CORPORATION CODE by DEAN NILO DIVINA 2015

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A. CORPORATION The one who represents an unincorporated corporation, he
alone is the one liable just like a Single Proprietor.
1. Definition
The SC said the one who represented UPC, is the real party in
What is a corporation?
interest, the judgment may be enforced against him even if he
Section 2. Corporation defined. – A corporation is an artificial was not impleaded as a formal party defendant.
being created by operation of law, having the right of succession
and the powers, attributes and properties expressly authorized by In 2010, BA Finance vs. ___ ******* interrupted******
law or incident to its existence.
Dean: While looking for the file, Alex can you please
This definition gives us the essential attributes of a distinguish a corporation from a partnership.
corporation. What are these?
Alex: ***Keeps on reciting *** (Umubo na naman si pete)
Based on these attribute of a corporation, how do we
Dean: I‟m listening, multitasking.
distinguish a corporation from a single
proprietorship? After several minutes……

A Single Proprietorship (parang si Zacky Single lol) is not
an artificial being because the proprietor has no legal
personality from its business. It is not created by law.
Whatever the assets and liabilities of the single
proprietorship are likewise the obligations and liabilities of
the proprietor and vice versa.
If in case a Single Proprietor wants to file a suit or a
legal action, (the suit is related to its business) how
should the caption ____ (umubo si pete) would be?
Let’s say Juan Dela Cruz doing business under the
trade name and style of Mabango Flower Shop.
Juan Dela Cruz doing business under the trade name and
style of Mabango Flower Shop vs. Defendant. Juan dela
Cruz and Mabango Flower Shop are one and the same. In
contrast with the action involving Juan Dela Cruz himself
it must be captioned as Juan Dela Cruz vs. Defendant
Who is liable in a suit filed against a corporation
which is not registered with the SEC but only
represented by one person?
Let‟s take the case of University Publishing
Corporation vs Albert, it is an old case.
Albert is a commentator, an authority in criminal law,
entered into a contract with UPC, for UPC to publish his
commentary, but UPC did not pay royalties to Albert, so
Justice Albert filed an action for the payment of the
royalties but during the pendency of the case, J. Albert
died so the judgment was rendered in favor of his estate,
but when the judgment was about to be enforced, they
discovered that there is no such corporation registered
with the SEC.
Against whom the judgment may be enforced?
The Supreme Court said that the one who represent an
unincorporated corporation is akin to Single Proprietorship.
So there is no corporation by estoppel if there is only one (1)
person because there is a corporation by estoppel if there are
two persons or more assume to be a corporation.
Dean: I was lying when I said I‟m listening.
Class: LOL
**************
Right now there is no one man corporation, it‟s just a proposal.
To repeat, in a Single Proprietorship, the assets of the
proprietor may be held to answer for the obligation of the
business, as if it is the personal obligation of the proprietor
because here, there is no separate legal personality.
2. Attributes of the Corporation
Distinguish a Corporation from a Partnership. Based on the
definition, the first one is 1. Artificial being.
Is a Partnership also an artificial being?
Yes, it is also a juridical person
So both corporation and partnership are legal being in the
sense that they have a legal personality separate and distinct
from the persons composing it. Second is created by law, a
corporation is created by law while a Partnership it is by
agreement.
When does a Partnership arise or created?
It is created from the moment of meeting of the minds of
the persons to contribute money, industry and property to
a common fund with the intention of dividing the profits
among themselves.
What is the purpose of registration of Articles of
Partnership with the SEC?
To get a license or permit and you cannot operate a
business unless registered with SEC.
What about a Corporation?
It is not created from the moment the five (5)
incorporators signed the AOI; likewise it is not created
upon filing of AOI with the SEC but it acquires legal
personality from the moment that SEC issued a certificate
of incorporation.

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 CORPORATION CODE by DEAN NILO DIVINA 2015
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It is created by operation of law, what law?
Corporation Code
Can a corporation be created by some other law?
Yes, by special law
When you say law, it may be a general law which is the
corporation code or Special law passed by Congress to create a
GOCC.
Third (3rd) the right to succession, do you mean the
corporation is immortal?
In Partnership, there is no right of succession because the
death of one of the partners will dissolve the Partnership.
The right of the succession of the corporation is the power
to exist continuously because it can extend the corporate
term.
Fourth (4th), Attribute, what does it mean? Briefly,
does it mean that a corporation can only exercise
those powers authorized by law, by the AOI or
incident to its existence?
Yes.
How about the Partnership? What is the limitation of
what the Partnership can do?
Based on what the Articles of Partnership provides.
Is the corporation delimited only by what is not
contrary to law, morals, good customs, public policy
and public order? Can a corporation enter into a
contract or transaction for as long as it is not
contrary to law, morals, good customs, public policy
and public order?
It is a question of whether or not the action or transaction
of the corporation is consistent with the powers conferred
to it by law.
While in Partnership, there is no limitation provided that
it is not contrary to law, morals, good customs, public
policy and public order.
What is the term of the corporation?
The term specified in the AOI but not to exceed fifty (50)
year and can be extended
In Partnership, can we say that the term is
indefinite?
Yes. It is indefinite unless there is a ground to dissolve.
Who exercises the powers of the corporation?
Corporation – generally, it is the Board of Directors
(BOD). In Partnership, it is the General partner. In the
absence of designation any partner may perform the
powers. In corporation, generally it is the BOD because
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under the law there are powers reserved for the
stockholders (SH) only, or joint by the SH and the BOD.
What about transferability of interest?
In Corporation, the SH can sell or transfer his or her share
in the corporation even without the consent of other SH or
the corporation. Whereas in the Partnership, it cannot do
so without the consent of the Partnership because the
personal qualification of the partner is taken into account.
Can a corporation require that its consent must be
secured before a SH can sell his share? Is that
restriction reasonable?
No, it is contrary to law.
What restriction can the corporation require?
The right of first refusal. It must be embodied in the AOI.
Distinguish the limitation as to liability of the
corporation from Partnership.
Dean: Did you graduate with honors?
Nikki: No Dean.
How about you April?
April: No Sir! (Dean Feble accent)
So it is the non-latin honors are the one excelling. Stephanie
(Teff) also did not graduate with honors in… in…. in… Science,
I think in Science.
Tituh Kaye: Econ…… Econ……… Econ………
**********
So let‟s continue
SH - they cannot be held liable beyond their subscription while
the partners, if the assets of the Partnership are not sufficient
to satisfy the obligation to the creditors, they can be held liable
personally.
BAR: Is that an absolute rule that the liability of the
SH is limited only to his subscription?
No. the exception is if he is a director, officer or agent, he
can be made personally liable.
************
DISCUSSION
Section 2 defines the corporation and at the same time gives all
its attributes.
If five (5) persons, (let‟s say Zacky, Brynn, Peter, Dustin
and Reggie – dream team in Dota 2) put up a corporation
named BLACK LION CORPORATION and registered it with
SEC, now we have six (6) persons composing the corporation,
so the corporation has personality separate from the five (5)
Black Lions composing it.
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The corporation can invoke the right against illegal search and
seizure (Stonehill v. Diokno), but it cannot invoke the right
against self-incrimination (PASECO vs. PCGG)
FILIPINAS BROADCASTINGNETWORK v. AGO
MEDICAL AND EDUCATIONAL CENTER
Can a corporation be entitled to moral damages?
In 2004, Justice Carpio, in this case, one of the
broadcasters of Filipinas Broadcasting Network uttered
libelous remarks over a radio against AGO Medical and
Education center. Ago Medical is a medical center in
Legazpi Albay. On air, the said broadcaster said that AGO
Medical is the dumping ground of intellectual misfits.
Held: Under the New Civil Code, in case of libel, oral
defamation or slander, the aggrieved person be entitled to
moral damages. The SC through Justice Carpio said that
the NCC makes no distinction between natural and
juridical person. The law authorizes recovery of damages
to any person victim of libel, defamation or slander,
whatever kind of person whether natural or juridical.
In one case, a corporation is not entitled to moral damages
because, not being a natural person, it cannot experience
physical suffering or sentiments with the exception that if the
corporation has a reputation that is debased, resulting to
humiliation in the business realm.
MERALCO v. TEAM ELECTRONICS (2007)
Can a corporation sue for Moral Damages if it is a
victim of tort?
Yes.
The corporation was a tenant in a building, its electrical
connection or supply was disconnected by Meralco
because of the alleged meter tampering, so it sued Meralco
for Moral damages. It lost the case because it did not
establish the connection between the tortious act or
conduct and the injury sustained. Therefore, if the
corporation can establish the connection not on account of
libel, the corporation may be entitled to moral damages.
BAR: Let‟s say the President of McDonalds Corporation was
spreading rumors that the hamburger of Jollibee is made from
the meat of cat. So the president of Jollibee was not able to
sleep, he suffered from sleepless nights, anxiety and depression
because of the libellous remark uttered against Jollibee. So he
filed an action for damages against McDo.
Will the suit prosper based on the allegation of the
complaint?
No. The aggrieved party is the corporation not the
president because the corporation has separate legal
personality.
Can the corporation be entitled to damages?
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Yes, the case of AGO.
It is not correct to say that the corporation cannot be criminally
prosecuted because it can be if the imposable penalty is not
imprisonment like fine, forfeiture of license, revocation of
franchise, in this context, the corporation can be criminally
prosecuted.
Can the corporation be held liable for tort?
Yes.
The corporation has separate legal personality from the
persons composing the corporation, therefore the properties of
the corporation are neither the properties of the SH vice versa.
The obligations of the corporation are not enforceable against
the SH vice versa.
The cause of action of the corporation can be enforced by the
SH vice versa.
STRONGHOLD INSURANCE v. CUENCA (2013) penned
by Bersamin
The assets of the corporation levied on attachment.
So a writ of preliminary attachment was issued
against the property of the corporation and the
Stockholders of the corporation filed a petition before
the Court of Appeals to set aside the attachment, on
the ground that it was fraudulently and irregularly
issued by the RTC. So assuming that it was
irregularly issued, can the petition be granted?
No, because the assets of the corporation were levied and
not the assets of the SH. So if there is any person who
should file a petition to set aside the attachments, it is the
corporation, not the SH.
- According to J. Bersamin, the SH are not the real
party in interest and the petition is dismissed
outright.
- The principle will not change even though the SHs
control the corporation.
If you will grant a loan to a corporation, how will
you make that the controlling SH be liable, if the
basic principle in Corporation law that ownership of
shares is not enough reason to disregard the
separate legal personality?
In practical application, you require a Surety or Guaranty
agreement from the SH, he will not be liable as a SH but a
surety or guarantor of the obligation.
The case of EPG, the issue is whether or not the obligation of
the corporation extends to the president because the president
own and controls the 90% of the corporation. The SC held that
the obligation of the corporation do not extend to the president
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because there is no foul play on the part of the President and
the act of resisting the claim if UP is not tantamount to bad
faith.
NOT YET ASKED IN THE BAR: THE CASE OF NISCE
Nisce is the owner of the Philippine Rabbit. It obtained a loan
from Equitable Bank, secured by mortgage of real property of
Nisce. The latter made as money market placement‟ Nisce
defaults; Equitable bank and PCIB merged to form EPCIB, so
because of the merger, EB acquires the rights, assets and
obligations of PCIB. EB threatened to foreclose but Nisce
argued that his money placement should be set off by the EB.
The SC said the fact that EB was the surviving bank with the
merger with PCIB which eventually resulted in Equitable PCI
bank becoming eventually the parent company of the
subsidiary PCIB, it is not enough reason to disregard the
separate legal personality.
Last case, LIM vs CA – Pastor Lim‟s wife wanted to include
the corporate properties as far as the settlement of the estate
just because the deceased is the controlling SH. The SC said
that the titles are in the name of the corporation, ownership is
conclusively in favor of the corporation. The fact that Pastor
Lim controls the corporation during his lifetime is not enough
reason to disregard the separate legal personality. Only shares
of stock but not the properties of the corporation.
What do you understand by this Doctrine of Piercing
the Veil of Corporate Fiction?
The doctrine that allows the State to disregard, for certain
justifiable reasons, the fiction of the legal personality to
the corporation separate from the persons who composed
it.
Bear in mind that the Doctrine of Corporate Legal Entity
is only a fiction to promote public convenience. If this doctrine
is misused or abused, then the State shall disregard the
separate legal personality, pierce the corporation, and shall
treat the corporation and the stockholders composing it as one
and the same entity.
What are the areas in which the doctrine of Piercing
of The Corporate Veil applies?
1. In cases where the fiction is used to defeat
convenience.
2. In case of Fraud.
3. Alter-ego or instrumentality cases where the
corporation is used as an instrumentality or alter-ego
of another corporation.
ALTER-EGO OR INSTRUMENTALITY TEST has three
elements:
1. Control in shareholdings, control in finances and then
control in business policy and practices such that the
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corporation has no mind of its own with respect to the
transaction
2. When the control is used to perpetuate fraud or breach
the duty in violation of the right of another
3. The control and the breach of duty are the proximate
causes of the harm suffered by a third person
So don‟t forget these three elements because many of the bar
questions can be answered by applying these elements.
Now, if you pierce the corporate fiction, does it mean
that the corporation is dissolved?
No
Does it mean that you have to pierce the corporate
fiction in all other transaction involving the
corporation?
No.
So only in the transaction where the three elements were
present. The fact that you pierced the corporate fiction with
respect to one transaction does not mean that you have to
pierce the doctrine of corporate fiction in other cases or
transaction if these elements are not present.
BAR: You said that the State allows disregarding, for certain
justifiable reasons, the fiction of the legal personality. When
you mean State means court right? When the court pierces
the veil of corporate fiction over a corporation if it
does not acquire jurisdiction? This was asked in 2014.
There are four cases in your outline. KUKAN v. REYES
(2010), GOLD LINE TOURS v. LACSA (2012), LIVESEY
v. BISWANGER PHIL., PACIFIC REHOUSE v. CA
(2014).
It depends on the facts of the case. This is because right
now you have these cases and they are even steven
meaning two cases holding the principle that a court may
pierce the veil of corporate fiction even if it does not have
jurisdiction and two cases where the SC said that courts
cannot pierce the veil of corporation if it does not acquire
jurisdiction
PACIFIC REHOUSE CORP. v. CA (2014)
ABC Bank has a wholly-owned subsidiary, XYZ Stock
Brokerage Firm. XYZ sold the shares of stock of Juan dela Cruz
without his consent. Juan filed and action to recover the shares
but the same cannot be recovered anymore because these have
been sold to a third party who acquired the shares in good
faith. So it was substituted for a money judgment. The court
directed the Stock Brokerage firm to pay the equivalent value
of the shares sold to third persons. It became final and
executory so Juan moved for an issuance of writ of execution
which was granted but could not levy the assets of Stock
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Brokerage Firm. So he decided to file for the issuance for alias
writ of execution against ABC Bank. Now the RTC issued the
alias writ of execution against the assets of ABC Bank because
ABC Bank owns 99.9% of XYZ Firm and the counsel or
representative of ABC is the same counsel representing XYZ.
Can it enforce judgment against ABC? Did RTC act
correctly in piercing the veil of the corporate fiction?
This question is worth 10 points.
An alias writ of execution could not be enforced against its
parent company because the court has not acquired
jurisdiction over the latter (it was not made a party
defendant) and while the parent company owns and
controls the brokerage firm, there is no showing that the
control was used to violate the rights of the plaintiff.
GOLD LINE TOURS v. LACSA (2011)
Maria, a graduate of a nursing school in Albay, went to Manila
to review for the boards. She boarded a bus owned by Travel
Tour Express. Unfortunately the bus collided with a passenger
jeepney and metals were detached from the passenger jeepney
which punctured her heart causing instantaneous death. The
heirs of Maria filed a case against Travel Tour. Judgment was
rendered with respect to the civil action of the case. When the
judgment became final and the heirs of Maria attempted to
enforce the judgment, they levied to the bus owned, however,
by Gold Line Tours. The Gold Line Tours filed a third party
claim asserting ownership, title, and interest over the bus. It
turns out that both Gold Line and Travel Tour Express are
family corporations owned by the same family, with
interlocking directors, officers and have overlapping finance
just that Gold Line was not brought to the court‟s jurisdiction.
Can the judgment of the court be enforced upon Gold
Line Tours?
Yes.
What makes Pacific Rehouse different from the Gold
Line case?
So we have cases with different rulings. In the first, the
court cannot pierce the corporate veil because the
corporation was not brought to the jurisdiction of the
court while the second case, Court said that you can pierce
the veil of corporate fiction as long as the RTC has
reasonable opportunity to assess the evidence and evaluate
the same, there is a basis to hold these two corporations as
one and the same entity.
So although at the outset, it was not brought to the court‟s
jurisdiction.
We discussed the circumstances which, by themselves, are
sufficient to disregard the separate legal personality of a
corporation.
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The first principle is that ownership of the controlling
shares is NOT enough reason to disregard the separate legal
personality of the corporation.
If ABC Corporation owns 99.9% of XYZ Corporation
because XYZ is the subsidiary of ABC, can Juan
enforce the debts of XYZ against ABC just because it
owns XYZ?
No because ownership of the controlling shares per se is
not enough reason to disregard separate corporate
personality.
Otherwise, if such is enough reason for two corporations to
be treated as one and the same entity then basically all
subsidiaries would be treated as the same as parent
companies and we all know that many corporations put up
subsidiaries like BDO. BDO has subsidiaries. They have
BDO Generali (insurance business). So can the policy
holders of BDO Generali enforce their claim against BDO
Bank just because BDO owns 99.9% on the shares of
Generali? The answer is no.
Now, the liability of XYZ will be compressed (?) to those
transactions related to its related operations and not
extend all the way to the parent company.
Remember earlier, when we discussed the elements of
instrumentality test, we said that the control must be
exercised in three areas – shares, finances, business values
and practices. So if the subsidiary has independent
operations, then it should have a separate legal personality
from the parent company.
PNU v. RITRATTO GROUP (2001)
BAR: This was asked three, four years ago. PNB has the
wholly-owned subsidiary in HK, PNB International Finance
Ltd. It is situated in World Wide House along Central HK so
this is where the Filipinos congregate every weekend so there
are many businesses there owned by corporations in the PH
and one of them is PNB International. So this PNB
International Finance granted LC/TR transactions or
accommodations in favor of Ritratto group secured by a
mortgage on the property of PNB in the PH and the parties to
the mortgage agreement were PNB, as agent of PNB
International Finance Ltd, and Ritratto group. The loan was
not paid prompting PNB to initiate foreclosure proceedings. To
stop the foreclosure, Ritratto Group filed an action in Manila to
compute the debts and payments made by the Ritratto Group
claiming that certain payments were made but were not
credited to its account. The action there was to re-compute the
interest payment to determine the standing obligation of
Ritratto Group and in the meantime, praying for the issuance
of writ of preliminary injunction or TRO. But the case was filed
against PNB period.
Will the suit prosper?
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No. This is because the suit was filed against PNB – parent that a corporation has a legal personality separate and distinct
company of PNB International. The fact that PNB is the from its stockholders, directors, and officers composing it.
parent company of PNB International does not make them
Since this is a doctrine, this is a principle of law. And principle
one and the same entity. The loan was granted by PNB
of law which shaped by jurisprudence (?). Now, is there a
International Finance Ltd. And not by PNB therefore the
provision in the Corporation Code about piercing the veil of
action must be filed against the subsidiary PNB
corporate fiction? There is none, right? Is there a law on the
International and not the parent company.
doctrine of separate legal entity? None.
How should the complaint be captioned?
The Doctrine of Separate Legal Entity is a principle emanating
The case should be filed against PNB as agent of PNB from the attribute of the corporation that it is a judicial need
International Finance Ltd and not PNB as parent company and as such the legal personality is separate and distinct from
of PNB International Finance Ltd. (I had an ah moment the persons composing it.
here hahaha). If it filed an action against PNB as an agent,
Now, the Doctrine of Piercing the Corporate Veil is an
then the suit is effective because the suit is ____ filed
application of the principle in a sense that if the fiction is
against PNB International, the one that granted the loan in
misused or abused, the fiction must yield to the reality.
favor of Ritratto Group.
If a corporation is set up, as we said, there are six persons – the
Okay, another circumstance to disregard separate entity is
corporation and the 5 incorporators composing it. So this is the
interlocking directors and similarity of business. So if
veil that separates the corporation from the stockholder. That‟s
two corporations have common directors, common
why we have seen in the previous discussions that the
stockholders, these are NOT enough reasons to treat them as
properties, right and obligations of the corporation do not go
one and the same entity, or their similarity of business even if
beyond the veil and cannot extend to the stockholders. Now,
both admit interlocking directors or common officers, still not
the moment that the fiction is misused or abused, the fiction is
enough reason to disregard separate entity of the corporations
pierced and when it is pierced, there is no more shroud that
DBP v. HYDRO RESOURCES CORP. (2013) separates the corporations from stockholders. They become as
one and the same entity. So this is a principle of law which is
DBP together with PNB foreclosed mortgage on the property of
also based on another principle of law.
Marinduque Mining Company. After foreclosure, it
consolidated title over the assets, it set up a new mining So second phrase, it allows the State… Can the Sheriff
company called Nonoc Mining and then transferred the pierce the corporate fiction?
foreclosed assets of DBP to Nonoc. Nonoc engaged a contractor
There are two cases in the outline where the sheriff, on his
to help Nonoc in its project. The consultant was only paid in
own, pierced the veil of corporate fiction and he was charged
part by Nonoc so he filed an action against both Nonoc and
administratively.
DBP claiming that they are one and the same entity because
DBP owns controlling shares of Nonoc and they have common DALISAY v. CRUZ
directors and SH.
Just when the blah blah blah of the corporation and the sheriff
Can the consultant enforce the collection against on his own, pierced the corporate veil to enforce the judgment
DBP? against the president of the corporation. He was charged
administratively and fired. Nineteen years later, people never
The SC said no citing the principles of interlocking
learn from the history. Another sheriff in ___ v. GORIS
directors, common stockholders, or controlling share are
(2009), levied on the vehicle of the president to answer for a
not enough reason to disregard the separate legal entity of
judgment against the corporation on the ground that,
the corporation
according to him, the vehicle was used by the president for the
DOCTRINE OF PIERCING THE CORPORATE VEIL official use of business.
This is a favorite topic in the bar as you all know and every year The Supreme Court said that it is not for the sheriff to
SC renders decision involving separate legal entity and piercing pierce the corporate fiction. It is a judicial function which
the corporate veil. Every year without fail and that is why we cannot be usurped by the sheriff.
have to know these decisions, jurisprudence because you have
Now you know that the State can pierce the corporate veil.
to answer based on the similarity with the facts decided by the
Which agency, instrumentality, or ___ can pierce the
SC. While this is a basic principle, knowing this is not enough
corporate fiction?
to answer the questions correctly so it has to be answered
based on the similarity with the facts of a pertinent case. Courts – all of them
As said earlier, this is a doctrine that allows the State to Can the court pierce the veil of corporate fiction
disregard for certain justifiable reasons the notion or fiction without acquiring jurisdiction?

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 CORPORATION CODE by DEAN NILO DIVINA 2015
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There are 4 cases that answer this question.
KUKAN INTERNATIONAL CORPORATION v. REYES.
Juan de la Cruz entered into a contract with Kukan
Corporation to set-up signages in buildings in Makati but he
was not paid his fees. So he filed an action for collection against
the corporation. Judgment by default rendered against Kukan
and attained finality. Juan de la Cruz sought to execute the
judgment. However, what were levied were not the properties
of Kukan Corporation but Kukan International Corporation. So
Kukan International filed a third party claim to the court. The
lawyer of Juan de la Cruz filed a motion to pierce the veil of
corporate veil of Kukan International Corporation on the
ground that Kukan International and Kukan International
Corporation are one and the same entity.
Can the court render judgment against Kukan
International Corporation?
SC SAID NO because the court must acquire jurisdiction
over Kukan International Corporation involving a cause of
action fully litigated by the court in a full blown trial
because jurisdiction is not acquired by mere motion.
Jurisdiction is acquired by service of summons and other
recognized modes.
GOLD LINE TOURS v. HEIRS OF MARIA
CONCEPCION LACSA
Lacsa board on a bus and was on her way to Ago Medical
Center where she met an accident and died. Judgment was
rendered against the bus company but the court levied the
properties of the sister company of Gold Line Tours.
The SC said that as long as the RTC has reasonable opportunity
to evaluate the evidence presented. And based on the evidence
presented, there is sufficient basis to warrant the conclusion
that two corporations are one and the same entity, then the veil
can be pierced.
The real party in interest, even though not impleaded as a party
defendant in the case can be substituted.
The SC took judicial notice that the two bus companies are
owned by one and the same family and they have common
officers. Moreover, it is common knowledge in the Albay region
that they are one and the same entity.
LIVESY v. BINSWANGER
There is a compromise agreement between ABC Corp and Juan
de la Cruz and judgment was rendered based on the agreement.
but before the agreement is imposed, ABC closed but it re-
emerged in the form of XYZ Corporation engaged in the same
line of business and has the same directors. A writ of execution
was issued by the Court upon motion to levy the properties of
XYZ Corporation.
The issue whether the writ of execution was valid against XYZ
Corporation even if it was not impleaded as a party to the case.
7
The SC said yes because of the circumstances when ABC Corpo
closed and XYZ suddenly emerged.
PACIFIC REHOUSE CORPORATION v. CA
An unsatisfied writ of execution against a subsidiary company
cannot be enforced against its parent company because the
court has not acquired jurisdiction over the said parent
company.
These 4 decisions are conflicting decisions. And the funny
thing is that these decisions did not make reference to each
other. The Lacsa case did not mention the Kukkan case.
To answer the question, look closely at the facts of each cases.
If the question is similar to the lacsa case, apply the lacsa case.
If there is no abuse or misuse or if there is no third party
abused, or if the issue can be resolved in other ways, forget
about piercing the veil of corporate fiction.
In one case, PHILIPPINE TEXTILE v. CREDIT, one
manufactures yarn and the other one sells it. The issue is
whether the employees of Filipina Credit should form part of
the Collective Bargaining Agreement of Philippine Textile. The
SC said no need because no third party prejudiced.
SC added one test: Test by Objective. The doctrine of piercing
the veil will only apply if the stockholders are being made liable
for the debts of the Corporation. So the end result of piercing
the veil is to make the stockholders liable for the debt of the
Corporation. If that is not the end result, forget about the
doctrine. Conversely, if the Corporation is being made liable for
the debts of the stockholders, do not apply the doctrine.
FRANCISCO MOTORS v. COURT OF APPEALS
A lawyer purchased motors from the Francisco Motors. He
rendered services for Francisco Motors but he was not paid. He
said that his fees should be applied or offset to the purchase
price. The SC did not apply the doctrine here because the end
result is that the Corporation is being held liable for the debt of
the stockholders.
What are the areas where the doctrine applies?
1. Defeat of public convenience
2. Used in case of fraud
3. Alter ego or instrumentality test
Defeat of public convenience – like when the veil is used to
evade a contractual duty
VILLA REY TRANSIT v. FERRER
Villarama sold buses to Tranco and its certificate of public
convenience. The contract stipulates that Villarama should not
engage in the same line of business. Villarama did not engage
in the same line of business but he formed a corporation
engaged in the same line of business the stockholders being his
spouse and children.
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The SC said that the corporation was set up to evade a Can Lanuza be compelled to arbitrate even when the
contractual obligation and the veil was pierced. agreement is between the two corporations?
Used in case of Fraud SC: if the complaint alleges bad faith or gross negligence
on the part of the officers and directors, and the same is
AC RANSOM v. NLRC
proven, then there is no more distinction between the
A group of laborers filed a complaint against AC Ransom for persons composing the corporation and the corporation
the payment of monetary benefits. During the pendency of the
In this case, it was proven that there was bad faith and the
case, the stockholders of AC set up a run-away corporation
directors and the corporation was regarded as one and the
called Rosario Corporation. It is engaged in the same line of
same. Hence, the arbitration agreement should continue
business and the assets of AC was transferred to Rosario
against them even if they are not parties to the arbitration
corporation.
agreement.
The SC said that Rosario was created to evade the obligation of
What is the liability of a third party mortgagor?
AC to its laborers and the veil was pierced.
Only to the value of the mortgaged property. he is not
Alter ego test
liable beyond the value of the property because he merely
3 elements lend his properties to secure the obligation of another

Control test EXCEPTION:

The subsidiary corporation is completely under the control The case of Heirs of Fe Tan Uy v. International Exchange
and dominion of the parent company. It is so organized Bank (2013)
and controlled as to make it merely an instrumentaliy or
ABC obtained a loan from the bank secured by a mortgage
adjunct of the parent corporation.
given by XYZ corporation. ABC Corp did not pay the loan. The
If you pierce the corporate veil, it does not mean that the bank forclosed the mortgage of XYZ. After foreclosing, there
corporation is extinguished. It does not also mean that in was a deficiency. Should the deficiency be enforced against
all transactions of the corporation, the veil should be either ABC or XYZ or only ABC? the SC said that ABC and XYZ
pierced. It just means that the veil can be pierced if all the are one and the same entity because they have a common
elements of the control test are present. president. The same president who signed the loan agreement
of ABC and the mortgage agreement of XYZ. Both are family
Fraud test
corporation. There was overlapping of finances and operations.
The control was used to commit fraud or evade a duty in
violation of the plaintiff‟s right
Harm test
The control and breach of duty are the proximate cause of
the harm or injury suffered by a third party.
BAR: What are the effects if the veil of corporate
fiction is pierced?
The corporation and the stockholders are treated as one
and the same
LANUZA v. BF CORPORATION
BF corporation was the contractor of Shangri-La corporation to
construct a building in Ortigas. BF was not paid so it filed an
action for collection ag. Included in the suit are the officers and
directors because the complaint alleges that there was bad faith
on the part of the said offices and directors. Shangri La moved
to suspend the case because the construction agreement
between them contains an arbitration clause which means that
resort to court should be preceded by arbitration.
Lanuza and the other directors are not parties to the
construction agreement. It is only between the 2 corps

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B. CLASSES OF CORPORATIONS
Sec. 3. Classes of corporations. - Corporations formed or
organized under this Code may be stock or non-stock corporations.
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 are
stock corporations. All other corporations are non-stock corporations.
1. Stock and Non-stock
What is a Stock Corporation?
It‟s a corporation with capital stock, divided into shares,
authorized to distribute dividends to stockholders on the
basis of their shares.
What about non-stock corporations?
Section 3 of the Corporation Code says “All the rest are
non-stock corporations”.
So Sec. 3 defines stock corporations as corporations with
capital stock, divided into shares, authorized to distributed
dividends or surplus profits to stockholders on the basis of
their shares. And all the rest are non-stock corporations.
Section 87 defines the purposes of non-stock
corporations
It‟s not for profit okay (okay dean sure). It‟s a non-stock,
non-profit corporation.
BAR: A stock corporation has two basic
characteristics: (1) It has capital stock divided into
shares (2) Its authorized to distribute dividends.
Oraaayt, the articles of incorporation of ABC Corp
provides that the authorized capital stock is 1
BILLION PESOS (INSERT DR. EVIL HERE), is that
VALID?
Go back to the definition of a stock corporation, and
compare. It‟s lacking. It‟s not enough that it says “1
BILLION” capital stock. It must be divided INTO one
million shares with a par value of 10 PESOS. So the
product between the shares and the par value is your
authorized capital stock.
How about this? The articles of incorporation of ABC
corp states that it has 1 BILLION PESOS divided into
1 BILLION SHARES, par value 1 pesos. It is engaged
in the business of managing golf courses, and issues
shares to members, allowing them to enjoy the
facilities of the corporation. It is SILENT(silence daw
sabi ni dean) on the power of the corporation to
declare dividends. And their articles further provide
that upon dissolution, their assets shall be donated to
a charitable institution. STOCK OR NON-STOCK?
It is a stock corporation sir.
9
Even though it’s silent on the declaration of
dividends?
Yes. Because its silence does not mean it is prohibited.
What would make it non-stock is if it is prohibited to
declare dividends.
If it is silent, Sec. 43 is DEEMED READ into the articles of
incorporation. And under Sec. 43, the corporation can
declare dividends in case of surplus profit.
Second, before dissolution, there is nothing that prohibits
the corporation from distributing dividends. And after
dissolution anyway, the assets are divided to the
stockholders and the stockholders may freely assign it to a
charitable institution.
For as long as we have two elements: (1) capital stock
divided into shares; (2) authorized to distribute surplus
profits to the stockholders, it is a STOCK corporation.
Now, if Sec. 87 enumerates the purposes of the non-
stock corporation, what is not allowed for a non-
stock corporation? What are the purposes not
allowed? It says charitable, religious, civic, cultural,
literary, social, educational, and so on, so what are
the ones not allowed?
It cannot be organized for profit or organized for partisan
political activity or political purposes. That‟s why
NONSTOCK, NONPROFIT.
Does that mean the non-stock corporation cannot
earn profit?
As long as the profits are not distributed to the members,
and are used in the furtherance of the purpose of the
corporation.
UST is a non-stock, non-profit corporation, and yet it
is in the TOP 500 corporations in terms of profit, and
there’s nothing wrong with that, as long as the profits
are not distributed to the members and used to
further or promote the purposes of the corporation.
Last question before we resume our lecture. How do
we distinguish a public from a private corporation?
A public corporation is organized to govern a portion of
the state, while the private corporation is organized for
private ends.
Is a GOCC necessarily a public corporation?
If the corporation is owned by the state does it make it a
public corporation?
Just because it is owned by the government does not make
it a public corporation. A public corporation is organized
for the government of a portion of the State.
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Is Boy Scouts of the Philippines a Public
Corporation?
It is a public corporation. Justice Teresita Castro said it
was. Because it was created by charter, it was owned and
controlled by the government. Congress cannot enact a law
to create a private corporation. But subsequently, there
were more private individuals that owned shares. So from
government owned, they became privately owned. The
BSP‟s argument was that since it is now privately owned,
they are no longer subject to COA audit. So BSP refused to
cooprate with COA. “We used to be owned by the
government, but now we‟re owned by private individuals,
so now you don‟t have jurisdiction over us”.
So if it is not controlled and owned by the government, is it
automatically a private corporation if it is no longer owned
by the government? Justice De Castro said there is another
kind of corporation, that organized for a public purpose,
found in the civil code.
2. De Jure, De Facto, Corporation by Estoppel, Corporation by
Prescription
DE FACTO CORPORATION
Sec. 20. De facto corporations. - The due incorporation of any
corporation claiming in good faith to be a corporation under this Code,
and its right to exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation may be a
party. Such inquiry may be made by the Solicitor General in a quo
warranto proceeding.
It exists in fact, but not in law. In the sense that the state
reserves the right to question its existence owing to an
infirmity in its incorporation.
It is allowed by law to exist, but the State reserves the right to
question its corporate existence because of defects in its
creation. So far as the state is concerned it does not exist, but
exists in fact.
And then you have corporations by estoppel, which is a group
of persons who assume themselves to be a corporation, and
they‟re precluded from denying the existence of the ostensible
corporation with respect to third persons relying on their
representations. They are liable as general partners for the
liabilities and damages incurred by the ostensible corporation.
What are the elements of a De Facto Corporation?
(1) A VALID LAW under which it is incorporated
(2) Bona Fide attempt to incorporate
(3) Exercise of Corporate Powers
The First Element: Valid Law under which it is
incorporated
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If the law is declared unconstitutional, then it does not give rise
to a de facto corporation.
BAR: Congress enacted a law to create a private
corporation. And that private corporation, after its
creation, was allowed to exercise corporate powers.
Is this a De Jure, De Facto, or Corporation by
Estoppel?
Is it DE JURE? It‟s not. Is it DE FACTO? Likewise, no.
Because there is no valid law under which it was
incorporated. The law creating it is unconstitutional
because congress cannot enact a special law to create a
private corporation. They can only enact a law to create a
GOCC.
A Group of Lawyers decided to put up a corporation
to engage in the practice of the law profession. They
stated in their AOI that the primary purpose is to
engage in the practice of the law profession and the
one who processed the papers of the corporation
belongs to the same fraternity, and he turned a blind
eye and had the AOI approved by the director of the
SEC. As a consequence the SEC issued a Certificate of
Incorporation. Is that a De Jure or a De Facto
corporation? Or neither de jure nor de facto?
Neither, right? It cannot be organized for the practice of a
profession.
The Second Element: Bona Fide Attempt to
Incorporate
As long as there are no Articles of Incorporation signed by the
parties, there is no De Facto Corporation.
If the AOI is not filed with the SEC?
No De Facto Corporation.
If the AOI is signed, and filed with the SEC, but not approved
by them, and no Certificate of Incorporation issued? It is NOT
a De Facto Corporation.
You cannot say that there was a Bona Fide attempt to
incorporate until the SEC at least issues a Certificate of
Incorporation.
So bona fide attempt is not tantamount to good faith
right?
It is tantamount to the actual issuance by the SEC of the
CERTIFCATE OF INCORPORATION.
So what if five persons sign the articles of
incorporation, subscribe to shares of stock of the
proposed corporation, gave the subscription fees to
the lawyer, and the lawyer pocketed the money, and
he issued to the five incorporators a FALSE or
SPURIOUS Certificate of Incorporation? Is it De Jure
or De Facto?
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It‟s NEITHER. There was no Certificate of Incorporation
issued by the SEC.
In these cases, if it’s neither de jure or de facto, is
there a corporation by estoppel?
A Corporation by Estoppel is a group of persons who
assume themselves to be a corporation when they are not
legally authorized for that purpose. Therefore in these
cases where there is representation by a group of persons
that they are a corporation, when they are not legally
authorized for that purpose, then there is a corporation by
estoppel.
So these persons are precluded or estopped from denying
the existence of the ostensible corporation and they are
liable as general partners for all the liabilities and damages
caused or incurred by the ostensible corporation.
So what are the liabilities of these incorporators?
So it‟s not de jure, not de facto, but by estoppel. On the
assumption that there was representation to a third person
that they are a corporation. So what is their liability? Are
they all liable as general partners? The answer is no.
There ought to be an OVERT ACT or REPRESENTATION
that they are a corporation so the doctrine of Corporation
by Estoppel can apply. So if there is no overt act, he is just
a mere passive subscriber he is not liable as a general
partner.
EXCEPT, in the case of Philippine Fishing Gear. Here
there was no overt act or representation but the passive
subscriber reaped the benefit from his association with his
partners in another transaction. With respect to the
transaction, there was no overt act, but he obtained the benefit
from the association with these affiliates in other transactions.
So if you reap the benefits as a result of association with other
persons, it makes you liable likewise as a general partner
Does the Good Faith or Bad Faith of the persons who
made the representations that they were a
corporation important in determining whether it is a
Corporation by Estoppel or not?
So five lawyers put up a corporation, it‟s their first time, so
they subscribed to shares of the corporation, they signed
the articles of incorporation, and then they paid the fees to
the lawyer, in the hope that the lawyer would process it.
But then the lawyer pocketed the money, and issued a
FALSE or SPURIOUS Certificate of Incorporation. But
believing in good faith that they‟re really authorized, they
entered into contracts, let‟s say for the purchase of office
equipment for their new office. Is it a corporation by
estoppel? Because 2 out of 5 believed in good faith that
they were really authorized? The answer is no because the
good faith or bad faith is immaterial to determine a
corporation by estoppel. The point is, two or more persons
assume themselves to be a corporation and they were not
legally authorized to do so. That would make them liable
as general partners for the liabilities and damages incurred
by such ostensible corporation.
What about the liabilities of a De Facto Corporation?
They have the same liabilities as a de jure corporation.
How about the liabilities of the directors, officers,
and stockholders of the De Facto Corporation? Are
they liable as general partners?
The answer is no. The liability as general partners only
applies to Corporations by Estoppel and not to a De Facto
Corporation. So whatever are the liabilities, rights, of
directors and officers and stockholders of a de jure
corporation are the same rights, duties, and obligations of
directors, officers, and shareholders of De Facto
Corporations. It is the same as a de jure corporation except
that the state reserves its right to question the corporate
existence through a quo warranto proceeding.
The liabilities of stockholders are limited to their
subscription agreement to the corporation, unless they are
also directors or officers.
BAR: What are the liabilities of A, B, C, D, and E in a
De Facto Corporation?
It depends on the acts they perform. As directors, or
officers, or stockholders. If only as stockholders, then
they‟re only liable to the extent of their subscription. If
they‟re directors, they can be personally liable in six cases,
which we‟ll discuss later on.
The existence of a De Facto Corporation cannot be
attacked collaterally. It can only be attacked in a direct
proceeding, a Quo Warranto proceeding.
ABC Corp is a De Facto corporation, it sold
merchandise to XYZ Corp. XYZ did not pay ABC, and
so the latter filed a collection suit against the former.
XYZ moved to dismiss the complaint on the ground
that ABC, as a de facto corporation, cannot sue or be
sued. Will you grant the motion to dismiss?
No. For two reasons:
A De Facto corporation has the power to sue and be sued,
just like a de jure corporation.
Second, the existence of a de facto corporation cannot be
questioned in a collateral proceeding like in this collection
suit. There must be a direct proceeding, initiated by the
state through the Solicitor General, to oust the corporation
from exercising corporate powers.
CORPORATION BY ESTOPPEL
Sec. 21. Corporation by estoppel. - All persons who assume to act
as a corporation knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities and damages incurred

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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.
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.
Can you sue a corporation by estoppel independently
of the persons assuming themselves to be a
corporation?
Who do you sue? The ostensible Corporation or the
persons or both?
But I thought that in the case of ostensible
corporations, those who assume themselves as a
corporation are liable as general partners? If they
are liable as general partners, so how can you
enforce the liability of those who assume themselves
as a corporation unless you implead them as party
defendants?
Is it ostensible corporation or the persons or both?
Both sir.
Can they have assets? How? How can they have
assets when they are not a corporation?
It is considered as a corporation only for equity purposes,
only because of its representation that the persons forming
it are a corporation.
Can it acquire assets?
The case of Macasaet vs. Francisco. A newspaper
which the plaintiff thought was registered with the SEC
was sued together with the publisher, editor. The lawyer of
the newspaper company filed a motion to drop Abante
Tonight (Abante Tonight?) as party-defendant because
they were not registered in the SEC. The court denied the
motion. Because a corporation by estoppel cannot be sued
or be sued independently of the persons comprising the
corporation. The SC said the RTC did not abuse its
discretion by denying its motion to drop the ostensible
corporation as a party defendant. So that is your authority
to say that the ostensible corporation , if you do not
register w/ the sec, you may be sued. Supreme Court said
it also possesses certain attributes.
If you do not plead the ostensible corporation, how
do you make it liable for damages and liabilities
incurred?
IN my notes, I said that what happens now if judgment is
later on rendered against the ostensible corporation, how
do you enforce the judgment against the ostensible
corporation that presumably will never have any capacity.
So you sue the persons comprising the ostensible
12
corporation, but not the corporation by estoppel right?
That‟s not how the SC viewed it.
For Bar purposes, if the question is, can you sue an
ostensible corporation, the answer is YES. Macasaet
vs Francisco.
Recently the SC imposed *** possessed certain attributes,
similar to a corporation. It can be sued, it can be made liable
for damages and liabilities it incurred as a corporation.
Alright, in a corporation ______ (***Tengene Pete I‟ve
repeated this part so many times and I couldn‟t understand
what Dean was saying dahil sa imbyernong ubo mo!) and the
persons who assumed themselves to be a corporation, are a
corporation by estoppel right? So regardless of the good faith
or bad faith of these persons
In the last meeting we said that, if five persons sign the articles
of incorporation and gave the subscriptions to the treasurer in
trust and then included the filing fee and they were duped into
believing that the SEC issued a Certificate of Incorporation,
and a Falsified Certificate was issued to them, and in good faith
they conducted their operations even though they were not
registered, we said that‟s not a de jure corporation, not even a
de facto corporation, because there was no attempt to
incorporate. It is a corporation by Estoppel, and those who
assume themselves to be a corporation are liable as general
partners.
BAR: If the corporation fails to materialize, (ubo ubo)
is there a partnership created among the
incorporators?
If the corporation fails to materialize and their
articles of incorporation are not filed with the SEC, is
there a partnership created among the
incorporators?
In the PIONEER INSURANCE CASE, we have to make
the distinction between those who assume themselves to
be a corporation, since they are liable as general partners,
but does that mean there‟s a partnership created among all
of the incorporators?
The Supreme Court said that the failure of the
incorporators to organize does not necessarily give rise to
a partnership, unless the parties intend to form a
partnership in case of failure of incorporation. IN a
partnership, two or more persons bind themselves to
contribute money or property with the intention of
dividing the profits among themselves, and that is NOT
the same as a corporation. There has to be intention to
organize as a partnership in case the corporation fails to
materialize. Otherwise, only the passive and active
subscribers will be liable as general partners, without
having to create a partnership with intent. The others are
not liable to share in the losses incurred by those who
actively held themselves to be a corporation.
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In the case of Lozano vs De Los Santos (June 1997), there Because Juan had a considerable investment in the supposed
can be no Corporation by Estoppel unless there is a third financing company, he was made the president of the proposed
person who relied on the representation that it is a corporation. corporation. He believed in good faith that the Articles and
other documents were filed with the SEC. So Juan dela Cruz,
There were two associations of Jeepney drivers and operators
with Pedro Reyes (bigla singit new name ha) entered into
in Mabalacat, Pampanga, and they agreed to unify to create a
various transactions with various clients. Thereafter he
consolidated corporation. They agreed that the election of
discovered that no Articles were filed, no certificate of
directors and officers, and the directors elected shall run the
incorporation issued. So they hurriedly remedied it and had a
consolidated corporation. They held their election, and typical
Certificate of Incorporation issued from the SEC. Three months
of the Philippines, the losing party cried “Cheating!”. The other
after the issuance of the Certification, the corporation collapsed
group refused to recognize the election. Thus a suit was filed
because of insolvency.
with the RTC acting as a Special Commercial Court. The
QUESTION is whether or not it falls as an INTRA- What are the liabilities of Juan dela Cruz and Pedro
CORPORATE CONTROVERSY. Reyes? Can they invoke (1) De Facto Corporation; (2)
Corporation by Estoppel against those investors who
There was an attempt to bring it under the rules on intra-
made placements with the corporation and did not
corporate controversies on the argument that there was a
get their return on investments?
corporation by Estoppel among them. So the proposed
consolidated corporation, at the least, is a Corporation by As to the first question, is there a De Facto
Estoppel and they argued that there is an intra-corporate Corporation?
relationship between the partners.
There is. The Certificate of Incorporation was allowed to
The SC said NO, if the representations made are between them, issue. But is the doctrine of De Facto Corporation available
and it did not involve a third party, there can be NO as a defense? No. Because that could only be raised in a
CORPORATION BY ESTOPPEL. Also keep in mind that only direct proceeding and not in a collateral proceeding.
the aggrieved party may invoke the doctrine of Corporation by
What about the defense of Corporation by Estoppel?
Estoppel.
It is not available. They were the ones who claimed the
He who obtained the benefits from the transaction
benefit. They are not the aggrieved party.
cannot invoke the Doctrine of Corporation by
Estoppel. How about the liabilities of Juan dela Cruz and Pedro
Reyes? Are they personally liable?
In the case of INTERNATIONAL EXPRESS TRAVEL
AND TOURS VS CA, Henri Kahn, on behalf of the Philippine It depends. There are six cases where a director of the
Football Federation, purchased airline tickets, from Travel and corporation may be held personally liable, and they are:
Tours, for Philippines athletes who will compete in the SEA
(1) Assenting to a patently unlawful act;
games. The tickets were not paid. Travel and Tours filed a
collection case against Kahn, and Kahn invoked the doctrine of (2) Gross Negligence or Bad Faith in directing the affairs;
Corporation by Estoppel. Curiously, the Philippine Football
(3) Acquiring Interest in conflict with their duty as a
Federation, while registered with the SEC, is still not a
director or officer of the corporation resulting in damage
corporation, because under the law creating Sports
thereof;
Federations, it is not enough that they register with the SEC, it
must also be accredited by the appropriate governing agency. (4) Issuance of Watered Down stocks;
So the law requires Sports Federations to be registered with the
(5) By Agreement to be held liable with the corporation;
SEC AND ACCREDITATION with the appropriate governing
agency, TO BE ABLE TO ACQUIRE LEGAL PERSONALITY. (6) By Express provision of law. Unless these are present,
The PFF did not have accreditation from the appropriate the insolvency of the corporation does not make them
governing agency, so it is not a De Jure corporation but a personally liable.
Corporation by Estoppel. Here, only Henri Kahn represents
That‟s an affirmation of my discussion *fake giggling by
PFF, and he who represents an unincorporated corporation is
the class*.
the one personally liable. Likewise, the SC said that Kahn
cannot invoke the doctrine because he was the one who
benefited from the transaction. Only the aggrieved party and
3. Domestic and Foreign
NOT the of
What is a Domestic Corporation?
fender may invoke the Doctrine of Corporation by Estoppel.
One formed, organized, and existing, under Philippine
BAR: Orayt, this was asked in the bar. Juan dela Cruz was
laws.
invited by four persons to invest in a financing company.

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Foreign Corporation? closed corporation in the ARTICLES OF
INCORPORATION. In the case of San Juan Steel vs CA,
One formed, organized, and existing, under laws other
there were 5 incorporators/subscribers and the Husband
than Philippine law, AND whose laws allows Filipino
and Wife owned 98.7% of the corporation. Does that make
Citizens to conduct business in their own country or state.
it a closed corporation? NO. Because it MUST have the
Sec. 123. Definition and rights of foreign corporations. - For characteristics of a Closed Corporation to be considered as
the purposes of this Code, a foreign corporation is one formed, such.
organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to What are the characteristics of a Closed Corporation?
do business in its own country or state. It shall have the right to
transact business in the Philippines after it shall have obtained a
(1) The AOI provides that the number of stockholders
license to transact business in this country in accordance with this should not exceed TWENTY.
Code and a certificate of authority from the appropriate government
(2) Subject to RESTRICTIONS on transfers, as specified
agency.
in the AOI, Bylaws, and stock certificate
Under Sec. 123, there are two features of a foreign corporation.
(3) Not available for listing in the stock exchange or
1. Formed, organized, existing under FOREIGN LAWS; public offering.
AND
BAR (1986): What do you mean by a Corporation
2. The element of RECIPROCITY whose laws allows “Going public” and “Going Private”?
Pinoys to do business in its own country or state.
Not in the corporation code but asked pa rin sa bar.
What if there is no element of Reciprocity? Is it still a Tinopak daw si examiner. May kalog ang isip.
foreign corporation?
GOING PRIVATE means adopting the features of a Closed
Yes. As long as it is formed, organized, existing under a Corporation. GOING PUBLIC means making shares
foreign law. BUT, if the foreign corporation‟s laws do not available in the Stock Exchange and made available for
allow Pinoys to do business in its own country, it cannot be public trading. (pero kay Pete iba ang Going Public nya.
given a license to do business in the Philippines. But it Chos)
does not detract from the fact that it is still a foreign
5. Parent and Subsidiary
corporation because the test to determine is its PLACE OF
INCORPORATION. The Parent Corporation controls another corporation, it owns
shares in that corporation, and elects the directors in the other
If ABC corporation is organized in the USA,
corporation.
composed fully of Filipino citizens, what is it?
Holding Company vis-à-vis Parent Corporation
It‟s a foreign corporation because it is formed, organized,
existing under foreign laws. The Holding company is organized for the purpose of
investing in equity of various corporations. Just like JG
But is it a Philippine National? Can ABC corporation
Summit of the Gokongwei‟s or SM Investments of the Sy‟s.
invest in the equity of a Public Utility company?
On the other hand, the parent company is not necessarily
Yes. A foreign corporation composed entirely of Pinoys is a organized for the purpose of investing in equity since the
Philippine National if it is registered as “doing business” in parent company may have a private purpose.
the Philippines.
So Baket ba kailangan ng Holding Company?
To determine nationality, the test is not the place of
To achieve synergy in various corporations. At the same
incorporation but the NATIONALITY of the
time to limit liability with the operations of the various
CONTROLLING STOCKHOLDERS, in case of investment
companies. The best examples of synergy are contracts
in nationalized activities. The definition of a Philippine
between companies with interlocking directors. Under Sec.
National under the Foreign Investment Act, in case of a
33, except in case of Fraud and if it is reasonable under the
foreign corporation, it is composed entirely of Filipinos,
circumstances, a contract between two corporations with
and registered to “do business” in the Philippines. Thus, it
interlocking directors is not good right? For example,
can invest in public utilities.
when Philippine Airlines was controlled by Ramon Ang of
4. Open and Close San Miguel, where did they get the fuel supply? From
Petron (owned by San Miguel).
Is a Family corporation a closed corporation?
6. Corporation Sole and Corporation Aggregate
Not necessarily. The SC held that what makes it a Closed
Corporation is whether it has ALL the characteristics of a 7. Public and Private

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8. Government-Owned and Controlled Corporation
What is a Public Corporation?
It is a corporation formed and organized for the
government of a portion of the State. It has a political
purpose. E.G. Cities, municipalities.
Are all GOCC’s considered public corporations?
NO. These GOCC‟s may not be organized for the
government of a portion of the State. Like DBP, it‟s a
GOCC but it does not exercise control over a portion of the
State.
What about the Boy Scouts of the Philippines?
In the Case of Boy Scouts of the Philippines vs CA, penned
by Justice De Castro. According to her, the BSP is a public
corporation. The Boy Scouts were created by Special Law,
it has a charter of its own, and because of its charter, it was
owned and controlled by the government. Thereafter, it
somehow became controlled by private individuals. And
since it is now controlled by private individuals, the BSP
now claims it is no longer a GOCC and not subject to COA
audit. Ayaw nila ma-audit eh. Binay daw kasi. Anyways,
the SC said that just because it is not anymore owned and
controlled by the government does not mean it is already a
private corporation. The SC said there is still ANOTHER
kind of corporation under Sec. 44 of the NEW CIVIL
CODE. These are corporations ORGANIZED FOR A
PUBLIC PURPOSE. Thus, since it was organized for a
public purpose, it is subject to COA audit.
TWO KINDS OF GOCC
There are two kinds: Chartered and Non-Chartered.
What’s the practical distinction between the two?
A chartered GOCC means there is a law creating the
GOCC, thus it is governed primarily by the special law
creating it. The Corporation Code is only suppletory. If it is
a NON-chartered GOCC, the governing law is the
Corporation Code.
Who has jurisdiction over employees of chartered
GOCCs?
The Civil Service Commission
Non-chartered GOCCs?
The Labor Arbiter and NLRC.
Example: Philippine National Bank. It was created by special
law, and thus governed by its charter. Before it was privatized
and acquired by Lucio Tan, it was a GOCC.
In the case of GONZALES v. PNB (1983), Ramon Gonzales
(the Oliver Lozano of his time, public advocate sya etc) wanted
to inspect the books of PNB, to investigate the Behest loans it
granted but he wasn‟t a stockholder of PNB. So he bought one
share of stock (barat lang), and invoked his stockholder‟s right
of inspection of the corporate books under the Corporation
Code. After examining the charter of PNB, the SC said that its
charter limits those allowed to examine the books of PNB, only
allowing the President, the Governor of the Central Bank, and
the Secretary of Finance, and only those authorized by the
board. IT did not include stockholders. Thus, the charter of
PNB prevails over the general law of the Corporation Code. But
of course it is not anymore applicable today since PNB is no
longer a GOCC but a private corporation.
BAR: Why is there no private corporation organized
by Congress?
Under the constitution, Congress, except by general law,
cannot pass a law for the creation of a private corporation.
So if you want to create a private corporation, do so by
general law (Corporation Code). That‟s why there was a
bar question regarding the creation of a private
corporation through congressional act, asking if it is a De
Facto Corporation. The answer is that it is neither De Jure
nor De Facto. IT cannot be de facto because there is no
valid law under which it is incorporated since Congress
cannot enact a law to create a private corporation. It can
only create, by law, a GOCC.
What about the Philippine National Red Cross?
Red Cross was created by special law, there‟s a charter.
The case cropped up because of a petition filed by former
congressman Dante Liban against Senator Dick Gordon.
According to LIban, Gordon is deemed to forfeit his Senate
seat by virtue of his assumption of the chairmanship of
Red Cross. Citing the Constitution, he argued that no
SINator or TONGressman shall occupy, during his term of
office, a position in government including GOCCs. Liban
said that the PNRC is a GOCC, since it was created by
special law. Therefore, Dick‟s insertion as the Chairman of
PNRC violated the Constitution and he should forfeit his
Senate seat.
The SC said that PNRC is NOT a GOCC. Because the funds
of Red Cross did not come from the Govenrment. It comes
from donations.
Does that mean the law creating Red Cross is
unconstitutional?
The SC initially said it is. But upon intervention of PNRC
in the Motion for Recon, the SC said that it is SUI
GENERIS and valid. Let‟s forget muna about the rules
daw, lets recognize PNRC for what it is, an important ally
of the govt in providing humanitarian service to all people.
Let‟s close our eyes muna to the legal principles. PNRC
does not need to re-organize anymore as a private
corporation.

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So what happens if an employee of PNRC is removed?
In one case, an officer of Red Cross was misappropriating
its funds so he was terminated. The SC said that the
termination dispute should be handled by the CSC, since
the PNRC has a charter of its own.
What makes a corporation a GOCC?
If it‟s a stock corporation, it must be 51% owned by the
government.
In the case of CARANDANG v. DESIERTO (Jan 2011),
Benedicto owned 72.4% of the outstanding capital stock of
RPN and ceded these to the PCGG and the Government.
Later on, he recanted and said that his shares represented
only 32.4% of RPN‟s stock and not 72.4%. So what does
the government own in this sequestered corporation?
During the pendency of this issue, the GM was removed,
thus giving rise to the question of jurisdiction between the
CSC and LA over his termination. The SC said that
pending conclusive determination as to the government‟s
shares, it is not considered yet a GOCC. Thus to be
considered a GOCC, it must be conclusively proven that
the government owns at least 51% of the outstanding
capital stock.
FUNA v. MANILA ECONOMIC AND CULTURAL
OFFICE
Is MECO a GOCC?
In the case of, the SC laid the requisites of a GOCC. It is
our cultural office in Taipei, Taiwan that acts as our
“embassy” there since under the One China Policy we only
recognize the People‟s Republic of China (CHINA) and not
Taiwan, so we don‟t have any diplomatic ties with Taiwan.
MECO collects fees. Friend daw ni Dean D. ang head ng
MECO now hahaha. So the issue here is whether the fees
collected by MECO are subject to COA audit. The SC said
MECO is NOT a GOCC, because it is organized as a non-
stock corporation and their funds don‟t come from the
government, the fees collected by it partake of
governmental funds and thus subject to COA audit. Pag-
gusto, gagawa ng paraan, pag-ayaw may dahilan. Pag may
alak, may balak! So MECO is not a GOCC but the fees it
collects partake of the nature of governmental funds and
subject to COA audit.

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C. NATIONALITY OF CORPORATIONS 100% reserved for Filipinos but if the
foreigner has a capital of 2.5 Million
1. Place of Incorporation Test
Dollars and up. Foreigners are allowed
2. Control Test to own 100%. So below 2.5million
dollars, it is reserved for Filipinos.
3. Grandfather Rule
Exceptions are high end products like
General Rule is that we don‟t apply control test, we only louis vuitton, hermes, Gucci. You can‟t
follow control test in times of war and in case of investment in expect hermes to be owned by
economic activities reserved in whole or in part to Filipinos. Filipinos, otherwise it is not hermes. In
Retail
We follow instead Sec. 123 of the code which is the place of the moment you have a foreigner, you
incorporation. are subjected to the 2.5 million dollar
requirement. Exceptions to repeat are
So the nationality is determined by the place of incorporation
High end products which have 30
except in case of investment in economic activities which are
thousand dollars per store and
considered nationalized or in times of war, in which case we
convenience store like 7/11 which
follow the control test and the grandfather rule.
should have _____(unclear figure,
Before the case of Nara vs Redmont, we only follow the hindi dahil sa ubo ni pete) thousand
control test in determining the nationality of the corporation in dollars per store.
investment in activities reserved for Filipinos.
General Rule: We apply Incorporation Test to determine
GAMBOA v. TEVES
Nationality of Corporation
ABC Corporation is Family Corporation, its
Exception: In case of investment in economic activities which
authorized capital stock consists of common shares
are considered nationalized or in times of war.
60% owned by Filipinos, 40% from the foreigners.
But in the case of Nara vs Redmont, the Supreme Court said, And then suddenly the corporation decided to issue
that we apply cumulatively both the control test and the preferred shares. And all the preferred shares are to
grandfather rule to determine the nationality of the be given to Foreigners the non-voting preferred
corporation engaged in nationalized activities. shares. Is this issuance of the non- voting preferred
shares given to foreigners allowed?
What are examples of economic activities that are
reserved for Filipinos that is why in these cases we In the First case the Supreme Court said that the term
follow the control test? Capital is limited to only Voting shares, so if the preferred
shares are voting they are included in the term Capital
Mass Media 100% Reserved for Filipinos
stock, if they are not voting they are not included.
Rice and
100% Reserved for Filipinos In the Motion for Reconsideration, the Supreme
Corn
Court clarified it further. What happens now when a
Small Scale corporation issues a mixture of shares whether
100% Reserved for Filipinos
mining
voting or non-voting?
Security
100% for Filipinos The Supreme Court said the 60-40 Filipino ownership
Agency
participation must be mirrored in all classification
Watchman shares. So across the board whether common,
and Detective 100% Reserved for Filipinos preferred, voting or non-voting, the 60-40 Filipino
agencies
Foreign ownership limit must be mirrored in all
Recruitment classification shares. So both economic rights and
75% Reserved for Filipinos
Agency voting rights must reside in the Filipinos by 60%.
Advertising 70% Reserved for Filipinos Why?

Large Scale The Rationale given by the Supreme Court under the
60% Reserved for Filipinos
Mining Constitution is that the state must adopt a self-reliant
60% for Filipinos except if foreign economy effectively controlled by Filipinos. And the
banks under the foreign bank term control applies to both voting rights and
Banks economic rights.
liberalization law certain banks are now
allowed to own 100%.

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The control test will only apply in case of investment in
economic activities reserved for Filipinos. So we have
enumerated the activities that are reserved for Filipinos except
for one.
What about a financial technical assistant
agreement? May a corporation owned by foreigners
provide financial, and technical assistance to a
mining company?
The answer is yes, so if the intention is to provide financial
or technical assistance to a mining company or a natural
resource exploration company. That corporation may be
owned by Foreigners.
But a corporation that participated in the exploitation,
utilization, development, exploration of natural resources, you
then have to apply or follow the 60-40 limit. So that
corporation can only own up to 40% of a corporation engaged
in mining activity.
Same principle also applies in investment of public utilities.
Under the Constitution, mining, public utility and corporations
engaged in exploration of natural resources. The constitution
in all these 3 cases provide that 60% of the capital of these
corporations must be owned by Filipinos.
How do you define Capital? Is it similar to
outstanding capital stock, because when we say
outstanding capital stock, it includes both common
and preferred shares; is this how you construe
Capital?
The Supreme Court said NO, the term capital is limited to
voting shares only.
For example, let‟s say a mining company has 200,000
outstanding shares with par value 1 peso and then divided into
100,000 common and 100,000 preferred shares. Now let‟s say
that 80,000 of the common shares are owned by foreigners
and 20,000 of the 100,000 common shares are owned by
Filipinos. And the entire preferred shares are owned by
Filipinos and the preferred shares are non-voting. Is this
corporation in compliance with the corporation code
that at least 60% of capital are owned by Filipinos?
200,000 outstanding shares consisting of 100,000
common and 100,000 preferred. Preferred shares are
non-voting. Out of the 100,000 common shares,
80,000 are owned by foreigners 20,000 are owned by
Filipinos. But all the preferred shares are owned by
Filipinos. If you compute, it will be 120,000
outstanding shares for Filipinos consisting of 20,000
common, 100,000 preferred. And 80,000 of the
200,000 shares are owned by foreigners, is this
compliant with the Constitution? Because 60% or
120,000 of the 200,000 is 60% and 80,000 of
200,000 is 40%. Is this compliant with the
Constitution?
18
The Supreme Court said NO, because it is important for
the Filipinos to own 60% of the common shares. OR the
preferred shares if they are voting. So 60% of the
outstanding capital stock is owned by the Filipinos, it‟s not
compliant with the Constitution that requires 60% of the
Capital and NOT outstanding capital stock to be owned by
Filipinos.
Now why is it that the term Capital is limited to
voting shares?
Because as we said earlier, under the Constitution, the
state must adopt a self-reliant economy effectively
controlled by Filipinos. And control in the corporation is
translated to the ability to elect the directors who would
run the corporation. So unless the Filipinos have the
control in the election of directors, unless they have 60%
of ownership in the corporation to elect the directors, then
you can say that the Filipinos are in control
Now, in the Motion for Recon, supposing we make the
preferred shares non-voting, let‟s say for example the question
we asked earlier. At the outset we have 100,000 common
shares, 60,000 Filipinos 40,000 preferred shares and then the
articles of incorporation amended to include only preferred
shares. 100,000 new preferred shares issued only to foreigners
and they are non-voting. because they are non-voting, is this
still in compliant with the Constitution?
Let‟s have a second example.
100k = Outstanding Shares, all common shares then 60k =
owned by Filipinos
40k = owned by foreigners. So the 60-40 allocation is complied
with. Now subsequently, the AOI was amended to include the
issuance of non-voting preferred shares. Now all the non-
voting preferred shares are to be given to Foreigners.
Now, if we follow the term capital in the first case, then these
corporations comply with the Constitution. Because non-voting
preferred shares are not included in the term capital and the
Filipinos own 60% the Voting shares.
That‟s why in the Motion for Recon, the Supreme Court said
that it is not the intention of the framers of the Constitution.
So now, if the corporation will issue a mixture of shares,
common and preferred, voting or non-voting. The 60-40
allocation must be mirrored in all classification of shares. So to
breathe more life to the provision of the Constitution that
Filipinos must control the Corporation. Both economic rights
and voting rights must reside in Filipinos.
(now, I had the chance to talk to marvic leonen about this case,
we came from a conference in manila sponsored by Philippine
Asssosiation of Law Schools. We talked about Gamboa vs Teves
case, and I said, Justice, what about those corporations where
the losses, 60% of the outstanding capital stock, do we apply
the same definition? That it should be limited only to voting
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shares? Of course he didn‟t answer because whether voting or 40% owned by foreigners
non-voting it will have to be 60-40. And I said what about
So is ABC in compliance with the Constitution that
advertising? Recruitment agency? Do we follow 60-40 or 75-25
requires 60% of Capital must be owned by Filipinos?
or 70-30? What about in advertising, 70-30, do we mirror all
shares? But before he could answer me, nag landing na yung Yes, because under the Control test, for as long as the
plane. So that‟s not clear yet. Because the SC decision on investing corporation is owned by Filipinos, the entire
Gamboa vs Teves pertains to Public Utility. The ruling in Nara shares recorded in the name of XYZ, the investing
vs redmont pertains to Mining. So we have no case yet on corporation should be recorded as Filipino owned. And
advertising or recruitment, realty or other corporations therefore, despite the fact that foreigners own 40% of XYZ,
engaged in nationalized activities, let‟s wait for the SEC ruling) XYZ is 60k shares considered as Filipino owned.
Let‟s move on the different kinds of test to determine But, what if it is like this. (DRAWS SOMETHING AGAIN)
nationality of Corporation.
ABC (100k shares)
Under Section 123 of the Corporation Code we follow the place
of the incorporation test, regardless the composition of the
stockholders. So a corporation owned by foreigners if
organized under the Philippines, is a Philippine National with XYZ Foreigners
respect to economic activities that are NOT reserved for (90%) (10%)
Filipinos.
But, as we said earlier, if it is Nationalized Activities, we follow
the Control Test and the Grand Father Rule. Filipinos Foreigners

When do we apply the Control Test? (50%) (50%)

Under the control test, the nationality of the controlling
Stockholder determines the nationality of the corporation
and for as long as 60% of the Capital of the Investing
Corporation is owned by Filipinos, then the entire shares
of that investing corporation will form as Filipino owned.
So we don‟t follow the Grand Father Rule Generally if on its
face 60% of the investing corporation is owned by Filipinos
40% by foreigners
(DRAWS SOMETHING ON THE WHITE BOARD)
ABC (100k shares)
XYZ Foreigners
If the capital of the investing corporation is not 60% owned by
Filipinos, we follow the Grand Father Rule. All the shares
corresponding to percentage owned by Filipinos shall be
recorded as Filipino owned and the shares corresponding to
the percentage owned by foreigners are recorded as foreign
owned.
Therefore, so you have 45k ownership by foreigners in the XYZ
Corporation plus the 10k ownership from ABC then you have
55k ownership by foreigners. Therefore, not in compliance with
the Consttution.
This is how the Grandfather Rule was played in the first case of
Nara vs Redmont.
Now what about this one. (DRAWS SOMETHING ON THE
WHITE BOARD)

(60%) (40%) ABC Mining Company(100k shares)

XYZ Foreign Corp

Filipinos Foreigners
(60%) (40%)
(60%) (40%)

Filipinos Foreigners
Is ABC a Philippine National?
(60%) (40%)
ABC corporation has 100k outstanding shares, lets say
they are all common shares and ABC is owned 60% by So on its face, it appears to have complied with the
XYZ and the Foreigners own 40k. 60-40 limit right? But the SC in this case applied the
Grandfather Rule. Why?
But XYZ is
60% owned by Filipinos,

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Because the subscriptions of the Filipinos are not paid. So “control” means the ability to elect the directors that will run
on paper, 60-40 nga, di naman binayaran. And then there the affairs of the corporation.
is an agreement between the Filipinos and the foreign
Gamboa v. Teves (2012; Motion for Reconsideration)
corp. to fund the operations of the mining company.
There is no more qualification needed for shares to be
So the SC applied the Grandfather Rule in cases wherein there
considered “capital” The 60-40 must be mirrored across the
is doubt on whether or not the Filipinos really own 60% of the
board in ALL classification of shares. (ex: Voting shares must
capital of the public utility of the mining company.
be 60-40, non-voting shares must be 60-40, preferred shares:
So for the first time in the case of Nara vs Redmont, the SC 60-40,)
applied the control test and the Grandfather rule. It was just a
RATIO: There are instances where even non-voting shares may
DOJ opinion, now this opinion has found its way in
still be allowed to vote:
Jurisprudence in Nara vs Redmont.
Dean‟s Mnemonics: A2SICMID (when you‟re sick, call a
And before the Motion for recon, we always thought that only
doctor [MD]): Amendment of the AOI, Amendment of the by-
the control test applies, and the grandfather will apply if it is
laws, Sale, lease or other disposition of corporate property,
less than 60% owned by Filipinos in the investment Corp.
Increase of bonded indebtedness, Increase of Capital Stock,
ORYT, the SC in the motion for recon said and clarified that
Merger or Consolidation, Investment of Corporate funds in
these 2 test do not contradict each other, they can be
another corporation and Dissolution
cumulatively applied.
Narra v. Redmond: For the first time, the SC applied BOTH
Conclusion:
the Control Test and the Grandfather test. Before this case,
You apply control test if on its face, the 60-40 allocation is either the Control Test or the Grandfather Test was applied.
complied with. BUT, if there is doubt on whether or not the
Apply the Control Test IF: The Nationality of the
Filipinos really own 60% of these corporations, then you can
corporation is determined by the nationality of the controlling
resort to the Grandfather Rule.
stockholder. As long as 60% of the Investing corporation is
There are 2 ways in using the Grandfather rule. owned by Filipinos, then the entire shareholdings of the
Investing Corporation shall be considered owned by Filipinos.
FIRST: if the investing corporation is less than 60% owned by
Filipinos then the shares corresponding to the percentage Apply the Grandfather Rule ONLY IF:
owned by Filipinos recoded as Filipino owned and the shares
1.) A corporation is engaged in a nationalized activity and its
corresponding to the percentage of foreigners will be recorded
shares are owned by a corporation.
as foreign owned.
2.) The Filipino ownership in such a corporate stockholder is
SECOND: on its face, the 60-40 allocation is complied with,
less than 60%;
and yet there is a doubt on whether or not the Filipinos really
own 60% of the Corporation. Then we have to resort to the 3.) The ownership of Filipino citizen in the Investing
grandfather rule. Corporation is in Doubt, meaning if the 60-40 is complied with
in paper but there are doubts on the extent of beneficial
So there is nothing wrong in corporate layering, you can have
ownership in such corporation. Any doubt will trigger the
many corporate layers as long as the combined totals of the
application of the rule.
investing and the investee corporation must show that 60% of
Capital are owned by Filipinos, and if there is a doubt. You 4.) If the ownership of the corporation is hidden by using a
apply the Grandfather rule, layer of corporations (ex: Corp1 is owned by Corp 2; Corpo 2 is
owned by Corpo 3, and so on.) In such a case, you trace the
REVIEW:
ultimate owner or the “grandfather” of the corporation. The
Gamboa v. Teves (2011): combined totals of the investee and the investing corporations
should indicate or establish that Filipinos own 60% of the
The 60-40 capital requirement of public utilities where
capital of such corporate stockholder. Otherwise, the 60-40
interpreted. The term “capital” is limited to voting shares. If
requirement cannot be complied with.
shares are allowed to vote, they form part of capital. However,
if the shares are not allowed to vote, they are not considered
“capital.”
RATIO: It makes reference to a constitutional provision
wherein the State should adopt a self-reliant economy
effectively controlled by Filipinos. In the corporate setting,

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D. INCORPORATION and ORGANIZATION

BAR: What are the qualifications of incorporators? Now what about partly nationalized?

- Not less than 5, not more than 15
- Natural persons of legal age
- Majority of them must be Philippine residents
- Must own at least 1 share of stock in his name in the
books of the corp.
Then foreigners can be incorporators to the extent of the
allowable equity participation.
A public utility company 40% are owned by
foreigners and 60% are owned by Filipinos. 3
foreigners were elected to the board of the Public
Utility corp. Is this a violation of the constitution?

1. Not less than 5, not more than 15. No, foreigners can be elected to the board to the extent of
the allowable foreign equity.
Are there exceptions?
Can they be elected officer of the mining company?
Corporation sole and non-stock, non-profit corporations.
They are now entitled to have more than 15 incorporators. No, while they can be elected or incorporators to the
extent of allowable equity participation, they cannot be
What about mergers of banks? appointed as officers because under the anti – dummy law.
The law says, 21 directors are allowed. Now this is 21 The foreigner cannot be appointed to any executive
directors not 21 incorporators. positions of any corporation engaged in a nationalized
activity whether wholly or partly.
So there are only 2 exceptions which are Corporation sole and
non-stock nonprofit corporations because the law allows more 4. Must own at least 1 share of stock in his name in
than 15 trustees or incorporators for non-stock nonprofit the books of the corp.
corporations. BAR: How do you distinguish Incorporators from
2. Natural persons Stockholder/Subscribers?

BAR: Is there an exception? INCORPORATORS STOCKHOLDERS/

Yes, in case of cooperative, which can be the incorporator SUBSCRIBERS

of a rural bank
Incorporators are Subcribers need NOT be
Can juridical persons be incorporators? mentioned in the Articles of mentioned in the AOI as
Incorporation as those originally forming part of the
No, but can be subscribers. For example BDO organized a
originally forming part of corporation
subsidiary. For example with BDO would like to organize
the corporation
an insurance company, so BDO Generali. Let‟s say BDO
Generali is 99.9% owned by BDO and at the same time you
Incorporators should not be Limited by the number of the
have 5 incorporators or natural persons. So how can BDO
less than 5 not more than 15 Authorized capital stock of the
own 99.9% of BDO Generali if under the law you need to
corporation
have natural persons as incorporators? EXPN: 1.) Corporation
Sole and
Nothing wrong here, because BDO, while cannot be an
incorporator, can be a subscriber. So it can own 99.9% of the 2.) Merger or Consolidation
outstanding capital stock of BDO generali. The 5 persons can of Banks
be nominees of BDO.
Incorporators must be a May either be a natural person
3. Majority of them must be Philippine residents. Natural Person or a juridical person
Just count how many are incorporators natural persons, so EXPN: Incorporators of
majority must be Philippine Residents. Cooperatives/Rural Banks
may be a natural/juridical
Is Citizenship a requirement?
person
Not a requirement as long as majority of them are Philippine
Majority of the No citizenship requirement
residents except if it is engaged in nationalized activities. If it
Incorporators must be
is nationalized, obviously you cannot have foreigners as EXPN: Corporations engaged
Filipino Residents
incorporators of mass media, rice and corn etc. etc. in a Nationalized Activity

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BAR: Distinguish Corporator from incorporator. Corporator is
hardly used now, now- subscriber or stockholder.
Discuss the step by step procedure in forming a
corporation/ if you have a client who wants to put up First, as regards number, incorporator not less than 5 not more
a corporation, what will your advice be? than 15 except corporation sole and non-stock non-profit
corporation. Subscribers, no limit on the number of
1. Determine the Incorporators
subscribers to the extent allowed by authorized shares of the
2. Execute the Articles of Incorporation corporation.

- It must conform with the form prescribed by the On natural persons, incorporators shall be natural persons.
corporation code Exception: cooperative for rural bank. Subscriber can be
juridical or natural persons.
3. Execute the By laws
Legal age, same requirements.
- May be submitted together with the AOI or 1
month after incorporation Majority of the incorporators must be residents. No such
requirement for subscribers.
4. Treasurer‟s Affidavit
Incorporators are mentioned in the articles and whose names
- Showing that 25% of the total subscriptions have
are mentioned as forming part originally of the corporation.
been paid
Subscribers are not really part of the corporation.
5. Verification Slip
SAMAHAN NG MGA OPTOMETRISTS NG PILIPINAS
- stating that the proposed name is not identical or CASE:
confusingly similar to other corporate names May a corporation engage in a practice of
6. Undertaking to Change Corporate Name profession?

- In case the SEC finds out that the coporate name No, limited to natural persons under the Constitution.
is identical with another corporation Isabela Optical(?) hired optometrists. Isabela optical
7. Payment of fees manufactures and sells lenses and eye glasses and in the course
of its business, hired optometrists who examine eyesight of
8. In case of Banks and other special Corporations, the patients to determine appropriate lenses or eyeglasses. They
favourable recommendation from the appropriate applied for a permit in Iloilo but blocked by the Samahan on
government agency. the ground that Isabela Optical by hiring optometrists is
9. Issuance by the SEC of the Certificate of engaged in the practice of a profession.
Incorporation SC: No, it is only incidental to the primary purpose of
- Certificate includes: Certificate of Filing of the manufacturing and selling lenses and eye glasses. You cannot
AOI and the Certificate of Filing of the By-laws manufacture the appropriate lenses or eye glasses without
examining the eyesight or vision of the patients. The
1. Promoter corporation itself being a juridical person cannot examine
Promoter - an agent of the 5 Incorporators before the eyesight so it has to hire optometrists to carry out that primary
incorporation or the agent of the Corporation after purpose. Therefore, hiring of optometrists is not tantamount to
incorporation. They promote the idea of the Corporation the exercise of a profession.

Is the Corporation liable for the contracts entered Steps in putting up a corporation
into by the Promoter? 1. Number of incorporators, not less than 5 not more
NO. Unless the Corporation ratifies or affirms as its own than 15.
those contracts. 2. AOI must conform to the form prescribed by the
Principal duties of an agent Code. One of the grounds to reject AOI is non-
conformity by the form prescribed by the Code.
1. Account and
3. Execution of the by-laws, there are 2 ways:
2. Remit any profit earned in the course of the agency
1. As part of incorporation
2. Number and Qualifications of Incorporators
2. Within 1 month after incorporation
An incorporator is always a corporator but a corporator is not
an incorporator.

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2005 BAR: If the corporation does not submit by laws one
month after incorporation, it is a de-facto corporation.
In practice, the SEC requires a copy of the by-laws along with
the AOI. So don‟t resort to the 2nd option.
4. Affidavit of treasurer which is under oath that at least
25% of the authorized capital stock has been
subscribed and 25% of the total subscription must be
paid in money or property.
5. Verification slip, you can now reserve corporate name
online. You conduct a verification to determine if your
proposed corporate name is not similar or confusingly
similar to any corporate name registered in the SEC.
The system will tell you if it is. In case of similarity,
you can get an override from the SEC Official.
Undertaking of the proposed corporation that in the
event name is approved is similar to existing
registered corporate name, the corporation
undertakes to change such corporate name.
Dean‟s former case: My Health clinic vs My Health Clinic. The
SEC approved the corporate name. Remedy, file a petition to
SEC to revoke or direct the corporation to change such
corporate name because it is confusingly similar to a previously
registered corporate name. SEC granted petition on the
strength of the undertaking that the corporation will change
corporate name in the event that it is similar to that already
registered with the SEC. It‟s what you call fall back mechanism.
When I was with the bank, Equitable PCI Bank. The president
was on his way from Cabanatuan to Manila. He saw “Equitable
Disco Club”. You cannot preclude the use of a trademark or
tradename for goods not related to the certificate of
registration unless it will affect its goodwill.
6. If special corporation, example bank, special
endorsement from the agency concerned.
7. Pay the filing fee
8. Issuance the certificate of incorporation
9. Filing of AOI and by laws
10. You have two years to organize
3. Corporate Name
REFRACTORIES CORPORATION vs. CA
SC: Elements so that a corporation may bar the proposed
corporate name
1. Complainant corporation must have a prior right over
the corporate name
How is prior right acquired? By registration, so the
complainant corporation must have registered first.
23
2. The proposed corporate name of the applicant
corporation must be similar or confusingly or
deceptively similar with the name registered with the
SEC or the name itself is deceptive or contrary to law.
BAR: A single proprietorship would like to adopt the
name ABC Marketing Incorporated. Is that valid?
No. You cannot adopt the name of a corporation, you
cannot use the name incorporated or corporation or their
abbreviation.
Problem: SEC Official to Dean “Nilo your corporation
Equitable PCI Bank does not contain the word corporation or
incorporated or the abbreviation”. If you change any provision
(amendment) of the plan of merger, you have to go back to the
board and the SHs. Luckily, the SEC official is a friend. It‟s
good to have many friends.
How come in the signage of BDO, We don‟t see BDO Inc? It‟s
just BDO. Because it‟s not marketing savvy to include Inc in
your signage.
National, Maharlika, Barangay – words reserved for the
government.
National Bookstore – not the name of the corporation
registered with SEC. Not the name of the corporation but the
name of the bookstore.
Principles on corporate name:
1. A change of corporate name is not a mode of
dissolution.
2. Does the corporation have the obligation to inform its
customers or clients about change of corporate name?
SC: No, there is no provision in the Corporation Code
or any law for that matter that obligates the
corporation to do so. It is not a matter of legal
obligation.
Javier case applies to a private or non-public
company. If it is a public company, it is required to
disclose to the PSE and SEC any material change
involving or affecting the company. A change of
corporate name is definitely a material change that
needs to be disclosed to PSE and SEC.
4. Corporate Term
What is the term of a corporation?
It is the term specified in the AOI but not to exceed 50
years.
What is the remedy available to a corporation in case
of a failure to extend corporate term due to
inadvertence?
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Fire the corporate secretary! haha.
REINCORPORATE! Same corporators, same authorized
capital stock, same everything including the corporate
name. The trustees of the defunct corporation may
authorize the adoption of that corporate name. The
trustee will simply authorize the new corporation to
adopt the same corporate name.
Are the assets of the defunct corporation transferred
automatically?
No. Expiration of the term automatically dissolves the
corporation. Next step? SC: the SHs from the defunct
corporation may assign (not sale or conveyance) their right
to the properties of the defunct corporation as their
subscriptions to the newly incorporated corporation.
Note: The term of the corporation may only be extended during
the term of the corporation and not when the term has expired.
Is that subject to tax?
Every corporation has a different registration number. The
defunct and the new have different registration numbers.
No taxable gain. Last year, Kim Henares issued a
regulation not to process reincorporation without affidavit
from the incorporators that taxes have been paid. So that
remedy is no longer economically viable. It is still a valid
legal option but you have to deal with the issue of taxation.
Pay the tax otherwise SEC will not approve it.
5. Minimum Capital Stock and Subscription Requirement
What is the minimum subscribed and minimum
authorized capital stock for a corporation?
Unless otherwise required by special law, there is no
minimum amount of authorized capital stock. Provided,
that the paid up capital is not less than 5,000 pesos.
Is it possible to fully subscribe and pay up the
authorized capital stock?
Yes.
You said that at least 25% of the authorized capital
stock must be subscribed and at least 25% of the total
subscription must be paid in cash or property. Is it
important that each subscriber must pay 25% of the
subscription?
No. As long as 25% of the TOTAL subscription is paid in
cash or property.
In what other cases may you require to pay at least
25% of the subscription?
1. Upon incorporation
2. Increase in capital stock
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Let’s say the authorized capital stock is 1 billion
pesos divided into 1 billion shares, par value of 1
peso. Let’s say the subscribed capital stock is 500
million shares, par value of 1 peso. Of course it’s
enough that you subscribe to 25% of 1 billion, so in
the example let’s say the subscribed capital stock is
500 million, so 1/2 of the authorized capital stock. We
said that the paid up capital stock should be 25% of
your subscribed, right? Let’s make it, let’s say 200
million shares, par value of 1 peso. Let’s say one of
the subscribers is A, he subscribed to 50 million
shares and then paid 20 million. That’s more than
25% right? Supposing the corporation will issue
additional shares from the remaining 500 million
unissued portion of the authorized capital stock and
A would like to subscribe to 50 million shares more
from the unissued portion of the authorized capital
stock, is he required to pay 25% of the subscription?
Issuance of shares taken from the unissued portion of the
authorized capital stock is not subject to 25% payment
requirement. So the only 2 cases when you are required to
pay 25% of the subscription are upon incorporation and
increase in the authorized capital stock. EXCEPT,
according to SEC, if the corporation is insolvent or about
to be insolvent, in which case, you have to pay 25% of the
subscription.
Issuance of shares or subscription to the unissued portion of
the original authorized capital stock is not subject to the 25%
payment requirement. The price, terms and conditions of
payment, may be determined by the Board of Directors, which
can be less than 25%. It can be 10% payment only, and the
balance at a later date, depending on the contract of
subscription. EXCEPTION is, to repeat, if the corporation is
insolvent, or about to become insolvent, according to the SEC,
you have to pay 25% of the subscription.
Let’s say if A subscribed to 50 and paid 20, when does
he pay the balance of the subscription?
Either the due date, which is the date specified in the
contract of subscription, or if there is no due date, upon
call, or demand by the board.
BAR: Let’s say the due date is June 1, 2015. On June 1,
he did not pay. On June 15, the Corporation declared
cash dividends. Is he entitled?
Yes, he is entitled to dividends. Because unpaid shares are
not delinquent shares and holders of unpaid shares under
Section 72 of the Corporation Code have all the rights
corresponding to the subscribed shares.
Section 72. Rights of unpaid shares. – Holders of subscribed shares
not fully paid which are not delinquent shall have all the rights of a
stockholder.
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Can you apply the dividends to unpaid subscription the outstanding capital stock at a regular or special meeting duly called
even if the subscription contract is silent? for the purpose.
No. The right to offset only applies to delinquent stocks
not unpaid shares.
BAR: Supposing on June 30 the Corporation called a
stockholder’s meeting to elect the directors of the
corporation. Can A vote the shares? Second, is he
qualified to be elected as a director?
Yes to both questions. Because, again, unpaid shares are
not delinquent shares, they have all the rights
corresponding to the subscribed shares.
Therefore, the question is, when do shares become
delinquent?
They become delinquent if not paid within 30 days from
due date. After 30 days, the shares are no longer entitled
to vote, receive stock dividends. In respect to cash
dividends, it shall be applied against unpaid subscription.
Let‟s clarify that, first, we are clear that unpaid shares are not
delinquent shares.
Next question is, how many unpaid shares of A are entitled to
receive dividends? The answer is, 50 million shares, right? The
standing of a shareholder in a corporation is measured by
subscription. So even though he paid only 20 million, he is
entitled to receive dividends for the entire 50 million shares.
How many shares can he vote during the election of directors?
Same, 50 million shares. So again, let‟s keep it in mind, the
standing of a stockholder is measured or dependent on his
subscription and not based on what he actually paid, until his
shares become delinquent.
Next point, may the corporation apply dividends against
unpaid subscription or unpaid shares? The answer is no, unless
of course the contract of subscription allows set-off. In which
case it is set-off by agreement of the parties, or conventional
set-off but not legal set-off.
Now why is it that the corporation cannot apply
dividends against unpaid subscription?
Because Section 43 is very clear. It can only apply
dividends against unpaid subscription only on delinquent
stocks not on unpaid shares.
Section 43. Power to declare dividends. - The board of directors of a
stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, in property, or in
stock to all stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on delinquent stock shall
first be applied to the unpaid balance on the subscription plus costs
and expenses, while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of
25
Stock corporations are prohibited from retaining surplus profits in
excess of one hundred (100%) percent of their paid-in capital stock,
except: (1) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring
dividends without its/his consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable
contingencies.
As we said, the balance of the subscription must be paid on due
date. Due date is either the date specified in the contract of
subscription, if any. Or if there is no due date specified in the
contract, then upon call by the Board. So “call” in corporate
jargon or parlance means demand. Demand is not necessary to
put the obligor in default if the contract specifies the due date.
According to the SEC, it is one of those cases where demand is
not necessary to put the obligor in default, when the law so
provides.
Okay next point, supposing the corporation will issue shares
from the unissued portion of the authorized capital stock, no
longer from the subscribed capital but the unissued portion, is
that subject to stockholder‟s approval? So there‟s this case in
your outline, the case of Ruby Industrial, penned by Bersamin,
so is that subject to stockholder‟s approval? In our scenario
earlier, in case he subscribes to the additional 50 million
shares, taken from the remaining 500 million unissued shares,
is that subject to stockholder‟s approval, and the answer is no.
Right? Because it is only the increase in capital stock that you
are required to secure stockholder‟s approval. But issuance of
shares from the unissued portion of authorized capital stock
only requires board approval. And when we say board
approval, it means majority of the quorum of the Board of
Directors because it is not one of those cases under the law
which requires majority of the entire board.
However, according to the Supreme Court, the issuance of
shares from the unissued portion of authorized capital stock is
subject to registration requirement under the SRC because as
you all know, shares of stock are securities right? And
securities cannot be distributed or sold to the public unless
registered with the SEC. And by registration, as you have taken
up in SRC, when you say registration of securities, when you
say registered with the SEC, it‟s a different concept from
registration of mortgage and sale, right? When you say
securities are registered, it means that the corresponding
registration statement has been filed with and approved by the
SEC and the sale or distribution of those securities, as stated in
the registration statement, has been approved by the SEC. So
that‟s the only case subject to, not stockholder‟s approval, not
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majority of the entire board, but simply majority of the
quorum.
Which is part of the so called Trust Fund Doctrine?
The total subscription - those subscriptions are considered
funds held in trust for the benefit of the corporate creditors.
Trust Fund Doctrine means that those subscriptions should be
untouched and unimpaired. They are funds held for the benefit
of the creditors, so it cannot be used, it cannot be distributed to
the stockholders because it is a fund held for the benefit of the
creditors. As you also know, the Trust Fund Doctrine has been
expanded to include not just subscriptions but even properties.
So properties of the corporation cannot be distributed to the
stockholders except in cases allowed by law and equity. The
moment you distribute the properties to stockholders, other
than those cases allowed by law and equity, you violate likewise
the Trust Fund Doctrine. So these properties are, again, held in
trust for the benefit of the creditors.
Now when are you allowed to distribute properties to the
stockholders? What‟s the most common form or distribution of
properties to stockholders?
Dissolution right? Dissolution, liquidation, reduction of capital
stock, redemption of redeemable shares and when you pay
dissenting stockholders in the exercise of his appraisal right.
Now you have authorized capital stock, what does it
mean?
It is the maximum number of shares that the corporation may
issue without amending the Articles of Incorporation. It
doesn‟t represent the maximum amount of capital the
corporation may raise because shares of stock, as you know,
can be issued for an amount higher than par value.
Let‟s give an example. The authorized capital stock is 1 billion,
par value is 1 peso. So 1 billion is not the maximum amount
that the corporation may raise, but it represents the maximum
number of shares that the corporation may issue without
amending the AOI. So if the corporation wants to issue more
than 1 billion, the over-issuance would be void. So you have to
amend the articles to be able to issue additional shares. Now, if
the share is issued for 10 pesos, then your authorized capital
stock and fully subscribed would be more than 1 billion but
would be 10 billion pesos. So as you know, the par value is only
the minimum value for which the shares may be issued,
otherwise they will be called watered shares.
Also the term “capital stock” has a precise meaning under the
Corporation Code. As held in the case of MISCI-NACUSIP
Local Chapter v. National Wages and Productivity
Commission, the term capital stock is the portion of the
authorized capital stock subscribed and ACTUALLY PAID UP.
So for example, if a wage order says that “employer whose paid
up capital is impaired by 25%, not obligated to pay minimum
wage,” so when it says paid up capital stock, you don‟t include
the properties received by the corporation. You don‟t include
26
the assets of the corporation because as we said the term
“capital stock” has a precise meaning under the Code. In our
example, under Section 43 of the Corporation Code, if the
surplus profit is 100% in excess of the PAID IN CAPITAL, any
excess should be distributed right? Now the term uses PAID
UP CAPITAL, does that include the properties or assets of the
corporation? No, because PAID UP capital stock differs from
capital of the corporation.
The definition of capital in Gamboa v. Teves, to repeat, only
applies to nationalized activities right? Particularly mining,
natural resources, and public utilities. The factual backdrop of
Gamboa v. Teves applies to public utility. But it can likewise be
applied to mining, as we saw in Narra v. Redmont. Narra v.
Redmont also made reference to Gamboa v. Teves, definition of
capital, and to corporations engaged in exploitation,
exploration, development of natural resources.
A foreign corporation could provide financial agreements and
technical service agreements to mining companies, that will
not be a violation of the law. It‟s only when the foreign
corporation participates in exploration, exploitation and
development of natural resources that it could be subjected to
the 60-40 foreign ownership requirement.
6. Articles of Incorporation
a. Nature and Functions of Articles
The AOI contains the power of the corporation and under
Section 45 of the CC, the corporation cannot exercise powers
other than those conferred upon it by the CC, the AOI, and
powers implied or incidental to it. So therefore, it‟s important
to know the powers of the corporation as contained in the AOI.
Because any act of the corporation, any activity of the
corporation that is outside or contrary to express, implied or
incidental powers of the corporation is ultra vires under
Section 45. So the enumeration of corporate powers under the
AOI serves also as a limitation on what the corporation can do.
So the powers are also limitations because outside these
powers, that would be ultra vires.
The AOI is the fundamental law of the corporation. It defines
the relation of the corporation between it and the State, the
corporation and its stockholders.
There‟s one question in the bar regarding shares owned by a
stockholder. So the stock and transfer book of the corporation
indicated that Juan dela Cruz only owns 300 common shares
but the AOI provides that he owns X number of founder shares
and X number of common shares. So which one prevails? The
entries in the stock and transfer book or the AOI? The SC said
in Lanuza v.CA that it‟s the AOI because it is the instrument or
document that defines the relation between the corporation
and the State and the corporation and the stockholders.
As regards form, well it has to be in official language, Filipino is
the official language, so the AOI may be in Tagalog or Filipino.
I have seen one in Spanish, UST. I‟m not so happy you know
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why? Because we amended, for the first time, the Articles of business. But as we will see later the Articles of Incorporation
Incorporation of UST because of a circular issued by Kim must be amended to make the business AS A SECONDARY
Henares that the phrase “non-stock, non-profit corporation” PURPOSE otherwise it would be ultra vires.
must be in the AOI, otherwise, it‟s not tax-exempt. We argued,
Domicile or place of business
not necessarily! Under the Constitution, as long as the property
is actually, directly and exclusively used for educational BAR: Where is the residence of the corporation?
purpose, you are not subject to tax. But no, now it has to be
The principal office as specified in the AOI. Not the place
seen in the AOI that it is a non-stock, non-profit corporation.
of actual operations. (Hyatt v. Goldstar) In this case, the
So that‟s why we have to amend the Articles of Incorporation of
AOI stated the principal office is Makati, and then they
UST, and it was successfully amended from Spanish to English.
relocated to Mandaluyong. Where‟s the venue for a civil
And we did not have to resort to Google Translator. Very
action? As you all know the venue is the domicile or
convenient noh. We were in Brazil for a family vacation, in Rio
residence of the plaintiff/defendant, at the option of the
no, and the driver has an app in his meter which translates
plaintiff. In this case, if you will consider the domicile of
from Portuguese to English so we can understand each other….
the corporation as the venue, where do you file the action,
is it in Makati, the principal office, or Mandaluyong, the
place of actual operation? The SC said that it is the place
b. Contents
specified in the AOI and not the place of actual operation.
The contents. On the first part, there‟s your purpose or Otherwise, it will be very easy on the part of the
purposes. As you all know there is only one primary purpose corporation to evade service of summons because all it will
and there can be many secondary purposes. You cannot have have to do is to keep on changing its area of operations.
more than one primary, it‟s an inconsistency. You can only
Now what about Metro Manila? Metro Manila, as you all
have one primary but you can have various secondary
know, is allowed under the CC, until 2006, the SEC made a
purposes. As long as these purposes are capable of being
declaration that it has to be specific, the city/municipality.
lawfully combined. So there can be as many as possible, as
What happens now to those corporations with AOIs stating
many as you want. As long as they are capable of being lawfully
that their principal place of business is Metro Manila? Well, in
combined. And what is your test to determine if they are
the case, it would be the area of actual operations because there
capable of being lawfully combined? If there is no law that
are many cities/municipalities in Metro Manila. According to
prohibits the combination of these purposes in the AOI. Now,
the SC, if Metro Manila is still the principal place of office in
can it be a bank and insurance company at the same time? You
the AOI, because it was approved before 2006, then the place
cannot because under the law, a bank cannot engage in
of operations is the residence of the corporation. But in 2012,
insurance business or vice versa. So you cannot have your
the SEC REQUIRED all corporations to amend their AOI which
primary purpose as a bank and your secondary purpose an
provided for Metro Manila as their principal office, in order to
insurance. What banks do is to put up a subsidiary, a
indicate the specific address.
corporation engaged in insurance.
Assuming that there are five directors; can the
However, we have to correlate the prerogative of the
articles and the by-laws decrease it to two?
corporation to have various purposes with Section 42 of the
Corporation Code, in the sense that if the funds of the No, because the law provides that the number of directors
corporation are devoted to the secondary purpose or purposes, should not be less than five.
then the Corporation Code requires the corporation to go back
Is it possible for the number of directors in a quorum
to the stockholder and secure their approval by atleast 2/3s of
to be less than majority? Let us say that the number
the OCS. And any stockholder not in favor of the proposed
of directors is fifteen and the articles provided that
investment of corporate funds in the secondary purpose, then
the quorum for certain corporate acts will be seven.
he can exercise his appraisal right. So it‟s very clear. While the
CC acknowledges and recognizes the prerogative of the Section 25 provides that unless the articles of
corporation to have many purposes in its AOI, there can only incorporation or the by-laws provide for a greater
be one primary and many secondary purposes. But the funds of majority, a majority of the number of directors or trustees
the corporation should be devoted to the primary purpose or as fixed in the AOI shall constitute quorum for the
any undertaking incidental to the primary purpose. If they transaction of corporate business, every decision of at least
invest in a secondary purpose, it requires not just board a majority of directors or trustees present in a meeting at
approval by majority vote but likewise, stockholders which there is quorum shall be valid as a corporate act,
representing 2/3s of the OCS. except for the election officer which shall require the
majority vote of a majority of all the members of the
As you have learned in Corpo, Section 42 likewise allows a
board.
corporation to invest the funds in another business right? So
either invest the funds in a secondary purpose or in another

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Unless the by-laws provide a GREATER number, quorum You cannot extend a corporate term by mere referendum or
shall be the majority of the number of directors as fixed in written assent of the stockholders.
the AOI. There is no prerogative for the by-laws to reduce
So even though under Section 23, it is enough that majority of
for quorum purposes the number of directors to less than
the directors are Philippine residents, when you check the
majority.
contents of the articles you must likewise indicate the
If the AOI substantially conforms to the requirement nationality of the incorporators and directors, whether or not
of the Code, does the SEC have the power to reject the involved in a nationalized activity.
AOI? The requirements are not fully complied with
For stock corporation, the outstanding capital stock, the
but substantially complied with, does the SEC have
amount subscribed, the amount paid-up, the names of the
the discretion to reject the AOI?
stockholders, subscribers and the secondary purpose of the
Sections 17 and 10 of the Corporation Code clearly corporation.
provides that substantial compliance is enough. It is
Now regarding the non-stock corporation, it says there the
enough that the AOI substantially complies with the form
amount of contribution. If the non-stock, non-profit
prescribed by the Corporation Code. This is also found in
corporation is also a foundation, then the minimum capital is 1
Section 10. The SEC has no discretion to reject the AOI if it
million pesos. That is the price you have to pay for including
substantially complies with the form prescribed by the
the word foundation as part of the corporate name.
Corporation Code.
A foundation is essentially, a non-profit, non-stock
Let us say the term of the Corporation is about to
corporation, right? Because you only have two kinds: stock or
expire. For example, UCPB is a sequestered
non-stock. A foundation cannot be a stock corporation because
corporation. 90% of its outstanding capital stock is
it is not organized for profit but to have the word foundation as
voted by PCGG under the public character test. Under
part of the corporate name, the SEC prescribes that the
the public character test, shares acquired through
minimum capital should be 1 million.
public funds can be voted by the Government.
Supposing that the term of UCPB is about to expire Why?
and every time they hold a stockholders meeting
It is because foundations have been used for fraudulent
there will be picket from farmers demanding release
purposes. It has become the instrument or vehicle for money
of their coco-levy funds and this will be captured by
laundering.
media and it will give the impression of chaos in the
bank. The bank decided that the extension of the Dean: But then I realized that 1 million is small pa din
corporate term be approved by the majority of the compared to the amount being funded to various NGOs or
board and by the written assent of PCGG because foundations. I mean Napoles is just one of them, there are
anyway that is majority or more than 2/3 of the many and there is someone even bigger than Napoles. Napoles
outstanding capital stock. Will that be a valid is peanuts compared to this guy. There are many Napoles. But
compliance with the requirements for the extension? of course, as a lawyer, my lips are sealed. I will not discuss the
details but there are many. Napoles is not even a little player.
Section 16 provides Amendment of Articles of
So that is the extent of corruption and the organized villains of
Incorporation. - Unless otherwise prescribed by this
our country. Anyway, so we pray for them. That is what we do
Code or by special law, and for legitimate purposes, any
as Thomasians, we pray for them to come to the right path.
provision or matter stated in the articles of incorporation
may be amended by a majority vote of the board of c. Amendment
directors or trustees and the vote or written assent of the
So the example I gave earlier was UCPB. In UCPB, they have
stockholders representing at least two-thirds (2/3) of the
not called a single stockholders‟ meeting for the last 13 years,
outstanding capital stock, without prejudice to the
until 6 months ago. Because every time they call a stockholders‟
appraisal right of dissenting stockholders in accordance
meeting, there will be picket among the coconut farmers
with the provisions of this Code, or the vote or written
demanding the release of their cocolevy funds. The rallies and
assent of at least two-thirds (2/3) of the members if it be a
pickets would be covered by the media and would convey the
non-stock corporation.
impression that there is something wrong in the bank. So the
Section 37 reads that: A private corporation may extend or management decided that there will be no more stockholders‟
shorten its term as stated in the articles of incorporation when meeting unless absolutely necessary. 6 months ago, when the
approved by a majority vote of the board of directors or term of the corporation was about to expire, I was asked a
trustees and ratified at a meeting by the stockholders question: Can we extend the term of UCPB by the mere written
representing at least two-thirds (2/3) of the outstanding capital assent of PCGG who has voting right of more than 2/3 of the
stock or by at least two-thirds (2/3) of the members in case of outstanding capital stock?
non-stock corporations.

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Of course I said that under Section 37 in relation to 16 of the
corporation code, we cannot do so because amendment of the
articles with regard to the extension of the Corporate Term has
to be made in corporate meetings.
But just the same I was tasked to talk to the SEC chair if I could
convince the SEC chair to relax the rules given the peculiar
situation of the UCPB. I was able to convince the SEC chair to
dispense with the stockholders meeting. I said that the survival
of the bank is at stake every time we call a stockholders‟
meeting but then she retired. Before we could implement the
extension of the Corporate Term by mere Referendum, she
retired. She was replaced by Teresita Herbosa. Tesa Herbosa is
much stricter so I didn‟t bother talking to her because I do not
want to exhaust my good will on an account that does not give
me money anyway. UCPB is for free. So I might as well exhaust
my good will for clients that pay me, right?
So I said we have no choice but to hold a stockholders‟ meeting.
I checked the by-laws and the notice said that it would be by
publication. So I said that we will make it discreet, we will
make it low key (Thor‟s brother?), we can publish the notice of
the meeting in a newspaper not widely read. The by-laws of the
bank provide that it should be general circulation. But looking
at the previous SC decisions, when it says of general
circulation, it does not have to mean the widest circulation. It
means it caters to the general interest of the community, as
long as there is a descent subscriber base. It need not be a
prominent newspaper, so we can publish it in Tiktik, Abante….
So we published it.
But despite the fact that we published it in a least known
newspaper, still more than 1000 attended. Sometimes, you
create your own ghost. Why? Because that is the most peaceful
stockholders‟ meeting that I have attended in my whole life. I
already attended a lot of corporate meetings and I have seen so
many intra-corporate fights. We were expecting fireworks from
the farmers. But none! Within 1 minute we were done.
Because there were only 2 items in the agenda: 1) certification
as to quorum; and 2) extension of the corporate term. So
somebody made the motion and that the articles be amended
to read as follows and the corporate term be extended to this
day… Second the Motion. Is there any motion to adjourn?
Move to adjourn, mister chairman. Alright, adjourn!! (*Dean
pounds the table with conviction* Dean: Oops, Sorry!)
So what is important under section 16 are the following:
Unless otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock,
without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written
assent of at least two-thirds (2/3) of the members if it be a non-stock
corporation.
29
But the key issue is: do you need to call a
stockholders’ meeting every time you approve an
amendment of the articles?
If the amendment requires a stockholders‟ meeting under the
Corporation Code or the By-laws, then written assent is not
enough. But if it is not required in the Corporation Code or in
the By-laws that a meeting be called for that purpose, then any
matter in the AOI may be amended by a vote of at least the
majority of the board and written assent of the stockholders
representing at least 2/3 of the outstanding capital stock.
Let us do are survey. What are the corporate acts under the
Corporation Code that have to be approved in a meeting
called for that purpose? Some not really part of amendment
but just the same needs to be in a meeting called for that
purpose…
1. Section 24 – Election of Directors
2. Section 28 – Removal of Directors (replacement of
the removed director)
3. Section 29 – Filling up of vacancy
4. Section 30 – Compensation of directors
5. Section 37 – Power to Extend or Shorten Corporate
Term
6. Section 38 – Increase of Decrease of Capital Stock;
incur, create or increase bonded indebtedness
7. Section 39 – Pre-emptive right
 Now this is debatable. What if the AOI would be
amended to deny pre-emptive right? Do you need
to have a meeting? So, Sec. 39 on pre-emptive
right. So if the AOI will be amended to deny pre-
emptive right, it is clear in the case of ___ vs.
United Shipping Corporation, that that kind of
amendments may justify appraisal rights under
Sec. 81 of the Corporation Code because any kind
of amendment in the AOI, there is the effect of
changing or restricting the rights of the
stockholders as in the instance of exercising
appraisal right and if you deny the stockholders
the right to subscribe to additional shares in the
corporation, you are restricting the right of the
stockholder. Well, the big consideration is a
stockholder can exercise appraisal right only by
dissenting as against the proposed corporation
act because you cannot exercise appraisal right if
he is absent or if he abstains. But should the
dissent be in a meeting or may the dissent be by
expressing likewise which is agreement to the
proposed corporate act? There is no case in the
Philippines but for foreign jurisprudence:
Appraisal right can be exercised even without
having to call a meeting. So long as he dissents.
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 For example, if the amendment is to deny pre-
emptive right, it can be routed among the
stockholders and as the beliefs(?) are being
routed to the stockholders, a stockholder may
dissent on the proposed amendment. Of course,
your safe bet is to call a stockholders‟ meeting.
But there is this foreign jurisprudence that it
need not be in a stockholders‟ meeting. The
dissent could be articulated in some other way.
(But that is already going too far, that is going to
deep already)
8. Section 40 – Sale of all or substantial corporate assets
9. Section 42 – Invest corporate funds in another
purpose (secondary purpose)
10. Section 43 – Stock dividends
11. Section 44 – Power to enter into management
contract
**Section 46 – adoption of by-laws
When you adopt the by-laws obviously you do not need to hold
a stockholders‟ meeting because when you adopt that is prior to
incorporation.
12. Section 48 – Amendment of by-laws
13. Section 76 – merger or consolidation
14. Section 117 – Dissolution
BAR: Can you amend the names of the incorporator? Can
you amend the date of incorporation? Can you amend the
name of the Notary Public before whom all the incorporators
appeared? What is common denominator to all these?
All these things may not be amended because these are matters
of accomplished fact. Matters of accomplished fact cannot be
amended.
Remember this case? A female incorporator had a falling out
with his husband and it must have been so bad that he wanted
to remove any association with his husband. So she petitioned
the SEC to have his name changed as an incorporator to drop
the name of his husband. Of course, the SEC rejected it because
you cannot amend the name of the incorporator. So the SEC
suggested that if you want you can change your name as
subscriber or stockholder in the stock and transfer book of the
corporation.
e. Grounds for disapproval of AOI and Amendments
1. Does not conform substantially to the form prescribed
by the Corporation Code;
2. The purposes are contrary to the Constitution, the law,
morals, good custom, public order, public policy;
3. The treasurer‟s affidavit with respect to the amount of
subscribed capital stock is false; and
4. The required percentage of Filipino ownership in case
prescribed by law, the constitution are not complied with.

*So other than these corporate acts, it may be done by mere Are the grounds under section 17 exclusive?
referendum even if it is amendment of AOI.
They are not exclusive because under P.D. 902-A, there
And you always include this as part of your answer: In are other grounds for rejection of the AOI or its
case of banks, insurance company, public utility, educational amendment such as:
corporations and other special corporations governed by
1. If there is fraud in procuring the AOI;
special law, the favorable endorsement of the appropriate
government agency must be obtained. 2. Misrepresentation as to the purposes of the
Corporation;
Now, with respect to amendment, you have to submit the
original and amendment articles of incorporation and not just 3. Non-compliance with the laws, rules and regulations
the highlighted portion. You must submit both and underscore administered by the SEC;
the changes made. You also have to indicate that as approved
4. Non-submission of the reports required by the SEC;
by the board on this date and approved the stockholders on
and
this date.
5. Non-payment of the filing fees.
Why does it have to be done that way?
7. Registration and Issuance of Certificate of Incorporation
First, that is what the law says and for practical purposes.
BAR: When does the corporation acquire legal personality?
When is it effective?
Upon issuance of certificate of incorporation, not upon the
Upon the approval of the SEC or the inaction of the SEC
filing of the articles, not upon the payment of filing fees. From
within 6 months from application for reasons not
that time on, the group of persons, associated persons, become
attributable to the corporation. So you have express
a body politic with all the rights privileges and attributes of a
approval or approval by inaction but the inaction must be
corporation.
for causes beyond or not attributable to the corporation.
Section 9 however failed to take into account corporations
d. Non-amendable Items
created by special laws; pertains only to corporations created

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under the corporation code because corporations created by
special law acquire legal personality upon the effectivity of the
law. (E.g. _____, Philippine national red cross, Philippine
national railways)
You have the case of Travel Tours Express vs CA, with regard to
sports federations, it is not enough that they are registered with
the SEC, not enough that they are approved for incorporation,
in addition to registration, they only acquire legal personality
from the time of accreditation by the appropriate government
agency as such sports federations.
BAR: A subscribed with the shares of stock of the proposed
corporation by contributing real property and the same was
considered as treasury trust, pending incorporation Y surfaced
and claimed ownership over the property that A contributed.
He files an action for reconveyance against the proposed
corporation. Will the suit prosper?
Answer: It will not because the corporation has not acquired
legal personality yet. Pending issuance of the certificate of
incorporation, it is a mere association of persons without any
legal personality. It acquires legal personality and therefore the
power to sue and be sued only upon issuance of the certificate
of incorporation.
Next question, who does he sue then?
The (treasury trust?) who received the property in trust for
the corporation.
8. Adoption of By-Laws
a. Nature and Functions of By-laws
b. Requisites of Valid By-laws
By laws are set of rules and regulations for the internal
government of the corporation. It is the implementing rules
and regulations. Not everything can be captured in the articles,
so the internal governance of the corporation has to be spelled
out in the by-laws. In case of conflict between AOI and by-laws,
AOI prevails.
c. Binding effect
Under sec. 46, is the submission of by-laws as a condition
precedent to acquire legal personality applicable to foreign
corporations?
Section 46. Adoption of by-laws. – Every corporation formed under
this Code must, within one (1) month after receipt of official notice of
the issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government not
inconsistent with this Code. 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 by-laws shall be signed by the stockholders or members
voting for them and shall be kept in the principal office of the
corporation, subject to the inspection of the stockholders or members
during office hours. A copy thereof, duly certified to by a majority of
the directors or trustees countersigned by the secretary of the
corporation, shall be filed with the Securities and Exchange
Commission which shall be 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 Securities and Exchange Commission, together with
the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the
by-laws or any amendment thereto of any bank, banking institution,
building and loan association, trust company, insurance company,
public utility, educational institution or other special corporations
governed by special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such by-laws or
amendments are in accordance with law.
Citibank vs. Chua
Citibank was a defendant in a collection case in Cebu and
during pretrial conference the lawyer was not equipped with a
board resolution authorizing it to appear on behalf of Citibank.
He presented an authorization from the EBP and Country
Manager of Citibank who under the by-laws is empowered to
hire lawyers to represent the corporation. Is it necessary to
submit a SPA to authorize a lawyer to represent the
corporation or will the authority given by the EBP manager
who under the by-laws is empowered to hire lawyers for the
corporation suffice?
SC said not necessarily, the SPA can be dispensed when there is
a by-laws provision authorizing...
The SPA in case of corporations is in the form of a board
resolution.
The other question is, what if the corporation is a foreign
corporation and the by-laws were not submitted with the SEC
prior to incorporation, can the provision in the by-laws be
invoked, adopted and relied on?
SC said in Citibank vs. Chua, the requirement of submitting by-
laws as a condition to acquire legal personality is applicable
only to domestic corporations. As clear in the phrase
"corporations created under this code".
The by-laws of the foreign corporation are submitted to the
SEC only for the purpose of securing a license and not to
acquire legal personality.
Binding effects of by-laws
There are two cases in your outline, PMI College vs. NLRC and
Chinabank vs. CA
In Chinabank vs CA, valley golf and country club issued a stock
certificate to Juan dela Cruz. Juan dela Cruz obtained a loan
secured by a pledge on the stock certificate. Failed to pay and
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pledge was foreclosed. Chinabank was the winning bidder. SC said it is a valid provision. The fiduciary duty of a director
Corporation refused to transfer ownership over the stocks may be compromised if he sits in the board of two competing
because of the provision in the by-laws granting first lien to the corporations. He may acquire vital sensitive information from
corporation in case of non-payment of dues and assessments. one and share it to the other to the detriment of the former.
Who is entitled?
What if there is a provision in the by-laws disqualifying a
The court said that the provision in the by-laws is not binding competitor from being elected to the board?
on Chinabank because the latter is a third person. Exception is
No. Because you have section 33 or 32? It allows corporations
when the third person has actual knowledge of the provision.
with interlocking directors.
The SC added that a corporation may refuse to transfer
ownership only when it has unpaid claims and the term unpaid But is it valid to include a non-compete clause in the
claims means and is limited to UNPAID SUBSCRIPTION. by-laws?
Other obligations such as dues and assessments does not
Yes. All corporations, public corporations i know have
preclude transfer of shares.
incorporated the ruling in Gokongwei in their by-laws such that
d. Allowable provisions it is now a standard provision or clause in the by-laws to
disqualify persons who are in conflict with the corporation to
What about the provision in the by-laws that dues
be elected in the board.
are first lien on the shares?
What about the argument that it deprives a stockholder of its
SC said that this provision is not self-executory. It does not
rights as a stockholder?
authorize the corporation to sell the delinquent shares not
delinquent in terms of subscription but delinquent in payment SC said if you join the Corp as a minority, you have to accept
of dues. It does not authorize the sale of the shares. There must the fact that you are subject to the will of the majority. The
be a complementing pledge or chattel mortgage agreement to manner by which you exercise your rights is dictated by the
authorize the corporation to sell the shares and apply the majority.
proceeds to the payment of dues and assessments and other
The Sy family, before they acquired Equitable PCI Bank,
obligations owing. This is different with condominium units. In
wanted a seat in the board. BDO acquired enough shares for
the latter, it can be sold for non-payment of dues and
the boardship. Equitable PCI was concerned that if they let
assessments if the deed of restrictions authorized the sale. In
them sit in the board they may ____ up the entire bank. So we
case of shares, by-laws provision is not enough but must be
wanted to exclude them. What case do we use? First we used
complemented by a pledge or chattel mortgage agreement.
LEE VS CA. The shares were not in their names. They were in
PMI vs. NLRC the names of the brokers. That is what you call scripless
trading. Yung certificate blank indorsement. Their names were
A has been teaching for three semesters. On the fourth
not in the books, of course the law says "in their own name in
semester, the school refused to honor the employment because
the books". The shares were held in trust by their brokers, not
the employment contract was signed not by the chairman who
in their own names. Second ground, they represent interest
under the by-laws is the only one authorized to sign
adverse to the bank. They sit in the board of BDO a competitor.
employment contracts. But he had been teaching for three
So they were not able to take the board seat. The following
semesters and it is only now that they raise as issue the lack of
year, they were smart enough. They did not include the SY's as
authority.
nominees to the board, no Henry Sy, no Teresita Sy but
SC said, admission by estoppel, A is not bound by the provision prominent business personalities. So what did I do? Pursuant
in the by-laws being a third person. to the case of Gokongwei that before you can disqualify a
nominee, you must give him due process, I required them to
The most favorite topic in the BAR, five times asked. The case
sign a questionnaire under oath to disclose their company
of Gokongwei vs SEC. What is the effect of a provision in the
affiliations. BOOM! I discovered that one is the director of this,
by-laws intended to disqualify any person from being elected in
a company owned by the Sy family and this and this owned by
the board for having interest adverse or in conflict with the
the Sy family and so on..... So I discovered that the nominees
business of the corporation?
are all of the Sy family so we disqualified them. Now before
John Gokongwei accumulated enough shares in San Miguel there was another stockholders' meeting, they bought out
Corp. enough for a boardship. San Miguel learned of the plan everybody including the Go's SSS GSIS so they now own
so they amended the by-laws in general terms, because if Equitable PCI. They merged it with Banco de Oro. That's the
specific it would be invalid for being discriminatory, stating story.
that any person having interest in conflict with the corporation
(Then puro kwento na about the building in divisoria and bla
cannot be elected in the board. The SEC approved. It went up
bla bla.)
to the SC. Is that provision in the by-laws invalid? Can the by-
laws disqualify a competitor from being elected to the board?

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Tell me whether the provision in the by-laws is valid
or void.
1. Directors of the corporation may or should be elected from
stockholders representing majority of the outstanding capital
stock.
- Not valid. This is because they have to be elected from
among all the stockholders
2. The meeting of board may be held in UST.
- Valid
3. All officers are not required to be directors of the
corporation.
- Not valid.
4. The annual compensation of directors as such directors shall
not exceed 10 % of the gross income of the corporation for the
income tax in the preceding year.
- Not valid. It‟s not gross income. Should be net.
5. Proxies must be submitted a day before the stockholders‟
meeting.
- Valid.
6. Proxies must be submitted 30 days before the stockholders‟
meeting otherwise the proxy is void.
- Valid (this is the by-laws of San Miguel) as long as it is
submitted any day before the meeting.
7. By-laws authorized the board to create a corporate office.
- Only the by-laws can create corporate offices. The board
cannot create a corporate office. This is the decision of SC
in the case of _____
8. Can the by-laws require that proxies must be authorized?
- Valid. Par 3 of Section 47
9. A director may be removed by his co-directors by a vote of at
least majority of the directors in case of non-payment of dues
and assessments and for absences.
- Not valid. Only stockholders can remove a director.
There are two ways to adopt by-laws.
1. Filing with the articles of incorporation; or
2. Within a month after the incorporation
Although we said in our previous discussions that the SEC now
requires submission of by-laws prior to incorporation. But for
BAR PURPOSES, the submission of by-laws during one
month after incorporation is still allowed by the Corporation
Code.
What‟s the distinction then?
33
If the by-laws should be adopted prior to incorporation, then
all incorporators must sign the by-laws.
If it adopted during one month from incorporation, only the
stockholders holding in favor of the by-laws and by-laws
adopted during one month of incorporation should be
approved by SH representing at least majority outstanding
capital stock.
AMENDMENTS
Amendments, as you know, should be approved by the BOD
that is majority vote and stockholders representing at least
majority of the outstanding capital stock.
When you go to practice don‟t forget if you amend AOI, the
matter or item amended has to be mirrored in the by-laws.
Example: Corporate name. Don‟t just approve or amend the
corporate name yet not to amend in the by-laws.
There‟s one transaction we handled. The AOI of the client was
amended. BTW the client is Century Properties, the owner of
Grand Tower, Azure, Milano, and other high-end condo
projects. So anyway… We need a backdoor receiver‟s 25 shares
of a dormant listing company.
Let‟s say ABC company is listed but dormant.
So how do you make shares of your company listed without
issuing a public offering? You can file the shares of the
dormant listing company. This is what you call backdoor
listing. So you buy the shares of a dormant listing company and
then you amend the AOI to make it your company.
So ABC Company is listed but it’s dormant. Century bought
the shares of the stockholder‟s of ABC Company so now they
become publicly traded and they amended the AOI of the ABC
Company to the Century Properties. So corollary, while the
Articles were amended, they changed the name of ABC to
Century, the by-laws were not. So the by-laws still ABC
Company but the AOI says Century Properties. So make sure
that when you amend the AOI, make the corresponding
changes to be mirrored in the by-laws. You have to amend
likewise the by-laws.
So in this case, you need 2/3 for the AOI but you only need a
majority of the outstanding capital stock to amend the by-laws
for the board approval by majority in both cases whether
amendment of AOI or by-laws.
The 2/3 requirement pertains to what? The delegation of
authority by the stockholders to the board and this was asked
in the bar. So the stockholders, may, by 2/3 of vote of
outstanding capital stock may delegate the authority to amend
the by-laws solely for directors but the power delegated may be
revoked by the vote of stockholders representing at least
majority of the outstanding capital stock.
Adoption of by-laws within one month of incorporation –
stockholders holding majority of the outstanding capital stock
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WITHOUT board. The board is required to certify the copy of amend the by-law. This is clear under Section 48 of the
the by-laws as approved by the stockholders. Corporation Code.
Amendment of by-laws - at least majority of the board and Section 48. Amendments to by-laws. – The board of directors or
stockholders holding majority. trustees, by a majority vote thereof, and the owners of at least a
majority of the outstanding capital stock, or at least a majority of the
Delegation of authority by stockholders to the board - 2/3 of members of a non-stock corporation, at a regular or special meeting
the outstanding capital stock duly called for the purpose, may amend or repeal any by-laws or adopt
new by-laws. The owners of two-thirds (2/3) of the outstanding capital
Revocation of the authority delegated to the stockholders – just stock or two-thirds (2/3) of the members in a non-stock corporation
majority of the outstanding capital stock may delegate to the board of directors or trustees the power to amend
or repeal any by-laws or adopt new by-laws: Provided, That any power
In all cases, such may be made in a meeting called for the
delegated to the board of directors or trustees to amend or repeal any
purpose. by-laws or adopt new by-laws shall be considered as revoked whenever
Should the delegation of authority be embodied in a stockholders owning or representing a majority of the outstanding
capital stock or a majority of the members in non-stock corporations,
stockholders’ resolution or can it be in the by-laws?
shall so vote at a regular or special meeting.
When I was a corporate secretary of Equitable, I reduced Whenever any amendment or new by-laws are adopted, such
the number of votes to disqualify a creditor. Under the by- amendment or new by-laws shall be attached to the original by-laws in
laws of the bank, we needed 2/3 to disqualify a creditor. So the office of the corporation, and a copy thereof, duly certified under
anyone, if you are a creditor you can be disqualified by the oath by the corporate secretary and a majority of the directors or
board by a vote of 2/3. So 2/3 is quite a big number so we trustees, shall be filed with the Securities and Exchange Commission
decided to reduce it to majority. The problem is we don‟t the same to be attached to the original articles of incorporation and
have majority of outstanding capital stock neither a original by-laws.
stockholder owns an outstanding capital stock but we The amended or new by-laws shall only be effective upon the issuance
could call the board. And I saw a provision in the by-laws by the Securities and Exchange Commission of a certification that the
that the stockholders have delegated to the board the same are not inconsistent with this Code.
authority to amend the by-laws. So on the strength of that
provision, I amended the by-laws solely upon the instance
of the board without stockholders‟ approval. I submitted
the papers to the SEC. It was approved.
It went up to the En Banc. The en banc cited a 1964 SEC
Opinion (before effectivity of the Corporation Code)
stating that the delegation of authority must be embodied
in a stockholders‟ resolution.
How can that be? It‟s already in the by-laws why should
the delegation of authority be in a stockholders‟
resolution? So we filed a petition for review before the CA
under the Rule 43 because you‟re not allowed to file MR
with the SEC but before the decision of the CA,
nagbentahan na ng shares… so it was not resolved but it is
interesting no? This is jurisprudence.
To me, the most favorable consideration is: Is that by-laws
that delegated to the board the authority to amend the by-
laws approved by the SH voting 2/3? If it is then it should
be a valid delegation and need not be in a SH resolution.
Of course after this, I knew why. The SEC Commissioner
who voted against us is a consultant of SM. So the Director
who approved the amendments is our consultant. The
commissioner who overruled the director is a counsel of
SM.
For BAR PURPOSES, the answer is as long as the
delegation of authority has been approved by the SH
representing at least 2/3 of the outstanding capital stock,
then by the strength of that authority, the board alone may

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E. BOARD OF DIRECTORS AND TRUSTEES
1. Doctrine of Centralized Management
As you all know, under Section 23 of the Corporation Code,
corporate powers, business transacted, property held by the
BOD.
Section 23. The board of directors or trustees. – Unless otherwise
provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of
directors or trustees to be elected from among the holders of stocks, or
where there is no stock, from among the members of the corporation,
who shall hold office for one (1) year until their successors are elected
and qualified. (28a)
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his
name on the books of the corporation. Any director who ceases to be
the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof.
A majority of the directors or trustees of all corporations organized
under this Code must be residents of the Philippines.
We have this doctrine – centralized management – so the
stockholders regardless of number they can be 5, 15, or
thousands SH, will have to delegate the power to run the
corporation to a centralized body called Board of Directors. So
BOD is the body who exercises the power of a corporation.
Under Section 23, there is a qualification unless otherwise
provided meaning there are certain cases where the law
conferred corporate powers only to the SH and there are
corporate powers exercised jointly by the board and the SH.
But other than these, corporate powers are exercised by the
BOD. They decide what is best for the corporation. Questions
on policy and management are left to the sound discretion of
the BOD.
BAR QUESTION: A general counsel of the corporation and
the lawyer who handled the case for the corporation entered
into a compromise agreement with a party in a civil case
without approval of the board. Is this compromise agreement
binding?
No, because general counsel does not have the power. It has
to be the board unless authorized by the by-laws or board to
enter into a compromise agreement but the lawyer himself
without authority from the board or the by-laws cannot
approve any compromise agreement.
2. Business Judgment Rule
This means that questions of policy and management are left to
the discretion of the board and the actions of the board are not
reviewable by the courts and they cannot be interfered with by
the courts and the stockholders for as long as the board acts in
good faith and not contrary to law.
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Can the stockholders pass a resolution repudiating
the resolution adopted by the board on questions of
policy and management?
No. SH cannot interfere with the board on how to run
corporate affairs.
REMEDY of SH: Remove the director by 2/3 of vote and
elect new directors but never to supplant BOD‟s judgment
because the powers were not granted to them by law. It is
to the BOD.
Can the court interfere on purely business matters?
No. For as long as the board acts in good faith and not
contrary to law, their (BOD) actions are not reviewable by
the courts.
If the Board made a mistake, they erred in making an
investment or in buying this property that they
thought would increase in value but six months after
the value decreased; can they be made liable for
damages?
No. Under Section 23, 34, and 31 of Corporation Code they
are not liable. They are only liable in case of gross
negligence or bad faith in directing the affairs of the
corporation.
Simple negligence and error in judgment are all part of the
administrative _________. So directors are not infallible.
There are no certainties that they will not make mistakes or
they will not err in the exercise of their judgment. What is
important is that they act in good faith and not contrary to law
and if they do make a mistake, their actions are not reviewable
by the courts and even by the SH.
Can the board create positions?
Yes. The board also may create a department. The board
may create ordinary positions, appoint ordinary officers.
What the board cannot do and cannot be justified by the
business judgment rule, as held in the case of Filipinas
Port Services v. Go and asked in the bar, is to create an
executive committee that would function like an executive
committee under the Corporation Code neither can they
create corporate offices.
So they cannot create officers and committees which, by
law, can only be created by the by-laws.
Now, you know very well that the board cannot
create corporate offices, but they can create ordinary
office. What does this mean?
The distinction is not in the importance of the position or
office in the corporation. The importance lies with the
jurisdiction in case of removal or incrimination dispute.
So the holder of a corporate office is considered a
corporate officer and any issue about the removal,
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appointment of a corporate officer is an intra-corporate
controversy cognizable by the RTC acting as a special
commercial court.
Whereas an officer holding of a by-laws position and
therefore he is not a corporate officer and considered as
ordinary, and in case of election, removal, or appointment
disputes, it becomes a labor issue or dispute cognizable by
Labor Arbiters and not the RTC acting as a special
commercial court.
What makes an office a corporate office?
It‟s not anymore WON it is appointed by the board. The
test is: Is that office specified in the by-laws?
If it is in the by-laws, it becomes a corporate office. If not,
it is not a corporate office but just an ordinary office.
There is a recent case. Is the office of the dean a corporate
office? Now it is not the Dean of the Faculty of Civil Law but
another dean somewhere in the north. So the test is WON it is
in the by-laws. In this case, it is not in the by-laws. So where
can the Dean go in case he‟s been removed? Go to the LA, not
RTC as a special commercial court.
EASYCALL v. KING (2005)
Let’s say Vice President for Nationwide Expansion
(although sabi ni Dean is Director for Nationwide
Expansion). Is it a corporate office if he was only
appointed by a managing director?
So he is appointed by the managing director, not even by
the board. The title is hifalutin, right? But he is not a
corporate officer because his position is not in the by-laws.
GARCIA v. EASTERN TELECOM (2009)
Vice President and Head of Business Support
Services and Human Resource Departments (sabi ni
Dean VP for Personnel and Business Management)?
He is because his position is in the by-laws of the
corporation.
As said earlier, it is not the question of the meaning of the
position. When we say ordinary office, we don‟t say that you‟re
less important compared to those who hold a corporate office.
It is to say that in case of removal, then the one who has
jurisdiction over the dispute will be the determined by the
distinction between one holding a corporate office and one who
holds an ordinary office.
_____v. Joson 2012
Can the board be authorized by the by-laws to create
corporate office?
Before this ruling, as I told you, once you‟re appointed by the
board, automatically you‟re a corporate officer. But the test, as
I said, is the inclusion in the by-laws.
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So what if the by-laws authorized the board to create a
corporate office and the board pursuant to this, it did
create a corporate office? Is the officer holding an ordinary
or corporate office? SC said it‟s ordinary.
So the remedy is not for the by-laws to authorize the
board. The remedy is for the by-laws to be amended to
make the office a corporate office.
What about the executive committee? Can the board
create an executive committee functioning as such
under Section 35 of the Corporation Code that can act
on matters with the board’s competence?
No. It is beyond the authority of the board.
No amount of business judgment rule can justify the creation
of the executive committee which by law states can only be
created by the by-laws.
The SC clarified, however, if the committee is called executive
committee but the function is not the same in Section 35, then
the board can create it under the business judgment rule. So
kahit na it is called an execom but management function lang
pala.
So what is so important under Execom in Section 35?
Execom under 35 is just like a mini-board which can act
on matters within board‟s competence. Whatever the
board can do, execom can also do except in those 5 cases
under 35. This is why the board cannot create another
board. It must be the by-laws that will create another
board but of course, not less than 3 must come from the
member of the board.
BAR: The corporation has been losing money for
many years and to motivate the SH, directors, and
officers, the board adopted series of resolutions
invoking the business judgment rule. So in good
faith. In first resolution, it says pay dividends to the
SH. Second, pay bonuses to all directors. Third, pay
bonuses to officers. So can they be justified by the
good faith of the board?
And of course in business judgment rule is subject to
the condition that the board acts in good faith. Now,
can the company declare dividends if it is losing?
No it cannot. Under Section 43 of the Corporation Code, a
corporation can only declare dividends if there is surplus
profit.
Can the director authorize payment of compensation
for themselves?
No because compensation of directors as such directors is
valid only if authorized by the by-laws or approved by the
SH owning or representing majority of the outstanding
capital stock under Section 30.
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What about payment of bonuses to officers if the
company is losing?
It is unreasonable.
So all of the resolutions cannot be justified by the business
judgment rule.
NOT YET ASKED IN THE BAR: PROVIDENT
INTERNATIONAL v. VENUS (2008)
There are two functions in the BOD.
Let‟s say the first set sided with the minority and the majority
directors filed an affidavit with the SEC that the stock and
transfer book (STB) is lost. So on the strength of the affidavit,
SEC issued a replacement STB but in truth and in fact, it is not
lost. It is in the possession of the corporate secretary.
Once the new STB is obtained by the board, the board passed a
resolution that all entries in the old book are void and all
entries in the new book are valid invoking the business
judgment rule.
Is the invocation of the business judgment rule valid
to make all entries in the old void and the in the new
book, valid? Can the SEC recall that erroneously
registered STB?
SC: If the book is not lost, no amount of business
judgment can justify the request for additional STB.
The erroneously STB can be recalled by the SEC. It does
not require court intervention. It falls within the general
authority of the SEC over all corporations.
Can the SEC decide WON the entries in the new book
be valid?
No, because they become intra-corporate controversies
cognizable by RTC acting as special commercial court.
3. Tenure, Qualifications and Disqualifications of Directors or
Trustees
There's no quorum during the regular annual stock
holder's meeting to elect BOD. Therefore the
incumbent BOD shall continue to serve in a hold-over
capacity. During the hold over period, a director
resigns; can the remaining directors constituting the
quorum fill such vacancy?
No. The BOD holds the position merely in a hold over
capacity. The reason/cause for such vacancy is expiration
of the term and not resignation. Therefore only the
stockholders can fill the vacancy in the board. The case of
Africa v. Valle Golf and Country Club.
Is there a difference between term and tenure?
Term is the 1year period in which he has the right to hold
office- the length of time during which a person has an
official or political office.
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Tenure -if it exceeds 1year period until his successor has
been elected - the amount of time that a person holds a
job, office, or title.
Directors shall have all the qualifications under Sec. 23 and the
by-laws, and none of the disqualifications under Sec. 27 and
the by-laws.
One of the qualifications is ownership of a share in the books of
the corporation.
Let's say ABC Corp obtained a loan from XYZ Bank
secured by a voting trust agreement on the shares of
A in ABC Corp. A is the controlling stockholder of
ABC Corp, so by signing a voting trust agreement in
favor of XYZ Bank , A conveyed the legal title to his
shares in ABC Corp in favor of XYZ Bank. The loan
was not paid, promptly XYZ filed an action for
collection. Summons is served on A. Is A still
qualified to act as director of ABC Corp.?
A can no longer act as director of ABC Corp. the moment
the director loses legal title over his shares, automatically
he ceases to be a director of the corporation. The case of
Lee v. CA.
CONTENTS OF THE BY LAWS
Section 47. Contents of by-laws. - Subject to the provisions of the
Constitution, this Code, other special laws, and the articles of
incorporation, a private corporation may provide in its by-laws for:
1. The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or members and
the manner of voting therein;
4. The form for proxies of stockholders and members and the manner
of voting them;
5. The qualifications, duties and compensation of directors or trustees,
officers and employees;
6. The time for holding the annual election of directors of trustees and
the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all
officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock
certificates; and
10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and affairs.
You must make a distinction between item #1 and #2 - time
place and manner v. time and manner. Place is not specified in
#2, and it's because the place of meeting for stockholders is
provided for by law - city or municipality where the principal
office of the business of the corporation is located.
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QUORUM
Section 25. Corporate officers, quorum. – Immediately after their
election, the directors of a corporation must formally organize by the
election of a president, who shall be a director, a treasurer who may or
may not be a director, a secretary who shall be a resident and citizen of
the Philippines, and such other officers as may be provided for in the
by-laws. Any two (2) or more positions may be held concurrently by the
same person, except that no one shall act as president and secretary or
as president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws provide for a greater
majority, a majority of the number of directors or trustees as fixed in
the articles of incorporation shall constitute a quorum for the
transaction of corporate business, and every decision of at least a
majority of the directors or trustees present at a meeting at which there
is a quorum shall be valid as a corporate act, except for the election of
officers which shall require the vote of a majority of all the members of
the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
Under Section 25, Quorum means majority of the directors as
stated in the AOI. Not fixed in the by-laws but fixed in the AOI.
Unless there is a higher number required in the AOI to
constitute a quorum, majority of the entire board is sufficient
to transact business.
If you see the phrase the BOD as distinguished from majority
of the BOD, the phrase BOD simply means majority of the
quorum. So this language is evident in Sec43-44 of the Code
regarding Declaration of Dividends, as compared to Sec 37-38,
40, 42. If the act is not provided for or is not covered by the
Corporation Code or the by-laws, then majority of the the
quorum is sufficient to transact business.
Can the by-laws prescribe lesser number?
No. It can be greater number but not lesser number.
PENA VS CA.
3 would have been a quorum of 5, but not if the by-laws
provide that 4 out of 5 constitutes a quorum. This involves loan
secured by mortgage. Loan was not paid mortgage was
foreclosed. Then the right to redeem was assigned to
another and the assignee wants to file an action for
ejectment against the mortgagor.
Was there a valid assignment of the right to rede
em considering that 3 out of 5 were present and
approved the assignment of the right to
redemption?
SC said it is invalid because the by-laws prescribed a
greater number and likewise under Sec 40 if what is
assigned is the right to redeem involving the only
property of the corporation that amounts to a sale of
substantially all the corporate assets and that requires
not only board approval but likewise votes of the
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stockholder representing at least 2/3 of the outstanding
capital stocks.
PROXY
It should be in writing and signed by the stockholder, filed
before the meeting, but the by-laws may prescribe additional
requirements for the sufficiency of proxy.
By laws may for example require that the proxy be notarized.
So a voting trust agreement is required to be notarized under
Sec. 59. The proxy is not required to be notarized under Sec. 58
and yet the by-laws may require that the proxy be notarized.
The only requirement under the Code is that proxy must be
submitted before the meeting, which could be an hour before
the meeting.
Now the by-laws may prescribe a longer period for submission
of proxy, San Miguel for example they require that it be
submitted 10days prior to meeting, public companies 5 days
before the stockholders meeting. It cannot be belated or later
that that period, otherwise the stockholder whose proxy has
been rejected may not have enough time to seek redress or gain
relief. So for a public company, minimum no. of days for
submission of proxy is not less than five days before the
stockholders meeting, so it cannot be any day earlier, to give
time to the course to value the proxy and to enable the
stockholder to seek redress in cases of unjust, improper, and
unlawful rejection of the proxies.
COMPENSATION OF DIRECTORS
As a GR, directors as such are not entitled to compensation
because they are not presumed to render services gratuitously.
The presumption is the return of their investment is enough
compensation.
Are there exceptions? Are there cases were a director
as such director maybe entitled to compensation?
Yes, if the by-laws fix the compensation of the director.
OFFICERS OF THE CORPORATION
It talks about manner of appointment, term of corporate
officers.
Can the by-laws then make the term of the corporate
officers 1 year and subject to renewal every year?
The Corporation Code covers only corporate officers, the code
does not cover ordinary officers. Because ordinary officers are
employees and in case of appointment, removal,
disputes/controversies, they partake of labor disputes
cognizable by the Labor Arbiter.
So the Corporation Code does not cover it, but only corporate
officers - the president, secretary, treasurer and other officers
whose offices are defined under the by-laws.
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So can the by-laws fix their term to 1 year?
YES. It is common in public companies, every year they
appoint corporate officers, and in fact this is allowed under
Sec.47.
Then you have manner of calling stock holders meeting. It
requires notice, the mode of giving notice. The notice has to be
by publication because it is difficult to prove notice by mail, or
personal notice of stockholders meeting. Many cases where the
SC rejected or invalidated Stockholders meeting for the failure
to notify one stockholder, because all stockholders must be
notified of such meeting. Regardless even if the number of
shares is/are significant or not, it is not a valid reason/excuse,
not to notify all stockholders. You cannot say that anyway the
vote of the stockholder is not required anyway.
Bottom line is that all stockholders must be notified, quorum
and vote required by the by laws- subject to notice by mail,
personal delivery, but it is best to do it by publication because
all you have to do is to present affidavit of the publisher that
caused the publication.
Is the enumeration under Sec. 47 exclusive or not?
It's not. That's why you have the all-encompassing clause
"Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and
affairs."
RECORD DATE means the stockholders of record entitled to
exercise the right of stockholders, whether right to vote or right
to dividends.
Let's say June 1 the corporation declared dividends "the board
thus declared dividends to stockholders of record as of June15,
2015 payable on June 30, 2015." On June 16 stockholder sold
his shares, between your record date June15 and payment date
of June30, there is a change of ownership. Who is entitled to
receive the dividends?
It is the stockholder of record as fixed in the by-laws, the
stockholders of the record date which is June15. Hence it is not
the buyer-transferee of the stocks but the seller-transferor who
is entitled to receive the dividends, being the stockholder of
record as of the June15, even though he is no longer the owner
as of payment date.
If there will be item in the articles that you have to amend but
is likewise mirrored in the by-laws, then you have to effect it in
the by-laws likewise.
Century Properties will enter into backdoor listing. Backdoor
listing means acquiring the shares of a dormant listed
company. Let's say the listed company is ABC Energy
Company, Century will acquire shares of ABC. Then after the
acquisition they will now amend the AOI to change the purpose
from being an energy company to Realty Company, and they
will also amend the corporate name from ABC Energy
Company to Century City Properties. Because IPO (initial
39
public offering) is expensive, so the cheapest way to do it, to
make your shares listed, is to do backdoor listing. After the
amendment of AOI, the name is now Century City Properties in
the AOI, but still ABC in the by-laws, because the by-laws has
not been amended. So if you have to amend the item in AOI
that is also contained in the by-laws, you also have to amend
the latter to effect the change. How many votes? 2/3 of the
outstanding capital stock and majority of the board for
amendment of AOI.
A BOD must have all the qualification of a BOD under
the Corporation Code as well as the qualifications under
the by-laws and none of the disqualifications under the
Corporation Code.
What are the qualifications under the Corporation
Code?
1. Must be a natural person except in case of a
cooperative
2. Legal age
3. Ownership of at least 1 share of stock registered in his
name in the books of the corporation
4. Not less than 5 not more than 15 except in case of
merger or consolidation of banks and corporation sole
5. Majority of them must be Philippine residence
QUALIFICATION:
Ownership of at least 1 share of stock
registered in his name in the books of the corporation as
of the date fixed in the by-laws.
Such qualification is a continuing qualification. If at any time, a
director loses ownership or ceases to be a SH, he automatically
loses or becomes disqualified to continue discharging the
functions of a director.
Can the trustee qualify as a director even if he is not a
full owner; he only has legal title over the shares,
NOT A FULL TITLE?
The SC held that a trustee can qualify as a director even if
he is not a full owner because it is the legal title that counts
not the beneficial title.
Generally, you have to be a full owner; it means you should
have both the legal title and beneficial title.
But in the case of Lee vs. CA - ABC Corp obtained a loan from
XYZ Bank secured by a voting trust agreement on the shares of
A in ABC Corp. A is the controlling stockholder of ABC Corp, so
by signing a voting trust agreement in favor of XYZ Bank , A
conveyed the legal title to his shares in ABC Corp in favor of
XYZ Bank. The loan was not paid; promptly XYZ filed an action
for collection.
In the voting trust agreement the lender acquires legal title to
the shares, and because the lender acquires legal title as trustee
then he has the right to elect the directors of the corporation so
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that they can now manage the affairs of the corporation. It is a
more effective way of gaining or acquiring control.
For qualification purposes who is qualified to be
elected director? The trustor-beneficial owner or the
trustee legal title?
SC said LEE V. CA: One with legal title, not necessarily
with full ownership. Conversely, the moment the director
loses the legal title to the share automatically he forfeits
the director position.
Why is it legal title suffices not full ownership?
Because SC said in LEE V. CA the phrase “in his own
right” under the old corporation code has been deleted.
What about the practice of lodging your shares with
a broker? (SCRIPLESS TRADING)[to be discussed in
detail regarding transfer of share] Let’s say you
want to sell your shares as a stockholder, what are
the requirements under the law?
Endorsement plus Delivery
To facilitate Scripless trading, the stock certificate of the
stockholder is lodged with the broker. It will be the name
of the broker for the benefit of whoever will be the
beneficial owner of the shares.
For Director qualification purposes, the one who lodged the
shares to a broker is NOT QUALIFIED TO BE A DIRECTOR
because he is no longer the stockholder in record in the books
of the corporation.
CONTINUING QUALIFICATION
BAR QUESTION: Let’s say X is a director of ABC Corp. , six
months in his term he sold the shares to Y. So who is qualified
to continue discharging the duties of a Director?
Neither X OR Y. X loss the director position because of the
transfer of shares to Y. Y is not qualified because purchase of
shares of X is not a mode of assumption of office.
GRACE CHRISTIAN HIGHSCHOOL V. CA
The by-laws of Grace Village homeowners association provides
that there are 15 directors and out of the 15 directors only 14
will be elected among the members of the association, the 15th
slot is reserved for the representative of the Grace Christian
School (Not a member of the association). For 14 years the
representative of Grace Christian High School is allowed to
have a seat in the homeowners association. Until one time,
when the board of trustees of the Association (Change of
trustees) decided to withdraw or revoked the privilege which
prompted the case filed by Grace Christian HS against the
association. Grace Christian HS‟s argument is that the school
has a vested right over the director seat. It has been the
practice and the school was the magnet that drew residence in
the village.
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Has Estoppel set in?
No. Estoppel cannot forestall the challenge against an act
which is contrary to law. You cannot have a permanent
representative in the board. Only for a 1 YEAR TERM. You
cannot be a director or trustee of the corporation unless
you are a stockholder or a member for non-stock
corporations.
BAR QUESTION: Can the by-laws enlarge the
qualification for a director to own atleast one share?
Yes, as long it is not intended to deprive the minority
representation
Can the by-laws prescribe other qualification? For
example only law deans be elected as directors of
trustees?
Yes.
Section 27. Disqualification of directors, trustees or officers. -
No person convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six (6)
years, or a violation of this Code committed within five (5)
years prior to the date of his election or appointment, shall
qualify as a director, trustee or officer of any corporation. (n)
GROUNDS FOR DISQUALIFICATION:
1. Conviction by final judgment of an offense punishable
by imprisonment for period exceeding 6 years
 Final Judgment
 Gravity of the penalty
2. Violation of the corporation code committed within 5
years prior to the date of his election or appointment
 Not the gravity of the penalty or offense (even
only mere reprimand or a fine), IT IS WHEN
THE VIOLATION IS COMMITTED.
Suppose in the SEC EN BANC, found a director there
violated the corporation code but he filed a petition
for review with the CA. During the pendency of his
appeal can he still run as a director in another
corporation?
No because decisions of the SEC EN BANC are executory.
Immediately executory but they are not final can be
appealed with the CA. The appeal will not stay the
enforcement of the decision of the SEC EN BANC.
XPN: If the petitioner obtains a TRO or injunction from
the CA
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4. Elections
Section 24. Election of directors or trustees. - At all elections of
directors or trustees, there must be present, either in person or by
representative authorized to act by written proxy, the owners of a
majority of the outstanding capital stock, or if there be no capital stock,
a majority of the members entitled to vote. The election must be by
ballot if requested by any voting stockholder or member. In stock
corporations, every stockholder entitled to vote shall have the right to
vote in person or by proxy the number of shares of stock standing, at
the time fixed in the by-laws, in his own name on the stock books of the
corporation, or where the by-laws are silent, at the time of the election;
and said stockholder may vote such number of shares for as many
persons as there are directors to be elected or he may cumulate said
shares and give one candidate as many votes as the number of directors
to be elected multiplied by the number of his shares shall equal, or he
may distribute them on the same principle among as many candidates
as he shall see fit: Provided, That the total number of votes cast by him
shall not exceed the number of shares owned by him as shown in the
books of the corporation multiplied by the whole number of directors
to be elected: Provided, however, That no delinquent stock shall be
voted. Unless otherwise provided in the articles of incorporation or in
the by-laws, members of corporations which have no capital stock may
cast as many votes as there are trustees to be elected but may not cast
more than one vote for one candidate. Candidates receiving the highest
number of votes shall be declared elected. Any meeting of the
stockholders or members called for an election may adjourn from day
to day or from time to time but not sine die or indefinitely if, for any
reason, no election is held, or if there are not present or represented by
proxy, at the meeting, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the member
entitled to vote.
REQUISITES FOR A VALID ELECTION
 Notice of the meeting to the Stockholders in
accordance with the form and mode under the by-laws
 There will be present either in person or by
representative authorized to act by written proxy the
owners of a majority of the outstanding capital stock
or majority of the members entitled to vote.
 Presided by the officer under the by-laws.
 The stockholder may cast such number of votes base
on his shares registered in his name in the books of
corporation multiplied by the directors to be elected.
o For example: Let us say a stockholder has 1000
shares, 15 directors to be elected. So 1000
shares x 15 – the answer is the number of votes
allowed for such SH to cast (15,000 votes)
 And the candidate having the highest number of votes
shall be duly elected as director.
Number of shares not number of Warm bodies present. So it
can only be one person, there can be a quorum, if that person is
Henry Sy of SM OR BDO. His presence accounts to more than
majority.
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BAR QUESTION: Which shares are not included in
the determination of majority of outstanding capital
stock?
NON-VOTING SHARES, DELINQUENT SHARES,
TREASURY SHARES but includes unpaid shares which
are not delinquent.
a. Cumulative Voting/Straight Voting
b. Quorum
CUMULATIVE VOTING – he may cast his votes in favor of
one nominee or he may spread out equally or various portions
to various nominees as long as it does not exceed the number
of shares owned by him as shown in the books of the
corporation multiplied by the whole number of directors to be
elected.
Such cannot be denied to a stockholder because it is a right
granted by law. The by-laws cannot deprived that right from a
stockholder.
For non-stock non-profit corporation
BAR QUESTION: If there are 6 trustees, how many
votes can one member cast?
6 but not more than once per nominee. There is no
cumulative method voting in non-stock non-profit
corporation unless provided in the by-laws.
INDEPENDENT DIRECTOR is one who is not part of
management and not subject to any circumstance, relationship
or factor present that may impair the exercise of the
independent judgment of a director of the corporation
Example: Legal Counsel of the corporations, adviser
BAR QUESTION: What corporations are required by
law to have an independent director?
Public companies -whose shares of stock are listed in the
stock exchange or with P50 million assets with at least 200
stockholder and each SH owning 100 shares.
5 directors, 2 independent directors at least
15 directors, 2 independent directors
How many election are you going to have if you are
required to have an independent director?
Only one
How many directors will you elect?
Same, the number of directors fixed in the AOI
How many votes may the SH cast?
Same formula, number of shares under their name X
number of directors to be elected INCLUSIVE OF THE
NUMBER OF INDEPENDENT DIRECTORS
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One nominee for regular director or one nominee for for the purpose, or in the same meeting authorizing the increase of
independent director, or spread its votes among regular only or directors or trustees if so stated in the notice of the meeting.
independent only or combination of both as long as the votes
do not exceed the shares of stock in his name multiplied by the
number of directors to be elected
Example 13 directors, 2 independent directors. There are 18
nominees to the positions of regular directors. The top 13 will
be considered regular directors.
What if the shares or votes of the 2 independent
directors are less than 14th nominees as general
directors?
The top 13 nominees for regular directors are considered
elected and top 2 nominees for independent directors are
elected as independent directors even though these 2
independent directors obtain less votes than the nominees
for regular directors.
5. Removal
REQUISITE FOR REMOVAL/PROCEDURE TO CARRY OUT
REMOVAL OF DIRECTORS/TRUSTEES:
1. Notice of the meetings and the procedures prescribe
by the by-laws.
2. Notice of the meeting must specify the purpose that
there includes the proposed intention to remove a
director although the code does not require that the
name of the director to be removed be specified. Just
include in the agenda that there is intention to remove
a director.
3. Presence of stockholders representing 2/3 of the
outstanding capital stock.
4. The removal may be with or without just cause.
However, if the removal is intended to deprive the
minority of their representative, the removal has to be
with cause.
5. The vacancy brought about by the removal of the
director may be filled up at the same stockholder‟s
meeting where the removal was effected or in a
separate meeting called for that purpose.
6. Filling of Vacancies
Section 29. Vacancies in the office of director or trustee. -
Any vacancy occurring in the board of directors or trustees other than
by removal by the stockholders or members or by expiration of term,
may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special
meeting called for that purpose. A director or trustee so elected to fill a
vacancy shall be elected only or the unexpired term of his predecessor
in office.
A directorship or trusteeship to be filled by reason of an increase in the
number of directors or trustees shall be filled only by an election at a
regular or at a special meeting of stockholders or members duly called
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Q: There are 3 cases/instances under Section 29
where vacancies in the board may exist. In cases of
expiration of term, removal and what is the third
one? It is important for us to determine these 3
because the board may fill up vacancy in cases other
than these 3 grounds.
A: When the Articles of the corporation is amended to increase
the number of the directors. Removal, Expiration of term and
increase in the number of the board seats, the stockholders
shall fill up the vacancy. For the board to fill up vacancies the
causes may be other ground than removal, expiration of term
and increase in the number of the board seat, it could be
resignation, withdrawal, retirement, abandonment, death,
insanity and incapacity as long as it is not removal, expiration
of term or increase in the number of the board seat. The other
requisite for the board to fill up vacancy is there must be a
quorum.
Q: There are 15 directors under the articles of incorporation, 7
went to Brazil to watch a football game. For example, there was
a plane crash and all of them died. The 8 called a special board
meeting to fill up vacancies and all of them showed up but they
were in disagreement as to who will be elected. 5 out of 8 voted
to fill up the vacancies by nominating certain individuals. Is
this valid?
A: Yes, the Code says the majority of the directors present if
they constitute a quorum. 5 out of 8 is a valid vote to fill up a
vacancy.
Quorum of the board meeting constitutes the number of
directors fixed by the articles of incorporation. If a director
abstains but is physically present in the meeting, his presence
is counted for quorum purposes.
How many votes are needed to fill up vacancies
brought about by the removal?
The power to remove requires 2/3 of votes of the
stockholder representing the outstanding capital stock
while the filling up of the vacancy require only majority of
the outstanding capital stock. So if for example in the
stockholder‟s meeting where the removal was effected, the
stockholders decided to appoint and elect the director,
appointment/election of the new director need not require
2/3 of the outstanding capital stock, majority suffices.
As we said earlier, the stockholders have the sole power to
remove a director. It does not belong to the board or jointly by
the board and the stockholders. So if the board passes a
resolution that a director who is absent for three consecutive
meetings or if the director fails to pay dues and assessment of
the corporation, the director may be removed, that board
resolution is invalid because the sole power to remove a
director belongs to the stockholders even though this is in the
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by-laws. Even if the by-laws says that a director who is absent
for three meetings or more or delinquent to pay the dues and
assessment, it cannot be a valid ground for the directors to
remove him because again the power to remove a stockholder
belongs to the stockholders. In case of absences or in case of
non-payment of dues and assessment, it amounts to just cause
and even though he is the representative of the minority, he
can be removed by the stockholders as long as you have 2/3 of
the outstanding capital stock.
CASES WHEN THE STOCKHOLDERS MAY FILL UP
VACANCIES IN THE OFFICE OF DIRECTORS/TRUSTEES:
1. If the ground or the cause is expiration, removal or
increase in the number of the board seats.
2. The ground is not expiration, removal nor increase in
the number of the board seats but the remaining
directors do not constitute a quorum.
3. The ground is not expiration, removal nor increase in
the number of the board seat and the remaining
directors who constitute a quorum decided to delegate
the power to the stockholders.
REQUISITES FOR THE BOARD TO FILL UP VACANCIES IN
THE OFFICE OF DIRECTORS/TRUSTEE:
1. The cause of the vacancy must be resignation,
withdrawal, retirement, abandonment, death, insanity
or incapacity or any ground other than removal or
increase in the number of the board seat.
2. The remaining directors must constitute a quorum.
To fill up the vacancy by the act of the board, majority of the
quorum suffices. These three on Section 29 of the Corporation
Code it says majority of the remaining directors present, if they
constitute a quorum unless if the by-laws requires otherwise.
The by-laws may require that it should be the majority of the
entire board but if not so provided, majority of the quorum
suffice.
The term of the director who is elected or appointed to fill up
the vacancy is the unexpired portion of the term of the director
replaced.
BAR QUESTION: A was the director appointed June 1, 2013
and then he resigned. On August 1, 2013, D was appointed by
the board. By September, D died and was replaced by X. What
is the term of X?
A: The term of X is the unexpired portion of the one year
term. He can serve only up to June 1, 2014.
Is it mandatory on the part of the board to fill up the
vacancy in case somebody resigns, withdraws or was
incapacitated?
No. It is discretionary on the part of the board and not
mandatory.
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STAGGERED ACCEPTANCE OF RESIGNATION
Let‟s say that your client buys 75% of a company and it is
customary in any sale transaction for nominees of the seller to
tender resignation of the directors in order to pave the way of
the nominees of the buyer. So the nominees of the seller tend
to resign, to be accepted by the board. The problem is if it is
75% and let us say you have 15 directors and 10 came from the
seller‟s nominees, if the board accepted the resignation then
you will not have the quorum to fill up the vacancies. The board
will have to call a stockholder‟s meeting. Can you request them
to stay and accept the resignation on staggered basis so even
though 10 tendered resignation, 5 will stay for one meeting and
only 5 will resign and the new nominees of the buyer will be
accepted by the 10. After the 5 has been filled up, the
remaining 10 will then reside and accept the resignation of the
5 remaining directors?
It is valid. The only requirement is the quorum to fill up
the vacancy brought about by the grounds other than the
expiration, removal or increase in the number of the board. In
fact, this has always been done by the corporation. You do not
have to call a stockholder‟s meeting. All you have to do is to call
a meeting of the remaining directors and accept the resignation
on a staggered basis. The only requirement to repeat, is that the
cause of the vacancy is not expiration, removal or increase in
the number of board seats and the number of the remaining
directors at the time they fill a vacancy constitute a quorum.
I remember when I was a corporate secretary of the bank, two
nominees come from the GSIS and two from SSS. The two
nominees from the GSIS resign to pave the way for the
appointment of new nominees. They resign 6 months before
their term to give way to the new nominees of GSIS.
Unfortunately the board decided not to fill up the vacancy from
the GSIS nominees and the board only chose one from the two
nominees of GSIS and appointed a third member of the
directors. Of course the GSIS cried and complained that it
should come from their rank. Is that legally correct?
Yes, because during the term of the director, you do not
have to set anymore a stockholders meeting, you are on your
own. So the board may decide who would become a member.
You can only use your shares to elect directors during the
stockholders meeting but the board during the incumbency of
the directors, may appoint someone from GSIS or not from the
GSIS as long as the replacement has all the qualification and
none of the disqualification under the by-laws and under the
Corporation Code.
Things became difficult when the President of the Philippines
called up our ambassador who seats in the board and said why
do you not appoint this guy from the GSIS, appoint him. So we
immediately called up a board meeting. The president all the
way from the palace called up the ambassador who is in the
board and very close to the chairman. The chairman called me
up and asked what shall we do? I said just elect him to seat in
the board of director. He said how could that be, it is against
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the Articles of the Corporation. I said we will invoke the
provisions under the General Banking Law that allows 21
directors in case of merger and consolidation and in the mean
time we shall give him all the rights of a director. We will give
him per diem allowance and voting rights of a director. In the
meantime, we will get the opinion of the general counsel of the
BSP, to at least to give him the semblance of legitimacy.
So that was done. We appointed him as the 16th member of the
board and then the minority directors questioned the
appointment and said how could we appoint the guy when
under the Articles of the bank only allows 15 directors. I said
under the General Banking Law in case of merger or
consolidation, the bank may have 21 directors and we are party
to the merger and the law does not say at the time of the
merger but says in case of merger. Of course, that was wrong
because the Articles of the corporation says that you have to
specify the number of directors, if you want to have 21 in case
of merger or consolidation then that 21 must be specified in the
Articles but I need something in order to sort of give him
legitimacy to be the 16th director of the bank. The good thing
was there was no more contentions or discussion and di
kailangan idivide ang house. That action was unanimous and I
made it appear on the record that the directors participated in
the discussion, deliberation and the votes were counted. We
were waiting for the opinion of the general counsel to say I‟m
sorry but that cannot be done. At least it buys time for me, the
good thing that I always pray that God be always with us. On
the third month, somebody resigned so it solved the problem
by itself. So there were 15 directors of the bank.
AFRICA CASE:
The resignation of the director, may not be filled up the
stockholders and may be done by the board if the vacancy is
other that expiration, removal and increase in the number in
the board seats.
Vacancies due to EXPIRATION OF TERM, REMOVAL and
INCREASE IN THE NUMBER OF BOARD SEATS, IF BOD
DOES NOT CONSTITUTE A QUORUM
 To be filled up by Stockholders in a meeting
called for a purpose
Vacancies due to grounds other than mentioned
 BOD can fill it up if there is quorum
7. Compensation
Section 30. Compensation of directors. - In the absence of any
provision in the by-laws fixing their compensation, the directors shall
not receive any compensation, as such directors, except for reasonable
per diems: Provided, however, That any such compensation other than
per diems may be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total
yearly compensation of directors, as such directors, exceed ten (10%)
percent of the net income before income tax of the corporation during
the preceding year.
Under Section 30 of the Corporation Code, directors as such
are not entitled to compensation because directors are
supposed to render the services to the corporation gratuitously
and the return of their investment is enough consideration for
their services. The directors presumably have significant
number of shares because you cannot be elected to the board if
you do not have sufficient numbers of share. So if they work
hard for the corporation it would translate into profits which
can be declared as dividends and the return on their
investment is enough consideration for their services. That is
why the by-law can entitle them compensation as such as
directors. There exception as we all know, the by-laws may
authorize the compensation or the stockholders by the vote of
the majority of the outstanding capital stock allowed to vote
may favour payment of compensation in the meeting called for
the purpose.
What if the directors render non-director services? What if the
director is also the president or vice president? Can he be paid
compensation if the by-laws is silent and without the vote of
the stockholders owning majority of the capital stock?
WESTERN TECHNOLOGY VS. SALAS
The Supreme Court said that the prohibition is on the payment
of compensation to the directors as such. The director as such
is not entitled to compensation. The prohibition is against the
payment of compensation for director‟s services. If the director
will be paid compensation for director‟s services that is the
time that the requirement of the by-laws or vote of the majority
of the stockholders comes in. In case they are paid
compensation in cases other than director capacity or for non-
director services, it does not require the authority of the by-
laws or the approval of the stockholders; the board approval
suffices.
Is there a limitation in the amount of the
compensation?
There is, the annual compensation as such should not
exceed 10% of the net income, not gross income, of the
corporation before income tax of the preceding year.
BAR QUESTION:
The limitation on the directors’ compensation is that in no
case shall the total yearly compensation of directors, as such
directors, exceed fifty (50%) percent of the gross income
before income tax of the corporation during the preceding
year.
NO, it must be 10% of the net income before income tax of
the preceding year.
Again, take note that 10% cut only applies only in
compensation for director‟s services and if they are paid
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compensation for other services, it is not subject to 10%
limitation.
What about per diem allowance? Is per diem
allowance? Is per diem allowance part of the
compensation?
NO, under the present Corporation Code.
On the proposed new Corporation Code, the per diem
allowance under the proposal is to make the per diem
allowance constitute compensation. Why? Because per
diem allowance becomes so big in many corporations and
bigger than the compensation of members of the faculty of
UST. Take a look at PLDT, the per diem allowance of
PLDT is Php 250,000 per board meeting and for every
committee meeting Php 200,000. For San Miguel
Corporation Php 200,00 per diem allowance and Php
150,000 for a committee meeting.
What is the concept of per diem allowance?
It is supposedly allowance for transportation, board and
lodging. The law says it must be reasonable. There is no
amount and it is a question of reasonableness. If a corporation
earns billions of pesos for PLDT, and you have assets of billions
of pesos, the php 250,000 may be defined as reasonable. It
depends on the facts of the case. And in case of meetings of the
corporation, you should get a committee also. In my case, I‟m
in the board of UCPB. Despite of the very tight schedule, I have
three committees. Others have 3, 4, 5 or 7 committees, di
naman pwedeng lahat kunin nila so kelangan magbigay ng
kahit konti, so I have to take 3 committees, the most that I can
take. So I am part of the board and I take 3 committees and I
am not a full time director, who can get 7-8 committees. So if
you are a director of PLDT, you have 250,000 and let us say
you have 3 committee memberships. So 200,000 times 3 is
600,000 plus 250,000 is 850,000 for four hours just to take
the board and committee and that is PLDT for you. And this is
abuse by some GOCCs, that is why the officer of the GOCC or
the Good Governance corporate counsel passed a regulation
that board meeting shall not be more than once a month and
the committee meeting has to be every other day. So ginagawa
nung iba Monday para tatlo, Monday, Wednesday and Friday.
Kasi kung Thursday, dalawa lang. When Pnoy took over,
remember the MWSS has so many Board meetings. Wow are
they serious? What are they talking about? What are they
discussing? They have the same problem sewerage problems
etc. The answer is per diem allowance and they get other
bonuses like productivity bonus, compensation bonus. That is
why there is a resolution passed by the good governance
counsel.
8. Fiduciaries Duties and Liability Rules
Q: (This is the case of AC Ransom) dito nagstart yung
recording…. by virtue of the finality of the judgment, the sheriff
45
upon motion of the winning party, enforce the decision to levy
the assets of the corporation. Unfortunately, assuming that
there are no assets, can the President and other corporate
officers of the corporation may be made liable personally
because of the closure or insolvency of the corporation. (Follow
up question) Can the President stand as an employer of the
Ee’s of the corporation?
A: There were SC decisions that the President stood as as
Employer representing the corporations. Those SC decisions
were no longer applicable.
Supreme Court said in CARAG vs NLRC, the liability of the
President and other officers is not determined by the Labor
Code but by the Corporation Code, sections 31 and 34. That is
why the enumerations are exclusive because you cannot think
of any other ground other than the six (6). –asked four (4)
times in the Bar.
Q1: The President signed a surety agreement to secure the
obligation of this corporation. It turns out that the surety
agreement is spurious. Can the President be made liable on
account of gross negligence or bad faith? Q2: What is
important so that the president can be charge personally when
it comes to the gross negligence and bad faith in conducting the
affairs of the corporation? Procedurally, how? What should be
alleged in the complaint?
A1: No. A2: The SC said that the act constituting the
negligence or bad faith must be alleged; it is not enough
to make averments that they are in bad faith, otherwise it has
no basis.
Q: Can the stockholder be made personally liable?
A: No. It is not included in the enumeration of the directors,
officers and employees. Stockholders are liable only to
the extent of their subscription UNLESS they are
directors, officers or agents of the corporation.
Last Question…
Q: What do you understand by the doctrine of corporate
opportunity?
A: When a director, by virtue of his office, acquires for himself
a business opportunity which should belong to the corporation,
thereby obtaining profits to the prejudice of such corporation.
There is a responsibility not just to account but to remit the
profits he realizes.
Last Question.. Dean: I think I lied. Class: LOL
The case of Lanuza vs BF Corporation, penned by J. Leonen
Q: If the complaint alleges bad faith or gross negligence on the
part of the director and officers of the corporation, and they are
found guilty of bad faith and gross negligence in the course of
the trial, is that tantamount to pierce the veil of corporate
fiction?
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A: Yes, in the sense that there is no distinction between the
corporation and the directors and officers of the corporation.
In effect it pierce the veil of corporate fiction, you make them
as if they are one and the same person.
Section 31. Liability of directors, trustees or officers. -
Directors or trustees who wilfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in respect
of any matter which has been reposed in him in confidence, as to which
equity imposes a disability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account for the
profits which otherwise would have accrued to the corporation. (n)
DISCUSSION.
This was asked four times (4X) in the bar, what are the cases
were the liabilities will attach to the directors, officers and
employees?
1. He wilfully and knowingly votes or assent to patently
unlawful acts of the corporation;
2. Guilty of gross negligence or bad faith in directing the
affairs of the corporation;
3. He acquires any personal or pecuniary interest in
conflict with his duty as such director or trustee.
4. When he consents to the issuance of watered stocks;
or having knowledge thereof, does not forthwith file
with the corporate secretary his written objection
thereto;
5. He is made by specific provision of law to personally
answer for his corporate action
6. When he agrees to hold himself personally and
solidarily liable with the corporation.
Q: Who are covered by this principle?
A: Only directors, officers and agents of the corporation are the
personally liable and not the stockholders, unless he is a
director, officer or employee.
It is not just to vote for but to assent likewise to a patently
unlawful act. Take note of the qualifier, “patently”. It is not
enough to be unlawful act; it must be patently unlawful
act, meaning without doubt, question or debate whatsoever
that the act is unlawful.
Q: What makes an act unlawful?
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In CARAG VS NLRC, the Supreme Court said it is
unlawful if the law declares the act is unlawful. Best
example is in the Labor Code, the E‟r must notify the
DOLE in case of termination atleast 30 days before the
intended termination, and so what is the consequence? A:
it affects the legality of the termination of the employment,
but will that make the erring officer liable personally? A:
The SC said, no. There is no law that makes that
omission to be unlawful.
Second is, Guilty of gross negligence or bad faith in
directing the affairs of the corporation;
As you all know, simple negligence and error in judgment will
not make the director or officer liable.
So if the directors decide to purchase a property and
after 2 months the price of the property went down,
let’s say the purchase price is 10 million, after 1
month it went down to 7 or 8 million a significant
reduction in the value. Are they liable for that?
Not necessarily, right? Keep in mind the business
judgment rule, that the business policy and management
are left to the sound discretion of the board as long as the
act in good faith, they can never be made liable. The SH
cannot interfere.
What constitutes gross negligence?
It depends on the facts of the case. The SC defined gross
negligence as patently negligent act, but in terms of
jurisprudence, it depends on the facts of the case.
Likewise, in bad faith. There is no hard and fast rule as to
what constitutes gross negligence or bad faith. The
complaint must allege with particularity the act
constituting the gross negligence or bad faith.
The case of Lanuza vs BF Corporation, this is an
interesting case. It refers to the construction of Shangri- La
Mall. BF Corp. constructed the Shangri- LA Plaza mall in
Ortigas, for the Shangri-LA Corporation. BF Corporation
alleged that the fees and the amounts due to it under the
construction agreement were not paid. So it filed an action for
collection and damages against the Shangri- LA Corp. and
impleading therein the directors and officers of the
Corporation. There is an arbitration clause under the
construction agreement in the sense that resort to arbitration is
necessary before they can proceed for an action for breach of
contract. The contention of Shangri-La is that the complaint is
premature because there is no arbitration initiated by the
party. Is this defense applicable to directors of the
corporation? BF Corporation alleges that the case will still
continue against the directors and officers because of bad faith.
On the other hand, the directors and officers of the
corporation, insofar as they are concerned the case should be
dismissed, because they are not part in the construction
agreement that has arbitration clause. In your ADR, arbitration
clause is only binding between the contracting parties. It does
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not bind the non-party to the agreement. But in this case the
SC said, because there is an allegation of gross negligence and
bad faith and if this allegation is proven then there is no
distinction between the corporation and the directors and
officers. So the case therefore may continue.
The third one is acquiring any personal or pecuniary
interest in conflict with his duty as such director or
trustee of the corporation. This conflict of interest must
result in damage to the corporation. So, conflict of interest is
nothing.
Section 34. Disloyalty of a director. - Where a director, by virtue
of his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profits to the prejudice of
such corporation, he must account to the latter for all such profits by
refunding the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked his own funds in the
venture. (n)
Under section 34, the consequences if the director seized an
opportunity belonging to the corporation, there is an obligation
to account for and remit any profit he earned form that venture
or transaction. The obligation to account and remit is not
excused even if he risked his own funds unless the act was
ratified by the SHs representing atleast 2/3 of the outstanding
capital stock.
So let‟s say, Juan Dela Cruz, the president of ABC Corp. is a
good salesman , he was sent by ABC Corporation to Korea to
negotiate with the President and CEO of Samsung to be the
exclusive distributor of SAMSUNG products, S6 in the
Philippines. Because he is so good, he was able to convince the
President of Samsung. Instead, he put up a corporation and
enforced the contract with that corporation. What are his
obligations under section 34? A: to account and remit whatever
he earned in that transaction or venture.
Letter D, is when he consents to the issuance of watered stocks;
or having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
Q: What are watered stocks?
A: stocks issued for the amount below par (fair value) so what
is the fair value of the share? For PAR VALUE SHARE, (the
minimum is the par value, malabo to, di ko masyadong
maintindihan), what about for NO PAR VALUE SHARE of the
corporation? The issued value fixed in the articles of
incorporation or by the board of directors. So for Par Value
Share of the corporation……… (malabo din , di ko magets)
So if the par is ten, issued for 8 pesos, the 2-peso difference
should be for the account of the consenting director and the
subscriber solidarily, jointly and severally.
What about let’s say ABC corporation issued shares fully paid
and then reacquired such through purchase, donation and
other lawful means and then subsequently the corporation
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sold these shares for an amount below par. Are those watered
shares?
NO, they are not watered shares because watered shares only
pertain to issuance of shares and not treasury shares. Treasury
shares are assets of the corporation. They are properties of the
corporation having been acquired through surplus profit and as
assets, properties of the corporation they can be disposed of for
any price, terms and conditions as the board may reasonably
determine. So for example if the par value of the share is 10
pesos and then the book value is 40 but it is trading at 20 pesos
per share. So it makes sense for the corporation to buy the
shares for in the market your book value is 40 and yet the
trade-in value is only 20 pesos. In its books each share is worth
40 pesos but it is traded only for 20 pesos so it is cheaper to
buy these shares. These shares acquired by the corporation
through surplus profit become assets of the corporation.
The par is 10. Supposing the value is not improved, so
the losses of the corporation have not been improved
and the price of the shares would just go down to
even 5pesos, can those shares be sold at 8 pesos?
The answer is YES right. The price, terms and conditions
of the sale of treasury shares determined reasonably by
board of directors not subject to the par value limit.
If he contractually binds himself to be liable with the
corporation.
Now there are cases where the Supreme Court said
that the director or officer is liable solidarily with the
corporation. In some cases the Supreme Court simply
says he is liable with the corporation. So if a director
or officer makes himself liable contractually with the
corporation, is he automatically liable solidarily?
Depends on whether or not he signed a surety agreement
or guaranty agreement. So not all cases where they assume
liability will give rise to solidary liability. If he signs a
surety agreement, he is liable solidarily. If he signs a
guaranty agreement, he is subsidiarily liable. But if he
signs a guaranty agreement which contains a waiver of the
right of excussion, the Supreme Court said in one case, it is
not the name that counts but the terms of the agreement,
in such case he is liable soildarily.
Now if he signs as a guaranty or surety agreement,
this must be read in relation to your credit
transactions. There is one case, CUENCA v. CA, the
president of the corporation signed a surety
agreement to secure the obligation of the corporation
and he signed this when he was president. Thereafter
he was replaced as president and when he was
replaced, the term of the loan was extended without
his consent. Now will the extension of the term of the
loan release him from the obligation?
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Well that question can never be resolved by Corpo right.
For Corpo he is liable if he contractually binds himself
with the corporation but whether or not he will be made
liable despite the extension of the term of payment is
something that could be answered by your credit
transactions. What is the effect if the surety agreement is
extended without the consent of the surety? As you all
know, any material or adverse change in the terms and
conditions in the principal contract made without consent
of the surety or guarantor shall release him from liability.
So in that case the term was extended without his consent.
That consent cannot be obtained because he was no longer
the president when the term was extended. He is released
from liability under the law on surety.
If by express provision of law he is made to answer for
a corporate act or omission.
So it is the law that makes him liable for the corporate act or
omission. As you all know the general rule is that a director or
officer will not be liable unless the law makes him liable for the
corporate act or omission. An example is PD 115. Under section
30 of PD 115 it is clear that if the offender is a corporation,
criminal liability should be imposed upon the director, officer
or any person responsible for the violation. That is why
remember the case of Ching vs. Secretary of Justice. The fact
that the director or officer did not receive the goods under TR,
the fact that he did not get the loan himself, the fact that he did
not derive any personal benefit under the TR transaction, not
an excuse in so far as the criminal liability is concerned because
it is the law that makes them liable for that corporate act.
Is the enumeration exclusive?
Yes. Because the previous supreme court decisions,
decisions in the past, that made the president liable in
cases of insolvency of the corporation or closure of
establishment are no longer controlling. Carag vs NLRC.
The Supreme Court said that the liability of the director or
officer is determined not by the Labor code but by the
provisions of the Corporation Code, sections 31 and 32?
There was this bad very bad, bad in the sense that it does not
make sense, Supreme Court decision which makes the officer
liable in the case of closure of business. There was no finding of
gross negligence or bad faith simply a case of closure of the
establishment. That does not make sense right. Just because
the corporation has no more assets does not make the officers
liable. Dean was the Corporate Secretary daw of the Equitable
PCI when this decision was promulgated. The bank almost
closed. Kawawa daw siya kung nagclose yun hahaha.
There ought to be gross negligence, bad faith, consenting…. to
make the officer or director liable for any corporate act or
omission.
Who can sign pleadings in behalf of the corporation?
Who can sign petitions, complaint or other initiatory
pleading in behalf of the corporation?
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The person authorized by the board.
Can the chief legal counsel verify or sign the
certificate of non-forum shopping? Can he sign a
petition or complaint in behalf of the corporation?
This is the case of Philippine Rabbit Bus Lines vs. Aladdin
Transit Corp. Philippine Rabbit filed a petition to assail
the order of the judgment of the RTC. It was signed by the
chief legal counsel but he was not authorized by the board.
The Supreme Court said that even if he was the chief legal
counsel and a controlling stockholder, he cannot verify
and sign the certificate of non-forum shopping because he
was not authorized by the board. So therefore, only the
person authorized by the board should sign the pleadings
in behalf of the corporation. If signed by someone else, the
pleadings are considered as unsigned, sham and a mere
scrap of paper.
What if your last day to file the petition for certiorari
is today and your board is fragmented and you have
no time to call a meeting, what do you do?
You route the minutes of the meeting and make it appear
that the board authorized you to sign. That is if the board
is friendly.
But what if your board is fragmented?
Justice de Castro, in one case, said that the President can
verify the certificate of non-forum shopping even without
board resolution. She relaxed the rule. That was 2010.
Reiterated in 2013 by Justice Peralta and expanded the
list. The following officers may verify or certify against
forum shopping even without board resolution: the
1. Chairman,
2. President,
3. General Manager,
4. Human Resource Officer and
5. the Employment Specialist in Labor Case.
Have you ever heard of employment specialists in labor
cases? This was reiterated three times already.
Why?
SC said that because of their familiarity with the affairs of
the corporation they can certify as to the truthfulness and
accuracy of the allegations in the petition.
UCPB vs Planters
A manager signed a document he called “pagares”
which means to pay. XYZ wanted to buy property
from ABC. ABC said I would sell to you only if a bank
guarantees that you pay. SO this manager signed
this document called pagares. The bank will pay in
case the buyer does not pay. Buyer failed to pay,
seller goes to the bank. IS the bank liable?
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NO. First, he was not authorized. Second, the bank is not
allowed to secure or guaranty the obligation of another.
The only time that the bank may do so is in case of a
STANDBY LETTER OF CREDIT.
9. Responsibility for Crimes
Can the corporation be criminally prosecuted?
Yes, if the penalty is not imprisonment, if the penalty is
fine, forfeiture or revocation of corporate franchise. Case
of ANG vs CA.
10. Inside Information
11. Contracts
a. By self-dealing Directors with the Corporation
b. Between Coporations with Interlocking Directors
i. Voidable Character
ii. Ratification
Section 32. Dealings of directors, trustees or officers with
the corporation. - A contract of the corporation with one or more of
its directors or trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary
for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or trustee,
such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or of at least two-thirds (2/3) of the members in a meeting called for
the purpose: Provided, That full disclosure of the adverse interest of
the directors or trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the
circumstances. (n)
Section 32. What is the status of the contract between the
corporation and the director?
It is voidable at the option of the Corporation. The
option to nullify ceases when the following elements
are present:
1. That the presence of such director or trustee in the board
meeting in which the contract was approved was not necessary
to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary
for the approval of the contract;
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3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the
members in a meeting called for the purpose: Provided, That
full disclosure of the adverse interest of the directors or
trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable
under the circumstances.
ABC corporation is engaged in the manufacture of
prime white cement. It entered into a contract with
Juan dela Cruz, one of the directors, for the right to
be the exclusive distributor of prime white cement in
their entire consortium. The contract stipulated that
the price of the cement is fixed at 9 pesos per pack for
a period of 5 years. Is the contract fair and
reasonable under the circumstances? Is it valid or
not?
SC said it is covered by the provision on self-dealing with
directors. It is not valid because the contract is not fair and
reasonable under the circumstances. As you all know there
is no hard and fast rule in determining whether the
contract is fair and reasonable under the circumstances.
That‟s why there is a clause “under the circumstances”. But
if the act has become a norm you no longer apply the
yardstick of fair and reasonable under the circumstances.
In this case the SC said that is not fair and reasonable
because you cannot fix the price for the period of 5 years,
the price fluctuates.
There was a time when my firm handled its biggest
case, UCPB. After that I was crucified in papers
because I was a director of the bank and also acting
as counsel for the bank. Of course, without the
farmers knowing that first, I did not solicit the
engagement, the bank was the one which solicited my
engagement and second, I abstained in the meeting,
and third, I waived my fees. So will section 32 apply
to me? Is it reasonable under the circumstances?
Obviously yes because I waived my fees right hehe and I
did not participate in the board meeting.
So 32 is the self-dealing provision under the corporation code.
Self-dealing by a director with the corporation. So as you can
see in 32, the element you cannot do away with, if the contract
is fair and reasonable under the circumstances.
1 and 2, presence of quorum, vote for approval can be
dispensed with as long as you get verification from
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stockholders holding 2/3. But the contract must be fair and
reasonable under the circumstances.
The next one, section 33 is the contract between 2 corporations
with interlocking directors. As you know in 32, except if there
is fraud and as long as the contract is fair and reasonable under
the circumstances, a contract between 2 corporations with
interlocking directors cannot be invalidated on that ground.
Just because you have a contract between 2 corporations with
common directors, is not a ground to invalidate the contract.
Because it‟s a guarantee of business that corporations deal with
affiliated companies.
When Ramon Ang was the president of Philippine Airlines,
where did PAL source their fuel requirements? Obviously not
from Caltex, not from Shell because they are competitors, but
they sourced their fuel from Petron.
Now, try taking a loan from BDO. Housing loan. You are
required to mortgage your house as collateral and you are also
required to get insurance. Where would they require you to get
insurance coverage?
o Not from Metrobank, not from AXA, or Ayala but
from their own, BDO Generali.
There is nothing wrong with this, because why would you give
business to your competitor? That is why the law is clear that
except if there is fraud or the contract is not fair and reasonable
under the circumstances, a contract cannot be invalidated just
because it is between 2 corporations with interlocking
directors.
Now if the contract with interlocking directors is a
management contract under sec. 44, then in addition to 33, you
must also apply sec. 44.
What are the additional requirements for
management contracts under sec. 44?
o The management contract must be approved by the BOD,
majority of the quorum of each of the managed and
managing corporation
o And by the stockholders representing at least majority of
the outstanding capital stock of the managing corporation
o And 2/3 of the outstanding capital stock of the managed
corporation.
- (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) (source: Sec. 44,
Corporation Code)
o It should not be longer than 5 years.
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So there were questions about management contract,
is management contract a reality or is it just a codal
provision, an abstract or theory?
It happens for hotels, so the best example of management
contract is hotels. So Shangri- la manages trader‟s royal
hotel, holiday inn in galleria. So in this kind of contract,
the corporation entrusts management of its affairs to
another corporation and governed by sec. 44.
(We have a client who is a billionaire; he wants to disinherit his
daughter. He has 2 daughters, he wants to disinherit 1, He
came to us, he said “Nilo, how can I find grounds to disinherit
my daughter” and I said “it‟s not easy because the grounds for
disinheritance are very stringent under the civil code and you
have to include it in your will and probated. So I said, just
because you don‟t like her, doesn‟t mean you can disinherit her.
So the client said, “FIND A WAY” and you know in my firm,
“WE FIND WAYS” (CLASS: HAHAHAHA)
Because he is a billionaire, he has properties all around the
world, Philippines, Spain and USA, and these are all in the
name of corporations. So to effectively disinherit your
daughter, I said, what you can do is to amend the AOI of these
various corporations to allow the issuance of preferred shares
to make them nonvoting, non-cumulative, non-participating
and all. Now we will divide the shares, the preferred shares to
your common daughter, and the common shares to your
preferred daughter. The common shares will only be given to
the preferred, the favorite. Then the preferred shares which
should be non-voting will be given to the common daughter. So
there will be disinheritance because each of them will get 1
share each equal. But who will control the corporation? Your
preferred daughter right? Because you made those pref shares
non-voting, and the right to receive dividends is subject to the
availability of surplus profits and you can manage the
corporation so that there can be no surplus profits to declare
dividends.
But I said it will take time to amend the AOI. He said “so what
do I do that in the meantime so that my daughter will control
the corporation?”
I said just enter into a management contract between the
daughter and the corporation. Question, is that subject to the 5
year limitation?
o It is not, right? Because the 5 year limitation only
applies to management contract between
corporations. Not a management contract with the
corporation and a natural person. It is dependent on
the terms and conditions of the agreement.
(So that idea is patented) (HAHAHA)
ABC Corporation granted a loan to a mining company secured
by a mortgage on the properties. The loan was not paid so ABC
foreclosed on the mortgage and the property of the mining
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company, after foreclosure, the right of redemption may be
exercised. ABC Bank put up a wholly owned subsidiary,
engaged in mining and then ABC transferred the assets
(foreclosed assets) of the old mining company to the new
mining company. It turns out that the old mining company had
unpaid purchase from Remington Steel. Remington steel sold
products to the mining company, the purchase price were not
paid. So when the assets of the old mining company as
foreclosed were transferred to the new mining company,
Remington Steel filed an action to nullify the contract on the
ground that it has Interlocking directors and therefore should
be void.
First Question, does Remington Steel have the legal
personality, to assail the transfer, assignment of
assets from ABC Bank to the New Mining Company?
Remington Steel does not have the legal standing to
assail the creation of the new mining company because
only the corporations, parties to the contract of
interlocking directors or stockholders are allowed, but not
3rd parties.
Second Question, if it does have personality, can the
contract be voided because ABC bank and the new
mining company have common directors and the
new mining company is wholly owned subsidiary by
the bank?
- The contract cannot be invalidated just because it is
between 2 corporations with interlocking directors.
Can the Exec Comm approve amendment of the bylaws? Can
the Exec comm approve stock dividends?
- The exec comm. cannot approve stock dividends,
because it also requires the approval of the
Stockholders.
So first exception, first item outside the powers of the exec
comm. because the judicial corporate act requires stockholders
approval. The stock dividends require stockholders approval.
Can the exec comm. Approve compromise
agreement?
- Yes, if authorized by the Board
Can the board create an exec comm.?
- If it is included in the by-laws, then the board is
authorized to create an exec comm.
Can the board have an authority to create exec
comm. If authorized by the bylaws or the board my
simply fill up the composition of the exec comm. Once
approved by the bylaws?
You remember the case of Filipinas Port Services vs Go (2007),
we discussed this 2 meetings ago.
51
So what is the limitation of the board to create exec
comm?
What kind of exec comm can the board can create?
What kind of exec comm can be created by the board
so that it would fall under the Business Judgment
Rule?
And what kind of exec comm can the board NOT
create because it is outside its authority?
- The SC said that the board can create a committee and
call it executive committee as long as it will not
function similar to Exec Comm under sec.35 of the
Corp Code. So it‟s a committee named exec comm.
But cannot function as such under sec 35 of the
corporation code.
- If that committee will function as the exec comm.
Under 35, then only the bylaws may create that kind
of committee.
- The board may fill up the composition but the
committee must first be created by the bylaws of the
corporation
Section 33. Contracts between corporations with
interlocking directors. - Except in cases of fraud, and provided the
contract is fair and reasonable under the circumstances, a contract
between two or more corporations having interlocking directors shall
not be invalidated on that ground alone: Provided, That if the interest
of the interlocking director in one corporation is substantial and his
interest in the other corporation or corporations is merely nominal, he
shall be subject to the provisions of the preceding section insofar as the
latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding
capital stock shall be considered substantial for purposes of
interlocking directors. (n)
So in addition to what we have said under sec.32, if the
contract is between 2 corporations with interlocking directors
and the interest of the interlocking director is substantial in
one, and nominal in the other, then he shall be subjected to the
requirement of sec 33 of the Corporation Code.
So if the interest of Juan dela Cruz in ABC is substantial and
the interest in XYZ is nominal, and Juan dela Cruz is in the
board of both ABC and XYZ corporation, under sec. 33, in so
far as XYZ is concerned where the interest is nominal, Juan
dela Cruz is subjected to the requirements of 32. Which means
that his presence must not be necessary in the meeting of XYZ,
his vote is not necessary for the contract in XYZ and the
contract is fair and reasonable under the circumstances. It is as
if, it is a contract between the corporation and Juan dela Cruz
in so far as the nominal corporation is concerned.
Substantial = more than 20%
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Substantial in the context of sec. 33 is not 50% plus 1, but more
than 20%. 20% or less is nominal.
Still on Sec. 33, so there are special laws that prohibit
interlocking director unless secured by Monetary Board
approval or Insurance Commission approval, as the case may
be. Somebody can be director of 2 banks without prior BSP
approval. You are going to be a director of a bank and a quasi-
bank without prior BSP approval or a bank and an investment
house likewise without BSP approval.
But save for these cases governed by special laws, under its
provisions under government agencies, there is nothing
wrongful in a contract between 2 corporations with
interlocking directors as long as there is no fraud and the
contract is fair and reasonable under the circumstances, and
then to repeat, if it is a management contract under section 44,
in addition to the requirements of under 33, you have to add
likewise the approval of the board of directors of each
corporation (managing and managed) and through the
stockholders owning majority for the managing corporation
and 2/3 for the managed corporation.
Now under sec.44, you don‟t need majority of the entire board,
majority of the quorum will suffice. This is clear from the
language of sec.44. It says that the board of directors unlike
Sec. 37 which says majority of the board
Sec. 38 majority of the board
Sec. 40 majority of the board
Sec. 42 majoirty of the board
But for 43 and 44, it only talks about the board of directors,
which means that for 43 and 44, you only need majority of the
quorum.
That‟s your guide, if the Corp Code says the board of directors,
quorum suffices. So as distinguished from the majority of the
entire board.
Found in 16 37 38 40 42 76 and 117.
As what we said also, in the case of DBP vs CA only the
corporation involved in the transaction or the stockholders
injured can file or by a derivative suit can file the action to
nullify or assail the contract.
Just like the example earlier. Let’s say fuel supply
between Philippine Airlines and Petron. Let’s say the
price of the fuel product being shouldered by PAL
with Petron is expensive, can you and I complain?
Obviously not because we have no interest in that contract
or transaction
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Who can complain?
Only Petron or San Miguel (San Miguel talaga sinabi niya
haha) or their stockholders either by themselves or by
derivative suit.
In the case of DBP vs CA what happened was, DBP granted a
loan to a mining company secured by a mortgage on the
property, the loan was not paid. So DBP foreclosed on the
mortgage. After foreclosure, it put up a new mining company
called “Nonoc” Mining Company and then transferred the
foreclosed assets to Nonoc Mining Company. Nonoc and DBP
have common directors. Nonoc is a subsidiary of DBP. So
Remington Steel sold steel products to Marinduque Mining,
who did not pay the purchase price. So to enforce payment of
the purchase price, Remington Steel filed an action to nullify
the contract, the assignment, transfer of assets from DBP to
Nonoc Mining company because they have common directors,
and as we have said, that cannot be allowed because he is not a
party to the contract. He is a 3rd party without any legal
personality to nullify the contract on the ground of interlocking
directors.
Now you remember this case of DBP vs CA was also the factual
background of DBP vs Hydro Resources. So DBP vs Hydro
Resources Corporation on separate legal personality, same
facts right? DBP foreclosed the mortgage, and then transferred
the assets to Nonoc Mining Company and Nonoc Mining
Company engaged a consultant to render services to Nonoc
Mining Company, who was not paid and then filed an action to
enforce his consultancy fees.
Can the fees be enforced against DBP and Nonoc
because they have common directors?
- Interlocking directors is not a ground to pierce the
corporate fiction.
So we have 2 cases with the same factual background, so DBP
vs CA, on the issue of the 3rd party not having the legal
personality to assail the contract between to corporations with
interlocking directors and DBP vs Hydro Resources
Corporation on the issue of interlocking director not enough
reason to pierce the veil of corporate fiction.
12. Executive Committee
Sec. 35. Executive committee. - The by-laws of a corporation may
create an executive committee, composed of not less than three
members of the board, to be appointed by the board. Said committee
may act, by majority vote of all its members, on such specific matters
within the competence of the board, as may be delegated to it in the by-
laws or on a majority vote of the board, except with respect to: (1)
approval of any action for which shareholders' approval is also
required; (2) the filing of vacancies in the board; (3) the amendment or
repeal of by-laws or the adoption of new by-laws; (4) the amendment
or repeal of any resolution of the board which by its express terms is
not so amendable or repealable; and (5) a distribution of cash
dividends to the shareholders.
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a. Powers of the Executive Committee because it already falls under the first. So what is this case? It is
a case of poor craftsmanship.
b. Limitations of the Powers of the Executive Committee
Anyway, for the purpose of the bar, execom cannot take the
Now why is there a need to create and executive
place of the board for these matters but it can replace the board
committee?
of directors for all other matters as long as it is created by the
So the board of directors only meets once a month, the by-laws.
regular board meetings are conducted only once a month.
Filipinas Port vs. Go
There are certain transactions that cannot wait for once a
month. That is why there is a need to create a mini board SC: Under the business judgment rule, the board can create
of directors that can act on matters with the board‟s committees and positions but the board cannot create an
competence. So effectively, the board delegates the execom if it will function as that mentioned in Section 35 of the
authority to the executive committee because it can act on Corporation Code. The only kind of execom the board can
all matters within the board‟s competence. Whatever the create is a committee that is execom by name but not
board can do, the executive committee can also do. What is performing those mentioned under Sec. 35.
important is that kind of committee be first created by the
by-laws because the board cannot create an execom unless
the committee is first created by the by-laws.
What the board can do under sec. 35 is to compose or to fill-up
the composition of the execom after created by the by-laws of
the corporation.
Can you appoint non-board members to the execom?
According to the SEC, you can but they are regulatory or
advisory only in nature. The functions are advisory or
recommendatory and they have no voting rights. Only
directors have voting rights when it comes to execom
meetings.
There are limitations on the powers of the execom, they are not
absolute.
What are the matters outside the competence of the
execom?
1. Any corporate act requiring stockholder‟s approval;
2. Adoption of new by-laws, repeal or amendment of the
by-laws;
3. Amendment of a board resolution which by its express
terms is not so amendable or repealable;
4. Distribution of cash dividends to shareholders; and
5. Filling up of vacancies in the board.
We said that stock dividends, likewise, are outside the
competence of the board. The decision of the board cannot be
replaced by the stockholders. For stock dividends, it is the
board and the stockholders. So the execom cannot take the
place of the board when it comes to stock dividends.
If you read section 35, it says stock dividends not included,
right? So the argument is not included if cash but it will fall
under stockholder‟s approval, right? Now what about adoption
of by-laws? How come it is there if it is already covered by the
preceding number? Meaning you do not have to include that

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F. CORPORATE POWERS
Sec. 16 – Amendment of AOI
Sec. 24 – Election of Directors
Sec. 25 – Appointment of Corporate
Officers
Removal of Corporate Officers
Sec. 28 – Removal of the Directors
Sec. 29 – Filling up of Vacancy: it
depends…
Sec. 30 – Payment of Compensation to
Directors
Sec. 35 – By-laws create an Executive
Committee appointed by the directors
Sec. 37 – Extension of Term; Shortening of
the term
Sec. 38 – Incurring, creating or increasing
bonded indebtedness; and increasing or
decreasing OCS
Sec. 39 – Amendment of the AOI and to
deny pre-emptive right
Sec. 40 – Sale or other disposition of assets
Sec. 42 – Invest funds in the primary
purpose
Invest funds to incidental purpose for
which corporation is created
Invest the funds in a secondary purpose
Cash Dividends
Stock Dividends
Enter into Management Contract
Board of Directors Outstanding Capital Stock
Majority of the board 2/3 of the OCS
At least majority of OCS
Majority of the entire board
Majority of the entire board
2/3 of the OCS
If the ground is not expiration, removal, If the ground is expiration, removal,
increase number of board seats AND the increase number of directors; OR If the
remaining directors constitute a quorum – ground is not expiration, removal, increase
Majority of the board number of board seats BUT the remaining
directors do not constitute a quorum –
Majority of the OCS
Majority of OCS
Majority of the board
Majority of the board 2/3 of the OCS
Majority of the board 2/3 of the OCS
Majority of the board 2/3 of the OCS
In the ordinary course – Majority of the
quorum (Why majority of the quorum and
not majority of the entire board? Sec. 25
says unless the corporation code or the by-
laws requires otherwise, quorum shall
mean majority of the board of directors as
fixed in the AOI. And the majority of the
quorum is sufficient to transact business
under sec. 25. Here the code does not
require majority of entire board)
All or substantially all – Majority of the 2/3 of the OCS
board
Majority of the quorum
Majority of the quorum
Majority of the entire board 2/3 of the OCS
Majority of the quorum
Majority of the quorum 2/3 of the OCS
Majority of the quorum for both managed Majority of the OCS of each managed and
and managing corporation managing corporation;
The only time that 2/3 of the OCS is
required from the managed corporation
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and retain majority of stocks of the
managing corporation is in the case of
interlocking directors and interlocking
stockholders.
Sec. 46 – Adoption of by-laws Adopted within 1 month after
incorporation – majority of OCS
Sec. 48 – Amendment of the by-laws Majority of the entire board Majority of the OCS

If delegate authority of the stockholders to

the board – 2/3 OCS
If they revoke the delegation – majority
Sec. 62 – fixing the issued value of no par Majority of quorum OR Majority of OCS
value shares
(if you remember the AOI may fix the
issued value of no par value share, or if
there is no provision, the BOD may fix the
value or the stockholders owning majority
of OCS
Sec. 76 – Merger or Consolidation Majority of the entire board 2/3 of OCS
Sec. 117 – Dissolution Majority of the entire board 2/3 of OCS

1. How Exercised BAR: May a foreigner be appointed as president, secretary and

treasurer of the corporation?
a. By the Shareholders
Yes except if the corporation is engaged in nationalized
b. By the Board of Directors
activity, whether wholly or partly nationalized, a foreigner
c. By the Officers cannot be appointed president under the Anti-Dummy Law. As
to Secretary, whether nationalized or not, a foreigner cannot be
c.1. Officers of the Corporation
appointed. As to Treasurer, a foreigner may be appointed as
- Statutory Officers treasurer.

- Corporate Officers BAR: Who is required to be a resident officer of the

corporation?
- Ordinary officers of the Corporation
President – not required for as long as majority of the directors
What are the corporate powers reserved solely to the
are Philippine residents
stockholders? Those exercised jointly with the board
and stockholders? When does it require majority of Secretary – YES
the quorum or majority of the entire board? Majority
Treasurer – as to the 2012 SEC Circular, treasurer need not be
of the outstanding capital stock or 2/3? (see Table 1)
a resident of the corporation
On officers of a corporation, who are the officers of
BAR: Who is required to be a director?
the corporation?
Only the president is required to be a director.
1. President
Case: There is a contract between a president and a corporation
2. Secretary
for 5 years. Let us say Juan dela Cruz will be president for 5
3. Treasurer years by ABC Co. The problem is in the second year of his term,
nobody wants to use his shares for him because they want to
4. Other officers as provided in the by-laws
use it for their own nominee (nobody now wants to vote for
him). What happens if the president is not a director? He will
now be a “de facto president”, right? But there is a 5 year

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contract. What do you do now? What is the solution to this
problem?
So I advanced this very noble theory which I have yet to be
tested by the SC. I said let us seed the president. By seed I
mean let us only vote for team under 15. So automatically he is
considered a director because if you don‟t make him a director,
the corporation would be entitled to damages because of the 5
year contract. Nobody wanted to carry him so naglaban-laban
lang yung 14 out of 15. Is it valid? Well, so far ano pero I don‟t
think that will be asked in the bar. That is already going too far.
I will kill the bar examiner ano… =))))
BAR: What is the only position that can be held at the same
time by the same individual?
President cannot be both secretary and treasurer at the same
time. Secretary and treasurer can be held by the same person.
What about chairman and president?
Yes, except if it is a public company. Under the Code of
Corporate Governance, the chairman must be different from
the president. But if it is an ordinary company, not a public
company, the chairman and president may be held by the same
person at the same time.
What are the qualifications of the president?
He must be a director, and therefore a stockholder.
Secretary – Filipino citizen and resident
Treasurer – neither citizen nor resident
SEC issued a circular (Dean: not part of the bar), said that the
Corporate Secretary must have the (Dean: hold your breath)
legal skills of Chief Legal Officer, the vision of a CEO, the
financial _____ of a Chief Financial Officer and skills of a
Human Resource Officer. Good thing we don‟t consider the
circular and the circular is issued by the SEC and nobody
qualifies. Nobody would qualify if that is the qualifications.
(Pero dean, super qualified ka daw sabi ni Atty. S. Pwede mo
nga kaming iadopt eh. =)))
I brought it up because there was one in the conference I
organized for PALS, the examiner in commercial law admitted
that the answer the question is based on a foreign
jurisprudence. So the committee in-charge in the UP Law
Center, answered based on local jurisprudence and the
examiner answered based on a foreign jurisprudence. There
was also a time that there is this examiner that answered based
on an SEC circular and not making reference to the corporation
code. What happens now if the examinee goes beyond the
Corporation Code? He is more diligent than the ordinary
reader. These I tell you are only for discussion purposes only
for intellectual discourse but for the bar you should stick to the
syllabus issued by the SC.
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2. General Powers, Theory of General Capacity
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in
the articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the
provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and
to amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers
and to sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to
the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction
of the lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with other corporations as
provided in this Code;
9. To make reasonable donations, including those for the public welfare
or for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, shall give
donations in aid of any political party or candidate or for purposes of
partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to
carry out its purpose or purposes as stated in the articles of
incorporation.
ABC Corp engaged in cement manufacture. Can it
construct roads or bridges? When does it become an
implied power?
Construction of roads or bridges per se is ultra vires
because it is not related to the primary purpose of the
corporation. However, if the road or bridge leads to or
paves way to the manufacturing site, it is an implied power
of the corporation.
Corporate powers:
1. EXPRESS- when conferred under the AOI or
Corporation Code
2. IMPLIED- implied from the express powers
3. INCIDENTAL
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Quarry operations for limestone to form part of cement
manufacture. It is needed for cement manufacture, thus, within
the powers of the corporation.
NAPOCOR vs. VERA
Can NAPOCOR hire stevedores?
SC: Primary purpose is electricity generation, stevedores
not related to the primary purpose. However, if they are
hired to transport coal from the pier to the plant, it
becomes an implied power.
Test: Is this act or transaction or activity in furtherance or
germane to the purpose of the corporation?
YES: Intra Vires
NO: Ultra Vires. Therefore, voidable or unenforceable
The power to sue and be sued is lodged in the BOD.
Is there an exception? Can there be a suit without
board approval?
Derivative Suit
A minority SH filed a derivative suit in behalf of ABC
Corporation to assail the acts of mismanagement on
the part of the majority of the board and key
corporate officers. The board convened and then
adopted a resolution instructing its counsel to move
to dismiss the complaint on the ground that it has not
been authorized by the board. Will you grant the
MTD?
Answer: The wrongful acts of the majority of the directors
and to require a board resolution would make ILLUSORY
the right of the minority SH to file a derivative suit on
behalf of the corporation.
General Capacity- general powers of the corporation
1. EXPRESS
2. IMPLIED
3. INHERENT- a.k.a. INHERENT POWERS
In our jurisdiction, inherent powers are also express powers.
Example: Right to succession inheres in a corporation.
Enumerated likewise as an express power under Sec 36.
Can a lending investor be engaged
pawnbrokering?
No, these are 2 different businesses. Pawnbrokering
requires another authority from the BSP.
PAEL v. CA
Corp engaged in mining, can it acquire property for
urban development?
No, not related to mining. Not justified.
Corp engaged in trading, can it buy a beach front
property?
No, no relation to its business. However, if the beach
house is a residence of a director, guest house or seminar
house it becomes an implied purpose of the corp.
Derivative suit - to enforce a corporate right or cause of
action because of wrongful acts of the majority of the board. It
is an exception to the rule that the right to sue and be sued is
lodged with the board.
GR: it does not require a board resolution
XPN: if the SH is a corporate SH, he must be authorized by the
board of the corporate SH but not the board of the corporation
whose acts or majority of acts of the board are being assailed.
VITO CASE
He claims to be a trustee of JAVA Publishing Company. He
filed a derivative suit. He is not a SH, SH is JACA Investment.
Board resolution is necessary to authorize filing of derivative
suit by JACA Investment because the shares of stock that he
represents are owned by JACA Investment.
With respect to a foreign corp, it cannot sue but can be sued on
any cause of action if it has no license to do business in the
Philippines. Foreign corp lacking license from SEC affects its
legal capacity to sue.
Corporation that is dissolved has no power to sue and be sued.
(ALABANG HILLS CASE)
Can a corporation that is dissolved file a suit?
SC: If the suit is filed AFTER 3 years from dissolution
DISMISSED!
Ground: Lack of legal capacity to sue
Note: Previous decisions say that a suit filed during its lifetime
can go beyond the 3 year period.
Board resolution necessary:
1. Filing a suit
2. Authorize a person to sign pleadings and
verifications on behalf of a corporation
EXCEPTIONS: The following are familiar with the corporate
affairs.
in
1. Chairman
2. President
3. General Manager
4. Human Resource Officer
5. Employment Specialist
To adopt and use a corporate seal- lack of corporate seal does
not invalidate a stock certificate.
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Why? It‟s a formal requirement only. Directory not mandatory.
Paragraph 6 contemplates:
1. Issuance of shares- pertains to UNISSUED shares
2. Sale of shares- pertains to TREASURY shares
(assets of the corporation, as assets, they can be
sold)
You issue PRIMARY shares!
You sell EXISTING shares!
You subscribe from ISSUED shares!
Paragraph 7. Test: Is the transaction reasonably required by
the business?
Subject to Constitutional limitations.
Example:
Private lands- Corporation must be 60% Filipino owned
Public lands- it can only be for lease not disposition
Can a corporation guarantee obligation of another?
No, it cannot mortgage its own property to secure
obligation of another
Can it act as a 3rd party mortgagor?
No. Property of corp must be used for its purpose and not
for the purpose of another corp
What is the remedy available to the corp to
guarantee obligation of another?
AMEND AOI to include the power to guarantee or secure
obligation of another
Section 36 subtitle 8: Merger or Consolidation, then
after that Donations.
So power to make donations, as you have noticed, there is no
limitation as to amount. It‟s a question of reasonableness. Of
course in any case it must not be made in favor of any partisan
political activity.
As you all know, there is a distinction between taxability and
ultra vires. To determine whether a donation is ultra vires, the
only test is “is it reasonable?” Which is different from “to what
extent can you claim the donation as a deductible item,
deductible amount?” “To what extent may the corporation
donate to another?” That will be governed by the Tax Code not
by the Corporation Code. CC only determines the issue of intra
vires or ultra vires act. The question is, it is reasonable? And
whatever is reasonable, of course, depends on the facts of each
case, the circumstances peculiar to the corporation.
There have been many corporations that made use of
donations and with corresponding press releases. You do
realize that these are all tax saving schemes right? You donate
to a foundation, say, you‟re a Taipan. You receive dividends
58
and corresponding 10% tax. Whereas if you donate your
property to a foundation, then the income is either tax exempt
or less tax rate. I‟m sure you have read announcements of
billionaires making donations, so they have to consider
likewise that this must be a tax avoidance scheme, especially if
they control the very foundation of the recipient of the
donation.
But the power to make and the power to accept, likewise
recognized by your CC.
Benefit Programs
Now what about benefit programs? So pension plan,
retirement plan, and other benefit program for employees,
that‟s an express power. Regarding retirement plan, what is
your default retirement plan under the Labor Code? Your
default retirement plan is ½ month salary for every year of
service, provided you have rendered at least 5 years of service
and you are 60 years of age. But can a corporation prescribe or
provide for a retirement plan with superior benefits than the
default retirement plan? Yes, that is found under Section 36 of
the CC. A corporation, however, cannot adopt a retirement
plan inferior to that of the basic or default retirement plan.
What about housing loans? Is it ultra vires? Intra vires? It is
an express power because any welfare or benefit program of
employees cannot be diminished. So any welfare program is an
express power under Section 36 of the CC. Remember this case,
Republic v. Acjoe Mining, putting up a postal office inside a
mining camp. It is for communication of the employees of
Acjoe Mining inside the camp and relatives outside the camp.
So is it ultra vires? Supreme Court said it‟s not because it is a
welfare program for the employees.
What about salary loan? Can the employer corporation grant
salary loan? Yes, again, it being a benefit or welfare program
for its employees.
What about acting as collection agent for a third party lender?
Supposing a corporation cannot grant a loan to its officers and
employees, but entered into a tripartite agreement among the
employees, employer and the lender, where the lender would
be the one to grant the loan to the employees at concessionary
rate but payment would be made through salary deduction. Is
that an ultra vires or intra vires act? So according to the SEC,
as long as the corporation does not obtain any benefit from that
arrangement, it is intra vires. But the moment it obtains a
benefit, let‟s say a commission or fee or facilitating the
payments of the employees to the lender, then it becomes an
ultra vires act.
The enumeration under Article 36 is not exclusive because, as
you all know, the corporation may exercise any other powers as
may be necessary to achieve its corporate ends.
3. Specific Powers, Theory of Specific Capacity
Now moving on to the theory of specific capacity or the specific
powers of the corporation, that‟s Section 37 to 44, capped with
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a conclusion under Section 35. So the whole chapter on
corporate powers is perfectly arranged. After the enumeration
of corporate powers, it ends with a conclusion that anything
outside this is ultra vires.
a. Power to Extend or Shorten Corporate Term
Sec. 37. Power to extend or shorten corporate term. - A
private corporation may extend or shorten its term as stated in the
articles of incorporation when approved by a majority vote of the board
of directors or trustees and ratified at a meeting by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or by at least two-thirds (2/3) of the members in case of non-stock
corporations. Written notice of the proposed action and of the time and
place of the meeting shall be addressed to each stockholder or member
at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, That in case of extension of corporate
term, any dissenting stockholder may exercise his appraisal right under
the conditions provided in this code. (n)
Now let‟s take up Section 37, the power to extend or shorten
corporate term. We have taken this up under Section 11 right?
But to repeat, what are the limitations on the power of the
corporation to extend its corporate term?
1. The extension can only be done during the
lifetime of the corporation but not earlier than 5
years prior to the original expiry date, unless
there are other causes that warrant an earlier
extension as may be determined by the SEC.
2. In a case (SEC v. _____ Cigar), extension may
not be done within the 3 year liquidation period.
BAR: Suppose a corporation is suffering losses, to recoup the
losses by the corporation, the corporation decided to extend its
term but during the 3-year liquidation period. So for a noble
purpose, to recoup or to recover the losses suffered by
corporation, it decided to extend its term during liquidation
period. Is it valid?
The answer is no.
BAR: What happens upon expiration of the corporate term? Is
the corporation dissolved? Or is there a need for an SEC
approval?
As you all know, under the law, once a corporation‟s term
expires, it is dissolved ipso facto. There is no need for a
certificate of dissolution from the SEC if the term expires. So
ipso facto, the corporation is dissolved. The next step is to
obtain a certificate of dissolution if it is a voluntary dissolution,
not when it comes to expiration of corporate term.
3. There is no limit on the number of extensions as
long as the extension does not exceed 50 years in
any single instance.
4. The extension entails an amendment of the AOI,
and therefore must be approved by at least
majority of the board and stockholders owning
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2/3s of the OCS. Then you have to comply with
the requirements for amending the AOI.
5. In the case of banks, insurance company, public
utility corporations, and other corporations
governed by special law, the favorable
endorsement of the appropriate government
agency.
6. Effective upon approval by the SEC.
What is the remedy available to the stockholder who
does not favor the extension of corporate term?
It is the exercise of his appraisal right.
What about shortening of corporate term?
Same, same approval requirement.
BAR: Can you shorten the corporate term one year before its
actual expiration?
The answer is yes because the 5 year limitation applies to
extension and not shortening of corporate term.
What is the remedy available to a stockholder in case of
shortening of corporate term?
Remember our discussion here. If the term is shortened to
dissolve the corporation, no need to exercise appraisal right.
Why? Because once the corporation is dissolved, the next step
anyway is to liquidate the corporation and its assets, after
payment of the claims due to creditors, would be distributed to
the stockholders anyway. So when we talk about appraisal right
as a remedy, in case of shortening of corporate term, it is
provided not under Section 37 but under Section 81.
Remember our conflict here, 37 is silent on the remedy of
appraisal right in case of shortening of corporate term. Senator
Miriam Santiago has a pending bill in the senate to amend only
one section of the CC. Only one, Section 37, to make it clear
that appraisal right is available when it comes to shortening the
corporate term. Which is not necessary because Section 81
already covers shortening of corporate term as an instance that
justifies appraisal right.
But we have to make a distinction. If the shortening of the
corporate term, as we said, will dissolve the corporation, it‟s
irrelevant to talk about appraisal right. So the corporate term
has to be shortened without dissolving the corporation.
Does it ever happen that the corporation‟s term is shortened
without dissolving it?
Of course, yes.
b. Power to Increase or Decrease Capital Stock or Incur, Create,
Increase Bonded Indebtedness
Sec. 38. Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness. - No corporation shall
increase or decrease its capital stock or incur, create or increase any
bonded indebtedness unless approved by a majority vote of the board
of directors and, at a stockholder's meeting duly called for the purpose,
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two-thirds (2/3) of the outstanding capital stock shall favor the
increase or diminution of the capital stock, or the incurring, creating or duly called for the purpose.
increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating,
or increasing of any bonded indebtedness and of the time and place of
the stockholder's meeting at which the proposed increase or
diminution of the capital stock or the incurring or increasing of any
bonded indebtedness is to be considered, must be addressed to each
stockholder at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with
postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors
of the corporation and countersigned by the chairman and the
secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the
names, nationalities and residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each,
and the amount paid by each on his subscription in cash or property, or
the amount of capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for the purpose of
making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the
meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock,
or the incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating
or increasing of any bonded indebtedness shall require prior approval
of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and
Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange
Commission and the issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or decreased and the
incurring, creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided, That the
Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at
the time of the filing of the certificate, showing that at least twenty-five
(25%) percent of such increased capital stock has been subscribed and
that at least twenty-five (25%) percent of the amount subscribed has
been paid either in actual cash to the corporation or that there has been
transferred to the corporation property the valuation of which is equal
to twenty-five (25%) percent of the subscription: Provided, further,
That no decrease of the capital stock shall be approved by the
Commission if its effect shall prejudice the rights of corporate
creditors.
Non-stock corporations may incur or create bonded indebtedness, or
increase the same, with the approval by a majority vote of the board of
trustees and of at least two-thirds (2/3) of the members in a meeting
Bonds issued by a corporation shall be registered with the Securities
and Exchange Commission, which shall have the authority to
determine the sufficiency of the terms thereof. (17a)
BAR: Cite practical reasons why a corporation would increase
its capital stock.
1. To have additional funds – the most practical
reason why the corporation would increase its
capital stock, to have extra or additional capital.
2. To have additional shares that can be used to
acquire more assets – so that when you increase
capital stock, you have additional shares, which
shares can be used to acquire assets, you issue
shares in exchange for assets.
3. To have additional shares to support stock
dividend declaration – this happens if the
corporation‟s authorized capital stock is almost
fully subscribed and the remaining shares are not
enough to justify your stock dividend declaration.
What if your ACS is almost fully subscribed, you don‟t have
additional shares to issue, what do you do? Where will you take
the shares to cover your stock dividends? Do you take them
from the existing shares of the corporation or do you split the
existing shares of the stockholder? Where do you source the
shares for stock dividends?
From the unissued portion of the capital stock.
BAR: What are the various ways, or remedies or tools,
available to the corporation to obtain additional funds?
1. To issue shares – because when you issue shares,
you receive consideration because shares cannot
be issued without consideration, they become
watered shares. You either issue shares from the
unissued portion of the ACS or you increase your
capital stock.
BAR: Are you sure to obtain additional funds when you
increase your capital stock?
Yes because the stockholders are required to pay subscription
(25% of the increase must be subscribed and 25% thereof must
be fully paid).
Supposing your capital stock is 1 billion divided into 1 billion
shares, with a par value of 1 peso per share. Subscribed capital
stock is 500 million. Ordinarily, 250 million will suffice
because the only requirement upon incorporation is to
subscribe to 25% of the ACS. But in this case, let‟s say the
subscribed capital stock is 500 million. The corporation
intends to increase the capital stock from 1 billion to 2 billion
consisting of 2 billion shares, par value of 1 peso and the
requirement is you have to subscribe to 25%. Can the
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corporation still receive additional funds considering that 500
million is already 25% of your 2 billion proposed increase in
capital stock?
Yes. When you increase your capital stock, you are sure to
obtain funds.
So either you issue shares or increase your capital stock, either
way, the corporation is sure to obtain additional funds.
2. Advances from stockholders – advances are loans
3. Deposits for future subscription
Are advances and deposits for future subscription considered
as equity already?
Not yet.
Are these securities? Certificates of deposit for future
subscription?
Yes. But they are not equity, they are not shares of stock. They
are considered securities under the SRC. They are not yet
equity, they are not yet converted to shares, but the corporation
still receives additional funds.
4. Loans
Is equity entitled to interest payment?
No because equity is not a loan. It‟s only a loan that would earn
interest. That‟s why the cheapest way to obtain funds is to issue
shares because there is no obligation to pay any interest. You
only pay interest on a loan but not on equity. For equity, as you
know, dividends. The expectation of the stockholder for
infusing equity to the corporation is dividends, but the right to
receive dividends is
a. dependent on the availability of surplus profits;
and
b. always discretionary on the part of the BoD.
What is CAPITAL STOCK?
It represents the maximum number of shares that the
corporation may issue without amending the articles of
incorporation.
What happens if there are no additional shares?
The corporation should increase capital stock to have
additional shares because issuance of shares in excess of
your authorized capital stock is null and void.
Does it mean that the only amount of capital that the
corporation may raise is the product of authorized
shares multiplied by the par value?
OBVIOUSLY NOT. It simply represents the maximum
number of shares the corporation may issue without
amending the AOI. It does not reflect the capital of the
corporation because shares of stock may be issued for an
amount above or in excess of par value.
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Capital stock or capital is different from the authorized
capital stock. Authorized capital stock is an arbitrary
amount indicated in the AOI.
25 % of your authorized capital stock must be subscribed
and 25% of this subscription paid in cash or property. The
subscribed capital stock is your outstanding capital stock,
these are shares subscribed by stockholders and therefore
outstanding in the sense that it is included in the
computation of the needed numbers to approve corporate
acts.
The stockholders are entitled to all rights pertaining to his
subscribed shares even though he did not pay the entire
subscription.
TRUST FUND DOCTRINE
BAR: Does the trust fund doctrine include the
additional paid in capital?
No. Your trust fund doctrine is synonymous with your
total subscriptions. It means that the total subscriptions
are funds held in trust for the benefit of the creditors.
Can a corporation increase the capital stock if its
authorized capital stock is not yet fully subscribed?
Yes because there is no prohibition.
MAJORITY OF STOCKHOLDERS OF RUBY
CORPORATION V. MIGUEL LIM (2011)
If the corporation will issue shares from your unsubscribed
portion of the original authorized capital stock it is not subject
to SH approval. What is required is board approval, majority of
the quorum suffices because under section 25 “unless the
corporation code requires otherwise, majority of the directors
constituting a quorum is sufficient to transact business”.
The power to issue shares of stock in a corporation is lodged in
the board of directors and no stockholders meeting is required
to consider it because additional issuances of shares of stock do
not need approval of the stockholders. What is only required is
the board resolution approving the additional issuance of
shares.
How many votes are needed when you increase your
capital stock?
Majority of the entire board and at the SH‟s meeting, 2/3
of outstanding capital stock (important!)
3 PRACTICAL REASONS for INCREASING CAPITAL
STOCK
1. To obtain additional funds
 You are assured to get at least 25 % of
subscription of the increase
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The capital stock of a corporation is 1B divided into shares with
par value of 1 peso and subscribed and paid up capital stock is
500 million and the corporation would like to increase the
capital stock from 1B to 2b. Is there still a need to subscribed to
the 25% of the 2B considering that the paid up capital is ¼ of
the capital stock as increased?
Yes but it must be 25% of the increase not as increased. It is
to make sure that the corporation receives minimum capital
because to interpret otherwise there is no need to subscribed
further because 500M is already ¼ of 2B.
2. To have additional shares to acquire assets for the
corporation
 Under section 62 of the Code shares of stock may
be exchange for property. The property is the
consideration for the issuance of shares and those
properties will become the assets of the
corporation.
3. To support stock dividend declaration
Are advances from SH subject to documentary stamp
tax?
Advances are loans. So if the advances are evidenced by a credit
or debit memo it is subject to DST. If not, just do an
accounting.
Until the case of BIR V. UST
There is no DST unless there is a loan. Doc stamps are not tax
on the document but a tax on the transaction.
Advances, although a loan, usually do not earn interest unlike
in loans it earns interest. A bank which does not charge interest
is performing an ULTRA VIRES ACT.
A SH who grants an advance to corporation without interest
can never be an ultra vires act. It is intended to help the
corporation.
Loans or advances are documented in the books of the
corporation as borrowings.
Shares of stock do not earn interest. Shares of stock are entitled
to dividends if declared by the corporation subject to
availability of surplus profits.
BAR: WAYS OF INCREASING CAPITAL STOCK
 By increasing the number of shares but maintaining
the par value
 By increasing the par value but maintaining the
number of shares
 By increasing the par value and increasing likewise
the number of shares
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REQUIREMENTS IN CASE OF INCREASE/DECREASE
OF THE CAPITAL STOCK
1. Approval of the majority of the entire board.
2. Approval of stockholders representing 2/3 of the
majority of the outstanding capital stock
3. Treasurer must sign an affidavit that 25% of the
increase in the capital stock has been subscribed
and 25% of the subscription of the increase has
been paid in cash or in property received by the
corporation. (Applicable only in case of increase
in capital stock)
4. Certificate of amendment filed with the SEC
which shall embody that the items contained
under Sec. 38 has been complied with or the
requirement for the increase in the capital stock.
Under Section 38, there is one item there that you are
supposed to state the amount of bonded indebtedness in the
certificate of amendment. There is increase of stock in one case
that we handled, we did not indicate the amount of bonded
indebtedness assuming there is none but the SEC looked for it.
So just state that there is no amount of bonded indebtedness to
fully comply with the requirements under Section 38.
And then, What is the effect of the amendment
brought about by the increase of the capital stock?
It is effective upon the approval of the SEC.
Now, what about the reduction of the capital stock?
Are the requirements the same?
As to the approval requirements, it is thesame. The
approval of the majority of the entire board and 2/3 of the
stockholders owning the majority of the capital stock.
What differs is the affidavit of treasurer. Obviously, it is not
applicable for the simple reason that such requirement is
peculiar only to increase in the capital stock.
But there is a requirement that is peculiar only to the
reduction of the capital stock and is not applicable to
the increase of capital stock and what is that?
The reduction of the capital stock shall not be done or
allowed if it will impair the rights of the third parties. So it
must not impair or prejudice third parties.
You don‟t see that when you increase the capital stock. Why?
Because every time you increase your capital stock, there can
be no impairment of rights of the third parties there. It is for
the interest of the third parties that they will have additional
funds for the corporation.
Now an example in the reduction of the capital stock. Let‟s say
your authorized capital stock is 1 billion divided into 1 billion
shares, you have a par value of one peso per share. Now the
subscribed capital stock is 600 million divided into 600 million
shares, par value of one peso.
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The Corporation reduced the capital stock from 1 billion to 600
million.
What happens now to the 400 million shares?
Then they are retired. They cannot be reissued anymore unless
allowed by the articles of incorporation.
What about this one, supposing that your authorized capital
stock is 1 billion divided by 1 billion share with a par value of 1
peso. Your subscribed is 600 million and your paid up is 500
million. Can you reduced the authorized capital stock from 1
billion to 500 million?
No, you cannot because it will amount to condonation of your
100 million subscription. And what did we say earlier? That all
subscriptions are funds held in trust for the benefit of the
creditors under the TRUST FUND DOCTRINE. To condone the
unpaid subscription is to violate the trust fund doctrineunless
the net assets of the corporation is 600 million and if the net
asset anyway is 600 million then you can reduce the capital
stock to 500 million.
What about this one, Let‟s say that 1 billion is authorized
capital stock and it has a par value of 1 peso fully subscribed
and paid up. The corporation decides to reduce capital stock to
600 million. What happens to your 400 million? Can they be
returned to the stockholders?
They can be returned only to the extent that it will not impair
third party creditors.
So in what way can you distribute the excess?
If the net assets of the corporation is 1billion pesos and you
have enough to cover the claims of your creditors.
Because if not, let‟s say that the net asset is only 700 million
and they reduced it to 600 million can they return the 400
million?
No, only the 100 million excess.
Now, if you return the surplus capital stock, is it a
declaration of dividends?
As you all know, when you return the surplus to the
stockholders, it is not dividends under Section 43 but a
return in capital or return in investment of the
corporation.
Our client Century did a backdoor listing. BACKDOOR
LISTING is when you buy the shares of a dormant listed
company. ABC is an energy company, it is listed in the stocks
exchange. Century wants to go public, it wants to trade its
shares publicly. So it wants to apply in the list for public
offering in the Philippine stock exchange. It is very expensive.
You have to hire accountants, lawyers, investment managers so
and so. The cheapest way to do it is to simplify, by buying a
dormant listed company. So Century bought the shares of ABC
company, a dormant listed company, then amended the
articles from energy to realty. Then the name from ABC to
Century. This is the problem: ABC incurred losses so that is
why it is sold for a cheap amount.
The question is: How do you wipe out the losses?
You wipe out losses by reducing the capital stock and it
will take .000001 of par value before you can decrease
capital stock and wipe out the losses. So ganun kalaki yung
reduction ng par value .000001 from 1 peso para ma wipe
out yung losses na 40 million. So ang tanong sakin meron
bang limitations sa par value?
Wala. The 5 peso applies to no par value. So for as long as
you have a monetary value, it can be used. So that‟s what
we did. We reduce the capital stock. By reducing the par
value to .000001 such as the capital stock of the
corporation became only 150 million.
Now of course, if you are a listed company and you want you
trade shares in the stock exchange and it is .000001, No one
will take you seriously. Sino bibiling stocks mo kung .000001
ang value. So after we reduce the capital stock and wipeout the
losses, we again amended the articles to increase the par value.
So this is what we did to wipe out the losses, we reduce the
capital stock and then again increase it to make it viable. And
the point is, there is no minimum par value according to the
SEC. As long as there is a value attached to it. The 5 peso
limitation is applicable only to no par value shares.
POWER TO INCUR, CREATE OR INCREASE BONDED
INDEBTEDNESS
Now moving on to Sec 38, the power to incur, create and to
increase bonded indebtedness. It is the only power of the
corporation that has not been asked in the bar, the power to
incur bonded indebtedness.
In the corporation power to incur debt, for example, 1
million debt or 5billion. Would that require
stockholder’s approval? For 5 billion? or 10 billion?
Is it a question of amount?
NO. It is not a question of amount but a question of
whether the following partakes of a bonded indebtedness.
Only bonded indebtedness requires approval of the
majority of the board and stockholders owning at least
2/3 of the outstanding capital stock.
Ordinary debts of the corporation under the general borrowing
of the corporation, regardless of the amount, only requires
approval of the majority of the quorum.
Now, the question there is what is a bonded
indebtedness? And how do you distinguish it from a
mere general borrowing of the corporation?
BONDED INDEBTEDNESS
Is in the form of the bond.

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Is the bond different from a promissory note?
A BOND is long term in nature involving large number of
creditors. Unlike promissory notes which is issued only to
one person and short term of payment, a bond cannot be
for one year. The bond is payable for three years, 5 years or
7 years as the case may be. It cannot be a bond if it is less
than 3 years.
So a bond is for longer term involving large number of
lenders more than 20. The second feature of a bonded
indebtedness is that it must be secured by an encumbrance
on the corporate assets. So assets are given or assigned to
a trustee and then offered as collaterals or secure the
obligations under the bond.
To repeat, it must be in the form of a bond and then
secured by an encumbrance in the corporate assets and
subject for the approval of the SEC.
You cannot issue bond to the public unless you have a SEC
approval. Under SRC, remember that you cannot issue
securities to the public unless you secure SEC‟s approval.
Bonds are securities.
Also keep in mind, the act of incurring requires majority and
2/3. The act of increasing requires majority and 2/3. So the if
you have approval of 1 billion bonded indebtedness and after
one year, the corporation once more increase the same, so it is
subject to the same requirement which is majority of the entire
board and 2/3 approval of stockholders.
c. Power to Deny Pre-Emptive Rights
Sec. 39. Power to deny pre-emptive right. - All stockholders of a
stock corporation shall enjoy pre-emptive right to subscribe to all
issues or disposition of shares of any class, in proportion to their
respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such pre-
emptive right shall not extend to shares to be issued in compliance with
laws requiring stock offerings or minimum stock ownership by the
public; or to shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital
stock, in exchange for property needed for corporate purposes or in
payment of a previously contracted debt.
The power of the stockholders is to subscribe to any shares of
the corporation. The power of the corporation is to deny.
The right of the stockholders to subscribe to any and all
issuance of shares or the disposition of shares of any class of
shares of the corporation in proportion to his shareholdings in
the corporation.
As I said, the right to subscribe in any and all issuance of
shares of the corporation.
First question, does pre-emptive right apply to
issuance of stock or issuance of shares from the
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unsubscribed portion of the original authorized
capital stock? Or only in the increase of the capital
stock?
There was an old Supreme Court decision, that the pre-
emptive rights is only applicable in case of increase in the
capital stock and not from the issuance of shares from the
original capital stock.
For example, the authorized capital stock is for 1billion divided
into 1 billion share with a par value of one peso. The subscribed
capital stock is 500 million pesos with 10 stockholders and
each stockholders subscribed into 50 million shares each to
make it 500. Let‟s say that your paid up is 250 million and 25
million is paid for each stockholders. So you have 10
stockholders holding 50 million shares each, so what does it
mean? Each of them owns 10% of the company.
Now let’s say the corporation will issue shares from
the unsubscribed 500 million. Is that subject to pre-
emptive right?
According to the Supreme Court, No. Why? Because if the
stockholders want more than 50 million, in the outset they
should have subscribed for more than 50 million. Having
subscribed to 50 million upon the incorporation, it means
that the only number of shares they want in the
corporation.
So according to this case, pre-emptive rights is only applicable
in case of increase in the capital stock.
According to the SEC, this is based on the old corporation code.
Under the new corporation code, when I say new it means the
current Corporation Code, pre-emptive right applies to any and
all issuance of shares whether from the increased or from the
unsubscribed portion of the original authorized capital stock.
Bottomline, every time the corporation issues new shares,
whether from the increased or the unsubscribed portion, the
stockholders are entitled to pre-emptive rights. Why?
Because the rationale of pre-emptive right is for the
stockholders to maintain their proportional interest in the
corporation in terms of voting rights, in terms of assets upon
dissolution and in terms of dividends .
In what sense?
We have 10 stockholders, each of them has been given 10% of
the shares each. Every time the corporation declares dividends,
each receives 10%. Every time there is a voting of corporate act,
each can vote 10%. If you dissolve the corporation, each of
them gets 10% of the assets. Now of you issue the shares from
whatever source to third parties outside the 10, they will get
diluted from 10% to less than 10%.
That is why pre-emptive rights apply to any or all issuance
because any or all issuance may result to dilution of the
stockholders interest or proportion of his interest in the
corporation.
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Is pre-emptive right applicable to sale of treasury
shares?
YES. Because the word disposition covers such.
It says of any class of shares. For example:
1) At the outset, the corporation has "all common shares." 1B
common shares with par value of One Peso, then the
corporation amended the AOI, to issue preferred shares. Can
the holders of the common shares subscribe to the new
preferred shares? The answer is YES, because the law says "of
any class." So any class whether common or preferred.
2) At the outset you have 2B authorized capital stock, 1B
common shares and 1B preferred shares, and the holders of the
common shares are different from the holders of the preferred
shares. The corporation will increase the capital stock, to
increase only common shares. Can the holders of the preferred
shares exercise pre-emptive right to the new common shares?
The answer is NO, because the pre-emptive right will only
apply to the holders of the common shares. The purpose is to
prevent dilution, so it can only grant pre-emptive right to the
holders of common shares, because the preferred shareholders
are not diluted as the same preferred shares remain the same.
Is pre-emptive right absolute?
NO.
EXCEPTIONS TO THE RIGHT OF PRE-EMPTIVE
RIGHT:
1. If it is denied in the AOI or any amendment
thereto
2. Waiver of that right, whether express or implied
3. Shares issued in compliance with
laws requiring minimum stock ownership to t
he public
4. Issuance of shares in exchange for
property given for a corporate
purpose, if approved by the SH owning at least
2/3 of the outstanding capital stock.
5. Issuance of shares in payment of debt made
in good faith, if approved
by the SH representing 2/3 of the outstanding
capital stock.
The first one, if the right is denied in the AOI or any
amendment thereto. The by-laws of the corporation were
amended to deny pre-emptive right. The amendment was
approved by majority of the board and SH representing 2/3 of
the outstanding capital stock. Is the denial valid? No. The Code
says "amendment of the AOI." Amendment of the by-laws is
not enough, it must be AOI.
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In 2013, the SC said in one case,
"you cannot freeze-out the minority SH, in bad faith." In such
case, the corporation is already insolvent, but the majority of
the SH still wanted to continue the existence of the corporation
and revived it by adopting rehabilitation plan that will call for
equity infusion, but the minority SH does not want to put up
more capital with the corporation since it is already insolvent.
The minority SH wanted to dissolve the corporation, liquidate
and distribute the assets to the SH, so they can recover their
investment or whatever is left. But what the majority SH did
was to amend the AOI and increase the capital stock resulting
to dilution of the interest of the minority SH in the corporation.
So when the corporation will liquidate its assets, the minority
will be left with lesser share in the distribution of assets. Then
eventually the SC declared the corporation to be insolvent and
the equity infusion was not advisable, improper, and illegal. It
is in that context that the SC said you cannot dilute the
minority.
The second one, waiver of pre-emptive right.
When you become a corporate secretary, and you will be
issuing shares, don't forget to include in your board resolution
that "SH are given, for examples, 7 days from notice to exercise
the pre-emptive right, otherwise the right is deemed waived."
Because it cannot be indefinite (the exercise of pre-emptive
right). So given that period, and you did not exercise the right
within that period, then the right is deemed waived impliedly.
The third one, Shares issued in compliance with
laws requiring minimum stock ownership to the public.
What is your minimum public ownership
requirement for a public company?
10% must be owned by the public.
What happens if the public does not own 10%?
It will be delisted by the SEC.
So if you issue shares to comply with laws requiring minimum
SH ownership by the public, then you don't have to offer those
shares to existing SH, you will offer them to third parties to
comply with the requirement.
The fourth one, Issuance of shares in exchange for
property given for a corporate
purpose, if approved by the SH owning at least 2/3 of
the outstanding capital stock.
ABC Corporation is on expansion mode and is looking for a
property that could be the site of the factory of the corporation,
and after considerable search, the corporation was able to find
a land. It entered into negotiations with the owner of the
property. The owner wants to sell the property to the
corporation but in exchange for shares of stock in the
corporation. So the president discussed the idea to the BOD,
made proposals to the board, and the board approved it, and
presented it to the SH, to increase the capital stock, for the
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issuance of shares in exchange of the property to the owner of
the property. The increase in the capital stock, and the issuance
of shares of the corporation in exchange for the property was
approved by the SH owning 2/3 of the outstanding capital
stock or 66.67%. Pedro Reyes who owns 10% claims that the
issuance of shares in exchange of the property is in violation of
his pre-emptive right. Is Pedro correct?
No because it is issuance of shares in exchange for
property given for a corporate purpose,
if approved by the SH owning at least 2/3 of
the outstanding capital stock.
The last one, Issuance of shares in payment of a debt made in
good faith, if approved by the SH representing 2/3 of the
outstanding capital stock.
d. Power to Sell or Dispose of Corporate Assets
Section 40. Sale or other disposition of assets. – Subject to the
provisions of existing laws on illegal combinations and monopolies, a
corporation may, by a majority vote of its board of directors or trustees,
sell, lease, exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets, including its goodwill, upon
such terms and conditions and for such consideration, which may be
money, stocks, bonds or other instruments for the payment of money
or other property or consideration, as its board of directors or trustees
may deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock,
or in case of non-stock corporation, by the vote of at least to two-thirds
(2/3) of the members, in a stockholder‟s or member‟s meeting duly
called for the purpose. Written notice of the proposed action and of the
time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions
provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
After such authorization or approval by the stockholders or members,
the board of directors or trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the rights of third parties
under any contract relating thereto, without further action or approval
by the stockholders or members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or otherwise
dispose of any of its property and assets if the same is necessary in the
usual and regular course of business of said corporation or if the
proceeds of the sale or other disposition of such property and assets be
appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting
rights, the vote of at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter into any
transaction authorized by this section.
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Section 40, there are two kinds of disposition. One is
disposition in the ordinary course of business and the other
one is the disposition, sale, encumbrance of all or substantially
all of properties of the corporation. If it is a sale in the ordinary
course of business, it requires approval of the majority of the
board. Why? The reason is Section 25 of the CC, it provides
that unless the Corporation Code or the by-laws requires
otherwise, majority of the members of the board constituting a
quorum are sufficient to transact business. Sale in the ordinary
course of business does not require majority of the entire
board. If the sale of the properties, mortgage of the properties
is in the ordinary course of business, it only requires the
approval of the board of directors, it means majority of the
quorum.
The other one is the disposition, sale, encumbrance of all or
substantially all properties of the corporation, it requires the
approval of the board of directors and the stockholders
representing atleast 2/3 of the outstanding capital stock. It is
also subject to the laws on illegal combination, monopoly,
restraint of trade or other relevant special laws.
This was asked 7 times in the bar, Q: What special law is
applicable when it comes to the sale of all or substantially all of
the corporate properties? A: The Bulk Sales Law. So the Bulk
Sales Law must be read in conjunction with Section 40 of the
Corporation Code. Under this law, any sale in bulk as defined
by law must comply with certain requirements otherwise the
sale is in fraud of the creditors. There is a presumption that if
the sale is in bulk and does not comply with the requirements
under the law, it is a sale in fraud of the creditors.
Q: So what are the different kinds of sales in bulk? A: 1. Sale,
exchange, transfer and mortgage not in the ordinary course of
business, 2. Sale, exchange, transfer and mortgage of all or
substantially all of the assets of the corporation. 3. Sale,
exchange, transfer and mortgage of all or substantially all of
the business or trade of the seller.
The requirements under the Bulk Sales Law are the following,
1. The seller must provide the buyer a verified list of the
creditors containing the names of the creditors, their
addresses, amounts owing to each of them and the
respective maturity dates.
2. Inventory of the properties or assets to be sold and
must include the cost price or acquisition price in the
amount being sold.
3. The inventory and the list must be filed with DTI.
The consent of the creditors is not required because there is no
law requiring the seller or the buyer to secure the consent of
the creditors before the sale can be effected. If the
requirements have not been followed, the consequences are it
is null and void, Q: Against whom? A: Null and void against the
creditors of the corporation.
Q: So what would be the rights and obligations of the buyer in
the bulk sales law if it does not comply with the requirement
under the bulks sales law? A: Well the buyer holds the
properties in trust for the benefit of the creditors with the right
to return the price plus damages if warranted. So holding the
properties in trust for the benefit of the creditors and the right
to require the return of the price plus damages.
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That is why it doesn‟t make sense not to comply,
because__________ except if you do not know the law.
That is why this afternoon; we had a meeting with a client who
is selling his assets to a foreign based company. He told us that
he engaged the services of a lawyer from Harvard, lawyers from
so on and so on and he is engaging our firm to make sure that
his interest is protected and to “proof read” the sale purchase
agreement because he already hired the lawyers from Harvard
who are supposed to be experts. And I said, I feel insulted that
you are hiring us just to proof read. Of course I said it in a nice
way, that I feel insulted. And I said, perhaps those lawyers from
Harvard do not know about the Bulk Sales Law. You are
selling your property in bulk, all of them. Please ask them if
they know about the bulk sales law.
Well if you have a transaction involving a sale of all or
substantially all, the bulk sales law applies. The foreign counsel
was surprised when I cited bulk sales law. He asked me “are
you sure there is a law in the Philippines?” and I said, “Yes, it is
an old law but it has not yet been repealed”.
In fact, it is not limited to sale, assignment or transfer, it even
includes mortgage of all or substantially all. So even if it is bulk
sale by name, it also applies to mortgage of all or substantially
all of the properties. If these are not complied with, the
transferee will hold them in trust for the benefit of the creditor.
So might as well comply. Anyway, these are all procedural
requirements, but the consequences can be fatal, can have
adverse effects in implication if you do not comply.
You just notify them right, so better to give the list to the buyer
so the buyer can inform the creditors at least 10 days before the
sale and what will it take to notify the DTI? Nothing, just a
paper, just a letter.
BAR: Supposing Juan Dela Cruz sought the advice of his lawyer
on how he can save on estate tax upon his death. So he was
advised by his lawyer that he can put up a holding company
and that he can transfer all of his real properties in the holding
company in exchange for shares of stock, and he was advised
further that a transfer of real properties in exchange for shares
is a tax exempt transaction provided he acquires control of the
transferee corporation. So he heeded the advice of his lawyer,
he assigned and transferred all of his properties to a transferee
corporation. It turns out that he has a creditor. Oryt, creditor
filed a case against him, obtained a judgment which became
final and executory and implemented judgment the against
transferor, only to find out that there are no real properties to
be levied on execution because they have been transferred to
the holding company.
And there is no registry when it comes to shares, you do not
find shares right? You will never know where the shares are,
because they are intangible properties and the stock certificate
is in the possession of the stockholder.
First Question: Can the creditor pierce the veil of
corporate fiction? Is the setting up of the holding
company, recipient of the properties from the
transferor, be the basis for the corporate veil to be
pierced?
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A: The answer is No. Delfin vs. IAC. Tax avoidance scheme is
valid, it is ethical, it is recognized by the tax code and piercing
the corporate veil only applies in case of misuse or abuse of the
fiction of separate legal personality. There is no misuse or
abuse of legal personality fiction in this case.
Second Question: What then is the remedy available
to the judgment creditor?
A: The bulk sales law as the transfer or assignment did not
comply with the requirement of the bulk sales law. The
transferee holds the properties in trust for the benefit of the
judgment creditors.
Now the question in the bar, the transfer or assignment was
made during the pendency of the case, so in other words, a case
was already filed against Juan Dela Cruz, and during the
pendency of the case he sought the advice of his lawyer on how
he can save on tax upon his death and he was told to put up a
holding company where he will transfer all of his properties in
the holding company in exchange for shares of stock.
Then the judgment creditor obtains a judgment which became
final and executory. The question then was,
Can he pierce the corporate veil?
Can he pierce the corporate veil? There were two
answers, two conflicting answers, primary and
alternative.
Primary answer- Because the transfer was made during the
pendency of the collection case, it is in bad faith; therefore the
corporate veil should be pierced.
Alternative answer- No, because tax avoidance is valid.
It is better to subscribe to the alternative answer because it is
based on jurisprudence. The primary answer assumes there
was bad faith just because the transfer was made during the
pendency of the case regardless of the intention to save tax. But
here there may still be leviable properties, the shares. You can
levy the shares and that there is no registry of property for
shares. Somebody showed me a book, Sir, according to so and
so... I said,” According to Supreme Court…” (tawanan)
What is the difference between tax avoidance and tax
evasion?
You can always tell me tax evasion is illegal, unethical, contrary
to public policy. Tax avoidance is valid, allowed by the code.
When you become lawyers, you realize that the difference
between tax avoidance and tax evasion is a good lawyer. A
good lawyer can make tax evasion look like tax avoidance and a
lousy lawyer can make tax avoidance look like tax evasion. But
of course the difference would be whatever Kim Henares says
until June 30, 2016.
Does the Bulk Sales Law apply to sales made by a
manufacturer? Asked twice in the BAR.
No, because a manufacturer always sells in bulk.
There is one case on Sale of Corporate Assets on your
outline, Pena vs CA. This has been asked in the Bar.
The question was, “Is the assignment of the right to
redeem the property of the corporation subject to
stockholders’ approval and majority of the board’s
approval?”
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Sc said, “If what is being assigned is the only or substantially all
the properties of the corporation, that is tantamount to sale of
sale of all or substantially all which requires the approval of
stockholders and majority of the board and would fall under
section 40 of the Corporation Code.”
What is the remedy of one who is not in favour of the
sale of all or substantially all of the corporate
properties?
Appraisal right.
That is why the stockholders‟ approval should be secured in a
meeting called for that purpose; because of the appraisal right.
The dissenting stockholder has to be present in the meeting
where he will express his dissent against the proposed sale of
all or substantially all properties.
What is the test to determine whether the sale
involves substantially all?
The Bulk Sales Law does not provide for the formula or test but
it is found in the Corporation Code. If after the sale, the
corporation cannot continue with the purpose for which it was
organized, then the sale is considered as a sale of substantially
all of the corporate assets. It is not a question of quantity; it is a
question of effects after the sale.
Let us say La vista land has various properties for
development and they were able to sell only the lots in
(a certain place), is that covered by the Bulk Sales
law?
No, it is a sale in the ordinary course of business and it is not
the only or substantially all the properties of the corporation.
e. Power to Acquire Own Shares
Section 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. (a)
SECTION 41 refers to the power of the corporation to
acquire its own shares. Relate to Sections 7, 8, and 9.
What are the cases where the corporation can acquire
its own shares?
Ordinarily, the corporation cannot acquire its own shares
right? The corporation cannot be its own stockholder. That
does not make sense, so it is only in certain cases that the
corporation becomes its own stockholder.
Instances when the corporation may acquire its own
shares
1. To eliminate fractional shares arising out of stock dividends;
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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
4. Redeemable Shares (Sec.8)
5. Treasury Shares (Sec.9)
1. To eliminate fractional shares arising out of stock
dividends
When can there be a fractional share in case of stock
dividends?
Fractional share (butal) is less than one share.
Example: Let us say a stockholder owns 250 shares and
the corporation declares 25% stock dividends. 25% of 250
is 62.5. The .5 is the fractional share that the corporation
may acquire.
When you become corporate secretary, don't forget to include
in your board resolution the authority of the corporation to
acquire fractional shares arising from stock dividends.
Section 41 is not self executory. It is implemented by a board
resolution. Section 41 only empowers the corporation to
acquire its own share but it has to be authorize by the BOD.
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;
Can the corporation acquire or participate in sale of delinquent
shares?
No. The corporation may acquire delinquent shares
only if there is no bidder willing to pay the full amount
of the subscription plus interest, costs and expense
and subject to the existence of surplus profits.
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
provisions of this Code
Appraisal right (sec.81) is the right of the stockholder to
demand payment of the fair value of his share after
dissenting from a proposed corporate act involving
fundamental changes in the corporation in the cases specified
by law.
It is basically the right to get out of the corporation.
In close corporations, appraisal right may be exercised at any
time.
4. Redeemable Shares (Sec.8)
These are shares classified as such in the AOI which the
Corporation may take up upon expiration of a certain
period, regardless of availability of surplus profits.
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5. Treasury Shares (Sec.9)
Treasury shares are issued, fully paid and outstanding but
they are reacquired by the corporation through purchase,
redemption, donation and any other lawful means.
Purchase
Example: If the economy is not doing well and the shares are
being traded in the amount below book value, it makes sense
for the corporation to acquire those shares because those
shares acquired become assets. Basically they are cheap assets
because they are acquired below their real worth.
DONATION, well shares may be donated back to the
corporation by the stockholder.
What about REDEMPTION? That is confusing because
redemption is a mode of acquiring shares under Sec.
9. Then redemption is also separately discussed under
Sec. 8.
This was asked in the Bar - What are the requisites to
enable the corporation to acquire its own shares?
1. For a legitimate purpose only. The corporation may acquire
its own shares for legitimate corporate purposes.
2. Subject to availability of unrestricted retained earnings.
3. The condition of the corporation warrants it.
Redemption under Sec. 8 v. Redemption under Sec. 9
If acquisition of its own shares, treasury shares, is subject to
availability of surplus profit and one of the modes of acquiring
treasury shares is redemption under Sec. 9, how do we
distinguish then redemption under Sec. 9 that requires surplus
profit from redemption under Sec. 8 that enables the
corporation to acquire such shares notwithstanding lack of
surplus profit. So the only way you can reconcile is to say that
Sec. 8 on redeemable shares contemplates shares that were
retired and were later on redeemed. So redeemable shares are
shares that are retired, once they are acquired they are retired,
they are no longer outstanding, that is why you have to amend
the AOI to take them out.
Can you reissue Redeemable Shares after they are
reacquired by the corporation?
YES if re-issuance is allowed by the AOI. When re-issuance is
allowed by the AOI, then they become treasury shares. So if re-
issuance is allowed then it will cover shares under Sec. 9. So in
other words, the corporation can redeem redeemable shares
not requiring surplus profit if those shares once redeemed are
retired. If the AOI allow the re-issuance of these redeemable
shares then it will be governed by Sec. 9 which requires now
surplus profit, because you know that such treasury shares can
be re-sold upon such terms and conditions as may be authorize
by the board. (Dean's Note: It may be better to amend these
provisions and take out "redemption" under the modes of
acquiring treasury shares because it is confusing with Sec. 8.
Unless it will be explained the way I explained it to you..)
Bar Exam Question: Can a bank acquire its own
shares?
A: YES.
Q: Within what period should the bank dispose of its
treasury shares?
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A: 6 months from acquisition.
Now is the 6month period applicable to other
corporations not a bank?
The answer is NO. A corporation may acquire its own shares,
they become treasury shares, they become assets of the
corporation and as assets they can be sold or disposed of at any
time and there is no period for the corporation to dispose of
treasury shares.
When it comes to shares of a bank, a bank can only acquire its
own shares subject to BSP approval. Any shares acquired by a
bank should be disposed of within 6 months from acquisition
because the bank cannot be a stockholder of its own.
Asked in the Bar: How do you distinguish Treasury
Shares from Redeemable Shares?
Redeemable shares are shares classified as such in the AOI
and reacquired upon expiration of a certain period regardless
of existence of retained earnings or surplus profit. Treasury
shares cannot be reacquired if there is no surplus profit.
Redeemable shares have to be denied the right to vote while
Treasury shares need not be denied the right to vote because
by their very nature they cannot vote.
Redeemable shares are generally retired upon redemption
and therefore cannot be reissued whereas Treasury shares
can be resold upon such price or terms and conditions as may
be determined by the board.
The answer to this question, how can the issuance be
allowed in the articles?
If it is a perpetual redeemable share. Perpetual
meaning it can be redeemed anytime. So there is no
period. For example, San Miguel is notorious for this,
they will issue preferred-redeemable shares (these
features go hand in hand, preferred and redeemable
shares). So redeemable up to 3 years. So Let‟s say the
corporation issues 1 billion worth of preferred
redeemable shares with a term of three years and
every year it pays dividends on a guaranteed basis. So
those are the features. 3% every quarter or 12%
dividends every year. After 3 years, it becomes
redeemable. On the first quarter of the first year, the
corporation must pay dividends.
What if there is no surplus profit and the features of
the preferred and redeemable shares are guaranteed
dividends?
In the case of Republic Planters Bank v. Agana, xxxx can
the holders of such shares compel the corporation to pay
dividends due on the preferred-redeemable shares if the
payment of dividends is guaranteed by the corporation and
there is no surplus profit?
The answer is NO because these shares are not
borrowings and not indebtedness of the corporation.
Although pref shares are ----, they are also
stakeholders of the corporation and the right to
receive dividends is still subordinate or dependent on
availability of surplus profit. So preference comes in
only if there is surplus profit and dividends are
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declared by the corporation. If there is none then
there is no such thing as guaranteed dividends.
This is the case of San Miguel Corporation. San
Miguel Corporation used to be owned by the
government by up to 40% and the Supreme Court
declared that --- goes to Danding Cojuanco. So only
20% are left to the government. Now, the San Miguel
made an offer to Sandiganbayan to convert the
common share into redeemable shares. So from
common, voting diba. Ang sabi ng San Miguel, let‟s
convert your common to preferred and we will pay
you guaranteed dividends every quarter. Then they
got the approval of the Sandiganbayan all the way to
Supreme Court. So that is why the government is no
longer a voting stockholder of San Miguel, they were
reduced to non-voting pref share holder. When the
new PCGG chairman came in, now the present
chairman of COMELEC, they asked me, can they undo
the deal because they wanted to get back the common
shares to enable the government to vote and elect the
Board of directors of San Miguel. It cannot be undone
anymore right because it was approved validly by the
Supreme Court. The question is suppose San Miguel
loses money and investment, right now they are very
profitable, but supposing it bungle in its many
investments and there is no surplus profit, can the
government insist on payments of dividends because
it was guaranteed?
The answer is NO because there is no such
thing as guaranteed dividends if there is no
surplus profit. So they can only pray that the
San Miguel always has surplus profit so
dividends can be declared.
So on the third year, what happens now?
It will be redeemed by the corporation, so obviously those
shares once redeemed are deemed retired because it was
only good for 3 years. It cannot be reissued anymore. You
have to amend the articles of incorporation to take out
those redeemable pref shares.
What if there is no period?
It can be redeemed anytime by the corporation. So
kung wala kang redeemable period, it can be
redeemed by San Miguel anytime. If there is no
term, limit, period or time, it can be reissued
anytime upon the terms and conditions approved
by the board of directors and in that case it
becomes treasury shares.
Are treasury shares entitled to dividends? NO.
Can they vote? NO as long as they are in the treasury.
Are they part of the outstanding capital stock?
They are not. They used to be outstanding but when
they are acquired by the corporation they become
mere assets of the corporation.
Can they become a part of outstanding capital stock
again?
Yes, if they are re-issued by the corporation.
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f. Power to Invest Corporation Funds in another Corporation
Sec. 42. Power to invest corporate funds in another
corporation or business or for any other purpose. - Subject to
the provisions of this Code, a private corporation may invest its funds
in any other corporation or business or for any purpose other than the
primary purpose for which it was organized when approved by a
majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3) of the members in the case
of non-stock corporations, at a stockholder's or member's meeting duly
called for the purpose. Written notice of the proposed investment and
the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books
of the corporation and deposited to the addressee in the post office
with postage prepaid, or served personally: Provided, That any
dissenting stockholder shall have appraisal right as provided in this
Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary purpose
as stated in the articles of incorporation, the approval of the
stockholders or members shall not be necessary. (17 1/2a)
Again, investment of funds may be for primary purpose or
secondary purpose in another corporation.
If the funds are invested by the corporation for primary
purpose, then obviously it must require approval of the board
of directors (if we say BOD, we mean, majority of the quorum
suffices)
BAR: ABC Corporation is engaged in the business of
manufacture of soft drinks and then it wanted to
invest its funds in the manufacturing of bottles for
the soft drinks and a stockholder required or asked
the board taken up in a stockholders’ meeting, so he
can dissent and then exercise his appraisal right. If
the funds to be invested by the manufacturer of
softdrink are for manufacture of bottles, does this
require SHs’ approval? Is this something that a
stockholder can exercise his appraisal right?
Under Section 42, if the funds invested are for primary
purpose, any undertaking or venture incident to primary
the purpose, then board approval suffices. The approval of
the stockholders is not necessary.
If the funds invested are for secondary purpose, then under
Section 21:
1. Approval of the majority of the board of directors
2. A meeting must be called for the purpose for the
stockholders
3. The corporation must secure the approval of the SH
holding at least 2/3 of the outstanding capital stock.
So obviously, written assent will not suffice. There must be
a meeting called for that purpose so the SH can exercise
their appraisal right
Section 42 is not enumerated in Section 81 where cases on
appraisal right may be exercised. Section 42 understandable on
the basis which provides that appraisal right is available for the
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stockholder who dissents in investing the corporation funds for
a secondary purpose with the expectation that the funds will be
invested for primary purpose, not secondary purpose. He puts
his money in a corporation with the expectation that the equity
he made in the corporation would be devoted for primary
purpose.
If the funds are invested for secondary purpose, the law
requires stockholders to be consulted, the board must go back
to the SHs to get their consent, and those who are not in favor
can exercise their appraisal right.
What about investment of funds in a business not in
the secondary purpose? Is this allowed by Section
42?
Section 42 says investment of funds in secondary purpose
or another business and this requires approval by the
board likewise and SH by the 2/3.
Does this require amendment of the AOI? Can the
corporation invest its funds in an undertaking or business
not at all related, not at all provided in the AOI as
secondary or primary purpose?
This Section 42, when it comes to investing funds in
another business not part of the secondary purpose must
be read in relation to Sections 16 and 45 of the
Corporation Code. So that business must be incorporated
either as a primary purpose or secondary purpose.
A corporation can only exercise powers conferred upon it
under the Articles, express, implied, or incidental to its
corporate existence.
So what 42 recognizes is the prerogative of the corporation
to invest the funds in another business, that requires an
amendment of the AOI otherwise it would be ultra vires.
BAR: A corporation is engaged in deep sea fishing, it
wants to invest funds in agriculture, it being the
secondary purpose. What steps should be undertaken
by the Corporation to allow investment of funds in
agriculture? What are the procedures that should be
taken up under Section 42 if the corporation invests
its fund for secondary purpose?
1. Board approval (majority vote)
2. Notice to the SH of the meeting and must include the
proposal to invest funds in secondary purpose,
3. and it that meeting, get the approval of the SH
representing 2/3 of the outstanding capital stock,
4. for the corporation to pay dissenting SH the fair value
of the shares subject to availability of surplus profits
Section 42 says funds. Does the term “funds” include
properties?
According to the SEC, the term “funds” includes properties
in the sense that can an idle asset of a corporation be used
for a different purpose not the primary purpose of the
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corporation? According to SEC, idle funds may be devoted
to secondary purpose, in this case, it will be treated as
investment of funds in secondary purpose requiring SHs‟
approval.
So the property must be devoted for primary purpose, right? If
the property is to be devoted for secondary purpose, it requires
board and SHs‟ approval. So same requirement.
g. Power to Declare Dividends
Sec. 43. Power to declare dividends. - The board of directors of a
stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, in property, or in
stock to all stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on delinquent stock shall
first be applied to the unpaid balance on the subscription plus costs
and expenses, while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly called
for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in
excess of one hundred (100%) percent of their paid-in capital stock,
except: (1) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring
dividends without its/his consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable
contingencies. (n)
43 is the heart and soul. Most of the questions on the powers of
a corporation focus on 43 and 45 – dividends and ultra vires.
The heart of the proprietary right of a stockholder is the right
to receive dividends. A stockholder invests money in the
corporation not because he just feels it or likes it but because
he wants to earn dividends, he wants to earn profits and those
profits must be translated(?) to dividends payable to the
stockholders.
BAR: Are profits same as dividends?
Profits are not dividends. Profits are sources of dividends.
Dividends are profits, in whole or in part, set aside for
distribution to the stockholders.
Profits are not dividends. [To be considered as dividends], they
ought to be separated or segregated, earmarked and
distributed to the stockholders.
REQUIREMENTS OR CONDITIONS FOR A
CORPORATION TO BE ABLE TO DECLARE
DIVIDENDS
1. Availability of unrestricted retained earnings
2. Board approval for cash dividends
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3. Board approval and stockholders‟ approval cause of investment and the value of the share upon dissolution
representing 2/3 of the outstanding capital stock for is your liquidating dividends.
stock dividends
It is called liquidating “dividend” but it is not really in the
RETAINED EARNINGS/SURPLUS PROFIT – a context of what we understand as dividends in Section 43 .
corporation has surplus profit if the assets exceed the Rather, it is the return of the capital to the stockholders upon
combined subscriptions and liabilities of the corporation dissolution of the corporation.
The formula is: Assets – liabilities – subscriptions BAR: Can the corporation declare dividends out of
re-appraisal or re-evaluation surplus? The
Now why is it that subscriptions are deducted from
corporation acquired a real property 5 years ago
the assets to determine the surplus profit?
which is 5M. Now, the appraised value of the
This is because subscriptions cannot be touched. They property is already 15M. May the 10M difference be
cannot be impaired. They are held in benefit for the the source of dividend distribution?
creditors under the trust fund doctrine. They cannot be
No, not allowed because it is merely a paper gain that can
used as basis/source for dividend contribution. They are
be wiped out anytime, it is not an actual gain. Hence it
part of capital, and if they are part of capital, they cannot
cannot be a basis for declaration of dividends.
be available for distribution
The BoD, to motivate the stockholders and directors,
In order to have surplus profit, the corporation must have
invoked the business judgment rule to pay dividends
something more than subscriptions plus liabilities of the
to stockholders and pay allowance and bonuses to
corporation.
the officers and directors all in the guise or pretext of
It is not enough to have retained earnings. The law qualifies business judgment rule. Can the corporation declare
retained earnings to be unrestricted, which means that there dividends under the business judgment rule to work
is no condition, no burden, no limitation imposed to the hard for the corporation?
corporation for the declaration of dividends.
No, because there is no surplus profit
For example, if a corporation is a party to the loan agreement
Anything that increases of the assets enhances the capability of
that prohibits the declaration of dividends, despite surplus
the corporation to declare dividends. So anything that
profit, it cannot be said that it is unrestricted since there is a
increases your assets like donation to the corporation or in
limitation or burden on it.
increase in the income of the corporation or gain in sale of a
BAR: What are the exceptions to the rule that a property of the corporation
corporation must have surplus profit before it can
Non-recurring claim – means it does not recur in the
declare dividends?
ordinary course of business.
Cases where the corporation may declare dividends
Operating profit is your recurring claim. It recurs. It is
despite lack of retained earnings.
continuous.
1.) Wasting Asset Doctrine – Wasting asset-corporation
An example of non-recurring claim is let‟s say, income arising
whose capital gets depleted during the course of the operations
from sale of real property not used in the usual course of
is NOT required to replenish its depleted capital before it can
business. It does not happen all the time that they have an
declare dividends.
income arising from the sale of property if you‟re not a realty
Ex: Mining Companies, timber cutting companies. The capital company.
of a mining company gets depleted in the course of its
And this is where Ramon Ang is an expert because he buys
operations. Diba as you complete the mining ___, you deplete
companies, flips, sells them. (What like Richard Gere sa Pretty
the capital? So the corporation can declare dividends if there is
Woman? Haha) He has done this for Coca-cola, Philippine
income without having to make-up or replenish depleted
Daily Inquirer, Meralco, PAL. That‟s his formula. So the gain
capital.
realized from the sale, of course, is the profit ___________.
Ordinarily, your capital should not be impaired in order to
Now for Cash Dividends, the law requires approval by the
declare dividends but under this doctrine, it is enough that the
board, and
corporation has income or profit to be able to declare
dividends. Stock Dividends, both board (majority of quorum to pota)
and stockholders (2/3 to ha pota) approval.
2.) Liquidating Dividends
BAR: In a stockholders’ meeting, a stockholder
When the corporation dissolves the share will be distributed to
demanded the corporation to pay them CASH
the stockholders so that the gain of the stockholder is subject to
dividends, the Corporation presented that it has only
liquidating dividends. The gain is the difference between the

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so much surplus profit. The stockholder stood up, and
demanded the corporation to declare dividends and
prevailed upon the chairman of the corporation to
have a “raising of the hands” and all the stockholders
in attendance voted to declare CASH dividends. Is
that valid?
Malamang hindi. It has to be approved by the BOARD and
not by the stockholders.
How about the stockholders declaring or voting to
declare STOCK Dividends?
Also NO. Likewise, to declare stock dividends, you need
board approval. (Majority of Quorum of Board and 2/3
vote of shareholders)
Supposing the question is, “Can the Stockholders
COMPEL the Board to declare CASH Dividends?” Is it
discretionary on the board to declare dividends?
As you all know it is discretionary. The corporation may or
may not declare dividends.
So when is it compellable by MANDAMUS?
It becomes compellable by mandamus when it becomes A
DUTY.
It becomes a duty when the surplus profit exceeds 100% of the
PAID-IN CAPITAL. Not subscribed capital ha, but paid-in
capital. Anything in excess of the paid-in capital must be
declared as dividends.
BUT then, given the language of Sec. 43, there are THREE
exceptions, and these exceptions make the general rule look
like nothing, especially the third exception.
The three exceptions are:
(1) When justified by definite corporate expansion
projects or programs approved by the board of
directors
(2) When the corporation is prohibited under any loan
agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends
without its consent, and such consent has not yet been
secured
(3) When it can be clearly shown that such retention is
necessary under special circumstances obtaining in
the corporation, such as when there is need for special
reserve for probable contingencies (codal nayan kasi
dean loves to eat his words)
The third one is the all-encompassing, flexible, “vague-of-
them-all” exception. The special reserve to meet contingencies.
The corporation can always say, “We need extra reserves. You
never know what will happen. You can never tell. A new
73
president may bring about instability, disorder, chaos. We need
to be prepared for the next election. Let‟s wait for a while ha”
*blah blah blah part of the lectuuure* I have a client who has
accumulated profit in excess of ONE THOUSAND TIMES his
paid-in capital, and has not declared dividends, because they
own 90% of the company, 10% by the minority. If they declare
dividends of 100M, 90M will go to them, and 10M will go to
the minority stockholders. They don’t want any leakage, they
want everything for themselves (trulaloo). So they did not
declare dividends. So the SEC came and visited their office,
and inspected the records as part of their visitorial right, and
it became clear to them that the corporation has amassed
surplus profit way in excess of the 100% paid-in capital
threshold. So the SEC asked why, and we said we were in
“expansion mode”, so the official asked, “Where’s your board
resolution approving the expansion program?” (because it
cannot be just laway diba?). The code says definite
expansion program as APPROVED by the BOARD of
directors. So I was forced to say, “nonono it’s in the works.
Relax”. Come on, declare ka na, nakakaawa naman
stockholders. But in a public company you cannot do it because
in a public company, you would be booted.
What are the kinds of dividends?
We have cash and stock, as you all know.
What about property dividends, bond dividends,
scrip dividends, how do you classify them?
In the context of Sec. 43, there are only two kinds. Cash
and Stock. Anything not payable in shares is considered
CASH DIVIDENDS. So other dividends require approval
by the board, not the stockholders.
Which of these dividends requires SEC approval?
Cash dividends do not require SEC approval.
Stock dividends do not require SEC approval, unless you
have to increase your capital stock, but you get SEC
approval not because of stock dividends but because of the
increase in capital stock. Remember Sec. 38, if your
authorized capital stock is not enough when you declare
stock dividends, then you have to increase your capital
stock.
Declaration of Property dividends are likewise not subject
to SEC approval. But in order to DISTRIBUTE property
dividends to stockholders, you have to get SEC approval.
The declaration PER SE does not require SEC approval,
but to distribute PROPERTY dividends, you have to get
SEC approval.
 CASH and STOCK dividends can be distributed
WITHOUT SEC APPROVAL.
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BAR: Distinguish CASH from STOCK dividends. Stock dividend is a 2-step process.

CASH DIVIDENDS STOCK DIVIDENDS 1st step: To declare cash dividends

payable in cash
board approval only
require cash disbursement on
the part of the corporation
increase the wealth of the
stockholder
cannot be revoked after
declaration
payable in shares
Board and stockholder
approval.
There is no cash outlay
because surplus profit is
capitalized.
do not increase the wealth of
the stockholder
may be revoked even after
declaration BUT BEFORE
ACTUAL ISSUE
2nd step: The Corporation will use the cash to subscribe
shares of stock at par value and distribute to SHs
What is the consideration for the issuance of shares
brought about by SH?
Section 62 of the Corporation Code paragraph 5- stock
dividends.
No money out from SHs, money comes from corporation‟s
surplus profit. Although the SHs own the money, they
don‟t have physical enjoyment because the corporation
uses the cash for subscription of shares.

Cash dividends received by RECORD DATE - date insofar as the corporation is

REGARDLESS OF THE concerned to recognize SHs right to vote, entitled to receive
natural persons are subject to RECIPIENT, SDs are not
tax. subject to tax. dividends or participate in the corporate acts.
Declaration date is different from record date and payment
date. If the corporation declares dividends, they are not paid
Revocation right away. Usually it‟s a 30-day wait or 1 month.
What consummates you stock dividends? Example:
Not by declaration but by issuance of shares that‟s why Declaration date is June 1
before issuance, you can revoke.
Payment date is June 30
Dean‟s client declared stock dividends, shares of stock are
supposedly listed but the PSE did not approve the listing. Record date could be between June 1 and June 30
My client asked me, can we revoke the stock dividends If the corporation said that record date is June 15, only
declaration? SHs of record are entitled to receive dividends.
Yes, because you have not yet issued the shares. But If a SH transferred shares on June 16 or 17, who
revoking it is different from acceptability. Legally allowed will get the dividends?
but PR wise, it‟s a nightmare. Can you imagine the feelings
of your SH, you whet their appetite diba? You declared SD SH of record as of June 15 NOT SH of records on June
tapos, ay di pala. 30 or payment date.

Why is it that after declaration of cash dividends, it
cannot be revoked?
Because the relationship is no longer SH (investor)-
Corporation, it becomes now creditor-debtor relationship.
The SH becomes the creditor with a right over the money.
Increase in wealth
Cash dividends increase the wealth of the SHs, while stock
dividends do not. This the academic distinction good for bar
purposes. But in the real world, you can make money in stock
dividends if you can sell the shares above par. What do I mean?
Cash dividends, there is wealth because the stockholder
receives cash but stock dividends, stockholder receives shares
not cash yet they have the same book value because dinamihan
mo lang yung shares mo pero pareho parin yung capital mo.
You can make money if you can sell your shares above par but
it‟s the selling after the stock dividend that results in increase
in wealth not the stock dividend per se.
Who are entitled to receive dividends?
Only SH.
NIELSON v. LEPANTO
ABC company enters into a management contract with XYZ
mining company and one of the features of the management
contract is the right of ABC to receive 10% stock dividends but
ABC is not a SH of the mining company.
So is it entitled to receive the dividends?
No.
What can be the alternative to 10% stock dividends?
It can be PROFIT-SHARING. There is nothing wrong in
giving profit share to a non-SH but it‟s also wrong to pay
dividends for someone who is not a SH.
May the corporation declare dividends midway to
the year?

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GR: Wait until the end of the fiscal year before you can
determine if you have surplus profit. Thus, it‟s not generally
allowed to declare dividends midway to the year.
EXCEPTION: If the corporation has so much surplus profit
that it cannot be wiped out by loses in the subsequent quarters
of the year.
Q: Can the corporation declare dividends out of its
additional paid in capital stocks?
Paid in surplus is the consideration received for the issuance of
shares in excess of par value. So if the par value is 10 Php and
the share is issued for 20 Php, this 10 Php share increase is
your paid in surplus.
So, let‟s say the corporation has a paid in capital stock of 1
billion Php divided into 1 billion shares par value of 1 Php , and
let‟s say 250 MILLION shares were issued for 2php so can 250
is your subscribed capital stock right? And 250 million
additional of paid-in capital or paid in surplus. The question
now can the corporation declare dividends out of the paid in
surplus? (BAR)
Q: Remember what section 43? What does section 43
provide with respect to the source of dividends?
A: Unrestricted retained earnings. It means profits in the
course of its operation.
A: No. Section 6 of the corporation code refers to the issuance
of no par value shares. Right? And under this, the
consideration received by the corporation for the issuance of no
par value shares forms part of the capital and not available for
redistribution.
Q: Is there a counterpart provision for par value
shares? That the consideration received for the
issuance of par value shares forms part of the capital
and not available for redistribution?
A: There is none.
Q: So can you now take a position that shares issued
in the excess of par value can be declared as
dividends?
So I’m just trying to confuse you noh…
Let‟s make a distinction between a cash and stock dividends.
(BAR)
Q: So can you declare stock dividends out of paid in
surplus?
A: Yes, because you‟re not giving away money out to the
stockholders. You are just capitalizing the profits. You just
convert the profit to capital.
With regard to cash dividends, there is a conflicting SEC
Opinion. One argument in support of declaring dividends out
of paid in surplus is section 43 that says that dividends shall be
taken resource from unrestricted retained earnings (profits in
the course of operations). On the other hand, you can take the
position that the excess of the par value may be declared as
cash dividends because under section 6 there is a provision to
the effect that the entire consideration received by the
corporation for the issuance of NO PAR VALUE shares forms
75
part of the capital and not available for distribution. There is
no counterpart provision for PAR VALUE SHARES.
Likewise, the trust fund doctrine is limited only to the par value
shares of the corporation. So in excess of the par value is not
covered by the trust fund doctrine. So it can be argued either
way when it comes to cash dividends. But for stock dividends,
no room for argument, it can be declared as stock dividends.
Easier question (acc. to Dean): The authorized
capital stock of the corporation is 1 billion divided
into 1 billion shares with a par value of 1 Php fully
subscribed and paid up. The Corporation has surplus
profits of 650 million. Can the corporation declare
STOCK DIVIDENDS of 50%?
A: Yes.
Q: What is the basis? Your authorized shares or
subscribed shares?
A: Based on the subscribed shares. Based on the example, the
authorized capital is fully subscribed, so if you have 650 M
surplus profits and your subscribed shares is 1 billion par value
is 1php, one-half (1/2) of that is 500 M, so you can declare 50%
stock dividends your surplus profits is more than 500 M, more
than ½ of your subscribed shares.
Q: What are the steps to be undertaken by the
corporation to support the 50% stock dividends?
A: There must be an approval of the majority of the board and
the stockholders (SH) representing at least 2/3 of the
outstanding capital stock. There must be notice to the SH.
To complete the process, what do you need to do? Let us
do the math again. You‟re authorized 1 million shares par
value and it is fully subscribed and paid off. You have the
money because you have 650 M and you only want to
declare 50% stock dividends. But what do you need to
carry-out this? Do you have enough shares? So what do
you do when you do not have enough shares? You pray to
God? So what would it take to get additional shares? What
do you do under sec. 38? (That is the most leading
question I have ever asked. Do you pray to God, please
grant me enough shared…?)
-Increase your capital stock by 500 M shares.
Q: So what is the maximum increase that the
corporation may effect given that you have 500 M?
A: You can increase up to 2 billion because 500 M is 25% of 2
billion.
Very easy question: A subscribed 200 million shares,
par value is 1php, subscription is hundred million
pesos, hundred million shares, so he paid 25 million,
how many shares can he vote?(BAR) 100 or 25?
A: 100.
Can the corporation apply the cash dividends against
the unpaid subscription?
A: No. Under section 43 of the CC, the power of the corporation
to apply the cash dividends applies to delinquent stocks.
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h. Power to enter into Management Contract
Sec. 44. Power to enter into Management Contract in
relation to Sec. 33 contract with interlocking directors
The contract can be called by any name for as long as the
intention is to delegate or entrust to another corporation the
management of the corporation.
Just because the corporation is entering into a management
contract does not mean that the BoD is neglecting its duty to
the corporation because the BoD can still exercise its powers.
Approval requirements:
- by the majority of the quorum of the BoD of both the
managing and the managed company
- by the majority of the stockholders of both the
managing and the managed corporation
- The only time that the requirement is elevated to 2/3
of the stockholders is in cases of interlocking
stockholders/directors
Interlocking directors in the context of Sec. 44 and Interlocking
directors in the context of sec. 33 are not the same.
In sec. 33, there is only one director seating in the board of the
two corporations. however under sec.44 majority of the
managed corporation is also the majority of the managing
corporation and the stockholder owns more than 1/3 of the
managing corporation. In which case, the approval requires
majority of the outstanding capital stock of the managing
corporation and 2/3 of the OCS in the managed corporation
Period of Management Contract
GR: 5 years as long as the contract is between TWO
CORPORATIONS.
EXPN: 1.) Management contract between two corporations
may be longer than 5 years pursuant to Mining laws (Mining
Act of 1995). Under the said law, the contract may be for 25
years.
2.) Technical/Financial Service Agreement or Production
Agreement can be for 25 years.
4. Ultra Vires Acts
May ultra vires act be ratified?
It depends. If the act is contrary to law, morals, good
customs, public order, it cannot be ratified. It is void. If it
is not contrary to law but simply outside of the express,
implied and incidental powers of the corporation, it can be
ratified. (Akohe? Mining) An ultra vires act, which is not
contrary to law may be ratified on equitable grounds such
as estoppel.
Akohe Mining Case: The company set up a posting office inside
its business premises to facilitate the communications between
its employees and their relatives. The director of posts agreed
to its request to set up the postal office on the strength of his
representation that it would agree to the terms and conditions
that the director may impose. The act was contested on the
ground that it was ultra vires. Is it an ultra vires act?
76
NO because any program to promote the welfare of the
employees is not considered ultra vires. Even assuming that it
is ultra vires, it is not a void act it may still be ratified by
estoppel.
Ultra vires act on the Part of the Board
Is it possible that an act be an intra-vires act on the part of
the corporation but ultra-vires in the part of the board?
Example:
Let‟s say the corporation is allowed to invest its funds in the
primary purpose, no problem right?
Or secondary purpose.
Now let‟s say the board of directors approved the investment of
funds for the secondary purpose, but no stockholders approval
was obtained.
Q: Is that act ultra vires on the part of the
corporation?
A: It‟s not. Because the corporation is authorized to invest
funds for secondary purpose.
But that act is ultra vires because the board acted beyond the
scope of its authority. By itself it cannot approve investment
funds in secondary purpose; it must be approved likewise by
the stockholders owning 2/3 of the outstanding capital stock.
Now that kind of act may be ratified because what you only
need to do is to get the approval of the stockholders
representing 2/3 of the outstanding capital stock.
What about ultra vires act on the part of the officer, is it
possible that the act is intra vires because it is the power of the
corporation and yet unenforceable because the officer has no
authority or acted beyond the scope of his authority?
Example:
Let‟s say a person signed a deed of sale without the consent of
the corporation. Let‟s say it‟s a purchase of a property in the
ordinary course of business, but the one who signed the deed of
sale was not the one authorized by the board, so the act is intra
vires but still unenforceable against the corporation because
the officer was not authorized to transact business for the
corporation unless the act is ratified with the doctrine of
apparent authority ___.
Q: What is the remedy for ultra vires act?
A: Injunction, to prevent the execution, performance of the
ultra vires act.
Q: Now once the act is performed or executed, what is
the remedy of the corporation? What if it has been
performed partly or wholly?
A: NOT injunction. Because you cannot enjoin an act that has
been consummated. So the remedy is a DERIVATIVE SUIT.
A stock holder may file a derivative suit on behalf of the
corporation to set aside, assail or question the ultra vires act.
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G. MEETINGS A: 1 day

There are only 2 kinds of meetings under the code. BOARD and
STOCKHOLDERS. Management meeting is not indicated. Q: should it be in writing?
For board meetings, you only have to 2 options, Majority of the A: not necessary, unless the by-laws requires otherwise.
entire board Quorum unless the by-laws provides otherwise
BAR:
And for stockholders you only have 2 options, majority or 2/3.
The AOI of ABC Corporation provides that its principal office is
Quick review. in Makati. Its area of operations is in Ortigas. The board meets
in Manila hotel and stockholders likewise Makati Shangri-La,
Stockholder‟s meetings, there are 2 kinds. Regular and Special.
so are the meetings valid?
Q: Regular, how often?
A: once, annual regular stockholder‟s meeting
Principal office – Makati
Area of operations – Ortigas
Q: For what purpose?
A: to elect directors of the corporation, because their term is
Board meetings – Manila hotel
only 1 year.
Stockholder‟s meeting - Makati

Q: Special stockholder’s meeting, how often?

Are the meetings valid?
A: as often as may be necessary upon call by the presiding
officer. So the board met in a place other than the principal office of
the corporation, not in the city where the office is located.

Q: notice requirement?
A: it is valid, because it can be even outside the country unless
A: Regular meetings – 2 weeks written notice
the by-laws provides otherwise.
Special meetings – 1 week written notice unless otherwise
provided by the by-laws
For the stockholder‟s meeting in Makati?
A: as long as it is in the city where the principal place of office
Q: Where do you hold your stockholder’s meeting,
is located. Preferably in the principal office itself.
regular or special, where?
A: in the city or municipality where the principal office is
located preferably the principal office itself BAR
Q: Who presides over the meetings?
Q: When? A: president. Unless otherwise provided by the by-laws
A: in the date fixed by the by-laws. If the by-laws is silent, any *in practice it is the chairman of the board but the chairman
date on April as approved by the board. must be authorized by the by-laws

Q: What about Board meetings? Q: Can you hold stockholder’s meetings through
teleconference?
A: Regular – once a month unless otherwise provided by the
by-laws A: you cannot, teleconference not allowed in the Philippines
Special – as often as may be necessary
Q: What about board meetings, can you hold board
meetings through teleconference or videoconference?
Q: Where?
A: Yes. The SEC has already issued a regulation regarding
A: any place even outside the country unless the by-laws
teleconference or videoconference.
provides otherwise.

Q: What are the requirements of teleconference or

Q: Notice requirement?
videoconference, should it be in the by-laws?

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A: Not necessarily. It is enough that the director expressed his
intention to participate through teleconference or
videoconference and he must be identified, and the
proceedings are recorded.
To repeat, under the SEC rules, he must express his intentions
to participate in teleconference or videoconference. He must be
identified as a director of the corporation participating in the
proceeding and second it must be recorded.
When I was corporate secretary of the bank, there was a
measure we are pushing for approval and it was a very
important measure. We needed everyone to be present.
Because we only have 8 out of 15, we control the board but it is
a very slim majority, so therefore, no one should be absent. If
one is absent, it becomes a tie with 7-7, now if 2 are absent, our
proposal might not be carried out. Our board meeting is at 2pm
and 1 is in California, the time there is 11pm, and the other one
is in New York with 2am there in New York. 1 is 60+ and the
other 1 is 80. So because no one could be absent and they
expressed their intention to participate in teleconference. So I
asked, are you blah blah the director of the bank, he answered
Yes, and I asked do you confirm or affirm your intention to
participate via teleconference, he replied yes. And before I can
even go to the measure, he said, I‟m in favor of everything that
you will present to the board, is that valid?
Pena vs CA, we covered this right? Remember that the
issue in this case, is that the By-laws provide that a
quorum is 4/5 and only three (directors) approved the
mortgage and assigned their right to redeem, so is the
mortgage and the assignment of the right of
redemption valid?
It is not valid. The by-laws of the corporation provided that 4/5
of the directors constitute a quorum and only 3/5 were present.
There was no quorum to validly transact business. Sec. 25
states that the by-laws of the corporation may fix a greater
number tha the majority of the number of board members to
constitute the quorum.
There’s this case also, People vs Dumlao. Dumlao was
a trustee of GSIS, so when he was still a trustee, he
and other members of the board of GSIS authorized
GSIS to enter into a “lease with option to purchase
agreement”. After a new set of trustees were elected,
the new set found the contract to be disadvantageous
to the government, so they filed a criminal complaint
for violation of RA 3019 against Dumlao et al. for
entering into a contract that is disadvantageous to the
government.
Dumlao motioned to quash the information on the
ground that the minutes attached to the information
showed that only THREE OUT OF SEVEN signed the
minutes. So his argument was if only 3/7 signed the
minutes, then the lease with option to purchase
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agreement was not really authorized by the board. So
if it was not authorized and approved by the board,
then he couldn’t be charged
The issue here is whether the minutes of the meeting
need to be signed by majority of the entire board to be
given PROBATIVE VALUE?
The Shupreme Court said that there is nothing in the
Corporation Code, or any law in the Philippines, that requires
the minutes of the meeting to be signed by majority of the
entire board. As long as it is signed by the CORPORATE
SECRETARY, it will be given probative value.
RULE ON ABSTENTION
I think I told you about GSIS vs CA right? In one of the
meetings I attended, as Corporate Secretary, after
certifying that there was a quorum, Atty. Winston
Garcia stood up and moved that the POSITIONS of
Chairman and Corporate Secretary be declared
Vacant.
He invoked the “sovereign will of the
stockholders”, “we own this company, and we have
the right to appoint our own chairman and corp. sec.”
Of course that’s wrong, since stockholders have no
right to appoint the corporate officers. The
stockholders must appoint the board, and it is the
board who will appoint the officers. The stockholders
cannot by-pass the board, and directly appoint or
remove the corporate officers. So I declared him “out
of order” (ano sya vending machine?)
Because they saw our strategy, that only nominees for
independent directors allied with us were qualified,
they got more directors than us, but we have the
independent directors, so we got 8/15, so we control
the corporation.
So they walked out, and had their own meeting in
Mandaluyong.
So we had two sets of directors, so which one is
controlling?
So there‟s this case, Marbel(?) vs CA, so right after we had an
election, I faxed the names of our directors to the SEC. Because
under that case (supra), whoever are listed in the GIS, are the
directors of the corporation.
The following day, they also faxed their set. Now we have two
sets of directors, our set and their set. Now that cannot be
decided by the SEC (obviously), because it is an intra-corporate
controversy cognizable by the RTC acting as a Special
Commercial Court.
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So for two weeks we had two sets of directors, until the Go
family could not take it anymore because the Bank was
bleeding, many customers were withdrawing their funds. The
Go family sold their bank. (Equitable PCI Bank yung
corporation. Thanks Dean for not emphasizing that earlier).
SO THE QUESTION NOW IS: Can the meeting
continue if the stockholders walked out?
Yes of course. Once the Corporate Secretary certifies that there
is a quorum, then the meeting can continue, even if, during the
meeting, some stockholders leave and there is subsequently no
quorum. Unless the meeting is adjourned, then the meeting
can continue.

What will take precedence over a Motion to Adjourn?

What motion takes precedence over it?
A motion to declare the person out of order. Here, one
stockholder moved to have the meeting adjourned since there
was no more quorum after some stockholders walked out. So
obviously I cannot adjourn the meeting because I have no more
quorum. A Motion to Declare A Person OUT OF ORDER is
superior to a Motion to Adjourn. Anyways, that‟s too technical,
let‟s move on to bar matters. (K!)

What is the effect of abstention on stockholder’s

meeting?
The effect is that a stockholder is NOT entitled to Appraisal
Right. In those cases allowed by law where appraisal right may
be exercised, so amended of AOI to restrict stockholder‟s
rights, the stockholder who is present BUT ABSTAINS, is NOT
ENTITLED TO EXERCISE HIS APPRAISAL RIGHTS. He
cannot demand payment of his fair value shares. Because one
of the elements of appraisal rights is that he must DISSENT. So
abstention is tantamount to a waiver of the right to demand the
payment of fair value of his shares.

What is the effect of abstention in BOARD meetings?

Is the abstaining director considered present for quorum
purposes? Yes of course.
Let‟s say we have FIFTEEN directors, the quorum is EIGHT.
The 8 are present, but one keeps on abstaining, “on everything
I abstain”.
So on those matters where only majority of the quorum is
needed, his abstention is immaterial.
If the requirement is approval of majority of the entire board,
his abstention is tantamount to no vote. Therefore they cannot
get the approval.
*alright, the other (better) class is joining tonight, so you‟ll
have the same page*

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H. STOCKHOLDERS AND MEMBERS filing of a certificate thereof with the Securities and Exchange
Commission.
1. Rights of Stockholders and Members
Shares of capital stock issued without par value shall be deemed fully
BAR: What are the rights of the SH? paid and non-assessable and the holder of such shares shall not be
liable to the corporation or to its creditors in respect thereto: Provided;
1. PROPRIETARY RIGHTS - anything about That shares without par value may not be issued for a consideration
economic benefits less than the value of five (P5.00) pesos per share: Provided, further,
That the entire consideration received by the corporation for its no-par
a. The right to receive dividends
value shares shall be treated as capital and shall not be available for
b. The right to participate in the assets of the distribution as dividends.
corporation upon dissolution and liquidation A corporation may, furthermore, classify its shares for the purpose of
2. MANAGEMENT RIGHTS insuring compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated

a. The right to vote on all corporate acts requiring
in the certificate of stock, each share shall be equal in all respects to
SH‟s approval every other share.
b. The right to elect the directors of the Where the articles of incorporation provide for non-voting shares in
corporation the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
3. REMEDIAL
1. Amendment of the articles of incorporation;
a. Appraisal right
2. Adoption and amendment of by-laws;
b. Pre-emptive right
3. Sale, lease, exchange, mortgage, pledge or other disposition of
c. Right to inspect all or substantially all of the corporate property;

d. Right to copy financial statements of the 4. Incurring, creating or increasing bonded indebtedness;
company 5. Increase or decrease of capital stock;
e. Right to file a derivative suit 6. Merger or consolidation of the corporation with another
corporation or other corporations;
a. Doctrine of Equality of Shares
7. Investment of corporate funds in another corporation or
BAR: What is the Doctrine of Equality of Shares business in accordance with this Code; and
DOCTRINE OF EQUALITY OF SHARES - all shares have 8. Dissolution of the corporation.
the same rights and privileges UNLESS classified differently in
the AOI. Note: Not just in the by-laws or by approval of Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this Code
directors
shall be deemed to refer only to stocks with voting rights.
Sec. 6. Classification of shares. - The shares of stock of stock
CLASSIFICATIONS OF SHARES
corporations may be divided into classes or series of shares, or both,
any of which classes or series of shares may have such rights, privileges 1. Par value
or restrictions as may be stated in the articles of incorporation:
Provided, That no share may be deprived of voting rights except those 2. No par value
classified and issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided, further, That there shall 3. Voting
always be a class or series of shares which have complete voting rights. 4. Non-voting
Any or all of the shares or series of shares may have a par value or have
no par value as may be provided for in the articles of incorporation: 5. Common
Provided, however, That banks, trust companies, insurance companies,
public utilities, and building and loan associations shall not be 6. Preferred
permitted to issue no-par value shares of stock.
CLASSIFICATION TO COMPLY WITH CONSTITUTIONAL
Preferred shares of stock issued by any corporation may be given LIMITATIONS:
preference in the distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or such other 7. Founder‟s (Section 7)
preferences as may be stated in the articles of incorporation which are 8. Treasury (Section 8)
not violative of the provisions of this Code: Provided, That preferred
shares of stock may be issued only with a stated par value. The board of 9. Redeemable (Section 9)
directors, where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series thereof: 10. Watered (Section 65)
Provided, That such terms and conditions shall be effective upon the

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2. Participation in Management
How does a SH participate in the management of the Presence of trustor, SH,
corporation? Transferor does not
revoke the authority of
1. By voting and electing directors of the
trustee. Trustee can
corporation
exercise right to vote, he
2. By voting in the corporate acts requiring SH‟s can inspect corporate
approval books, he can obtain
copy of financial
a. Proxy Presence of Revokes the
statements.
SH or authority of the
b. Voting Trust
principal proxy holder
The right to vote may be done:
All rights that may be
1. In person exercised by the SH can
be exercised by the
2. Through a proxy
trustee EXCEPT
3. Through a voting trust agreement beneficial ownership-
the right to receive
How do you distinguish proxy from VTA?
dividends
PROXY VTA

In writing, signed by
In writing, signed by the
the SH, filed with  You cannot extend a proxy
SH, must be notarized,
the corporate
copy of the VTA must Can you renew a proxy?
As to form secretary before the
be submitted to the SEC
meeting. Not Yes, you can have another proxy agreement in increments of 5
otherwise it is not
required to be years. Renew it on the 4th year and you can have a new proxy
enforceable
notarized. agreement. Existing agreement is good only for 5 years.
VTA of course can be longer than 5.
What is a VTA? What are the limitations?
Legal title to the shares
Only the right to VTA - agreement whereby the SH conveys legal title and other
and other rights a SH
vote. No right to rights pertaining to the shares in favor of a trustee.
may exercise. Qualified
inspect UNLESS to be elected as director Why would parties enter into a VTA?
separately (trustee).
authorized for that In ordinary transactions:
Rights
conferred purpose. If a bank wants to lend money, what are the collaterals it can
LEE CASE: If a director require from the borrower?
loses legal title over the
Cannot be voted and It can require mortgage, surety, guarantee, antechresis but all
shares, he ceases to be
cannot qualify as these will not give the lender or bank the power to control the
director of the
director of the corporation.
corporation
corporation In VTA:
The lender will gain control of the corporation because he will
Valid for 5 years. Can be have the voting shares of the stocks of the SH-transferor.
Good only for the longer than 5 years if What does the trustor get in return?
meeting intended pursuant to a loan
Term or UNLESS general agreement but it expires He gets a voting trust certificate. The stock certificate in the
Period and continuing in upon full payment of a SH‟s name will be cancelled to give way to the VTA. A voting
nature but not to loan. Can be extended if trust certificate is transferable just like a stock certificate. Once
exceed 5 years it is co-terminus with the VTA expires, then the stock certificate issued will be
the loan agreement cancelled and the stock certificate issued in favor of the trustor.

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BAR: A executed a voting trust agreement in favor of
XYZ bank transferring legal title over his shares in
favor of XYZ bank. At the same time, ABC
Corporation mortgaged a property in favor of XYZ
bank. The loan was not paid so the bank foreclosed
the mortgage. Upon expiration of the voting trust
agreement, A requested that XYZ turns over the
management of the corporation back to the trustor.
Can he demand that the trustee turns over the
corporation to the trustor? Let us take a look at the
facts again. By virtue of the voting trust agreement,
XYZ bank acquired legal title over the shares of A
effectively voting the shares and taking management
control of ABC corporation. To complement the
voting trust agreement, ABC corporation mortgaged
the property to secure the loan which XYZ granted
likewise to ABC. The loan was not paid, xyz bank
foreclosed the mortagage. After foreclosure, xyz
became the owner of the foreclosed assets. Now, the
voting trust agreement expired, it was good only for
five years. Can the trustor now demand that xyz, the
trustee, turns over the management and control of
corporation A? Is that concept similar to the voting
trust agreement under section 59 of the Corporation
Code?
No, because the assets have been foreclosed. Foreclosure
of the mortgage is different from the voting trust
agreement. The foreclosure is a distinct right and remedy
available the lender.
c. Cases When Stockholders‟ Action is Required
i. by a majority vote
ii. by a two-thirds vote
iii. by cumulative voting
3. Proprietary Rights
a. Right to Dividend
b. Right of Appraisal
What is appraisal right?
The right of a stockholder to demand the payment of the
fair value of his shares after dissenting from a proposed
corporate act in cases specified by law.
It is a right of a stockholder - that right can only be
exercised by a stockholder. To demand the fair value of his
shares
What do you mean by the fair value of his shares?
The value of the shares the day before the vote was taken
regardless of any depreciation or appreciation of the value
of the shares as agreed upon by the corporation and the
stockholders and in case of disagreement, by three
appraisers, one chosen by the corporation, the second by
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the stockholder, and third to be chosen by the nominees of
the corporation and the stockholder. A day before the vote
was taken- so if the merger, for example, is voted upon by
the stockholders today, it is the value yesterday regardless
of any appreciation or depreciation to prevent any
speculation on the stocks brought about by the corporate
act subject of the appraisal right. It is by agreement of the
corporation and the stockholder; if they agree, there is no
dispute, but if they don't agree, the corporation code
provides for a mechanism to resolve the differences (three
appraisers). The award of the appraiser is final and
executory.
After dissenting from a proposed corporate act, it is important
for the stockholder to dissent, to express his disagreement,
objection or disapproval to the proposed corporate act. If he
waives his presence, or if he is present but abstains, then he
cannot demand the fair value of his shares. So one of the
elements is PHYSICAL PRESENCE AND DISSENT to the
proposed corporate act.
In the cases provided by law – Appraisal right can only be
exercised in the cases provided by law. So not all types of
disagreement, not all forms of dissent. So just because he does
not agree with how the board runs the corporation does not
justify the exercise of appraisal right.
 There is only one corporation where you can exercise the
right for any reason whatsoever even though there is no
surplus profit, in case of a Close corporation.
What are these cases?
1. Amendment of the AOI which has the effect of changing
or restricting the rights of stockholders or any shares of
any class or authorizing preference of shares over the
others and extension or shortening of corporate term.
2. Merger or consolidation
3. Sale, mortgage, encumbrance or disposition of all or
substantially all if the corporate assets.
4. Even if not enumerated in section 81, investment of
corporate funds in the secondary purpose under section
42.
AMENDMENT OF AOI WHICH CHANGES OR
RESTRICTS THE RIGHTS OF STOCKHOLDERS
Take note the amendment has to be in the AOI and has to have
the effect of changing or restricting the rights of stockholders
or any shares of any class.
Example:
NOT YET ASKED IN THE BAR: If the corporation
amends the AOI to deny preemptive right, can a
stockholder exercise his appraisal right?
Yes, because that amendment restricts his right to
subscribe to any issuance of shares of the corporation.
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Let us say all of the shares are common and the
corporation amended the AOI to issue preferred
shares, does the issuance of preferred shares justify
the exercise of appraisal right?
Yes, because the issuance of preferred shares restricts the
rights of the common shares.
That's why you remember the anecdote I told you about Dean
Dimayuga and I. We were called by the Father Rector about the
problem caused by the minority SH. That there was increased
in capital stock and denying pre-emptive right, then issue new
shares to third party. It was done in good faith.
Now, what is your remedy if the AOI was amended
denying pre-emptive right?
Appraisal Right.
That is why there is no bad faith because there is a remedy
available to the SH. If they are not in favor of the amendment
to deny pre-emptive right, then "get-out of the company" and
demand payment of the fair value of your shares.
What if at the outset you have common and preferred
shares, can a stockholder exercise his appraisal right
because there are preferred shares that restrict his
rights as a stockholder?
The answer is NO. There has to be an amendment in the
AOI. So if at the outset you already have preferred shares,
and those preferred shares have better rights in terms of
dividends, the right to receive assets over the common
shares, you cannot exercise your appraisal right because
you got into the corporation knowing that there are shares
superior than your common shares. So there has to be an
amendment to the AOI.
Another example would be, if, let's say common shares
converted to preferred shares, or preferred shares converted to
common shares.
So remember the example of San Miguel Corporation,
so if the common shares of the government were
converted to preferred shares, can the holders of the
common shares exercise their appraisal right?
YES because by converting the common shares to
preferred shares, they are given preference superior to the
holders of common shares.
AMENDMENT OF AOI TO EXTEND OR SHORTEN
CORPORATE TERM
Amendment of the Articles to Extend or Shorten Corporate
term both justify Appraisal right. When it comes to shortening
of the corporate term, it has to be shortening the corporate
term without dissolving the corporation.
If it will dissolve the corporation, it is pointless, irrelevant to
talk about the exercise appraisal right because the stockholder,
anyway, will receive the properties or assets of the corporation.
83
So it has to be shortening the corporate term without
dissolution of the corporation.
SECOND MERGER OR CONSOLIDATION
We will take this up under Sec.76
SALE OF ALL OR SUBSTANTIALLY ALL OF THE
CORPORATE ASSETS
We have covered this under Sec.40.
INVESTMENT OF FUNDS IN SECONDARY PURPOSE
We have covered this under Sec.42.
REQUISITES for the exercise of Appraisal Right:
1. It can only be exercise in the cases provided by law.
2. The SH must make a demand for payment for the fair
value of his share within 30 days from the date the
vote was taken.
3. The value of the shares must be determined in
accordance with the Corporation Code. That is, the fair
value of the share shall be the value as of the day
before the vote was taken as agreed upon by the board
and the SH. In case of disagreement, then 3 appraisers
shall be appointed in accordance with the procedure set
forth in the Corporation Code.
4. The corporation must have surplus profit.
5. Submission of stock certificate to the corporation, for
notation, of those shares subject to appraisal right, within
10days from demand for payment of the fair value of the
shares.
6. Once the shares are paid, Cancellation of the certificate
of stock and acquisition of the corporation of such shares
of stock as treasury shares.
THE CORPORATION MUST HAVE SURPLUS PROFIT
Sec.41 is complemented by Sec.81 onwards of the Corporation
Code.
To refresh your memory under Sec.41, Treasury shares, one of
the cases where a corporation may acquire its own shares is to
pay a dissenting stockholder exercising his appraisal right, and
Sec.41 is clear on the condition before the corporation may
acquire the shares of a dissenting SH - legitimate purpose and
availability of surplus profit. So Sec.41 is complemented by
Sec.81 onwards. Reiterating the need for surplus profit.
TURNER v. LORENZO SHIPPING CORP (2010)
When should the corporation have surplus profit to
warrant the exercise of appraisal right? Is it the time
for demand for payment, or the time of actual
payment, or the time of the surrender of the shares?
The surplus profit must be available at the TIME OF DEMAND
FOR PAYMENT OF THE FAIR VALUE OF THE ASSETS, not
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the time of actual payment. (Turner v. Lorenzo Shipping Corp
2010)
What happened in this case is that Lorenzo Shipping Corp
amended its AOI to deny pre-emptive right. So Turner, a SH,
dissented from the amendment, and then after, he demanded
the fair value of his shares. At the time he demanded the
payment, the corporation has no surplus profit, so not enough
retained earnings. Despite the non-availability of surplus
profit, Turner filed an action to enforce the payment of the fair
value of his shares. During the pendency of the course of action
to enforce payment of the fair value of his shares, the
corporation posted surplus profit.
So the question now is does the fact that the
corporation posted surplus profit retroact to the date
of demand for payment. Is Turner entitled to
appraisal right?
The SC said NO, because at the time he made a demand
for payment, the corporation have no surplus profit. So the
cause of action of Turner is premature. So it can only be a
cause of action if the corporation has surplus profit and
with the ability to pay the fair value of the shares, and the
fact that during the pendency of the case the corporation
earned surplus profit does not cure the defect, it does not
retroact to the date of demand for payment.
 Existence of surplus profit at the time of payment (but not
at the time of demand) will not retroact to the date of
demand, in order for the appraisal right may be exercised.
Now the Supreme Court did not answer the question however.
What happens now to the 30 days or the 30-day period to make
the demand for payment. Is it not under the Code, you
suppose that tomake the demand for payment within 30 days
right after the date the vote was taken. So supposing that
the 30 days is about to lapse and you have no surplus
profit? So when do we start counting now the 30-day
period?
So the Supreme Court did not answer that question. It
simply said that when you make a demand for payment,
you better be sure that the corporation has surplus profit.
Otherwise, your cause of action is premature.
Remedy: wait for the corporation to have surplus profit
and once so earned, make the demand for payment and if
was not paid, that is the time to demand and go to Court.
So eventually by virtue of this ruling, the period is
extended if the corporation has no surplus profit. So the
30-day period would seem to apply to a situation where
the corporation has surplus profit. If none, the period is
extended until such time the corporation earns surplus
profit.
Submission of stock certificate for notation that is
subject to appraisal right
So why the stockholders’ certificates should be
submitted for notation that is subject to appraisal
right?
Because as you all know, once the right is exercised and
the stockholder dissents and demands the right of
payment of the fair value of the shares, all of his rights are
suspended.
So the moment he demands for payment for the fair value of
the shares, all of his rights as a stockholder shall be suspended.
Everything. There is only one right available to him, it is just a
redundancy but that‟s what the law says. What is the right
available to the dissenting stockholder upon dissent and
demand the payment of the fair value of the shares? It is the
right to receive the fair value of the shares. That is redundant
because that is the essence of appraisal right but that is what
the law says. So all the rights are suspended except the right to
receive the payment of the fair value of the shares.
And the last one, of course, once the corporation pays the fair
value of the shares, the shares are acquired by the corporation
making them treasury shares. So the stock certificates named
before the stockholder will be cancelled and the shares become
the properties and assets of the corporation.
BAR: Stockholder dissented from the proposed
corporate act and the demanded payment for the fair
value of the shares. While waiting for payment, he
sold the shares. Can the buyer demand for the fair
value of the shares? It is a very funny question right.
Why very funny?
If you are the buyer, why would you buy the shares only to
demand the fair value of the shares? Might as well not buy
if that is what you are interested anyway.
So because that was asked in the bar, we have to answer.
And the answer under the Code is that the buyer cannot
exercise appraisal right because the sale of the dissenting
shares cleansed the effects of appraisal right. So all of the
rights pertaining to the shares will be acquired by the
buyer so the effects of appraisal right are removed. He
becomes a regular stockholder of the corporation.
c. Right to Inspect
Right to inspect is more interesting.
Under Section 74 of the Corporation Code, every stockholder
has the right to inspect the corporate records of the
corporation.
YUICO v. QUIAMBAO (2014)
Does the right of inspection extend to the stock and
transfer book?

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If you read the code, it does not mention stock and
transfer book, it refers to the minutes of the meeting and
other records of the corporation because minutes and
other records qualified by that minutes. Can we include
stock and transfers book? So can the stockholder demand
that he sees the entries in the stocks and transfer books or
the entries in such book confidential?
The Supreme Court said in Yuico v. Quimbao (2014),
the right of inspection extends to the stocks and transfer
book because it is deemed part of the record of the
corporation.
Now as we all know under 74, the refusal of the right of
inspection is criminal in nature. It is the only provision in the
code that imposes criminal liability to the responsible officer in
case of refusal of the right to inspection. So other provisions
are governed by Section 144 saying that all violation of the
provisions of the Code are criminal in nature. So this is the only
section where the law or the Corporation code is clear that
refusal or denial of the right of inspection is a criminal offense
that imposes liability to the responsible officer of the
corporation.
And who is the responsible officer?
The corporate secretary because he is the custodian of
corporate records.
Now what about the directors? Can you sue the
directors for refusal of the right of inspection?
If you read the code it says if the refusal of is in the form of
board resolution, they too can be charged of violation of
Sec. 74 of the corporation code. But who among the
directors would be stupid enough to deny the right of
inspection in the board resolution. So why would they pass
a resolution saying we are denying to you your right of
inspection? So the only one usually sued is the corporate
secretary unless the directors openly deny the right of
inspection.
We are handling a case about the right of inspection and for the
first time in the history of Makati prosecution office, somebody
got indicted for the violation of Sec. 74 of the corporation code.
Our client is 83 years old, he sued the chairman and the
corporate secretary of a condo association in Makati because he
was not given minutes of the meeting. And after we filed the
complaint, he was given the minutes. Of course, the crime has
been committed. Can you imagine 83 years old suing another
80-year old lady?
So pag away ng matatanda, labas tayong mga bata. So I asked
him, are you sure you want to do this? So we got an indictment,
so they did the piano. The chairman and the corporate
secretary did the piano. In practice, pag sinabing do the piano
that means you take the finger prints. Because if you post bail,
you are required to give your finger prints. So they did the
piano, their finger prints were taken. After we got indictment, I
asked our client. Okay we got indictment, you made your point,
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we had delivered your message that you cannot be taken
lightly. Do you want them convicted? He said yes. I said, they
could not go to jail because they were more than 70 years old.
Nevermind noh heh, he wants a conviction. He was the same
guy, (we‟ll take this up on transpo if you‟ll be under me next
sem) who filed a suit against Cathay Pacific because he was
upgraded to first class. He was in business class and moved to
first class, he sued Cathay for breach of contract and won a
nominal damage of one peso.
Is the right of inspection absolute?
No
Exceptions to the Right of Inspection (Cases when the
right of inspection is not available)
1. If the purpose of inspection is not germane to the
interest of the stockholder
The stockholder cannot just pry into the affairs of the
corporation. He must have a purpose germane to his interest as
a stockholder.
GONZALES V. PNB
Gonzales was not a stockholder of PNB and he was not allowed
to inspect the corporate records of PNB. What he did, he
acquired one share of stock from a certain Montano and after
buying one share of stock from Montano, he invoked his right
of inspection under the corporation code.
He was denied for two reasons: 1) the charter of PNB at that
time allows only inspection to specified persons; 2) SC said that
the purpose of Gonzales is not germane to his interest as a
stockholder. He only wants to satisfy his own sense of curiosity.
2. If the stockholder has improperly used the
information secured in previous examination or if he
is prompted by bad faith or ill motive
3. It cannot be exercised outside office hours
4. Not in the Code but by Jurisprudence, Right of
inspection does not extend to Trade Secrets
So if you’re a stockholder, can you demand for the
formula of Jollibee, Coke, or San Miguel beer?
You cannot, it is outside the right of inspection
a. One case stated that Formula for Chemicals is
Trade Secret.
b. One case that they handled, the RTC and CA
ruled that the right of inspection does not extend
to names of customers and suppliers.
A stockholder demanded inspection for the corporate records.
We opposed but if we deny the right of inspection they will sue
us criminally. What we did we file a petition for declaratory
relief to determine if the request is made in bad faith or in good
faith. So if they file a written complaint, we can invoke the
petition for declaratory relief as a prejudicial question. We said
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that they are the competitor of the corporation engaged in the
same business –steel manufacturing – and for us to open the
books would mean to give them the name of the suppliers and
creditors and customers. So the RTC ruled that the right to
inspection does not extend to the names of customers and
suppliers. They appealed to the CA, CA affirmed the decision of
the RTC. I was hoping they would go up to the SC to enrich
jurisprudence, not to mention our pockets, but unfortunately
they did not appeal to the SC so it‟s still just a CA decision but
just the same it has a persuasive effect.
c. Generally, right to inspection includes
information about the amount of attorney‟s fees if
there is no confidentiality clause, you can
demand because you have every reason to know
how much funds is being paid to your lawyer.
But in one case handled by Divina Firm involving Maxicare.
The other stockholders demanded from management the
amount of fees Maxicare pays to the Firm. They wanted to
inspect the corporate records to check and verify the amount of
fees. So Firm anticipated that once they determine the figures.
They would file a derivative suit on behalf of Maxicare to stop
the payment of fees to the firm. The RTC ruled that Attorney‟s
fees are not subject to inspection right because of the presence
of a non-disclosure agreement between the firm and Maxicare.
Guess who the Judge is? RTC Makati. JUDGE PIMENTEL.
Do you agree with that decision? Of course I agree. Again, I was
hoping they would go to the SC to enrich jurisprudence.

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GONZALES vs. PNB
SC said that the purpose of the right to inspection must be
related, relevant or germane (germane is the word used by the
SC) to his interest as a SH. The right to inspection cannot be
used as a fishing expedition to satisfy one‟s sense of curiosity.
The purpose of the right to inspection must be germane to his
interest as a SH and not as a creditor. So remember the case of
Gonzales, if the SH only wants to find out the behest loans that
the bank granted without showing the injury that he may suffer
as a result of the behest loans, the right can be denied.
Second, the right to inspection can only be granted during
reasonable hours on a business day. So that means 8-5 only on
a business day. No matter how insecure the SH may be, he has
to wait during reasonable hours.
Can you photocopy?
Yes, but at whose cost? It depends upon the by-laws. The
BOD may decide that it must be on account of the
requesting SH. There is no provision in the Corporation
Code (CC) that provides that the Corporation will bear the
cost of the reproduction.
The next one it must be made in good faith, and bad faith is a
state of mind, so it has to be evaluated based on the
surrounding circumstances. The law says if the SH improperly
used the information, that is in bad faith. So the right to inspect
may be denied by the corporation. It also includes trade
secrets, name of suppliers, formulas, chemicals used, list of
buyers and creditors. These are out of the right of inspection.
The last one, asked in the bar which is it does not extend to
information under relevant special laws.
Juan Dela Cruz obtained a judgment against Pedro
Reyes and he discovered that Pedro Reyes is a
depositor of ABC Bank where he is also a depositor
and a stockholder. So both of them are stockholders
and depositors of ABC Bank. Can Juan Dela Cruz, the
judgment creditor, inspect, photocopy and get copies
of the bank deposits of Pedro Reyes, the judgment
debtor invoking his right to inspection?
No, the right of inspection is based on CC which is a
general law, whereas the right to secrecy of information of
bank deposits is governed by a special law and special law
prevails over general law. So the right of inspection is
subordinate to other special laws.
GOKONGWEI v. SEC
Does the right to inspection extend to subsidiaries?
Can the Subsidiary invoke the doctrine of separate
legal personality?
John Gokongkwei of San Miguel Corporation examines the
records of Neptunia Corporation based in HongKong, a
holder subsidiary of San Miguel, can Neptunia the
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subsidiary corporation, invoke its separate legal
personality?
The SC said the right to inspection extends to wholly
owned subsidiary.
What is the consequence of unjustified refusal by the
corporation to allow separate legal personality?
Under sec 74 in relation to sec 144 of the CC, the refusal of
the corporate officer gives rise to criminal liability, it is a
criminal offense to deny unjustifiably the right to
inspection to the SH.
Who is the corporate officer being referred to under
sec 74?
Corporate Secretary and the custodian of the corporate
records.
What about BOD?
The law says that if the refusal is in the form of board
resolution, the board can be charged with the violation of
the CC.
Now, what if there is no board resolution, but here is
an overt act? They consented and authorized the
refusal
Still, they can be held liable. The board resolution is just an
evidence that they refuse access to it. It can be prove in some
other ways.
YUJUICO 2014
What if the action s to recover possession of the stock
and transfer book from the former corporate
secretary? Can the former sexytary refuse? Can that
be enforced through criminal prosecution? Let’s say
the President and the corporate secretary were
replaced so they demanded the stock and transfer
book be turned over or to surrender the possession of
the stock and transfer book. Is there a defense under
sec 74 of the CC?
The refusal of the corporate officer gives rise to criminal
liability. It is a criminal offense to deny unjustifiably the
right of inspection to the stockholders.
Now, who is the corporate officer being referred to
under Section 74?
Obviously, the corporate secretary who is in possession of
the corporate record.
What about the board of directors?
When the law says that the refusal of the board is in the
board resolution, they too can be charged of violation of
Section 74 they too can be charged criminally.
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Now, what if it is not in the board resolution but by
their overt acts, they consented, authorized refusal of
the right of inspection?
They too can be held criminally liable. The board
resolution is just an evidence that they refused access to
the stockholder but other evidence may be induced to
show that they refused or did not authorize the right of
inspection to the stockholder.
Now, this one we have previously covered in our previous
discussion. Now there is a recent case YUICO (2014)
What if the action is to recover possession of the
stock and transfer book from the former corporate
secretary and that former corp sec refused. Can that
be enforced through criminal prosecution? Let’s say
the president and the corporate secretary of the
corporation who are replaced by the president and of
course the new president demanded that the stock
and transfer book be turned over to them. Let’s say
the former corp sec refused. Can that be enforced by
criminal prosecution? Is it a crime not to turnover or
surrender the possession of the stock and transfer
book? Is there an offense under the Section 74 of the
Corporation Code?
The Supreme Court said none because Section 74 is the
refusal to allow inspection of corporate records not the
refusal to turnover possession of the stock and transfer
book. It doesn‟t make sense, right? So ang gagawin mo
pala dapat di turnover of possession so ang dapat ang
gawin mo, can I see? So I can take a look at the entries
standing in the book. If he refused I „ll charge you with __.
You have to change the cause of action right? So it has to
be to photocopy, to examine or to inspect the records. So
pag binigay sayo kunin mo na, it does not belong to them it
belongs to the corporation and you are the new corporate
secretary. But that‟s not what the Supreme Court said. It
is not enforceable criminally under 74. What is penalized
under 74 is the refusal to allow inspection of corporate
records.
Does that includes the stocks and transfer book or is
it limited to the minutes of the meetings?
The Supreme Court said that the right of inspection
extends to the Stocks and transfer book and even the
entries in the stock and transfer book.
What crime is violated if the former corporate
secretary refuses to turnover possession stock and
transfer book?
Theft, right? Not 74 of the corporation code. So you cannot
sue him under 74 because that section, to repeat, penalizes
refusal to inspect or examine the corporate records but you
can sue the corporate secretary for qualified theft because
he has no authority to hold on the stocks and transfer
book, it belongs to the corporation. The corporation may
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demand for the turnover of the same to the new corporate
secretary.
In _ , they sued a former law dean for theft. He was the former
corporate secretary of __ and he refused to turn over the stocks
and transfer book to us, the new corporate secretary. We filed a
complaint for qualified theft and he was indicted but the
parties settled. Because even though he cannot be penalized
under 74, he can be penalized under the revised penal code.
d. Pre-emptive Right
(see previous discussions)
e. Right to Dividends
(see previous discussions)
f. Right of First Refusal
BAR: Is the right of first refusal the same as pre-
emptive right? Is the pre-emptive right, as we
understand it under section 39 of the corporation
code, is the right to subscribe to any or all issuance
or disposition of shares of any class in the
corporation?
Now that right exists unless denied in the Articles of
Incorporation or any amendment thereto. So if the Articles
of Incorporation is silent, it means that stockholders have
pre- emptive right. Now the only way for it to be denied or
to be exercised, is to deny in the Articles of Incorporation
or any amendment thereto.
In fact that is one of the question in the prelims, the denial
must be in the Articles of Incorporation and not just only
be in the by-laws of the corporation.
Denial has to be in the AOI and not in the by-laws of the
corporation.
What about the right of first refusal? Does that right
exist? Does the stockholder have the option to buy the
shares of a selling stockholder before he can sell to a
third party? Or can the stockholder freely sell his
shares in the corporation to any party without
having to offer the same to the corporation or to his
co-stockholders?
Yes, because there is no right of first refusal in favor of
stockholders under the corporation code, unless that right
is granted to the stockholders and EMBODIED in the AOI,
by-laws and stock certificate.
The restriction has to be in all 3 documents:
1. The AOI,
2. The by-laws and
3. The stock certificate.
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Now, is it not a redundancy? Why In 3 documents?
Why not just the AOI or the by-laws?
This is because the AOI and the by-laws are not binding on
non-stockholders. It does not bind 3rd persons.
So for 3rd persons, they will be bound by the restrictions on
transfer if it is in the stock certificate.
What are the requisites for the right of the
corporation to impose restrictions on transfer? Can
the corporation impose restrictions on transfer of
shares of a stockholder?
Yes. There are 2 requisites, if these 2 requisites are absent;
any of these 2 is absent. Then the restriction on transfer is
null and void.
1. The restriction must be in the AOI, by-laws and the
stock certificate
2. Any restriction on transfer cannot be more onerous than
the option granted to a stockholder to purchase the shares
of a (transferring) stockholder.
Or in simpler words, any restriction on transfer cannot be more
onerous than the right of first refusal.
So any restriction that is more burdensome, more restrictive
than right of first refusal is VOID.
BAR: The corporation adopted a resolution that a
stockholder must first get the consent of the
corporation before he can sell the shares. Alright, the
restriction is in the board resolution. Is it Valid or
not?
Void, because the restriction must be in the AOI, by-laws
and stock certificate
Assuming that the restriction that the stockholder
must secure the consent of the corporation before he
can sell the shares to another is in the AOI, by-laws
and stock certificate, is it now valid?
Still NO because the consent of the corporation before he
can sell the shares is more burdensome than the right
of first refusal.
So what can be granted to the stockholders is only the option to
buy the shares of a selling stockholder but not to burden him
with the condition of getting the consent of the corporation and
the stockholder before he can sell the shares.
The by-laws of the corporation provides for the right of first
refusal to the stockholder, in the sense that a stockholder has
the option to buy the shares of a selling stockholder at 25%
above par value.
The stockholder has the right to buy the shares being sold by
the stockholder at 25% above par value. The par value is 100
pesos and you can buy at 125.
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Now let’s say that a stockholder has a buyer willing
to buy at 150. Can the stockholder exercise the option
to buy the shares being sold for 150 at 125?
NO, because it‟s only in the by-laws. It is not in the AOI
and not in the stock certificate.
Supposing that the restriction given to the
stockholder to buy the shares of a selling stockholder
at 25% above par value is in those 3 documents. Is it
now valid?
YES. Because it is not more onerous than the right of first
refusal. The stock holder cannot complain because the
restriction is in the stock certificate. So he would ___ of
the corporation knows that these shares are subject to
certain restrictions, and neither can the stockholder
complain because when he joined the corporation, this
restriction is already imposed by the corporation.
(hindi more burdensome kasi above par value yung offer. Pag
below par value ang offer, more burdensome kasi hindi na
reasonable)
Is this applicable to an Open corporation? Because
these requisites are found in sec. 98 of the
corporation code and sec. 98 is on close corporation,
are they applicable to open corporation?
The SC said in one case, YES. They are also applicable in
Open or Regular Corporation.
In addition to the argument that the stockholder in our
example can buy the shares at above par even though the offer
price is more than the pricing proviso in the AOI. Well sec. 98
does not say that it must be for a strict terms and conditions. It
does not require that the stockholder must match the same
terms and conditions being offered to a 3rd party. It simply
says, UPON REASONABLE TERMS AND CONDITIONS.
So it is a question of reasonableness and if it is above par value,
it certainly is reasonable. Now if it is below par, obviously that
is not reasonable because the par value is the minimum value
for the shares of the corporation.
Take note also that sec.98 applies only to voluntary transfer.
The restrictions that the corporation may impose only apply to
voluntary transfers and not in involuntary transfer.
Example:
Can a judgment creditor levy the shares of a
stockholder if there is a right of first refusal granted
to other stockholders? So before the judgment
creditor can levy the shares, should it first give the
stockholder of the judgment debtor the right to buy
the shares?
NO because section 98 only contemplates voluntary
transfer not involuntary transfer. So it is only when the
stockholder is selling the shares that he is required to offer
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the same to his co-stockholders if that right is embodied in
the articles, bylaws, and stock certificate.
Nyenyenye it's part of the lecture.
One of our clients wanted to get a loan from a company in
Hongkong. This company in Hongkong is willing to grant a
loan only if it becomes a stockholder of the corporation. So let's
say ABC owns 25% of XYZ Corporation. ABC our client wants
to get a loan from the Hongkong company. Hongkong company
says, "I'll grant you the loan if I become a stockholder of XYZ
corporation." Meaning if I would have to buy some of those
shares. The thing is, there is a right of first refusal granted to
the stockholders. A stockholder says no way! Whatever shares
you will sell, I will buy! Our client came to us for advice on
what to do. I said, "This is what you should do. ABC company,
our client, you borrow money from the Hongkong company
secured by a pledge or chattel mortgage. Don't pay the loan.
After 3 years you foreclose the pledge. Foreclosure is not
voluntary, it is involuntary right? Then the Hongkong company
said that's very cute! But you will not say you will not pay the
loan right. That is just the structure. Foreclosure and Chattel
mortgage are not conveyances, they are not transfers, they are
encumbrances and therefore not covered by Section 98.
I am not teaching you to circumvent the law. I am teaching you
to think right? To find a way taking into account the interest of
your client.
The corporation passed a resolution that the
stockholders can only sell their shares to relatives up
to the first degree of consanguinity or affinity and it
is a close corporation. Valid or not?
Void because it is only a board resolution.
Supposing it was in the AOI, by-laws and indicated in
the stock certificates, is that restriction valid? The
test is - Is it more onerous than the right of first
refusal? If you will subject the stockholder to the
burden that he can only sell his shares to relatives up
to the first degree of consanguinity or affinity, that is
more onerous right?
According to the SEC, that restriction is void because it is
more onerous than the right of first refusal.
Stockholders are given the right to buy the shares at a discount.
According to the SEC, _______________________ (di ko
talaga maintindihan sorry).
Ok so that's the right of first refusal.
Remedial rights
Derivative suit - favorite topic in the bar. Sure to be asked
because there are 5 new SC decisions on derivative suit this
year.
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Certain wrongful acts on the part of the directors and corporate
officers will give rise to certain rights, to certain types or kinds
of suit.
Individual, Representative, and Derivative.
When we say individual suit, who is the aggrieved
party?
stockholder
Representative suit?
stockholders similarly situated
Derivative suit?
not the stockholder principally or primarily but the
corporation.
The aggrieved party is and the cause of action belongs to
the corporation but the majority of the directors refuse to
take action so the minority stockholder will file the suit on
behalf of the corporation.
Example of individual suit.
Stockholder paid in full the subscription price but
was not issued a stock certificate. Can he file a
derivative suit to compel the corporation to issue a
stock certificate?
No. The aggrieved party is not the corporation but
himself.
Representative suit example.
The corporation denied the stockholders pre emptive
right. Can they file a derivative suit?
No. The aggrieved parties are the stockholders who were
denied pre emptive right, not the corporation. So
stockholders similarly situated may file a representative
suit to enforce their preemptive right against the
corporation.
The other one is derivative suit.
The concept is the majority of the directors are the ones guilty
of wrongdoing but because they control the corporation they
are not expected to change course to rectify the wrongful act.
But because of the wrongful act, the corporation suffers. So a
minority stockholder will file a suit..
Derivative Suit
The concept is majority of the directors are the ones guilty of
wrong doing but because they control the corporation they are
not expected to change course to rectify the wrongful act, but
because of the wrongful act the corporation suffers. So a
minority stockholder will file the suit on behalf of the
corporation.
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What are the elements of Derivative Suit?
Keyword for bar purposes: CSENA (Carla Seña)
1. Corporate Right - the cause of action belongs to the
corporation
2. Stockholder - the plaintiff must be a stockholder when these
two concur:
1. At the time the cause of action accrues; and
2. At the time of the filing of the action unless the cause of
action is continuing in nature, in which case it is enough
that he is a stockholder at the time of filing.
3. Exhaustion of intra-corporate remedies to obtain the reliefs
he desire, under the AOI or by-laws of the corporation
4. Not a nuisance or harassment suit
5. Appraisal Right is not available
The SC said in more recent cases that these elements, the
CSENA, must be alleged in the complaint for Derivative Suit
otherwise the complaint is dismissible. So the elements must
be alleged. Same in the bar exam questions if these elements
are not alleged or not found in the question, the answer is
"Derivative Suit is not proper."
There was a case we handled, our clients are the owners of the
biggest wine company/wine store in the Philippines and at the
same time they are gun enthusiast, they are into guns. They put
up a corporation together with their suppose compadres who
are shooting-competition-champions. So let's say our clients
are A and B and the other stockholders X and Y, they put up a
corporation to sell guns, so it was 50-50, and everything was
smooth-sailing until X and Y complain that allegedly certain
sales were not accounted for by A and B. So the corporation
allegedly sold guns to the customers/buyers but the proceeds
were not remitted to the corporation, so they filed a criminal
complaint for Qualified Theft against A and B. As you know in
Qualified Theft if the amount involved is 222, the 222 rule is
non-bailable under the DOJ bail bond right? The 200 and
2000, if the amount involved is that much only even though
the amount is that much only it is non-bailable. The amount
involved is P2M, chicken for our clients, they live in
Dasmariñas Village, it is nothing for them, but they were
charged with Qualified Theft, and to cut the story short the City
Prosecutor all the way to the SC found probable cause, charged
them with Qualified Theft. Information was filed in Court and
what is the next step, the consequence if the information is
filed in court, a warrant of arrest is issued. For the judge who is
suppose to conduct a personal assessment of the evidence and
must return it, determine if there is probable cause, usually the
court issue a warrant of arrest. So the warrant of arrest was
issued on Thursday but unfortunately for them, that was a time
that it was a long holiday and work will resume only on
Wednesday. They are brothers (A and B), one of them was able
to escape, and the other was issued a warrant of arrest and was
arrested. He was at Rockwell at that time, about to watch a
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movie, Finding Nemo 3, with his family and when he was
issued a warrant of arrest he went home to get some stuff,
while reliefs are being obtained from the court, that is the only
time we engaged a Motion for Reconsideration. So when he (A)
was arrested called us up and said "Nilo help me, I was arrested
by the police." So I went to the Makati City jail, and for the first
time in my life I saw jail. I put up a team of five lawyers to help
him and accompany him around the clock. Fortunately we were
able to convince the officers to let him sleep in the quarters and
not behind prison bars, so he talked to the maid to bring him
mattress, blanket and pillows (y'know) so he would sleep in the
quarters. But ofcourse as a lawyer what would you do? Would
you allow your client to sleep in the quarters and the lawyer for
the adverse party is about to come and I am sure he will insist
that my client stay behind prison bars not in the quarters. So
what do you do? You can't file petition for bail because there is
no court, so what do you do in that situation?
We invoked the "Makati Med Doctrine" what do that mean? I
got a certification from a doctor that my client is suffering from
medical condition, because he was very fat and he was
hypotensive, so he got certification from a very reputable
doctor in Makati Med, one of the top notch surgeon haha! So
he certified that our client is suffering from a condition, so we
were able to get him out, so he stayed in a suite at Makati Med.
So now what's the relevance of that in the Derivative
Suit?
We filed a Motion for Reconsideration and we alleged that
"who own the guns" it is the corporation, and "who can file the
complaint for Qualified Theft" it is the corporation. But there is
no Board Resolution, that the corporation could not have
authorized the filing of the complaint for Qualified Theft
because there is no Board resolution. It was X and Y who filed
the complaint. Now how can you justify the filing by and X and
Y (the SH)
- It is only by way of Derivative Suit. They can only file a
complaint for Qualified Theft on behalf of the corporation
through a Derivative Suit but all the elements of Derivative Suit
were not alleged in the complaint. So that means we were able
to get a status quo ante order, it is not even a TRO because
TRO only enjoin performance of an action, and at the time of
the issuance my client was already arrested, so there was
nothing to enjoin because the act has already been done. If you
want to revoke the warrant you have to file a motion to quash it
or status quo ante order.
So he got a certification from a credible doctor from Makati
Med, certified that the client suffering from a medical
condition
Instead of staying in jail, he spent the night at a suite in Makati
Med
What is the relevance with Derivative Suit?
We allege that who owns the guns? The corporation. Who can
file the complaint for qualified theft? Only the Corporation. But
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there is no board resolution thus the Corporation did not
authorize the filling of the complaint. It was X and Y who filed
for qualified theft. Stockholders can only file a complaint for
qualified theft through a derivative suit.
All the elements of derivative suit were not allege in the
complaint. In that basis we were able to get a Status Quo Ante
Order. Retroactive in character. It sets aside all acts taken in
lieu of the issuance of the warrant. Eventually, the Parties
settled.
They fight for principle. And when the parties fight for
principle, who wins? The lawyers.
ELEMENTS OF DERIVATIVE SUIT
1. Corporate Right of Cause of Action
The complaint must allege that the aggrieved party is the
Corporation not the SH.
What if the wrongful acts also injured the SH?
- Still qualifies as a derivative suit provided that the principal
cause of action is to enforced a corporate cause of action and
the Injury to the SH is only incidental, incidental relief of
prayer.
VILLAMOR v. MAGPALE (2013)
First element is IMPLIED. Even if not enumerated among the
elements. It is implied that Derivative suit is based on the
enforcement of a corporate right of cause of action.
The case was dismissed for wrong caption.
Correct Caption for Derivative Suit: Juan Dela Cruz in Behalf of
ABC Corporation v. Majority Directors of ABC corporation
Examples:
BAR: If there is an admission of mismanagement on
the part of the directors/ officers of the corporation,
is it proper for Derivative Suit?
Yes.
BAR: Appointment of corporate officers, proper for
derivative suit?
Yes. In case the Directors appointed a corporate officer
who is not qualified under the by-laws the aggrieved party
is the Corporation.
REYES v. RTC MAKATI
2 brothers (Cain and Abel) fighting over their share of
inheritance from their mother
Their mother is a SH. Cain allege that Abel got more than what
is due him. So Cain filed a derivative suit for the wrongful
allocation given to his brother. So he filed a derivative suit. He
questioned the wrongful allocation of shares given to his
brother.
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Is that proper for a derivative suit? Can he argue that
the aggrieved party is the corporation because it
does not reflect the true and actual owner of the
shares in the stock and transfer book?
The SC said that the aggrieved party is not the corporation
but the heir who was deprived the lawful share in the
estate of his mom. So probate issues, successional rights,
are not proper in a derivative suit
BAR: In the stockholders meeting, the corporate
secretary validated the proxies, and concluded that
there was no quorum because certain proxies were
not considered for inclusion. So the incumbent
directors left the meeting, thinking that there was no
valid stockholders meeting anyway. After they left,
the remaining stockholders resumed the stockholders
meeting, and elected new directors. So naisahan ung
former directors no? So the former incumbent
directors filed a derivative suit on behalf of the
corporation, arguing that the corporation ws denied
of a different board of directors. Is this proper for a
derivative suit?
The SC said this was not proper for a derivative suit. The
aggrieved party was not the corporation but the
stockholders who were disenfranchised. It‟s a personal
injury to the stockholders who were not allowed to vote. So
the stockholders should file their own suit, to give redress
to their grievances and their own causes of actions.
ANG v. ANG
A & B are brothers, who obtained a loan from their
sister, C. A & B are also stockholders of Sunrise
Marketing. The loan was secured by their shares in
the assets of the cocrporation. On maturity of the
loan, A was willing to pay half, but B was not. So
what did A do? He filed a derivative suit on behalf of
Sunrise Mktg, alleging that the refusal of B to pay the
loan obtained from C threatens the financial viability
of the corporation. Is that proper for a Derivative
suit?
The SC said no its not proper. Its not the corporation who
has to pay the loan, it‟s A & B. The corporation is not the
borrower, not a guarantor, of the loan. There is no cause of
action pertaining to the corporation.
What about the fact that the loan is secured by shares
of A & B in the assets of the corporation? Does that
make the corporation a party-in-interest in the case?
The SC again said no. The rights of a stockholder to the
property of the corporation is merely inchoate. It‟ll only
ripen to full ownership in case of dissolution. IT would be
different if the loan was secured by the assets of the
corporation (as opposed to the shares in the assets), in this
case, A may file a derivative suit, since the corporation
would be affected.
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2. Next one is S, stockholder. So the plaintiff must be a That shouldn‟t be an exception right? Because the essence of
stockholder in two occasions that must concur. derivative suit is that majority directors are the ones who are
guilty of wrongdoing. If they are not the ones who are guilty of
First, when the CAUSE OF ACTION accrued, and second, at
wrongdoing, there is no basis to file a derivative suit. That‟s
the TIME OF FILING.
why in the most recent cases, they do not include this as an
BAR: Supposing ABC corporation, engaged the exception because it is in futility.
services of a lawyer, and he was paid exorbitantly,
You have to exhaust all the remedies. It is no enough to say that
on JUNE 30 2015. On July 1, 2015, Juan dela Cruz
you have talked to all the other stockholders.
became a stockholder of the corporation. Can he file a
derivative suit, basing it on the exorbitant payment You have to exert reasonable efforts.
made to the lawyer?
4. Not a nuisance or harassment suit
No. When the cause of action accrued, he was not yet a
As you know, under the rules on intra-corporate controversy,
stockholder of the corporation.
you can move to dismiss the complaint on the ground that it is
EXCEPTION: a nuisance or harassment suit.
When the cause of action is continuing in nature. This is not the remedy available for regular actions, right?
For example, the lawyer above, will be paid all throughout. In regular actions (actions not governed by intra-corporate
So hired in March 2015, it‟s a continuing engagement, and controversy) you cannot move to dismiss the case on the
Juan owned a share in July 2015. Since the engagement ground of nuisance or harassment suit. It is not available in
was continuing in nature, it was enough that he was a regular action. Only in intra-corporate controversies and
stockholder at the time of filing of the complaint. derivative suit is one of the cases under intra-corporate
controversies.
BAR: How many shares do you need to file a
derivative suit? If you only own one share, can you That‟s why the Supreme Court said in case of intra-corporate
still file derivative suit? controversy, that the minority must alleged in the complaint
that it is not a nuisance or harassment suit because otherwise it
Yes. Because the number of shares is insignificant, as long
may ___ with __ the stockholder to cause trouble and
as you are filing on behalf of the corporation.
inconvenience to the corporation.
But of course you have to contend now with… that you are
So there must be legitimate cause of action. Not just to harass
not a nuisance or that appraisal right is not available.
or vex the corporation.
Even though the shares that you own may be insignificant, it
5. Appraisal Right is not available
does not disqualify you from filing a derivative suit. That‟s the
essence of derivative suit, right? The minority stockholder – This must be alleged likewise in the complaint.
not the majority – will be the one filing the suit on behalf of the
corporation.
3. Exhaustion of Intra-corporate remedies
YU v. YUKAYGUAN (2009)
Is there a need to exhaust intra-corporate remedies
in case of close corporation?
You only have three ___ , max. You have to exhaust intra-
corporate remedies and the Supreme Court said the
requirement of exhaustion of intra-corporate remedies
and so with all the other elements of derivative suit are
also applicable even to close corporation.
Now before these elements on derivative suit in the recent
cases that we discussed there‟s also an exception to the element
of intra-corporate remedy.
The exception was UNLESS the ones who made the
wrongdoing are the majority directors. In this case it is useless
to exhaust intra-corporate remedies.

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CAPITAL STRUCTURE
Let’s say A subscribed to 100,000 shares of ABC
Corporation, each share has a par value of 1 peso. He
paid 25% of the 100,000 subscription, 25,000 was the
amount received by the corporation. So the
corporation subsequently became insolvent and
because it became insolvent it reached the balance of
the subscription. As the president, the payment of the
subscription was asked to be condoned. The president
agreed to the condonation of the balance of the
subscription provided that the payment A made to the
corporation be forfeited in favor of the corporation.
Can the president condone the payment of the
subscription?
No because it will violate the Trust Fund Doctrine.
Can A demand for the issuance of a stock certificate
corresponding to the shares he actually paid if there is
an agreement between the corporation and the
subscriber?
If there is no agreement, he cannot demand the
issuance of a stock certificate corresponding to the
shares he paid. The contract of subscription is
indivisible so the payment has to be applied pro rata
for the shares he actually paid.
What if there is an agreement to the contrary? What if
the stockholder and the corporation agreed at the
outset that the stockholder will be entitled to the
issuance of the stock certificate corresponding to the
shares covered by the amount he paid? That means
the payment will not pro rated among the 100,000
shares. The 25,000 payment will be applied only to the
25,000 shares. Will the issuance of the stock
certificate corresponding to the 25,000 shares
amount to a condonation of the payment of the
balance of the subscription?
No. He is still obligated to pay only that he will be
issued a stock certificate corresponding to the shares
he actually paid. He should still pay the balance
otherwise it will invalidate the Trust Fund Doctrine.
What does 64 say regarding issuance of stock
certificate?
No stock certificate shall be issued unless there is full
payment of subscription.
Is that mandatorily couched in favor of the
corporation or in favor of the subscriber? Is that for
the benefit of the corporation or for the benefit of the
stockholder?
It is for the benefit of the corporation so the
corporation can waive the benefit.
Baltazar v. Lingayen Golf
The Supreme Court allowed issuance of a stock certificate
corresponding to the shares paid. In our example, 100,000 was
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subscribed to by A. He paid 25,000. The corporation agreed to
issue the stock certificate. The SEC commented that this was
based on the old Corporation Code and the new Corporation
Code is couched in mandatory language that no stock
certificate shall be issued unless there is full payment of the
subscription but that‟s for the benefit of the corporation. The
corporation may waive that benefit. That‟s why if there is an
agreement to the contrary, so the corporation and the
subscriber will agree, in which case the payment shall not be
pro-rated. It will be applied only to the 25,000. So there will be
no violation of the doctrine of indivisibility of stock
subscription as it will no longer be pro rated but instead,
applied in toto or entirely to the 25,000 shares covered by the
payment.
Now if you ask me how many corporation has done that, none.
It‟s only a philosophical discussion. No corporation will issue
stock certificate corresponding to the shares paid.
ABC Corporation issued 1,000,000 shares. Of the
1,000,000 shares, 100,000 was reacquired by the
corporation through purchase. In other words,
100,000 shares became treasury shares. The
corporation now decides to sell or re-sell the shares.
100,000 shares was sold for 100,000 pesos. The buyer
is Juan dela Cruz. He paid 25% only, 25,000 of the
entire 100,000 resold shares. Pending payment of the
purchase price, can Juan dela Cruz, the buyer,
exercise the rights pertaining to the 100,000 shares?
No.
What about this one? A subscribed to 100,000 shares
of ABC Corporation. He paid 25% only or 25,000
shares. Can he exercise the rights pertaining to the
100,000 subscribed shares if he only paid 25%?
Yes sir.
Is there no difference between the first and the second
situation?
The first one is a sale transaction the second one is
subscription.
In what case or instance can the creditor of the
corporation enforce payment of the purchase price of
the subscription? In both cases or only in
subscription?
Only in subscription.
So are you saying that the Trust Fund Doctrine does
not apply to purchase of shares?
It does not because it only applies to subscription.
That‟s why if this should be asked in the bar, make
sure that you determine if it is a purchase or
subscription because purchase has different
consequences from subscription. It‟s not a question of
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denomination, title or name of the transaction. It‟s a The term “paid-up capital stock” has a precise meaning. it
question of the nature of the transaction. does not include assets or loans obtained by the corporation
When is it a purchase? When is it subscription? This definition became important in one case. The National
Productivity Wage board issued a wage order increasing the
It‟s a purchase if the object of the transaction pertains
minimum wage of all covered employees but exempting from
to existing shares like treasury shares. It is
the coverage employers whose paid-up capital is impaired by
subscription if the transaction pertains to unissued
25%. The issue is the definition of “paid-up capital” – whether
shares of the corporation. That‟s why 60 says any
it is the portion of the subscribed capital stock which are
contract for the acquisition of unissued shares is
actually paid or whether it includes assets and loans of the
called subscription even if the parties may call it a
corporation.
purchase, sale or any other transaction because as we
have seen in our example, the rules are different, the Subscription agreement
consequences are different, the effects are likewise
The object of subscription is unissued shares. It can mean an
different between purchase and subscription of
existing corporation or a corporation yet to be formed.
shares.
PURCHASE/SALE v. SUBSCRIPTIONS
PURCHASE/SALE SUBSCRIPTIONS
Okay so we are on capital structure, subscription agreement.
Of course we know the distinction between authorized capital pertains to existing Pertains to a corporation
stock, subscribed capital stock, paid-up capital stock right? So corporations yet to be formed
we have these concepts, we‟ve discussed these terms. Pertains to existing shares Refers only to unissued
shares

Authorized Capital Stock – represents the maximum number Buyer cannot exercise the Subscriber is entitled to
of shares that the corporation may issue without amending the rights pertaining to the exercise the rights even if
Articles of Incorporation. purchased sales unless there there was no full payment
has been full payment of the of the subscriptions
Subscribed Capital Stock – equated with outstanding capital purchase price
stock, the legal capital. The portion of the authorized capital
stock which is actually subscribed even though not fully paid.
Paid-up Capital Stock – is the portion of the subscribed capital The creditor cannot enforce The creditor of the
stock that is actually paid up, in cash or property. payment for lack of privity of corporation may enforce
contract payment on the unpaid
subscriptions under the
In relation to our discussion on Trust Fund Doctrine, which of trust fund doctrine
these is relevant? It‟s the subscribed capital stock not your
authorized capital stock. The subscriptions received by the
corporation, the aggregate par value shares issued by the If the sale involves 500 pesos It may be done verbally or
corporation are covered by the Trust Fund Doctrine. The or more, it should be in writing
totality of the subscriptions or the aggregate par value of the writing otherwise it is
shares issued by the corporation are covered by the Trust Fund unenforceable under the
Doctrine. statute of frauds

What does it mean? This means that the subscriptions received
by the corporation from the stockholders corresponding to the
aggregate par value of the shares subscribed are not available
for distribution to stockholders…
12:47 to 27:18
what does it mean? this means that the subscriptions received
by the corporation from stockholders corresponding to the
aggregate par value of the shares subscribed are not available
for distribution to the stockholders. That‟s why in our
discussion in dividends, they cannot be declared as dividends.
Formula: assets – subscriptions – liabilities
the assets of the corporation must exceed the combined
subscriptions and liabilities of the corporation.
Why do you deduct the subscriptions and liabilities
from the assets to determine surplus profits?
because the subscriptions should be unimpaired because they
are intended for the benefit of the creditors.
Ong v. Chua 401 scra
A is a controlling stockholder of ABC corporation. ABC secured
a loan from PNB. The loan was not paid. PNB threatened to
foreclose the mortgage. to avoid foreclosure, A invited X to
infuse the equity into the corporation so that they would have
enough funds to pay the loan. However, they found out that the
subscription agreement is unreasonable. Both parties wanted
to rescind the contract
May either party rescind the contract of subscription?
NO, because the contract is between the corporation
and the stockholder and not between the two stockholders.
This is tantamount to returning to the stockholder his equity
investment which is violative of the trust fund doctrine since
the subscriptions are held in trust for the creditors.
There are only 4 cases where the investment may be
returned to the stockholder without violating the trust fund
doctrine:
1. Dissolution/liquidation

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2. Reduction of capital stock
3. Redemption of redeemable shares
4. Exercise of the stockholder of his appraisal right
Mesina v. Yamamoto
A is a controlling SH of ABC corporation. He sold 70%
to X. The lawyer of X wrote A that in view of his equity
investment, X can now take properties of ABC corporation. The
corporation refused. X filed a petition for Replevin to take the
assets and properties of the corporation.
The SC said that the advice of the lawyer is not valid
because it is without board approval. Assuming that there is an
approval, it is still not valid because giving the properties o the
corporation to X will violate the trust fund doctrine since it is
one of the assets of the corporation
The trust fund doctrine also extends to the
properties of the corporation
The corporation cannot declare stock dividends from
subscriptions. It cannot pay a SH‟s appraisal right from the
SH‟s subscription. It cannot acquire treasury shares using the
SH‟s subscriptions. No properties of the corporations shall be
returned to the stockholders unless it is provided by law.
Ali v. Springwell 2011
ABC corp rendered printing services to XYZ corp. XYZ did not
pay. ABC filed a collection suit against XYZ. In the course of
the collection, ABC discovered that the subscribers of XYZ have
not yet paid in full their subscription. So ABC moved to amend
the complain to include the subscribers of XYZ.
May the creditors of the corporation enforce
payment of the subscriptions even if the corporation
is not yet insolvent? YES. There is no need to wait to for the
declaration of insolvency of the corporation to enforce payment
under the trust fund doctrine.
CAPITAL STRUCTURE
26:09 – 38:30
ABC Corp rendered printing services to XYZ Corp
XYZ did not pay
ABC filed an action for collection
ABC discovered that subscribers of XYZ have not paid in full
the subscription
ABC moved to amend the complaint to include subscribers of
XYZ
SC: You can file against both because of the Trust Fund
Doctrine
No need to wait for the declaration of insolvency on the part of
the corp
While you can file a case against subscribers, any judgment
against the subscribers will be deferred until you can show that
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the assets of the corporation are not enough to pay the
obligation
The president of the corp cannot condone payment because of
the trust fund doctrine
GR: liability of subscriber limited to his unpaid subscription
XPN: He is a director and officer of the corp at the same time
He can be held liable beyond his subscription
BAR: A is a SH of ABC corp
He paid in full the subscription
B has unpaid subscription equivalent to 50%
C has fully paid subscription but he is an officer and director of
the corp
Corp became insolvent due to mismanagement of directors
Can you file a case against A, B, C?
A- No
B- Yes to the extent of unpaid subscription
C- Yes, not because he is a SH but because he is a
director who is responsible for the insolvency of the
corp
BAR: A subscribed to 100,000 shares of ABC Corp
Agreement: subscription price shall be paid from the dividends
to be declared by the corp
Is he relieved from the obligation of paying the subscription?
No. Only the condition is void but not the contract of
subscription. You cannot condone the payment of obligation,
otherwise, you violate the trust fund doctrine
Consideration for stocks
1. Cash
Can it be in dollars?
Yes. Contracting parties are now free to stipulate any
currency to be used in paying the obligation.
2. Property
Conditions:
a. Necessary or convenient to the lawful purpose of
the corp
Should not be alien to its purposes
b. Must be fairly valued
c. Subject to SEC approval
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Purpose is to prevent issuance of watered stocks
3. Labor performed or services actually rendered
BAR: Can shares of stock be issued for future
services? No
Can the corp grant stock options? Yes
Are stock options violative of Sec 62? No
Its an options to subscribe to shares of stock at par
value at a pre-agreed price on a pre-agreed date
Ex: Steve Jobs
He was fired. He was convinced to come back on a 1M
salary with stock options of $10 per share for 3 years.
After 3 years, its $140 per share. So it is wise to
exercise your option if the price went up.
4. Previously incurred indebtedness
5. Amounts transferred for retained earnings to capital
Basically stock dividends- forced used of cash
dividends to subscribe shares at par value and issue
stock dividends to SH.
6. Convertible shares
Ex: Corp has preferred renewable shares convertible
to common shares after 3 years
CAPITAL STRUCTURE (*queue Rianna – I hate this part right
here*)
39:31 till the end…it doesn‟t even matter. I had to fall, to lose it
all…
In the last paragraph of Art. 62, there is this provision
regarding the authority to fix no par value shares. It says that
the AOI may fix the issued alvue of no par value shares, and in
the absence thereof, by the BOD (majority of the QUORUM,
because it only says “the BOD may fix…”), pursuant to
authority conferred to them by the AOI or By-laws, OR in the
absence thereof , by the STOCKHOLDERS representing at least
a majority at a meeting duly called for the purpose.
NATURE OF STOCK
Stock is a personal property, intangible, and incorporeal.
It does not represent a specific right over the assets of the
corporation. It only represents an aliquot interest in the
property of the corporation.
The stockholders are not co-owners, not possessors of
corporate property because shares of stock does not represent a
97
specific right to corporate property. Its only an aliquot
proportionate interest in the corporation‟s property. Inchoate.
Ripens only into ownership upon dissolution and liquidation.
WATERED STOCKS
These are stocks issued for an amount BELOW FAIR VALUE
(don‟t say par value).
What‟s the fair value of shares?
For PAR VALUE: It is the equivalent to PAR VALUE
For NO PAR: The issued price fixed by the BOD or the
SH but not less than 5 pesos per share.
What‟s the consequence for issuing watered shares?
The Stockholder/Subscriber and consenting director
or director-who-knew-about-the-issuance are liable solidarily
for the difference in issued value and the fair value of the share.
EXAMPLE: So if the fair value is P10 and issued for P5, there‟s
a P5 watered portion of the share for the account of the
consenting director and subscriber of share.
What about treasury shares? Can they be sold for an amount
below par? Are the watered shares rules applicable to treasury
shares?
Yes, a corporation may sell treasury shares below par.
The only condition is that it must be reasonable based on the
appreciation of the BOD. However, There can be watered
shares if the corporation does not get the corresponding
equivalent of those treasury shares.
EXAMPLE: Treasury shares given for free to a lawyer, but who
lost the case. Those are watered shares, even if they are
treasury shares.
So the concept of watered shares does not only apply to
issuance but also to sale. Bottom line, if the corporation did not
get the FAIR VALUE for shares issued or sold.
CLASSES OF SHARES OF STOCK QUICK REVIEW
(again)
 Common and preferred,
 Par value and No-Par value, Voting and Non-Voting,
 others under the AOI,
 founders shares,
 Redeemable shares in Sec 8,
 Treasury shares under Sec.9,
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 Watered Stocks. Only two kinds are allowed to be denied the right to vote,
REDEEMABLE AND PREFERRED SHARES.
Do treasury shares need to be denied the right to vote? NO.
COMMON AND PREFERRED
They are not entitled to vote. The AOI does not need to deny
them the right to vote anymore.
BAR Q: If the corporation issued preferred shares, under its
AOI, does it violate the doctrine of equality of shares?
WHERE NON-VOTING SHARES MAY STILL VOTE:
FOLLOW ME MENTALLY!!!
ANS: No. Because the Corporation and the AOI may classify its
shares accordingly. But if there is no classification, all shares
are deemed alike, with the same rights. A2SICMID

Different kinds of Preferred shares?  Adoption, amendment of AOI

As to assets, the holders of these shares will receive  Adoption, amendment of BYLAWS
the assets of the corporation before the holders of common  Sales, lease, exchange, etc of all/substantially all
shares. corporate assets
 Create bonded INDEBTEDNESS
 Increase in CAPITAL STOCK
As to dividends, there are several kinds:  MERGER
 INVESTMENT of funds in secondary purpose or
business
Cumulative and non-cumulative, participating and  DISSOLUTION
non-participating, and a combination of both.

BAR Q: Can non-voting shares participate in amendment of by-

What do you mean by cumulative preferred shares?
The holder of shares is entitled to receive the
dividends for the years covered by the shares. The right to
receive dividends is not extinguished if the corporation fails to
declare divs in the year.
laws to fill up or add a corporate office?
ANS: YES. This is one of the cases where non-voting shares
may vote.

With non-cumulative, the right to receive dividends is

extinguished if none is declared in the current year. BAR Q: Can holders of nonvoting shares vote on issuance of
corporate bonds?

Participating shares?
This refers to holders of pref shares may participate in ANS: NO. The question asks about corporate bonds NOT
the surplus profits together w/ the common shares after bonded indebtedness. So they cannot vote on corporate bonds.
receiving what‟s due to them as pref shareholders.
Non-participating, once the holders of pref shares gets
what‟s due to them, they do not anymore participate with the
common shares in the residual profits.

BAR QUESTIONS: Are holders of preferred shares creditors of

the corporation?

ANS: NO. The holders of pref shares are not creditors, they are
EQUITY HOLDERS, just like any stockholders, and while they
have a right to receive dividends, it is dependent on SURPLUS
PROFITS AND DECLARATION OF DIVIDENDS.

VOTING AND NON-VOTING

Non-voting shares are denied the right to vote, in the AOI.

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DELINQUENCY
Let‟s say a stockholders of ABC corporation, he subscribed to 1 When do stocks become delinquent?
million shares with the par value of 1 peso. The subscription
30 days from the due date. So the payment must be within 30
price is 1 million pesos and the contract of subscription
days from the due date, after 30 days from due date it becomes
stipulates that it shall earned an interest of 12%per annum, so
delinquent.
1 million plus 12% interest per annum. At the outset of the
contract, upon signing he paid 25% or 250,000. Then, the
balance of the 250,000 shares.
How many stocks becomes delinquent? In our example,
1 million or 750,000?
First question, When should it pay the balance of the 1 million shares despite the payment of 250,000.
subscription? Why is that so? The contract of subscription is
indivisible. Therefore the stocks, corporate
The balance should be paid on due date and the due
subscription and agreement are delinquent.
date is the date specified in the subscription contract.
Therefore, from June 1 to June 30 all rights apply.
And if there is no due date specified in the contract of
Nothing suspended.
subscription upon call by the board.

On July 1, the shares become delinquent. Here all rights are

Does the call requires board resolution? Who makes
the call?
The call is made by the board so it requires board
resolution. If there is date specified in the contract of
subscription then the call is not necessary because one
of the exceptions to the demand is when the law says
so. According to the SEC as we pointed out in our
previous discussion, there is one case where the law
does not require demand, when the contract specified
the due date. It should be paid on that date with or
without the call. Call is necessary only when there is
no date specified.
Supposing the due date for discussion purposes, the due date is
on June 1, 2015 and on that date, it did not pay the balance of
subscription. On June 15,2015, the corporation declared
dividends. Is A entitled to receive dividends?
So June 1 is your due date and then June 15 is the date
of declaration of dividends, so A is entitled to receive
dividends.
For how many shares?
For the number of shares he subscribed which is 1
million shares.
On June 17, the corporation declare a stockholders meeting. Is
A entitled to vote?
Yes. For how many votes? 1 million shares.
suspended EXCEPT the right to receive dividends. So from
delinquency date before sale date, all the rights are suspended
except the right to receive dividends in accordance with law
which means if the corporation declares cash dividends, the
said corporation may apply dividends to the unpaid
subscription.
If the corporation declares stock dividends, the corporation
may withhold the payment of stock dividends or the issuance of
the said stocks.
If the dividends are declared on June 30, can the
corporation apply the cash dividends to the unpaid
subscription?
The corporation cannot apply because it applies only
to delinquent share. As we said in our previous
discussion, from June 1 to June 30 before the
delinquency date, all rights applies. So holders of
unpaid shares not delinquent. They are entitled to all
the rights pertaining to their shares and the
corporation can only apply cash dividends on
delinquent stocks not on unpaid shares. That‟s why
from the delinquency date before the sale date, all
rights are suspended except the right to receive
dividends qualified by the statement in accordance
with the law. As we pointed out already, for cash
dividends it can be applied to unpaid subscription.
While for stock dividends, it can be withheld until full
payment of subscription.

With what period should the shares be sold?

How many share is he representing on the meeting?
Not earlier than 30 days but not later than 60 days
1 million shares. from the delinquency date. Before the sale date, the

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stockholder may buy or pay the subscription but with 900,000. So 900,000. There are 3 bidders X, Y and Z. One of
interest, cost and expenses. them tendered for the same bid for 900,000. But X bids for
900,000 equivalent to 800,000 share. Y 900,000 for 700,000
shares and Z bids for 900,000 for 900,000 shares. So who is
Now if the stockholders did not pay the subscription, the winning bidder here?
interest,cost and expense the sale will push through. Can the
Y is the winning bidder.
corporation participate in the sale of delinquency
shares?
The corporation may acquire shares only if there is no Supposing Z bids for 1.2 million for 900,000 share.
one who is willing to pay the full amount plus interest, Who is the winning bidder?
cost and expense. If there is someone or qualified
Still Y is the winning bidder. The winning bidder is
bidder willing to pay the full amount of subscription
not the one who offers to pay for the highest amount.
plus interest, cost and expense, the corporation
Unlike your foreclosure of mortgage, unlike execution
cannot participate in sale of delinquent shares. The
under Rule 39 where the winning bidder is the one
corporation can acquire such delinquent share only if
who offered for the highest amount. For the said
there is no qualified bidder and qualified bidder in the
delinquent shares it is uniform right equivalent to
context of the law or provisions on subscription and it
unpaid subscription plus interest, cost and expense.
is not the one who offers for the highest amount.

So the winning bidder under the code is the one who pays
Qualified bidder, in the context of the corporation code is,
the full amount plus interest, cost and expense for the smallest
the bidder who is willing to pay the full amount of subscription
or least number of shares. Therefore, the winning bidder here
plus interest cost and expense. So if no one is willing to pay
is Y because it paid the full amount for 700,000 shares.
such amount, the balance of subscription plus interest,cost and
expense, that is the only time the corporation may acquire the
delinquent share but subject to availability of surplus profit.
What will happen now to the remaining 300, 000?
The 300,000 shares will be credited on account of A.
What happens if the corporation has no surplus So that means there will be 2 stock certificate will be
profit? Can the shares be sold on piecemeal basis? issued by the corporation.
Here‟s the scenario there is no one,willing to pay the
amount for the full amount of subscription plus
What will happen to the stock certificate of A? Will it
interest,cost and expense and the corporation has no
be cancelled? In the first place, does A have a stock
surplus profit. Can the corporation sell the shares in
certificate?
the piecemeal basis? Otherwise they will stay
delinquent shares forever. This is an actual case, 49% So A is not entitled to stock certificate because he did
of the outstanding capital stock became delinquent not pay in full the subscription. So this time, 2 stock
and 49% is a lot of money but there is no one willing certificates will be issued because both of them are
to pay the amount and the corporation has no surplus now paid in full. So A will have a stock certificate for
profit. Can the corporation acquire the shares 300,000 and the winning bidder Y will get a stock
on piecemeal basis? certificate for 700,000.

The SEC said that the contract of subscription is Just to finish up our discussion on Classes of Shares, we have
indivisible. In fact the corporation applied for par value and no par value.
authority to sell on piecemeal basis but sabi ng SEC
sorry the corporation code says otherwise. So you
have to wait until there is surplus profit or wait for a Par value shares
qualified bidder. In the meantim, so what if 49% is
Means there is an arbitrary amount assigned in the shares of
delinquent. You still have the majority or the quorum
stock under the article of incorporation and stocks certificate.
51% anyway is the quorum for certain corporate acts.

We all know that par value is not equivalent to the book value
Supposing the unpaid subscription is 750,000 plus 12%
or fair market value share. It is simply an arbitrary amount
interest is about 8,400 plus cost and expense. Lets estimate at

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fixed by the corporation appearing in the articles and the stock
certificate. --- of the par value, book value and fair market
value. So Par value as we said is the arbitrary amount assigned
in the shares fixed in the articles of incorporation and the stock
certificate.
Book value
Is computed by dividing the total capital of the corporation by
the number of outstanding share. So capital divided by number
of outstanding share. Not the authorized share but the
outstanding shares. So if you have a capital of 50 million
divided by the number of shares and that is your book value.
Fair Market value
is the value of the shares where the seller is willing to sell and
the buyer willing to buy. It is declared by market forces.
Is it possible for the share to be trade below or above
Par? Is it possible for the share with par value of 10, a
book value of 50 be traded at 100?
Yes, because 100 is the price the seller is willing and
the buyer willing to buy. It is declared by market
forces.
Is it possible that the book value of the share is lower
than par value?
Yes,in case of losses by the corporation. Book value is
the function capital net worth divided by the number
of the outstanding shares.
No Par Value shares
No value is assigned to the shares under the articles but that
does not mean that it has no value, it has an issued value but
the issued value should not be less that 5 peso per shares.
Can the no par value be issued for different amounts?
Yes as long as the value or issuance is not lower than 5
pesos. If shares are acquired for 10 pesos, lets say
1000 shares for 10 pesos and another 1,000 for 5
pesos. They have same rights and privileges even
though acquired for different issued values.
What are the limitations for the issuance of no par
value shares? So follow me mentally. (Follow me elementary
sabi ni Zacky)
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1. Preferred shares cannot be issued without stated par
value.
2. Certain type or kinds of corporations are not allowed
to issue no par value shares like banks,insurance
companies, public utilities, corporations governed by
special law by virtue of public interest.
3. The consideration received for the issuance of no par
value share forms part of the capital, not available for
distribution.
4. It cannot be issued for a value lower than 5 pesos.
5. They are deemed fully paid and non-assessable .
Is partial payment of subscription allowed for no par
value share?
In our discussion, we have always mentioned that you
can pay the downpayment and the balance on a later
date depending on contract of subscription. NOT
when it comes to no par value shares because they are
deemed fully paid and non-assessable.
What kinds of share ought to be paid in full? And not
just a percentage allowed.
1. If stipulated
2. No par value share
3. In case of foreign subscribers unless the balance or
obligations is secured by a bond.
Before, corporations are not allowed to make partial payment
but the SEC lifted that stipulation. If you are reading the old
corporation code or documentary they take that out.
Corporation now are allowed to pay portion or percentage of
the subscription. Before they are required to pay in full the
subscription.
Remember all subscription, payment and the requirement to
pay 25% of subscription only applies to
1. Incorporation
2. Increase of capital stock
3. If the corporation is insolvent
If not, the price, payment and subscription are determined
by the board of directors.
Can we have other classification other that section 6?
There can be many as possible as long as they are in
the Articles of Incorporation and not contrary to law.
For example, can you have a classification of shares
to comply with the constitutional requirement like
class A and Class B shares? Yes. In a public utility
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corporation 60% of the capital are reserved for
Filipinos, 40% allotted for foreigners. How can you
make sure that you track or you don‟t over issue the
40% limit for foreigners? By having two kinds of
shares, class A and class B. Class A shares will be held
by Filipinos and Class B share will be held by
foreigners so you would not need to track every now
and then, whether or not you have exceeded the 40%
limit for foreigners. More so because of the Gamboa v.
Teves, if the corporation issues mixtures of shares the
60-40 limitation shall be mirrored across the board.
Founder Shares
This are shares classified as such in the Articles of
incorporation which are given certain preferences or privileges
but if the privilege consist of right to be voted or the right to
vote the directors, the same shall not exceed for a period of 5
years from the approval of the SEC.
Take note that only the right to vote or be voted are subject to
5 year period or limit. Other privileges are not subject to the
same term limit.
For example, can you afford the founder share the right
to receive dividends ahead of all kinds of share eve the
preferred? Yes.
Can it be longer than 5 years? Yes because of section 7.
Now, section 8 and 9. We covered this already. Section 8 is
treasury shares and section 9 is redeemable share, we already
taken this up.
BAR QUESTION: What do you mean by a Street
certificate? What is Street certificate?
It is not a classification of share in the Corporation code. You
don‟t see that as classification or kind in the corporation code.
It is a certificate indorsed in blank. Indorsed in blank. This is
particularly true for listed companies where shares are actively
traded.
What is the usual procedure when you sell your
shares?
He has to indorse the stock certificate and deliver to
the transferee.
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Again the transferee would have to pay the taxes and
get the CAR (Certificate Authorizing Registration).
Once you get the CAR from the BIR, he goes to the
corp sec of the corporation, the corp sec will cancel
the stock certificate of the seller stock holder and issue
a new one for the buyer. If the buyer sells again then
the same procedure. The buyer indorse the stock
certificate and delivers to the new buyer or transferee,
he has to pay the tax, get the CAR then go to the corp
sec. The corp sec cancels the stock certificate and
issues a new certificate so on and so forth.
To facilitate scriptless? trading, stock certificate is given to the
SH. The certificate shall be held by the broker but for the
benefit of the SH. So the beneficial ownership rests with the SH
but the legal title is with the broker. If the SH sells his shares,
there is no need to cancel the stock certificate because it is only
a change of ownership.
If the ultimate owner wants to get a new certificate, he can
uplift a certificate from the broker and ask the Corporate
Secretary to issue a certificate on his name
Payment of Subscriptions
There are two ways by which a corporation may enforce
payment of subscriptions:
 by judicial action, by filing an action for collection
 by extrajudicial, through a call by the Board of
Directors or when the due date on the stock
certificates occur.
(BAR) the President of ABC Corporation owned shares
of stock of the corporation and he resigned from the
corporation. He is claiming for his labor benefits from
the corporation. However, he has not yet paid in full
his subscriptions to the corporation. Can the
corporation apply or set off his unpaid subscription
against his benefits?
NO, because there is no call made by the board or due date in
the contract of subscription.
Supposing that there is a call, can the corpo offsets? It
depends. If you are the counsel of the corporation, apply the
civil code on compensation by operation of law if they are
present if you are for the employee, argue the provision which
says that the employer may not interfere with employee‟s
disposition of his wages.
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Does subscriptions earn interest? Yes.
Two kinds of subscription interests:
By stipulation or moratory interest
By reason of default or compensatory interest
Is it possible to collect both kinds of interests? Yes. If
the interest is stipulated and the SH is in default.
Nature of a stock certificate
it is a quasi-negotiable instrument. The concept of holder in
due course does not apply. The holder of the certificate is still
subject to all kinds of defences. This was explained in the case
of Republic v. Sandiganbayan, wherein the Marcoses left
stock certificates endorsed in blank. The issue was whether the
blank instruments may be converted to bearer instruments
which shall be owned by the person in possession of the blank
instruments.
representation by the President that they will be taken back. Q:
is there any obligation on the part of ABC Corp. or XYZ or both
terminate the employment of those officers of XYZ. A: No
because it is only a change of SHs. It is only a share of share. It
doesn‟t matter if XYZ sell all or substantially all the shares in
favor of ABC. ABC, the new owner cannot terminate their
employment. It is not a merger. Purchase of shares, even if it is
all or substantially all does not amount to merger. It not being
a merger, it has no obligation to observe the employees of the
corporation. XYZ, also cannot terminate because change of
owner is not a ground to terminate under the Labor Code. Q: Is
ABC liable? No, the one liable for the termination is XYZ.
What about the President of XYZ? Yes, the president is liable
because of bad faith. In choosing the officers of the corporation
to resign………With representation that they will be absorbed
under new management.
That‟s sale of shares. So the (change) is at the level of the
(stockholder).

Second one. This time, ABC buys all or substantially all of the
The SC said NO, since stock certificates are not negotiable assets of XYZ or XYZ sells all or substantially all of the assets in
instruments, the concept of converting an instrument endorsed favor ABC.
in blank to a bearer instrument does not apply.

Q: Does ABC have any obligation to assume and

MERGER AND CONSOLIDATION absorb the liabilities of XYZ Corporation?

Recit.
Discuss the step by step procedure in merger or consolidation. A: the buyer corporation has no obligation to assume the
(BAR) liabilities of the seller corporation. Because sale of assets even
though all or substantially all is not a merger. If it were a
The assets of XYZ Corporation will be swapped for shares of
merger, if XYZ is the surviving corp. then XYZ is duty bound to
stock of ABC. So the SH of XYZ will get shares of stock of ABC
absorb the employees of ABC Corporation. This is the ruling in
in consideration for the ________. Is that a merger? No, is
BPI vs BPI DAVAO EMPLOYEES UNION.
that a de facto merger? A: this is the case of RPN9 v. Bank of
Commerce. Under the Corporation Code there is no de facto
merger. There can be no merger unless the procedures are
Q: In case of sale of all or substantially all assets, does
complied with. There must be a certificate of merger issued by
the seller lose its own existence, does the seller cease
the SEC.
to exist by selling all or substantially all of the assets
Lecture in favor of the purchaser?

There are different forms of corporate combinations in the

Philippines. Quick review, one is sale of all or substantially all
A: NO. because sale of all or substantially all is not a mode of
assets of the corporation. Next is sale of all or substantially all
dissolution, and besides you can have a corporation without
shares of the corporation and the third one is merger or
assets.
consolidation. Remember the case of _______ v _____, so to
refresh your memory, XYZ Corporation is owned by three (3)
SHs, X, Y and Z. ABC would like to buy the shares of XYZ
Q: can XYZ terminate employment?
Corporation. Before ABC can proceed with the purchase of
shares ABC identified certain officers that XYZ should talk to
and ask him. When ABC finally bought the shares of XYZ after
A: YES, because if there is no business, then XYZ can terminate
the officers were asked to go, ABC after it acquired the
employment for authorized cause. So if they have no business
corporation did not take back the officers after all the
because they have sold their assets, then what‟s the point of

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keeping your employees. So XYZ the seller can layoff the Merger = 1 corporation exist which retains corporate existence
employees subject to the payment of appropriate separation and called the surviving corporation. it acquires the assets and
benefits. the obligations of the absorbed corporation while retaining its
own corporate existence.

Q: what about the buyer ABC, does ABC have the obligation to
absorb the employees of XYZ?
A: NO. The only obligation of the buyer is to give preference to
the employees of XYZ if they are qualified, but not a legal
compulsion to absorb and accommodate the employees of the
seller corporation.
And it goes to all liabilities of the seller corporation not just to
employees but to all liabilities,
-Taxes owing to the government
-Obligations owing to the creditors
Consolidation = both corporations cease to exist, all their
assets and liabilities are transferred to the new corporation to
form the consolidated corporation
In our jurisdiction, merger is the most common mode of
corporate combination and not consolidation. In fact, in all my
years as a corporate lawyer and as a person, I haven‟t seen
consolidation. It‟s always merger.
So who is notorious for merger?
Number 1 is BDO with equitable pci bank, after, we have BPI,
as you all know BPI has merged with FAR EAST BANK and
then BPI family savings bank.

So these are not passed on to the buyer corporation except in 4

cases where the buyer corporation is duty bound to assume the
Metro bank also ___merger with asian bank and so for and so
liabilities of the seller corporation:
on.
1. Stipulation
2. If it amounts to a merger and consolidation
So it is always a merger, in the States, the trend before was
3. In case the buyer is a continuation of the merger because the bigger the better. But then they realized
personality of the seller corp. that it doesn‟t work that way because there are many cultural
4. In case the sale is made in bad faith. As when incompatibilities just like a marriage, you can have the two best
there is a basis to pierce the veil of corporate individuals on a standalone basis separately. Separately they
fiction. are the best, but because of cultural incompatibilities or other
differences and personalities the marriage does not work.

What is merger?
Merger is the absorption by 1 corporation of another. Acquiring
the assets and liabilities of the corporation _____ retaining its
corporate existence.
Same thing with merger, imagine a merger between equitable
pci bank binondo old style Chinese way of doing business and
citi bank. In equitable, everything was based on handshake, the
promissory can come up later. Everything is based on trust,
unang tingin ko palang sayo alam ko makakapag tiwalaan kita,
therefore I will lend you.

In a merger, there is a surviving corporation. in terms of

mathematical formula,
Merger is A + B = either A or B depending on who is your
surviving corporation.
Consolidation is A + B = C. so the 2 corporations lose their
existence to give rise to a new corporation called consolidated
corporation.
In Citibank, no way. Every step of the way it must be
documented. In citi bank sobrang daming pages. In equitable
pci bank, 2 pages lang.
So if you merge equitable pci bank with Citibank, obviously it
won‟t work, even though separately they can do and they are
very good banks right? And that‟s what‟s happening. So in this
case they are undoing the mergers that were made.

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Let us discuss merger in the light of my experience as a
corporate lawyer. So we have acted as counsel for the surviving
corporation, and we have acted as counsel likewise for the
absorbed corporation. so we know how it feels to be the
surviving corporation and we know how it feels for the
employees of the absorbed corporation. if you are the counsel
of the surviving corporation, you feel like you are the victor,
you are the conqueror, but if you are for the absorbed
corporation, you feel vanquished, conquered, taken by other
corporation.
Q: What is the procedure for merger?
A:
First is the Preparation of the plan of merger
The Corporation Code says that the plan of merger must be
approved by the BOD by a majority vote. But of course you
cannot present a plan of merger unless you have the plan of
merger. The first step is the preparation and execution of the
plan of merger
What does the plan of merger consist of? Let‟s take the case of
equitable pci bank and BDO.
The plan of merger must include the names of the parties to the
merger. So equitable and pci bank.
Then the terms of the merger and the mode carrying the effect.
What are the most important terms of a merger?
- Who is your surviving corporation
- What will be the swap or exchange ratio when you
swap the shares of the absorbed corporation with the
surviving corporation
The first is determine who is your surviving corporation. When
we did the merger of BDO and equitable pci bank, our proposal
was to make equitable pci bank the surviving bank _____
Why? Because the authorized capital stock of BDO is almost
fully subscribed, whereas the authorized capital stock of
equitable pci bank or a significant portion, is still unsubscribed.
The unissued portion of the authorized capital stock of
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equitable is still huge to accommodate the shares to be
swapped with shares of BDO.
Wherein if you make BDO the surviving bank, you have to
increase the capital stock of BDO to have the shares to swap for
the shares of equitable.
What do I mean? In a merger, there is always 1 surviving
corporation. at the end of the day only 1 will survive. Let us say
BDO, what will happen now to the stockholders of equitable pci
bank?
They will become stockholders of BDO. So the shares of stock
of the stockholders of equitable pci, will be swapped with
shares of stock of BDO.
So the stockholders of equitable pci bank will get the equivalent
of the corresponding shares of stock of BDO. That is what
happens in a merger.
The authorized capital stock of BDO is say 10Billion, ang
subscribed is nasa 9.7B
Let us say sa equitable, ang authorized capital stock is
__Billion and subscribed ay nasa 10B. so meron ka pang 10B
na natitira that you will swap with shares of BDO.
So sabi ko Ma‟am why don‟t we just make equitable pci bank
the surviving bank, dahil in this case you don‟t have to increase
the capital stock, because if you increase capital stock, you have
to pay filing fee 1/10 of 1%. You pay docs stamp tax, original
issuance of shares. And this will amount to almost 200million.
This is my proposal which is correct right, to make equitable
pci bank the surviving bank.
Because we in equitable pci bank, we kept on quarreling. You
quarrel with ____, with your own stockholders. Toni and I
quarreled who is the former chairman of equitable.
So for emotional consideration, she did not accede to my
suggestion. Never mind the 200 million. She said let us just
make BDO the surviving corporation. What is 200 million
pesos to a family worth 15Billion dollars.
Just like what is 500 pesos to someone who is worth 1 billion.
(pertaining to dean himself) (haha)
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So that is the most important part of the ___to determine the
surviving corporation.
The second is the so called swap or exchange ratio, the
exchange ratio is
For 1 share of equitable, how many shares of BDO
For 1 share of the absorbed corporation, how many shares of
the surviving corporation.
Of course that is determined by negotiations. Taking into
account the respective values of the assets of each corporation.
Because BDO was smaller than equitable pci bank then, so for 1
share of equitable pci bank is equal to .90 share of BDO.
It is enough that you know that there is an exchange or swap
ratio in a merger of stock corporation. so at the end of the day
there is only 1 surviving corporation, so all stockholder will be
folded under 1 umbrella, the umbrella of the surviving
corporation.
Next will be the statement of changes to be made if any in the
AOI of the surviving corporation and the matters to be
contained in the AOI in case of consolidation.
As regards the merger of equitable and pci bank, the surviving
bank was equitable, and we changed the name to equitable pci
bank. The principal office of equitable was in binondo. Now if
you want to make it big, you have to change the principal office
from Binondo to Makati. In the case of equitable pci bank, it
was proposed to make the name Bdo epcib because epcib was
bigger at that time than banco de oro until somebody
whispered to the ears of teresita sy," maam you do not have to
retain the name of EPCIB as long as u give them their jobs."
That is why bdo. You also have other matters like deposits,
branches, and other important principles in a plan of merger,
and well items to be incorporated in the articles of
incorporation.
You know we were hold up for 3nights in galleria suite. No one
was allowed to go out until we were finished with the plan of
merger because of insider trading which we will take up under
SRC because we were in possession of material non-public
information and if we disclose the information to another
stockbroker who buys shares of the corporation there will be
insider trading violation. In your book, it says the plan of
merger should be approved by the board but before there can
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be a plan of merger to be presented to the board, it must had to
undergo discussions, negotiations and horse-trading. I
remember, this is why you have to be on your toes in a merger,
there were some provisions suggested by lance gokongwei. One
sentence. If you are not on your toes it means to steal
500million. It was about dividends to be declared before the
merger. In a merger, lahat ng assets ng absorbed makukuha ng
surviving kaya para mabawasan ang assets ng surviving
magdeclare ka muna ng dividends. But it was not worded that
way. Hindi sinabing we will declare dividends so you will not
get a single centavo. It was worded so innocuously but if you
analyze it it means you will lose 500million. So that what
happens in the real world. Discussions, negotiations, horse-
trading before you have the plan of merger.
Back to theoretical, it must be approved by the BOD by
majority vote, of each corporation in a meeting separately
called for that purpose.
Third, notice to of the meeting to be given to the stockholders
including the plan of merger. Why is it important that the plan
of merger be included in the notice of meeting? So that the
stockholders may examine the merits of the merger and if they
are not in favor they can exercise their appraisal right.
The plan of merger must be approved or affirmed by the
stockholders representing at least 2/3 of the outstanding
capital stock again in a meeting separately called for that
purpose. In case of banks, insurance companies, educational
corporations, corporations created by special law, the favorable
endorsement of the appropriate government agency.
After that, the execution of the articles of merger. The articles
of merger includes the plan of merger, the number of
authorized shares and shares voting for and against the
merger. The articles of merger is like your AOI. Then the
articles of merger must be signed by the president or vice
president and countersigned by the corporate secretary and
submitted to the SEC. If petition is in order the SEC will
approve the merger and issue a certificate of merger.
That is the procedure.
If these procedures are not complied with then there is no
merger. There are two cases in your outline both to the effect
that if it is a sale of assets only, it cannot be considered a
merger in which case the buying corporation has no obligation
to assume the liabilities of the selling corporation. The case of
Commissioner of internal revenue vs bank of commerce and
bank of commerce vs RPMI. The most recent is the RPMI
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which involved the RPMI and bank of commerce. RPMI
obtained a judgment against traders royal bank. That judgment
became final and executory. So when rpmi tried to enforce the
judgement it realized that bank of commerce acquired all the
assets of traders royal bank. It entered into a deed of purchase
buying all the assets of the latter so there were no more leviable
assets the same having been acquired by bank of commerce. So
RPMI prayed for the issuance of an alias writ of execution this
time including bank of commerce. Bank of commerce
intervened and argued that it is not liable because it amounts
not to a merger but simply to a purchase of assets. This case
went up all the way to the Sc. The issue is whether or not rpmi
can enforce its judgment claim against bank of commerce when
the latter acquired all the assets of traders royal bank. There
was a dissenting opinion from justice mendoza to the effect
that this should be treated as similar to a merger, a de facto
merger and therefore bank of commerce must be made to pay
for the claim of rpmi. If you would come to think of it, you
acquired the assets not the liabilities, that is jot a merger right.
If insolvent ka, traders royal bank in this case, nobody wants to
merge with you. Finally BSP found a buyer of traders royal
bank, the bank of commerce. Bank of commerce said i will buy
all the assets but not the liabilities so after buying all the assets
there was nothing left for the creditor noh. So thr poor Rpmi
had to ask for a writ of execution against the bank of
commerce. But the Supreme Court said that there is no such
thing as de facto merger. So it is merger or not. And there can
be no merger unless you comply with the procedure that we
discussed and a certificate of merger is issued by the SEC.
But soon we will have a de facto merger once the New
corporation code is approved we will have a de facto merger
and what would be the consequences, it would be like a merger.
The buyer corporation would have to assume all the obligations
of the seller corporation. Kawawa naman kasi yung judgment
creditor ng seller corporation if they can simply sell their assets
to avoid their liabilities. So soon you will have a de facto
merger. When you take the bar not yet.
regard. So any payment by the debtor to the surviving
corporation is not a valid payment.
I have seen some plans of merger conditioned that their
effectivity is conditioned on the issuance of a BIR ruling. As we
said in a merger the assets of the absorbed will be transferred
to the surviving. Is that subject to tax? Capital gains tax or
donors tax? No. Because property for share swap in a merger is
not subject to capital gains tax or value added tax. But then we
need a BIR ruling in order to confirm that that is not subject to
tax. I have seen cases where the plan of merger provides that it
is effective upon approval by the BIR. That is wrong right
because as if have said it is effective upon approval by the SEC.
So do not make a BIR ruling a condition precedent to the
effectivity of the merger. But one of the requirements that
would be asked by the SEC is a BIR Ruling. You can undertake
to submit the BIR ruling when it is available but in the mean
time once you have complied with the procedure you can now
ask the SEC to approve your merger.
Effects
What are the effects of a merger?
1. There will be a single corporation. (S)
2. The corporate existence of the constituent corporations
ceases except the surviving corporation in a merger. (E)
3. The surviving corporation or consolidated corporation shall
possess the immunity, franchise, and privilege of a corporation
under the corporation code. (P)
4. The assets, real and personal, including any cause of action
or interest on real or personal property shall be deemed vested
in or transferred to the surviving corporation without any
further act or deed.

Merger of Equitable PCI Bank, it tried selling a real property

registered in the name of PCI bank.
Effectivity Properties are transferred to the surviving corporation without
any deed of sale or donation. By operation of law upon
When is a merger effective?
approval of the certificate of merger by the SEC.
There is a case in your outline, a merger involving two banks
and the merger was approved by central bank. Can the debtor
of the absorbed corporation pay the surviving corporation? No. BAR: Is there dissolution in a merger? Yes because the
Payment to the surviving corporation does not extinguishment existence of the absorbed corporation ends
the obligation because payment should be made to the
Is there liquidation? No, after the merger all the assets of the
principal creditor. The merger approved by the BSP was not yet
absorbed corporation are transferred to and vested to the
effective until approved by the SEC. So the operative fact is the
surviving corporation.
issuance of certificate of merger by SEC not by the BSP even
though it involves two banks. The law is very clear in this

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Liabilities of the absorbed corporation shall be assumed by the
surviving corporation AS IF incurred by the surviving
corporation
No claim/lien of the creditor shall be impaired in account of
merger
Pacific Bank case: Is there novation in merger?
Can the debtor of the absorbed corporation validly refuse to
pay the obligation to the surviving corporation on the ground
that there is novation? No, no claim/lien shall be impaired on
account of merger, all liabilities and claims are transferred to
the surviving corporation
BAR: Associated Bank vs CA
What about receivables accruing after the effectivity date of
merger?
Receivables are transferred to the surviving corporation
Are the employees of the corporation deemed hired by the
surviving corporation?
BPI vs BPI Employees on MR:
It is more in keeping with social justice that the
employees of the absorbed corporation be deemed
(automatic) hired by the surviving corporation even though the
AOI is silent on that matter. The surviving corporation is
obligated but without prejudice to the right of the surviving
corporation to terminate employment on account of
redundancy. But merger perse is not a mode of termination of
employment.
TRANSFER OF SHARES
… so stock certificate is just an evidence of ownership of shares
and the SH is entitled to exercise all the rights pertaining to the
shares subscribed in the corporation. Stock Certificate (SC) is
issued upon full payment of the subscription. SC is not a
negotiable instrument; we are talking about the case of
_______ vs Sandiganbayan.
Q: Let’s say the SC is endorsed in blank by the SH
(Juan Dela Cruz) and he left it on the top of his table.
It was stolen by his messenger and the latter
negotiated it to Pedro Reyes who bought it in good
faith without notice that the title of the messenger is
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defective. Who has a better right over the shares
covered by the SC?
A: It is Juan Dela Cruz, the stockholder of record and not Pedro
Reyes despite the fact that Pedro acquires the SC in good faith
and for value he did not acquire the rights of a holder in due
course. So Pedro Reyes acquires title to the instrument subject
to all defenses that Juan can raise against the messenger. The
concept of a holder in due course does not apply.
BAR- An old case were the SH endorsed in blank a SC and
entrust it to his friend. Thereafter, it was pledge with the bank.
Who has the better right? The SH of record or the bank? The
SCourt said that it was the bank who has better right because
there was negligence and fault on the part of the SH. This was
the answer of UPLC based on an old SC decision.
Q: How do you transfer shares?
A: There are 2 ways to transfer shares. If it is stock certificate it
must be endorsed plus delivery to the transferee. What about
shares not covered by the SC, can you sell them? A: Yes,
because shares of stock are also personal property. How do you
sell if there is no SC? A: The appropriate document is a deed of
assignment. So the SH assigns his right to the contract of
subscription in favor of the transferee. Is consent of the
corporation required before one can sell his shares in the corp?
A: here, you must need to make a distinction. If the shares are
fully paid, any restriction on transfer that is more onerous than
the right of first refusal is VOID. So if the BOD passed a
resolution that the SH cannot sell shares without the consent of
the corp. or SHs that restriction is VOID. Even if that
restrictions are indicated in the AOI, by laws or in the SC. So
the only restriction is the option granted to the SHto buy
shares of the transferred SH.
Q: What about the sale of shares that are not fully
paid? Is the consent of the corporation required?
A: this time, the consent of the corporation is required. This is
consistent with section 63 of the CC. that a corporation cannot
be compelled to transfer shares over which it has or holds
unpaid claims. So those shares of stock shall be transferred in
the books of the corporation ____ unpaid claims over shares.
So therefore, if it has unpaid claims or has unpaid
subscriptions, the corporation can refuse transfer. And 2nd
reason given by the SEC is that there is novation, because you
change the personality of the debtor from the original SH to the
transferee. So the consent of the corporation is required. (So if
a question is given in the Bar, analyze the facts carefully.
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Speaking of restriction, remember the case of ChinaBankvs CA,
Juan is a SH of Valley Golf Country Club. He obtained a loan
REQUIREMENTS FOR VALID TRANSFER OF STOCK
from Chinabank, and the loan is secured by the pledge on the
SC, Juan did not pay the loan and the bank foreclosed the
pledge. The bank who is the winning bidder, when the bank
Under 63 as you all know
presented the certificate of sale the CORSEC refused on the
ground that under the by-laws the corporation has a first lien
on the shares in case of non payment of dues and assessment.
Endorsement coupled with delivery
So Juan Dela Cruz had unpaid dues and assessment with the
corporation. Q: So can the Chinabank compel the CORSEC?
A: yes, ______ is not bound by the by laws of the corporation. So if there is endorsement of stock certificate plus delivery,
Second, the corporation can only refuse the transfer of share if then the transfer is valid between the contracting parties.
there is unpaid claims and this only refer to unpaid
subscriptions and not any other obligation with the corporation
like unpaid dues. The provision in the by laws, the SC said in RAZON VS IAC (asked twice in the BAR)
the case of CARAG that it is valid but it has to be
complemented by a Pledge or chattel mortgage.
Q: ABC corp. issued stock certificates to 5 incorporators. These
5 incorporators included A and B. alright, when B died, his
So in case of nonpayment of dues and assessments, then the heirs wanted to include his shares in ABC corp. as part of his
corporation may secure the pledge or the chattel mortgage. estate for settlement proceeding.

Without the pledge or the chattel mortgage, the (provisions) in Unfortunately, the stock certificate was not in his possession
the bylaws is not enough. on the time of his death, it was in the possession of A, and A
claimed that he funded the subscription of B to ABC corp.

Q: Second, can the corporation sell the shares in case

of nonpayment of dues and assessment? Who owns the shares? Is it A or the heirs of B?

A: it cannot, unless there is a pledge or a chattel mortgage A: The heirs of B. because delivery alone is not enough. It has
to be both endorsement plus delivery to transfer title

Now this is different from condominium. For condominium

units in your loan property, the mastered deed of restrictions of
the condo corporation may provide that a condo corporation
may sell the condominium unit and apply the proceeds in
payment of fees and assessments.
Is that valid?
The SC said in many cases, YES it is valid. If it is a mastered
deed of restriction.
in fact, in this case of ___condominium vs. Moreno when we
talk about corporate controversy in 1 week time or next week
probably. In that case, the SC said that the provision in the
mastered deed allowing the condo corporation to sell condo
unit for nonpayment of dues and assessments is VALID.
When is a sale of shares consummated? Is it consummated by
the meeting of the minds of the parties on the cause and the
consideration of the sale?
This has not yet been asked in the bar yet. In the case of
VERTEX vs. PHIL ESTATE, 2013
ABC corp. is a golf course corp. it issued stock certificate in
favor of XYZ ___ for the services rendered in the construction
of the golf course.
XYZ sold the shares to A, then A to B, without endorsement of
stock certificate.

This is different from SALE OF SHARES.

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B was allowed to play golf and exercise all the rights of a So the seller should have been the one to appeal but did not
stockholder of the golf corp. But after a few months, he decided appeal. So it makes the judgment final and executory.
to rescind the agreement because the stock certificate has not
been delivered to him.
Whether or not there was a mistake in the decision of the RTC
is irrelevant because the aggrieved party did not appeal from
Can you still rescind the sale of the shares despite the fact that the decision of the court.
he has been allowed to enjoy all the benefits of being a member
of the corporation.
That is why it‟s now part of jurisprudence. So VERTEX vs.
PHIL ESTATE
The answer to that question will depend on how you
consummate the sale of shares. When is it perfected, is it
perfected by the meeting of the minds of the parties similar to We know that under 63 also, to bind the corporation and the
your law on sales, is it consensual? whole world, it is not enough that there is endorsement plus
delivery.

The SC said when it comes to sale of shares, it is perfected not

by the meeting of the minds, it is not consensual, it is not To bind the corporation and the whole world, the transfer must
perfected upon meeting of the minds on the object, cause and be recorded in the books of the corporation.
consideration of the sale.
So what happens if it is not recorded in the stock and transfer
books?
What consummates the sale of shares is compliance with the
formalities prescribed by 63 of the corp. code. Endorsement
It means that the stockholder of record is the one entitled to
coupled with delivery.
exercise all the rights of the stockholder, it is the one entitled to
represent and to vote the shares in the meeting, the one
entitled to dividends.
Now, there being no endorsement given from XYZ to A, and A
to B, then B the transferee can still rescind the sale agreement.

So if a stockholder sold his shares to the buyer, endorsed and

delivered, but the buyer took time to transfer the shares in the
It does not matter that he was allowed to enjoy all the benefits
books of the corporation, the corporation declares dividends,
of being a member of the corporation. Bottom-line is the stock
who receives the dividends?
certificate was not endorsed and the formalities of the law were
not complied with, the sale could be rescinded.

The seller. Now can the corporation be faulted for paying the
dividends to the stockholder of record?
This case gave rise to another case.

- No because the law is very clear that you have to

Q: Who can appeal the decision of the RTC rescinding the sale?
transfer the same in the books of the corporation.
Is it the aggrieved party of the sale, can the corporation whose
shares of stock are subject of the sale appeal the decision?
The corporation call for a stockholders meeting, who gets to
elect, or who gets to vote the shares?
In this case, it was the corporation whose shares of stock are
sold that appeal the decision, and not the contracting parties of
the sale. - Still the stockholder of record, until the transfer is
effected on the books by the buyer

The SC said that the corporation is not a proper party to appeal

for the simple reason that it‟s not the party on the contract of
sale.
THIS WAS ASKED IN THE BAR

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Stockholder sold his shares, the buyer delayed in the transfer of
the shares in his favor. In the meantime, A died. Who is
entitled to exercise the rights pertaining to the deceased
stockholder?
The buyer or the heirs?
If the heirs were able to register the transfer in books of the
corporation, then they have a better right even against the
buyer.
So if the buyer were able to register first ahead from the death
of the stockholder, then he will have a better right over the
heirs.
More so in the case of PUNO vs. PUNO ENTERPRISES
2009.
When it was asked in the bar, wala pang puno vs puno
enterprises.
Sa Puno vs Puno enterprises, namatay yung stockholder, sabi
ng mga heirs, succession transmits ownership upon death
which is under the civil code so automatically if you die,
ownership over your estate is transmitted to the heirs.
Now is that a valid argument for shares? Sabi ng SC, NO,
because for shares, it is a different species. It is governed by a
different provision, governed by the corporation code.
So the heirs will only be recognized by the corporation with all
the rights they inherited from their deceased relative, if they
have effected or caused the transfer in the books of the
corporation.
Another example.
Let‟s say the stockholder sold the shares, the buyer delayed in
the registration of the transfer, in the meantime, a judgment
creditor served a writ of execution to the corporation, the
judgment creditor of the stockholder served a writ of execution
on the CORSEC.
Can the buyer of the shares argue that the shares are no longer
owned by the stockholder ____ sold to him?
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No. because ___ in the registration of the shares in the books
of the corporation.
This is the case of IAC VS _____.
So if you are the buyer after the sale, register! Or better yet,
don‟t pay after until you have recorded the transfer in the
books of the corporation. Otherwise, your right is only against
the seller not against the corporation and the whole world.
How do you describe the duty of the corporate secretary in the
transfer of shares. Assuming that all the requirements have
been complied with it is ministerial and therefore compellable
by mandamus.
A Stockholder sold his shares and all the formalities complied
with, endorsement, delivery, taxes were paid, certificate
authorizing registration but corporate secretary refused the
transfer because the stockholder died. The corsec said the
estate of the stockholder must first be settled before he can
transfer the shares in favor of the buyer. Can the corsec dwell
upon issues on succession?
No. Formalities have been complied with, it is a ministerial
duty of the corsec to cause the transfer.
Rural bank of Salinas vs SEC
THe husband appointed the wife as agent to sell the shares.
Endorsement and delivery done, taxes were paid by the buyer.
When the buyer went to the corsec to transfer the shares in his
name in the books,the husband died. Sabi ng corsec i cannot
transfer because the estate must first be settled.
SC. No. Ministerial duty.
What is the remedy if the corsec refuses to transfer?
Mandamus
Who can file petition for mandamus?
Can the buyer file if corsec refuses?
Sc said only the stockholder transferor not the buyer because
he has not acquired a standing in the corporation yet.
The remedy is for the transferee to get authority from the
transferor to cause the transfer in the books of the corporation.
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The transferee may then file a petition for mandamus against
the corsec to compel him to cause the transfer in the books.
Issuance of Stock Cerificate

Does the term transfer include mortgage or pledge? No. Union

bank vs Chua
It means that a pledge or a chattel mortgage binds the
corporation and the whole world even though not recorded in
the books if it is in a public instrument if pledge or registered in
the RD if chattel mortgage. What binds the whole world in
chattel mortgage? The fact of registration not recording in the
books. If pledge, if it is embodied in a public instrument and
the object described.
Does the term transfer include donation? Yes. Also succession.
Any transfer of ownership. Sale donation succession.
Not included in the corporation code is the tax aspect.
Endorsement, delivery that is what your book says. Tax code
says that the corsec should not allow the transfer without proof
of payment of tax. Thats why you have the certificate
authorizing registration or CAR from BIR. If not listed, capital
gains tax, if listed stock transaction tax, if donation donors tax.
Succession estate tax. Get CAR from BIR and present to corsec.
In your tax code, share swap is not subject to tax. Property for
share swap not subject to tax.
We assisted a client for share swap. Unfortunately, kim henares
has not issued yet s bir ruling. You cannot get a CAR without a
bir ruling you do not want to pay the tax if there is no tax due
but you need the bir ruling. Chicken and egg. Dahil maraming
pera yung client sabi nya magkano ba i'll pay then ill ask for
refund para lang matransfer sa pangalan ko.
Stock certificates can only be issued by full payment of
subscription.
Supposing A subscribed to 1M shares paid only 250T. Can he
ask the corp sec to issue stock certificate corresponding to the
shares actually paid?
No, not anymore allowed in the new Code
Bar: What if the corp and the SH agreed? Is it valid?
Stock certificate MAY BE issue but you don‟t prorate
the payment. Issue on Stock Certificate for the payment
actually paid. Apply the 250T to the 250T not the 1M.
Moreover, sec 64 is for the benefit of the corp and thus it may
waive the benefit.
Violative of the trust fund doctrine?
No. No condonation of the balance.
Procedure for lost or destroyed certificate
1. Affidavit of loss must be executed by the SH
indicating the circumstances of the loss or destruction
etc
-if everything is in order the corp sec will order the publication
of loss once a week for 3 consecutive weeks
-if there is no contest within 1 year from the last publication,
corp may issue a replacement stock certificate and cancel the
old stock certificate
BAR: What if somebody comes forward during the 1 year
period, remedy available to the corporation?

What did we do? We were the corsec. We took a liberal stand.
Without the bir ruling we caused the transfer. The tax code
says that the corsec should not cause the transfer without proof
of payment of the tax. It did not say "without the CAR." If there
is no tax what proof of payment will you require, if the tax code
says it is exempt, you do not pay the tax. But we did not take
that liberal decision without asking for a substantial amount of
money hehe. The risk. The client gave us this X amount that is
why i can afford to treat you dinner every now and then.
Subsequently, Kim Henares issued a ruling in favor of our
client upholding the tax free nature of the transaction. After
one month she recalled because of the materiality of the
transaction. Sabi niya masyadong malaki ung amount kaya
review ko ulit. Pero nung irecall niya bayad na kami. Tapos na
eh. SORRY!
Interpleader. To compel the conflicting claimants to litigate
and prove who has a better right over the shares
Can the corporation waive the 1 year period if the SH offers a
bond?
DISCRETIONARY on the part of the corporation to waive the 1
year period.
What if after 1 year somebody comes forward, that stock
certificate was not in fact lost but was indorsed. Who has a
better right over the stock certificate, the endorsee of the
original or the endorsee of the replacement?

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UPLC: Corp must recognize both stock certificates
DEAN: Endorsee of the replacement of stock certificate. After 1
year, the old stock certificate is cancelled. If the endorsee
acquired it in good faith and for value, he has a better right
without prejudice to the right of the endorsee of the original to
run after the SH.
Stock and transfer book- document containing list of SHs
alphabetically arranged and number of shares subscribed to,
paid up etc
Who can make entries? Corp Sec.
BAR: Torres vs CA
Judge Torres owns 80% of the Corp. He was supposed to be in
control. Cor sec refused to transfer shares to the modifying
shares issued by Torres. On his own he made the entry.
SC: Even if you are the majority SH, you are not the cor sec,
only he can make the entry.
Remedy available to Torres? Petition for mandamus with
prayer of Writ of Mandatory injunction during the pendency of
the petition.
NON STOCK CORPORATION
The most basic classification of corporation - Stock or Non-
stock Corporation.
Stock Corporation has capital stock divided into shares and
authorized to distribute surplus profits to its stockholders, and
all the rest are non-stock corporation. Therefore, Non-stock
corporation is one with no capital stock and not authorized to
distribute profit to the members.
Section 87. Definition. - For the purposes of this Code, a
non-stock corporation is one where no part of its income
is distributable as dividends to its members, trustees, or
officers, subject to the provisions of this Code on
dissolution: Provided, That any profit which a non-stock
corporation may obtain as an incident to its operations
shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the
corporation was organized, subject to the provisions of this
Title. The provisions governing stock corporation, when
pertinent, shall be applicable to non-stock corporations,
except as may be covered by specific provisions of this Title.
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What are the purposes of a Non-Stock Corporation?
Non-stock corporations may be formed or organized for:
(CREP-CFLSS)
1. Charitable,
2. Religious,
3. Educational,
4. Professional,
5. Cultural,
6. Fraternal,
7. Literary,
8. Scientific,
9. Social,
10. Civic service, or
11. Similar purposes, like trade, industry, agriculture and like
chambers, or any combination thereof
NOTE: A non-stock corporation organized to promote
educational objectives may not be an educational corporation
as contemplated in Secs. 106 to 108, CC.
The only thing missing there - profits and political. From that
long enumeration, those two are not included. Non-stock
corporation cannot be organized for profit. That goes hand in
hand, "non-stock" and "non-profit" corporation. It is because
non-stock corp is not engaged in business, it is for a different
purpose. Also non-stock corp cannot be organized for a
political purpose or engage to any partisan political activities.
So if you want to organize an entity or association for political
purpose or consideration then have it organized as a party
under the COMELEC, but not a corporation to be governed and
supervised by the SEC.
Section 88. Purposes. - Non-stock corporations may be
formed or organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific, social,
civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof,
subject to the special provisions of this Title governing
particular classes of non-stock corporations.
There is nothing wrong with a non-stock corporation earning
profits. What is wrong is when a non-stock corporation
distributes profit to its members, in any form, directly or
indirectly, it is not allowed.
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*What about assets? Can you distribute assets to the
members?
The answer is NO. Unless the distributive rights of the
members of the non-stock corporation are specified in the
Articles of Incorporation. But it can only be distribution of
assets to the members of a non-stock corporation upon
dissolution of the corporation. Only upon dissolution that there
can be distributive rights, as specified in the AOI or if there is
none (in the AOI), then there should be a plan of distribution
upon dissolution which should be approved by atleast 2/3 of
the total members of the corporation. So during the lifetime of
the corporation there can be no distribution of assets of the
corporation, unlike in a stock corporation.
*Can a non-stock corporation ACQUIRE SHARES OF
STOCK? Would that be incompatible with the
enumeration of the purposes for which a non-stock
corporation be organized?
Yes. As long as authorized by the AOI, a non-stock corporation
can be a stockholder of another corporation.
*What about the dividends declared by the investee
corporation?
It forms part of the income of the non-stock corporation, but
they cannot be distributed to the members. So there is nothing
wrong with investments in equity; what is wrong is to
distribute its own profits to its members, not invest.
*Can non-stock corporation grant LOANS?
Yes, as long as it is provided in the AOI as a secondary purpose
Bottomline is, as long as it is in the AOI and it is not for profit,
not for political purpose or consideration, it can be done by a
non-stock corporation.
Now let us compare Non-Stock to a Stock Corporation (insert
table from Merc GN 2014 page 252)
Profit
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• Stock Corporation is organized for profit;
•Non-stock Corporation is not organized for profit.
Number of Directors
• Stock Corporation- not less than 5 not more than 15
except in case of corporation Sole, and in merger or
consolidation were the law allows 21 directors.
•Non-stock Corporation-by express provisions of law, a non-
stock corporation can have more than 15 trustees, not less than
5 but can be more than 15, except non-stock non-profit
educational institutions where the no. of trustees must not be
more than 15.
Term of Directors
• Stock Corporation- 1 year until the successor is elected or
qualified
•Non-stock Corporation- 3years, staggered basis, unless the by-
laws provides otherwise. (It can be a term of less than 3years- it
is a prerogative granted to non-stock corporation)
Membership
• Stock Corporation- not personal because a stockholder can
sell his shares to anyone, and the buyer of the shares need not
be approved by the corporation nor the stockholders. Shares
may be transferred by the stockholder with or without the
consent of the corporation. The only restriction is the Right of
first refusal or something less onerous.
•Non-stock Corporation- membership is personal and
therefore non-transferrable.
Voting
• Stock Corporation- Stockholders can resort to cumulative
voting. Only preferred and redeemable shares can be denied
the right to vote except those matters in Sec. 6. Voting of
directors may be made only through general voting. Regional
or district voting of directors is not allowed.
•Non-stock Corporation- No cumulative voting unless allowed
by AOI. Right to vote may be limited, broadened or denied by
the AOI and by-laws (Sec. 89, CC). Regional or district voting
of trustees is allowed. The SC said that voting by district is
a form of limitation on the right to vote for Non-stock
Corporation. Voting by mail is allowed for non-stock if it is
provided in the by-laws.
Meetings
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• Stock Corporation-Stockholders meeting shall be held in city
or municipality where the principal office of the corporation is
located or at the principal office of the corporation. (Sec. 51,
CC).
•Non-stock Corporation- May be held at any place outside the
principal place of business of the corporation provided it shall
be within the Philippines.(Sec. 93,CC)
Dissolution
• Stock Corporation:
Assets of stock corporation shall be distributed in the following
order:
1.Payment of claims of creditors who are not stockholders
(based on preference of credit)
2.Payment of claims of stockholders as creditors
3.Residual balance is distributed proportionately to preferred
shares, if any, then to common stock.
•Non-stock Corporation:
Assets of non-stock corporation shall be distributed as follows:
1. Payment of claims of creditors
2. Assets held on condition of return or subject to limitation of
use shall be returned, transferred or conveyed.
3. Distribution to member based on distributive rights stated in
AOI or by-law.
4. In case of default, distribution pursuant to Plan of
Distribution of Assets.
**Order of distribution of assets on dissolution of non-stock
corporations
1. All liabilities of the corporation shall be paid or adequate
provision thereof shall be made;
2. Assets held upon a condition requiring return, transfer or
conveyance upon, and which condition occurs by reason of the
dissolution, shall be returned, transferred or conveyed;
3. Assets received and held by the corporation subject to
limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes shall be
transferred or conveyed to one or more corporations, societies
or organizations engaged in activities in the Philippines
substantially similar to those of the dissolving corporation.
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4. All other assets shall be distributed to the members as
provided by the articles of incorporation or the by-laws.
5. In the absence of provision in the AOI or by-laws,
distribution may be made in accordance to a plan of
distribution adopted by the board of trustees by majority vote
and by at least 2/3 of the members (Sec. 94, CC).
In the case of UST Hospital Incorporated, the fathers organized
UST Hosp. Inc. to manage the UST Hosp. Where did the assets
of the USTHI came from? The contributions came from the
fathers, 100K each. The capital of the corporation was 1.2M al
coming from the Dominican Fathers. You cannot survive
operating the hosp for only 1.2M , so how did they get the
machineries, equipment- they were donated by UST. We
dissolved USTHI, so what happened to those properties? They
are reverted to the donor, and this is what the law provides.
There are certain assets of the corporation requiring return in
case of dissolution. Those assets donated by UST to USTHI on
the condition that upon its dissolution, it reverts to the donor.
*What about the provisions for a stock corporation,
are they also applicable to non-stock corporation?
Obviously, yes, they have to apply, because there are only few
sections provided for a. non-stock corp under the Corporation
Code. The rest is captured by the provisions on stock
corporation. The provisions are applicable to the extent that
they are not inconsistent with the features of a non-stock
corporation.
**Asked in the Bar: There are 15 trustees in a non-
stock corporation, 7 of them resigned, can the 8
remaining trustees fill up the vacancies by the vote of
the board?
The answer is not found under the provisions/chapter for non-
stock corporation. You have the provision on filling up the
vacancy under Sec.29. Sec.29 is deemed also applicable to non-
stock corporation because it is not inconsistent with the
features of a non-stock corporation under the Code. Therefore,
following Sec.29, the remaining 8 trustees, because they still
have quorum, can fill up the 7 vacancies.
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ANS: No. Because the Articles provides that the stockholders
have to participate in the management of the corporation, in
Conversion
which case board meetings may be dispensed with. So board
meetings may be dispensed with, if stockholders are
accustomed to not having meetings, or acquiescence of
1. A non-stock corporation cannot be converted into a stock
stockholders, or if provided in the articles of incorporation.
corporation through mere amendment of its AOI. This would
violate Section 87 which prohibits distribution of income as So are you saying that the board meeting can be
dividends to members. Giving the members shares is dispensed with in a closed corporation? That a
tantamount to distribution of its assets or income (Sundiang, stockholder has no right to demand that a board
2014 citing SEC Opinion, March 1995). meeting be called among the stockholders?
ANS: Yes. If it is provided for in the by-laws.

Can you covert non-stock to stock? No. Are all of them liable for damages for the injury
suffered by the customer (cockroach drink)?
Rationale: Because if you convert non-stock to stock it means
that the assets of the non-stock corporation will be the ANS: Sec. 100 (5)
contribution of the members to the stock corporation. In such
To the extent that the stockholders are actively engaged in the
case you are distributing the assets of a non-stock corporation
management or operation of the business and affairs of a close
to its members, which is prohibited. You can only distribute
corporation, the stockholders shall be held to strict fiduciary
assets upon dissolution. However, in this case, by distributing
duties to each other and among themselves. Said stockholders
the assets without dissolving the corporation, you are violating
SHALL BE PERSONALLY LIABLE FOR CORPORATE
that principle. The remedy is to dissolve the non-stock
TORTS unless the corporation has obtained reasonably
corporation, have a distribution plan approved by the
adequate liability insurance. (sorry Dean talked too fast. Just
members, and let the assets received by the corporation be
got codal)
their contribution to the stock corporation to be formed.
Is the cockroach in the drink a CORPORATE TORT?
ANS: According to the UPLC committee, the SH are liable for
2. A non-stock corporation can be converted into a stock
corporate tort. The better example is NAGUIAT VS NLRC
corporation only if the members dissolve it first and then
(1997). Where the SC gave an example of a corporate tort that
organize a stock corporation. However, there is a resulting new
would make the SH liable unless they have adequate liability
corporation (Sundiang, 2014 citing SEC Opinion, May 13,
insurance coverage. In this case, it is the non-payment of
1992).
separation benefits that was considered a corporate tort that
would make the SH of a closed corporation liable if they are
actively involved in the management.
Can you convert a stock corporation to non-stock corporation?
Yes.
3. A stock corporation may be converted into a non-stock CLOSE CORPORATIONS QUICK REVIEW
corporation by mere amendment provided all the requirements
So it is one where its articles of incorporation provide for the
are complied with. Its rights and liabilities will remain
features of a closed corporation.
(Sundiang, 2014).
Those features are:
1. The SH shall not exceed twenty.
ABC Corporation was organized, its articles of incorporation 2. Restrictions on transfers. Specified in AOI, By-laws,
provides that the stockholders , not more than 10, actively Stock Cert.
participate and manage the affairs of the corporation, 3. Shares are not available for listing in the stock
likewise provides restrictions on transfer of shares, provided exchange
it’s in the articles, by-laws, and stock certificate. It is
composed of 10 classmates from UST LAW. Unfortunately,
business was brisk, and one of the bottles sold to a customer FIRST: SH NOT MORE THAN TWENTY
contained a cockroach, so the customer drank the cockroach Is it enough that you just have less than twenty
and experienced a stomach ache. After that the company subscribers? Or if you only have five incorporators?
suffered losses, so Juan dela Cruz, one of the 10, demanded Or if you’re a family corporation? Do these make you
that a meeting be called among the stockholders. automatically a closed corporation?
Can Juan demand a meeting be called among the
stockholders?

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ANS: SAN JUAN STEEL FABRICATORS VS CA. Where
Husband and Wife owned 99.8% of the corporation. SC said
We encountered this under Sec. 39 of the Corp Code.
that ownership is not the only indicator, its just a feature. If the
Stockholder’s right to subscribe to any and all issuance of
other features are present in the AOI, then that would make it a
shares by the corporation. It does not extend to sale or
close corporation. A narrow distribution of ownership does
issuance of shares in exchange for property needed for
not, by itself, make a close corporation.
corporate purposes.
Why make a closed corporation?
ANS: There are certain formalities proper to corporaitons that
In a CLOSE CORPORATION, by express provision, this right
are not applicable to a closed corporation.
is available to SH’s in case of issuance of shares for payment
Remember the case of Dulay vs CA. The corporation sold a real of property needed for corp purpose.
property without a Board Resolution. Dulay is the controlling
SH. The SH are accustomed to not having any board meetings.
So is the sale of the real property valid without a Board Reso? What about issuance of treasury shares?
The SC said YES because it is a closed corporation.
Now, ordinarily, in an open corporation that isn‟t allowed
ANS: Under Sec. 39, preemptive right also applies in
because you need a board reso to sell a property. Not so in a
disposition of shares. By virtue of an SEC opinion, the sale of
close corporation, because they‟re accustomed to not having a
treasury shares is subject to pre-emptive right.
board meeting or if no one objects to not having a meeting.

But in Sec. 102, under Close Corporations, it includes

SECOND: RESTRICTIONS ON TRANSFERS
the reissuance of treasury shares. So here, its by express
The right of the corporation to impose restrictions on transfers provision of law.
is recognized by the corp code, foundi n Sec. 98 on Close
Corporations.
We said that even if it‟s found in the chapter for close
corporation, it is not limited to a close corporation. We can AMENDMENT OF AOI
apply it to a regular corporation, for as long as the restrictions
are reflected in the AOI, By-laws, and Stock Cert. And the
restrictions cannot be more onerous than the option granted to If he converts from close to open, you can amend the AOI to
an SH who purchased the shares from a transferring SH upon remove the characteristics of the close corporation. And just
reasonable terms stated therein. like any amendment, you need majority of the board and 2/3
SH.

VALLEY GOLF VS VDA. DE CARAM (2009)

DEADLOCKS
The SC said that the restrictions on transfers is also applicable
to an open corporation Sec. 104. Asked in the bar.
What is the remedy available to an SH in case of
deadlock in the mgmt. of the affairs of the
THIRD: NOT LISTED IN STOCK EXCHANGE
corporation? Can the SEC intervene without
SELF-EXPLANATORY. violating the business judgment rule?

What are the corporations not allowed by law to be ANS: In case of deadlock, the SEC may appoint a provisional
close corporations? director.
ANS: MINING, OIL COMPANY, STOCK EXCHANGE, BANKS, And also has the power to enjoin the performance of an act,
INSURANCE, PUBLIC UTILITIES, EDUCATIONAL enjoin the effectivity of a board resolution, order the
INSTITUTIONS, AND PUBLIC INTEREST (vested with). Dean corporation to pay the fair value of the share, and may appoint
said the keyword is M-O-SE-B-I-P-U-E-P. (MOSEBIPUEP) a provisional director.

PRE-EMPTIVE RIGHT

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HOW DO WE DISTINGUISH OPEN FROM CLOSE
CORPORATION?
BUT, for CLOSE corporations, the SH who are
1. Number of SH involved in the management of the corporation, they cannot
a. CLOSE – not more than twenty SH invoke the doctrine of separate legal entity. By law, they are
b. OPEN – no limit liable for CORPORATE TORT, and non-payment of separation
2. Corporate powers
benefits are corporate torts. (NAGUIAT VS NLRC)
a. CLOSE –
b. OPEN – Exercised by the board. SH are not QUICK REVIEW: RESTRICTIONS ON TRANSFER
involved in its mgmt.
3. Board Meetings What are examples of RESTRICTIONS ON TRANSFER
a. CLOSE – dispensable if provided for in AOI, that are VOID?
or by acquiescence or lack of objection.
b. OPEN – cannot be dispensed with. ANS: 1. Requiring the CONSENT of the corporation or SH.
4. Pre-emptive Right
a. CLOSE – extends to sale/issuance of shares
for payment of debt, property, or reissuance SEC OPINION: If the AOI, Bylaws, Stock Cert provide that sale
of treasury shares. can only be done in favor of relatives up to the first degree, it is
b. OPEN – does not extend to issuance of
shares in exchange for property, more onerous than the right of first refusal.
5. Appraisal Right
a. CLOSE – exercised for any reason
whatsoever, regardless of availability of Now what if the AOI provides for the qualifications of
surplus profit. As long as its not insolvent or SH who can own shares?
will not result in insolvency.
b. OPEN –limited in cases provided by law Ans: That‟s allowed. Under Sec. 97.
(Sec. 81, 42, 40, 37). In case of surplus profit.
6. Listing
a. CLOSE – Cannot be listed in Stock Exchange Let’s say these shares can only be owned by relatives up to the
b. OPEN – Pwede.
1st degree. Now, the AOI, Bylaws, Stock Cert, provide that SH
can only SELL to relatives up to 1st degree. Is it valid?
LIABILITIES

ANS: SEC said NO. Because IT IS MORE ONEROUS than the

There are two provisions regarding SH who act as directors.
If the SH are performing functions of directors, they are subject
to the liabilities of directors. Same rights, same powers, and
subject to the same liabilities of directors. Whatever we
discussed in opoen corporations with directors will also apply
in close corporations if the SH are directors of the corporation.
The other one, SH who are not directors but are actively
involved in the management of the corporation. Here, they‟re
liable only for CORPORATE TORT. Unless they have adequate
liability insurance coverage.
right of first refusal.
So it‟s one thing to define the qualifications of SH who may
own shares, but another thing to impose restrictions on
transfers. If it is more onerous than the right of first refusal, its
VOID.
If a SH sells his share to a 3rd party, and he has a
right to first refusal, can the SH buy the shares lower
than the offered price to the buyer?
ANS: yes. As long as its not BELOW PAR VALUE. The law does
not say “upon the same terms and conditions”. It only says
UPON REASONABLE TERMS AND CONDITIONS.

Likewise, we said voluntary transfers are what are

Now, if the corporation does not pay separation benefits to its
contemplated by Sec. 98. So restrictiosn on trasfers, the option
employees? Who is liablie?
granted to the SH to buy shares, only applies to VOLUNTARY
NOT INVOLUNTARY TRANSFER.
ANS: Only the corporation right? If its an OPEN
corporation, then only the corporation is liable. The directors
Can a judgement creditor levy the shares of an SH who is also
and officers are not liable under the Doctrine of Separate Legal
a debtor?
Entity.

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Or is the SH entitled to buy the shares first before it
can be levied by the judgement creditor?
ANS: no. Involuntary dealings are not covered by Sec. 98.
So Tony Go effectively became the owner. After he became the
owner, he organized the corporation, he appointed the key
officers, the corporate secretary, and he organized committees.
And then they filed an action in court to nullify the sale with a
prayer for injunction not to register the sale in the books of
corporation. Now, they weren‟t able to get a TRO because it‟s
moot and academic. We already implemented the sale… now
what am I saying?
The STB was not in the possession of Maxicare. It was in the
possession of former corporate secretary who was also one of
the stockholders who tried to match the offer of Tony Go so we
could not record the transfer in the STB. So if we could not
record, we could not bind the corporation and third persons.
So what did we do? We made a demand on former corporate
secretary to turn over to us STB. He refused. So the new
corporate secretary signed an affidavit that despite demands on
the former corporate secretary to return the book, it cannot be
returned and then he said that the STB is presumed lost. On
that basis we requested for a replacement of STB from SEC. We
got the replacement and in the new book, we recorded the
transfer. Is it valid?
Yes. A resolution was passed stating all the entries in the
new book are valid and all the entries in the new book are
set aside.
Now where can you buy Stock Certificate?
National bookstore. So don‟t think that Stock Certificate is
something holy or sacrosanct, or can only be bought from
the corporate secretary.
Can the SEC decide on whether or not entries in the book are
valid?
They cannot. Because this is an intra-corporate
controversy. It is outside the SEC and cognizable by RTC
acting as special commercial court.
DISSOLUTION
Dissolution is the termination of corporate existence;
relinquishment of the corporate franchise. If the corporation is
dissolved, it exists only for one purpose – to liquidate and wind
up its corporate affairs.
What are the voluntary modes? Follow me mentally
It is voluntary because it is upon the instance or will of the
corporation.
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1. Filing of a petition by the corporation where creditors
are not affected and where creditors are affected
2. Shortening of corporate term
3. Merger or consolidation
 In merger, the existence of the absorbed
corporation ends. In consolidation, the existence
of the constituent corporation likewise ceases
4. Affidavit of dissolution by a corporation sole
What are the involuntary modes?
1. Expiration of term
2. Order by the SEC in various cases
3. Dissolution by judicial decree
4. Dissolution by legislative enactment
VOLUNTARY MODES
1. Filing of a Petition for Dissolution by the Corporation
There are two situations contemplated under the code if the
dissolution is filed or upon the instance of the corporation
through the filing of a petition with the SEC, in both cases
where the creditors are affected or not, it is axxcx common
requirement that you get the approval of at least:
a. Majority of the entire board AND
b. Stockholders representing at least 2/3 of the
outstanding capital stock
How do you distinguish a petition creditors are not
affected from creditors are affected?
If the creditors are affected, you have to list all the
creditors in a petition and the petition must be signed by
the majority of the board and approved by the
stockholders representing at least 2/3 of the outstanding
capital stock countersigned by the president and the
corporate secretary
If creditors are not affected, it is a petition without
creditors.
And second, more importantly, you don‟t need to conduct
a hearing to determine claims. So the creditors to be
affected, a hearing must be conducted to ascertain the
claims against the dissolved corporation.
BPI v. ONG
Don‟t forget this case. The SEC has no authority to carry
out the liquidation of the corporation. SEC has no
jurisdiction to hear out claims against the corporation as
an incident to liquidation because under the FRIA law,
that has been transferred to RTC.
Now, is it RTC Special Commercial Court or RTC
of General Jurisdiction?
RTC of general jurisdiction because it requires
ascertaining various claims of creditors that may
attend intra-corporate relations with the corporation
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So we have to be careful about that. While in corporation
code talks about___ if creditors are affected, this seems to
be superseded by the FRIA Law.
2. Shortening of Corporate Term
We have a client who wanted to dissolve the corporation and I
said the most expeditious way is to shorten the corporate term
and among us there was a discussion WON appraisal rights are
available.
The client is under impression that in shortening the corporate
term, you will allow the stockholders to exercise their appraisal
rights and we have discussed this exhaustively.
We said that Section 81 on appraisal right which includes
shortening of the corporation term, is on the assumption that
for the corporation to be shortened without dissolving the
corporation without termination of the corporation but
But if the term will be shorten without dissolving, the appraisal
right will be available.
But if the term will be shorten to dissolve the corporation,
appraisal right will not be available. Otherwise, all modes of
voluntary dissolution would be given the exercise of appraisal
right
It is pointless and irrelevant to give appraisal right if the
corporation is to be dissolved because its assets will be
distributed to the stockholders anyway after payment of claims
owing to the creditors and we likewise got an information from
the SEC and the SEC confirmed that they will only allow
exercise of appraisal right in case of shortening the corporate
term without dissolving the corporation.
But if you will dissolve by shortening the corporate term, there
is no appraisal right available for the simple reason that it is
irrelevant.
When you amend the Articles of Incorporation to shorten the
corporate term, give yourself an allowance of one to one and a
half years.
Halimbawa, gusto mo nang tapusin yung Corporation right
away, wag mong gawin next month. So let‟s say the expiry date
is 2050 pa, gagawin mong 2016. Today is November 2015, wag
mong gawin February because it would a very short time for
you to comply with the requirements.
The ideal time is 1 year to 1 and a half years. There are so many
requirements, if you check the website of SEC, in shortening
the corporate term to dissolve the corporation
Also don‟t forget that if you shorten the corporate term, it
entails the amendment of the AOI, therefore you have to
amend the corresponding AOI or section of the AOI of the
corporation. It is not enough to say that BOD hereby approves
the dissolution of the corporation and by stockholders of 2/3
vote of the outstanding capital stock affirm the dissolution of
the corporation. You also have to pass resolutions to amend
sections so and so of the AOI so the term from this is amended
to this period.
Of course, this mode is the most expeditious way to dissolve
the corporate term. There are requirements like obtaining a tax
clearance and all but this is the most expeditious way.
3. Merger or Consolidation
We‟ve discussed this already.
4. In case of corporation sole, by filing of an affidavit of
dissolution
INVOLUNTARY MODES
1. Expiration of Term
When the term expires. Under the code, when the term expires,
ipso facto, the corporation is deemed dissolved. So you don‟t
have to pass a board resolution for dissolution if the term
expires. Ipso facto, it expires.
So do you need a certificate of dissolution from the
SEC?
No because the law says ipso facto, by that fact, the
corporation is dissolved.
2. Order of the SEC in any of the following cases:
a. Failure to commence business within two years from
incorporation
b. Continuous inoperation for a period of five years
c. Non-submission of reports required by the SEC
d. Non-compliance with the conditions imposed by the SEC
e. Fraud in procuring the certificate of the corporation
f. Failure to submit by-laws within one month from
incorporation
FAILURE TO ORGANIZE BUSINESS WITHIN TWO
YEARS FROM INCORPORATION AND CONTINUOUS
INOPERATION FOR FIVE YEARS (Sec. 22)
BAR: If the corporation is able to elect the board
within two years but no president appointed, is the
corporation a candidate for dissolution?
According to SEC, as long as the BOD is elected, it is
deemed organize
What about this? The board is elected, president,
corporate secretary, and treasurer were appointed,
but not a single business activity was undertaken by
the corporation.
You know the grounds to dissolve, the answer is no. It is
deemed organized as long as you have the board.
What about you have corp, president, secretary,
treasurer but no transaction for five years?

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Then it becomes a ground to dissolve if the inoperation is
continuous for a period of five years under Section 22.
So Section 22 gives two grounds for the SEC to suspend or
revoke corporate franchise.
1. Failure to organize within two years from
incorporation
2. Continuous inoperation for a period of five years
NON-SUBMISSION OF REPORTS REQUIRED BY THE
SEC
If you‟re a corporation, you have to submit certain reports.
What are these?
 Financial statements every year
 General Information Sheet which contains the names
of the directors of the corporation, corporate officers,
structure of the corporation under Section 26. Diba
within 30 days after filling out the appointment of the
directors and corporate officer, the corporate
secretary must file the report with the SEC
 If you are non-operational, you file for an affidavit of
non-operations because if you are not operational,
you will not have financial statements
What is the importance of GIS?
Remember in one case, directors whose names are under
the GIS, they are presumably the ones authorized to
represent the corporation.
The problem of the case, we have two names in two GIS. It
becomes an intra-corporate controversy.
The SC said that the officers whose names are under the
GIS, it is the GIS filed with the SEC they are presumably
the directors and officers of the corporation.
What do you do if you are non-operational?
You file an affidavit of non-operations. Because if you have
no income, you cannot file financial statement but of
course this is subject to the rule on non-operation for five
years
UST Hospital incorporated was organized by the Dominican
Fathers.
Put up a corporation to manage the hospital, UST Hospital
Incorporated. UST Hospital Incorporated obtained a loan from
Land Bank and DPB for 15 Billion without the approval of the
Master Order from Rome. The master order from Rome issued
an order to abort the loan transaction. The documentary
stamps were already paid and other fees but because it was the
directive from Rome to abort the loan, the loan transaction was
withdrawn.
The master order also ordered to dissolve the UST hospital
Incorporated.
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We first recommended shortening the corporate term. This is
the easiest way to dissolve a corporation. The BIR assessed us
for 18 million pesos. So 18M is a lot of money just to comply
with the directive from Rome. We informed the Fathers that we
have to pay 18M. Asked them whether they still want to
proceed and pay 18M. They told us to think of another way.
So we recommended Merger. I was asked to explain whether
merger is a form of dissolution. They want to make sure that it
was. So I went to Rome to explain that merger is a form of
dissolving a corporation.
But we did not still choose merger. You know why? Because we
received an order from the SEC addressing the UST Hospital
Incorporated that we have not submitted any reports, financial
statements, and if we will not submit the corporation will be
dissolved.
So what was supposed to be a penalty or punishment became
_______
So we told the SEC we will not comply. Go ahead dissolve us. :P
Because of the non-submission of reports, non-filling of GIS we
were dissolve INVOLUNTARILY by the SEC.
One good thing about that in the case of PDIC v. CA (2006)
when it comes to involuntary dissolution there is no need of
BIR clearance so we don‟t have to pay taxes.
It‟s easy to put up a corporation but what is difficult is to retain
the corporation. You have to file reports every year if you don‟t
there will be penalties. Penalties can be excessive and
expensive especially when it is for a period of years you are not
submitting your reports.
So if you‟re asked which is better, to put up a new corporation
or to just pay the penalty?
Do your math. If it‟s cheaper to put up a new corporation, then
put up a new one. If it‟s cheaper to just pay the penalty, just file
a petition to revive or to reinstate the corporation.
Still under PD 902-A, other grounds for dissolution
 Fraud in procuring certificate of incorporation
 Misrepresentation in the purposes of the corporation
 Non- compliance with the conditions imposed by the
SEC
 Non submission of By-laws within one month from
incorporation
 Judicial Decree (Quo Warranto Proceeding)
o The Court can dissolve a corporation through
Quo Warranto Proceeding
 Legislative Enactment
o The congress can dissolve all private
corporations because BP68 can always be
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repealed. All private corporations are
dissolved without prejudice to vested rights.
LIQUIDATION AND WINDING UP OF CORPORATE
AFFAIRS
Once a corporation is dissolve, there is a 3 year period to
liquidate and wind up its corporate affairs.
The corporation cannot do anything during the 3 year period
except to liquidate and wind up corporate affairs.
What happens if the liquidation and the winding up is
not done or completed in 3 years? Is it submit your
papers finish or not finish? Hahaha is the claims
abated?
OLD CASE: Mamburao v. CA, the SC said everything must be
completed in 3 years. (Already Abandoned by the SC)
Under the Code, it says that you must appoint your Trustees
during the 3 year period. If you were able to appoint a trustee,
the trustee can carry out the liquidation even beyond 3 years.
But if you failed to appoint, everything ends in 3 years.
Until many SC decisions which is in contrary to the Code
o GILLANO V. CA- The lawyer who handled
the case for the corporation is considered a
trustee and therefore the case can continue
even beyond 3 years.
o REBURIANO V. CA and CLEMENTE V. CA-
the BOD are deemed trustees of the
corporation. So basically you don‟t have to
appoint a trustee because the BOD can carry
out the liquidation even beyond 3 years.
If a suit is filed during the lifetime of the corporation it can go
beyond 3 years.
Any judgment by or against the corporation can be enforced
even beyond 3 years as long as the suit is filed during the
lifetime of the corporation even though there is no trustee.
If the suit is filed within 3 years, no trustee is appointed it can
go on beyond 3 year. Why? Sec. 145 “No right or remedy in
favor of or against any corporation, its stockholders,
members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders, members,
directors, trustees, or officers, shall be removed or impaired
either by the subsequent dissolution of said corporation or by
any subsequent amendment or repeal of this Code or of any
part thereof.”
So whatever right or remedy that a corporation or SH has or
may exercise cannot be impaired just because the corporation
is dissolved. That is the reason given by the SC.
However, ALABANG VILLAGE CASE (JUNE 2014) – if the suit
is filed after the 3 year period expires, the corporation has no
more legal capacity to sue.
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What does the corporation do during the liquidation
period?
Liquidate and wind up corporate affairs – returning your
assets, collect receivables, pay obligations owed to creditors,
o basically to identify the claims and
o then pass upon this claims based on concurrence and
preference of credit
o residual assets are distributed to the SH holding
preferred shares then SH holding common shares
BAR QUESTION: Supposing there is only one real
property left after payment of claims to the creditors,
how do you distribute?
Answer:
o physical partition
o sell the property then distribute the proceeds
o value of the property , let the SH buy the property and
then distribute corresponding values equivalent to
their interest
Can the SEC interfere and say that the property belongs to so
and so?
No, because once the corporation is dissolved the property now
belongs to the SH. So the SH owned the properties and can
decide on how to dispose of the same. Thus the SEC cannot
interfere on how the SH will liquidate the property. That right
belongs to the SH.
CASE: CHUNG KA BIO v. IAC,
Transferring properties to the a new corporation
So the SH, BOD negotiate that the assets will be the
contribution of the SH to the new corporation. It is not
automatic that the transfer to the new corporation with the
same SH. What happens is that when the corp is dissolved, the
SH will get the property but the BOD may negotiate with the
SH that the properties will be their subscription for the new
corporation.
CASE: AGUIRRE v. FQB7
Same lawyer who covered his ears while Miriam Santiago was
speaking
Aguirre filed an action to correct the entries in the General
information sheet of the corporation and to inspect the books
of the corporation. In the meantime the corporation was
dissolved.
Can his action continue?
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Yes because of Sec. 145. Also it must continue to determine But for purpose of definition, it‟s simply one that is formed,
whether he is really a SH of the corporation, and if he is he is organized and existing under foreign laws regardless of
entitled to receive the residual assets of the corporation. composition of stockholders. As we said last time, if the
corporation is wholly owned by Filipinos, it remains to be a
Receiver v. Trustee
foreign corporation for as long as it is formed, organized and
Receiver – appointed by the court existing under foreign laws. And therefore even if you have
Filipinos composing a corporation formed, organized and
Trustee- Appointed by the corporation
existing abroad, that foreign corporation cannot do business in
the Philippines unless it obtains a license to do business from
the SEC.

CASE: PARAMOUNT INSURANCE CORP V. ORDOÑEZ

(2008)
Can an appeal be taken from an adverse judgment
against the corporation if the appeal is beyond the 3
year liquidation period?
Yes.
CASE: BENIGNO M. VIGILLA, etal V. Philippine Criminology
College (2013)
ABC corp. is a job contractor. It provides janitors to the school.
ABC corp. closed shop. The janitors signed a quitclaim and
were executed 6 years from the dissolution of the corporation.
Janitors filed a claim against the school arguing that they are
the employees of the school and not the ABC corp.
Defense of the school: quitclaim signed by the janitors
Janitors: such quitclaim is not valid because it was signed 6
years after the dissolution of the corp
Q: Can the document signed 6 years after the
dissolution be considered valid?
A: Yes. Sec. 145
So a foreign corporation can only do business in the place of
incorporation. Its license or authority is confined to the
territorial boundaries of the country of incorporation. Now for
it to conduct business outside of its boundaries, it must obtain
a license to do business in that country where it intends to do
business outside the place of incorporation. So if a foreign
corporation organized and existing in the USA wants to do
business in the Philippines, it has to obtain a license from the
SEC to do business.
What is the effect of a corporation that does business
in the Philippines without a license issued by the SEC?
Does that make the transaction void?
The answer is no. It simply means that the
corporation has no legal capacity to sue. It cannot file
or maintain any action in any court or administrative
agency. So basically, it cannot sue on any cause of
action even though in its favor. So it may be
aggrieved, but if it did not obtain a license to do
business from the SEC, it cannot seek redress or relief
from any court. So it affects, therefore, its legal
capacity to sue.

What is a foreign corporation?

We said a foreign corporation is one formed,
organized and existing under foreign laws and whose
laws allow Filipino citizens to do business in their own
country or state.
The first element: is the place of incorporation.
A foreign corporation needs a license only if it will do business
in the Philippines. So if it will not do business, it can perform
casual or isolated transactions in the Philippines and in case it
is aggrieved, its rights are violated in those casual transactions,
the foreign corporation may sue regardless of lack of license
from the SEC.

The second element: is the principle of reciprocity. That‟s why it‟s important for us to determine what doing
business means. This is a favorite topic in the bar.
Suppose the laws of the foreign corporation do not permit
Filipino citizens to do business in its own country or state, does
that corporation cease to be a foreign corporation?
What do you mean by doing business?
The answer obviously is no. The second element is
The Corporation Code does not define what doing
only for the purpose of confirming the rule that if the
business means. But the Foreign Investment Act
foreign corporation law‟s does not allow Filipino
enumerates the activities that are tantamount to
citizens to do business in that country or state, then
doing business.
that foreign corporation will not be allowed likewise
or permitted to do business in the Philippines.

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So what are the acts considered as doing business
under the Foreign Investment Act? (SOAPA)
1. Soliciting orders or entering into service contracts
2. Opening offices, no matter how you call it, regional,
headquarters, national
3. Appointing a distributor exclusive to the foreign
corporation domiciled in the country for 180 days or
more
4. To participate in the management of a corporation
5. Act or acts that imply continuity of commercial
dealings to attain the purpose for which it was
incorporated
Soliciting orders or entering into service contracts
BMW v. CA
BMW, before the Foreign Investment Act was enacted or
passed, appointed a distributor in the Philippines. Its only task
was to receive orders from interested customers and the order
is transmitted to BMW in Germany. And BMW in Germany will
now cause shipment of the car. So soliciting orders done by the
distributor is tantamount to doing business. So can BMW, for
example, file an action for foreclosure in case it is not paid the
purchase price for the car it delivered?
The answer is no, unless it obtains a license to do
business from the SEC.
Service contracts means having centers in the country to do
repairs, maintenance work, likewise tantamount to doing
business.
Opening offices
Whatever kind of office. Either representing office,
headquarters, regional area, operating headquarters. So the
establishment of presence in the Philippines by opening offices
is obviously tantamount to doing business.
Appointment of a distributor
There is this case, not yet asked in the bar.
Special Steel case
Regarding the appointment of a distributor. So the question is
will the appointment of a distributor automatically give rise to
the conclusion that the foreign corporation is doing business?
It depends. If the distributor is exclusive to the foreign
corporation and does not have independent
operations and domiciled in the Philippines for 180
days or more, then that foreign-appointed distributor
is synonymous to doing business.
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There are two important elements then for the
appointment of a distributor to translate into doing business.
1. It is exclusive to the foreign corporation and does
not have independent foreign operations.
2. Domiciled in the Philippines for 180 days or
more.
In this case, the corporation is organized under the laws of
Italy. It manufactures Italian furniture and it has a distributor
in the Philippines to sell its furniture. The distributor also sells
other furniture. The SC said in that case that if the distributor
is not exclusive to the foreign corporation, the foreign
corporation does not need a license to be able to sue. So
nagbenta, hindi nabayaran, can the foreign corporation file a
case in the Philippines? Obviously, yes.
It would be different if the distributor sells only the products or
the furniture manufactured by the foreign corporation. In
which case it cannot sue in the Philippines unless there‟s a
license to do business here.
Participation in the management of the corporation
Favorite topic in the bar is regarding equity investment.
May a foreign corporation buy shares of stock of a corporation?
Can it be a stockholder of another corporation? Is investment
in equity to doing business?
The answer is no. Passive investment in equity, being
a stockholder in another corporation, does not mean
doing business. So a foreign corporation, therefore,
can invest in the equity of another corporation
without having to obtain a license from the SEC. But it
has to follow the laws regarding restrictions on
foreign ownership in corporations engaged in
nationalized activities. In other words, although it
does not need a license to buy shares to invest in
equity, if it will invest in a company whose equity is
reserved for Filipinos in part, then it is subject to laws
regarding foreign equity restrictions.
If it would like to buy shares of a public utility
company, it cannot own more than 40%. The capital
of a corporation in a public utility, mining company,
natural resources corporation, 60% of the capital
should be owned by Filipinos and remember again
what we said, the definition of capital includes both
voting rights and beneficial ownership. So if a
corporation issues a mixture of shares, a combination
of common, preferred, and whether or not the
preferred are non-voting, the 60-40 Filipino-Foreign
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ownership limitation must be mirrored in all
classification of shares. So it includes non-voting
shares because the mandate under the Constitution is
that the state must adopt an economy effectively
controlled by Filipinos cannot be achieved unless
Filipinos own both the voting rights and beneficial
rights of the corporation. So Gamboa v. Teves was
asked again, this time in Political Law.
So I talked to Justice Carpio because I accompanied
him to the lobby after the conference with the deans. I
told him, Justice, Gamboa v. Teves was asked three
times in the bar, 3 years, successive right? This year,
the year before this year, and the preceding year.
Twice in Commercial Law and then once in Political
Law. Also in the elevator was Justice Presbi Velasco,
your chairman for this year. I told him, Justice, for
sure, your case in Redmont will be asked. So think
about Narra v. Redmont. Grandfather Rule. So he
assured me it will be asked in the bar. Either Political
Law or Commercial Law, atleast you have a tip.
So what about electing the directors of the corporation? Buying
shares, investing in equity, electing directors in that
corporation by voting its shares, is that tantamount to doing
business?
The answer is no. Passive equity investment including
electing of directors, buying shares, investment in the
company are not deemed as doing business under the
law.
So what is doing business then?
That is to participate, not just in equity but in the
management, of a corporation.
Any act or acts that imply continuity of commercial dealings
incident to or related to the prosecution of the substance or
purpose for which the foreign corporation was organized
The question is regarding this, is one act tantamount to doing
business?
Ordinarily, doing business means more than one. So if
the corporation grants or sells merchandise on a 90-
day credit basis, ___________________,
tantamount to doing business. A corporation will not
sell on a 90-day credit basis unless it‟s doing business.
But what about purchase of soccer uniforms. We have a
corporation which sells uniforms on credit basis. 3,600 plus
uniforms, one time purchase. Is that doing business?
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Yes. It may be one transaction but it shows, it is
incident to the purpose or substance for which the
corporation was organized. So it shows the intention
of the corporation to attain the purpose for its
incorporation.
Hutchison v. SBMA
Hutchison is a port operator in Hong Kong. It is owned by the
richest man in Southeast Asia, Lee Ka Shin. SBMA conducted a
public bidding of the Subic Bay Port. Also participated in the
bidding was ICTSI. So the committee awarded the project to
Hutchison. On appeal to the SBMA Board, the SBMA Board
reversed the SBMA committee and awarded the project to
Razon Group. On appeal to the OP, the OP affirmed the
decision of the SBMA Board granting the award or project to
Razon Group. So Hutchinson filed an action for injunction
before the RTC of Olongapo to restrain the awarding of the
project to Razon Group. The RTC dismissed the complaint on
the ground that it has no license to do business in the
Philippines and therefore, cannot sue and have access to
Philippine courts. The defense of Hutchinson: “we‟re not doing
business yet! We‟re only participating in a bidding to operate
the port.”
The SC said an act or participation, rather, in a bidding to
operate ports of a foreign corporation organized to operate
ports is doing business. It may be one transaction alone but
that is incident to the attainment or prosecution of the purpose
for which the foreign corporation was organized.
So in our jurisdiction, we follow the so-called characterization
test, not number of transaction but characterization test. If it
has been characterized as showing the intention of the foreign
corporation to do business to attain the purpose for its
incorporation, if it is, then it needs a license otherwise it cannot
sue.
Isolated or Casual Transactions
Now what is the opposite of doing business? Isolated or casual
transactions.
Antang (?) Consolidated case
A foreign corporation entered into a contract with a domestic
corporation for the purchase of copra products. The domestic
corporation failed to deliver the copra products. A second
contract was entered into between the same parties and the
purchase price reflected the losses incurred by the foreign
corporation as a consequence of the failure of the domestic
corporation to deliver. Again, under the second contract, the
domestic corporation did not deliver. There was a third
contract for the delivery of copra products entered into by the
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same parties, also to reflect the losses incurred by the foreign
corporation in the first and second contracts where there were
no deliveries. Still, the domestic corporation failed to deliver.
The foreign corporation filed an action for collection in the
Philippines. The domestic corporation moved to dismiss the
complaint on the ground of lack of legal capacity to sue. So will
the motion prosper?
It will not. Even though there are three transactions,
there is only one contract. So all those transactions
form part of one seamless transaction.
Can a reinsurer, after paying the insurance company the
insurer (?), file an action in the Philippines against the
wrongdoer? We‟ll take up insurance in our review next sem,
the reinsurer is subrogated to the rights of the insurer. The
insured, thereafter, has the right to proceed against the
wrongdoer. So can the reinsurer file an action in the
Philippines to enforce the right under the reinsurance contract
even without a license to do business?
Yes because it‟s a casual or isolated transaction.
There‟s one transaction we handled. Equitable PCI Bank
granted a loan in Hong Kong secured by a pledge of shares of
stock of Manila Pavilion (Is it Waterfront ba in Taft or
Continental Hotel? Whatever.) The loan was not paid, the
pledge was foreclosed. After foreclosure of the pledge, we sold
the shares to RCBC Group. The pledger filed an action in the
Philippines to restraint the sale of shares to RCBC Group. We
moved to dismiss the complaint on the ground that it is a
foreign corporation without license to do business. And sabi
nila, it is a casual transaction. We said, give me a break, you‟ve
been here in the Philippines for many years, you‟ve been
operating the hotel and it‟s a casual transaction?! So we moved
to dismiss the complaint. The lawyer of the foreign
corporation, guess who? Aguirre. Who‟s the lawyer who
granted the motion to dismiss for us? Judge Pimentel
(HAHAHAHA!). The motion was granted. They did not appeal
anymore. But regardless of the judge, it‟s not credible to say
that it‟s a casual transaction because they‟ve been in the
Philippines for many years already operating the hotel.
BAR QUESTION: What about the act of exporting or
importing products? By itself, it’s not tantamount to
doing business. This is a settled decision. Exporting or
importing products by a foreign corporation not
tantamount to doing business.
Personality to sue
Regarding personality to sue, BAR QUESTION: Let‟s say
Manny Pacquiao, after a successful fight in Vegas, came to the
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Philippines, before the crowd, he was seen wearing a Lacoste
shirt. So Lacoste took advantage of this, took pictures of Manny
Pacquiao and then used the pictures without the consent of
Manny. Manny sued Lacoste. Lacoste moved to dismiss the
complaint on the ground that it‟s a foreign corporation, the
Philippines has no jurisdiction over it. Will the motion to
dismiss be granted?
No. Because the foreign corporation, despite lack of
license to do business, can always be sued on any
cause of action recognized under Philippine laws. So
it‟s no defense that the foreign corporation is not
under the court‟s jurisdiction. It can always be sued
under any cause of action recognized under Philippine
laws. If it will be the one to sue, that‟s the time it
needs a license. But if it will be sued, even without a
license, it can be brought to the court‟s jurisdiction.
This is a case that I‟m handling. Hopefully, we win on motion
for reconsideration. What about if a foreign corporation is an
assignee of a golf share? Manila Golf and Country Club, the
foreign corporation is MR Holdings. MR Holdings is an
assignee of a golf share of Manila Golf. It got embroiled in
many suits by or against it. One of the issues raised in this case
is whether or not it can sue, being an assignee of a golf share
and having other assets in the Philippines? The question is, if
you are a foreign corporation, an assignee of asset, is that
synonymous to doing business?
The SC said no. So you can acquire assets, even a golf
share, you can play in Manila Golf and Country Club,
but these activities are not considered doing business.
What are the cases or instances when a foreign
corporation may be allowed to sue despite lack of
license?
SC said that the complaint of a foreign corporation must allege
any of the following, otherwise a motion to dismiss on the
ground of lack of legal capacity to sue may prosper. What are
the allegations of the complaint?
1. It has a license to do business in the Philippines or it
is suing on a casual or isolated transaction;
So what will confer upon the foreign corporation the capacity
to sue in the Philippines is has a license to do business from the
SEC or it is suing on a casual or isolated transaction, which
does not require a license from the SEC.
2. An action to enforce intellectual property rights.
So if a foreign corporation owns for example, a trademark. So it
had a trademark registered in its name in the country of its
incorporation and that trademark is being used in the
Philippines, can the foreign corporation file a petition for
cancellation of trademark with the IPO or infringement of
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trademark even if it is not licensed to do business in the
Philippines?
Yes. We‟ll take this up in IP next sem. An action to
enforce intellectual property rights does not require a
license for as long as it will be filed in a country
signatory to the Paris Convention that accords
reciprocal protection to citizens or persons domiciled
in the country that extends reciprocal rights to foreign
citizens.
What should be alleged in the complaint if the foreign
corporation is filing an action to enforce Intellectual Property
Rights? (1) it must allege that the trademark is registered in its
foreign country in its favor; and (2) that trademark is being
used in the Philippines without authority. It‟s important for the
foreign corporation to allege that it‟s the owner of the
registered trademark in the country of incorporation and it‟s
being used or infringed without the consent of the registrant, of
course with a country that accords reciprocal protection to
citizens of e.g. USA, both signatories to the Paris Convention.
The treaty obligation of the Philippines under the Paris
Convention is now incorporation under Section 3 of your
Intellectual Property Code.
What about a well-known mark? Can a foreign corporation sue
likewise for infringement of a well-known mark? So can it file
an action enforcing intellectual property rights arising from the
well-known mark even though not registered in the
Philippines?
Even a well-known mark is entitled to protection or
registration in the Philippines for similar goods or
services. The case of Fredco Manufacturing v. Court of
Appeals. So Harvard is a well-known mark associated
with Harvard University. Fredco Manufacturing was
able to register a trademark Harvard for jeans with
the suggestion that it came from Cambridge,
Massachusetts. So the trademark Harvard for jeans
should not have been registered because it suggests a
connection with an institution, with a non-registrable
mark under the IP Code, but just the same it was
registered. Can Harvard file a petition to cancel
registration of Harvard for jeans even though, let‟s
say, assuming that Harvard is not registered in the
Philippines yet?
Yes because Harvard is a well-known mark.
3. If the foreign corporation subsequently obtains a
license from the SEC.
Hope Insurance v. Eastern Shipping Lines
It means that at the time of the transaction, the foreign
corporation has no license to do business but subsequent to the
transaction, the foreign corporation cured the defect and
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obtained a license from the SEC. That license retroacts to the
date of the transaction. Therefore what is the status of a
contract or transaction by a foreign corporation without license
to do business? Is it void or voidable?
The SC said it is only voidable but without prejudice
to criminal prosecution against the representatives of
the foreign corporation for doing business even
though it has no license from the SEC. What is the
basis of the imposition of criminal liability? Sec. 144
of the Corporation Code that says that any violation of
the Code is penal in nature. So this is the only case
which you can cite where the Supreme Court said that
a violation of the Corporation Code is penal in nature.
When you come to think about it, the Corporation
Code does not expressly say that a foreign corporation
that does business without a license commits a crime,
none. Unlike refusal to give access or examination of
corporate books, documents and records under
Section 74. The refusal by the corporation to the
stockholder the right to examine corporate books is
criminal in nature by express provision of law, Section
74. But you have no counterpart provision when it
comes to doing business for a foreign corporation and
the Supreme Court said there is criminal liability,
Section 144.
It is scary because that means that any violation of the
Code, theoretically, can be a ground for criminal
liability. Example, refusal to issue stock certificate
after payment of the subscription price. Criminal or
not? If we follow Hope Insurance v. Eastern Shipping
Lines, it is because it is a violation of the Code. What
about this one? What about breach of fiduciary duty?
What about violation of the doctrine of corporate
opportunity under Section 34? If you take an
opportunity that belongs to the corporation, is that a
crime? Well it depends on what case you‟re handling.
If you‟re arguing that it is, you cite the case of Hope
Insurance. If you are the one representing the
accused, you say that‟s too much, that‟s already
unconstitutional, whatever whatever whatever
(HIHIHI.)
4. If the venue is laid in Philippine courts by stipulation.
The parties stipulated that venue shall be laid in
Philippine courts to the exclusion of other courts.
Stipulation on venue is only permissive except if it is to the
exclusion of other courts. If it is exclusive, then it becomes
jurisdictional. So if the foreign corporation enters into a
contract and the parties stipulated that in case of suit, it will
only be filed in the Philippines, then obviously the foreign
corporation cannot file it anywhere else.
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5. If the foreign corporation is a co-plaintiff in a case
filed in the Philippines arising from one cause of
action.
So you cannot split a cause of action obviously. So a case filed
in the Philippines arising from the same cause of action shared
by the foreign corporation, the foreign corporation cannot
commence another suit outside the country. It may join as a co-
plaintiff in the case filed in the Philippines.
6. Estoppel
Favorite topic in the bar, asked twice already. If the foreign
corporation dealt with a domestic corporation or a domestic
counterpart, where the latter, knowing fully well that the
foreign corporation had no license to do business, but despite
that knowledge, dealt with the corporation and obtained the
benefit from the transaction. So that domestic counterpart is
now estopped or precluded from assailing the lack of legal
capacity to sue on the part of the foreign corporation.
These are the cases when a foreign corporation may sue despite
of lack of license to do business from the SEC.
Other miscellaneous topics regarding resident agent
If a foreign corporation applies for a license, it must nominate
a resident agent and the license will only be issued by the SEC
with a resident agent appointed to receive summons and other
court processes on behalf of the foreign corporation.
RATIONALE for the requirement of a resident agent: to make
sure that the foreign corporation is brought to the court‟s
jurisdiction. To make sure that it cannot desist being brought
to the court‟s jurisdiction so there is someone authorized to
receive summons and processes on behalf of the foreign
corporation.
Can they certify against non-forum shopping?
The case of Expert Travel Tours. The SC said it cannot
certify or verify against non-forum shopping because
the only authority it has is to receive summons or
process on behalf of the foreign corporation. So
verification against non-forum shopping is a different
story altogether. He must be separately authorized for
that purpose before he can verify or certify against
non-forum shopping.
BAR QUESTION: If the resident agent resigns without
any successor or replacement, does that automatically
revoke the license of the foreign corporation or is it
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just a ground to revoke the license of the foreign
corporation?
It‟s only a ground to revoke the license so the foreign
corporation will be given a chance to appoint a
replacement successor/resident agent.
What documents must be submitted by the foreign
corporation to the SEC?
Documents showing that it is a bona fide corporation
organized under its foreign country. It must submit its
1. Articles;
2. By-laws;
3. Certificate of Incorporation;
4. Constituent documents from the place of
incorporation;
These must be submitted to the SEC to prove its bona fide
existence in its foreign country. And it must deposit securities
to answer for any liability that the public may suffer as a result
of allowing the foreign corporation to do business in the
Philippines.
Citibank v. Chua
What about the by-laws of the foreign corporation? Is
it subject to the prior approval of the SEC before it can
be relied upon by the foreign corporation?
In this case, Citibank, through its executive vice president,
appointed a lawyer to represent the corporation in a case filed
in Cebu during the pre-trial conference. There was no need for
a board resolution authorizing the lawyer as there was an
authority coming from the EVP of Citibank, under its by-laws,
to make the appointment. Unfortunately, Citibank‟s by-laws
did not prior approval from the SEC. The argument is can
Citibank use the by-laws as a basis to support the appointment
of the lawyer if the by-laws were not approved by the SEC?
The SC said that only by-laws of a domestic
corporation should be approved by the SEC because
the word or phrase under Section 46, every
corporation organized UNDER THIS CODE must
submit by-laws within one month from incorporation.
So it pertains only to domestic corporations organized
under the Philippine Corporation Code.
What about the foreign corporation?
It does not require the approval of the SEC for its by-
laws to be effective. Those by-laws were approved by
its foreign country and submitted only to the SEC as a
condition for the grant of license to do business.