Corporation Law (2019) MIDTERM REVIEWER ATTY.

GAVIOLA-CLIMACO

Corporation  Corporation: limited liability

INTRODUCTION
TYPES OF BUSINESS ORGANIZATIONS:
1. SOLE PROPRIETORSHIP
A form of business organization with only one
proprietary owner. It is when a person personally or a single
individual conducts business under his own name or under a
business name.
Atty G: What distinguishes a sole proprietorship is that the
individual is the business. You cannot separate the individual from
the business. It is the most basic form of business organization.
2. PARTNERSHIP
Article 1767 NCC: By the contract of partnership, two or
more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the
profits among themselves.
Two or more persons may also form a partnership for
the exercise of a profession.
Atty G: The essence of partnership is that it is “contractual in
nature”. It is created by mere consent. The moment the partners
agree as to what they will contribute and how to conduct business,
there will now be a contract of partnership between them. You
don’t need to register the partnership with the SEC in order to
create it.
Aside from being a contract, a partnership is a separate
and distinct entity from that of the partners. It is basically a bridge
between sole proprietorship and a corporation. Partnership is a
contract and at the same time an entity, a business organization
thus, reflecting its peculiarity.
o liability of the corporation is distinct from the liabilities of
the persons composing it and the liabilities of the persons
composing the corporation, as a general rule, are only
limited to their contribution to the corporation
o in other words, stockholders are liable only to the extent
of their contributions in the corporation
 Partnership
o General partnership: liability can extend to personal
assets
 partnership properties are exhausted prior to
partners’ personal properties
o Limited partnership: limited partner’s liability is limited to
contribution
AS TO MANAGEMENT
 Corporation: managed by Board of Directors acting together
(not even individually) who can bind the corporation
o Ex. to open a bank account, an individual director cannot
perform such in the name of the corporation as the bank
will require a board resolution
 Partnership: generally every partner is an agent of the
partnership and can bind the partnership
AS TO TRANSFERABILITY OF INTEREST
 Corporation: shares of stock can be transferred without
seeking the consent of the other stockholders
o corporation’s existence is independent of the
composition of its Board or stockholders
 Partnership: transfer of partner’s interest requires the consent
of all partners
o change in composition of partners automatically dissolves
partnership

3. CORPORATION AS TO SUCCESSION
Section 2, Corporation Code of the Philippines: An  Corporation: right of succession exists
artificial being created by operation of law, having the right of o heirs of stockholder will succeed in the rights
succession and the the powers, attributes and properties  Partnership: no right of succession
expressly authorized by law or incident to its existence.

CORPORATION VS. PARTNERSHIP

AS TO CAPITALIZATION
 Corporation: The corporation can acquire more investments
since there are unlimited opportunities for the increase in
capitalization. Consequently, this makes it feasible for the
corporation to engage in bigger business.
 Partnership: Because of the principle of trust and
confidence, only those chosen may invest and be a partner.
Capitalization is limited to the contribution of the partners
and loans from creditors.

AS TO THE NUMBER OF PERSONS COMPOSING IT

 Corporation: needs at least 5 incorporators but not more
than 15
 Partnership: atleast 2 partners would be enough

AS TO MANNER OF CREATION
 Corporation: created through a legal process and requires SEC
approval via Certificate of Incorporation
 Partnership: contractual, created by mere agreement

AS TO LIABILITIES
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Corporation Law (2019) MIDTERM REVIEWER
TITLE I- GENERAL PROVISIONS
CORPORATION DEFINED
Section 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.
NOTE: THIS PORTION WAS DISCUSSED UNDER THE OLD
CORPORATION CODE
Attributes of a Corporation
1. An artificial being
2. Created by operation of law
3. Has the right of succession
4. Has the powers, attributes and properties expressly authorized
by law or incident to its existence
1 | Artificial being
As an artificial being, it has a separate juridical personality. It can
enter into obligations and contracts, and when it has liabilities, the
corporation shall be liable but its members or stockholders could
not be held personally liable as they are considered to be separate
from the corporation itself.
Atty. GC: So how does this relate to the Doctrine of Piercing the
Veil?
(Based on Aquino book) Doctrine of Piercing the Veil of
Corporate Fiction:
Basic in corporate law is the principle that a
corporation has a separate personality distinct from its
stockholders and from other corporation to which it may be
connected. It is a fiction created by law with the intent that it
should be treated as true. However, under this doctrine, the
corporation’s separate juridical personality may be disregarded
when there is an abuse of the corporate form. Whenever the
doctrine applies, the principal and the conduit will be treated as
one; the controlled corporation will be deemed to have, “ so to
speak, no separate mind, will or existence of its own, and is but
a conduit for its principal.” If applicable, “ the corporation is
merely an aggregation of persons whose liabilities must be
treated as one with the corporation.” The conduit corporation
will then be solidarily liable with the principal.
S: It means that the veil or the artificial or separate personality of
the corporation is disregarded and that the members or the
stockholders thereof are made personally liable because they are
using the corporation as an alter ego or an avatar(term used by
Atty.) as a means to defeat public convenience, justify a wrong,
protect a fraud, defend a crime, to commit injustice or as a vehicle
for the evasion of an existing obligation.
2 | Created by operation of law
S: As we have discussed, a corporation is different from a
partnership for the latter can be formed by mere consent. A
corporation, however, is formed once it gains the approval of the
Securities and Exchange Commission. Technically, a corporation
needs to comply with the necessary requirements set forth by law
and from that, the issuance of the Certificate of Incorporation
follows which in turn starts its corporate existence.
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3 | Has the right of succession
(Based on Aquino book) Right of Succession or Perpetual
Succession:
Perpetual Succession is” that continuous existence which enables
a corporation to manage its affairs, and hold property without the
necessity of perpetual conveyances , for purposes of transmitting
it. By reason of this quality, the ideal and artificial person remains,
in its legal entity and personality, the same though frequent
changes may be made of its members.”
Blackstone on the concept of perpetual succession:
“All individual members that have existed from the foundation to
the present time, or that shall ever hereafter exist, are but one
person in law, a person that never dies; in like manner as the River
Thames is stiull the same river, though parts which compose it are
changing every instant.” (char)
IOW, a corporation continues to exist even if there is a change in
those who compose it. Death of a shareholder or a transfer of his
shares will not dissolve it.
Atty. GC: When a stockholder transfers his share, does it need the
consent of the other stockholders just like in partnership?
S: No. In the transfer or assignment of shares or rights in a
corporation, a stockholder does not need the consent of the other
stockholders because they own it in their own right and as oppose
to a partner in a partnership, it is needed because of their highly
fiduciary relationship.
Atty. GC: So as a general rule, a stockholder can transfer his share
in the corporation even without the consent of the other
stockholders.
Exception: If they expressly provide for a restriction on transfers
as reflected in their Articles of Incorporation.
4 | Has the powers, attributes and properties expressly
authorized by law or incident to its existence
S: It means that once a corporation is registered or has been
approved by the SEC, it can immediately perform the different
obligations or exercise rights related to the purpose for which it is
formed.
The corporation also has powers and attributes given by law and
incidental to its existence. It means that a corporation can:
1. Sue in its own name
2. Acquire properties
3. Enter into contract
This fourth attribute is a direct result of a corporation being an
artificial being.
This means that because a corporation is created by operation of
law as a separate and distinct entity, the powers is limited to only
that prescribed by law and any power incidental to the express
powers provided by law. Anything beyond that, the corporation is
not authorized anymore.
KINDS OF POWERS
 Express powers: those authorized by law
 Implied powers: those incidental to its existence
Corporation Law (2019) MIDTERM REVIEWER
Atty: But the implied powers must be only those that are related
to the expressed powers of the corporation. It cannot be just
anything implied, it has to be powers that are directly related or
incidental to the powers expressly provided for by law. As a
creature of law, its powers are limited only to that, and anything
done beyond that will be considered “ultra vires” or an authorized.
HEIRS OF FE TAN UY V. INTERNATIONAL EXCHANGE BANK, G.R.
NO. 166282-166283, FEBRUARY 13, 2013
FACTS: Respondent International Exchange Bank (iBank),
granted loans to Hammer Garments Corporation (Hammer),
covered by promissory notes and deeds of assignment.
These were made pursuant to the Letter-Agreement between
iBank and Hammer, represented by its Pres and Gen Manager,
Manuel Chua (Chua) a.k.a. Manuel Chua Uy Po Tiong, granting
Hammer a P 25 Million-Peso Omnibus Line. The loans were
secured by a Real Estate Mortgage executed by Goldkey
Development Corporation (Goldkey) over several of its
properties and a Peso Surety Agreement signed by Chua and his
wife, Fe Tan Uy (Uy).
Hammer defaulted in the payment of its loans, prompting iBank
to foreclose on Goldkey’s third-party Real Estate Mortgage.
The mortgaged properties were sold for P 12 million during the
foreclosure sale, leaving an unpaid balance of P 13,420,177.62.
For failure of Hammer to pay the deficiency, iBank filed a
Complaint for sum of money against Hammer, Chua, Uy, and
Goldkey.
Despite service of summons, Chua and Hammer did not file their
respective answers and were declared in default. In her separate
answer, Uy claimed that she was not liable to iBank because she
never executed a surety agreement in favor of iBank. Goldkey,
on the other hand, also denies liability, averring that it acted
only as a third-party mortgagor and that it was a corporation
separate and distinct from Hammer.
ISSUES:
1. Whether Uy can be held liable to iBank for the loan obligation
of Hammer as an officer and stockholder of the said
corporation? Uy is not liable.
2. Whether Goldkey can be held liable for the obligation of
Hammer for being a mere alter ego of the latter? Goldkey is a
mere alter ego of Hammer.
HELD:
Uy is not liable.
Basic is the rule in corporation law that a corporation is a
juridical entity which is vested with a legal personality separate
and distinct from those acting for and in its behalf and, in
general, from the people comprising it. Following this principle,
obligations incurred by the corporation, acting through its
directors, officers and employees, are its sole liabilities. A
director, officer or employee of a corporation is generally not
held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded
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if it is used as a means to perpetrate fraud or an illegal act, or as
a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues.
Goldkey is a mere alter ego of Hammer
Goldkey’s argument, that iBank is barred from pursuing Goldkey
for the satisfaction of the unpaid obligation of Hammer because
it had already limited its liability to the real estate mortgage, is
completely absurd. Goldkey needs to be reminded that it is
being sued not as a consequence of the real estate mortgage,
but rather, because it acted as an alter ego of Hammer.
Accordingly, they must be treated as one and the same entity,
making Goldkey accountable for the debts of Hammer.
Under a variation of the doctrine of piercing the veil of corporate
fiction, when two business enterprises are owned, conducted
and controlled by the same parties, both law and equity will,
when necessary to protect the rights of third parties, disregard
the legal fiction that two corporations are distinct entities and
treat them as identical or one and the same.
While the conditions for the disregard of the juridical entity may
vary, the following are some probative factors of identity that
will justify the application of the doctrine of piercing the
corporate veil:
a. Both corporations are family corporations of defendants
Manuel Chua and his wife Fe Tan Uy.
b. Hammer Garments and Goldkey share the same office and
practically transact their business from the same place.
c. Defendant Manuel Chua is the President and Chief Operating
Officer of both corporations. All business transactions of
Goldkey and Hammer are done at the instance of defendant
Manuel Chua who is authorized to do so by the corporations.
d. The assets of Goldkey and Hammer are co-mingled. The real
properties of Goldkey are mortgaged to secure Hammer's
obligation with creditor hanks.
e. When defendant Manuel Chua "disappeared", the defendant
Goldkey ceased to operate.
The bank filed a collection case against Chua and Goldkey. There
are two issues in this case :
first issue. Whether or not UY the wife of Chua can be personally
liable being the officer of hammer garment.
second issue. Whether or not Goldkey can be peirce by the veil
being the surety where its property has been used as the
mortgage on the loan by the hammer garment ?
With repspect to the first issue on the w/n Uy the wife of Chua
can be personally liable , the Supreme Court said no because
the corporation has its distinct and separate personality distinct
from its officer.
So the ground was not that because she signed the surety
agreement the ground was due to the fact that she was an
officer because it was found that its not here real signature so
the only basis that the court has in making here liable on the
obligation of hammer is the mere fact that she is an officer and
a director of Hammer . So what happened there? What did the
Corporation Law (2019) MIDTERM REVIEWER
Supreme Court say?Is that a sufficient ground to make her
liable? The SC said it is not a sufficient ground that UY will be
held liable in this case because of the separate and distinct
personality of the corporation.
Atty: So is she liable by the mere fact that she is an officer?
So the Supreme Court said , go back to general rule because of
the separate personality of a corporation and its officer and
stockholders the officer and the stockholders does not become
liable of the obligation of the corporation by the mere fact of
their being an officer.
DOCTRINE OF PIERCING THE CORPORATE VEIL
It is a recognition that while a corporation is granted by law a
personality distinct and separate from its stockholder - meaning
its a separate person, its an artificial being which is recognized as
a person under the law separate from its stockholder and its
members. That artificial being is only created by law, a mere legal
fiction, because in reality there is no real person there. That
recognition as a person is a mere legal fiction created by law so
that when that artificial being is used as a means to commit fraud
or injustice then the law allows that this legal fiction will be taken
down. The law allows that it will pierce the veil of this separate
entity and consider it as one with the persons opposing it. That is
the reason behind the Doctrine of Piercing the Veil.
SOLIDBANK CORPORATION VS
MINDANAO FERROALLOY CORPORATION
Facts:
Philippine corporation Maria Cristina Chemical Industries
(MCCI) and three Korean corporations: Ssangyong Corporation,
Pohang Iron and Steel Company and Dongil Industries Company,
Ltd., entered into a joint venture under the name of Mindanao
Ferroalloy Corporation. The officers of these corporation
comprised the Board members of Mindanao Ferroalloy
Corporation: Guevara as the President and Chairman, Hong the
Vice President, Teresita Cu as a member. Subsequently, the
Board of Directors authorized Guevara to secure a loan of
30Million pesos from Solidbank.
The Mindanao Ferroalloy started their operation in April 1991.
However, the indebtedness acquired from Solidbank ballooned
to 200.4Million pesos while its asset is only 65.4Million pesos.
The Corporation executed Promissory Note signed by Teresita
Cu and Jong-Won Hong. They also executed a Deed of
Assignment in favor of the Bank covering its rights, title and
interests: entire proceeds of drafts drawn under Irrevocable
Letter of Credit a Quedan. Hong and Cu also affixed their
signatures for the Corporation. The Corporation, also, through
Hong and Teresita Cu, executed a Trust Receipt Agreement, by
way of additional security for said loan, the Corporation
undertaking to hold in trust, for the Bank, some of its property.
Shortly after the execution of the said deeds, the Corporation
stopped its operations. The Corporation failed to pay its loan.
Hence, a collection of sum of money was filed against the
Corporation imploding Guevarra, Hong, and Cu as joint and
solidary debtors.
Question: What was the basis of Solidbank for impleading the
officers of Ferro Alloy as solidary debtors of the loan?
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Hong and Cu signed the promissory note. Now the bank is saying
that they signed as a co-maker and not just a representative of
the said corporation.
However the Supreme Court said that they actually signed in
one set of signature, as a mere representative of the
corporation. It could have been different if they affixed their
signature twice.
Question: Why does it matter if they are signing as
representative of the corporation or signing under their own
name?
It is different because a corporation has a separate and distinct
personality as opposed to its officers. So because of that the
officers should not be held liable with the liabilities of the
corporation if they did not act in bad faith or there has no fraud
or illegality of the transaction, and that they are authorized to
do such transaction. In this case, it was shown that they were
authorized proven by the Board Resolution.
There is a principle in the Negotiable Instruments Law that was
discussed in the case, if you are only signing as a representative
of a particular corporation and that you are actually authorized
to represent the corporation you should not be held liable.
This is because your personality is distinct from the corporation
and you are merely acting on behalf of the corporation.
Question: So, when they sign the loan documents as
representatives of the corporation. Whose obligation was
created?
The obligation created is that of the corporation and of the
Bank, not of their personal capacity. They only acted as a
representative of the corporation.
ATTY. GAVI: That is correct, because they signed as officers of
the corporation and representing the corporation then that loan
obligation that was created is not their personal obligation. It is
the obligation of the corporation. They were only acting as
representatives of the corporation. The act and obligation was
entered into by the corporation and not the officers even if they
are the ones representing the corporation. Why is that?
Student: This is because of the artificial being created by law to
a corporation. Since there is an artificial created to a corporation
by law then the officers, members, and representatives of such
should not be held liable since their personality is different.
ATTY. GAVI: If the corporation has an obligation just because it
was contracted through a particular officer, does it now mean
that it becomes the liability of the officer? Why?
Section 2. A corporation is an artificial being. Being an artificial
being its obligations are separate and distinct of its officers,
directors, and stockholders.
Question: Why would it have been different if the officers signed
the second time around?
Corporation Law (2019) MIDTERM REVIEWER
If they sign the second time around the Supreme Court was
saying that they are already signing in their own capacity and
not mere representative of the corporation. By signing, it means
that they are really liable to the loan.
Question: If they sign the second time, what happens now to
that obligation of solid bank?
They are now solidary liable because they already bind
themselves not as officers of corporation but in their personal
capacity. The first time they signed, they are representing the
corporation, if they sign the second time (done na ang
corporation na part), SC said they are now signing on their own
behalf, they are now obliged in their personal capacity but in the
case at hand, THEY DID NOT, they only signed once. Hence, they
signed on behalf of the corporation.
The officers were not made joint and solidary liable with the
corporation. It is only the corporation that is liable to the loan
contracted by its officers.
Being an artificial entity, a corporation can only act through its
board of directors ( no physical hands to sign contract). It acts
through its officers or board of directors. When they act on
behalf of the corporation, it doesn’t mean that the obligations
created are the obligations of the board or its officers because a
corporation is an artificial being having a separate and distinct
personality from its stockholders and officers.
But if the representatives would voluntarily take on themselves
the obligation, that’s allowed. In which case they are now
solidarily liable with the corporation because they bound
themselves as such.
CLARIFICATION: REMEDY LEFT FOR CREDITORS WHEN THE
DOCTRINE OF PIERCING THE CORPORATE VEIL IS DISREGARDED.
WHEN THE OFFICERS AND STOCKHOLDERS ARE NOT PERSONALLY
LIABLE.
Atty G: Remedy is against the corporation, when it is proved that
the grounds of piercing the corporate veil are not present or when
they did not bind themselves voluntarily, the creditors have no
other remedy but to go after the corporation. When the assets of
the corporation are not enough, they will have to go through
insolvency proceeding and follow the rule in preference of credits.
Just because a corporation is liable it does not mean that its
people are liable also, as long as they did not voluntarily bind
themselves and as long as there are no grounds to pierce the veil.
WHAT ABOUT SIGNING AS CO-MAKER OR CO-DEBTOR?
That is not piercing the veil, they are liable because of contract.
There is no need to pierce the veil, no need to prove that they
were in bad faith. Piercing the veil is based on different grounds.
REVIEW:
The first attribute of a corporation is based on Section 2 of
Corporation Code is that a Corporation is an artificial being which
means it has a personality which is separate and distinct from its
stockholders, board of directors and officers which means that the
corporation can own properties and it can incur obligations in its
own name and that whichever properties that are owned by the
corporation or whatever obligations that are incurred by the
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corporation are its own properties and obligations and not that of
its stockholders, directors or officers.
Meaning, by fiction of law the person of the corporation is
separate from the person of stockholders that the latter may
compose the corporation but they are not the corporation.
However, in certain instances the fiction or the veil of the
corporation and its stockholders may be lifted in which case the
corporation is considered as one with its board of directors and
stockholders. There are only very specific instances where this is
allowed because the law considers that corporation as separate
entity for the convenience of the parties involved and to facilitate
economic transactions. If this artificial being is being used to
commit injustice or to defraud the public, the law will lift the veil
because this is only a legal fiction, it’s not reality. The law will
pierce the veil of legal fiction and consider the corporation as one
with its stockholders.
ZAMBRANO CASE
Facts:
Zambrano et al were employees of PhilCarp and then they
were dismissed because PhilCarp ceased operation on the
grounds of serious business reversals. So upon termination,
they filled a case against PhilCarp and Pacific contending that
they were illegally dismissed since Phil carp did not incur
serious business losses because as a matter of fact they are
earning. They also want to implead Pacific because they are
mere Alter Ego given the fact that the assets of Phil Carp was
transferred to Pacific and some of the employees of Phil CArp
were absorbed by Pacific
The Court resolved that there was no illegal dismissal
Atty: So Zambrano was employed by which company?
B:by Phil Carp
Atty: What did Zambrano want done? And Why?
B:Wants Phil carp to be liable for illegal dismissal and at the
same time to make Pacific Carpet also solidarily liable.
Because they contend that there was no serious business
losses incurred by Phil Carp , there was unfair labor practice.
Atty: And what happened to the operations of PhilCarp
according to Zambrano?
Their operations of Phil Carp was merely transferred to Pacific
Atty: So according to Zambrano the closure of Phil Carp was
merely a pretense just to get them out of their employment, to
terminate their employment when in fact the operations of
Phil Carp was merely transfered to Pacific which they own
Subsidiarily . So now they are claiming from both Phil Carp
(initial employer) and according them ( Zambrano ) ALTER EGO
Pacific Carpet.
Atty: Now what happened in the case?
B:First there was no finding of Unfair labor practice , since the
petitioner failed to prove and they were not able to cite a
specific ground for unfair labor practice
Second , there was no illegal dismissal. Since in as much as no
one is compelled to open a business, no one is also compelled
to sustain a business.
Corporation Law (2019) MIDTERM REVIEWER
CORPORATION AS AN ARTIFICIAL BEING
Atty: Before going to the issue of Piercing of veil, this case also
discusses on the effects about the Corporation being an
artificial being.
We mentioned earlier that as an Artificial being , it has a
separate personality form its directors, stockholders and
officers. Besides those people who else has a Corporation
distinct and separate personality?
B: From any other legal entities to which it may be related
Atty: Not just stockholders, directors or officers being the
natural person but also any other legal entity to which they
were related.
Doctrine: The Concept of corporation being an Artificial being
does not only apply to the directors, officers or stockholders
(natural persons) it also applies to ANY OTHER ENTITY to whom
the corporation may be related, even if that entity is a
(Juridical entity)
For example:
You have A-B-C-D-E(natural person-stockholder) of Corporation
B and C.
Under the Concept of Artificial entity , Corporation B is
separate and distinct from ABCDE (stockholders-BOD-officers)
IN the same way Corporation C is separate and distinct from
ABCDE. But at the same time Corporation C is separate and
distinct form Corporation C.
PIERCING OF VEIL ISSUE
The court said that , the mere fact that Pacific as a Subsidiary
of Phil Carp it will not permit the piercing of veil .
Under the concept of artificial entity, corporation B is separate
and distinct from A, C, D and E, the stockholders, board of
directors and officers. In this way, corporation C is separate and
distinct from corporation A, B, D and E, the stockholders, board of
directors and officers and at the same time corporation C is
separate and distinct from corporation D. The separate entity
applies not only to your stockholders, board of directors and
officers but also to any other legal entity in which the corporation
is created. In this case, we have the Philippine carpet being the
stockholder of the pacific carpet so now the employee’s
contention are that Philippine carpet merely transferred its
operations to pacific carpet and now they are trying to say that
Philippine Carpet committed unfair labor practice by transferring
its operations and now pacific carpet should also be liable to them
so they’re not claiming against stockholders, board of directors
and officers of Philippine carpet, they’re claiming against the
subsidiary of Philippine carpet. Thus the rule on artificial being
apply in this case. The Supreme Court said that a corporation has
a personality separate and distinct from the persons composing it
as well as from any other legal entity which it may be related. The
artificial entity is applicable not just to the persons composing the
corporation but also to any other legal entity which it may be
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related. In regards to piercing, it is allowed only in three instances;
first is when there is evasion of obligation, second is when there
is protection of commission of a wrong and third is in alter ego
cases which is one given in this case. In alter ego cases, it must
passed the three test, first is the instrumentality test, second is
fraud test and third is the harm test. In instrumentality test, the
mere fact that one corporation is controlled by a person, a single
person does not permit the piercing because it must also be prove
that such control extends to policy making, financial activities and
etc. with regards to the fraud, there must be a clear and proof of
fraud that the corporation was used to commit a fraud. And in the
harm test, there must be a causal relationship between the use of
the identity of the corporation and the harm committed. In this
case, the mere fact that Pacific is a subsidiary will not allow
piercing. With regards to the transfer of assets, it was found out
that the transfer of asset was actually a sale from Philippine carpet
to Pacific Carpet which explains the claim of the petitioners why
there are income generated by the Philippine carpet.
Atty G: what do you mean by evasion of obligation?
Student: since a corporation has a separate entity of its own, the
owners may protect themselves by creating an entity that would
absorbed the obligations that they may incur and therefore shield
them on the doctrine of limited liability. What happens then is the
whole obligation of the supposed obligors may not be enforced
against them because of the shield of the corporate fiction so the
creditors will be prejudiced on the use of the corporation. In which
case, the legal fiction will not be allowed to prevail.
Atty. G: so one, if the corporate vehicle is used to evade
obligations, the corporate then will be pierced and the
stockholders will still be made liable for the obligation of the
corporation.
Student: second is the protection of commission of a wrong, since
the corporation is a separate entity, it can only act through its
agents, so a corporation cannot be held, for example, criminally
liable. So if there are perpetrators, they might say for example
commit estafa through the corporation then the corporate fiction
will be used for them.
Atty. G: so when the corporate fiction is used to defraud or
commit a crime then a corporate fiction will be pierced and the
stockholders will be held liable. The third instance is alter ego
cases.
Student: The alter ego principle is that, a corporation is created
by another person or juridical person through which the
transactions of that person is directly done through the
corporation, the essence of alter ego principle is that the person
who is using the corporation in shielding himself from any possible
liabilities that may arise from its transactions. The difference
between that and the first one is that the first one, there might be
a pre-existing intent to defraud whereas the third one there might
be none, that he is just shielding himself from any possible liability.
Atty. G:The essence of the alter ego principle is CONTROL. If
somebody is controlling the corporation such that the corporation
basically does not have its own mind because a person is
controlling not just majority but complete dominion not only of its
finances but also its policies and business practice so whatever the
decision of this controlling person is considered the decision of the
Corporation Law (2019) MIDTERM REVIEWER
corporation, so control, not just financial but also with respect to
business decisions and operations and you use this control in
order to commit a fraud or wrong, and that the control causes
harm or injury to other persons. In this case, the corporation is
merely your alter ego such that whatever obligations incurred by
the corporation because of your control can be attributed to you
and that person controlling the corporation becomes liable.
So when do you apply the alter ego principle? There are three test
Student: the instrumentality, the fraud and the harm. The
instrumentality test means the person has control including the
financial activities and policies. Second is fraud test, the entity is
used to commit fraud. Lastly, the harm test, there is a causal
connection between the injury to the person and the use of the
corporate fiction. The ruling of the SC in this case is that, there was
no alter ego or control because while there is control in the
subsidiary it does not amount to alter ego. There is absence of
harm and fraud.
A: Why not?
S: because the move of Philippine carpet to cease its operation is
lawful and there is no unfair labor practice committed.
A: so in order for there to be piercing of the veil based on alter ego
the three elements must occur together. It is not because you own
all the stocks in a certain corporation and another corporation
owns the stocks in another corporation, it does not mean
automatically that you will apply the alter ego rule. All three
elements must occur. There was complete control, there was an
intention to defraud, using that control and you cause harm to
another person because of that control. In this case it is true there
was control by Phil Carpet of pacific carpet. It owned 100% of the
shares. However it was also found that there was no fraud and
there was no harm because Phil carpet’s reason for foreclosure
was legitimate. It was shown by the audited financial statements
of the corporation that it was really losing money and based on
the labor code that is a sufficient ground to terminate the
employment of your employees. There was no fraud and
technically there was no harm. So the SC said that the alter ego
principle is not applicable in this case to justify piercing the veil.
A: So you have here CLL which is a foreign corporation engaged in
buy and sell of molasses. One of its suppliers was MarTiera, which
is based in the Philippines and was owned partially by RJL Martinez
fishing corporation. RJL on the other hand was owned by Ruben
Martinez. Okay? so that was the relationship of the parties.
MARTINEZ VS. CA
Facts:
In this case, CLL which is a foreign corporation engaged in the
importation of molasses from the Phil which are obtained from
a company called Mar Tierra which is a domestic company and
the president of Mar Tierra was Wilfred Martinez.
Who was Wilfredo to CLL?
CLL has nominee shareholders and one of them was a firm also
owned by Wilfredo which was Baker Mckenzie (their firm here
in the Phil is Quisumbing Torres). Baker was a nominee
stockholder but the beneficial ownership was vested in Wilfredo
Martinez, Lacson et.al
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RJL owned some of the shares of Mar Tierra which was 42%
owned by petitioner Ruben Maritnez. Ruben had nothing to
with CLL he was neither a beneficial owner nor a stockholder of
CLL. He was a stockholder of RJL.
CLL purchases molasses from Mar Tierra through letters of
credit.
This is how CLL and Mar Tierra did their business and their bank
was BPI. The bank transferred funds to Mar Tierra upon
instructions of CLL, so what happened next was that there was
a non-payment of $340k.
CLL had Money market placements with BPI so the arrangement
was that the bank will deduct the deposit from the amount that
was paid to Mar Tierra. The bank did not do this because at the
time the money market placements were not matured and so
instead of deducting it from the deposit, it recorded as a
receivable from CLL meaning CLL owes the bank.
When the placements matured, the bank did not collect but
they allowed withdrawal from amount. So at the end of the day
there was no more money in the account of CLL but CLL still had
an obligation to the bank.
The bank filed a case against CLL, Wilfredo and Ruben, He was
included because he was one of the signatories of the account.
Ruben questions why he was impleaded because he had nothing
to do with CLL.
The bank filed a case for the payment of the 340k against CLL,
Wilfredo et.al and Ruben.
Atty G: Why was Wilfredo and Lacson liable in the RTC and CA?
Because they signed and agreed that they bound themselves
solidarily with CLL while Ruben Martinez was made liable by the
RTC because he owned shares in RJL.
RJL owns share with Mar Tierra and Mar Tierra and CLL had
common stockholders and that he was a co-signor in the bank
account, so they ruled that Ruben was liable because of such
connection they pierced the veil.
Atty G: Is this valid?
No. The SC said that the mere fact the majority stockholder of
Mar Tierra is RJL and that Ruben along with Jose and Luis
Martinez owned 42% of the corporate stock does not mean that
they had complete domination over Mar Tierra.
There was no showing that Ruben even benefitted of the
transaction. Just because he was a signatory, does not mean
that he can be made liable. Control alone does not warrant
piercing the veil.
The SC said that the mere fact, therefore, that the businesses of
two or more corporations are interrelated is not a justification
for disregarding their separate personalities, absent sufficient
showing that the corporate entity was purposely used as a shield
to defraud creditors and third persons of their rights
So Ruben was held not liable, Wilfredo and Lacson were liable.
Corporation Law (2019) MIDTERM REVIEWER
How does the case of Tan Uy differ from Martinez or Zambrano,
because we said that mere ownership of stock does not pierce
the corporate veil?
In this case, the corporation was used to evade the liability from
the other corporation. It would cause harm, thus the corporate
veil may be pierced.
An important fact in this case was that Hammer and Goldkey
commingled their assets. Meaning one corporation benefited
from the other’s loan. Even without an express finding of fraud
on the part of Goldkey, by the mere fact that it benefited, then
it should be held liable.
Ordinarily, control alone is not sufficient, unless there is a
finding of fraud and harm. But an exception is this case of Uy,
where the commingling of assets is considered sufficient ground
to consider them as one entity.
Side Discussion about letter of credit:
What’s the letter of credit for? How does it work?
Atty. Gavi: It is a financial instrument it’s used basically as a
bridge between buyer and seller especially if they are located in
different countries.
Illustration: if I were a buyer, I am not going to pay you until I
get the goods because if I pay you what if I don’t get the goods?
On the other hand if I was the seller, I’m not also going to pay
you if I don’t get paid, because what happens if I ship the goods,
its already with you and you don’t pay me? Okay ra if we’re in
the same City, what if you’re in HK and I’m in Cebu. So how do
you reconcile? You do a letter of credit transaction. So as the
buyer, you’re going to go to a bank, open a letter of credit and
then the bank will contact its correspondent bank where the
seller is, and then you will say “hey, seller, I have here a letter of
credit in your favor, you ship the goods to the buyer then give
me the shipping documents, the moment you give the complete
shipping docs, me and the bank will pay you” so the seller
knowing that he will get paid by the bank will ship the goods, the
bank now will turn around and tells the buyer “hey mr. buyer
the good are on their way, these are the docs you will need to
claim the goods, now pay me what I paid the seller”)
So that is what was used in this case, we have here CLL buying
molasses from Mar Tierra, so as part of that transaction, CLL
opened a letter of credit in favor of Mar Tierra. So Mar Tierra,
shipped goods to CLL knowing that its going to get paid under
the letter of credit. But ultimately, the letter of credit is a liability
of the buyer because iya man I reimburse ang bank, so the letter
of credit is the liability of CLL.
Atty. Gavi: (reiterations) So when everything was said and done,
that $340k transferred to Mar Tierra was supposed to be
deducted from their deposit with the bank, but the bank did not
deduct, so it just recorded a receivable, and then worse is it
allowed CLL and its representatives to deduct the full amount of
the deposit without taking into consideration that they still had
an obligation in the amount of $340k. So now, the bank was left
with no money in its hand but with a receivable with CLL. So
what happened?
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S: So the bank tried to collect from CLL and Ruben and Gonzales,
but they refused.
....the bank tried to collect from CLL, Ruben and Gozales but
they refused. Eventually, they discovered that they really have a
payable to BPI after auditing their account. BPI filed a collection
case. Since they refused to pay BPI asked the court to pierce the
corporate veil, claiming that since the majority of the
stockholders are the same.
The respondents to the complaint filed by the bank are CLL,
Ruben, Lacson, Gonzales, and Wilfredo Martinez. Wilfredo is a
stockholder of CLL. Ruben is not a stockholder of CLL. He is the
stockholder of RJL corp which is a stockholder of Martiera.
Martiera is the supplier of CLL and they also have common
stockholders. The SC ruled that the mere identity of the officers
is not sufficient to pierce the corporate veil.
The persons, as ruled by the court, who were not held liable are
Ruben and Gonzales. Wilfredo Martinez and Lacson were held
liable because they signed a surety agreement and not because
of piercing the veil. This is because they voluntarily bound
themselves. Ruben was one of the signatories of the account but
he did not sign the surety agreement.
The RTC found the claim of the bank to be valid. That yes, CLL,
the two Martinez and Lacson are liable under the piercing of the
veil. That they were being used to defraud the bank. The CA
agreed that they are liable except for Gonzales, considering that
he was merely an employee and not a stockholder. Ruben went
to the SC on the ground that there was no basis on the judgment
against him. Why? Because the rest of the stockholders signed
a surety agreement. Having signed such will make one liable
jointly and solidary liable with CLL. You do not even need to
pierce the veil because they bound themselves voluntarily by
contract.
What about Ruben? The ground for including him as one of the
solidary debtor merely on the basis of piercing the veil/ the alter
ego doctrine. According to the SC, it pierced the veil to CLL to
Martiera to RJL and to Ruben who was the majority stockholder
of RJL, saying that all of these persons are one and the same.
That CLL was merely a paper corporation and sham used to
defraud the bank. The only proof that they had is the common
stockholding between Martiera and CLL. THAT IS NOT A
SUFFICIENT GROUND TO APPLY THE ALTER EGO PRINCIPLE. As
we go back to the case of Zambrano, we apply the alter ego
when there is a concurrence of 3 elements: (control, fraud,
injury)
THREE TESTS:
CONTROL TEST – not just financial, but COMPLETE business and
operating control control.
INSTRUMENTALITY TEST – that control must be used to defraud.
HARM TEST – that fraud cause harm to the other party.
In this case, the bank was able to establish only the common
shareholdings between CLL and Martiera. But they have no
proof to show that Martiera was using CLL to conduct fraud. In
fact, the SC found that there was a valid business transaction
between CLL and Martiera. Martiera also has other clients other
than CLL. The SC found that there was no fraud. And since there
was no fraud, there was not harm. And since these two
elements are missing then you cannot apply the alter ego
Corporation Law (2019) MIDTERM REVIEWER
doctrine. So, there can be no piercing the veil as far as Ruben is
concerned.
HEIRS OF FE TAN UY VS. INTERNATIONAL EXCHANGE BANK
The bank granted a loan to Hammer which is secured by the
property of Goldkey under a surety agreement signed by Chua
and his wife. Hammer defaulted with the payment. The property
of Goldkey was foreclosed. But there is still an outstanding
balance of the loan. Bank filed a collection case against Hammer,
Goldkey and Chua. The issues are: whether or not UY can be held
personally liable, being an officer of Hammer; and whether or
not the alter ego doctrine is applicable in this case.
There was a finding by the trial court that Uy did not sign the
loan agreement. But she was made liable solely because she is
an officer and director of the corporation. That is the only basis
that the court had. The SC said that it is not a sufficient ground
to hold her liable because a corporation has a personality
distinct from its officers and stockholders. The officer does not
become liable with the obligations of the corporation by that
mere fact.
As to the issue whether Goldkey can be held liable for the
obligation of Hammer for being a mere alter ego of the latter?
It was ruled that the corporate veil must be pierced on the
ground that Goldkey is a mere alter ego of Hammer because of
certain circumstances such as they have common stockholders,
both are family corporations by Chua who is the president of
both corporations, they share the same office, when Chua
disappeared, Goldkey and Hammer ceased operations. But the
reason which cannot found in any other case is the commingling
of assets of the corporations. This means that when Hammer
contracted the loan, Goldkey was also benefited by it. Whatever
benefits that Hammer received from the loan was also enjoyed
by Goldkey. SC said that you are under the same control, you
have the same person running the corps, and that you
commingled you assets, even without mentioning fraud, or
harm which is a requirement under the alter ego doctrine,
Goldkey is still liable.
Atty G: Whatever benefits that Hammer receives from the
proceeds of the loan, it is assumed that Goldkey also enjoyed it
because they co-mingled their assets. So now that Hammer
cannot pay, Goldkey should be held liable.
CIR VS NORTON & HARRISON.
It is about a case where Norton and Harrison company came
into an agreement with Jackbilt where it manufacture concrete
blocks. They came into an agreement where Jackbilt will
manufacture these concrete blocks and Norton will sell it to the
public, and it was found out that, when Norton and Harrison
sells it to the public, sells it, it will receive a lesser amount and
the rest of the (inaudible) of the amount goes to Jackbilt and.
Atty G: So how many transactions were there in the sale of the
goods? How did they structure their transactions?
S: It was like a buy and sell structure, buy and sell …
Norton and Harrison buys the concrete blocks from Jackbilt, and
then upon buying them, Norton and Harrison will sell it to the
public. And the proceeds of the sale will go to, will go to both of
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ATTY. GAVIOLA-CLIMACO
them. The bigger amount goes to Jackbilt and the lesser amount
serves as profit or the compensation in selling the concrete
blocks to Norton and Harrison.
Atty G: Okay, take note class that this case happened 1964 pa or
1940’s ang facts occured. So lahi pa, the corporate income tax
then was different. So you have here two companies, one is the
manufacturing, the other is the distributor. Okay? What did they
have in common?
S: Three years after their agreement or their arrangement
rather, here comes Norton and Harrison eventually buying the
shares of Jackbilt.
Atty G: They purchased the shares. What’s the difference
between purchasing assets and purchasing shares? For example
you have A company and B company. What is the difference if
“A company will buy all the assets of B company” or “A company
buying the outstanding shares of B company”? Is it the same or
are they different transactions? They are different. So don’t
interchange them. What’s the difference?
When you buy assets, you acquire the business. You acquire the
business because now you have all the assets of that other
entity but you don’t acquire another entity. Do you get it? You
acquire the assets of B so you acquire its business but you don’t
acquire B. Get it?
But if you buy shares, you are not only buying the business, you
are buying the entity. Do you get it? So rather than buying the
business, you buy the entity, you buy shares. So you acquire a
subsidiary. So be careful with that. That’s not the same. So in
practice, you can do an asset purchase or a share purchase. Two
very different transactions.
Okay? So what was the transaction here?
S: The sale of the concrete blocks, or the purchase of the assets
of the, or the outstanding shares of stocks
Atty G: The shares of Jackbilt were purchased by Norton. In
effect, Norton now acquired control.
Atty G: So Norton and Harrison became the sole stockholder of
Jackbilt. They now have control over Jackbilt. What happened
next?
S: The CIR (inaudible) collecting sales tax said that the sale, it
should disregard the entity of Jackbilt since its shares were
acquired by Norton. The sales tax should be imposed upon the
sales made by Norton to the public, and not the sale by Jackbilt
to Norton. Because after the, after Norton purchased the
outstanding shares of Jackbilt, the CIR said that (inaudible)
Jackbilt is now the corporation of Norton since it exercises
control over Jackbilt.
Atty G: What was the effect of the two transactions, the scheme
done by Norton and Jackbilt? What was the effect of that of their
tax liability? Why is the CIR saying that there should only be one
sale? How many sales were there? Two diba? Jackbilt to Norton
then Norton to the public. But now the CIR is saying that no,
there should only be one sale because is the same as Norton.
Corporation Law (2019) MIDTERM REVIEWER
Why would the CIR do that? Of course, they want to get more
taxes. How is that scheme, nga iduha ka transaction, depriving
the CIR of taxes? Why? Because lain-lain man nga sales price.
Lain ang price from Jackbilt to Norton, and they declared that as
different revenue. Okay? At that time, the lower the revenue,
the lower your tax rate. Mura xag individual the taxation style
bah. Have you have your tax already? Then from Jackbilt to
Norton, another sale. So daku man ang cost, so again lower na
sad ang tax. Diba? Because they broke the transactions into two,
ni-qualify sila for a lower bracket sa tax rates. You understand?
Whereas if ila lang tu giusa nga sale, daku ang revenue, that
means that they go to the higher bracket. So the CIR is saying
that no, there should be only one sale, direct from Norton to the
public. We disregard from Jackbilt to Norton because that first
sale was only used to create a buffer to lower their tax. So you
understand? So what happened?
FOLLOW UP DISCUSSION
xx---direct from Norton to the public. We disregard the sale from
Jackbilt to Norton because that first sale was only used to create
a buffer to lower their tax.
General Rule, just because one corporation owns another, it
doesn’t mean that they are one and the same corporation; they
are still separate and distinct. However, there are circumstances
to show that the separate personality is used to evade an
obligation then that separate personality will be disregarded
and both corporations will be considered as one.
So in this case, the Supreme Court found that Norton and
Harrison and Jackbilt were structed in such a way as to evade
paying the larger amount of tax; and it was shown that basically
the two corporations were under the same control. It was
Norton and Harrison who financed the operations of Jackbilt.
Since there was a finding that the structure was made that the
two-pronged sale was made just to avail of a lower tax, then the
Supreme Court said that Yes, we disregard the separate entity
and consider that there should only be one sale—the sale from
Norton and Harrison to the public. So that sale is assessed with
a higher tax rate, and Norton and Harrison were held liable for
deficiency tax.
(End of Norton Case Discussion)
FRANCISCO MOTORS CORPORATION VS. CA
GR NO. 100812, JUNE 25, 1999
The stockholders had a payable to lawyer. What the lawyer did
was that he sued the stockholders and the Corporation.
Nagreverse siya, diba ang piercing the veil is when you sue the
stockholders for the liabilities of the Corporation? In this case,
you’re suing the Corporation for the liability of the stockholders.
The Supreme Court said na well, there’s no definite rule on how
to apply here piercing the veil, but definitely, it is for the
protection of the public, diba. For the protection of the public,
when you are using that legal fiction of that corporation to
defraud the public, that’s the essence of piercing the veil. You’re
using that legal fiction to defraud the public and in order to
escape liability. Is that applicable in this case? It’s not, because
in this case, the legal entity of the Corporation was not being
used to defraud the public. In fact, the obligation that was being
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claimed was the personal obligation of the stockholders, so the
Supreme Court refused to apply the piercing the veil principle
here.
It’s not black and white, but generally, piercing the veil will only
apply if you want to make the stockholders liable for the
liabilities of the Corporation, not the other was around. Why?
You go back to the essence of piercing the veil—if you are using
the legal entity to defraud, so if naa na siya then you pierce the
veil. In this case, there was no such allegation that the Corp was
being used to defraud the lawyer. So, the Supreme Court, it will
not apply.
KUKAN INTERNATIONAL CORPORATION VS. HON. AMOR REYES
GR NO. 182729, SEPTEMBER 29 2010
Here, you have a supplier not being paid. Supplier sued Kukan
Inc., and then Kukan Inc. stopped appearing in court, so that
judgment was made and then Kukan Inc. was held liable.
However, when they served the writ of execution, they found
that there was another Corporation occupying the premises,
Kukan International Corporation—same stockholder but
different corporation. So now you have the supplier trying to
enforce the judgment of Kukan Inc. against Kukan International
Corporation and the justification is piercing the veil. Can he do
that? No. The Supreme Court said that while piercing the veil
can be used as a basis to impute liability, it cannot be used as a
basis to acquire jurisdiction. That’s a different matter—
acquisition of jurisdiction is something that’s technical. You
cannot just enforce a judgment against Corporation A when the
judgment was against Corporation B under the guise of piercing
the veil. The Supreme Court said that it is not how piercing the
veil works. It is used to establish a liability but it is not used to
acquire jurisdiction.
CLASSIFICATION OF CORPORATION
Section 3. Classes of Corporations. – Corporations formed or
organized under this Code may be stock or nonstock
corporations. Stock corporations are those which have capital
stock divided into shares and are authorized to distribute to
the holders of such shares, dividends, or allotments of the
surplus profits on the basis of the shares held. All other
corporations are nonstock corporations.
AS TO EXISTENCE OF STOCKS:
 Stock corporation - Corporations which have capital
stock divided into shares and are authorized to
distribute to the holders of such shares dividends or
allotments of the surplus profits on the basis of the
shares held.
 Non-stock corporation - It does not issue stocks and
does not declare or distribute dividends. They are
organized for non-profit purposes.
AS TO THE NUMBER OF COMPONENTS:
 Aggregate corporation - A corporation consisting of
more than one member defined as an artificial body of
men, composed of diverse individuals, the ligaments of
which body, the franchises and liberties bestowed upon
it, bind and unite all into one, and consists the whole
frame and essence of the corporation. For corporation
Corporation Law (2019) MIDTERM REVIEWER
aggregate you need to have at least 5 members or
stockholders.
 Corporation sole - It consists of only one person or
member. As per Section 110 of the Corporation Code, a
corporation sole is one formed by the chief archbishop,
bishop, priest, rabbi, etc. For the purpose of managing
and ministering, as trustee, the affairs, property and
temporalities of any religious denomination, sect, or
church.
Atty. GC: Can you have a corporation with 3 corporators?
Ans: Technically, the corporation will not be dissolved if you have
3 corporators but the law requires that you must have atleast 5
members in the board, and each member of the board must have
atleast 1 share. So, that non-compliant corporation will be
penalized by the SEC.
AS TO LAWS OF INCORPORATION:
 Domestic corporation - A corporation formed,
organized or existing under Philippine laws.
 Foreign corporation - A corporation 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.
Atty. GC: So when we talk about domestic or foreign corporations,
what are we talking about specifically?
Ans: We are talking about the classification based on the Law of
Incorporation or the Place of Incorporation. It answers the
question as to where the corporation is incorporated in order to
call it as a “Domestic or a Foreign corporation.” It does not speak
about the citizenship of its corporators.
Thus, it can be possible that you have a domestic corporation but
all of its stockholders are foreign. There is no prohibition as to
organizing a corporation that is 100% foreign-owned except in
cases of nationalized activities/corporations.
AS TO NATIONALITY:
 Place of incorporation test: where the corporation was
created [Corporation Code]
o Domestic corporation: created in the
Philippines
o Foreign corporation: created abroad
 Citizenship of stockholders [Foreign Investment Act]
o Philippine National: 100% owned by Filipino
citizens even if incorporated abroad
o Foreign-owned corporation: majority of
stockholdings owned by foreigners, even if
incorporated in the Philippines
TESTS TO DETERMINE CITIZENSHIP OF STOCKHOLDINGS
APPLIES WHEN THE CORPORATION IS NOT 100% FILIPINO OWNED
 Control test: at least 60% of the capital stock
outstanding and entitled to vote are owned by Filipinos
 Grandfather rule: if the percentage of Filipino
citizenship is less than 60% then only the number of
shares corresponding to such percentage shall be
counted as Philippine nationality
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ATTY. GAVIOLA-CLIMACO
NARRA NICKEL V. REDMONT
The “Control Test” is still the prevailing mode of determining
whether or not a corporation is a Filipino corporation, within the
ambit of Sec. 2, Art. II of the 1987 Constitution. When in the mind
of the Court there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-equity ownership
in the corporation, then it may apply the “Grandfather Rule”
AS TO CITIZENSHIP OF THE STOCKHOLDERS:
 Philippine National
FOREIGN INVESTMENTS ACT OF 1991 (RA 7042), SECTION 3.
DEFINITION:
The term "Philippine national" shall mean a citizen of the
Philippines or a domestic partnership or association wholly owned
by citizens of the Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held
by citizens of the Philippines; or a trustee of funds for pension or
other employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty (60%) of the fund
will accrue to the benefit of the Philippine nationals: Provided,
That where a corporation and its non-Filipino stockholders own
stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stocks
outstanding and entitled to vote of both corporations must be
owned and held by citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of Directors of both
corporations must be citizens of the Philippines, in order that the
corporations shall be considered a Philippine national;
 Foreign-owned corporation - those that don’t qualify in
the abovementioned definition
NATIONALIZED ACTIVITY
Determined by looking at the Foreign Investment Negative List
(FINL) which enumerates the activities which are limited or
reserved to Filipinos. It is a list of areas of economic activity whose
foreign ownership is limited to a maximum of forty ownership is
limited to a maximum of forty percent (40%) of the equity capital
of the enterprise engaged therein. (pls. check Section 8 of RA 7042
or the Foreign Investments Act of 1991)
If the activity is not listed, that activity can be performed by a
corporation which is 100% foreign owned even if incorporated in
the Philippines.
Nationalized Corporations are those that by Constitution or by
special laws are limited to Filipino citizens.
Eg. Natural resource exploration, development and use, public
utility corporations, land ownership, educational institutions and
advertising companies.
[Atty. talks about foreigners and their attorneys’ erroneous belief
that they need Filipino stockholders to incorporate in the
Philippines.
Moral of the story: get rid of the notion that you need to have
citizenship in order to incorporate because to be an incorporator
all that is required is to be a resident. In fact, only a majority needs
to be residents.]
Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

TAKE NOTE McArthu Shareholding Total Paid-up Total

A domestic corporation can be foreign owned. This happens when r Mining s Subscribe outstanding
a corporation is incorporated in the Philippines but is composed capital stock
of foreigners. MMC 5,997 shares 5,997,000 825,000 59.97%
(Filipino) @ 1k
In the same way, a foreign corporation can be considered a MBMI 3,998 shares 3,998,000 1,878,174 39.98%
Philippine national when 100% of its capital stock or its (Canadia @ 1k
stockholders are Filipino citizens. n)

NARRA NICKEL V. REDMONT MMC Shareholding Total Paid-up Total

s Subscribe Outsanding
In the case of Narra Nickel what happened here was Redmont, a capital stock
domestic corporation ,filed an action in order to cancel or revoke Olympic 6,663 shares 6,663,00 No paid up 66.63%
the mineral production sharing agreements between 3 Mines @1K
corporations MBMI 3,331 @ 1K 3,331,000 2,803,900 33.31%

Atty: What is that document? mineral production sharing

agreement or mpsa? Equation:

Student:These are like permits which allow or authorizes or 1. Shares of MMC in McArthur x MBMI shares in MMC = Indirect
allows a foreign corporation to exploit, explore or extract shares of MBMI in McArthur
minerals or do mining. This is a nationalized activity. 2. Direct shares of MBMI with McArthur + Indirect shares of
MBMI in McArthur = Total shares to determine compliance
Atty: A nationalized activity so under our constitution it can only with foreign equity limitation
be done by corporations which are owned at least 60% by Filipino
citizens so it is a nationalized activity. Applying in the case:

Atty: Redmont here try to apply for the same permits in certain
parts in Palawan but it new that these permits are already
distributed to the three corporations namely , Narra , McArthur
and Tesoro and after that Redmont claimed that these 3
corporations are disqualified from having such mpsas because
they are basically foreigned owned thus contradicts the
prohibitions provided for under the constitution basically for the
exploitation, development and utilization of the natural resources
because it claims that these 3 corporations are controlled by a
100% Canadian Corporation MBMI so with this regard those mpsa
should be revoked or cancelled. In this case the major issues was
the determination really of the nationality of these three
corporation.
Atty: So let us take one corporation of those three, the Mcarthur
Mining Corporation, what was the structure of mcArthur Mining
Corp.?
1. 60% x 33% = 19.8% or 20% is MBMI’s indirect shares in
McArthur
2. 40% + 20% = 60% which is a clear violation of the foreign
equity limitation.
CORPORATE LAYERING
 A type of arrangement whereby a corporation has for its
stockholder another corporation
 This is not a circumvention of the law. It is a valid
structure UNLESS it can be establish that it is used to
circumvent the law or the constitution
 Basis: Foreign Investment Act where it only requires that
the investee corporation and investor corporation
should be Filipino citizens at least 60% of its outstanding
stock entitled to vote and its board of directors should
compose at least 60% filipino citizens

Student: Actually McArthur Mining had was qble to get its mpsa Section 3. Definitions. - As used in this Act:
from its predecessor SMMI.
Atty: What was the capital Structure of MMI?

Student: It has a capital structure of 10M and it is divided into one
, 10 thousand common shares at 1 thousand pesos per share
The Supreme Court held that McArthur is a foreign corporation
because applying the grandfather rule it has to account MBMI's
shareholdings in MMC which in turn is a shareholder of MMI.
Applying the 60/40 foreign equity requirement based on the
Constitution, it is evident that MBMI adding up his percentage of
shares in MMC and MMI it will exceed the 40 percent limitation.
a) The term "Philippine national" shall mean a citizen
of the Philippines or a domestic partnership or
association wholly owned by citizens of the
Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty percent
(60%) of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines;
or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee
is a Philippine national and at least sixty (60%) of the
fund will accrue to the benefit of the Philippine
nationals: Provided, That where a corporation and
its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC)

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Corporation Law (2019) MIDTERM REVIEWER
registered enterprise, at least sixty percent (60%) of
the capital stocks outstanding and entitled to vote
of both corporations must be owned and held by
citizens of the Philippines and at least sixty percent
(60%) of the members of the Board of Directors of
both corporations must be citizens of the
Philippines, in order that the corporations shall be
considered a Philippine national;
Summary of Narra Nickel Mining et. al v Redmont:
1. Apply Control Test
“at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the
Philippines AND at least sixty percent (60%) of the
members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order
that the corporation shall be considered a Philippine
national; (as amended by R.A. 8179).”
If it FAILED: then it means it does not comply with 60-40
requirement and NO NEED TO APPLY THE GRANDFATHER RULE
because you already fell below the 60% requirement.
Automatically, it is disqualified and it is not a Philippine National.
If it PASSED and there is NO DOUBT as to the BENEFICIAL
OWNERSHIP and CONTROL of the Corporation = stop here
If it PASSED however there is DOUBT as to the BENEFICIAL
OWNERSHIP and CONTROL of the Corporation = apply
GRANDFATHER RULE
What do you mean by “doubt”?
“Doubt” is any circumstance, which renders the beneficial
ownership and control of the corporation outside of Filipino
ownership. It is not when you fall below 60%.
In the Narra Nickel Case the following circumstances were
considered to establish doubt:
1. MBMI fully funded the joint ventures or ventures that MMI
will enter into. The fund of MMC actually came from MBMI
2. Foreign corporation practically provides all the technical
support and supplies for that particular venture
3. Foreign corporation although has minor ownership in said
corporation but it is the own who prepares its economic
viability studies
4. During the pendency of the case the three petitioners
converted its MPSA application to an FTAA application. It
confirmed that the petitioners did not have the capacity to
be given the MPSA
WHERE DOES THE 60/40 RULE APPLY, Nationalized Activities:
1. Public Utilities
2. Land Ownership
3. Mining Exploration
Clarification:
For tax laws, there is different classification based on where you
earn the income, or based on your situs. I don’t think we based it
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ATTY. GAVIOLA-CLIMACO
on FIA or Corporation Law. There is different classification under
NIRC. The classification would depend on the purpose.
Examples: a. ) Whether or not this entity is qualified to engage in
a certain activity, then you are going to look at the FIA
classification. Another, b.) whether or not this entity requires a
permit with the SEC in order to engage business in the Philippines,
then you are going to look at the Corporation Code classifications.
Bottomline, depends on the purpose.
The nationality classification based on place on incorporation will
be discussed later because around section 60s pa sa Corpo code.
It matters whether you are domestic or foreign corporation as to
whether or not you are doing business in the Philippines because
if you are doing business in the Philippines and you re domestic
corporation, you don’t need to get a permit anymore from the
SEC, your certificate of incorporation is already sufficient but if you
are a foreign corporation (you are not registered in the SEC) if you
want to do do business in the Philippines, you need to get permit
from SEC to operate either as a branch or a representative office.
This classification is also important with regard to doing business
in the Philippines. (will be further discussed later on)
Place of incorporation whether domestic or foreign, citizenship of
the stockholding s as to what activities your corporation can
engage in, you look at the FIA. Philippine national or foreign
owned. In order to determine whether or not it’s a Philippine
national or foreign owned, apply the control test. If there are no
doubts, control test is sufficient. If there are doubts on the
ownership of the corporation based on facts and circumstances
then you need to apply the grandfather rule.
Question: In the corporate structure of MMC it is not MBMI but
another foreign corporation, would you still consider the
stockholdings of another foreign corporation to determine
whether MMI is a Filipino corporation?
Atty Gavi: Yes, the law does not distinguish as to who the
stockholder is. What the law looks into is the citizenship of the
stockholders. So as long as the stockholders of the investor
corporation (MMC) is still foreigner and if you are going to apply
the grandfather rule, then it is still considered foreign ownership.
Clarification: The SEC rulings were quoted by the SC but unless the
SC really adopts those rulings, they are merely guidelines, they are
not black and white rules. I would like to maintain that you have
to go the ultimate stockholders. Unless the SC will rule on a
specific case really saying to apply only second layer or third layer
but for me grandfather rule means that you have to go to the
ultimate stockholders.
Where do we apply the 60% in order to determine the nationality
because there are different kinds of shares? What shares are
relevant in determining nationality of a corporation?
Corporation Law (2019) MIDTERM REVIEWER
GAMBOA VS. TEVES, G.R. NO. 176579, JUNE 28, 2011
FACTS
1) The Philippine Legislature granted PLDT the franchise
and right to engage in telecommunications business.
2) The American company, General Telephone Electronics
Corporation (GTE) which is a major stockholder of PLDT,
3) Sold 26% of its common shares to Philippine
Telecommunications Investment Corporation (PTIC).
4) PTIC stockholders executed three deeds of assignment
in favor of Prime Holdings, Inc. (PHI) which became the
owner of 111,415 shares of stock of PTIC.
5) Such 111,415 shares of PTIC held by PHI were
sequestered by the PCGG which represent 46.125% of
the outstanding capital stock of PTIC that were later
declared to be owned by the Republic of the Philippines.
6) First Pacific which is a Bermuda-registered & HK-based
firm acquired the remaining 54% of PTIC.
7) Subsequently, Interagency Privatization Council
announced selling the 111,415 shares or 46.125% of
PTIC through a public bidding. Parallax won the bid.
8) Thereafter, First Pacific as PTIC stockholder announced
to match the bid of Parallax to buy the 111,415 shares.
However, it failed to do so.
9) Through its subsidiary MPAH, First Pacific entered into a
Conditional Sale & Purchase Agreement with the
government for the 111, 415 shares.
Since PTIC is a stockholder of PLDT, the sale by the Philippine
Government of 46.125% of PTIC shares is actually an indirect sale
of 12M shares or about 6.3% of the outstanding common shares
of PLDT. With the completed sale, First Pacific common
shareholdings in PLDT increased from 30.7% to 37%, thereby
increasing the shares of foreigners to about 81.47% and thus
violating the constitutional limitation of foreign ownership of the
capital of a public utility.
Sec 11, Art 12 of the Constitution:
No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or associations organized under
the laws of the Philippines, at least sixty per centum of whose
capital is owned by such citizens of the Philippines.
The facts according to public respondents Finance Secretary
Teves, Undersecretary Sevilla, and PCGG Commissioner Abcede:
The HR Committee on Good Government conducted a public
hearing of the impending sale and concluded that First Pacific’s
intended acquisition of the government’s 111,415 PTIC shares
(see 9 in the illustration above) resulting in First Pacific’s 100%
ownership of PTIC will not violate the constitutional limit since
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PTIC holds only 13.847% of the total outstanding common shares
of PLDT.
Petitioner filed the instant petition for prohibition, injunction,
declaratory relief, and declaration of nullity of sale of 111,415
shares and averred that the sale would result in an increase in First
Pacific’s common shareholdings in PLDT from 30.7% to 37%, and
this, combined with Japanese NTT DoCoMo’s common
shareholdings in PLDT would result to 51.56% foreign
shareholdings which is over the 40% constitutional limit.
TN: First Pacific + Japanese NTT DoCoMo’s common shareholdings
= 51.56% foreign shareholdings
Is PLDT in compliance with the constitutional requirement of the
60% capital which must be owned by Filipino Citizens?
The contention of the petitioner
It is not compliant because when you say capital, you have to look
at common shares only. If that is the basis, foreigners already own
80% which is beyond the 60% limitation.
The contention of respondent
If you look at all the outstanding shares, the 80% ownership in
common shares of the foreigners will only be around 17% of the
pie. Hence, PLDT is compliant since this is below 60%.
ISSUE:
Does the term "capital" in Section 11, Article XII of the
Constitution refer to common shares or to the total outstanding
capital stock (combined total of common and non-voting
preferred shares)?
RULING
We agree with petitioner and petitioners-in-intervention. The
term "capital" in Section 11, Article XII of the Constitution refers
only to shares of stock entitled to vote in the election of directors,
and thus in the present case only to common shares, and not to
the total outstanding capital stock comprising both common and
non-voting preferred shares.
The Supreme Court looked into the definition of Capital under the
Law. Under FIA, which governs foreign investments in the
Philippines, Capital is considered 60% of the capital stock
outstanding and entitled to vote.
Capital was explained through differentiating common from
preferred shares of PLDT. SC said that the shares that foreign
nationals own was already in violation of the Constitutional
requirement.
First, the foreigners owned 64% of the common shares. Common
shares include the sole, exclusive right to vote in the election of
directors. Thus, when they are such conferred with that right, they
are already in control and in management of the corporation.
However, Filipinos only owned 35% of the PLDT’s common shares.
As between the holdings of the Filipino citizens and foreign
nationals in terms of common shares, the latter have the
superiority. In preferred shares, the Supreme Court described
them as mere investors who do not have the right to vote in the
election of directors and officers.
Corporation Law (2019) MIDTERM REVIEWER
The preferred shares of PLDT is owned by 99% Filipinos. Thus, they
do not have the voting rights—they cannot control, manage or
participate. However, the rest are already owned by the
foreigners.
Compliance with the required Filipino ownership of a corporation
shall be determined on the basis of outstanding capital stock
whether fully paid or not, but only such stocks which are generally
entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks,
the voting rights of which have been assigned or transferred to
aliens cannot be considered held by Philippine citizens or
Philippine nationals. Individuals or juridical entities not meeting
the aforementioned qualifications are considered as non-
Philippine nationals.
GAMBOA VS. TEVES, G.R. NO. 176579, OCTOBER 9, 2012
FACTS:
The lawyers of PLDT felt that they were disadvantaged by this
decision, because now it is not based on total outstanding stock,
but on the common shares. They filed a Motion for
Reconsideration brought by the foreigners and their lawyers who
were insisting on the total outstanding capital stock.
ISSUE
Whether or not the MR should be granted
RULING
No. SC denied the MR.
(...but according to Atty G: The SC now realized that their ruling in
the First Gamboa v. Teves case actually narrowed down the
definition of capital. Because of the MR, the SC revised their ruling
although they did not admit that they revised it. They just
maintained that this it was their ruling all along. But it’s not true
because they said “entitled to vote in the election of directors.”
According to them, what they focused on is on the
pronouncement “that mere legal title is not sufficient, but full
beneficial ownership.” )
Since a specific class of shares may have rights and privileges or
restrictions different from the rest of the shares in a corporation,
the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution must apply not only to
shares with voting rights but also to shares without voting rights.
Preferred shares, denied the right to vote in the election of
directors, are anyway still entitled to vote on the eight speci􀀾c
corporate matters mentioned above. Thus, if a corporation,
engaged in a partially nationalized industry, issues a mixture of
common and preferred non-voting shares, at least 60 percent of
the common shares and at least 60 percent of the preferred non-
voting shares must be owned by Filipinos. Of course, if a
corporation issues only a single class of shares, at least 60 percent
of such shares must necessarily be owned by Filipinos. In short,
the 60-40 ownership requirement in favor of Filipino citizens must
apply separately to each class of shares, whether common,
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ATTY. GAVIOLA-CLIMACO
preferred non-voting, preferred voting or any other class of
shares.
Moreover, such uniform application to each class of shares insures
that the "controlling interest" in public utilities always lies in the
hands of Filipino citizens.
Philippine Nationality of Corporations
Sec 3(a) of the Foreign Investments Act provides, “The term
"Philippine national" shall mean a citizen of the Philippines;or a
domestic partnership or association wholly owned by citizens of
thePhilippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned and held by
citizens of the Philippines;...”
The second ruling expanded the first ruling. They said that it must
apply to all types of shares—voting or non-voting. Common shares
must have 60-40 shares, preferred shares 60-40 limitation applies
as well. You apply it separately. You don’t apply it on total
outstanding shares, like what PLDT wanted in their MR. The SC
wanted it more strict. SC said that it must apply not just those
entitled to shares but to each type of shares—whether voting or
non-voting, class A, class B…
(sa IBL ni) Atty Gaviola: That interpretation for me is the correct
interpretation because when the law says outstanding capital
stock entitled to vote, this is very general. You cannot say that
preferred stocks are not entitled to vote. General rule is that if the
articles are silent, preferred stocks are entitled to vote in the
election of directors. Only when they are deemed to be non-voting
expressly can they be deprived of their right to vote but only in the
election of directors. For all the 8 other items enumerated in the
corporation code, they are required to vote.
So where do you apply the 60%?
60% voting shares or 60%total outstanding shares?
The lawyers of PLDT were insisting that you should apply based on
total outstanding shares because these are the lawyers
representing the foreign stockholders of PLDT. If you apply it
based on total outstanding shares, PLDT’s total outstanding
shares, more than 70% of its outstanding shares were preferred
non-voting shares and majority of that almost 99% were owned
by Filipino citizens. On the other hand, the common stockholdings,
the voting shares were only around 20+% but majority of that
were owned by foreigners.
Do we apply it to common or do we apply it to the total?
If in common, it would mean PLDT should not own a utility
franchise because more than 60% of its voting shares are owned
by foreigners. But if we apply it on total outstanding, then that’s
okay because more than 60% of its total outstanding are owned
by Filipinos.
Corporation Law (2019)
GAMBOA CASE-DECISION
MEANING: TOTAL CAPITAL STOCK OUTSTANDING & ENTITLED TO
VOTE : ON THE ELECTION OF DIRECTORS
Control Test:
You need to have 60 % in your outstanding capital stock
entitled to vote should be owned by Filipino Citizens
Now the question is , what is meaning of “60 % outstanding
capital stock & entitled to vote?”
Summary :
Gamboa Case: 60 % should be based on the total shares entitled
to vote in the election of directors
Gamboa Resolution: Based on each class of shares regardless if
voting or non-voting :apply it to each class.
SEC: total voting shares entitled to vote on the election of
directors & total outstanding shares whether voting or not.
Ans: Base on the Gamboa case, when you say total capital stock
outstanding & entitled to vote, it means the Total capital stock
outstanding and vote (Election of directors).
IOW: apply the 60 & on the capital stock entitled to vote in the
election of directors:
Ans: So basically, what you classify as voting shares are those
shares entitled to vote in the election of directors.
Example. 200 shares outstanding,
100- voting shares
100- non-voting
Gamboa Decision:
60 % of the shares entitled to vote in the election of directors
must be owned by Filipino Citizens ( refers to 100 voting shares
lang) non-voting and shares outstanding (NOT IMPORTANT)
200 SHARES OUTSTANDING
100 -VOTING
100-NON VOTING
Gamboa Reso:
Its not just the shares entitled to vote in the election of directors
, because the law says TOTAL OUTSTANDING AND ENTITLED TO
VOTE, and under the corporation code there are really no non-
shares cause even the non-voting shares are required to vote in
certain circumstances. Meaning it should be applied to each class
of shares.
200 SHARES OUTSTANDING
100 - VOTING
100 - NON VOTING
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SEC: 60 % of the voting: entitled to vote in the election of
directors & 60 % of the total outstanding capital stock , meaning
if you have 60 of the voting but 0 % of the non-voting under the
SEC test you will not pass because you only have 60 of the total
outstanding shares.
Atty: Which will prevail?
Ans: The prevailing rule is the SEC. The SC said that in the Roy
case, basically everything of the discussion in the Gamboa Reso is
a mere Obiter. And the prevailing rule is still the Gamboa
Decision That the 60 % should be based on the Total Capital
stock entitled to vote on the election of directors. But since the
SEC requirement is more stringent because it does not look at
the total voting but also takes a look at the total outstanding
capital , then it SEC memorandum Circular is VAlid. So as long as
the memorandum circular exist that is the prevailing rule. The
SC upheld is because it’s in accordance with our Gamboa
Deicsion ruling in fact it is more stringent than the Gamboa
Deicion. Second GAmboa ruling, does not matter because it’s
just all Obiter. All the hours that you spend analyzing the
Gamboa Reso is a mere obiter.
As to nationality , you can have the place of the corporation ,
citizenship of stockholders. Which classification you apply, it
depends on what’s the purpose. If it’s a matter on “can the
corporation do business?” and to secure a permit, then you take
a look at the place of incorporation . If it a question on what
activity can that corporation engage in?” Look at the Citizenship
of the stock holders and you apply the foreign investment act.
How do you determine nationality base on the FIA?
Apply the Control test: 60 % of the Capital stock outstanding and
entitled to vote must be owned by Filipino Citizen.
If there is corporate layering
60 % of both the investor and investee if outstanding capital
stock and entitled to vote must be owned by Filipino Citizens &
60 % of the directors both corporation must be Filipino citizen.
In which case, your corporation is Philippine national .
Can you have a Philippine national that is domestic?
Ans: Yes,
Can you have a Philippine national that is foreign?
Ans: Yes, because Philippine national at least 60 %. Foreign here
in the Philippines since incorporated. But it could still be
considered as Filipino if composed of 100 & Filipino.
Can you have a foreign corporation that is domestic?
Ans: Yes, because, incorporated here but less than 60 % Filipino
owned.
What are the other classifications?
As to legal status:
De jure corporation- one that is organized in accordance with the
requirements of law, a validly existing corporation;
De facto corporation- a corporation where there exists a flaw in
its incorporation. These three elements must exist In order for a
corporation to be considered as de facto:
Corporation Law (2019) MIDTERM REVIEWER
a. There must be a valid law under which the
corporation may be incorporated;
b. There must be an attempt in good faith to
incorporate;
c. There must be an exercise or use of corporate
powers
There is also a corporation by estoppel where there is a group of
persons holding itself out in the public as a corporation and it
enters into a contract with third persons, thus they cannot deny
their existence to those persons. The persons making the
corporation by estoppel is solidarily liable. They are liable as an
association because they are not considered as a corporation.
They are estopped from claiming that they are not a corporation
but their liability is individual.
Corporation by prescription- it is not formally organized as a
corporation as such but has been duly recognized by immemorial
usage as a corporation, with rights and duties enforceable under
the law.
As to function:
Public Corporation: a corporation organized for the government
of a state for the purpose of serving general good and welfare.
Private Corporation: a corporation formed for some private
purpose, benefit aim or end.
As to manner of creation:
Corporation created by Special law - a corporation directly created
by Congress through a special law.
Corporation created under a General law- a corporation created
under the Corporation Code of the Philippines or the old
Corporation Law.
As to whether they are for religious purposes or not:
Ecclesiastical corporation or one organized for religious purposes.
Under the Code, religious corporations are classified into
corporations sole and religious societies.
Lay corporation or one organized for a purpose other than for
religion. Lay corporations, in turn, may be either eleemosynary or
civil.
As to whether they are for charitable purposes or not:
Eleemosynary corporation or one established for or devoted to
charitable purposes or those supported by charity; or
Civil corporation or one established for business or profit, i.e., with
a view toward realizing gains to be distributed among its
members.
As to their relation to another corporation:
Parent or holding corporation or one which is so related to
another corporation that it has the power, either directly or
indirectly, to elect the majority of the directors of such other
corporation;
- So basically a parent corporation controls the other
corporation.
Subsidiary corporation or one which is so related to another
corporation that the majority of its directors can be elected either
directly or indirectly by such other corporation. it is one in which
another corporation owns at least a majority of the shares and
thus has control; or
Affiliated corporation or one related to another by owning or
being owned by common management or by a long term lease of
its properties or other control device.
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GOVERNING LAW
SEC. 4. Corporations Created by Special Laws or Charters. –
Corporations created by special laws or charters shall be
governed primarily by the provisions of the special law or
charter creating them or applicable to them, supplemented by
the provisions of this Code, insofar as they are applicable.
COMPOSITION
SEC. 5. Corporators and Incorporators, Stockholders and
Members. – Corporators are those who compose a
corporation, whether as stockholders or shareholders in a
stock corporation or as members in a nonstock corporation.
Incorporators are those stockholders or members mentioned
in the articles of incorporation as originally forming and
composing the corporation and who are signatories thereof.
Components of a corporation:
1. Incorporators - those originally forming and composing the
corporation as mentioned in the articles, and who are
signatories thereof.
Under the RCC, any person, partnership, association or
corporation, singly or jointly with others but not more than fifteen
(15) in number, may organize a corporation for any lawful purpose
or purposes. Incorporators who are natural persons must be of
legal age. Each of the incorporators of a stock corporation must
own or be a subscriber to at least one (1) share of the capital stock
of the corporation.
2. Corporators - they are the stockholders or members of the
corporation.
They comprise the general population.
3. Officers - required officers under the law are the
President, Corporate Secretary and Treasurer.
The corporation may add more positions under its by-laws.
Three other classes
 Promoters - Persons who bring about or cause to bring
about the formation and organization of a corporation by
bringing together the incorporators or the persons
interested in the enterprise, procuring subscriptions or
capital for the corporation and setting in motion the
machinery which leads to the incorporation of the
corporation itself.
 Subscriber - Person who have agreed to take and pay for
original, unissued shares of a corporation formed or to be
formed. All incorporators are subscribers but a subscriber
need not be an incorporator.
 Underwriter - A person, usually an investment banker, who:
a. Has agreed, alone or with others, to buy at stated terms an
entire issue of securities or a substantial part thereof; or
b. Has guaranteed the sale of an issue by agreement to buy from
the issuing party any unsold portion at a stated price; or
c. Has agreed to sue his “best efforts” to market all or part of an
issue; or
d. Has offered for sale stock he has purchased from a controlling
stockholder.
Corporation Law (2019) MIDTERM REVIEWER
Relationship between an incorporator as against a corporator
 Incorporators are always corporators, but corporators are
not always incorporators.
- incorporators refer only to those persons who first
formed the corporation and signed the Articles of
Incorporation. Some incorporators stop being
corporators after they sell their share but they never
stop being incorporator because their name will remain
in the Articles of Incorporation of the corporation.
CLASSIFICATION OF SHARES
Section 6. Classification of shares. –The classification of shares,
their corresponding rights, privileges, or restrictions, and their
stated par value, if any, must be indicated in the articles of
incorporation. Each share shall be equal in all respects to every
other share, except as otherwise provided in the articles of
incorporation and in the certificate of stock.
The shares in stock corporations may be divided into classes or
series of shares, or both. 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, That there shall always be a class or series of shares
with complete voting rights.
Holders of nonvoting shares shall nevertheless be entitled to
vote on the following matters:
Amendment of the articles of incorporation;
Adoption and amendment of bylaws;
Sale, lease, exchange, mortgage, pledge, or other disposition
of all or substantially all of the corporate property;
Incurring, creating, or increasing bonded indebtedness;
Increase or decrease of authorized capital stock;
Merger or consolidation of the corporation with another
corporation or other corporations;
Investment of corporate funds in another corporation or
business in accordance with this Code; and
Dissolution of the corporation.
Except as provided in the immediately preceding paragraph,
the vote required under this Code to approve a particular
corporate act shall be deemed to refer only to stocks with
voting rights.
The shares or series of shares may or may not have a par value:
Provided, That banks, trust, insurance, and preneed
companies, public utilities, building and loan associations, and
other corporations authorized to obtain or access funds from
the public, whether publicly listed or not, shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by a corporation may be given
preference in the distribution of dividends and in the
distribution of corporate assets in case of liquidation, or such
other preferences: 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, further, That such terms and
conditions shall be effective upon filing of a certificate thereof
with the Securities and Exchange Commission, hereinafter
referred to as the “Commission”.
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Shares of capital stock issued without par value shall be
deemed fully paid and nonassessable and the holder of such
shares shall not be liable to the corporation or to its creditors
in respect thereto: Provided, That no-par value shares must be
issued for a consideration of at least Five pesos (P5.00) 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 further classify its shares for the purpose of
ensuring compliance with constitutional or legal requirements.
Stock - It is a unit of division of the capital stock of the corporation.
The stock represents:
1. It represents the interest or right of the stockholder in
the management of the corporation through the
exercise of the voting right;
2. It represents the interest of right of the stockholder in
the earnings of the corporation in the form of the
dividends to be distributed; and
3. It represents the interest or right of the stockholder in
the residual assets of the corporation upon dissolution.
So the share of stock represents your share in the corporation in
the form of dividends. Shares of stocks are therefore an asset on
the part of the shareholder. It is an intangible asset representing
its right and interest in the corporation.
Example: you have 1M capital divided into 1M shares, that means
that your capital is divided into 1M parts and each share
represents 1 part.
Types of capital Stock
 AUTHORIZED CAPITAL STOCK - It refers to the amount of
capital stock as specified in the articles of incorporation.
Additional shares may not be issued unless the articles of
incorporation are amended by vote of the stockholders. But
unissued authorized shares may be issued at a later date
without amendment of the articles of incorporation or
approval of the stockholders.
 SUBSCRIBED CAPITAL STOCK - It is the amount of the capital
stock subscribed, whether fully paid or not. It connotes an
original subscription contract for the acquisition by a
subscriber of unissued shares in a corporation and would,
therefore, preclude the acquisition of shares by reason of
subsequent transfer from a stockholder or resale of treasury
shares.
 OUTSTANDING CAPITAL STOCK - The Code defines the
terms as “the total shares of stock issued to subscribers or
stockholders, whether or not fully or partially paid (as long
as there is a binding subscription agreement), except
treasury shares.” the portion of the capital stock which is
issued and held by persons other than the corporation itself.
Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

 PAID-UP CAPITAL STOCK - It is that portion of the subscribed

or outstanding capital stock that is actually paid. There’s no difference in the right of stockholders who have paid
or have not yet paid their subscription. They’re all entitled to the
 UNISSUED CAPITAL STOCK - That portion of the capital stock same right, even the right to the dividends. Only when your shares
that is not issued or subscribed. It does not vote and draws are declared as delinquent will be the time that you stop enjoying
no dividends. stockholder rights. So as long as you’re not declared as delinquent,
even unpaid, you are considered as a stockholder.
 LEGAL CAPITAL - It is the amount equal to the aggregate par
value and/or issued value of the outstanding capital stock.
When par value shares are issued above par, the premium Requirements before a corporation can purchase its own shares
(sec 40 RCC)
or excess is not to be considered as part of the legal capital.
In the case of no par value shares, the entire consideration
1. The corporation has unrestricted retained earnings in its
received forms part of legal capital and shall not be available books to cover the shares to be purchased or acquired
for distribution as dividends. We’re talking here about the 2. For a legitimate corporate purpose or purposes, including
capital contribution. But financially, capital is not just the the 3 instances mentioned.
financial contribution. It includes the earnings in the
corporation in the form of retained earnings. So assets-
liabilites, that composes your legal capital. But this term is Power to classify shares
not really used here in the Philippine practice.
Unless restricted by law or the provision of its articles of
incorporation, a corporation has unrestricted freedom to issue
TREASURY SHARES
such classes or series of shares as the prospects and needs of its
Shares which have been issued by the corporation, but are no
business may require to attract investors.
longer outstanding because they have been acquired by the
corporation.
When classification of shares may be made
Status of treasury shares: not retired shares and they do not
1. By the Incorporator
revert to the unissued shares of the corporation but are regarded
as property acquired by the corporation which may be reissued or
The classes and numbers of shares which a corporation shall issue
resold by the corporation at a price to be fixed by the board of
are first determined by the incorporators as stated in the articles
directors. Hence, when you acquire treasury shares, you don’t
of incorporation fled with the SEC. The incorporators have the
decrease your authorized capital stock. The corporation cannot
power to classify while making/drafting the AOI.
declare dividends on its own treasury shares, nor can the
corporation have the right to vote by virtue of these treasury
2. By the BOD and the stockholders
shares.
After the corporation comes into existence, they may be altered
When are shares considered retired?
by the BOD and the stockholders by amending the AOI. So the BOD
When the shares are reacquired by the corporation with no
has to make the proposal, approved by the majority of the Board,
intention of reissuing. When you retire your shares, you decrease
and then it has to be ratified by the stockholders. Both of them
your authorized capital stock, which needs the consent of all the
working together. Can amend the classification or characteristics
creditors pursuant of the trust fund doctrine.
of shares.
classes of shares
Illustration:
A newly established corporation with authorized capital stock of
10 million divided into 1 million shares at P10 per share. Out of 1. PAR VALUE SHARE
the 10 million ACS, 5 million is subscribed. Par value share is one with a specific money value fixed in the
articles of incorporation and appearing in the certificate of stock.
The remaining 5 million is the unissued shares. Meaning, there
are no buyers yet. If it is subscribed, there must be an existing The primary purpose thereof is to fix the minimum issue price of
subscription agreement over these shares. Meaning, these shares the shares thus, assuring creditors that the corporation would
have been purchased. receive a minimum amount for its stock.

Out of the 5 million subscribed, 4 million is paid, this is the paid up Requirement as to its issuance:
capital stock. A par value share cannot be issued below par but can be issued
more than par and the excess thereof shall form part of the paid-
Supposing the corporation repurchased/reacquired 1 million in capital but it is accounted for as a premium or as an additional
shares from the shareholders, the 1 million are the treasury paid-in capital.
shares. These treasury shares remain subscribed and issued
because somebody already paid for it. Even the corporation that
reacquired it, paid for it. But they are no longer outstanding capital2. NO PAR VALUE SHARE
stock. Therefore, the outstanding capital stock is 4 million. ACS It is one without any stated value appearing on the face of the
remains at 10M. Unissued shares remain at 5M. certificate of stock. IOW, it is a stock which does not state show
much money it represents.
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Requirement as to its issuance:
1) Shares of 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.
- The consideration given shall be considered as the full amount of
the issue price, there can be no subscription receivable.
2) The shares without par value may not be issued for a
consideration less than the value of Five pesos (P5.00) per share.
- This is the minimum consideration for a non par value share
3) The entire consideration received by the corporation for its
non-par value shares shall be treated as capital and shall not be
available for distribution as dividends.
(2nd to the last paragraph, RCC)
THE FF INSTITUTIONS ARE NOT ALLOWED TO ISSUE SHARES
WITH NO-PAR VALUE:
That banks, trust, insurance, and preneed companies, public
utilities, building and loan associations, and other corporations
authorized to obtain or access funds from the public.
3. VOTING SHARE
Voting share is share with right to vote.
4. NON-VOTING STOCK
Non-voting share is share without right to vote.
Requirement as to its issuance:
1) Only preferred or redeemable shares may be made non-voting
shares.
2) There must remain other shares with full voting rights.
- There can be no valid agreement where a corporation has all
non-voting shares. Any agreeement that will take away the right
to vote of all the shares in a corporation is not valid.
3) Holders of non-voting shares shall nevertheless be entitled to
vote on the ff matters:
a. Amendment of the articles of incorporation
b. Adoption and amendment of by-laws
c. Sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property
d. Incurring, creating or increasing bonded indebtedness
e. Increase or decrease of capital stock
f. Merger or consolidation of the corporation with another
corporation or other corporations
g. Investment of corporate funds in another corporation or
business in accordance with this Code, and
h. Dissolution of the corporation.
Conditions for the issuance of non-voting shares
1. If the stock is originally issued as voting stock, it may not
thereafter be deprived of the right to vote without the consent of
the holder.
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2. Under the Code, no share may be deprived of voting rights
except those classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in the Code.
3.Where non-voting shares are provided for , the Code requires
that there shall always be a class or series of shares which have
complete voting rights.
4. Under Section 6 (par. 1), only preferred or redeemable shares
may be denied the right to vote. The issuance of common stock
with a feature that voting rights thereof shall be exercised by a
trustee violates the rule that common shares cannot be deprived
of voting rights. The automatic assignment of voting rights in an
indirect violation of Section 6.
5. In case any amendment of the articles of incorporation has the
effect of changing or restricting the rights of any stockholder, the
latter shall have the right to dissent and demand payment of the
fair value of his shares
Atty: The rule is that a corporation must always have voting shares
there can be no valid agreement where a corporation has all non-
voting share. Any agreement that will take away the right to vote
of all the shares of a corporation is not valid.
5. COMMON STOCK
It is one which entitles the holder thereof to a pro rata division of
the profits, if there are any, and in its assets upon dissolution,
without any preference or advantage in that respect over other
stockholders but equally with all other stockholders except
preferred stockholders. Basic shares issued by the corporation.
You cannot have a corporation that has no common shares.
6. PREFERRED STOCK
It is one with a stated par value which entitles the holder thereof
to certain preferences over the holder of common stock. Shares
which are specified in the AOI that the preferred shares have
preference over the distribution of assets in case of liquidation
and preference in the distribution of dividends.
NOTE: Common and preferred shares are the 2 main classes or
forms of stock.
Kinds of preferred shares
a. Preferred share as to assets
Share which the holder thereof preference in the distribution of
the assets of the corporation in case of liquidation. It has been
held that preferred stock, standing alone, creates a preference
only to dividends and not to assets in case of liquidation.
b. Preferred share as to dividends
Share the holder of which is entitled to receive dividends on said
share to the extent agreed upon before any dividends at all are
paid to the holders of common stock. The preference simply
means that holders of common stock may receive dividends only
after the satisfaction of the prior claims on dividends of preferred
stockholders. There is no guaranty that it will receive any
dividends. The corporation is not bound to pay dividends unless
the BOD declare them.
Corporation Law (2019) MIDTERM REVIEWER
i. Cumulative preferred share - Share which entitles the
holders thereof not only to the payment of current dividends but
also to dividends in arrears. Dividends in arrears means that for
every year that the company did not declare dividends, each
cumulative preferred shareholder will have an interest in those
undeclared dividends.
ii. Non-cumulative - Share which entitles the holder
thereof to the payment of current dividends only in preference to
commons stockholders.
Example: 1000 shares; Stated in the AOI that these are preferred
shares entitled to cumulative dividends at Php5/share per year.
2017 and 2018, no dividends declared. 2019 – corporation
declares dividends.
Entitled to how much dividends?
Cumulative: 2017, 2018 and 2019, entitled to 5000/yr
Non-cumulative: 5000 only for the current year
iii. Participating preferred share - Share which gives the
holder thereof not only the right to receive the stipulated
dividends at the preferred rate but also to participate with the
holders of common shares in the remaining profits pro rata (or in
the proportion stated in the articles of incorporation) after the
common shares have been paid the amount of the stipulated
dividend at the same preferred rate. Those which after they get
their share of the dividends, they still participate in the sharing
of dividends of the common stockholders.
iv. Non-participating - Share which entitles the holder
thereof to receive the stipulated preferred dividends and no
more. The balance, if any, is given entirely to the common stocks.
v. Cumulative-participating - Share which is a
combination of the cumulative share and participating
share. This means that the holder is entitled not only to
dividends in arrears but also, after receiving his
preferred share of dividends, to participation with the
holders of common stock in the remaining profits.
NOTE: In the absence of an agreement, express or implied,
dividends should be deemed noncumulative and non-
participating in accordance with the presumption established in
Section 6 par.5 that shares are equal in all respects unless
otherwise stated in the articles of incorporation and in the
certificate of stocks.
FOUNDER’S SHARES
Section 7. Founders' shares.
Founders' shares classified as such in the articles of
incorporation may be given certain rights and privileges not
enjoyed by the owners of other stocks, provided that where
the exclusive right to vote and be voted for in the election of
directors is granted, it must be for a limited period not to
exceed five (5) years subject to the approval of the Securities
and Exchange Commission. The five-year period shall
commence from the date of the aforesaid approval by the
Securities and Exchange Commission.
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“exclusive right to vote and be voted for in the election of
directors is granted”
GR: Common shares cannot be deprived the right to vote.
XPN: In the case of Founder’s Shares – for a limited period of 5
years, owners of founders’ shares shall have an exclusive right to
vote and be voted. (Sec. 7)
 Founders’ Shares – shares issued to the organizers and
promoters of a corporation in consideration of some
supposed right or property having special rights and
privileges not enjoyed by the owners of other classes of
shares.
 Effect: After the lapse of 5 years the founder’s shares
will be treated and given the same rights as other
common shareholders.
Amendment: Changes in founder’s share expressly provided that
exclusive right to vote and be voted on founders share in the
election of directors should not violate the Anti-Dummy Law and
FIA.
Anti dummy law – persons not allowed to have interest in
nationalized corporation, they just nominate Filipino citizen to be
legal stockholders but in reality they are the one controlling, a
violation of Anti-Dummy Law, a criminal offense.
Common Shares vs. Preferred shares
COMMON SHARES
 refers to the residual ownership of the corporation
PREFERRED SHARES
 preference as to the distribution of the assets of the
corporation
 preference as to the dividends of the corporation:
Kinds of Preferred shares as to dividends
 cumulative preferred shares
- the stockholder is entitled to the dividends in the
years where the corporation was not able to declare
dividend plus the current year.
- example: In 2017 and 2018 the corporation did not
declare dividend. In 2019 it declared dividend. In
this case, the stockholder shall be entitled to the
dividends in 2017, 2018, and 2019.
 non-cumulative preferred share
- the stockholder does not have any right for the
years that the corporation did not declare dividends
but only entitled to the dividends declared in the
current year.
 participating preferred shares
- the stockholder is not only entitled to his preferred
shares but also entitled in the distribution with the
common shareholders.
Corporation Law (2019) MIDTERM REVIEWER
 non-participating preferred shares
- the stockholder is entitled only to his preferred
shares.
- it is a common practice that a preferred shareholder
enters into a stipulation with a percentage of
interest, such stipulated interest will be followed in
the distribution of his share in the dividends.
Doctrine of Equality of Shares
 Absent any stipulation to the contrary in the Articles of
Incorporation, all shares are treated equal with the
same rights and privileges.
 Therefore, if the articles of incorporation provide only of
common and preferred shares but does not provide for
anything else the two shares are treated equally.
-IF THE ARTICLES OF INCORPORATION ARE SILENT, PREFERRED SHARES ARE
PRESUMED TO BE NON-CUMULATIVE AND NON-PARTICIPATING.
- AOI CAN SPECIFY THAT SHARES ARE BOTH CUMULATIVE AND PARTICIPATING
. REDEEMABLE SHARES
CUMULATIVE - MEANS YOU HAVE THE RIGHT TO DIVIDENDS IN ARREARS.
PARTICIPATING- MEANS YOU HAVE THE RIGHT TO PARTICIPATE WITH THE COMMON
SHARES.
TN: PREFERRED SHARES CAN BE BOTH CUMULATIVE AND PARTICIPATING
Rule in case of acquisition by the corporation in its own shares
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.
CORPORATION has the power to acquire its own shares whether
or not these shares are deemed as redeemable.
Even if there are no redeemable shares in the articles of
incorporation, corporation is still allowed to reacquire its own
shares under section 41. But this section allows such purchase only
if the corporation has unrestricted retained earnings.
GR: Corporation has the power to acquire its own shares whether
the shares are redeemable or not provided that:
1. if not redeemable the corporation has unrestricted
retained earnings.
2. But if the shares are termed or classified as redeemable
on AOI, even without unrestricted retained earnings, it is
authorized to purchase or reacquire the shares.
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Effect of reacquisition of redeemable shares
1. If retired. You need to amend the AOI in order to
decrease the authorized capital stock.
2. If not retired. The corporation can sell the shares or they
can be issued as property dividends because these
shares once reacquired by corporation become property
by the corporation.
If it is redeemable shares at the option of the corporation, whether
the stockholders like it or not, the corporation can compel the
acquisition. That’s one of the difference between ordinary shares
and redeemable shares.
How about if the stockholders compel the corporation to redeem
the shares?
You can have redeemable shares at the option of the stockholders.
There is also an instance where the stockholders can compel the
corporation to purchase as an exercise of their appraisal right.
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 stated in the articles of incorporation, which terms
and conditions must also be stated in the certificate of stock
representing said shares, (n)
Rules to Redeem:
1. Redeemable shares are redeemable even without
UNRESTRICTED RETAINED EARNINGS.
2. BUT SEC RULES REQUIRES:
- after redemption , there should still be sufficient assets to pay
of all liability plus the capital stock.
IOW: You cannot redeem without Retained Earnings.
The retained earnings may not be Unrestricted but if you have a
deficit (negative Retained earnings)= CANT REDEEM.
WHO CAN REDEEM: Corporation/ shareholder
If you have shares that are redeemable , it means that the
parties have already agreed beforehand whether it is
redeemable at the option of the corporation or whether
redeemable at the option of the stockholder.
WHEN TO REDEEM: it depends (Redemption Rights &
Agreement)
1. As a matter of right - when the redemption date
comes, the stockholder can compel redemption as a
matter of right
2. As a matter of agreement - redemption date comes
and the corporation does not redeem and the
Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

stockholders do not compel redemption, it is now a
matter of agreement between the two.
If the stockholder dili ganahan magpa redeem sa
iyahang shares , then the corporation and the
stockholder can just agree that we’ll just amend our
AOI to put in there that it’s no longer redeemable.
conversion. So what you will do is to apply for the convertibility
feature and at the same time you need to apply for the ACTUAL
CONVERSION.
NOTE: Generally it needs 2 amendments unless the Convertibility
feature is already there. You only need to amend for the actual
conversion.

But if the redemption date arrives and the stockholders

and corporation does not say anything and after a few
years the stockholders now say “ui redeem or shares”,
it’s now a matter on how the redemption date was
worded.
Ex:
1. “Redemption can take place anytime after March
30”
Effect: Redemption can still be done.
2. “Redemption shall only be until March 30”
Effect: They can no longer redeem.
TN: IT DEPENDS ON HOW REDEMTION RIGHTS ARE
WORDED IN THE ARTICLES OF INCORPORATION AND
AGREEMENT BETWEEN THE PARTIES.
TREASURY 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.
Treasury shares- it refers to the shares wherein it is fully issued
and paid but is subsequently reacquired by the corporation who
issued such shares through redemption, donation or any other
means.
What happens to the treasury? What is the status of the treasury
shares?

AMEND ROI (reduce ACS) IF REDEEMED SHARES ARE
RETIRED
There’s a need to amend the Articles of Incorporation
to decrease the AUTHORIZED CAPITAL STOCK (ACS) .
The retirement or cancellation of the redeemed shares
will not automatically reduce the ACS , there has to be
approval by the SEC.
CONVERTIBLE SHARE
CONCEPT
Are shares which are convertible or changeable by the
stockholder from one class to another class (such as from
preferred to common) at a certain price and within a certain
period.
The treasury shares will become a property of the corporation
meaning that the corporation can resell it in an amount which is
fixed by the board of directors and it cannot be considered as a
retired share because it does revert into unissued shares.
Retirement is different from an unissued share.
We said that when we have treasury shares, it becomes the
property of the corporation, it can reissue the shares, or it can
retire the shares but regardless the shares do not revert to the
unissued it will always be issued but no longer outstanding.
Retirement – a decrease in the authorized capital stock. It has
nothing to do with the unissued shares.

Conversion of shares is a 2-step process:

1ST AMENDMENT: PROVIDE CONVERTIBILITY FEATURE IN AOI
Provide the Right to Convert in the AOI. If your articles do not
provide for Convertibility, you need to amend the articles first to
allow for the conversion.

2ND AMENDMENT: ACTUAL CONVERSION: WIPE OUT OR

DELETE THE CONVERTIBLE SHARE
when you do convert , you need to amend the AOI to provide for
the issuance or addition (for example) of new common shares
and delete the convertible preferred shares as you no longer
have those class of shares once conversion takes place.

EXAMPLE
If you allow Preferred shares to be converted to Common.
1. Amend your articles to provide for the Convertibility Feature.
( Preferred to Common)
2. Do a 2nd Amendment to wipe out the Convertible preferred
and they are now all Common Shares

The two amendments can be filled simultaneously with the SEC

because they will not allow you to change without going though

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Corporation Law (2019) MIDTERM REVIEWER
TITLE II- INCORPORATION AND ORGANIZATION OF PRIVATE
CORPORATIONs
Steps in the creation of a corporation:
Promotion
(1) Promotion
(2) Incorporation
(3) Formal organization and commencement of business
operations
INCORPORATION
SEC. 18, Revised Corporation Code (RCC). Registration,
Incorporation and Commencement of Corporate Existence. – A
person or group of persons desiring to incorporate shall submit
the intended corporate name to the Commission for
verification. If the Commission finds that the name is
distinguishable from a name already reserved or registered for
the use of another corporation, not protected by law and is not
contrary to law, rules and regulations, the name shall be
reserved in favor of the incorporators. The incorporators shall
then submit their articles of incorporation and bylaws to the
Commission.
If the Commission finds that the submitted documents and
information are fully compliant with the requirements of this
Code, other relevant laws, rules and regulations, the
Commission shall issue the certificate of incorporation.
How to incorporate
1. Make a name reservation online on the SEC website +
pay the reservation fee
2. Submission to the SEC of:
a. Name verification slip
b. Articles of Incorporation
c. By-laws
d. For banks, quasi-banking institutions,
preneed, insurance and trust corporations,
non-stock savings and loan associations
(NSSLAs), pawnshops, and other financial
intermediaries, a favorable recommendation
of the appropriate government agency to the
effect that such articles, or even in case of an
amendment, is in accordance with law.
CONTENTS OF THE ARTICLES OF INCORPORATION
SEC. 13, RCC. Contents of the articles of incorporation. - All
corporations shall file with the Commission articles of
incorporation in any of the official languages duly signed and
acknowledged or authenticated by all of the incorporators,
containing substantially the following matters, except as
otherwise prescribed by this Code or by special law:
a. The name of the corporation;
b. 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 indicate the
primary purpose and the secondary purpose or purposes:
Provided, That a non-stock corporation may not include a
purpose which would change or contradict its nature as such;
c. The place where the principal office of the corporation is to
be located, which must be within the Philippines;
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d. The term for which the corporation is to exist, if the
corporation has not elected perpetual existence;
e. The names, nationalities and residences of the
incorporators;
f. The number of directors or trustees, which shall not be more
than fifteen (15) or the number of trustees which may be more
than fifteen (15);
g. 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;
h. If it be a stock corporation, the amount of its authorized
capital stock, number of shares into which it is divided, the par
value of each, names, nationalities and residence addresses of
the original subscribers, amount subscribed and paid by each
on the subscription, and a statement that some or all of the
shares are without par value, if applicable;
i. If it be a non-stock corporation, the amount of its capital, the
names, nationalities and residence addresses of the
contributors and the amount contributed by each; and
j. Such other matters consistent with law and which the
incorporators may deem necessary and convenient.
An arbitration agreement may be provided in the articles of
incorporation pursuant to Section 181 of this Code.
The articles of incorporation and applications for amendments
thereto may be filed with the Commission in the form of an
electronic document, in accordance with the Commission’s
rules and regulations on electronic filing.
FORM OF ARTICLES OF INCORPORATION
SEC. 14, RCC. Form of Articles of Incorporation. – Unless
otherwise prescribed by special law, the articles of
incorporation of all domestic corporations shall comply
substantially with the following form:
Articles of Incorporation
of
__________________________
(Name of Corporation)
The undersigned incorporators, all of legal age, have
voluntarily agreed to form a (stock) (nonstock) corporation
under the laws of the Republic of the Philippines and certify
the following:
First: That the name of said corporation shall be
“_______________, Inc., Corporation or OPC (ONE PERSON
CORPORATION)”;
Second: That the purpose or purposes for which such
corporation is incorporated are: (If there is more than one
purpose, indicate primary and secondary purposes);
Third: That the principal office of the corporation is located in
the City/Municipality of ___________________, Province of
_________________________, Philippines;
Fourth: That the corporation shall have perpetual existence or
a term of ______________ years from the date of issuance of
the certificate of incorporation;
Corporation Law (2019) MIDTERM REVIEWER
Fifth: That the names, nationalities, and residence addresses
of the incorporators of the corporation are as follows:
NAME NATIONALITY RESIDENCE
Sixth: That the number of directors or trustees of the
corporation shall be _________________; and the names,
nationalities, and residence addresses of the first directors or
trustees of the corporation are as follows:
NAME NATIONALITY RESIDENCE
Seventh: That the authorized capital stock of the corporation
is ______________ PESOS (P________), divided into ______
shares with the par value of ____________ PESOS
(P_______________) per share. (In case all the shares are
without par value): That the capital stock of the corporation is
_____________________ shares without par value.
(In case some shares have par value and some are without par
value): That the capital stock of said corporation consists of
___________________ shares, of which
_______________________ shares have a par value of
_________________ PESOS (P____________) each, and of
which _______________________ shares are without par
value.
Eighth: That the number of shares of the authorized capital
stock above-stated has been subscribed as follows:
Name of Subscriber - Nationality - No. of Shares Subscribed
- Amount Subscribed - Amount Paid
(Modify No. 8 if shares are with no-par value. In case the
corporation is nonstock, Nos. 7 and 8 of the above articles may
be modified accordingly, and it is sufficient if the articles state
the amount of capital or money contributed or donated by
specified persons, stating the names, nationalities, and
residence addresses of the contributors or donors and the
respective amount given by each.)
Ninth: That _____________________ has been elected by the
subscribers as Treasurer of the Corporation to act as such until
after the successor is duly elected and qualified in accordance
with the bylaws, that as Treasurer, authority has been given to
receive in the name and for the benefit of the corporation, all
subscriptions, contributions or donations paid or given by the
subscribers or members, who certifies the information set
forth in the seventh and eighth clauses above, and that the
paid-up portion of the subscription in cash and/or property for
the benefit and credit of the corporation has been duly
received.
Tenth: That the incorporators undertake to change the name
of the corporation immediately upon receipt of notice from the
Commission that another corporation, partnership or person
has acquired a prior right to the use of such name, that the
name has been declared not distinguishable from a name
already registered or reserved for the use of another
corporation, or that it is contrary to law, public morals, good
customs or public policy.
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Eleventh: (Corporations which will engage in any business or
activity reserved for Filipino citizens shall provide the
following):
“No transfer of stock or interest which shall reduce the
ownership of Filipino citizens to less than the required
percentage of capital stock as provided by existing laws shall
be allowed or permitted to be recorded in the proper books of
the corporation, and this restriction shall be indicated in all
stock certificates issued by the corporation.”
IN WITNESS WHEREOF, we have hereunto signed these Articles
of Incorporation, this ________ day of _________________,
20______ in the City/Municipality of _________________,
Province of _________________, Republic of the Philippines.
____________________ ____________________
____________________ ____________________
____________________ ____________________
(Names and signatures of the incorporators)
______________________________
(Name and signature of Treasurer)
Contents and Form of Articles of Incorporation
It must be written in any of the official languages ( i.e., English or
Filipino) duly signed and acknowledged by all of the incorporators.
NAME OF THE CORPORATION
(In practice, as a lawyer, you will have to ask 3 corporate names
from your client just in case the first name won’t pass)
- Once you have the name, apply for reservation and once
reserved, put that in the Articles of Incorporation.
Importance:
- The corporation acquires juridical personality under the name
stated in the certificate of incorporation.
- It has the power of succession by its corporate name
- It is the name that identifies and distinguishes it from the other
corporations, firms or entities. By that name it is authorized to
transact business.
- Therefore, a name is peculiarly essential to its existence.
Nature:
- A corporate name is regarded as of the nature of a trademark
even though composed of individual names, and its simulation
may be restrained.
- A corporation’s right to use its corporate and tradename is a
property right, a right in rem, it may be asser or protect such right
against anybody, in the same way as it may protect its tangible
property against trespass or conversion. It cannot be impaired or
defeated by subsequent appropriation by another corporation in
the same field.
PURPOSE OF THE CORPORATION
A corporation may be organized only for “any lawful purpose or
purposes” (SEC.10). The purpose or purposes must be stated
with sufficient clarity.
Primary Purpose
refers to the primary activity of the corporation
Secondary Purpose
the additional activities that the corporation can do
Corporation Law (2019) MIDTERM REVIEWER
If you do a transaction not covered by your purpose, the
transaction is ultra vires. The purpose determines the power and
authorities of the corporation.
PRINCIPAL OFFICE
It is important because any notice or communication or any letters
that the government will issue or send to you will be addressed or
directed to that address that you have indicated. It must be
specific and must contain the street number, street name,
barangay, building name, unit number, municipality or the city
where it is located.
GENERAL RULE
if there is a change of address, you amend the articles of
incorporation
EXCEPTION
if there is a change of address but within the same city, you can
file a general information sheet with the new address.
TERM
SEC. 11, RCC. Corporate term. – A corporation shall have
perpetual existence unless its articles of incorporation
provides otherwise.
Corporations with certificates of incorporation issued prior to
the effectivity of this Code, and which continue to exist, shall
have perpetual existence, unless the corporation, upon a vote
of its stockholders representing a majority of its outstanding
capital stock, notifies the Commission that it elects to retain its
specific corporate term pursuant to its articles of
incorporation: Provided, that any change in the corporate term
under this section is without prejudice to the appraisal right of
dissenting stockholders in accordance with the provisions of
this Code.
A corporate term for a specific period may be extended or
shortened by amending the articles of incorporation: Provided,
That no extension may be made earlier than three (3) 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 Commission: Provided, further, That such
extension of the corporate term shall take effect only on the
day following the original or subsequent expiry date(s).
A corporation whose term has expired may apply for a revival
of its corporate existence, together with all the rights and
privileges under its certificate of incorporation and subject to
all of its duties, debts and liabilities existing prior to its revival.
Upon approval by the Commission, the corporation shall be
deemed revived and a certificate of revival of corporate
existence shall be issued, giving it perpetual existence, unless
its application for revival provides otherwise.
No application for revival of certificate of incorporation of
banks, banking and quasi-banking institutions, preneed,
insurance and trust companies, nonstock savings and loan
associations, pawnshops, corporations engaged in money
service business, and other financial intermediaries shall be
approved by the Commission unless accompanied by a
favorable recommendation of the appropriate government
agency.
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OLD Corporation Code: Not to exceed 50 years
Renewable for another 50 years.
REVISED Corporation Code: Perpetual existence unless articles of
incorporation provides otherwise
NAME, NATIONALITIES AND RESIDENCE OF INCORPORATORS
SEC. 10, RCC. Number and qualifications of incorporators. –
Any person, partnership, association or corporation, singly or
jointly with others but not more than fifteen (15) in number,
may organize a corporation for any lawful purpose or
purposes: Provided, That natural persons who are licensed to
practice a profession, and partnerships or associations
organized for the purpose of practicing a profession, shall not
be allowed to organize as a corporation unless otherwise
provided under special laws. Incorporators who are natural
persons must be of legal age.
Each of the incorporators of a stock corporation must own or
be a subscriber to at least one (1) share of the capital stock of
the corporation.
A corporation with a single stockholder is considered a One
Person Corporation as described in Title XIII, Chapter III of this
Code.
QUALIFICATIONS
 OLD Code:
- only natural persons - juridical persons such as a corporations
and partnership can never be incorporators but they can be initial
stockholders.
Situation:
Foreign Client wants to put up a subsidiary what should you advise
since a corporation cannot be an incorporator?
- The foreign corporation can be subscribers in a
corporation here in the Philippines but they can never
be incorporators for the law specifically provides that
they be natural persons.
- must not be less than 5 and not more than 15
- must be of legal age
- majority must be residents of the Philippines but in cases of
corporation engaged in nationalized activities, they still have to
comply with the minimum Filipino stockholdings required under
special laws or the Constitution
- must own or be a subscriber to at least one (1) share of the
capital stock of the corporation.
 REVISED Code:
- any person, partnership, association or corporation, singly or
jointly with others may organize a corporation
- no more minimum number for incorporators but should not be
more than fifteen (15)
- natural persons must be of legal age
-requirement that majority should be residents of the Philippines
removed but still have to comply with the minimum Filipino
stockholdings in cases of nationalized activities under special laws
or the Constitution
- must own or be a subscriber to at least one (1) share of the
capital stock
- “ONE PERSON CORPORATION” or corporation with a single
stockholder now recognized
Corporation Law (2019) MIDTERM REVIEWER
CAPITAL STOCK
SEC. 12, RCC. Minimum capital stock required of stock
corporations. – Stock corporations incorporated under this
Code shall not be required to have any minimum capital stock
except as otherwise specifically provided for by special law.
 OLD Code:
-No minimum amount for authorized capital stock (ACS)
- Subscribed capital - must be at least 25% of the ACS
- Paid-up capital- at least 25% of the subscribed capital stock
should be paid up
(EXAMPLE UNDER OLD CODE, JUST IN CASE):
IF A CORPORATION HAS AUTHORIZED CAPITAL STOCK OF P100,000,
P25,000 (25% OF THE ACS) MUST BE SUBSCRIBED AND AT LEAST
25% OF THE SUBSCRIBED CAPITAL STOCK MUST BE PAID UP.
IF THE 100,000 ACS IS SUBSCRIBED BY A,B,C, D AND E, WHAT IS
REQUIRED IS THAT THE TOTAL SUBSCRIPTION MUST AT LEAST BE
25,000. IT IS NOT A REQUIREMENT THAT THE 25,000 MUST BE DIVIDED
EQUALLY AMONG THE A,B,C, D AND E. IT IS NOT REQUIRED THAT A,B,C, D
AND E MUST SUBSCRIBE 5,000 EACH FOR AS LONG AS THE TOTAL
SUBSCRIPTION IS AT LEAST 25% OF THE ACS.
THE LAW DOES NOT SAY WHO MUST SUBSCRIBE. WHAT THE LAW ONLY
REQUIRES IS THAT 25% OF THE SUBSCRIBED CAPITAL MUST BE PAID
UP, SO YOU MAY HAVE INCORPORATORS SUBSCRIBING TO SHARES WITHOUT
PAYING UP. IN FACT THAT IS WHAT HAPPENED IN THE NARRA NICKEL
CASE. OLYMPIC MINES DID NOT PAY THEIR SUBSCRIPTION. ALL THE PAID UP
CAPITAL CAME FROM MBMI, A FOREIGN INVESTOR. SO THAT IS THE
REQUIREMENT ON THE SUBSCRIPTION TO INCORPORATE.
 REVISED Code
- no more minimum capital stock requirement unless
specifically provided by special laws
- The 25%/25% requirement under RCC is applicable
only in case of increase in authorized capital stock under Title IV,
SEC. 37, RCC.
CORPORATE NAME
SEC 17, RCC. Corporate name. – No corporate name shall be
allowed by the Commission if it is not distinguishable from that
already reserved or registered for the use of another
corporation, or if such name is already protected by law, or
when its use is contrary to existing law, rules and regulations.
A name is not distinguishable even if it contains one or more
of the following:
(a) The word “corporation”, “company”, “incorporated”,
“limited”, “limited liability”, or an abbreviation of one of such
words; and
(b) Punctuations, articles, conjunctions, contractions,
prepositions, abbreviations, different tenses, spacing, or
number of the same word or phrase.
The Commission, upon determination that the corporate name
is: (1) not distinguishable from a name already reserved or
registered for the use of another corporation; (2) already
protected by law; or (3) contrary to law, rules and regulations,
may summarily order the corporation to immediately cease
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and desist from using such name and require the corporation
to register a new one.
The Commission shall also cause the removal of all visible
signages, marks, advertisements, labels, prints and other
effects bearing such corporate name. Upon the approval of the
new corporate name, the Commission shall issue a certificate
of incorporation under the amended name.
If the corporation fails to comply with the Commission’s order,
the Commission may hold the corporation and its responsible
directors or officers in contempt and/or hold them
administratively, civilly and/or criminally liable under this
Code and other applicable laws and/or revoke the registration
of the corporation.
REQUIREMENTS FOR A VALID CORPORATE NAME:
1. Distinguishable from a name already reserved or
registered for the use of another corporation;
TN: A name is not distinguishable even if it contains
one or more of the following:
(a) The word “corporation”,“company”, “incorporated”,
“limited”, “limited liability”, or an abbreviation of one
of such words; and
(b) Punctuations, articles, conjunctions, contractions,
prepositions, abbreviations, different tenses, spacing,
or number of the same word or phrase.
2. One that is not yet protected by law;
3. Not contrary to law, rules and regulations
Upon determination by the Commission that the
corporate name violates either of the three requirements, it may
summarily order the corporation to IMMEDIATELY CEASE AND
DESIST FROM USING SUCH NAME AND TO REGISTER A NEW ONE.
IT SHALL ALSO CAUSE THE REMOVAL OF VISIBLE SIGNAGES,
MARKS, ADS, etc. bearing such corporate name.
Upon approval of the new corporate name, the
Commission shall issue a certificate of incorporation under the
amended name.
Failure to comply WITH THE ORDER of the commission (last par.
Sec.17,RCC) :
The corporation and its responsible directors or officers , may be
held:
1. In contempt and/or
2. Be administratively, civilly, and/or criminally liable under the
Corporation Code and other applicable laws, and/or
3. May result into the revocation of the corporation’s registration
Atty’s Discussion:
Late December 2017, SEC came out with a new regulation
concerning corporate names. Under the Intellectual Property
Code, the moment you create a trade name and start using a trade
name it is already protected even if it is not yet registered under
the IP Code. But under this new regulation, if the corporation is
doing business under a trade name different from its corporate
name, the trade name should be included in its Articles of
Incorporation. In that regard, the protection granted by Section
18 of the Corporation Code (now Section 17 of the Revised
Corporation Code) is extended to that trade name.
Corporation Law (2019)
Effect if the trade name is not included in the Articles of
Incorporation:
SEC Rules provide that such trade name can be used by some
other corporations subject to the consent of the owner of the
trade name.
Trade name and Corporate name need not be the same.
EXAMPLE
Trade name: Penshoppe
Corporate name: Golden ABC
Grounds to question a corporate name
1. Complainant corporation has acquired prior right over
the use of such corporate name; and
2. Proposed name is either:
a. Identical; or
b. Deceptively or confusingly similar to that of any
existing corporation or to any other name already
protected by law; or
c. Patently deceptive, confusing or contrary to
existing laws.
INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES,
PETITIONER, VS. COURT OF APPEALS, SECURITIES AND
EXCHANGE COMMISSION AND REFRACTORIES CORPORATION
OF THE PHILIPPINES, RESPONDENT
G.R. NO. 122174. OCTOBER 3, 2002
FACTS:
October 13, 1976 - RCP was organized for the purpose of
engaging in the business of manufacturing refractory bricks.
June 22, 1977-RCP registered its name with DTI
August 23, 1979- “Synclaire Mftg Corp” was organized
August 23, 1985- Synclaire changed its name to IRCP.
Both are the only local suppliers of monolithic gunning mix.
April 14, 1988- RCP filed a petition with SEC to compel IRCP to
change its corporate name on the ground that it was confusingly
similar with RCP
SEC: Rendered judgment in favor of RCP
SEC en banc: Ordered IRCP to delete or drop the name
“Refractories”
Court of Appeals: Name is confusingly similar and RCP has
established prior right to use the word “refractories”
IRCP argues:
1. Jurisdiction is vested with regular courts as it is not under PD
902-a
2. “refractories” is a generic name
3. Not confusing similarity
RULING:
SEC has jurisdiction— under regulatory powers
Jurisdiction of SEC is not merely confined to adjudicative
functions under PD 902-A. By express mandate, it has absolute
jurisdiction, supervision and control over all corporation. It
exercises regulatory and administrative powers to implement
and enforce the Corporation Code, one of which is Section 18
which provides:
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“Sec 18. Corporate name. — no corporate name may be allowed
by the SEC if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation…or is
patently deceptive, confusing or contrary to existing laws..”
It is the SEC's duty to prevent confusion in the use of corporate
names not only for the protection of the corporations involved
but more so for the protection of the public, and it has authority
to de-register at all times and under all circumstances corporate
names which in its estimation are likely to generate confusion.
There is confusing or deceptive similarity.
To fall within the prohibition of the law, two requisites must be
proven:
1. That complainant corporation acquired a prior right over the
use of the corporate name
2. That proposed name is either:
i. Identical; or
ii. Deceptively or confusingly similar to that of any existing
corporation or to any other name already protected
by law; or
iii. Patently deceptive, confusing or contrary to existing laws.
In this case, anent the second requisite in determining the
existence of confusing similarity, the test is whether the
similarity is such as to mislead a person using ordinary care and
discrimination. The only word that distinguishes them is the
word “industrial” which merely identifies a corporation’s
general field of activities or operations. Both corporations also
cater to the same clientele and as established by SEC, both have
similar packaging.
Refractories is a generic term but its usage is not widespread
and its continuous use by RCP for a considerable period has
made the term so closely identified with it.
IRCP’s appropriation of RCP’s corporate name cannot find
justification under the generic word rule. A contrary ruling
would encourage corporations to adopt verbatim and register
an existing and protected corporate name, to the detriment of
the public.
Test in determining Identity/similarity
“If it has the tendency to mislead a person using ordinary care and
discrimination. “
In the case of a corporation desiring to incorporate a subsidiary:
Usually you will have the same name. The SEC allows it provided
that the corporation which had a priority right will send a letter of
consent. In this case, you cannot reserve your name online. You
will have to write a letter to the SEC main office in Manila to
basically grant permission for the subsidiary to use the name of
the parent. So, just because it’s similart, it’s automatically not
allowed. So if the corporation with the prior right consents, then,
it will be allowed. But it has to be proven that there is a parent-
subsidiary/affiliate.
Corporation Law (2019) MIDTERM REVIEWER
ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS,
H.S.K. SA BANSANG PILIPINAS, INC. PETITIONER, VS. IGLESIA NG
DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG KATOTOHANAN,
RESPONDENT
G.R. NO. 137592. DECEMBER 12, 2001
When Soriano, et al. registered the corporate name of petitioner
corporation, respondent corporation filed a petition before the
SEC for the change of petitioner's corporate name on the ground
that the same causes confusion among their members and the
public.
Issue:
Is the corporation name “Ang Mga Kaanib sa Iglesia ng Dios Kay
Kristo Hesus, H.S.K, sa Bansang Pilipinas “(The acronym "H.S.K."
stands for Haligi at Saligan ng Katotohanan) confusingly similar
to “IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG
KATOTOHANAN”?
Held: YES.
The additional words "Ang Mga Kaanib" and "Sa Bansang
Pilipinas, Inc.” in the petitioner’s name are, as correctly
observed by the SEC, merely descriptive of and also referring to
the members, or kaanib, of respondent who are likewise
residing in the Philippines. These words can hardly serve as an
effective differentiating medium necessary to avoid confusion
or difficulty in distinguishing petitioner from respondent. This is
especially so, since both petitioner and respondent corporations
are using the same acronym — H.S.K.; not to mention the fact
that both are espousing religious beliefs and operating in the
same place. Parenthetically, it is well to mention that the
acronym H.S.K. used by petitioner stands for "Haligi at Saligan
ng Katotohanan."
In holding out their corporate name to the public, petitioner
highlights the dominant words IGLESIA NG DIOS KAY KRISTO
HESUS, HALIGI AT SALIGAN NG KATOTOHANAN, which is
strikingly similar to respondent's corporate name, thus making
it even more evident that the additional words Ang Mga Kaanib
and Sa Bansang Pilipinas, Inc., are merely descriptive of and
pertaining to the members of respondent corporation.
Significantly, the only difference between the corporate names
of petitioner and respondent are the words SALIGAN and
SUHAY. These words are synonymous --- both mean ground,
foundation or support. Hence, this case is on all fours with
Universal Mills Corporation v. Universal Textile Mills, Inc., where
the Court ruled that the corporate names Universal Mills
Corporation and Universal Textile Mills, Inc., are undisputably so
similar that even under the test of reasonable care and
observation confusion may arise.
Furthermore, the wholesale appropriation by petitioner of
respondent's corporate name cannot find justification under the
generic word rule. We agree with the Court of Appeals
conclusion that a contrary ruling would encourage other
corporations to adopt verbatim and register an existing and
protected corporate name, to the detriment of the public
Atty’s Discussion:
Under the Intellectual Property law (IP), trade name is not
protected if it is generic. If you use a generic name for a product,
you cannot register it, and other companies can use that name.
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ATTY. GAVIOLA-CLIMACO
Eg: Your product name is “bag”. You cannot prevent other
corporations from using that word because that is a generic
word.
The Supreme Court in this case said that such rule is not
applicable to the provision of the Corporation Code on
corporate names. So, even if the corporate name is generic, it is
still protected under the Corporation Code because the SC, to
rule otherwise, would encourage other corporations to adopt
verbatim and register an existing corporate name to the
detriment of the public. So, for example you have a corporation
named “bag Inc.”, you can prevent another corporation from
using “bag Corp.”. Generic names, although not protected in the
IP code, they are protected as corporate names. This is the
essence of the Iglesia ni Kristo case.
ZUELLIG FREIGHT AND CARGO SYSTEMS, PETITIONER, VS.
NATIONAL LABOR RELATIONS COMMISSION AND RONALDO V.
SAN MIGUEL , RESPONDENTS
G.R. NO. 157900, JULY 22, 2013
Petitioner Zuellig (formerly, “zeta”) ceased operations and
dismissed some of its workers. One of those workers was
Ronaldo San Miguel. He filed a complaint, alleging that it was an
illegal dismissal.
Zeta amended its articles and changed its name to “Zuellig”. It
was found out that there was no business cessation but merely
a change of business name and the upgrading of stocks of the
corporation. SC held that that there was no closure to speak of.
The termination of services allegedly due to cessation of
business operations of Zeta was illegal. It was merely a change
of name, and not a change of being.
Atty’s Discussion:
The right of succession in corporate law basically is that: any
change in the stockholdings or in the board of directors of the
corporation will not change the continuity of the corporation. A
change in name is basically just ancillary to the right of
succession, in the sense that the corporate entity continues to
exist, even if it changes its name or amend its articles. Although
there is no change in the shareholdings of the corporation, but
there is a change of name. it’s similar to a person changing his
name. it doesn’t mean that he is a new person.
The SC said that: no, this is still one and the same corporation.
therefore, you cannot say that you’ve stopped business
operations. The corporation continued to exist. It merely
changed its name, purpose, and its authorized capital stock.
So, a corporation, unlike a partnership, where if you amend
anything in the articles of partnership, it automatically dissolves
that one partnership and creates another one. In a corporation,
such is not the case. A corporation continues to exist even if you
amend its articles.
Corporation Law (2019) MIDTERM REVIEWER
AMENDMENT OF ARTICLES OF INCORPORATION
SEC. 15, RCC. 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. The articles of incorporation of a
nonstock corporation may be amended by the vote or written
assent of majority of the trustees and at least two thirds (2/3)
of the members.
The original and amended articles together shall
contain all provisions required by law to be set out in the
articles of incorporation. Amendments to the articles 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, with a
statement that the amendments have been duly approved by
the required vote of the stockholders or members, shall be
submitted to the Commission.
The amendments shall take effect upon their
approval by the 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.
Process of amending articles
 Stock Corporation
1. Approval by majority vote of the board of directors
2. Ratified by the stockholders representing two thirds
(2/3) of the outstanding capital stock.
TN: The vote is not on the stockholders, but on the
outstanding capital stock. You don’t count by person.
You count by shares.
Moreover, first paragraph of Section 15 also provides
that the amendment may be effected by the “written
assent” of the stockholders or members, meaning that
such action need not be taken in a meeting and upon a
vote.
Except: If the amendments consists in extending or
shortening the corporate term, or increasing or
decreasing capital stocks, a meeting of the
stockholders is necessary.
 Non-stock Corporation
1. Approval by majority vote of the trustees
2. Ratified by at least two thirds (2/3) of the members.
TN: Both 1&2 could either be by vote or written assent
ILLUSTRATION:
5 Stockholders, 4 owns one share each, and you have 1
stockholder owning 996 shares, total of 1000 shares.
The vote is based on the two thirds of the shares (1000), not two
thirds of the stockholders. (5)
LEGAL IMPLICATIONS OF THE ILLUSTRATION:
The stockholder holding 996 shares already owns the two thirds
vote if he votes.
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ATTY. GAVIOLA-CLIMACO
How to Amend
1. Underscore all changes made
2. Indicate the date of the meeting under the provision
changed
TN: Date pertains to the date the amendment was
approved/ratified by the stockholders
3. Copy thereof duly certified under oath by the corporate
secretary and a majority of the directors or trustees with
a statement that the amendments have been duly
approved by the required vote of the stockholders or
members
4. Submit to the Commission
Example: 5 Directors 7 Directors
Seven (7) Directors
(As amended on ______)
INCORPORATORS; ACCOMPLISHED FACT
The original incorporators do not change despite approval of the
amended Articles of Incorporation by a new set of stockholders.
The Securities and Exchange Commission will only require the
original signature page bearing the signatures of the original
Articles and append it to the amended articles. The original
incorporators will never change, it being an accomplished fact.
EFFECTIVITY OF AMENDMENT:
1. Takes effect upon approval by the Commission, or
2. From the date of filing with the Commission if not acted upon
within 6 months from the date of filing for a cause not attributable
to the corporation.
IN COMPARISON WITH
AMENDMENT OF ARTICLES OF INCORPORATION OF CLOSE
CORPORATIONS, TITLE XII, SEC.102
SEC. 102, RCC. Amendment of articles of incorporation. - Any
amendment to the articles of incorporation which seeks to
delete or remove any provision required by this Title or to
reduce a quorum or voting requirement stated in said articles
of incorporation shall require 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.
Amending the Articles of incoporation of close corporations
1. Affirmative vote of at least 2/3 of the outstanding capital stock,
with or without voting rights; or
2. 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
TN: Unlike in stock/non-stock corporations, meeting is always
required in cases of amenmdents under this provision. A mere
written assent would not suffice.
Corporation Law (2019) MIDTERM REVIEWER
DISAPPROVAL OF ARTICLES
SEC. 16, RCC. Grounds When Articles of Incorporation or
Amendment May be Disapproved. - The Commission may
disapprove the articles of incorporation or any amendment
thereto if the same is not compliant with the requirements of
this Code: Provided, That the Commission shall give the
incorporators, directors, trustees, or officers a reasonable time
from receipt of the disapproval within which to modify the
objectionable portions of the articles or amendment. The
following are grounds for such disapproval:
1.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. The certification concerning the amount of capital
stock subscribed and/or paid is false; and
4. The required percentage of Filipino ownership of the
capital stock under existing laws or the Constitution has not been
complied with.
No articles of incorporation or amendment to articles of
incorporation of banks, banking and quasi-banking
institutions, preneed, insurance and trust companies, NSSLAs,
pawnshops and other financial intermediaries shall be
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.
GROUNDS TO DISAPPROVE INITIAL APPLICATION FOR
INCORPORATION AND AMENDMENT OF ARTICLES
1. Articles or Amendment is not substantially in
accordance with form prescribed under the law
2. Purpose or purposes of the corporation is patently
unconstitutional, illegal, immoral, or contrary to
government rules and regulations
3. Certification concerning the amount of capital stock
subscribed and/or paid is false
4. Percentage of Filipino ownership of capital stock under
existing laws or the Constitution not complied
INDUSTRIES REQUIRING PRIOR AUTHORITY BEFORE
INCORPORATION (REGULATED CORPORATIONS; SEC. 16, LAST
PARAGRAPH)
1. Banks
2. Banking and quasi-banking institutions
3. Preneed, insurance and trust companies
4. Non-stock savings and loan associations (NSSLAs)
5. Pawnshops
6. Other financial intermediaries
These industries cannot incorporate or apply for amendment
without the prior authority of the government agencies governing
or controlling them. (Ex. Certificate to Incorporate from the BSP
before Incorporating a Bank)
The Certificate to Incorporate is to be attached to the Articles of
Incorporation.
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ATTY. GAVIOLA-CLIMACO
COMMENCEMENT OF CORPORATE EXISTENCE
par. 2 & 3, SEC. 18, RCC. Registration, Incorporation and
Commencement of Corporate Existence. -
xxxxxxxxxxx.
If the Commission finds that the submitted documents and
information are fully compliant with the requirements of this
Code, other relevant laws, rules and regulations, the
Commission shall issue the certificate of incorporation.
A private corporation organized under this Code commences
its corporate existence and juridical personality from the date
the Commission issues the certificate of incorporation under
its official seal and thereupon the incorporators,
stockholders/members and their successors shall constitute a
body 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.
LIFE OF A CORPORATION
The issuance of the SEC of the certificate of
incorporation if all papers filed after verification and examination
are found in order commences the corporate existence, it’s
juridical personality and legal existence. The incorporators,
stockholders/members and their successors shall constitute a
body 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.
The certificate of incorporation is a final determination
of the corporation’s right to do business or enter into contracts in
its name. Once issued, the certificate becomes the charter or
corporate franchise from which the authority of the corporation
to operate as such flows. It is the primary franchise of the
corporation akin to a birth certificate.
IOW, The life of the corporation starts at the date of the
issuance of the certificate of incorporation..
The moment the SEC issues the certificate of incorporation, there
arises a relationship between:
1) The State and the corporation – because it is the state which
granted life to the corporation
2) The corporation to its stockholders – because the stockholders
are the one who compose the corporation
3) The stockholders and the State – because in reality, the
corporation is just an artificial being. The stockholder being the
ones making up the corporation, the franchise granted by the
state to the corporation, is a privilege granted to the stockholders.
DE FACTO CORPORATIONS
SEC. 19, RCC. 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.
De Jure Corporation
One created with substantial conformity to the mandatory
statutory requirements in the Corporation Code of the Philippines
Corporation Law (2019) MIDTERM REVIEWER
De Facto Corporation
One which actually exists for all practical purposes as a
corporation, but which has no legal right to corporate existence as
against the State.
CASE: SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF
SOUTHERN PHILIPPINES VS. NORTHEASTERN MINDANAO
MISSION OF SEVENTH DAY ADVENTIST, INC.
G.R. NO. 150416, JULY 21, 2006
FACTS:
Spouses Cosio donated a parcel of land to South Philippine
Union Mission of Seventh Day Adventist Church of Bayugan,
Esperanza, Agusan (SPUM-SDA Bayugan), petitoner’s
predecessor, situated in the Barrio of Bayugan, Municipality of
Esperanza, Province of Agusan, Philippines.
The donation was allegedly accepted by one Liberato Rayos, an
elder of the Seventh Day Adventist Church, on behalf of the
donee.
21 years later, however, the same parcel of land was sold by the
spouses Cosio to the Seventh Day Adventist Church of
Northeastern Mindanao Mission (SDA-NEMM), respondents in
this case.
Petitioners asserted ownership over the property. It filed a case
for the cancellation of title, quieting of ownership and
possession, declaratory relief and reconveyance with prayer for
preliminary injunction and damages), in the RTC of Bayugan,
Agusan del Sur.
This was opposed by respondents who argued that at the time
of the donation, SPUM-SDA Bayugan could not legally be a
donee because, not having been incorporated yet it, had no
juridical personality. Neither were petitioners members of the
local church then, hence, the donation could not have been
made particularly to them.
After trial, the trial court rendered a decision upholding the sale
in favor of respondents.
On appeal, the CA affirmed the RTC decision but deleted the
award of moral damages and attorney's fees.
Issue:
Should respondent SDA-NEMM's ownership of the lot covered
by TCT No. 4468 be upheld?
Ruling:
Yes.
Donation is an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another person who
accepts it. The donation could not have been made in favor of
an entity yet inexistent at the time it was made. Nor could it
have been accepted as there was yet no one to accept it.
The deed of donation was not in favor of any informal group of
SDA members but a supposed SPUM-SDA Bayugan (the local
church) which, at the time, had neither juridical personality nor
capacity to accept such gift.
Declaring themselves a de facto corporation, petitioners allege
that they should benefit from the donation.
But there are stringent requirements before one can qualify as
a de facto corporation:
(a) the existence of a valid law under which it may be
incorporated;
(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.
There is no proof that there was an attempt to incorporate at
that time.
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ATTY. GAVIOLA-CLIMACO
The filing of articles of incorporation and the issuance of the
certificate of incorporation are essential for the existence of a
de facto corporation.
Petitioners themselves admitted that at the time of the
donation, they were not registered with the SEC, nor did they
even attempt to organize to comply with legal requirements.
Corporate existence begins only from the moment a certificate
of incorporation is issued. No such certificate was ever issued to
petitioners or their supposed predecessor-in-interest at the
time of the donation. Petitioners obviously could not have
claimed succession to an entity that never came to exist.
Neither could the principle of separate juridical personality
apply since there was never any corporation to speak of. And, as
already stated, some of the representatives of petitioner
Seventh Day Adventist Conference Church of Southern
Philippines, Inc. were not even members of the local church
then, thus, they could not even claim that the donation was
particularly for them.
Principle:
"The de facto doctrine thus effects a compromise between two
conflicting public interests - the one opposed to an unauthorized
assumption of corporate privileges; the other, in favor of doing
justice to the parties and of establishing a general assurance of
security in business dealing with corporations.
Generally, the doctrine exists to protect the public dealing with
supposed corporate entities, not to favor the defective or non-
existent corporation.’
Requirements before one can qualify as a de facto corporation:
a. The existence of a valid law under which it may be
incorporated;
b. An attempt in good faith to incorporate; and
c. Assumption of corporate powers
COLLATERAL ATTACK NOT ALLOWED:
De facto corporation’s existence can only be attacked directly,
through a quo warranto proceeding. A quo warranto proceeding
is a direct attack which questions the very existence of the
corporation because the issue of the case is WON the
corporation exist.
Attempt in good faith (minimum requirements):
In order to have an attempt in good faith to incorporate, you
must actually have INCORPORATED.
The corporation must have filed the articles of incorporation,
treasurer’s affidavi (old Code)t, and by-laws with the SEC.
The SEC must have actually issued the certificate of
incorporation.
Atty’s Discussion:
If you did not comply with the preceding minimum
requirements, that is not a de facto corporation. Hence, the
existence of such may be attacked collaterally.
If the SEC issued the certificate of incorporation, even if there
was a defect in the issuance by the SEC, that corporation is a de
facto corporation, and its existence cannot be attacked
collaterally. It must be done thru a direct attack, thru a quo
warranto proceeding.
In relation to the Seventh Day Adventist case, the donee was
saying that you cannot just question my existence thru the
revocation of the donation, you cannot say that I do not exist
because only the state can question my existence thru a quo
warranto. Only the state can question the existence of a de facto
corporation and I am a de facto corporation. We cannot just say
Corporation Law (2019)
that the donation is revoked because I don’t exist. You have to
file a quo warranto case first. Is this contention valid? NO.
Ruling: In this case, the SC said that Northeastern Seventh Day
Adventist did not even attempt to file their articles of
incorporation, hence, it is not a de facto corporation. Therefore,
it is not protected and its existence can be attacked collaterally.
It may be negated even without bringing a quo warranto case.
CORPORATION BY ESTOPPEL
SEC. 20, RCC. 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
as a defense. Anyone who assumes an obligation to an
ostensible corporation as such cannot resist performance
thereof on the ground that there was in fact no corporation.
Corporation by Estoppel
A group of persons which holds itself out as a corporation and
enters into a contract with a third person on the strength of such
appearance cannot be permitted to deny its existence in an action
under said contract.
“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.”
These are corporations who have exercised rights as a corporation
and has undertaken obligations as a corporation, even without
validly incorporating. In which case, the person’s who made up the
corporation are estopped from claiming that they are not. But
they cannot, because there is no real corporation, they will not be
liable as a corporation. They will be liable as partners. They will be
solidarily liable in their personal capacity.
Lack of corporate personality is not a defense that it can avail.
EFFECTS OF NON-USE OF CORPORATE CHARTER AND
CONTINUOUS INOPERATION
SEC. 21. Effects of Non-Use of Corporate Charter and
Continuous Inoperation. – If a corporation does not formally
organize and commence its business within five (5) years from
the date of its incorporation, its certificate of incorporation
shall be deemed revoked as of the day following the end of the
five (5)-year period.
However, if a corporation has commenced its business but
subsequently becomes inoperative for a period of at least five
(5) consecutive years, the Commission may, after due notice
and hearing, place the corporation under delinquent status.
A delinquent corporation shall have a period of two (2) years
to resume operations and comply with all requirements that
the Commission shall prescribe. Upon compliance by the
corporation, the Commission shall issue an order lifting the
delinquent status. Failure to comply with the requirements
and resume operations within the period given by the
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MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO
Commission shall cause the revocation of the corporation’s
certificate of incorporation.
The Commission shall give reasonable notice to, and
coordinate with the appropriate regulatory agency prior to the
suspension or revocation of the certificate of incorporation of
companies under their special regulatory jurisdiction.
ORGANIZATION
The issuance of the certificate of incorporation calls the
corporation into being but it is not ready to do business until it
is organized. The corporation must formally organize and
commence the transaction of its business or the construction
of its works within five (5) years from the date of its
incorporation, otherwise, its certificate of incorporation shall
be deemed revoked. (Sec. 21)
Organization includes:
1. Adoption of by-laws
2. Election of the corporate officers
3. Putting up of corporate office as the principal place of their
business (as indicated in the articles of the incorporation)
4. Application for permits (eg. Mayor’s or business permits)
INCORPORATION WITHOUT COMMENCEMENT OF OPERATIONS
(FAILURE TO FROMALLY ORGANIZE)
 OLD Code:
Within two (2) years from the date of its incorporation – DEEMED
DISSOLVED (Automatic)
 REVISED Code:
Within five (5) years from the date of its incorporation -
CERTIFICATE OF INCORPORATION DEEMED REVOKED as of the day
following the end of the 5-year period.
INOPERATIVE AFTER COMMENCEMENT OF OPERATIONS
 OLD Code
Continuously inoperative for a period of at least five (5) years –
GROUND FOR SUSPENSION OR REVOCATION of corporate
franchise or certificate of incorporation.
 REVISED Code
Inoperative for at least 5 consecutive years - Commission may,
after due notice and hearing, place corporation under
DELINQUENT STATUS.
TN: A delinquent corporation shall have a period of 2 years in
which to resume operations and comply with all the requirements
that the Commission shall prescribe.
COMPLIANCE - Commission issues an order lifting the delinquent
status
NON-COMPLIANCE - REVOCATION of the corporation’s certificate
of incorporation.
Reasonable notice shall be given to the appropriate regulatory
agency in case of suspension or revocation of the certificate of
incorporation of companies under their special regulatory
jurisdiction.
Corporation Law (2019) MIDTERM REVIEWER
TITLE III- BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
QUALIFICATION AND TERM
SEC. 22. The Board of Directors or Trustees of a Corporation;
Qualification and Term.- Unless otherwise provided in this
Code, the board of directors or trustees shall exercise the
corporate powers, conduct all business, and control all
properties of the corporation.
Directors shall be elected for a term of one (1) year from
among the holders of stocks registered in the corporation’s
books, while trustees shall be elected for a term not exceeding
three (3) years from among the members of the corporation.
Each director and trustee shall hold office until the successor is
elected and qualified. A director who ceases to own at least
one (1) share of stock or a trustee who ceases to be a member
of the corporation shall cease to be such. XXXXXXXXXXXXXXX
Qualifications for a Director:
1. Must own at least 1 share of stock
- by ownership, what is required is legal ownership
which is determined through the stocks and transfer book
reflecting one’s name as the owner /holder thereof. Beneficial
ownership not necessary.
2. Must not possess of any of the disqualifications
Take Note :
Majority of the directors should be resident of the Philippines
Majority, not all. There is NO citizenship requirement except
Nationalized industries even foreigners can be voted as
directors
DISQUALIFICATION
SEC. 26. Disqualification of Directors, Trustees or Officers. – A
person shall be disqualified from being a director, trustee or
officer of any corporation if, within five (5) years prior to the
election or appointment as such, the person was:
Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a period
exceeding six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise known
as “The Securities Regulation Code”;
(b) Found administratively liable for any offense involving
fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority
for acts, violations or misconduct similar to those enumerated
in paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications or other
disqualifications, which the Commission, the primary
regulatory agency, or the Philippine Competition Commission
may impose in its promotion of good corporate governance or
as a sanction in its administrative proceedings.
Disqualification
1.Conviction by final judgment -
A.Offense punishable by imprisonment exceeding 6 years;
B.Violation of the RCC regardless of the penalty involved;
C.Violation of the R.A. No. 8799 (Security Regulations Code)
- newly inserted but already practiced
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2.Found guilty in an administrative proceedings
3.Found guilty by foreign courts or equivalent foreign regulatory
authority for analogous cases
Note: These are not perpetual disqualifications as it is qualified by
the phrase “within five (5) years prior to the election or
appointment as such.” After the lapse thereof, one may qualify as
a nominee in the Board.
ELECTION OF BOD
Sec. 23 Election of Directors or Trustees. – Except when the
exclusive right is reserved for holders of founders’ shares
under Section 7 of this Code, each stockholder or member shall
have the right to nominate any director or trustee who
possesses all of the qualifications and none of the
disqualifications set forth in this Code.
At all elections of directors or trustees, there must be present,
either in person or through a representative authorized to act
by written proxy, the owners of majority of the outstanding
capital stock, or if there be no capital stock, a majority of the
members entitled to vote. When so authorized in the bylaws
or by a majority of the board of directors, the stockholders or
members may also vote through remote communication or in
absentia: Provided, That the right to vote through such modes
may be exercised in corporations vested with public interest,
notwithstanding the absence of a provision in the bylaws of
such corporations.
A stockholder or member who participates through remote
communication or in absentia, shall be deemed present for
purposes of quorum.
The election must be by ballot if requested by any voting
stockholder or member.
In stock corporations, stockholders entitled to vote shall have
the right to vote the number of shares of stock standing in their
own names in the stock books of the corporation at the time
fixed in by-laws or where the by-laws are silent, at the time of
the election. The said stockholder may: (a) vote such number
of shares for as many persons as there are directors to be
elected; (b) cumulate said shares and give one (1) candidate as
many votes as the number of directors to be elected multiplied
by the number of the shares owned; or (c) distribute them on
the same principle among as many candidates as may be seen
fit: Provided, That the total number of votes cast shall not
exceed the number of shares owned by the stockholders 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 non-stock corporations may cast as many votes as
there are trustees to be elected but may not cast more than
one (1) vote for one (1) candidate. Nominees for directors or
trustees receiving the highest number of votes shall be
declared elected.
If no election is held, or the owners of majority of the
outstanding capital stock or majority of the members entitled
to vote are not present in person, by proxy, or through remote
communication or not voting in absentia at the meeting, such
meeting may be adjourned and the corporation shall proceed
in accordance with Section 25 of this Code.
Corporation Law (2019) MIDTERM REVIEWER
The directors or trustees elected shall perform their duties as
prescribed by law, rules of good corporate governance, and
bylaws of the corporation.
Election of Directors:
1. Done at any meeting called for the election of BOD and voted
for by the stockholders. At all elections, owners of the majority of
the outstanding capital stocks must be present either:
● In person;
● Through a representative authorized to act by
written proxy (in absentia) eg. proxy or trust; or
● If allowed by the by-laws or majority of the BOD,
through remote communication eg. Telephone
conference or video conference.
Note: Such modes of attending the meeting and voting may be
utilized by corporations vested with public interest although not
provided in their by-laws.
2.The election must be by ballot if requested by any voting
stockholder. Hence, voting by viva voces or roll call (raising
hands) is valid except when there is a request that it be by ballot.
3.Stockholders shall have the right to vote the number of shares
of stock standing in their own names (1share=1vote) as long as
the total number of votes cast shall not exceed the number of
shares owned by the stockholders as shown in the books of the
corporation multiplied by the whole number of directors to be
elected.
Formula:
No. of votes = No. of shares x No. of vacancy
Methods of Voting:
● Straight voting - vote such number of shares for as many
persons as there are directors to be elected.
Eg. A owns 100 shares, if there are 5 directors to be elected,
A is entitled to 500 votes multiplying 100 by 5. He may give
to the 5 candidates 100 votes each.
 Cumulative voting for one candidate - cumulate said
shares and give one (1) candidate as many votes as the
number of directors to be elected multiplied by the
number of the shares owned.
a.The privilege of cumulative voting is permitted for
the purpose of giving minority stockholders representation
in the BOD. Stockholders shall have the right to vote the
number of shares of stock standing in their own names.
b.A director elected because of the vote of
minority stockholders who united in cumulative voting
cannot be removed without cause. (Sec.27, 1st par, last
sentence)
● Cumulative voting by distribution - distribute them on the
same principle among as many candidates as may be seen
fit.
Note: Comparison with non-stock corporations: Members may
cast as many votes as there are trustees to be elected but may not
cast more than one (1) vote for one (1) candidate unless otherwise
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provided in the articles of incorporation or in the by-laws. They
cannot cumulate.
4.No delinquent stock shall be voted.
5. Nominees for directors or trustees receiving the highest
number of votes shall be declared elected.
6.If no election is held, or the owners of majority of the
outstanding capital stock or majority of the members entitled to
vote are not present in person, by proxy, or through remote
communication or not voting in absentia at the meeting, such
meeting may be adjourned and the corporation shall follow
Section 25.
INDEPENDENT DIRECTORS
Sec. 22, last 6 paragraphs. Xxx The board of the following
corporations vested with public interest shall have
independent directors constituting at least twenty percent
(20%) of such board:
Corporations covered by Section 17.2 of Republic Act No. 8799,
otherwise known as “The Securities Regulation Code”, namely
those whose securities are registered with the Commission,
corporations listed with an exchange or with assets of at least
Fifty million pesos (P50,000,000.00) and having two hundred
(200) or more holders of shares, each holding at least one
hundred (100) shares of a class of its equity shares;
(b) Banks and quasi-banks, nonstock savings and loan
associations, pawnshops, corporations engaged in money
service business, preneed, trust and insurance companies, and
other financial intermediaries; and
(c) Other corporations engaged in businesses vested with
public interest similar to the above, as may be determined by
the Commission, after taking into account relevant factors
which are germane to the objective and purpose of requiring
the election of an independent director, such as the extent of
minority ownership, type of financial products or securities
issued or offered to investors, public interest involved in the
nature of business operations, and other analogous factors.
An independent director is a person who, apart from
shareholdings and fees received from the corporation, is
independent of management and free from any business or
other relationship which could, or could reasonably be
perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities as a
director.
Independent directors must be elected by the shareholders
present or entitled to vote in absentia during the election of
directors. Independent directors shall be subject to rules and
regulations governing their qualifications, disqualifications,
voting requirements, duration of term and term limit,
maximum number of board memberships and other
requirements that the Commission will prescribe to strengthen
their independence and align with international best practices.
Corporation Law (2019)
Note: Independent directors are required in corporations vested
with public interest which include:
● regulated corporations such as bank, quasi-banks, etc.,
● corporations covered by Sec. 17.2 of the SRC:
- corporations whose securities are registered in the
SEC
- listed corporations
- corporations with assets of at least 50M and have
200 or more shareholders each holding at least 100 shares
of a class of its equity shares. These are known as
“public corporations” under the SRC.
ELECTION REPORT
Section 25. Report of Election of Directors, Trustees and
Officers, Non Holding of Election and Cessation from Office–
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
Commission, the names, nationalities, shareholdings, and
residence addresses of the directors, trustees and officers
elected.
The non-holding of elections and the reasons therefor shall
be reported to the Commission within thirty (30) days from
the date of the scheduled election. The report shall specify
a new date for the election, which shall not be later than
sixty (60) days from the scheduled date.
If no new date has been designated, or if the rescheduled
election is likewise not held, the Commission may, upon
the application of a stockholder, member, director or
trustee, and after verification of the unjustified non-holding
of the election, summarily order that an election be held.
The Commission shall have the power to issue such orders
as may be appropriate, including orders directing the
issuance of a notice stating the time and place of the
election, designated presiding officer, and the record date
or dates for the determination of stockholders or members
entitled to vote.
Notwithstanding any provision of the articles of
incorporation or bylaws to the contrary, the shares of stock
or membership represented at such meeting and entitled
to vote shall constitute a quorum for purposes of
conducting an election under this section.
Should a director, trustee or officer die, resign or in any
manner cease to hold officer, the secretary, or the director,
trustee or officer of the corporation, shall, within seven (7)
days from knowledge thereof, report in writing such fact
to the Commission.
No election held
 the reasons therefor shall be reported to the
Commission 30 days from the date of the scheduled
election. The report shall specify a new date for the
election which shall not be later than 60 days from the
scheduled date
 the commission has authority to motu proprio issue an
order for the conduct of another election of the BOD
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Now, it is expressly provided under the corporation Code that if
the elections of the BOD are not held at all the SEC may order the
conduct of the election so this is a new power granted by
Corporation Code to SEC but this power is already reflected in the
Securities Regulation Code.
CREATION OF COMMITTEES
Section 34. Executive, Management, and Other Special
Committees– If the bylaws so provide, the board may create
an executive committee composed of at least three (3)
directors. 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
bylaws or by majority vote of the board, except with
respect to the: (a) approval of any action for which
shareholders' approval is also required; (b) filling of
vacancies in the board; (c) amendment or repeal of bylaws
or the adoption of new bylaws; (d) amendment or repeal
of any resolution of the board which by its express terms
is not amendable or repealable; and (e) distribution of cash
dividends to the shareholders.
The board of directors may create special committees of
temporary or permanent nature and determine the
members' term, composition, compensation, powers, and
responsibilities.
Executive Committee
- committee which exercise power within the competence of the
board that requires the authority under the by-laws. The board
cannot just create their own executive committee if that
executive committee will be exercising powers of the board
Special Committee
- can be created by the board even without the authority under
the by-laws
FILIPINAS PORT SERVICES, INC VS. GO
G.R. NO. 161886, MARCH 16, 2007
FACTS:
FilPort is a domestic corporation engaged in stevedoring
services with principal office in Davao City. On 4 September
1992, petitioner Eliodoro Cruz, Filport’s president from 1968
until he lost his bid for re-election as Filport’s president during
the general stockholders’ meeting in 1991, wrote a letter to the
corporation’s Board of Directors questioning the board’s
creation of the positions of Assistant Vice-Presidents for
Corporate Planning, Operations, Finance and Administration,
and the creation of the additional positions of Special Assistants
to the President and the Board Chairman with a monthly
remuneration of P13,050.00 each, and the election thereto of
certain members of the board. In his aforesaid letter, Cruz
requested the board to take necessary action/s to recover from
those elected the salaries they have received. However, it was
not shown on the records that action was taken. On 14 June
1993, Cruz, purportedly in representation of Filport and its
stockholders, among which is herein co-petitioner Mindanao
Terminal and Brokerage Services, Inc., filed with the SEC a
petition which he describes as a derivative suit against the
herein respondents who were then the incumbent members of
Filport’s Board of Directors, for alleged acts of mismanagement
detrimental to the interest of the corporation and its
shareholders at large. With the enactment of R.A. No. 8799, the
Corporation Law (2019) MIDTERM REVIEWER
case was first turned over to the RTC of Manila, Branch 14,
sitting as a corporate court. Thereafter, on respondents’
motion, it was eventually transferred to the RTC of Davao City.
On 10 December 2001, RTC-Davao City rendered its decision in
the case. Even as it found that (1) Filport’s Board of Directors has
the power to create positions not provided for in the by-laws of
the corporation since the board is the governing body; and (2)
the increases in the salaries of the board chairman, vice-
president, treasurer and
assistant general manager are reasonable, the trial court
nonetheless rendered judgment against the respondents by
ordering the directors holding the positions of Assistant Vice
President for Corporate Planning, Special Assistant to the
President and Special Assistant to the Board Chairman to refund
to the corporation the salaries they have received as such
officers "considering that Filipinas Port Services is not a big
corporation requiring multiple executive positions" and that
said positions "were just created for accommodation." On
appeal, the CA taking exceptions to the findings of the trial court
that the creation of the positions of Assistant Vice President for
Corporate Planning, Special Assistant to the President and
Special Assistant to the Board Chairman was merely for
accommodation purposes, granted the respondents’ appeal,
reversed and set aside the appealed decision of the trial court
and accordingly dismissed the so-called derivative suit filed by
Cruz, et al. Hence this petition for review on certiorari.
ISSUE:
Whether or not Filport’s Board of Directors has the power to
create positions not provided for in the by-laws of the
corporation.
RULING:
The governing body of a corporation is its board of directors.
Section 23 of the Corporation Code explicitly provides that
unless otherwise provided therein, the corporate powers of all
corporations formed under the Code shall be exercised, all
business conducted and all property of the corporation shall be
controlled and held by a board of directors. Thus, with the
exception only of some powers expressly granted by law to
stockholders (or members, in case of non-stock corporations),
the board of directors (or trustees, in case of non-stock
corporations) has the sole authority to determine policies, enter
into contracts, and conduct the ordinary business of the
corporation within the scope of its charter, i.e., its articles of
incorporation, by-laws and relevant provisions of law. Verily, the
authority of the board of directors is restricted to the
management of the regular business affairs of the corporation,
unless more extensive power is expressly conferred.
The raison d’etre behind the conferment of corporate powers
on the board of directors is not lost on the Court. Indeed, the
concentration in the board of the powers of control of corporate
business and of appointment of corporate officers and
managers is necessary for efficiency in any large organization.
Stockholders are too numerous, scattered and unfamiliar with
the business of a corporation to conduct its business directly.
And so the plan of corporate organization is for the stockholders
to choose the directors who shall control and supervise the
conduct of corporate business.
In the present case, the board’s creation of the positions of
Assistant Vice Presidents for Corporate Planning, Operations,
Finance and Administration, and those of the Special Assistants
to the President and the Board Chairman, was in accordance
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with the regular business operations of Filport as it is authorized
to do so by the corporation’s by-laws, pursuant to the
Corporation Code.
Amended Bylaws of Filport provides the following:
Officers of the corporation, as provided for by the by-laws, shall
be elected by the board of directors at their first meeting after
the election of Directors. xxx
The officers of the corporation shall be a Chairman of the Board,
President, a Vice-President, a Secretary, a Treasurer, a General
Manager and such other officers as the Board of Directors may
from time to time provide, and these officers shall be elected to
hold office until their successors are elected and qualified.
Atty: Here the Supreme Court upheld the validity of the
executive committee even if the same was not authorized under
the by-laws, the by-laws was silent which should not be because
under the law executive committee can only be authorized
under the by-laws.
The reason is as long as the power of a committee is within the
power of the board that requires authority under the by-laws
but if it is any other committee with only recommendatory
authority meaning it cannot act on its own (ex. it cannot
approves resolutions on its own) in that case a committee
maybe created without any express authority under the by-laws
In other words, the committees created are only required to be
in the by laws if they act as the board if they don’t act as the
board then the board may create these committees even
without authority under the by laws.
Executive committee vis-a-vis Special Committee
 Executive Committee: Requires an authority in the by-
laws. One exercising powers that is within the power of
the board of director. They are as powerful as the board
of directors and in effect acting for the board itself.
 Special Committee: No authority required in the by-
laws and is within the competency of the board to
create. Any other committee exercising a mere
recommendatory power whose actions require
ratification and confirmation by the board. It cannot
approve resolutions on its own. Reason here is that the
board is the corporation's governing body, clearly
upholding the power of its board to exercise its
prerogatives in managing the business affairs of the
corporation.
LIABILITY
Section 30. 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.
A director, trustee or officer shall not attempt to acquire, or
acquire any interest adverse to the corporation in respect of
any matter which has been reposed in them in confidence, and
upon which, equity imposes a disability upon themselves to
deal in their own behalf; otherwise, the said director, trustee
or officer shall be liable as a trustee for the corporation and
Corporation Law (2019) MIDTERM REVIEWER
must account for the pro􏰀fits which otherwise would have
accrued to the corporation.
Best Judgement Rule
 General Rule: The will of the majority of the Board
Members controls in corporate affairs, and contracts
intra vires entered into by the board of directors are
binding on the corporation and courts will not interfere.
There is no liability for any damages caused by their
decisions.
 Exceptions:
1.Assent to patently unlawful acts of the corporation
2.Gross negligence or bad faith in directing the affairs of
the corporation
3.Acquiring personal or pecuniary interest in conflict with
their duty
o Liability if it falls within the exceptions: The director
shall be solidarity liable to the corporation, creditors,
stockholders, and to any other persons.
MAGALING V ONG
FACTS:
Spouses Reynaldo Magaling and Lucia Magaling is the
controlling stock holders/owner of Thermo Loans and Credit
Corporation. On December 1994, defendant Reynaldo Magaling
induce the Peter Ong at the latter’s store in Lipa City to lend him
and/or his company Thermo Loans and Credit Corporation
money amounting to P350,000.00 at the interest rate of 2 1⁄2%
per month. The plaintiff, herein defendant extended the loan to
the defendant, herein petitioner based on the assurance of
Reynaldo Magaling. Sometime in September 1997, or three
years thereafter the defendants issued and tendered to plaintiff
series of postdated checks for the payment of interest and
principal of the loan.
Upon failure of Thermo Loans and Credit Corporation to pay its
outstanding loan despite demand from Mr. Ong, the latter filed
a complaint with the RTC for the collection of the loan with
interest, attorney’s fees and cost of suit, with prayer for
issuance of a writ of preliminary attachment against the spouses
Reynaldo Magaling and Lucia Magaling and Thermo Loans and
Credit Corporation.
The RTC dismissed the complaint of Peter Ong on the ground
that the subject obligation is the obligation of the defendant
corporation in which the stockholders and officers are not
personally liable. Said corporation has a personality separate
and distinct from that of Reynaldo Magaling who happens to be
only a stockholder and president thereof at that time.
On appeal the appellate court reversed and set aside the
decision of the RTC. The Court of Appeals pierced the veil of
corporate fiction and held the spouse’s solidarity liable with
Thermo Loans for the corporate obligations of the latter. Hence,
this petition for certioraris.
ISSUE: Whether or not the defendants being officers and
stockholders of Thermo Loans and Credit Corporation are
solidarity liable to the financial liability of said corporation.
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RULING:
The Supreme Court affirmed the ruling of the Court of Appeals.
The general rule is that obligations incurred by the corporation,
acting through its directors, officers and employees, are its sole
liabilities, and vice versa. However, there are exceptional
circumstances warranting the disregard of a separate
personality and held such officer’s and director’s solidarily liable
with the corporation:
1) When directors /trustees and officers of a corporation:
b.Vote or assent to patently unlawful acts of the
corporation;
c.Act in bad faith or with gross negligence in directing
corporate affairs;
d.Are guilty of conflict of interest to the prejudice of the
corporation, stock holders or members, and other
persons;
4) When a director or officer consented to the insurance of
watered down stocks or who, having knowledge, did not
forthwith file with the corporate secretary his written
objection thereto; or
5) When a director, trustee or officer is made by specific
provision of law, personally liable for his corporate action.
In the instant case, Reynaldo Magaling’s very own testimony
convincingly displayed his gross negligence in the conduct of the
affairs of Thermo Loans without due regard to the plight of its
investor. He resigned as President of Thermo Loans in 1998
when the company already became insolvent. He also admitted
that no one or nobody took over as president of the corporation,
when he resigned. Neither was the investor in-formed about the
bankruptcy thereof, nor was any bankruptcy or involvers
proceeding instituted to protect the assets of the corporation
and the interest of its investor. Reynaldo Magaling miserably
failed to exercise at most diligence expected from the highest
officer of a corporation in the conduct of its affairs. Hence, he
should be held jointly and severally liable for the corporate
obligation of Thermo Loans to appellant Peter Ong.
JAMES IENT AND MAHARLIKA SCHULZE, VS. TULLETT PREBON
Facts:
Ient is a British national and the Chief Financial Officer of
Tradition Asia Pacific Pte. Ltd. (Tradition Asia) in Singapore.
Petitioner Schulze is a Filipino/German who does Application
Support for Tradition Financial Services Ltd. in London (Tradition
London). Tradition Asia and Tradition London are subsidiaries of
Compagnie Financiere Tradition and are part of the "Tradition
Group."
Tradition Group and Tullett are competitors in the inter-dealer
broking business. Tullett was the first to establish a business
presence in the Philippines and had been engaged in the inter-
dealer broking business or voice brokerage here since 1995.
Meanwhile, on the part of the Tradition Group, the needs of its
Philippine clients were previously being serviced by Tradition
Asia in Singapore. The other IDBs in the Philippines are Amstel
and Icap.
In August 2008, in line with Tradition Group's motive of
expansion and diversification in Asia, petitioners Ient and
Schulze were tasked with the establishment of a Philippine
subsidiary of Tradition Asia to be known as Tradition Financial
Services Philippines, Inc. (Tradition Philippines).[9] Tradition
Corporation Law (2019) MIDTERM REVIEWER
Philippines was registered with the Securities and Exchange
Commission (SEC) on September 19, 2008.
On October 15, 2008, Tullett, through one of its directors,
Gordon Buchan, filed a Complaint-Affidavit against the
officers/employees of the Tradition Group for violation of the
Corporation Code.
Villalon ( formerly President and Managing Director of Tullett)
and Chuidian ( formerly a member of Tullett's Board of
Directors) were charged with using their former positions in
Tullett to sabotage said company by orchestrating the mass
resignation of its entire brokering staff in order for them to join
Tradition Philippines. Tullett claimed that the Villalon held
several meetings between August 22 to 25, 2008 with members
of Tullett's Spot Desk and brokering staff in order to convince
them to leave the company. Villalon likewise supposedly
intentionally failed to renew the contracts of some of the
brokers. On August 25, 2008, a meeting was also allegedly held
in Howzat Bar in Makati City where petitioners and a lawyer of
Tradition Philippines were present. At said meeting, the brokers
of complainant Tullett were purportedly induced, en masse, to
sign employment contracts with Tradition Philippines and were
allegedly instructed by Tradition Philippines' lawyer as to how
they should file their resignation letters. Villalon allegedly
informed Mr. Barry Dennahy, Chief Operating Officer of Tullett
Prebon in the Asia-Pacific, through electronic mail that all of
Tullett's brokers had resigned. Subsequently, , in another
meeting with Ient and Tradition Philippines' counsel, indemnity
contracts in favor of the resigning employees were purportedly
distributed by Tradition Philippines.
According to Tullett, respondents Villalon and Chuidian(who
were still its directors or officers at the times material to the
Complaint-Affidavit) violated Sections 31 and 34 of the
Corporation Code which made them criminally liable under
Section 144. As for petitioners Ient and Schulze, Tullett asserted
that they conspired with Villalon and Chuidian in the latter's acts
of disloyalty against the company.
In their respective Counter-Affivadits, Villalon alleged that
frustration with management changes in Tullett Prebon
motivated his personal decision to move from Tullett and accept
the invitation to enlist with the Tradition Group. Villalon further
argued that his resignation from Tullett was done in the exercise
of his fundamental rights to the pursuit of life and the exercise
of his profession; he can freely choose to avail of a better life by
seeking greener pastures; and his actions did not fall under any
of the prohibited acts under Sections 31 and 34 of the
Corporation Code. He claimed that the DOJ had previously
proclaimed that Section 31 is not a penal provision of law but
only the basis of a cause of action for civil liability. Thus, he
concluded that there was no probable cause that he violated the
Corporation Code nor was the charge of conspiracy properly
substantiated.
Chuidian claimed that she left Tullett simply to seek greener
pastures. Like Villalon, She merely exercised her right to exercise
her chosen
profession and pursue a better life. She argued that Section 144
as a penal provision should be strictly construed against the
State and liberally in favor of the accused and Tullett has failed
to substantiate its charge of bad faith on her part.
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In her Counter-Affidavit, petitioner Schulze denied the charges
leveled against her. She argued that "[s]ince the Corporation
Code does not expressly provide that the provisions of the
Revised Penal Code shall be made to apply suppletorily, nor
does it adopt the nomenclature of penalties of the Revised Penal
Code, the provisions of the latter cannot be made to apply
suppletorily to the former as provided for in the first sentence
of Article 10 of the Revised Penal Code." She concluded that a
charge of conspiracy which has for its basis Article 8 of the
Revised Penal Code cannot be made applicable to the provisions
of the Corporation Code.
For his part, Ient alleged that the charges against him were
merely filed to harass Tradition Philippines and prevent it from
penetrating the Philippine market. Adopting a similar line of
reasoning as Schulze, Ient
believed that the Revised Penal Code could not be made
suppletorily applicable to the Corporation Code so as to charge
him as a conspirator. According to Ient, he merely acted within
his rights when he offered job opportunities to any interested
person as it was within the employees' rights to change their
employment.
In a Consolidated Reply-Affidavit, Tullett argued that Villalon,
Chuidian, Schulze, and Ient have mostly admitted the acts
attributed to them in the Complaint-Affidavit and only
attempted to characterize said acts as "normal," "innocent" or
"customary." Even assuming that Villalon and Chuidian were
dissatisfied with their employment in Tullett, this would
supposedly not justify nor exempt them from violating their
duties as Tullett's officers/directors. Tullett asserts that Section
144 applies to the case at bar since the DOJ Resolution in UCPB
is not binding as it applies only to the parties therein and it
likewise involved facts different from the present case.
In a Resolution, State Prosecutor (Prosecutor Delos Trinos,
Acting City Prosecutor of Makati City, dismissed the criminal
complaints.
Tullett filed a petition for review with the Secretary of Justice to
assail the foregoing resolution of the Acting City Prosecutor of
Makati City.
Ient and Schulze moved for reconsideration of the foregoing
Resolution by the Secretary of Justice. Secretary of Justice
denied the motion for reconsideration filed by petitioners.
ISSUE:WON Section 144 of the Corporation Code aplicable to
Sections 31 and 34 of the same statute such that criminal
liability attaches to violations of Sections 31 and 34.
Ruling: the consolidated petitions are GRANTED
The main bone of disagreement among the parties in this case
is the applicability of Section 144 of the Corporation Code to
Sections 31 and 34 of the same statute such that criminal
liability attaches to violations of Sections 31 and 34.
Petitioners posit that Section 144 only applies to the provisions
of the Corporation Code or its amendments "not otherwise
Corporation Law (2019) MIDTERM REVIEWER
specifically penalized" by said statute and should not cover
Sections 31 and 34 which both prescribe the "penalties" for their
violation; namely, damages, accounting and restitution of
profits. On the other hand, respondent and the appellate court
have taken the position that the term "penalized" under Section
144 should be interpreted as referring to criminal penalty, such
as fine or imprisonment, and that it could not possibly
contemplate "civil" penalties such as damages, accounting or
restitution.
After a meticulous consideration of the arguments presented by
both sides, the Court comes to the conclusion that there is
textual ambiguity in Section 144; moreover, such ambiguity
remains even after an examination of its legislative history and
the use of other aids to statutory construction, necessitating the
application of the rule of lenity in the case at bar.
A perusal of Section 144 shows that it is not a purely penal
provision. When it is a corporation that commits a violation of
the Corporation Code, it may be dissolved in appropriate
proceedings before the Securities and Exchange Commission.
The involuntary dissolution of an erring corporation is not
imposed as a criminal sanction, 53 but rather it is an
administrative penalty.
There is no provision in the Corporation Code using similarly
emphatic language that evinces a categorical legislative intent
to treat as a criminal offense each and every violation of that
law. Consequently, there is no compelling reason for the Court
to construe Section 144 as similarly employing the term
"penalized" or "penalty" solely in terms of criminal liability.
Sections 31 to 34 were introduced into the Corporation Code to
define what acts are covered, as well as the consequences of
such acts or omissions amounting to a failure to fulfil a director's
or corporate officer's fiduciary duties to the corporation. A
closer look at the subsequent deliberations on C.B. No. 3,
particularly in relation to Sections 31 and 34, would show that
the discussions focused on the civil liabilities or consequences
prescribed in said provisions themselves.There is no legislative
intent to criminalize Sections 31 and 34 was manifested in the
deliberations on the Corporation Code.
It is noteworthy from the same deliberations that legislators
intended to codify the common law concepts of corporate
opportunity and fiduciary obligations of corporate officers as
found in American jurisprudence into said provisions. In
common law, the remedies available in the event of a breach of
director's fiduciary duties to the corporation are civil remedies.
If a director or officer is found to have breached his duty of
loyalty, an injunction may be issued or damages may be
awarded. A corporate officer guilty of fraud or mismanagement
may be held liable for lost profits. A disloyal agent may also
suffer forfeiture of his compensation. There is nothing in the
deliberations to indicate that drafters of the Corporation Code
intended to deviate from common law practice and enforce the
fiduciary obligations of directors and corporate officers
through penal sanction aside from civil liability.
The Corporation Code was intended as a regulatory measure,
not primarily as a penal statute. Sections 31 to 34 in particular
were intended to impose exacting standards of fidelity on
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corporate officers and directors but without unduly impeding
them in the discharge of their work with concerns of litigation.
Considering the object and policy of the Corporation Code to
encourage the use of the corporate entity as a vehicle for
economic growth, we cannot espouse a strict construction of
Sections 31 and 34 as penal offenses in relation to Section 144
in the absence of unambiguous statutory language and
legislative intent to that effect. We stress that had the
Legislature intended to attach penal sanctions to Sections 31
and 34 of the Corporation Code it could have expressly stated
such intent in the same manner that it did for Section 74 of the
same Code.
WHEREFORE, the consolidated petitions are GRANTED.
Discussion:
Section 144 is not applicable since sections 31 and 34 already
provide penalty for violations of those provisions. Section 144
will only apply if the act is not penalized in the sections that are
violated.
Note:
Section 144 (now section 170 under the revised corporation
code) is no longer a criminal offense. It is now civil. However, it
still applies to violations of the corporation code that do not
have specific penalties.
SEC. 170. Other Violations of the Code; Separate Liability. –
Violations of any of the other provisions of this Code or its
amendments not otherwise specifically penalized therein shall
be punished by a fine of not less than Ten thousand pesos
(P10,000.00) but not more than One million pesos
(P1,000,000.00). If the violation is committed by a corporation,
the same may, after notice and hearing, be dissolved in
appropriate proceedings before the Commission: Provided, That
such dissolution shall not preclude the institution of appropriate
action against the director, trustee, or officer of the corporation
responsible for said violation: Provided, further, That nothing in
this section shall be construed to repeal the other causes for
dissolution of a corporation provided in this Code.
Liability for any of the foregoing offenses shall be separate from
any other administrative, civil, or criminal liability under this
Code and other laws.
SELF-DEALING DIRECTORS
SEC. 31. Dealings of Directors, Trustees or Officers with the
Corporation. – A contract of the corporation with one or more of
its directors, trustees, officers or their spouses and relatives
within the fourth civil degree of consanguinity or affinity is
voidable, at the option of such corporation, unless all the
following conditions are present:
a.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;
b.The vote of such director or trustee was not necessary for the
approval of the contract;
c.The contract is fair and reasonable under the circumstances;
Corporation Law (2019) MIDTERM REVIEWER
d.In case of corporations vested with public interest, material
contracts are approved by at least two-thirds (2/3) of the entire
membership of the board, with at least a majority of the
independent directors voting to approve the material contract;
and
e.In case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first three (3) 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 and the contract is fair and
reasonable under the circumstances.
Requirements
1.Quorum (presence)
2. Approval ( vote)
3. Contract is fair and reasonable under the circumstances
1 | Quorum
There has to be a quorum but the presence of such director in
the board meeting in which the contract was approved WAS NOT
necessary to constitute a quorum.
ILLUSTRATION: 5 directors
a. to constitute quorum , needs 3 directors
b. the presence of the inter dealing director should not be
counted in constituting the quorum , ( not part of the 3 directors)
2 | Vote of such director or trustee was not necessary for the
approval
His vote is still counted but his vote should not be necessary for
the approval for such contract.
ILLUSTRATION:
3 Directors present and 1 of them is the Self-dealing director
(Majority -2)
a. If one of the 2 is a self dealing director
Legal Effect : Contract is Voidable
3 |Contract should be fair and reasonable
(Self -explanatory )
If any of the three is missing :
Effect: Contract is voidable
REMEDY : Ratification by Stockholders
a. representing at least (2/3) of the members in a meeting called
for the purpose
b. Provided, that full disclosure of the adverse interest of the
directors or trustees involve dis made at such meeting
c. Contract is fair and reasonable under the circumstance
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SUMMARY
If a director contracts with the corporation , the contract that has
been entered into is VOIDABLE unless the following requirements
are complied:
a. There should be a QUORUM but the presence of the director is
not necessary to constitute a quorum
b. The VOTE (approval ) of such director is not necessary for the
approval of the contract.
c. Contract is fair and reasonable under the circumstances.
Atty: If 1 of this three or even if all is not complied with the contract
is NOT VOID. There is still a quorum if his presence is required to
constitute a quorum , there is still a valid approval if his vote was
necessary for the approval. But that contract itself is voidable for
being a self dealing contract. But even if the contract is voidable it
could still be ratified. (see above discussion on ratification)
Note:
1. Contract entered into by the corporation is still considered as
“self -dealing “ if entered into with the spouses and relatives
within the fourth civil degree of consanguinity or affinity of the
directors, trustees , or officers.
CORPORATION VESTED WITH PUBLIC INTEREST
● Material Contracts - they are approved by at least two- third
( 2/3) of the ENTIRE MEMBERSHIP of the board, with at least
a majority of the independent directors voting to approve
the material contract
Atty: not just of the directors present but of the Entire
Membership
INTERLOCKING DIRECTORS
Sec. 32 . 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 (2) 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 (1) corporation is substantial and the interest
in the other corporation or corporations is merely nominal ,
the contract shall be subject to the provisions of the
preceding section insofar as the latter corporation or
corporations are concerned.
Stockholdings exceeding twenty percent (20 %) of the
outstanding capital stock shall be considered substantial for
the purposes of interlocking.
INTERLOCKING DIRECTOR
There is an interlocking director when you have two corporations
contracting with each other and there is a common director/
directors.
GENERAL RULE:
Contracts between corporations with interlocking directors is
valid SO LONG AS IT IS FAIR AND REASONABLE.
Corporation Law (2019) MIDTERM REVIEWER
INTERLOCKING DIRECTORS IS NOT A GROUND TO INVALIDATE A
CONTRACT. There is no prohibition at all to be an interlocking
director.
EXCEPTION:
1. IN CASES OF FRAUD.
2. IF THE INTEREST OF THE INTERLOCKING DIRECTOR IS
SUBSTANTIAL IN ONE, AND NOMINAL IN THE OTHER
CONTRACTING CORPORATION, IN WHICH CASE, THE
CORPORATION WHERE THE DIRECTOR HAS A NOMINAL
INTEREST HAS TO COMPLY WITH THE REQUIREMENTS
ON SELF- DEALING (SEC. 31).
Important: A director is considered to have substantial interest in
a corporation when he has stockholdings exceeding 20% percent
of the outstanding capital stock.
EFFECT OF EXCEPTION
When this happens, the contract is voidable, unless:
1. The presence of such interlocking director is not necessary to
constitute a quorum.
2. The vote of such interlocking director is not necessary to
approve a contract.
3. When contract is fair and reasonable under the circumstances
given.
REMOVAL OF DIRECTORS OR TRUSTEES
Section 27. 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 in 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 for
the purpose of removing any director or trustee must be called
by the secretary on order of the president, or upon written
demand of the stockholders representing or holding at least a
majority of the outstanding capital stock, a majority of the
members entitled to vote.
If there is no secretary, or if the secretary, despite demand,
fails or refuses to call the special meeting or to give notice
thereof, the stockholder or member of the corporation signing
the demand may call for the meeting by directly addressing the
stockholders or members. 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 23
of this code.
The commission shall, motu propio or upon verified complaint,
and after due notice and hearing, order the removal of a
director or trustee elected despite the disqualification, or
whose disqualification arose or is discovered subsequent to an
election. The removal of a disqualified directed shall be
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without prejudice to other sanctions that the commission may
impose on the board of directors or trustees who, with
knowledge of the disqualification, failed to remove such
director or trustee
Who may remove
 Stock corporation: vote of the stockholders holding or
representing at least two-thirds (2/3) of the outstanding
capital stock
 Non-stock corporation: vote of at least two-thirds (2/3)
of the members entitled to vote
How removal is done
 By the stockholders through a regular or special
meeting
o If in a special meeting, the special meeting shall be
for the purpose of removing the director.
o Must be called by the secretary on order of the
president, or upon written demand of the
stockholders representing or holding at least a
majority of the outstanding capital stock, a majority
of the members entitled to vote.
o If there is no secretary, or if the secretary, despite
demand, fails or refuses to call the special meeting
or to give notice thereof, the stockholder or member
of the corporation signing the demand may call for
the meeting by directly addressing the stockholders
or members.
o 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
 By SEC
o upon verified complaint, and after due notice and
hearing, order the removal of a director or trustee
elected despite the disqualification, or whose
disqualification arose or is discovered subsequent to
an election
BERNAS V. CINCO, GR NO. 163356-57 JULY 1, 2015
Facts:
The case is about Makati Sports Club where in this case, there is
a certain group that had been managing the sports club. And
then there were rumor that the group was mismanaging and
certain funds were missing. The oversight committee which is
made up of previous/past presidents of the organization, called
for a special meeting to remove the directors. And they were
able to call that meeting and they had that meeting and they
were able to remove and replace the ruling group. So now a case
was brought by the removed directors saying that the oversight
committee had no right to remove them as director.
Ruling:
The SC said that the relationship of the directors and the
stockholder is a Fiduciary Relationship. Such that the
stockholder being the proprietor of the corporate interest and
the beneficiary of the corporate interest should have the power
to console the directors, such that if the directors fail to perform
their duty, then
Corporation Law (2019) MIDTERM REVIEWER
the director has the right under the law, under the by-laws of
the corporation to remove and replace the erring director. So SC
said, of course, the stockholders of a corporation has the right
to remove the directors because of the fiduciary relationship
between the corporation, the stockholders and the directors. In
the case, there is a problem because the special stockholders
meeting was not called by the corporate secretary upon order
of the president. The corporate secretary and the president
would not call because they were part of the ruling group, so it
was not called by the secretary, it was not even called by the
members but rather it was called by the oversight committee.
The by-laws of the Makati Sports Club says that it is the
president or the board of directors who can call for a special
meeting. So it did not comply with the
procedure.
So according to the SC that even if you have the right to remove
the directors you have to follow the procedure. Sec 28 says, it is
the corporate secretary or upon written demand of a
stockholder.
And even the by-laws says it is the president and board of
directors. SC said that nowhere in the corporation code or in the
bylaws of the Makati Sports Club that the oversight committee
is authorized to set in whenever there is a breach of fiduciary
duty and call for special election for the purpose of removing the
existing set of officers and electing their replacement. The
oversight committee did not have the power to call. Thus, the
special stockholders meeting is void. Even if that special meeting
was later on ratified during the annual stockholders meeting.
“SC said, if the act is invalid it cannot be ratified.” You have to
distinguish an act which is illegal because it is against the law
and an act which is beyond the authority of the officers. SC said
that the act is against the law, it cannot be ratified. The law is
very specific, in order to remove a director you have to comply
with the requirements of the corporation code or the bylaws.
There was also an issue that it’s impossible for the president to
call for the meeting because he’s the person that’s supposed to
be removed. SC said, it doesn’t matter because you are left
recourse with the court. If the officers mentioned in the bylaws
fails to call such meeting you can
go to SEC.
Take note: An improper Board Meeting is a void meeting and if
the person calling the meeting is not the person authorized to do
so, that is a ground for voiding the meeting and any resolutions
passed during that meeting.
HOW VACANCIES IN THE BOARD FILLED
1. BY THE BOARD MEMBERS: If the reason for the vacancy
is other than the removal or expiration of the term or
amendment of the Articles of Incorporation increasing
the numbers of the Directors, provided they still
constitute a quorum.
2. BY THE STOCKHOLDERS: If the reason for the vacancy is
the expiration of the term or the removal by the
stockholders, or vacancy due to the amendment of the
Articles of Incorporation or if the Board Members does
not constitute a quorum.
Take note: the stockholders always has the inherent right to fill in
the vacancies. Regardless of the reason.
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VALLE VERDE CASE
Legal question on corporate governance: Can the members of
a corporation’s board of directors elect another director to fill
in a vacancy caused by the resignation of a hold-over director?
FACT:
In 1996, during the Annual Stockholders Meeting of petitioner
Valle Verde Country Club, Inc. (VVCC), an election was
conducted (9 directors were elected). In the years 1997, 1998,
1999, 2000, and 2001, however, the requisite quorum for the
holding of the stockholders meeting could not be obtained.
Consequently, the directors elected in 1996 continued to serve
in the VVCC Board in a hold-over capacity.
In 1998, Dinglasan resigned from his position as member of the
VVCC Board. In a meeting after, the remaining directors, still
constituting a quorum of VVCCs nine-member board, elected
Roxas to fill in the vacancy.
A year later, Makalintal also resigned as member of the VVCC
Board and was replaced by Ramirez, who was elected by the
remaining members of the VVCC Board in 2001.
Respondent Africa, a member of VVCC, questioned the election
of Roxas and Ramirez with SEC and RTC, respectively. [SEC –
Roxas; RTC – Ramirez]
In his nullification complaint before the RTC, Africa alleged that
the election of Roxas was contrary to Section 29, in relation to
Section 23, of the Corporation Code of the Philippines
(Corporation Code). These provisions read:
Africa claimed that a year after Makalintal’s election, his term
as well as those of the others should be considered to have
already expired. Thus, the resulting vacancy should have been
filled by the stockholders in a regular or special meeting called
for that purpose.
Africa additionally contends that for the members to exercise
the authority to fill in vacancies in the board of directors, Section
29 requires, among others, that there should be an unexpired
term during which the successor-member shall serve. Here,
there is no more unexpired term during which Ramirez could
serve.
ISSUE:
Whether the remaining directors of the corporation’s Board, still
constituting a quorum, can elect another director to fill in a
vacancy caused by the resignation of a hold-over director.
Contention of VVCC:
The power to fill in a vacancy created by the resignation of a
hold-over director is expressly granted to the remaining
members of the corporation’s board of directors under Section
29 of the Corporation Code. Correlating Section 29 with Section
23 of the same law, VVCC alleges that a member’s term expires
only when his successor to the Board is elected and qualified.
Thus, until such time as [a successor is] elected or qualified in an
annual election where a quorum is present, VVCC contends that
the term of [a member] of the board of directors has yet not
expired.
Corporation Law (2019) MIDTERM REVIEWER
Upon failure of a quorum at any annual meeting the directorate
naturally holds over and continues to function until another
directorate is chosen and qualified. Unless the law or the charter
of a corporation expressly provides that an office shall become
vacant at the expiration of the term of office for which the
officer was elected, the general rule is to allow the officer to
hold over until his successor is duly qualified. Mere failure of a
corporation to elect officers does not terminate the terms of
existing officers.
RULING:
Unmeritorious.
The resolution of this legal issue is significantly hinged on the
determination of what constitutes a directors term of office.
The holdover period is not part of the term of office of a member
of the board of directors.
Definite meaning of TERM (based on jurisprudence)
- time during which the officer may claim to hold the office as of
right, and fixes the interval after which the several incumbents
shall succeed one another
- not affected by the holdover
- fixed by statute and not change simply because the office may
have become vacant, nor because the incumbent holds over in
office beyond the end of the term due to the fact that a
successor has not been elected and has failed to qualify
Term vs Tenure
Officer’s tenure represents the term during which the
incumbent actually holds office. The tenure may be shorter (or,
in case of holdover, longer) than the term for reasons within or
beyond the power of the incumbent.
Based on the above discussion, when Section 23 of the
Corporation Code declares that the board of directors shall hold
office for one (1) year until their successors are elected and
qualified, we construe the provision to mean that the term of
the members of the board of directors shall be only for one year;
their term expires one year after election to the office. The
holdover period that time from the lapse of one year from a
member’s election to the Board and until his successor’s
election and qualification is not part of the director’s original
term of office, nor is it a new term; the holdover period,
however, constitutes part of his tenure. Corollary, when an
incumbent member of the board of directors continues to serve
in a holdover capacity, it implies that the office has a fixed term,
which has expired, and the incumbent is holding the succeeding
term.
After the lapse of one year from his election as member of the
VVCC Board in 1996, Makalintal’s term of office is deemed to
have already expired. That he continued to serve in the VVCC
Board in a holdover capacity cannot be considered as extending
his term. His resignation as a holdover director did not change
the nature of the vacancy; the vacancy due to the expiration of
Makalintal’s term had been created long before his resignation.
The powers of the corporation’s board of directors emanate
from its stockholders. VVCCs construction of Section 29 in
relation to Section 23 thereof, effectively weakens the
stockholders power to participate in the corporate governance
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by electing their representatives to the board of directors. The
board of directors, in drawing to themselves the powers of the
corporation, occupies a position of trusteeship in relation to the
stockholders, in the sense that the board should exercise not
only care and diligence, but utmost good faith in the
management of corporate affairs.
The underlying policy of the Corporation Code is that the
business and affairs of a corporation must be governed by a
board of directors whose members have stood for election, and
who have actually been elected by the stockholders, on an
annual basis. The shareholder vote is critical to the theory that
legitimizes the exercise of power by the directors or officers
over properties that they do not own.
The law has authorized the remaining members of the board to
fill in a vacancy only in specified instances, so as not to retard or
impair the corporations operations; yet, in recognition of the
stockholders right to elect the members of the board, it limited
the period during which the successor shall serve only to the
unexpired term of his predecessor in office.
While the Court in El Hogar (case cited by VVCC) approved of the
practice of the directors to fill vacancies in the directorate, we
point out that this ruling was made before the present
Corporation Code was enacted and before its Section 29 limited
the instances when the remaining directors can fill in vacancies
in the board.
As correctly pointed out by the RTC, when remaining members
of the VVCC Board elected Ramirez to replace Makalintal, there
was no more unexpired term to speak of, as the term had
already expired. Pursuant to law, the authority to fill in the
vacancy lies with the VVCCs stockholders, not the remaining
members of its board of directors.
SEC. 28. VACANCIES IN THE OFFICE OF THE DIRECTOR OR
TRUSTEE; EMERGENCY BOARD.
XXXX
XXXX
HOWEVER, WHEN THE VACANCY PREVENTS THE REMAINING
DIRECTORS FROM CONSTITUTING A QUORUM AND
EMERGENCY ACTION IS REQUIRED TO PREVENT GRAVE,
SUBSTANTIAL, AND IRREPARABLE LOSS OR DAMAGE TO THE
CORPORATION, THE VACANCY MAY BE TEMPORARILY FILLED
FROM AMONG THE OFFICERS OF THE CORPORATION BY
UNANIMOUS VOTE OF THE REMAINING DIRECTORS OR
TRUSTEES. THE ACTION BY THE DESIGNATED DIRECTOR OR
TRUSTEE SHALL BE LIMITED TO THE EMERGENCY ACTION
NECESSARY, AND THE TERM SHALL CEASE WITHIN A
REASONABLE TIME FROM THE TERMINATION OF THE
EMERGENCY OR UPON ELECTION OF THE REPLACEMENT
DIRECTOR OR TRUSTEE, WHICHEVER COMES EARLIER. THE
CORPORATION MUST NOTIFY THE COMMISSION WITHIN
THREE (3) DAYS FROM THE CREATION OF THE EMERGENCY
BOARD, STATING THEREIN THE REASON FOR ITS CREATION.
(New provision; POWER TO CONSTITUTE AN EMERGENCY
BOARD)
Atty: If there is an emergency situation, in order to prevent, grave,
substantial, and irreparable loss or damage to the corporation, the
vacancy may be temporarily filled from among the officers of the
Corporation Law (2019) MIDTERM REVIEWER
corporation. Temporary only. After the emergency the
Stockholders would have to fill-in the vacancy because the board
does not form a quorum anymore.
Take note: for emergency situations, the board, even if they do
not constitute a quorum may temporarily fill-in the vacancy from
the officers of the corporation.
Rationale
The reason why the law allows the directors to fill-in the vacancies
is for convenience because it’s very hard to call a stockholders’
meeting especially if you have a lot of stockholders. It will be
difficult to get quorum, and it’s also the directors who manage the
corporation. So, if the board of directors cannot act, because
they’re missing a member, then that is not good for the
corporation.
So, the law allows the directors to fill in a vacancy. But only in
certain instances. But, if the stockholders really insist on holding a
meeting to fill in the vacancy, then that is their prerogative.
Because the power of the board, as mentioned in the valle verde
case to fill in the vacancy is merely a delegated power coming
from the stockholders. IT’S INHERENT IN THE STOCKHOLDERS TO
FILL IN OR ELECT MEMBERS OF THE BOARD.
TITLE IV- POWERS OF CORPORATIONS
CORPORATE POWERS
Section 35. Corporate Powers and Capacity – Every corporation
incorporated under this Code has the power and capacity.
a) To sue and be sued in its corporate name;
b) To have perpetual existence unless the certificate of
incorporation provides otherwise;
c) To adopt and use a corporate seal;
d) To amend its articles of incorporation in accordance with
the provisions of this Code;
e) To adopt by laws, not contrary to law, morals or public
policy , and to amend or repeal the same in accordance
with this Code;
f) In case of stock corporations , to issue or sell stocks to
subscribers and to sell treasury stocks in accordance with
the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
g) To purchase , receive, take or grant , hold, convey , sell,
lease, pledge, mortgage, and otherwise deal with such
real and personal property, including securities and bonds
of other corporations, as the transaction of the lawful
business of the corporation may reasonably and
necessarily require , subject to the limitations prescribed
by law and the Constitution;
h) To enter into a partnership , joint venture , merger,
consolidation , or any other commercial agreement with
natural and juridical persons;
i) To make reasonable donations, including those for the
public welfare or for hospital , charitable cultural ,
scientific , civic , or similar purposes: Provided, That no
foreign corporation shall give donations in aid of any
political party or candidate or for purposes of partisan
political activity;
j) To establish pension, retirement and other plans for the
benefit of its directors, trustees, officers, and employees;
and
k) To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated in
the articles of incorporation.
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Kinds of Powers:
1. Express Powers
- This refers to the power expressly conferred upon the
corporation by law. These powers can be ascertained
from the special law creating the corporation, or from
the general incorporation law under which it is created,
the general laws of the land applicable to corporations
(i.e., Corporation Code), and its articles of incorporation.
Atty: Ordinarily the express powers is provided under the Primary
Purpose in the Articles of Incorporation, in the primary purpose it
does not enumerate section 35. If you think about it, sec. 35 are
incidental powers they exist by virtue of the juridical personality
of the corporation.
To be strict about it, express powers will only exist if they are
expressly provided in the primary purpose in the Articles of
Incorporation.
2. Implied Powers
- Those powers which are reasonably necessary to
exercise the express powers and to accomplish or carry
out the purposes for which the corporation was formed.
Atty: The implied power of the corporation is one which is related
or exist by virtue of the express power even if it is not expressly
provided. They need not be expressly provided in the Articles of
Incorporation but they exist by virtue of the express powers.
EXAMPLES:
a. Acts in the usual course of business
b. Acts to protect debts owing to a corporation
c. Embarking in different business
d. Acts in part or wholly to protect or aid employees
e. Acts to increase business
3. Incidental Powers
- Powers which a corporation can exercise by the mere
fact of it being a Corporation; or
- This refers to powers which are necessary to the
corporate existence and are, therefore, impliedly
granted. As powers inherent in the corporation as a legal
entity, they exist independently of the express powers.
Atty: These are the powers which are there by virtue of your being
a corporation, so your ability to sue and be sued, your ability to
buy and sell properties, everything that is enumerated under Sec.
35 basically. Regardless of the purpose, incidental powers exists.
Side Note:
- There was a problem before on the secondary purpose
because people just enumerated the secondary purpose
and among the secondary purpose the subparagraph (g)
is to sell or lease property. A few years back, BIR came
up a rule that they have been strictly enforcing, if it is
ordinary asset- VAT AND INCOME TAX, if it is capital
asset – then its CAPITAL GAINS. Ordinarily, you can say
that it is an ordinary asset of the corporation if it is
related to its express powers in its primary purpose; real
estate is an ordinary asset if the corporation is engaged
in real estate business. What if the corporation is
engaged in retail, selling land ordinarily is considered a
Corporation Law (2019) MIDTERM REVIEWER
capital asset unless it is used for business. The problem
with the BIR is that, if they see it in your secondary
purpose, “to purchase, receive, take or grant real and
personal property” they consider that you are a real
estate company. So there is disconnect between SEC
and BIR. Corporations who copied the incidental powers
in their secondary purpose, if they sell land even if it is
not used as capital asset they were assessed VAT plus
the 30% tax as against the 6% capital gains tax.
EXAMPLES:
a. Power of succession
b. To sue and be sued
c. To have a corporate name
d. To purchase and hold real property
e. To adopt and use a corporate seal
f. To contract, to make by-laws, etc.
Implied Power vs Incidental Power
IMPLIED POWER
Those which exist by virtue of the Express powers of the
Corporation. They need not be expressly provided in the articles
but because of the express provisions provided in the articles they
can exist. They are necessary for the exercise for the Express
powers.
INCIDENTAL POWER
Powers given to a Corporation as a result or consequence of
being a Juridical Entity.
TERESITA ELECTRIC AND POWER VS. PUBLIC SERVICE
COMMISSION AND FILIPINAS CEMENT CORP
FACTS:
The Teresa Electric Light and Power Co., Inc., — hereinafter
referred to as PETITIONER — is a domestic corporation
operating an electric plant in Teresa, Rizal, under a subsisting
certificate of public convenience and necessity issued on June 2,
1960 (PSC Case No. 129940), while the RESPONDENT Filipinas is
likewise a domestic corporation engaged in the manufacture
and sale of cement (who applied for a certificate of public
convenience to install, maintain and operate an electric plan for
its factory and employees living within its compound).
On May 24, 1962 Filipinas filed an application with the Public
Service Commission for a certificate of public convenience to
install, maintain and operate an electric plant in sitio Kaysapon
of barrio Pamanaan, municipality of Teresa, Rizal, for the
purpose of supplying electric power and light to its cement
factory and its employees living within its compound.
Petitioner filed its written opposition alleging: that it is the duly
authorized operator of an electric light, heat and power service
in Teresa, Rizal; that Filipinas is not authorized by its articles of
incorporation to operate an electric plant; that the Municipal
Council of Teresa had not authorized it either to operate the
proposed service; that it is willing to supply Filipinas' need for
electricity; and that Filipinas' principal business does not come
within the jurisdiction of the respondent Commission.
Answering the opposition, Filipinas averred that, under
paragraph 7 of its articles of incorporation, it is authorized to
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operate the proposed electric plant; that there is no need for
securing the approval of the Municipal Council before operating
its electric plant as this is not a necessary requisite for the
issuance of a certificate of public convenience inasmuch as it
already possesses the 3 basic requirements of law, namely:
Filipino citizenship, financial capacity and the need for the
service in the interest and convenience of the consuming public.
Upon consideration of the evidence, oral and documentary,
adduced by Filipinas to the effect that the proposed electric
service will be limited to the exclusive needs of its cement
factory and to give light facilities to its employees living in the
compound only, without adversely affecting the interests and
services of petitioner; that like the latter, Filipinas will not
generate its own electric current but buy it from the MERALCO;
and that no municipal streets will be traversed by its electric
wires and posts except small portions of private properties, the
Commission, pursuant to section 15 of Commonwealth Act. 146,
as amended, issued a certificate of public convenience to it on
March 15, 1963, subject to the conditions set forth therein.
ISSUES:
1. whether or not Filipinas should have secured either a
municipal or legislative franchise before it could be entitled
to a certificate of public convenience and necessity to
operate and maintain an electric plant
2. whether under its articles of incorporation Filipinas is
authorized to operate and maintain an electric plant
3. whether Filipinas could be granted a certificate of public
convenience and necessity to operate and maintain an
electric plant notwithstanding the existence of an electric
plant operator (the petitioner) in the same municipality.
RULING:
1. No. The purpose is not for business but for exclusive use for
its own factory and employees. Petitioner contends that under
the provisions of Act. No. 667 of the Philippine Commission, a
municipal or legislative franchise is a condition precedent to the
granting to Filipinas of a certificate of public convenience and
necessity to operate and maintain an electric plant.
Section 1 of the Act mentioned above requires the filing of a
formal application with the Council of the municipality in which
or through which the petitioner desires to construct or maintain
its line, stating, among other things, the rate per month to be
charged for electric light by lamp of specified standard candle-
power, and by amount of electricity consumed where a meter is
used, and the rate per centum of the gross receipts which
petitioner is willing to pay into the provincial treasury for the
franchise. Paragraphs 2 and 3, section 2 of the same act also
provide that not less than one-half of one per centum of the
gross earnings shall be paid into the provincial treasury, and that
the rates to be charged shall always be subject to regulations by
act of the Philippine Commission or the legislative body of the
Islands.
The above requirements show that the act was intended to
apply exclusively to any person or corporation who desires a
franchise to construct and maintain an electric line or power
plant and line for business purposes, that is, to render service to
the general public at such rate of compensation as may be
approved and regulated by the government. Clearly, therefore,
it should not be made to apply to Filipinas who applied for a
Corporation Law (2019) MIDTERM REVIEWER
certificate of public convenience and service to operate and
maintain an electric plant exclusively for its own use in
connection with the operation of its cement factory and for the
use of its employees living within the compound of the factory
— the latter to receive service free of charge.
It is, consequently, our view that all that Filipinas needs for the
purpose above mentioned is a certificate of public convenience
and necessity such as the one granted to it by the respondent
Public Service Commission.
2. Yes. It is necessarily connected with the business of
manufacturing cement. It appears that the Articles of
Incorporation of Filipinas (paragraph 7) provide for authority to
secure from any governmental, state, municipality, or
provincial, city or other authority, and to utilize and dispose of
in any lawful manner, rights, powers, and privileges, franchises
and concessions — obviously necessary or at least related to the
operation of its cement factory. Moreover, said Articles of
Incorporation also provide that the corporation may generally
perform any and all acts connected with the business of
manufacturing portland cement or arising therefrom or
incidental thereto.
It cannot be denied that the operation of an electric light, heat
and power plant is necessarily connected with the business of
manufacturing cement. If in the modern world where we live
today electricity is virtually a necessity for our daily needs, it is
more so in the case of industries like the manufacture of
cement.
3. No. Nobody has any exclusive right to secure a franchise or a
certificate of public convenience. Just because there is an
existing grantee does not preclude the grant to another, but
such grant must be guided by public service and interest.
While it is true that operators of public convenience and service
deserve some protection from unnecessary or unlawful
competition, yet the rule is that nobody has any exclusive right
to secure a franchise or a certificate of public convenience.
Above any or all considerations, the grant of franchises and
certificates of public convenience and service should be guided
by public service and interest; the latter are the primordial
considerations to be taken into account.
Moreover, it has been established in this case that petitioner
was in no condition to supply the power needs of Filipinas,
because its load capacity was only 200 kilowatts while Filipinas
was in need of 6,000 kilowatts power to operate its cement
factory.
DISCUSSION
It must be emphasized that Filipinas needed 6,000 kilowatts
power in order to operate, while the load capacity of petitioner
was only 2000 kilowatts. It can be said therefore that petitioner
was in no condition to supply the power needs of Filipinas.
If Filipinas will not put up its own electric power it cannot continue
its operation. Thus, although the putting up of a power plant is not
expressly provided in their purpose in the Articles of
Incorporation, it nevertheless provided for the authority to secure
from any governmental, state municipality, or provincial, city, or
other authority, and to utilize and dispose of in any lawful manner
rights, powers, and privileges, franchises, and concessions
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obviously necessary or at least related to the operation of the
cement factory.
REPUBLIC VS ACOJE MINING COMPANY
FACTS:
Acoje Mining Company has a lot of employees. In order to
provide more convenience to its employees, the company wrote
the Director of Posts requesting the opening of a post, telegraph
and money order offices at its mining camp at Zamables for the
use of its employees and their families in said camp. The
Director of Posts said yes but with a condition. The Director
conditioned that the company should assume direct
responsibility for whatever pecuniary loss may be suffered by
the Bureau of Posts by reason of any act of dishonesty,
carelessness or negligence on the part of the employee of Acoje
who is assigned to take charge of the post. The BOD of Acoje
passed a resolution stating that: “That the requirement of the
Bureau of Posts that the company should accept full
responsibility for all cash received by the Postmaster be
complied with, and that a copy of this resolution be forwarded
to the Bureau of Posts.”
Post Office branch was opened in October 13, 1949. However,
after 5 years, the postmaster, an employee of Acoje, went on a
3-day leave and never returned. Acoje informed the Manila Post
Office and upon auditing, it was found that P13,867.24 was
missing.
The post office demanded payment and filed a suit with the CFI
of Manila for the amount but Acoje denied liability alleging that
the BOD’s act in assigning a postmaster was ultra vires; also, the
company alleged that their liability was merely that of a
guarantor.
CFI: Ruled in favor of the Post Office but only to the amount of
P9,515.23 (since they could only present evidence for such
amount)
Acoje appealed to SC.
ISSUES:
1. Whether or not the acts of the BOD was ultra vires
2. Whether or not its liability is merely that of a guarantor
RULING:
1. No. The act covers a subject which concerns the benefit,
convenience, and welfare of the company’s employees and their
families. An ultra vires act is one 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. However, there are certain corporate acts that may be
performed outside of the scope of the powers expressly
conferred if they are necessary to promote the interests or
welfare of the corporation. Establishment of the local post office
is a reasonable and proper adjunct to the conduct of the
business.
Moreover, an ultra vires act is merely voidable, in contrast to
illegal acts which are void. It may be enforced by performance,
ratification or estoppel. Here it is fair that the resolution be
upheld at least on the ground of estoppel since the company at
least benefited from the transaction.
Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

DISTINGUISHED FROM SECTION 37:

The claim that the resolution adopted by the board of directors
of appellant company is an ultra vires act cannot also be SECTION 35 (f) – SECTION 37 –
entertained it appearing that the same covers a subject which Power to issue or Power to Increase or
concerns the benefit, convenience and welfare of its employees sell stocks to Decrease Capital
and their families. Here it is undisputed that the establishment subscribers and to Stocks
of the local post office is a reasonable and proper adjunct to the sell treasury
conduct of the business of appellant company. stocks in
accordance with
2. No. A mere reading of the resolution of the Board of Directors the provisions of
dated August 31, 1949, upon which the plaintiff based its claim this Code
would show that the responsibility of the defendant company is Coverage Sale of unissued Increase of authorized
not just that of a guarantor. Notice that the phraseology and the but authorized capital stock
terms employed are so clear and sweeping and that the stock;
defendant assumed 'full responsibility for all cash received by Includes sale of
the Postmaster.' Here the responsibility of the defendant is not treasury stocks;
just that of a guarantor. It is clearly that of a principal. The terms Approval Majority of the Majority vote of the
employed in the resolution are clear and sweeping. Acoje requirement board of directors board of directors in a
assumed “full responsibility for all cash received by the in a meeting meeting where there is
Postmaster”. Its liability is that of a principal. constituting a a quorum and by two-
quorum thirds (2/3) of the
outstanding capital
DISCUSSION stock at a stockholders’
The power to put up a post office was not expressly granted by meeting duly called for
the Articles of Incorporation of Acoje Mining Company or under the purpose
the Corporation Code, the Supreme Court granted it because it Effect No change in There is a change in
was necessary to promote the interest or welfare of the authorized capital Authorized capital
Corporation. According to SC, It was part of the implied power of stock, but only stock, and a change in
the Corporation based on the nature of the operations of the change in the the subscribed and
company as a mining industry - go back to the primary purpose of subscribed and issued.
the Corporation. issued stock.

There are powers, although not expressly provided in the Articles Amendment Only General Articles of
of Incorporation or even under the law, as long as it is necessary Information Sheet Incorporation and
for your operations to promote the welfare of corporation or (GIS) General Information
employees it is still considered as part of the scope of the Sheet (GIS)
Corporate Powers. Minimum No minimum At least twenty-five
subscription subscription percent (25%) of the
TO SUE AND BE SUED IN ITS CORPORATE NAME required increase in capital
stock has been
As a Juridical entity the corporation can directly pursue all actions subscribed and that at
to enforce its rights. It does not have to go through its least twenty-five
stockholders. At the same time the corporation can directly be percent (25%) of the
held liable for its obligations. The creditor does not have to go amount subscribed has
through the stockholders. been paid. This must
be supported by a
POWER TO ISSUE OR SELL STOCKS Treasurer’s Affidavit.
Reporting Required under
SECTION 35 (F) requirement Securities and
f) In case of stock corporations , to issue or sell stocks to Regulation Code
subscribers and to sell treasury stocks in accordance with (SRC) and not in
the provisions of this Code; and to admit members to the Corporation Code.
corporation if it be a non-stock corporation;
SEC Form 10-1
basically a form to
show that the
increase or that
the new issuance
is not covered by
the registration
requirement
under the SRC.
Effectivity No prior approval Deemed effective upon
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from the SEC is approval of the SEC of DISTINGUISHED FROM SECTION 39:
needed the application and
upon the issuance of SECTION 35 (g)– SECTION 39 –
SEC of the certificate of To purchase, Sale and other
filing. receive, take or disposition of assets
grant , hold,
ILLUSTRATION: SECTION 35 (F) convey, sell, lease,
Authorized capital stock: 1,000,000 pledge, mortgage,
Subscribed Issued shares: 500,000 and otherwise
Unissued but authorized shares: 500,000 deal with such
real and personal
If the corporation decides to sell the 500,000 unissued but property
authorized shares, what is required is only the approval of the Object Sale of any asset of Sale or disposition of
majority of the board of directors in a meeting constituting a the corporation, as all or substantially all
quorum. In this case, apply Sec. 35 (f) long as it is not all, of the assets
or substantially all
After the sale of the unissued 500,000 shares, the authorized of the assets
capital stock will remain at 1,000,000. Your subscribed and issued, Approval Majority of the Majority of the board
on the other hand, will now be 1,000,000 instead of 500,000. requirement board of directors of the directors in a
in a meeting quorum and at least
ILLUSTRATION: SECTION 37 constituting a two-thirds (2/3) of the
Authorized capital stock: 1,000,000 quorum outstanding capital
Subscribed Issued shares: 1,000,000 stock (both voting and
non-voting)
If the corporation decides to increase the authorized capital stock
from 1 million to 2 million, then such increase would need the NOTE:
approval of a majority vote of the board of directors where there - If the primary purpose of the corporation is to sell
is a quorum and by two-thirds (2/3) of the outstanding capital assets, there is no need for approval by the board. Any
stock. authorized officer or employee can transact as long as it
is in the ordinary course of business.
In this case, apply sec. 37. In the end, after it has been approved - If it is not in the ordinary course of business of the
by the SEC, the Authorized capital stock will now be at 2 million. corporation and it is a sale of not all or substantially all
The subscribed issued shares should be at least 1,250,000 because of the assets, then you only need a board approval -
of the requirement under sec. 37 that at least twenty-five percent majority vote of the directors in a meeting where there
(25%) of the increase in capital stock has been subscribed and is a quorum.
that at least twenty-five percent (25%) of the amount subscribed
has been paid. POWER TO EXTEND OR SHORTEN CORPORATE TERM
Section 36. Power to extend or shorten corporate term. – A
In the amended code, there is no need of the 25% requirement in private corporation may extend or shorten its term as stated in
order to incorporate. But to increase the authorized capital stock the articles of incorporation when approved by a majority vote
there is the requirement that at least twenty-five percent (25%) of of the board of directors or trustees, and ratified at a meeting by
the increase in capital stock has been subscribed and that at least the stockholders or members representing at least two-thirds
twenty-five percent (25%) of the amount subscribed has been (2/3) of the outstanding capital stock or of its members. Written
paid. notice of the proposed action and the time and place of the
meeting shall be sent to stockholders or members at their
Note: the two-thirds (2/3) stockholder approval requirement respective place of residence as shown in the books of the
includes both stocks – voting or non-voting corporation, and must be deposited to the addressee in the post
office with postage prepaid, served personally, or when allowed
in the bylaws or done with the consent of the stockholder, sent
POWER TO PURCHASE, RECEIVE, TAKE OR GRANT, HOLD. electronically in accordance with the rules and regulations of the
CONVEY, SELL, LEASE, PLEDGE, MORTGAGE REAL AND PERSONAL Commission on the use of electronic data messages. In case of
PROPERTIES extension of corporate term, a dissenting stockholder may
exercise the right of appraisal under the conditions provided in
SECTION 35 (G) this Code.
a) To purchase , receive, take or grant , hold, convey , sell,
lease, pledge, mortgage, and otherwise deal with such Requirements to extend or shorten corporate term:
real and personal property, including securities and bonds 1. Voting
of other corporations, as the transaction of the lawful  majority vote of the board of directors or trustees
business of the corporation may reasonably and constituting a quorum
necessarily require , subject to the limitations prescribed  ratified at a meeting by the stockholders or
by law and the Constitution; members representing at least two-thirds (2/3) of
the outstanding capital stock or by at least two-
thirds (2/3) of its members.
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NOTE: they vote for the amendment of the Articles of
Incorporation to extend or shorten the corporate term. Filing
is not enough. It also requires the approval of the SEC.
2. Written Notice
 Notice of the proposed action and the time and
place of the meeting shall be sent to stockholders
or members at their respective place of residence
as shown in the books of the corporation, and must
be deposited to the addressee in the post office
with postage prepaid, served personally ,or when
allowed in the bylaws or done with the consent of
the stockholder, sent electronically in accordance
with the rules and regulations of the Commission
on the use of electronic data messages.
3. Filing and Approval of the Securities and Exchange
Commission is required
 Mere filing of the amended Articles of
Incorporation is not enough it must be coupled
with an approval by SEC.
 The amendment shall take effect once the increase
or decrease in the corporate term is approved by
the SEC.
4. Dissenting Stockholder may exercise the right of appraisal
POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR,
CREATE OR INCREASE BONDED INDEBTEDNESS
Section 37. 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 by two-thirds (2/3)
of the outstanding capital stock at a stockholders’ meeting
duly called for the purpose. Written notice of the time and
place of the stockholders’ meeting and the purpose for said
meeting must be sent to the stockholders at their places of
residence as shown in the books of the corporation and served
on the stockholders personally, or through electronic means
recognized in the corporation’s bylaws and/or the
Commission’s rules as a valid mode for service of notices.
A certificate must be signed by a majority of the directors of
the corporation and countersigned by the chairperson and
secretary of the stockholders’ meeting, setting forth:
(a) That the requirements of this section have been complied
with;
(b) The amount of the increase or decrease of the capital
stock;
(c) and the amount paid by each on the subscription in cash
or property, or the amount of capital stock or number of
shares of no-par stock allotted to each stockholder if such
increase is for the purpose of making effective stock
dividend therefor authorized;
(d) Any bonded indebtedness to be incurred, created or
increased;
(e) The amount of stock represented at the meeting; and
(f) The vote authorizing the increase or decrease of the
capital stock, or the incurring, creating or increasing of
any bonded indebtedness.
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Any increase or decrease in the capital stock or the incurring,
creating or increasing of any bonded indebtedness shall
require prior approval of the Commission, and where
appropriate, of the Philippine Competition Commission. The
application with the Commission shall be made within six (6)
months from the date of approval of the board of directors and
stockholders, which period may be extended for justifiable
reasons.
Copies of the certificate shall be kept on file in the office of the
corporation and filed with the Commission and attached to the
original articles of incorporation. After approval by the
Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall be deemed increased
or decreased and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of filing
may declare: Provided, That the Commission shall not accept
for filing any certificate of increase of capital stock unless
accompanied by a 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 percent (25%)
of the increase in capital stock has been subscribed and that at
least twenty-five percent (25%) of the amount subscribed has
been paid in actual cash to the corporation or that property,
the valuation of which is equal to twenty-five percent (25%) of
the subscription, has been transferred to the corporation:
Provided, further, That no decrease in capital stock shall be
approved by the Commission if its effect shall prejudice the
rights of corporate creditors.
Nonstock corporations may incur ,create or increase bonded
indebtedness when approved by a majority of the board of
trustees and of at least two-thirds (2/3) of the members in a
meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the
Commission, which shall have the authority to determine the
sufficiency of the terms thereof.
Requirements to increase or decrease capital stock:
1. Voting
 Majority vote of the Board of Directors in a meeting
where there is a quorum; and
 Affirmative vote of the Stockholders owning 2/3 of the
outstanding capital stock at a meeting duly called for
the purpose
2. Written Notice
 Notice for the Stockholder’s meeting served
personally or through electronic means recognized
by the by-laws and/or rules of Securities and
Exchange Commission
3. Amendment of the Articles of Incorporation and General
Information Sheet
4. Filing to the Securities and Exchange Commission is required
 Certificate signed by majority of the BOD and
countersigned by the chairperson and secretary
(contents refer to the section 37) which shall be
filed before the SEC.
Corporation Law (2019) MIDTERM REVIEWER
 If it is an Increase in Capital Stock it further requires
a Treasurer’s Affidavit which must show the
following:
a) At least 25% of such increased capital
stock has been subscribed.
b) At least 25% of the amount subscribed
has been paid.
 When appropriate filing before the Philippine
Competition Commission shall also be required.
NOTE: The required 25% subscription is based on additional
amount by which the capital stock is increased and not on the
total capital stock as increased.
ATTY: The law retains the 25/25 requirement in Section 37 for the
increase of capital stock. Under the old law, the 25/25
requirement is for incorporation but in the amended code that
requirement has been taken out. However, the 25/25
requirement is retained for increase of capital stock. For this
purpose, when there is increase of Authorized Capital Stock (ACS),
you are required to submit Treasurer’s Affidavit. As distinguished
from incorporation where this requirement is no longer required.
5. Approval of the Securities and Exchange Commission;
Effectivity
 The capital stock shall be deemed increased or
decreased, and the incurring, creating or increasing
of any bonded indebtedness authorized shall be
deemed effective upon the approval and issuance
by the SEC of its certificate of filing.
Increase in Subscription
Refer back on the tabled distinction above between Section 35 (f)
and Section 37.
 There is no minimum requirement for subscription
 Only amend the General Information Sheet and not
the Articles of Incorporation.
Atty: There is a reporting requirement in the increase of
subscription that is not required in the increase of Authorized
Capital Stock it is not found under the Corporation Code but it is
found in the Security Regulation. SEC Form 10-1 it is basically a
form to show that the new issuance is not covered by the
registration requirement under the Securities Regulation Code
meaning it is among the exempt transactions or exempt securities
under the SRC you need to file that report in the SEC. It is not
really for approval but it is just a notice and reportorial
requirement.
Increase in Bonded Indebtedness
Bonded indebtedness is an indebtedness that is evidenced by a
bond. It is a debt instrument that is long term in nature which is
issued by a corporation.
It is different from a promissory note. A promissory note is more
of a short or medium term and its normally issued to a particular
person (payee) which is not the case in a bond.
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ATTY. GAVIOLA-CLIMACO
REQUIREMENTS FOR ITS ISSUANCE
1. Majority vote of the Board of Directors in a meeting where
there is a quorum; and
2. Affirmative vote of the Stockholders owning 2/3 of the
outstanding capital stock at a meeting duly called for the
purpose
3. The corporation must secure the approval of the Securities
and Exchange Commission (SEC)
 Unlike in the increase or decrease of capital stock,
in bonded indebtedness amendment of the
Articles of Incorporation is not required but only
requires an approval from SEC. The reason is that
the issuance of bonds is governed by the Securities
and Regulation Code. Under the SRC, no security
may be issued within the Philippines unless it is first
registered in the Securities and Exchange
Commission (SEC). A bond being a type of security
is registrable under the SRC.
Atty: You need to amend the articles of incorporation only when
in the first place it is provided there. Go back to the Contents of
the Articles of Incorporation it does not state that the amount of
the liability of the corporation should be provided. It only requires
the statement of the capital of the corporation.
SIDE NOTE:
The securities under Commercial Law are different from the
securities that are governed under Civil Law.
Commercial Law Civil Law
Purpose security are issuances of security to ensure
the issuer payment of a debt
Types 1. Equity security -i.e.
stocks
2. Debt security - i.e.
promissory notes, or
bonds
POWER TO DENY PRE-EMPTIVE RIGHT
Section 38. Power to Deny Preemptive Right. – All stockholders
of a stock corporation shall enjoy preemptive 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 preemptive right shall not extend to
shares issued in compliance with laws requiring stock offerings
or minimum stock ownership by the public; or to shares 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.
Pre-emptive right
Rights given to all stockholders with regard to issuances or
dispositions of shares. The rule is that stockholders enjoy
preemptive right to all issued shares in proportion to their
respective shareholdings.
Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

Purpose of Preemptive Right pre-emptive rights. As a rule, the existing

shareholders must first be given the opportunity to
To maintain the percentage of the stockholdings of the purchase the new shares to be issued before selling
stockholders and to prevent the dilution of their shares. it to third persons, it must first be offered to
 The shareholder cannot insist on more than his stockholders in proportion to their shareholdings,
shareholdings but they can buy more if other hence:
shareholders waive their preemptive right, also in
proportion to their shares. A – 1,000 shares; 20%
 If the shares are diluted it has the effect of reducing B – 1,000 shares; 20%
the percentage of voting and the economic benefit C – 2,000 shares; 40%
of the share. D – 1,000 shares; 20%
.
Rule on Pre-emptive rights Can A insist on more? A cannot.

General rule: If the articles are silent, pre-emptive rights can be
exercised.
Exception: Pre-emptive right can be denied in the following
instances:
1. When the right is expressly denied in the Articles of
Incorporation
2. When shares are issued in compliance with laws requiring
stock offerings or minimum stock ownership by the public; and
3. When shares are 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.
Exception to the Exception:
If the directors acted in breach of trust and their primary purpose
is to perpetuate or shift control of the corporation, or to “freeze
out” the minority interest, the preemptive right may be exercised
(Majority Stockholders of Ruby International v Lim)
3. From the previous answer, can A buy more?
 Yes. If the other shareholders do not exercise their pre-
emptive right, then the other existing shareholders can
exercise their pre-emptive right also in proportion to their
current shareholdings. For example, if C declines, the shares
pertaining to C can now be shared among A, B and D if they
want.
4. What if the corporation want to issue to E? Meaning if
A, B, C and D do not buy, what do they do? What do they
do if they want a fresh capital coming in?
 The corporation have to execute waiver of pre-
emptive rights. If the current stockholders do not
exercise their pre-emptive rights, the SEC will
require you to submit proof thru a waiver of pre-
emptive rights. It is one of the reportorial
requirements to the SEC if you are increasing your
subscribed capital.

ILLUSTRATION: CLARIFICATORY QUESTION:

10,000 ACS What if the issuance involves common shares, but what we have
100 par per share are preferred shares?
5,000 already issued  If they have the same characteristics of shares, you don’t
There is a move to issue the remaining 5,000 shares have to look whether it is preferred or common. You take a
look at how much is their total shareholdings. For example,
Current Shareholdings: the 5000 shares are common, and the 5000 additional
A 1,000 issuance are preferred, but all the same characteristics, it is
B 1,000 still 20%, 20%, 40%, 20%. Same characteristics, no need to
C 2,000 distinguish.
D 1,000
Total subscribed: 5,000 MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL
CORPORATION VS. MIGUEL LIM, ET. AL.
FACTS:

Answer: Ruby Industrial Corporation (RUBY) is a domestic corporation

1. If A owns 1,000 shares, his pre-emptive right is 20% of engaged in glass manufacturing. Reeling from severe liquidity
the newly issued 5,000 shares or 1,000 shares. problems beginning in 1980, RUBY filed on December 13, 1983
a petition for suspension of payments with the Securities and
Equation: Exchange Commission (SEC).
1,000 shares
x 5,000 (to be issued shares) = 1,000 On December 20, 1983, the SEC issued an order declaring RUBY
5,000 already issued
shares under suspension of payments and enjoining the disposition of
shares
its properties pending hearing of the petition, except insofar as
2. If the additional 5,000 shares are to be purchased by E, necessary in its ordinary operations, and making payments
a new person coming into the corporation (a new outside of the necessary or legitimate expenses of its business.
stockholder), rules: On August 10, 1984, the SEC Hearing Panel created the
 If the Articles is silent, meaning it does not management committee (MANCOM) for RUBY, composed of
expressly prohibit and it does not expressly allow, representatives from Allied Leasing and Finance Corporation
as a general rule the stockholders can exercise their (ALFC), Philippine Bank of Communications (PBCOM), China
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Corporation Law (2019) MIDTERM REVIEWER
Banking Corporation (China Bank), Pilipinas Shell Petroleum
Corporation (Pilipinas Shell), and RUBY represented by Mr. Yu
Kim Giang.
The MANCOM was tasked to perform the following functions:
(1) undertake the management of RUBY; (2) take custody and
control over all existing assets and liabilities of RUBY; (3)
evaluate RUBYs existing assets and liabilities, earnings and
operations; (4) determine the best way to salvage and protect
the interest of its investors and creditors; and (5) study, review
and evaluate the proposed rehabilitation plan for RUBY.
Subsequently, two (2) rehabilitation plans were submitted to
the SEC: the BENHAR/RUBY Rehabilitation Plan of the majority
stockholders led by Yu Kim Giang, and the Alternative Plan of
the minority stockholders represented by Miguel Lim (Lim).
Plan 1 (BENHAR/RUBY): Benhar International, Inc. (BENHAR) —
a domestic corporation engaged in the importation and sale of
vehicle spare parts which is wholly owned by the Yu family and
headed by Henry Yu, who is also a director and majority
stockholder of RUBY — shall lend its P60 million credit line in
China Bank to RUBY, payable within ten (10) years. Moreover,
BENHAR shall purchase the credits of RUBY's creditors and
mortgage RUBY's properties to obtain credit facilities for RUBY.
Upon approval of the rehabilitation plan, BENHAR shall control
and manage RUBY's operations. For its service, BENHAR shall
receive a management fee equivalent to 7.5% of RUBY's net
sales.
Plan 2 (Alternative/Minority): On the other hand, the
Alternative Plan of RUBY's minority stockholders proposed to:
(1) pay all RUBY's creditors without securing any bank loan; (2)
run and operate RUBY without charging management fees; (3)
buy-out the majority shares or sell their shares to the majority
stockholders; (4) rehabilitate RUBY's two plants; and (5) secure
a loan at 25% interest, as against the 28% interest charged in the
loan under the BENHAR/RUBY Plan.
Both plans were endorsed by the SEC to the MANCOM for
evaluation. In 1988, SEC approved BENHAR/RUBY Plan.
Meanwhile, BENHAR started to pay off secured creditors of
RUBY and executed deeds of assignments of credit and
mortgage rights in favor of BENHAR. These were done despite
the TRO and injunction and even before the SEC Hearing Panel.
AFLC and Lim moved to nullify the deeds of assignment in favor
of BENHAR and cite the parties in contempt for willfull violation
of SEC order on suspension of payments. They also charged that
in paying of FEBTC debts, it was given undue preference over
the other creditors of Ruby. SEC nullified the deeds of
assignments, upon appeal SEC En Banc denied appeal for
BENHAR et al, CA affirmed SEC ruling nullifying the deeds.
On the other hand, it appears that even during the pendency of
appeals, BENHAR and Ruby have performed other acts in
pursuance of BENHAR/RUBY Plan approved by SEC (even if there
was an injunction).
Lim received a notice of stockholder’s meeting signed by Mr
Magtalas the “designated secretary” of Ruby and stating the
matters to be taken up in said meeting which includes extention
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ATTY. GAVIOLA-CLIMACO
of Ruby’s corporate term for another 25 years and election of
directors. At the scheduled stockholder’s meeting, Lim together
with other minority stockholders appeared in order to put on
record their objections on the validity of the holding thereof and
the matters taken therein. Specifically, they questioned the
percentage of stockholders present in the meeting which the
majority claimed stood at 74.75% of Ruby. Lim also argued that
a majority of the stockholders claiming to be 74.75% of Ruby
increased their shares to 75.75% by subscribing from the
unissued shares of the authorized capital stock as “capital
infusion”.
Accordingly, Lim said that the extension of corporate term and
increase in capital stock were done in violation CA and without
compliance to legal requirements of Corporation Code.
RULING:
Supreme Court ruled that the preemptive right of the
shareholders were violated.
Pre-emptive right under Sec. 39 of the Corporation Code refers
to the right of a stockholder of a stock corporation to subscribe
to all issues or disposition of shares of any class, in proportion
to their respective shareholdings. The right may be restricted or
denied under the articles of incorporation, and subject to
certain exceptions and limitations. The stockholder must be
given a reasonable time within which to exercise their
preemptive rights. Upon the expiration of said period, any
stockholder who has not exercised such right will be deemed to
have waived it.
The validity of issuance of additional shares may be questioned
if done in breach of trust by the controlling stockholders. Thus,
even if the pre-emptive right does not exist, either because the
issue comes within the exceptions in Section 39 or because it is
denied or limited in the articles of incorporation, an issue of
shares may still be objectionable if the directors acted in breach
of trust and their primary purpose is to perpetuate or shift
control of the corporation, or to “freeze out” the minority
interest.
SALE OR OTHER DISPOSITION OF ASSETS
Section 39. Sale or Other Disposition of Assets. — Subject to
the provisions of Republic Act No. 10667, otherwise known as
the "Philippine Competition Act," and other related laws, a
corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge, or otherwise
dispose of its property and assets, 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.
A sale of all or substantially all of the corporation's properties
and assets, including its goodwill, must be authorized by the
vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock, or at least two-thirds (2/3) of
the members, in a stockholders' or members' meeting duly
called for the purpose.
In non-stock corporations where there are no members with
voting rights, the vote of at least a majority of the trustees in
Corporation Law (2019) MIDTERM REVIEWER
office will be sufficient authorization for the corporation to
enter into any transaction authorized by this section.
The determination of whether or not the sale involves all or
substantially all of the corporation's properties and assets
must be computed based on its net asset value, as shown in its
latest 􀀾financial statements. 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.
Written notice of the proposed action and of the time and
place for the meeting shall be addressed to stockholders or
members at their places of residence as shown in the books of
the corporation and deposited to the addressee in the post
office with postage prepaid, served personally, or when
allowed by the bylaws or done with the consent of the
stockholder, sent electronically: Provided, That any dissenting
stockholder may exercise the right of appraisal under the
conditions provided in this Code.
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 the
corporation or if the proceeds of the sale or other disposition
of such property and assets shall be appropriated for the
conduct of its remaining business.
Board of Directors approval only
• Voting requirement: Board resolution by a majority vote of
the Board of Directors in a meeting where there is a
quorum.
• Instances:
a) A sale of all or substantial all of the assets of the
corporation, provided, that it is in the regular course
of business of the corporation.
b) It is not in a regular course of business but it is a sale
of NOT all of substantial all of the assets of the
corporation.
Board of Directors and Stockholder approval
• Voting requirement:
1. Board resolution by a majority vote of the Board of Directors
in a meeting where there is a quorum.
2. Stockholders vote representing at least two-thirds (2/3) of
the outstanding capital stock, or at least two-thirds (2/3) of
the members, in a stockholders' or members' meeting duly
called for the purpose.
• Instance/s:
a) A sale of all or substantially all of the assets of the
corporation
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ATTY. GAVIOLA-CLIMACO
- 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.
Y-I LEISURE VS. YU
FACTS:
This case involves a complaint for collection of sum of money
and damages with prayer for preliminary attachment against
MADCI and its president Rogelio Sangil (Sangil) to recover his
payment for the purchase of golf and country club shares.
Mt. Arayat Development Co., Inc.(MADCI) was a real estate
development corporation. Respondent James Yu (Yu) was a
businessman, interested in purchasing golf and country club
shares.
Sometime in 1997, MADCI offered for sale shares of a golf and
country club located in the vicinity of Mt. Arayat for the price of
P550.00 per share. Relying on the representation of MADCI's
brokers and sales agents, Yu bought 500 golf and 150 country
club shares for a total price of P650,000.00 which he paid by
installment with fourteen (14) Far East Bank and Trust Company
(FEBTC) checks.
Upon full payment of the shares to MADCI, Yu visited the
supposed site of the golf and country club and discovered that
it was non-existent. In a letter, Yu demanded from MADCI that
his payment be returned to him. MADCI recognized that Yu had
an investment of P650,000.00, but the latter had not yet
received any refund. Yu filed with the RTC above-said complaint.
In his transactions with MADCI, Yu alleged that he dealt with
Sangil, who used MADCI's corporate personality to defraud him.
Sangil alleged that Yu dealt with MADCI as a juridical person;
that he did not benefit from the sale of shares; that the return
of Yu's money was no longer possible because its approval had
been blocked by the new set of officers of MADCI, which
controlled the majority of its board of directors; that MADCI
failed to develop the golf course because its properties were
taken over by YIL after he allegedly violated the MOA. The lands
of MADCI were eventually sold to YICRI for a consideration of
P9.3 million, which was definitely lower than their market price.
MADCI claimed that it was Sangil who defrauded Yu invoked the
Memorandum of Agreement (MOA) entered into by MADCI,
Sangil and petitioner Yats International Ltd. (YIL) wherein Sangil
undertook to redeem MADCI proprietary shares sold to third
persons or settle in full all their claims for refund of payments
claimed that Sangil should be ultimately liable to refund the
payment for shares purchased
Yu filed an Amended Complaint, impleaded YIL, Y-I Leisure Phils.,
Inc. (YILPI) and Y-I Club & Resorts, Inc. (YICRI). According to Yu,
he discovered in the Registry of Deeds of Pampanga that,
substantially, all the assets of MADCI, consisting of 120 hectares
of land located in Magalang, Pampanga, were sold to YIL, YILPI
and YICRI. The transfer was done in fraud of MADCI's creditors,
and without the required approval of its stockholders and board
of directors under Section 40 of the Corporation Code. Yu also
Corporation Law (2019) MIDTERM REVIEWER
alleged that Sangil even filed a case in Pampanga which assailed
the said irregular transfers of lands.
YIL, YILPI and YICRI alleged that they only had an interest in
MADCI in 1999 when YIL bought some of its corporate shares
pursuant to the MOA. This occurred two (2) years after Yu
bought his golf and country club shares from MADCI that as a
mere stockholder of MADCI, YIL could not be held responsible
for the liabilities of the corporation as to the transfer of
properties from MADCI to YILPI and subsequently to YICRI, they
averred that it was not undertaken to defraud MADCI's creditors
and it was done in accordance with the MOA. In fact, it was
stipulated in the MOA that Sangil undertook to settle all claims
for refund of third parties.
The President and CEO of YILPI and YICRI, and managing director
of YIL, Denny On Yat Wang (Wang) testified that YIL was an
investment company engaged in the development of real
estates, projects, leisure, tourism, and related businesses that
YIL subscribed to the shares of MADCI because it was interested
in its golf course development project in Pampanga. Thus, he
signed the MOA on behalf of YIL and he paid P31.5 million to
subscribe to MADCI's shares, subject to the fulfillment of Sangil's
obligations; that the MOA stipulated that MADCI would execute
a special power of attorney in his favor, empowering him to sell
the property of MADCI in case of default in the performance of
obligations; that due to Sangil's subsequent default, a deed of
absolute sale over the lands of MADCI was eventually executed
in favor of YICRI, its designated company; that, aside from its
lands, MADCI had other assets in the form of loan advances of
its directors
ISSUES:
1. Whether fraud must exist in the transfer of all the corporate
assets in order for the transferee to assume the liabilities of the
transferor. No.
2. Whether or not the petitioners indeed became a continuation
of MADCI’s business. Yes
RULING:
1. No. Fraud is not an essential consideration. Under the Nell
doctrine (Nell v Pacific Farms Inc.) the general rule is that the
transfer of all the assets of a corporation to another shall not
render the latter liable to the liabilities of the transferor, except
when:
a) Where the purchaser expressly or impliedly agrees to
assume such debts; Article 2047, NCC: When a person
binds himself solidarily with the principal debtor, then a
contract of suretyship is produced. Necessarily, the
corporation which expressly or impliedly agrees to assume
the transferor's debts shall be liable to the same.
b) Where the transaction amounts to a consolidation or
merger of the corporations; Sections 76 to 80, Corporation
Code: If the transfer of assets of one corporation to another
amounts to a merger or consolidation, then the transferee
corporation must take over the liabilities of the transferor.
c) Where the purchasing corporation is merely a
continuation of the selling corporation, and transferee
purchases not only the assets of the transferor, but also
its business thus the transferor is merely left with its
juridical existence, devoid of its industry and earning
capacity.
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ATTY. GAVIOLA-CLIMACO
d) Where the transaction is entered into fraudulently in order
to escape liability for such debts; Article 1388, NCC:
whoever acquires in bad faith the things alienated in fraud
of creditors, shall indemnify the latter for damages
suffered.
Thus, if there is fraud in the transfer of all the assets of the
transferor corporation, its creditors can hold the transferee
liable. This exception contemplates the “business-enterprise
transfer” where the transferee coproration’s interest goes
beyond the assets of the transferor’s assets and its desires to
acquire the latter’s business enterprise including its goodwill.
The transferee here actually purchases not only the assets but
the business itself that the transferor is merely left with its
juridical existence. The proper provision of law that is
contemplate by this exception (business-enterprise transfer) is
Section 40 refers to the sale, lease, exchange or disposition of
all or substantially all of the corporation's assets, including its
goodwill. The sale under this provision does not contemplate an
ordinary sale of all corporate assets; the transfer must be of such
degree that the transferor corporation is rendered incapable of
continuing its business or its corporate purpose. 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.
However not every transfer of the entire corporate assets would
qualify under Section 40, it does not apply: if the sale of the
entire property and assets is necessary in the usual and regular
course of business of corporation, or if the proceeds of the sale
or other disposition of such property and assets will be
appropriated for the conduct of its remaining business. Thus,
the litmus test to determine the applicability of the Section
would be the capacity of the corporation to continue its
business after the sale of all or substantially all of its assets.
The purpose of the business-enterprise transfer is to protect the
creditors by allowing them a remedy.
2. Yes. Based on the factual findings, the Court is convinced that
MADCI indeed had assets consisting of 120 hectares of
landholdings in Magalang, Pampanga, to be developed into a
golf course, pursuant to its primary purpose. Because of its
alleged violation of the MOA, however, MADCI was made to
transfer all its assets to the petitioners. No evidence existed that
MADCI subsequently acquired other lands for its development
projects. Thus, MADCI, as a real estate development
corporation, was left without any property to develop
eventually rendering it incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
Section 40 must apply.
The MOA cannot prejudice respondent Yu. CA correctly ruled
that there was novation of its provision. Since it was done
without securing the consent of respondent, the agreement
cannot prejudice him and MADCI is still its debtor and given that
there was transfer to the petitioners, then the petitioners shall
be liable.
Petition is denied.
Corporation Law (2019) MIDTERM REVIEWER
TO BE LIABLE UNDER THE BUSINESS ENTERPRISE RULE,
REQUIREMENTS:
1. The transferor Corporation sells all or substantially all its
assets to another entity; and
2. The transferee corporation will continue the business of
the transferor corporation.
Under Sec. 39, when a corporation sells all or substantially all its
assets and the Corporation can no longer continue its operations,
the presumption that the transferee corporation will now be the
one to continue the business of the corporation.
REASON FOR THE RULE: To avoid a situation where the creditors
can no longer go after the assets of the corporation because it has
already transferred the assets to another entity. FOR THE
PROTECTION OF CREDITORS.
Ways to transfer a Corporate Business
1. Share Purchase Agreement (SPA)
EXAMPLE: A owning all the shares of B Corporation, if A wants to
transfer the business of B Corp, A can enter into a SPA with C, with
that, C now becomes the owner of B corp.
Is there a change in entity in B Corporation? No. the corporation
has the power of succession and its identity is separate and
distinct from the stockholders. Here, there is no change in the
Entity, only the stockholders. There is no change or transfer of
liability because B Corporation continues to exist only that it is C
and no longer A that owns all the shares in the corporation.
LABOR CODE: in case of transfer of shares, the employee of the
Corporations continues to be its employees. No termination of
employment because the corporation continues to exist.
2. Asset Purchase (AP)
There is no change in its stockholders but you are taking away the
assets of B corporation and giving it to C. (Related to the above
example) B corporation continues to be owned by A.
Rule on Asset Purchase in terms of transfer of Liability (Nell
Doctrine)
General Rule: The purchaser only acquires the assets, liabilities
remain with the Corporation.
Exception:
1. when there is an agreement that the purchaser will assume the
liability;
2. when the transaction amounts to a merger or consolidation;
3. Transferee Corporation is merely a continuation of the business
of the corporation;
4. Transaction is fraudulently entered into to escape liability.
Where does Section 39 fall? 3rd exception. Rule is called BUSINESS
ENTERPRISE RULE.
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Agreement that the transferor will assume the liability
An agreement where the transferor retains the liability is a valid
agreement but it is only enforceable between the transferor and
transferee. The creditors not being a party to their agreement, are
not bound by such.
If the transferee assumes the liability, such is binding to the
creditors.
If the transferor expressly assumes liability, such is not binding to
the creditors. The creditors can still go after the transferee, but of
course the transferee has the recourse to go after the transferor
based on their agreement.
POWER TO ACQUIRE OWN SHARES
Section 40. Power to Acquire Own Shares. — Provided that the
corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired, a stock
corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes,
including the following cases:
(a) To eliminate fractional shares arising out of stock
dividends;
(b) 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
(c) To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this
Code.
Applicability: Section 40 applies to all shares other than
redeemable shares because there is a specific provision on
redeemable shares. One of the rule on redeemable shares is that
it does not require the existence of Unrestricted Retained
Earnings (URE).
Requirements for a Corporation to acquire its own shares
1. There must be unrestricted retained earnings.
2. Voting required is only a majority of the directors present in
a meeting where there is a quorum
 Determine first if there is a quorum to constitute a
valid meeting. If there is no quorum in the first
place, there is no need for voting because the
meeting is invalid.
 If there is already a quorum to have a valid
meeting, the voting will now depend on the actual
number of directors present. The vote needed is a
majority vote of the directors present in a meeting
where there is a quorum to be a valid corporate
act.
Atty: The quorum requirement is segregated from the voting
requirement.
3. It must be for a legitimate purpose
 To eliminate fractional shares arising out of stock
dividends;
Corporation Law (2019) MIDTERM REVIEWER
Fractional Share – it refers to a share less than one full share of
equity.
ILLUSTRATION
When the stockholder has 250 shares and the corporation issues
stock dividends, so 250 X 25% ownership, that is 62.5, so the share
will now be 112.5. The .5 shares is the fractional share, the
corporation will now acquire the .5 shares.
 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
 To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
provisions of this Code.
Note: The list is NOT exclusive. There can be other legitimate
purposes that may be allowed.
POWER TO INVEST CORPORATE FUNDS
Section 41. 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, 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 nonstock
corporations, at a meeting duly called for the purpose. Notice
of the proposed investment and the time and place of the
meeting shall be addressed to each stockholder or member at
the place of residence as shown in the books of the corporation
and deposited to the addressee in the post office with postage
prepaid, served personally, or sent electronically in accordance
with the rules and regulations of the Commission on the use of
electronic data message, when allowed by the bylaws or done
with the consent of the stockholders: 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.
General rule: A corporation cannot engage in a business outside
its Primary Purpose.
Exception: The corporation can if they amend their Articles of
Incorporation and include the activity as part of its primary
purpose.
Requirements for a corporation to invest its funds in another
Corporation or Business
PURSUING PRIMARY PURPOSE
 Approval of the Majority of the BOD
PURSUING SECONDARY PURPOSE (SECTION 42)
 There must be approval by a majority of the board of
directors
 The approval of the board must be ratified by the
stockholders representing at least 2/3 of the
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outstanding capital stock at a stockholder’s meeting
duly called for that purpose.
 Amendment of the Primary Purpose in the Articles of
Incorporation
Note: Failure to amend the AOI’s primary purpose, that activity
will be considered as ULTRA VIRES, it being not part of the primary
purpose of the corporation.
POWER TO DECLARE DIVIDENDS
Section 42. 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, 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 stockholders until their unpaid
subscription is fully paid: Provided, further, That no
stock dividend shall be issued without the approval
of stockholders representing at least 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 percent (100%) of their paid-
in capital stock, except: (a) when justified by definite corporate
expansion projects or programs approved by the board of
Directors; or (b) when the corporation is prohibited under any
loan agreement with financial institutions or creditors,
whether local or foreign, from declaring dividends without
their consent, and such consent has not yet been secured; or
(c) 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.
TYPES OF DIVIDENDS (PRO-CA-ST)
1. Property Dividends
2. Cash Dividends
3. Stock Dividends
General Rule: The Board of Directors has the discretion to declare
dividends.
Exception: In case of stock dividends, the decision of the board is
subject to the approval of the stockholders.
Requirements for the declaration of dividends
CASH AND PROPERTY DIVIDENDS
1. Existence of unrestricted retained earnings;
2. Majority vote of the Board of Directors present in a
meeting where there is a quorum.
STOCK DIVIDENDS
1. Existence of unrestricted retained earnings.
2. Majority vote of the Board of Directors present in a
meeting where there is a quorum.
3. Approval of stockholders representing at least two-
thirds (2/3) of the outstanding capital stock at a regular
or special meeting duly called for the purpose.
Corporation Law (2019) MIDTERM REVIEWER
RETAINED EARNINGS
Accumulated profits of a corporation in its previous operations. It
includes all income accumulated all throughout the years during
which the corporation was in operation.
So, if the corporation has been experiencing losses, there will be
no retained earnings. Rather, there will be deficits. Retained
earnings can only exist if the corporation has been operating at a
profit.
TYPES OF RETAINED EARNINGS
 RESTRICTED RETAINED EARNINGS – in general, it is
restricted if it is not available for dividend declaration
 UNRESTRICTED RETAINED EARNINGS – if available for
dividend declaration
RESTRICTING RETAINED EARNINGS
1. Appropriated by its Board of Directors for corporate expansion
projects or programs.
EXAMPLE:
If the Board of directors says that out of the 50 million retained
earnings, we are going to allocate 15 million for a future
expansion, that will make your 15 million a restricted retained
earnings. Therefore, out of the 50 million, 15 million cannot be
declared as dividends.
2. Covered by a restriction for dividend declaration under a loan
agreement.
Contractual Covenants - If, for example, there is a loan
agreement, and the creditor expressly provides that the
corporation cannot declare dividends out of a certain amount
of its retained earnings. That portion that is restricted under
the contract, becomes restricted retained earnings.
3. Required to be retained under special circumstances obtaining
in the corporation such as when there is a need for special
reserve for probable contingencies.
EXAMPLE
When a corporation acquires treasury shares, it is required to
restrict a portion of its retained earnings, in the same amount
as the treasury shares that they acquired. That portion
becomes restricted retained earnings. It cannot be available for
dividend declaration.
If the corporation has been experiencing losses, such that it has
zero or negative retained earnings, then it cannot declare
dividends at all. So, there has to be unrestricted retained
earnings for a corporation to declare dividends.
Declaring dividends from the Capital - paid-up capital
General Rule: Dividends CANNOT be distributed out of the capital.
It violates the trust fund doctrine. Under the trust fund doctrine,
you cannot return capital to the stockholders unless all the
creditors have been paid first.
Exceptions: (exclusive exceptions)
1. If the dividend is A LIQUIDATING DIVIDEND – it is distributed
during a liquidation of a corporation.
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Here, the trust fund doctrine no longer applies because the
corporation is already being liquidated. Which means that
before you can even distribute your liquidating dividends,
you have to pay your creditors first. Whatever is left, can be
distributed as dividends.
2. When the corporation is a WASTING ASSET CORPORATION –
a type of corporation where the corporation has a limited life
because its assets are consumed during the operation of the
corporation and it’s not replenished.
EXAMPLES
 Mining – if a corporation is created to mine a certain
area, that area once the minerals are gone, the
corporation’s purpose no longer exists. So slowly, as the
minerals are consumed, the assets of the corporation
are being depleted. In that sense, the corporation is
allowed to return capital to its stockholder. Because, the
idea is that the corporation is only for a limited period,
as long as the assets are existing. Once the assets are
depleted, then the corporation can return capital to the
stockholders.
Relevant dates when it comes to dividend declaration
1. Declaration date
Before the declaration date, the dividends are not a liability of the
corporation. In fact, the corporation is not obliged to declare
dividends, even if it has unrestricted retained earnings. The BOD
cannot be compelled to declare dividends. Dividends do not
become a liability of the corporation unless and until it is actually
declared. The moment of declaration is the time that the
corporation now recognizes the liability.
2. Record date
This refers to the date to determine who are the stockholders
entitled to receive dividends. The stockholders of record as of the
record date are the stockholders who will be receiving the
dividends.
Before the record date, the stocks are considered sold at
DIVIDENDS ON. Meaning, before the record date, you are also
selling with it the right to receive the dividends, which means that
there is actually a premium on the price of those shares because
they carry with it the right to receive dividends.
When we sell the stocks after the record date, normally we call it
as DIVIDENDS OFF, because even if you sell shares or transfer
ownership, the person who was the owner as of the record date
will be the one entitled to receive the dividends. The record date
is important to determine who is receives the dividends.
EXAMPLE:
Declaration date March 10
Record date March 30
 A is holder of the share on declaration date. On March
15, A sells the shares to B, that is still considered as
dividends on.
 B sells the shares to C on March 25, still considered as
dividends on.
Corporation Law (2019) MIDTERM REVIEWER
 On March 30, the record date, if C is still the owner of
the shares by that time, C is the stockholder entitled to
the dividends.
 If on April 5, C sells the shares to D. It still C who is
entitled to receive dividends.
 The sale from A to B to C is still dividends on. It carries
with it the right to receive dividends. They are sales
before the record date. Sales after the record date is
already dividends off, because the right to receive the
dividends remains with the stockholder as of the record
date.
3. Payment Date
Date when the dividends are actually paid by the corporation.
When a corporation declares dividends, it will normally say what
is the record date and what is the payment date.
If the corporation’s resolution for the declaration of dividends is
silent as to the record date, the record date is considered the same
as the declaration date.
Declaration of dividends
General Rule: The directors of the corporation cannot be
compelled to declare dividends because it is discretionary.
Dividends are not liabilities of the corporation, until declared.
Exception: Limitation under Section 42 where it prohibits
corporations from retaining unrestricted retained earnings in
excess of one hundred percent (100%) of their paid-up capital.
Take note, not subscribed but the paid-up capital.
Note: Violations of this will render the corporation liable for
penalties with the SEC as well as with the BIR for improperly
accumulated earnings tax. If the corporation don’t declare
dividends, it will be penalized both by the SEC and BIR.
LIABILITIES FOR VIOLATION OF SECTION 42
Penalized by both the Securities and Exchange Commission and
the Bureau of Internal Revenue
HOW TO AVOID LIABILITY FROM SECTION 42
Restrict the dividend/earning by—
(1) Declaring it necessary for future expansion
(2) Entering into a loan covenant which provides that the
dividend declaration is restricted
(3) For any other special circumstances
In all these three instances, the dividends will be considered as
restricted and will not form part of the prohibition.
POWER TO ENTER INTO MANAGEMENT CONTRACT
Section 43. Power to Enter into Management Contract. — No
corporation shall conclude a management contract with
another corporation unless such contract is approved by the
board of directors and by stockholders owning at least the
majority of the outstanding capital stock, or by at least a
majority of the members in the case of a nonstock corporation,
of both the managing and the managed corporation, at a
meeting duly called for the purpose: Provided, That (a) where
a stockholder or stockholders representing the same interest
of both the managing and the managed corporations own or
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control more than one-third (1/3) of the total outstanding
capital stock entitled to vote of the managing corporation; or
(b) 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 nonstock corporation.
These 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 pertinent laws or
regulations.
No management contract shall be entered into for a period
longer than five (5) years for any one (1) term.
Management Contract
 An agreement whereby one undertakes to manage or
operate all or substantially all of the business of
another, whether such contracts are called service
contracts, operating agreements, or otherwise.
 Contemplates a situation where the contract is between
two corporations.
 Maximum term is 5 years, subject to renewal.
APPROVING AUTHORITY
 General Rule: Approval of the Board of Directors and by
Stockholders owning at least majority of the
outstanding capital stock of both the managing and
managed corporation at a meeting duly called for the
purpose.
 Exception: Approved by the Stockholders of the
managed corporation owning at least 2/3 of the total
outstanding capital stock entitled to vote in the
following instances:
a. Where a stockholder or stockholders 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; or
b. 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.
ULTRA VIRES ACTS
Section 44. Ultra Vires Acts of Corporations. — No corporation
shall possess or exercise corporate powers other than those
conferred by this Code or by its articles of incorporation and
except as necessary or incidental to the exercise of the powers
conferred.
Corporation Law (2019) MIDTERM REVIEWER
Ultra Vires Act
One not within the express, implied, and incidental powers of the
corporation conferred by the Corporation Code or articles of
incorporation. An ultra vires act means simply an act which is
beyond the conferred powers of a corporation or the purposes or
objects for which it is created as defined by the law of its
organization.
CONSEQUENCE OF AN ULTRA VIRES ACT
Merely voidable which may be enforced by performance,
ratification or estoppel. (De Leon)
AS DISTINGUISHED FROM ILLEGAL ACT
Void and cannot be validated. An illegal corporate act, on other
hand, is an act which is contrary to law, morals, good customs,
public order, or public policy (Art. 1306, Civil Code.) and,
therefore, per se illicit.
UNIVERSITY OF MINDANAO, INC. VS. BANGKO SENTRAL NG
PILIPINAS, ET AL.
FACTS:
University of Mindanao (UM) is an educational institution. For
the year 1982, its Board of Trustees was chaired by Guillermo B.
Torres. His wife, Dolores P. Torres, sat as University of
Mindanao's Assistant Treasurer.
Guillermo B. Torres and Dolores P. Torres incorporated and
operated two (2) thrift banks: (1) First Iligan Savings & Loan
Association, Inc. (FISLAI); and (2) Davao Savings and Loan
Association, Inc. (DSLAI). Guillermo B. Torres chaired both thrift
banks. He acted as FISLAI's President, while his wife, Dolores P.
Torres, acted as DSLAI's President and FISLAI's Treasurer.
Upon Guillermo B. Torres' request, Bangko Sentral ng Pilipinas
issued a P1.9 million standby emergency credit to FISLAI. There
were three promissory notes. All these promissory notes were
signed by Guillermo B. Torres, and were co-signed by either his
wife, Dolores P. Torres, or FISLAI's Special Assistant to the
President Ramos, Jr.
On May 25, 1982, University of Mindanao's Vice President for
Finance, Saturnino Petalcorin, executed a deed of real estate
mortgage over University of Mindanao's property in Cagayan de
Oro City in favor of Bangko Sentral ng Pilipinas. There was
allegedly executed on University of Mindanao’s behalf. Proof of
the authority to execute the REM was a Secretary’s Certificate
showed by Saturnino Petalcorin authorizing him to represent
the University of Mindanao to transact, transfer, convey, lease,
mortgage, or otherwise hypothecate any or all of the following
properties situated at Cagayan de Oro and Iligan City and
authorizing further Mr. Petalcorin to sign any or all documents
relative thereto.
FISLAI, DSLAI, and Land Bank of the Philippines entered into a
Memorandum of Agreement intended to rehabilitate the thrift
banks, which had been suffering from their depositors' heavy
withdrawals. Among the terms of the agreement was the
merger of FISLAI and DSLAI, with DSLAI as the surviving
corporation. DSLAI later became known as Mindanao Savings
and Loan Association, Inc. (MSLAI). MSLAI failed to recover from
its losses and was liquidated. Bangko Sentral ng Pilipinas sent a
letter to University of Mindanao, informing it that the bank
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would foreclose its properties if MSLAI's total outstanding
obligation of P12,534,907.73 remained unpaid.
In its reply, University of Mindanao denied that University of
Mindanao's properties were mortgaged. It also denied having
received any loan proceeds from Bangko Sentral ng Pilipinas,
which prompted them to file for nullification and cancellation of
mortgage.
University of Mindanao also alleged that Aurora de Leon's
certification was anomalous. It never authorized Saturnino
Petalcorin to execute real estate mortgage contracts involving
its properties to secure FISLAI's debts. There was no board
resolution to that effect. Thus, the mortgages executed by
Saturnino Petalcorin were unenforceable. It never ratified the
execution of the mortgage contracts. Moreover, as an
educational institution, it cannot mortgage its properties to
secure another person's debts. The execution of the mortgage
contract was ultra vires. As an educational institution, it may not
secure the loans of third persons. Securing loans of third persons
is not among the purposes for which petitioner was established.
Bangko Sentral argued that petitioner's act of mortgaging its
properties to guarantee FISLAI's loans was consistent with
petitioner's business interests, since petitioner UM was
presumably a FISLAI shareholder whose officers and
shareholders interlock with FISLAI. It also argued that it merely
relied on the regularity of the Secretary Certificate authorizing
Petalcorin.
ISSUE:
Whether petitioner University of Mindanao is bound by the real
estate mortgage contracts executed by Saturnino Petalcorin.
RULING:
Corporations are artificial entities granted legal personalities
upon their creation by their incorporators in accordance with
law. Unlike natural persons, they have no inherent powers.
Third persons dealing with corporations cannot assume that
corporations have powers. It is up to those persons dealing with
corporations to determine their competence as expressly
defined by the law and their articles of incorporation. A
corporation may exercise its powers only within those
definitions. Corporate acts that are outside those express
definitions under the law or articles of incorporation or those
"committed outside the object for which a corporation is
created are ultra vires. The only exception to this, rule is when
acts are necessary and incidental to carry out a corporation's
purposes, and to the exercise of powers conferred by the
Corporation Code and under a corporation's articles of
incorporation. This exception is specifically included in the
general powers of a corporation under Section 36 of the
Corporation Code: “To exercise such other powers as may be
essential or necessary to carry out its purpose or purposes as
stated in its articles of incorporation. (Emphasis supplied)”
Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc.[78] stated
the test to determine if a corporate act is in accordance with its
purposes:
It is a question, therefore, in each case, of the logical relation of
the act to the corporate purpose expressed in the charter. If that
act is one which is lawful in itself, and not otherwise prohibited,
is done for the purpose of serving corporate ends, and is
Corporation Law (2019) MIDTERM REVIEWER
reasonably tributary to the promotion of those ends, in a
substantial, and not in a remote and fanciful, sense, it may fairly
be considered within charter powers. The test to be applied is
whether the act in question is in direct and immediate
furtherance of the corporation's business, fairly incident to the
express powers and reasonably necessary to their exercise. If so,
the corporation has the power to do it; otherwise, not.
In the case, Petitioner does not have the power to mortgage its
properties in order to secure loans of other persons. As an
educational institution, it is limited to developing human capital
through formal instruction. It is not a corporation engaged in the
business of securing loans of others. Securing FISLAI's loans by
mortgaging petitioner's properties does not appear to have
even the remotest connection to the operations of petitioner as
an educational institution. Securing loans is not an adjunct of
the educational institution's conduct of business. It does not
appear that securing third-party loans was necessary to
maintain petitioner's business of providing instruction to
individuals. Therefore, the presumption that the execution of
mortgage contracts was within petitioner's corporate powers
does not apply. Securing third-party loans is not connected to
petitioner's purposes as an educational institution. Moreover,
regardless of the number of shares that petitioner had with
FISLAI, DSLAI, or MSLAI, securing loans of third persons is still
beyond petitioner's power to do. It is still inconsistent with its
purposes under the law and its articles of incorporation.
Acts of an officer that are not authorized by the board of
directors/trustees do not bind the corporation unless the
corporation ratifies the acts or holds the officer out as a person
with authority to transact on its behalf.
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TITLE V - BY-LAWS
By- laws may be defined as the rules of action adopted by a
corporation (or association) for its internal government and for
the government of its stockholder or members and those having
the direction, management and control of its affairs in their
relation to the corporation and as among themselves, including
rules for routine matters such as calling meetings and the like. It is
not an essential requisite for the existence of the corporation
Because what gives life to a corporation is the issuance of
certificate of incorporation, failure to adopt by laws does not
invalidate its existence because its existence is derived from
authority given pursuant to the issuance of articles of
incorporation.
ADOPTION OF BY-LAWS
Section 45. Adoption of By-laws. –For the adoption of by- laws
by the corporation, 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, shall be necessary. The bylaws 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 by a majority of the
directors or trustees and countersigned by the secretary of the
corporation, shall be filed with the commission and attached to
the original articles of incorporation.
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 Commission, together with
the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by
the commission of a certification that the by-laws are in
accordance with this code.
The 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 bylaws or amendments are in
accordance with law.
TIME AND PROCEDURE FOR THE ADOPTION OF BY-LAWS:
1) PRE-INCORPORATION
Submitted or filed before the SEC together with the articles of
incorporation. (this is the one required now in practice, you
cannot incorporate without it.)
REQUIREMENTS:
1. Approved and signed by ALL INCORPORATORS
2. Submitted to the SEC together with the AOI
Additional requirements for banks and other special
corporation: accompanied by a certificate of the appropriate
Corporation Law (2019) MIDTERM REVIEWER
government agency to the effect that such bylaws or amendments
are in accordance with law
2) POST-INCORPORATION
Basically, everything that you need to do post incorporation in
order to commence transaction of business.
Requirements:
1. Affirmative vote and must be signed by the stockholders
representing at least a majority of the outstanding
capital stock/members in case of non-stock.
2. Duly certified by the majority of the directors/trustees
3. Filed to the SEC, to be attached to the original AOI
NOTE: LOYOLA GRAND CASE MAY NOT BE APPLICABLE
ANYMORE SINCE UNDER THE REVISED CORPORATION CODE, THE
1 MONTH REQUIREMENT WAS REMOVED
LOYOLA GRAND VILLAS HOMEOWNER ASSOCIATION,
INC.,PETITIONER,VS. HON. COURT OF APPEALS, HOME
INSURANCE AND GUARANTY CORPORATION, EMDEN
ENCARNACION AND HORATIO AYCARDO, RESPONDENTS.
Facts:
LGVHAI was organized on February 8, 1983 as the association
of homeowners and residents of the Loyola Grand Villas. For
unknown reasons, however, LGVHAI did not file its corporate
by-laws.
There was an inquiry about the status of LGVHAI. Atty. Joaquin
A. Bautista, the head of the legal department of the HIGC,
informed that LGVHAI had been automatically dissolved for
two reasons. First, it did not submit its by-laws within the
period required by the Corporation Code and, second, there
was non-user of corporate charter because HIGC had not
received any report on the associations activities.
Petitioner contends that, since Section 46 uses the word must
with respect to the filing of by-laws, noncompliance therewith
would result in self-extinction either due to non-occurrence of
a suspensive condition or the occurrence of a resolutory
condition under the hypothesis that (by) the issuance of the
certificate of registration alone the corporate personality is
deemed already formed. It asserts that the Corporation Code
provides for a gradation of violations of requirements. Hence,
Section 22 mandates that the corporation must be formally
organized and should commence transactions within two years
from date of incorporation. Otherwise, the corporation would
be deemed dissolved. On the other hand, if the corporation
commences operations but becomes continuously inoperative
for five years, then it may be suspended or its corporate
franchise revoked.
Issue: WON, the failure to file LGVHAI’s by-laws within the
period prescribed by Sec. 46 of the Corporation Code had the
effect of automatically dissolving the said corporation.
Ruling: NO.
Section 46 reveals the legislative intent to attach a directory,
and not mandatory, meaning for the word must in the first
sentence thereof. Note should be taken of the second
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paragraph of the law which allows the filing of the by-laws
even prior to incorporation. This provision in the same section
of the Code rules out mandatory compliance with the
requirement of filing the by-laws within one (1) month after
receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission. It
necessarily follows that failure to file the by-laws within that
period does not imply the demise of the corporation. By-laws
may be necessary for the government of the corporation but
these are subordinate to the articles of incorporation as well
as to the Corporation Code and related statutes. There are in
fact cases where by-laws are unnecessary to corporate
existence or to the valid exercise of corporate powers, thus:
Although the Corporation Code requires the filing of by-laws,
it does not expressly provide for the consequences of the non-
filing of the same within the period provided for in Section 46.
However, under by Presidential Decree No. 902-A, the
pertinent provisions on the jurisdiction of the SEC of which
state: SEC. 6. In order to effectively exercise such jurisdiction,
the Commission shall possess the following powers:
(l) To suspend, or revoke, after proper notice and hearing, the
franchise or certificate of registration of
corporations, partnerships or associations, upon any of the
grounds provided by law, including the following:
5. Failure to file by-laws within the required period;
Even under the foregoing express grant of power and
authority, THERE CAN BE NO AUTOMATIC CORPORATE
DISSOLUTION SIMPLY BECAUSE THE INCORPORATORS FAILED
TO ABIDE BY THE REQUIRED FILING OF BY-LAWS EMBODIED IN
SECTION 46 OF THE CORPORATION CODE. THERE IS NO
OUTRIGHT DEMISE OF CORPORATE EXISTENCE. PROPER
NOTICE AND HEARING ARE CARDINAL COMPONENTS OF DUE
PROCESS IN ANY DEMOCRATIC INSTITUTION, AGENCY OR
SOCIETY. In other words, the incorporators must be given the
chance to explain their neglect or omission and remedy the
same.
CONSEQUENCES OF FAILURE TO ADOPT BY LAWS
(THIS MAY NOT BE APPLICABLE PURSUANT TO THE REVISED
CORPO CODE. But this was not discussed by Atty after the
revision)
Non-filing of the by- laws on time will not result in the automatic
dissolution of the corporation. Such consequence is not provided
in the Corporation Code.
1. Pursuant to Section 6(i, 5) of Pres. Decree No. 902-A(see Sec.19),
the failure to file a code of by-laws within one (1) month from the
date of incorporation with the SEC shall render the corporation
liable to the revocation of its registration.
2. There must, first of all, be a hearing to determine the existence
of the ground, and assuming such finding, the penalty is not
necessarily revocation but may only be revocation.
3.Under the rules and regulations of the Commission, the failure
may be merely with the imposition of an administrative fine.
Corporation Law (2019) MIDTERM REVIEWER
EFFECT OF FAILURE TO ADOPT BY-LAWS:
 Only gives a ground to penalize the Corporation and not
an automatic dissolution or termination of its franchise.
 The penalty is not found in the Corporation Code.
 Basis of the penalty: Section 6 of P.D. 902-A with respect
to the power of the Securities and Exchange
Commission to suspend or revoke a corporation’s
registration.
 Under this law, it is still a requirement that the
corporation is accorded with due process which is
satisfied by due notice and hearing. Therefore, still not
automatic suspension or revocation.
CONTENTS OF BY-LAWS
Section. 46. Contents of By-laws. –A private corporation may
provide the following in its by-laws:
a. The time, place and manner of calling and conducting regular
or special meetings of the directors or trustees;
b. The time and manner of calling and conducting regular or
special meetings and mode of notifying of the stockholders or
members thereof;
c. The required quorum in meetings of stockholders or
members and the manner of voting therein;
d. The modes by which a stockholder, member, director, or
trustee may attend meetings and cast their votes;
e. The form for proxies of stockholders and members and the
manner of voting them;
f. The directors’ or trustees’ qualifications, duties, and
responsibilities, the guidelines for settling the compensation of
directors’ or trustees’ and officers, and the maximum number
of other board representations hat an independent director or
trustee may have which shall, in no case, be more than the
number prescribed by the commission;
g. The time for holding the annual election of directors or
trustees and the mode or manner of giving notice thereof;
h. The manner of election or appointment and the term of
office of all officers other than directors or trustees;
i. The penalties for violation of the by-laws; In the case of stock
corporations, the manner of issuing stock certificates; and
j. Such other matters as may be necessary for the proper or
convenient transaction of its corporate affairs for the
promotion of good governance and anti-graft and corruption
measures.
An arbitration agreement may be provided in the by-laws
pursuant to section 181 of this code.
The time and manner of calling and conducting regular or special
meetings of the stockholders or members
 The by-laws does not provide for the place of the
meeting for Stockholders or Members because the
Articles of Incorporation has provided for it which is the
principal place of business.
 It is different with the Board of Directors that they can
hold there meeting anywhere.
The required quorum in meetings of stockholders or members
and the manner of voting therein
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 The by-laws may provide for quorum but it must not be
less than what is required in the corporation code.
Therefore, it cannot be less than 50% + 1. If the by-laws
does not provide for the quorum, the default is what is
Stated in Section 25 of the Corporation Code which
refers to the “majority holding the outstanding capital
stock”. It is counted by shares and not by the number of
persons.
 Majority is counted as 50% + 1
NOTE:
If it is more than the majority it is called as Super Majority quorum
WHY BY-LAWS CANNOT PROVIDE THE MANNER OF VOTING OF THE ELECTION OF
BOARD OF DIRECTORS?
VOTING FOR ELECTION OF DIRECTORS IS NOT THE SAME AS THE VOTING FOR OTHER
MATTERS BY THE STOCKHOLDERS. VOTING FOR OTHER MATTER OR APPROVAL BY
THE STOCKHOLDER REQUIREMENT IS BASED FROM THE NUMBER OF SHARES. IF THE
LAW OR THE BY-LAWS ALLOW FOR THE MAJORITY THEN BASE IT FROM THE
OUTSTANDING CAPITAL STOCK. IF IT REQUIRES 2/3 VOTES, THEN YOU JUST NEED
TO GET THE APPROVAL OF THE HOLDERS OF THE 2/3 OF OUTSTANDING CAPITAL
STOCK. TAKE POPULATION AS A WHOLE. THAT’S ORDINARY RATIFICATION OR
APPROVAL BY STOCKHOLDERS.
HOWEVER, VOTING FOR ELECTION OF DIRECTORS IS NOT THE SAME. THIS
REQUIRES CUMULATIVE VOTING OF STOCKHOLDERS. MEANING, YOUR VOTE IS
COUNTED BY THE NUMBER OF VACANCIES IN THE BOARD MULTIPLIED BY THE
NUMBER OF SHARES IN THE CORPORATION.
EXAMPLE
THERE ARE 5 VACANCIES AND YOU HAVE 100 SHARES, THE CORPORATION GIVES
THE STOCKHOLDER 500 VOTES ALLOWED. FOR ORDINARY MATTER, YOU CAN ONLY
VOTE 100 OR THE NUMBER OF VOTES THAT YOU HAVE. FOR ELECTION OF
DIRECTORS, ITS CUMULATIVE OR THE NUMBER OF VACANCIES MULTIPLIED THE
NUMBER OF SHARES YOU HAVE.
THE BY-LAWS CANNOT PROVIDE FOR ANY OTHER MANNER OF VOTING IN THE
ELECTION OF DIRECTORS, OTHER THAN WHAT IS PROVIDED IN THE LAW WHICH IS
CUMULATIVE VOTING. IT HAS TO COMPLY WITH THE CORPORATION CODE.
THEREFORE, BY-LAWS SHOULD NOT BE CONTRARY TO THE PROVISIONS OF THE
CONSTITUTION, THE CORPORATION CODE, OTHER SPECIAL LAWS, AND THE
ARTICLES OF INCORPORATION.
IF THERE IS A CONFLICT BETWEEN THE BY-LAWS AND CONSTITUTION, THE
CORPORATION CODE, OTHER SPECIAL LAWS, AND THE ARTICLES OF
INCORPORATION, SUBSTANTIVE LAWS WILL PREVAIL.
GRACE CHRISTIAN HIGH SCHOOL VS. CA
Facts:
In 1968, when the by-laws of the Grace Village Association Inc.
was adopted, it states that the director shall be elected every
year and shall serve for one year. An amendment was made in
1975 in the by-laws making the representative of Grace
Christian High School as permanent Director of the
Association. This draft was never presented to the general
membership for approval. In 1990, Mr. James Tan, the
principal of the said school was informed by the association
that “it was the sentiment that all directors should be elected
by members of the association”.
Corporation Law (2019) MIDTERM REVIEWER
A suit for mandamus in the HIGC was brought by the school to
compel the board of directors of the association to recognize
its right to a permanent seat in the board.
SEC: practice of allowing unelected members in the board was
contrary to the existing by-laws of the association and to the
Corporation Code.
Moreover, the said by-laws which made the School
representative as permanent director of the board was merely
a proposal and never been ratified by its members.
SC: There was no valid amendment of the association’s by-laws
because there was a failure to comply with the requirement of
its existing by-laws and the Corporation Code pertaining to the
manner of voting of board of directors. It is worthy to note that
the proposed amendment to the by-laws was never approved
by the holders of the association representing majority of the
outstanding capital stock as required by the provisions of the
law and its own by-laws. Further, the law provides that the
position must be elected. Petitioner has not acquired
a vested right despite its long and continued “practice” since
practice, no matter how long continued, cannot give rise to any
vested right if its contrary to law.
DISCUSSION OF THE CASE:
In order to be elected as a director, you need to be a
stockholder or in order for you to be a trustee, you need to be
a member. You cannot be elected as a director or a trustee
when you are not a stockholder or a member of a corporation.
The representative of Grace Christian High School in this case
is not a member of the village association. He just sits in the
board as a representative of Grace Christian School. This is not
allowed under the law. Even if it was provided in the by-laws
and the latter is approved by the SEC, that by-laws cannot be
contrary to the Corporation Code. Clearly, the latter should
prevail.
This case was worse because the by-laws giving the principal a
permanent seat in the board was never approved by the SEC.
Even if it was approved, the Corporation Code requirement will
still prevail. By laws, cannot put a requirement that is contrary
to the provisions of the Corporation Code.
Moreover, even the fact that it has been practiced from 1975
to 1990s , that’s not mean that you have a vested right to the
position because the law gives a specific qualification on who
can be considered as directors or trustees. If you do not fall
within the requirement of the law then you cannot be elected
as director or trustee even if it is provided in the by-laws.
Persons bound by the By-Laws
1. Corporation
2. Directors
3. Board of Trustees
4. Stockholders
Persons not bound by the By-Laws
1. Any person who has no actual knowledge of the
corporation
2. Employees of the corporation
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CHINABANK V CA
FACTS:
Calapatia pledged his VGCCI stocks to Chinabank (CBC). CBC
informed VGCCI and asked the latter to record it in its books to
which the latter acceded. Calapatia obtained a loan from CBC
secured by the pledge agreement. He failed to pay thus CBC
extrajudcially foreclosed the mortgage which resulted in CBC
as the highest bidder. VGCCI refused to transfer the stock in
the name of CBC due to Calapatia’s unsettled accounts (unpaid
monthly dues). Instead, VGCCI sent a demand letter to
Calapatia and later on informed the latter of the termination
of his membership to the sale of his stocks which was also
conducted by VGCCI. CBC protested such sale.
VGGCCI STATED THAT UNDER ITS BY-LAWS, A member cannot
sell his shares if there are unpaid obligations to the country
club.
ISSUE: WHETHER CBC IS BOUND BY VGCCI’S BYLAWS
HELD:
Since China bank is not among those enumerated by law as
being bound by the by-laws of a corporation, CBC is not bound
by that specific requirement of the by-laws.
If Chinabank was notified by the bank when he applied for the
registration of the pledge Effect: it would make a difference ,
since he would have prior knowledge.
In this case, the notice given by the country club came in too
late, since they only notified CB only after the pledge has
aldready been foreclose, they did not notify upon the
registration of the pledge.
Therefore, Chinabank is not bound by the by-law for being a
third person without prior knowledge.
CEBU MACTAN MEMBERS INC V TSUKAHARA
Facts:
on February 1994, the CMMCI President, purportedly on behalf
of CMMCI, obtained a loan amounting to P6,500,000 from
Tsukahara. As payment for the loan, CMMCI issued seven
postdated checks of CMMCI payable to Tsukahara. On 13 April
1994, Sugimoto, again purportedly on behalf of CMCI,
obtained another loan amounting to P10,000,000 from
Tsukahara. Sugimoto executed and signed a promissory note
in his capacity as CMMCI President and Chairman, as well as in
his personal capacity. Upon maturity, the checks were
presented for payment but the same were dishonored by PNB,
the drawee bank. After several failed attempts to collect the
loan Tsukahara filed a case for collection of sum of money
against CMMCI and Sugimoto with the Regional Trial Court.
ISSUE: WHETHER CMMMI’S PRESIDENT CAN BIND THE
CORPORATION EVEN THOUGH IT ACTED WITHOUT AUTHORITY
FROM THE BOARD, BUT UNDER THE AUTHORITY FROM THE
CORPORATION’S BYLAWS
HELD:
The Supreme Court ruled that the CMMCI President is given
the power under CMMCI’s by-laws to borrow money, execute
contracts, and sign and indorse checks and promissory notes,
in the name and on behalf of CMMCI.
Corporation Law (2019) MIDTERM REVIEWER
ARTICLE III
Officers
2. President. The President shall be elected by the Board of
Directors from their own number. He shall have the following
powers and duties . . .
c. Borrow money for the company by any legal means
whatsoever, including the arrangement of letters of credit and
overdrafts with any and all banking institutions;
d. Execute on behalf of the company all contracts and
agreements which the said company may enter into;
e.Sign, indorse, and deliver all checks, drafts, bill of exchange,
promissory notes and orders of payment of sum of money in
the name and on behalf of the corporation
With such powers expressly conferred under the corporate by-
laws, the Supreme Court ruled that the CMMCI president, in
exercising such powers, need not secure a resolution from the
company’s board of directors:
“Thus, given the president’s express powers under the
CMMCI’s by-laws, Sugimoto, as the president of CMMCI, was
more than equipped to enter into loan transactions on
CMMCI’s behalf. Accordingly, the loans obtained by Sugimoto
from Tsukahara on behalf of CMMCI are valid and binding
against the latter, and CMMCI may be held liable to pay such
loans.”
A corporate officer may represent and bind the corporation in
transactions with third persons to the extent that the authority
to do so has been intentionally, incidentally or impliedly
conferred upon him, or by apparent powers as corporation has
caused persons dealing with its officer or agent to believe that
it has conferred.
Discussion:
The corporation, its stockholders and officers are bound by its
by-laws. The third person therefore have the right to rely on
the provision or authority in the by-laws. The corporation,
when it provides for certain authority in its by-laws (which is it
is allowed to do) is bound by such authority. When the
corporation provide for certain authorities for its officers in its
by-laws, it cannot thereafter retract and say later on that it is
not what they intend to so long as such authority is expressly
provided in the by-laws and so long as it is not contrary to laws
and public policy. Ordinarily, any transaction entered into by
the corporation should be done by the board of directors, so
supposedly without the approval of the board of directors the
corporation cannot transact business. In this case there was no
approval by the board of directors it was just the president
himself who signed the documents, however such is still
binding to the corporation because it is expressly provided in
their by-laws.
GOKONGWEI JR. V SEC
Facts:
In this case petitioner Gokongwei is a stockholder of San Miguel
Corporation. He filed a case for the declaration of nullity of the
amended by-laws of respondent corporation because he allege
that the said amendment made by the stockholders is done to
prejudice him because at that time, he was qualified to be
elected as a board of director. The respondent on the other
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hand contended that Gokongwei cannot successfully impugn
the amendment of the by-laws because they discovered that
Gokongwei, although he was a stockholder of San Miguel, he
was also at the same time a controlling stockholder of UFC AND
CFC who are also stockholders of San Miguel Corporation and in
that instance they discovered that these two corporations which
are controlled by Gokongwei, are also engaged in businesses in
competition with San Miguel. Taking from this, in most of the
meetings that they had, the stockholders voted against the
election of Gokongwei in fact in one meeting the stockholders
voted 80% against Gokongwei and in another meeting 90%
against him.
Discussion:
What was Gokongwei fighting against?
He was fighting against the amendment of the by-laws because
the amendment will disqualify him from being elected as a
Board of Director. The amendment provides for a ground to
disqualify a nominee from election to the board. Under the
proposed amendment of San Miguel, it provides that a nominee
who holds a competing interest or conflicting interest against
the corporation may not be elected as a director.
In this case, the voting of the Justices were tied. They dismissed
the question on the validity of the by-laws for failure to acquire
the necessary votes. However it mentioned in the decision that
the stockholders can amend the by-laws because as a rule when
a stockholders enters into corporation it submits to the idea that
the decisions are controlled by the majority and in this case he
cannot acquire any vested right to the position and that by
virtue of the fact that he has antagonistic claims or being the
controlling stockholder of two corporations which are in
competition with SMC. SMC therefore has a right to protect its
interest that is why the stockholders can validly amend the by-
laws. (The corporation has the authority to provide for
qualifications.)
What is the ground in order to render the qualifications and
disqualifications valid?
IT MUST BE REASONABLE.
In this case, the Supreme Court mentioned that reasonableness
is a question of whether or not the provisions in the by-laws are
applied without qualification. SC held that the provision is
reasonable because it applies to all, it does not apply to a
specific person. So any provision in the by- laws which provides
for qualification and disqualifications of directors in the election
of directors is a valid provision provided that it applies to all and
not just to a specific person.
AMENDMENT OF BY-LAWS
Section 47. Amendment to by-laws –A MAJORITY
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 THE 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 the by-laws or adopt new bylaws:
Provided, That any power delegated to the board of directors
or trustees to amend or repeal the by-laws or adopt new by-
laws shall be considered as revoked whenever stockholders
Corporation Law (2019) MIDTERM REVIEWER
owning or representing a majority of the outstanding
capital stock or a majority of the members in shall so vote at a
regular or special meeting.
Whenever the by-laws are amended or new by-laws are
adopted, the corporation shall file with the commission such
amended or new by-laws and, if applicable, the stockholders’
or members’ resolution authorizing the delegation of the
power to amend and/or adopt new by-laws, duly certified
under oath by the corporate secretary and a majority of the
directors or trustees.
The amended or new by-laws shall only be effective upon the
issuance by the Commission of a certification that the same is
in accordance with this Code and other relevant laws.
AMENDMENT OF BY LAWS CAN BE DONE IN TWO (2) MODES:
1. DIRECT METHOD – done by the vote of majority of the
board and the owners of at least the majority of the
outstanding capital stock
Requirements:
a. Vote of the Majority of the Board of
Directors/trusees
b. Vote of the stockholders owning at least
majority of the Outstanding capital stock
2. INDIRECT METHOD – this is when the power to amend
the by-laws are delegated to the Board alone.
Requirements:
a. The power to amend/repeal the by-laws must
be delegated to the board by the owners of
the 2/3 of the outstanding capital stock to the
board.
b. After the delegation, the power to
amend/repeal the by-laws is now solely
lodged in the board.
NOTE:
To revoke the delegation of the power to amend/repeal the by-
laws, ownly the vote of the stockholders owning a majority of the
outsanding capial stock is needed.
DIFFERENCE BETWEEN THE TWO MODES:
 1ST mode is approved by both the BOD and
Stockholders; 2nd mode is only to be approved by BOD.
 In the 1st mode the stockholders actually approve what’s
in the amended by law. First the BOD then the
Stockholders approve. In the 2nd mode, the stockholders
do not actually see what’s in the amended by-laws
because the stockholder’s approval comes first
(approval to delegate to the BOD the power to amend
the by-laws).
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TITLE VI - MEETINGS
KINDS OF MEETINGS
SECTION 48. Kinds of Meetings. — Meetings of directors,
trustees, stockholders, or members may be regular or special.
MEETINGS OF STOCKHOLDERS AND MEMBERS
SECTION 49. Regular and Special Meetings of Stockholders or
Members. — Regular meetings of stockholders or members
shall be held annually on a date fixed in the bylaws, or if not so
fixed, on any date after April 15 of every year as determined by
the board of directors or trustees: Provided, That written notice
of regular meetings shall be sent to all stockholders or members
of record at least twenty-one (21) days prior to the meeting,
unless a different period is required in the by-laws, law, or
regulation: Provided, further, That written notice of regular
meetings may be sent to all stockholders or members of record
through electronic mail or such other manner as the
Commission shall allow under its guidelines.
At each regular meeting of stockholders or members, the board
of directors or trustees shall endeavor to present to
stockholders or members the following:
(a) The minutes of the most recent regular meeting which shall
include, among others:
(1) A description of the voting and vote tabulation procedures
used in the previous meeting;
(2) A description of the opportunity given to stockholders or
members to ask questions and a record of the questions asked
and answers given;
(3) The matters discussed and resolutions reached;
(4) A record of the voting results for each agenda item;
(5) A list of the directors or trustees, officers and
stockholders or members who attended the meeting; and
(6) Such other items that the Commission may require in the
interest of good corporate governance and the protection of
minority stockholders;
(b) A members’ list for non-stock corporations and,for stock
corporations, material information on the current
stockholders, and their voting rights;
(c) A detailed, descriptive, balanced and comprehensible
assessment of the corporation’s performance, which shall
include information on any material change in the
corporation’s business, strategy, and other affairs;
(d) A financial report for the preceding year, which shall
include financial statements duly signed and certified in
accordance with this Code and the rules the Commission may
prescribe, a statement on the adequacy of the corporation’s
internal controls or risk management systems, and a
statement to fall external audit and non-audit fees;
(e) An explanation of the dividend policy and the fact of
payment of dividends or the reasons for nonpayment thereof;
(f) Director or trustee profiles which shall include, among
others, their qualifications and relevant experience, length of
service in the corporation, trainings and continuing education
attended, and their board representations in other
corporations;
(g) A director or trustee attendance report, indicating the
attendance of each director or trustee at each of the meetings
of the board and its committees and in regular or special
stockholder meetings;
(h) Appraisals and performance reports for the board
and the criteria and procedure for assessment;
Corporation Law (2019) MIDTERM REVIEWER
(i) A director or trustee compensation report prepared in
accordance with this Code and the rules the Commission may
prescribe;
(j) Director disclosures on self-dealings and related party
transactions; and/or
(k) The profiles of directors nominated or seeking election or
reelection.
A director, trustee, stockholder, or member may propose any
other matter for inclusion in the agenda at any regular meeting
of stockholders or members.
Special meetings of stockholders or members shall be held at
any time deemed necessary or as provided in the bylaws:
Provided, however, That, at least one (1) week written notice
shall be sent to all stockholders or members, unless a different
period is provided in the bylaws, law, or regulation.
A stockholder or member may propose the holding of a special
meeting and items to be included in the agenda.
Notice of any meeting may be waived, expressly or impliedly,
by any stockholder or member: Provided, That, general
waivers of notice in the articles of incorporation or the bylaws
shall not be allowed: Provided, further, that attendance at a
meeting shall constitute a meeting for the express purpose of
objecting to the transaction of any business because the
meeting is not lawfully called or convened.
Whenever for any cause, there is no person authorized or the
person authorized unjustly refuses to call a meeting, the
Commission, upon petition of a stockholder or member on a
showing of good cause therefor, may issue an order, directing
the petitioning stockholder or member to call a meeting of the
corporation by giving proper notice required by this Code or
the bylaws. The petitioning stockholder or member shall
preside thereat until at least a majority of the stockholders or
members present have chosen from among themselves, a
presiding officer.
Unless the bylaws provide for a longer period, the stock and
transfer book or membership book shall be closed at least
twenty (20) days for regular meetings and seven (7) days for
special meetings before the scheduled date of the meeting.
In case of postponement of stockholders’ or members’ regular
meetings, written notice thereof and the reason therefor shall
be sent to all stockholders or members of record at least two
(2) weeks prior to the date of the meeting, unless a different
period is required under the bylaws, law or regulation.
The right to vote of stockholders or members may be exercised
in person, through a proxy, or when so authorized in the
bylaws, through remote communication or in absentia. The
Commission shall issue the rules and regulations governing
participation and voting through remote communication or in
absentia, taking into account the company’s scale, number of
shareholders or members, structure, and other factors
consistent with the protection and promotion of shareholders’
or members’ meetings.
PLACE AND TIME
Section 50. Place and Time of Meetings of Stockholders or
Members. – Stockholders’ or members’ meetings, whether
regular or special, shall be held in the principal office of the
corporation as set forth in the articles of incorporation, or, if
not practicable, in the city or municipality where the principal
office of the corporation is located:
Provided, That any city or municipality in Metro Manila, Metro
Cebu, Metro Davao, and other Metropolitan areas shall, for
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purposes of this section, be considered a city or municipality.
Notice of meetings shall be sent through the means of
communication provided in the bylaws, which notice shall
state the time, place and purpose of the meetings.
Each notice of meeting shall further be accompanied by the
following:
(a) The agenda for the meeting;
(b) A proxy form which shall be submitted to the corporate
secretary within a reasonable time prior to the meeting;
(c) When attendance, participation, and voting are allowed by
remote communication or in absentia, the requirements and
procedures to be followed when a stockholder or member
elects either option; and
(d) When the meeting is for the election of directors
or trustees, the requirements and procedure for nomination
and election.
All proceedings and any business transacted at a
meeting of the stockholders or members, if within the
powers or authority of the corporation, shall be valid
even if the meeting is improperly held or called:
Provided, That all the stockholders or members of the
corporation are present or duly represented at the meeting
and not one of them expressly states at the beginning of the
meeting that the purpose of their attendance is to object to
the transaction of any business because the meeting is not
lawfully called or convened.
NOTE: Please check the rest of Section 49 of the Revised
Corporation Code. There is a long list of what is to be presented in
meetings. It was not discussed in class.
KINDS OF MEETINGS
REGULAR
 DIRECTORS OR TRUSTEES’ REGULAR MEETING
 STOCKHOLDER OR MEMBERS’ REGULAR MEETING
SPECIAL
 DIRECTORS OR TRUSTEES’ REGULAR MEETING
 STOCKHOLDER OR MEMBERS’ REGULAR MEETING
MEETINGS OF STOCKHOLDERS/MEMBERS
REGULAR MEETINGS OF STOCKHOLDERS
WHEN
 Annually
 On a date fixed in the by-laws,
a. or if not so fixed, on any date after April 15 of
every year, as determined by the board of
directors or trustees
WHERE
(a) principal office of the corporation as set forth in the
articles of incorporation
(b) if not practicable, in the city or municipality where the
principal office of the corporation is located: Provided,
That any city or municipality in Metro Manila, Metro
Cebu, Metro Davao, and other Metropolitan areas shall,
for purposes of this section, be considered a city or
municipality.
Corporation Law (2019) MIDTERM REVIEWER
written notice of regular meetings -
 shall be sent to all stockholders or members of record
at least twenty-one (21) days prior to the meeting
unless the by-laws provide for a longer period
SPECIAL MEETINGS OF STOCKHOLDERS
WHEN
 Any time as deemed necessary
WHERE
(a) principal office of the corporation as set forth in the
articles of incorporation
(b) if not practicable, in the city or municipality where the
principal office of the corporation is located: Provided,
that any city or municipality in Metro Manila, Metro
Cebu, Metro Davao, and other Metropolitan areas shall,
for purposes of this section, be considered a city or
municipality.
Written notice of special meetings
 at least one (1) week before the meeting unless a
different period is provided in the bylaws, law, or
regulation.
SIMNY G. GUY, VS. GILBERT G. GUY,
G.R. No. 184068. April 19, 2016.
(Attorney’s lecture):
The issue in this case was that the Stockholders did not receive
the notice but it was sent. There was a question W/N the
meeting was valid. The Supreme Court ruled that the law and
the by-laws of the corporation are unambiguous, it only require
the sending of notices and nothing therein state that it should
be received by the SHs.
To send in Corporation Code is different from Remedial Law in
terms of filing or sending of petitions/ documents which
requires receipt, here it does not.
In this case, the president was able to prove that notices were
sent to all SHs, so the SC upheld the validity of the meeting even
if some SHs were not able to receive the notice.
‘Depositing in the mail of the notice is sufficient as part of
sending. Receipt is not required.” Thus, the corporation need
not show that the notice was received unless the by-laws of that
corporation specifically requires.
FACTS:
GCI is a family-owned corporation of the Guy family .
On 10 September 2004, Paulino Delfin Pe and Benjamin Lim
(stockholders of record of GCI) informed Simny that they had
received a notice dated 31 August 2004 calling for the holding
of a special stockholders' meeting on 7 September 2004.
On 30 September 2004, Simny, for himself and on behalf of GCI
and Grace Guy Cheu, filed a Complaint against respondents for
the "Nullification of Stockholders' Meeting. He argued on the
following grounds:
(1) there was no previous notice to Simny and Cheu; (2) the
meeting was not called by the proper person; and (3) the notices
were not issued by the person who had the legal authority to do
so.
Gilbert argued that the meeting on was legally called and held;
that the notice of meeting was signed by the authorized officer
of GCI and sent in accordance with the by-laws of the
corporation
ISSUE:
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Whether or not the notice of the stockholders' meeting was
properly sent in compliance with law and the by-laws of the
corporation?
HELD:
YES. Special meetings of stockholders or members shall be held
at any time deemed necessary or as provided in the by-laws:
Provided, however, that at least one (1) week written notice
shall be sent to all stockholders or members, unless otherwise
provided in the by-laws. Notice of any meeting may be waived,
expressly or impliedly, by any stockholder or member.
The Court finds that the provisions under Sec. 50 of the
Corporation Code and the by-laws of GCI are clear and
unambiguous. They do not admit of two or more meanings, nor
do they make reference to two or more things at the same time.
The provisions only require the sending/mailing of the notice of
a stockholders' meeting to the stockholders of the corporation.
Sending/mailing is different from filing or service under the
Rules of Court. Had the lawmakers intended to include the
stockholder's receipt of the notice, they would have clearly
reflected such requirement in the law. Absent that requirement,
the word "send" should be understood in its plain meaning:
‘Depositing in the mail of the notice is sufficient as part of
sending. Receipt is not required.” Thus, the corporation need
not show that the notice was received unless the by-laws of that
corporation specifically requires.
WHO CAN CALL THE MEETING?
1. Any person designated in the by-laws; or
2. In the absence of that provision or in case of refusal of the said
person to call the meeting, then the stockholder may
petition the SEC to order the calling of the meeting. So, the
SEC will issue an order directing the petitioning stockholder
to call the meeting to call the meeting of the corporation.
BERNAS VS. CINCO
G.R. No. 163356-57, July 10, 2015 - cited provisions based on Old
Corporation Code
(Atty’s lecture:)
Here is a case of an Oversight Committee calling for a meeting
to overthrow the current directors or officers of the corporation.
In this case, the SC held that the meeting was improperly called,
IOW void. The Oversight Committee did not have the authority
to call the meeting. It ruled that it could have been allowed if
the stockholders did not have any options but its by-laws and
the law provided the option. One contention in this case was
that the sitting officers, of course, would not call a meeting to
oust themselves. The SC said that it may be true but they were
not left without any recourse because they can always go to the
SEC and petition the SEC for the calling of the meeting. Hence,
the meeting in this case was invalid for it was called for by
people who were not authorized to do it and consequently, the
election held was also invalid.)
FACTS:
Makati Sports Club (MSC) is a domestic corporation duly
organized and existing under Philippine laws for the primary
purpose of establishing, maintaining, and providing social,
cultural, recreational and athletic activities among its members.
Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas),
Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T.
Frondoso, Ignacio T. Macrohon and Paulino T. Lim (Bernas
Group) were among the Members of the Board of Directors and
Corporation Law (2019) MIDTERM REVIEWER
Officers of the corporation whose terms were to expire either in
1998 or 1999.
Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo
Librea and Alex Y. Pardo (Cinco Group) are the members and
stockholders of the corporation who were elected Members of
the Board of Directors and Officers of the club during the 17
December 1997 Special Stockholders Meeting.
Alarmed with the rumored anomalies in handling the corporate
funds, the MSC Oversight Committee (MSCOC), composed of
the past presidents of the club, demanded from the Bernas
Group, who were then incumbent officers of the corporation, to
resign from their respective positions to pave the way for the
election of new set of officers. Resonating this clamor were the
stockholders of the corporation representing at least 100 shares
who sought the assistance of the MSCOC to call for a special
stockholders meeting for the purpose of removing the sitting
officers and electing new ones. Pursuant to such request, the
MSCOC called a Special Stockholders’ Meeting and sent out
notices to all stockholders and members stating therein the
time, place and purpose of the meeting. For failure of the
Bernas Group to secure an injunction before the Securities
Commission (SEC), the meeting proceeded wherein Jose A.
Bernas, Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T.
Frondoso, Ignacio T. Macrohon, Jr. and Paulino T. Lim were
removed from office and, in their place and stead, Jovencio F.
Cinco, Ricardo G. Librea, Alex Y. Pardo, Roger T. Aguiling, Rogelio
G. Villarosa, Armando David, Norberto Maronilla, Regina de
Leon-Herlihy and Claudio B. Altura, were elected.
Aggrieved by the turn of events, the Bernas Group initiated an
action before the Securities Investigation and Clearing
Department (SICD) of the SEC docketed as SEC Case No. 5840
seeking for the nullification of the 17 December 1997 Special
Stockholders Meeting on the ground that it was improperly
called. Citing Section 28 of the Corporation Code, the Bernas
Group argued that the authority to call a meeting lies with the
Corporate Secretary and not with the MSCOC which functions
merely as an oversight body and is not vested with the power to
call corporate meetings. For being called by the persons not
authorized to do so, the Bernas Group urged the SEC to declare
the 17 December 1997 Special Stockholders’ Meeting, including
the removal of the sitting officers and the election of new ones,
be nullified.
For their part, the Cinco Group insisted that the 17 December
1997 Special Stockholders’ Meeting is sanctioned by the
Corporation Code and the MSC by-laws. In justifying the call
effected by the MSCOC, they reasoned that Section 25 of the
MSC by-laws merely authorized the Corporate Secretary to issue
notices of meetings and nowhere does it state that such
authority solely belongs to him. It was further asseverated by
the Cinco Group that it would be useless to course the request
to call a meeting thru the Corporate Secretary because he
repeatedly refused to call a special stockholders’ meeting
despite demands and even filed a suit to restrain the holding of
a special meeting.
ISSUE: W/N the meeting was validly called?
No. The Special Stockholders' Meeting called by the Oversight
Committee cannot have any legal effect. The removal of the
Bernas Group, as well as the election of the Cinco Group,
effected by the assembly in that improperly called meeting is
void, and since the Cinco Group has no legal right to sit in the
board, their subsequent acts of expelling Bernas from the club
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and the selling of his shares. at the public auction, are likewise
invalid.
The Corporation Code laid down the rules on the removal of the
Directors of the corporation by providing, inter alia, the persons
authorized to call the meeting and the number of votes required
for the purpose of removal, thus:
Textually, only the President and the Board of Directors are
authorized by the by-laws to call a special meeting. In cases
where the person authorized to call a meeting refuses, fails or
neglects to call a meeting, then the stockholders representing at
least 100 shares, upon written request, may file a petition to call
a special stockholder's meeting.
In the instant case, there is no dispute that the 17 December
1997 Special Stockholders' Meeting was called neither by the
President nor by the Board of Directors but by the MSCOC.
While the MSCOC, as its name suggests, is created for the
purpose of overseeing the affairs of the corporation, nowhere
in the by-laws does it state that it is authorized to exercise
corporate powers, such as the power to call a special meeting,
solely vested by law and the MSC by-laws on the President or
the Board of Directors.
The board of directors is the directing and controlling body of
the corporation. It is a creation of the stockholders and derives
its power to control and direct the affairs of the corporation
from them. The board of directors, in drawing to itself the power
of the corporation, occupies a position of trusteeship in relation
to the stockholders, in the sense that the board should exercise
not only care and diligence, but utmost good faith in the
management of the corporate affairs.
The underlying policy of the Corporation Code is that the
business and affairs of a corporation must be governed by a
board of directors whose members have stood for election, and
who have actually been elected by the stockholders, on an
annual basis. Only in that way can the continued accountability
to shareholders, and the legitimacy of their decisions that bind
the corporation's stockholders, be assured. The shareholder
vote is critical to the theory that legitimizes the exercise of
power by the directors or officers over the properties that they
do not own.
Even the Corporation Code is categorical in stating that a
corporation exercises its powers through its board of directors
and/or its duly authorized officers and agents, except in
instances where the Corporation Code requires stockholders'
approval for certain specific acts (Section 23, Old Code).
A corporation's board of directors is understood to be that body
which (1) exercises all powers provided for under the
Corporation Code; (2) conducts all business of the corporation;
and (3) controls and holds all the property of the corporation.
Its members have been characterized as trustees or directors
clothed with fiduciary character.25
It is ineluctably clear that the fiduciary relation is between the
stockholders and the board of directors and who are vested with
the power to manage the affairs of the corporation. The
ordinary trust relationship of directors of a corporation and
stockholders is not a matter of statutory or technical law. It
springs from the fact that directors have the control and
guidance of corporate affairs and property and hence of the
property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and
are ultimately the only beneficiaries thereof. Should the board
fail to perform its fiduciary duty to safeguard the interest of the
stockholders or commit acts prejudicial to their interest, the law
Corporation Law (2019) MIDTERM REVIEWER
and the by-laws provide mechanisms to remove and replace the
erring director.
Relative to the powers of the Board of Directors, nowhere in the
Corporation Code or in the MSC by-laws can it be gathered that
the Oversight Committee is authorized to step in wherever
there is breach of fiduciary duty and call a special meeting for
the purpose of removing the existing officers and electing their
replacements even if such call was made upon the request of
shareholders. Needless to say, the MSCOC is neither
empowered by law nor the MSC by-laws to call a meeting and
the subsequent ratification made by the stockholders did not
cure the substantive infirmity, the defect having set in at the
time the void act was done. The defect goes into the very
authority of the persons who made the call for the meeting. It is
apt to recall that illegal acts of a corporation which contemplate
the doing of an act which is contrary to law, morals or public
order, or contravenes some rules of public policy or public duty,
are, like similar transactions between individuals, void.They
cannot serve as basis for a court action, nor acquire validity by
performance, ratification or estoppel. The same principle can
apply in the present case. The void election of 17 December
1997 cannot be ratified by the subsequent Annual Stockholders'
Meeting.
A distinction should be made between corporate acts or
contracts which are illegal and those which are merely ultra
vires. The former contemplates the doing of an act which are
contrary to law, morals or public policy or public duty, and are,
like similar transactions between individuals, void: They cannot
serve as basis of a court action nor acquire validity by
performance, ratification or estoppel. Mere ultra vires acts, on
the other hand, or those which are not illegal or void ab initio,
but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding
and enforceable when ratified by the stockholders. The 1 7
December 1997 Meeting belongs to the category of the latter,
that is, it is void ab initio and cannot be validated.
IMPROPERLY CALLED MEETINGS
Improperly called meetings can be considered valid provided:
1. ALL the stockholders attend or duly represented during
that meeting.
2. not one of those stockholders attended just for the
purpose of objecting to the calling or holding of the
meeting.
Even if the meeting is improperly held or improperly called, all
transactions all resolutions approved during the stockholders’
meeting can still be considered as valid provided that ALL the
stockholders attend or duly represented during that meeting.
The new amendment added a new caveat, provided that not
anyone of those stockholders attended just for the purpose of
objecting to the calling or holding of the meeting.
so even if the stockholders are duly represented or are present,
but one of them was there just to object the calling or the holding
of the meeting then you cannot apply the exception that the
meeting is still valid even if it’s improperly held or called provided
all the stockholders are present or duly represented.
METHODS OF ATTENDING MEETING:
1. IN PERSON
2. BY PROXY
3. IN ABSENTIA – remote communication
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Previously under the old Corporation Code they can attend in
person or by proxy but now the new law has added a third form
of attendance which is through remote communication or in
absentia, provided that in these two the vote shall be received
before the corporation finishes the tallying of the votes
QUORUM IN MEETINGS
SECTION 51. Quorum in Meetings. — Unless otherwise provided
in this Code or in the bylaws, a quorum shall consist of the
stockholders representing a majority of the outstanding
capital stock or a majority of the members in the case of
nonstock corporations.
STOCK CORPORATIONS
Based on the number of outstanding capital stocks (so long as it is
subscribed and outstanding)
NONSTOCK CORPORATIONS
Based on actual living members with the right to vote
DISCUSSION:
Ordinarily, the quorum of the stockholders is majority of the
outstanding capital stock or majority of members in case of non-
stock corporations. In ordinary approval by the stockholders you
just need to look at the outstanding 50% plus one (1) of the
outstanding capital stock meaning you don’t include treasury
shares.
But there are certain instances where two-thirds (2/3) vote is
required so those are exceptions to the rule that quorum is
majority because in those instances where 2/3 vote is required
you don’t use 50% plus one (1) the required vote is 2/3.
LEE TAN VS SYCIP, G.R. NO. 153468, AUGUST 17, 2006
Facts: Petitioner Grace Christian high school is a non-stock, non-
profit educational institution composed of 15 regular members
who are ALL members of the board of trustees.
An annual stockholder’s meeting was held and during that time,
4 members were already deceased effectively making both the
Board of Trustees (BOT) and Members(shareholders)
membership only 11.
During the meeting, only 7 members attended with their
respective proxies. When the meeting was sought to be
convened, Atty. Pacis objected arguing that there was no
quorum (50% plus 1).
Quorum if based on total member composition (15) - 8
Quorum if based on remaining alive members(11) - 6
In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia
Khoo, and Judith Tan were voted to replace the four deceased
member-trustees.
Issue: WON there was quorum in the meeting held.
Held: YES, THERE WAS QUORUM, hence the meeting was valid.
In the absence of an express charter or statutory provision to
the contrary, the general rule is that every member of a
nonstock corporation, and every legal owner of shares in a stock
corporation, has a right to be present and to vote in all corporate
meetings. Conversely, those who are not stockholders or
members have no right to vote. Voting may be expressed
personally, or through proxies who vote in their representative
capacities. Generally, the right to be present and to vote in a
meeting is determined by the time in which the meeting is held.
Section 52 of the Corporation Code states: "Section 52. Quorum
in Meetings. —Unless otherwise provided for in this Code or in
the by-laws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or a
majority of the members in the case of non-stock corporations."
Corporation Law (2019) MIDTERM REVIEWER
Stock Corporations
The right to vote is inherent in and incidental to the ownership
of corporate stocks. Only stock actually issued and outstanding
may be voted. Under Section 6 of the Corporation Code, each
share of stock is entitled to vote, unless otherwise provided in
the articles of incorporation or declared delinquent under
Section 67 of the Code. The intention of the lawmakers was to
base the quorum mentioned in Section 52 on the number of
outstanding voting stocks.
Nonstock Corporations
In nonstock corporations, the voting rights attach to
membership. 39 Members vote as persons, in accordance with
the law and the bylaws of the corporation. Each member shall
be entitled to one vote unless so limited, broadened, or denied
in the articles of incorporation or bylaws.
Section 25 of the Code specifically provides that a majority of
the directors or trustees, as fixed in the articles of incorporation,
shall constitute a quorum for the transaction of corporate
business (unless the articles of incorporation or the bylaws
provide for a greater majority). If the intention of the lawmakers
was to base the quorum in the meetings of stockholders or
members on their absolute number as fixed in the articles of
incorporation, it would have expressly specified so. Otherwise,
the only logical conclusion is that the legislature did not have
that intention.
In stock corporations, shareholders may generally transfer their
shares. Thus, on the death of a shareholder, the executor or
administrator duly appointed by the Court is vested with the
legal title to the stock and entitled to vote it.
On the other hand, membership in and all rights arising from a
nonstock corporation are personal and non-transferable, unless
the articles of incorporation or the bylaws of the corporation
provide otherwise. In other words, the determination of
whether or not "dead members" are entitled to exercise their
voting rights (through their executor or administrator), depends
on those articles of incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation
shall, among others, be terminated by the death of the member.
Section 91 of the Corporation Code further provides that
termination extinguishes all the rights of a member of the
corporation, unless otherwise provided in the articles of
incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead
members who are dropped from the membership roster in the
manner and for the cause provided for in the By-Laws of GCHS
are not to be counted in determining the requisite vote in
corporate matters or the requisite quorum for the annual
members' meeting. With 11 remaining members, the quorum in
the present case should be 6. Therefore, there being a quorum,
the annual members' meeting, conducted with six members
present, was valid.
Filling of Vaccancies in the BOT
Under Sec. 29 of the corporation code, trustees may fill
vacancies in the board, provided that those remaining still
constitute a quorum. The phrase "may be filled" in Section 29
shows that the filling of vacancies in the board by the remaining
directors or trustees constituting a quorum is merely
permissive, not mandatory. Corporations, therefore, may
choose how vacancies in their respective boards may be filled
up — either by the remaining directors constituting a quorum,
or by the stockholders or members in a regular or special
meeting called for the purpose.
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While a majority of the remaining corporate members were
present, however, the "election" of the four trustees cannot be
legally upheld for the obvious reason that it was held in an
annual meeting of the members, not of the board of trustees.
REGULAR AND SPECIAL MEETINGS OF BOD/ TRUSTEES
Section 52. Regular and Special Meetings of Directors or
Trustees; Quorum — Unless the articles of incorporation or the
bylaws provides for a greater majority, a majority of the
directors or trustees as stated in the articles of incorporation
shall constitute a quorum to transact corporate business, and
every decision reached by at least a majority of the directors
or trustees constituting a quorum, except for the election of
officers which shall require the vote of a majority of all the
members of the board, shall be valid as a corporate act.
Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the bylaws provide
otherwise.
Special meetings of the board of directors or trustees may be
held at any time upon the call of the president or as provided
in the bylaws.
Meetings of directors or trustees of corporations may be held
anywhere in or outside of the Philippines, unless the bylaws
provide otherwise. Notice of regular or special meetings
stating the date, time and place of the meeting must be sent
to every director or trustee at least two (2) days prior to the
scheduled meeting, unless a longer time is provided in the
bylaws. A director or trustee may waive this requirement,
either expressly or impliedly.
Directors or trustees who cannot physically attend or vote at
board meetings can participate and vote through remote
communication such as videoconferencing, teleconferencing,
or other alternative modes of communication that allow them
reasonable opportunities to participate. Directors or trustees
cannot attend or vote by proxy at board meetings.
A director or trustee who has a potential interest in any related
party transaction must recuse from voting on the approval of
the related party transaction without prejudice to compliance
with the requirements of Section 31 of this Code.
REGULAR MEETINGS OF THE BOARD OF DIRECTORS/TRUSTEES
WHEN
 Monthly
 unless the by-laws provide otherwise
WHERE
 anywhere in or outside of the Philippines, unless the
bylaws provide otherwise
notice of regular board meetings -
 at least two (2) days prior to the scheduled meeting,
unless a longer time is provided in the bylaws
SPECIAL MEETINGS OF THE BOARD OF DIRECTORS/TRUSTEES
WHEN
 anytime upon the call of the President, rr as provided in
the by-laws
WHERE
 anywhere in or outside of the Philippines, unless the
bylaws provide otherwise
Corporation Law (2019) MIDTERM REVIEWER
Notice of special board meetings
 at least two (2) days prior to the scheduled meeting,
unless a longer time is provided in the bylaws.
It can be anywhere within or even outside the Philippines unless
the bylaws provide otherwise
So the rule for the place of holding the meetings for is more
lenient in the case of the BOD because the presumption is the BOD
will go to wherever place the meeting will be held and in fact it is
normally the corporation who pays the travel expenses of the
BOD and they got paid to attend the meetings so it can be held
anywhere in the Philippines unlike stockholders who has to pay
for their own expenses when they will attend the meeting the
corporation will not pay for their expenses so it is always fix for
the stockholders.
Atty: The presumption is that the director will go to the place
wherever the meeting is held. This is because it is the Corporation
who pays for the meeting of the board and even the corporation
will pay the directors if they attend the meeting. Unlike for the
stockholders that they pay for their own expenses for the
meetings. That is the reason why the meeting of the stockholders
is always fixed.
QUORUM IN BOARD MEETINGS
- Quorum:
Majority of the directors or trustees stated in the Articles of
Incorporation.
- For there to be a valid corporate act:
GENERAL RULE:
Decision reached by at least a majority of Directors or
Trustees present in a meeting where there is a quorum shall
be a valid vote.
EXCEPTION
In election of officers, the vote required is a majority of ALL
the Board of Directors.
WHO SHALL PRESIDE AT MEETINGS
SECTION 53. Who Shall Preside at Meetings. — The chairman
or, in his absence, the president shall preside at all meetings
of the directors or trustees as well as of the stockholders or
members, unless the bylaws provide otherwise.
There is a slight revision here from the old law so now, it is the
Chairman or in his absence the President shall preside at the
meeting of the stockholders as well as the board of directors.
Before it is used to be the President now it is the Chairman and
only if his absent it is the President.
PLEDGE/ MORTGAGE SHARES
SECTION 54. Right to Vote of Secured Creditors and
Administrators. — In case a stockholder grants security
interest in his or her shares in stock corporations, the
stockholder-grantor shall have the right to attend and vote
at meetings of stockholders, unless the secured creditor is
expressly given by the stockholder-grantor such right in
writing which is recorded in 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.
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It is the pledgor or the mortgagor who has the right to vote if the
pledgee or mortgagee wants to have that right then the right must
be recorded in the Stock and Transfer Book of the corporation
otherwise it is still the pledgor or mortgagor being the stockholder
has the right to vote.
For legal representatives they can attend without a need of a
written proxy.
VOTING TRUST AGREEMENTS
SECTION 58. Voting Trusts. — One or more stockholders of
a stock corporation may create a voting trust for the purpose
of conferring upon a trustee or trustees the right to vote
and other rights pertaining to the shares for a period not
exceeding five (5) years at any time: Provided, That in the
case of a voting trust specifically required as a condition in
a loan agreement, said voting trust may be for a period
exceeding five (5) years but shall automatically expire upon
full payment of the loan. A voting trust agreement must be
in writing and notarized, and shall specify the terms and
conditions thereof.
A certified copy of such agreement shall be led with the
corporation and with the Commission; otherwise, the
agreement is ineffective and unenforceable. The certificate or
certificates of stock covered by the voting trust agreement
shall be cancelled and new ones shall be issued in the name
of the trustee or trustees, stating that they are issued
pursuant to said agreement. The books of the corporation
shall state that the transfer in the name of the trustee or
trustees is made pursuant to the voting trust agreement.
The trustee or trustees shall execute and deliver to the
transferors, voting trust certificates, which shall be
transferable in the same manner and with the same effect
as certificates of stock.
The voting trust agreement led 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 trustor and the trustee
or trustees may exercise the right of inspection of all
corporate books and records in accordance with the
provisions of this Code.
Any other stockholder may transfer the shares to the same
trustee or trustees upon the terms and conditions stated in
the voting trust agreement, and thereupon shall be bound
by all the provisions of said agreement.
No voting trust agreement shall be entered into for purposes
of circumventing the laws against anti-competitive
agreements, abuse of dominant position, anticompetitive
mergers and acquisitions, violation of nationality and capital
requirements, or for the perpetuation of fraud.
Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed
period. The voting trust certificates as well as the certificates
of stock in the name of the trustee or trustees shall thereby
be deemed cancelled and new certificates of stock shall be
reissued in the name of the trustors.
The voting trustee or trustees may vote by proxy or in any
manner authorized under the bylaws unless the agreement
provides otherwise.
Here, you need to cancel the original certificate and instead you
need to have a voting trust certificate issued in favor of the
trustee. The voting trust certificate will allow the trustee to vote
on the shares.
Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

TITLE VII- STOCKS AND STOCKHOLDERS
2 ways to become a stockholder
1. SUBSCRIPTION – purchasing unissued stocks
2. ASSIGNMENT – purchasing issued stocks
SUBSCRIPTION
SEC. 59. 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.
Subscription is an offer to acquire a specified number of unissued
shares of an existing corporation or one still to be formed.
Types of subscriptions
2. Pre-incorporation subscription – subscription before
the corporation is incorporated
3. Post-incorporation subscription – subscription after the
corporations incorporated
(g) Shares of stock in another corporation; and/or
(h) Other generally accepted form of consideration.
Where the consideration is other than actual cash, or
consists of intangible property such as patents or
copyrights, the valuation thereof shall initially be
determined by the stockholders or the board of
directors, subject to the approval of the Commission.
Shares of stock shall not be issued in exchange for
promissory notes or future service. The same
considerations provided in this section, insofar as
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 by the
articles of incorporation or the bylaws, or if not so
fixed, by the stockholders representing at least a
majority of the outstanding capital stock at a meeting
duly called for the purpose.

PRE-INCORPORATION SUBSCRIPTION The amount of the consideration should not be less than the par
value or the issued price of the shares. If it is less, it becomes a
SEC. 60. Pre-incorporation Subscription. –
WATERED STOCK.
A subscription of shares in a corporation still to be
formed shall be irrevocable for a period of at least six
LIABILITY FOR WATERED STOCKS
(6) months from the date of subscription, unless all of
the other subscribers consent to the revocation, or the SEC. 64. Liability of Directors for Watered Stocks. –
corporation fails to incorporate within the same A director or officer of a corporation who:
period or within a longer period stipulated in the contract of
subscription. (a) consents to the issuance of stocks for a consideration less than
No pre-incorporation subscription may be revoked its par or issued value;
after the articles of incorporation is submitted to the (b) consents to the issuance of stocks for a consideration other
Commission. than cash, valued in excess of its fair value; or
(c) having knowledge of the insufficient consideration, does not
file a written objection with the corporate secretary, shall be liable
Rule for Pre-incorporation Subscription
to the corporation or its creditors, solidarily with the stockholder
 Irrevocable for a period of six months, unless all of concerned for the difference between the value received at the
the other subscribers consent to the revocation, or the time of issuance of the stock and
corporation fails to incorporate within the same period the par or issued value of the same
or within a longer period stipulated in the contract of
subscription.
When director or officer liable
 No pre-incorporation subscription may be revoked after
a. If the consideration is cash, and the officer/director
the articles of incorporation is submitted to the
consents to the issuance of stocks for a consideration
Commission
less than its par or issued value;
b. If the consideration is other than cash, and the
CONSIDERATION FOR STOCKS
officer/director consents to the issuance of stocks for a
SEC. 61. Consideration for Stocks. – Stocks shall not
consideration valued in excess of its fair value; or
be issued for a consideration less than the par or
c. If having knowledge of the insufficient consideration,
issued price thereof. Consideration for the issuance of does not file a written objection with the corporate
stock may be:
secretary
(a) Actual cash paid to the corporation;
(b) Property, tangible or intangible, actually received
Liability
by the corporation and necessary or convenient for its
The officer/director who falls under the enumeration above
use and lawful purposes at a fair valuation equal to
shall be solidarily liable with the stockholder concerned, to
the par or issued value of the stock issued;
the corporation and or its creditors, for the difference
(c) Labor performed for or services actually rendered
between the value received at the time of issuance of the
to the corporation;
stock and the par or issued value of the same.
(d) Previously incurred indebtedness of the corporation;
(e) Amounts transferred from unrestricted retained
earnings to stated capital;
(f) Outstanding shares exchanged for stocks in the
event of reclassification or conversion;

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TRUST FUND DOCTRINE
This doctrine, first enunciated by the Supreme Court in the
case of Philippine Trust Co. vs. Rivera (144 Phil. 469 [1923].), holds
that 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 creditors 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.
As between the stockholders and the creditors, the creditors have
preference over the assets of the corporation. And the unpaid
subscription of the stockholders is considered as assets of the
corporation. They are receivables. So, even without going through
piercing the veil, the stockholders, really, are liable for their
unpaid subscription. it is just like any other asset of the
corporation that creditors can go after.
When you have an unpaid subscription, your true creditor is the
corporation. It owns the accounts receivables. It’s just that the
creditors can look into the unpaid subscription for the fulfillment
of their obligation. Under normal circumstances, the creditors
don’t go directly at the stockholders. They go after the
corporation. If the corporation does not have sufficient funds,
that’s the time they go after the receivables, which is the unpaid
subscription.
HALLEY VS PRINTWELL - G.R. NO. 157549
Facts:
Halley was an incorporator and original director of Business
Media Philippines, Inc. (BMPI). BMPI commissioned Printwell for
the printing of magazines Philippines For that purpose, Printwell
extended 30-day credit accommodations to BMPI. BMPI paid
only P25,000.00 therefore, Printwell sued BMPI for the
collection of the unpaid balance of P291,342.76 in the RTC.
Printwell amended the complaint in order to implead as
defendants all the original stockholders and incorporators who
have remaining unpaid subscriptions to BMPI. defendants filed
a consolidated answer averring that BMPI had a separate
personality from those of its stockholders
Issue:
Whether the stockholders can be liable to the creditors for their
unpaid subscriptions
Ruling:
the petitioner is liable pursuant to the trust fund doctrine for
the corporate obligation of BMPI by virtue of her subscription
being still unpaid. Printwell, as BMPIs creditor, had a right to
reach for Halley’s unpaid subscription in satisfaction of its claim.
a stockholder is personally liable for the financial obligations of
the corporation to the extent of his unpaid subscription. In view
of the petitioners’ unpaid subscription being
worth P262,500.00, she was liable up to that amount.
Atty’s Discussion on the case:
The extent of her liability is only up to the full amount of the
stockholder’s unpaid subscription. It’s the same as to the other
stockholders – They are liable only up to the extent of their
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unpaid subscription. It is not prorated per stockholder. It is to
the exact peso amount of the unpaid subscription.
The unpaid subscription constitutes a fund to which creditors
can look into for the fulfillment of the corporation’s obligation
to them. That is the trust fund doctrine
QUESTIONS:
1. Two stockholders. The unpaid subscription is 250K each.
Amount payable to creditor is 20K. If the creditor decides to sue
only one of the stockholders, can said stockholder cannot demand
that it be prorated among them, considering that they have the
same unpaid subscription? Can the stockholder demand that the
liability be 10K for each?
NO. It doesn’t matter that the payable is only 20K because your
liability is 250K. The whole amount of your subscription is owed to
the corporation. The stockholder cannot say that “dili pwede nga
ako ra imu paninglan”, just because wala gipaninglan ang uban
does not make the obligation void. In the same way, you can’t say
that it is “okay ra mag cheat because others are also cheating.”
Ang dili pwede, dili pwede.
2. Under the trust fund doctrine, what is the liability of the
subscribers? Direct or not to the creditors of the corporation?
Supposedly, the liability of the subscriber is only to the
corporation because it is an asset of the corporation. But in rare
instances, the courts allow that the creditor can collect directly
from the subscribers. The creditors have to implead the
corporation because the obligation is supposedly to the
corporation. You have to establish that.
SECOND MODE OF TRANSFERRING STOCKS
SEC. 62. Certificate of Stock and Transfer of Shares. – The
capital stock of 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 bylaws.
Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates
indorsed by the owner, his attorney-in-fact, or any 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.
The Commission may require corporations whose securities
are traded in trading markets and which can reasonably
demonstrate their capability to do so to issue their securities
or shares of stocks in uncertificated or scripless form in
accordance with the rules of the Commission.No shares of
stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation.
Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

Two ways to transfer shares

1. Deliver the stock certificate with an intention to transfer
ownership duly indorsed; or
2. Execute a Deed of Assignment for the shares
Transfer meaning secondary, it is not the unissued shares
anymore. Pertains to issued shares. You are buying from issued
stocks of a corporation.
Effect
It merely transfers the ownership of the shares to the transferee
or the assignee, being now the owner of the shares. There is
already a valid transfer of ownership. However, it does not make
the transferee or assignee a stockholder yet.
HOW ONE BECOMES A STOCKHOLDER
The registration of the transfer makes one a stockholder,
regardless of the issuance or non-issuance of a new certificate.
TENG VS. SEC, GR NO. 184332, FEBRUARY 17, 2016
Facts: This case originated from the case of TCL Sales Corp v. CA.
Respondent Ting Ping purchased shares of TCL Sales
Corporation (TCL) from Chiu, his brother Teng Ching Lay
(President and operations manager of TCL), and Maluto. Teng
Ching died. Ting Ping, to protect his shareholdings with TCL,
requested petitioner Teng (TCL's Corporate Secretary), to enter
the transfer in the Stock and Transfer Book of TCL for the proper
recording of his acquisition. He also demanded the issuance of
new certificates of stock in his favor. TCL and Teng refused
despite repeated demands. Ting Ping filed mandamus with the
SEC which was granted. SEC issued a writ of execution. Teng
argued that prior to registration of stocks in the corporate
books, it is mandatory that the stock certificates are first
surrendered because a corporation will be liable to a bona fide
holder of the old certificate if, without demanding the said
certificate, it issues a new one. On the other hand, Ting Ping
argued that Section 63 of the Corporation Code does not require
the surrender of the stock certificate to the corporation, nor
make such surrender an indispensable condition before any
transfer of shares can be registered in the books of the
corporation. The only limitation imposed by Section 63 is when
the corporation holds any unpaid claim against the shares
intended to be transferred.
"Shares of stock may be transferred by delivery to the transferee
of the certificate properly indorsed. Title may be vested in the
transferee by the delivery of the duly indorsed certificate of
stock."
Nevertheless, to be valid against third parties and the
corporation, the transfer must be recorded or registered in the
books of corporation. Upon registration of the transfer in the
books of the corporation, the transferee may now then exercise
all the rights of a stockholder, which include the right to have
stocks transferred to his name.
Atty G: The delivery of the stock certificate duly indorsed is a
mode of transferring ownership. It is only required if you are
going to transfer ownership. However, delivery of stock
certificate is not required in the registration of the transfer in
the Stock and Transfer Book. Delivery is important to transfer
ownership, hence it is necessary. But once that is done, the
transferee only needs to have the transfer registered in the
Stock and Transfer Book.
Is the issuance of a new certificate necessary to make Ting Ping
a stockholder?
NO. What makes the transferee a stockholder is the registration
of the transfer of the shares in the Stock and Transfer Book.
Hence, it is not the issuance of the new stock certificate that
makes one a stockholder.
F & S VELASCO VS. MADRID, GR NO. 208844, NOVEMBER 10,
2015
Facts: F&S Velasco Company, Inc. (FSVCI)was duly organized and
registered as a corporation with its incorporators: Spouses
Francisco and Simona Velasco, their daughter Angela Madrid
whose husband is Dr. Rommel Madrid (respondent), and
Saturnino Velasco (petitioner). Spouses Velasco died, thus, their
daughter Angel inherited their shares thereby giving her control
of 70.82%, who was also then the Chairman of the BOD. She
however later on died intestate and w/o issue, thus, Madrid
executed an Affidavit of Self-Adjudication which includes the
shares owned by his wife Angela.

Without registration on the corporate book of such transfer,

Issue: Whether or not the surrender of the certificates of stock
Madrid called for a meeting for the Re-Organization of the BOD,
is a requisite before registration of the transfer may be made in
to which meeting, other respondents (Madrid Group) was given
the corporate books and for the issuance of new certificates in
one share, and such group took over the BODs. At the same
its stead.
time, Velasco also had a meeting for the election of the
President and Vice-P of the BOD. Thus, two separate meetings.
Held: NO. To compel Ting Ping to deliver to the corporation the
Later on, Velasco petitioned with the RTC to declare null and
certificates as a condition for the registration of the transfer
void Madrid’s meeting.
would amount to a restriction on the right of Ting Ping to have
RTC: Declared both meetings null and void. Velasco’s meeting
the stocks transferred to his name, which is not sanctioned by
lacks quorom; while the estate of Angela was not yet settled,
law.
thus, Madrid only has an inchoate right of the 70.82%. Madrid
appealed, but Velasco did not.
In a sale of shares of stock, physical delivery of a stock certificate
CA: Madrid’s meeting was valid as the Affidavit executed was
is one of the essential requisites for the transfer of ownership of
sufficient to transfer the 70.82% shares to Madrid. Further ruled
the stocks purchased. The delivery contemplated in Section 63,
the creation of a Management Committee in view of the
however, pertains to the delivery of the certificate of shares by
conflicting interests between the two.
the transferor to the transferee, that is, from the original
stockholder named in the certificate to the person or entity the
stockholder was transferring the shares to, whether by sale or
some other valid form of absolute conveyance of ownership.
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Issue:
1. WON Madrid’s meeting is legal and valid.
2. WON a Management Committee should be created.
Ruling:
1. NO. It is true that the RTC already recognized Madrid as the
sole heir of Angela to the exclusion of others (sister of Angela
for failure to appeal in a separate case), thus death of Angela
immediately transferred the 70.82% ownership of shares to
him, and he can compel issuance of certificates of stock in his
favor. However, this does no ipso facto afford him the rights
accorded to such majority ownership of FSVCI’s shares. Sec. 63
of the Corporation Code provides that:
Xxx 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.
Thus, all transfers of shares of stock must be registered in the
corporate books in order to be binding on the corporation.
Specifically, this refers to the Stock and Transfer Book as
provided for under Sec. 74.
An owner of shares of stock cannot be accorded the rights
pertaining to a stockholder — such as the right to call for a
meeting and the right to vote, or be voted for — if his ownership
of such shares is not recorded in the Stock and Transfer Book.
until registration is accomplished, the transfer, though valid
between the parties, cannot be effective as against the
corporation. The purpose of registration, therefore, is two-fold:
to enable the transferee to exercise all the rights of a
stockholder, including the right to vote and to be voted for, and
to inform the corporation of any change in share ownership so
that it can ascertain the persons entitled to the rights and
subject to the liabilities of a stockholder. Records are bereft of
any showing that the transfer of Angela's shares of stock to
Madrid had been registered in FSVCI's Stock and Transfer Book.
Further, be it noted also that submission of a GIS of a
corporation before the SEC is pursuant to the objective sought
by Section 26 40 of the Corporation Code which is to give the
public information, under sanction of oath of responsible
officers, of the nature of business, financial condition, and
operational status of the company, as well as its key officers or
managers, so that those dealing and 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. The contents of the GIS, however, should not be
deemed conclusive as to the identities of the registered
stockholders of the corporation, as well as their respective
ownership of shares of stock, as the controlling document
should be the corporate books, specifically the Stock and
Transfer Book. As between the General Information Sheet and
the corporate books, it is the latter that is controlling.
Since as reflected in the Stock and Transfer book Madrid only
has 4.16% in view of the non- registration of the transfer,
Madrid’s Meeting is null and void. And considering that RTC’s
decision of Velasco’s Meeting’s nullity, the FSVCI’s BOD at the
time of Angela’s death should be reconstituted, and Angela’s
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vacant seat should be filled. Such BODs should only act in a hold-
over capacity until their successors are elected and qualified.
2. NO. Such extraordinary remedy requires the concurrence of
two elements: (a) Dissipation, loss, wastage or destruction of
assets or other properties; and (b) Paralyzation of its business
operations which may be prejudicial to the interest of the
minority stockholders, parties- litigants or the general public.
This is because appointed management committees will
immediately take over the management of the corporation and
exercise the management powers specified in the law. This may
have a negative effect on the operations and affairs of the
corporation with third parties, as persons who are more familiar
with its operations are necessarily dislodged from their
positions in favor of appointees who are strangers to the
corporation's operations and affairs. The CA merely based its
directive on the finding that there is a conflicting interest
between the two groups. However, absent any actual evidence
from the records showing such imminent danger, the CA's
findings have no legal or factual basis to support the
appointment/constitution of a Management Committee for
FSVCI. Accordingly, the CA erred in ordering the creation of a
Management Committee in this case.
SCRIPLESS TRADING
“The Commission may require corporations whose securities are
traded in trading markets and which can reasonably demonstrate
their capability to do so to issue their securities or shares of stocks
in uncertificated or scripless form in accordance with the rules of
the Commission” – excerpt from Section 62 of the Revised
Corporation Code of the Philippines.
“Scrip”
A duly signed stock certificate
Scripless Trading
Transfer of ownership of shares without actually delivering stock
certificates is done through BOOK ENTRIES
This kind of trading is usually done when the stocks are listed in
the Stock Exchange.
Rationale
For convenience of buying and selling securities. To strictly follow
to the traditional way of transferring shares (delivery of actual
certificates), the stock market will not survive because the
transactions will take from days to months.
How Done
The Corporation that intends to trade shares in the Stock
Exchange must—
1. Deliver all their securities on their shares to the
Philippine Depository and Trust Corporation (PDTC).
2. The shares in the book of PDTC will now be assigned or
given to the brokers who purchased the shares
3. Stock and Transfer Agent records the stocks in the Stock
and Transfer Book and issues the Stock Certificates of
the Corporation.
Take Note: The entity recorded in the Stock and Transfer Book will
be PDTC, the holder of the share under the Stock and Transfer
Book.
Corporation Law (2019) MIDTERM REVIEWER
4. In turn, PDTC will make entries their own records (BOOK
ENTRIES)
Uplifting of Shares
If the shares are desired to be kept for a long time without intent
to trade it, the shares can be uplifted by—
1. Requesting the PDTC to take out the shares from their
custody and record it in the Stock and Transfer Book
under the name of the purchaser
(Corporation/Stockholder)
2. Stock and Transfer Agent will issue the shares to that
person
If later on you decide to sell it, the stock certificate should be
returned to the Stock and Transfer Agent, which will again take
time.
Take Note: This is the delay and complication that Scripless
Trading avoids.
Key Points on Scripless Trading
1. There is only one owner—PDTC, the listed stockholder
in the books of the Corporation.
2. PDTC will have its own list of brokers who hold the
shares for their clients
3. Brokers will have their own list of their own clients as
well
Ownership of stocks traded through Scripless Trading
Legal Owner – PDTC; Beneficial Owner – Client of the Brokers
Voting during Elections
The beneficial owner should ask for a certification from the broker
that he is the owner of this certain number of shares; that
certification (NOT a stock certificate) should be brought by the
beneficial owner during the election; akin to proxy allowing to
vote shares.
REVOCATION OF SUBSCRIPTIONS
Rule for Pre-incorporation Subscription
 GR: Irrevocable for a period of six months
o The 6 months irrevocability is counted from
the date of subscription.
 EXC: unless
o all of the other subscribers consent to the
revocation, or
o the corporation fails to incorporate within the
same period or within a longer period
stipulated in the contract of subscription.
 EXC to EXC: Irrevocable after the articles of
incorporation is submitted to the Commission.
Rule on Post-incorporation Subscription
Under Post Incorporation the law is silent as to the revocability or
irrevocability of the subscription but actually it is irrevocable. The
moment a subscriber subscribes in a post incorporation even if he
did not pay yet the subscription he becomes a stockholder and he
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cannot anymore revoke his subscription. And since he is already a
stockholder he can now enjoy the rights of a stockholder.
BASIS:
RIGHTS OF UNPAID SHARES, NONDELINQUENT
SEC. 71. Rights of Unpaid Shares, Nondelinquent. – Holders of
subscribed shares not fully paid which are not delinquent shall
have all the righst of a stockholder.
Rights of a stockholder
- He may check the corporate books
- Right to vote if he has a voting share
- He has the right to dividends when the
corporation declare such
NOTE: Atty. made mention of the rule in Oblicon that generally a
contract is revocable when it is not consummated. We apply the
same logic here in a sense that when a subscriber pays for his
subscription pre-incorporation, it is given with the condition that it
shall be used for the formation of the corporation. The failure of
such event to happen would allow the subscriber to revoke his
subscription but this is subject to the period provided in Sec.60 that
the corporation is given 6 months to comply with its obligation.
And once the corporation files its articles of incorporation then it
is as if it had complied with its obligation thus, making the
subscription irrevocable (contract is consummated).
For post-incorporation subscription, it is akin to a valid and binding
contract already perfected hence, it is irrevocable. The
subscription now becomes a part of the capital stock of the
corporation hence, the corporation cannot allow such
subscriptions to be revoked without prejudicing its interests and
that of its stockholders. The corporation now must comply with its
obligations to its stockholders (eg. distribution of dividends,
allowing them to exercise their rights as stockholders).
Difference between a Stock and Stock Certificate
STOCK CERTIFICATE OF STOCK
ownership interest in the mere evidence of your
corporation ownership interest
Intangible Tangible
merely represent the number of
shares or ownership in a
corporation
you acquire stocks whether you can only be acquired upon full
pay it or not payment
Certificate of Stock as defined in Anna Teng vs SEC
A certificate of stock is a written instrument signed by the
proper officer of a corporation stating or acknowledging that
the person named in the document is the owner of a
designated number of shares of its stock. It is prima facie
evidence that the holder is a shareholder of a corporation.
Corporation Law (2019) MIDTERM REVIEWER
A certificate, however, is merely a tangible evidence of
ownership of shares of stock. It is not a stock in the
corporation and merely expresses the contract between the
corporation and the stockholder.
The shares of stock evidenced by said certificates, meanwhile,
are regarded as property and the owner of such shares may,
as a general rule, dispose of them as he sees fit, unless the
corporation has been dissolved, or unless the right to do so
is properly restricted, or the owner's privilege of disposing of
his shares has been hampered by his own action
The moment you subscribe post-incorporation you already enjoy
all the benefits of being a stockholder with the exception that you
are not yet issued with a stock certificate if you have not yet fully
paid your subscription.
Time to pay your subscription ( 2 instances)
1. When there is a date fixed in a subscription contract
2. If you receive a call from the company demanding you to pay
the remaining balance
The call is only required when there is no date fixed for the
payment of the shares. It is the Board of Directors who will make
the call by resolutions of the BOD in a meeting when there is a
quorum approved by majority of the directors present in the
meeting.
PAYMENT OF BALANCE OF SUBSCRIPTION
Section 66. Payment of Balance of Subscription. — Subject to
the provisions of the subscription contract, the board of
directors may, at any time, declare due and payable to the
corporation unpaid subscriptions and may collect the same or
such percentage thereof, in either case, with accrued interest,
if any, as it may deem necessary.
Payment of unpaid subscription or any percentage thereof,
together with any interest accrued, shall be made on the date
specified in the subscription contract or on the date stated in
the call made by the board. Failure to pay on such date shall
render the entire balance due and payable and shall make the
stockholder liable for interest at the legal rate on such balance,
unless a different interest rate is provided in the subscription
contract. The interest shall be computed from the date
specified, until full payment of the subscription. If no payment
is made within thirty (30) days from the said date, all stocks
covered by the subscription shall thereupon become
delinquent and shall be subject to sale as hereinafter provided,
unless the board of directors orders otherwise.
How to call
A call is made by a resolution of the Board of Director’s in a
meeting where there is a quorum and approved by majority of the
Director’s present in a meeting.
Effect of failure to pay after a call or upon the lapse of the date
specified in the subscription contract:
The Board of Directors may issue another board resolution
declaring said subscriptions delinquent.
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EFFECT OF DELINQUENCY
Section. 70. Effect of Delinquency. — No delinquent stock shall
be voted for, be entitled to vote, or be represented 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 payment is made by the holder of such delinquent
stock for the amount due on the subscription with accrued
interest, and the costs and expenses of advertisement, if any.
Effects of Delinquency
• The stockholder will remain to be a stockholder but the exercise
of any of the stockholder’s right is suspended, except the right
to dividends.
• The distribution of share in the dividend by a delinquent
shareholder shall be applied in the following manner:
• If cash/property dividend - the corporation will off-set
the payment of the unpaid subscription from the
stockholder’s share in the dividend.
• If stock dividend - the stockholder’s share in the
dividend is withheld by the corporation until the
subscription is fully paid.
DELINQUENCY SALE
Section. 67. 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 the sale, with a copy of the resolution, shall be sent
to every delinquent stockholder either personally, by
registered mail, or through other means provided in the
bylaws. The same shall 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 the former's 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 a 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 the
purchaser's favor. The remaining shares, if any, shall be
credited in favor of the delinquent stockholder who shall
likewise be entitled to the issuance of a certificate of stock
covering such shares.
Should there be no bidder at the public auction who offers to
pay the full amount of the balance on the subscription
together with accrued interest, costs of advertisement, and
expenses of sale, for the smallest number of shares or fraction
of a share, the corporation may, subject to the provisions of
this Code, bid for the same, and the total amount due shall be
Corporation Law (2019) MIDTERM REVIEWER
credited as fully paid 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.
Procedure
1. Board resolution declaring the subscription delinquent
2. The sale must be made not less than 30 days but not more
than 60 days from the date the stock became delinquent.
3. Notice together with the resolution must be made to all
delinquent stockholders personally, registered mail, or
through other means authorized.
4. Publication once a week for two consecutive weeks in a
newspaper of general circulation.
5. Before the sale, the stockholder may stop the delinquency
sale by paying the unpaid subscription, interest, cost of
advertisement, and expenses.
6. Failure of the stockholder to pay, the delinquent stock shall
be sold at a public auction.
ILLUSTRATION: “DELINQUENT STOCK”
Total subscription - 20,000 shares valued at 1,000,000
Total paid - 10,000 shares valued at 500,000
Total unpaid - 10,000 shares valued at 500,000
In this case, the entire subscription of 20,000 shares are
considered delinquent stock. This is because of the Principle of
Indivisibility of Subscription. Thus, a delinquent stock shall refer
not only to the the unpaid subscription but includes the paid
subscription.
7. The winning bidder is determined by the bidder who is willing
to pay for the smallest number of shares or fraction of a
share.
ILLUSTRATION: “THE SMALLEST NUMBER OF SHARES OR
FRACTION OF A SHARE”
Bidder A - 2,000 shares valued at 10,000; 5 pesos/share
Bidder B - 1,500 shares value at 10,000; 6.67 pesos/share
Bidder C - 1,000 shares value at 10,000; 10 pesos/share
In this case Bidder C should be declared the highest bidder
because he is the bidder who is willing to pay the smallest number
of shares or fraction of a share. This means that the highest bidder
must be the bidder who is willing to pay the highest amount per
share.
8. Upon payment of the highest bidder, 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
the purchaser's favor.
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9. 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.
ILLUSTRATION: Based on the illustration above 1,000 shares out
of the 10,000 delinquent shares shall be given to Bidder C. The
remaining 9,000 shares shall be given to the delinquent subscriber.
10. If there is no bidder, the corporation is authorized to
purchase the shares and shall form part of the treasury
shares.
EFFECT: If the bidder is the corporation there will be no shares
given to the stockholder. Applying the illustration above all the
10,000 delinquent shares shall pertain to the corporation. This
shall form part of the treasury shares.
COURT ACTION TO RECOVER UNPAID SUBSCRIPTION
Section 69. Court Action to Recover Unpaid Subscription. —
Nothing in this Code shall prevent the corporation from
collecting through court action, the amount due on any unpaid
subscription, with accrued interest, costs and expenses.
ASSIGNMENT: 2ND MODE OF ACQUIRING SHARES
THIS IS A SECONDARY TRANSFER SINCE SHARES ARE ALREADY ISSUED. YOU
ACQUIRED THE SHARES FROM THE OWNERS OF THE SHARES NOT FROM THE ISSUER
ANYMORE.
PROCEDURE FOR ASSIGNMENT
1. DELIVERY OF THE STOCK CERTIFICATE TO THE TRANSFEREE
2. THE STOCK CERTIFICATE MUST BE INDORSED BY THE
ASSIGNOR/TRANSFEROR.
3. THE TRANSFER OR ASSIGNMENT IN THE TRANSFEREE’S NAME MUST BE
REGISTERED IN THE STOCK AND TRANSFER BOOK
THE FIRST TWO REQUIREMENTS ALONE WILL BE SUFFICIENT AS FAR AS THE PARTIES
ARE CONCERNED TO TRANSFER OWNERSHIP. HOWEVER, AS TO THIRD PERSON AND
THE CORPORATION, THE TRANSFEREE IS NOT YET A STOCKHOLDER. IT IS ONLY WHEN
THE THIRD REQUIREMENT IS COMPLIED WITH THAT THE TRANSFEREE OR ASSIGNEE
BECOMES A STOCKHOLDER.
THIS IS EVEN WITHOUT A STOCK CERTIFICATE AS LONG AS THE TRANSFER IS
RECORDED IN THE STOCK AND TRANSFER BOOK.
TENG VS. SEC
NO NEED TO SURRENDER THE ORIGINAL STOCK CERTIFICATE FOR THE
TRANSFEREE TO BECOME A STOCKHOLDER. THE TRANSFEREE BECOMES A
STOCKHOLDER THE MOMENT HIS NAME IS REGISTERED IN THE STOCK AND
TRANSFER BOOK. THE TRANSFEREE IS ONLY REQUIRED TO SURRENDER THE
ORIGINAL STOCK CERTIFICATE TO THE CORPORATION FOR THE ISSUANCE OF A
NEW ONE.
LOST OR DESTROYED CERTIFICATES
SEC. 72. Lost or Destroyed Certificates. – The following
procedure shall be followed by a corporation in issuing new
certificates of stock in lieu of those which have been lost,
stolen or destroyed:
Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

deed of assignment of shares.

(a) The registered owner of a certificate of stock in a
corporation or such person’s legal representative shall file with How : (basically just like a deed of sale)
the corporation an affidavit in triplicate setting forth, if a. Execute the deed of assignment
possible, the circumstances as to how the certificate was lost, b. Have it recorded in the Stock and Transfer book as well
stolen or destroyed, the number of shares represented by such
certificate, the serial number of the certificate and the name TN:
of the corporation which issued the same. The owner of such -if not recorded = merely valid between the parties to the deed
certificate of stock shall also submit such other information and NOT against the corporation & third person
and evidence as may be deemed necessary; -mere execution of the deed does not make you a Stockholder
but its the recording in the stock and transfer book
After verifying the affidavit and other information and
evidence with the books of the corporation, the corporation Assignment of Subscription Rights
shall publish a notice in a newspaper of general circulation in
the place where the corporation has its principal office, once a 1. Although generally, the law says that you cannot transfer
week for three (3) consecutive weeks at the expense of the shares where there is an unpaid subscription but in practice , you
registered owner of the certificate of stock which has been can transfer shares by deed of assignment of subscription rights.
lost, stolen or destroyed. The notice shall state the name of the What happens is that you assign your rights to the subscription.
corporation, the name of the registered owner, the serial You don’t assign the shares because you are not allowed.
number of the certificate, the number of shares represented
by such certificate, and shall state that after the expiration of 2. The Principle of Indivisibility still exist when you assign your
one (1) year from the date of the last publication, if no contest rights to the subscription. Meaning, you assign the subscription
has been presented to the corporation regarding the as a whole.
certificate of stock, the right to make such contest shall be
barred and the corporation shall cancel the lost, destroyed or
stolen certificate of stock in its books. In lieu thereof, the
corporation shall issue a new certificate of stock, unless the
registered owner files a bond or other security 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. If a contest has been presented to the
corporation or if an action is pending in court regarding the
ownership of the 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 court renders a final
decision regarding the ownership of the 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.

Issuance of New Stock Certificate

GR: There is a one year waiting period before the issuance of
New Stock certificate. Which would give the chance for the
transferee or assignee to object to the declaration of lost or
destroyed certificates.

If they do not object , the certificate will be issued after one year.

EXC: the owner will give a bond or security which will be valid for
1 year. That will now allow the issuance of the new certificate of
stocks before the lapse of 1 year.

Deed of Assignment of shares ( transfer w/o Stock Certificate)

1. If there is a stock certificate , transfer will be done by delivery
and endorsement and then you record if in the stock and
transfer book , if no stock certificate transfer can still be done by
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TITLE VIII- CORPORATE BOOKS AND RECORDS
BOOKS TO BE KEPT; STOCK TRANSFER AGENT
Section 73. Books to be Kept; Stock Transfer Agent . — Every
corporation shall keep and carefully preserve at its principal
office all information relating to the corporation including, but
not limited to:
(a) The articles of incorporation and bylaws of the
corporation and all their amendments;
(b) The current ownership structure and voting rights of the
corporation, including lists of stockholders or members,
group structures, intra-group relations, ownership data,
and beneficial ownership;
(c) The names and addresses of all the members of the board
of directors or trustees and the executive officers;
(d) A record of all business transactions;
(e) A record of the resolutions of the board of directors or
trustees and of the stockholders or members;
(f) Copies of the latest reportorial requirements submitted
to the Commission; and
(g) The minutes of all meetings of stockholders or members,
or of the board of directors or trustees. Such minutes shall
set forth in detail, among others; the time and place of the
meeting held, how it was authorized, the notice given, the
agenda therefor, whether the meeting was regular or
special, its object if special, those present and absent, and
every act done or ordered done at the meeting. Upon the
demand of a 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 a director, trustee,
stockholder or member on any action or proposed action
must be recorded in full upon their demand.
Corporate records, regardless of the form in which they are
stored, shall be open to inspection by any director, trustee,
stockholder or member of the corporation in person or by a
representative at reasonable hours on business days, and a
demand in writing may be made by such director, trustee or
stockholder at their expense, for copies of such records or
excerpts from said records. The inspecting or reproducing
party shall remain bound by confidentiality rules under
prevailing laws, such as the rules on trade secrets or processes
under Republic Act No. 8293, otherwise known as the
"Intellectual Property Code of the Philippines," as amended,
Republic Act No. 10173, otherwise known as the "Data Privacy
Act of 2012," Republic Act No. 8799, otherwise known as "The
Securities Regulation Code," and the Rules of Court.
A requesting party who is not a stockholder or member of
record, or is a competitor, director, officer, controlling
stockholder or otherwise represents the interests of a
competitor shall have no right to inspect or demand
reproduction of corporate records.
Any stockholder who shall abuse the rights granted under this
section shall be penalized under Section 158 of this Code,
without prejudice to the provisions of Republic Act No. 8293,
otherwise known as the “Intellectual Property Code of the
Philippines," as amended, and Republic Act No. 10173,
otherwise known as the "Data Privacy Act of 2012.”
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Any officer or agent of the corporation who shall refuse to
allow the inspection and/or reproduction of records 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 161 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: 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 the demand to examine or reproduce
corporate records, or is a competitor, director, officer,
controlling stockholder or otherwise represents the interests
of a competitor.
If the corporation denies or does not act on a demand for
inspection and/or reproduction, the aggrieved party may
report such denial or inaction to the Commission. Within five
(5) days from receipt of such report, the Commission shall
conduct a summary investigation and issue an order directing
the inspection or reproduction of the requested records.
Stock corporations must also keep a stock and transfer book,
which shall contain a record of all stocks in the names of the
stockholders alphabetically arranged; the installments paid
and unpaid on all stocks 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, by and to whom made; and such other entries as the
bylaws may prescribe. The stock and transfer book shall be
kept in the principal office of the corporation or in the o􀀾ce 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.
A 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 upon
securing a license from the Commission and the payment of a
fee to be fixed by the Commission, which shall be renewable
annually: Provided , That a stock corporation is not precluded
from performing or making transfers 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: Provided, further, That the
Commission may require stock corporations which transfer
and/or trade stocks in secondary markets to have an
independent transfer agent.
Corporate Books
1. Records of all business transactions i.e. accounting books,
ledgers, and journals
2. Minutes book for Stockholders - minutes of the meetings of the
stockholders
3. Minutes book for Directors and Trustees - minutes meetings of
the Board of Directors and Trustees
4. Stock and Transfer Book
Corporation Law (2019) MIDTERM REVIEWER
Corporate Records
1. Charter documents - Articles of Incorporation, Bylaws,
and it’s amendments.
2. Reports filed with the SEC - general information sheets
(GIS), and all other reports required under the Securities
Regulation Code (SRC)
Book of Minutes; Contents
(1) date and time of meeting
(2) place of holding the meeting
(3) how the meeting was authorized
(4) the fact that notice was given
(5) whether the meeting was regular or special
(6) if the meeting is special, object must be
stated
(7) those present and absent
(8) every act done or ordered done at the
meeting
(9) upon demand of a 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
(10) upon demand of a director, trustee,
stockholder or member, a carefully made
record of the yeas and nays must be taken on
any motion or proposition
(11) upon demand of a director, trustee,
stockholder, or member, the protest on any
action or proposed action
o The mere certification of the Corporate Secretary gives the
Minutes probative value, the signatures of the directors is
not necessary.
o Minutes of the meeting of the BOD may be proof of the
existence of a contract (considered as a written contract for
the purposes of extinctive prescription under Article 1144(1)
of the New Civil Code)
Stock and Transfer Book; Contents
(1) All stocks in the name of the stockholders alphabetically
arranged
(2) installments paid and unpaid on all stocks for which
subscription has been made and the date of any
installment
(3) statement of every alienation, sale or transfer of stock made,
the date thereof, by and to whom made
(4) such other entries as the bylaws may prescribe
• The Stock and Transfer Book shall be kept in the principal office
of the corporation or in the office of its stock transfer agent.
• Only the Corporate Secretary is duly authorized to make entries
on the stock and transfer book. Entries made by the Chairman
or President are invalid.
• Serves as the best evidence of the transactions that must be
entered or stated therein. However, the entries are considered
prima facie evidence only and may be subject to proof of the
contrary.
• Stock and transfer book is the primary evidence of being a
stockholder, but if the corporation refuses to produce it, other
evidences may be presented (Insigne vs. Abra GR 2040089);
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Inspection of Corporate Records
Open to inspection by any director, trustee, stockholder or
member of the corporation in person or by a representative at
reasonable hours on business days, and a demand in writing may
be made by such director, trustee, or stockholder at their expense,
for copies of such records or excerpts from said records.
The inspecting or reproducing party shall remain bound by
confidentiality rules under prevailing laws, such as the rules on
trade secrets or processes under Intellectual Property Code of the
Philippines, Data Privacy Act of 2012, and The Securities
Regulation Code.
The right to inspect covers all the books of the corporation,
including the journal, ledger, financial statements, income tax
returns, vouchers, receipts, contracts and all papers pertaining to
the operation of the corporation which are of interest to its
stockholders.
There are matters that are not covered by the right to inspect. For
instance, a corporation engaged in manufacturing goods can keep
secret the formula or process which is not generally well known.
Requisites for Exercise of Right
1. must be exercised at reasonable hours on business days
2. has not improperly used any information he secured through
any previous examination
3. demand is made in good faith or for a legitimate purpose
Who Cannot Inspect
A requesting party that is not a stockholder or member of record,
or is a competitor, director, officer, controlling stockholder or
otherwise represents the interest of a competitor.
Liability for refusal to allow inspection or production of records
Who can be held liable?
Any officer or agent of the corporation who shall refuse to allow
the inspection or production of records shall be liable
Any director who allows or approves the refusal shall also be guilty
of an offense punishable under Section 161 of the Corporation
Code.
Liability for Unjust Refusal of Inspection
2. Damages
3. Liability under Section 161 of the Revised Corporation Code, a
fine of:
₱ 10,000 to ₱ 200,000.
₱ 20,000 to ₱ 400,000 (if injurious to public interest)
Note: Under the Old Code, the penalty was criminal in nature. In
addition to the administrative fees and civil liability the penalty
also included imprisonment.
VIOLATION OF DUTY; PENALTIES
Section 161. Violation of Duty to Maintain Records, to Allow
Their Inspection or Reproduction; Penalties. — The unjustified
Corporation Law (2019) MIDTERM REVIEWER
failure or refusal by the corporation, or by those responsible
for keeping and maintaining corporate records, to comply with
Sections 45, 73, 92, 128, 177 and other pertinent rules and
provisions of this Code on inspection and reproduction of
records shall be punished with a fine ranging from Ten
thousand pesos (P10,000.00) to Two hundred thousand pesos
(P200,000.00), at the discretion of the court, taking into
consideration the seriousness of the violation and its
implications. When the violation of this provision is injurious
or detrimental to the public, the penalty is a fine ranging from
Twenty thousand pesos (P20,000.00) to Four hundred
thousand pesos (P400,000.00).
The penalties imposed under this section shall be without
prejudice to the Commission's exercise of its contempt powers
under Section 157 hereof.
YUJUICO V QUIAMBAO
Facts: Strategic Alliance Development Corporation (STRADEC) is
a domestic corporation operating as a business development
and investment company. During the annual stockholder's
meeting of STRADEC, petitioner Aderito Z. Yujuico was elected
as president and chairman of the company. Yujuico replaced
respondent Cezar T. Quiambao, who had been the president
and chairman of STRADEC since 1994. With Yujuico at the helm,
STRADEC appointed petitioner Bonifacio C. Sumbilla as
treasurer and one Joselito John G. Blando as corporate
secretary. Blando replaced respondent Eric C. Pilapil the
previous corporate secretary of STRADEC.
Subsequently, a criminal case was filed by petitioners against
respondents and one Giovanni T. Casanova alleging that
Quiambao refused for the turnover of the corporate records of
the company, particularly the accounting files, ledgers, journals
and other records of the corporation's business as well as its
stock and transfer books. Initially, it was agreed to be deposited
in a safety box in BPI but the same resulted to the refusal of
respondents.
Upon determination of probable cause, the RTC concluded that
respondents were at most withholding the stock and transfer
books and that refusing inspection to such is not punishable
under the Corporation code as opposed to refusal to inspect
other corporate records thus the case was dismissed against
respondent.
Issue: WON refusal to inspect the stock and transfer books is
punishable under the Corporation Code?
Ruling: Yes. Such refusal is a violation of Section 74 of the
Corporation Code to which Section 144 provides for the penalty.
However, a criminal action based on the violation of a
stockholder’s right to examine or inspect the corporate records
and the stock and transfer book of a corporation under the
second and fourth paragraphs of Section 74 of the corporation
code - such as Criminal Case No. 89724 — can only be
maintained against corporate officers or any other persons
acting on behalf of such corporation.
The problem with the petitioners' complaint and the evidence
that they submitted during preliminary investigation is that they
do not establish that respondents were acting behalf of
STRADEC. Quite the contrary, the scenario painted by the
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ATTY. GAVIOLA-CLIMACO
complaint is that the respondents are merely outgoing officers
of STRADEC who, for some reason, withheld and refused to turn-
over the company records of STRADEC. It clearly suggest that
respondents are neither in relation to STRADEC.
In other words, petitioners are not actually invoking their right
to inspect the records and the stock and transfer book of
STRADEC under the second and fourth paragraphs of Section 74.
What they seek to enforce is the proprietary right of STRADEC
to be in possession of such records and book. Such right, though
certainly legally enforceable by other means, cannot be
enforced by a criminal prosecution based on a violation of the
second and fourth paragraphs of Section 74. That is simply not
the situation contemplated by the second and fourth
paragraphs of Section 74 of the Corporation Code.
Note: The SC agreed that refusal to allow inspection is subject to
a criminal liability. However, the case was still dismissed because
the person who refused to show the corporate books was not an
officer of a corporation, because the liability is criminal in nature
it is construed strictly. Therefore, only an officer or a director of a
corporation that can be held liable.
That is no longer applicable because under the amended
corporation code, the refusal to allow inspection or reproduction
is now only subject to civil liability under Section 161, and no
longer criminal in nature.
IF THE CORPORATION OR ITS OFFICERS REFUSE TO ALLOW A
STOCKHOLDER TO INSPECT, IS A CASE THE ONLY OPTION OF THE
STOCKHOLDER?
NEW PROVISION UNDER SEC. 73 OF THE REVISED CORPORATION CODE:
“If the corporation denies or does not act on a demand for
inspection and/or reproduction, the aggrieved party may report
such denial or inaction to the Commission. Within five (5) days
from receipt of such report, the Commission shall conduct a
summary investigation and issue an order directing the
inspection or reproduction of the requested records.”
Remedy of Party Refused Inspection; Summary Investigation
Aggrieved party may report such denial or inaction to the
Commission.
Within five (5) days from the receipt of such report, the
Commission shall conduct a Summary Investigation and issue and
order directing the inspection or reproduction of the requested
records.
Defenses for Refusal
(1) 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
(2) person demanding to examine was not
acting in good faith or for a legitimate purpose
Corporation Law (2019) MIDTERM REVIEWER
in making the demand to examine or
reproduce corporate records
(3) person demanding is a competitor, director, officer,
controlling stockholder or otherwise represents the interests
of a competitor.
TERELAY VS. YULO
THE STOCKHOLDER WHO WANTED TO INSPECT THE RECORD ONLY OWNED
0.001% OF THE OUTSTANDING STOCK OF THE CORPORATION. THE OFFICERS
WERE SAYING , “YOU KNOW YOUR STOCKHOLDINGS IS TOO INSIGNIFICANT FOR
US TO GRANT YOU THE RIGHT TO INSPECT”.
ACCORDING TO SC, SUCH CONTENTION IS NOT VALID. THE 0.001% OWNERSHIP
DOES NOT JUSTIFY THE REFUSAL TO ALLOW THE STOCKHOLDER THE RIGHT TO
INSPECT OR TO REPRODUCE BECAUSE AS LONG AS YOU OWN, 1 SHARE OF STOCK
EVEN OUT OF MILLIONS, YOU ARE CONSIDERED AS A STOCKHOLDER, AND THE
LATTER HAS A RIGHT TO INSPECT AND REPRODUCE THE BOOKS OF THE
CORPORATION. IT IS GRANTED TO ALL STOCKHOLDERS AND NO DISTINCTION TO
ALL OWNERSHIP.
Jurisprudential Principles (Terelay citing Ballantine) – Additional
Information
Justified purpose for inspection
(1) To ascertain the financial condition of the
company or the propriety of dividends;
(2) the value of the shares of stock for sale or
investment;
(3) whether there has been mismanagement;
(4) in anticipation of shareholders' meetings
to obtain a mailing list of shareholders to
solicit proxies or influence voting;
(5) to obtain information in aid of litigation
with the corporation or its officers as to
corporate transactions.
Unjustified purpose
(1) Obtaining of information as to business secrets or to aid
a competitor;
(2) to secure business "prospects" or investment or
advertising lists;
(3) to find technical defects in corporate transactions in
order to bring "strike suits" for purposes of blackmail or
extortion.
INSIGNE VS. ABRA VALLEY
This is basically an issue of “is the STB the only basis to determine
whether or not a person is a stockholder (SH) of a corporation?”
Answer: It is the primary record, so absent any other showing, it
is the STB which should determine whether or not a person is a
SH. But if the person can present other evidence as basis of his
stockholdings, then he is not precluded from bringing up that
evidence in order to support his contention that he is a SH.
In this case, the corporation refused to present the STB. The
reason of such refusal is that they said that based on the STB, he
is not a SH, but they refused to show the STB. (medyo
namilosopo sad).
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ATTY. GAVIOLA-CLIMACO
SC said: Well just because you say that they are not listed in the
STB, we cannot just take your word for it because the STB is not
the only proof that a person is a SH. Besides, there is a rule under
Rules of Court that “an evidence willfully suppressed would be
adversed if produced”.
STB is not the only source of proof that a person is a SH.
The below portion is lifted from Gaviola Notes of Batch Invictus
In this case, the company claimed that petitioner is not a
Stockholder however, it failed to present the Stock and Transfer
Book.
SC: You cannot deny the right to inspect so long as the name of
the SH is in the STB. And if the name is not in the STB, the
corporation should present the STB because non-presentation
thereof would mean that there is no valid ground to deny.
The stock certificate is one of the proofs of ownership, but it is
not the only proof. The STB is the best evidence in proving
whether or not a person is a SH.
In this case, the SEC also allowed other evidences to prove
ownership like the SEC’s certificate of subscription, the receipts
of subscription, and their elction as directors (because they
cannot be elcted directors if they are not SHs).
IN RELATION TO MADRID CASE
In this case, SC said that General Information Sheet (GIS) is not
sufficient to show the records of the stockholders.
The husband presented the GIS but the SC said, well between the
STB and the GIS, the STB will prevail. But of course, the GIS can
also be considered as a secondary source. It is not the primary
source. The primary source will always be the STB. However,
other documents can be used to show that a person is a SH of
the corporation. Same ruling in the Insigne case.
STOCK & TRANSFER BOOK VS GIS
Stock & Transfer book as a Primary Source
Stock & transfer book is still the primary source in determining
whether a person is a stockholder or not, but GIS can also serve
as a secondary source and other documents can still be shown
that a person is a stock holder of a Corporation.
ADDITIONAL INFORMATION (NOT DISCUSSED BY ATTY.)
RIGHT TO FINANCIAL STATEMENT
SECTION 74. Right to Financial Statements. — A corporation
shall furnish a stockholder or member, within ten (10) days
from receipt of their written request, its most recent 1nancial
statement, in the form and substance of the 1nancial reporting
required by the Commission.
At the regular meeting of stockholders or members, the board
of directors or trustees shall present to such stockholders or
members a 1nancial report of the operations of the
corporation for the preceding year, which shall include
Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

1nancial statements, duly signed and certi1ed in accordance

with this Code, and the rules the Commission may prescribe. Stock Transfer Agent
Engaged principally in the business of registering transfers of stock
However, if the total assets or total liabilities of the in behalf of a stock corporation shall be allowed to operate in the
corporation are less than Six hundred thousand pesos Philippines upon securing a license from the Commission and
(P600,000.00), or such other amount as may be determined payment of a fee to be fixed by the Commission, which should be
appropriate by the Department of Finance, the 1nancial renewed annually.
statements may be certi1ed under oath by the treasurer and
the president.
Transfer by Corporation
When Recent Financial Statement Furnished
a stock corporation is not precluded from performing or making
Within ten (10) days from from receipt of the written request of
transfers of its own stocks, in which case all the rules and
stockholder or member, in the form and substance of the financial
regulations imposed on stock transfer agents, except the payment
reporting required by the Commission
of a license fee herein provided, shall be applicable.
The Commission may require stock corporations which transfer
Presentation of Financial Report and/or trade stocks in secondary markets to have an independent
The board of directors or trustees shall present to such transfer agent.
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 in accordance
with this Code, and the rules the Commission may prescribe

When Certified under Oath

If the total assets or liabilities of the corporation are less than Six
Hundred Thousand Pesos (₱600,000.00) or such other amount as
may be determined appropriate by the Department of Finance

Submission to the Commission

SECTION 177. Reportorial Requirements of Corporations.

— Except as otherwise provided in this Code or in the
rules issued by the Commission, every corporation,
domestic or foreign, doing business in the Philippines
shall submit to the Commission:

4. Annual financial statements audited by an

independent certified public accountant: Provided,
That if the total assets or total liabilities of the
corporation are less than Six hundred thousand
pesos (P600,000.00), the 􀀾financial statements shall
be certified under oath by the corporation's treasurer
or chief financial officer; and
5. A general information sheet

Corporations vested with public interest must also submit the

following:

(1) A director or trustee compensation report; and

(2) A director or trustee appraisal or performance report and the
standards
or criteria used to assess each director or trustee.

The reportorial requirements shall be submitted annually and

within such period as may be prescribed by the Commission.

Loss of Stock and Transfer Book

Secondary or extrinsic evidence may be introduced to reconstitute
its contents. The new stock and transfer book should be presented
to the SEC for registration, accompanied by a sworn statement
executed by any responsible officer setting forth the
circumstances attending the loss.
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Corporation Law (2019) MIDTERM REVIEWER
TITLE IX- MERGER AND CONSOLIDATION
DEFINITION
SEC. 75. Plan of Merger or Consolidation. - Two (2) 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:
(a) The names of the corporations proposing to merge
or consolidate, hereinafter referred to as the constituent
corporations;
(b) The terms of the merger or consolidation and the
mode of carrying the same into effect;
( c) A statement of the changes , if any in the articles
of incorporation of the surviving corporation in case of merger;
and, in case of consolidation , all the statements required to be
set forth in the articles of incorporation for corporations
organized under this Code; and
(d) Such other provisions with respect to the
proposed merger or consolidation as are deemed necessary or
desirable
Merger
1. A + B = A or B
2. Meaning 2 corporations combined, one is dissolved then the
other becomes the surviving corporation
Consolidation
1. A + B = C
2. When two corporations combined they form an entirely new
corporation. When A & B consolidate, non of the combining
corporation survive, what is created in its place is a new
corporation.
Requirements
1. Creation of “Plan of Merger and Consolidation “ by the Board
of each corporation
- this is the first document that the corporation needs to create
- the plan should specify what will happen to the surviving
corporation or the newly created corporation
2. Approval of Majority vote of each of the BOD or trustees of
such plan
- the plan of merger or consolidation shall be approved by
majority vote of each of the board of the concerned corporations
at separate meetings
3. Approval of such plan by 2/3 Stockholders and Members
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ATTY. GAVIOLA-CLIMACO
What is needed as an affirmative vote of stockholders
representing 2/3 of the outstanding capital stock of each
corporation in the case of stock corporaitons or member in case
of non-stock corporation.
Amendments: majority of the board approval & vote of the
stockholders representing at least 2/3 of the outstanding capital
stock. (same approval )
TN: merger & consolidation is a ground for Appraisal Right for
any dissenting stock holders
4. Execution of Articles of Merger or Consolidation
Articles of Merger or Articles of Consolidation shall be:
a)executed by each of the constituent corporation
b) Signed by the President or Vice President
c) AND Certified by the Secretary or assistant secretary
5. Submission of the Articles to SEC for approval
Four copies of the Articles of Merger or Consolidation (together
with favorable recommendation of a pertinent government
agency in certain cases) shall be submitted to the SEC for
approval.
6. Issuance by SEC of Certificate of merger
The SEC shall issue certificate of merger if it is satisfied that the
merger or consolidation of the corporations concerned is not
inconsistent with the provisions of this code and existing laws.
EFFECTIVITY OF MERGER OR CONSOLIDATION
SEC. 78. Effectivity of Merger or Consolidation . - The articles of
merger or of consolidation , signed and certified as required by
this Code, shall be submitted to the Commission for its approval
; Provided, That in case of merger or Consolidation of banks or
banking institutions, 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
consistent with the provisions of this code and existing laws, it
shall issue a certificate approving the articles and plan of merger
or of consolidation , at which time the merger or consolidation
shall be effective.
If, upon investigation , the 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.
Effectivity of Merger & Consolidation
GENERAL RULE
Takes effect only upon the approval of the SEC.
TN: no approval of the SEC no valid merger or consolidation
EXCEPTION
Any merger or acquisition in excess of 1 Billion pesos
- additional Requirement of Notice to Philippine Competition
Corporation Law (2019) MIDTERM REVIEWER
Commission
- PCC has power to deny or disallow the merger or acquisition
Effects of merger or consolidation
 The Constituent corporations shall become a single
corporation;
 The separate existence of the constituents shall cease
EXCEPT that of the surviving corporation ( in merger) or
the consolidated corporation (in consolidation)
 The surviving or the consolidated corporation shall
possess all the rights, privileges , immunities and
powers and shall be subject to all duties and liabilities of
a corporation;
 All liabilities of the constituents shall pertain to the
surviving or the consolidated corporation.
 Merger: the constituent corporations becomes a single
entity.
 Consolidation: there is a now a consolidated
corporation.
o The separate existence of constituent
corporations cease except the surviving or
consolidated corporation. So automatically
the non-surviving or the non-consolidated
corporation will be dissolved.
o The surviving or consolidated corporation will
now possess all the rights, privileges,
immunities and powers, and shall be subject
to the duties and liabilities of a corporation
organized under this code.
ATTY:
So meaning, the new corporation need not be registered again
with the SEC. Automatically upon approval of the merger or
consolidation that new corporation whether it’s the surviving
corporation or a consolidated corporation possesses all the
powers of a corporation under this code. The surviving
corporation or the consolidated corporation shall also possess all
the rights, privileges, immunities and franchises of the constituent
corporation and all the properties and receivables including
subscriptions and other interest of the constituent corporation
shall be deemed transferred to the surviving or consolidated
corporation. The surviving corporation or the consolidated
corporation shall also be responsible for all the liabilities and
obligations of the constituent corporation. Under the NELL
DOCTRINE, merger and consolidation is one of the ways in which
liabilities are passed to the new corporation.
Prohibitions under Philippine Competition Act
1. Anti- competitive Agreements;
2. Abuse of Dominant Positions;
3. Anti-competitive mergers and acquisitions.
Anti- competitive Agreements
 Horizontal Agreements - these are agreements
between parties who are similarly situated meaning a
supplier of a certain commodity entering into an
agreement of a supplier of the same commodity.
 Vertical Agreements - this is when a supplier or
producer of a certain goods will enter into an
agreement with the supplier of the raw materials for
the production of that goods. It is vertical because it
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ATTY. GAVIOLA-CLIMACO
goes up the supply chain or it goes down the supply
chain.
ATTY: Horizontal or vertical agreements are not prohibited, they
become prohibited only when they become agreements between
competitors that restrict competition as to the price component
thereof or as to the other terms or trade, so let’s say for , an
agreement between Globe and Smart that they will now charge
P5 per text message so they fix the price and no one can go against
them because they are the major players in the market. So if they
agree, people will normally have no choice because you are either
a Globe or a Smart subscriber. So wala kay choice but to pay up, if
ang Globe lang ang mag-increase sa price and Smart does not,
people will go to Smart but if they both agree then the market has
no choice. So any agreement that will restrict competition as to
the price component so meaning wala na kay choice because that
is the essence of competition, giving the public a choice kung kinsa
imong source of your goods or services. So any agreement which
restricts a choice for the public in terms of price or any other terms
or trade, that can be considered as an anti-competitive
agreement.
What else is considered as an anti-competitive agreement? If you
fix the price in an auction or you try to do bid manipulation that is
also prohibited.
BID MANIPULATION
It can be cover bidding, bid suppression, bid rotation, market
allocation and other forms of bid manipulation.
- Cover bidding – it is when the participants to an auction
will agree to basically pad their bid price in order to
allow one competitor to win.
- Bid suppression – is when they agree that the
competitor will not submit their bid to allow whoever is
participating to win.
- Bid Rotation – similar to cover bidding and bid
suppression except that the parties agree that for this
bidding, ikaw makadaog, for the second bidding, ako na
sad. So you agree or fix who will win per
bidding/auction.
Those are considered as manipulative practices, which are
considered as anti-competitive agreement and prohibited under
the Competition Act.
- Any other agreement which would have the effect of
restricting or preventing competition such as:
1. Setting, limiting or controlling production
markets, technical development, investment
dividing, or sharing the market.
So if the competitors agree nga sige akong area ang
Luzon so don’t come in here but I don’t go to Visayas
and Mindanao. So Luzon is your monopoly, that’s not
allowed.
Setting, limiting or controlling production - This can be
in the form of a vertical agreement where you have an
agreement with the supplier that any raw material that
they produce will only be supplied to you or to lessen
the production of that raw material so that your
Corporation Law (2019) MIDTERM REVIEWER
competitors will now not have any materials for
production, so any agreement which restricts
competition is considered as anti-competitive
agreement and not allowed under the Competition Act.
2. Abuse of Dominant position – it is basically a
situation where a company is in a dominant
position, menaing 50% or more of the market share
is considered as dominant. Being in the dominant
position is not illegal per se so in the same way that
being an insider is not illegal. What is illegal is when
you abuse your dominant position. In such a way
that you do predatory pricing to impose barriers
to entry or discriminate in price and you do tying
and bundling.
EXAMPLE FOR PREDATORY PRICING:
If you are the go to supplier for that particular market, you can get
control in the sense that because you have more customers,
pwede nimo paubsan imo price because you exchange volume for
the price.
But if you do it in such a way that you will now edge out your
competitors because you are doing predatory pricing nga dili na
maapas saimo competitors so they have to close down because if
they follow your pricing malugi na sila. That’s not allowed.
EXAMPLE FOR TYING AND BUNDLING:
Suppliers that have a product which is dominant in the market,
and then they have ancillary products that they tie to their main
product i.e. printer, if the producer of the printer will create a
printer na dili ka makagamit ug any other ink except ang ink na
ilang gi produce, that is an abuse of dominant position.
Tying and bundling: bundling of your ancillary product with your
main product.
Another example: Apple products, there are certain applications
that will only apply to their phones. But not illegal because people
have the options. But what if you have no other options or all the
other phones will be inferior to their phones. In that case, that
would be considered as an abuse of dominant power.
You have a product that is dominant or preferred in the market
meaning more than 50% of the market share and then you tie up
other products to it. Such that you can’t use any other products
created by the suppliers except kadtong imo lang.
Merger or acquisition that exceeds 1b
Any merger or acquisition which exceeds 1 billion pesos (the
transaction value). Are prohibited from consummating their
agreement for 30 days after providing notice to the Philippine
Competition Commission (PCC).
Effect of failure to comply with the notice requirement to the
PCC:
1. Transaction will be considered as void; and
2. Penalty of 1%-5% of the value of the transaction.
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ATTY. GAVIOLA-CLIMACO
UPON NOTIFICATION TO THE PCC, THE COMMISSION MAY:
1. OUTRIGHT PROHIBIT THE IMPLEMENTATION OF THE
AGREEMENT
Just like what it did with the acquisition by Globe of the San
Miguel cell sites. (a case pending in the SC) This case would
rule if the PCC can be granted such power to prohibit certain
transaction.
It is a very far reaching power that was granted to the PCC
2. MODIFY OR ADD SOME PORTIONS IN THE CONTRACT
The PCC can add or modify some portions in the contract. If
the parties do not agree to the proposed changes, then, the
PCC can deny the merger/acquisition
3. PROHIBIT THE IMPLEMENTATION OF THE AGREEMENT
UNLESS AND UNTIL THE PERTINENT PARTY/PARTIES
ENTER INTO LEGALLY ENFORCEABLE AGREEMENT
SPECIFICIED BY THE COMMISSION
If the commission finds out that there are anti-competitive
terms in the transaction, then the commission can take out
those terms.
NOTE: In the second one, PCC adds or modifies; but, in the third
one, the PCC removes some portions to make the agreement
legally enforceable.
NOT ALL MERGERS OR ACQUISITIONS WHICH RESTRICT
COMPETITION SHOULD BE INVALIDATED
The law provides that there are certain mergers/acquisition that
even though are anti-competitive can still be allowed.
GENERAL RULE: ANTI-COMPETITIVE MERGERS/ACQUISITIONS ARE
PROHIBITED
EXCEPTIONS:
1. IF THERE COULD BE GAINS IN EFFICIENCY BROUGHT
ABOUT BY THE COMBINATION, AND THAT GAIN IN
EFFICIENCY IS MORE THAN ANY ADVERSE EFFECT OF
THE LIMITATION ON COMPETITION
If, for example, 2 competitors will combine. With the
combination, the new company will be producing double the
volume of what they ordinarily produce before the merger.
The production has doubled because the assets of the two
competitors have been combined. And also, with that double
production, the production cost became less. (greater
production, lesser cost. Meaning, economy of scale)
If it can be shown that that economy of scale resulting from
greater efficiency in production will redound to the benefit
of the public, shown by reduced prices of the goods, then
that combination can be allowed.
Corporation Law (2019)
So, if there are certain efficiencies created by the
combination which efficiencies will be shown to be of greater
benefit than the disadvantage of restricting competition,
then the merger/acquisition can be allowed.
2. IF THE OTHER PARTY IS FACED WITH ACTUAL OR
IMMINENT FINANCIAL FAILURE
If a corporation is about to go bankrupt and is acquired by its
competitor. In this case, then, the combination, even if it
restricts competition, will not be considered as
disadvantageous. Because if that other party actually goes
bankrupt, it’s the same effect, because the surviving
competitor will still be the sole source in the market.
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MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO
TITLE X- APPRAISAL RIGHT
Appraisal Right
It is the right of the stockholder to compel the corporation to
purchase his/her share. Appraisal right is strictly construed
because it violates and is actually an exception to the trust fund
doctrine.
TRUST FUND DOCTRINE:
All assets and capital of the corporation is a trust fund to be held
for the benefit of its creditors. So, a stockholder cannot just
withdraw his shares/stockholdings. The exception is if it is
pursuant to the exercise of appraisal right.
EXERCISE OF APPRAISAL RIGHT; WHEN
SEC. 80. When the Right of Appraisal May Be
Exercised. – Any stockholder of a corporation shall have the
right to dissent and demand payment of the
fair value of the shares in the following instances:
(a) In case an 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;
(b) 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 this Code;
(c) In case of merger or consolidation; and
(d) in case of investment of corporate funds for any
purpose other than the primary purpose of the corporation
(a) In case an 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;
- If you look at the provision on amendment of the
articles, it also expressly provides there that any
amendment is subject to appraisal right of the
stockholders
(b) 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 this Code;
(c) In case of merger or consolidation;
(d) In case of investment of corporate funds for any
purpose other than the primary purpose of the
corporation
Corporation Law (2019)
- Technically, if you invest funds in another corporation,
as discussed before, you amend your articles.
EXERCISE OF APPRAISAL RIGHT; HOW
SEC. 81. How Right is exercised. – The dissenting stockholder
who votes against a proposed corporate
action may exercise the right of appraisal by making
a written demand on the corporation for the payment
of the fair value of shares held within thirty (30) days
from the date on which the vote was taken: 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, the
corporation shall pay the stockholder, upon
surrender of the certificate or certificates of stock
representing the stockholder’s shares, THE FAIR
VALUE THEREOF AS OF THE DAY BEFORE THE
VOTE WAS TAKEN, excluding any appreciation or
depreciation in anticipation of such corporate action.
If, within sixty (60) days from the approval of the
corporate action 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 (2) 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: Provided, further, That upon
payment by the corporation of the agreed or
awarded price, the stockholder shall forthwith
transfer the shares to the corporation.
Manner of exercising appraisal right
1. VOTE AGAINST THE CORPORATE ACTION
- It can only be exercised by a stockholder who actually
dissented or voted against that particular corporate
action, where the right is allowed. Meaning, if you, a
stockholder, voted to approve the amendment in the
articles, you cannot exercise appraisal right.
2. MAKE A WRITTEN DEMAND ON THE CORPORATION
WITHIN 30 DAYS AFTER THE DATE ON WHICH THE VOTE
ÂWAS TAKEN FOR THE FAIR VALUE OF YOUR SHARES
- Failure to make that demand shall be deemed a waiver
of the appraisal right. Appraisal right is strictly construed
against the stockholder, being violative of the trust fund
doctrine.
3. SUBMIT THE STOCK CERTIFICATE TO THE
CORPORATION WITHIN 10 DAYS AFTER DEMANDING
PAYMENT
- So that there can be an annotation on the stock
certificate that he is a dissenting stockholder, and the
shares/stocks are dissenting shares. Failure to do so
shall terminate his appraisal right at the option of the
corporation. So, even if you have dissented and
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MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO
thereafter notified, but you failed to surrender the stock
certificate, appraisal right is terminated.
Under Sec. 81, Paragraph 2: “If the proposed corporate action
is implemented, the corporation shall pay the stockholder,
upon
surrender of the certificate or certificates of stock
representing the stockholder’s shares, the fair
value thereof as of the day before the
vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.”
- It means that if the corporation does not push through
with the action where the stockholder dissented,
appraisal right is also terminated. So, the appraisal right
can only be pursued if the corporation actually pushes
through with the corporate action and the fair value
should be the value of the shares THE DAY BEFORE THE
ACTUAL VOTING ON THE CORPORATE ACTION.
APPLICATION OF THE RULE
This is most applicable in publicly listed corporations because the
corporate action will normally be published by the issuer
corporation. So, it can affect the price of the shares.
Example:
You acquire another subsidiary. If the market deems that
acquisition to be advantageous to the corporation, it can result to
an increase in the shares. If the market deems that acquisition to
be disadvantageous to the corporation, it can result to a decrease
in the price of shares.
Being a dissenting stockholder, the stockholder who wants to
exercise his appraisal rights, should be immune from any of those
fluctuations. He cannot benefit nor can he be disadvantaged of
any change in the price brought about by the action which he
dissented from.
TWO THINGS TO REMEMBER IN THE SECOND PARAGRAPH OF
SECTION 81:
1. If the proposed action does not push through, then the
appraisal right is terminated
2. The fair market value of the share should be on the day before
the vote was taken.
- Within the period of 60 days from the approval of the
corporate action, if the parties cannot agree how much
is the value of the shares, then there needs to be an
appraisal by 3 disinterested persons.
Who determines
One will be named by the stockholder.
The other will be named by the corporation.
The third one will be named by the two representatives.
- Basically, this will be an independent appraisal
committee to determine the value of the shares. The
findings of this appraisers will be final and the award
shall be paid by the corporation within 30 days after the
award is made. The stockholder and the corporation
cannot anymore question on the value given by the
appraisers.
Last but not the least, appraisal right can only be granted if there
is unrestricted retained earnings in the books of the corporation.
Corporation Law (2019) MIDTERM REVIEWER
- It is not sufficient that there is only retained earnings. It should
be unrestricted retained earnings. Meaning, you don’t take into
account the retained earnings that has been restricted for
corporate expansion, retained earnings that has been restricted
for certain contractual provisions, and retained earnings that has
been restricted for contingencies or any other valid restriction of
retained earnings. They are not included in the determination.
The exercise of appraisal right is very strict that the failure to
comply with one requirement automatically terminates the
appraisal right because this is an exception to the trust fund
doctrine.
GR:
The corporation is not allowed to give back the capital
contribution of a stockholder because that capital contribution is
considered as a trust fund in favor of the creditors.
EXC:
The exercise of appraisal right.
EFFECT AND TERMINATION OF RIGHT
SEC. 82. 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 the said shares within thirty (30) days after the award,
the voting and dividend rights shall immediately be restored.
- All rights accruing to the shares, including voting and
dividend rights shall be suspended. No more voting
right, right to inspect, or right to dividends during the
period where you notified that you want to exercise
your appraisal right.
- The only right remaining with the stockholder will be
the right to receive the fair value of his shares.
- But if the dissenting stockholder is not paid with the fair
value of his shares within 30 days after the award, all his
rights will be restored until he is actually paid.
CESSATION OF RIGHT TO PAYMENT
SEC. 83. 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 Commission where such
approval is necessary, or if the Commission determines that
such stockholder is not entitled to the appraisal right, then the
right of the stockholder to be paid the fair value of the shares
shall cease, the status as the stockholder shall be restored, and
all dividend distributions which would have accrued on the
shares shall be paid to the STOCKHOLDER.
When right to payment ceases
1. Demand for payment is withdrawn with the consent of the
corporation
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ATTY. GAVIOLA-CLIMACO
2. proposed corporate action is abandoned or rescinded by the
corporation
3. proposed corporate action is disapproved by the Commission
where sun approval is necessary
4. Commission determines that such stockholder is not entitled
to the appraisal right
5. failure to make a written demand within the 30-day period
provided
6. the shares are transferred by the dissenting shareholder
7. the dissenting shareholder failed to submit the stock certificate
within 10 days from demand
Effect
When the right of said stockholder to be paid the fair value of his
shares ceased in the cases enumerated above, his status as a
stockholder shall be restored, and all dividend distributions which
would have accrued on the shares shall be paid to the stockholder.
TAKE NOTE: Appraisal Right is not an inherent right of a
stockholder, because upon being one, there is an understanding
that the stockholder does not have a say in a corporation and will
be subject to the whims of the majority of the stockholders.
(NOT DISCUSSED BY ATTY. G)
WHO BEARS COSTS OF APPRAISAL
SEC. 84. 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.
NOTATION ON CERTIFICATES; RIGHTS OF TRANSFEREE
SEC. 85. Notation on Certificates; Rights of Transferee. – Within
ten (10) days after demanding payment for shares held, a
dissenting stockholder shall submit the certificates of stock
representing the shares to the corporation for notation that
such shares are dissenting shares. Failure to do so shall, at the
option of the corporation, terminate the rights under this Title.
If shares represented by the certificates bearing such notation
are transferred, and the certificates consequently cancelled,
the rights of the transferor as a dissenting stockholder under
this Title shall cease and the transferee shall have all the rights
of a regular stockholder; and all dividend distributions which
would have accrued on such shares shall be paid to the
transferee.
Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

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