of public policy and in the interest of justice,
the corporate veil will justifiably be impaled only when it becomes a
shield for fraud, illegality or inequity committed against third persons.
Hence, any application of the doctrine of piercing the corporate veil
should be done with caution. A court should be mindful of the milieu
where it is to be applied. It must be certain that the corporate fiction
was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing
must be clearly and convincingly established; it cannot be presumed.
Otherwise, an injustice that was never unintended may result from an
erroneous application. This Court has pierced the corporate veil to ward
off a judgment credit, to avoid inclusion of corporate assets as part of
the estate of the decedent, to escape liability arising from a debt, or to
perpetuate fraud and/or confuse legitimate issues either to promote or
to shield unfair objectives or to cover up an otherwise blatant violation
of the prohibition against forum-shopping. Only in these and similar
instances may the veil be pierced and disregarded.
4. ID.; ID.; ID.; ELEMENTS; NOT PRESENT IN CASE AT BAR. —
The question of whether a corporation is a mere alter ego is one of fact.
Piercing the veil of corporate fiction may be allowed only if the
following elements concur: (1) control — not mere stock control, but
complete domination — not only of finances, but of policy and
business practice in respect to the transaction attacked, must have been
such that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own; (2) such control must have
been used by the defendant to commit a fraud or a wrong to perpetuate
the violation of a statutory or other positive legal duty, or a dishonest
and an unjust act in contravention of plaintiff's legal right; and (3) the
said control and breach of duty must have proximately caused the
injury or unjust loss complained of. We believe that the absence of the
foregoing elements in the present case precludes the piercing of the
corporate veil. First, other than the fact that petitioners acquired the
assets of PASUMIL, there is no showing that their control over it
warrants the disregard of corporate personalities. Second, there is no
evidence that their juridical personality was used to commit a fraud or
to do a wrong; or that the separate corporate entity was farcically used
Escudero|Dansal|Gutierrez (2016-2017) 27
as a mere alter ego, business conduit or instrumentality of another
entity or person. Third, respondent was not defrauded or injured when
petitioners acquired the assets of PASUMIL. Being the party that asked
for the piercing of the corporate veil, respondent had the burden of
presenting clear and convincing evidence to justify the setting aside of
the separate corporate personality rule. However, it utterly failed to
discharge this burden; it failed to establish by competent evidence that
petitioner's separate corporate veil had been used to conceal fraud,
illegality or inequity. The CA erred in affirming the trial court's lifting
of the corporate mask. The CA did not point to any fact evidencing bad
faith on the part of PNB and its transferee. The corporate fiction was
not used to defeat public convenience, justify a wrong, protect fraud or
defend crime. None of the foregoing exceptions was shown to exist in
the present case. On the contrary, the lifting of the corporate veil would
result in manifest injustice. This we cannot allow.
5. ID.; ID.; CONSOLIDATION OR MERGER OF CORPORATIONS;
REQUISITES; NOT PRESENT IN CASE AT BAR. — A
consolidation is the union of two or more existing entities to form a
new entity called the consolidated corporation. A merger, on the other
hand, is a union whereby one or more existing corporations are
absorbed by another corporation that survives and continues the
combined business. The merger, however, does not become effective
upon the mere agreement of the constituent corporations. Since a
merger or consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders and creditors, there
must be an express provision of law authorizing them. For a valid
merger or consolidation, the approval by the Securities and Exchange
Commission (SEC) of the articles of merger or consolidation is
required. These articles must likewise be duly approved by a majority
of the respective stockholders of the constituent corporations. In the
case at bar, we hold that there is no merger or consolidation with
respect to PASUMIL and PNB. The procedure prescribed under Title
IX of the Corporation Code was not followed.
Fifth meeting.
Sec. 41. Power to acquire own shares. - A stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate purpose
or purposes, including but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to cover the shares to
be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising
out of unpaid subscription, in a delinquency sale, and to purchase
delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for
their shares under the provisions of this Code
Q: What are legitimate purposes?
Ø Under Sec. 41: (EC-PaTREC)
o To eliminate fractional shares
o To collect or compromise an indebtedness
o To pay the shares of dissenting or withdrawing shareholders
Ø The enumeration under Sec. 41 is not exclusive. The following are
other instances not included in the enumeration:
o To acquire treasury shares
o To acquire redeemable shares
o To reacquire shares to effect a decrease in the capital stock of
a corporation
o In a close corporation, where there is a deadlock in the
management, SEC may order the purchase of share at their
FMV (to remove the deadlock)
Q: What is a fractional share?
Ø It is a share which is less than 1 corporation share
Ø Ex: if a SH owns 250 shares and corp declares 25% stock dividend, his
total shares will be 312 and ½ shares. The corpo may purchase the
fractional shares
Ø Reason why fractional shares must be eliminated: they cannot be
represented at corporate meetings
Q: Can shareholders buy fractional shares?
Ø Yes, such stockholder who may negotiate for the sale thereof with other
stockholders also owning fractional shares so as to convert them into
full shares may be issued with fractional script certificates by the
Corporation.
Q: What are the requirements before a corporation acquire its own shares?
Ø (CLUG-C)
Escudero|Dansal|Gutierrez (2016-2017) 28
The right and power of a corporation to acquire or purchase its own
shares is not absolute, but depends upon the contingency of the condition
of its affairs and its relation to creditors at the time of the purchase.
Briefly, a corporation's right to purchase its shares according to the
weight of authority is subject to the following limitations:
(1) That its capital is not thereby impaired;
(2) That it be for a legitimate and proper corporate purpose;
(3) That there shall be unrestricted retained earnings to purchase the
same and its capital is not thereby impaired;
(4) That the corporation acts in good faith and without prejudice to
the rights of creditors and stockholders; and
(5) That the conditions of corporate affairs warrant it.
Q: What is the trust fund doctrine?
Ø The subscribed capital stock of the corporation is a trust fund for the
payment of debts of the corporation which the creditors have the right
to look up to satisfy their credits, and which the corporation may not
dissipate. The creditors may sue the SH directly for the latter’s unpaid
subscription.
Ø The assets of the corporation as represented by its capital stock are
TRUST FUNDS to be maintained unimpaired and to be used to pay
corporate creditor in the sense that there can be no distribution of such
assets among the stockholders without provision being first made for
the payment of corporate debts and that any such disposition of it is a
fraud on the creditors of the corporation who extend credit to the
corporation on the faith of its outstanding capital stock and, therefore,
void.
Sec. 42. Power to invest corporate funds in another corporation or business
or for any other purpose. - Subject to the provisions of this Code, a private
corporation may invest its funds in any other corporation or business or for any
purpose other than the primary purpose for which it was organized when
approved by a majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, or by at least two thirds (2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's meeting duly called for the purpose.
Written notice of the proposed investment and the time and place of the meeting
shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That any dissenting
stockholder shall have appraisal right as provided in this Code: Provided,
however, That where the investment by the corporation is reasonably necessary
to accomplish its primary purpose as stated in the articles of incorporation, the
approval of the stockholders or members shall not be necessary.
Q: What are the requirements before a corporation can invest in another
corporation or business?
Ø With respect to purposes other than primary purpose: (A-RAMEN)
o Approval by a majority of the board of directors
o Ratification by the stockholders representing at least 2/3 of
the outstanding capital stock or by at least two-thirds (2/3) of
the members in the case of non-stock corporations
o Without prejudice to a dissenting stockholder’s appraisal
right
o Meeting duly called for the purpose
o Prior written notice of the proposed investment and the time
and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on
the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally
Ø Where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of
incorporation:
o Ratification by stockholders or member is not necessary
Q: Is investment without the approval of shareholders allowed? Give an
example.
Ø Yes, with respect to investments by a corporation reasonably necessary
to accomplish a primary purpose which is stated in the AOI.
Q: Is there a possibility that an investment can be made in order to accomplish
a purpose other than the primary purpose and still there is no need for
ratification by the stockholders?
Ø Yes, if the purpose is incidental or reasonably necessary to accomplish
the primary purpose
o Ex: Beer manufacturer invests in equipment from another
country to brew beer (See book)
Escudero|Dansal|Gutierrez (2016-2017) 29
Sec. 43. Power to declare dividends. - The board of directors of a stock
corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock to all stockholders on the
basis of outstanding stock held by them: Provided, That any cash dividends due
on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of the outstanding
capital stock at a regular or special meeting duly called for the purpose.
Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except: (1) when justified
by definite corporate expansion projects or programs approved by the board of
directors; or (2) when the corporation is prohibited under any loan agreement
with any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation, such as when there is
need for special reserve for probable contingencies.
Q: What is a dividend?
Ø It is that part or portion of the profits of a corporation set aside,
declared, and ordered by the directors to be paid ratably to the
shareholders on demand or at a fixed time
Ø Purpose: return of investment of the stockholders
Q: What is the difference between dividend and profit?
Ø Dividend is that portion of the profits or net earning which the
corporation has set aside for ratable distribution among the
shareholders
o They are the assets of the shareholders
o There are generally 3 kinds of dividends:
1. Cash dividend
2. Property dividend
3. Stock dividend
Ø Profit means return to capital rather than earning from labor performed
or services rendered. Profits are not dividends unless declared or set
aside by the corporation
o They are the assets of the corporation
 Ø Dividends come from profits while profits are the source of dividends
Q: Who has the power to declare dividends?
Ø Board of directors have the power to declared dividends out of
unrestricted retained earnings
Ø Stock dividends – requires ratification of shareholders representing 2/3
of the outstanding capital stock in a regular meeting or special meeting
called for the purpose
Ø Other dividends – mere majority of the quorum of the board of
directors is sufficient to declare other dividends.
Ø o Existence of unrestricted retained earnings
Q: What is the reason why ratification for stock dividends is required but it is
not required in cash dividends? See p. 416 of book
Q: What are unrestricted retained earnings?
Ø Retained earnings = assets – liabilities and legal capital
o Excess of the profits – Retained Earnings
o Negative balance – Deficit
Ø Other term: surplus profits
Q: What is the meaning of “unrestricted”?
Ø Items which are not set aside or earmarked for the some purpose; free
to be distributed
Ø Unrestricted – free for dividend distribution to shareholders, if they
have not been reserved or set aside by the board of directors for some
corporate purpose or some other purpose in accordance with
managerial, legal, or contractual requirements
o Example of purpose that are restrictive:
§ Corporate expansion
§ Payments for debt and liabilities
§ Insurance reserves
§ Bank reserves
Q: May dividends be declared out of capital?
Ø GR: No. A corporation cannot make a valid contract to pay dividends
other than from retained earning or profits and an agreement to pay
such dividends out of capital is null and void
Ø EXPN:
o (1) Dividends from investments wasting assets corporation
(ex: corp engaged in mining or timber cutting)
Escudero|Dansal|Gutierrez (2016-2017) 30
o (2) To utilize a lease or patent
o (3) Liquidating dividends
Q: What are the requirements before dividends may be declared?
Ø With respect to Cash Dividends:
o Existence of unrestricted retained earnings (this is the most
basic requirement)
o Resolution of the Board declaring the payment of such earning
to the shareholders
Ø With respect to Stock Dividends:
o Resolution of the Board declaring the payment of such earning
to the shareholders
o Approval of stockholders representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose.
o Corp must have sufficient number of authorized unissued
shares for distribution to stockholders
§ Otherwise, it must increase its capital stock to the
extent of the corporate earnings to be declared and
distributed as stock dividends
Q: What are the limitations in retaining surplus profits?
Ø GR: Stock corporations are prohibited from retaining surplus profits in
excess of one hundred (100%) percent of their paid-in capital stock
Ø EXPN: (SLEx)
Ø (1) When justified by definite corporate expansion projects or
programs approved by the board of directors; or
Ø (2) When the corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has not
yet been secured; or
Ø (3) When it can be clearly shown that such retention is necessary under
special circumstances obtaining in the corporation, such as when there
is need for special reserve for probable contingencies.
NIELSON CASE
Ø Stock dividends are payable only to shareholders of the corporation and
not to strangers or non-stockholders
 o Reason: only shareholders are entitled to ANY KIND OF
DIVIDEND
Ø Q: Could there be a possibility that you pay a stranger thru shares of
stock?
o Yes
1. MERCANTILE LAW; CORPORATIONS; SHARES OF STOCK;
ISSUANCE THEREOF. — From Section 16 of the Corporation Law,
the consideration for which shares of stock may be issued are: (1) cash;
(2) property and (3) undistributed profits. Shares of stock are given the
special name "stock dividends" only if they are issued in lieu of
undistributed profits. If the shares of stocks are issued in exchange of
cash or Property then those shares do not fall under the category of
"stock dividends". A corporation may legally issue shares of stock in
consideration of services rendered to it by a person not a stockholder,
or in payment of its indebtedness. A share of stock issued to pay for
services rendered is equivalent to a stock issued in exchange of
property because services is equivalent to property. Likewise a share of
stock issued in payment of indebtedness is equivalent to issuing a stock
in exchange for cash. But a share of stock thus issued should be part of
the original capital stock of the corporation upon its organization, or
part of the stocks issued when the increase of the capitalization of a
corporation is properly authorized.
2. ID.; ID.; STOCK DIVIDEND, DEFINED. — A "stock dividend" is
any dividend payable in shares of stock of the corporation declaring or
authorizing such dividend. It is, what the term itself implies, a
distribution of the shares of stock of the corporation among the
stockholders as dividends. A stock dividend of a corporation is a
dividend paid in shares of stock instead of cash and is properly payable
only out of surplus profits. So, a stock dividend is actually two things:
(1) a dividend, and (2) the enforced use of the dividend money to
purchase additional shares of stock at par. When a corporation issues
stock dividends, it shows that the corporations' accumulated profits
have been capitalized instead of distributed to the stockholders or
retained as surplus available for distribution, in money or in kind,
should opportunity offer. Far from being a realization of profits for the
stockholder, it tends rather to postpone said realization, in that the fund
represented by the new stock has been transferred from the surplus to
assets and no longer available for actual distribution.
Escudero|Dansal|Gutierrez (2016-2017) 31
3. ID.; ID.; DIVIDEND. — The term "dividend" both in the technical
sense and its ordinary acceptation, is that part or portion of the profits
of the enterprise which the corporation, by its governing agents, sets
apart for ratable division among the holders of the capital stock. It
means the fund actually set aside, and declared by the directors of the
corporation as a dividend, and duly ordered by the directory, or by the
stockholders at a corporate meeting to be divided or distributed among
the stockholders according to their respective interests.
Sec. 44. Power to enter into management contract. - No corporation shall
conclude a management contract with another corporation unless such contract
shall have been approved by the board of directors and by stockholders owning
at least the majority of the outstanding capital stock, or by at least a majority of
the members in the case of a non-stock corporation, of both the managing and
the managed corporation, at a meeting duly called for the purpose: Provided,
That (1) where a stockholder or stockholders representing the same interest of
both the managing and the managed corporations own or control more than one-
third (1/3) of the total outstanding capital stock entitled to vote of the managing
corporation; or (2) where a majority of the members of the board of directors of
the managing corporation also constitute a majority of the members of the board
of directors of the managed corporation, then the management contract must be
approved by the stockholders of the managed corporation owning at least two-
thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least
two-thirds (2/3) of the members in the case of a non-stock corporation. No
management contract shall be entered into for a period longer than five years for
any one term.
The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to manage or operate all or substantially all of
the business of another corporation, whether such contracts are called service
contracts, operating agreements or otherwise: Provided, however, That such
service contracts or operating agreements which relate to the exploration,
development, exploitation or utilization of natural resources may be entered into
for such periods as may be provided by the pertinent laws or regulations.
Q: What is a management contract?
Ø It is an agreement whereby a corporation delegates the management of
its affairs to another corporation for a certain period of time (not
exceeding 5 years)
 o The managed corporation is bound by the acts of the
managing corporation. It is estopped from denying such
authority.
Ø Any contract whereby a corporation undertakes or operates all or
substantially all of the business of another corporation whether such
contracts are service contracts, operating agreements or otherwise (Sec.
44)
Q: Can a natural person enter into a management contract with a
corporation?
Ø No. The law expressly provides that only a corporation can enter into a
management contract with another corporation. A contract between a
corporation and a natural person is called an employment contract.
Q: What are the requirements of a management contract?
Ø (ARMA-5)
Ø 1. Approval by majority of the quorum of the board of directors
Ø 2. Ratification by shareholders owning at least majority of the
outstanding capital stock of BOTH:
o The managing corporation
o The managed corporation
Ø 3. Meeting duly called for the purpose
Ø 4. Approval by the shareholders of the managed corporation owning
at least two-thirds (2/3) of the total outstanding capital stock entitled to
vote:
o (1) Where a stockholder/s representing the same interest of
both the managing and the managed corporations own or
control more than 1/3 of the total outstanding capital stock
entitled to vote of the managing corporation
(INTERLOCKING SHAREHOLDERS); or
o (2) Where a majority of the members of the board of directors
of the managing corporation also constitute a majority of the
members of the board of directors of the managed corporation
(INTERLOCKING DIRECTORS
§ See illustrations of these 2 cases in the book
Ø 5. GR: No management contract shall be entered into for a period
longer than 5 years for any one term
o EXPN: Contracts which relate to exploration, development,
exploitation or utilization of natural resources that may be
entered into for such periods as may be provided for by law
Escudero|Dansal|Gutierrez (2016-2017) 32
Q: What are the limitations of a management contract
Ø Must comply with: (1) Approval of the board, (2) Ratification of the
SH or (4) Approval of SH if falling under either of the 2 cases, and (5)
Period of contract.
Ø In the case of Interlocking directors, the contract must comply with the
requirements of Sec. 33
Ø Also, a management contract cannot delegate entire supervision and
control over the officers and business of a corporation to another. In
other words, there is no total abdication of the powers of the
corporation
o Otherwise it will contravene Sec. 23, which provides for the
rule that the corporate powers of all corporations shall be
exercised by the board
Sec. 45. Ultra vires acts of corporations. - No corporation under this Code
shall possess or exercise any corporate powers except those conferred by this
Code or by its articles of incorporation and except such as are necessary or
incidental to the exercise of the powers so conferred.
Q: What is an ultra vires act?
Ø Not within express, implied, and incidental powers. Not expressly, but
rather impliedly forbidden since it is not recognized power of the
corporation
Ø Intra vires acts – done within the legitimate powers of the corporation
Ø It is an act committed outside the object for which a corporation is
created as defined by the law of its organization and therefore beyond
the powers conferred upon it by law
Q: What are the consequences/effects of an ultra vires act?
Ø Ultra vires contract which is executory on both sides:
o Unenforceable by either party
§ This means that neither party can demand the
performance of the obligation
Ø Ultra vires contract which has been performed on both sides:
o Neither party can maintain an action to set aside
transaction/recover
Ø Ultra vires contract which has been performed on one side:
o Recovery is permitted in most courts by the one who
performed and not the one who received benefits
 o Other courts – unenforceable and orders the person benefitted basis of estoppel
to return that which is received/pay its reasonable value Ultra Vires Acts Acts beyond the powers of
Ø Contracts ultra vires in part: particular officers or directors
o If separable, sustain/enforce the part which is not ultra vires Ultra Vires Acts Acts done w/o complying with
and hold invalid the ultra vires part certain conditions and formalities
Ø Executory contract – no enforcement even at the suit of either party Ultra Vires Acts Acts involving inexistent contracts
(void or unenforceable)
Ø Executed contract – courts will not set aside or interfere with such
contracts Q: Is an ultra vires act subject to ratification?
Ø Part executed and part authorized – principle of “no unjust Ø With respect to contract or act illegal per se:
enrichment at the expense of another” shall apply o No. it is wholly void and inexistent. It cannot be ratified. The
Ø Executory contract apparently authorized but Ultra Vires – the doctrine of estoppel cannot operate to give effect to a void act
principal of estoppel shall apply Ø With respect to contract or act not illegal per se:
o Merely voidable and may be ratified or doctrine of estoppel
HYDRO may be enforced
Doctrine of apparent authority o Provided that ratification must be by the officer or governing
The rule is of course settled that "although an officer or agent acts without, or in body having authority to make the contract
excess of, his actual authority if he acts within the scope of an apparent authority § GR: Approval of the Board is sufficient to ratify an
with which the corporation has clothed him by holding him out or permitting ultra vires act
him to appear as having such authority, the corporation is bound thereby in favor § EXPN: Instances which require ratification of
of a person who deals with him in good faith in reliance on such apparent stockholders
authority , as where an officer is allowed to exercise a particular authority with
respect to the business, or a particular branch of it, continuously and publicly, Assignment:
for a considerable time." Up to Sec. 59 plus cases

Q: Is an ultra vires act an illegal act? What is the
vires act and other acts
Ø By itself, it is not necessarily illegal.
Ultra Vires Acts
As to nature Not necessarily
unlawful, but outside the
powers of the corp
As to susceptibility of Can be ratified
ratification (expressly or impliedly)
by the shareholders.
Reason: Such acts are
merely voidable
As to binding effect Can bind parties wholly
or partly executed on the
difference between ultra Sixth meeting.
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code must,
Illegal Acts within one (1) month after receipt of official notice of the issuance of its
Unlawful; against law, certificate of incorporation by the Securities and Exchange Commission, adopt a
public morals, public code of by-laws for its government not inconsistent with this Code. For the
policy, and public order adoption of by-laws by the corporation the affirmative vote of the stockholders
Cannot be ratified representing at least a majority of the outstanding capital stock, or of at least a
because they are void ab majority of the members in case of non-stock corporations, shall be necessary.
initio The by-laws shall be signed by the stockholders or members voting for them and
shall be kept in the principal office of the corporation, subject to the inspection
of the stockholders or members during office hours. A copy thereof, duly
certified to by a majority of the directors or trustees countersigned by the
Cannot bind the parties secretary of the corporation, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of incorporation.

Escudero|Dansal|Gutierrez (2016-2017) 33
Notwithstanding the provisions of the preceding paragraph, by-laws may be
adopted and filed prior to incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and submitted to the Securities and
Exchange Commission, together with the articles of incorporation.
Q: What are the requirements for the adoption of by-laws?
In all cases, by-laws shall be effective only upon the issuance by the Securities
and Exchange Commission of a certification that the by-laws are not
inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws
or any amendment thereto of any bank, banking institution, building and loan
association, trust company, insurance company, public utility, educational
institution or other special corporations governed by special laws, unless
accompanied by a certificate of the appropriate government agency to the effect
that such by-laws or amendments are in accordance with law
Q: What are by-laws?
Ø By-Laws - the rules of action adopted by a corporation for its internal
government and for the government of its stockholders or members and
those having the direction, management, and control of its affairs in
their relation to the corporation and among themselves
o It includes rules for routine matters (i.e. calling meetings, etc)
Ø The power to adopt by-laws is inherent in every corporation
Ø The word “by-law” signifies a rule for future action (that is why it
cannot be retroactively applied if it will impair existing contracts or
vested right)
Q: What are the functions of by-laws? (SuSoDeRegla)
Ø (1) To supplement the AOI
Ø (2) To be the source of authority for corporate officers and agents
Ø (3) To define the rights and duties of the corporate officers and
directors/trustees as well as of stockholders/members towards the
corporation and among themselves
Ø (4) To regulate business transactions of the corporation in a particular
way
Q: Why does a corporation need to adopt by-laws?
Ø When a corporation comes to existence upon the issuance of the
certificate of corporation, it does not mean that it is already prepared to
do business. It may be in existence, but it is not yet organized.
Escudero|Dansal|Gutierrez (2016-2017) 34
Ø To be organized, it is required that: (1) There are executive officers
charged with the management of the corporation’s affairs, and (2)
There are rules governing the management of its affairs
Ø With respect to by-laws adopted PRIOR to incorporation:
o The by-laws must be signed and approved by ALL the
incorporators and submitted with the SEC together with the
AOI
o Q: What specific time should you file or submit the by-laws if
you file PRIOR to incorporation?
§ Upon filing of the AOI. Since the SEC already
provides for a ready-made form which contains AOI
and by-law, what needs to be done is to fill it up.
Ø With respect to by-laws adopted and filed AFTER incorporation
o The by-laws must be adopted within 1 month after receipt of
notice of issuance of the certificate of incorporation by the
SEC
o The affirmative vote of the stockholders representing at least
a majority of the outstanding capital stock, or of at least a
majority of the members in case of non-stock corporations
Ø In either of the above cases, the following are also required:
o With respect to special corporations governed by special laws,
the SEC shall not accept their by-laws/amendment thereto
unless accompanied by a certification by the appropriate
government agency to the effect that such by-
laws/amendments are in accordance with law
o Must be signed by the voting stockholders and members
voting for them
o Must be kept in the principal office of the corporation subject
to the inspection of the stockholders or members during office
hours
o Must file a copy of the entire by-laws (certified by majority
of the directors/trustees and countersigned by the corporate
secretary) with the SEC who will attach the same to the
original AOI (but this is only a formal requisite according to
an SEC Opinion)
Q: When do by-laws take effect?
Ø Upon the issuance SEC of a certification that the by-laws are not
inconsistent with the Corporation Code
Q: Is the 30-day period mandatory? What is the effect if the corporation does
not file the by-laws within the required period?
Ø No, it is not mandatory. Failure to file the by-laws within 30 days
from incorporation does not automatically dissolve the corporation
o Reason: It is merely a ground for suspension or revocation of
its charter (See Sec. 22(2)) or imposition of administrative fine
after notice and hearing
o This was the doctrine cited in LOYOLA V. CA
Ø By failing to submit its by-laws within the prescribed period, a
corporation can be considered as a de facto corporation which cannot
be collaterally attacked.
Ø Under the rules and regulations of the SEC, the failure may be merely
with the imposition of an administrative fine
Q: What are the elements of valid by-laws? (LaMOG-CR)
Ø (1) Must not be contrary to existing law and inconsistent with the
Corporation Code (See Sec. 47)
o SC declared invalid the automatic and permanent seat in the
Board of Directors contrary to Sec. 23 of the Corpo Code. By-
laws contrary to law cannot attain validity on the basis of long
practice nor give rise to any vested rights (Grace Christian
High School v. CA)
Ø (2) Must not be contrary to morals and public policy
Ø (3) Must not impair existing obligations of contracts or rights
o SALAFRANCA V. PHILAMLIFE
§ The right to amend the by-laws lie solely in the
discretion of the employer corporation. However, the
right cannot impair the obligation of existing rights
such as the right to security of tenure of regular EEs
under the LC
§ Q: What right was violated?
• The security of tenure which is granted to an
employee who was become regular after
working for more than 1 year. Such regular
employee cannot be dismissed without just
or authorized cause under the Labor Code
Escudero|Dansal|Gutierrez (2016-2017) 35
Ø (4) Must be general and uniform in their operation and not directed
against particular individuals (or not discriminatory)
o A by-law disqualifying a person from being elected as a
director if he is already a director in a competitor corporation
is VALID if it equally applies to all stockholders (Gokongwei
v. SEC)
Ø (5) Must be consistent with the charter or AOI
o By-laws are subordinate to the charter and AOI
Ø (6) Must be reasonable
Q: Explain the binding effect of the by-laws.
Ø Until repealed or amended, a by-law is a continuing rule for the gov’t
of the corporation and the individuals composing it
As to members and 1. They have the force of contract between the
shareholders members themselves
2. There is a conclusive presumption that they know the
provisions of the corporate by-laws by the fact of their
being such is charged with notice of by-laws. If he
remains actually ignorant of the provisions, he does so
at his peril
As to corporate 1. They have force and effect of laws of the corporation
directors and its 2. They are bound by and must comply with them
officers unless and until they are changed
3. Subordinate employees without actual knowledge of
the by-laws are not bound
As to third persons GR: They are not bound to know the by-laws. Reason:
by-laws merely operate as internal rules among the
stockholders
EXPN: unless they have notice/actual or constructive
knowledge.
CHINA BANK V. CA
• Q: So who has the better right to the stock
certificate?
o China Bank because at the time it entered
into the transaction with the SH, it was
not given notice as to the by-laws of
VGCCI and thus, is not bound thereby
• Q: Why did the SEC have jurisdiction?
o SC ruled that the interpretation of the by-
laws is clearly an intra-corporate dispute
 which may be resolved thru the technical
expertise of the SEC
Q: What must be contained in the by-laws? Give at least 5
Sec. 47. Contents of by-laws. - Subject to the provisions of the Constitution, this
Code, other special laws, and the articles of incorporation, a private corporation
may provide in its by-laws for: (TiTiQuoP-D-Ho-Ma-PeStO)
1. The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members;
a. Q: Why does this item not provide for the “PLACE” whereas
in the 1st item it does?
i. The reason is because with respect to a board
meeting, the place of meeting may be ANYWHERE
in or out of the Philippines; Whereas the place of a
SH/M’s meeting is either:
1. The city/municipality where the principal
office of the corporation is located; or
2. The principal office of the corporation
3. The required quorum in meetings of stockholders or members and the
manner of voting therein;
4. The form for proxies of stockholders and members and the manner of
voting them;
5. The qualifications, duties and compensation of directors or trustees,
officers and employees;
6. The time for holding the annual election of directors of trustees and the
mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all
officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock
certificates; and
10. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs.
Sec. 48. Amendments to by-laws. - The board of directors or trustees, by a
majority vote thereof, and the owners of at least a majority of the outstanding
capital stock, or at least a majority of the members of a non-stock corporation, at
a regular or special meeting duly called for the purpose, may amend or repeal
Escudero|Dansal|Gutierrez (2016-2017) 36
any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors or trustees the power to
amend or repeal any by-laws or adopt new by-laws: Provided, That any power
delegated to the board of directors or trustees to amend or repeal any by-laws or
adopt new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a majority
of the members in non-stock corporations, shall so vote at a regular or special
meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new
by-laws shall be attached to the original by-laws in the office of the corporation,
and a copy thereof, duly certified under oath by the corporate secretary and a
majority of the directors or trustees, shall be filed with the Securities and
Exchange Commission the same to be attached to the original articles of
incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are not
inconsistent with this Code
Q: How may by-laws be amended/repealed or new by-laws be adopted?
Ø There are 2 ways:
o (1) By majority vote of the board of directors or trustees
AND the owners of at least a majority of the outstanding
capital stock, or at least a majority of the members of a non-
stock corporation, at a regular or special meeting duly called
for the purpose, may amend or repeal any by-laws or adopt
new by-laws
o (2) The owners of 2/3 of the outstanding capital stock or 2/3 of
the members in a non-stock corporation may delegate to the
board of directors or trustees the power to amend or repeal
any by-laws or adopt new by-laws.
§ Q: When is the delegated power revoked?
• The power delegated to the board of
directors or trustees to amend or repeal any
by-laws or adopt new by-laws shall be
considered as REVOKED whenever
stockholders owning or representing a
majority of the outstanding capital stock or a
 majority of the members in non-stock corporate will; applies to of the conduct of
corporations, shall so vote at a regular or a single act of the corporate affairs
special meeting. corporation
§ Q: In the second way that by-laws may be amended, Rule in case of conflict Subordinate Prevails over resolution
is a meeting required? Necessity of approval by No need for SEC Subj to the approval of
• Yes. Although there is no express SEC approval unless required SEC
requirement of a meeting in this case, such by law
meeting is necessary. Reason: if revocation
of the delegated power requires a meeting, Q: What is the difference between by-laws and AOI?
there is no reason why a meeting is not also AOI By-Laws
required in the delegation of such power As to nature Condition precedent to Condition subsequent;
Ø Q: What are the formal requirements? corporate existence its absence is only a
o A meeting is required (Whether in majority vote, delegation, ground for
or revocation of delegated authority, meeting is required) revocation/suspension of
o The amended or new by-laws shall be attached to the original charter
by-laws in the office of the corporation As to purpose Constitutes the charter Merely rules and
o A copy of the amended or new by-laws shall be duly certified of the corporation regulations of the
under oath by the corporate secretary and a majority of the corporation
directors or trustees and shall be filed with the SEC the same As to time of execution Executed before Executed within 1
to be attached to the original articles of incorporation and incorporation month after certificate of
original by-laws. incorporation (but may
o With respect to special corporations governed by special laws, be prior thereto)
the SEC shall not accept their by-laws/amendment thereto As to Amendment Amended by majority Amended by majority
unless accompanied by a certification by the appropriate vote by the Board AND vote of the Board AND
government agency to the effect that such by- stockholders owners of at least
laws/amendments are in accordance with law representing 2/3 of OCS majority of OCS
§ Although this requirement is embodied under Sec. 46 As to delegation of Cannot be delegated May be delegated to the
and not in 48, still it is required. Reason: Since the power to amend Board by owners of at
power to make by-laws implies the power to alter, least 2/3 of the OCS
amend, or enact new ones, it follows that the latter
power has the same limits as the former power Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or
members may be regular or special.
Q: When do the amended or new by-laws take effect?
Ø The amended or new by-laws shall only be effective upon the issuance Sec. 50. Regular and special meetings of stockholders or members. - Regular
by the Securities and Exchange Commission of a certification that the meetings of stockholders or members shall be held annually on a date fixed in
same are not inconsistent with this Code the by-laws, or if not so fixed, on any date in April of every year as determined
by the board of directors or trustees: Provided, That written notice of regular
Q: What is the difference between by-laws and resolution? meetings shall be sent to all stockholders or members of record at least two (2)
Resolution By-Laws weeks prior to the meeting, unless a different period is required by the by-laws.
Nature and subj-matter Mere declaration of the Permanent rule of action

Escudero|Dansal|Gutierrez (2016-2017) 37
Special meetings of stockholders or members shall be held at any time deemed regular or special meetings stating the date, time and place of the meeting must
necessary or as provided in the by-laws: Provided, however, That at least one (1) be sent to every director or trustee at least one (1) day prior to the scheduled
week written notice shall be sent to all stockholders or members, unless meeting, unless otherwise provided by the by-laws. A director or trustee may
otherwise provided in the by-laws. waive this requirement, either expressly or impliedly.

Notice of any meeting may be waived, expressly or impliedly, by any Sec. 54. Who shall preside at meetings. - The president shall preside at all
stockholder or member. meetings of the directors or trustee as well as of the stockholders or members,
Whenever, for any cause, there is no person authorized to call a meeting, the unless the by-laws provide otherwise.
Securities and Exchange Commission, upon petition of a stockholder or member
on a showing of good cause therefor, may issue an order to the petitioning Q: What are the kinds of meetings?
stockholder or member directing him to call a meeting of the corporation by Ø SH/M meeting
giving proper notice required by this Code or by the by-laws. The petitioning o Regular
stockholder or member shall preside thereat until at least a majority of the o Special
stockholders or members present have been chosen one of their number as Ø D/T meeting (or Board Meeting)
presiding officer. o Regular
o Special
Sec. 51. Place and time of meetings of stockholders or members. -
Stockholders' or members' meetings, whether regular or special, shall be held in Q: What is the importance of the meeting?
the city or municipality where the principal office of the corporation is located, Ø So that the persons SH/M or D/T may act upon certain corporate
and if practicable in the principal office of the corporation: Provided, That matters, discuss issues, and exercise their right to vote in appropriate
Metro Manila shall, for purposes of this section, be considered a city or case under the Corpo Code.
municipality.
Q: Is there Any instance wherein a meeting is no longer required?
Notice of meetings shall be in writing, and the time and place thereof stated Ø Yes.
therein. Ø GR: A meeting is always needed
o EXPN: With respect to the amendment of the AOI, mere
All proceedings had and any business transacted at any meeting of the WRITTEN ASSENT is required
stockholders or members, if within the powers or authority of the corporation,
shall be valid even if the meeting be improperly held or called, provided all the Q: For example, the principal office is located in Las Pinas, can the SH
stockholders or members of the corporation are present or duly represented at meeting be held in Muntinlupa?
the meeting. Ø Yes. With respect to the place of SH/M meeting, Metro Manila shall be
considered as a city
Sec. 53. Regular and special meetings of directors or trustees. - Regular
meetings of the board of directors or trustees of every corporation shall be held Q: Can the SEC call for a meeting?
monthly, unless the by-laws provide otherwise. Ø No.
Special meetings of the board of directors or trustees may be held at any time Ø A stockholder may petition before the SEC when there is no person
upon the call of the president or as provided in the by-laws. authorized to call the meeting and if the SEC finds good cause, it will
direct the petitioning SH/M to call the meeting
Meetings of directors or trustees of corporations may be held anywhere in or Ø The SEC will not call the meeting, it may only make an order directing
outside of the Philippines, unless the by-laws provide otherwise. Notice of SH to hold a meeting

Escudero|Dansal|Gutierrez (2016-2017) 38
Q: Is there any instance wherein a SH/M may preside in a meeting? (2) if practicable in the
Ø Yes PRINCIPAL OFFICE of the
Ø Q: So any ordinary SH/M may preside? corporation:
o No Ø Provided, That
Metro Manila shall,
Q: If the by-laws are silent, who shall preside? for purposes of this
section, be
EXPERT TRAVEL considered a city or
Ø A foreign corporation’s resident agent who is a lawyer is not authorized municipality
to sign the certification or verification of non-forum shopping in the
absence of a Board Resolution authorizing him to do so and such is EXPN: If the meeting be
submitted to the court improperly held or called, it
Ø The SC recognized teleconferencing, videoconferencing, audio- is still VALID, provided:
conferencing as a means to conduct business. However, these modes 1. The proceedings had and
cannot be used to substitute a written board resolution any business transacted are
o Bases: within the powers or
1. R.A. 8792 – E-Commerce Act authority of the corporation
2. SEC memorandum no. 15 – guidelines to be complied (not ultra vires); and
with 2. ALL the SH/M of the
a. (Sabi ni sir take a look at these) corporation are present or
duly represented at the
STOCKHOLDERS/MEMB DIRECTORS/TRUSTEES meeting
ERS MTG. MEETING Notice Written Written Written notice must be given to
Time Regular Special Regular Special notice must notice must every Director or Trustee at
meeting Meeting meeting meeting those be given to be given to least 1 day prior to the meeting,
those held those held at those held by held by the SH/M at least SH/M at unless: 1. Otherwise provided
ANNUALLY ANY TIME: the board board at ANY 2 weeks prior least 1 week under the by-laws, or 2. Waived
: 1. Deemed MONTHLY, TIME: to the prior to the by the D/T
1. On a date necessary or unless the by- 1. Upon the meeting, meeting,
fixed in the 2. As laws provide call of the unless: 1. unless: 1.
by-laws, or provided in or otherwise president or Otherwise Otherwise
2. On any the by-laws 2. As provided in provided in
date in April otherwise by-laws, or 2. by-laws, or
of every year provided in the Waived by 2. Waived
as determined by-laws the SH/M by the SH/M
by the Board
Place GR: (1) In the CITY OR ANYWHERE in or out of the Requisites of notice of meeting: (AW-DaBus-TiLaw)
MUNICIPALITY where the Philippines, unless the by-laws 1. Must be issued by one who has authority to issue it
principal office of the provide otherwise 2. Must be in writing
corporation is located, and 3. Must state date, time, and place unless otherwise

Escudero|Dansal|Gutierrez (2016-2017) 39
 provided in by-laws proxy
4. Must state business to be transacted Requirement (PDP-NoQ)
5. Must be sent at a certain time before scheduled s 1. Held at the proper place
6. Must comply with any other requirements prescribed 2. Held at the stated date and appointed time or a
by law or by-laws reasonable time thereafter
Who may 1. Person/s designated in by- By the President, unless 3. Called by the proper person
call laws have authority to call otherwise provided in the by- 4. There must be previous notice
SH/M meeting; laws 5. There must be a quorum
2. In the absence of such
provision in by-laws, it may Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code or in
be called by a D/T or by an the by-laws, a quorum shall consist of the stockholders representing a majority
officer entrusted with the of the outstanding capital stock or a majority of the members in the case of non-
management of the corp; stock corporations
3. A petitioning SH/M may
make the call upon the order Q: What is quorum?
of the SEC whenever for any Ø It is that number of members of a body which when legally assembled
cause, there is no person in their proper places will enable the body to transact its proper
authorized to call the business
meeting; Ø With respect to Stockholders or members meetings:
4. A special meeting for o GR: A quorum shall consist of the SH representing a majority
removal of D/T may be of the OCS or a majority of the member of a non-stock
called by the secretary or by corporation
SH/M § So with respect to Stock corporation, it is majority of
Who may 1. President presides the President presides the meetings the OCS while in non-stock, it is the number of the
preside meetings unless the by-laws unless the by-laws provide members of the corporation
provide otherwise otherwise o EXPN: Unless otherwise provided for in the Corpo Code or in
the By-laws (but not less than 2 SH/M may constitute a
2. A SH/M may preside in a quorum)
temporary capacity where the
person authorized to preside Q: What happens when some of the shareholders or members walked out in
is absent the middle of the meeting and there is no more quorum, what is the effect?
Ø Once there is a quorum at the time the meeting is called to order, even
3. The petitioning SH/M if some people walked out leaving less than the majority, the
shall preside until at least a proceedings will be valid. A minority group cannot prevent corporate
majority of the SH/M present action by walking out
have chosen one of their
number as presiding officer Seventh meeting.
(in rel. to #3 of “Who may
call” Sec. 55. Right to vote of pledgors, mortgagors, and administrators. - In case of
Allowance of Proxy is allowed Proxy is not allowed pledged or mortgaged shares in stock corporations, the pledgor or mortgagor

Escudero|Dansal|Gutierrez (2016-2017) 40
shall have the right to attend and vote at meetings of stockholders, unless the
pledgee or mortgagee is expressly given by the pledgor or mortgagor such right
in writing which is recorded on the appropriate corporate books.
Executors, administrators, receivers, and other legal representatives duly
appointed by the court may attend and vote in behalf of the stockholders or
members without need of any written proxy.
Sec. 56. Voting in case of joint ownership of stock. - In case of shares of stock
owned jointly by two or more persons, in order to vote the same, the consent of
all the co-owners shall be necessary, unless there is a written proxy, signed by
all the co-owners, authorizing one or some of them or any other person to vote
such share or shares: Provided, That when the shares are owned in an "and/or"
capacity by the holders thereof, any one of the joint owners can vote said shares
or appoint a proxy therefor
Sec. 57. Voting right for treasury shares. - Treasury shares shall have no voting
right as long as such shares remain in the Treasury
Q: Explain the right to vote.
Ø With respect to stock corporations:
o Voting is based on the number of shares owned and not on
the number of stockholders or per capita
o Thru the right to vote, the SH participates in the management
of the corporation
o It is the SH’s “supreme right and main protection”
o It is an incident of ownership or the property in the stock of
which the SH cannot be deprived without his consent and he
may vote it as he chooses, although not in the manner or for
the purposes contrary to law, public policy or fraudulently
o This right may be lawfully denied under the AOI/By-laws
o The right to vote does not impose a legal duty to vote
o The vote is based on the number of shares represented, not the
number of SHs present
o A director has the right to vote as a director or as a SH
Ø With respect to non-stock corporations:
o GR: Each member shall be entitled to one vote
§ EXPN: The right of the members of any class to vote
may be limited, broadened or denied to the extent
specified in the AOI or by-laws (Sec. 89)
Escudero|Dansal|Gutierrez (2016-2017) 41
Q: Who are entitled to vote? Who are not entitled to vote?
Ø It depends upon the kind of share.
Ø Voting shares – Only the legal owners of shares have the right to
attend and vote in a corporate meeting
Ø Sequestered shares
o GR: the registered owners of shares sequestered by gov’t
(PCGG) or their duly authorized representatives or proxies
may vote. The gov’t is merely a conservator and cannot vote.
§ Q: How do you know if PCGG may vote sequestered
shares?
§ #1 EXPN: The 2-Tiered Test:
1. WON there is prima facie evid showing that the
shares are ill gotten wealth and thus belong to
the State
2. WON there is an immediate danger of
dissipation thus necessitating their continued
sequestration and voting by the PCGG while the
main issue is pending with the Sandiganbayan
o REPUBLIC V. COCOFED
§ #2 EXPN: Public Charter Exception: The 2-tiered
test does not apply in cases of sequestered shares
purchased with public funds or prima facie public
funds or at least funds affected with public interest
even though the case is still pending
• In the case of COCOFED, coco levy funds
partake the nature of taxes. The beneficial
ownership belong to the government
although the shares are in the name of
Eduardo Cojuangco.
§ Thus, the gov’t has the authority vote:
• 1. Where gov’t shares are taken over by
private persons or entities which registered
them in their own names; and
• 2. Where the capitalization or shares that
were acquired with public funds somehow
landed in private hands
Ø Non-voting shares – the owners may vote in certain instances:
o When law provides that 2/3 or majority vote of OCS “entitled
to vote”, the excludes non-voting shares
 o GR: In all corporate acts, only voting shares are entitled to
vote
§ EXPN: Holders of non-voting shares may vote in
cases provided in Section 6, par. 6, nos. 1-8
Ø Disqualified shares – not entitled to vote
Ø Preferred and redeemable – entitled to vote, but may be denied under
the AOI
Ø Delinquent shares – not entitled to vote
Ø Treasury shares – have no voting rights so long as they remain in
treasury
o Reason: these shares are not part of the OCS. The only right a
corp has over them are to reissue them for a valuable
consideration
o To give voting rights to these shares could enable the directors
to prolong their stay in office against the wishes of the holders
of majority of the shares.
Ø Fractional shares – not entitled to vote
Ø Unpaid shares – if they are not delinquent, they are entitled to vote
Ø Escrow shares – not entitled to vote before fulfillment of the condition
imposed
Ø Pledged or mortgaged shares
o GR: The pledgor or mortgagor shall have the right to attend
and vote at meetings of stockholders
§ Q: So what is the effect of a pledge on the right to
vote on a SH who pledges his shares?
• No effect at all.
o EXPN: Unless the pledgee or mortgagee is
1. Expressly given by the pledgor or mortgagor such right in
writing
2. Which is recorded on the appropriate corporate books.
a. Q: Who must record this authority?
i. The PLEDGOR
Ø Voting rights for shares a deceased stockholder
o Exercised only where a legal representative has been
appointed
o Executors, administrators, receivers, and other legal
representatives duly appointed by the court may attend and
vote in behalf of the stockholders or members without need of
any written proxy.
Ø Shares jointly owned (effect by 2 or more persons own shares jointly)
Escudero|Dansal|Gutierrez (2016-2017) 42
o GR: In order to vote the same, the consent of all the co-
owners shall be necessary,
o EXPNs:
1. Unless there is a written proxy, signed by all the co-
owners, authorizing one or some of them or any other
person to vote such share or shares
2. Provided, that when the shares are owned in an "and/or"
capacity by the holders thereof, any one of the joint
owners can vote said shares or appoint a proxy therefor
Q: Explain the manner of voting.
Ø A SH/M may vote:
o 1. Directly (in person)
o 2. Indirectly, through a representative (PTA)
§ By means of a proxy
§ By a trustee under a trust agreement
§ By executor, administrators, receivers, or other legal
representatives duly appointed by the court
Ø Voting may either be straight or cumulative (Sec. 24)
Q: How about parents, can the vote for the minor children’s shares?
Ø Yes. Under the family code, parents are considered JOINT
ADMINISTRATORS of the property of the minor children
Q: What if the person represented is not a minor, there is no proxy, no trustee,
no legal representative, and he dies. Who may represent him?
Ø No one.
Ø Q: What is the remedy of the heirs who want to vote?
o They must file an action for partition
CHUA v. CA
Ø The 2 requirements of a derivative suit are:
o 1. It must be alleged that it is a derivative suit, meaning it is
filed on behalf of the corporation
o 2. It must include all indispensible parties, meaning that the
corporation itself must be impleaded
Ø A derivative suit may be filed by a SH on behalf of the corporation as
the real party in interest only when the Board of directors do NOT file a
case. Reason: the power to sue in the name of the corp resides with the
board.
 Ø The SH may enforce a corporate cause of action thru a derivative suit
Ø In the case at bar, the petition was for certiorari and was not alleged to
be a derivative suit nor was the corporation impleaded as a party.
Sec. 58. Proxies. - Stockholders and members may vote in person or by proxy in
all meetings of stockholders or members. Proxies shall in writing, signed by the
stockholder or member and filed before the scheduled meeting with the
corporate secretary. Unless otherwise provided in the proxy, it shall be valid
only for the meeting for which it is intended. No proxy shall be valid and
effective for a period longer than five (5) years at any one time
Q: What is proxy?
Ø Written authorization given by one person to another so that the 2nd
person can act for the first
Ø Used to apply to the holder of the authority or person authorized by an
absent SH/M to vote for him at a SH/M’s meeting
Ø Nature of proxy: purely personal. The right to appoint is an incident of
ownership.
Q: What are the requisites for a valid proxy?
Ø F5-SWV
Ø 1. Filed before the scheduled meeting with the corporate secretary
Ø 2. No proxy shall be valid and effective for a period longer than 5 years
at any time
Ø 3. It shall be signed by the SH/M concerned
Ø 4. Proxies shall be in writing
o Oral proxies are not allowed
Ø 5. Unless otherwise provided in the proxy, it shall be valid only for the
meeting which it was intended
Q: What are the kinds of proxy?
Ø 1. General Proxy – confers a general discretionary power of attorney
to attend and vote at an annual meeting “with all the powers the
undersigned would possess if personally present”
Ø 2. Limited Proxy – restricts the authority to vote specified matters only
and direct the manner in which the vote shall be cast
Ø 3. Specific Proxy – the authority granted is merely for a particular
meeting on a specific date
Escudero|Dansal|Gutierrez (2016-2017) 43
Ø 4. Continuing Proxy – authority given is to represent the SHs at any
and all regular and special SH’s meetings unless the SH revokes the
same
Q: What is the purpose of proxy?
Ø 1. For convenience or favor to the distant and indifferent SH
Ø 2. Assured the presence of a quorum
Ø 3. Enables those who do not wish to attend a SH/M’s meeting to protect
their interest by exercising their right to vote thru representative
Ø 4. Secure voting control or management control in corporation
Q: What are the instances wherein the right to vote by proxy may be
exercised?
Ø 1. Election of the Board of D/T (Sec. 24)
Ø 2. Voting in case of joint ownership stock (Sec. 56)
Ø 3. Voting by trustee under voting trust agreement (Sec. 59)
Ø 4. Voting by members in a non-stock corporation (Sec. 89)
Ø 5. Pledge or mortgage of shares
Ø 6. As may be provided for in its by-laws
Q: Who may be appointed as a proxy?
Ø No limitation under Sec. 58
Ø A SH/M may appoint anyone he sees fit to represent him. Such right
cannot be restricted by the by-laws (otherwise, such provision would be
void) with respect to Stock corporations. It may be denied with respect
to non-stock corporations, but the same must not be discriminatory
Ø D/T cannot attend or vote by proxy in Board Meetings
Q: May proxies be revoked? Yes. How? Explain the rules
Ø Proxies, even those with irrevocable terms, have always been
considered revocable, unless coupled with an interest
Q: How may revocation be done?
Ø 1. Formal notice
Ø 2. Verbal communication
Ø 3. Conduct
Q: What are the rules on revocation?
Ø Last proxy given revokes all previous proxies
Ø Where proxies are undated, the postmark dates become important
Q: What are the powers and rights of a trustee?
Ø Sec. 59. Voting trusts. - One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring upon
a trustee or trustees:
o 1. The right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any time:
Provided, That in the case of a voting trust specifically
required as a condition in a loan agreement, said voting trust
may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan. A voting
trust agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy of
such agreement shall be filed with the corporation and with
the Securities and Exchange Commission; otherwise, said
agreement is ineffective and unenforceable.
o 2. The certificate or certificates of stock covered by the voting
trust agreement shall be canceled and new ones shall be
issued in the name of the trustee or trustees stating that they
are issued pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the name of
the trustee or trustees is made pursuant to said voting trust
agreement.
o The trustee or trustees shall execute and deliver to the
transferors voting trust certificates, which shall be transferable
in the same manner and with the same effect as certificates of
stock.
o 3. The voting trust agreement filed with the corporation shall
be subject to examination by any stockholder of the
corporation in the same manner as any other corporate book or
record: Provided, That both the transferor and the trustee or
trustees may exercise the right of inspection of all corporate
books and records in accordance with the provisions of this
Code.
o Any other stockholder may transfer his shares to the same
trustee or trustees upon the terms and conditions stated in the
voting trust agreement, and thereupon shall be bound by all
the provisions of said agreement.
o No voting trust agreement shall be entered into for the purpose
of circumventing the law against monopolies and illegal
Escudero|Dansal|Gutierrez (2016-2017) 44
combinations in restraint of trade or used for purposes of
fraud.
o Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed
period, and the voting trust certificates as well as the
certificates of stock in the name of the trustee or trustees shall
thereby be deemed canceled and new certificates of stock shall
be reissued in the name of the transferors.
o 4. The voting trustee or trustees may vote by proxy unless
the agreement provides otherwise.
Q: What is a voting trust agreement?
Ø It is an agreement whereby a SH of a stock corporation confers upon a
trustee/s the right to vote and other rights pertaining to the shares for a
period not 5 years at any time
Ø It is not governed by the law on agency. Unlike agency, a voting trust
agreement is not revocable at will
Q: What are the purposes of voting trust agreement?
Ø Unified control of the affairs of the corporation and consistent policy
and management especially of a new corporation desirous of attracting
investors
Ø Assure continuity of policy and management especially of a new
corporation desirous of attracting investors
Ø Enable owners of majority of the stock of the corp to control the corp
Ø Vest and retain the management of the corporation in the persons
originally promoting it
Ø Prevent a rival concern from acquiring control of the corp
Ø To carry out a proposed sale of the corp’s assets and to facilitate
dissolution
Ø To enable 2 holding companies to operate jointly a corporation
controlled by them
Ø To effect a plan for reorganization of a corp in financial difficulty or in
bankruptcy proceedings
Ø To aid a financially embarrassed corp to obtain a loan and protect its
creditor
Q: What are the limitations (requirements) of a voting stock agreement?
Ø Not more than 5 years at any 1 time
 Ø Not used to circumvent the law against monopolies/illegal EXPLAIN
combinations in restraint of trade • Identity doctrine
Ø Must be in writing, notarized, specifying the terms and conditions • Instrumentality rule
Ø Certified copy must be filed with the Corporation and SEC • Alter ego doctrine
Ø Subject to examination by the SH • Trust fund doctrine
Ø Right automatically expired at the end of the period. • Business judgment rule
Q: What is the difference between voting trust agreement and proxy? DOCTRINES
• Francisco v. CA
MIDTERM EXAM
• Cruz v. Dalisay
• Seventh day adventist v. Northeastern
MULTIPLE CHOICE
• Grace Christian Highschool
• VOTING TRUST AGREEMENT
• Western Institute v. Salas
o What are valid purposes?
o What is the difference between a voting trust agreement and • Santos v. NLRC
all other kinds of trust pools/arrangements? • PNB v. Andrada
o Something about liability for damages • Salafranca v. Philamlife
• DIVIDEND • Chua v. CA
o How do you compute a guaranteed cumulative dividend? • Lyceum v. CA
• TELECONFERENCING
o Can you conduct a SH meeting thru teleconferencing?
• VOTING
o When is it required that the majority vote of the board +
majority vote of SH representing 2/3 of the OCS be obtained?
o When may preferred or redeemable shares vote?

ESSAY
• ECE had a lot registered in its name. FHM took possession of the land.
ECE filed a complaint against FHM. The court ruled in ECE’s favor. A
writ of execution was filed against FHM to deliver. FHM bought a
substantial amount of the shares from ECE. FHM refused to obey the
writ and argued that there its acquisition of shares was a supervening
event the effect of which makes FHM not liable.
• No pre-emptive rights on additionally issued shares
• Non-filing the by-laws within 30 days does not make a corporation a de
facto corporation
• Ratification of 2/3 of SH is required under Sec. 40 if sale of all or
substantially all the assests of the corporation

Escudero|Dansal|Gutierrez (2016-2017) 45
FINALS
TITLE VII
STOCKS AND STOCKHOLDERS
Sec. 60. Subscription contract. - Any contract for the acquisition of unissued
stock in an existing corporation or a corporation still to be formed shall be
deemed a subscription within the meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or some other contract.
Q: What is a subscription contract? Nature?
Ø Any CONTRACT for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a
SUBSCRIPTION
Ø Unissued stock = stock never been issued (original issuance or the
increase of capital stock)
Ø No required form
Ø By accepting a stock certificate, or acting as SH (i.e. participate in SH
meeting, make payment), a person becomes a SH even without express
contract
Ø The subscription contract may cover one or more shares. Still, it
remains an indivisible contract
Ø Nature: The subscription contract is a consensual contract that is
perfected upon meeting of the minds of the parties . The name of the
subscriber is recorded in the stock and transfer book. From that time,
the subscriber becomes a SH of record and is entitled to all rights of a
SH. Until the stocks are fully paid, it continues to be a subsisting
liability that is legally enforceable
Q: What are the kinds of subscription contract? (Give an example for each)
Ø (PrePo-CAS)
Ø 1. Pre-incorporation subscription – entered into BEFORE
INCORPORATION. It constitutes as a binding contract among
subscribers (See: Sec. 61)
Ø 2. Post-incorporation subscription – entered into AFTER
INCORPORATION for the acquisition of unissued stock
o It shall be deemed a subscription notwithstanding the fact that
the parties refer to it as a purchase or some other contract.
o Q: When does a subscriber become a SH?
Escudero|Dansal|Gutierrez (2016-2017) 46
§ Upon acceptance by the corporation of the
subscriber’s offer or by acceptance of subscriber of
the corporation’s offer (unless the agreement or law
provides otherwise, and in case of increase in ACS)
even before full payment
Ø 3. Conditional subscription – SUBJECT TO A CONDITION, which
may be a past event unknown to the parties or a future, uncertain event,
that is, an event which may or may not happen. (The subscriber
becomes a SH only upon fulfillment of condition)
Ø 4. Absolute subscription – NOT SUBJECT TO ANY CONDITION.
(Subscriber becomes liable on subscription and acquires rights of a SH
from time the subscription is accepted)
Ø 5. Subscription with a special term – where the corporation AGREES
TO DO SOMETHING, the fulfillment of which NOT being a condition
precedent to liability of subscriber or acquisition of rights as SH. It is
an absolute subscription.
Q: Are SH liable to corporate creditors for unpaid subscriptions?
Ø Generally, SH cannot be compelled to make good deficiency when
corporation is not able to meet its obligation. Reason: persons dealing
with the corporation are presumed to know that they can have recourse
only to property of the corporation.
Ø However, stock subscriptions are in the nature of a Trust Fund since
they are to be maintained unimpaired for the protection of the corporate
creditor. Subscribers who have not paid in full are debtors of the
corporation for the balance and if the corporation does not enforce the
liability, the creditors may do so.
Ø An unpaid subscription is an asset which the corporate creditors may
look for payment and may insist that it be collected
Ø Trust Fund Doctrine - the subscribed capital stock of the corporation
is a trust fund for the payment of debts of the corporation which the
creditors have the right to look up to satisfy their credits, and which the
corporation may not dissipate. The creditors may sue the SH directly
for the latter’s unpaid subscription
Q: When is rescission available in a subscription contract?
Ø When there is material or substantial breach of the contract.
Ø Q: Example of material breach?
ONG YONG TIU
Ø If there is no material or substantial breach in the subscription contract,
rescission is not allowed
Ø If the court will interfere, there will be a violation of the business
judgment rule
Ø Q: What should have been the proper remedy in this case?
o Specific performance
Ø Rescission is not proper remedy for distribution of capital assets
and property of the corporation - even if subscribers have legal
standing to sue for rescission of subscription contract based on breach
of contract, such action cannot prosper since rescission will violate the
Trust Fund Doctrine and the procedures for the valid distribution of
assets and properties under the Corpo Code.
o Otherwise, any SH may demand rescission for his subscription
and call for distribution of corporate assets to him without
complying with the requirements under the Corpo Code
Sec. 61. Pre-incorporation subscription. - A subscription for shares of stock of
a corporation still to be formed shall be irrevocable for a period of at least six
(6) months from the date of subscription, unless all of the other subscribers
consent to the revocation, or unless the incorporation of said corporation fails
to materialize within said period or within a longer period as may be stipulated
in the contract of subscription: Provided, That no pre-incorporation
subscription may be revoked after the submission of the articles of
incorporation to the Securities and Exchange Commission.
Q: Is pre-incorporation subscription required?
Ø Yes, it is mandatory.
Ø Recall 25%-25% Rule under Sections 13 and 14. The SEC shall not
accept the AOI of any stock corporation unless at least 25% of the ACS
has been subscribed and at least 25% of the total subscription has been
fully paid.
Q: When is the pre-incorporation subscription irrevocable?
Ø RULE 1: It is irrevocable for a period of 6 months from the date of
subscription, unless:
o All of the other subscribers consent to the revocation
o The incorporation fails to materialize
Ø Q: Other than these 2 exceptions, are there any other circumstances
in which the subscription is revocable?
Escudero|Dansal|Gutierrez (2016-2017) 47
o Yes. If the 6-month period has already lapsed, the subscription
becomes revocable.
Ø RULE 2: It becomes irrevocable after the submission of AOI to the
SEC
Ø Reason for irrevocability – it prevents a subscriber from speculating
on the stocks of a proposed corporation. Furthermore, the rule protects
the corporation from financially irresponsible subscribes
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the
following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation equal
to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
Where the consideration is other than actual cash, or consists of intangible
property such as patents of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors, subject to approval by
the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future
service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred upon it
by the articles of incorporation or the by-laws, or in the absence thereof, by the
stockholders representing at least a majority of the outstanding capital stock at a
meeting duly called for the purpose.
Q: What are valid considerations in subscription agreements? (Explain each)
Ø (CaPLa-PAO)
Ø 1. Actual cash paid to the corporation;
o Q: What is evidence that cash has been paid?
§ In practice, the bank will allow the opening of a
temporary account in the name of the future
corporation where a deposit shall be made in
compliance with the 25%-25% rule (25% of the ACS
must be subscribed, 25% of the subscribed capital
must be fully paid. The bank shall await the approval
of the SEC. Payment of cash is evidence by a
certificate requested from the bank that a deposit has
been made to said temporary account
o With respect to items 1 and 2, payment for shares of stock
must be actually received by the corporation.
o Thus, receivables cannot be treated as cash since payment is
to take place in the future. (However, they may be treated as
property payment subject to SEC verification as to existence
and credibility and to the condition that the same shall be held
in escrow until actual payment or collection of the receivables)
Ø 2. Property, tangible or intangible, actually received by the corporation
and necessary or convenient for its use and lawful purposes at a fair
valuation equal to the par or issued value of the stock issued;
o Q: What are the requisites/conditions for property to be valid
consideration for a subscription agreement?
§ (RNV3-T)
§ 1. Property is actually received
§ 2. Necessary and convenient for the use and for
lawful purposes of the corporation
§ 3. Property is based on a fair valuation equal to the
par or issued value of the stock issued
§ 4. The valuation is INITIALLY determined by BOD
or incorporators
§ 5. The valuation is subject to SEC approval
§ 6. Capable of being transferred to the corporation
and applied to payment of debts
o Q: Example of intangible property?
§ Patents; copyrights; mining claim
o Where the consideration is other than actual cash, or consists
of intangible property such as patents or copyrights, the
Escudero|Dansal|Gutierrez (2016-2017) 48
VALUATION thereof shall initially be determined by the
incorporators or the board of directors, subject to APPROVAL
by the Securities and Exchange Commission.
o True Value Rule – if the consideration is other than actual
cash (2-4), its value must be worth the value of the stocks
issued. That is why SEC approval is required.
o US dollars should be duly converted to peso, otherwise they
will be considered payment by way of property
o Financial instruments may be considered as personal property
and may be legally accepted as capital contribution
Ø 3. Labor performed for or services ACTUALLY rendered to the
corporation;
o Corporation is allowed to receive as payment for its stocks
labor or services actually performed/rendered, provided
that the transaction must be done in GF + no fraud is
perpetrated upon SHs and creditors
o Compensation payable/services actually rendered to
corporation is CREDIT which has ascertainable value.
o Future services is not acceptable as payment.
Ø 4. Previously incurred indebtedness of the corporation;
o Sec. 62(4) expressly allows set off or satisfaction of
previously incurred indebtedness of a corporation by
issuance of its shares of stock where conflicting rights of
creditor are not involved
o The indebtedness must be the kind that is
ACKNOWLEDGED by the board of directors
o Set off = payment to creditor with shares of stock of debtor
corporation in the form of property [See62(2)] in lieu of cash
[62(1)] at the option of the corporation
o Should the corporation enters into such set off, the SEC
requires that the corporation submit a report on the matter
indicating the total number of shares and the total amount to
be paid for each claim and a deed of assignment executed by
subscriber/creditor applying his claim in consideration of the
shares of stock.
Ø 5. Amounts transferred from unrestricted retained earnings to stated
capital; and
o This means declaration of Stock Dividends.
o If stocks are issued in consideration of profits earned by the
corporation but not distributed among the SH, such issue is
 called stock dividends. Such consideration is permitted under
Sec. 62(5). Once declared and issued, stock dividends are
fully paid.
o Stock dividends involve issuance of stock directly paid from
amounts transferred from URE to stated capital. Since the
retained earnings have already been applied as payment to
issuance of shares covering stock dividend declaration, the
same can no longer be reapplied as payment to subsequent
subscription rights.
Ø 6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.
o Q: What does ‘conversion’ mean?
§ Conversion from a sole proprietorship or a
partnership to a corporation. The consideration shall
be the net assets of those enterprises/units.
o A corporation may reclassify its shares by amending its AOI
and exchange outstanding shares of SHs for stocks reclassified
or converted from one class to another.
o Thus, a holder of preferred shares with conversion privilege
may give his convertible preferred shares as a consideration
for the issuance of a certain number of common shares
Ø A corporation cannot issue its stock as a gratuity
Q: What are the conditions that must complied with respect to the valid
consideration?
Ø 1. Where the consideration is other than actual cash, or consists of
intangible property such as patents of copyrights, the valuation
thereof shall initially be DETERMINED by the incorporators or the
board of directors, subject to APPORVAL by the Securities and
Exchange Commission.
Ø 2. Shares of stock shall not be issued in exchange for promissory notes
or future service.
o The same considerations provided for in this section, insofar
as they may be applicable, may be used for the issuance of
bonds by the corporation.
Ø 3. The issued price of no-par value shares may be FIXED: (ABS)
a. In the articles of incorporation or
b. By the board of directors pursuant to authority conferred upon it
by the articles of incorporation or the by-laws, or
Escudero|Dansal|Gutierrez (2016-2017) 49
c. In the absence thereof, by the stockholders representing at least a
majority of the outstanding capital stock at a meeting duly called
for the purpose.
o Thus, the Issued Value of no-par value shares may vary from
time to time
o But they may not be issued for a consideration less than 5
pesos [Sec. 6(3)]
o However, the Stated Value of the issued no par value shares
cannot be changed anymore because they are deemed fully
paid and non-assessable upon issuance [Sec.6(3)]
Q: What are watered stocks? What is the consequence of issuing watered
stocks? (See Sec. 65)
Q: What is the difference between par value and issued value?
Ø Par value – the value of a share as fixed in the AOI and reflected in the
certificate of stock
Ø Issued value – the value fixed by the Board of Directors which can be
higher than the par vale
Q: What should be the amount of the consideration?
Ø GR: Under Section 65, shares of stock shall NOT be issued for a
consideration LESS than the par or issued price thereof
o Watered stocks – stocks issued for a consideration less than
their par or issued price
Ø EXPN: treasury shares so long as the price is reasonable (Sec. 9)
Ø It is implied under Sec. 62 that a corporation may issue shares of stock
at a price ABOVE the par or issued value. This does not necessarily
reflect the true or actual value of stock since book or market vale
normally fluctuates
Ø However, a new issue of capital stock above par value may be issued,
provided that old SHs are given the right to purchase their
proportionate part of the issue
Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are personal property
and MAY be transferred by delivery of the certificate or certificates endorsed
by the owner or his attorney-in-fact or other person legally authorized to make
the transfer. No transfer, however, shall be valid, except as between the parties,
until the transfer is recorded in the books of the corporation showing the names
of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall
be transferable in the books of the corporation.
Q: What is a certificate of stock?
Ø Certificate of stock – a WRITTEN INSTRUMENT signed by the
proper officer of a corporation stating or acknowledging that the
person named therein is the owner of a designated number of shares of
its stock
Ø Q: Who is the ‘proper officer” referred to?
o The certificate must be signed by the PRESIDENT OR VICE
PRESIDENT, countersigned by the SECRETARY OR
ASSISTANT SECRETARY
Ø The Certificate must indicate:
o The name of the holder
o The number, kinds, and class of shares represented, and
o The date of issuance
Ø Certificate is NOT STOCK but is merely evidence of the holder’s
interest and status in the corporation. It is not equivalent to
ownership. It expresses the contract between the corporation and SH.
It is based on the # of shared owned by SH.
Ø Certificate is not essential to the existence of a share of stock
Ø It is prima facie evid that the holder is a SH in the corporation
Ø The certificate itself is property, but it has a value separate and
distinct from the value of the shares represented
Ø As between a General Information Sheet and corporate books, the latter
controls
Ø Only stock corporations can issue shares of stock
Ø A certificate of stock is not necessary to render one a SH
Q: Is a certificate of stock a negotiable instrument?
Ø No. Reason: A certificate of stock can only be issued to the registered
owner
Ø Also, a certificate of stock does NOT comply with Section 1 of the
Negotiable Instruments Law.
Escudero|Dansal|Gutierrez (2016-2017) 50
o Section 1. Form of negotiable instruments. An instrument to
be negotiable must conform to the following:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable
certainty.
Ø It is not a negotiable instrument. However, it is sometimes regarded
as quasi-negotiable in the sense that it may be transferred by
indorsement coupled by delivery, it is well-settled that it is non-
negotiable because the holder takes it without prejudice to the right or
defenses as the registered owner’s or transferor’s creditor may have
under the law
o EXPN: When estoppel arises. Street Certificate of Stock is
one which is indorsed in blank by the owner thereof and thus
is transferrable by mere delivery. If a street certificate is
delivered by the owner to a broker who pledged it to a bank
which had no knowledge that the certificate did not belong to
the broker, he is estopped from claiming title or interest
against the pledgee bank
Q: What are the REQ for the issuance of Certificate of stock?
Ø (SSID-RFSO)
Ø 1. Certificate must be signed by the president or vice president,
countersigned by the secretary or assistant secretary, and
Ø 2. Sealed with the seal of the corporation
Ø 3. Issued in accordance with the by-laws.
Ø 4. Delivery of the certificate with endorsement
Ø 5. To be valid against third persons, the transfer is recorded in the
stock and transfer books of the corporation
Ø 6. The par value, as to par value shares, or the full subscription as to no
par value shares, must first be fully paid
Ø 7. The original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from the SH
Ø 8. Such other requirements as may be pursuant to AOI or valid by-
laws
Q: What must be recorded in the books of the corporation?
Ø (NaDaNuNu)
Ø 1. The names of the parties to the transaction,
Ø 2. The date of the transfer,
Ø 3. The number of the certificate or certificates and
Ø 4. The number of shares transferred.
Q: What are the remedies where the corporation refuses to issue a certificate?
Ø 1. A petition for mandamus
o See: Ponce v. Alsons
o Mandamus will not lie where the certificate was not indorsed
by the owner
Ø 2. A suit for specific performance of an express or implied contract
Ø 3. May sue for damages where specific performance cannot be granted
Ø 4. Rescission of contract of subscription and recover the
consideration paid
Q: Can you transfer shares?
Ø Yes
Ø (See modes and requirements below)
Q: What are the modes of stock transfer?
Ø According to De Leon, there is more than 1 mode of transferring stock.
Reason: Section 63 states: “Shares of stock so issued are personal
property and MAY be transferred”.
o 1. Indorsement and delivery of stock certificate and to issue
a new certificate unless the original certificate is surrendered
unless the original certificate is surrendered for cancellation or
is clearly shown to have been lost, stolen, or destroyed
o 2. Transfer made in a separate instrument – this mean the
transfer of stock by the execution of a Deed of Sale or
Assignment. While an assignment may be valid and binding
between the parties despite non-compliance with the requisite
endorsement and delivery, it does not necessarily make the
transfer effective for the assignee cannot enjoy the status of a
SH until and unless the issue of ownership is resolved with
finality
o 3. Judicial or extra-judicial settlement of estate – upon the
death of the SH, his administrator or executor becomes vested
Escudero|Dansal|Gutierrez (2016-2017) 51
with the legal title of the stock until the settlement and
division of the estate is made
Ø However, jurisprudence (Rural Bank v. CA) provides that there is
really only 1 mode: Indorsement + Delivery (in order to bind the
parties) + Registration in the corporate books (in order to bind the
corporation). Without delivery and indorsement at the very least, the
transfer shall be fatally defective
Q: What are the requirements for a valid stock transfer?
Ø RURAL BANK OF LIPA V. CA – in case of shares represented by a
certificate, the transfer must strictly comply with the ff conditions:
o 1. There must be DELIVERY of the certificate
o 2. The share must be INDORSED by the owner or his
attorney-in-fact or any authorized person
o 3. To be valid to the corporation and 3rd persons, the transfer
must be duly REGISTERED in the books of the
corporation
§ While an assignment or sale may be valid between
the parties, even without endorsement and delivery, it
does not necessarily make the transfer effective,
for the assignee cannot enjoy the status of a SH; and
the assignor cannot yet be deprived of his rights as
SH until and unless the issue of ownership and
transfer of the shares in question is resolved with
finality
Ø If there is no certificate that has been issued yet, or where it is not in
the possession of the SH – shares may be transferred by means of a
deed of assignment duly recorded in the corporate books
Q: Who causes the registration?
Ø The registration of transfers of shares of stock in the stock and transfer
books is a function which usually pertains to that of the corporate
secretary or the transfer agent of the corporation (Lim Tay v. CA)
Ø The registered owner will REQUEST from the Secretary or transfer
agent to change the name under the certificate to the transferee’s name.
Q: What are the effects of unregistered transfer of shares?
Ø 1. It is valid and binding as between the transferor and the transferee
Ø 2. It is void as to the corporation except when notice is given to the
corporation for purposes of registration
 Ø 3. It is void as against corporate creditors, and the transferor is still
liable to the corporation
Ø 4. It is void as to the attaching or executing creditors of the transferor,
as well as subsequent purchasers in good faith without notice of the
transfer
Ø 5. Where no certificate has been issued or for some reason, it is not in
the possession of the SH, it may be transferred by means of a deed of
assignment but the same must be duly recorder in the books of the
corporation
Q: What is an unpaid claim?
Ø Unpaid claim – those claims arising from unpaid subscription and not
to any indebtedness which a subscription may owe the corporation
arising from any other transaction
Ø No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation.
PONCE v. ALSONS CEMENT
Ø Q: Is a corporation justified in refusing to register the transfer even
though delivery and indorsement has been made?
o Yes. The buyer/assignee of shares cannot just go to the
corporation and have the transfer registered in the corporate
books. Only the registered owner, his attorney, or any
authorized person, may cause registration. Absent any
instruction and despite the fact that there is valid indorsement
and delivery, the transfer is not consummated because there is
no valid registration.
Ø Q: What must the assignee do to protect his interest?
o He must secure a SPA executed by the registered owner of
the share authorizing the transferor to demand transfer in the
stock and transfer book
o The transferee must present the indorsed certificate to the
corporate secretary who shall effect the transfer in the
corporate books, issue a new stock certificate in favor of the
transferee and cancel the former certificate
Ø Mandamus as a remedy where corporation refuses to issue
certificate – mandamus should not issue to compel the secretary of the
corporation to make a transfer of the stock on the books of the
corporation UNLESS it affirmatively appears that he has failed or
refused to do so upon demand of the proper person
Escudero|Dansal|Gutierrez (2016-2017) 52
Ø Considering that the law does not prescribe a period within which the
registration of the transfer of shares should be effected, the action to
enforce the right does not accrue until there has been a demand and
a refusal concerning the transfer
NAVA V. PEERS
Ø As to the issue on assignment, in the absence of a certificate of stock,
there can be no transfer of shares of stock
Ø A stock subscription is a subsisting liability from the time it is made.
The subscriber is as much bound to pay his subscription, as he would
be to pay any other debt. The right of the corporation to demand
payment is no less incontestable, and this is true even in then absence
of an express promise to pay the amount subscribed.
Ø Restrictions on transfer of stock – the power to impose restrictions on
transfer of shares cannot be exercised unless conferred upon the
corporation by law or it AOI
Ø Indorsement and delivery – The certificate must be properly indorsed
and title is vested to certificate by delivery of the duly indorsed
certificate even without executing a deed of assignment or sale of
shares which is necessary only when no certificate of stock has as yet
been issued or where the same is not in the possession for whatever
reason of the transferor.
LIM TAY V. CA
Ø A mere pledgee of shares of stock does not have ownership over the
shares. If the obligation is not paid, the creditor (in this case, Lim Tay)
should have foreclosed the shares or caused the transfer in his own
name. There is no automatic appropriation allowed. In credit
transactions, automatic appropriation is referred to as “pactum
commissorium” and is void.
Ø Validity of stock transfer – A bona fide transfer of shares of a
corporation not registered or noted in the books, is invalid as against a
subsequent lawful attachment or execution of said shares regardless of
whether the attaching creditor had actual notice of the transfer or not.
And indeed, as to all persons interested, except the parties to the
transfer
Ø Sec. 63 strictly requires the recording of the transfer in the
corporate books, and not elsewhere, to be valid as against 3rd parties
Ø Reason for requiring registration of stock transfer – intended
principally for the benefit and protection of the corporation to whom it
 must accord the right granted to them by law and against whom it can
enforce liability that may arise from ownership of stock
Ø Right of corporation to refuse registration of transfer – the
registration of transfers of shares of stock in the stock and transfer
books is a function which usually pertains to that of the corporate
secretary or the transfer agent of the corporation
Assignment: Up to Sec. 73.
Sec. 64. Issuance of stock certificates. - No certificate of stock shall be issued
to a subscriber until the full amount of his subscription together with interest
and expenses (in case of delinquent shares), if any is due, has been paid.
Q: Can the corporation issue stock certificates without full payment of the
subscription?
Ø No. No certificate of stock shall be issued to a subscriber until the
FULL AMOUNT of his subscription together with interest and b (in
case of delinquent shares), if any is due, has been PAID
Q: For instance, you subscribe to 5 shares at a par value of P100 for each
share, the full amount of which is P500. You paid P200 as down payment and
have a balance of P300. Can the corporation issue stock certificate?
Ø Generally, no. No stock certificate shall be issued until full payment of
subscription. Reason: Subscription is an indivisible contract. The
prohibition in Sec. 64 is to prevent partial disposition of subscription
when it is not yet fully paid
Ø However, De Leon has the following ‘contrary view’: when it is not
restricted by the by-laws, a corporation has the option to issue stock
certificates with respect to the shares that may be covered by the
amount paid (pro-rata)
o Note: Sir says that since this view is based on an SC case
promulgated in 1965 (prior to the enactment of the present
corpo code), the view is obsolete and Sec. 64 prevails. This
was in essence embodied in a SEC opinion.
Sec. 65. Liability of directors for watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks for a consideration less than its
par or issued value or for a consideration in any form other than cash, valued in
excess of its fair value, or who, having knowledge thereof, does not forthwith
express his objection in writing and file the same with the corporate secretary,
Escudero|Dansal|Gutierrez (2016-2017) 53
shall be solidarily, liable with the stockholder concerned to the corporation and
its creditors for the difference between the fair value received at the time of
issuance of the stock and the par or issued value of the same.
Q: What is a watered stock? What are the instances wherein a watered stock is
issued?
Ø Watered stock – It is a stock issued not in exchange for its equivalent
either in case, property, share, stock dividends, or services. It includes
stock
o 1. Issued without corporation (bonus share)
o 2. Issued as fully paid when the corporation has received a
lesser sum than its par or issued value (discount share); or
o 3. Issued for a consideration other than actual cash, such as
property or services, the fair valuation of which is less than its
par or issued value
o 4. Issued as stock dividend when there are no sufficient
retained earning or surplus to justify it
Ø Purpose of prohibition against issuance of Watered stock: to protect
persons who may acquire stock and the creditors of the corporation
particularly those who may become such on the faith of its outstanding
capital stock being fully paid
Q: What is the liability may be liable for issuance of watered stock?
Ø Any director or officer of a corporation:
o 1. Consenting to the issuance of watered stocks or,
o 2. Having knowledge thereof, does not forthwith express his
objection in writing and file the same with the corporate
secretary,
o = shall be SOLIDARILY LIABLE with the stockholder
concerned to the corporation and its creditors
Ø Q: For how much?
o For the difference between the FAIR VALUE received at the
time of issuance of the stock and the PAR OR ISSUED
VALUE of the same.
o Par value – the value of a share as fixed in the AOI and
reflected in the certificate of stock
o Issued value – the value fixed by the Board of Directors
which can be higher than the par value
 Ø Q: Is there any way to escape liability? Q: When does a stock become delinquent?
o Yes. Upon having knowledge of the issuance of the watered Ø When the subscriber fails to pay the unpaid subscription or balance
stock, the director/officer must immediately file his written within 30 days
objection to the issuance with the corporate secretary Ø Q: When is the 30-day period reckoned?
o 1. From the date fixed in the subscription contract to make
Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay to payment; OR
the corporation interest on all unpaid subscriptions from the date of subscription, o 2. From the date fixed or stated in the call, if there is no date
if so required by, and at the rate of interest fixed in the by-laws. If no rate of fixed in the subscription contract
interest is fixed in the by-laws, such rate shall be deemed to be the legal rate Ø Q: What is the effect if stock is declared delinquent?
o It may be subject to sale by the corporation
Q: When is a subscriber liable to pay interest for unpaid subscription?
Ø If so required by the by-laws and/or subscription contract Q: What is a call?
Ø Call – a declaration officially made by a corporation requiring payment
Q: What is the rate of interest? of all or a certain prescribed portion of a shareholder’s stock
Ø Generally, the rate fixed in the by-laws subscription
Ø In the absence thereof, the legal rate of 12% per annum Ø Q: What must be the form of the call?
o Resolution of the BOD
Q: When should you reckon the payment interest? Ø Q: What must the resolution contain?
Ø From the date of subscription until the payment of such interest is o The date in which payment is to be made (otherwise, non-
made payment will make stock delinquent)

Sec. 67. Payment of balance of subscription. - Subject to the provisions of the
contract of subscription, the board of directors of any stock corporation may at
any time declare due and payable to the corporation unpaid subscriptions to the
capital stock and may collect the same or such percentage thereof, in either case
with accrued interest, if any, as it may deem necessary.
Q: Is call always necessary in order to make a stock delinquent?
Ø No. Even if there is no call, but the date of payment is fixed in the
subscription contract, a stock may become delinquent due to
continuous non-payment for 30 days from the date fixed in the
subscription contract

Payment of any unpaid subscription or any percentage thereof, together with the Q: What are the REQ for a valid call?
interest accrued, if any, shall be made on the date specified in the contract of Ø 1. Made by the BOD (thru a resolution)
subscription or on the date stated in the call made by the board. Failure to Ø 2. Made in the manner prescribed by law
pay on such date shall render the entire balance due and payable and shall make Ø 3. Must operate uniformly to all SH
the stockholder liable for interest at the legal rate on such balance, unless a
different rate of interest is provided in the by-laws, computed from such date Q: What is the meaning of ‘operate uniformly’? Example?
until full payment. If within thirty (30) days from the said date no payment is Ø Firstly, when a call is made, it must be applied to all subscribers with
made, all stocks covered by said subscription shall thereupon become delinquent unpaid subscriptions
and shall be subject to sale as hereinafter provided, unless the board of directors Ø Q: Assuming that the call complies with the first, is there any other
orders otherwise way that the 3rd requisite is violated? In other words, is there any
other form of discrimination?

Escudero|Dansal|Gutierrez (2016-2017) 54
 o Yes. When some subscribers are called to pay a HIGHER
RATE or price than other, then the call does not operate
uniformly
Q: What are the remedies to enforce payment of stock subscription?
Ø 1. Extrajudicial (Sec. 67-69)
Ø 2. Judicial (Sec. 70)
Ø 3. Collection of Cash Dividends – deduct the cash dividends before
issuing them
Ø 4. Withholding of Stock Dividends (recall Sec. 43)
Sec. 68. Delinquency sale. - The board of directors may, by resolution, order
the sale of delinquent stock and shall specifically state the amount due on each
subscription plus all accrued interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor more than sixty (60) days from
the date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally or by registered mail. The same shall
furthermore be published once a week for two (2) consecutive weeks in a
newspaper of general circulation in the province or city where the principal
office of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the date
specified for the sale of the delinquent stock, the balance due on his
subscription, plus accrued interest, costs of advertisement and expenses of sale,
or unless the board of directors otherwise orders, said delinquent stock shall
be sold at public auction to such bidder who shall offer to pay the full amount
of the balance on the subscription together with accrued interest, costs of
advertisement and expenses of sale, for the smallest number of shares or fraction
of a share. The stock so purchased shall be transferred to such purchaser in the
books of the corporation and a certificate for such stock shall be issued in his
favor. The remaining shares, if any, shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to the issuance of a certificate of
stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full
amount of the balance on the subscription together with accrued interest, costs
of advertisement and expenses of sale, for the smallest number of shares or
fraction of a share, the corporation may, subject to the provisions of this Code,
Escudero|Dansal|Gutierrez (2016-2017) 55
bid for the same, and the total amount due shall be credited as paid in full in the
books of the corporation. Title to all the shares of stock covered by the
subscription shall be vested in the corporation as treasury shares and may be
disposed of by said corporation in accordance with the provisions of this Code.
Q: What is delinquency sale?
Ø Sale of delinquent stocks in a public auction to the highest bidder
Q: What is the procedure for the sale of delinquent stock?
Ø 1. RESOLUTION declaring unpaid subscriptions payable
o This means that the BOD shall make a call for payment
o Q: What are the contents of the resolution?
§ The date which payment is to be made. Reason why
this is necessary: to know when to reckon the 30-day
period in determining when stock becomes
delinquent
Ø 2. NOTICE to SHs of resolution
o Must give notice to SH to make payment, otherwise the stock
shall be delinquent
o The corporation must wait for 30 days to lapse
o After the days and the SH fails to make payment, the next step
is:
Ø 3. RESOLUTION ordering sale of delinquent sale
o Q: What are the contents of the resolution?
§ FULL AMOUNT = Amount due + interest + costs
of advertisements + expenses of sale
§ Date, time, and place of sale which is not less than
30 days but not more than 60 days from date stock
becomes delinquent
Ø 4. NOTICE AND PUBLICATION of sale
o The SH shall be notified personally or thru registered mail
o Publication once a week for two (2) consecutive weeks in a
newspaper of general circulation in the province or city where
the principal office of the corporation is located
Ø 5. SALE of delinquent stocks
o Sale of so many shares so as to effect payment of the full
amount to the highest bidder
Q: Who is the highest bidder?
Ø Highest bidder – such bidder who shall offer to pay the full amount
of the balance on the subscription (together with accrued interest, costs
of advertisement and expenses of sale) for the smallest number of
shares or fraction of a share
Q: For instance, the corporation is offering 5 shares with a par value of 100
peso each or a total amount of 500 for subscription for each SH. A subscribed
to 5 shares and paid the full subscription of 500. B only paid the amount of
300, the leaving 200 remaining unpaid. The corporation made a call and gave
notice to the SH but still B was not able to pay. The corporation made a call
for payment but B failed to pay. The corporation declared the unpaid stock of
B delinquent and caused its sale after notice and publication. There where 3
dealers who wanted to buy the remaining shares: X bid 200 for 2 shares, Y bid
25 for 2 shares, and Z bid 250 for 1 share. The interest and cost and expenses
cost 50 pesos
Ø Q: What is the minimum bid?
o The minimum bid is 250. The full amount = amount due,
which is 200; + interest and costs and expenses, which is 50.
Thus, yielding a full amount of 250
Ø Q: Who is the highest bidder?
o Z is the highest bidder because he offers to pay the full
amount of the unpaid subscription for the smallest number of
shares (250 for 1 share.
o X is not the highest bidder because he does not even meet the
minimum bid of 250
o Y is no the highest bidder because he is offering to buy 2
shares at 250, which is equivalent only to 125 per share. Thus,
his offer does not even meet the minimum bid
Ø Q: Where shall each share go?
o Of the total subscription of 5 shares:
§ B shall retain the 3 shares that he has already paid
§ Z, being the highest bidder of the sale shall own 1
share
§ And the remaining 1 share shall be deemed fully paid
and shall be credited to the delinquent SH, B.
Escudero|Dansal|Gutierrez (2016-2017) 56
Q: What if there are no bidders, can the corporation forfeit the delinquent
stock?
Ø NO. The corporation may only purchase the stock from the net earning
or from the URE
Ø Q: What doctrine will be violated if no URE?
o The Trust Fund Doctrine which provides that the subscribed
capital stock shall not be impaired because it is the common
fund which shall be for the payment of creditors
Q: Assuming that there is already a highest bidder, is the corpo bound to
accept the offer of the highest bidder?
Ø NO. In a public auction, the bidders are the ones who are making their
offers to the corporation. Thus, the BOD have the discretion whether or
not to accept their offer.
Sec. 69. When sale may be questioned. - No action to recover delinquent stock
sold can be sustained upon the ground of irregularity or defect in the notice of
sale, or in the sale itself of the delinquent stock, unless the party seeking to
maintain such action first pays or tenders to the party holding the stock the sum
for which the same was sold, with interest from the date of sale at the legal rate;
and no such action shall be maintained unless it is commenced by the filing of a
complaint within six (6) months from the date of sale.
Q: What are the grounds to question a delinquency sale? Example?
Ø IRREGULARITY or DEFECT:
o 1. In the notice of the sale
§ Ex: No notice was made; the date of sale in the notice
was incorrect (not less than 30 days, not more than 60
days from delinquency); no publication or the
publication was not fully complied with (I.e. only 1
week of publication)
o 2. In the sale itself of the delinquents stock
§ Ex: Failure to conduct a public bidding or auction
(i.e. the corporation sold it to whomever it wishes);
incorrect determination of the correct full amount due
Q: Is Irregularity in call a ground to question the sale? Why or why not?
Ø No.
Q: What are the requisites before filing an action questioning the delinquency
sale?
Ø REQ:
Ø 1. Pay or tender the sum + interest
o Sum – the amount for which the stock was sold
Ø 2. Commence and file the action within 6 months from the date of sale
o Otherwise, the action will be barred/Prescribed
Sec. 70. Court action to recover unpaid subscription. - Nothing in this Code
shall prevent the corporation from collecting by action in a court of proper
jurisdiction the amount due on any unpaid subscription, with accrued interest,
costs and expenses.
Q: What are the requisites for judicial action?
Ø REQ:
Ø 1. Prior call
o Q: Why do you need a call?
o Reason: In oblicon, an obligation becomes due upon demand.
The call serves as a demand because it is the resolution by the
board calling out to all SH to pay their unpaid subscriptions. A
call is necessary to make the obligation to pay due and
demandable.
Ø 2. The action must be filed within the prescriptive period
o With respect to written subscription contract = 10 YEARS
reckoned from the date the right of action accrues (meaning
from the date of the subscription itself
o With respect to verbal subscription = 6 YEARS reckoned
from the LAST DEMAND
Ø 3. The amount must be limited to the amount due on any unpaid
subscription
o Amount due = balance of unpaid subscription + Interest +
Costs of SUIT + Expenses of LITIGATION
Ø 4. With respect to the jurisdiction, the commercial courts of the RTC
have jurisdiction
Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be
entitled to vote or to representation at any stockholder's meeting, nor shall the
holder thereof be entitled to any of the rights of a stockholder except the right to
dividends in accordance with the provisions of this Code, until and unless he
Escudero|Dansal|Gutierrez (2016-2017) 57
pays the amount due on his subscription with accrued interest, and the costs and
expenses of advertisement, if any.
Q: What are the effects of stock delinquency?
Ø 1. The SH cannot vote or be voted upon and to be represented in a SH
meeting
Ø 2. GR: All other rights are lost
o EXPN: The right to receive dividends
o Reason: One of the modes to collect payment of unpaid
subscription is through these dividends (i.e. collection of cash
dividends; withholding of stock dividends)
Ø 3. Subject the stock to delinquency sale (depending upon BOD’s
discretion) unless otherwise ordered by the board
Ø 4. Directors who are elected by virtue of delinquency stock may be
subject to quo warranto proceedings
o Reason:
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid
which are not delinquent shall have all the rights of a stockholder.
Q: If you are a subscriber with unpaid stock, do you lose all your rights as a
SH?
Ø No. The subscriber is still entitled to all rights of a SH until the stock
has been declared delinquent
Ø However, the subscriber is liable for interest on his unpaid
subscription, provided:
o It is required under the By-Laws. The amount of interest shall
be that stated in the Subscription Contract or By-Laws. In the
absence thereof, the interest shall be charged at the legal rate
of 12%
o The liability to pay interest shall be reckoned from the date of
subscription
Sec. 73. Lost or destroyed certificates. - The following procedure shall be
followed for the issuance by a corporation of new certificates of stock in lieu of
those which have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal
representative shall file with the corporation an affidavit in triplicate setting
forth, if possible, the circumstances as to how the certificate was lost, stolen or
destroyed, the number of shares represented by such certificate, the serial
number of the certificate and the name of the corporation which issued the same.
He shall also submit such other information and evidence which he may deem
necessary;
2. After verifying the affidavit and other information and evidence with the
books of the corporation, said corporation shall publish a notice in a newspaper
of general circulation published in the place where the corporation has its
principal office, once a week for three (3) consecutive weeks at the expense of
the registered owner of the certificate of stock which has been lost, stolen or
destroyed. The notice shall state the name of said corporation, the name of the
registered owner and the serial number of said certificate, and the number of
shares represented by such certificate, and that after the expiration of one (1)
year from the date of the last publication, if no contest has been presented to said
corporation regarding said certificate of stock, the right to make such contest
shall be barred and said corporation shall cancel in its books the certificate of
stock which has been lost, stolen or destroyed and issue in lieu thereof new
certificate of stock, unless the registered owner files a bond or other security in
lieu thereof as may be required, effective for a period of one (1) year, for such
amount and in such form and with such sureties as may be satisfactory to the
board of directors, in which case a new certificate may be issued even before the
expiration of the one (1) year period provided herein: Provided, That if a contest
has been presented to said corporation or if an action is pending in court
regarding the ownership of said certificate of stock which has been lost, stolen
or destroyed, the issuance of the new certificate of stock in lieu thereof shall be
suspended until the final decision by the court regarding the ownership of said
certificate of stock which has been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the corporation
and its officers, no action may be brought against any corporation which shall
have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant
to the procedure above-described.
Q: What must a SH do if his stock certificate is lost or destroyed?
Ø 1. File an AFFIDVIT (of loss) in triplicate containing the following:
o 1. The circumstances as to how the certificate was lost, stolen
or destroyed,
o 2. The number of shares represented by such certificate,
o 3. The serial number of the certificate and
o 4. The name of the corporation which issued the same
Escudero|Dansal|Gutierrez (2016-2017) 58
Ø He shall also submit such other information and evidence which he
may deem necessary.
Ø Q: What could be evidence in addition to the affidavit of loss? What
could be supporting documents?
o Blotter in the barangay; police report; Certified True Copy of
either. The purpose of additional evidence is to prove to the
corporate secretary that the certificate was indeed lost
Ø 2. VERIFICATION of the affidavit and other information and
evidence
Ø Q: Why is it necessary for the affidavit, etc. to be verified?
o In order to compare the same with the corporate books. (i.e.
the serial number and other details correspond with that
reflected in the books)
Ø 3. PUBLICATION of a notice in a newspaper of general circulation in
the place where the corporation has its principal office, once a week for
3 consecutive weeks at the expense of the registered owner of the
certificate of stock. The notice shall contain the ff:
o The name of said corporation,
o The name of the registered owner and
o The serial number of said certificate, and
o The number of shares represented by such certificate, and
o That after the expiration of one 1 year from the date of the
last publication, if no contest has been presented to said
corporation regarding said certificate of stock, the RIGHT
TO CONTEST shall be barred and said corporation shall
cancel in its books the certificate of stock which has been lost,
stolen or destroyed and issue in lieu thereof new certificate of
stock
o Q: When may the 1 year period be dispensed with?
§ unless the registered owner files a BOND or other
SECURITY in lieu thereof as may be required,
effective for a period of one (1) year, for such amount
and in such form and with such sureties as may be
satisfactory to the board of directors
o Q: What if there is a contest?
§ If a contest has been presented to said corporation or
if an action is pending in court regarding the
ownership of said certificate of stock which has been
lost, stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be
 SUSPENDED until the final decision by the court
regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed
Q: Can you sue a corporation for issuing new stock certificates?
Ø GR: No action may be brought against any corporation which shall
have issued certificate of stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described.
Ø EXPN: in case of fraud, bad faith, or negligence on the part of the
corporation and its officers
Q: What must the corporate secretary do?
Assign: Sec. 74-80
TITLE VIII
CORPORATE BOOKS AND RECORDS
Sec. 74. Books to be kept; stock transfer agent. - Every corporation shall keep
and carefully preserve at its principal office a record of all business transactions
and minutes of all meetings of stockholders or members, or of the board of
directors or trustees, in which shall be set forth in detail the time and place of
holding the meeting, how authorized, the notice given, whether the meeting was
regular or special, if special its object, those present and absent, and every act
done or ordered done at the meeting. Upon the demand of any director, trustee,
stockholder or member, the time when any director, trustee, stockholder or
member entered or left the meeting must be noted in the minutes; and on a
similar demand, the yeas and nays must be taken on any motion or proposition,
and a record thereof carefully made. The protest of any director, trustee,
stockholder or member on any action or proposed action must be recorded in
full on his demand.
The records of all business transactions of the corporation and the minutes of
any meetings shall be open to inspection by any director, trustee, stockholder or
member of the corporation at reasonable hours on business days and he may
demand, writing, for a copy of excerpts from said records or minutes, at his
expense.
Any officer or agent of the corporation who shall refuse to allow any director,
trustees, stockholder or member of the corporation to examine and copy excerpts
Escudero|Dansal|Gutierrez (2016-2017) 59
from its records or minutes, in accordance with the provisions of this Code, shall
be liable to such director, trustee, stockholder or member for damages, and in
addition, shall be guilty of an offense which shall be punishable under Section
144 of this Code: Provided, That if such refusal is made pursuant to a resolution
or order of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted for such
refusal: and Provided, further, That it shall be a defense to any action under this
section that the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any information secured
through any prior examination of the records or minutes of such corporation or
of any other corporation, or was not acting in good faith or for a legitimate
purpose in making his demand.
Stock corporations must also keep a book to be known as the "stock and transfer
book", in which must be kept a record of all stocks in the names of the
stockholders alphabetically arranged; the installments paid and unpaid on all
stock for which subscription has been made, and the date of payment of any
installment; a statement of every alienation, sale or transfer of stock made, the
date thereof, and by and to whom made; and such other entries as the by-laws
may prescribe. The stock and transfer book shall be kept in the principal office
of the corporation or in the office of its stock transfer agent and shall be open for
inspection by any director or stockholder of the corporation at reasonable hours
on business days.
No stock transfer agent or one engaged principally in the business of registering
transfers of stocks in behalf of a stock corporation shall be allowed to operate in
the Philippines unless he secures a license from the Securities and Exchange
Commission and pays a fee as may be fixed by the Commission, which shall be
renewable annually: Provided, That a stock corporation is not precluded from
performing or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of a license fee
herein provided, shall be applicable.
Q: What are the documents that must be kept in the principal office of a
corporation?
Ø 1. A record of all business transactions
Ø 2. Minutes of the SH/members meetings
Ø 3. Minutes of the Board/trustees meetings
Ø 4. Stock and transfer books (with respect to stock corporations only)
Q: What do you mean by Stock and Transfer Books?
Ø Records all stock ownership, as well as any alienation, sale or transfer
of stocks. Before incorporation, the corporation must buy a blue book
with the SEC which is kept therein worth around 500 pesos
Q: What do you mean by record of business transactions?
Ø Includes all papers pertaining to the operation of the corporation to its
SHs, such as: journal, ledger, financial statement, income tax returns,
vouchers, receipts, contracts, etc.
Q: A corporation applied a loan with BPI. What should be kept in relation to
the transaction?
Ø Promissory note (to prove contract of loan);
Ø A Rea Estate Mortgage or Chattel mortgage (to prove that the loan is
secured by a mortgage)
Ø Receipts or bank deposits (to prove payment, assuming that the
corporation
Ø All other records in relation to the transaction must be kept at the
principal office
Q: What do you mean by minutes?
Ø All matters taken up during the meeting. It does not only include the
time it started and adjourned.
Q: Every SH is entitled to inspect corporate books. What are the remedies in
case a SH’s right is violated?
Ø 1. Petition for Mandamus
Ø 2. Civil Action
Ø 3. Criminal Action based on Section 144 which is the penal provision
of the Corporation Code
Q: What could be the grounds to deny the right to inspect corporate books?
Ø 1. Misuse of information previously obtained by the SH
Ø 2. The SH acted in bad faith
o Ex: to obtain trade secrets for the SH’s own benefit or to be
divulged to competitors
Ø 3. The exercise of the right was not for a legitimate purpose
o This applies when the SH did not act in BF but his purpose
was not legitimate
Escudero|Dansal|Gutierrez (2016-2017) 60
o A legitimate purpose could be to determine whether the fund
used to distribute dividends really come from URE, otherwise
the trust fund doctrine will be violated
o Ex of not legitimate purpose?
GONZALES V. PNB
Ø A SH can inspect corporate books, subject to limitations (the right is
not absolute).
Ø The SC ruled that the SH, Gonzales, acted on ulterior motives and in
bad faith. He only owned 1 share of stock. The significance of this is
that he acquired only 1 share not for the purpose of investing in the
corporation’s business, but to get information relevant to his case with
PNB (since he sued PNB for several transactions)
Sec. 75. Right to financial statements. - Within ten (10) days from receipt of a
written request of any stockholder or member, the corporation shall furnish to
him its most recent financial statement, which shall include a balance sheet as of
the end of the last taxable year and a profit or loss statement for said taxable
year, showing in reasonable detail its assets and liabilities and the result of its
operations.
At the regular meeting of stockholders or members, the board of directors or
trustees shall present to such stockholders or members a financial report of the
operations of the corporation for the preceding year, which shall include
financial statements, duly signed and certified by an independent certified public
accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the
financial statements may be certified under oath by the treasurer or any
responsible officer of the corporation.
Q: What is included in the right to financial statements?
Ø 1. Balance Sheet as of the end of the last taxable year
Ø 2. Income Statement (profit or loss statement for the taxable year,
stating in detail the assets and liabilities of the corporation)
Q: Is it necessary to always have a request?
Ø No. There shall be an annual SH/members meeting and each SH shall
receive a copy of the financial statement
Ø Q: Who shall CERTIFY the financial statement?
 o It depends
o If the paid-up capital of the corporation is MORE than
P50,000.00 - By an Independent CPA
o If the paid-up capital of the corporation is LESS than
P50,000.00 - the financial statements may be certified under
oath by the TREASURER only (or any responsible officer of
the corporation – Sir did not mention this)
Ø Q: Who shall SIGN the financial statement?
o Aside from the independent CPA, the other signatories are:
the President OR Vice-president
TITLE IX
MERGER AND CONSOLIDATION
Sec. 76. Plan or merger of consolidation. - Two or more corporations may
merge into a single corporation which shall be one of the constituent
corporations or may consolidate into a new single corporation which shall be the
consolidated corporation.
The board of directors or trustees of each corporation, party to the merger or
consolidation, shall approve a plan of merger or consolidation setting forth the
following:
1. The names of the corporations proposing to merge or consolidate, hereinafter
referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same
into effect;
3. A statement of the changes, if any, in the articles of incorporation of the
surviving corporation in case of merger; and, with respect to the consolidated
corporation in case of consolidation, all the statements required to be set forth in
the articles of incorporation for corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or consolidation as
are deemed necessary or desirable.
Sec. 77. Stockholder's or member's approval. - Upon approval by majority vote
of each of the board of directors or trustees of the constituent corporations of the
plan of merger or consolidation, the same shall be submitted for approval by the
stockholders or members of each of such corporations at separate corporate
meetings duly called for the purpose. Notice of such meetings shall be given to
all stockholders or members of the respective corporations, at least two (2)
weeks prior to the date of the meeting, either personally or by registered mail.
Escudero|Dansal|Gutierrez (2016-2017) 61
Said notice shall state the purpose of the meeting and shall include a copy or a
summary of the plan of merger or consolidation. The affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock of each corporation in the case of stock corporations or at least two-thirds
(2/3) of the members in the case of non-stock corporations shall be necessary for
the approval of such plan. Any dissenting stockholder in stock corporations may
exercise his appraisal right in accordance with the Code: Provided, That if after
the approval by the stockholders of such plan, the board of directors decides to
abandon the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided
such amendment is approved by majority vote of the respective boards of
directors or trustees of all the constituent corporations and ratified by the
affirmative vote of stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds (2/3) of the members of each of the
constituent corporations. Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation.
Sec. 78. Articles of merger or consolidation. - After the approval by the
stockholders or members as required by the preceding section, articles of merger
or articles of consolidation shall be executed by each of the constituent
corporations, to be signed by the president or vice-president and certified by the
secretary or assistant secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case of
non-stock corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for and
against such plan, respectively.
Sec. 79. Effectivity of merger or consolidation. - The articles of merger or of
consolidation, signed and certified as herein above required, shall be submitted
to the Securities and Exchange Commission in quadruplicate for its approval:
Provided, That in the case of merger or consolidation of banks or banking
institutions, building and loan associations, trust companies, insurance
companies, public utilities, educational institutions and other special
corporations governed by special laws, the favorable recommendation of the
appropriate government agency shall first be obtained. If the Commission is
satisfied that the merger or consolidation of the corporations concerned is not
inconsistent with the provisions of this Code and existing laws, it shall issue a
certificate of merger or of consolidation, at which time the merger or
consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission has reason to
believe that the proposed merger or consolidation is contrary to or inconsistent
with the provisions of this Code or existing laws, it shall set a hearing to give the
corporations concerned the opportunity to be heard. Written notice of the date,
time and place of hearing shall be given to each constituent corporation at least
two (2) weeks before said hearing. The Commission shall thereafter proceed as
provided in this Code.
Sec. 80. Effects or merger or consolidation. - The merger or consolidation shall
have the following effects:
1. The constituent corporations shall become a single corporation which, in case
of merger, shall be the surviving corporation designated in the plan of merger;
and, in case of consolidation, shall be the consolidated corporation designated in
the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except that
of the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights,
privileges, immunities and powers and shall be subject to all the duties and
liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter
possess all the rights, privileges, immunities and franchises of each of the
constituent corporations; and all property, real or personal, and all receivables
due on whatever account, including subscriptions to shares and other choses in
action, and all and every other interest of, or belonging to, or due to each
constituent corporation, shall be deemed transferred to and vested in such
surviving or consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable for
all the liabilities and obligations of each of the constituent corporations in the
same manner as if such surviving or consolidated corporation had itself incurred
such liabilities or obligations; and any pending claim, action or proceeding
brought by or against any of such constituent corporations may be prosecuted by
or against the surviving or consolidated corporation. The rights of creditors or
liens upon the property of any of such constituent corporations shall not be
impaired by such merger or consolidation.
Escudero|Dansal|Gutierrez (2016-2017) 62
Q: What is merger?
Ø 2 or more corporations unite, where 1 corporation is dissolved and the
other is retained. In other words, there is an absorption of 1 corporation
of the other
Ø Surviving Corporation – The corp which absorbs the other corp
Ø Absorbed Corporation – The corp which is dissolved
Q: What are the effects of merger?
Ø The assets, rights, and privileges of the AC are transferred to the SC
Ø The liabilities and responsibilities of the AC shall be assumed by the
SC
Ø The AC will be dissolved
Ø The SC will be retained
o Ex: Landbank and DBP merged. LB is the SC. DBP is the AC
Ø The SHs of the AC will become the SH of the SC
Q: What is consolidation?
Ø 2 or more corporations unite to give rise to a new corporation.
Ø The dissolved corporations are called Constituent Corporations
Ø The new corporation is called Consolidated Corporation
Q: What are the effects of consolidation?
Ø The assets, rights, and privileges of the constituent corps shall be
transferred to the consolidated corp
Ø The consolidated corp shall assume the liabilities and responsibilities of
the constituent corps
Ø The constituent corps will be dissolved
Ø A new corp shall be established
Ø The SH of the constituent corps shall become the SH of the
consolidated corp
Q: If you are a director of a corporation, which would you prefer? Why?
Ø (not answered)
Ø Merger – one of the corporations has already an established name
Ø Consolidation – can start a new slate
Q: Explain the procedure in case of merger/consolidation.
Ø 1ST STEP: Board approval - The BOD/BOT of each corporation to
the merger or consolidation, shall approve a plan of merger or
consolidation setting forth the following:
 o 1. The names of the corporations proposing to merge or
consolidate, hereinafter referred to as the constituent
corporations;
o 2. The terms of the merger or consolidation and the mode of
carrying the same into effect;
o 3. A statement of the changes, if any, in the AOI of the
surviving corporation in case of merger; and, with respect to
the consolidated corporation in case of consolidation, all the
statements required to be set forth in the AOI for corporations
organized under the corpo code; and
o 4. Such other provisions with respect to the proposed merger
or consolidation as are deemed necessary or desirable
Ø 2nd STEP: SH’s approval – the plan of merger shall then be submitted
for approval by the SHs or members of each corporation at separate
corporate meetings duly called for the purpose. Notice of such
meetings shall be given to all SHs or members of the respective
corporations, at least 2 weeks prior to the date of the meeting, either
personally or by registered mail. Said notice shall state the purpose of
the meeting and shall include a copy or a summary of the plan of
merger or consolidation. The affirmative vote of stockholders
representing at least 2/3 of the outstanding capital stock of each
corporation in the case of stock corporations or at least (2/3) of the
members in the case of non-stock corporations shall be necessary
for the approval of such plan.
Ø 3rd STEP: Draft the Articles of Merger or Consolidation - articles of
merger or articles of consolidation shall be executed by each of the
constituent corporations, to be signed by the president or vice-president
and certified by the secretary or assistant secretary of each corporation
setting forth:
o 1. The plan of the merger or the plan of consolidation;
o 2. As to stock corporations, the number of shares
outstanding, or in the case of non-stock corporations, the
number of members; and
o 3. As to each corporation, the number of shares or members
voting for and against such plan, respectively.
o (Sir: in short, the matter set forth in 78)
Ø 4th STEP: If the proposal is inconsistent with the Corpo Code, the
SEC will hold a hearing to give the parties a chance to be heard
(due process) - If, upon investigation, the Securities and Exchange
Commission has reason to believe that the proposed merger or
Escudero|Dansal|Gutierrez (2016-2017) 63
consolidation is contrary to or inconsistent with the provisions of this
Code or existing laws, it shall set a hearing to give the corporations
concerned the opportunity to be heard.
Ø 5th STEP: If a corporation is created by special law, a
recommendation by the appropriate government agency must first
be obtained - That in the case of merger or consolidation of banks or
banking institutions, building and loan associations, trust companies,
insurance companies, public utilities, educational institutions and other
special corporations governed by special laws, the favorable
recommendation of the appropriate government agency shall first be
obtained
Ø 6th STEP: Issuance of Certificate of Merger/Consolidation by SEC.
The articles of merger or of consolidation, signed and certified as
herein above required, shall be submitted to the Securities and
Exchange Commission in quadruplicate for its approval. If the
Commission is satisfied that the merger or consolidation of the
corporations concerned is not inconsistent with the provisions of this
Code and existing laws, it shall issue a certificate of merger or of
consolidation, at which time the merger or consolidation shall be
effective.
ASSOCIATED BANK V. CA
Ø AB can enforce the promissory note because there was an effective
merger. AB already assumed the assets and liabilities. It now has the
right to collect
Ø Principle of unjust enrichment under Article 19 of the CC – if AB will
not be able to collect, the defendant will be unjustly enriched.
MINDANAO SAVINGS V. CA
Ø 1. The merger did not take effect. If the steps/procedure under the
Corpo Code are not followed, there will be no issuance of Certificate of
Merger by the SEC which will give rise to creation of MSLAI.
Ø Q: Why was MSLAI party to the case?
Ø MSLAI did not yet assume the assets and liabilities of FSLAI. Due to
incomplete submission of documents, SEC did not yet issue the
certification. Uy was correct in suing FSLAI, since the latter still
continued to exist and was not yet absorbed by MSLAI
Ø 2. Other than the Corpo Code, another issue was on novation. The REQ
for a valid novation are:
o Previous valid obligation
 o Consent of the creditor is obtained
Ø In the case at bar, consent of the creditor Uy was not obtained
BAPST V. CA
Ø 1. BPI has standing to sue and is the real party in interest. There was a
valid merger between BPI and CBPC. Thus, BPI assumed the assets
and liabilities of CBPC
Ø 2. BPI cannot run after ELISCON. DBP has already assumed the debts
and liabilities of ELISCON. One of the requisites of novation is
consent of the creditor. There was implied consent on the part of BPI
when it did not object during the meeting. Thus, there was a valid
novation. The obligation of ELISCON is now extinguished and BPI
can only run after DBP
Ø 3. The obligation of Bapst and Chua are likewise extinguished. A
surety agreement is an accessory contract which cannot exist on its own
without the principal contract. A spring cannot jump higher than its
source.
Assignment: 81-86
TITLE X
APPRAISAL RIGHT
Sec. 81. Instances of appraisal right.- Any stockholder of a corporation shall
have the right to dissent and demand payment of the fair value of his shares in
the following instances:
1. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares of
any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets as
provided in the Code; and
3. In case of merger or consolidation.
Q: Define the appraisal right of a SH.
Ø Appraisal right – the right of a SH to demand payment of the fair
value of his shares, after dissenting from a proposed corporate action
Escudero|Dansal|Gutierrez (2016-2017) 64
involving fundamental change in the corporation in the cases provided
for by law.
Ø REQ: (SDC)
Ø 1. You should be a SH of a corporation
o Thus, a treasurer or a secretary do not necessarily have
appraisal right since they are not required to be SH. Unless of
course they happen to be SH as well
Ø 2. The SH must dissent to a proposed corporate action involving
fundamental change in the corporation
Ø 3. Must exercise the right only in cases provided for by law
Q: What are the instances when the right may be exercised?
Ø (ASMIC)
Ø Under Sec. 81:
1. Amendment to the AOI that has the effect of:
o Changing or restricting the rights of any stockholder or class
of shares, or
o Of authorizing preferences superior to those of outstanding
shares of any class,
o Or of extending or shortening the term of corporate existence;
2. Sale, lease, exchange, transfer, mortgage, pledge or other of all or
substantially all of the corporate property and assets
3. Merger and consolidation
Ø Under Sec. 42:
4. Investment of corporate funds in another corporation or in a purpose
other than the primary purpose
Ø Under Sec. 105:
5. In a close corporation, a SH may, for any reason, compel the
corporation to purchase his shares when the corporation has sufficient
assets in its books to cover its debts and liabilities exclusive of capital
stock
Sec. 82. How right is exercised. - The appraisal right may be exercised by any
stockholder who shall have voted against the proposed corporate action, by
making a written demand on the corporation within thirty (30) days after the
date on which the vote was taken for payment of the fair value of his shares:
Provided, That failure to make the demand within such period shall be deemed a
waiver of the appraisal right. If the proposed corporate action is implemented or
affected, the corporation shall pay to such stockholder, upon surrender of the
certificate or certificates of stock representing his shares, the fair value thereof
as of the day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was
approved by the stockholders, the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall be determined and
appraised by three (3) disinterested persons, one of whom shall be named by the
stockholder, another by the corporation, and the third by the two thus
chosen. The findings of the majority of the appraisers shall be final, and their
award shall be paid by the corporation within thirty (30) days after such award
is made: Provided, That no payment shall be made to any dissenting
stockholder unless the corporation has unrestricted retained earnings in its
books to cover such payment: and Provided, further, That upon payment by the
corporation of the agreed or awarded price, the stockholder shall forthwith
transfer his shares to the corporation.
Q: What is the procedure in exercising the right?
Ø 1st STEP: SH shall make Written Demand - The appraisal right may
be exercised by any stockholder who shall have voted against the
proposed corporate action, by making a written demand on the
corporation within thirty (30) days after the date on which the vote was
taken for payment of the fair value of his shares
o Q: What is the effect is the SH does not make a demand?
§ Failure to make the demand within such period shall
be deemed a waiver of the appraisal right.
Ø 2nd STEP: Corpo shall pay the SH - If the proposed corporate action is
implemented or affected, the corporation shall pay to such stockholder
o Q: When shall the corpo pay?
§ Upon surrender of the certificate/s of stock
representing the SH’s shares within 10 days after
demanding payment if his shares
o Q: What shall be the basis of the amount to be paid?
§ The fair value thereof as of the day PRIOR to the
date on which the vote was taken
• Excluding: any appreciation or
depreciation in anticipation of such
corporate action
§ Note: if the parties cannot agree to the fair value, an
appraisal committee shall be established. (To be
discussed later ons)
Escudero|Dansal|Gutierrez (2016-2017) 65
Ø 3rd STEP: SH shall transfer the shares - upon payment by the
corporation of the agreed or awarded price, the stockholder shall
forthwith transfer his shares to the corporation.
Q: Who shall determine the Fair Value of the dissenting shares?
Ø Initially – BOTH
Ø However, in case of disagreement as to the value of the shares, an
Appraisal Committee shall be constituted. It shall be composed of 3
disinterested persons:
o 1. One shall be named by the stockholder,
o 2. Another shall be named by the corporation, and
o 3. The third by the two thus chosen
§ This means that a 3rd appraiser shall be chosen by
both parties, namely the SH and the Corpo
Ø The 3 appraisers will now determine and appraise the fair value of the
shares. A majority is sufficient to make an award deciding on the fair
value. Majority means 2 appraisers against 1
Ø Q: Is the award of the appraisers questionable or appealable?
o No. The findings of the majority of the appraisers shall be
final
Ø Q: After the appraisers make an award, what happens next?
o The SH shall be paid by the corporation based on the award
within thirty (30) days after such award is made
Q: What are the limitations of the appraisal right?
Ø 1. Any of the instances under the law must be present
Ø 2. The dissenting SH must have voted against the proposed action
Ø 3. Demand for payment must be made within 30 days from the date the
vote is taken. Failure to demand shall be deemed a waiver
Ø 4. Price must be based on the fair value as of the day prior to the
date on which vote was taken
Ø 5. Submission by the SH of his shares to the corporation for notation
of being dissenting shares within 10 days from the written demand
Ø 6. Payment must be made only when the corporation has unrestricted
retained earnings (most important)
Ø 7. SH must transfer his shares to the corporation upon payment by the
corporation
TURNER V. LORENZO SHIPPING
Ø Q: What is the reckoning period in determining when the corporation
must have URE: upon demand, when the case is filed, or even when
it is still pending?
o At the time when the case is filed. Reason: civil cases must be
based on a cause of action at the time of the filing of the
complaint. If there is no URE at the time of filing, there is no
COA.
o In the case at bar, the corporation only had URE during the
pendency of the case. When the case was filed, there was no
URE and consequently no COA. Thus, the case shall be
dismissed.
Ø Lesson learned: if you are the dissenting SH, check first for the
existence of URE before filing a complaint. Otherwise, wait for the
corporation to have URE
Sec. 83. Effect of demand and termination of right. - From the time of
demand for payment of the fair value of a stockholder's shares until either the
abandonment of the corporate action involved or the purchase of the said
shares by the corporation, all rights accruing to such shares, including voting
and dividend rights, shall be suspended in accordance with the provisions of
this Code, except the right of such stockholder to receive payment of the fair
value thereof: Provided, That if the dissenting stockholder is not paid the value
of his shares within 30 days after the award, his voting and dividend rights
shall immediately be restored.
Q: What is the effect of the exercise of the right?
Ø All rights accruing to such shares, including voting and dividend
rights, shall be SUSPENDED
o EXCEPT the right of such stockholder to receive payment of
the fair value thereof:
Ø Q: What happens if the dissenting SH is not paid?
o The SH shall be restored in all his rights and status as a SH
§ If the dissenting stockholder is not paid the value of
his shares within 30 days after the award, his voting
and dividend rights shall immediately be restored.
Ø Q: What happens if the dissenting SH is paid?
o He shall lose all his rights as a SH permanently
Escudero|Dansal|Gutierrez (2016-2017) 66
Ø Q: What if the proposed corporate act is abandoned or not pushed
through?
o The SH shall be restored in all his rights and status as a SH
Sec. 84. When right to payment ceases. - No demand for payment under this
Title may be withdrawn unless the corporation consents thereto. If, however,
such demand for payment is withdrawn with the consent of the corporation, or
if the proposed corporate action is abandoned or rescinded by the corporation
or disapproved by the Securities and Exchange Commission where such
approval is necessary, or if the Securities and Exchange Commission
determines that such stockholder is not entitled to the appraisal right, then the
right of said stockholder to be paid the fair value of his shares shall cease, his
status as a stockholder shall thereupon be restored, and all dividend
distributions which would have accrued on his shares shall be paid to him.
Q: Can a SH withdraw his appraisal right?
Ø GR: No
Ø EXPN: When the corporation consents thereto
Q: When is the appraisal right extinguished?
Ø 1. When demand for payment is withdrawn with the consent of the
corporation,
Ø 2. If the proposed corporate action is abandoned or rescinded by the
corporation, or
Ø 3. Disapproved by the SEC where such approval is necessary, or
Ø 4. If the SEC determines that such stockholder is not entitled to the
appraisal right
Q: What is the effect of extinguishment?
Ø The dissenting SH’s status as a SH shall be restored, and all dividend
distributions which would have accrued on his shares shall be paid to
him
Sec. 85. Who bears costs of appraisal. - The costs and expenses of appraisal
shall be borne by the corporation, unless the fair value ascertained by the
appraisers is approximately the same as the price which the corporation may
have offered to pay the stockholder, in which case they shall be borne by the
latter. In the case of an action to recover such fair value, all costs and expenses
shall be assessed against the corporation, unless the refusal of the stockholder
to receive payment was unjustified.

Q: Who shall bear the cost of appraisal?
Ø It depends:
Ø GR: The corporation shall bear costs in the ff instances:
o 1. Where the price which the corporation offered to pay the
dissenting SH is lower than the fair value determined by the
appraisers
o 2. When an action is filed by the dissenting SH and his refusal
to accept payment is unjustified
Ø EXPN: The SH shall bear costs in the ff instances:
o 1. Where the price offered by the corporation is
approximately the same as the fair value determined by the
appraisers
o 2. Where an action is filed by the dissenting SH and his refusal
to accept payment is unjustified
Sec. 86. Notation on certificates; rights of transferee. - Within ten (10) days
after demanding payment for his shares, a dissenting stockholder shall submit
the certificates of stock representing his shares to the corporation for notation
thereon that such shares are dissenting shares. His failure to do so shall, at the
option of the corporation, terminate his rights under this Title. If shares
represented by the certificates bearing such notation are transferred, and the
certificates consequently canceled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have all the
rights of a regular stockholder; and all dividend distributions which would
have accrued on such shares shall be paid to the transferee.
Q: After demanding payment, what must the SH do?
Ø Within ten (10) days after demanding payment for his shares, a
dissenting stockholder shall submit the certificates of stock
representing his shares to the corporation
Ø Q: What must the corporation do upon receipt of the stock
certificate/s?
o The corporation shall make an annotation thereon that such
shares are dissenting shares
Ø Q: What is the effect of failure by the SH to submit the stock
certificate/s?
o His right to be paid shall be terminated
Ø Q: What happens when the dissenting shares are transferred?
Escudero|Dansal|Gutierrez (2016-2017) 67
o If shares represented by the certificates bearing such notation
are transferred, and the certificates consequently canceled:
§ 1. The rights of the transferor as a dissenting
stockholder under this Title shall cease and
§ 2. The transferee shall have all the rights of a
regular stockholder; and all dividend distributions
which would have accrued on such shares shall be
paid to the transferee.
o Q: Who will now have the right to receive the fair value of
the dissenting share?
§ No one. Since the dissenting SH (transferor) has
already been paid, he will not receive the fair value.
When he transferred his right to another (transferee),
the latter is entitled to all rights and status of a SH.
He is not entitled to the fair value of the share.
§ The essence of appraisal right of a SH is that you
want to get back your investment. You want to get
out of the company because you disagree with a
proposed corporate action. You will then be given the
fair value of your share.
CUA V. OCAMPO
Ø The ff are the REQ for a valid derivative suit:
o 1. The petitioner was a SH/M at the time the acts or
transactions subject of the action took place and at the time
the action is filed
o 2. He exerted all reasonable efforts and alleges the same with
particularity in the complaint, exhaust all remedies available
under the AOI, by-laws, laws, or rules governing the
corporation to obtain relief desired
o 3. No appraisal rights are available for the act/acts
complained of
o 4. The is not a nuisance or harassment suit
Ø In this case, the 4th requisite was not complied with
Ø SC: the SH had appraisal rights but failed to exercise them. In this case,
the transaction falls under one of the instances wherein the appraisal
right is available under Sec. 81: sale of all or substantially all the
property of the corporation
Ø It was the SH themselves who caused the unavailability to exercise
their appraisal right by not voting against the proposed corporate
 action. Instead, they filed a derivative suit which does not comply with Ø Sec. 88. Purposes. - Non-stock corporations may be formed or
the 4th requisite. organized for:
o Charitable,
VILLAMOR V. UMALE o Religious,
Ø Same REQ as Cua v. Ocampo, but the SC added a 5th: o Educational,
o Although not expressly enumerated as a requisite, it is implied o Professional,
that the corpo should be impleaded because it is the RPI o Cultural,
whereas the SH is only a nominal party o Fraternal,
o This was recognized in the Western Institute case o Literary,
Ø Q: Why did the SC rule that there is no derivative suit? -- o Scientific,
Ø The essence of a derivative suit is that the SH shall file a case on behalf o Social,
of the corporation in order to prosecute a corporate cause of action o Civic service, or
because the directors did not do anything/lift a finger in filing a case. o Similar purposes, like trade, industry, agricultural and like
The SH take the cudgels in filing the suit chambers, or any combination thereof,
o Ex: the directors did not do anything to collect receivables Ø Subject to the special provisions of this Title governing particular
amounting to 1 million which matured in 2016. SH can now classes of non-stock corporations
file a derivative suit on behalf of the corpo provided that the Ø Q: Is the enumeration exclusive?
REQ are complied with, to wit: Sue in the name and on behalf o Yes. Thus, a corporation engaging in political purposes is not
of the corporation; Implead the corporation; and the 4 other a valid non-stock corporation
REQ
Q: What are the requisites for a non-stock corporation?
Assign: Sec. 87-95 Ø 1. No part of its income is distributable as dividends
Ø 2. Must be for any of the purposes under Sec. 88
TITLE XI Ø 3. Must not own capital stock divided into shares
NON-STOCK CORPORATIONS
Q: Is a non-stock corporation absolutely not allowed to earn profit?
Q: What is a non-stock corporation? Ø GR: a non-stock corporation is one where no part of its income is
Ø Sec. 87. Definition. - For the purposes of this Code, a non-stock distributable as dividends
corporation is one where no part of its income is distributable as Ø EXPN: Any profit which a non-stock corporation may obtain as an
dividends to its members, trustees, or officers, subject to the INCIDENT TO ITS OPERATIONS shall, whenever necessary or
provisions of this Code on dissolution: Provided, That any profit proper, be used for the furtherance of the purpose or purposes for
which a non-stock corporation may obtain as an incident to its which the corporation was organized
operations shall, whenever necessary or proper, be used for the Ø Q: What is a good example of a purpose incident to its operation?
furtherance of the purpose or purposes for which the corporation was o With respect to a school, a canteen business. Reason: it earns
organized, subject to the provisions of this Title. money, but it is operated to that the students and teachers have
Ø The provisions governing stock corporation, when pertinent, shall be something to eat
applicable to non-stock corporations, except as may be covered by o With respect to a homeowners association, the collection of
specific provisions of this Title. association dues
§ In such instances, these are not the main business, but
Q: What are the valid purposes of a non-stock corporation? (memorize) they are merely incidental. Meaning, that they are

Escudero|Dansal|Gutierrez (2016-2017) 68
 reasonably necessary to the operation of the main
business
Ø Q: Can a non-stock corporation invest its funds in another activity?
o Yes, as long as the profit is used for the purpose it is organized
§ Ex: used to pay salaries, defray operational expenses,
etc
Ø Q: Can a non-stock corporation invest its funds in a business other
than its primary purpose?
o Yes, as long as the profit is used for the purpose it is organized
Ø Q: For instance, a member of a non-stock corporation dissents from
a proposed corporate action. Can he exercise his appraisal right?
o No. An appraisal right is the right of a SH to demand the fair
value of his share if he dissents to a proposed corporate action.
A member of a non-stock corporation does NOT have an
appraisal right because such right involves shares which
applies only to stock corporations
Q: Can a non-stock corporation be converted to a stock corporation by mere
amendment of the AOI?
Ø No. Reason: because the assets will be converted into capital to be
distributed to its members who are now SHs. This is unfair because
there are certain rules for distribution with respect to non-stock
corporation that must be complied with (Sec. 94)
o Other reasons: it will change the nature of the corporation
from non-profit to profit; it will defraud persons who have
already contributed or donated to the non-stock corporation
only to find out that it has been converted to a stock
corporation
Ø The non-stock corporation must first be dissolved and a new stock
corporation may be set up
Chapter I - MEMBERS
Q: What are the rules on voting rights?
Ø Sec. 89. Right to vote. - The right of the members of any class or
classes to vote may be limited, broadened or denied to the extent
specified in the articles of incorporation or the by-laws. Unless so
limited, broadened or denied, each member, regardless of class, shall be
entitled to one vote.
o GR: each member is entitled to 1 vote
Escudero|Dansal|Gutierrez (2016-2017) 69
o EXPN: unless it is limited, broadened, or denied
o Example for each:
o 1. BROADENED – If by-laws provide that for every 5,000
pesos contributed, a member shall be entitled to 1 vote. Thus,
if he contributes 10,000, he shall be entitled to 2 votes.
o 2. LIMITED – If by-laws provide that regardless of
contribution, each member shall only be entitled to 4 votes
o 3. DENIAL – members must maintain good standing to be
entitled to vote. He is not in good standing if he commits an
infraction, does not pay association dues, etc
Ø Unless otherwise provided in the articles of incorporation or the by-
laws, a member may vote by proxy in accordance with the provisions
of this Code.
Ø Voting by mail or other similar means by members of non-stock
corporations may be authorized by the by-laws of non-stock
corporations with the approval of, and under such conditions which
may be prescribed by, the Securities and Exchange Commission.
Q: Can membership be transferred?
Ø Sec. 90. Non-transferability of membership. - Membership in a non-
stock corporation and all rights arising therefrom are personal and
non-transferable, unless the articles of incorporation or the by-laws
otherwise provide.
Ø GR: No. Reason: it involves the personal element. A member is
admitted to the corporation because of his qualifications and personal
attributes, and not by his contributions
Ø EXPN: Unless otherwise allowed under the AOI/BL
Ø Q: What do you mean by the word ‘Transfer’? What does it cover?
o Transfer covers – sale, donation, inheritance (transfer by
descent)
§ Unlike in stock corporation where the heirs can own
the shares after proper proceedings
o EXPN: Unless otherwise provided under the AOI/BL
Q: What are the rules on termination?
Ø Sec. 91. Termination of membership. - Membership shall be
terminated in the manner and for the causes provided in the articles
of incorporation or the by-laws. Termination of membership shall
have the effect of extinguishing all rights of a member in the
 corporation or in its property, unless otherwise provided in the articles
of incorporation or the by-laws.
o Must be terminated in accordance with the MANNER and for
the CAUSES provided for in the AOI/NBL
Ø Q: What are the usual CAUSES to terminate membership?
o Non-payment of membership dues
o Acts of disloyalty
o Acts of dishonesty
o Acts involving moral turpitude
o Any act inimical to the interest of the corporation
§ When members dies, it is obvious that membership
terminates. What we are talking about are the usual
causes of termination as stated by the AOI/BL
LONG V. BASA
Ø The by-laws must conform to existing laws including the Constitution.
Petitioners contend that they were deprived of their right to due process
of law because they were not given ample notice of their expulsion as
members of the church
Ø SC: Although every person is entitled to due process of law, petitioners
were continuously warned for 5 years. It is NOT the lack of prior notice
which the law abhors, but it is the total absence of opportunity to be
heard
Ø In the case at bar, the petitioners were continuously reminded and
admonished. This gave them the opportunity to reform their ways. But
still, they did not
Ø SC: there was implied waiver of the right to prior notice on the part of
the petitioners because when they joined the church, they knew the
rules and regulations including that the church had the right to expel
any member by resolution without the need of giving notice or the
reasons for expulsion
o By adhering to the by-laws, they became members of the
corporation voluntarily. They bound themselves through their
consent
Escudero|Dansal|Gutierrez (2016-2017) 70
Assign: same (up to 95)
Chapter II - TRUSTEES AND OFFICERS
Sec. 92. Election and term of trustees. - Unless otherwise provided in the
articles of incorporation or the by-laws, the board of trustees of non-stock
corporations, which may be more than fifteen (15) in number as may be fixed in
their articles of incorporation or by-laws, shall, as soon as organized, so classify
themselves that the term of office of one-third (1/3) of their number shall expire
every year; and subsequent elections of trustees comprising one-third (1/3) of
the board of trustees shall be held annually and trustees so elected shall have a
term of three (3) years. Trustees thereafter elected to fill vacancies occurring
before the expiration of a particular term shall hold office only for the unexpired
period.
No person shall be elected as trustee unless he is a member of the corporation.
Unless otherwise provided in the articles of incorporation or the by-laws,
officers of a non-stock corporation may be directly elected by the members
Q: Give an illustration of the term of office of trustees.
Ø The term of trustees shall be in a staggered basis
Ø The Board is composed of 15 trustees. The 15 shall be divided into 3.
Assuming that the elections is held on 2016, the term of the First 1/3
shall be 1 year, or on 2017. Upon expiration of their term, an election
shall be held but this time the First 1/3 shall serve for 3 years
o After one year, or on 2018, the term of the Second 1/3 shall
expire. An election shall be held and the Second 1/3 shall
serve for 3 years
o After one year, or on 2019, the term of the Third 1/3 shall
expire. An election shall be held and the Third 1/3 shall serve
for 3 years
Q: When do you apply the last sentence of Sec. 92 which states: “trustees
thereafter elected to fill vacancies occurring before the expiration of a
particular term shall hold office only for the unexpired period.”?
Ø It is only applied when there is a vacancy in the middle of the term of
the trustee. A special election shall be held to fill such vacancy and the
person elected shall only serve for the unexpired term.
Q: How many trustees are allowed?
 Ø No maximum provided for by law
o However, according to an SEC opinion, the number of
trustees should not exceed the total number of
membership of the corporation
Ø The minimum number of trustees is 5. Reason: Sec. 87 provides: the
provisions governing stock corporation, when pertinent, shall be
applicable to non-stock corporations, except as may be covered by
specific provisions of this Title. The law is silent as to the minimum
number of Trustees. Since the minimum number of directors in a stock
corporation is 5, the minimum number of trustees in a non-stock
corporation is also 5
Q: May the term of office be reduced from 3 years to 2 years?
Ø Yes. Sec. 92 provides: unless otherwise provided in the articles of
incorporation or the by-laws
Q: Who may elect the corporate officers?
Ø In a Stock corporation, it is the Board of Directors
Ø The law is silent as to who shall elect corporate officers in non-stock
corporation
Ø (Not sure ito:)
Ø GR: Board of Trustees shall elect
o EXPN: Unless otherwise provided under the AOI/BL
Sec. 93. Place of meetings. - The by-laws may provide that the members of a
non-stock corporation may hold their regular or special meetings at any place
even outside the place where the principal office of the corporation is located:
Provided, That proper notice is sent to all members indicating the date, time and
place of the meeting: and Provided, further, That the place of meeting shall be
within the Philippines.
Q: Where shall meetings be held?
Ø GR: Place where the principal office of the corporation is located
Ø EXPN: The by-laws may proved that member may hold their meeting
even outside of the principal office, provided
o 1. Proper notice is sent to al member indicating date, time and
place of the meeting; and
o 2. The place of meeting shall be within the Philippines
Q: Can members conduct meetings thru teleconferencing?
Escudero|Dansal|Gutierrez (2016-2017) 71
Ø To answer this, we must first answer the MT question: Can SH meeting
be held thru teleconferencing?
o Yes, as long as it is held in the city or municipality where
the principal office is located.
o GR: SH meeting must be held, if practicable, in the principal
office of the corporation
o EXPN: In the city or municipality where the principal office
of the corporation is located
o The answer is not ‘as long as it complies with SEC circular
15’ because this only applies to board meetings
Ø By analogy, a Members’ Meeting of a non-stock corporation may be
held thru teleconferencing as long as it complies with Sec. 93 insofar
as prior notice is sent + it is done within the Philippines
Chapter III - DISTRIBUTION OF ASSETS IN
NON-STOCK CORPORATIONS
Q: What are the rules of distribution? (Memorize)
Ø Sec. 94. Rules of distribution. - In case dissolution of a non-stock
corporation in accordance with the provisions of this Code, its assets
shall be applied and distributed as follows:
o 1. All liabilities and obligations of the corporation shall be
paid, satisfied and discharged, or adequate provision shall be
made therefore;
o 2. Assets held by the corporation upon a condition requiring
return, transfer or conveyance, and which condition occurs by
reason of the dissolution, shall be returned, transferred or
conveyed in accordance with such requirements;
o 3. Assets received and held by the corporation subject to
limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes, but not held upon
a condition requiring return, transfer or conveyance by reason
of the dissolution, shall be transferred or conveyed to one or
more corporations, societies or organizations engaged in
activities in the Philippines substantially similar to those of the
dissolving corporation according to a plan of distribution
adopted pursuant to this Chapter;
§ Numbers 1-3 must first be settled before 4 and 5
o 4. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance with the
 provisions of the articles of incorporation or the by-laws, to
the extent that the articles of incorporation or the by-laws,
determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and
§ 2 requirements:
• 1. Must be authenticated under the AOI
• 2. Must be specified under a Plan of
Distribution
§ This is to determine whether members may be
entitled to distribution of assets
o 5. In any other case, assets may be distributed to such persons,
societies, organizations or corporations, whether or not
organized for profit, as may be specified in a plan of
distribution adopted pursuant to this Chapter.
§ Any person or entity may be entitled to distribution
under a plan of distribution
Q: What are the voting requirements for a plan of distribution of assets?
Ø Sec. 95. Plan of distribution of assets. - A plan providing for the
distribution of assets, not inconsistent with the provisions of this Title,
may be adopted by a non-stock corporation in the process of dissolution
in the following manner:
Ø The board of trustees shall, by majority vote, adopt a resolution
recommending a plan of distribution and directing the submission
thereof to a vote at a regular or special meeting of members having
voting rights.
Ø Written notice setting forth the proposed plan of distribution or a
summary thereof and the date, time and place of such meeting shall be
given to each member entitled to vote, within the time and in the
manner provided in this Code for the giving of notice of meetings to
members.
Ø Such plan of distribution shall be adopted upon approval of at least
two-thirds (2/3) of the members having voting rights present or
represented by proxy at such meeting.
PADCOM V. ORTIGAS CENTER ASSOCIATION
Ø Freedom of association was not violated. Automatic membership was
provided for under the terms and conditions of the agreement (deed of
sale) and there was an annotation to the title to that effect
Escudero|Dansal|Gutierrez (2016-2017) 72
Ø Q: Assuming that PADCOM did not see the annotation, will it still be
bound thereby?
o Yes. Anything annotated in the title shall be constructive
notice to the whole world. This is a feature of the Torrens
system. No one forced PADCOM to but the land. They bough
it voluntarily and agreed to all the Terms and Conditions.
Lesson: Always check a title for annotations.
STA. CLARA HOMES ASSOCIATION V. SPS. GASTON
Ø Sps. Gaston cannot be compelled to become members of SCHA by the
simple expedient of including them in its AOI and BL without their
express or implied consent
Ø As to Jurisdiction: SCHA’s contention that RTC did not have
jurisdiction since the proper body which has jurisdiction is HIGC is
erroneous. HIGC has exclusive jurisdiction over intra-corporate
disputes affecting homeowners association. However, there is not intra-
corporate dispute in the case at bar because Sps. Gaston are NOT
members of SCHA
o The new name of HIGC is Housing and Land Use Regulatory
Board (HLURB)
Ø Q: What is the difference between the Padcom case and the SCHA
case?
o In PADCOM, the title had an annotation providing automatic
membership in the homeowner’s association which is binding
upon PADCOM
o In SCHA, there is no such annotation
Q: Assuming that you are a non-member but you live in an association and
benefit by their activities and projects. Can you be charged by the association
for association dues?
Ø Yes. No one shall be unjustly enriched at the expense of another. There
is a HLURB circular which provides that a homeowner who has
benefitted by the acts of the homeowner’s association may be liable for
association dues
o There is a jurisprudence implementing this. In a case, a non-
member was sued by the homeowner’s association before the
HLURB. It submitted as evidence photos of the non-members
house showing that there was a lamp post which stood in front
of their house. This indicates that the non-member benefitted
thru the acts of the association
 o Since such dispute does not involve a member of the
association, it is not an intra-corporate dispute. The proper
entity with which to file the case is the RTC
TAN V. SYCIP
Ø Quorum is determined by the actual number of trustees, NOT by the
number specified under the AOI. In the case at bar, there were 15
trustees indicated under the AOI. But the actual number is only 11
because 4 had already died
Ø Q: Since there was a quorum, was the election of the 4 who filled the
vacancies valid?
o No. The election was held in a members meeting when it
should have been held in a trustees meeting. This is wrong
because in a members meeting, members are allowed to vote
by proxy, whereas in a Trustee’s meeting, vote by proxy is not
allowed. In the case at bar, the election was held in a
Member’s meeting where all the trustees voted thru proxy
o Proxies cannot fill in the vacancies of trustees. Reason:
Trustees were elected by the SH/M to do their job. The
proxies were not the ones elected. The position of trustees
involve trust and confidence
Assign: Sec. 95-105 + 2 cases
TITLE XII
CLOSE CORPORATIONS
Q: What is a close corporation?
Ø Sec. 96. Definition and applicability of Title. - A close corporation,
within the meaning of this Code, is one whose articles of incorporation
provide that:
o (1) All the corporation's issued stock of all classes, exclusive
of treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20);
o (2) all the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this Title;
and
o (3) The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class.
Escudero|Dansal|Gutierrez (2016-2017) 73
Ø Notwithstanding the foregoing, a corporation shall not be deemed a
close corporation when at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another corporation which is
not a close corporation within the meaning of this Code.
Q: Can all corporations be close corporations?
Ø GR: Any corporation may be incorporated as a close corporation,
Ø EXPN: except mining or oil companies, stock exchanges, banks,
insurance companies, public utilities, educational institutions and
corporations declared to be vested with public interest in accordance
with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided,
That the provisions of other Titles of this Code shall apply suppletorily except
insofar as this Title otherwise provides.
Q: Why is there a need for special rules with respect to close corporations?
Ø (Not answered)
Ø A close corporation has been described as a corporation de jure and a
partnership de facto. A close corporation has special needs and
problems different from an ordinary corporation. It would not be fair to
apply indiscriminately to the 2 types of corporations the same rules.
Hence, the need for special provisions to govern close corporation
Q: What is the very objective of a close corporation?
Ø To enjoy the advantages of the corporate organization, like the
limitation of personal liability, and at the same time to retain internally
the partnership form of doing business. Close corporations are usually
small business corporations with few stockholders who participate
actively in the management of the business
Ø In other words, to take advantage of the benefits of both a corporation
and a partnership; to enjoy the best of both worlds
Ø A close corporation is also known as a “de facto partnership”
Ø Q: What is the best benefit of a corporation or the partnership?
o Corporation – Limited liability
o Partnership – Participation in management affairs
Q: What is the difference between close corporation, closed corporation, and
closely held corporation? (pwede itanong sa finals)
Ø Closed – emphasizes a determination on the part of the participants in
the enterprise to keep outsiders from acquiring any interest in the
business and may indicate that they have taken steps to accomplish that
objective by shareholders’ agreement or provision in the AOI
Ø Closely Held – focuses more on the number of shareholders in the
corporation at that particular time, indicating that they are few in
numbers. The shares of a closely held corporation are owned by
relatively limited number of stockholders)
Q: What are the permissible provisions which may be provided for in the AOI
under Sec. 97?
Ø Sec. 97. Articles of incorporation. - The articles of incorporation of a
close corporation may provide:
o 1. For a classification of shares or rights and the qualifications
for owning or holding the same and restrictions on their
transfers as may be stated therein, subject to the provisions of
the following section;
o 2. For a classification of directors into one or more classes,
each of whom may be voted for and elected solely by a
particular class of stock; and
o 3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
Q: Is Section 97 in addition to Sec. 14 which provides for the general matters
which must be contained in the AOI? Or does Sec. 97 take the place of Sec. 14
with respect to close corporation?
Ø It is in addition to Sec. 14. A close corporation must both comply with
Sec. 14 and 97
Ø (Feeling ko nagkamali lang si sir. Nakalagay sa memaid with respect to
close corporation: “the AOI must contain the provisions required by
Sec. 97 aside from the general matters in Sec. 14. Failure to do so
precludes a de jure close corporation status”. Dapat 96 yun. Kasi
mandatory yung provision under 96 whereas merely permissible lang
yung provisions sa 97. Feeling ko lang naman.)
Q: May a close be corporation be managed by the shareholders?
Ø Yes.
Escudero|Dansal|Gutierrez (2016-2017) 74
Ø The articles of incorporation of a close corporation may provide that
the business of the corporation shall be managed by the stockholders of
the corporation rather than by a board of directors. So long as this
provision continues in effect:
Ø Q: What are the effects if the shareholders act as directors?
o 1. No meeting of stockholders need be called to elect
directors;
o 2. Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed to be directors
for the purpose of applying the provisions of this Code; and
o 3. The stockholders of the corporation shall be subject to all
liabilities of directors.
o 4. The stockholders shall be held to strict fiduciary duties to
each other and among themselves. (See Sec. 100)
§ This means that they have utmost trust and
confidence in the management of the corporation.
o 5. The stockholders shall be personally liable for corporate
torts unless the corporation has obtained reasonably adequate
liability insurance. (See Sec. 100)
The articles of incorporation may likewise provide that all officers or employees
or that specified officers or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
Q: When is a restriction on transfer of shares valid?
Ø Sec. 98. Validity of restrictions on transfer of shares. - Restrictions on
the right to transfer shares must appear in the articles of incorporation
and in the by-laws as well as in the certificate of stock; otherwise, the
same shall not be binding on any purchaser thereof in good faith. Said
restrictions shall not be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the
transferring stockholder with such reasonable terms, conditions or
period stated therein.
Q: What is a good example of a restriction that is more onerous than the
granting of the pre-emptive right? (sir calls it pre-emptive right)
Ø (Not answered)
Ø Ex: a restriction fixing the purchase price far below the FMV of the
shares = more onerous because the term is unreasonable = invalid
 Ø Ex: a restriction providing that no shares may be transferred without the
consent of the BOD or SH = more onerous because the condition
unreasonable = invalid
Ø Ex: a restriction which provides for a pre-emptive right which must be
exercised only within 24 hours = more onerous because the period to
exercise the pre-emptive right is unreasonable = invalid
Q: What is a good example of a restriction that is NOT more onerous than the
granting of the pre-emptive right?
Ø Ex sa other class: a restriction which provides that only lawyers may be
transferees of shares = NOT more onerous because it does not violate
the granting of a pre-emptive right with reasonable terms, conditions,
and period
Q: What is the effect of the existing shareholder or corporation fails to
exercise the pre-emptive right?
Ø If upon the expiration of said period, the existing stockholders or the
corporation fails to exercise the option to purchase, the transferring
stockholder may sell his shares to any third person.
Q: What are the effects of a transfer of stock in breach of qualifying
conditions?
Ø Sec. 99. Effects of issuance or transfer of stock in breach of qualifying
conditions. –
Ø 1. If stock of a close corporation is issued or transferred to any person
who is not entitled under any provision of the articles of incorporation
to be a holder of record of its stock, and if the certificate for such stock
conspicuously shows the qualifications of the persons entitled to be
holders of record thereof, such person is conclusively presumed to have
notice of the fact of his ineligibility to be a stockholder.
Ø 2. If the articles of incorporation of a close corporation states the
number of persons, not exceeding twenty (20), who are entitled to be
holders of record of its stock, and if the certificate for such stock
conspicuously states such number, and if the issuance or transfer of
stock to any person would cause the stock to be held by more than such
number of persons, the person to whom such stock is issued or
transferred is conclusively presumed to have notice of this fact.
Ø 3. If a stock certificate of any close corporation conspicuously shows a
restriction on transfer of stock of the corporation, the transferee of the
stock is conclusively presumed to have notice of the fact that he has
Escudero|Dansal|Gutierrez (2016-2017) 75
acquired stock in violation of the restriction, if such acquisition violates
the restriction.
Ø 4. Whenever any person to whom stock of a close corporation has been
issued or transferred has, or is conclusively presumed under this section
to have, notice either (a) that he is a person not eligible to be a holder of
stock of the corporation, or (b) that transfer of stock to him would
cause the stock of the corporation to be held by more than the number
of persons permitted by its articles of incorporation to hold stock of the
corporation, or (c) that the transfer of stock is in violation of a
restriction on transfer of stock, the corporation may, at its option, refuse
to register the transfer of stock in the name of the transferee.
Ø Q: Can the shareholder raise the defense of good faith?
o No. Good faith is not a defense because there is a conclusive
presumption of knowledge of the restriction
Ø Q: Are there exceptions to the rules that the shareholder will have
conclusive presumption of notice?
o 5. The provisions of subsection (4) shall not applicable if the
transfer of stock, though contrary to subsections (1), (2) of (3),
has been consented to by all the stockholders of the close
corporation, or if the close corporation has amended its
articles of incorporation in accordance with this Title.
Ø Q: What does the term “transfer” cover?
o 6. The term "transfer", as used in this section, is not limited to
a transfer for value.
Ø 7. The provisions of this section shall not impair any right which the
transferee may have to rescind the transfer or to recover under any
applicable warranty, express or implied.
SAN JUAN V. CA
Ø Sec. 96
Ø Just because Spouses Gruenberg own 99.866% of the subscribed
capital stock of Motorich, it does not follow that the doctrine of
piercing of the veil of corporation is applicable in the absence of fraud
or illegality at the expense of 3rd persons like petitioner
Q: Enumerate the agreements by stockholders.
Ø Sec. 100. Agreements by stockholders. –
Ø 1. Agreements by and among stockholders executed before the
formation and organization of a close corporation, signed by all
stockholders, shall survive the incorporation of such corporation and
 shall continue to be valid and binding between and among such
stockholders, if such be their intent, to the extent that such agreements
are not inconsistent with the articles of incorporation, irrespective of
where the provisions of such agreements are contained, except those
required by this Title to be embodied in said articles of incorporation.
Ø 2. An agreement between two or more stockholders, if in writing and
signed by the parties thereto, may provide that in exercising any voting
rights, the shares held by them shall be voted as therein provided, or as
they may agree, or as determined in accordance with a procedure
agreed upon by them.
Ø 3. No provision in any written agreement signed by the stockholders,
relating to any phase of the corporate affairs, shall be invalidated as
between the parties on the ground that its effect is to make them
partners among themselves.
Ø 4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to
the conduct of the business and affairs of the corporation as to restrict
or interfere with the discretion or powers of the board of directors:
Provided, That such agreement shall impose on the stockholders who
are parties thereto the liabilities for managerial acts imposed by this
Code on directors.
Ø 5. To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be
personally liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance.
Q: When is a board meeting unnecessary or improperly held?
Ø Sec. 101. When board meeting is unnecessary or improperly held. -
Unless the by-laws provide otherwise, any action by the directors of a
close corporation without a meeting shall nevertheless be deemed valid
if:
Ø 1. Before or after such action is taken, written consent thereto is signed
by all the directors; or
Ø 2. All the stockholders have actual or implied knowledge of the action
and make no prompt objection thereto in writing; or
Ø 3. The directors are accustomed to take informal action with the
express or implied acquiescence of all the stockholders; or
Escudero|Dansal|Gutierrez (2016-2017) 76
Ø 4. All the directors have express or implied knowledge of the action in
question and none of them makes prompt objection thereto in writing.
Ø If a director's meeting is held without proper call or notice, an action
taken therein within the corporate powers is deemed ratified by a
director who failed to attend, unless he promptly files his written
objection with the secretary of the corporation after having knowledge
thereof.
Q: What if a meeting is required under the AOI, but there was no proper
notice or call?
Ø The corporate act cannot become valid. The provision says “unless the
by-laws provide otherwise”
DULAY V. CA
Sec. 102. Pre-emptive right in close corporations. - The pre-emptive right of
stockholders in close corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for money, property or personal
services, or in payment of corporate debts, unless the articles of incorporation
provide otherwise.
Q: What is the difference between the pre-emptive right under Sec. 39 and
Sec. 102
Ø 1. Sec. 39 – applies only to newly issued shares; while Sec. 102 –
applies to all shares
Ø 2. Sec. 39 – subject to exceptions; Sec. 102 – not subject to exceptions
o Q: What are the exceptions under Sec. 39?
o 1. Shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or
o 2. To shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding
capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.
Q: How is the AOI of a close corporation amended?
Ø Sec. 103. Amendment of articles of incorporation. - Any amendment to
the articles of incorporation which seeks to delete or remove any
provision required by this Title to be contained in the articles of
incorporation or to reduce a quorum or voting requirement stated in
said articles of incorporation shall not be valid or effective unless
 approved by the affirmative vote of at least two-thirds (2/3) of the
outstanding capital stock, whether with or without voting rights, or of
such greater proportion of shares as may be specifically provided in the
articles of incorporation for amending, deleting or removing any of the
aforesaid provisions, at a meeting duly called for the purpose.
Q: When is there a deadlock?
Ø Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the
articles of incorporation or by-laws or agreement of stockholders of a
close corporation, if the directors or stockholders are so divided
respecting the management of the corporation's business and affairs
that the votes required for any corporate action cannot be obtained,
with the consequence that the business and affairs of the corporation
can no longer be conducted to the advantage of the stockholders
generally, the Securities and Exchange Commission, upon written
petition by any stockholder, shall have the power to arbitrate the
dispute.
Ø Q: What may the SEC do when there is a petition for the SEC to
arbitrate filed by a shareholder?
Ø In the exercise of such power, the Commission shall have authority to
make such order as it deems appropriate, including an order:
o (1) canceling or altering any provision contained in the articles
of incorporation, by-laws, or any stockholder's agreement;
o 2) canceling, altering or enjoining any resolution or act of the
corporation or its board of directors, stockholders, or officers;
o (3) directing or prohibiting any act of the corporation or its
board of directors, stockholders, officers, or other persons
party to the action;
o (4) requiring the purchase at their fair value of shares of any
stockholder, either by the corporation regardless of the
availability of unrestricted retained earnings in its books, or by
the other stockholders;
o (5) appointing a provisional director;
o (6) dissolving the corporation; or
o (7) granting such other relief as the circumstances may
warrant.
Q: What are the qualifications of a provisional director?
Ø A provisional director shall be:
o 1. An impartial person
Escudero|Dansal|Gutierrez (2016-2017) 77
o 2. Who is neither a stockholder nor a creditor of the
corporation or of any subsidiary or affiliate of the corporation,
and
o 3. whose further qualifications, if any, may be determined by
the Commission.
Ø Q: What are the rights and powers of the provisional director?
o 1. A provisional director is not a receiver of the corporation
and does not have the title and powers of a custodian or
receiver.
o 2. A provisional director shall have all the rights and powers
of a duly elected director of the corporation,
§ Including the right to notice of and to vote at
meetings of directors, until such time as he shall be
removed by order of the Commission or by all the
stockholders.
o 3. His compensation shall be determined by agreement
between him and the corporation subject to approval of the
Commission, which may fix his compensation in the absence
of agreement or in the event of disagreement between the
provisional director and the corporation.
Ø Q: How long will the provisional director serve?
o Until such time as he shall be removed by:
§ 1. Order of the Commission or
§ 2. By all the stockholders
Q: What are the 2 remedies of the shareholder under 105?
Ø Sec. 105. Withdrawal of stockholder or dissolution of corporation. - In
addition and without prejudice to other rights and remedies available to
a stockholder under this Title, any stockholder of a close corporation
may:
o 1. Appraisal Right - for any reason, compel the said
corporation to purchase his shares at their fair value, which
shall not be less than their par or issued value, when the
corporation has sufficient assets in its books to cover its
debts and liabilities exclusive of capital stock:
o 2. File a Petition for dissolution with the SEC - Provided,
That any stockholder of a close corporation may, by written
petition to the Securities and Exchange Commission, compel
the dissolution of such corporation
 o 2 Grounds:
§ 1. Whenever any of acts of the directors, officers or
those in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or unfairly
prejudicial to the corporation, or
§ 2. Any stockholder, or whenever corporate assets
are being misapplied or wasted.
Q: What is the difference between the appraisal right with respect to ordinary
corporations to close corporation?
Ø 1. With respect to ordinary corporations – must be for any of the cases
under Sec. 81; With respect to close corporations – may be for any
reason
o Q: What are the cases provided for under Sec. 81?
o 1. In case any amendment to the articles of incorporation has
the effect of changing or restricting the rights of any
stockholder or class of shares, or
o 2. Of authorizing preferences in any respect superior to those
of outstanding shares of any class, or of extending or
shortening the term of corporate existence;
o 3. In case of sale, lease, exchange, transfer, mortgage, pledge
or other disposition of all or substantially all of the corporate
property and assets as provided in the Code; and
o 4. In case of merger or consolidation
o There is also appraisal right under Sec. 42 – investment in
corporate funds in another corporation or business or for any
other purpose
Ø 2. With respect to ordinary corporation – no need sufficient assets to
cover debts and liabilities exclusive of capital. What is required is that
the corporation has Unrestricted Retained Earnings; With respect to
close corporation – corporation needs sufficient assets to cover debts
and liabilities exclusive of capital
Q: What is the difference between an ordinary corporation and a close
corporation?
Ø (See memaid for table)
Assign: amendment of AOI of close corp up to special corporations, dulay case,
2 cases on special corporations
Escudero|Dansal|Gutierrez (2016-2017) 78
TITLE XIII
SPECIAL CORPORATIONS
Chapter I - Educational Corporations
Q: What is an educational corporation?
Ø It is a stock or non-stock corporation organized to provide for facilities
for teaching or instruction
Q: What provisions govern educational corporations?
Ø Sec. 106. Incorporation. - Educational corporations shall be governed
by special laws
o Ex of special law: RA 7798 – amending the education act of
1982
Ø and by the general provisions of this Code.
Q: Is there any pre-requisite before incorporation of an educational
corporation?
Ø Sec. 107. Pre-requisites to incorporation. - Except upon favorable
recommendation of the Ministry of Education and Culture (Now
Department of Education), the Securities and Exchange Commission
shall not accept or approve the articles of incorporation and by-laws of
any educational institution.
Q: What are the rules as to number of trustees and their terms?
Ø With respect to Non-Stock:
o Sec. 108. Board of trustees. - Trustees of educational
institutions organized as non-stock corporations shall not be
less than five (5) nor more than fifteen (15): Provided,
however, That the number of trustees shall be in multiples of
five (5).
o Unless otherwise provided in the articles of incorporation on
the by-laws, the board of trustees of incorporated schools,
colleges, or other institutions of learning shall, as soon as
organized, so classify themselves that the term of office of
one-fifth (1/5) of their number shall expire every year.
o Q: Give an illustration of the staggering term of BOT.
o Q: When does the rule with respect to the serving of
unexpired period of the term apply?
§ Only in case of vacancy (Such as when a trustee has
died, been removed, or even resigned)
 § Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term,
shall hold office only for the unexpired period.
Trustees elected thereafter to fill vacancies caused by
expiration of term shall hold office for five (5) years.
A majority of the trustees shall constitute a quorum
for the transaction of business. The powers and
authority of trustees shall be defined in the by-laws.
Ø With respect to Stock:
o For institutions organized as stock corporations, the number
and term of directors shall be governed by the provisions on
stock corporations.
Chapter II - RELIGIOUS CORPORATIONS
Q: What is a religious corporation?
Ø A corporation composed entirely of spiritual persons and which is
organized for the furtherance of a religion or perpetuating the right of
the church or for the administration of church or religious works or
property
Q: What are the classes of religious corporations?
Ø Sec. 109. Classes of religious corporations. - Religious corporations
may be incorporated by one or more persons. Such corporations may be
classified into:
o Corporations Sole, and (See Sec. 110)
o Religious societies or Corporation Aggregate (See Sec. 116)
Ø Q: What is the difference between the 2?
o Corporation Sole – 1 member/incorporator
o Religious Society – 2 or more members/incorporators
Ø Religious corporations shall be governed by this Chapter and by the
general provisions on non-stock corporations insofar as they may be
applicable.
ROMAN CATHOLIC V. DAVAO
Ø There was no violation of the constitutional requirement which
provides that agricultural lands must be 60% Filipino owned. The basis
of ownership is not the corporation sole. He is not the owner if such
property. The true owner is the Roman Catholic Faithful. The
corporation sole is merely holding the property in trust
Escudero|Dansal|Gutierrez (2016-2017) 79
IGLESIA EVANGELICA V. BISHOP LAZARO
Ø There is no need to dissolve the corporation sole to convert it to a
corporation aggregate in order to increase membership. Mere
amendment of the AOI is sufficient by the one member of the
corporation sole with the concurrence of 2/3 of the membership of the
organization for whom he acts as trustee
Q: What is corporation sole?
Ø Sec. 110. Corporation sole. - For the purpose of administering and
managing, as trustee, the affairs, property and temporalities of any
religious denomination, sect or church, a corporation sole may be
formed by the chief archbishop, bishop, priest, minister, rabbi or other
presiding elder of such religious denomination, sect or church.
Q: What must be contained in the AOI of a corporation sole?
Ø Sec. 111. Articles of incorporation. - In order to become a corporation
sole, the chief archbishop, bishop, priest, minister, rabbi or presiding
elder of any religious denomination, sect or church must file with the
Securities and Exchange Commission articles of incorporation setting
forth the following:
o 1. That he is the chief archbishop, bishop, priest, minister,
rabbi or presiding elder of his religious denomination, sect or
church and that he desires to become a corporation sole;
o 2. That the rules, regulations and discipline of his religious
denomination, sect or church are not inconsistent with his
becoming a corporation sole and do not forbid it;
o 3. That as such chief archbishop, bishop, priest, minister, rabbi
or presiding elder, he is charged with the administration of the
temporalities and the management of the affairs, estate and
properties of his religious denomination, sect or church within
his territorial jurisdiction, describing such territorial
jurisdiction;
o 4. The manner in which any vacancy occurring in the office of
chief archbishop, bishop, priest, minister, rabbi of presiding
elder is required to be filled, according to the rules, regulations
or discipline of the religious denomination, sect or church to
which he belongs; and
o 5. The place where the principal office of the corporation sole
is to be established and located, which place must be within
the Philippines.
 o The articles of incorporation may include any other provision
not contrary to law for the regulation of the affairs of the
corporation.
Q: What is required to be filed when filing AOI?
Ø Sec. 112. Submission of the articles of incorporation. - The articles of
incorporation must be verified, before filing, by affidavit or affirmation
of the chief archbishop, bishop, priest, minister, rabbi or presiding
elder, as the case may be, and accompanied by a copy of the
commission, certificate of election or letter of appointment of such
chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly
certified to be correct by any notary public.
Ø From and after the filing with the Securities and Exchange Commission
of the said articles of incorporation, verified by affidavit or affirmation,
and accompanied by the documents mentioned in the preceding
paragraph, such chief archbishop, bishop, priest, minister, rabbi or
presiding elder shall become a corporation sole and all temporalities,
estate and properties of the religious denomination, sect or church
theretofore administered or managed by him as such chief archbishop,
bishop, priest, minister, rabbi or presiding elder shall be held in trust by
him as a corporation sole, for the use, purpose, behalf and sole benefit
of his religious denomination, sect or church, including hospitals,
schools, colleges, orphan asylums, parsonages and cemeteries thereof.
Q: Can a corporation sole acquire property?
Ø Yes.
Ø Sec. 113. Acquisition and alienation of property. - Any corporation
sole may purchase and hold real estate and personal property for its
church, charitable, benevolent or educational purposes, and may
receive bequests or gifts for such purposes.
Ø Q: Can a corporation sole sell or mortgage its property?
o Yes, provided that it has obtained a court order from the RTC
of the province where the property is situated. This done by
filing a verified petition. Such notice thru publication or any
other manner under the court order shall be made.
o Such corporation may sell or mortgage real property held by it
by obtaining an order for that purpose from the Court of First
Instance of the province where the property is situated upon
proof made to the satisfaction of the court that notice of the
application for leave to sell or mortgage has been given by
Escudero|Dansal|Gutierrez (2016-2017) 80
publication or otherwise in such manner and for such time as
said court may have directed, and that it is to the interest of the
corporation that leave to sell or mortgage should be granted.
The application for leave to sell or mortgage must be made by
petition, duly verified, by the chief archbishop, bishop, priest,
minister, rabbi or presiding elder acting as corporation sole,
and may be opposed by any member of the religious
denomination, sect or church represented by the corporation
sole:
Ø Q: Is there any exception to the necessity of court intervention?
o Yes. When the rules, regulations of the religious
denomination, sect, or church, religious society, or order
regulate the method or manner of acquiring, holding, selling,
or mortgaging the estate
o Provided, That in cases where the rules, regulations and
discipline of the religious denomination, sect or church,
religious society or order concerned represented by such
corporation sole regulate the method of acquiring, holding,
selling and mortgaging real estate and personal property, such
rules, regulations and discipline shall control, and the
intervention of the courts shall not be necessary.
Q: How are vacancies filled in religious corporation?
Ø Sec. 114. Filling of vacancies. - The successors in office of any chief
archbishop, bishop, priest, minister, rabbi or presiding elder in a
corporation sole shall become the corporation sole on their accession to
office and shall be permitted to transact business as such on the filing
with the Securities and Exchange Commission of a copy of their
commission, certificate of election, or letters of appointment, duly
certified by any notary public.
Ø During any vacancy in the office of chief archbishop, bishop, priest,
minister, rabbi or presiding elder of any religious denomination, sect or
church incorporated as a corporation sole, the person or persons
authorized and empowered by the rules, regulations or discipline of the
religious denomination, sect or church represented by the corporation
sole to administer the temporalities and manage the affairs, estate and
properties of the corporation sole during the vacancy shall exercise all
the powers and authority of the corporation sole during such vacancy.
Q: How are religious corporations dissolved?
Ø Sec. 115. Dissolution. - A corporation sole may be dissolved and its
affairs settled voluntarily by submitting to the Securities and Exchange
Commission a verified declaration of dissolution.
Ø The declaration of dissolution shall set forth:
o 1. The name of the corporation;
o 2. The reason for dissolution and winding up;
o 3. The authorization for the dissolution of the corporation by
the particular religious denomination, sect or church;
o 4. The names and addresses of the persons who are to
supervise the winding up of the affairs of the corporation.
Ø Upon approval of such declaration of dissolution by the Securities and
Exchange Commission, the corporation shall cease to carry on its
operations except for the purpose of winding up its affairs
Q: What is a religious corporation?
Ø Sec. 116. Religious societies. - Any religious society or religious order,
or any diocese, synod, or district organization of any religious
denomination, sect or church, unless forbidden by the constitution,
rules, regulations, or discipline of the religious denomination, sect or
church of which it is a part, or by competent authority, may, upon
written consent and/or by an affirmative vote at a meeting called for the
purpose of at least two-thirds (2/3) of its membership, incorporate for
the administration of its temporalities or for the management of its
affairs, properties and estate by filing with the Securities and Exchange
Commission, articles of incorporation verified by the affidavit of the
presiding elder, secretary, or clerk or other member of such religious
society or religious order, or diocese, synod, or district organization of
the religious denomination, sect or church, setting forth the following:
o 1. That the religious society or religious order, or diocese,
synod, or district organization is a religious organization of a
religious denomination, sect or church;
o 2. That at least two-thirds (2/3) of its membership have given
their written consent or have voted to incorporate, at a duly
convened meeting of the body;
o 3. That the incorporation of the religious society or religious
order, or diocese, synod, or district organization desiring to
incorporate is not forbidden by competent authority or by the
constitution, rules, regulations or discipline of the religious
denomination, sect, or church of which it forms a part;
Escudero|Dansal|Gutierrez (2016-2017) 81
o 4. That the religious society or religious order, or diocese,
synod, or district organization desires to incorporate for the
administration of its affairs, properties and estate;
o 5. The place where the principal office of the corporation is to
be established and located, which place must be within the
Philippines; and
o 6. The names, nationalities, and residences of the trustees
elected by the religious society or religious order, or the
diocese, synod, or district organization to serve for the first
year or such other period as may be prescribed by the laws of
the religious society or religious order, or of the diocese,
synod, or district organization, the board of trustees to be not
less than five (5) nor more than fifteen (15).
TITLE XIV
DISSOLUTION
Q: What is dissolution?
Ø The extinguishment of franchise to be a corporation and the termination
of its corporate existence
Q: What are the steps in corporate dissolution?
Ø STEP 1: Termination of the corporation at least as far as the right to
go on during ordinary business is concerned
Ø STEP 2: Winding up of its affairs
o This refers to the settlement of debts and liabilities to unpaid
creditors. Whatever is left of the corporation’s assets will be
distributed to its stockholders or members
Ø STEP 3: Termination of the corporation for all purposes
Q: What are the methods of dissolution?
Ø Sec. 117. Methods of dissolution. - A corporation formed or organized
under the provisions of this Code may be dissolved:
Ø Voluntarily or
o 1. Dissolution where creditors are not affected
o 2. Dissolution where creditors are affected
o 3. Dissolution by shortening corporate term
o 4. With respect to Corporations Sole, submission of a verified
declaration of dissolution for SEC approval
§ Q: Who submits the verified declaration?
 § The sole incorporator of a corporation sole, or the § Q: What are the grounds in which a petition for
chief archbishop, bishop, priest, minister, rabbi or dissolution may be filed with the SEC?
other presiding elder of the religious denomination, § 1. Violations by a corporation
sect or church. § 2. Deadlocks in a close corporation
Ø Involuntarily. • Upon petition, SEC may arbitrate a
o 1. Expiration of corporate term corporation and order dissolution
o 2. Legislative enactment § 3. Mismanagement of a close corporation
§ Especially public utilities. • Grounds: 1. Illegal, dishonest, fraudulent,
§ Reason: Congress have the inherent power to make oppressive or unfairly prejudicial to the
laws which carries with it the power to alter or repeal corporation/SH; 2. Corporate assets are
them being misapplied/wasted
§ Q: What are the limitations to the exercise of this § 4. Suspension or revocation of Certificate of
power? Registration of a corporation
§ 1. Sec. 11, Art XII, 1987 Constition: “xxx neither • Q: What are the grounds to suspend/revoke
shall any such franchise or right be granted except COR?
under the condition that it shall be subject to • 1. Fraud in procuring the COR
amendment, alteration, or repeal by the Congress • 2. Serious misrepresentation as to what the
when the COMMON GOOD so requires corporation can do/is doing (to the great
§ 2. Sec. 145. Amendment or repeal: “No right or prejudice to the general public)
remedy in favor of or against any corporation, its • 3. Refusal to comply/defiance of any lawful
stockholders, members, directors, trustees, or order of the SEC of acts which would
officers, nor any liability incurred by any such amount to grave violation of its franchise
corporation, stockholders, members, directors,
• 4. Continuous inoperation for at least 5 years
trustees, or officers, shall be removed or impaired
• 5. Failure to file by-laws within the required
either by the subsequent dissolution of said
period
corporation or by any subsequent amendment or
• 6. Failure to file required reports in
repeal of this Code or of any part thereof”
appropriate forms as determined by the SEC
§ 3. The dissolution must NOT impair existing
within the prescribed period
obligations of contracts or take away vested rights
§ Q: Can Congress dissolve by legislative enactment
Q: Explain the procedure with respect to dissolution where no creditors are
even private entities, say San Beda?
affected.
§ Yes, provided that the limitations are complied with
Ø Sec. 118. Voluntary dissolution where no creditors are affected. - If
o 3. Failure to formally organize and commence corporate
dissolution of a corporation does not prejudice the rights of any creditor
business within 2 years from the issuance of Certificate of
having a claim against it, the dissolution may be effected
Incorporation
Ø By majority vote of the board of directors or trustees, and
§ Q: What do you mean by “formally organize or
Ø By a resolution duly adopted by the affirmative vote of the
commence”?
stockholders owning at least 2/3 of the outstanding capital stock or of at
§ Election of corporate officers
least 2/3 of the members
o 4. Order of the SEC in cases provided for under existing law,
Ø Of a meeting to be held upon call of the directors or trustees
rules and regulations

Escudero|Dansal|Gutierrez (2016-2017) 82
 Ø After PUBLICATION of the notice of time, place and object of the
meeting
o For 3 consecutive weeks in a newspaper published in the
place where the principal office of said corporation is
located; and
o If no newspaper is published in such place, then in a
newspaper of general circulation in the Philippines,
Ø After sending such NOTICE to each stockholder or member either by
registered mail or by personal delivery at least 30 days prior to said
meeting.
Ø A copy of the resolution authorizing the dissolution shall be
CERTIFIED (Certificate which is signed ) by a majority of the
board of directors or trustees and
o Q: What is the certification all about?
§ That the majority of the board is authorized by
corporation and the required vote is obtained
Ø COUNTERSIGNED by the secretary of the corporation.
Ø The Securities and Exchange Commission shall thereupon issue the
CERTIFICATE OF DISSOLUTION.
VESAGAS V. C.A.
Ø Members of the corporation complained that they were stripped off
their membership without due process. The defense of Vesagas was the
corporation no longer existed
Ø On the issue of WON the corporation was dissolved, the SC held in the
negative because the corporation failed to follow the required
procedure under the corporation code.
Ø The corporation merely submitted the following documentary evidence:
board resolution and minutes of the meeting. These alone do not prove
dissolution
Ø The procedure in dissolution must be strictly followed
Ø The 3 documents required to prove dissolution
o 1. Certificate of Dissolution issued by the SEC
o 2. Board Resolution
o 3. Certification countersigned by the majority of the board and
signed by the corporate secretary authorizing the dissolution
Ø The Certificate of Dissolution issued by the SEC is the best evidence of
dissolution. Thru this, the corporation is presumed to have complied
with required procedure under the Corporation Code
Escudero|Dansal|Gutierrez (2016-2017) 83
Q: Explain the procedure with respect to dissolution where creditors are
affected.
Ø Sec. 119. Voluntary dissolution where creditors are affected. - Where
the dissolution of a corporation may prejudice the rights of any
creditor, the petition for dissolution shall be filed with the Securities
and Exchange Commission.
Ø The petition shall be signed by
o A majority of its board of directors or trustees OR other
officers having the management of its affairs,
Ø Verified by its
o President or
o Secretary or
o One of its directors or trustees, and
Ø Shall set forth:
o All claims and demands against it, and
o That its dissolution was resolved upon by the affirmative vote
of the stockholders representing at least 2/3 of the outstanding
capital stock or by at least 2/3 of the members at a meeting of
its stockholders or members called for that purpose.
Ø If the petition is sufficient in form and substance, the Commission
shall, by an ORDER reciting the purpose of the petition, fix a date on
or before which OBJECTIONS thereto may be filed by any person,
o Which date shall not be less than 30 days nor more than
sixty 60 days after the entry of the order.
o Timeframe: this means that the date of filing objections must
be fixed on a date NOT earlier than 30 days after the order and
NOT later than 60 days after the order.
o Ex: if the date of entry of the order is April 4, then the date for
filing objections must be fixed not earlier than May 4 and not
later June 5
Ø Before such date, a copy of the order shall be published
o At least once a week for 3 consecutive weeks in a newspaper
of general circulation published in the municipality or city
where the principal office of the corporation is situated, or
o if there be no such newspaper, then in a newspaper of
general circulation in the Philippines, and
Ø A similar copy shall be posted for 3 consecutive weeks in 3 public
places in such municipality or city.
Ø Upon 5 day's notice, given after the date on which the right to file
objections as fixed in the order has expired, the Commission shall
 proceed to HEAR the petition and try any issue made by the
OBJECTIONS filed; and if no such objection is sufficient, and the
material allegations of the petition are true,
Ø It shall render judgment dissolving the corporation and
o Directing such disposition of its assets as justice requires, and
o May appoint a receiver to collect such assets and pay the
debts of the corporation.
§ The function of the receiver is to administer the
liquidation, manage the settlement of liabilities and
debts
Q: Explain the procedure with respect to dissolution by shortening the
corporate term of existence.
Ø Sec. 120. Dissolution by shortening corporate term. - A voluntary
dissolution may be effected by amending the articles of incorporation
to shorten the corporate term pursuant to the provisions of this Code.
Ø A copy of the amended articles of incorporation shall be submitted to
the Securities and Exchange Commission in accordance with this
Code.
Ø Upon approval of the amended articles of incorporation of the
expiration of the shortened term, as the case may be, the corporation
shall be deemed dissolved without any further proceedings, subject to
the provisions of this Code on liquidation.
Q: If the corporate term is shortened, do the shareholders still have appraisal
right?
Ø Yes.
Ø Under Section 37, shortening of the corporate term is not one of the
instances wherein the appraisal right is available
Ø Under Section 81, however, it is included.
Ø Thus, appraisal right is available in both shortening and extending the
corporate term
Sec. 121. Involuntary dissolution. - A corporation may be dissolved by the
Securities and Exchange Commission upon filing of a verified complaint and
after proper notice and hearing on the grounds provided by existing laws, rules
and regulations.
Sec. 122. Corporate liquidation. - Every corporation whose charter expires by
its own limitation or is annulled by forfeiture or otherwise, or whose corporate
Escudero|Dansal|Gutierrez (2016-2017) 84
existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and after
any such conveyance by the corporation of its property in trust for the benefit of
its stockholders, members, creditors and others in interest, all interest which the
corporation had in the property terminates, the legal interest vests in the trustees,
and the beneficial interest in the stockholders, members, creditors or other
persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found shall be
escheated to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities.
Q: What is Liquidation?
Ø It is the winding up of the affairs of the corporation by:
o 1. Reducing its assets in money
o 2. Settling with the creditors or debtors, and
o 3. Apportioning the amount of profit or loss
Q: What are the methods of corporate liquidation?
Ø 1. Liquidation by the corporation itself
Ø 2. Liquidation by a duly appointed receiver
Ø 3. Liquidation by a trustee to whom the corporation had conveyed the
corporate assets
Q: What is the difference between a receiver and trustee?
Ø Receiver – appointed by the corporation or SEC to collect the
corporate assets and pay the debts of the corporation (Sec. 119)
Ø Trustee – appointed by the corporation
Q: What is the priority of obligations of corporations?
Ø 1. When corporation becomes insolvent - Creditors
Ø 2. SH/members/directors/officers who are also creditors
Ø 3. Remaining assets to be distributed to the SH/members
Ø 4. If no SH/members, escheated (forfeited) in favor of the government,
specifically the municipality or city where the asset is located
SPS. GELANO V. CA
Ø While the civil case against Sps. Gelano was pending, ISI amended its
AOI to shorten its corporate existence. The case was dismissed by the
RTC on the ground that it had no jurisdiction since the corporation is
no longer in existence
Ø WON RTC had jurisdiction? Yes.
Ø Sec. 122: Every corporation shall nevertheless be continued as a body
corporate for 3 years after the time when it would have been so
dissolved. xxx At any time during said 3 years, the corporation is
authorized and empowered to convey all of its property to trustees for
the benefit of stockholders, members, creditors, and other persons in
interest.
Ø Even if the case continued beyond the 3 year period (in this case, 7
years had already elapsed), as long as the case was filed when the
corporation was still in existence, the case will still SUBSISTS
Ø Also, a lawyer who prosecuted and defended the interest of a
corporation and appeared on behalf of the corporation before and after
dissolution, may be considered as a trustee contemplated in Sec. 122.
In the case at bar, there was a substantial compliance of the
appointment of a trustee when the lawyers prosecuted the interest of the
corporation when it was still in existence
PHILIPPINE VETERANS BANK V. VEGA
Ø The enactment of Republic Act No. 7169 has rendered the liquidation
court functus officio and respondent judge has been stripped of the
authority to issue orders involving acts of liquidation.
Ø Liquidation connotes a winding up or settling with the creditors and
debtors while rehabilitation connotes a reopening or reorganization.
Both are diametrically opposed to each other, such that both cannot be
undertaken at the same time. To allow the liquidation proceedings to
continue would seriously hinder the rehabilitation of the subject bank.
Ø Liquidation = termination; Rehabilitation = continuation
Escudero|Dansal|Gutierrez (2016-2017) 85
TAN TIONG BIO V. CIR
Ø Q: What if a corporation has no more assets, can the creditors still
collect?
o Yes, SH be liable. The creditors can follow the properties of
the corporation even beyond the 3 year period under Sec. 122
if the assets of the corporation were distributed to the
SH/members without first settling the corporation’s debts and
liabilities first
§ This is the principle enunciated in American
jurisprudence made applicable also in this case
Ø If the government was not allowed to collect taxes which are rightfully
due to it, then that would set a dangerous precedent for the reason that
the SH/members could easily escape tax liability by the simple
expedient of transferring to other persons the property of the
corporation. This is an indirect tax evasion.
REBOLLIDO V. CA AND PEPSICO
Ø WON PEPSICO is a Real-Party-Interest? Yes.
Ø Sec. 122: Every corporation shall nevertheless be continued as a body
corporate for 3 years after the time when it would have been so
dissolved. xxx At any time during said 3 years, the corporation is
authorized and empowered to convey all of its property to trustees for
the benefit of stockholders, members, creditors, and other persons in
interest.
Ø Assuming that a corporation is already dissolved but the action lasted
beyond the 3 year period, the action may still be prosecuted as long as
the corporation was still in existence at the time of filing
Ø In the case at bar, the case was filed within the 3 year period.
Ø As long as the properties are identifiable to the corporation and
transferred to another person, the creditors may follow the property
Ø Since the corporation is still subject to suit, it is incidentally subject to
the court processes such as summons
Assign: Up to foreign corporations
TITLE XV
FOREIGN CORPORATIONS
Q: What is a Foreign Corporation?
Ø Sec. 123. Definition and rights of foreign corporations. - For the
purposes of this Code, a foreign corporation is one formed, organized
or existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in
its own country or state.
Ø Q: From the definition under the Corporation Code, what are the 2
elements of a Foreign Corporation?
o 1. The FC is formed, organized or existing under any laws
other than those of the Philippines; and
o 2. The laws by which the FC is organized allows Filipino
citizens and corporations to do business in its own country
or state.
§ This also known as the “Right of Reciprocity”
Ø Q: What right is granted to foreign corporations?
o It shall have the right to transact business in the Philippines
after it shall have obtained:
§ 1. A license to transact business in this country in
accordance with this Code and
§ 2. A certificate of authority from the appropriate
government agency.
Q: How do you determine the nationality of a corporation? (3 tests)
Ø 1. Incorporation test – the nationality of a corporation is that of the
state of incorporation regardless of the nationality of the shareholders
Ø 2. Control test – the nationality of a corporation is depends upon the
nationality of the controlling stockholders
Ø 3. Grandfather rule – the combined totals in the investing corporation
and the investee corporation must be traced (grandfathered) to
determine the total percentage of Filipino ownership
Ø Q: In our jurisdiction, which test do we apply?
o According to a SEC circular, we apply the Control Test in
determining whether a corporation has complied with the
constitutional provisions requiring certain industries to be
Filipino owned (i.e. 100% Filipino-owned, 60%-40%)
Escudero|Dansal|Gutierrez (2016-2017) 86
Q: What happens when a foreign corporation was granted a license before the
effectivity of the Corporation Code?
Ø Sec. 124. Application to existing foreign corporations. - Every foreign
corporation which on the date of the effectivity of this Code is
authorized to do business in the Philippines under a license therefore
issued to it, shall continue to have such authority under the terms and
condition of its license, subject to the provisions of this Code and other
special laws.
o However, the corporation must still comply with the new
requirements of the Corporation Code (I.e. Rule of
Reciprocity) within 2 years from the effectivity of the Code
Q: What are the requirements for the issuance of a license?
Ø The FC must file an application under oath
Ø Sec. 125. Application for a license. - A foreign corporation applying
for a license to transact business in the Philippines shall submit to the
Securities and Exchange Commission:
o A copy of its articles of incorporation and by-laws,
o Certified in accordance with law, and their
o Translation to an official language of the Philippines, if
necessary.
o The application shall be under oath and,
Ø Q: What must be contained in the application?
o Unless already stated in its articles of incorporation, shall
specifically set forth the following:
§ 1. The date and term of incorporation;
§ 2. The address, including the street number, of the
principal office of the corporation in the country or
state of incorporation;
§ 3. The name and address of its resident agent
authorized to accept summons and process in all legal
proceedings and, pending the establishment of a local
office, all notices affecting the corporation;
§ 4. The place in the Philippines where the corporation
intends to operate;
§ 5. The specific purpose or purposes which the
corporation intends to pursue in the transaction of its
business in the Philippines: Provided, That said
purpose or purposes are those specifically stated in
 the certificate of authority issued by the appropriate
government agency;
§ 6. The names and addresses of the present directors
and officers of the corporation;
§ 7. A statement of its authorized capital stock and the
aggregate number of shares which the corporation
has authority to issue, itemized by classes, par value
of shares, shares without par value, and series, if any;
§ 8. A statement of its outstanding capital stock and the
aggregate number of shares which the corporation
has issued, itemized by classes, par value of shares,
shares without par value, and series, if any;
§ 9. A statement of the amount actually paid in; and
§ 10. Such additional information as may be necessary
or appropriate in order to enable the Securities and
Exchange Commission to determine whether such
corporation is entitled to a license to transact business
in the Philippines, and to determine and assess the
fees payable.
Ø Q: What are the necessary attachments to the application?
(Conditions Precedent)
o 1. Attached to the application for license shall be a duly
executed certificate under oath by the authorized official or
officials of the jurisdiction of its incorporation, attesting to the
fact that:
§ The laws of the country or state of the applicant
allow Filipino citizens and corporations to do
business therein, and
§ That the applicant is an existing corporation in good
standing.
§ If such certificate is in a foreign language, a
translation thereof in English under oath of the
translator shall be attached thereto.
o 2. The application for a license to transact business in the
Philippines shall likewise be accompanied by a statement
under oath of the president or any other person authorized
by the corporation, showing to the satisfaction of the
Securities and Exchange Commission and other governmental
agency in the proper cases that:
§ The applicant is solvent and
Escudero|Dansal|Gutierrez (2016-2017) 87
§ In sound financial condition, and
§ Setting forth the assets and liabilities of the
corporation as of the date not exceeding one (1) year
immediately prior to the filing of the application.
o 3. Foreign banking, financial and insurance corporations
shall, in addition to the above requirements, comply with the
provisions of existing laws applicable to them. In the case of
all other foreign corporations, no application for license to
transact business in the Philippines shall be accepted by the
Securities and Exchange Commission without previous
authority from the appropriate government agency,
whenever required by law.
o 4. (Sec. 128) Written power of attorney designating some
person who must be a resident of the Philippines, on whom
any summons and other legal processes may be served in all
actions or other legal proceedings against such corporation
o 5. (Sec. 128) Any such foreign corporation shall likewise
execute and file with the Securities and Exchange
Commission an agreement or stipulation, executed by the
proper authorities of said corporation, in form and substance
with the SEC to the effect that if the FC shall cease to transact
business in the Philippines or that there is no resident agent,
then the SEC can receive summons and legal processes on
behalf of the FC
Q: What happens when all the requirements are complied with? (Conditions
Subsequent)
Ø Sec. 126. Issuance of a license. - If the Securities and Exchange
Commission is satisfied that the applicant has complied with all the
requirements of this Code and other special laws, rules and regulations,
the Commission shall issue a license to the applicant:
Ø 1. To transact business in the Philippines (only) for the purpose or
purposes specified in such license. Upon issuance of the license, such
foreign corporation may commence to transact business in the
Philippines and continue to do so for as long as it retains its authority
to act as a corporation under the laws of the country or state of its
incorporation,
o Unless such license is sooner surrendered, revoked, suspended
or annulled in accordance with this Code or other special laws
 Ø 2. Within sixty (60) days after the issuance of the license to transact
business in the Philippines, the license, except foreign banking or
insurance corporation, shall deposit with the Securities and Exchange
Commission for the benefit of present and future creditors of the
licensee in the Philippines, securities satisfactory to the Securities
and Exchange Commission, consisting of bonds or other evidence of
indebtedness of the Government of the Philippines, its political
subdivisions and instrumentalities, or of government-owned or
controlled corporations and entities, shares of stock in "registered
enterprises" as this term is defined in Republic Act No. 5186, shares of
stock in domestic corporations registered in the stock exchange, or
shares of stock in domestic insurance companies and banks, or any
combination of these kinds of securities, with an actual market value of
at least one hundred thousand (P100,000.) pesos;
Ø 3. Provided, however, That within six (6) months after each fiscal year
of the licensee, the Securities and Exchange Commission shall require
the licensee to deposit additional securities equivalent in actual
market value to two (2%) percent of the amount by which the
licensee's gross income for that fiscal year exceeds five million
(P5,000,000.00) pesos.
Ø 4. The Securities and Exchange Commission shall also require deposit
of additional securities if the actual market value of the securities
on deposit has decreased by at least ten (10%) percent of their
actual market value at the time they were deposited.
Ø 5. The Securities and Exchange Commission may at its discretion
release part of the additional securities deposited with it if the gross
income of the licensee has decreased, or if the actual market value
of the total securities on deposit has increased, by more than ten
(10%) percent of the actual market value of the securities at the
time they were deposited.
Ø Q: May the corporation allow the licensee to substitute the securities?
o Yes. The Securities and Exchange Commission may, from
time to time, allow the licensee to substitute other securities
for those already on deposit:
o 1. As long as the licensee is solvent.
o 2. And allowed by the SEC.
o Such licensee shall be entitled to collect the interest or
dividends on the securities deposited.
Ø Q: What happens if a corporation ceased to conduct business?
Escudero|Dansal|Gutierrez (2016-2017) 88
o In the event the licensee ceases to do business in the
Philippines, the securities deposited as aforesaid shall be
returned,
§ 1. Upon the licensee's application therefor and
§ 2. Upon proof to the satisfaction of the Securities
and Exchange Commission that the licensee has no
liability to Philippine residents, including the
Government of the Republic of the Philippines.
Q: Who may be designated as a resident agent?
Ø Sec. 127. Who may be a resident agent. - A resident agent may be
either:
Ø 1. An individual
o a. Residing in the Philippines or
o b. Of good moral character and
o c. Of sound financial standing
Ø 2. A domestic corporation
o lawfully transacting business in the Philippines:
Ø (Provided, That in the case of an individual, he must be of good moral
character and of sound financial standing.)
Q: What is the function of the resident agent
Ø Receive summons and other legal processes may be served in all
actions or other legal proceedings against such corporation
Ø Sec. 128. Resident agent; service of process. - The Securities and
Exchange Commission shall require as a condition precedent to the
issuance of the license to transact business in the Philippines by any
foreign corporation that such corporation file with the Securities and
Exchange Commission a written power of attorney designating some
person who must be a resident of the Philippines, on whom any
summons and other legal processes may be served in all actions or
other legal proceedings against such corporation, and consenting
that service upon such resident agent shall be admitted and held as
valid as if served upon the duly authorized officers of the foreign
corporation at its home office.
Ø Q: Aside from the resident agent, who else may receive summons or
legal processes?
o The SEC after the FC executed an agreement/stipulation (as a
precondition to the issuance of license) with the SEC to the
effect that if the FC shall cease to transact business in the
 Philippines or that there is no resident agent, then the SEC can
receive summons and legal processes on behalf of the FC
§ Provided that: the SEC shall, within ten (10) days
thereafter, transmit by mail a copy of such
summons or other legal process to the corporation
at its home or principal office.
§ All expenses incurred by the Commission for such
service shall be paid in advance by the party at
whose instance the service is made.
o Any such foreign corporation shall likewise execute and file
with the Securities and Exchange Commission an agreement
or stipulation, executed by the proper authorities of said
corporation, in form and substance as follows:
§ "The (name of foreign corporation) does hereby
stipulate and agree, in consideration of its being
granted by the Securities and Exchange Commission
a license to transact business in the Philippines, that
if at any time said corporation shall cease to
transact business in the Philippines, or shall be
without any resident agent in the Philippines on
whom any summons or other legal processes may
be served, then in any action or proceeding arising
out of any business or transaction which occurred
in the Philippines, service of any summons or
other legal process may be made upon the
Securities and Exchange Commission and that such
service shall have the same force and effect as if
made upon the duly-authorized officers of the
corporation at its home office."
o Whenever such service of summons or other process shall be
made upon the Securities and Exchange Commission, the
Commission shall, within ten (10) days thereafter, transmit
by mail a copy of such summons or other legal process to
the corporation at its home or principal office. The sending
of such copy by the Commission shall be necessary part of and
shall complete such service. All expenses incurred by the
Commission for such service shall be paid in advance by the
party at whose instance the service is made.
Escudero|Dansal|Gutierrez (2016-2017) 89
o In case of a change of address of the resident agent, it shall be
his or its duty to immediately notify in writing the Securities
and Exchange Commission of the new address.
Q: What do you mean by ‘transacting’ or ‘doing business’ in the Philippines?
Ø The Corporation Code itself does not define such terms
Ø Under the Foreign Investments Act (RA 7042):
o The phrase doing business shall include: (SSOAP)
§ “Soliciting orders, service contracts, opening
offices, whether called liaison offices or branches;
appointing representatives or distributors domiciled
in the Philippines; participating in the management,
supervision or control of any domestic business, firm,
entity or corporation in the Philippines; and 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 purpose and object of the business
organization”
Ø The Corporation Code does not define this phrase
Ø Q: What if none of the circumstances are present, can the FC still be
considered to be doing business?
o Yes. Jurisprudence provides for the definition (See Eriks Pte
v. CA)
Ø Q: Is a license always pre-requisite before a corporation is considered
to be ‘doing business’? Such that if a corporation does not have
license, it cannot be considered to be ‘doing business’?
o No
ERIKS PTE LTD V. CA
Ø WON Petitioner has the capacity to sue? No.
Ø Petitioner, a non-resident foreign corporation, has no legal capacity to
sue. License is required only in transacting business in the Philippines
and not required to grant the FC legal capacity to sue
Ø What is determinative as to whether a corporation is doing business or
not is its intent as well as the nature of the transaction
 Ø The rule is that if a FC does business without license, any agreement
executed thereto is void. Moreover, it shall not have access to PH
courts
o Q: Is this incapacity curable? How?
o Yes. By obtaining the requisite license
Ø However, a FC without license is not ipso facto incapacitated from
bringing an action. A license is necessary only if it is transacting or
doing business in the country.
Ø That is why there is a need to define “doing business”
Ø Q: How did the court define “doing business”?
o The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the
business or enterprise for which it was organized or whether it
has substantially retired from it and turned it over to another.
o “The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive prosecution
of, the purpose and object of its organization” (Memorize
this!)
Ø In the case at bar, the grant of the 90-day credit term by FC to DC for
every purchase made shows an intention to continue transacting with
the latter since in the usual course of commercial transactions, credit is
extended to members in good standing or to those on whom there is an
intent to maintain a long-term relationship
Ø Therefore, granting credit term = continuity of commercial dealing =
doing business = needs license. Without license, Eriks Pte has no legal
capacity to sue.
Sec. 129. Law applicable. - Any foreign corporation lawfully doing business in
the Philippines shall be bound by all laws, rules and regulations applicable to
domestic corporations of the same class, except such only as provide for the
creation, formation, organization or dissolution of corporations or those which
fix the relations, liabilities, responsibilities, or duties of stockholders, members,
or officers of corporations to each other or to the corporation.
Q: If the AOI has been amended, what is the rule?
Ø Sec. 130. Amendments to articles of incorporation or by-laws of
foreign corporations. - Whenever the articles of incorporation or by-
laws of a foreign corporation authorized to transact business in the
Escudero|Dansal|Gutierrez (2016-2017) 90
Philippines are amended, such foreign corporation shall, within sixty
(60) days after the amendment becomes effective, file with the
Securities and Exchange Commission, and in the proper cases with the
appropriate government agency,
o 1. A duly authenticated copy of the articles of
incorporation or by-laws, as amended,
o Q: What do you mean by duly authenticated?
§ Certified by the appropriate government entity (In the
Philippines, we have NSO) in the country of origin
o 2. Indicating clearly in capital letters or by underscoring
the change or changes made,
o 3. Duly certified by the authorized official or officials of the
country or state of incorporation.
Ø Q: What is the effect if the license is amended?
o The filing thereof shall not of itself enlarge or alter the
purpose or purposes for which such corporation is authorized
to transact business in the Philippines.
Q: When is amended license necessary?
Ø Sec. 131. Amended license. - A foreign corporation authorized to
transact business in the Philippines shall obtain an amended license in
the event it:
o 1. Changes its corporate name, or
o 2. Desires to pursue in the Philippines other or additional
purposes,
Ø Q: How is amendment done?
o By submitting an application therefor to the Securities and
Exchange Commission,
o The application must be favorably endorsed by the
appropriate government agency in the proper cases.
Q: Is it possible that a FC conduct business other than the main purpose for
which it is authorized to transact?
Ø GR: No. The FC may transact into business only for the purpose it is
authorized
Ø EXPN: If the FC undertakes merely an isolated transaction, or one
which is not in continuity with the commercial dealings of the
corporation
 Ø Q: Give an example of an isolated transaction.
o Ex: (not sure) assignment of rights/obligation to a domestic
corporation
Q: Can a Foreign Corporation merge with a Domestic Corporation?
Ø FC can merge with DC only when their respective laws provide that
they can merge
Ø FC – it depends if the country has a law allowing merger
Ø DC – there is no law in the Philippines which allow this kind of merger
Ø Therefore, the answer is NO.
Ø Sec. 132. Merger or consolidation involving a foreign corporation
licensed in the Philippines. - One or more foreign corporations
authorized to transact business in the Philippines may merge or
consolidate with any domestic corporation or corporations if such is
permitted under Philippine laws and by the law of its
incorporation: Provided, That the requirements on merger or
consolidation as provided in this Code are followed.
Ø Q: How about a FC with another FC, are they allowed to merge?
o Yes, provided that the Sec. 132 is complied with
o 1. Allowed by the state of incorporation
o 2. Petition for withdrawal
o Q: Why is there a need for withdrawal?
§ There is only a need for withdrawal in cases of
ABSORBED corporation doing business in the
Philippines.
§ (Alternative answer: withdrawal is important so that
the corporation will not get pregnant)
§ Q: What is a logical explanation for this? -
o Whenever a foreign corporation authorized to transact
business in the Philippines shall be a party to a merger or
consolidation in its home country or state as permitted by the
law of its incorporation, such foreign corporation shall, within
sixty (60) days after such merger or consolidation becomes
effective, file with the Securities and Exchange Commission,
and in proper cases with the appropriate government agency, a
copy of the articles of merger or consolidation duly
authenticated by the proper official or officials of the country
or state under the laws of which merger or consolidation was
effected:
Escudero|Dansal|Gutierrez (2016-2017) 91
o Provided, however, That if the absorbed corporation is the
foreign corporation doing business in the Philippines, the latter
shall at the same time file a petition for withdrawal of it
license in accordance with this Title.
o Q: What happens to the absorbed corporation after merger?
§ Its assets and liabilities will belong to the surviving
corporation; its debts and liabilities will be assumed
by the surviving corporation; and the absorbed
corporation will cease to exist
• This is the reason behind withdrawal:
because the corporation ceases to exist
o Q: If the corporation is the surviving corporation, what is the
rule?
§ Within sixty (60) days after such merger or
consolidation becomes effective, file with the
Securities and Exchange Commission, and in proper
cases with the appropriate government agency, a
copy of the articles of merger or consolidation
duly authenticated by the proper official or officials
of the country or state under the laws of which
merger or consolidation was effected
Sec. 133. Doing business without a license. - No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall
be permitted to maintain or intervene in any action, suit or proceeding in any
court or administrative agency of the Philippines; but such corporation may be
sued or proceeded against before Philippine courts or administrative tribunals on
any valid cause of action recognized under Philippine laws.
FMC V. DELA ROSA
Ø WON the company was ‘doing business’? Yes.
Ø Under the rules and regulations promulgated by the Board of
Investments, the phrase 'doing business' has been exemption with
illustrations, among them being as follows:
o (1) Soliciting orders, purchases (sales) or service contracts.
Concrete and specific solicitations by a foreign firm, not
acting independently of the foreign firm amounting to
negotiation or fixing of the terms and conditions of sales or
service contracts, regardless of whether the contracts are
actually reduced to writing, shall constitute doing business
 even if the enterprise has no office or fixed place of business
in the Philippines. xxx
o (2) Appointing a representative or distributor who is domiciled
in the Philippines, unless said representative or distributor has
an independent status, i.e., it transacts business in its name and
for its own account, and not in the name or for the account of
the principal.
o (4) Opening offices, whether called 'liaison' offices, agencies
or branches, unless proved otherwise.
o (10) 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, or in the
progressive prosecution of, commercial gain or of the purpose
and objective of the business organization
Ø Q: What are the circumstances in this case which constitute doing
business?
o The act by a non-resident foreign corporation of recruiting
Filipino workers for its own use abroad constitutes in the law
doing business in the Philippines.
Ø Test of "doing business": Whether the foreign corporation is continuing
the body or substance of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it
over to another.
Q: What are the grounds for revocation?
Ø Sec. 134. Revocation of license. - Without prejudice to other grounds
provided by special laws, the license of a foreign corporation to
transact business in the Philippines may be revoked or suspended by
the Securities and Exchange Commission upon any of the following
grounds:
o 1. Failure to file its annual report or pay any fees as required
by this Code;
o 2. Failure to appoint and maintain a resident agent in the
Philippines as required by this Title;
o 3. Failure, after change of its resident agent or of his address,
to submit to the Securities and Exchange Commission a
statement of such change as required by this Title;
o 4. Failure to submit to the Securities and Exchange
Commission an authenticated copy of any amendment to its
Escudero|Dansal|Gutierrez (2016-2017) 92
articles of incorporation or by-laws or of any articles of
merger or consolidation within the time prescribed by this
Title;
o 5. A misrepresentation of any material matter in any
application, report, affidavit or other document submitted by
such corporation pursuant to this Title;
o 6. Failure to pay any and all taxes, imposts, assessments or
penalties, if any, lawfully due to the Philippine Government or
any of its agencies or political subdivisions;
o 7. Transacting business in the Philippines outside of the
purpose or purposes for which such corporation is authorized
under its license;
o 8. Transacting business in the Philippines as agent of or acting
for and in behalf of any foreign corporation or entity not duly
licensed to do business in the Philippines; or
o 9. Any other ground as would render it unfit to transact
business in the Philippines.
Sec. 135. Issuance of certificate of revocation. - Upon the revocation of any
such license to transact business in the Philippines, the Securities and Exchange
Commission shall issue a corresponding certificate of revocation, furnishing a
copy thereof to the appropriate government agency in the proper cases.
The Securities and Exchange Commission shall also mail to the corporation at
its registered office in the Philippines a notice of such revocation accompanied
by a copy of the certificate of revocation.
Q: Can a FC withdraw its license? What are the requisites?
Ø Yes.
Ø Sec. 136. Withdrawal of foreign corporations. - Subject to existing
laws and regulations, a foreign corporation licensed to transact business
in the Philippines may be allowed to withdraw from the Philippines by
filing a petition for withdrawal of license. No certificate of withdrawal
shall be issued by the Securities and Exchange Commission unless all
the following requirements are met;
o 1. All claims which have accrued in the Philippines have been
paid, compromised or settled;
o 2. All taxes, imposts, assessments, and penalties, if any,
lawfully due to the Philippine Government or any of its
agencies or political subdivisions have been paid; and
 o 3. The petition for withdrawal of license has been published
once a week for three (3) consecutive weeks in a newspaper of
general circulation in the Philippines.
HUTCHINSON PORTS PHILS. V. SUBIC BAY METROPOLITAN
AUTHORITY
Ø WON Hutchinson is doing business in the Philippines? Yes.
Ø Participating in the bidding process constitutes "doing business"
because it shows the foreign corporation's intention to engage in
business here. The bidding for the concession contract is but an
exercise of the corporation's reason for creation or existence.
Ø Participation in bidding process = intent to engage in business here
HOME INSURANCE COMPANY V. EASTERN SHIPPING LINES
Ø WON HIC has capacity to sue? No. A FC doing business without
license has no capacity to sue
Ø A contract entered into by a foreign insurance company without license
to do business in the Philippines is not void. It is valid and enforceable
o The effect of this is that:
o 1. The FC has no access to the courts
o 2. The FC is subject to penalty under Sec. 144 of the Corpo
Code (penal sanction)
o Thus, the officers or persons who executed the agreement can
be liable for criminal offense
MR HOLDINGS
Ø It is not the absence of license but the doing of business without
license which prohibits FC from access to the courts
Ø Same definition of doing business (continuity of commercial dealings
Ø Isolated Transactions – should not be defined so as to exclude every
other transaction. A transaction is isolated depending upon the
circumstances
o Ex: assignment to a DC of certain right/obligation = no intent
to do business
Ø WON MR Holdings and Marcopper are one and the same?
o No. If a corporation is owned by a subsidiary, it does not mean
that the 2 corporations are one and the same
o The mere fact that a corporation owns majority of the stock of
another corporation is not sufficient in order to pierce the
Escudero|Dansal|Gutierrez (2016-2017) 93
corporate veil of fiction. There must be allegations of fraud or
wrongdoing
CASES ON SRC
SUMNDAD V. HARRIGAN
Ø The actions of BBCHI did not amount to fraud but only for the simple
collection of money which is cognizable by the regular courts
Ø Q: How did the SC interpret the phrase “in fraud of creditors”
o
Ø Q: Where there malicious acts done by the BOD?
o
Ø The jurisdiction over intra-corporate disputes was transferred from SEC
to RTC pursuant to R.A. 8799 (SRC)
OREDAIN V. BF HOMES
VELARDE V. LOPEZ
Ø SC dismissed the case since Lopez is not RPI
Ø No piercing of corporate veil. Mere control of corporate stocks do not
amount to the perpetration of fraud
Ø Under the SRC IRR, the dismissal of a director is an incorporate
dispute which is cognizable by SEC à RTC
TIMESHARE REALTY V. CA
Ø Mere registration of timeshare as a corporation is not valid authority to
sell securities
Ø A corporation must first comply with the requirement of registration of
the securities, otherwise, not authorized
Ø Q: What is time sharing? How do you share time?
UNION BANK V. SEC
Ø Petitioner is required to comply with IRR with respect to disclosure
Ø Since it is already exempted from Sec. 5, it also is exempt from
reportorial requirements
Ø “Unless Expressly Provided”
Ø Certain securities are exempted from legislation provision. However, in
this case, there is none which would exempt from reporting. Despite the
fact of supervision, there is still a need to comply with SEC rules
ONAPAL V. CA Ø 2. Purpose of TOR
Ø “Commodity Futures Contract” Ø 3. Nature of agency of SEC = can fix the rights and obligations of the
Ø After the CFC matures, the Trading Company shall make delivery of parties
the commodity. When there is an increase or decrease of the amount of
the commodity: an increase = give margin of price of commodity (?); a ABACUS SECURITIES V. AMPIL
decrease = purchaser shall bear loss and must still make delivery
Ø Q: Is a CFC allowed? PHILIPPINE VETERANS BANK V. CALLANGAN
o Yes. Just because no delivery was made it does not follow that Ø PVB is a public corporation because Section 17.2 states that a Public
there the CFC is invalidated Corporation is one that owns at least 50M worth of assets + 200 SH,
Ø TC only made a final settlement regarding purchase. There was no each holding at least 100 shares.
actual delivery. TC only subtracted the loss incurred by the purchaser Ø The reportorial requirements will be beneficial to the veterans because
Ø Just like in the law of sales, there must be delivery it will give them information on banks
Ø There was no delivery. There is only the intention to speculate on the Ø Q: What constitute reportorial requirements?
commodity o Annual Report
o The facts needed to establish that the corporation is a public
CEMCO HOLDINGS V. NATIONAL LIFE INSURANCE corporation
Ø SEC is the administrative agency with power of administration under
Section 5(c) as amended by RA 8790. It can exercise powers implied or SEC V. INTERPORT RESOURCES
necessary to its express powers. It is the regulatory agency to fix the
rights and obligations of parties
Ø Sec. 19.1 of RA 8799 provides that any acquisition of any SH of 30%
of a Public Corporation
Ø Public Corporation is listed in the stock exchange, with at least 50M
worth of assets + at least 200 SH who own at least 100 shares
Ø When SH acquire at least 15% / at least 30% of corporation must
comply with the Tender Offer Rule à must submit to SEC that they
complied the TOR
Ø Tender Offer Rule – defined
o When SH acquire at least 35% of a Public Corporation, it must
first offer to the minority SH the equivalent of their shares
o Nature: a public announcement that SH has the intention of
acquiring a certain number of shares. Must offer it to the
minority
o Purpose: to protect the minority SH
o How?
o TOR is the remedy or exit to sell the shares if the SH do not
agree to the transaction
Ø Doctrines:
Ø 1. “Acquisition” is construed to include direct or indirect. Law does not
distinguish. It is still considered as a TOR

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